For the second consecutive year, Turkmenistan is facing the problem of decline in the amount of its natural gas customers. In 2017 Ashgabat reduced the list of its natural gas export routes down to one, namely, to China. In the early January 2016, the Russian state gas company Gazprom formally suspended purchases of the Turkmen natural gas. Therefore, in 2016, Ashgabat was obliged to provide natural gas shipments only in the Chinese and the Iranian directions. However, in the beginning of 2017 Turkmenistan decided to stop delivering the contracted natural gas to Iran. For instance, on January 3, 2017, the Turkmen Foreign Ministry issued an official statement, according to which, the necessity to restrict deliveries of the Turkmen natural gas to Iran starting from January 1, 2017 was caused by inability of the National Iranian Gas Company (NIGC) to pay off its debts for the natural gas supplies. (Ministry of Foreign Affairs of Turkmenistan, 2017) Actually, it was also stated that since 2013 the NIGC has not been able to succeed in making debt payments for the Turkmen natural gas, which was previously supplied to Iran.
According to Ashgabat, since the signing of the take-or-pay contract with Iran in December 1997, the NIGC has constantly violated the natural gas supply agreement and has not paid the “penalty” price for the contracted amount of natural gas, which was not taken by the Iranian side. As a result, the NIGC accumulated a vast debt, which has created financial difficulties for operating the gas-transport infrastructure at the regular mode aimed at long-term gas supply to Iran. (Putz, 2017) It was also highlighted that during the last year, on several occasions Turkmenistan’s state gas company Turkmengas officially informed its Iranian partner about the unfavorable conditions for further development of the Turkmen-Iranian energy relations pointing at the possible limitations in the Turkmen natural gas export. Therefore, the Turkmenistan’s authorities do not consider the decision to suspend natural gas supplies as politically motivated.
However, from the perspective of the NIGC, the situation is not limited to the financial and technical fields of maintenance of the Turkmen pipeline system. The Iranian side claimed that Tehran was open for further high-ranking consultations on the issue of payment of its $2 billion unpaid debts stemming from the sanction years. Therefore, Ashgabat’s decision to stop delivering contracted gas to the Iranian northern provinces, namely, Gilan, Mazamdaram and Golestan, which are suffering from the lack of energy supply, especially in winter months, was considered as a groundless measure.
It should be specified that $2 billion debt was accumulated by Iran during the severe winter in 2007-2008 when energy shortages across the Iranian provinces forced the country to raise gas imports from its northeastern neighbor. According to the Iranian side, Ashgabat demanded a 9-fold increase of the price of the exported natural gas claiming $360 per 1,000 cubic meters of gas instead of $40. (Press TV Agency, 2016)
Actually, it is not the first time Iran and Turkmenistan experienced debt disputes. After signing the Joint Comprehensive Plan of Action (JCPOA) in July 2015, which removes the economic and financial sanctions related to Iran's nuclear program, the NIGC could manage to pay off a significant part of its debt to Turkmengas in different ways amounting to over $4.5 billion. It was also stated that even during the period when Iran was unable to make direct payments to Turkmenistan because of expelling from the SWIFT international payment system, considerable amounts were paid to Turkmengas in the form of exports of goods and services. (Tehran Times, 2017) Consequently, it is quite understandable why the existence of debt or delay in payment is perceived by the NIGC as an insufficient reason for halting natural gas supplies to Iran. Furthermore, Tehran has already declared that such a gross violation of the energy contract opens up an opportunity for Iran to apply to the international arbitration over the cessation of the natural gas exports by Turkmenistan.
Actually, Ashgabat has already faced the threat of international arbitration over its gas dealings. In July 2015, Gazprom, accused by Turkmenistan of failing to fully pay for the imported natural gas, filed a suit against Turkmengaz in the Stockholm arbitration court, seeking $5 billion in retroactive payments in 2010-2015. (Hasanov, 2016) However, in November 2016, a week after Turkmenistan’s President, Gurbanguly Berdimuhamedov, visited Russia, Gazprom and Turkmenistan suspended the arbitration dispute over the gas supply due to the progress in peaceful settlement of the issue. It should be highlighted that the parties did not provide information on how and under which conditions the gas dispute was solved. Therefore, if the NIGC enters the international arbitration, there is a high possibility that Ashgabat will seek for the gas dispute settlement through an informal consultations between the high-ranking officials.
To date, Turkmenistan and Iran are connected via two gas pipelines with the total capacity of up to 20 billion cubic meters of natural gas annually, namely, the Korpedzhe-Kurdkui and the Dauletabad-Sarakhs-Khangiran pipelines. However, the parties could not manage to provide full loading of their gas transportation facilities. Despite the fact that Iran has two contracts with Turkmenistan enabling delivery of 14 billion cubic meters of the Turkmen gas annually, Ashgabat supplied over 9 billion cubic meters of natural gas to Iran in 2016. Therefore, it can be stated that the parties started facing difficulties in their energy relations long before the current gas dispute.
Figure 1. Turkmenistan’s oil and natural gas pipelines infrastructure
Thus, the key reason for Ashgabat’s decision to pressure Iran to pay off its unpaid debts could be Turkmenistan’s urgent need for funding. Nowadays, due to the drop in world prices for crude oil and natural gas Turkmenistan is facing serious economic challenges. (Pannier, 2017) Actually, the President Gurbanguly Berdymukhamedov clearly demonstrated his dissatisfaction with Turkmengaz’s work by firing its head, Ashirguly Begliyev, who was replaced by his deputy, Maksat Babayev, on January 13, 2017. In fact, the termination of gas supplies to Iran gives Ashgabat little freedom to bargain. According to the NIGC, Iran currently produces 700 million cubic meters of natural gas per day and the import from Turkmenistan is only 2% of the country’s gas production. (Neftegaz, 2017) Therefore, focusing on the improvement of its internal gas-pipeline network by reaching sufficient connection between the gas-rich regions of southern Iran and northern parts of the country, Tehran could eliminate the need for the Turkmen natural gas imports in the nearest future. Under these circumstances, additional amounts of natural gas produced in Turkmenistan would be rerouted to China.
In 2015, Turkmenistan exported over 28 billion cubic meters of natural gas to China. According to Chinese customs officials, Turkmenistan’s export volumes to China increased by 11.2% in January-October 2016 compared to the same period of 2015. However, Turkmenistan’s revenues from these sales dropped by 29% down to $4.68 billion in line with a global decline of energy commodities. (EurasiaNet, 2017) Since Ashgabat has not yet made public the results of energy sector for 2016, there is no exact information on the volumes of the Turkmen natural gas transported in the Chinese direction. Nevertheless, even though Turkmenistan managed to exceed the amount of 30 billion cubic meters of exported natural gas, it is clear that this has not led to restoration of the previous revenue levels. Moreover, there is no guarantee that the possible increase in natural gas exports to China through redirecting the natural gas volumes formerly contracted to Iran would provide significant natural gas revenues for Ashgabat.
In conclusion, there is no doubt that the Iranian side will continue to criticize the termination of the natural gas deliveries stressing that this constituted a violation of the agreements between the two countries. On the other hand, Turkmenistan, which is now left with China as its sole customer, hopes to broaden its customer list by building the TAPI gas pipeline passing through Afghanistan, Pakistan and reaching India. However, in order to launch the TAPI pipeline and to ensure a diverse base of natural gas customers, Ashgabat needs significant financial resources. Therefore, suffering from the lack of investments, Turkmenistan could restore the natural gas shipments to Iran even if the unpaid debt issue remains unresolved.
 Since 2008, Gazprom has been trying to have the procurement price of the Turkmen gas revised. For instance, in 2015, Gazprom was purchasing Turkmen gas at over $240 per 1,000 cubic meters, while the European prices were estimated at below $200 per 1,000 cubic meters. Moreover, China was allegedly purchasing the Turkmen gas at $185 per 1,000 cubic meters.
 The Korpedzhe-Kurdkui pipeline was the first pipeline that gave Turkmenistan an export route outside the former Soviet Union. It has the export capacity of 8 billion cubic meters of natural gas per year. It was launched at the end of 1997. The Dauletabad-Sarakhs-Khangiran pipeline with the capacity of 12 billion cubic meters of natural gas annually was put into operation in early 2010.
Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.
Lydiya Parkhomchik (nee Timofeyenko) was born on February 9, 1984 in Zelenodolsk city, located at the territory of the Republic of Tatarstan (Russia). Since 1986 she became resident of the Republic of Kazakhstan.