Ashgabat Presses Iran for Higher Gas Price

A worsening energy dispute between Iran and Turkmenistan may have dealt a fatal blow to plans to build a gas pipeline from Turkmenistan to Europe, running through Iran, experts say.



The crisis, which erupted in late December when Turkmenistan halted gas exports to northern Iran, has bloomed into a full-scale diplomatic standoff between the neighbours.



Officially, Turkmen officials said the gas supply was cut because Tehran had failed to pay its bills, thus obstructing vital maintenance work to the 200-kilometre Korpeje-Kord Koy pipeline to Iran.



“Iran’s failure to fulfill its obligations and pay for previous natural gas shipments… is holding back completion of the repairs and maintenance work [to the pipeline],” said a foreign ministry statement.



Iran’s deputy oil and gas minister, Akbar Torkan, denounced the decision to cut off the gas during the freezing winter as “immoral”. Tehran said problems over unpaid bills ought to have been discussed bilaterally before Turkmenistan resorted to extreme measures.



Iran claimed the real reason Turkmenistan halted exports was to increase the pressure on Tehran to accept a doubling in the gas price from 75 to 140 US dollars per 1,000 cubic metres.



In the meantime, the proposed Turkmenistan-Iran-Turkey pipeline seems likely to become a casualty of the quarrel.



Since the early Nineties, Iran, Turkey and Turkmenistan have been discussing a 1,400 km-long pipeline with an annual capacity of 28 billion cu m, and last year they signed another memorandum confirming their plans.



With little sign of reconciliation in sight between two of them, work on the scheme now looks unlikely.



TURKMEN SEEK BETTER DEAL



While the two sides trade recriminations over the causes of the dispute, most energy experts agree the pricing issue is central.



The original gas agreement between the two countries was signed in 1998, and is intended to cover the period to 2024. This agreement has been periodically updated since then, with new arrangements for pricing and export volumes.



In 2006, Iran agreed that its neighbour could raise the gas price from 42 to 65 dollars per 1,000 cu m, while Turkmenistan pledged to increase annual exports from 5.8 to eight billion cu m in 2006 and then to 14 billion in 2007.



However, the increase in export volumes did not happen at the anticipated pace, and experts say no more than eight billion cu m went to Iran in 2007.



Last year, the Iranians agreed to another price rise, to 75 dollars per 1,000 cu m. One industry source quoted by Iranian media claimed this agreement included a pledge not to increase prices again for three years.



Many energy analysts believe the stoppage in December was an attempt to force Tehran to accept Ashgabat’s terms.



Oleg Lukin, an Ashkhabad-based analyst with the Neftegazovaya Vertical magazine, said price disputes were the only possible explanation. “If Tehran had agreed to pay a higher price, no repair works… would have stopped the gas exports,” he said.



Jonathan Stern, from the Oxford Institute for Energy Studies, also expressed doubt in the truth of the Turkmen assertion that repairs to the pipeline had become essential.



However, Murad Esenov, an expert on Turkmenistan and editor of the Swedish-based Central Asia and the Caucasus Journal, maintained that apart from pricing issues, there were other factors at play, such as the dilapidated state of the Turkmen gas industry and its inability to meet even current demand.



Esenov said Turkmenistan had spent too little on developing its gas industry and had not attracted foreign investment. “For all these years, they have been using what was left over from the Soviet Union,” he said. “The gas industry has not been modernised at all.”



As a result, Esenov believes Turkmenistan has recently been finding it difficult to produce enough gas to meet all its export commitments. In addition, he says exports have recently been curtailed to meet soaring domestic demand over the unusually cold weather.



“They simply reduced their exports in order to meet domestic needs,” he said. “Exports to Iran stopped completely and shipments to Russia and Ukraine were also significantly reduced.”



Turkmenistan has denied reducing gas supplies to Russia. In a press statement, the foreign ministry said the industry was “fulfilling its obligations and carrying out deliveries of Turkmen natural gas to Russia in strict compliance with contractual terms.”



TURKMEN HAVE THE UPPER HAND



The text of the 1998 agreement governing gas exports to Iran was never made public, so it is hard to judge who has the upper hand when disputes occur. In the current case, though, most experts believe Turkmenistan is in a better position to dictate terms.



Stern says there can be only two possible outcomes to the current row - either Iran agrees to the Turkmen conditions, or it does not get any more gas from this source.



Lukin agrees that Tehran is more likely to blink first. “It is not beneficial for Iran to lose the gas supplier for its northern provinces,” he said, explaining that while the Iranians are themselves rich in gas, it would cost them a good deal of money to build a new pipeline connecting their gas fields in the south to their northeaster provinces. The current Korpeje-Kord Koy pipeline meets this demand at a reasonable cost.



Tehran is now suggesting that it has the right to seek international arbitration on the dispute. Foreign ministry spokesman Mohammad Ali Hosseini said last week that the terms of the original contract give Iran the right to appeal to “international legal authorities in the eventuality of a breach of the gas agreement”.



But Stern doubts the original contract made provision for such arbitration, and if it did, he says, the legal case “would turn on the detail of the price clause(s) in the contract”.



According to Jonathan Hines, a lawyer from Dewey & LeBoeuf, a firm specialising in energy matters, contracts normally set out a fixed or escalating price table with reference to standard market indicators. The contract cannot simply have nothing to say about prices, he says.



Hines believes a mutually agreed solution to the dispute is more likely than an Iranian surrender. “They are neighbouring countries, not a private company,” he says. “They cannot go away from each other; they have to deal with one another on a daily basis.”



MORE COMPETITION TO BUY TURKMEN GAS



Turkmenistan has shown before that it can play hardball over energy. In 1997, it cut off gas supplies to Russia for two years after the two countries failed to agree on new prices.



Because Russia was the only major purchaser of Turkmen gas, Turkmenistan was eventually forced to make concessions. But the situation is now changing. While Moscow remains the dominant player, there are more potential buyers lining up in anticipation of future opportunities, not least China, which is planning to lay a pipeline to bring Turkmen gas to its energy-hungry economy.



Tehran will also have to face the fact that Russia has already agreed to pay more for Turkmen gas than the 100 dollars per 1,000 cu m it was charged last year. In November, the giant gas company Gazprom agreed to pay 130 dollars per 1,000 cu m for the first half of 2008, and then 150 dollars for the rest of the year. The price could well rise even further in 2009.



China, too, seems prepared to accommodate higher tariffs. Citing China Securities Journal, Reuters recently reported that Beijing had agreed to a price of 195 dollars per 1,000 cu m from 2009.



In other words, if Tehran does not agree to pay more, Turkmenistan may sell its gas to others at the most advantageous price.



DISPUTE AFFECTS WIDER REGION



While the crisis may have torpedoed any remaining hopes of constructing a pipeline to transport Central Asian gas to Europe via Iran and Turkey, analysts note that other practical difficulties had already rendered the project highly unlikely.



For one thing, the United States is bitterly opposed to any pipeline project that involves its arch-enemy Iran.



Meanwhile, what may look like a localised dispute has had a kind of domino effect on other states in the region. After Turkmenistan suspended the supply of gas to Iran, Tehran stopped exporting to Turkey, which in turn halted sales of the fuel to Greece.



Experts say that given the unstable relations between states in this region, chain reactions of this kind will always be a risk.



According to Stern, one lesson is clear – in order for pipeline projects to succeed, it is important that they involve “as few transit countries as possible”.



Abdujalil Abdurasulov is an IWPR contributor in Almaty.