Power plays: Transit, pipeline and renewable projects are all in the works

Long-time aspirations to become an energy corridor are now within Turkey’s grasp. A raft of pipeline projects and a grand canal have been proposed, with hopes these projects will be under way soon. Turkey’s location between the hydrocarbons-rich Middle East and Eurasian regions and energy-hungry Western markets makes it a key player in energy trade. But challenges abound as well. The economy is saddled with a crippling energy import bill that may jump 25% to $68bn in 2012, which will make Turkey one of the world’s biggest energy importers, according to the International Energy Agency (IEA). Blackouts are a feature of daily life, as the country struggles to keep up with demand for electricity, which increases about 7-8% annually. Pledges to fully liberalise energy markets have been repeatedly put off. And Turkey needs to invest some $130bn by 2023 to overhaul ageing energy infrastructure and boost capacity.

PIPELINES: Two major oil pipelines already transit Turkey. BP’s 1760-km Baku-Tbilisi-Ceyhan link has the capacity to carry up to 1.2m bpd of Azeri crude. The 986-km Kirkuk-Ceyhan dual pipe has the annual capacity to carry 1.6m bpd, but typically pumps about 500,000 bpd. Flows in the 25-year-old dual line are frequently cut due to faults or sabotage by insurgents in Turkey and Iraq. More pipelines between Iraq and Turkey may be part of future plans. The autonomous Kurdistan Regional Government (KRG) in the north of Iraq has proposed an oil pipeline and a gas pipeline to Turkey, and Baghdad has also proposed an oil link. “Turkey is a logical choice for regional business for several reasons,” said UB Holding Chairman, Hadi Nezir. “The financing, communications, transport and all other needed logistical infrastructures are well developed and the opportunity for exports from Iraq is very high, making it an ideal point to export Iraqi oil.” Efforts are under way to protect the environment as well, including the proposed construction of a canal near Istanbul’s environmentally sensitive Bosphorus Strait (see analysis). Likewise, in 2010, the Ministry of Energy mooted a $20bn environmental fund to which oil majors would contribute. The government has also thrown its weight behind the planned $3bn Samsun-Ceyhan-Adana Pipeline (SCP), a venture between Turkey’s Çalık Holding and Italy’s Eni, which aims to carry 1.5m barrels per day (bpd) from the Black Sea to the Mediterranean. But Russian supplies are essential, and Moscow has dragged its feet on committing oil, seeking Turkish support for other energy projects in exchange. Although one of the aims of the project is to reduce tanker traffic on the Bosphorus, even if SCP were to open, it is not clear how much traffic would ease in Turkish waters. Firms that do not join the project are likely to continue using the narrow waterways. Analysts also point out that the least-safe vessels transiting the Istanbul strait are the ones carrying refined products, and therefore would not be affected by the bypass since they do not carry crude.

TRANSIT: Turkey re-exports Azeri gas through the Turkey-Greece pipeline, which has 7bn cu metres of capacity per annum. It is a partner in the planned €14bn Nabucco project, backed by the EU and US because it bypasses Russia, upon which Europe is overly fuel dependent. Nabucco aims to send 31bn cu metres of Caspian and Middle Eastern gas through Turkey and into Europe, but the project has stalled due to financing, a lack of committed supplies and a rival Russian project, Gazprom’s South Stream. Turkey expressed support for South Stream in late 2011, betting there is enough demand for both. Either way, it stands to gain as both projects would pass through its territory, offering transit fees and gas. If Turkey is to become a linchpin in the global gas trade, it must import enough fuel to meet both domestic demand and re-export commitments. It also must expand its pipeline capacity. While it currently has excess capacity, as domestic demand rises, that surplus will decline. “It could disappear altogether within the next decade without additional investment,” the EIA said. Other pipeline projects include the Italy-Turkey-Greece Interconnector, the Trans-Anatolian Natural Gas Pipeline and the Trans-Adriatic Pipeline, which the Shah Deniz consortium selected as a destination for their gas in February 2012.

OIL RESERVES & IMPORTS: At home, proven oil reserves, located largely in the south-east, are 270m barrels, the US Energy Information Administration (EIA) said. Oil production was 16.4m barrels in 2011, meeting about 8% of national demand, Energy Minister Taner Yıldız told parliament in March 2012. Because it is such a large net importer of oil, Turkey is among the world’s “most negatively” affected by the recent rise in oil prices, Morgan Stanley said in February 2012. It is also worth noting that Turkey’s petrol prices at the pump are the highest in the world at $1.97 per litre, according to official data in early 2012.

In recent years, Iran has become Turkey’s top supplier of crude, sending 9.7m tonnes in 2011, while Russia is number two, delivering 2.1m tonnes that year, according to an investor presentation from Tüpraş, Turkey’s main refiner. As sanctions against Iran over its nuclear programme bite, Turkey, Iran’s fifth-biggest export market, has agreed to reduce its imports from Iran, running at about 200,000 bpd in first-quarter 2012, by 20%. Yıldız has said Turkey will replace the lost Iranian fuel with 1m tonnes of Libyan fuel and is in talks with Saudi Arabia on boosting spot purchases.

REFINING: Turkey’s six refineries process 714,275 bpd, and four of them are owned by Koç Holding’s Tüpraş, the country’s biggest industrial firm. With a market share of 85%, the Izmit-based company has annual capacity of 28m tonnes, and utilises nearly 80% of it. The company said record automobile sales in 2011 and strong jet fuel growth have boosted demand for its products. It is one of just three companies in Turkey that Deutsche Bank predicts will profit from the spike in global oil prices. “The companies that we believe could potentially benefit from rising oil prices are refiner Tüpraş, petrochemicals producer Petkim and LPG distributor Aygaz,” analysts said in a March 2012 report. Existing refineries are upgrading to meet EU environmental criteria, and new refineries at the Ceyhan terminal hub are in the planning stages.

A new refinery being developed jointly by Turcas petrol, a domestic fuel retailer and Azerbaijan’s SOCAR, is due to come on-line in 2015. “Increasing oil refining capacity in Turkey is a strategic way to offset the current account deficit,” Kenan Yavuz, the president and CEO of SOCAR Enerji Turkey, told OBG. “Since the output from this new refinery will be used as inputs for downstream olefins and aromatics, we anticipate a value add of $3-4 per barrel of oil.”

The state-owned Turkish Petroleum Company (TPAO) has pledged to boost exploration and production (E&P) to reach the government’s goal of covering all gas and oil demand with domestic means by 2020. It plans to drill up to five extra-deep exploration wells by 2013 in the Black Sea at a cost of $1bn. Chevron acquired a 50% stake in a Black Sea deep-water exploration licence with TPAO in 2011. Brazil’s Petrobras and US-based ExxonMobil are exploring in the Black Sea as well. TPAO thinks Turkish waters hold up to 10m barrels of oil.

Territorial disputes with Greece, the country’s western neighbour, have deterred oil exploration in the Aegean Sea, but Turkey is searching for hydrocarbons off of its Mediterranean coast. TPAO inked a deal with Shell in November 2011 to explore for oil and gas and said it aims to begin processing by 2014. ExxonMobil, Chevron, Total, Petrobras, Statoil and RWE are interested in exploring in the Mediterranean, TPAO officials have said. TPAO is also involved in E&P for both oil and gas in Iraq, Azerbaijan, Kazakhstan, Libya and Colombia.

WATER WITH GAS: Turkey and Greek Cyprus in 2011 ratcheted up a war of words over gas exploration off of the latter’s coast. The two nations have a history of tension due to territorial disputes over the island. Exploratory drilling in September 2011 showed a Cypriot prospect may contain between 85bn cu metres and 255bn cu metres, enough to make the Mediterranean island self-sufficient for up to 250 years. Turkey fears that Turkish Cypriots, who have no peace settlement with the internationally recognised Greek Cypriot government, will not share in the profits. Recep Tayyip Erdoğan, Turkey’s prime minister, accused Cyprus of “oil-exploration madness” and said Greek Cypriots wanted to sabotage the latest round of reunification talks on the island, which has been ethnically divided for 37 years. Turkey then dispatched naval ships to accompany its own seismic survey vessel to an area just 10 km from the Cyprus drill site.

“The dependency of Turkey on fossil resources, especially natural gas, is above the world average,” the Energy Market Regulatory Board (EPDK) said in a 2010 report. “The share of natural gas in electricity production in Turkey is more than two times its share in the rest of the world.” Domestic natural gas production was just 679.6m cu metres in 2010, while 39bn cu metres were consumed, according to BP’s “Statistical Review of World Energy”. Unless new discoveries are made, Turkey’s gas reserves – about 6bn cu metres, according to the IEA – will last eight years.

Most gas, about 25bn cu metres a year, comes from Russia. Iran is Turkey’s second-biggest supplier, sending 10bn cu metres annually. Turkey said in January 2012 it would take Tehran to international arbitration over the price it charges, and Iran promptly reduced flows. Azerbaijan is the next main supplier at 6.6bn cu metres per year, and Turkey also has liquefied natural gas (LNG) contracts with Algeria and Nigeria. Gas storage capacity is 2.6bn cu metres, which Turkey wants to see double by the year 2020.

State pipeline operator BOTAŞ dominates the import business, though companies like Shell and Gazprom have entered the natural gas market and there are calls for liberalisation. “This business is becoming quite complex and multi-faceted. It needs to be run by a private enterprise, driven by profit,” said İbrahim Palaz, president of BOTAŞ International. “The government’s role needs to be more on the regulation side.”

Still, others say Turkey is reducing the government’s role in the sector swiftly. “Energy liberalisation in the EU took a very long time, and Turkey is accomplishing this same feat comparatively quickly,” said Metin Şen, CEO of Bosphorus Gaz, Gazprom’s Turkish unit. “There is room within the sector for many players, particularly considering that the number of customers that are looking for a licensed importer has doubled since 2010.”

RISING PRICES: For now, Turkey is struggling to cover demand at home, and a weaker lira and higher oil prices have forced the government to raise prices for consumers. The Ministry of Energy announced gas would cost almost 19% more in March 2012. Besides the knock-on effect in inflation and the wider economy, price shocks contribute to urban air pollution.

Due to rising costs, Turks refrain from turning on natural gas heating and instead burn dirty coal or unconventional fuel, like scrap wood. Newspapers reported air quality indices in major cities, including non-industrial centres like Erzurum and Van, are at record highs. Conservation is also an issue. Insulating buildings could save Turkey TL10bn (€4.25) a year in heating and cooling costs. But only 10% of the country’s 18m buildings are insulated, according to local press.

POWER PLAY: High gas prices push up power prices too, and the EPDK hiked tariffs by 8% in March 2012. Turkey produced 228.4 TWh of electricity in 2011, of which half is from gas-fired plants, the Ministry of Energy said. EPDK figures showed coal-fired stations account for 30% of production, 17% is from hydropower, 4% is oil and less than 1% is wind, solar and other resources. Installed capacity is now almost 55 GW, which the government wants to lift to 125 GW in the next 10 years.

Economy Minister Zafer Cağlayan in April 2012 announced a massive incentive scheme to attract investment and boost development, and pledged to back energy as a strategic industry. “We will support energy investments by including them in our incentive scheme. Investment in electricity production, will be supported, except for natural gas,” he said. But industry executives warn Turkey cannot entirely give up its gas habit. “Turkey will be dependent on importing gas for some time,” said Turcas Petrol’s chief executive, Batu Aksoy. “The government is working to see the share of renewables increased to balance the similarly growing need for natural gas. Ideally, a ratio of 50:50 can be achieved.”

As it stands, the government has pledged to raise the share of renewables in the mix to 30% of total installed capacity by 2020. Of that 30 GW will be from hydropower and 3 GW will be from other alternative sources, primarily wind. The private sector is taking a lead, with non-state-owned renewable generation going to 3840 GWh from 1490 GWh in 2002, according to the EPDK.

The rapid shift has not been without complications. The issuance of some 1000 licences for small hydropower projects has raised charges of improper environmental-impact assessments, and projects are being delayed by lawsuits. The hasty issuing of wind-farm licences in 2007 saw permission going to unqualified applicants, likely speculating in the new market. “The energy regulators are quickly learning from both the European experience and challenges in the domestic market,” said Selahattin Hakman, president of Enerjisa, a venture between Sabancı Holding and Austria’s Verbund. “For instance, the authorities are responsive and are steadily weeding out the kind of speculative behaviour that causes irregularities in the energy trade.”

The shift towards renewable energy options will also help Turkey contain its fast-rising carbon emissions. In 2009, the country released some 230m tonnes of carbon dioxide, according to data from the EIA, ranking it 23rd among global polluters.

About half of power generation in Turkey is still state-owned, though 16 GW of existing generation capacity is set for sale. “The government is still the single biggest player in the country’s energy sector,” said Adil Tekin, the head of French engineering group Alstom’s operations in Turkey. “However, it is no longer investing in new generation facilities. Full liberalisation of the energy market is still 10 years away, but the markets are increasingly liquid and this is enabling the growth.”

GOING NUCLEAR: A cornerstone in the government’s efforts to reduce reliance on energy imports is its plans for two nuclear power stations. The government wants to establish 12 nuclear reactors with total capacity of 15 GW. Its goal is to have nuclear energy provide 5% of electricity, according to the European Energy Observatory. It is seeking to build two plants, one on the Mediterranean and the other on the Black Sea. Seismologists have said both plants lie near earthquake-prone areas in a country with many fault lines.

While Japan, Germany and other countries move towards decommissioning nuclear industries, Turkey is about to launch one. “The Justice and Development Party (AKP) government is moving in the opposite direction from the rest of the world in its determination to build a nuclear plant,” Şahin Alpay, a professor of political science at Bahçeşehir University, wrote in Zaman newspaper in March 2012.

For the first plant at Akkuyu, Ankara and Moscow signed an agreement that gives Russian state nuclear company Rosatom a contract to build a station with capacity of 4.8 GW of power at a cost of $20bn by the time it is completed in 2019. This will be Russia’s first foreign nuclear station, and Rosatom will fully own and operate the plant for 100 years. The four-unit station will sell power to the state for 12.35 cents per KWh, compared with the average wholesale price of 9.38 cents per KWh, bringing the total nuclear bill to $70bn.

In 2011, a 9.0-magnitude earthquake shook Japan; the quake and subsequent tsunami resulted in a partial meltdown of the Fukushima Daiichi nuclear plant and drew international media attention. In its wake, a poll of 2469 Turks by opinion research firm A&G found 64% opposed the construction of both nuclear plants.

“If the AKP government represents the people, it cannot establish a nuclear plant that an overwhelming majority does not want. A referendum on nuclear energy must be held,” said Alpay. Other critics say Turkey still lacks a clear legal framework to launch a nuclear industry and question whether Rosatom will be able to raise the funds. “If the aim is to diversify supply, then it shouldn’t be Russia building the plant. It is already one of our main suppliers of oil, gas and coal,” said Necdet Pamir of the World Energy Council.

GRID LOCK: Regardless of major improvements to Turkey’s power generation facilities, its distribution networks still lose about 20% of electricity, which the government hopes to reduce to 5% in the next decade.

The privatisation of 21 dilapidated and inefficient grids has seen varying success. Well-subscribed tenders, despite upfront prices and the large investments required to upgrade infrastructure, have brought Turkey’s major industrial companies into the auction room.

The latest round of privatisations in 2010 received offers worth $5.7bn, with state-owned distributor TEDAŞ calling for the entire grid to be sold off. In January 2012, IC Holding won a tender to operate the Thrace grid until 2035 for $575m with a loan backed by local banks Garanti, Vakıf and İfl Bank. The original winner for the grid, whose 822,000 subscribers consumed 5000 GWh in 2011, was Aksa, whose $622m bid was rejected by the Competition Board after it won other tenders.

In June 2011, Turkey began commercially trading power with Europe after synchronising its electricity network with Greece and Bulgaria in 2010. Private companies like Akenerji, a Turkish power producer that exported 5 MW to Greece in November, have international service provisions to sell power.

OUTLOOK: Opportunities for the private sector abound as liberalisation of the energy market continues, particularly in the gas-import business and power generation and distribution. But profits will only stack up once ageing infrastructure is rehabilitated. New energy sources will help Turkey become more self-reliant while increasing overall capacity. As international oil and gas links are slowly realised, Turkey’s aspirations to become an energy hub look like they may be in its grasp.

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The Report: Turkey 2012

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