Publication: Eurasia Daily Monitor Volume: 5 Issue: 81

Nearly four months after a pricing dispute shut down Turkmen natural gas deliveries to Iran, the pipelines are again open. The bad news for Tehran is that the new price per thousand cubic meters (tcm) is nearly twice what it paid Ashgabat in 2007.

On April 25 Iran’s Deputy Oil Minister Reza Kasaizadeh told reporters, “Iran has accepted the increase in the price of gas that it imports from Turkmenistan,” but he diplomatically declined to reveal the new pricing arrangement (Fars News Agency, April 26). Before the taps were closed, Iran’s annual purchases of Turkmen natural gas totaled 6 to 8 billion cubic meters, for which it paid $75 per tcm. Under the new agreement, Turkmen natural gas will now cost $130 per tcm until June 30, after which the price will rise to $150 (www.strana.ru, April 25). The new Turkmen-Iranian agreement is one more proof, if any were needed, that at a time of record-high oil and natural gas prices, the era of cheap energy is over, and energy-exporting nations have increasing clout in an interconnected world.

Turkmen gas is supplied to Iran’s northern provinces via the 124-mile, $190-million Korpezhe-Kurt Kui pipeline, which opened in December 1997. Korpezhe-Kurt Kui’s capacity is almost 300 billion cubic feet per year. Ironically, the pipeline, the first in Central Asia to bypass Russia, played an integral role in the efforts of the late Turkmen President Saparmurat Niyazov to break the Russian energy giant Gazprom’s stranglehold on Turkmen natural gas exports. If Iran had been expecting gratitude, then the events of last December proved a sharp shock.

Tehran’s first inkling that the new regime of Turkmen President Gurbanguly Berdimukhamedov might be contemplating price increases came on December 31, when Ashgabat unexpectedly cut off exports via the Korpheze-Kurt Kui pipeline, citing the need for “maintenance.” As Iran imported 23 to 24 million cubic meters of gas each day from Turkmenistan via Korpheze-Kurt Kui, it was left scrambling to cope with the shortage. After the cutoff, Iran reduced its daily gas exports to Turkey by 75 percent, from 20 to five million cubic meters. At the same time, severe weather hiked domestic demand, and gas distribution to some Iranian cities was disrupted.

On January 8 the Turkmen cutoff forced Iran to halt all natural gas exports to Turkey, forcing Ankara to use as much as a third of its stored fuel. The domino effect continued, with Turkey shutting off the transit of Azeri gas to Greece the following day because of Iran’s suspension of gas supplies. Adding to Turkish anxieties, Russia, Turkey’s other main supplier of natural gas, also reduced exports; and Ukraine reduced the amount of natural gas it sent to Turkey as well (The New Anatolian, January 8).

For Tehran the incident had a feeling of déjà vu. In December 2006, shortly after Niyazov’s death, Turkmen gas supplies were halted until a new Iranian-Turkmen agreement was signed, which stipulated that the price of Turkmen gas exports to Iran would increase and, in exchange, the volume of gas exported to Iran would double. After the December 2006 cutoff, an informed source in Iran’s Oil Ministry said that Turkmenistan was using the cutoff opportunistically to attempt to double the price of natural gas exports to the Islamic Republic (Fars News Agency, December 31, 2007). The agency quoted a knowledgeable official who said that the cutoff actually occurred after Ashgabat had defaulted on a $170 million debt owed to Iran for building the “friendship dam,” proposing instead to cover the outstanding debt by exporting water to Iran.

Currently Iran can produce 440 million cubic meters of gas per day, with about 380 million cubic meters needed for domestic consumption, an increase of 12 per cent over 2007 levels. The 29 years of U.S. sanctions have had an even more negative impact on the country’s natural gas output that on its oil production facilities. As a result, Iran’s natural gas potential remains largely unrealized, despite the fact that Iran has the world’s second-largest natural gas reserves.

The Iranian-Turkmen pricing dispute illustrates in microcosm the rising economic power of Central Asian energy producers, humbling even mighty Moscow. On March 11, following a meeting in Moscow between Gazprom CEO Alexei Miller and top energy officials from Kazakhstan, Turkmenistan and Uzbekistan, Gazprom announced, “based on the interests of the national economies and taking into account international obligations to ensure reliable and uninterrupted energy supplies, beginning in 2009 the sale of natural gas will be made at European prices” (www.gazprom.ru). Simply put, Iran has been outbid on Turkmen gas, first by Moscow but by also by China and Western energy companies, which have sent a stream of representatives into Ashgabat since Niyazov’s death.

Far from participating in the incipient Turkmen natural gas El Dorado, Iran has only been able to get Korpheze-Kurt Kui pipeline deliveries resumed, and at a price nearly double that of a mere four months ago. Ashgabat has great plans for the future. Last month Turkmengaz Oil and Gas Institute director Makhtumguly Khydyrov said that Turkmenistan would increase its annual gas output to 130 billion cubic meters in the near future (Neitral’nyi Turkmenistan, March 19). If Tehran wants to continue getting supplies of Turkmen natural gas, it will soon have to pay the same price as Ashgabat’s other customers and meanwhile can only watch from afar as sanction-free Western investment pours into Turkmenistan, transforming the country’s energy infrastructure as Iran’s own quietly deteriorates. To Iran, it must seem bitter recompense for helping Turkmenistan break Russia’s pipeline stranglehold a decade earlier.