Chain Reaction Seen in Gas Supply Reduction from Turkmenistan to Iran, and from Iran to Turkey

A New Year, A Familiar Trend

Once again, the new year has begun with a gas supply disruption involving a former Soviet state, but unlike in 2006 or 2007, the incident does not involve Russian gas giant Gazprom. Instead, the makings of a new gas supply dispute to kick off January 2008 are in progress between Turkmenistan and Iran, with the Central Asian state halting gas supplies earlier this week, supposedly due to technical problems (see "Related Articles" below). Turkmenistan halved gas supply deliveries over the weekend, then shut the gas off altogether as of Sunday night (30 December). Turkmenistan supplies around 5% of Iran's total domestic supply needs via the Korpezhe-Kurt Kui pipeline, which links southern Turkmenistan's gas fields to north-eastern Iran.

Although Turkmen officials have sought to reassure Iranian officials that the outage is related to technical problems, speculation has quickly focused on the potential that Turkmenistan is looking to exercise its power as a gas exporter and force Iran into paying more for gas supplies. Having succeeded in convincing Gazprom to pay between 30% and 50% more for Turkmen gas imports this year—indeed, the Russian gas giant hardly protested, and quickly consented to paying US$130 per 1,000 cm for Turkmen gas imports in the first half of 2008, rising to US$150 per 1,000 cm in the second half—Turkmenistan may very well be seeking a similar price hike for Iran.

Russia is Turkmenistan's main gas export market (although most of the Turkmen gas is actually delivered via Russia to Ukraine, which is now set to feel the brunt of Turkmenistan's export price increases), but Iran, which imports around 10 to 14 bcm of Turkmen gas per year, is the Central Asian state's second-largest partner. However, with China now angling for access to Turkmen gas supplies, and a pipeline connecting Turkmenistan to China via Central Asia now taking shape, Iran's importance to Turkmenistan as a gas export market is likely to be reduced. Thus, it would come as little surprise, given the pressure on Turkmenistan to meet export commitments to Russia, China, and Iran, if Turkmenistan decided to increase its gas export price to Iran, essentially telling Iran to pay more to ensure that it continues to receive Turkmen supplies. Iran currently pays US$100 per 1,000 cm for these, but this price will surely rise—if not this month, then likely sometime this year—as international gas prices continue to increase.

Still, at least for now, the halt in Turkmen gas imports to Iran is being characterised as a technical halt, due to the need for pipeline repairs, with Turkmen officials promising their Iranian counterparts that the outage is due only to operational problems and that supplies will soon be restored in full. In the meantime, however, Iran has been forced to reduce its own gas exports to Turkey, with supplies cut from normal levels of 20 mmcm/d to just 5 mmcm/d. Iran's surging gas demand, together with cold weather and the drop in pressure in the gas pipeline system due to the Turkmen supply outage, has effectively forced the Iranian government's hand.

Outlook and Implications

While the Turkmen gas supply halt to Iran is a new wrinkle in the recent pattern of New Year's gas disputes, the reduction in Iranian gas exports to Turkey in January is an all-too-familiar trend, as the latest incident is a virtual repetition of what happened last year. Indeed, the Turkmen gas halt is perhaps a convenient excuse for Iran to blame for its own reduction in gas exports to Turkey. Former oil minister Kazem Vaziri-Hamaneh, fired by President Mahmoud Ahmedinejad in August 2007, warned that Iran faces a "catastrophe" in its energy sector unless it deals with the country's rising gas consumption in the next 15 years. Given such surging demand Iran might very well have reduced its gas exports to Turkey this month even if Turkmenistan had kept the taps open. One thing appears certain—Iran will have to pay more for Turkmen gas supplies in the near future if it wants to continue to receive them.

A quick resumption of Turkmen gas exports to Iran, followed by a return to normal deliveries of Iranian gas to Turkey, could avert any lasting damage to efforts by the three states to widen their energy-sector co-operation and deepen their economic ties. The three countries signed a series of gas and power deals in mid-2007, so any extended disruption could well undermine those deals by putting into question the ability of each state to meet its own commitments under those agreements. A continued chain reaction of events that sees Turkey reducing its own gas transit volumes to Europe, perhaps by using more Azeri gas volumes to supplement its own demand needs in the absence of Iranian gas, could even go so far as to undermine the emerging non-Russian gas supply corridor allowing Europe to import Central Asian gas via Turkey.

Europe seems sure to continue to push for Central Asian and Middle Eastern gas imports via Turkey, but the potential collapse of the Turkmenistan-Iran-Turkey gas deal signed in July could spell trouble. The United States, for one, would be only too happy for this deal to fall through, particularly if it prompts Turkey to redouble its efforts to support the construction of a trans-Caspian gas pipeline that takes Iran out of the equation in the emerging east-west gas supply corridor. Iran may indeed be the weak link in the Turkmenistan-Iran-Turkey supply route, so if the current gas reduction to Turkey indirectly helps build political support in Turkey for the trans-Caspian pipeline linking Turkmenistan to Azerbaijan, European and U.S. policymakers, for once, will be pleased with this New Year's gas dispute.

Related Articles

Turkmenistan: 31 December 2007: Turkmenistan Reportedly Cuts Off Gas Supplies to Iran

Russia: 21 December 2007: Caspian Gas-Pipeline Agreement Signed

Turkey: 7 December 2007: Turkish Officials Propose Gas Pipeline Link with Turkmenistan Via Iran

Turkey: 6 December 2007: Turkey Proposes Gas JV with Turkmenistan

CIS: 28 November 2007: Gazprom Consents to Increased Turkmen Gas Prices; Ukraine to Face Higher Prices in Turn

Turkmenistan: 26 November 2007: Turkmenistan Calls for 30% Increase in Gas Export Price

Turkmenistan: 27 September 2007: Turkmen President Reiterates Commitment to Pursue Alternative Gas Export Options

Turkey: 17 July 2007: Iranian Gas Deal Marks Turkish Response to Russian Bypass Challenge

Turkey: 16 July 2007: Iran in Energy Deal with Turkey, Turkmenistan, in U.S.-Defying Grand Plan 

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