Iraq has awarded a $350m contract to build a new cross-border pipeline to import gas from southern Iran to a power plant in the Basra area.

The deal is a sign of increased cooperation between the two countries and could provide a new avenue for Iran to monetise its vast gas reserves, which it has struggled to export to surrounding countries.

The contract was awarded by operator State Company for Oil Projects (Scop) to Iran’s privately held Tadbir Energy Gostar Iranian Company.

According to Iraq’s Ministry of Oil, the pipeline will connect Abadan – an Iranian refining hub on the border between the two countries – with a power station in southern Iraq.

The exact capacity and destination of the pipeline is not clear, but the infrastructure will provide a new route in addition to an under-construction pipeline linking Iran and Iraq.

In May, Iranian deputy oil minister for international affairs and trading Ali Majedi said that the original pipeline is due to be completed in the second quarter of 2015.

Iranian and Iraqi officials had agreed on a contract for 25 million cubic metres a day (cm/d) of gas through a 270-kilometre pipeline from the gas processing hub of Assaluyeh in southern Iran into the Iraqi gas network.

Construction works on the Iran-Iraq pipeline are 75 per cent complete, according to official reports. Iraq, which has far less gas assets than its neighbour, is expected to use Iranian gas imports to fuel three power plants.

The original scheme was to export gas through an Iran-Iraq-Syria pipeline exporting gas to Europe through the Mediterranean Sea, but this is reported to have been put on hold due to a lack of security in Syria.

Iraq-Iran relations have improved significantly since the US-led invasion of the former ousted Sunni nationalist dictator Saddam Hussein.

Iraq’s subsequent Shia-led governments have been formed with the support of Tehran, while bilateral trade rose to $12bn in 2013, making Iraq one of Iran’s top five trading partners.