How commercially viable is the gas pipeline project from Russia to Iran via Azerbaijan?

At a press conference on January 17 following negotiations with his Iranian counterpart Masoud Pezeshkian, Russian President Vladimir Putin confirmed that the project for constructing a gas pipeline between the two countries is underway. According to him, the initial supply could reach up to 2 bcm, but it could eventually increase to 55 bcm annually.

Russia is confident that the project will be realized, emphasized Vladimir Putin.

In turn, Russian Energy Minister Sergey Tsivilev,  told journalists that the route for the gas pipeline from Russia to Iran has been agreed and will pass through Azerbaijan.

He added that the negotiations are in the final stage, with the price still being negotiated.

“Through Azerbaijan, the route has been agreed upon. We are now in the final stage of negotiations – finalizing the price. Volumes have already been fixed. Price is always a commercial issue, a search for compromise, so working groups from both sides have been formed, and specialists are working on pricing methods,” the minister explained.

The Azerbaijani government, as well as the State Oil Company of Azerbaijan (SOCAR), the owner of the main gas pipelines in Azerbaijan in the "North-South" direction, have not commented on the Russia-Iran gas pipeline project thus far.

It is worth noting that in June 2024, Gazprom and the National Iranian Gas Company (NIGC) signed a strategic memorandum for preparing Russian natural gas supplies to Iran. It was reported at that time that the costs for the necessary infrastructure, including the construction of a new gas pipeline, would be covered by Russia. However, the route for the future gas supplies to Iran, as well as the volumes, were not officially announced.

Iranian media reported at the time that Iran and Russia had agreed to supply gas via the Mozdok-Shirvanovka (Azerbaijan-Russia border) - Hajiqabul - Astara (Azerbaijan-Iran border) – Abadan pipeline. It was noted that the project capacity of the existing Russia-Azerbaijan and Azerbaijan-Iran pipelines is 10 bcm per year.

However, Turan agency clarified, citing sources in Azerbaijan’s gas industry, that the current working capacity of the Mozdok-Hajiqabul gas pipeline in Azerbaijan is slightly over 4.5 bcm per year, and from Azerbaijan to Iran, it is 2 bcm.

Iran produces over 250 bcm of gas annually, but although it previously experienced gas shortages in winter, last year it also faced similar issues during the summer months. As a result, Iran had to reduce its gas exports to Türkiye and Iraq. For this reason, official Tehran is interested in importing Russian gas.

However, it is unclear why Iran did not choose to import Russian electricity, as the transportation of electricity is far cheaper than that of natural gas. While the Russia-Azerbaijan-Iran energy corridor project has been on the agenda for nearly 20 years, the Kremlin has not taken significant practical steps toward its implementation.

Additionally, Iran could import electricity from neighboring Azerbaijan, which reduced its export volumes last year due to weak consumption in Turkey and Georgia. Furthermore, after the liberation of occupied territories in Azerbaijan, official Baku expressed its intention to quickly implement the construction of two hydropower plants on the Araz River (Khudaferin and Giz Galasi HPPs, which have long been designed and will have a combined capacity of 280 MW, to be equally divided between the parties).

Therefore, it is hard to believe in the successful realization of the construction of a new main gas pipeline from Russia to Iran: both countries are under sanctions, their economies are weakened, and both face capital shortages, making it difficult to invest in a capital-intensive infrastructure project.

Based on the above circumstances, one can conclude that the Russia-Iran gas pipeline project through Azerbaijan is more of a political project than a commercial one. This project has come to the forefront due to the political interests of Moscow and Tehran, both of which are facing intense sanctions from the collective West.