Sunday, December 11, 2016

Turkey’s evolving energy policy - IN CYPRUS / CYPRUS WEEKLY

December 11, 2016
Charles Ellinas

Since the rift with Russia last year and the subsequent rapprochement between Turkey, Russia and Israel, Turkey’s energy policy has been evolving in response to the shifting regional geopolitics, but also its own changing energy priorities and needs.

In this article, I review the latest developments in Turkey’s energy policy and markets and how these affect the region and Cyprus.

Turkey’s energy consumption

Turkey’s total primary energy demand in 2015 was 125 million tonnes of oil equivalent (Mtoe). This was met by natural gas (35%), coal (28.5%), oil (27%), hydro (7%) and renewables (2.5%). Only 25% of this was met by domestic resources.

Natural gas accounted for 37.8% of total electricity generation in 2015, coal 28.4%, hydro 25.8%, renewables 6.3% and oil 1.6%.

Turkey imports 99% of the natural gas it consumes. Of the 48.4 billion cubic metres (bcm) imported in 2015, 55.3% was from Russia, 16.2% from Iran, 12.7% from Azerbaijan, 8.1% from Algeria and 2.6% from Nigeria.

This high dependence on natural gas has made the country vulnerable to external factors and changes in regional geopolitics, as was evidenced by the troubles in Syria’s and Turkey’s rifts with Israel and Russia.

As a result of this vulnerability, Turkey reviewed and redirected its energy strategy to limit such dependence and increase its long-term energy security to ensure sustainable economic growth.

Turkey’s energy policy

Turkey’s Energy Under-Secretary, Fatih Donmez, confirmed recently that the country has put in place a new energy strategy, focusing on energy source and route diversification, with an emphasis on reducing energy imports and increasing the use of domestic resources.

It is aiming to achieve this by reducing heavy dependence on piped gas and switching to renewables, liquefied natural gas (LNG), coal and nuclear, and by increasing energy efficiency.

Until last year, Turkey’s energy intensity, calculated as units of energy per unit of GDP, was increasing, and therefore bucking the trend in other G20 countries. However, the target now is to reduce this by 20% by 2023, compared with 2011, through increased energy efficiency. Even though this may be too ambitious, it is nevertheless another important factor shaping Turkey’s new energy strategy.

Turkey’s strategy to reduce energy imports appears to be succeeding. Gas imports in 2016 are now expected to total 45 bcm, well down on 2015, when it was 48.4 bcm, and which, in turn, was lower than gas imports in 2014.

Pipeline projects such as the Trans-Anatolian (TANAP) pipeline from Azerbaijan and TurkStream from Russia are adding to Turkey’s prominent position and importance in the wider region as a gas transit route and potentially as a hub.

With the need for future gas import growth under question and the security of low-cost Russian gas supplies assured, the need for additional gas import sources is receding.

The world is going through an energy transformation which is also affecting Turkey. Electricity markets are changing and traditional methods are no longer viable. 

Liberalisation of Turkey’s electricity markets has progressed, but it still has further to go, including free electricity markets, deregulation, predictability and transparency.

Liberalisation of the country’s gas markets lags further behind, with only just over 20% of gas imports purchased by private companies. BOTAS, the state-owned pipeline and trading company, dominates the market in Turkey, as well as operating the gas network.

Turkey as a hub
One of Turkey’s longer-term energy strategy goals is to become a regional gas hub. The country’s geographic location, with abundant oil and gas resources to its east, north and south, and major markets in need of these resources to its west, make it ideally suited to fulfil such a role.

Existing gas pipelines include the Baku-Tbilisi-Erzurum Natural Gas Pipeline (BTE); the Turkey-Greece Interconnector (ITG); Blue Stream, which runs across the Black Sea from Russia; the west route of Russian gas through Ukraine; and the Iran-Turkey pipeline. Planned pipelines include the Southern Gas Corridor (SGC) comprising TANAP in Turkey and the Transadriatic Pipeline (TAP) through Greece to Italy; TurkStream and a Kurdistan to Turkey pipeline. Turkey also has LNG import facilities but lacks adequate storage capacity. It is in the process of expanding both.

Turkey’s success to become a hub could also attract East Med gas, should this prove to be viable and should regional geopolitics allow it. The region has been shown to hold significant quantities of gas and, without credible and commercially viable export routes, it risks remaining stranded.

A key requirement for a gas hub is a transparent and cost-based pricing mechanism. But without market liberalisation, regulatory changes and transparency, the realisation of this aspiration will remain a challenge.

However, Turkey is locked into long-term gas supply contracts for the next 10 years, which, combined with regional instability, may slow down the process of setting up a gas hub. As the International Energy Agency (IEA) says, for Turkey to become a regional energy hub, the government will need to diversify its long-term supply contracts and routes to increase competitive supplies in the market.

Nevertheless, in a highly-volatile energy region, Turkey has an important role to play for securing energy trade and transit to Europe.

Turkey’s future gas needs
Turkey’s annual average GDP growth rate over the past three years has been over 4%, but in 2016 it has slowed down closer to 3%. Forecasts do not expect this to recover back to 4% until 2020. This, coupled with Turkey’s energy policy to reduce dependence on gas, has led to reduction in gas demand, now down to 45 bcm/year.

The forecast is that gas demand will remain largely stagnant to the end of this decade, as coal, hydro and renewables gain a higher share of the power market. Growth will then resume, with gas demand increasing to about 55 bcm/y by 2025, tempered by nuclear power coming into production.

Existing pipelines and LNG import facilities, TANAP and TurkStream can provide up to 65 bcm/y by then. Thus, the urgency for additional gas imports may no longer be there, unless Turkey’s needs change dramatically after 2020, or unless these are driven by security of supply concerns, or cheaper gas supplies become available.

Impact on East Med gas

It is clear from the above that Turkey’s changing energy strategy and priorities are having a significant effect on the country’s gas demand. And with this, the need for East Med gas may not be the priority it was a year ago.

In the aftermath of the rift with Russia in November 2015, Turkey turned to other potential sources to ensure the security of its future gas supplies. These included Israeli/East Med gas. Relations with Russia are now mended and TurkStream and TANAP are progressing, bringing more gas to Turkey. Russian gas is particularly cheap, at about $4.5/mmBTU, and even if it goes up as the oil price goes up, it will still be cheaper than East Med gas. Unless Israeli or East Med gas is prepared to compete with Russian gas, it may find it difficult to secure markets in Turkey.

The dynamics of the Turkish energy market are now different than they were in 2015. Security of supplies is less of a concern and, over the next decade, additional gas import needs may be limited.

This poses additional challenges to the already difficult quest of securing export markets for East Med gas outside the limited-capacity regional and domestic markets.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council