An overview of the natural gas market of Turkey
Natural gas is one of the main fuels in Turkey, accounting for 17 percent of total primary energy supply and 36.6 percent of electricity generation in 2016.1 Natural gas supply is almost entirely provided by imports of 46.4 billion cubic meters (bcm), as domestic gas production is negligible (0.35 bcm).2 Since the enactment of the 4646 numbered Natural Gas Market Act in 2001, Turkey's natural gas net imports have grown significantly, driven by higher gas consumption in the residential sector and large-scale gasification, rising private investments in gas-fired power plants and growing consumption in the industry sector.3 Russia is the main natural gas supplier of Tukey with a 52.9 percent share of total natural gas imports; it is followed by İran, Azerbaijan, Algeria and Nigeria. According to the 2014 data, a 78 percent share of the import contracts is owned by BOTAŞ (state owned pipeline/transmission company) and only 22 percent shares of the import contracts are owned by the private companies. However, being dependent on Russia raises security of supply concerns while Turkey is pursuing the aim of being a regional gas hub. In fact, the construction of TANAP and TurkStream pipeline projects4 are solid steps towards that goal. In the meantime, Turkey has access to major supply sources through four import pipelines and two regasification terminals.
In 2016, the consumption amount of natural gas by sectors in Turkey was roughly 16.7 bcm by conversion sector, 14.1 bcm by industry, 11.6 bcm by household, 3 bcm by service sector, 0,4 by transportation sector and 0,34 by energy sector.5 Even though the legal framework of the upstream activities of natural gas is subject to the Turkish Petroleum Act, the legal framework of the natural gas market or, in other words, midstream and downstream activities of natural gas is designed under the Natural Gas Act which envisages a regulated liberal market. The main objectives of the legal system of Natural Gas Act may be summed up under three main headlines: establishment of a competitive natural gas market, reducing the share of state-owned enterprises within the market, and harmonization of the domestic legal framework with the EU. We should admit that the liberalization of the market and relatedly cost-reflective pricing have only slowly advanced since 20096 considering that regulated tariffs are set by the government, and as we mentioned before, the domination of the wholesale market with the control of roughly an 80 percent share by BOTAŞ and moreover insufficient network and storage infrastructure. Therefore, it is expected that we will observe new reforms for the market in the near future.
As a matter of fact, the establishment of a natural gas stock market may have the potential to serve for the liberalization of the market. Mustafa Yılmaz, the president of Energy Market Regulatory Authority (EMRA), has announced the good news that natural gas trading on the energy stock exchange will begin next year to institute an effectively functioning gas hub.
The Constitution of Energy Exchange İstanbul (EXIST)
Under the article 11 of 6446 numbered Electricity Market Act Energy Exchange Istanbul (EXIST) was officially established in 2015 upon the registration processes completed subject to the provisions of The Natural Gas Act, and the main objective and principal business activity is to:
"Plan, establish, develop and manage energy market within the market operation license in an effective, transparent, reliable manner that fulfills the requirements of energy market and to be an energy market management that procures reliable reference price without discriminating equivalent parties and maximizes the liquidity with increasing number of market participants, product range and trading volume as well as allowing to merchandise by means of market merger."
EXIST started operating in the power generation sector with day-ahead and intraday power markets. In particular, the day-ahead market is the main arena for trading power. In the day ahead market, contracts are made between seller and buyer for the delivery of power the following day, and basically the price is set where the curves for sell price and buy price meet.7 We called it "market clearance price". The market clearance price works as both market equilibrium price and benchmark price for the power. In other words, tariffs of the energy determined automatically and transparently in EXIST stock market with proportion to supply and demand of electricity. Thus, the success and effectiveness of electricity companies trading on EXIST triggered the demand for a spot natural gas market to provide investors and gas companies with a reliable pricing mechanism and financial products with the trade of contracts and derivatives.8
What is natural gas stock market:
The spot is a market for financial instruments such as commodities and securities which are traded immediately or on the spot. In spot markets, spot trades are made with spot prices. Unlike the futures market, orders made in the spot market are settled instantly. Spot markets can be organized markets or exchanges or over-the-counter (OTC) markets.
Natural gas may be sold on a spot market basis, under longer-term contracts with fixed pricing, or terms that are affiliated with the market prices, and under contracts with some other types of pricing provisions. On the other hand, natural gas may be sold on financial natural gas markets such as future contracts, option contracts and swaps.
Natural gas stock market will be a spot market organized by EXIST, and its application will be a huge step for the liberalization of the market not only for creating a reliable pricing mechanism but also it will constitute transparency in the market.
What might be the expected benefits of the natural gas stock market
As we mentioned before, on the one hand, market mechanism of the natural gas in Turkey has some deficiencies such as regulated tariffs, the domination of the wholesale market by the state-owned pipeline company and moreover insufficient network and storage infrastructure and other regulatory restrictions, and on the other hand, as a developing country the market is far away from its limits, which involves so many opportunities. In other words, relative investment in the natural gas market of Turkey is risky but worth it. However, it can be claimed that the Natural Gas Stock Market will diminish the uncertainties and serve for the sake of the common good.
Considering that in the day-ahead market, the system price of natural gas will be determined by matching offers from suppliers with bids from market players to develop a supply and demand equilibrium price, the first benefit of the Natural Gas Stock Market will be the creation of a benchmark price for the market.
Furthermore, transparency in any market is critical to its overall health and efficiency and enables competition to benefit customers. Electronic trading and the reporting of certain natural gas commodity prices to index publishers will show us how natural gas markets maintain transparency and foster reliable price discovery.
In addition, marketers and other buyers and sellers of natural gas are able to use financial instruments traded on exchanges to hedge the risks associated with price volatility.
In summation, the natural gas market of Turkey has some structural deficiency caused by the slow advance of the liberalization of the market and related cost-reflective pricing; however, keep in mind that the legal infrastructure of the market is extremely liberal. On the other hand, a natural gas stock market may solve many problems of the market and pave the way to competition and liberalization. We should admit that gas cost must be reflected in the prices, and the restriction of gas import must be abolished in order to create a liberal market which attracts foreign direct investment to the country.
1. EMRA Natural Gas Market Report 2016, p.62.
2. EMRA Natural Gas Market Report 2016, p.i.
3. IEA: Energy Policies of IEA Countries, Turkey 2016 Review, p.103
5. EMRA Natural Gas Market Report 2016, p.63
6. IEA: Energy Policies of IEA Countries, Turkey 2016 Review, p.103
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