BLACK SEA BLOG: Murkiness surrounds Turkey's licensing of Iran-Germany gas pipeline

By bne IntelliNews November 30, 2010

David O'Byrne in Istanbul -

In a move that might seem calculated to damage already delicate relations with Washington, Turkey has issued a license to a Turkish company planning to construct a pipeline to export Iranian natural gas across Turkey and Europe to Germany.

Turkey's state Petroleum Administration (PIGM) has issued the license to Turang Transit Tasimacilik, giving it the right to operate a 35bn cubic metre per year (cm/y), 1,720-kilometre-long pipeline from the Iranian border town of Bazargan across Turkey to Ipsala on the Turkey-Greece border and from there across Europe to Germany.

Valid for 30 years, the license carries the condition that Turang must demonstrate within two years that it has finalized agreements with gas producers and concluded financing for the line, or face the license being cancelled. However, here's where the facts end and the speculation begins.

Where's the gas?

Turang is a subsidiary of Turkey's Som Petrol, a small petroleum products trading company owned by Turkish businessman Sitki Ayan, which was said by Tehran to have signed a deal to transport Iranian and Turkmen gas from Iran to Europe via Turkey. Subsequently, Ayan was reported in the Turkish media as claiming to have arranged financing for the construction of an export pipeline, which is expected to cost up to $11.5bn to build.

However, it's unclear what sort of financial institutions would be prepared to take on what amounts to quite a substantial risk, with an unknown company on a project over which there are several significant question marks.

To begin with, while Som Petrol does appear to have some sort of agreement with Tehran allowing it to export gas from Iran to Europe via Turkey, it is unclear exactly where the gas will come from.

Iran has for some years been facing problems developing production from its own gasfields due to US pressure on oil and gas companies not to work there. Turkmenistan too doesn't currently have sufficient gas to fill a 35bn cm/y pipe; currently, it sells most of its gas to Russia and China, with only a small portion being exported to Iran for domestic use there.

At the other end of the equation, Som Petrol also has yet to negotiate transit agreements with Greece and whichever other countries it chooses to run its pipeline through to reach Germany, not to say conduct environmental impact studies, receive construction permits and, most importantly of all, identify potential buyers of the gas and sign sales agreements.

In fact other than the agreement with Iran - the details of which have not been made public - all the project currently has is a license from Turkey, valid for two years during which the sponsoring company, must complete all of the above. In other words, Turang, a small company with no previous experience of developing multi-national pipeline projects, must in two years conclude a lengthy series of agreements and studies that the six large state energy groups that make up the consortium sponsoring the Nabucco gas pipeline, which also plans to carry gas across Turkey to Europe, have been unable to complete in eight years, even with the full backing the EU. And that's the same EU which has backed the US sanctions against Iran and repeatedly indicated an unwillingness to take gas from an Iranian regime conducting a nuclear programme, allegedly aimed at developing weapons capability.

Given the tiny odds of Som Petrol managing to arrange all this within the given two-year time span, it begs the question why anyone is bothering to try to publicize a project that surely cannot be realized. The answer to that almost certainly lies in the decision earlier this year by the US to impose a second sanctions package on Iran - over and above that approved by the UN.

Keeping the door ajar

This second package seeks to penalize international companies from working in certain sectors of the Iranian petroleum sector. Among those companies subsequently listed as being in breach of sanctions was Turkey's state-owned upstream operator TPAO, which in 2007 was the subject of a preliminary agreement between Ankara and Tehran under which TPAO would develop three blocks of Iran's giant South pars gasfield and export the gas back to Turkey for transit to Europe.

Although no final agreement was ever reached, it remained under discussion until the announcement of Som Petrol's agreement with Tehran, at which point Turkish officials confirmed that TPAO's deal had been shelved. This move served to bring Ankara in line with Washington's wishes, while at the same time keeping a door open to Tehran.

It may not be that Som Petrol or its subsidiary Turang ends up constructing and operating a pipeline carrying Iranian gas to Europe, but their role may yet serve to allow that happen at some point in the future - assuming that Tehran can succeed in convincing Washington and Europe that it has no aspiration to attain nuclear weapons.

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