Burak Bekdil | Nov 5, 2018 | 0
The Impacts of the US Iran Embargo on Turkey #Energy
The United States, on May 8, 2018, announced that it was withdrawing from the Joint Comprehensive Plan of Action signed by the other 4 permanent members of the UN Security Council (Russia, China, France and the UK) and Germany. They have also initiated a two-tier embargo plan concerning Iran and the countries that continue to trade with Iran.
USA has been implementing various embargos on Iran via presidential decrees and passed laws since 1979 when the American Embassy in Tehran was occupied following the Islamic Revolution. Some of these embargos have been supported by the UN, but this time the US is facing opposition from virtually every country including the EU.
The EU member countries that are represented in the UN Security Council have already announced measures to protect the EU companies that may be affected by the sanctions. Others have either been openly critical of Trump’s decision and have been talking to the US administration, asking to be excluded from the ordinance of the embargo. The US has, so far, been tough in its stance and has not agreed to any of these demands.
Turkey is very likely to be influenced negatively from these sanctions given that in 2017 Turkey has exported $3.3B (out of $10.8B total exports) worth of goods to Iran and has imported from them to the amount of $7.5B. We must also note that, during the last few years, Turkey’s oil and natural gas purchases from Iran have partially been financed with a policy that included gold trade, and thus the real trade volume may be significantly higher. For comparison, our foreign trade with Iran in 2012 was approximately $22B. This is to say that our already fragile economy is likely to face further problems if our foreign trade with Iran goes even lower.
Iran’s Share in Turkey’s Energy Consumption
It is necessary to lay down Turkey’s energy data in general in order to better understand and evaluate the impact from a potential interruption in our bilateral trade with Iran.
Turkey meets 31% of its energy demand with oil, and 28.2% of it with natural gas while importing almost all of both resources (99.7% in natural gas 93.6% in oil). This high rate of dependency demands us to take a close look at our relationships with the countries we are importing from, the price activity of natural gas and petroleum, as well as the unstoppable depreciation of the Turkish Lira against the US dollar. Another crucial parameter is the purchasing agreements signed by TUPRAS and Iran, and how the stipulations and clauses of this agreement fare against Turkey’s alternate energy sources (Russia, Iraq, Saudi Arabia, etc.).
Next to “Turkey’s Energy Dependency By Resource” chart, it is also important to stress which countries we are dependent on when it comes to energy, as it affects not only our foreign policy, but also our energy supply and economic security. Since we are focusing on Iran here, let us note that we imported 46% of our crude oil in 2017 from Iran. This is a very significant ratio both in itself and also the sheer amount of the volume with regards to our fiscal burden.
Turkey does not merely import crude oil, it imports petroleum products as well. We imported crude oil from 13 countries last year while importing petroleum products from 23. Our total crude oil and petroleum product imports in 2017 amounted to 42.65 million tons. Let us note that we buy only crude oil from Iran.
It is also important to note that in 2017, we imported 17% of our natural gas from Iran, which makes them our second biggest natural gas provider after Russia’s 51.9% share. In other words, 9.25 billion cubic meters out of 55.25 total, were imported from Iran.
The Importance of Iranian Natural Gas for Turkey
While we import crude oil and petroleum products from 23 countries, we purchase natural gas via pipelines and as LNG from fewer countries. Natural gas purchases, in general, are regulated by long-term agreements whether they arrive through pipelines or in liquified form. Our pipeline purchases from Russia, Iran and Azerbaijan, as well as our LNG purchases from Nigeria and Algeria are carried out by 20 to 30-year agreements. These types of agreements typically enforce a “buy or pay” structure, which means that Turkey guarantees the purchases set out in the agreements, and if for some reason it can’t (or doesn’t) it still has to fulfill its obligations and pay the other side for the natural gas it doesn’t import. The seller, on the other hand, guarantees to offset the economic impact the importer faces in case, they can’t provide the product. We also make cash purchases and procure natural gas via FSRUs (Floating Storage and Regasification Units) in order to secure our supply.
When it comes to crude oil and petroleum products we have a wide variety of exporters to choose from, but this is not the case with natural gas because of these agreements. We cannot simply discard Iranian purchases and gravitate to other sources just because that’s what the Trump administration asks. So, brushing the ethical and political consequences of submitting to the unilateral demands and ambitions of the United States to reshape the Middle East aside, Turkey doesn’t have the luxury to go down that path.
In Turkey -just like the rest of the world, natural gas is primarily used in electricity production to be used in homes and industries. Any likelihood of a disruption in its procurement will upset the electricity sector. The share of natural gas in electricity production is as high as 48% during the periods when the dams that nourish our hydroelectric power plants are low. Our daily natural gas demand in cold winter months can climb to 260 million cubic meters. Last year our total natural gas supply -excluding the amount from FSRUs, from the pipelines, long-term LNG contracts, cash purchases and our domestic reserves were limited to 210 million cubic meters at most. That means that any disruption in its procurement from Iran is likely to inflate the 50 million cubic meter deficit to even higher levels. We have experienced interruptions from multiple sources in the past, so we may have a better understanding of the impacts from a likely stoppage of 29 million cubic meters of gas we purchase from Iran on our homes, businesses and industries. The disruptions do not only cause shortages, they also hike up the gas prices adding a multifaceted impact from such a scenario.
Will Turkey Submit to US Embargo?
Our relations with the United States of America is currently very tense which is reflected in the USD/TRY rate already. Our conflicting foreign policy interests coupled with the “Brunson” and Halkbank criminal case have taken our rapport to its lowest levels in modern times. The US will enroll the second phase of its Iran embargo in November, and that’s when our dealings with them are likely to take a turn for the worse.
The initial phase of the embargo as dictated by the US on August 7 concerned Iran’s automotive sector, public borrowings, financial transactions conducted in Iranian Rial, its foreign trade in precious metals, and graphite, aluminum, steel and coal industries.
The second phase which is slated to begin on November 5, will focus on Iran’s port administration, energy, shipping, ship building, their energy transactions, and the dealings of foreign banks with the Iran Central Bank, and that is the part that specifically relates to Turkey.
We may have a better understanding of the consequences of adapting the embargo when we consider that we imported 44.6% of our crude oil from Iran in 2017. We are standing between the hammer and the anvil. What we must do is act in accordance with international law, border law, and respectable and independent foreign policy and stand up against the unfair practices of the US and keep our trade channels with Iran open. As states above, we do have alternative sources for crude oil and petroleum product procurement, but it wouldn’t be prudent to cut our business ties with Iran simply out of pressure by the United States.
But, how are things really progressing?
Minister of Foreign Affairs, Mr. Cavusoglu had this to say on July 24: “Turkey will not submit to US’ unilateral decision to sanction Iran. Where will we get our natural gas and oil from if not from Iran or Azerbaijan? It is easy to spur threats when you’re located far away. We are neighbors with Iran. I cannot say we agree with them on everything, but we are against this embargo and its kind, and this is our principal approach.”
Statements such as this are to be expected of course, but it is constructive to look at the walk behind the talk. Purchases by TUPRAS of Iranian oil has already decreased significantly even though it is not November yet. Iran’s 44.6% share in our oil imports in 2017 has declined to 15.6% in June of this year.
In the meantime, Iran’s total oil exports have dwindled from 3.09 million barrels per day in April to 2.08 million in August. Russia, Iraq and Saudi Arabia have stepped up to fill in the space in the face of Iran’s efforts to lower the price -which seems to have failed for now. French companies Peugeot and TOTAL have terminated their investments in Iran while KLM, British Airways and Air France discontinued their flights over there. Russian and Chinese companies saw this as an opportunity to step up their game and began increasing their investments in Iran. Russian Rosneft signed a $30 billion deal with NIOC, Iran’s national petroleum company while China’s CNPC took over TOTAL’s shares in Southern Pars region.
It must be stressed over and over again that, contrary to the situation in oil, we do not have any short or medium alternatives to Iranian natural gas. We are obligated to buy Iranian gas as per our “buy or pay” agreement with them. That’s why we must pursue a solid and decisive policy in line with our national interests rather than swaying left and right. We have to hold serious talks with the US, as we have done in the past, detailing our natural gas dealings with Iran and stating our case which is that we cannot substitute Iranian gas with gas from elsewhere neither physically of economically. Turkey must continue its foreign trade and policies with Iran keeping our national interests at the helm and not buckling under US pressure. We operate about 40 companies and 200 stores in Iran. Although we are direct competitors with them in a lot of areas, we must not forget that our joint actions against PKK and other regional terror organizations have been beneficial for both countries.
While all these are happening, the price of crude oil is on the rise thanks to the looming Iran embargo as well as other factors. This increase is an economic threat on our budget since we are almost totally dependent on oil and natural gas. Both products are bought and sold in US dollars, which further complicates Turkey’s position. Brent crude oil which was being sold at $46/barrel in 2016, rose to $54.3 in 2017 and $73/barrel in August of 2018. All these factual numbers point to one thing: that unless US’ policies against Iran and our own national energy policies undergo a radical change, we are headed for a serious bottleneck situation.
What we must categorically do is, to come up with and implement a national energy policy that will utilize our idle renewable energy resources more effectively. This policy must not focus solely on supply-side management, but it also has to embrace the manufacturing of domestic energy equipment and providing domestic designs, and must be coalescing with indigenous employment opportunities for our workers, engineers and all related human source.