Turkmenistan: Iran Admits Defeat in Gas Pricing Dispute

Iran and Turkmenistan engaged in one of the nastiest natural gas pricing disputes in recent memory over this past winter. It seems that the spring has brought resolution, with Tehran appearing to grudgingly bow to Ashgabat's efforts to jack up export prices.

On April 19, Iranian officials, who have managed to fight the international community to a standoff in the confrontation over the country's nuclear program, were forced to admit defeat in the gas pricing dispute. "If Turkmenistan wants a logical increase in the price of gas, it is okay with Iran because this country [Turkmenistan] is selling its gas to Russia with a new price," Ali Kordan, Iran's vice oil minister, was quoted by the Fars New Agency as saying. The announcement served as tacit recognition that the regional pricing structure for gas had been blown up by the March decision by the Russian conglomerate Gazprom to pay Central Asian producers a "European market" price for gas exports. [For background see the Eurasia Insight archive].

The dispute started at the end of December, when Ashgabat abruptly stopped supplies via the Karabcheh-Korkui pipeline to northern Iran. Although it holds the second largest reserves of gas in the world, much of Iran's energy wealth remains to be developed. Tehran imported about 23 million cubic meters of gas per day before the outbreak of the dispute, paying $75 per thousand cubic meters (tcm).

Ashgabat officially attributed the cut-off to "technical reasons." The halt happened at a time when Iranian regions that depend on Turkmen gas deliveries were experiencing some of the coldest weather in 30 years. [For background see the Eurasia Insight archive].

The real reason for the stoppage appeared to be the inability of the two countries to agree on a new export price. Iran's deputy oil minister, Akbar Turkan, described Ashgabat's behavior as attempted blackmail, going on to call Turkmen officials "immoral." Iranian media in mid-January reported that Ashgabat was seeking an almost 100 percent price increase – to $140/tcm. Officials in Tehran, filled with indignation, vowed that they would not continue pricing negotiations until Turkmenistan turned the export tap back on.

Iran's tough response failed to move Turkmenistan. Officials in Ashgabat were unrepentant and the pipeline remained "broken." Iranian officials too showed no signs of budging from their confrontational stance.

Three developments over ensuring months appear to have forced Tehran to back down. Most important was the Gazprom pricing decision. While a specific price has not yet been formally announced, experts believe that Gazprom will pay at least $210/tcm for Turkmen gas in 2009. The meteoric rise in the price that Gazprom was willing to pay rendered Iran's pricing stance untenable. [For background see the Eurasia Insight archive].

Domestic considerations also may have come into play. Throughout the winter, the pricing dispute was intertwined with politics, as President Mahmoud Ahmadinejad's administration staked out a tough stance in the hopes of giving pro-presidential candidates a boost in the March parliamentary elections.

Those elections are likely to produce a parliament that offers more resistance to Ahmadinejad's populist policies. A second round of voting to finalize the legislature's new composition is due to be held on April 25. The president, in general, has faced mounting domestic resistance, as his administration has presided over a period of general economic deterioration. In early April, a government spokesman announced that two key Ahmadinejad allies, Economic Minister Davoud Danesh Jaafari and Interior Minister Mostafa Pour Mohammadi, would be stepping down. It may well be that the government, now under mounting economic pressure, decided that a resumption of Turkmen gas supplies could help restore calm in a restive region.

Yet another factor influencing decision-making in Tehran could be the desire of Iranian officials to become a major supplier to the Nabucco pipeline. [For background see the Eurasia Insight archive]. On April 20, the head of Iran's national Gas Export Co., said Tehran's participation in Nabucco would be essential to the pipeline's success, Fars reported.

Repairing Iranian-Turkmen relations would seem an important precondition for the realization of Tehran's Nabucco ambitions. While some European states, especially Germany, are interested in pursuing the Iranian import option, the United States is vehemently opposed to Iran's participation in Nabucco. At the same time, US officials have vigorously sought a commitment from Ashgabat to join a Western export grid that would include Nabucco. [For background see the Eurasia Insight archive]. Thus, it could be difficult for Iran to gain access to Nabucco without first brokering some sort of export arrangement with Turkmenistan.

In the nearer term, Iranian and Turkmen officials will have to agree on a new gas export price. Tehran may well end up wishing it had settled for $140/tcm price rumored to have been on the table during the early winter.