When Trabzonspor, a premier-league football club on Turkey’s Black Sea coast, needed to raise revenue, it did not sign on more corporate sponsorship or look to boost merchandising sales. Instead, it decided to build a hydroelectric plant. The six-time champion in August 2012 won a licence to build a 28-MW power station in the mountains above the city of Trabzon. The plant at Üzüngöl in north-eastern Turkey could gross $500m over its 50-year lifespan, Milliyet newspaper reported. “Realising this project will mean major financial support for Trabzonspor,” Sadri Şener, the club president, told the daily. Within two months, Trabzonspor had applied to state regulators for a second hydro license.
Trabzonspor’s innovative approach to earning cash illustrates just how attractive all stripes of investors find Turkey’s energy market. With demand for electricity rising at about 6% a year in Europe’s fastestgrowing economy, the government expects that it will have to more than double installed capacity by 2023, the centenary of the founding of the modern republic, to keep up. Now ranked the world’s 17thbiggest economy with a GDP of nearly $790bn, Prime Minister Recep Tayyip Erdoğan has said Turkey will be the 10th largest in 10 years.
To fuel that kind of growth, Turkey needs energy. Situated between the hydrocarbonsrich Middle East and energy-hungry Europe but with negligible reserves of its own, the country was long viewed as a transit state. While that continues to be part of its strategy, Turkey is also hunting for resources to power its own economy, whether it is domestic supplies like coal or renewable energy, oil and gas extracted in foreign fields or new pipeline agreements to ship in fuel (see analyses).
It is spending record amounts on purchases from abroad to cover some 70% of its own energy consumption, with its import bill rising 11% to $60bn in 2012. Energy typically accounts for about a quarter of all imports, inflating a persistently high current account deficit, which stood at $44bn in 2012, according to central bank figures. For each $10 rise in the price of oil per barrel, the deficit increases by $4.5bn, according to a research note by Tim Ash, a London-based analyst for Standard Bank Group.
In 2012 Turkey consumed 45bn cu metres of natural gas, up from 18bn cu metres a decade earlier and expected to rise to 48bn cu metres in 2013. Nearly all of this is imported, with minimal domestic production. In the Black Sea, the Akç akoca, East Ayazlı, Akkaya and Ayazlı natural gas fields have come on-line, contributing to Turkey’s total production of less than 1bn cu metres. In September 2012, Turkey Petroleum Corporation (TPAO) discovered more gas in the Black Sea at the Istanca-1 field. Production wells have yet to be drilled.
Natural gas fires just under half of the country’s power plants, accounting for the most of consumption. New gas-fired facilities are still being developed, with about 9000 MW due to come on-line by 2018, according to the Energy Market Regulatory Authority (EPDK). Current average gas demand is some 125m cu metres per day, peaking at 220m cu metres in winter.
The bulk of Turkey’s needs are met by pipeline shipments from Russia (a total of 27bn cu metres in 2011), Iran (7bn) and Azerbaijan (6bn). Turkey also has liquefied natural gas (LNG) contracts with Algeria and Nigeria and turns to the spot market to cover any shortfalls during the winter months.
The government sees market liberalisation as one way to boost supplies. BOTAŞ, the loss-making state pipeline operator, lacks sufficient funds to invest in infrastructure to cope with rising energy demand. Its losses stem largely from selling expensive gas imports to the domestic market at a discount. In 2012, EPDK approved licences for four companies – Bosphorus Gaz, Akfel Gaz, Bat› Hatt› Doğalgaz Ticaret and Kibar Holding – to import some of the 6bn cu metres of Russian gas shipped each year on the Trans-balkan I pipeline, which mainly supplies Istanbul. Another nine companies have submitted licence applications but still need to conclude agreements with Russian gas giant Gazprom to take hold of the licence. Other private sector companies are importing 4bn cu metres of gas from Gazprom on a parallel line, following a 2006 tender. “Energy market liberalisation is a natural step in the development towards a more modern and efficient system. It will also provide the right incentives for much-needed infrastructure modernisation,” said Joachim Conrad, the general manager of Bosphorus Gaz, an Istanbul-based gas importer that is majority-owned by Gazprom and has a licence to import 1.75bn cu metres of Russian gas a year.
However, Conrad added that, even though the liberalisation process is irreversible, there have been some challenges along the way. “Persistent market inefficiencies have sent confusing signals to investors, to the detriment of both the private sector and the state,” Conrad told OBG.
Indeed, this is a sentiment with which many industry stakeholders agree. “Although the government has made it clear that liberalisation is a priority, delays in the tendering process demonstrate that market conditions are not yet attractive enough for investors,” Frank Quante, the CFO of EWE Enerji, told OBG. “Meanwhile, BOTAfi is incurring huge losses, thereby draining public finances at a time when budget deficits are one of the country’s major weaknesses.”
Turkey paid a total of $20.2bn for more than 44bn cu metres of natural gas imports in 2011, according to local newspaper Zaman. Azeri gas costs $350 per 1000 cu metres, Kenan Yavuz, the head of the Turkish unit of Azerbaijan’s state energy company, Socar, was quoted as saying by the daily, about 35% under current market value. Russia covers 55% of Turkish gas needs at a price of $400 per 1000 cu metres. Gazprom and Turkish officials are in talks to increase the supply by about 12% to 30bn cu metres annually.
Iranian gas to Turkey cost $505 per 1000 cu metres, as of December 2012. The quantity of gas has remained unchanged despite the fact that Turkey, Iran’s biggest natural gas customer, took the Islamic republic to arbitration over the high price, which saw the International Court of Arbitration (ICA) award Turkey $800m in 2009. Turkey again sought arbitration in March 2012 over the Iranian price, even though Minister of Energy and Natural Resources Taner Yıldız said that Ankara was “happy about the natural gas trade with Iran”. Notwithstanding the latest appeal to the ICA, Iran has yet to discuss new prices, which were locked in under a 1996 contract.
Iran is a problematic gas supplier for other reasons. Ever-tighter US sanctions against Tehran for its disputed nuclear programme have been choking off channels for payments from Turkey. It had been paying for its gas in lira, as the sanctions prevent euro and dollar transactions, and Iran, in turn, was using the lira to buy gold bullion worth millions of dollars in Turkey, which it then transported by courier to Dubai. There the gold was sold for foreign currency or shipped to Iran. In February 2013, the US tightened sanctions to effectively block the sale of precious metals to Iran, and Turkey now needs to trade sanctions-free industrial products.
These disputes, plus the steady rise in demand, have compelled Turkey to seek out additional sources of natural gas. The Trans-Anatolian Pipeline (TANAP) is a joint venture between Turkey and Azerbaijan that will carry 6bn cu metres annually of Azeri gas to Turkey and another 10bn cu metres to Europe (see analysis). If it opens as planned in 2018, it will herald the Southern Gas Corridor, an initiative by the European Commission to supply Caspian and Middle Eastern gas to markets in Europe.
“This year, Turkey has a real chance to become an important energy bridge between East and West,” said Kjetil Tungland, a managing director of the Trans-Adriatic Pipeline, a separate project that aims to connect with TANAP at the Greek-Turkish border and deliver gas to Western Europe. “The realisation of the Southern Gas Corridor will not only create key energy infrastructure but also will bring economic prosperity and beneficial political partnerships to Turkey and other countries along the route.”
In January 2013 Yıldız said Algeria had agreed to extra shipments of 2bn cu metres of LNG in 2015 after the current contract lapses in 2014. At the same time, the minister announced Turkey was in discussions with Qatar on the construction of an LNG re-gasification terminal on the coast of the Gulf of Saros in the Aegean Sea. The terminal will have capacity of between 5m and 6m cu metres. A feasibility study will be carried out by the Qataris, the world’s largest LNG exporters. Yıldız has indicated that Turkey’s neighbours Bulgaria and Greece could also acquire Qatari gas from the facility.
Among the most attractive prospects for new supplies of natural gas is the neighbouring Kurdistan region in the north of Iraq, with which trade and diplomatic ties have improved in recent years. The semi-autonomous region wants to make Turkey the primary destination for its gas, shipping it 10bn cu metres, then selling on whatever is left to Europe, Ashti Hawrami, the minister of energy for the Kurdistan Regional Government (KRG), said in July 2012. Such projections may be overly optimistic, especially since direct sales overseas will likely run afoul of the central government in Baghdad, which says the KRG has no legal authority to export hydrocarbons or sign development agreements.
All of these new supplies of gas will require Turkey to develop storage facilities. According to figures from BOTAŞ, the maximum daily volume that Turkey’s grid can handle is 185m cu metres, which means some 67bn cu metres a year at maximum capacity. Currently, the volume of gas available is about 53bn cu metres a year, with the gap down to the change in peak demand over the course of the year. Increased storage would allow Turkey to import more gas in warmer months to cover higher demand in winter. As it stands, the country has just one storage facility, in a disused gas field under the Sea of Marmara, that it plans to expand. There is also a World Bank-backed project to build a second centre under Tuz Gölu, a salt lake in central Turkey, at a cost of about $538m. The government wants to double gas storage capacity to 5bn cu metres by 2023.
As with its gas, Iranian oil has been complicated as Turkey faces pressure from the US to reduce crude imports from Iran. In 2011, Turkey bought more than half of its crude from the Islamic Republic; imports peaked at about 250,000 barrels per day (bpd) in early 2012. However, Turkey slashed imports by 15% to 7.6m tonnes in 2012, or 151,829 bpd, and in February 2013 it imported just three cargoes of Iranian crude, equivalent to 100,000 bpd, according to Reuters.
The US has rewarded Turkey and 10 other countries for their efforts to reduce Iranian crude by giving them three consecutive 180-day waivers, the latest extended in March 2013, to buy increasingly small amounts. Without the exceptions, banks in these countries, which include Japan and India, would face being cut off from the US financial system.
Since Turkey imports 91% of its oil, it has had to turn to other exporters to cover the shortfall. Yıldız has said it may raise Libyan imports to 1m tonnes a year. Russia, which provides 10% of Turkish oil, and Saudi Arabia, which sends 14%, nearly doubled their sales to Turkey in 2012, according to TurkStat figures. Neighbouring Iraq covered about 15% of Turkish crude imports in the first half of 2012, the US Energy Information Administration said.
TPAO has sought a role in Iraqi oil production as the country recovers from decades of war and sanctions that crippled its energy sector. In 2009, the state-owned energy company won operating licences to develop two Iraqi oilfields, and the following year, won 20-year contracts for the Siba and Mansuriya gas fields. But a deteriorating diplomatic relationship with Baghdad has hamstrung those ventures, and TPAO was expelled from an exploration deal in eastern Iraq in November 2012.
Now Turkey is eying the more stable Kurdish north of Iraq, and TPAO is being considered for lucrative production-sharing contracts there, joining the ranks of ExxonMobil and Chevron. A stake in the north could lead to TPAO being blacklisted in the south, however, as Chevron was.
TPAO’s interest in the north shows just how much relations between Turkish and Kurdish authorities have improved. Just a decade ago Turkish politicians worried that Iraqi Kurds’ autonomy, enshrined in the federal constitution, could stoke separatism among its own, much larger Kurdish population. Today, annual trade with the KRG hovers at around $8bn. Kurdish officials say they see their future aligned with a prosperous, secular Turkey that is a candidate for EU membership and has access to markets there.
Anglo-Turkish firm Genel Energy arrived well before this rapprochement, spearheading the renaissance of the KRG’s oil industry. Genel entered the first production-sharing contract in 2002 for the Taq Taq licence, one of the two largest fields in the region. Genel also has stakes in the Tawke, Dohuk, Miran, Ber Bahr, Chia Surkh and Bina Bawi projects. In November 2012 Genel Energy, now headed by ex-BP chief Tony Hayward, upped its stake in the Miran exploration block, from 25% to 51%.
In July 2012, Turkey began importing crude from the KRG in tanker trucks crossing the land border, Yıldız said, adding the volume may rise from some 15 tankers a day to as many as 200. Most crude from the KRG still has to be pumped into Iraq’s national pipeline system, and Kurdish officials regularly must halt production when Baghdad refuses to make payments for contracts it has not approved. Though rumours of a new pipeline allowing direct Kurdish exports to Turkey persist, Iraqi officials said in February 2013 that Turkey had agreed to cancel plans for direct oil and gas links with Iraqi Kurdistan unless the projects had Baghdad’s approval. A top Iraqi security official told Reuters in March 2013 that direct oil trade between Turkey and Kurdistan was tantamount to “dividing Iraq”.
Power To Grow
While diversifying its sources of oil and gas is essential to energy security, the government sees liberalisation of power generation and distribution as key to improving the health of its electricity sector. It wants private investment to boost capacity, which stood at 58,000 MW at the end of 2012, so it can meet demand that will make Turkey Europe’s third-biggest consumer in a decade.
Amendments to the electricity market law have reduced taxes and, for the past year, non-residential consumers have been able to choose their supplier. The government plans to open the market to all customers by 2015. It has also eliminated subsidies so that retail tariffs reflect the cost of generation, transmission and distribution. Erol Memioğlu, the president of Koç Holding Energy Group, told OBG, “Energy distribution is a low-margin business, so the government must do more to eliminate certain risk factors. More accurate information on existing loss/theft ratios and realistic targets would be of much help in this respect. Further clarification is urgently needed regarding the ability of distribution companies to freely determine their suppliers from alternative sources.”
The trading of power futures was introduced on the derivatives market at the beginning of 2012. The government now wants Turkey to become the benchmark electricity market for spot and derivatives contracts for South-eastern Europe and Central Asia, officials have said. The state-owned Turkish Electricity Transmission Corporation (TEİAŞ) and Germany-based European Energy Exchange signed a memorandum of understanding in July 2012 regarding the establishment of an energy exchange in Turkey.
The exchange, seen as a public-private joint stock corporation that could open before 2015, has the prerequisites in place to develop into a liquid market, including sufficient demand across the region, consulting firm Accenture said in a report. With the regulatory framework now in place, “the energy exchange establishment process is expected to pick up pace and the Turkish Energy Exchange will start operating in due time,” it added.
This is indeed a very important development, Kemal Y›ld›r, the chairman and general manager of TEİAŞ, told OBG. “The establishment of the electricity exchange, which will create a liquid market for power trading, will be a major step forward for the liberalisation of Turkey’s energy sector,” Y›ld›r said.
The most exciting development for free market advocates has been the government’s successful sale of its electricity companies. Besides power stations, Turkey has now privatised all 21 of its electricity-distribution firms.
The final four grids were tendered by the government’s Privatisation Administration (ÖIB) in March 2013. It was the second time the networks were on the block; the first tenders in 2010 were cancelled after the top bidders failed to secure loans to make payments. This time around, all but one grid fetched more money. The biggest sales netted $1.7bn and $1.3bn for grids serving the Adana region and the Asian side of Istanbul, respectively.
Those sales breathed new life into a sluggish privatisation programme. Between 2010 and 2012, with financing difficult to find in the wake of the 2008 global financial crisis, sales of Turkey’s state assets brought in $7.5bn. By comparison, in the first three months of 2013 alone, nine sales raised $8.5bn. The tenders have heartened economists who had criticised Ankara for dragging its feet on privatisation, even cancelling a $5.7bn tender to operate roads and bridges after the government concluded the winning bid was too low. The sale of state assets is an important source of revenue in the budget, and Turkey was left with a bigger-than-projected deficit in 2012 because it missed its privatisation targets. Now analysts say that 2013 may prove to be a record year for privatisation revenue.
Liberalisation is not without its side effects. As with other formerly state-controlled sectors, the power business is bound up in complex procedures and unclear oversight, with several bodies regulating the sector, such as EPDK and TEİAŞ. There has also been pain for consumers. In early 2013, lower electricity prices in the free market, against a high cost of natural gas, prompted power generators to operate plants below capacity, requiring net electricity imports equal to 1.7% of consumption in February 2013, according to Uygar Gezer, an analyst at local brokerage Oyak Securities. This “was virtually nonexistent in the past”, he wrote in a research note. “We suspect limp electricity prices motivate natural gas power plants to work at a lower capacity utilisation rate. High renewable-sourced production seems incapable of making up for idle thermal capacity.”
Splitting The Atom
Still, renewable energy will account for a greater share in the energy mix. Peak load is projected to rise to 40,130 MW in 2013 from 36,120 MW in mid-2011, according to TEİAŞ. As demand rises inexorably towards Turkey’s installed capacity, the government is looking for domestic sources and is serious about nuclear power.
The country’s nuclear ambitions date back to at least 1970, but each project has been shelved for environmental or economic reasons. This time around, there are eight reactors due to come on-line by 2022: four at a first plant near the town of Akkuyu on the Mediterranean with a capacity of 4800 MW, followed by four more near the Black Sea city of Sinop with capacity of 5000 MW. The government then wants to build another three nuclear power plants with four reactors each by 2030; proposed sites include Iğneada, Ankara and Tekirdağ. Altogether, the plants would provide 15,000 MW to Turkey, or 5% of electricity, the Athens-based think tank European Energy Policy Observatory said.
Rosatom, Russia’s state nuclear state energy company, has agreed to build the Akkuyu plant at an expected cost of $20bn. The state will purchase the plant’s power at a price of $0.1235 per KWh, compared with an average wholesale price of $0.0938 per KWh. Over the lifespan of the facility, this price differential will add another $50bn to the cost for the state. The Sinop plant, expected to run to around $25bn, is at an earlier stage of planning, and the state is considering bids from a variety of international players, including Korea Electric Power Corporation and Japan’s Toshiba and Tepco. The winner would give a 25% stake in the plant to the state-owned electricity firm, Elektrik Üretim, and have no power off-take guarantees as with Akkuyu.
The 2011 nuclear disaster in Japan has not dissuaded Turkey, and the prime minister remains a staunch defender of nuclear power. “Nuclear energy is a necessity,” Erdoğan said in 2012 at an opening ceremony for the Turkish Atomic Energy Authority. “The risks to human life have been eliminated. It is wrong to tie everything to Japan because of what happened there. By 2023, we will have two nuclear power stations in operation, securing us cheap energy.”
But the Japan comparison is fair. Seismologists say both Sinop and Akkuyu are in earthquake-prone areas. “Has the government put in place the sufficient controls to protect the civilian population in the case of a nuclear disaster, and is there even sufficient know-how in Turkey to run a nuclear power plant and to deal with the nuclear waste?” asked Borut Grgic, chairman of the Institute for Strategic Studies in Brussels, in an essay published in local newspaper Hürriyet Daily News. Other critics including Greenpeace say nuclear power’s contribution of 5% of supply is negligible and that Turkey has enough green-energy potential to cover demand, especially if it reduces waste on its network that now accounts for at least 16% of transmission.
Celal Metin, the chairman of MET Group, an investment firm focused on water, food and energy generation, told OBG that nuclear power stakeholders in Turkey will have to focus on three areas to win over sceptics and develop a successful energy programme. “First, project planners will have to mobilise sufficient capital and expertise. Second, they must ensure security and safety, and heed the lessons of Fukishima. Third, led by the Turkish government, they must form international nuclear energy cooperation agreements to ensure transparency and the use of international best practices,” he said.
With energy targets including installing 25,000 MW, increasing renewables share of the energy mix by 30%, establishing an energy exchange and constructing four nuclear reactors with a capacity of 5000 MW, among other things, Turkey has more than enough on its plate. In order to reach its own goals by 2023, the government will have to bring all actors to the table to form an integrated strategy and vision for its energy sector. Mehmet Ö€ütçü, the head of the OECD Global Forum, told the local press in August 2011 that Turkey must maintain its standing as a credible partner by streamlining management structures and enhancing human capital as well as continuing to be a pioneer in renewable energy.
Whether nuclear power ever gets off the ground, the country’s determination to win greater energy independence and security is clear. When the modern republic turns 100 in 2023, it plans to have 125,000 MW of generation capacity, 25% more transmission lines and wind mills churning out some 20,000 MW of power. Oil and gas links are bringing Turkey closer to the Caspian, Middle East, North Africa and Russia. What once appeared to be lofty targets are slowly being realised.