Iran's Natural Gas Connection

Among the more subtle effects of the Iranian revolution has been its impact on the natural gas markets in Europe and the fertilizer business in the US.

A bit of background is useful: aside from the United States, few nations have employed natural gas as a major fuel until fairly recently. Gas provides about a third of all energy in the U.S. and, of course, is in keen demand because of its cleanliness and overall efficiency.

Outside of the U.S., the international trade is just beginning to burgeon. Japan is beginning to use large quantities in the form of liquefied natural gas from Indonesia and Brunei; gas in Japan is employed to make electricity. Natural gas is flowing in large quantity into Great Britain from North Sea fields, and now provides 19 percent of the energy source there. 'And in the 15 years since it was first introduced on the European continent, gas has rapidly become an important fuel. It now accounts for 15 percent of the energy needs in continental western Europe.

On the continent, 88 percent comes from on-shore fields-mostly from the huge Groningen deposit in the Netherlands-with the balance coming from Algeria, the Soviet Union and Libya. (Shell and Exxon play a key role in carrying Groningen gas to consumers.) Within another five years more gas will be pouring in from the Dutch and Norwegian sectors of the North Sea.

As an indication of how important gas has become in Europe, the continent has been underlaid with a pipeline grid. Two major pipelines link the North Sea and the Mediterranean. At the same time, an East-West system is being constructed to carry gas from the Soviet Union and, depending on the course of the revolution, some day from Iran.

The Soviet Union's share of Europe's gas market is expected to increase over the years as it builds pipelines to carry fuel from the far off reaches of Siberia and the Soviet Far East to Moscow and thence down into western Europe.

Meanwhile, in order to meet existing contracts in western Europe and compete for new business, the Soviets have employed a switching arrangement with Iran, whereby the Soviet Union imports Iranian gas up into the Caucasus region, thereby lightening the demand both within that part of the nation and among nearby Eastern European countries. The import of Iranian gas thus allows the Soviet Union to exports its own supplies to nations such as West Germany and Italy.

Overall, Soviet gas supplies could turn out to be of considerable significance to western Europe. Total Soviet fuel sales to the West, of which natural gas was an important part, ran to $6 billion in 1976 or 60 percent of total foreign exchange earnings from commercial exports to western nations.

Under the Shah, there were plans to strengthen the gas trade between Iran and the Soviet Union by construction of a second major line (IGAT-2) to accommodate increased Soviet imports. With the onset of the revolution, however, the projected pipeline was shelved, and the flow of gas along the existing pipeline has been interrupted on several occasions. Most recently, the Soviets and Iranians have been engaged in negotiations aimed at increasing trade ties in a variety of areas, including gas. And it may well be that over the long run, natural gas-not oil-will become the commodity that links the interests of western Europe, the Soviet Union and Iran, and forms the foundation on which a wider set of trade agreements between Iran and the Soviet Union can be elaborated.

The Iranian revolution may have unexpected effects on Occidental Petroleum's big fertilizer deal with the Soviet Union. This project, which involves a swap of U.S. phosphate for Soviet ammonia, has been under sharp attack within the U.S. by fertilizer companies which fear import of the Soviet products will ruin their markets. However, the revolution has been reported in the business press to place pressure on the Occidental scheme from quite a different angle. Interruption of service along the existing gas pipeline between Iran and the Soviet Union and cancellation of the second project line may cause the Soviets to reshuffle gas, in the process denying the fuel to an ammonia complex near Odessa. This step could call into question the entire Occidental project.