Publication: Eurasia Daily Monitor Volume: 4 Issue: 185

The Turkish Energy Ministry has repeated Turkey’s determination to press ahead with a new natural gas agreement with Iran, despite objections from the United States. On October 3, Turkish Energy Ministry officials announced that that Turkey would not seek international financing for the $3.5 billion project but would fund it entirely from its own resources.

In July 2007 Turkey and Iran signed a memorandum of understanding (MOU) to import natural gas from Iran’s South Pars field. A final agreement is expected to be signed later this month after the religious holiday to mark the end of the Islamic holy month of Ramadan. The proposed project foresees the state-owned Turkish Petroleum Corporation (TPAO) investing a total of $3.5 billion to bring the gas to Turkey, including the construction of a $2 billion gas pipeline.

If the deal goes ahead, TPAO could become liable to U.S. sanctions under the 1999 Iran Sanctions Act, which makes any foreign company that invests more than $20 million in Iran’s gas and oil sector subject to punitive measures. The announcement of the MOU came at a time when Washington was already seeking to increase Iran’s international isolation in order to apply pressure for Tehran to curb its nuclear program (Milliyet, Radikal, September 28).

However, since it came to power in November 2002, Turkey’s ruling Justice and Development Party (AKP) has been keen to strengthen the country’s economic ties with neighboring Muslim states. Government officials argue that Turkey’s growing needs for oil and gas require it to diversify its energy suppliers. They are also keen for Turkey to become an energy hub for exports of oil and gas from the Caucasus and Central Asia, including using the proposed new gas pipeline to transport Iranian gas to European markets.

When the MOU was signed in July, analysts questioned how Turkey would be able to finance the proposed $3.5 billion investment. TPAO does not have an established track record of securing such large sums from the international market, and most foreign financing institutions are reluctant to become involved with projects linked to Iran.

On October 3, officials from the Turkish Energy Ministry announced that Turkey would finance the project itself and that they were confident of being able to find sufficient resources. However, they declined to give details (Anadolu Ajans, October 3).

It is currently difficult to see how Turkey can find $3.5 billion from its own resources in time, particularly as in August TPAO officials predicted that the construction of facilities in the South Pars field would begin in 2008 (see EDM, August 13).

In addition to finding the funding for the project, in order for it to be profitable TPAO also needs to be able to market some of the gas to Europe. TPAO officials have announced that Turkey and Iran will establish a joint venture to sell the gas. However, energy analysts doubt whether the company will be able to secure enough gas contracts to make the proposed project economically viable (Radikal, September 28).

Nevertheless, there is little doubt that natural gas has begun to play an important role in cementing a growing trilateral alliance among Turkey, Iran, and Syria. On October 4 the Turkish media quoted Iranian television as reporting that Iran and Syria had signed a MOU for Tehran to export three billion cubic meters (105 billion cubic feet) of natural gas to Syria each year at an estimated annual cost of around $1 billion. Iranian caretaker Oil Minister Gholam Hossein Nozari said that the gas would be exported to Syria via existing pipelines running across Turkey starting from 2009 (Anatolian Agency, October 4).

Iran is already Turkey’s second-largest supplier of natural gas after Russia. Turkey signed its first natural gas agreement with Iran in August 1996, during a short-lived coalition government headed by the Welfare Party (RP). Initially the agreement was plagued by disagreements over prices, as the RP appeared to have been primarily motivated by ideological considerations and had agreed on a price well in excess of that offered by alternative suppliers, such as Russia. However, the agreement was subsequently renegotiated and Iran currently supplies Turkey with several cubic meters of natural gas a year, which is used both for industry and for residential heating during the winter in eastern Anatolia.

Bilateral trade between Turkey and Iran has grown rapidly since the moderately Islamist JDP came to power in November 2002. In 2006, bilateral trade stood at $6.7 billion, compared with just $1.2 billion in 2002.