Turkmenistan and Iran: Bad Gas

On January 1, 2017 Turkmenistan halted deliveries of gas to northern Iran, claiming Iran had failed to pay $1.8 billion in debt. As 2018 dawns, the dispute looks likely to head to international arbitration. Negotiations between Tehran and Ashgabat throughout 2017 have failed to settle the question of who owes what to whom.

The roots of the dispute reach back a decade, to the winter of 2007-2008. That winter, reportedly an exceptionally cold one in northern Iran, talks between the neighbors on the price of gas broke down. As the New Year dawned, RFE/RL reported at the time, Turkmenistan cut supplies to Iran. Ashgabat said the halt was for maintenance work on the pipeline but Tehran had other opinions on the matter.

While Iran has the world’s second largest proven gas reserves, behind Russia and several places ahead of Turkmenistan, its domestic pipeline network cannot sufficiently supply northern Iran during times of increased demand, such as the depths of winter. Iran’s efforts to further develop its internal pipeline networks were slowed in large part due to the impact of sanctions on the Iranian economy.

The on-the-ground reality – that Iran could not adequately supply its northern provinces during winter – led to Tehran’s agreements to import gas from Turkmenistan in the late 1990s. In 1997 the two countries inaugurated a 200-kilometer “friendship” pipeline.

But in late 2007, as a harsh winter increased Iranian demands, new Turkmen President Gurbanguly Berdimuhamedov wanted to up the price.

Then-Iranian Oil and Gas Minister Gholamhossein Nozari said at the time that Turkmenistan wanted to nearly double the the price from $75 to $140 per 1,000 cubic meters.

Ashgabat said that Tehran was already behind in payments and that the country’s failure to pay for past deliveries led to a lack of funds to repair the pipelines, thus the cut-off. Tehran, predictably, denied Ashgabat’s version and called the cut-off in winter “immoral.”

Eventually deliveries resumed. Details of the deal that made the resumption of gas relations possible are at the core of the current problem as Turkmenistan claims that the $1.8 billion it says Iran owes stems from the 2007-2008 period.

Iranian sources now say that in 2007 the country had been paying $40 per 1,000 cubic meters (not $75)  and that Turkmenistan demanded, and got, a nine-fold increase to $360 per 1,000 cubic meters.

This is the source of the $1.8 billion Ashgabat is looking for. What isn’t clear is what was in the original agreement between the two countries and what terms, if any, it provided for a change in price. Further, whatever deal was struck in 2008 is similarly vague.

The National Iranian Gas Company (NIGC), in a 2017 New Year’s Day press release, accused Turkmengaz, the Turkmen state-owned gas company, of violating their 20-year-old gas deal and the spirit of good neighborliness “from time to time.” NIGC said that over the previous three years, Iran had settled its debts with Turkmenistan “based on the price agreed upon in the aforementioned deal” and that Turkmengaz cut off supplies the day after the two countries had agreed to continue gas cooperation for five years. Iran essentially depicted the cut-off as a blind-side.

Officials from Iran and Turkmenistan spent much of 2017 trying to square their divergent claims. Neither necessarily wants to take the case into an international arbitration court – which may invariably lead to unwanted transparency into their bilateral business – but both have floated (or threatened) the idea should negotiations continue to falter.

In January 2017, Mehr News Agency (an Iranian press agency) reported that Iran’s Oil Minister Bijan Zanganeh had “stressed that international arbitration on the issue is not on the table for now…” but later statements from the NIGC suggested that it would make an appeal to the International Court of Arbitration (ICA).

In early December 2017, Turkmen state media reported that the head of Turkmengaz, Myrat Archaev, said in a televised conference with President Berdimuhamedov that negotiations with Iran had been unsuccessful and that the Iranian side had proposed taking the issue into arbitration. Berdimuhamedov then instructed Archaev to accept the offer and start getting the paperwork together.

The Iranian side made similar statements.

The managing director of NIGC, Hamid Reza Araghi, reportedly said, “Iran and Turkmenistan both have claims that need to be addressed but we believe that international arbitration is the last solution to the dispute.”

“NIGC would welcome it if Ashgabat prefers to resort [to] international arbitration for settling the row,” he said, but also underscored that “Iran always prefers negotiation over international arbitration for solving such matters.”

In the end, this dispute may ultimately be meaningless, except, perhaps, for Turkmenistan's coffers.

On the Iranian side, the rollback of international sanctions following the settling of the Joint Comprehensive Plan of Action and the Turkmen cut-off contributed new energy to Iran’s internal pipeline network development. In August, the Damghan-Neka gas pipeline came online, connecting the country’s gas-rich south to the north. The pipeline is expected to deliver 35 million cubic meters of natural gas per day to northern Iran, bolstering the attitude in Tehran that the country will no longer needs Turkmen gas.

In a sign that the gas spat has damaged Iranian-Turkmen relations more deeply than bank accounts and gas volumes, Tehran in October rejected a proposal from Turkmenistan for a gas-swap deal, which would have effectively allowed Turkmenistan to export gas into Turkey where it could be pumped into the under-construction Trans-Anatolian Natural Gas Pipeline (TANAP). Turkmenistan, under the proposal, would export gas to Iran and Iran would export the same volume to Turkey, given that there’s no current pipeline that would allow a direct Turkmen-Turkish connection.

Araki, NIGC head, said Iran was not “positively disposed” to the idea and that Iran is generally “against the sale of a rival country's gas to Turkey via swap operations.” Interestingly,  swap-deals for unreported but arguably small amounts of Turkmen gas to reach Armenia and Azerbaijan reportedly remain in place.

Turkmenistan, at present, is left with only one significant gas customer: China.

In 2009, the first line of the Central Asia-China gas pipeline was inaugurated, bringing gas from Turkmenistan, Uzbekistan, and Kazakhstan to China. The pipeline was largely financed by China, leading regional experts to ponder when (or if) Ashgabat will make a profit beyond repaying its debts to Beijing with gas.

In 2008, Russia was Turkmenistan’s main customer, with Gazprom purchasing more than 40 billion cubic meters of gas that year from Turkmenistan. By 2014 imports had fallen to around 11 bcm. In December 2014, Gazprom notified Turkmenistan that it would limit its purchase in 2015 to 4 bcm, and by year’s end had only imported 2.8 bcm.

In July 2015, Turkmenistan said Gazprom hadn’t paid for any gas so far that year and later that month Gazprom filed a lawsuit in an international arbitration court in Sweden demanding a revision of prices. The case was suspended in late 2016 (set to resume in 2019 if an out-of-court solution is not found). Earlier that year, Russia said it would cease importing gas from Turkmenistan entirely.

Gas exports to China run around 30 bcm annually and Turkmenistan has consistently claimed that the amount will double by 2020. That, however, seems increasingly unlikely as Chinese growth slows from its past breakneck pace. Additionally, China and Russia are working on a gas pipeline – the Power of Siberia – which, if completed, would further undercut Turkmenistan’s dreams of increased Chinese sales.

Iran was always a smaller customer than Russia or China, but provided a diversification that was important to the overall stability of the country’s economy. Consider the shift of Turkmenistan’s gas business. In 2008, Turkmenistan exported nearly 45 bcm of gas, mostly to Russia with the rest to Iran. By 2016, Turkmenistan exported less than 35 bcm of gas in total, most of that to China, none to Russia, and the remainder to Iran. By 2018, Turkmenistan’s major customers will have dwindled to just China.

Dreams of exporting gas to Turkey – and through Turkey, to Europe – are blocked by both Iran and Russia. At the same time, despite constant optimism from the participating countries, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline remains what Luca Anceschi of the University of Glasgow terms a “virtual pipeline” – an infrastructure project “that wields invaluable influence only when it is employed as a foreign policy tool or permeates domestic discourses of progress framed by the elites of the four consortium partners” but which, in physical terms, has not made any progress.

Gas is Turkmenistan’s main export, accounting for some 70 percent of state revenues according to Bruce Pannier of RFE/RL. Therefore, the troubles described above most certainly are having an impact on the country’s economy; not that anyone would know that from official government statements. But the signs are there. In the past year there have been more and more reports that take the shine off official statements that all is well in Turkmenistan’s economy: the government decided to roll back subsidies on electricity; the prices for basic foodstuffs, like sugar, flour, and oil, have been rising rapidly, as have rents and the price of medicines; farmers went on strike in Lebap province, claiming they had not been paid in months; parents in Dashoguz Province protested against a decision to increase the price for children to attend kindergarten ten-fold, followed by a government mandate that state employees could be fired if they did not send their children to kindergarten; and more.

Whether this dire financial situation comes to a head in 2018 or not, it’s not surprising that Ashgabat is keen on a $1.8 billion check from Tehran.