Beyond the Deal: Turkish-Iranian Energy Relations in the Post-Sanctions Era

Headquarters of the Petroleum Ministry in Tehran (Maps/Shutterstock)Headquarters of the Petroleum Ministry in Tehran (Maps/Shutterstock)

by Omid Shokri Kalehsar

Because of the EU/U.S. sanctions regime against Iran’s energy sector, the country’s oil and gas production capacities have been decimated. Following the signing of the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (JCPOA)—Iran hoped the country would attract more foreign investment and reverse the damage caused to its oil and gas industry.

Meanwhile, with growing domestic energy demands, neighboring Turkey is in dire need of energy supplies from reliable sources and wants to diversify its its energy resources. Thus, both countries are in the ideal situation to develop a mutually beneficial energy relationship. Yet, as many challenges as opportunities lie ahead. 

Iran and Turkey signed their first energy agreement in 1978, just before the Iranian Revolution, with Iran agreeing to supply the country with one million tons of oil. By the Ahmadinejad era (before EU and U.S. sanctions were launched against Iran’s nuclear program), Iran had become Turkey’s largest oil supplier with the latter relying on Iran for 43.13% of its oil. With the onset of sanctions, Iraq replaced Iran as Turkey’s number one supplier. By 2015, with a deal to end sanctions, Turkey began importing around 20% of its oil and 18% of natural gas from Iran.

Since the U.S. withdrawal from the JCPOA, however, Turkey has once again decreased the amount of oil it imports from Iran. Turkey imported about 174 000 barrels per day from Iran between January and June 2018—down 27% from the year before—with Russian and Iraqi suppliers gaining lost ground.

Turkey signed an agreement to purchase 10 billion cubic meters annually of Iranian natural gas in 1996. Iranian natural gas exports to Turkey made up around 90% of the country’s total natural gas exports. Due to high domestic consumption in Iran, especially in winter, gas exports were curtailed to the frustration of those in the south of Turkey who were directly affected by the resulting supply deficit. According to the conditions of the agreement, if Iran were unable to export the agreed amount to Turkey, then the case would be referred to the International Court of Arbitration (ICA) with Iran incurring a heavy fine. At present, Turkey has no integrated natural gas infrastructure and needs Iranian natural gas to supply its southern regions in the winter.

Between 2009 and 2012, Turkey often complained about the quality and price of Iranian natural gas, and took its complaint to the ICA, which ordered Iran to pay Turkey part of its $1.9 billion debt with free natural gas supplies. The current agreement is set to end by 2026, and both countries must sign a new agreement to extend their relationship. Iran asked Turkey to double the amount of natural gas it imports from Iran in return for a discount in price. However, as of October 2018, no major progress has been made in negotiation, and if Iran and Turkey cannot sign a new agreement Iran will likely lose a major market. At present, Turkey is party to several transit projects. Once these go online, it will be doubly difficult for Iran to rely on its custom.

Furthermore, Turkey has begun to import natural gas from Azerbaijan and has also signed an agreement to receive 31.5 billion cubic meters annually from Russia. The United States, developing its shale gas, also supplies Turkey with liquid natural gas. At present, Turkey is the second major U.S. LNG importer in Europe and might come to rely more on the United States if an energy agreement with Iran cannot be extended. Turkey also imports LNG from Qatar,and is planning to expand this agreement in the future. Turkey has made huge investments in LNG storage facilities to increase the share of LNG in its energy basket in the mid-to-long-term future. Turkey also invests in renewable energy, eventually hoping to decrease foreign dependency in the long term.

Turkish private and state energy firms are interested in investment opportunities in the Iranian energy sector, with state energy company Bota? signing deals to support work on phases 22-24 of the South Pars Field project in 2007 and 2008. Iran and Qatar share the South Pars Field together. Botas was to invest $12 billion in three phases, with half the production going to Turkey and the rest to the EU. However, due to EU and U.S. sanctions, these agreements were cancelled.

By 2015, and after the nuclear agreement, Iranian officials frequently called for around $200 billion in foreign investment and technology to revive its oil and gas production. In 2017, Turkey’s Unit International, Russia’s state-owned Zarubezhneft, and Iran’s Ghadir Investment Holding agreed to drill for oil and natural gas in Iran. This deal, worth $7 billion, involves work on three oil fields and one large natural gas field in the country. Unit International also has signed an agreement with Iran’s Energy Ministry to build power plants in other parts of Iran. This agreement, worth $4.2 billion, will boost capacity by 5000 megawatts. However, Unit International will likely withdraw from Iran’s energy sector due to U.S. pressure.

Still, Iran offers exciting prospect for Turkish investors. This investment can ensure Turkey achieve its goal of becoming a transit hub for moving gas and oil supplies from supplier countries to world markets. Although Turkey has at times complained about the quality and price of Iranian gas, the question is whether Iran will be able to be become a reliable supplier for Turkey in the post-sanctions era. Iran needs to press for an extension of the gas agreement with its Turkish counterparts. If Turkey does not extend this agreement, then the results will be a serious step back for Iran. Iran also needs Turkey to send its natural gas to Europe in the mid-term in order to regain its position among suppliers.

Turkish energy firms hold the power to provide Iran with needed investment, so Iran will be heavily dependent on Turkey for the foreseeable time. If Iran is interested in retaining its share in Turkey’s energy market, it must revise its regional policy and aim to solve problems with the United States, using the potential of its energy supplies to its advantage and attracting foreign investment to develop its facilities. Iran needs to offer Turkey a higher discount in order to sway the country from the temptations of U.S. and Qatari LNG and Russian and Azerbaijani natural gas. Further, Iran needs to develop a domestic legal framework that better facilitates contracting and granting commercial rights. At present, however, these problems are far from being resolved.

Omid Shokri Kalehsar is a Washington-based energy security analyst. Follow him at @ushukrik and uskenergy.com.

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