PANNIER: Why the Turkmenistan, Iran gas “friendship” is back on

Iran appears set to become an important partner as Turkmenistan pursues its natural gas export ambitions.

A recent swap agreement that will see Turkmenistan provide up to 10bn cubic metres (bcm) of gas to Iraq via Iran is potentially just the start of a new era of gas cooperation between Iran and Turkmenistan.

Checkered past

After Turkmenistan became independent in late 1991, the only route for shipping Turkmen gas exports was made up of Soviet-era pipelines leading to Russia.

At that point, the Turkmen government knew that there were huge gas reserves in Turkmenistan, and would later confirm that the country had the fourth largest gas reserves in the world. However, having only one export route – and a route that led to Russia, the country with the largest gas reserves in the world – was clearly going to be a handicap for Turkmen gas exports, especially with Moscow also anxious to sell its gas.

In September 1995, Iran and Turkmenistan agreed on the construction of a pipeline to carry Turkmen gas to northern Iran. The 200-kilometre (124-mile) Korpeje–Kordkuy pipeline, with the capacity to carry 8 bcm/year, was launched at the end of December 1997.

Like Russia, Iran is gas-rich. It has the second largest gas reserves in the world, but, on the other hand, northern Iranian regions are not sufficiently connected to the gas pipeline system built in the southern part of the country where Iran’s gas fields are located.

It was less complicated for Iran to import Turkmen gas than to extend the pipeline system to the far north of the country.

In 2010, the two countries launched the Dauletabad–Sarakhs–Khangiran pipeline, with a capacity of 12 bcm/year.

Neither of the Turkmenistan-Iran pipelines have, however, ever reached full, or even half, capacity.

Turkmenistan can only pipe its gas to Iraq via Iran, hence Iraq will receive "Turkmen" gas that is actually Iranian gas under swap arrangements. Turkmen "swap" gas flowing to Europe via Turkey is probably a much more distant prospect, if a prospect at all (Credit: Mehr news agency).

In late 2016, with the global prices of oil and natural gas plummeting, Turkmenistan’s economy started to decline precipitously.

Turkmen authorities suddenly  demanded $1.8bn for gas supplies Iran received in the winter of 2007-2008 and threatened to cut off gas supplies on pain of non-payment.

Iran countered that Turkmenistan had taken advantage of the severe cold that winter to jack up prices “to $360 from $40 for every 1,000 cubic metres of gas.”

Tehran threatened to take Ashgabat to international arbitration, but on January 1, 2017, Turkmenistan went ahead and halted gas exports to Iran.

Both sides ended up taking each other to international arbitration and eventually the International Court of Arbitration ruled that Iran must pay Turkmenistan nearly $2bn.

Iran has been paying off this debt in installments and at the end of May 2023, then Iranian oil minister Javad Owji said that the debt had been fully paid.

Turkmenistan and Iran have still not reached agreement on a renewal of Turkmen gas exports, but it appears that might change soon.

Nowhere else to turn

At the end of 2008, Turkmenistan had two customers for its gas, namely Russia and Iran, while the first of what would be an eventual three pipelines to China was nearly finished.

If they had ever been realised, export contracts that were at that time under discussion with the three countries, could have seen Turkmenistan exporting more than 100 bcm of gas annually.

The deals did not, however, materialise and Turkmenistan’s fortunes as a gas exporter quickly took a turn for the worse.

An explosion on the pipeline to Russia in April 2009 halted Turkmen gas exports.

Then when the pipeline was fixed and operational again in 2010, Russia cut it gas imports from Turkmenistan to 11 bcm/year. Two years earlier, it had been buying more than 40 bcm/year.

The amount of Turkmen gas Russia imported continued to shrink until, in 2016, Russia unilaterally cancelled the deal entirely, only renewing it in 2019 for just 5.5 bcm/year at a maximum.

The contract that came of the renewal expired at the end of June this year. It has not been renewed, meaning Turkmenistan no longer sells any gas to Russia.

The two pipelines to Iran, with a combined capacity of 20 bcm/year, have never carried even half that much.

China has thus become Turkmenistan’s only gas customer, buying 35 bcm annually.

Construction of a promised fourth line of the pipeline network leading to China, Line D, that would carry an additional 30 bcm/year of Turkmen gas, has made very little progress.

Construction, moreover, never started on the long ago proposed Trans-Caspian Gas Pipeline envisaged as transiting some 30 bcm/year of Turkmen gas across the Caspian Sea to Azerbaijan, from where it could be piped to Europe.

Another project that was first mentioned in the 1990s, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, designed to carry some 33 bcm/year of Turkmen gas, is still far from becoming a reality.

Only Turkmenistan has done any significant TAPI construction on its territory, while Pakistan and India recently signalled they are losing interest in the project.

Thus, blocked from increasing exports in nearly every direction, Turkmenistan has turned its attention back to Iran.

Done deal. Iran's Ambassador to Turkmenistan Ali Mojtaba Roozbahani (left) and Turkmengaz chairman Maksat Babayev met to seal the agreement that means Turkmen gas for northern Iran and Iranian gas for Iraq in return (Credit: IRNA).

Iran lately cooperated with Turkmenistan in a swap arrangement for shipping 1.5-2 bcm/year of gas to Azerbaijan and is now involved in the gas swap deal that will enable Turkmenistan to sell gas to Iraq.

It is the deal with Iraq that seems to have sparked new cooperation betweem Iran and Turkmenistan.

According to Iranian media, “Iranian companies will construct a new 125-kilometre gas pipeline along with three gas pressure booster stations in Turkmenistan aimed at boosting annual shipments of gas to Iran to 40 bcm.”

Also as part of the deal, the existing two gas pipelines connecting Turkmenistan and Iran will require repairs, having been largely dormant for some eight years.

Local reports have not mentioned the cost of building the new pipeline or the three compressor stations, but it is notable that Iranian companies will be working inside Turkmenistan.

Turkmenistan generally keeps out foreigners and Turkmen companies have themselves built domestic gas pipelines, so the agreement to have Iranian companies conduct construction work for the new pipeline and compressor stations on Turkmen territory is interesting. But neither party has mentioned which Iranian companies will be involved, or when construction is expected to start.

Also interesting is the figure of 40 bcm/year of gas Iran intends to import from Turkmenistan from as an as yet unspecified date.

The swap deal with Iraq only calls for 10 bcm/year.

Notably, officials in another of Iran’s neighbours, Turkey, have this year often talked about securing Turkmen gas that could be exported onwards to Europe.

It is still unclear how Turkmen gas would reach Turkey, but another swap arrangement involving Iran has been mentioned as a possiblity.

Northern Iran still needs additional gas and the resumption of supplies from Turkmenistan would be welcome.

A matter of trust

The 45 bcm Turkmenistan shipped to Russia in 2008, combined with 2-3 bcm shipped to Iran that year, marked the peak of Turkmen gas exports.

In recent years, the Turkmen government has become more active in seeking out new gas customers. They added Uzbekistan as a buyer for 2 bcm/year in late 2022, but Turkmenistan is a long way from reaching its potential for selling gas.

Still, the Iranian agreement seems somewhat desperate, if for no other reason than that the biggest disputes between the two countries in more than three decades have centred on gas.

What’s more, the continued international sanctions applied to Iran make any partnerships with Tehran complicated at best, and risky at worst.

Yet a great difficulty for Turkmenistan emerged after, in the wake of Russia’s February 2022 full-scale invasion of Ukraine, the European Union in retaliation greatly curtailed its purchases of Russian gas. Ever since Russia has been reorienting its gas exports toward Asia, giving Turkmenistan a new competitor in the region.

Particularly alarming for Turkmenistan are Russia’s attempts to ship more of its gas to China, Turkmenistan’s primary gas customer.

Given the new realities, the fragile deal with Iran looks rather necessary, and it’s probably the best deal Turkmenistan can hope for at the moment.