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Turkey: Ankara Seeks To Reduce Gas Supplies From Russia, Iran

Turkey has opened negotiations with Russia and Iran to reduce its gas imports under supply contracts that may impose costly penalties. Last week the country lowered its demand forecasts for the second time in three months after years of warnings that its estimates were too high.

Boston, 23 April 2002 (RFE/RL) -- After a long series of denials and delays, a Turkish energy official conceded last week that the country is trying to reduce its gas supplies from Russia and Iran.

Speaking at an Ankara energy conference on 15 April, Gokhan Bildaci, the general manager of the Turkish state pipeline company Botas, said the company is seeking "possible cuts on the price and amount of gas Turkey buys from these two countries," the "Turkish Daily News" reported.

During the previous week, Bildaci told the Reuters news agency that company officials had recently returned from Iran, suggesting that their mission was to seek new contract terms. Russian gas officials are expected to visit Turkey this week to negotiate cuts in price and volume, the "Turkish Daily News" said.

Turkey has signed contracts with both countries that oblige it to pay for set volumes of gas whether it takes delivery or not. But Turkey's 14-month-old economic downturn has sharply reduced the amount of gas it can use. The take- or-pay contracts could cost the country hundreds of millions of dollars.

How much gas Turkey really needs is debatable, because energy officials used inflated demand estimates long before the current economic crisis and an earlier recession in 1999.

In the mid-1990s, other countries also relied on Turkey's forecasts of rapid economic growth. Russia and Iran have both invested in new pipelines to Turkey. Russia in particular is engaged in the $2.5-billion Blue Stream project to pipe gas across the Black Sea, while Azerbaijan is scheduled to start building another gas line through Georgia at the end of next year.

Turkey's bid to reopen its contracts may prompt a long-overdue examination of what went wrong with its gas plans and why it took so long to recognize that they would not be fulfilled.

Last week, the Turkish daily "Radikal" wrote, "The erroneous natural gas planning, the exorbitant prices set by the municipalities, the sad end: Turkey will pay compensation to the tune of 221 trillion liras ($170 million) to Iran and Russia for the natural gas it was unable to obtain over the past three months." The paper said the bill could top $1 billion this year.

But Turkish officials have continued to accentuate the positive and have given various versions of the problem in recent days.

At last week's conference, Energy Minister Zeki Cakan stressed growing demand and the need for private investment, saying that Turkey would import 80 percent of its energy by 2020. The country needs between $3 billion and $3.5 billion in energy investment every year until 2020, he said. Cakan apparently said nothing about the current over-commitment to gas purchases, leaving the question to Bildaci. But the issue has been hard to confront.

Days earlier, Bildaci denied to Reuters that Turkey would have to pay penalties because of its lagging consumption so far this year. Bildaci said, "We will not pay any compensation money to Russia or Iran because of the first-quarter purchases." He argued, "We did receive less than contract volumes in the first three months. But for the clause to take effect you have to look at the annual purchases."

But at the conference, Bildaci seemed to concede that "Turkey might this year face compensation on gas it has so far been unable to import due to the unexpectedly drastic fall in domestic demand and the absence of facilities which could store the surplus gas," according to the "Turkish Daily News."

Sensing a problem, Turkey has rushed to reach an agreement on building a pipeline to Greece so that it can pass on its surplus. But it may take years to transfer transit gas to Europe as a way to ease Turkey's glut.

On 19 April, Botas lowered its gas demand estimates for this year by 5 percent, marking the second downward revision in the past three months. The company posted the new data on its website, apparently without an announcement.

Turkey is said to be paying $135 per thousand cubic meters of gas. If the new Botas numbers are accurate, the company has contracted to buy almost 6 billion cubic meters more than it can use this year. The cost would be $810 million.

That may not be the full extent of the damage. The latest forecast still assumes a 19.5 percent increase in consumption from 2001 at a time when the economy is expected to grow only 3.6 percent, according to a new International Monetary Fund projection. Turkey's economy so far has shown no sign of growth this year.

The latest Botas estimate also implies that gas use will soar an astonishing 66 percent next year. The growth rate is even higher than before, because the company has left its high forecast unchanged for 2003 while lowering the figure for 2002. A further decrease in the Botas estimates seems warranted.

Turkey's trouble in facing reality has several implications for other countries. First, Iran and Russia must decide whether to quietly revise their contracts and accept lower revenues or impose penalties, which could be hard to collect. The press in both countries has largely ignored the problem, perhaps because it can only be blamed on equally poor planning in Russia and Iran.

Secondly, it is unclear whether pipeline and gas development should be slowed to allow for Turkey's problems. Even if the contracts are revised, the unused capacity of new pipelines could mean millions of dollars in opportunity costs.

Lastly, the reliability of take-or-pay contracts for financing gas projects in the region may also suffer, increasing the risks for many countries. Poland has also been negotiating with Russia to revise its contracts with the gas monopoly Gazprom due to slower growth in demand.

Turkey's experience is a strong argument for examining energy forecasts early and often, especially when revisions may meet resistance because of political concerns.