Unblocking the Caspian route for Turkmen gas

On 28 November, the official opening of the representative office of the Azerbaijani state oil company SOCAR in Ashgabat took place[1] within the framework of the visit of Azerbaijan’s Minister of Economy, Mikayil Jabbarov, to Turkmenistan. Speaking there, Mr. Jabbarov stated that this initiative “embodies belief in the long-term strengthening of SOCAR’s activity in Turkmenistan and implementation of the countries’ common interests in the energy sector”. A little earlier, at the 7th meeting of the Intergovernmental Commission on Economic Cooperation, both sides agreed to intensify cooperation in energy, oil and gas sectors, chemical industry, transport and communications, agriculture and food industry.

In fact, Turkmenistan had been already developing energy cooperation with Azerbaijan for quite some time. SOCAR is involved in implementing a number of projects in Turkmenistan, including developing the Dostlug field following the MoU signed by the parties in January 2021 after a protracted dispute on its ownership rights, transporting oil from Turkmenistan to international markets in transit through Azerbaijan via the Baku-Tbilisi-Ceyhan oil pipeline, and a number of other areas. Dostlug’s oil reserves, estimated at 50 million tons of oil, will be distributed at 30% for Azerbaijan and 70% for Turkmenistan[2]. Moreover, Ashgabat is involved in a trilateral gas swap agreement according to which it has been providing gas to the eastern part of Iran, who further delivers an equivalent amount to Azerbaijan[3]. In early June this year, Iran and Azerbaijan reportedly signed an agreement to double the volume of gas swap between them and Turkmenistan[4].

The latest event, beyond its importance for SOCAR, fits a trend for the Central Asian country, for decades considered one of the most closed countries in the world, towards modest attempts at opening up its economy. Western sanctions against Russia which caused a gradual halt to energy supply from Russia to Europe and swelling Russian gas supplies to China, once Turkmenistan’s almost-exclusive client, made Ashgabat face a new reality that challenged its longstanding economic model, resulting in a significant deterioration of living standards and social discontent. Against this background, the country had to start considering options for diversifying its gas export geography and attracting foreign investment. Thus, in November 2023 Turkmenistan agreed on a 5-year long swap contract with Iraq (through another swap deal with Iran) to export 9 bcm of its natural gas annually.

However, the real intrigue is whether the long-cherished idea of the Transcaspian pipeline, the link which would bring Turkmenistan’s gas cornucopia to European markets, will finally come to fruition after many years of aborted attempts and uncertainty. The idea which had been around since 1990’s, has been viewed by the regional powers, primarily Russia and Iran, with a strong suspicion since it was believed to bring Western interests to this region, do away with European energy dependence on Russia and increase Ashgabat’s leverage. The talks on implementing the Transcaspian pipeline failed multiple times, most recently in December 2022 when a breakthrough was expected from the trilateral meeting between the leaders of Turkmenistan, Azerbaijan and Türkiye ,but their concluding statement was disappointing.

However, the impact of the Russian sanctions triggered Brussels to bolster its efforts at persuading Ashgabat to accepting the Transcaspian project. In fact, Azerbaijan’s 2022 pledge to raise its gas export to the EU up to 20 bcm/year by 2027 already envisaged opportunities for the transit of gas from Turkmenistan. So, the second half of 2023 has brought a number of interesting developments.

On July 25, the MFA of Turkmenistan issued a statement openly endorsing the idea of laying the pipeline through the Caspian. This statement emphasized that relevant trilateral mechanisms with Baku and Brussels had been already established, and Ashgabat is willing to embrace the project “not just as economically and commercially sound, but also as an essential component of diversification of energy flows as a key condition for global energy security and sustainability”[5]. President Berdymukhamedov spoke about the significance of the Transcaspian pipeline with German Chancellor Scholz during his visit to Germany in October; on November 1, Turkmen Deputy Prime Minister Shakhym Abdrakhmanov reiterated that his country will not abandon the Trans-Caspian project[6].

Moreover, European interest in Turkmenistan is not confined to the hydrocarbons import. In October Turkmenistan’s Foreign Minister Meredow, discussed with European Commissioner for International Partnerships, Jutta Urpilainen, potential for enhancing energy cooperation, including production of hydrogen energy, methane emission reduction, and the conversion of natural gas[7]. The parties also discussed an opportunity for Ashgabat to invite German development agency GTZ to implement green energy-related projects in Turkmenistan.

So, the implementation of the Transcaspian project has a potential to re-draw the Eurasian energy map and dramatically increase the value of Azerbaijan as a transit hub, as well. Turkmenistan, with its 4th biggest gas reserves in the world, stands to capture some of Russia’s European gas markets and/or replace Russian exports to Turkiye, currently covering 40% of its consumption. Technical realization of the project in fact is not that difficult given that in 2015 Turkmenistan built a 700-km linear gas pipeline to the Caspian Sea coast starting in Galkynysh. The existing pipeline project envisions supplying up to 30 bcm of Turkmen gas annually through Azerbaijan, Georgia, and Türkiye to the European market for at least 30 years. Moreover, building an interconnector between Turkmenistan’s and Azerbaijan’s fields in the Caspian which may be envisaged as the first step towards the Transcaspian, will require just $400 million of investment and may be completed in as little as four months [8].

Turkish energy regulator EPDK since the 1990’s has already been renovating 10-year licenses to the state gas importer Botas for importing up to 16 bcm/year of gas from Turkmenistan on the expectation that a pipeline would be built. However, two issues constitute major risks. The more immediate one is obtaining necessary funds for completing the works. This far, no energy major has unambiguously expressed their interest, so speaking in May this year, Azerbaijani President Aliyev had to emphasize that despite its commitment to this project, it would help on funding and called on the companies developing Turkmenistan’s gas fields and other international investors to join[9]. There are rumours that Emirati national company ADNOC, which in 2023 acquired a 30-% stake in Azerbaijan’s Absheron gas field, would be an investor but this has not yet materialized.

The second issue is related to the aforementioned irritation the Transcaspian pipeline has traditionally stirred among regional powers. The risk of active Russian efforts aimed at undermining its construction should not be discarded, as the explosion of the Nord Stream-2 pipeline in September 2022 emphasized the vulnerabilities faced by offshore cables. However, there may be some reasons why Moscow could be less worried about these prospects. The war in Ukraine has caused European dependence on the import of American LNG, so for Russia the prospect of Europe’s reorientation towards Turkmenistan may now look like a lesser evil. At the same time, Tehran may also view this perspective positively, since swap deals with Ashgabat have enabled the heavily sanctioned energy industry of the Islamic Republic to raise its profits. Currently, the potential for elevating gas swap supplies from Turkmenistan to Iran from 8 mcm to 20 mcm per day is being considered[10], emphasizing growing trust between the countries.

Murad Muradov is the co-founder and deputy director of the Topchubashov Center in Baku, Azerbaijan