ONE FOR ALL AND EVERYONE FOR HIMSELF

Unexpectedly for many due to the previous political background in the region, the presidents of three countries signed an agreement at the end of November on the swap supplies of Turkmen gas to Azerbaijan through the territory of Iran. The agreement seems quite interesting not only because of its economic significance, although the latter demonstrates the solidarity between the three signatory states in maintaining energy security in the region on par with the political motives behind the deal.

Unlimited deal

Swap gas supplies between Azerbaijan and Iran to cover the needs of the Nakhchivan Autonomous Republic has a long history. Supplies have been in effect since 2004 and reached 1-1.3 million cubic meters of gas daily. Neither side has officially announced any changes to the swap mechanism due to the increasing volume of supplies or the number of regional players involved in these operations. Therefore, the signing of a gas agreement between Azerbaijan, Iran, and Turkmenistan came as a complete surprise.

Under the terms of the new contract, Turkmenistan will supply 1.5-2 billion cubic meters of gas to Azerbaijan annually through Iran. The daily volume of supplies will reach 5-6 million cubic meters, IRNA reports. The contract is open-ended and the actual deliveries will begin on December 22, 2021. Also, it is agreed that Iran receives gas from Turkmenistan and supply an equivalent amount to Azerbaijan on the border with Astara.

The head of the Administration of the President of Iran, Golamhosein Ismaili, explained that the new contract will make it possible for Iran to meet the needs of five provinces thanks to the transit of the Turkmen natural gas to Azerbaijan. "The gas agreement between Turkmenistan, Iran, and Azerbaijan will solve most of the problems with Iranian gas," Ismaili noted.

Iran believes that the new swap deal will add to the reputation of Iran as a transit country, turning it to a gas hub, and will increase Iran’s trade turnover with Turkmenistan, especially in the gas supplies. Under the previous government, Iran suspended the purchase of the Turkmen gas on January 1, 2017. The issue was even reviewed by the international arbitration court, which determined the exact amount of Iran's debt. With the conclusion of the new trilateral agreement, the two countries made a step forward in their relations in the gas sector.

In addition, now it will be possible to export the natural gas from the eastern coast of the Caspian Sea through Azerbaijan to Turkey and Europe along the Southern Gas Corridor (SGC).

"New contract means new opportunities"

Iran’s Minister of Oil, Javad Ovji, noted that the resumption of the Turkmen gas exports to Iran could be the first step in the comprehensive development of relations between the two countries. He noted that the Iranian administration is looking forward to expand bilateral relations with the neighbouring countries, including with Turkmenistan.

Mr. Ovji also expressed Iran’s readiness to export technical and engineering services to Turkmenistan, underlining that Iran had great potential in various fields, such as petrochemistry, oil refining, onshore and offshore drilling. Iran is also ready to export equipment for the oil and gas industry to Turkmenistan.

In addition, Iran is moving towards the settlement of the protracted dispute over the gas debt with Turkmenistan. In 2017, Turkmenistan stated that Tehran owed Ashgabat $1.8 billion for the supplied gas.

“We will soon pay the first instalment of our gas debt to Turkmenistan,” Mr. Ovji said, without indicating the exact amount of the debt.

Although Iran has large gas fields in the south of the country, it has imported gas from Turkmenistan since 1997 for distribution in the northern provinces, especially during the winter season.

In addition to the gas swap operations, the new Iranian administration expressed its readiness to develop cooperation with Azerbaijan also in the field of oil and field development.

“Deputy Prime Minister of Azerbaijan, Shahin Mustafayev, and I held constructive negotiations in Tehran. Experts of our countries discussed the development of oil and gas fields in the Caspian Sea. Experts already held the first meetings,” Mr. Ovji stated.

He believes that the existing cooperation between Azerbaijan and Iran in the oil and gas sector is mutually beneficial and productive, but there is great potential for deepening this cooperation.

In the next ten years, Iran plans to attract about $90 billion in the oil sector and about $70 billion in the development of gas fields from foreign and local funds, according to the head of the National Iranian Oil Company (NIOC), Mohsen Hojastehmehr. NIOC is currently negotiating joint oil and gas development with foreign companies.

Also, Iran plans to increase the export of crude oil and refining capacity by 1.5 times compared to the pre-sanction period during the Donald Trump administration (2018). If the US sanctions against Tehran are lifted, the Iranian authorities will begin an active search for foreign investors in the oil and gas production and oil refining sectors. Azerbaijan will also have a chance to evaluate this market to expand its portfolio of foreign projects. Considering that the parties have launched expert discussions on the joint development of the Caspian fields, we can assume that the discussion may also concern the disputable structures in the Caspian.

To "Dostlug"

The cost of gas that Azerbaijan will receive under the swap agreement from Turkmenistan has not been disclosed. In winter, after covering the needs of Nakhchivan, Azerbaijan will be able to use the excess gas to ensure its growing domestic consumption. It will also be possible to sell its own free volumes to Turkey or Europe, where the price of swap deliveries of natural and liquefied gas still exceed $1,000 per 1,000 cubic meters. In addition to revenues from the sale of swap gas to Azerbaijan, Turkmenistan also receives a new route for the export of its volumes, thereby expanding the geography of supplies. This in no way diminishes the significance of the project for the construction of the Trans-Caspian gas pipeline, but creates a land-based alternative to direct export across the Caspian. But this requires a careful study whether this is a good alternative or not. Indeed, an appropriate infrastructure will be required to deliver large volumes of gas from Turkmenistan through Iran along the Southern Gas Corridor. And most importantly, it requires the consent of Iran, which opposes the supply of the Turkmen gas through its territory to Turkey. Although, Iran perhaps will have no objections regarding the transit of the Turkmen gas to Azerbaijan for its subsequent export via the Southern Gas Corridor. After all, this will only increase Iran's role in the natural gas supply chain to Europe, which is experiencing a severe deficit trying to reduce its dependence on the Russian gas.

On the other hand, the implementation of the joint Azerbaijani-Turkmen project for the development of the Dostlug field will require to solve the issue of delivering the extracted hydrocarbons onshore for further delivery to markets. This means that the construction of a maritime transport infrastructure connecting the two countries simply cannot be avoided. The involvement of the Russian company LUKOil in this project will greatly facilitate the construction of the underwater pipeline.

Total reserves of natural gas in Turkmenistan are estimated at 50 trillion cubic meters. The country currently exports natural gas to China and Russia. The construction of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline is also ongoing.

For many years, Turkmenistan has been discussing with Azerbaijan, Turkey, Georgia, and the EU the possibility of constructing a Trans-Caspian gas pipeline (10-30 billion cubic meters annually). The EU has included the Trans-Caspian gas pipeline in the list of promising projects. For a long time, Moscow and Tehran were against the construction. However, in August 2018, in Aktau, Kazakhstan the presidents of Russia, Kazakhstan, Azerbaijan, Turkmenistan, and Iran signed the Convention on the Legal Status of the Caspian Sea. According to the document, the consent of all the Caspian countries is not required to lay a pipeline on the seabed of the Caspian Sea. The issue of construction is coordinated only between the states which will host the pipeline. In the case of the Trans-Caspian gas pipeline, these states are Azerbaijan and Turkmenistan.

Meanwhile, the American company Trans Caspian Resources (TCR) recently proposed to Turkmenistan to implement a different project—the Trans-Caspian Interconnector—a smaller gas pipeline connecting to Azerbaijan. “We propose a less ambitious project than the Trans-Caspian gas pipeline. This is a medium capacity line for the delivery of natural gas from offshore wells of Turkmenistan in the Caspian Sea to the existing infrastructure of Azerbaijan,” Allan Mustard, Co-director of TCR said.

According to the plan, the $500-800 million-worth project will make it possible to maximise the potential of the existing infrastructure with much smaller investments in comparison with the Trans-Caspian gas pipeline. The new pipeline can pump up to 12 billion cubic meters of gas annually. "The Caspian interconnector is a fairly simple project that can guarantee Turkmenistan the export of 10-12 billion cubic meters of natural gas in just 24 months," Mr. Mustard said.

Obviously, there are enough opportunities to make a choice. But definitely the first and most important step was taken when the three littoral states of the Caspian Sea agreed on joint actions while respecting the interests of each side. This is a huge success amid the existing complex geopolitical background.