Energy ties deepen between Iran and Turkey

Jul 02, 2008 02:00 AM

by John C.K. Daly

The United States has maintained various sanctions against Iran since 1979, implemented in aftermath of the seizure of the US embassy in Tehran. As relations worsen between the US and Iran, Washington is seeking to have the United Nations Security Council impose additional sanctions on Iran for its nuclear enrichment activities, which Tehran insists are legal, entirely peaceful, and intended for generating electricity.
Among the sanctions that most concern foreign energy companies and nations is the 1996 Iran-Libya Sanctions Act (ILSA), renewed in 2001, which provides for punitive measures against entities that invest more than $ 20 mm (EUR 13 mm) annually in the Iranian oil and gas sectors.

Many countries are deeply ambivalent toward the US policy, none more so than Turkey, which imports 90 % of its energy needs. Now Ankara is pushing the limits by increasing its natural gas purchases from Iran and considering possible involvement in developing the world’s largest hydrocarbon reserves. On July 29 Iranian Petroleum Minister Qolam Hosein Nozari said in Tehran that Turkey and Iran were negotiating over Turkey being a transit corridor for Iranian natural gas exports to Europe and that Iran would provide increased amounts of natural gas to Turkey during the winter (Anadolu Ajansi, June 30).
According to Nozari, the pipeline, which would run from Iran’s South Pars natural gas and oil fields to the border province of Bazargan, was discussed during the OPEC summit held on June 22 in Jeddah (Tehran Times, June 29). Even worse for administration officials seeking to sustain and intensify the US sanctions regime, Nozari said, “We have also spoken about the participation of Turkey in the development of phases 14 and 23 of the South Pars field” (Hurriyet, June 30).

The 3,745 sq-mile Persian Gulf South Pars-North Dome gas condensate field, straddling Iranian and Qatari territorial waters, is the world’s largest known gas field. Discovered by the National Iranian Oil Company (NIOC) in 1990, Iran’s sector, known as South Pars, covers 1,428 sq miles, with the site’s remaining 2,317 sq miles, North Dome, lying in Qatari waters. South Pars-North Dome has estimated reserves of approximately 51 tcm of natural gas and 50 bn barrels of condensate; with in-place reserves equivalent to 360 bn barrels of oil. South Pars-North Dome is the world’s biggest conventional hydrocarbon accretion, dwarfing even Saudi Arabia’s 170 bn barrel Ghawar oil field (Middle East Economic Survey, March 20, 2006).
Phase 14, due to begin production in 2014, is part of a $ 10 bn (EUR 6.5 bn) liquefied natural gas (LNG) project, which already has foreign investors -- a partnership of NIOC (50 %), Anglo-Dutch firm Royal Dutch Shell (25 %), and Spain’s Repsol-YPF (25 %). When operational, the project’s initial production capacity will consist of two components, each capable of an annual production of 8 mm tons of LNG.

For Ankara, the choice of major natural gas suppliers is difficult, Russia or Iran, while waiting for Azerbaijan to ramp up production. Iran, which holds the world's second largest gas reserves, currently provides over one-third of Turkey’s domestic demand, while Turkey receives 63.7 % of its imports from Gazprom with smaller volumes coming from Azerbaijan.
In 1996 Turkey signed a contract with Iran for natural gas deliveries, which began in December 2001 via a pipeline from Tabriz to Ankara. The South Caucasus pipeline, also known as the Baku-Tbilisi-Erzurum natural gas pipeline, opened in December 2006 with an annual capacity of 8.8 bn cm and carries Azeri Caspian natural gas to Turkey via Georgia.

Energy imports from both nations are critical to sustaining Turkish economic growth, even though Washington, whose diplomatic relations are increasingly strained with Russia and non-existent with Iran, is very unhappy about the situation. According to Turkey’s Turkiye Istatistik Kurumu (Turkish Statistical Institute), Turkey’s economic growth accelerated more than expected from January through March, increasing to 6.6 % from 3.4 % in the fourth quarter of 2007 (www.tuik.gov.tr). The figure exceeded the market estimates by 35 to 40 %, as the expected growth rate was around 4 % (Milliyet, July 1). In 2007 Turkey's annual GDP growth rate was 4.5 %.
Rising energy costs, however, are proving to be a significant drag on economic growth. Earlier this year the Turkish government hiked electricity prices by 21 %, and Ankara is preparing to raise natural gas prices in July by 9 % for residences and 11 % for businesses (Radikal, July 1).

In June, Turkey’s Devlet Planlama Teskilati (State Planning Organization, or DPT) prepared a comprehensive projection for Turkey’s economy from 2009 through 2011, which has been approved by the Cabinet and published in the government’s official gazette, Resmi Gazete (http://rega.basbakanlik.gov.tr, June 28). The plan includes measures to ensure energy supply security in the long-term and gives top priority to decreasing the country’s dependence on imported natural gas.
At a time of record high oil prices, when Saudi Arabia’s King Abdullah said, "Consumer countries have to adapt to the prices and the mechanisms of the market," Washington’s efforts to compel its allies to respect its hard-line sanctions against Tehran seem at best naïve, especially when the United States has no alternative sources of energy to offer (Al-Siyassah, July 2). While Washington’s threats of sanctions in June caused both Royal Dutch Shell and Repsol-YPF to withdraw from the South Pars development, there is a major difference between a multinational company and a sovereign government bending to sanctions.

For Turkey, displays of political solidarity must take a back seat to financial considerations, as the government is committed to economic growth to improve the lives of its citizens. Ankara estimates that from Desert Storm in 1991 until the March 2003 invasion of Iraq, it lost an estimated $ 80 bn in oil revenues and increased energy costs as a result of supporting US and UN sanctions and policies against Iraq.
Washington can hardly expect Turkey to suffer further financial losses for supporting its Middle East policies. With no end to energy price increases in sight, Washington must acknowledge the reality of Turkey’s pragmatic economic relations with its energy-rich eastern neighbour, even if it does not agree with them.

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