Sunday, April 30, 2017

Turkey getting to grips with energy puzzle - IN CYPRUS / CYPRUS WEEKLY

April 30, 2017
Dr Charles Ellinas

Energy supply security concerns led Turkey to revise its policy by reducing the share of imported gas and increasing the share of domestically- produced energy resources in the energy mix, mainly hydropower, coal, lignite, wind and solar energy, particularly in the power generation sector.
This was also the subject of a recent report by the Oxford Institute of Energy Studies. Given that Turkey is considered to be a potentially important market for East Med gas, I review the findings of the report and assess the impact on our region.

Turkey’s dash for gas
New laws liberalising the gas market introduced in 2001 led to a rapid growth in gas consumption in Turkey. It grew from 15bcm in 2000 to close to 49bcm by 2014/2015. On the one hand, this was a great success, but, on the other, as Turkey’s gas production is negligible, it exposed the country to increasing dependence on external gas suppliers.
These are Russia, Azerbaijan, Iran, Algeria and Nigeria, with Russia being by far the biggest supplier with 27bcm or 55% in 2014.
Together with oil and coal imports, the total cost of energy imports to Turkey rose to about $50billion/year, constituting about 60% of the country’s foreign trade deficit.
By 2014 gas consumption grew to 33% of Turkey’s primary energy mix. Moreover, almost half, 48%, of the country’s electricity was generated from gas. This fast-growing gas demand made Turkey vulnerable. As a result, energy security became a matter of national security. Any factors causing a shortage of gas could expose the country to unacceptable consequences.
This issue became acute after the downing of the Russian fighter plane in November 2015. With 55% of the country’s gas being supplied by Russia, Turkey embarked on a wide-ranging energy policy review and rushed into looking for alternative supplies, including East Med gas.
As it turned out, Russia did not cut gas supplies, but Turkey became acutely aware that its priority must be to ensure that its energy needs, including future needs, are secure and under the country’s control.

Vision 2023
A strategic review of Turkey’s energy market and security of supply, started in 2010, led to the preparation of the Vision 2023 plan. The year 2023 was chosen as it marks the 100th anniversary of the founding of the Republic of Turkey.

Vision 2023 adopted targets to maximise utilisation of the country’s lignite and coal potential, by increasing their share to 30% of Turkey’s electricity mix. This also included increasing renewable sources to 30% and nuclear power to 10%, while reducing the share of natural gas to 30%.

The plan includes completion of the Akkuyu and Sinop nuclear power plants by 2023, to respectively deliver another 4,800MW and 4,480MW power into the Turkish electricity grid.

Turkey is well on the way to achieving these targets. Gas consumption has been falling since its peak in 2014/2015 and this year it is expected to be about 46bcm. The share of gas in power generation has already dropped from 48% in 2014 to 33% in 2016 and it is expected to drop further this year.

In support of Vision 2023, the government introduced policies and incentives to increase energy production from domestic renewable sources, including hydro, and indigenous coal and lignite.

As a result, between 2014 and 2016 the share of renewables in electricity production rose from 4.9% to 7.8% and hydro from 16% to 25%. The share of domestic coal and lignite increased from12% to 16%.

By 2016, 49% of Turkey’s electricity production was from domestic resources and it is expected to exceed 50% in 2017.

The target set by the government is that two thirds of power generation should be produced from domestic resources, which are also cheaper than imported gas. This, inevitably, will reduce dependence on imported natural gas further.

Impact on gas imports
As we have seen, Turkey’s gas imports have been going down since their peak in 2014/2015 and are expected to remain stagnant over the next couple of years, as the government’s policies and targets favouring domestic resources are achieved and the economy recovers.
However, as Turkey’s economy starts picking-up forecasts show that gas demand may increase to 55bcm/yr by 2025, substantially less than the 70bcm/yr predicted only a few years ago. But over the same period LNG imports are expected to exceed 12bcm/yr from about 7bcm/yr now. Turkey’s first FSRU was commissioned in December and another one is on the way, further increasing Turkey’s diversification and security of gas supplies.
With the TurkStream pipeline from Russia back on track and with a second string now agreed to be built, Turkey will have access to plentiful cheap gas. In fact existing pipelines and LNG import facilities, TANAP and TurkStream, as well as additional LNG import capacity, can provide Turkey up to 65bcm/yr gas by 2025. This is well in excess of forecast demand.
And it is cheap gas, costing between$5-$6/mmBTU in 2016. According to market data, the cost of Russian gas to Turkey in March 2017was $5.2/mmBTU, Azerbaijani gas $5.5/mmBTU and Iranian gas $5.8/mmBTU. Coal and domestic energy supplies cost even less.

Impact on East Med gas
Not only is Turkey’s dependence on natural gas being reduced, but it also has access to plentiful, cheap, supplies. With global oil and gas prices not expected to rise significantly for a long time, if not forever, it leaves little room for other gas suppliers to penetrate this market, unless they can offer cheaper gas. This includes Israel.
Even though in total over 36bcm/yr gas contracts will be up for renewal between 2021 to 2025, mostly with Gazprom, Israel needs to compete on price to replace any of this gas – which is a challenge.
This makes it very difficult for East Med gas to secure markets in Turkey. The above prices are prices which Israeli gas cannot match. On top of this, Gazprom made it clear that it is prepared to take action to support this price to stave-off competition.
Turkey’s need for East Med gas may no longer be an urgent priority, despite the political support, and more so given price challenges. Private companies would not take such risk.
Gas from Israel to Turkey and then to Europe faces similar commercial challenges to the EASTMED gas pipeline – gas prices in Europe need to exceed $8/mmBTU to make this commercially viable.

Even though Cyprus, without a solution of the Cyprus problem, objects to a pipeline from Israel to Turkey passing through its EEZ, it may not be able to stop it. However, given the above challenges to such a pipeline, it may not come to that.

The writer is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council