Vali Kaleji

Iran, Azerbaijan and New Developments in the Field of Energy

Date of publication : March 7, 2017 21:49 pm
Iranian President Hassan Rouhani (R) welcomes as he shakes hands with Azerbaijan
Iranian President Hassan Rouhani (R) welcomes as he shakes hands with Azerbaijan's President Ilham Aliyev (L) before they hold a joint press conference following their meeting in Tehran, Iran on March 05, 2017
As passions on oil and gas resources of the Caspian Sea subsided, the fact that more realistic statistics are given for the volume of reserves, and multinational companies are more discreet to enter this area in line with the global decline in oil and gas prices have all reduced the level of the unilateral and divergent approach of Azerbaijan in the exploitation of oil and gas resources and energy transport. In  line with the remarkable improved political relations between Tehran and Baku which is at its highest level (in the past 25 years), and that Presidents of the two states will have their eighth bilateral and multilateral meeting in the three past years, Azerbaijan pursues a more interactive approach with its neighbors, including Iran, particularly after the nuclear deal (the JCPOA) in the field of energy that given the past conflicts and competition between the two states, this is a new development which needs to be realistically studied and evaluated.
The global decline in oil and gas prices in recent years that resulted in reduced national income, deficit, stopping or slowing down the implementation of many economic and welfare projects, and also led to public protests in some areas of Azerbaijan for the reduced income and the welfare and financial commitments of the government, has seriously pushed the Azerbaijani government to reduce its dependence on oil and gas economy, in particular selling crude oil. That is why the subject has received high attention in the document “Azerbaijan 2020: Look into the Future Development Concept” under a separate section entitled “The improvement of the economic structure and the development of the non-oil sector”. Increased production and exports of natural gas, development of the petrochemical industry, investment in new and renewable energy, the strengthened capacity of the private sector in the economic structure and the use of new technologies are among the important issues of this document to offset the impact of reduced oil prices on the economy of Azerbaijan.
In this regard, Azerbaijan, as a country outside the oil and gas OPEC, has turned to cooperating and interacting with influential states in the two organizations such as Iran and Saudi Arabia. The presence of the representative of Azerbaijan with Russia and Kazakhstan (three countries outside the OPEC) in the meeting of the Petroleum Exporting Countries (OPEC) in Doha, Qatar, in April 2016, and the presence of Ilham Aliyev, President of Azerbaijan, as a guest at the gas OPEC meeting in Tehran in November 2015 clearly demonstrate this. This is an approach seen less by Baku in the past two decades, especially in the period of the unprecedented increase in the global oil and gas prices.
Another important development was that the Azerbaijani government invited Iran to contribute to the development of the Shah Deniz gas field, and participate in gas projects of the Trans Adriatic Pipeline (TAP) and the Trans Anatolian Pipeline (TANAP). A contract was also signed between Research Institute of Petroleum Industry of Iran and the State Oil Company of the Azerbaijan Republic (SOCAR) for the development of oil fields, the improved exploitation of reserves and environmental activities in 2014. These are among the cases that show a relatively significant shift of Azerbaijan’s approach towards Iran in the field of energy. On inviting Iran to contribute to the development of the Shah Deniz gas field, it should be pointed out that Iran has participated in the development of the Shah Deniz gas field of Azerbaijan for a decade. Iran has a 10 percent stake in the project, namely with regard to the fact that this is a “production sharing” contract, 10% of the total reserves of the field belong to Iran. But what has further motivated Azerbaijan to have Iran more involved in the development of the Shah Deniz gas field should be found in these two points. First, Azerbaijan feels that after Iran’s nuclear deal with the major powers (the JCPOA), Iranian companies can enter and invest in the development of the Shah Deniz gas field on more favorable terms. The second point relates to concerns, especially in the EU, over the inability of the Shah Deniz gas field to supply large quantities of gas required for the TAP and the TANAP. Currently, the field has more than one trillion cubic meters of extractable gas, and now 27 million cubic meters of gas and 50 thousand barrels of gas condensate are daily extracted from its first stage. Therefore, the Azerbaijani government is highly seeking to implement the second stage of the Shah Deniz field development, and is calling for Iran’s participation in this process to be able to increase the production capacity and exports to fulfill its extensive supply obligations toward Europe. It seems that there is no specific limitation and problem for the cooperation between the two countries in this sector.
But in regard to Iran’s participation in the two gas pipelines of the TAP and the TANAP, it should be said that Iran has some consideration. First, the low price of export gas in these two pipelines that for Iran, the price is cheap, non-standard and not in accordance with the current realities of the global gas market. Thus, Iran thinks its participation in the TAP and the TANAP is economically unacceptable and unjustified, and in the present circumstances, the Iranian Ministry of Petroleum and the National Iranian Gas Company are not willing to participate in the TAP and the TANAP. It seems that only if the Iranian investment in the second stage of the Shah Deniz gas field development produces revenue, and when the states of Azerbaijan, Turkey and the European states participating in the TAP and the TANAP are willing to increase the price (to the level of the real price), Iran’s entry and participation in these two gas pipelines can be expected. The ability or inability of Azerbaijan in supplying large quantities of gas required for the TAP and the TANAP gas pipelines is a decisive factor in this regard that will be clear when the gas transmission line is operationalized practically and concretely.
Another important consideration in this process for Iran is the possible participation of Turkmenistan in the TAP and the TANAP pipelines. In general, the transfer of Turkmen natural gas to Europe and the connection to the TAP and the TANAP pipelines can be done via land and sea routes - the land route passes through the network of gas transmission lines in northern Iran, and the sea route passes through the Trans-Caspian project (if revived) (the transfer of natural gas through the Caspian Sea).
All developments occurred in 2015 and 2016 indicate that the Turkmen government and other parties, including Azerbaijan and Turkey are mainly willing to export the Turkmen gas through the Trans-Caspian route. This issue is important for Iran, because the Islamic Republic of Iran and the Russian Federation have always been opposed to the Trans-Caspian project due to the severe environmental consequences of passing the pipeline through the Caspian Sea, and that the dispute over the legal regime of the Caspian Sea is not fully settled. Therefore, preventing the revival of the Trans-Caspian pipeline, and emphasizing on the use of the northern land route of the Iranian gas transmission lines for exporting the Turkmen gas to Europe is one of Iran’s serious considerations for a possible participation in the TAP and the TANAP pipelines.
In general, it seems that in the process of the remarkable development of relations between Iran and Azerbaijan, the factor of energy can play a very important role in strengthening relations between the two states. Tehran and Baku have a successful experience in gas swaps in the Nakhchivan Autonomous Republic. At present, Azerbaijan daily delivers about one million and 200 thousand cubic meters of gas to Iran, and Iran with the right to reduce some volume of gas as the swap, delivers about one million cubic meters of gas to Nakhchivan. Therefore, in parallel with the bilateral cooperation for supplying the gas for the Nakhchivan Autonomous Republic, Iran’s wider participation in the second stage of the Shah Deniz field development, the prepared ground for Iran’s participation in the TAP and the TANAP pipelines (in case of practical attention to Iran’s considerations), and the continued cooperation and interaction between Iran and Azerbaijan in the oil and gas OPEC to stabilize and increase the global oil and gas prices, it can be expected that the relations between Tehran and Baku enter into a new phase in the energy sector which is very different from the past, and will have relations between the two states more intertwined at the bilateral and regional levels.

Vali Kaleji, an expert at Iran's Center for Strategic Research, is the senior fellow at IRAS.

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ID: 3084
Author : Vali Kaleji