Turkey's importance in the energy market grows as a regional transit hub given its location between the oil rich Middle East, Caspian region, and Europe. Turkey is the home of the Bosporus and Dardanelles connecting the Black Sea to the Mediterranean. In 2013, approximately, 2.8 to 3.0 million barrels of crude oil and petroleum products passed per day through the straits. In addition to the straits, Turkey has two international crude oil pipelines carrying oil from Iraq (Kirkuk-Ceyhan) and Azerbaijan (Baku-Tbilisi-Ceyhan) to the Ceyhan oil terminal in the Iskenderun bay as well as four international natural gas pipelines. In 2012, Azerbaijan and Iraq exported a combined 900,000 barrels of oil per day through Ceyhan oil terminal. Currently, a new natural gas pipeline project colloquially termed "Turkish Stream" is being discussed with Russia. Turkish Stream would be an alternative to the cancelled South Stream line. Besides becoming a growing transit hub, Turkey is also a major energy market itself with a rapidly growing demand for energy. According to the Turkish Statistics Institute, Turkey's population is estimated to be 77.7 million in 2014. Turkey is the 17th biggest economy in the world by GDP. According to the Turkish Ministry of Energy and Natural Resources (MENR), the demand for energy has been growing by 5.7% yearly on average in the last 12 years and is expected to grow by about 6% per year until 2020.
The increase of demand is expected to be mainly driven by the power generation sector, which depends highly on imported natural gas. Turkey's energy strategy for 2015-2019 focuses on securing the energy supply for the coming years, decreasing the dependence on imported energy sources as well as improving energy efficiency. Turkey is also aiming to improve the investment environment with planed reforms as significant investments are needed in the energy sector. In order to keep up with the increasing demand, Turkey needs to invest more in electricity, natural gas, and, renewable energy. Turkey has an installed power generation capacity of 69,681 MW with a projected capacity of 100 GW by 2023. Although the market is still highly regulated, Turkey has made significant attempts to liberalize the sector in recent years, primarily in the electricity and natural gas areas. Turkey is steadily decreasing the share of the state in power generation. In 2014, 6 thermoelectric plants and 10 hydroelectric plants were privatized mainly attracting local investors. At the end of 2014, the share of energy produced by the private sector reached 72%, up from 57% in 2003.
Growth in the Europe and Central Asia (ECA) region is expected to be around 3.0% in 2015 and 3.8% in 2016–17, but with substantial divergence between countries. While recession in Russia detains growth in Commonwealth of Independent States (CIS), moderate upturn in the Euro area could hoist growth in Central and Eastern Europe as well as Turkey. However, political tensions between Russia and Ukraine, the possibility of stagnation in Europe, and declines in commodity price are major risks for the region. As of February 2015, the current account deficit for Turkey has narrowed to $45.84 billion, mainly due to a decrease in the foreign trade deficit, lira depreciation, and compressed oil prices. Inflation has slightly increased to 7.44% as a result of high food prices, which is well above the Turkish Central Bank's target of 5%. Despite weak capital inflows into the ECA region, gross capital flows to Turkey remained significant, partly because global investors have redirected funds from Russia. Although fixed investment in Turkey has been weak for some time, in the view of improving prospects for consumer demand, lower interest rates and production costs, gross fixed capital formation is projected to increase moderately over the forecast period of 2015-16. Falling oil prices could have significant effect on both, exports and imports in Turkey. There could be a negative influence on exports, since lower oil prices tend to withhold growth in Turkey's traditional trading partners, such as Russia and countries in the Middle East. On the other hand, import expenses will be considerably lower due to the low-cost of energy resources.
The public debt-to-GDP ratio returned to its descending trend in 2014 to an estimated 34.3%, after pausing in 2013 due to exchange rate effects. The debt ratio will continue to decline in 2015 and 2016. Impending growth in Turkey could be bolstered by stronger private consumption, which is likely to recover from its recent sluggishness. Purchasing power is improved by lower energy prices, stabilizing food prices and wages, which are increasing at an annual rate of close to 10%. The per capita income for 2014 was $10,518. The easing of monetary policy in Turkey should also provide stimulus to consumption. Output growth is expected to increase to 3.0% in 2015 and 3.5% in 2016, based primarily on the oil price stimulus.
Growth in 2015 could be negatively affected by the recent sell-off of Turkish assets and currency as seen with the departure of Citigroup from Akbank and the Lira's record low against the dollar. An improving U.S. economy will increase the likelihood of a raise in interest rates by the Federal Reserve, which will in turn reduce the appetite for investments in emerging markets. Moreover, news reports have called in to question the independence of Turkey's financial institutions with the seizure of Bank Asya and the central bank interest rate controversy. Deterioration of the geo-political situation in the Middle East, Russia and Ukraine are also other risks to growth in Turkey.
The main regulatory authority in Turkey is the Ministry of Energy and Natural Resources (MENR). MENR is responsible from determining the short and long-term demand for energy and its resources as well as policy making for supply of these resources. MENR also determines the policies for exploration of natural resources, operation, development of power generation facilities in addition to granting licenses. Creating pricing policies for energy is also among the responsibilities of MENR. MENR is organized in to sub-units. These are namely, the General Directorate of Energy, Petroleum, Mining, Renewable Energy Affairs, the Department of Transit Petroleum Pipelines and the Department of Nuclear Energy Project Implementation. The General Directorate of Energy Affairs is the main policy-making body within MENR and is responsible from executing energy policy. In addition, it conducts studies on energy policy, energy markets, efficiency, and the environment. MENR also has several other related institutions, such as the General Directorate of Electricity Generation Company (EUAS), the General Directorate of Electricity Transmission Company (TEIAS), the Electricity Trade and Contracting Corporation (TETAS), the Turkish Petroleum Corporation (TPAO), the Directorate of Petroleum Pipeline Corporation (BOTAS), the Turkish Coal Enterprises (TKI) in addition to several others. The Turkish Petroleum Corporation (TPAO) is the state owned exploration and production company. On the distribution side, the Turkish Electricity Distribution Company (TEDAS) is divided in to 21 regions. Each subsidiary has distribution operating rights for 30 years and maintains a monopoly for its respective region as an operator and holds a retail sales license.
By the end of 2014, oil production in Turkey was 17.1 million barrels, 12.1 million barrels of this was produced by TPAO. In 2014, the consumption was about 157.17 million barrels. 60% of the total oil demand is imported as crude oil and then refined in Turkey. TUPRAS is the market leader in the refinery sector with four refineries in İzmir, İzmit, Kırıkkale, and Batman. As of 2012, the capacity utilization ratio for these refineries was 79%.
In order to ensure a steady supply of natural gas, Turkey is investing in gas storage facilities. Kuzey Marmara and Degirmenkoy are facilities owned by TPAO with a total capacity of 2.6 bcm. Tuzgolu is a planned underground storage facility with a capacity of 1 bcm and is expected to be operational by 2019. As of 2013, the storage capacity of Turkey was 5 bcm. It should be noted that under Turkish law, gas importers are required to store 10% of gas imports.
Natural gas production in Turkey remains low compared to consumption; almost 99% of natural gas consumption is imported. In 2014, Turkey produced about 502 mcm of natural gas, where 49,173 mcm was imported. 55% of the overall natural gas imports came from Russia, followed by Iran with 18% and Azerbaijan with 12%. According to the Turkish Energy Minister Taner Yildiz, Turkey's natural gas consumption is expected to reach 50.8 bcm in 2015. Furthermore, natural gas demand is expected to reach to 70 bcm by 2030. The main driver of the increase is from the power generation sector followed by households and industry. Turkey has signed purchase agreements to ensure the supply for the increasing natural gas consumption: 20 bcm per year from Russia, 9.5 bcm from Iran, 12.75 bcm from Azerbaijan in addition to 4.4 bcm of LNG per year from Algeria and 1.4 bcm from Nigeria. Turkey is attempting to decrease its dependence on natural gas by prioritizing locally sourced coal, hydroelectric, nuclear power generation. Turkey aims to decrease the share of natural gas in the power generation sector to 30% by 2030.
In 2014, the demand for electricity increased by 4.1% compared to 2013. According to MENR, a significant portion of power was generated by natural gas powered electric plants (48%). The second biggest source was coal (29%), followed by hydroelectric plants (16%) and wind tribunes (3%). EUAS, the state energy generation company was responsible for 28% of the overall energy production in 2014. As of February 28, 2015, the installed electricity generation capacity in Turkey has increased to 69,681 MW. Hydroelectric plants were the major installed capacity source with 34.1%, followed by 30.7% of natural gas/LNG, and 21% coal powered plants. Multi-fuel power plants accounted for 6.9% and wind 5.3%. Turkey is planning to increase installed capacity to 100 GW as the demand for electricity is expected to grow around 6% a year until 2020. Turkey will become a permanent member of the European Network of Transmission System Operators for Electricity (ENTSO-E) in April 2015, which will enable electricity trading with Europe's electric system.
As Turkey's dependence to imported natural gas and oil increases due to steep rise in energy demand, domestically produced lignite still plays an important role in the Turkish energy sector. In 2014, the state owned coal reserve and production in Turkey was 12,504 and 25,925 tons respectively. At the end of 2014, 21% of the overall power generation capacity in Turkey was from coal-powered plants. In May 2014, a private coal mine collapsed in Soma which hundreds of miners were killed and injured. As a result, new legislation has been passed which mandates a permanent supervision system and limits the transfer of mining licenses.
Although the share of the renewable energy is still relatively low in the overall Turkish energy market, it has been on an increase in the last decade as a result of Turkey's strategy for finding alternative energy resources. Turkey passed new laws incentivizing the investments in renewable energy, such as providing tax exemptions, higher feed-in tariff, and land usage fee incentives. In 2014, Turkey's wind power capacity was 3,763 MW. Turkey intends to increase the electricity generation capacity powered by renewable resources to 61,000 MW by 2023, with the majority of investments being planned in wind and hydroelectric projects.
Turkey has four crude oil pipelines. Two of these, Ceyhan-Kırıkkale and Batman-Dortyol are domestic lines with relatively small capacities; both pipelines are owned and operated by BOTAS. Ceyhan-Kırıkkale line which was built to provide oil to Kırıkkale oil refinery is 448 km long and has a capacity of 36 million barrels a year. Batman-Dortyol line is 511 km long and was built to transport locally produced oil from Batman to Dortyol in order to be transported via sea to refineries in İzmit, İzmir, and Kırıkkale. Batman-Dortyol has a capacity of 25 million barrels per year. Kirkuk-Ceyhan line was built to bring Iraqi petroleum to the Mediterranean ports (Iskenderun). It serves both domestic and international markets. Kirkuk-Ceyhan line is 1,876 km long (1,297 km in Turkey) and has a capacity of transporting 553 million barrels a year, making it Turkey's largest pipeline. Although frequent disruptions of supply occur, in 2012, Turkey and Iraq entered into an agreement to continue oil imports for 15 more years. The Baku-Tbilisi-Ceyhan line brings crude oil from Azerbaijani and Kazakh to Mediterranean (Ceyhan port), partially relieving the straits from the heavy traffic from oil tankers coming from the black sea. The Baku-Tbilisi-Ceyhan line is partly owned and operated by BOTAS. Similar to Iraqi oil, the Azerbaijani oil serves both the domestic and international markets.
Turkey has four international gas pipelines. West Line and Blue Stream transport Russian natural gas, together supplying 8 bcm a year. The Blue Stream became operational in 2003. The line starts in Samsun on the Black Sea coast and connects with the Malkoclar-Ankara distribution center. The Eastern Anatolia pipeline carries 9.5 bcm of natural gas from Iran. The line is 1,491 km long, starting in Dogubeyazit and branching out to Ankara and Konya via Kayseri. The Baku-Tbilisi-Erzurum pipeline, which became operational in 2007, transports Azerbaijani natural gas to Turkey through Georgia. The yearly purchase agreement on this line is 6.6 bcm. The Trans-Anatolian Natural Gas Pipeline (TANAP) is projected to be operational by 2018, carrying 16 bcm of Azerbaijani gas per year of which 6 bcm will be supplied to Turkey. The purchase agreement between the two countries will be valid for 15 years. In addition, a new potential pipeline project is in the works called "Turkish Stream," which is an alternative to the cancelled South Stream. South Stream was supposed to connect to Bulgaria supplying Europe with natural gas, but the project was cancelled due to a potential breach of EU anti-trust law. The Turkish Stream would be supplying natural gas to Turkey as well as transporting it to Europe via Greece, with a potential offshoot to Bulgaria.
Turkey is investing in nuclear energy with two nuclear energy projects currently being developed, Akkuyu and Sinop. The production capacities will be 4,800 MW and 4,480 MW respectively. Akkuyu nuclear plant is being built in collaboration with Russia and is expected to be Turkey's first nuclear plant with projected completion by 2020. Sinop nuclear energy plant will be built in collaboration with Japan and will consist of four units. The first unit of the plant is expected to be operational by 2023. Energy generated by nuclear plants is expected to reach 5% in 2020.
Natural Gas Law
Although Turkey needs new investments in the natural gas sector, investors face a number of obstacles due to the regulatory environment in Turkey. One such obstacle is the bar of private companies importing natural gas from countries which BOTAS has a contract with. Natural Gas Market Law 4646 will remove this restriction. Other changes in the Draft Natural Gas Law include the establishment of a natural gas market and the separation of BOTAS into three entities for transmission, storage and trade. In addition, BOTAS will not be permitted to sign any additional natural gas purchase agreements until it's market share is reduced down to 20%.
A new mining law was passed on January 2015 as a response to a serious mining accident that occurred in the previous year. According to the new law, a permanent supervision system will be in place in addition to changes in transfer of mining licenses. The new law mandates that mine owners cannot make royalty contracts with third parties except for state owned organizations.
Deal Highlights 2014
Turkish Petroleum Corporation bought a 49% share in MOL's production field in Baituganskoye, Russia
Turcas Petrol sold its entire equity stake in Turkey's biggest refinery project to Rafineri Holding A.S., which is fully owned by SOCAR Turkey Enerji A.S.
Demir Madencilik won Çatalağzı coal mine tender with a $351 million bid.
World Bank approved $400 million loan to finance the Tuz Golu gas storage facility project.
Halliburton is set to explore for natural gas reserves in the Northwestern Thrace region of Turkey with unconventional drilling.
ExxonMobil is in talks with Turkish Petroleum Corporation to explore for Turkish shale gas in southeast and northwest regions.
Shell is to drill in Black Sea in 2015
Gazprom bought out Eni, EDF, and Wintershall for the remaining interest in the canceled South Stream pipeline project.
Smart Grid & Meter development – The national grid needs to be modernized by upgrading the electric power system and intergrading it with new information and communication technologies.
Foreign Direct Investment in Power Generation – With growing demand, there is a need for more investment in generation.
Lack of Energy Market Integrity and Transparency (REMIT) – Turkey has not implemented REMIT type rules such as those in the EU which requires participants to report wholesale energy market contracts in order to reduce the risk of market manipulation.
Electric power transmission and distribution losses – Losses are due to an antiquated, inefficient, and unreliable grid and theft of service.
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