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The Reason Why Iran Won't Become an EnergySuperpower


Tehran has a high domestic natural gasconsumption and needs more foreign technology and financial capital.


by Omid Shokri Kalehsar


In recent years, the Turkmen government hasrefused to toe the line of the United States and Europe, continuing gas salesto Iran, despite misunderstandings over costs affecting the economic relationsof both countries. These issues must be ironed out once and for all if anyincrease in ties is to be realized at a time when Iran desperately needs alliesin the region.


According to 2017 figures, the volume oftrade between Iran and Turkmenistan has already grown to a value of $1.7billion. Mahmoud Vazei, the Iranian president’s chief of staff, has set out thegoal of pushing this to an overall value of $60 billion. The roadmap to achievethis goal requires boosting ties across every industry, improving trade,transport and engineering service links. Oil products, petrochemicals,electricity, textile products and light industry are the most important exportitems Turkmenistan is equipped to provide to Iran. Thus, Turkmenistan is Iran’sstrongest partner in Central Asia and the Caucasus, despite a decline in tradeover recent years.


The cooperation between the two countriesinvolves gas swaps, the development of banking cooperation and technical andengineering services, with further progress expected on the Sarkhas Bridge,which will allow for road and rail links to become operational within a shorttime.


Gas Dispute


According to an agreement signed in 1997,Turkmenistan exports gas to Iran, but almost every year during the wintermonths, short-term price hikes are experienced. In 2006, the country stoppedexporting gas to Iran and demanded an increase of nine times the price, whichIran accepted for a brief time. The same action was taken by Turkmenistan inthe winter of 2016, but this time Iran refused to comply.


Referring to Iran's plan to sueTurkmenistan's Turkmen Gas company for the quality of the gas supplied, theIranian Minister of Oil stated, “We have another complaint the InternationalArbitration Court in order to reconsider the price of its export gas, becausewe believe the prices are too high and should be reduced.”


The gas dispute between Iran andTurkmenistan, which has only been inflamed since the beginning of 2017 when thecountry once more cut off gas exports to Iran, has come to no compromise despiteperiodic negotiations. It is most likely that the dispute will be referred tothe International Arbitration Tribunal. The threat of cutting gas exports toIran is a tool that Turkmenistan has used many times over the past few years.Indeed, in recent years, given the need of the northern and northeasternregions of Iran to pump extra gas from Turkmenistan, Tehran often folded todemands. However, due to the increase in gas production in South Pars andentering of the eleventh stage of the gas transmission network, the latestthreats and ultimate cuts were far less effective. Therefore, after Turkmen gaswas cut off in January 2017, Iran announced that ultimately it would beTurkmenistan who missed out from the action.


While Turkmenistan has demanded between$1.5 billion to $1.8 billion from Iran for gas exports in 2006–2007, Iran hasnot accepted the figure on principle, and calls for referral to internationalarbitration. In January of 2007, when the cold of the winter peaked and morethan twenty provinces of the country suffered freezing temperatures,Turkmenistan took advantage of the situation and announced that it would raiseits export gas prices to Iran by nine times the price. Forty dollars perthousand cubic meters was thus risen to 360 dollars, and the extent of thishike marks the crux of Iranian policymakers’ anger.

虽然土库曼斯坦要求伊朗对在2006 - 2007年间出口的天然气出口支付15亿至18亿美元,但伊朗原则上不接受这个数字,并呼吁提交国际仲裁。2007年1月,当冬天的寒冷达到顶峰,伊朗20多个省份遭遇严寒时,土库曼斯坦利用这一情况,并宣布将其向伊朗出口的天然气价格提高至原先的九倍。因此,由每千立方米40美元上涨到了360美元,这一上涨幅度也标志着伊朗决策者愤怒的关键所在。

Furthermore, with sanctions making itdifficult to carry out the banking transactions required to make payments, theability of Iran to make such payments has fallen into question, which may leadto the subject being shelved for the time being.


Gas Swap


The gas transmission capacity of thispipeline is 14.5 billion cubic meters per year. Iran imported about ninebillion cubic meters of gas from Turkmenistan in 2015, but in the winter of2016, Turkmenistan cut gas exports to the Iran due to Iran’s $ 1.8 billiondebt. Thus, Iran only received around six billion cubic meters of gas.


Since the beginning of 2018, Turkmenistanhas continued to withhold gas exports to Iran due to what it calls the“nine-year delay in Tehran's $ 1.8 billion debt settlement.” Despite thisexport restriction, a gas swap has continued. Since October last year, Iran hasreceived Turkmen gas under the so-called Swap Agreement, delivering the sameamount of gas to the Republic of Azerbaijan.


One month after the cutting of Turkmen gassupplies to Iran, officials of the Islamic Republic claimed Turkmen gas wasstill being swapped regardless. The Ministry of Oil has expressed toTurkmenistan its willingness to engage in a long-term cooperation in the energysector as well as joint exports to India, Pakistan and the Gulf states.


New talks regarding a potential gas swapbetween Turkmenistan and two Indian companies, Gil and Indian Ocean, werediscussed in Tehran. The talks resulted in a contract agreement to supply Indiawith gas through a maritime pipeline. Turkmenistan, on the other hand, wants toexport gas to India in a more affordable and secure manner, which can only beachieved through joint bilateral negotiations between Turkmenistan, Iran, andIndia. Turkmenistan has welcomed plans to launch the construction of a pipelineand called for its gas to once more funnel through Iranian pipes.


The increase of production in joint fieldsis a priority for Iran, which is missing out due to vastly better investmentsin fields along its borders with Iraq and Gulf states. Investments in fieldsshared with Turkmenistan have a strong chance of yielding fruitful results. Thepriority is to exploit common gas fields in the north and northeast part of thecountry where it can be immediately consumed at minimal transit costs.According to Bijan Zanganeh, “The joint fields of Iran and Turkmenistan areIran’s priority, this is now an Iranian exploration project, and Iran hopes thatthe results of these studies will be sent to the Central Oil Company.” Thepolicies of the Ministry of Oil include joint projects in the fields of oil,gas and petrochemicals with neighboring countries. Therefore, Iran is ready tocarry out design, construction of oil and gas transmission lines,pressure-boosting stations, refining and separating liquids from gas andconverting them to other petrochemical products, and to negotiate withTurkmenistan in the same way.


With new sanctions back in place, Iran nowhas no opportunity to increase its swap capacity with Turkmenistan.Additionally, it cannot expect to have great amounts of investmentopportunities to explore. India was interested in importing Turkmen gas viaIran’s infrastructure, but now it seems intent to wait until Iran’s problemswith the United States are resolved. Iran can, on the one hand, rely on itspolitical, cultural, and economic capacities to provide a stronger basis forits economic relations with its neighbors. But that means Iran has to know whento pay attention. Turkmenistan’s foreign-policy priority focuses on cooperationwith its neighbors, including Iran, which Turkmenistan’s president has signaledon various occasions. On the other hand, Iran must seek solutions for morereliable contracts than those based on oil or limited gas transfers toTurkmenistan. Long-term contracts with a clear and workable system of pricingwould go a good way towards achieving this.


Under normal circumstances, Iran’s energyinfrastructure could transfer oil and gas from the Caspian Sea to consumermarkets across the globe. As it is, the country is struggling under sanctions.It now relies on production from the South Pars and other gas fields which,despite being sufficient to fuel current domestic demands, may fall behind andonce again make imports from Turkmenistan necessary. Iran has a high domesticnatural gas consumption and needs more foreign technology and financialcapital. Easing tensions with the international community is the best—andperhaps the only—tool for Iran to achieve its own interests. In sum, despiteexisting cooperation, there are still many areas in the energy sector that canbe used to promote bilateral relations in the interests of both neighbors, butthe expansion of cooperation depends on solving the challenges and making themost of the opportunities that come.


Omid Shokri Kalehsar is a Washington-basedsenior energy security analyst, and Ph.D. Candidate in International Relationsat Yalova University, Turkey.


Image: Reuters