Dostlug deal: the start of a beautiful “friendship”?

Dostlug deal: the start of a beautiful “friendship”?

Ashgabat’s landmark energy agreement with Baku expands bilateral ties and could link its gas to Europe.

WHAT’S HAPPENING?

On January 21, Azerbaijan and Turkmenistan signed a Memorandum of Understanding on exploring and developing the long-disputed “Dostlug” (“Friendship”) hydrocarbon field in the Caspian Sea.

KEY INSIGHTS

– The Dostlug deal and other recent external outreach is likely motivated by domestic money struggles
– Limited financial resources and European demand will likely stymie transit of Turkmenistan’s gas through Azerbaijan in the near term

CRISIS AND COOPERATION

Photo: Hans Birger Nilsen/Flickr

The recent Azerbaijani-Turkmenistani agreement concerning the disputed Dostlug hydrocarbon field is a pivot point in regional energy politics. The field, along with two others that have been developed by Azerbaijan since 2002, had previously been the subject of a three-decade-long dispute and were referred to by separate names in each country’s language. At the January 21 meeting with Azerbaijani leader Ilham Aliyev, Turkmenistani President Gurbanguly Berdimuhamedov remarked on the symbolism of the joint decision to call the field “Dostlug,” which means “friendship” in both languages. Observers note that the agreement negates the last diplomatic hurdle to constructing the Trans-Caspian pipeline, which would link Turkmenistani gas to Europe through the TANAP and Trans-Adriatic pipelines. Together these pipelines make up the majority of the recently-completed Southern Gas Corridor, which connects Iranian and Caucasian output to Central Europe via Turkey and the Balkans.

The Dostlug agreement comes in the wake of Turkmenistani talks with Afghanistan to expand aid, transport, communications, and water transit ties to Kabul and beyond, to India and Pakistan. Just days later, Ashgabat agreed to expand direct bilateral trade ties with Istanbul as well. At the signing of the memorandum on Dostlug, Azerbaijan and Turkmenistan also discussed cooperation within the framework of the Lapis Lazuli transit and transport corridor, which would connect Afghanistan to Europe.

Known to be one of the most closed and internationally isolated countries in the world, Turkmenistan has been devastated economically over the past year despite reported GDP growth. The country does not acknowledge the existence of COVID-19 within its borders, but the WHO has expressed concern over the sharp increase in atypical cases of pneumonia in the country and the crisis has undoubtedly left its mark on the economy. Beyond reported restrictions on food and money flows for ordinary citizens, the country has instituted major cuts in law enforcement, infrastructure, and the government employee base on the whole, and much of the cited GDP growth can likely be attributed to increased exports from three chemical and power plants.

These economic difficulties, exacerbated by measures taken to combat the second wave of a “non-existent” pandemic, no doubt spurred the long-awaited resolution of the Dostlug dispute and Turkmenistan’s recent flurry of international outreach as a whole. In addition to direct revenues generated by energy and other trade vis-à-vis these agreements, Ashgabat is likely hoping that increased international clout and ties will make international financial institutions more amenable to extending substantial aid. Indeed, Turkmenistan has recently been in talks with international financial institutions about potential loans.

A LINK TO EUROPE: EXPECTATIONS VS. REALITY

Photo: Leonhard Lenz/Wikimedia Commons

The question of whether the Trans-Caspian pipeline will serve as a means to Ashgabat’s ends remains. As recently as 2018, Azerbaijani authorities made clear that the financing for building the pipeline would need to come from Turkmenistani coffers, and have not yet clarified the extent to which they expect the country to contribute financially to developing the Dostlug field.

Soon after the agreement with Azerbaijan was signed, Turkmenistan’s leadership ambiguously noted the “progressive dynamics” of the construction of the country’s section of another pipeline, the TAPI energy route to Afghanistan, Pakistan, and India. However, this statement follows official concerns that COVID-19 related difficulties would delay progress on its completion by six to nine months. In light of the country’s current financial difficulties and stymied progress on a separate pipeline that is already underway, it is unlikely that Turkmenistan will have the resources or capacity needed to complete the Trans-Caspian pipeline and gain access to the much-needed energy revenues that it might bring in the near term.

Even if the Trans-Caspian pipeline is completed, it may not guarantee access to European markets. The TANAP is currently operating at less than full capacity, and would have the technical capability to transport Turkmenistani gas from Dostlug and the country’s other currently-exploited hydrocarbon fields. However, the company that operates the TANAP pipeline has indicated that it will only transport additional gas if there is a corresponding demand for it. European demand for gas fell 7% year-on-year in the first quarter of 2020, and a sharp decrease has been forecast in the decades to come. Given these trends, it is unlikely that organic demand would justify the transit of Turkmenistani gas to Europe through Azerbaijan.

However, the Southern Gas Corridor has been advocated for by the EU as a geopolitically significant alternative to Russian gas, which accounted for 40% of extra-EU imports as of early 2020. Continued EU advocacy could create artificial demand from its member countries for gas via the Southern Gas Corridor with the distinct goal of simultaneously reducing imports from and dependence on Russia. Given that the former has only been in operation since December 2020, it is too soon to determine how effective such pressure could prove.

Should Turkmenistan prioritise the Trans-Caspian pipeline above other projects and urgent domestic concerns and the EU successfully foment and demonstrate demand for additional gas via the Southern Gas Corridor, this perfect storm may indeed see the realisation of a long-theorised source of revenue and international linkages for the largely closed Central Asian country in the medium- to long-term. Regardless of the consequences of the landmark Dostlug agreement, the country’s recent economic struggles will likely prompt it to maintain or even expand its current level of increased international outreach in the near future.

Any views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Internews.