A dispute currently brewing over Iranian natural gas flowing to Turkey that is “too expensive” can only be overcome with mutual understanding, unless Iran desires a new impasse in its sanction-stricken foreign trade and energy-poor Turkey can afford to cut down on its supply channels, observers argue.
Turkey has long complained that Iran charges the most for the natural gas that it buys. The Turkish Pipeline Corporation (BOTAŞ) has tried to remain at the bargaining table and to end an impasse over the price of gas it buys from the Islamic republic, a futile effort due to Iran’s unbending stance. Turkey currently buys a cubic meter of Azerbaijani gas for $330 and pays Russia $400 for the same amount. However, Iran sells its gas to Turkey for $505 for each cubic meter, which increases Turkey’s natural gas bill by an extra $800 million annually. The price of a cubic meter of natural gas is sold for $400 in international markets.
Unable to resolve the problem following separate calls on the Iranian authorities, Turkey announced last Wednesday it was taking the issue to an international court of arbitration, “left with no other option,” as the country’s energy minister, Taner Yıldız, put it. This is not the first time the two have gone to arbitration, so there is a lesson to be learned by the two countries before they sign yet another gas trade contract.
Much of the problem in the gas trade between Tehran and Ankara derives from a “take or pay” condition that requires Turkey to import predetermined amounts of natural gas -- 10 billion cubic meters per year -- according to a gas deal signed in August 1996 and valid for 25 years. A case heard by Switzerland’s International Chamber of Commerce (ICC) Commission on Arbitration in 2009 resulted in a $750 million award for Turkey in compensation for gas purchases from Iran. An update made to the 1996 deal in 2002 requires Turkey to pay the remainder in each annual purchase of less than 70 percent of the stipulated amount -- 10 bcm. Turkey has similar deals with other major gas suppliers, Azerbaijan and Russia. The country had to pay TL 4.6 billion for unused gas from Azerbaijan, Iran and Russia between 2009 and 2011, unofficial data show.
Yıldız’s remarks, however, hint at “a door still open to a deal.” “We are determined to take this step -- suing Iran -- unless a desired solution is reached with them,” the minister said, adding that the Turkish side is ready to sit down to discuss the issue once again. All these factors aside, the two neighbors really have to exhaust all bargaining options: On the one had is Tehran, labeled by Western powers as a “potential nuclear threat,” and it is already under increasing economic pressure, leading to little room to maneuver. While on the other hand we have a Turkey desperately dependent on forces sources of energy. Many experts believe the two should not forget they are complementary, not rival economies. Some argue Turkey may find its hand strengthening in the game following two separate recent deals: a price discount it secured for Russian gas and an agreement to receive more gas from Azerbaijan. But this is still not enough to ignore Iran’s role.
“The Energy Market Regulatory Agency [EPDK] estimates Turkey imported 51 percent of its natural gas need from Iran last year. This being the case, Iran could drag its heels in not offering a price discount,” argues energy policy expert Necdet Pamir. He tells Sunday’s Zaman, however, that it is quite normal for Turkey to take the issue to a court of arbitration “at a time when global natural gas prices are on a steady decline.” The increase of shale gas extraction in the US also led to a decline in LNG prices.
One prominent detail Pamir recalled was that the 1996 agreement requires Turkey to receive the unused gas in a year -– for which it paid in advance –- in the following five years, or else it will lose its right to claim the gas. The current economic slowdown and an anticipated fall in demand make it hard for Turkey to exercise this right.
Sorting out differences in midst of harsh diplomacy
In the bigger picture, if the Iranian gas impasse continues, Turkey may feel compelled to save its natural gas imports -– as much as its storage capacity allows –- and hence create a problem of a decline in natural gas supply to the EU. Observers say the union should take this into account, keeping a close eye on the dispute. A Ministry of Energy and Natural resources official who asked to remain anonymous told Sunday’s Zaman that third parties might be expected to mediate in the dispute, adding, however, that there are no strong signs that suggest both countries would actually want such a thing. In a phone interview with Sunday’s Zaman, Turkish Asian Center for Strategic Studies (TASAM) President Süleyman Şensoy identifies the arbitration process as “risky for both sides.” “Iran is going through a sensitive period as it is under pressure due to Western sanctions. Tehran would perceive Turkey suing on gas as a further attempt at intimidation. Their differences notwithstanding, it will be to their benefit if Turkey and Iran agree on the terms,” he says.
Noting that the two economies complement each other, he says Turkey needs Iran for the diversification of its gas supply resources while the latter opens to Western markets via Turkey. He noted that Turkey has a long-term interest in its eastern neighbor, with some Turkish energy firms already known to be interested in operating licenses for oil fields inside Iran. “We import oil at relatively profitable prices from Iran, and the Islamic republic may need Turkish backing to fend off international diplomatic pressure that is turning against it. Turkey has rejected joining the US and the EU in their oil import sanctions on Iran,” he said.
If we speculate further, a prolonged dispute threatens to open Pandora’s box and harm political balances in the region. Iran, with its Shiite-oriented diplomacy mindset, in its own justification already reserves the right to use Turkey’s approval of a NATO missile shield and its harsh criticism of the predominantly Alawite Syrian regime as cards to be played against the Sunni neighbor. Şensoy says Iran might opt to use “some tools” against Turkey. The Islamic republic is known to have cut gas supplies due to “technical failures” during harsh winters in the past. “The best option will be the sides reaching a compromise before tension grows any further,” Şensoy adds. Süleyman Yaşar looks at the situation from a different perspective. He says some parties are deliberately fueling political tension between Iran and Israel. “When we look at world oil markets, experts expect a slump in demand due to an anticipated global economic stagnation. … We know that gas prices are defined in line with developments in oil. The question is, who is benefiting from such speculative maneuvers?” he asks. Yaşar says Turkey should concentrate on new investments to facilitate its own natural resources so as to reduce its dependency on gas for electricity production.
Natural gas accounts for 47 percent of Turkey’s electricity generation, according to data from the Ministry of Energy and Natural Resources, a larger share than other major resources. A steep rise in natural gas consumption across the country due to cold weather last month has prompted the ministry to increase supply to households. The Chamber of Mining Engineers (MMO) Chairman Mehmet Torun tells Sunday’s Zaman the share of natural gas in electricity production should be minimized with such diversified local sources as lignite. “Turkey has a recoverable capacity of 13 billion tons in lignite reserves. We are paying nearly $50 billion for energy imports every year, and more than half of this money goes to electricity production. … Why not use our own potential for electricity generation?” he explains. Torun underlines the importance of research and development (R&D) investments to provide an environmentally friendly use of natural resources. The average share of natural gas in global electricity production stands at 18.3 percent, while coal has a 38.7 percent and oil a 7.5 percent share.