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Iran: Tehran Still Faces Competition From Caspian

An agreement Wednesday between Iran and Turkey on gas supplies comes as Azerbaijan increases its efforts to sell gas to Ankara. While Iran now appears to have assured the status of its 25-year export deal, RFE/RL correspondent Michael Lelyveld reports that it may still face fierce competition from Caspian suppliers.

Boston, 3 August 2000 (RFE/RL) -- A new agreement Wednesday between Iran and Turkey appears to be aimed at assuring Tehran that it will not be pushed aside as a gas supplier by Azerbaijan.

The protocol signed in Ankara pledges that Turkey will start accepting gas from an Iranian pipeline by July 30 of next year, 18 months after Iran announced that it was ready to begin deliveries.

The agreement, which serves as an addendum to a 1996 contract between the two countries, seems to be a little more than a formality. All the major terms, including a three-year extension of the 22-year contract, were already negotiated in February after Iran threatened Turkey with a $120-million fine for its delay in taking the gas.

The dispute began in January after Iran rushed to complete a pipeline to the Turkish border and lit a ceremonial flare at the town of Bazargan in a display aimed at proving that its gas exports were available.

Turkey, which continually insists that it needs all the gas it can get, was taken by surprise. Ankara had moved slowly on building its portion of the 1,500-kilometer pipeline on Turkish territory. Under the terms of its take-or-pay contract, Iran claimed that it was entitled to collect the $120-million fine or the $200-million cost for its part of the line.

Turkey's delay was aggravated by its inability to obtain a needed compressor from a U.S. company because of Washington's opposition to the Iranian gas deal, which is valued at over $20 billion. Ankara argued that Iran had not lived up to its part of the bargain, either, by failing to build a metering station to measure the gas.

But Turkey has clearly been on the defensive over the Iranian penalty, which has been only one of several points of friction between the two countries. In an interview with the Turkish Daily News this week, Foreign Minister Ismail Cem said, "We basically have security problems with Iran from time to time."

Under the agreement Wednesday, Iran reaffirmed that it will drop its claim to the penalties as long as Turkey abides by the deadline for gas deliveries next year.

But the real reason for the protocol appears to be concern about Azerbaijan's accelerating plans for its own gas exports to Turkey. Last week, the head of the Georgian International Gas Corporation said that construction of a gas pipeline from Azerbaijan to Turkey will start by the end of this year.

The project is part of a $1.5 billion investment in new and old gas lines to link Turkey to Azerbaijan's giant offshore Shakh Deniz gas field. The British oil company BP plans to begin deliveries in the winter of 2002, if a deal with Turkey is signed.

That deal may have been waiting only for an easing of Iranian pressure and an assurance that Iran will not be replaced by Azerbaijan as a supplier. Tehran is already concerned about the fate of its biggest long-term contract, which faces competition from Russia's Blue Stream project to pipe gas across the Black Sea, as well as possible supplies from Turkmenistan. The emergence of new gas fields in Azerbaijan's sector of the Caspian may be an even greater threat because of close ethnic and political ties between Baku and Ankara. Any further delay in accepting Iranian gas would only fuel suspicions in Tehran.

The potential for competition and conflict of interest is complicated by Iran's own involvement in Shakh Deniz. Iran's OIEC oil company owns 10 percent of the gas field, while Turkish Petroleum holds 9 percent, giving both countries an interest in Azerbaijan's exports to Ankara.

Despite Turkey's economic growth, Western experts remain doubtful about its forecasts that gas demand will rise fourfold by 2010. More modest growth is likely to leave one of Turkey's suppliers with gas that it cannot sell.

If Turkey can pass excess gas onto Europe, the problem of oversupply could be solved. But if not, Iran and Azerbaijan could become bitter rivals in the race to sell gas. The issue appeared to be underscored by the interview with Turkish Foreign Minister Cem this week.

Cem said, "The only country that can pay cash, pay it now and continue to pay up front is Turkey. There is no other customer apart from Turkey."