US complicates Turkey’s energy interests in Iraq, Iran

The US currently sanctions trade with Iran and does not support the Kurdistan Regional Government (KRG) of Iraq’s attempts to trade energy independent of central government control from Baghdad. Furthermore, the US has recently warned Turkey, which has not only expanded the scale of its oil and gas imports from Iran, but also ships KRG’s crude oil via truck instead of using Baghdad-controlled oil pipelines.

A contradiction here is clear. In opposition to their own government’s actions, US-based Exxon Mobile and Chevron are now exploring KRG oil fields. Moreover, despite the ongoing dispute with the central government, the National Iranian Oil Company (NIOC) owns shares in Azerbaijan’s Shah Deniz field, which is led by BP, Shah Deniz and comprises the main supply of sources for the southern energy corridor project to Europe.

Turkey is searching for new energy sources, first, to meet its growing energy hunger. Second, Turkey wishes to one day become to a regional energy hub. In the coming decade, this search will shape the country’s relations with its oil- and gas-supplying neighbors, in spite of its longstanding international alliance and commitments, such as with the US.

Despite US sanctions, Turkey remains Iran’s biggest natural gas consumer. It imports about 22% of its gas and 44% of its oil from Iran. In the last few years, as a result of US pressure, Turkey has made some efforts to reduce its oil imports; however, it is unlikely to drop to zero. Moreover, during his visit to Iran in late April, Cevdet Yilmaz, Turkey’s minister of development, called for the expansion of economic ties with Iran, currently measured at $22 billion. A US reaction to this declaration is expected soon, as Turkey’s energy trade with Iran was done under a gold-for-gas formula and the US has recently widened its control of precious metal sales to Iran.

This is not the first time Turkey has overstepped US limits for energy trade. Early this year, the Turkish-British joint venture Genel Energy delivered via truck the first shipment of crude oil from the KRG’s Taq Taq oil field to Turkey’s Ceyhan port on the Mediterranean Sea, where it was shipped to the international market. Genel Energy’s oil export target is relatively small compared Iraq’s annual oil exports, between 5,000 and 10,000 barrels per day. This was less then a quarter of the volume exported by KRG via the Baghdad-controlled Kirkuk-Yumurtalik oil pipeline last year, but it nevertheless was enough to create an international diplomatic crisis. The KRG’s decision to deliver its oil delivery by truck instead of using the Kirkuk-Yumurtalik oil pipeline has prompted new concerns about the KRG’s drive for economic and political independence.

Baghdad has declared the KRG’s actions unconstitutional and illegal and has accused Ankara of complicity in smuggling Iraqi oil. The US has also officially stated its objections to the KRG’s separate energy arrangements with Turkey. On several occasions Washington’s high-level representatives have expressed worries about how energy trade bypassing Baghdad would undercut the unity of Iraq.

Turkey’s trade is not a unique headache to Baghdad. Erbil has also begun signing deals directly with oil majors such as ExxonMobil and Chevron. The Iraqi-state-owned SOMO has announced it will take legal action against oil companies exporting crude without dealing with the central government. However, it seems Baghdad cannot count on the US government to advise American energy companies against working with the KRG.

Parallel contradictions remain in the case of energy trade relations with Iran. Iran’s NIOC has subsidiary companies operating abroad, such as Naftiran Intertrade Co. (NICO) in Switzerland and the Iranian Oil Co. (IOC) in the United Kingdom. NIOC has a 10% stake in the Shah Deniz upstream project in Azerbaijan. With this strategy, NIOC holds a 10% stake in Azerbaijan’s Shah Deniz field — likely to be the primary source for all gas in the southern energy corridor. NICO is also a stakeholder of the South Caucus gas pipeline, running from Baku to Erzurum.  All these activities are considered exempt from US sanctions limiting Turkey’s energy relations with Iran.

The Iran sanction began in 1996 when the US Congress passed the Iran-Libya Sanctions Act (ILSA), prohibiting all investments over $20 million in Iran’s petroleum industry. Over the next 17 years, the US has gradually widened the scope of sanctions. Today, the US prohibits all trade and investment, as well as banks’ processing of funds transfers involving Iran. Sanctions also prevent the use of dollars or euros by any parties trading with Iran.

Restricted by these sanctions, Turkey developed a gold trade formula. Turkey pays its oil and gas bills to Iran with Turkish lira held in Turkey’s Halkbank. Iranians use those liras to buy gold in Turkey, and couriers carry this gold in luggage to Dubai, where it is sold for foreign currency or shipped to Iran.

Last summer, the US widened its sanctions, tightening control on sales of precious metals to Iran and has granted Turkey a waiver until July 2013, According to the new sanctions (which began in January 2013) Halkbank can only accept payments for Turkish oil and gas purchases and Iran is only allowed to buy food, medicine and industrial products with that money.

In this controversial environment, Turkey continues to grow its overall presence in the KRG and its oil and gas trade with Iran.  Genel Energy is moving toward becoming the largest investor in the region, operating in seven sites. In March 2013, Turkey’s Prime Minister Recep Tayyip Erdogan confirmed he was pushing ahead with plans to build a separate pipeline with Erbil’s government.

If Turkey takes the risk of staying in the gray zone of its US alliance, this is probably because there is no other choice, as shown by the example of the strategies used by BP, Chevron, and ExxonMobil.  If Turkey turns its back on Iranian and KRG sources, it does not to seem to have a way to fulfill its energy demands, as Azerbaijan’s sources are already committed to European consumers, and Cypriot and Israeli sources have a long political road to travel before being accepted by Ankara.

By Al-Monitor

 

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