The volume of trade between Iran and Turkmenistan is expected to double this year, due in large part to Iran’s growing need for natural gas. As Tehran has sought to increase its imports, Ashgabat has made efforts to scale up its gas production in order to meet Iranian demand. To increase commerce and promote economic integration between the two countries, efforts are also being made to upgrade transportation infrastructure, especially railway connections. The growing economic and energy cooperation between the two countries emphasizes their growing bonds and mutual gains from trade.
With the second- and fourth-largest natural gas reserves in the world, Iran and Turkmenistan each play an outsized role in the global energy market. Until the present, Ashgabat’s planning for expanding its gas sales is centered on China; it also announced a plan to double its natural gas export capacity to China after the construction of a fourth gas pipeline between the two countries. Once the construction is complete, Turkmen leaders expect to export 65 billion cubic meters of natural gas to Beijing per year, strengthening China’s energy security and leading to a windfall in profits. However, although neighboring Iran has even greater reserves than Turkmenistan, it witnessed an energy crisis last winter after its natural gas production was unable to meet local demand. Consequently, Iran’s Ministry of Oil was forced to cut off gas to large industrial units, including cement, steel, and petrochemicals, leading to a further decrease in economic output. To shore up its domestic supplies, Iran has turned to Turkmenistan.
Iran’s inability to produce enough gas—in spite of its enormous domestic reserves—is largely the fault of long-term infrastructure issues, exacerbated by a lack of access to foreign equipment and capital due to international sanctions. For several years, Tehran has bought gas from Turkmenistan to supply its northern regions. Both nations see the need to work together on energy issues, since Iran wants to meet the demands of its northern provinces while Turkmenistan wishes to diversify its energy strategy. The two nations’ hydrocarbon partnership gives Turkmenistan the chance to broaden its market and increase its economic security; conversely, it gives Iran access to hard foreign currency and allows it to evade international sanctions.
Economic relations between Iran and Turkmenistan stretch back almost to that country’s independence from the Soviet Union in 1991. A natural gas deal was negotiated between the two countries in July 1995, under the leadership of Iranian President Ali Akbar Hashemi Rafsanjani and Turkmen President Saparmurat Niyazov. The 200 km Korpeje-Kurtkuyu pipeline, constructed in 1997, has an annual capacity of 8 billion cubic meters (bcm), while the 182 km Dauletabad-Sarakhs-Khangiran pipeline, constructed in 2010, has an annual capacity of 12,5 bcm. Natural gas is transported by the Korpeje-Kurtkuyu pipeline from the Korpeje field in western Turkmenistan to the Kurtkuyu region in northern Iran. Although the pipeline’s capacity is not very large, it is significant historically since it transports natural gas from the post-Soviet Caspian Sea to its first export route without Russia’s involvement.
The gas import agreement from Turkmenistan was signed for a duration of 25 years. According to this contract, Iran was able to import up to 12 billion cubic meters of natural gas annually from Turkmenistan. The favorable price of Turkmenistan’s gas provided Iran with the opportunity to benefit by purchasing gas from this country and exporting gas at higher prices to other countries. In 2003, Iranian and Turkmen authorities signed a 10-year agreement, whereby Turkmenistan would annually export 640 million kilowatt-hours of electricity worth $8.12 million to the Islamic Republic of Iran.
In November 2021, Iran, Turkmenistan, and Azerbaijan signed an unusual three-way gas swap agreement. Under the deal, Turkmenistan will export natural gas to Iran, while Azerbaijan will deliver an equivalent volume of gas to Turkmenistan’s border with Iran. The gas swap arrangement aims to enhance regional energy cooperation, optimize gas supply routes, and ensure stability in gas exports; it is seen as a positive step towards diversifying gas sources and strengthening energy security in the region. By the end of May, Javad Owji, the Iranian Energy Minister, announced that the payment of the country’s debt had been completed, resolving the longstanding issue between the two countries. The settlement of the debt highlights Tehran’s commitment to honor its financial obligations and reinforces the bilateral energy cooperation with Turkmenistan. Owji said that the gas supply agreement between Iran and Turkmenistan was anticipated to be signed soon, adding that the two parties are in the last stages of discussions. The agreement represents a strengthening of Iran and Turkmenistan’s energy cooperation, and it is anticipated to improve gas trade and guarantee a steady supply of natural gas between the two countries.
Natural Gas Shortage in Iran
Current trends project that Iran’s natural gas shortage will grow as extraction capacity fails to keep up with growing demand. According to a report by the Majlis Research Center, Iran’s total supply of natural gas will reach 898.7 million cubic meters per day by 2041, while the consumption of all sectors will be equal to 1410.8 million—an imbalance of 512 million cubic meters per day. If this problem is not addressed, Iran’s long-term stability will be impacted, as societal dissatisfaction will reach such a level that Tehran will be hard-pressed to contain it.
In 2021, the natural gas shortage period began in autumn, but in 2022, it started in summer. The country posted a deficit of 250 million cubic meters of gas per day during Winter 2021-22, according to Oil Minister Javad Owji—a greater deficit than the entire gas consumption of Turkey. At the same time, Iran has experienced a sharp rise in domestic gas consumption, fueled by industrial demand, population growth, and subsidies that reward excessive usage. These elements, along with inadequate production and infrastructure investment, have made it challenging to meet the nation’s gas demand. To address Iran’s gas scarcity issues, better management, investment, and energy efficiency measures are needed—measures that seem increasingly unlikely to be adopted in Iran’s current environment.
Finding a Sufficient Solution
The difficulties and weaknesses in Iran’s gas sector—declining production, aging infrastructure, poor management, and rising domestic demand—have created a steadily growing problem for the Iranian government, which has been forced to resort to extreme measures in order to save the power grid from collapse. To address these problems and stop the gas crisis in Iran, significant investments, technology improvements, and governmental changes are urgently required. To guarantee a steady and sustainable gas supply that can satisfy Iran’s expanding demand, it is essential to put into place effective methods to boost production, modernize infrastructure, and promote energy efficiency. None of these things, however, are likely to occur under the current sanctions regime, and the future of Iran’s energy sector has never been more uncertain.
One lifeline Tehran has is Turkmenistan, which lacks the high gas demand and systemic electricity problems that Iran has. It is claimed that signing the gas swap contract and doubling its volume, settling the gas debt to Turkmenistan, and reviving the gas import contract from this country are among the measures taken by the Raisi administration to save Iran from an energy catastrophe and increase its share of the regional gas trade.
However, dependence on a foreign partner for essential hydrocarbons—apparently antithetical to Iran’s “resistance economy”—has its own drawbacks. In January, Turkmenistan briefly halted its gas supplies to Iran and Uzbekistan, owing to money-related problems and payment disagreements with both nations. Iran has sought to increase its gas imports from Turkmenistan by double, but Turkmenistan could cut off Iran’s access to gas over the forthcoming winter if Iran doesn’t make payments on schedule. This situation highlights how crucial it is for Iran to guarantee quick payment to Turkmenistan to maintain a regular flow of gas and prevent supply interruptions during the winter—with ominous consequences should it be unable to.
Increased imports from Turkmenistan or any other nation cannot be relied upon to solve Iran’s persistent natural gas shortfall. The South Pars field’s falling production and postponed Phase 11 completion show that the natural gas crisis will continue, with particularly severe impacts during the forthcoming winter months. However, taking advantage of the chance to double Turkmenistan’s natural gas exports to Iran has enormous potential; it could help to avert Iran’s energy crisis, strengthen Turkmenistan’s crucial position in the region’s energy security, and improve the bilateral ties between the two countries. Along with meeting Iran’s energy requirements, this partnership will improve the general stability and cooperation in the region’s energy sector. For long-term relief, the answer remains the same as it was two years ago; Iran needs to revive the nuclear deal, approve FATF, and slow its nuclear program in exchange for sanctions relief, which would necessarily include sanctions relief on hydrocarbon extraction. In such circumstances, Iran would gradually be able to solve its own energy crisis. Until this happens, incremental steps—including gas from Turkmenistan—will not be sufficient.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.