Turkey puts Pressure on Iran over Gas Prices

Following last month’s controversial deal with Russia on the South Stream pipeline, the Turkish government is trying to strengthen its hand with another energy supplier by threatening to take Iran to an arbitration court over a gas pricing dispute. Energy Minister Taner Yıldız said on 17th January that Turkey “shared with [the Iranians] our unease about the high gas price. They did not share the same view”.

Iran-Turkey trade ties have – notwithstanding the impact of Western sanctions - been booming over the past few years, largely due to growing Turkish energy imports. Although the dispute is unlikely to change this overall pattern, it underlines Ankara’s increasingly assertive approach towards its energy suppliers. With Tehran under increasing economic pressure, it may feel compelled to compromise and give in to Turkey’s demands.

Currently, Iran is Turkey’s second single largest source of natural gas, providing around 20% of the country’s needs. The basis for the supply is a major contract signed in 1996, set to run for twenty-five years, under which Iran would supply Turkey with 10bcm per year.

The actual figure has been considerably lower: over the last ten years, according to an Iranian official in October, Iran has supplied a total of 47bcm, less than half the agreed total. The original 1996 contract stipulated that a take-or-pay clause kicks in at 87% of the annual contract quantity: i.e. if Turkey purchased less than 87% it would still have to pay the remainder.

After a series of acrimonious debates, Turkey’s state energy firm BOTAŞ managed to knock the take-or-pay clause down to 70% in 2002. However it remains a sore point in their gas relationship, since Turkey is oversupplied with gas at the moment due to a combination of increased imports, a more efficient distribution network, rising domestic prices and more sluggish growth than expected due to the recession. Although there are occasional shortages, this has more to do with the relative inefficiency of the power sector than any deep-rooted shortage. 

This is not the first time that Tehran and Ankara have gone to international arbitration to try and resolve their dispute. Over the past ten years both sides have repeatedly threatened to take legal action, and BOTAŞ won an arbitration case at the International Chamber of Commerce Commission on Arbitration in 2009, which required Tehran to pay $750 million for refusing Turkish demands to lower gas prices (whether it actually paid up or not is not entirely clear). Cut-offs of Iranian gas supplies have also occurred, often during harsh winters.

The latest dispute has been brewing for some time, but after the discount on Russian gas imports it secured last month, as well as the deal to import more gas from Azerbaijan, Turkey is now prepared to start putting serious pressure on Iran. Ankara is seeking to cut the amount it spends on foreign energy imports, which is responsible for around two-thirds of the country’s swelling current-account deficit. 

Turkey is aided in its efforts by the increased US and European pressure on Iran. Although unwilling to line up with Washington and Brussels on the sanctions, as a significant purchaser of Iranian energy Turkey has a golden opportunity to secure a better deal on its contracts – Iran has few other export options and cannot run the (admittedly) slim risk of a cut-off in Turkish imports. With sanctions tightening around Iran’s Central Bank, Tehran is also increasingly desperate for any source of foreign revenue.

Ankara is undoubtedly serious about its threat to take the case to arbitration, but is also hoping that Tehran will back down and agree to Turkey’s as-yet-unspecified terms. It seems more likely than not that Iran will indeed compromise on the price, given the corner it finds itself in.

Europe should be closely watching the outcome of the confrontation. A decline in Iranian gas supplies to Turkey would, at least in the short term, force Turkey to conserve more gas for domestic use, decreasing the amount available to export to Europe. In the long term, this would lead to a greater reliance on gas from Russia and Azerbaijan, which could further complicate the regional energy picture.

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region.