farhad emam Farhad Emam
Publish Date : 02/05/2016

Iran-Turkey Oil and Gas Arbitration Cases

EXECUTIVE SUMMARY

Key terms

Gas deals, international arbitration, Turkey, price-reduction claims

Summary

Resorting to arbitration in gas and oil disputes is “normal”. The list of oil and gas arbitration cases is long enough to enable arbitration experts to prepare books and booklets on this issue. Few examples of recent gas arbitration claims are:

1) Eni against Statoil of Norway in 2013;

2) Turkey against Russia in 2015; and

3) Poland (PGNiG) against Gazprom of Russia in 2016.

So, the Turkish case against Iran is not an exception to the general rule. To explain this rule, first we will look at some of the Iran-Turkey oil and gas deals. Then three gas price arbitration cases covering the period of 2004 to 2016 will be analyzed briefly.

I. Iran-Turkey oil and gas deals

Turkey and Iran signed a natural gas export agreement in August 1996. Despite different disagreements, Iran continued to supply Turkey with gas till end of December 2006.

In February 2007, Ankara and Tehran negotiated a new energy deal. Under a new agreement, Turkey’s Petroleum Company, TPAO, wanted to get the right to explore for oil and gas in Iran. On the other hand, Iran was supposed to take the needed measures to enable Turkmen natural gas transferred through Iran to Turkey and then to Europe.

On July 14, 2007, Iran and Turkey signed an MOU under which natural gas would be transferred from South Pars field of Iran to Turkey and then to Europe. The state-owned Turkish Petroleum Corporation (TPAO) accepted to develop three gas wells in the above field. Under the MOU, Turkey would finance a $3.5 billion investment in Iranian gas production entirely from TPAO despite opposition of the US to this deal.  

The parties agreed to sign a final agreement in October 2007 but apparently they never signed it because on February 9, 2014 it was reported on the website of todayszaman.com that:

The Turkish government is quietly intensifying its efforts to reach an agreement with Iran to build the Iran–Turkey–Europe Natural Gas Pipeline Project (ITE) to convey natural gas sourced in Iran via Turkey to Europe despite uncertainty concerning the future of sanctions on Iran.

According to another report on the website of oilprice.com on February 19, 2014, Turkish side opted out of the above project.

The 1996 Agreement, therefore, remains the basis of the gas exportation deals between Iran and Turkey.

II. First arbitration case in 2004

This arbitration case started in March 2004 and came to an end on 27 February 2009 when the Switzerland-based International Chamber of Commerce Court (ICC) on arbitration ordered the immediate reduction by 18% in the price Turkey pays for Iranian gas imports.

According to the website of todayszaman.com on February 12, 2010, Turkey also requested compensation for the unstable flow of natural gas into Turkey and the below par quality of the gas. The ICC Court order left two issues of insufficient quality and the instability in the flow for another case but awarded Turkey $800 million compensation.

III. Second and third arbitration cases in 2012

It is reported on the website of hurriyetdailynews.com on February 4, 2016 that:

Turkey, which buys around 10 billion cubic meters (bcm) of gas from Iran, opened two separate cases against Iran in 2012. One of the cases was over higher gas prices and another was over deficiencies in gas distribution. In the second case, the court sided with Iran. The court ruled against Iran in its other gas dispute with Turkey, according to officials from both countries speaking on Feb. 2.

Two cases need to be studied separately.

A. Case on higher gas prices

1. Turkey lodged an arbitration case with the International Chamber of Commerce on January 16, 2012.

2. Turkey claimed that the prices at which the gas was brought from Iran were above international prices and had to be reduced by 35.5 percent.

3. Iran rejected the above claim.

4. The Court agreed to a reduction of 13.3 to 15.8 percent on gas purchased from Iran between 2011 and 2015.

5. Iran and Turkey will have to agree on the exact percentage in the coming months. Or else, the Court will make a decision on the above matter.

 B. Case on deficiencies in gas distribution

The Court rejected the claim of BOTAS concerning deficiencies in gas distribution on November 10, 2014. In the 1996 Agreement between Iran and Turkey, a “Take or Pay” condition is included under which, even if the Turkish company fails in getting ten billion cubic meter of gas per annum, it must pay the amount fixed by the Agreement. For example, in 2009, BOTAS had to pay a compensation of $600 million due to the fact that instead of 10 billion cubic meters, it could only import 6.8 billion cubic meters. 

CONCLUSION

The final outcome of the arbitration process that started in 2012 is summarized by the following statement of the ambassador of Iran to Turkey, Mr. Ali Reza Bikdeli, who spoke at a press meeting as reported on the website of hurriyetdailynews.com on February 3, 2016:

“The finalization of the arbitration case with Turkey has constituted a fresh beginning to gas cooperation between the two countries…With the ending of this arbitration process, there will be better cooperation in this field, I promise,” said the Iranian envoy, as quoted by Reuters. 



GOOD TO KNOW

To learn more about the issues mentioned in this Legal Report, you may read the following texts. If after reading them, you still have questions that call for detailed responses, you may send your questions to us by clicking on “Our Services” button and following the procedure explained there.

RELEVANT LEGAL NEWS:

1. Law in Iran Legal News: Finalization of Iran-Turkey Arbitration, Friday, February 5, 2016.

2. Law in Iran Legal News: Turkey Wins Gas Price Ruling Against Iran, Friday, February 5, 2016.

3. Law in Iran Legal News: Turkish-Iranian gas deals, Friday, February 5, 2016.

RELEVANT BOOK:

Farhad Emam and Dr. Behrooz Akhlaghi, ICLG - The International Comparative Legal Guide to: Oil and Gas Regulation 2015 (chapter on Iran), Global Legal Group Ltd., 2015.

 

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