Our Analytics 4 may — 14:09

Even Azerbaijani oil isn't saving Turkey (Our comment)



The exemption that the White House granted to eight countries, including Turkey, from sanctions against Iranian oil will end soon. All attempts by Ankara to reach an agreement with Washington to extend the exemption failed. Secretary of State Mike Pompeo made it clear that Iranian exports of hydrocarbons will be brought to zero, and new exemptions will no longer be issued.

Mike Pompeo

The White House provided special exemptions for eight countries, allowing them to temporarily import Iranian oil even after the imposition of sanctions. However, exemptions from sanctions for the purchase of Iranian oil cease to operate from 2 May. US officials say the global total oil supply will remain sufficient, despite the sanctions, not least because of the boom in American shale oil. But most of the supplies, which remain in abundance, account for lighter varieties.

While some customers are willing to buy heavy and medium oil at elevated prices, others are holding back. In general, the tightening of US sanctions on the Iranian oil sector will add to the many factors holding back world supplies of heavy and medium oil and increase its value. New restrictions on Iranian exports complement the previously imposed sanctions by Washington on Venezuela and the obstacles to mining in Angola. So, some of the regular customers of Angolan state-owned oil company Sonangol refused extra charges, which prompted the company to offer oil to other buyers. The threat of US sanctions led Iranian oil consumers to look for new sources of it. India took it easy. China, although complains, also reduces the volume of purchases. Ankara initially made tough statements on the US decision, but it seemed to have decided to abide by the restrictions imposed by the White House. But here a new problem arises - the search for alternative suppliers of oil.

The fact is that Turkey faces two main challenges in connection with sanctions and diversification of sources - this is the opinion of many experts. First, the most suitable oil for Turkey's largest refinery 'Tupras' is heavy Iranian oil (oil is divided into light, medium and heavy, based on its density). Oil from other countries requires additional processing, and therefore additional costs. Secondly, because of its geographical proximity, Iranian oil is much cheaper to transport.

The current confrontation between buyers and sellers is partly due to uncertainty about how much Iranian oil can still flow to the market, especially to China, which is the largest consumer. Analysts expect that China may neglect the lifting of the anti-Iran sanctions exemption, especially since Washington may not want to apply sanctions against Chinese companies importing Iranian oil, which are also key buyers of American oil and liquefied natural gas. This would make it difficult for sellers to raise prices. But in this case it is not about that.

The United States promises to fill the shortage of Iranian oil in the market with its shale oil, the Saudis also promise to prevent a shortage of 'black gold' in the market. American shale oil, like its Arabian counterparts, belong to light sorts. The cost of transporting them also leaves much to be desired. What can in this situation Ankara do, for whom sanctions against Iran are only one more item in the long list of disagreements with Washington. The US-Turkish relations are going through hard times, mainly due to the support by the administration of Donald Trump for the Syrian Kurds, and due to Turkey's intentions to buy the Russian C-400 air defence system.

Moreover, Ankara's purchase of Iranian oil in recent years has been increasing. So, in 2015, the share of Iran in the oil import of Turkey was 14.10%, in 2016 this figure reached 16.9%. Since the end of 2016, Iran has become the supplier of oil No.1 to Turkey with a share of 26.74%, and in July 2017 this figure has already risen to 37.26%. However, after May 8, 2018, when the United States withdrew from the JCPOA, imports began to decline. Oil supplies from Iran from 21.48% in the first 10 months of that year fell to zero in November, when American sanctions were imposed. Turkey stopped importing Iranian oil, despite public condemnation of the restrictions. Only in December 2018, imports rose to 3.26%, and in January 2019 rose to 12.35%. Official figures for February and March were not disclosed. But the change in the supply of Iranian oil since May last year indicates that Turkey has not particularly resisted sanctions.

Against the background of a reduction in oil imports from Iran, Ankara is actively seeking alternative suppliers; the main candidates include Iraq and Russia. Last year, these countries took the top two places among the suppliers of 'black gold' to Turkey. When in November 2018, imports from Iran fell to zero, Russia's share in total oil imports of Turkey soared to 32.18%, and Iraq - to 12.61%. But deliveries from Russia are carried out by sea tankers, which increases costs. In addition, since Italy and Greece abandoned Iranian oil and switched to Russian Urals oil, tanker shipments through the Turkish straits have increased from 5-6 days of waiting to 15-16 days, which further increased costs.

But there is Azerbaijani oil coming through the Baku-Tbilisi-Ceyhan pipeline, how can you not help the brotherly country. But our oil is not consumed in Turkey, but goes to other countries, primarily to Israel. And Iraqi oil alone cannot solve all the problems. 'Tupras' refinery is designed to process heavy oil, which includes Iranian and North-Iraqi oil. Oil from Basra is not suitable for this plant. In addition, Iraqi oil is cheaper because it comes through a pipeline. Also suitable is Russian Urals oil. Turkey buys oil from Saudi Arabia and the United Arab Emirates, but these countries cannot completely replace supplies from Iran. As a result, Ankara began to buy more petroleum products, and the volume of imports is likely to increase. But this means that 'Tupras' will stand idle.

It is difficult to calculate all the additional costs, if Turkey completely switches to alternative sources. However, it is known that the increase in the cost of Brent oil by 10 dollars increases Turkey's current deficit by at least 3.5 billion dollars. Therefore, its first reaction was a public promise not to comply with this decision. But Ankara's impressive tone is fading away, today it intends to increase the volume of purchases of Iraqi oil. Turkey has no other alternative.

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