Publication: Eurasia Daily Monitor Volume: 4 Issue: 157

The Turkish government has reiterated its determination to press ahead with massive investment in the Iranian energy sector, despite U.S. opposition.

On August 12 Turkish Energy Minister Hilmi Guler announced that Turkey was determined to implement the terms of a memorandum of understanding signed with Iran on July 13 (CNNTurk, August 12).

When the agreement was originally announced, Guler described it as an important step towards realizing Turkey’s goal of becoming an energy corridor to meet Europe’s needs for oil and natural gas (Vatan, July 16). However, the agreement also foresees the state-owned Turkish Petroleum Corporation (TPAO) being granted operating licenses for three different sections of Iran’s South Pars gas field, which has estimated total recoverable reserves of around 14 trillion cubic meters (Milliyet, July 19). Turkish energy officials have estimated that the project will require a total investment of around $3.5 billion, including approximately $2 billion to build a pipeline to transport the gas across Turkey.

The United States has opposed the agreement. The Turkish media has quoted U.S. officials as commenting that, given the tensions between Washington and Tehran over the latter’s nuclear energy program, it is not the right time for Turkey to be investing in the Iranian energy sector (CNNTurk, August 12).

However, Turkey has been undeterred. On August 12, Guler announced that a Turkish delegation had flown to Tehran to begin detailed discussions with their Iranian counterparts in order to finalize details of the price, volume, and quality of the gas (CNNTurk, August 12). The negotiations are expected to last four-to-six months and TPAO is aiming to begin the construction of facilities in the South Pars field in 2008.

Turkey already imports Iranian natural gas for its own use under an agreement signed in 1996. It also imports natural gas from Russia. Turkish governments have repeatedly expressed their desire to diversity their sources in order to avoid becoming dependent on a single supplier (Milliyet, July 19).

Even if much of it is eventually forwarded to European markets, the expectation is that, if the latest project is realized, at least some of the natural gas will be used to meet Turkey’s growing energy demands. During the 1990s there were hopes that the country would be able to meet most of its demand for electricity through hydroelectric plants. However, in recent years low rainfall and higher than expected demand have made Turkey increasingly dependent on imported fuel, particularly natural gas. The country is also currently experiencing one of its worst droughts in living memory, and several hydroelectric plants have been forced to reduce production or temporarily close. In the first seven months of 2007, natural gas fuelled power stations accounted for 52.4% of Turkey’s total electricity production, up from 32.5% in 2004. The share of hydroelectric generation fell from 30.3% to 23.0% over the same period. The remaining demand for electricity is met from power stations burning coal and oil (Milliyet, August 12).

However, Turkey’s desire to diversify its energy sources does not explain the huge increase in economic contacts and bilateral trade since the moderate Islamist Justice and Development Party (AKP) came to power in November 2002. In 2006 bilateral trade between the two countries reached $6.7 billion, an increase of 52.5% on 2005 and more than five times the level of $1.2 billion in 2002 (EkoTurk News Agency, February 6).

The growth in bilateral trade between Turkey and Iran appears to be part of the AKP’s strategy of trying to strengthen economic ties with other Muslim countries. On July 31, Foreign Trade Minister Kursad Tuzmen announced that Turkey would soon sign preferential trade agreements with “18 Islamic countries” (EDM, July 31). On August 12 he announced plans to sign preferential trade agreements with Iran and Pakistan. He said that tariff barriers between the countries would be reduced in stages as part of part of an attempt to boost trade among the ten members of the Economic Cooperation Organization (ECO), which includes Turkey, Iran, Pakistan, Afghanistan, and the six Central Asian republics. “At the moment, trade between ECO members only accounts for 5-6% of their total trade. This is a very small proportion. We must certainly increase it,” he said (Radikal, August 13).

However, in addition to further antagonizing Washington, any attempt to grant preferential trade status to Iran and Pakistan could create problems for Turkey in its relations with the EU, which is Turkey’s main export market. Under the terms of Turkey’s 1995 Customs Union Agreement with the EU, which came into force on January 1, 1996, all of Turkey’s tariff barriers with third parties must be harmonized with those of the EU.