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Iran: Turkey Seeks To Avoid Gas Penalties

Boston, 30 December 1999 (RFE/RL) -- While Turkey tries to avoid a penalty for postponing purchases of Iranian gas, some analysts are concerned that there could be consequences for Iran's competitors, as well.

Turkey said recently that it plans to send officials to Tehran this week for talks on a $120 million charge for failing to take delivery of gas under a contract with Iran. The huge deal signed in 1996 was originally valued at $20 billion over 23 years.

The high penalties are part of the "take-or-pay" contract under which Iran agreed to supply Turkey with gas. As the term implies, Turkey is legally bound to take delivery of the gas or pay for it, if it does not.

Relying on its contract, Iran has been working to complete a pipeline in the mountainous area west of Tabriz to the Turkish border, while Turkey has been building a connecting line east of Erzurum.

After months of silence, Iran surprised Turkey last week by announcing that its part of the work was nearly finished, allowing it to start pumping gas to Turkey in as little as two weeks. Turkish Energy Minister Cumhur Ersumer voiced doubts that Iran would be ready with either the pipeline or sufficient volumes of gas. But the threat of deliveries has been enough to send officials scrambling to renegotiate the possible penalties. Ankara is far from ready to accept deliveries.

Turkey started work east of Erzurum in 1998 but slowed it down under pressure from the United States. Instead, the Turkish pipeline company Botas focused efforts on the western part of the line between Erzurum and Ankara, because that could also be used for trans-Caspian gas shipments from Turkmenistan, which are backed by U.S. policy. The administration of President Bill Clinton also reportedly blocked the shipment of a needed compressor to complete Turkey's gas link to Iran.

It is difficult to know whether Iran has actually fulfilled its part of the deal. In June, the managing director of the National Iranian Gas Company, Mohammad Mohammadnejad, told the official Iranian news agency IRNA that a 142-kilometer section of pipeline to the border town of Bazargan was 78 percent complete.

The short segment was said to be only the first phase of a project to lay 550 kilometers of large-diameter line northwest of Qazvin, which in turn is 140 kilometers west of Tehran. At the time, Mohammadnejad told IRNA that Iran would start exporting gas to Turkey in 2001.

Iran's claim that the project is suddenly finished is more likely related to the recent progress on the trans-Caspian project. Competition for the Turkish market has grown intense with the series of agreements that were signed at the Istanbul meeting of the OSCE last month.

Analysts have long doubted Turkey's forecasts that it will need all the pipelines and gas that it can get. Russia, the United States and Iran are all racing to the market with new pipeline projects. At least one seems likely to lose out. Iran's reminder about its contract seems to be a signal to Turkey that it will have to pay a price if it casts its lot with either the United States or Russia and turns its back on Iran.

But Turkey's attempt to avoid penalties could have negative effects on the other pipeline projects in the region, said Julia Nanay, director of the Petroleum Finance Company in Washington. Until now, take-or-pay contracts have been the ultimate assurance for projects and financing. Once they are compromised, the market for all pipelines to Turkey could suffer a loss of credibility.

In October, Russia's Gazprom reportedly approached Turkish officials about a possible delay in plans for building its Blue Stream pipeline across the Black Sea because of concerns that Turkey might not be ready for the gas. Under its take-or-pay contract, Turkey could invoke a clause to delay deliveries due to its recent earthquake, a circumstance beyond its control.

Now with the news on the Iranian penalties, more doubts have been raised. Nanay believes that the lack of confidence in commitments could spread to other projects, including the trans-Caspian line.

Iran may well be bluffing about its readiness to start deliveries to Turkey in the next two weeks. But with all the new projects scheduled to begin pumping gas in 2001 and 2002, the credibility issue will have to be faced soon.

So far, the competition has been among pipelines that are mostly still on paper, like the agreements themselves. The Iranian penalties may be a signal that this phase is now over and the real competition is about to start.