Hamidreza Azizi

Prospect of Iran-Georgia Energy Relations after the JCPOA

Date of publication : June 22, 2016 15:06 pm
Thousands of Georgians formed a convoy through the capital Tblisi on March 6, 2016 to protest negotiations between Georgian government and the Russian gas company, Gazprom.

Reaching a deal on the nuclear issue between Iran and the “P5+1” on July 14, 2015 and then, the beginning of its implementation since January 2016, resulted in the lifting or reduction of most of the international sanctions against Iran. For years, these sanctions had been a big hurdle in the way of developing Iran’s international economic relations. What have been considered as important subjects in this respect, are the prospects for returning of major foreign companies to Iran and developing the investment in various sectors in the country from one hand and the possibilities for entering Iran into the international arena as an active economic actor on the other. In such circumstances, the existence of rich energy resources in Iran, along with Iran’s desire to recapture its old markets and – possibly – entering new markets, have led the energy sector to become one of the main sectors considered for further development in the post-sanctions era.
The South Caucasus is an important region to Iran. The main reasons behind this importance are the long-lasting historical ties between Iran and the region and also their geographical proximity. The South Caucasus is a region in which there is a country with rich energy resources (Azerbaijan) and also there are energy-consuming countries (Georgia and Armenia). Among these countries, Georgia, because of its geographical location, has always been considered as a route for transiting energy to Europe. This has caused this country to gain a special status in the energy relations in the South Caucasus.
In this context, shortly after the implementation of JCPOA (the Iran nuclear deal) and the start of lifting the sanctions, serious discussions were raised about the possibility of supplying Georgia’s needs to natural gas by Iran. According to the existing proposals, Iran aims to transit natural gas to Georgia through Armenian soil. Although it’s been declared that the goal of this project is just to supply Georgia’s domestic energy needs, but in case of its final implementation and development, this project could also provide a basis for connecting Iran’s gas to the European markets. Moreover, the implementation of such a plan per se could have huge impacts on the energy geopolitics in the region and further diversify Georgia’s energy supply sources. This article discusses these two factors, namely the prospects for the implementation and development of the Iran-Georgia gas project and its impacts on the energy relations in the South Caucasus.
Potentials for Iran – Georgia natural gas cooperation

According to the 2015 BP report, with a capacity of 34 trillion cubic meters (tcm), Iran possesses about 18.2 percent of the world’s total natural gas reserves, which puts it in the first place in this case, ahead of Russia and Qatar. However, in terms of natural gas production, Iran’s share is just 5 percent of the world’s total, ranked 4th after the US, Russia and Qatar.
However, since 2014 and after 3 years of production decline, the natural gas production in the country experienced an upward trend once again and with a 5.2 increase compared to the previous year, reached to 172.6 billion cubic meters (bcm).This increase in production is above all, thanks to the launching of phase 12 of the South Pars gas field. In 2014, this event led to a 5.8 bcm increase in gas production, about 67 percent of the country’s total production increase. This trend has raised the prospect of improving Iran’s position in the global gas production sphere. In addition, since reaching the nuclear deal has prepared the initial grounds for reattracting foreign investments in the field of oil and gas, Iran’s gas production potential has been increased more than any time in the recent years.
In contrast, Georgia is known primarily as a fossil-fuel consumer country, dependent on importing natural gas to satisfy its domestic needs. Currently, Georgia imports 90 percent of its natural gas from Azerbaijan and the remaining 10 percent from Russia. This level of dependence on only two natural gas suppliers has always caused economic as well as strategic concerns for the country. From the economic point of view, limited import options reduces Georgia’s bargaining power in the field of prices and puts the tool of pricing in the hands of the exporters. Georgia’s strategic concern derives from its volatile relationship with Russia and the fact that the Russians have repeatedly used the energy factor as a political tool. Regarding to Georgia itself, they used this tool in 2006 by suspending the gas export. That event caused many problems for Georgia and raised a serious need for this country to diversify its energy sources. In such circumstances, Georgia’s energy needs on the one hand and Iran’s potentials in this field on the other have produced a potentially suitable ground for gas cooperation between the two.
Iran – Georgia gas cooperation; past and present

Initial plans for the transition of Iran’s natural gas to Georgia were raised in the first years following the collapse of the Soviet Union, in connection with the proposals for developing Iran’s general economic relations with the former Soviet republics. In 1992, preliminary agreements reached for exporting Iran’s gas to Georgia. At the time, the basis of the plan was a barter contract, according to which Georgia would provide part of Iran’s needs in the field of minerals and raw materials, in exchange for natural gas. However, due to some problems, especially the Georgian side’s inability to fulfill its obligations, the plan actually failed.
Since then onwards, the Iran – Georgia gas transition plan has been raised from time to time and the two sides have conducted negotiations on it. But the most practical and realized cooperation in this field was in 2006, when the crisis caused for Georgia by cutting off Russian gas imports, led Tbilisi to turn to Tehran for satisfying its energy needs. Following these developments, Iran and Georgia reached an interim agreement, according to which Iran would transit 4 million cubic meters a day of natural gas to Georgia through Azerbaijan. However, as expected from the beginning, the agreement was temporary in nature and couldn’t lead to the formation of an enduring cooperation between the two sides in the energy field. In March 2007 and following the inauguration of Iran – Armenia gas pipeline, speculations raised about the possibility of extending the pipeline to Georgia. However, this new plan also failed to be realized.
Overall, since Georgia’s independence, a set of obstacles, including the lack of necessary infrastructures, economic problems in Georgia, and the opposition of the third parties, especially the US’ permanent opposition to the development of any Iran-related energy plan, have prevented the development Tehran – Tbilisi relations in this field. Since 2011, the imposition of international sanctions on Iran’s energy sector, added to the obstacles in this field. However, shortly after the finalization of the nuclear deal between Iran and p5+1, serious discussions broke out once again on the transition of Iran’s natural gas to Georgia and negotiations conducted between the two sides on this issue.
In early January 2016, Managing Director of the National Iranian Gas Exports Company Alireza Kamali announced that Iran has held negotiations with Georgia on sending its gas to the Caucasian nation through Armenia. According to his statement, the plan was to transfer 8-14 million cubic meters a day of Iranian gas through a pipeline for use in power generation in Georgia. Kamali said however that “for signing a deal, the gas export plan must be economical for Georgia”, stressing that the sole target of the plan was Georgia and “the issue of exports to Europe through a pipeline is out of question” in Iran’s view. However, at the same time, the possibility of engaging Europe in the plan, was seriously considered in the European capitals.
At the time, the statements and positions taken by Iranian and Georgian authorities were positive and it seemed that the stage was set for reaching an agreement. However, about two months later and on March 5th, the Georgian government announced that it had chosen Azerbaijan as a supplying source for its additional gas needs and also as its long-term partner. According to the Georgian Energy Minister Kakha Kaladze, Tbilisi and Baku reached an agreement, according to which Georgia will increase its gas imports from Azerbaijan by 500 million cubic meters per year. In exchange, Baku has agreed to reduce the price from 318 $ for a thousand cubic meters to 278-283 $. Thus, Georgia won’t have a need for Iranian gas, at least in the foreseeable future.
Nevertheless, the both sides’ continuing expressions of interest to develop the cooperation in this field on the one hand and the prospect of developing the plans to export Iranian gas to Europe through Georgia on the other, have caused the issue of Iran – Georgia energy cooperation to remain an important topic to discuss. Recent positive developments in Tehran – Tbilisi relations, from the re-abolition of visa requirements for the Iranian citizens to enter Georgia, to a multilateral agreement between Iran, Georgia, Russia and Armenia to create North-South energy corridor, have also seen as promising factors in this regard.
Obstacles to the development of Iran-Georgia gas cooperation

In discussing the challenges for developing gas cooperation between Iran and Georgia and the obstacles in the way, one can specifically point to three important factors:
1- Azerbaijan’s efforts to preserve its gas monopoly in Georgia: As mentioned above, Azerbaijan supplies about 90 percent of Georgia’s natural gas needs. Thus, the entry of any competitor in the field could reduce Baku’s share and benefits. Therefore, even at the expense of the reduction of gas prices, Azerbaijan wants to maintain its special status in Georgia and prevent Iran from entering this market.
2- Russia’s strategic considerations: Since the collapse of the Soviet Union, Russia’s main concern in the field of energy interactions in Central Eurasia has been preserving its monopoly in exporting gas to Europe, while preventing new rivals from entering this field. In this vein, it is natural that Iran-Georgia gas cooperation – due to the possibility of its extension and developing into Europe – could cause a serious concern for Russia. Furthermore, as mentioned before, Moscow has frequently used the energy factor as a political tool in order to control the centrifugal tendencies in its “Near Abroad”. Thus, diversifying Georgia’s energy partners could take this tool off Russia’s hand.
3- Infrastructure problems in the Iranian side: Years of international sanctions on Iran’s energy and financial sectors has deprived the country from necessary foreign investments for the development of energy production and transition infrastructures and addressing these problems is not possible overnight. In addition, despite the formal lifting of the most parts of the sanctions, international companies and institutions still wary of unilateral, non-nuclear sanctions imposed by the US and this very fact has made them doubtful about returning to Iran.
Implications of developing Iran-Georgia energy cooperation

In case of the realization of the current plans – or at least parts of them – and developing Iran- Georgia energy cooperation, the possible implications will represent themselves at three national, regional and trans-regional levels. At the national level, this trend can provide new income sources for Iran and as a result, improve its economic situation. At the same time, establishing economic ties with different countries – Georgia in the first stage and then, the European countries – could reduce Iran’s potential strategic vulnerability. On the Georgian side, more competition for transiting energy to the country can lead to reducing the prices, thereby, bringing economic benefits for Tbilisi. Furthermore, Georgia’s vulnerability against Russia will also be reduced.
At the regional level, due to the connection the Iranian pipeline might create between Georgia and Armenia, a basis could be provided for strengthening and developing of Tbilisi-Yerevan relations in general. In addition, by connecting to all of the energy suppliers in the region, Georgia could become the hub of multilateral energy cooperation in the region. Finally, at the trans-regional level, if the gas cooperation between Iran and Georgia could result in connecting Iran to the European markets, this will lead to increasing EU energy security and reducing its dependence on the Russian gas. This, in turn, could affect EU-Russia relations dramatically.

The energy field and specifically the gas sector, is a potential for cooperation between Iran and Georgia, which due to various reasons, has yet to be realized. However, Iran’s considerable gas resources on the one hand and Georgia’s energy needs on the other hand, have provided the best environment for developing the interactions between the two. The expansion of Tehran-Tbilisi energy cooperation not only yields obvious economic and strategic results, but will also be effective at the trans-regional level, benefiting the European countries in particular. In the current circumstances, it seems that the new atmosphere shaped regarding Iran in the “post-sanctions” era, has set the stage for the development of this field more than ever; but the realization of this potential requires a real and serious determination from the both sides and a specific plan to achieve this goal.
NOTE: This article first Presented at the conference on Iran-Georgia relations; Caucasus International University; Tbilisi on June 7th 2015.
Hamidreza Azizi, a lecturer at Shahid Beheshti University, is the fellow at IRAS.

ID: 1486
Author : Hamidreza Azizi