NATURAL GAS QUARREL IRAN WANTS HIGHER PRICE FOR SUPPLY TO RUSSIANS

Press, Volume CXIV, Issue 33601, 1 August 1974, Page 16

NATURAL GAS QUARREL IRAN WANTS HIGHER PRICE FOR SUPPLY TO RUSSIANS

(By

RALPH JOSEPH,

, reporting from Teheran on July 14 )

If the Russians were laughing up their sleeves when the oil-producing nations were putting a squeeze on the consumers, they are doing so no longer. The moment of truth caught up with Moscow recently when Iran began seeking a price increase for natural gas she is selling to the Soviet Union. Just what can happen to the gas flow to the southern Caucasus it the Russians do not pay up was illustrated graphically a few days ago when the Iranian gas pipeline blew up a few miles south of the Soviet border. Officially it was described as an “accident,” nothing more.

The pipeline itself is historic in the sense that it was one of the products of Khrushchev’s “co-existence" policy. It was built under the 1966 gas-for-steel agreement between Iran and the Soviet Union, after the Shah’s bid to acquire a steel mill from the United States was politely turned down. The Russians agreed to build a steel mill for Iran in return for gas supplies to their southern republics. They got the gas on the cheap then — at 18.7 cents (U.S.) for 1000 cubic feet. In the belief that gas prices would go down even further, the Russians tried to play it smart. They included a clause in the deal pegging the gas prices to those of oil, and allowing for the gas prices to be boosted or decreased with those of oil. As it turned out, oil prices went up, and a year ago the Russians found themselves paying 30 cents a 1000 cubic feet of gas. To make things worse, between October and December last the posted prices of oil took a fourfold jump from $U52.99 a barrel to $11.65 a barrel. When Iran recently asked for an increase in gas prices from 30 to 62 cents a 1000 cubic feet, the Russians began to squirm. Iran could have asked for a fourfold increase to $1.24 a 1000 cubic feet. Why it did not is still a mystery, but officials explain that they wish to keep their relations with the Russians friendly. The Russians do not appear to have reciprocated. They say that the prices of supplies to the Isfahan steel mill have remained steady and have put out a barely disguised threat to raise the prices of equipment still going to the mill if gas prices are increased forcibly. Steel mill costs In fact, under the original deal the steel mill was supposed to have been built for SUS3SO million. The actual cost, when the mill was completed last year, worked out to 700 million dollars. In addition Iran spent another 700 million dollars to build the gas pipeline from her southern gasfields to the Soviet Union. Before the pipeline “accidentally” blew up near Rasht a few days ago. the Iranians have been claiming that the Soviet Union owed them more than 50 million dollars in back payments for the gas, at the new demand price. The Isfahan steel mill has not been fully paid for yet, but Iran now has an oversupply of oil dollars with which to pay off the Russians, if it comes to the crunch. In retaliation the Russians could probably cut off the necessary supplies of equipment, but this would cause only a temporary setback. Iran is already building another steel mill with West German technical assistance. In fact the quarrel intensified soon after Iran

began to negotiate a new three-way deal with the Russians for the supply of Iranian gas to the West Germans. In this arrangement Iran was to supply 13,000 million cubic metres of gas to the Soviet Union by a new pipeline running parallel to the old one. In exchange the Russians were to supply West Germany with an equivalent quantity of gas by another pipeline from their Orenburg fields near Volvograd. These fields are nearer Europe and the Russians already have gas pipelines supplying Europe from there. Had the deal come through, it would have involved a revenue of 1000 million dollars from the Germans for the Iranians in the initial phase. The Russians would have received a “transit fee” from Bonn. Profit motive The negotiations began to hit serious snags when the Russians demanded a “transit fee” equivalent to three times the price of the gas the Germans would have paid Iran. In addition, the Russians sought to keep 3,000 million cubic metres of the gas for themselves. Before this new deal could be concluded Iran determined to secure a fair price for the gas already going to the Soviet Union, based on world market prices. Iran has complained that after buying gas on the cheap the Russians were selling their own gas to Europe at four times the Iranian price. The profit motive seemed to be a major incentive for the Russians to buy gas

from Iran, considering that the reserves in their own fields are so huge they have enormous surpluses for export. Besides the Orenburg field, the Russians have recently discovered large fields in Kazakhstan in Central Asia. They have been hoping to sell this gas to the Japanese through another pipeline in eastern Siberia. In addition, the Russians have big gasfields in Soviet Azerbaijan near Baku. Originally Western observers were puzzled that the Iranian gas should be going to precisely this region. However, the recently intensified Soviet search for more oil in the same area provides a clue to the riddle. With the Soviet oil reserves rapidly falling in the Baku area, the Russians have been desperately looking for alternative sources of energy for their industries in the south-west-ern republics without having to build expensive pipelines from gas and oilfields in other areas of the Soviet Union. It makes an interesting footnote to add that the Russians are going to import 2,800 million cubic metres of gas from Afghanistan this year, in a region where they least need it — Tajikistan, north of Mazare Sharif. The Russians have their own gas and oil fields in that area. But once again, they will get the gas on the cheap from the Afghans, enabling them to preserve their own gas for export or future use. Besides, the gas sales are the only way the Afghans can pay for the Soviet weapons they are getting.