The EU’s energy supply security : Iran’s role in the energy supply security of the EU

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The EU’s energy supply security

Iran’s role in the energy supply security of the EU

Frank van Moock

Student ID: 10001978

BA-Research Project:

Energy and Geopolitics in China and the European Union

January 2014

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‘Energy Security is National Security’

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Abstract

The aim of this thesis is to make an assessment of the factors that influence the EU’s energy supply security from the perspective of Iran. Energy security will become increasingly important in the coming years, especially in the EU. The main threat for the EU’s energy security is the high dependency on only a few countries that provide most of the imported natural resources. One of the alternative suppliers of oil and gas, and the subject of this case study, is Iran. Iran has some of the largest oil and gas reserves in the world and could play an important role on for the energy supply security of the EU. By examining the factors that shape the European Union’s energy supply security situation from the perspective of Iran, this thesis tries to analyze the EU’s energy supply security situation. Iranian domestic factors that are important are the stability of the regime and the Iranian energy consumption. Geopolitical factors of importance are Iran’s nuclear program, the Saudi-Iranian relations, Chinese influence in Iran, and the Syrian civil war. Overall it can be said that Iran could play a crucial role in improving the energy supply security of the European Union. Yet, there are some serious challenges on the road towards further economic cooperation between Brussels and Tehran.

Keywords: Iran, European Union, Energy Supply Security, Geopolitics, Scarcity

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Maps

Map 1: Europe

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Map 2: the Middle East

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Map 3: Iran

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Acknowledgement

I would like to thank all the people who have assisted me during this research. During the process of writing this bachelor thesis, I have learned a lot about the subject matter. Writing this thesis made me realize that Iran’s position in the Middle East and in the world is crucial for understanding many of the recent geopolitical events. I would like to thank my fellow students for the constructive talks on our subject. And of course I would like to thank my supervisor dr. Mehdi Amineh for putting in the efforts of teaching and guiding us through this research project. His guidance and dedication helped me a lot with structuring and focusing my research on a subject that is so extensive. Furthermore, I would like to thank my father Ruurd for his constructive criticism during the process of writing this thesis.

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List of tables and figures

Graph 2.1: Energy mix in the EU in 2011 pp. 24

Table 3.1: EU trade flows with the Islamic Republic of Iran (2008-2012) pp. 29

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List of abbreviations

EAP Energy Action Plan

EC European Commission

EIA United States Energy Information Administration

EU European Union

GDP gross domestic product

IEA International Energy Agency

IRI Islamic Republic Iran

MENA Middle-East and North Africa

NIOC National Iranian Oil Company

NPC National Petroleum Corporation (Chinese)

OPEC Organization of the Petroleum Exporting Countries

UK United Kingdom

UN United Nations

UNSC United Nations Security Council

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Chapter 1: General overview of the thesis

1.1 Introduction

This thesis seeks to explore the energy supply security of the European Union (EU) by examining the case of Iran. The aim is to make an assessment of the factors that influence the EU’s energy supply security from the perspective of Iran. Energy security deals, as the name suggests, with the security issues that surround energy policies. Since natural resources1 are scarce and production is limited, strategic challenges exist. Energy security will become increasingly important in the coming years, especially in the EU. This is because the EU is highly dependent on the import of energy to keep up with the energy usage. Projected energy import dependency of the EU will reach 55 percent by 2030 and 57 percent by 2050 (European Commission, 2013a:49). High dependency on imports can threaten the energy security if the uninterrupted supply of energy against a stable and affordable price cannot be guaranteed. The main threat for the EU’s energy security is the high dependency on only a few countries that provide most of the imported natural resources. For the EU, the biggest supplier of oil and gas is Russia (European Commission, 2013:24). 35 percent of crude oil imports and 30 percent of natural gas imports origin in Russia (ibid). This dependency on Russia has proven to bear risks. The best examples of these risks are the disputes between Russia and the Ukraine in 2006 and 2009 when Russia shut down the gas supports to the Ukraine. Even though the EU was not directly involved in the dispute, it did cause the gas supply to the EU to be limited (Bradshaw, 2009:1928, Chevalier 2006:13).

In order to improve the energy supply security, the EU should reduce the dependence on Russia and diversify their imports. One of the alternative suppliers of oil and gas, and the subject of this case study, is Iran. Iran has some of the largest oil and gas reserves in the world and could play an important role on for the energy supply security of the EU. Of the world’s total oil reserves, 9 percent lies in Iran, only Venezuela, Saudi-Arabia, and Canada have bigger oil reserves (EIA, 2013). In terms of gas, Iran has the second largest reserves with 18 percent of the world’s total (BP, 2013:20). Increasing the imports from Iran would reduce the heavy dependency on Russia. However, the relationship between Iran and the Western world has been tense ever since the Iranian revolution in 1979. Trade, especially with oil and gas products, between Iran and the EU is limited due to sanctions from the United States (US), United Nations Security Council (UNSC), and the EU (Website European Commission, 2013). These sanctions not only affect the Iranian petro-industry but the global oil and gas markets as well. Less strict sanctions would, for instance, offer opportunities for Western petrochemical companies to invest in the Iranian energy sector. If Iran would have more access to the global energy market, the increase in production would possibly cause oil prices to decrease (Hussein, 2013). The main reason for the sanctions, and the tense relationship with the Western world, is Iran’s nuclear ambition. Iran has been

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20 building facilities to enrich uranium that could be used to fuel nuclear power plants or, as the rest of the world fears, to produce nuclear weaponry.

The combination of the enormous reserves of natural resources, the sanctions, and the nuclear program, make Iran an interesting case from which to examine the EU’s energy supply security. The importance of Iran in the international relations has also been shown by recent events. In November of 2013, Iran has come to a preliminary agreement with several countries on reducing the economic pressure in return for putting a hold on its nuclear program (Website BBC, 2013a).

1.2 Research Objectives

The factors that influence the EU’s energy supply security from an Iranian perspective are central to this thesis. The main question posed in this thesis follows from this.

What are the factors that shape the European Union’s energy supply security situation from the perspective of Iran?

To answer this question, several other questions will have to be answered. - What is the energy supply security situation of the EU?

- What are the EU’s strategies on energy security?

- What shaped the Euro-Iranian relations?

- What are the factors that influence the EU’s access to Iran’s energy supply?

1.3 Problem statement and hypotheses

As mentioned before, Iran has the potential to be a major partner of the European Union when it comes to the energy supply. This thesis will examine the factors, in terms of risks and opportunities, which shape the Euro-Iranian relations. It is expected is that political factors are the most important in shaping Iran’s position in relation to the energy supply security of the European Union. Economic factors, however, should also play a crucial role in this respect. A preliminary research of this subject revealed that it is expected that Iran can enhance the EU’s energy supply security if trade between Iran and the EU increases but there are hurdles along the way of getting there.

1.4 Research Method

This thesis is a case study and will be using quantitative as qualitative research methods. This so called mixed method has the benefit of combining the depth of a qualitative study with the explanatory power of a quantitative study. The qualitative data will mainly come from articles, books, and reports. The quantitative data will be gathered from several databases such as the database of British Petrol (BP) and the US Energy Information Administration (EIA). Information

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21 about European Union member states will come from the Eurostat database. Most of the

information about Iran’s energy supply can be obtained from the EIA or the International Energy Agency (IEA).

1.5 Theoretical Framework

In order to examine the main question, and to find the factors that shape the Iranian-European relations, several concepts need to be explained. The main concept is energy supply security. This is closely linked to the concept of scarcity. Another important concept is that of critical geopolitics. In the next part these concepts will be briefly covered.

1.5.1 Energy supply security and the scarcity model

Energy security is crucial because modern economies cannot function without energy. Oil and gas make up respectively 40.5 and 22.3 percent of the world’s electricity generation (European Commission, 2013a:15). Security surrounding the supply of oil and gas therefore is important, and becoming even more important since economies in Asia, Africa and South America are developing and increasing their energy consumption. The International Energy Agency (IEA) defines energy security as ‘the uninterrupted availability of energy sources at an affordable price’ (Website IEA, 2013). This definition is relatively straight forward. However, the aspect of having an affordable price needs some further explanation. An affordable price relates to a price that is based on supply and demand (Bielecki, 2002:237). For this research it is important to keep in mind that competition on the market for hydrocarbon products is important to assure affordable prices. The work of Daniel Yergin expands the general definition of energy supply security given by the IEA by specifying four principles (2006:75-76). The first principle is that to enhance energy security countries need to diversify their supply. Secondly, countries need a buffer to counter shocks in prices or other disruptions. The third principle is that integration in global markets is necessary because there is only one market for oil and stability on that market is crucial for energy security. The last principle is that information is important in energy security. “High quality information underpins well-functioning markets.” (Yergin, 2006:76). This thesis will focus on the reliability and affordability of the energy supply of the EU. Yergin’s first principle is the most relevant when researching the EU’s energy security situation from the perspective of Iran.

Threats to reliability and affordability are a direct result of the scarcity of energy. Production of oil and natural gas is limited. In addition most of the reserves are located in only a couple of regions in the world, with the Middle-East and North Africa (MENA) as the most important region. To explain the increasingly complex and interconnected situation of the global energy market we will use the resource scarcity model. This model is developed by Amineh and Houweling in 2007. Three types of resource scarcity are distinguished in the model (Amineh and

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22 Houweling, 2007:374-375). The first type is demand-induced resource scarcity. Demand-induced resource scarcity exists because of three factors: population growth, per capita income, and technological advancements. Each of these factors increases the demand for energy and could thus increase the scarcity. The second type of scarcity, supply-induced scarcity, depends on the amount of resources that are available. Changes in reserves, changes in consumption patterns, and volatile prices can influence the supply-induced scarcity. The last type of scarcity in the model is structural scarcity. This type relates to the actions of actors that deliberately influence the scarcity of others (ibid:376). An example is the Organization of the Petroleum Exporting Countries (OPEC). The OPEC can be characterized as a cartel that can influence the oil prices by adjusting the supply.

1.5.2 Critical geopolitics

The last concept that is important is critical geopolitics. Traditional geopolitics is focused on states as the main actors in the international relations. In critical geopolitics more elements are included such as non-governmental organizations, transnational organizations, and religious organizations. Critical geopolitics examines questions about how states and non-state actors interact in the world just as traditional geopolitics, but it adds other important aspects, such as geo-economic aspects, that have been neglected by traditional geopolitics (Mercille, 2008:570). According to critical geopolitics, the main factor that determines policy is the geographical expansion of capitalism (ibid:578). In this thesis we will use critical geopolitics to examine the threats to the Euro-Iranian energy relations. It is important to remember is that the international political order is dynamic. States are not the only actors in the global arena. Other actors such as oil companies, political factions, and non-governmental organizations are also important in the international relations.

1.6 Structure of the thesis

The second chapter of this thesis is used to provide the information about the energy security situation of the EU. By looking at the energy security and at the strategies the EU implemented that affect the energy security. Chapter 3 is used to briefly outline the context of the Euro-Iranian relations. This is done by also looking at the role of the United States (US) in the Middle East and the implementation of Western sanctions on Iran. Finally, chapter 4 will examine the factors that threaten the Euro-Iranian relations with respect to the EU’s energy supply security. Several domestic and geopolitical risks and impediments will be covered. The last part of the chapter is used to briefly assess whether the recent nuclear agreement offers more possibilities for EU access to Iranian deposits.

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Chapter 2: Energy supply security in the European Union

Before we can assess the role Iran could play in the energy supply security of the EU, it is necessary to look at the energy security of the EU. In this chapter we will briefly sketch the EU’s energy security situation as well as the strategies the EU has implemented on this terrain. The goal of this chapter is to answer two questions. What is the energy supply security situation of the EU and what are the EU’s strategies on energy security?

2.2 The EU’s energy supply security

The EU consists of 28 member states. Because of the scope of this thesis, we will not examine the individual member states but focus on the EU as one actor. In terms of gross domestic product (GDP) the EU is the biggest economy in the world (IMF, 2013a). More interesting is the energy situation. Only 6.5 percent of the global energy production takes place in the EU (European Commission, 2013a:12). In terms of final energy consumption, the EU consumes 13.8 percent of the global energy (ibid:14). In comparison, the United States (US) with an economy that is slightly smaller than that of the EU in terms of GDP, produces 13,4 percent of the global energy and consumes 17.3 percent of the world energy (ibid). The difference between the consumption and production of energy in the EU shows there is a gap in the supply that needs to be filled in order to fulfill demand. This is done by importing energy. The dependency on imports of energy in the EU is high. Of the total energy used in the EU, 54 percent was imported in 2011 (Eurostat, 2013). In 2008 in terms of money around €700 was spent on energy imports per citizen of the EU (Bahgat, 2010:334). The transport sector uses one third of the total energy consumption in the EU (European Commission, 2013a:19). Since the transport sector relies heavily on petroleum products it is not surprising that oil is the main source of energy in the EU (graph 2.1). Of all the energy consumed in the EU, 59 percent consists of oil and gas. Because of the lack of sufficient natural resources within the EU, oil and gas need to be imported.

When looking at solely the EU, there is not enough supply to meet demand within the EU, as shown above. Imports are therefore needed to keep up with demand, and imports of energy directly impact the energy supply security of the EU. As mentioned before, this import dependency will only increase further. In 2050 the EU expects to import 57 percent of its energy (European Commission, 2013b:49). To maintain a steady supply of energy at an affordable price you need to rely on the suppliers of energy. If, for whatever reason, the imports of energy are limited, the supply-induced scarcity will increase which in turn affects the energy security of the EU. The high import dependency can therefore become troublesome for the EU. Of the countries from which the energy imports originate, one country sticks out: Russia. As mentioned above, around 35 percent of oil and 30 percent of natural gas imports in the EU originate from Russia

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24 (European Commission, 2013:25). Being this dependent on one country for the supply of energy can cause problems for the energy supply. An example of the risks that are related to the reliance of one trade partner is the dispute between Russia and the Ukraine in 2006. In January of 2006 Gazprom, Russia’s state-controlled monopoly, shut off the gas supply to Ukraine (Bradshaw, 2009:1928, Chevalier 2006:13). The real reasons for this conflict are plentiful and complex but the conflict was said to revolve around an argument over the pricing. As a result of this dispute, the EU’s gas supply was limited because Ukraine is an important transit country for the supply of gas from Russia to the EU. For the European policy makers this incident was a wake-up call when it came to the reliability of Russia as such an important source of the energy. Or in the words of former British prime minister Gordon Brown: “no nation can be allowed to exert an energy stranglehold over Europe” (Bahgat, 2010:337). In 2009 another dispute between Russia and the Ukraine threatened the supply of gas to the EU (Bradshaw, 2009:1929-1930). These incidents show that the large dependency of Russia comes with a price: more uncertainty about a stable supply of oil and gas. In order to increase its energy supply security, the EU should focus more on Yergin’s first principle: diversifying the energy supply.

Another challenge for the EU’s energy security is the lack of cooperation between the individual member states on the field of energy policies. The European Commission (EC) has called for an active external energy policy in the EU in 2006 but it still seemed difficult to bring the member states together on this issue (European Commission, 2006; Umbach, 2010:1237).

Graph 2.1 Energy mix in the EU in 2011 (in%)

35%

24% 17%

14%

10%

Petroleum and Products Gas

Solid Fuels (i.e. Coal) Nuclear Heat Renewables

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25 2.3 The EU’s energy strategy

For the long term (the period after 2030) experts assume that securing the EU’s energy supply will be less of a challenge due to the expansion of renewable energy sources (Umbach, 2010:1234). In the short and medium term (the period before 2030) however, renewable energy will not be sufficient for improving the energy supply security of the EU. Short term challenges to energy supply security need attention from European policy makers. One of the ways the EU tries to cope with these challenges is with the ‘Energy Action Plan’ (EAP). In 2007 the EU member states agreed on the so called ‘20/20/20’ plan. This means that by 2020: energy efficiency should be increased by 20 percent, carbon emissions should be reduced by 20 percent, and an additional 20 percent of the energy mix (graph 2.1) should consist of renewable energy (European Commission, 2013b; Umbach, 2010:1235). The ambitions in this plan, if it were to succeed, will drastically reduce the dependency on energy imports. Increasing the energy efficiency and relying more on renewable energy would reduce the demand-induced scarcity of the EU and therefore improve the security of the European energy supply.

Another plan was launched in 2008 by the European Commission (EC). They came up with the ‘EU Energy Security and Solidarity Action Plan’ (European Commission, 2008a). With this plan the EU tried to overcome the major weaknesses and problems on the way to a common energy policy between the member states. This is done by focusing on five areas: (1) infrastructure and the diversification of energy supply; (2) external energy relations; (3) oil and gas stocks and crisis response mechanisms; (4) energy efficiency and (5) making the best use of the energy resources that exist within the EU (Umbach 2010:1235-1236). For this thesis, the first and second areas are interesting because the EU wants to diversify the energy supply and the EU wants to increase the relations with energy suppliers including the OPEC and Russia by promoting a “global common understanding of energy security” (Bahgat, 2010:335). In relation to Iran, this ambition offers possibilities but there are threats to improving this relationship. These threats to an improved relation between the EU and Iran on the field of energy security will be examined in the rest of this thesis.

2.4 Conclusion

In this chapter we sketched the energy security situation in the European Union. With its high dependency on energy imports, the EU’s energy supply security is threatened by several factors such as instable situations in the supplying or transit countries. The import dependency is projected to increase even further in the coming years, making the need for EU action even bigger.

We also looked at the strategies of the EU to counter the threats to the EU’s energy security. The EU has launched several plans including the ‘20/20/20’ initiative is focused on reducing the demand-induced scarcity by increasing the availability of renewable energy in the EU and improving the energy efficiency of the member states and thus reducing the dependency on

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26 imports. The 2008 ‘EU Energy Security and Solidarity Action Plan’ tries to address issues regarding energy security by focusing more on the relations with suppliers of energy products. In the next chapter we will assess the Euro-Iranian relations.

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Chapter 3: Euro-Iranian relations

Historically there have been ties between Iran and several European countries. For instance the positive attitude towards France in Iran originates from the months before the Islamic Revolution when France accepted Khomeini to live in Paris (Izadi, 2012: 38). These ties and the geographical proximity cause extensive yet complicated relations between Brussels and Tehran (Bahgat, 2010:339). In this chapter we will explore the Euro-Iranian relations by looking at the political relations followed by an assessment of the economic relations. We will try to answer the question about what shaped the Euro-Iranian relations. One key aspect of this chapter, and the Euro-Iranian relations, is the effect of the US, UN, and EU sanctions on the relations between Brussels and Tehran which will be covered in every section of this chapter.

3.2 Diplomatic relations between the EU and Iran

Ever since the Iranian Revolution of 1979 the relations between Iran and the Western world have been tense. In this section we will examine the diplomatic relations between Iran and the EU. To do so we first look at the influence of the United States, a close ally to the EU, in the Middle East because it is crucial in shaping the Euro-Iranian relations. We will continue after that by assessing the diplomatic relations between the EU and Iran directly.

3.2.1 US influence in the Middle East

To understand the relations between Iran and the EU it is important to look at the US influence in the Middle East. For the US, which relies heavily on imports of oil and gas to cope with demand, the Middle East is of crucial importance. It is not surprising that the US influence in the region is extensive in terms diplomatic, economic, and military presence. The presence of the US can be explained by two logics. First, the geoeconomic logic states that because of the amount of oil and gas that is necessary to literally fuel the American economy, the US policy is shaped by its economic needs (Mercille, 2006:582). On the other hand geopolitical logic also affects the behavior of the US in the region. American officials are concerned with maintaining the US credibility in the international arena which drives the actions of the US when it comes to Iran (ibid). The national safety of Israel, a close ally to the US, in the region is also important to keep in mind but will not be covered due to the limited scope of this thesis.

The relations between Iran and the United States have changed a lot since the 1950s. The US helped restoring the power of the Shah in 1953 by overthrowing the nationalist prime minister of Iran Mohammad Mossadegh and kept influence in Iranian politics until the Iranian Revolution of 1979 (Mercille and Jones, 2009:858). Just after the Islamic Revolution militants stormed the US embassy in Tehran, taking fifty-two Americans captive for 444 days (ibid). This incident has

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28 partially shaped the relations between the US and Iran. As a response to the Islamic Revolution and more importantly Iran’s nuclear program, the US has implemented sanctions that are in place to this day. Furthermore, the US is concerned with the Iranian ambition to become the regional hegemon and thereby threatening the US global hegemony and challenging Saudi Arabia, a close ally of the US, in the Middle East. For the EU’s energy security situation the US influence is vital. If the US loses its control over the region, especially on the important energy supplying countries - such as Saudi Arabia and Qatar - and energy transit routes, it directly impacts the global oil price and the supply of oil and gas. In the last years, US influence has been declining in the region (The New York Times, 2012; The Independent, 2012; National Post, 2013). This decline is caused by several factors such as regional resentment towards the wars in Iraq and Afghanistan, the weakened economic position of the US, and the limited efforts and successes of the Israeli-Palestinian peace talks.

3.2.2 Euro-Iranian diplomatic relations

Relations between the EU and Iran are better than the relations between the US and Iran. Just after the Iran-Iraq war of 1980-1988, Iranian leaders wanted to establish and consolidate relations with the EU (Bahgat, 2010:339). EU policy regarding Iran was also based on improving relations with the Islamic Republic of Iran. In 1992 the EU initiated the ‘critical dialogue’ which emphasized the gains for Iran if it would bypass producing nuclear weapons (EUCE, 2008). After the election of the reformist Khatami as president in 1997, a new phase began. The EU tried to improve the partnership with Iran and the ‘critical dialogue’ was transformed into the ‘comprehensive dialogue’ (Youngs, 2013). Iran and the EU held regular meetings to discuss topics such as higher education, drug trafficking, refugees, and human rights (Bahgat, 2010:339). For Iranian students and scholars the opportunity opened to move to European universities, the EU helped with Iran with dealing with refugees from Iraq and Afghanistan, and in 2002 a bilateral dialogue on human rights was created (ibid:339-340).

Since 2000 the US has increased the pressure on Iran. The increased pressure is focused on stopping the Iranian nuclear ambition. The confrontational strategy of the US follows the geopolitical logic that the US wants to maintain international credibility and the geoeconomic logic that stability in the region is crucial for the economic wellbeing of the US. A more diplomatic approach to the nuclear ambitions of Iran was chosen by the EU. In October 2003 France, Germany, and the United Kingdom (UK) (and later a representative of the entire EU) started negotiations with Iran to try to resolve the nuclear issue (Bahgat, 2010:340). Iran temporarily suspended its uranium enrichment but a real solution to the issue was not agreed upon. With the election of the hawkish Ahmadinejad as president of Iran, the tensions between Iran and the EU increased again. As a result of Ahmadinejad’s isolationist foreign policy and increased attention for Iran’s nuclear ambitions, the EU chose to support the US in its confrontational policy.

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29 The EU supported several UNSC resolutions that imposed economic sanctions on Iran (Bahgat, 2010:341). Negotiations on Iran took place in the so called ‘E3+3’ setting. The E3+3 consist of the three European great powers: France, Germany, and Great Brittan; and the three other great powers in the world: China, Russia, and the US. Goal of the confrontational policy was to avoid two scenarios: either Iran developing nuclear weapons, or the bombing of Iran by Western powers (Posch, 2007:538).

3.3 Economic relations: shaped by sanctions

The economic relations between the EU and Iran are closely linked to the political relations. This is because of the economic sanction. In terms of trade several important remarks are to be made. First, the EU is the main trading partner of Iran. Almost one third of all the Iranian exports go to the EU (European Commission, 2014b). As table 3.1 shows, the 2012 sanctions that were announced autonomously by the EU on January 23, had a great impact on the export of Iranian energy to the EU and EU-Iranian trade in general (Patterson, 2013). These sanctions put an embargo on the ‘import, purchase and transport of Iranian oil and Iranian petrochemical products by EU member states’ (ibid). For Iran, with EU as most important trading partner, this decrease has an enormous effect on the economy. Secondly, Most of the EU imports from Iran consist of energy products, but the sanctions have limited this import. Of the products that the EU exports to Iran, the majority are machinery and transport equipment and chemicals (European Commission, 2014). The US, UN, and EU sanctions profoundly impacted the economic relations between the EU and Iran. Especially the most recent rounds of sanctions have caused a drop in the exports of Iranian crude oil. In 2011 $95 billion in oil export revenues was earned by the Iranian government, in 2012 this dropped to $69 billion (US Energy Information Administration, 2013). In 2011 the EU was the biggest buyer of energy from Iran, in 2012 the amount of imported energy from Iran was negligible (Katzman, 2013).

Table 3.1 EU trade flows with the Islamic Republic of Iran (2008-2012)

Imports from Iran

(€ in millions) Exports to Iran (€ in millions) 2008 15,936 11,337 2009 9,378 10,424 2010 14,526 11,312 2011 16,457 10,494 2012 5,645 7,362

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30 3.4 Conclusion

To determine what shaped the Euro-Iranian relations, we have looked at the diplomatic and the economic relations. The diplomatic relations between the Brussels and Tehran have been partially shaped by the US influence in the Middle East. The US is concerned with the Iranian ambition to become the regional hegemon. For the EU’s energy security situation the US influence is vital. If the US loses its control over the region this would directly harm the EU’s energy supply security. Therefore the EU’s diplomatic and economic relationship with Iran partially depends on the US’ Middle Eastern strategy. Diplomatic relations between the EU and Iran are better than the relations between the US and Iran. EU policy regarding Iran has been focused on improving relations. This also manifested itself by the EU’s diplomatic ambition to solve the tensions surrounding the nuclear program. As a result of Ahmadinejad’s isolationist foreign policy and increased attention for Iran’s nuclear ambitions, the EU chose to support the US in its confrontational policy and increase the diplomatic pressure on Iran.

The economic relations between the EU and Iran are closely linked to the political relations. This is because of the economic sanctions. For Iran, with EU as most important trading partner, the sanctions have had a significant effect on the economy. For instance, Iranian oil exports to the EU became negligible as a result of the 2012 EU sanctions. An increased trade relation between the EU and Iran can be considered a win-win situation but yet there are factors that threaten an improved relation. In the next chapter we will examine these threats for the EU’s energy supply security from the context of Iran.

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Chapter 4: EU energy supply security from Iran

In the previous chapters we have sketched the background of the Euro-Iranian relations with respect to the EU’s energy security. In this chapter we will look factors that threaten the EU’s energy supply security in relation to the Iranian energy market. We will start with the Iranian domestic factors followed by the geopolitical factors. Finally, we will briefly look at the recent developments in terms of the Euro-Iranian relations.

4.2 Iranian domestic factors

4.2.1 Stability in Iranian politics and society

Iranian politics, and the stability of the Iranian regime, affect the possibilities for the EU to enhance its energy supply by increasing imports from Iran. In other words, regime stability is important for creating and maintaining the relations that are necessary to improve trade cooperation between Iran and the EU. Some observers refer to the Iranian domestic political situation as one of ‘relative stability’ (Rafati, 2012:50; RAND, 2008:xiv). The first thing to note is that the Iranian political structure is more complex than one might think. Because of the existence of regular elections, both parliamentary and presidential, Iran is different from other countries in the region. Compared to neighboring countries that do not hold elections or are ruled by a single powerful elite, Iran’s politics can be described as dynamic (Selvig and Stenslie, 2011:71). The political dynamic of the Iranian regime is characterized by the interaction of the ‘politically relevant elites’ (Rakel, 2009:106). With this term the political leadership, opinion makers, and temporary elites such as journalists and intellectuals are meant. The interaction between these elites partially determines the stability of the regime and thereby the EU’s possibilities in Iran.

The Supreme Leader, currently Ayatollah Ali Khamenei, is the most powerful person in Iranian politics. He obtains his power from the velayat-e faqih system (ibid:109). This system says that the Supreme Leader, who should follow the traditional Islamic sharia, is the political guardian over its people. In addition to his religious influence on the Iranian society, the Supreme Leader can also declare war, mobilize troops, and dismiss many of the important position holders in Iran (ibid). The second most powerful institution is that of the president. The president is elected by the people and confirmed by the Supreme Leader. However, the president is only responsible for the domestic policy since the Supreme Leader controls the armed forces and thus foreign policy (ibid:110). The interaction between the Supreme Leader and the president is characterized by the competition for influence of three factions within the politically relevant elites: the conservatives, the pragmatists, and the reformists (Rakel, 2009:108). Table 4.1 shows the position of these factions on the terrains of politics, economy, sociocultural issues, and foreign policy. The Supreme Leader is part of the conservative faction. Therefore the conservatives always play a crucial role in

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32 the Iranian politics as they hold the highest power. The presidents that were in office since 1979, however, have been members of all of the three factions in different periods. With their relatively positive stance on foreign policy and foreign relations, the pragmatists and reformists offer the best opportunities for increased EU influence in the Iranian oil sector.

Since the events of the Arab Spring in 2011, a new threat has come for the EU’s access to Iranian reserves. The risk of new protests in Iran, just like the 2009 anti-government protests, has increased because of the events in the region. It cannot be ruled out that Iran’s internal divisions could potentially cause new instabilities in the regime (Rafati, 2012:49-50). Possible instabilities in Iran could induce further supply-induced scarcity and be an impediment for the EU’s increase in energy imports from Iran.

Table 4.1 The three political factions in Iran and their stances

Politics Economy Sociocultural Foreign Policy

Conservative faction Conservative1 Traditional3/Liberal4 Conservative5 Conservative8/Liberal9 Pragmatist faction Conservative1 Liberal4 Liberal6 Liberal9

Reformist faction Conservative1/ Liberal2

Liberal4 Liberal +7 Liberal9

Source: Rakel, 2009:123 Notes

Politics: 1conservative (supportive of the velayat-e faqih system)

2liberal (limits to the velayat-e faqih system)

Economy: 3traditional (supportive of the traditional economic sectors) 4_{liberal (market economy)}

Sociocultural: 5conservative (great restrictions on individual freedom)

6_{liberal (limited individual freedom as legitimized by Islamic ideology)}

7liberal+ (individual freedom) Foreign Policy:8conservative (isolationist)

9_{liberal (integration in international relations)}

Iranian stability is also affected by domestic vulnerabilities on the terrains of ethnicity and demographics. The Iranian society is split up between several ethnic groups, the largest group being Persian with around 61 percent of the population (CIA World Factbook, 2014). Other ethnicities being: Azeri (16 percent), Kurd (10 percent), and other less represented groups (ibid). Grievances between these ethnic groups generate political demands and following from that political tension (RAND, 2008:xv). Real tensions, however, have remained minimal due to one factor that unifies these ethnic groups, Islam. Of the Iranian population, 98 percent is Muslim with

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33 89 percent being Shia Muslims (CIA World Factbook, 2014). The Iranian government has seemed to be successful in using this unifying factor to prevent the manifestation of these ethnic cleavages. Demographics will be covered in the next segment which is focused on Iran’s energy consumption.

Overall, the Iranian political system and society is relatively stable. Yet, there are factors that threaten this stability and could pose an impediment for EU investments in the Iranian oil and gas sector as stability is crucial to build and maintain the necessary EU-Iranian relations needed for increasing energy trade.

4.2.2 Iranian energy consumption

Another Iranian domestic factor which influences the EU’s possibility for access to Iranian oil and gas, is the energy consumption in Iran. Iran has one of the highest per capita energy consumptions in the world (Bahgat 2010:342). In 2010 the per capita energy consumption in Iran was around ten times as high as in the EU (RFERL, 2010). Due to the high energy consumption Iran less Iranian oil and gas is available for the global markets and thereby for the EU as well. There is one major reason for the high energy consumption in Iran: public subsidies on energy products. With these public subsidies, prices for gasoline, natural gas, electricity, and other energy products are lower than the market price (Bahgat, 2010:342). These subsidies result in wasteful use of, for instance, petrol, diesel, and electricity. A second result is that smugglers sell energy products to neighboring countries where the prices for energy products are lower. Because the Iranian government is highly dependent on revenues from the energy sector, the subsidies have a great impact on the Iranian budget. Most of the revenues the government receives from exporting and selling oil are used to pay for the energy subsidies (Massarrat, 2007:6). The subsidies also cause a faster depletion of Iran’s hydrocarbon deposits and thus reduce the exporting capacity of Iran. The public subsidies increase the supply-induced scarcity. Less available supply for the world market is an impediment for increasing EU energy imports from Iran.

There are two other reasons for the high energy consumption in Iran: population growth and urbanization. Iran’s population increased from 19 million in 1956 to 64.5 million in 2001 and to around 76.5 million in 2012 (Massarrat, 2007:5, Worldbank 2013). In terms of urbanization, the population that lives in cities in Iran has increased from around 31 percent in 1956 to around 69 percent in 2012 (Massarrat, 2007:5, World Bank 2013). Both these factors also increase the supply-induced scarcity and threaten the possible EU imports from Iran.

However, the Iranian government has made steps to decrease the energy consumption and thus improve energy efficiency. In December 2010 the Iranian government reformed the energy subsidies (Hassanzadeh, 2012:1). According to the state owned Press TV, the reforms are ‘in line with global financial organizations’ recommendations that Iran get rid of a heavily subsidized economy if it wants to solve its economic problems’ (Press TV, 2010). Gasoline prices have

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34 increased from $0.10/liter to $0.42/liter for the first 50 liters per month. If more than 50 liters are consumed, a liter price of $0.70 is charged (Press TV, 2010; Reuters, 2013; Hassanzadeh, 2012:3). This increase has a tremendous effect on the welfare of the Iranian population and caused an increase in the inflation in Iran. The regime was afraid the reforms would cause civil unrest, but it seemed that the Iranian public has ‘embraced the program’ because they know these steps are necessary to improve the Iranian economy (The Guardian, 2010; The New York Times, 2011). Currently, Iran is preparing to further increase the domestic fuel prices and bring them closer to global energy prices (Reuters, 2013). The new increase is for a large part the result of the sanctions that are imposed on the regime. Since the oil exports have declined by over fifty percent, the Iranian government has lost billions in revenues which undermines the budget. In order to improve the economy a further increase of fuel prices is necessary. The reforms will, in addition to improving the budget, also reduce the domestic demand for energy and as a result reduce the imports of energy to comply with demand (ibid). Since these reforms reduce the energy consumption in Iran, the supply-induced scarcity of the subsidies is dampened. This offers possibilities for the EU imports from Iran since more supply will be available. However, overall the public subsidies still are an impediment for increasing the EU’s access to the Iranian energy sector. The inefficient use of energy in Iran, and the resulting supply-induced scarcity, affects the possible supply of energy from Iran to the EU.

4.3 Geopolitical factors

4.3.1 Iran’s Nuclear Program

The first geopolitical factor that is examined in this thesis deals with Iran’s nuclear program. The nuclear ambitions of Iran are of crucial importance for the relationship between Iran and the rest of the world. If Iran would develop a nuclear arsenal it would threaten the regional and global stability and thereby the energy security of the EU. The Middle East is crucial for the supply of energy for the EU and for the prices of oil and gas, if the stability in this region is threatened it will almost certainly lead to an increase in oil prices which causes problems for the EU’s energy security. For Iran the goal is, next to national survival, to become the most dominant state in the Middle East (Kroenig and McNally, 2013). Nuclear weapons would provide Iran with leverage to pursue a greater regional influence as it will have less to fear from US military intervention. US policy regarding Iran’s nuclear program is aimed to prevent Iran from getting a nuclear arsenal. President Obama describes why this is crucial:

“The risks of an Iranian nuclear weapon falling into the hands of terrorist organizations are profound. It is almost certain that other players in the region would feel it necessary to get their own nuclear weapons. So now you have the prospect of a nuclear arms race in the most volatile region in the world, one that is rife with unstable governments and sectarian tensions.

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And it would also provide Iran the additional capability to sponsor and protect its proxies in carrying out terrorist attacks, because they are less fearful of retaliation.”

(The Atlantic, March 2, 2012)

In the last sentence, President Obama refers to Iran’s possible support for terrorist groups. In this respect it should be mentioned that Israel and its security in the region are a major concern for US policy makers. Iranian pressure on Israel’s national security threatens stability in the region and could cause Western intervention in the Middle East.

Now the question remains how the above relates to the energy supply security of the EU. If the US were to put pressure on Iran, in any form, the EU is likely to support the US and thus preventing the economic cooperation between the EU and Iran. For this thesis it is more relevant to look at the direct effect a nuclear-armed Iran would have on the energy security of the EU. In the short run, if Iran were to pursue its nuclear program and the US uses military force to disrupt Iran’s nuclear program, a conflict would emerge that threatens global energy security. US officials state that a military attack on Iran could spark regional war, damaging key oil and gas production and transit routes (Kroenig and McNally, 2013). The EU would be, as a logic consequence, be unable to import oil and gas from Iran but also has to deal with spikes in the oil prices that further threaten the EU’s energy security.

On the long run Iranian nukes would further intensify the conflicts in the Middle East and would very likely cause an increase of the oil price as market participants would add a ‘risk premium’ to cover the risks (ibid). In 2006 the oil price increased by $4 per barrel because of the concerns of escalation of the Israel-Hezbollah war and in 2012 a risk premium of around $10-$15 per barrel was instated after the EU and the US intensified their sanctions on Iran (ibid). This shows that for the EU to gain access to Iranian oil and gas reserves in order to improve its energy supply security, the containment of Iran’s nuclear ambition is crucial. The latest negotiations between Iran and the so called E3+3 seemed to have reduced tensions but it is uncertain what will happen in the near future. For the EU interests on the field of energy it is important to prevent escalation in the region by finding a negotiated solution, which is formally stated as goal by the EU (European Union External Action Service, 2014).

4.3.2 Saudi-Iranian relations

The second geopolitical factor is the relationship between Iran and Saudi Arabia. Iran and Saudi Arabia are the two most important players in the region. The competition for regional dominance shapes their tense relationship. Saudi-Iranian relations are shaped by four factors. The first factor has to do with religion. Iran’s population is mainly Shiite while the Saudi Arabian population is mainly Sunni (RAND, 2009:xi). This difference of interpretation of the Islam has a great impact on their relation. The Shia view on politics, society, and governance is different from the Sunni

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36 view. Saudi Arabia is a monarchy, a state form that is rejected by the Shia Islamic Republic. The Shia-Sunni divide is an important factor but should not be overestimated (ibid). Other factors important as well. Geopolitical factors, for instance, are more important. The second factor thus deals with geopolitics. Iran sees Saudi Arabia as a proxy state of the US whose job it is to prevent Iran from becoming the regional dominant power. Saudi Arabia on the other hand is afraid that the attacks on the legitimacy of the al-Saud family by Iran will undermine their role in the region (RAND, 2009:x). The importance of the legitimacy of the al-Saud family should not be underestimated as their heritage influences the geopolitics in the region and is one of the major drivers of policy in the region. The tensions between Iran and Saudi Arabia are especially interesting because the region is characterized by weak states and competing local factions, thereby offering potential Iranian and Saudi tendencies to expand regional influence (ibid:xii). The third factor deals with energy. Saudi Arabia is a crucial player on the global energy markets and because of their long-term strategy on energy they want to moderate energy prices. This is because high prices would damage the economies of countries that would otherwise invest in the Iranian oil sector (Financial Times, 2012). Iran on the other hand would benefit from higher energy prices in the short term to boost its economy and improve their energy sector. The difference between both countries strategies are manifested in the Organization of the Petroleum Exporting Countries (OPEC). Both countries are members of this organization but Iran and Saudi Arabia disagree on the strategy of the OPEC. For instance, Iran’s oil minister, Bijan Namdar Zanganeh, said that he hoped that Iran could gradually increase exports and also showed that rivalries between Iran and Saudi Arabia are still relevant by stating that “when a member country [of the OPEC] comes back (…) they should open the doors for him and not fight with him”, hinting at Saudi Arabia (Yahoo News, 2013). The last factor that shapes the Saudi-Iranian relations deals with the role of the US in the region. Iran is opposed to the US influence in the region and supports Palestine. Saudi Arabia, on the other hand, has close ties with the US and thus is more supportive of US policy in the region and also in terms of the Israel-Palestinian conflict (RAND, 2009:xii).

The relationship between Iran and Saudi Arabia is crucial for stability in the region and it is possible that tensions between these regional powers will increase. A stable region is crucial for European companies to invest in Iran and the Iranian energy sector. But furthermore, disagreements within the OPEC between Iran and Saudi Arabia could cause changes in oil prices which could threaten the affordable price of oil and gas. Since the OPEC already disrupts the market mechanism and thereby influences the global oil and gas prices it is highly undesirable that that the prices become unpredictable. For the European policy makers it is important to keep close attention on the Saudi-Iranian relations. If the EU wants to increase the energy imports from Iran, it should do so in a matter that does not deter the relationship with Saudi Arabia, as Saudi Arabia is one of the few allies of the West in the region and crucial for stability on the global energy markets.

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4.3.3 Chinese interests in the Iranian energy sector

China is the largest energy consumer in the world and the second largest oil importer (US EIA, 2014b). Because of this, China’s role on the global energy market should be examined when looking at the EU energy supply security. For China, Iran is an important trade partner. In 2011 nearly 11 percent of Chinese oil imports originated in Iran, only leaving Saudi Arabia and Angola in front (ibid). Because of China’s reliance on the Iranian energy sector, it tried to secure its hold over the Iranian oil and gas reserves. To accomplish this, China has invested heavily in the Iranian energy sector in 2007 and in 2009. The Chinese National Petroleum Corporation (NPC) has invested a total of $5.6 billion in the sector in these years (Simpson, 2010). With these investments, China has proven to be an alternative to the Western countries when it comes to providing Iran with the necessary investments in the energy sector. The Chinese influence in the sector is a risk for the EU access to the Iranian resources because China can make EU investments less important for Iran. China is willing to fill the void that is created because of Western oil companies such as Shell and Total who cannot play a role in Iran due to the sanctions. However, since 2011 the Chinese presence in Iran has decreased due to the sanctions also limiting China from securing the technology needed to invest in Iran, and uncertainty about possible conflicts surrounding Iran’s nuclear program (Downs, 2013). The reduced presence of China in Iran offers opportunities for the EU to invest in Iran, but Chinese influence in Iran is still one of the risks for increased EU influence in the Iranian energy sector.

4.3.4 The Syrian civil war

The final factor deals with the Syrian civil war. One of the biggest supporters of the Syrian regime during the civil war that started in 2011 and continues to this day, is Iran. Iran is said to provide technical support, troops, and financial support to Syrian president Bashar Assad’s regime (Wall Street Journal, 2013). Historically, Iran and the Syrian regime of Bashar al-Assad have strong ties. A combined resentment against US influence in the region, the mutual hate against former Iraqi dictator Saddam Hussein, and the support for the Palestinian resistance and the Shia militia Hezbollah in Lebanon have shaped the Iranian-Syrian relationship. During the 1980-1988 Iran-Iraq war, the only Arab country to support Iran was Syria. Because of this close relationship Iran has supported the Syrian regime during the Syrian civil war. Other allies of al-Assad are Russia and China. Russia and China have geopolitical reasons to support al-Assad. If the Syrian regime falls, it could cause a tremendous shift in the balance of power of the region. Iran, Russia, and (in a less outspoken manner) China, are afraid of increasing US influence in the region which would mean that their own influence would decrease (CNN, 2013). For Iran the survival of the Syrian regime is important as it is one of the only allies Iran has within proximity. It is even said that if Assad’s government were to be removed from power, it would be ‘the greatest loss for the Islamic Republic since its creation in 1979’ (Goodarzi, 2013:52).

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38 Because of the alignment with Assad, Iran’s role in the Syrian conflict is a threat to the EU’s access to Iran’s energy supply. Euro-Iranian relations are troubled by the conflict as the EU and Iran stand on opposite fields on the Syrian issue. While Iran, Russia, and China support the Assad regime, the EU, the US, and Saudi Arabia support the Syrian opposition groups. There is close coordination within these ‘power blocks’ on the Syrian issue. Russia, for instance, has recently stated that Iran would inevitably become part of attempt to end Syria’s civil war (ABC news, 2014). An escalation of the conflict in Syria would mean a serious setback for the relations between the EU and Iran and thus for EU access to Iranian oil and gas.

4.4 Conclusion

In this chapter we answered the question which factors, domestic and geopolitical, threatened the access of the EU to the Iranian energy sector. Domestically we’ve found two important factors: regime stability and the energy consumption. On the geopolitical level we’ve identified four factors that are important for the EU: Iran’s nuclear program, the relationship between Iran and its regional rival Saudi Arabia, the Chinese investments in the Iranian energy sector, and the Syrian civil war. All of these factors threaten the access to Iranian hydrocarbon deposits, either by causing problems for the supply or price of oil and gas, or by having an influence on the Euro-Iranian diplomatic relationship.

Some of these factors also bring positive signals for pursuing the EU interests. Efforts by the Iranian government to reduce domestic energy consumption, for instance, reduce offer opportunities for improving the EU’s energy security from the perspective of Iran. However, it is hard to examine the true effects of these factors. Overall there are a lot of impediments for improving the Euro-Iranian relation. European policy makers should still keep an eye out for these factors that threaten EU influence in the Iranian energy sector.

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5. Conclusion

With this thesis we tried to answer what factors shape the European Union’s energy supply security from the perspective of Iran. The problem for the energy supply security of the EU is the high dependency on imports and the heavy reliance on Russia. This especially true for the short and the medium run (the period before 2050) since renewable energy won’t be a sufficient alternative for oil and gas in that period. To improve the energy security situation of the EU it is important to diversify the supply.

This thesis examined the factors that influence the role Iran could play in this context. Relations between the EU and Iran have been tense ever since the Islamic Revolution of 1979. Increased international efforts to stop Iran’s nuclear program have caused deteriorated relations between Brussels and Tehran. As a result of Iran’s nuclear ambition, the EU has autonomously implemented sanctions which have done substantial damage to the Iranian economy. Yet, for both the EU and for Iran there is a lot to gain from economic cooperation. For Iran, improving trade with the EU could help its economic development in a time where the sanctions have severely impacted its economy. For the EU, cooperation would provide options to enhance its energy security by diversifying the supply of oil and gas. Iranian hydrocarbon deposits offer the possibility to reduce the EU’s dependency on Russia.

In the final chapter we explored the factors that are an impediment for increased Euro-Iranian cooperation. Domestically this thesis found two important factors: a stable Iranian regime and society stability is needed for EU investors to want to invest in the Iranian energy sector, and the high energy consumption in Iran causes scarcity which decreases the opportunities for EU investments. Furthermore this thesis found four geopolitical factors that influence the Euro-Iranian energy relations. The first factor is the Iranian nuclear program. The development of nuclear weapons in Iran will likely provoke conflict in the region and thereby preventing EU to pursue its interests in the Iranian energy sector. Secondly, the escalation of the tense relationship between Saudi Arabia and Iran would threaten the global energy markets and the energy security of the EU. Chinese investments as a viable alternative to European investments pose another threat for the EU’s energy supply security. And finally the developments in the Syrian civil war should be followed with great interest by European policy makers since Iran has explicitly chosen sides with the Syrian regime of Assad. If the EU wants to improve its relationship with Iran, it should operate carefully in relation to the Syrian civil war.

Despite these threats to increased European influence in the Iranian energy sector, there are also positive signs. The nuclear negotiations of November 2014 between Iran and the E3+3 seemed to have opened the door to further diplomatic relations between Iran and the Western world. What the effects of this deal are remains unclear and a further assessment of the situation would be needed in the future. Overall it can be said that Iran could play a crucial role in

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40 improving the energy supply security of the European Union. Or in words of former Shell Chief Executive Jeroen van der Veer: “We have a dilemma. Iran’s oil and gas reserves are too big to ignore, but we have all the short-term political concerns” (Mouawad, 2007). For the EU there are possibilities to improve its energy supply security by engaging more closely with Iran but there are some serious challenges on the road towards further economic cooperation between Brussels and Tehran.

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The EU’s energy supply security : Iran’s role in the energy supply security of the EU