Azerbaijan's President Ilham Aliyev arrived in Tehran on Tuesday for two days of talks to push the envelope in economic relations with Iran, more than a month after sanctions against it were lifted.
The two sides on Tuesday signed 11 memoranda of understanding, including two agreements reached by National Iranian Oil Company and Ghadir Investment Company with SOCAR—the State Oil Company of Azerbaijan Republic.
But besides the political gesture and a pair of agreements whose details are largely under wraps, what is actually in store for Tehran and Baku in energy projects?
The most immediate energy cooperation between the two Caspian Sea neighbors, who have traditionally maintained close relations, can come in the form of a swap deal.
Iran's Oil Minister Bijan Namdar Zanganeh said ahead of Aliyev's visit the Islamic Republic would formally present a proposal to Azerbaijan for swapping oil and natural gas.
"We have been actively trading with NIOC in the Caspian Sea region, until international sanctions forced us to discontinue such deliveries. There is a great potential to explore," Arzu Azimov, the head of SOCAR Trading, said on Tuesday.
Iran exports natural gas via pipelines to Turkey and Armenia, with its third customer Azerbaijan receiving less than 5% of Iran's supplies. But Baku can play a key role in realizing Iran's long-term ambitions in the gas sector.
The Islamic Republic plans to boost gas production capacity to 1.2 billion cubic meters a day by 2020, up from around 420 mcm/d at present.
It is already pushing forward its gas export projects to Oman and Pakistan while planning to increase supplies to its current customers, but the gas-rich nation cannot simply turn a blind eye to Europe's huge market.
Azerbaijan's role becomes more prominent when political complications and the huge cost of laying thousands of kilometers of pipelines from Iran to Europe comes into perspective.
In view of Iran's improving relations with Azerbaijan and the Southern Gas Corridor initiative there to supply Caspian and Middle East gas to Europe, the prospect of piped gas supply to Europe looms large for the Islamic Republic.
Caspian Reserves
The second issue on the table is developing Caspian Sea's rich hydrocarbon reserves, an area in which Iran is uncomfortably trailing its small northwestern neighbor.
The Caspian region, which is surrounded by Russia, Azerbaijan, Kazakhstan, Turkmenistan and Iran, is one of the oldest oil-producing areas in the world and is an increasingly important source of global energy production.
Iran and Russia produce around 85% of total oil and gas output of Caspian littoral states, according to the International Energy Agency, but Iran's Caspian production is nil.
The gains in oil and gas production from southern reserves have partially offset Iran's lingering lassitude in the north. But Tehran introduced several oil and gas exploration projects to international companies last year to make up for past negligence.
The development projects include three exploration blocks and Sardar-e-Jangal oil and gas field in the Caspian Sea.
Iran is virtually years away from oil and gas production from the Caspian Sea, and with no major breakthrough in sight in the short run, Aliyev's visit to Tehran can prove to be a stepping stone in the country's Caspian projects.
In Dec. 2011, Iran announced it had discovered a substantial oil deposit, later called Sardar-e-Jangal Field, which reportedly contains about 10 billion barrels of oil and 500 million cubic meters of recoverable gas.
And Azerbaijan can lend a helping hand here. It has two gas processing unit in the Caspian Sea, while none of Iran's more than 40 refining units operate in the Caspian region, further proof that the ex-Soviet country, despite its small processing capacity, can come in handy when it comes to exploiting Caspian reserves.
IEA data show Azerbaijan ranks fourth in Caspian oil and gas production, but it is increasing output from its Azeri-Chirag-Guneshli oil block it developed between 2006 and 2008. Sanctions have also dented efforts to start production from the Caspian Sea, as many international contractors abandoned Iran's energy market following the introduction of tougher sanctions against Iran's nuclear program in 2012.
This is while Azerbaijan has been cooperating with energy firms such as BP, Chevron, ExxonMobil and Royal Dutch Shell to boost its oil and gas production.
The Jan. 16 lifting of sanctions is expected to energize oil and gas ties between the two Caspian neighbors.
