Turkey’s national energy policy is compromised of geostrategic realities and national ambition. Unlike many Central Asian and its many Middle Eastern neighbors to the east, Turkey lacks the conventional energy reserves required to power its economy, which keeps Energy Secretary Taner Yildiz on the road inking deals and negotiating agreements that weave Turkey into an increasingly complex web of energy networks and strategic alliances. This has a diplomatic component as well, since Turkey does not have the luxury of refusing a good deal. As a result, recent energy deals have raised the ire of old friends, made new ones, and generally underscored just how critical energy security is for Turkey. And while many details are still murky, the near future may bring massive pipeline projects, Mediterranean deep-sea wells, and increased trade with politically contentious partners like Iraqi Kurdistan.
Better integration into energy markets is crucial for Turkey, as it is a net importer of energy—often traded in dollars—and a depreciating lira is driving up energy costs. The country has immense potential as an energy hub given its proximity to the oil rich Middle East, the Caspian Sea region, Russia, Central Asia and Europe. The Bosphorus and the Dardanelles are the only water routes between large energy markets, and oil tankers must move. While these waterways move energy vertically, two international crude oil pipelines carry oil from Iraq (Kirkuk-Ceyhan) and Azerbaijan (Baku-Tbilisi-Ceyhan) to the Ceyhan terminal, located in Iskenderun, on Turkey’s southern coast near the Syrian border. Four international natural gas pipelines move natural gas onwards to international markets.
BIG MOVES
A number of noteworthy events in 2014 demonstrated that the energy sector is on track to becoming one of the country’s most dynamic sectors in the years ahead. These events include the purchase by the Turkish Petroleum Corporation of a 49% share in MOL’s production field in Baituganskoye, Russia. Meanwhile, Turcas Petrol, one of the county’s oldest energy firms, sold its entire stake in Turkey’s biggest refinery project to Rafineri Holding A.S., a fully-owned subsidiary of SOCAR Turkey Enerji A.S, which in turn, is part of the Azerbaijani state oil company ,one of the largest oil and gas companies in the world.
In the energy sector, liberalization is almost synonymous with internationalization and in Turkey, global energy firms and investors are all looking to increase their footprint. In July 2014, the World Bank signed off on an additional $400 million loan to finance the Tuz Golu gas storage facility. Upon completion, the facility will have a storage capacity of about 960 mcm of working gas (available) and 460 mcm of cushion gas (gas which must remain in the storage unit to maintain its structural integrity).
Halliburton announced plans to explore for natural gas reserves in the Northwestern Thrace region of Turkey with unconventional drilling. 2014 also saw ExxonMobil move forward with the Turkish Petroleum Corporation to explore for shale gas formations in the southeast and northwest parts of the country. With plans implemented in 2014, Shell started moving manpower and equipment to the Black Sea to start drilling and extraction in 2015. Finally, with the collapse of the South Stream pipeline project, Gazprom bought out all Eni, EDF, and Wintershall shares in the project, freeing up the Russian giant to move forward with its alternative plans in Turkey. As the year progresses, and terms are finalized, the specifications of the project should become clearer.
WHAT’S NEXT?
A new natural gas pipeline project termed the “Turkish Stream” is being discussed with Russia. Its current status is still unclear, and despite immense publicity, the project has not yet developed past an MoU signed between Turkey and Russia. This project has received a surplus of international attention thanks to its political overtones. The Turkish Stream is seen as a replacement for the South Stream pipeline that was canceled due to legal challenges and international acrimony.
By transporting gas through Turkey, Russia hopes to maintain its influence in the EU energy market, and Turkey hopes to achieve energy security. According to the Turkish Statistics Institute (TURKSTAT), the country’s population reached 77.7 million in 2014. By 2023, the population is projected to exceed 84 million. Turkey is the 17th biggest economy in the world by GDP, and moving up in the ranking. According to the Turkish Ministry of Energy and Natural Resources (MENR), demand for energy has grown by 5.7% yearly over the last 12 years, and it is expected to grow by 6% annually through 2020. In other words, Turkey must work every angle possible to avoid energy deficits cutting into growth.
Power generation will require an increasing share of Turkey’s energy imports, most of which will be in the form of imported natural gas. The country’s energy strategy through 2019 prioritizes securing energy supplies, in part through decreasing domestic energy production. The government is also working to improve the investment environment. These reforms are timely, as the energy sector is in need of significant requirements. In response to rising demand, the country must increase capacity in electricity, natural gas, and renewable energy. Even nuclear power is on the table with ground broken in the southern city of Mersin for the first of three planned plants. The country’s current installed power generation capacity is around 69,681 MW, with capacity projected to reach 100 GW by 2023.
THE MARKET
Deregulation is underway, albeit at a slow pace. Turkey has made significant attempts to liberalize the sector in recent years, mostly in electricity and natural gas. As this happens, the state is ceding more ground to private firms. In 2014, six thermoelectric plants and ten hydroelectric plants were sold off to investors, most of whom were local. By the close of 2014, the private sector generated 72% of the power sold in the country, up from 57% in 2003.
In order to continue market liberalization, and to move energy as efficiently as possible to the end user, ongoing reforms are set to eliminate exclusive rights to certain imports by the Directorate of Petroleum Pipeline Corporation (BOTAS). Under the current arrangement, private companies are barred from importing natural gas from countries where BOTAS has a contract. This de-facto exclusivity eliminates competition for imports, which disincentivizes cost cutting and ultimately makes imports more expensive. Natural Gas Market Law 4646 will remove this restriction. This law includes the establishment of a natural gas market. The reform also separates BOTAS into three entities for transmission, storage, and trade. BOTAS’s role in the market will be capped at 20%, and it will not be permitted to sign any additional natural gas purchase agreements until its market share is reduced to this share.
THE GOODS
Turkey’s 2014 oil production of 17.7 million barrels was dwarfed by its total consumption of 157.17 million barrels. Of these imports, 60% were imported as crude oil and then refined in the country by TUPRAS, the market leader in the refinery sector with four refineries throughout the country. Domestic oil production is dominated by Turkish Petroleum (TPAO), which produced 12.1 million barrels in the same year.
Natural gas consumption versus domestic production ratios are even lower than in the oil sector in other words, almost exclusively imported. The largest exploration sites are the Akcakoca Ayazli-1 wells in the western Black Sea. This site runs at a production rate of 360,000 cubic meters per day. TPAO and Shell operate the site on a joint operation agreement, which will expand exploration activities into the Mediterranean in 2013. Overall in 2014, Turkey produced about 502 mcm of natural gas, whereas 49.173 bcm was imported. 55% of the natural gas imports came from Russia, followed by Iran with 18%, and Azerbaijan with 12%. With a 50.8 bcm demand projected for 2015, consumption is expected to rise dramatically over the next decade and a half to 70 bcm by 2030.
Most natural gas goes to power generation, and while Turkey has signed deals that lock in supply for the foreseeable future, the country is working to decrease its dependence on natural gas by prioritizing locally sourced coal, hydroelectric power, and nuclear power generation. By 2030, Turkey aims to decrease the share of natural gas in the power generation sector to 30%.
A perpetual rise in manufacturing and infrastructure expansion in 2014 drove up electricity consumption in the country by 4.1% compared to 2013. According to Turkish Ministry of Energy and Natural Resources (MENR), almost half the juice was generated by natural gas powered electric plants (48%). Coal powered plants generated 29%, followed by hydroelectric plants at 16%, and wind tribunes, which generated a small but growing 3%. The state energy generation company (EUAS) generated 28% of the overall energy in 2014 as newly privatized generation companies powered an increasing share of the nation.
As of 1Q2015, installed electricity generation capacity had increased to 69,681 MW. The grid is expanding with Turkey’s membership in the European Network of Transmission System Operators for Electricity (ENTSO-E) in April 2015. This will enable electricity trading with other countries in Europe’s electrical grid.
TIME TO SHINE
As any visitors to the Mediterranean coastline in the south, or the blazing central plains can testify, Turkey has an abundance of sun at its disposal, which the government is hoping to convert into a powerful energy source to meet its ever-increasing demands. Seeking to reduce its reliance on combustible imports, the modernizing nation is looking eagerly toward renewables and has set a target of producing 3GW through solar power by 2023. Somewhat uncommonly among the centenary goals, this figure is relatively unambitious, representing 1.66% of total projected capacity, given vast heliacal resources estimated at a potential 50GW.The stage is, however, being set, with the government declaring 2015 the “Year of Solar” and promising reports emerging from the Turkey Photovoltaic Market Outlook 2015-2025. A welcome decision to increase eligibility criteria and remove size limits on renewable power generation for self-consumption is anticipated to catalyze growth in the unlicensed segment. Within the licensed market, signs are emerging of crucial improvements in the issuance of permits with the close of 2014 seeing the construction of two licensed photovoltaic power plants. April 2015 saw the Energy Market Regulatory Agency (EPDK) begin accepting new licensing applications in a move igniting intense interest from the global Solar PV industry. With a daily average of 7.2 hours of sunlight and serious investments already underway in nuclear, geothermal, hydroelectric, and wind power, now is certainly the moment for solar to shine. With 28 incentive certificates given to solar, out of 35 energy production certificates, the government has recognized this. The incentive policy also promotes domestic production and is part of a solar strategy to have Turkey as a top-10 solar producing nation by 2023. There remains a lot of work to consolidate this target and fully realize the nation’s potential, chiefly involving the usual suspects of licensing permits and internecine bureaucracy. Recent steps, however, paint a rosy picture and this emergent energy field is certainly one to look out for.