Why is Turkey buying more gas than it needs from Iran?

On Jan. 29, Turkish Prime Minister Recep Tayyip Erdogan visited Tehran to bolster trade and energy ties, hoping to reach $30 billion in trade volume by the end of 2015. Turkish Energy Minister Taner Yildiz followed up with an offer Iranian Oil Minister Bijan Namdar Zanganeh promptly accepted. Under the terms of the agreement, Tehran will reduce its gas prices if Turkey doubles its gas imports — from 10 billion cubic meters (bcm) to 20 bcm. Despite the price-reduction commitment, if the gas-import volume continues to increase, Turkey could face a critical budget threat, as Turkey’s gas bills have averaged 9% higher than its consumption volume should have cost over the last six years.

Zanganeh said, “We are willing to lower the gas price supplied to Turkey on the condition that it increases the volume of imported gas from Iran.” He noted that the share of gas Turkey buys is important for Iran. According to the US Energy Information Administration, Turkey purchases more than 90% of Iran’s natural gas exports under a long-term contract.

From a Turkish perspective, asking for a price reduction is completely legitimate. Iranian gas prices are already higher than what Turkey pays to any other trading partner. Indeed, in 2012 Turkey took Iran to an international court of arbitration over the high price it charges on its natural gas exports. Although the cost of Turkey’s gas imports is a state secret, information leaked to the media estimates the figures for Azerbaijan at $330 per cubic meter of gas, for Russia at $400 per cubic meter and for Iran at $505 per cubic meter. The price of Iranian gas for Turkey is therefore some 20% higher than average international market prices. According to this scale, Iran’s high prices inflate Turkey’s natural gas bill by an extra $800 million annually. But much of the problem in the gas trade between Tehran and Ankara derives from a “take-or-pay” condition that requires Turkey to import predetermined amounts of natural gas — 10 bcm per year — according to a gas deal signed in August 1996 and valid for 25 years.
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