Warming Up To Tehran


Economic News

22 Jul 2010
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Iranian President Mahmoud Ahmadinejad's recent visit to Turkey marked an important step for relations between the two countries, as Iran's role as a key energy supplier and growing trade partner make a deepening of diplomatic ties a necessity for Ankara.

On August 14-15, Ahmadinejad and his Turkish counterpart, Abdullah Gul, signed a number of agreements on issues ranging from anti-terrorism and drug cooperation to cultural exchanges. However, the two countries failed to reach an agreement on a priority issue - a deal that would guarantee Turkey's winter supply of Iranian gas.

The recent conflict in Georgia has intensified Turkey's search for alternative energy supplies, as Russia supplies around 65% of the country's natural gas demand. As winter approaches and Russian policy is causing many uncertainties, the need to secure supplies and diversify sources of natural gas has become a pressing one.

By the end of 2007, Turkey was importing approximately 17% of its gas needs from Iran, according to figures from the Turkish Petroleum Pipeline Corporation (BOTAS). However, in the past this supply has been shaky, as for the past three winters, Iran has not hesitated to reduce supplies to Turkey in order to meet its own domestic demand. Iran even turned off the pipeline completely on January 7 of this year when its own supplies from Turkmenistan were cut off.

Turkish companies were hoping that Ahmadinejad's visit would conclude a $3.5bn investment deal in the Iranian energy sector that has been under negotiation since 2007, when the two countries signed a Memorandum of Understanding (MoU) to build a new pipeline through Turkey capable of transporting 40bn cubic metres of gas to the EU annually. The agreement stipulated that Turkish companies would produce and export 20bn cubic metres of gas from the South Pars gas field, one of the world's largest.

However, Ahmadinejad left Turkey without a deal being struck, and the stalling of the talks is believed to be mainly due to disagreements over the Iranian policy of buyback contracts. Under these contracts, Turkish firms investing in Iranian gas fields bear sole risk for the development of the site in exchange for remuneration from the National Iranian Oil Company (NIOC) in the form of an allocated production share. After meeting an agreed-upon profit, the NIOC takes ownership of the site and assumes windfall profits. But Turkish companies believe the buyback contracts do not offer sufficient incentives, and would rather buy gas from the fields directly.

There were also disagreements over technical issues relating to infrastructure, as Turkish representatives believe that the production and transmission hitches that have caused the winter cuts in supply have not been adequately addressed.

While the final details on the new pipeline are expected to be hammered out in the coming months, it is likely that the state-owned Turkish Petroleum Corporation (TPAO) will undertake the project alone. Foreign backers have so far stayed away from the deal. The project is also problematic in regards to relations with Washington, which is firmly opposed to any energy deals with Iran.

While an agreement over gas could not be reached, trade between the two countries shows more promising signs. Bilateral trade, which stood at just $1.5bn in 2000, exceeded $7bn in 2007 and has grown to $6.1bn in the first seven months of 2008. It is expected to top $10bn by the end of the year.

Although the value of Iranian gas exports dominates these figures, Iran is becoming an increasingly important export destination for Turkey's booming automotive industry. Iran imported $145m worth of cars in the first seven months of 2008, a 167% increase on the previous year's figure, according to data from the Uludag Exporters' Union. Iran is also the sixth largest source of tourism arrivals and the largest outside the EU and Russia. Over 640,000 Iranians visited Turkey in the first seven months of 2008, accounting for over 4% of Turkey's foreign arrivals, according to data from the Ministry of Tourism.

The deepening of trade ties with Iran could also bring enormous benefits to parts of Eastern Anatolia, according to Kaan Korkmaz, finance coordinator of Eren Holding, a Turkish group with operations in cement, energy and paper.

"Eastern Turkey has limited history as an industrial region and 70% of the country's economy is centred on Istanbul and surrounding regions. The deepening of trade with Iran, Iraq and other countries in the region has the potential to develop export facilities in cities such as Erzurum and Kars. In the long term, only by developing major cities can greater prosperity be brought to the region," he told OBG.

During Ahmadinejad's visit, the two presidents announced that the Tehran-Ankara Joint Economic and Commercial Commission will soon convene in Tehran to discuss ways to raise the volume of trade to $20bn over the next four years. A final deal on gas is also expected by the end of the year.

Ankara's warming to Tehran has been met with raised eyebrows in Washington and Brussels. Though their new rapprochement may make the West nervous, Turkey's pressing need for energy diversification and search for new business opportunities are now driving relations with Iran.

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