The EU's risky symbolism over Iranian gas

By bne IntelliNews November 14, 2012

David O'Byrne in Istanbul -

The EU ban on importing Iranian gas risks alienating Turkey - the key state in the route of Brussels' long-planned southern "gas corridor", which will bring Caspian, Central Asian and Middle Eastern gas to Europe.

At first glance the EU's decision to ban gas imports from Iran appears to be nothing more than a symbolic gesture, aimed at further signalling to Tehran the EU's opposition to its nuclear programme. What UK Foreign Secretary William Hague described as, "a sign of our resolve in the European Union that we will step up the pressure."

No EU state actually imports gas from Iran or is in a position to do, so no problem. Or at least there wouldn't be if EU candidate state Turkey, were not dependent on Iran for 20% of its gas imports.

Exactly what the implications are for Turkey's EU candidacy if it continues to import gas from Iran in contravention of the EU ban, are still unclear.

Little room for manoevre

Legally speaking, Turkey has little room for manoevre. The take-or-pay contact between Turkish state gas importer Botas and The National Iranian Gas Exports Company (NIGEC) was drafted under international law and is legally binding for 25 years from 2001 when flow started, leaving Botas little option but to continue taking the 10bn cubic metres a year (cm/y) or face legal action.

At the same time, Turkish gas demand is expected to reach 48bn cm this year, rising to around 50bn cm in 2013 despite a slowing economy -

perilously close to the 51.8bn cm/y maximum limit of the country's current gas import portfolio.

And that demand is set to grow further with liberalisation of the Turkish power market, which has seen private generation companies dash to construct cheap gas fired power plant to meet power demand growing at 8% a year. Generating licenses have already been issued to 21 new Combined Cycle Gas Turbine (CCGT) plants of 100 megawtts (MW) or over, totalling 12.3 gigawatts (GW), while applications for generating licenses have been submitted for a further 60 plant over 100 MW totalling 29.2 GW.

With Turkey already struggling to find enough new gas supplies to meet expected growth in demand, it simply isn't in a position to abandon 20% of its imports to fall in line with the EU ban and indeed energy minister Taner Yildiz has confirmed that he won't be pressured into them, tell reporters on November 6 that: "Turkey does not plan to reduce gas supplies from Iran [when an exemption from US sanctions expires on December 3], as the EU sanctions against Iran will not cover existing contracts."

This could be viewed as an acceptable result by right-wing European politicians intent on blocking Turkey's accession, but it also raises questions over the EU's long-mooted plan for Turkey to become the route for its o-called "Southern Gas Corridor" - a planned pipeline or pipelines carrying gas from the Caspian and Middle East to Europe, which has long been envisaged as the best way to avoid over dependence on gas imports from Russia.

As such, it is supposed to increase diversity of supply, encourage competition, and lower prices. All admirable aims, and at least on paper, achievable given the planned pipelines actually get built, across Turkey.

All the more odd then why the EU would be seeking to encourage Turkey to abandon 20% of its gas supply, risking starting a new spat with Ankara which has already frozen relations with Brussels until January, during the period of Cyprus holding the EU presidency.

The irony of the ban is that Ankara is actually in a position to end imports from Iran, albeit only in three or four years time, and only at the expense of taking the very gas with which the EU hopes to kick start its Southern Gas Corridor.

That gas, 10bn cm of planned production from the second phase of Azerbaijan's Shah Deniz gas field, has been earmarked for transit to Turkey's European borders from where two rival pipelines are competing to carry it to European markets.

Plans envisage a consortium of Azerbaijan's Socar (51%), Turkey's Botas (20% and Shah Deniz consortium members BP, Total and Statoil (29%) building a new pipeline from Baku to western Turkey, dubbed the Trans-Anatolian Gas Pipeline (TANAP) at an anticipated cost of upwards of $7bn.

Currently the only factor delaying investment upstream in Shah Deniz is the need to finalise plans for carrying the gas to Europe, and hence secure customers.

How much easier for all concerned if the gas could be sold in Turkey as a replacement for previous imports from Iran.

Not to say over $7bn cheaper, with the gas able to be carried to Turkish buyers through Botas existing transit network, offering potentially higher margins for the producing consortium, and lower prices for consumers.

Of course it would spell the end of the EU's Southern Gas Corridor. At least until the development of further gas fields in the Azeri Caspian releases more gas for export, or Azerbaijan and Turkmenistan succeed in agreeing on the transit of Turkmen gas through Azeri territory and manage to construct the necessary infrastructure. Developments few expect to see any time in the next decade.

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