DIVERSE THINKING

Turkey 2014 | ENERGY | REVIEW: ENERGY

Liberalized, but not lean, Turkey's energy industry is opening its doors to foreign investment and new projects to narrow its energy supply and demand gap.

Moving in stride with Turkey's booming economy is its energy industry. Such growth beckons international investment, especially as Turkey is a net importer of oil and gas. In 2012, imports of oil and gas totaled $60 billion. Deloitte estimates that Turkey will require investment totaling $120 billion to satisfy its energy demands by 2023.

Luckily, the industry is evolving, with liberalization efforts leading the way. The privatization program has penetrated the energy industry and has increased competition and overall efficiency, putting the state-owned Turkish Petroleum Company (TPAO) at the same level as private players. Meanwhile, Turkey continues to enjoy its geographically crucial position, harnessing the supply-rich East and the demand-rich West.

STATE OF GAS

In 2012 natural gas consumption hit 46 billion cubic meters (bcm), or 1.6 trillion cubic feet (tcf), a 4.7% increase on 2011. However, local production only covers some 2% of total consumption. According to the Ministry of Energy and Natural Resources, until 2017, natural gas demand will grow 1 bcm (35.3 bcf) per year, and between 2019 and 2020, demand will hit 2 bcm (70.6 bcf) per year, translating to a demand growth of 2.9% per year from 2012 to 2020. Turkey uses natural gas to produce some 32% of its electricity, and for this it imports from four gas pipelines, two of which—the 16-bcm (565-bcf) West Gas and 14-bcm (494.4-bcf) Blue Stream pipelines—link Russian gas to Turkey'smarket, providing the country with 58% of its gas supply. Despite the vulnerabilities inherent in continuing to stream gas from Russia via Ukraine, especially during the fallout of the Crimea crisis in March 2014, Turkey's gas dependence remains unchanged.

Managing Director of Bosphorus Gaz, the largest private importer of natural gas in Turkey, Joachim Conrad, told TBY, “We have two long-term contracts for the import of Russian natural gas, but still observe the need for the import of additional gas volumes. Turkey needs more gas, and besides Russian natural gas we are also pursuing the procurement of gas produced in Kazakhstan."

The Trans-Anatolian Pipeline (TANAP) will begin construction in 2018 and will transport gas from the second stage of the Shah Deniz gas field in Azerbaijan. The 867-kilometer Trans-Adriatic Pipeline (TAP) is also in the works and begins at the Greece-Turkey border, traversing Greece, Albania, and the Adriatic Sea before reaching Italy.

OIL & REFINERIES

Oil, too, is a matter of relative dearth. Consumption in Turkey in 2012 was some 31.5 million tons, while production was approximately 2.3 million tons, making for a huge gap between supply and demand. Demand for oil, however, will continue to grow 2%-3% per year.

The Baku-Tbilisi-Ceyhan (BTC) pipeline has been instrumental in supplying oil to Turkey from Azerbaijan's Azeri-Chirag-Guneshli oil field. Mehmet Atıf Çay of Botaş International told TBY of the pipeline's success and sheds light on the domestic industry's efficacy, “The BTC pipeline is an international scheme managed by a Turkish company, which proved that Turkey can profitably assume any kind of project."

Some 60% of total oil demand is satisfied by refined good imports, half of which came from Iran in 2012, in addition to Iraq and Russia. In lieu of US sanctions, Turkey is expected to slightly shift its purchase of imports from Iran and more to Saudi Arabia, Libya, and Russia. Tüpraş is the top refining company in Turkey, with four refineries in Izmit, Izmir, Kirikkale, and Batman, respectively. Another refinery, the SOCAR Star Refinery, will enter the market in 2017 to produce diesel, jet fuel, liquefied petroleum gas, and petroleum products.

SEEK & YOU SHALE FIND

Despite domestic reserve shortcomings, there are ongoing and future exploration efforts that are going on to help buffer Turkey's remarkable growth in the years to come. For the past four years, shale gas fracking has been entering the scene.

In 2013, Turkey joined the ranks, passing Norway as the biggest regional oil driller, drilling for oil and gas with as many as 34 rigs, more than any other European country at the time. This is owing to increased exploration efforts in the Black and Mediterranean seas, which multiplied in response to large gas discoveries by nearby Cyprus and Israel. In one decade, exploration spending leapt from $42 million to $610 million. TPAO has joined with world majors Royal Dutch Shell and ExxonMobil as well as minors such as US-based Transatlantic Petroleum and Canada's Anatolia Energy to explore its offshore areas.

In its 2013 report, the US Energy Information Administration ranked Turkey among the 41 countries in the world with the most prospective shale formations. Shale gas exploration is currently taking place in the Southeast Anatolia and Thrace basins, and it has been predicted that shale reserves may exist in the Sivas and Salt Lake basins. With an estimated total of 163 tcf (4.6 tcm) of risked shale gas in-place in the Dadas and Hamitabat shales in the Southeast Anatolian and Thracian basins, respectively, as well as 94 million barrels of risked shale oil in-place, hydraulic fracturing operations are underway. In September 2012, TPAO and Shell began to extract shale gas from the Dadas shale in the Saribugday-1 natural gas field. In January 2012, Anatolia Energy drilled its first well, Çalıktepe-2, on the Dadas shale formation. Transatlantic Petroleum reported flowing gas and light oil from its test Göksu-1 and Bahir-1 wells on the Dadas Shale. TPAO and Transatlantic Petroleum are also active in the Thrace Basin.

On the other side of the spectrum, Turkey's growing demand has meant a diversification of its offerings. Currently, some 5% of installed capacity is comprised of renewables. These projects are buffered by favorable feed-in tariffs and Turkey's advantageous landscape. By 2023, Turkey hopes to install 600 MW of geothermal, 3 GW of solar, and 20 GW of wind power energy.

LIBERALIZE THE MARKET

At the helm of energy industry growth in Turkey is privatization. Turkey's privatization efforts took hold in the 1980s, but have only grown rapidly over the past decade. In March 2013, Turkey sold the last four of its electricity grids, accomplishing the full privatization of the electricity distribution sector. As of 2012, installed electric capacity as been 57 GW, but the country hopes to reach 100 GW by 2023.

The New Petroleum Law, ratified in March 2013, aims to develop Turkey's resources and support a hydrocarbons transit hub by offering incentives to invest. The law narrowed the role of TPAO; reduced the ceiling of income tax from 55% to 40%; simplified license application procedures; improved provisions concerning the extension of exploration licenses, removal or lowering of imported oil and gas field equipment taxes; eased labor laws; and eliminated obstacles to the repatriation of registered capital. Another step toward a liberalized market and increased liquidity and transparency is the establishment of an energy stock exchange (EPİAŞ), which was outlined by the Electricity Market Law to launch in the second quarter of 2014. Borsa Istanbul will retain a 30% share of the planned EPİAŞ and private sector investors will have 40% ownership, while the Turkish Electricity Transmission Company, (TEİAŞ) will hold the remaining 30%.

However, even with a more attractive market, the state is exhibiting increased discernment. In February 2013, Prime Minister Recep Tayyip Erdoğan unexpectedly canceled a 25-year-term privatization tender for eight roads and two bridges. Despite its sudden nature, the call to cancel is telling of Turkey's changing international position. Impressive growth over the past decade has put Turkey in a more economically confident situation in which it can vet its investors instead of accepting whatever comes its way.