How Turkey Beats Iran on Energy

Article Summary
Iran may be an oil and gas giant, but it has failed to play much of an official role in Iraq’s energy industry because its companies are technically and financially weak. Turkey, on the other hand, is emerging as a tough, strategic competitor.

In the contest between Turkey and Iran for influence in Iraq, energy is one of the crucial factors. It might seem that an oil and gas giant such as Iran would have a clear advantage over importer Turkey, but Ankara has played to its strengths while Iran has, as so often before, failed to use energy strategically.

Both countries seek to use energy as part of wielding wider influence within Iraq. Both also seek profitable business opportunities. But then, their strategies diverge.

Turkish-Iraqi trade ran at about $12 billion last year, and Iranian-Iraqi at $7 billion. Turkish companies were involved in construction and engineering; Iran was more notable for consumer goods and agricultural products. Not surprisingly given geographic and sectarian affiliations, Turkey is prominent in the north and Baghdad, and Iran is in the south. Both supply electricity to Iraq, which has only six to eight hours' supply across most of the country.

Despite Iran’s oil history stretching back to 1908, its 30 years of state management of the business and its policy of self-sufficiency, it has failed to play much of an official role in Iraq’s energy industry. Its energy companies are technically and financially weak.

In contrast, Turkish state corporation TPAO, which was planning its strategy even before the 2003 invasion, has won bids to develop two oil and two gas fields in Iraq. Turkish companies have enjoyed success in oil developments with the Kurdistan Regional Government (KGM) — notably Genel Enerji, one of the early entrants, which merged with ex-BP boss Tony Hayward’s Vallares in 2011.

Turkey, which imports more than 90% of its oil, has a clear interest in lower oil prices, especially with inflation running over 10%. It does not need to buy directly from Iraq to achieve this, as long as Iraqi production is increasing. But the planned rehabilitation and expansion of the Kirkuk-Ceyhan pipeline to the Mediterranean would give Ankara some more leverage while diversifying Baghdad’s markets and reducing its dependence on its congested Gulf loading ports and the Strait of Hormuz.

Some Kurdish oil, which cannot be exported without Baghdad’s permission, is smuggled to Turkey and Iran. This helps Turkey, but while some elements in Iran no doubt benefit, it is not in Tehran’s overall interest at a time when it is finding it hard to sell its own crude.

A new complication materialized this year with the United States' pressure on buyers of Iranian oil. Turkey gets almost a third of its supplies from Iran, and its sole refiner cut its purchases by 20%, hoping to replace them with Libyan and Saudi crude. Nevertheless, Turkey was not on an initial list of 11 countries judged by the US to have done enough to escape financial sanctions.

By contrast, Iraq is the greatest threat to the Iranian economy. Its plans for a massive ramp-up in oil production, if only partially realized, would put heavy downward pressure on prices. The re-emergence of some slack in the market would greatly assist the US in tightening the embargo. Iran’s own oil production was declining even before the latest round of sanctions, under the pressure of mismanagement, lack of access to technology and underinvestment. Iran and Iraq teamed up to oppose production increases at OPEC’s "worst ever meeting" in June last year, but it would hardly make sense for Baghdad to take that line in the future.

Iran has some ways to frustrate Iraq’s oil ambitions. It advocated in Baghdad for Iraq to use a version of its own contractual terms, generally found unappealing by international oil companies. It can maintain a certain level of insecurity around Basra and, if really threatened, it could inspire unrest or sabotage.

But Iran cannot act too openly against Iraqi national interests without burning its bridges in Baghdad. It might also need Iraq as a useful smuggling conduit as sanctions bite deeper.

Turkey also seeks to secure gas supplies from Iraq, which introduces direct energy relations between Turkey and Iran into the picture. Gas exports via pipeline from Tabriz to Ankara started in 2001, but have been reduced or cut off 18 times since, usually because Iran has kept gas at home during cold winters.

Turkey’s favorable geographic location allows it to buy gas from Azerbaijan and Russia, and natural gas from around the world, making it unwise for Iran to appear an unreliable supplier. Turkey complains that the prices for Iranian gas are some 25% higher than Russian gas, but new Azeri supplies will not be available until 2017 at the earliest.

Gas from Iraqi Kurdistan could potentially arrive earlier, but is, like Kurdish oil exports, held hostage by the interminable dispute between Baghdad and Erbil over the hydrocarbon provisions of the constitution.

Turkey has wisely opted for a policy of engagement and investment in Kurdistan as a way of neutralizing the KRG as a factor in its dealing with its own Kurdish minority. It may have flirted last year with the idea of striking a direct deal with the KRG for oil and gas exports. This would have made Erbil economically independent of Baghdad, but a virtual economic fiefdom of the Sublime Porte. But Ankara seems to have decided for now not to sideline the central government, with whom it has many other interests.

In the meantime, Turkey is content to continue to play a waiting game, while toughening its negotiating stance against Azerbaijan for a transit pipeline which would open up a direct route from the Caspian and Middle East to Europe.

By contrast, Iran has consistently failed to develop major gas-export projects to any other neighbors. A deal signed last year to build a gas pipeline from Iran across Iraq to Syria had clearly political aims. The pipeline is not going to be built during the continuing uprising against Syrian president Bashar Assad, another complicating factor in Turkish-Iranian relations. It also does not make much sense for Baghdad to assist a competitor in accessing the potentially lucrative Levant gas market.

In the end, Turkey has the advantage because its energy interests are complementary to Iraq’s. Iran, on the other hand, offers little positive incentives and is a strategic competitor. Maintenance of its power depends on how skillfully it can continue to manipulate Iraqi factions against the country’s national interest.

Robin M. Mills is Head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing  and Twitter @robinenergy

Robin Mills is head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis and Capturing Carbon. On Twitter: @robinenergy

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