Will Azerbaijan Export Gas to Iraq via Iran?

The importance of Iraq for Azerbaijan

The significance of Iraq for Azerbaijan is notable, as Baku views it as a crucial gateway to the Arabian Gulf. Consequently, Azerbaijan seeks to invest in Iraq’s transportation infrastructure, particularly the development corridor between the port of Faw in Basra to the Turkish border.

Azerbaijan also closely monitors the North-South corridor connecting Russia to Iranian ports, exploring railway options between Iran and Iraq as a means to deliver goods to the Arabian Gulf and beyond.

Recently, bilateral visits between officials from both countries have increased, resulting in agreements in tourism, transportation, development, and business sectors.

Azerbaijan is currently discussing Iraq’s pivotal role in gas projects aimed at supplying Europe, with the Azerbaijani ambassador in Iraq expressing the country’s interest in gas exports to Iraq, sparking inquiries about the feasibility, quantities, pricing, and timeline.

Azerbaijan gas to Europe

Azerbaijan possesses vast natural gas reserves totaling 2.6 trillion cubic meters, with its production reaching 44 billion cubic meters in the previous year, 2023.

Minister of Energy Parviz Shahbazov states that Azerbaijan can increase gas exports to Europe via the TANAP pipeline, traversing Anatolia, from 16 to 31 billion cubic meters and through the TAP pipeline across the Adriatic Sea from 10 to 20 billion cubic meters.

However, Azerbaijan faces a significant rise in domestic consumption, increasing by 25% in the past year compared to 2022. The growing demand from Georgia, as it shifts away from Russian imports, may exert pressure on the quantities reaching the European market.

Europe relies on Azerbaijan as a crucial alternative for gas following the halt of Russian gas exports. In 2021, Azerbaijan exported around 8 billion cubic meters of gas to Europe, with expectations to reach approximately 12 billion cubic meters in 2023.

Yet, this figure falls short of the target outlined in the memorandum of understanding signed between Azerbaijan and the European Union in the summer of 2022, aiming to increase gas exports to Europe from 10 to 20 billion cubic meters annually by 2027. European concerns arise regarding Azerbaijan’s ability to achieve this goal.

To meet the increasing demand from Georgia, Turkey, and Europe, Azerbaijan has been forced to import between 1.5-2 billion cubic meters annually from Iran through exchange agreements with Turkmenistan and Iran. Iran receives gas from Turkmenistan and delivers a similar quantity to Azerbaijan.

The need for huge investments

The need for substantial investments is evident in Azerbaijan’s efforts to expand the capacity of gas export pipelines from Turkmenistan to Azerbaijan through Iran, potentially providing an additional 9 billion cubic meters of Azerbaijani gas for export to Europe.

This highlights Azerbaijan’s necessity for significant investments to develop its gas fields, including expansion projects for key fields like Shah Deniz, the largest gas field in Azerbaijan, to reach 26 billion cubic meters annually.

Additionally, developments in the Shafaq-Asiman and Absheron fields, as well as gas injection in the Chirag-Gunashli fields and the development of the Umid field, aim to increase the country’s gas export capacity.

To meet the requirements for developing these fields, Baku has devised plans to increase gas production while reducing local consumption, generating a surplus that Azerbaijan aims to export globally.

The country has also entered agreements with European investors to purchase gas when available, urging major buyers to commit to quantities before production, considering the need for funds to boost output.

European buyers, however, have been slow to commit to purchasing the gas that Azerbaijan promised to supply Brussels by 2027.

High gas reserves in Europe and the European Union’s establishment of numerous ports for liquefied natural gas reception are believed to be reasons for the European delay in submitting purchase offers.

Iraq imports Azerbaijan’s gas

With Azerbaijan’s gas exports reaching 22 billion cubic meters last year and a slowdown in European demand, Baku is actively seeking alternative markets. Iraq has emerged as a crucial nation in trade, transportation, and energy for Azerbaijan.

Due to the absence of direct gas pipelines connecting Azerbaijan and Iraq, a likely scenario involves a swap agreement with Iran, resembling Turkmenistan’s gas swap deal with Iran to later deliver it to Iraq.

This option ensures rapid revenues for Azerbaijan, contributing to further investments in field development and increased production.

Iran, despite having significant natural gas fields in the south, requires gas imports to distribute in its northern provinces, especially during the winter when local demand rises.

Therefore, facilitating the transfer of Iranian gas to Iraq in the south, in exchange for Azerbaijan providing gas to Iran in the north, appears feasible.

While Iraq needs approximately 20 billion cubic meters annually to meet its local energy demand, it currently imports over 9 billion cubic meters annually from Iran. However, this exposes Iraq to the risk of sanctions imposed on Iran multiple times.

Therefore, Iraq is granted exceptions to avoid economic repercussions for purchasing Iranian gas until it can develop its energy sector and find suitable alternatives.

Will Iraq dispense with importing gas from Iran?

Recently, Iraq and Turkmenistan signed a five-year gas swap agreement with Iran, allowing Iraq to receive around 9 billion cubic meters of Iranian gas without direct payments.

However, these quantities are insufficient to meet Iraq’s growing domestic energy needs, emphasizing the importance of gas exports from Azerbaijan, possibly through a swap deal with Iran.

These swap agreements raise questions about the price differentials between what Iraq pays for Iranian gas and what Iran spends to obtain gas from Turkmenistan or Azerbaijan.

The Iranian Oil Minister, Javad Owji, previously stated that Iran profits approximately $2 billion from the gas swap deal with Turkmenistan, purchasing gas at a low price to meet the needs of its northern and northeastern provinces and later exporting surplus gas to neighboring countries at a higher price.

If an exchange agreement is reached between Iraq and Azerbaijan via Iran, it would ensure stability in gas flows to Iraq without interruptions that occur during summer due to increased demand within Iran.

The expected gas quantities covered by the swap agreement are around 6 billion cubic meters annually for three years, sufficient to complete the expansion of the TAP pipeline, increasing Europe’s gas supply from Azerbaijan.

This timeframe allows Iraq to develop various natural gas projects and invest in associated gas, aiming to reach a stage where it exports 28 million cubic meters of gas daily in the next five years, but it will still need to ensure the continuity of its imported gas shipments.