Iran's oil, gas, power transit proposal for Turkmenistan

Oil&Gas Materials 13 March 2015 15:22 (UTC +04:00)

By Dalga Khatinoglu

The Iranian president has proposed that Turkmenistan study the possibility of transiting oil, gas and power to other countries through its territory.

"Our countries are among the largest oil and gas producers and the partnership in this sphere will be significantly expanded in the future," Iranian President Rouhani said March 11.

Iran stopped crude oil swap from Turkmenistan five years ago, but currently imports Turkmen gas and exchanges power with its northern neighbor.

Iran's oil swap

Iran seriously needs oil swap with northern neighbors, because Iran's southern regions share almost the total of the country's oil production. The distance between the country's southern regions with north provinces is about 1800 km and transferring crude oil to refineries in Tehran and Tabriz cities costs a lot.

Based on Iran's fifth five-year development plan (2010-2015), the country should have boosted the volume of crude oil swap from 5 million metric tons annually (about 100,000 barrels per day) to 18 million metric tons (about 317,000 barrels per day), however the capacity of country's only oil port Neka hasn't improved yet.

Iran had swapped a part of the Caspian littoral states' oil from 1997 to 2009 for 12 years, but stopped it due to transit fee disputes. Iran had deals with 16 companies including Select Energy Trading, Dragon Oil of the UAE, Vitol of Switzerland, and Caspian Oil Development of Ireland, to swap crude oil from Kazakhstan and Turkmenistan for $1.1 transit fee per a barrel, but the operations were halted when Iran demanded $5.5/barrel transit fee.

During a 12-year period Iran earned $880 million from oil swap operations.

After suspending the swap operations, some of the mentioned companies appealed to Iran, however then withdrew with the exception of Caspian Oil Development.

The Hague International Court of Justice fined Naftiran Intertrade Company (NICO) of Iran $5.5 million last June due to stopping the swap of oil with its international partners.

Before Rouhani's statement in Turkmenistan, Press TV quoted Rabi Fallah Jelodar, the governor general of Iran's Mazandaran Province Feb.14 as saying that "Iran has received new requests from its northern neighbors to revive a strategic crude oil swap scheme that was abandoned more than five years ago".

However, it's not clear whether the international companies trust Iran to resume oil swaps again or not. But one must consider the tough oil export-related sanctions Iran has faced.

Iran can only swap crude oil and is not able to transit the Caspian oil from Neka port to Gulf (Jask port), because construction of the Neka-Jask pipeline needs a $2.6 investment. The capacity of Tehran and Tabriz refineries is also about 364,000 barrels per day together, sharing about 20 percent of the country's total crude oil refining capacity.

Gas transit

Iran has two contracts with Turkmenistan enabling delivery of 14 billion cubic meters per annum (bcm/a) of Turkmen gas, however, Ashgabat supplied only 7.5 bcm to Iran in 2014 after Iran was unable to pay off its $1 billion debts to Turkmenistan in 2013. This led to halving Turkmen gas delivery to Iran but the amount of gas supplement resumed again in September 2014.

Coming to the gas transit issue, the two countries are vying to supply gas to Pakistan. Turkmenistan is keen to deliver gas through TAPI projects to Afghanistan, Pakistan and India, while Iran is seeking a way to realize IP project to supply Pakistan with its natural gas. There is not any major gas pipeline in Iran to connect Turkmenistan to Pakistan.

On the other hand, Iran is preparing the 11th cross-country pipeline to pump gas from the South Pars gas field towards the northwestern province, Khorasan, to make this region self-sufficient instead of relying on Turkmen gas imports. The 11th cross-country gas pipeline project is 1,100 kilometers long and worth $4 billion with the capacity to transfer 100 mcm/d of gas.

With all these things considered, Rouhani's gas transferring proposal doesn't seem realizable.

Power exchange

Last year, Iran imported 3,718 million kilowatt-hours (KWh) of electricity, 67 percent of which comes from Turkmenistan. Iran also exports a restricted amount of electricity to Turkmenistan.

Back in December 2008, members of the Economic Cooperation Organization (ECO) including all Central Asian countries, Iran, Afghanistan, Pakistan, Turkey and Azerbaijan agreed to hold talks on converting some of their gas to power. The agreement was part of a larger plan to establish a regional power network for exporting power to Iraq, Europe and Syria. The issue was later forgotten.

Now, Iran and Turkmenistan are working separately to increase their power production. Last year, Turkmenistan increased its electricity production by about 12 percent. The country exports 2.8 billion KWh of electricity but based on a state program, Ashgabat plans to establish 14 new power plants to raise its electricity production to 27.4 billion KWh.

Iran exports annually approximately 12 billion KWh of electricity and is now planning to allocate an additional 6 bcm/a of its gas to new power plants by 2018 to increase its power export by additional 5,000 MW.

Iran now has power generation capacity up to 73,000 MW (equivalent to about 275 billion KWh electricity). Iraq and Turkey are importing 68 and 20 percent of Iran's power export respectively.

Iran's eastern neighbors, Afghanistan and Pakistan, both constitute about 10 percent of Iran's power export. So, Turkmenistan can gain a greater share in these markets via Iran. For the time being, Ashgabat is exporting about 250 MW power to Afghanistan.

Edited by CN

Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service.

Follow him on @dalgakhatinoglu