Turkey’s rising oil relationship with Iran awaits US presidential election outcome

Turkey’s rising oil relationship with Iran awaits US presidential election outcome

Iran has emerged as a swing oil supplier for Turkey in 2016, enabling Ankara to significantly reduce the amount of crude oil purchased from Russia. Iran has been able to play this vital role for Turkey because of the remarkable jump in Iranian oil production that has occurred since the January implementation of the Joint Comprehensive Plan of Action (JCPOA) agreement between Iran and the P5+1 countries that lifted international sanctions against Iran’s oil industry. However, for Iran to continue to play this strategic role in alleviating Turkey’s need for Russian oil exports, Tehran will need to further increase oil production.  Whether Iran can do so, and in what timeframe, depends – to a great extent – on the US presidential elections.

Although Iraq was Turkey’s top crude oil supplier in 2015, accounting for 46% of Turkish imports, Iran and Russia were the next largest exporters of crude oil to Turkey, collectively supplying 39% of Turkey’s imported crude oil. According to Turkey’s Energy Market Regulatory Authority (EMRA), Iranian oil accounted for 20% in 2015 while Russia accounted for 19%. However, in first the quarter of 2016, Turkey’s oil imports from Russia dropped to 10.5% while imports from Iran increased to 23.5% of Turkey’s imported oil supply mix.  

Although Turkey also increased its oil imports from Saudi Arabia, Tehran’s contribution to Turkey’s oil supply is more than double that of Riyadh. Tehran became in a position to increase exports to Turkey because of the dramatic rise in post-sanctions Iran’s oil production. Prior to the 2012 sanctions on Tehran, Iran was producing about 4.4 million barrels a day (mbd). In January, its production stood at about 2.8 mbd, or 64% of the pre-sanctions level. Since the January removal of sanctions under the JCPOA, Iran has increased its crude oil output to 3.8 mbd, about 53% of which is exported, and is on track to reach an output level of 4 mbd by the end of 2016.

In 1Q 2016, Turkey also began to import crude oil from Kuwait, becoming Turkey’s fifth-largest supplier and accounting for 8.3% of Turkish oil imports. However, the new Kuwaiti imports largely offset a decline in the amounts of oil Turkey imported from its more traditional suppliers Iraq, Egypt, Kazakhstan and Italy. 

Nonetheless, Iran’s contribution to Turkey’s oil supply is still greater than Saudi Arabia and Kuwait combined. However, for Iran to continue to be Turkey’s swing exporter, foreign investment is the key – both to enhance recovery in Iran’s aging oil fields and in the development of its new fields, and the timetable of each is being affected by the current US presidential election.

While Iran needs to improve the terms of its new oil contract model to attract investors, European international oil companies (IOCs), particularly some of those which were present in Iran’s energy sector such as BP, Eni, Repsol, Shell, Statoil and Total, are eager to invest in Iran. But these IOCs are waiting to see what level of continuity will exist between the policies of the next US president and those of current US President Barack Obama. With one of the two major presidential candidates having declared that he would “renegotiate” the Iran deal, there is too much uncertainty for foreign companies to finalize their investment decisions.

The next president’s term begins on Jan. 20, 2017, and his/her policy toward Iran will likely crystalize sometime during the first three months in office. If US policy toward Iran continues on its current overall trajectory, investment decisions in Iran’s energy sector could be finalized by the end of 2017 or in 2018, Hurriyet writes.

As Turkey seeks to maintain a reduced level of oil imports from Russia, whether Turkey’s oil relations tilt more toward Iran or the Arab states of the Gulf could in large measure be determined at the American ballot box.

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