Azerbaijan-Iran-Turkmenistan gas swap deal opens new horizons The basis for new geopolitical shifts

Recently, the CEO of the National Iranian Gas Company (NIGC), Deputy Minister of Oil and Gas Industry of Iran Majid Chegeni, in one of his interviews, stated that Iran registered a 358% growth in the volume of swap gas supplies from Turkmenistan to Azerbaijan in comparison to the previous year.

NIGC imports natural gas from Turkmenistan as part of a swap deal signed with the Azerbaijani company SOCAR in 2021. The agreement between Iran, Azerbaijan and Turkmenistan on a natural gas swap deal for up to two billion cubic meters of Turkmen gas took effect as of January 1, 2022.

Considering the successful experience of the natural gas swap, Iran expresses a willingness to boost the natural gas flow under the current agreement. Iran, Azerbaijan and Turkmenistan signed a trilateral gas swap deal in 2021 for up to 2 billion cubic meters per year on the sidelines of the Economic Cooperation Organization (ECO) summit in the Turkmen capital Ashgabat by the oil ministers of the three countries in the presence of the presidents of Iran and Turkmenistan and prime minister of Azerbaijan.

While the agreement came at a time when Baku-Tehran relations entered a tumultuous period shortly after Azerbaijan's military victory in the second Karabakh war in 2020 and unveiled plans to establish a land corridor with Turkey via Armenia's Syunik province dubbed Zangazur Corridor, Tehran strictly objected to the idea citing national interests and security concerns, which Baku refuted as baseless claims. Although Tehran opposed any corridor project through Armenia, it agreed to provide land route access to Türkiye through its territory.

The strained relations between Baku-Tehran led to Ankara's proposal to establish a 3+3 cooperation format in the South Caucasus, including Russia and Armenia, in order to decrease the level of tensions, albeit unsuccessfully. The 3+3 cooperation format is one of many initiatives attempting to establish regional cooperation in the South Caucasus.

Earlier projects such as the "Peaceful Caucasus Initiative," "Stability Pact for the Caucasus," "Caucasus Stability and Cooperation Platform," and "United Caucasus" have been put forward without any substantial success.

Notwithstanding the political disputes, Iran-Azerbaijan energy and trade partnerships keep growing. For example, in early 2023, Azerbaijan constituted 19% of the trade turnover of Iran with the Caspian states. In comparison, in 2021, the trade turnover between Azerbaijan and Iran increased by 30 per cent, reaching $400 million. This puts it within striking distance of the record peak year of 2007.

Also, joint infrastructure projects such as the construction of the Khudafarin and the Maiden Tower Hydro-junction and Hydroelectric Power Plants (HPP) on the Aras River are likely to improve bilateral ties in the energy area. According to officials from both sides, the construction of Khudafarin and Maiden Tower HPPs, with a total installed capacity of 200 MW and 80 MW, will be completed by 2024.

However, natural gas export is the most attractive partnership field for both states. This strategic pillar played a crucial role in signing the gas swap deal in 2021 and the memorandum of understanding in 2022. Consequently, Iran is willing to increase gas imports from Turkmenistan while increasing export volumes to Azerbaijan.

As such, in May 2023, minister Owji announced Iran was planning to sign a new gas import agreement with Turkmenistan for up to 10 billion cubic meters a year.

Although specific numbers regarding exports are unknown, it is clear that Azerbaijan seeks additional gas imports due to rising domestic consumption and commitment to keep gas exports to Georgia and Türkiye. Azerbaijan does have other gas reserves as in 2023, it was announced exploratory drilling into deep gas reservoirs believed to lie below the Shah Deniz gas field and the giant oil field, Azeri-Chirag-Guneshli (ACG).

Nevertheless, at this stage, the newly discovered gas fields will not be able to export natural gas until 2027. Despite strained relations, Azerbaijan will likely continue to cooperate with Iran regarding the gas swap, as energy diplomacy is the main pillar of Baku's foreign policy strategy.