Given the country's reliance on energy imports and the recent economic slow-down, Turkey has benefitted from the collapse of oil prices in late 2014. It has boosted energy supplies to support future growth, while seeking to reduce its energy dependence. In addition, a long-running dream to become a global energy hub is starting to become a reality, bolstered by efforts like the EU-Turkey high-level energy dialogue and strategic energy cooperation process, launched in early 2015.
One of Turkey’s top strategic concerns is energy security. Largely deprived of hydrocarbons reserves, Turkey buys some 18.5m tonnes of its oil from overseas – 92% of consumption – and imports 98% of its natural gas, which fires almost half of its power plants. It has coal but most of it is cooler-burning lignite, and so it imports most of the coal needed to generate power. This weighs heavily on Turkey’s balance of payments and leaves it vulnerable to supply disruptions abroad. The country's 12-month rolling external energy shortfall has hovered between 6% and 6.8% of GDP since January 2012, according to the World Bank, and as of 2014 the nation’s energy shortfall amounted to 58% of the trade deficit. Thus, lower oil prices have helped Turkey close its trade deficit, but it has not changed its dependence on foreign energy sources.
Turkey’s annual energy import bill was $56bn in 2013, accounting for the bulk of a current account deficit (CAD) that swelled to $65bn that year. From the end of 2013 through January 2015, Turkey’s CAD fell roughly 30% as a result of lower oil prices. The 2014 energy import bill was approximately $55bn, while the total CAD was $45.84bn for the year. The imbalance has historically been the weakest point of an economy that was among Europe’s fastest growing in the past five years.
Energy import dependency was 74%, including 59% for its electricity generation, according to environmentalists at Greenpeace. Rapid economic expansion has translated into greater demand for energy, rising about 5% annually. Since 1990 energy demand has jumped 270% –the most among any country in the OECD.
The trend is likely to continue. The government expects electricity consumption to more than double by 2023 to about 500bn KWh and therefore needs to lift capacity by 50% to 100,000 MW. The Ministry of Energy and Natural Resources (MENR) has ambitious plans to bring domestic coal-fired and hydroelectric power production to 130bn KWh, raise wind-power capacity to 20,000 MW and lift geothermal capacity to 600 MW. Nuclear power is planned to account for 5% of power production in 2023, the centenary of the republic, after Turkey launches its first nuclear plant, built by Russian and Japanese firms, in 2015.
The government also wants to wean Turkey off natural gas and oil imports, and instead explore Black Sea territorial waters and cooperate with oil- and gas-producing partners in Iran, Iraq, Azerbaijan, Russia and Turkmenistan to explore and develop resources in those countries. In the meantime, it is chasing new suppliers to diversify its sources. Achieving these goals will require between $5bn and $10bn of investment each year in the energy sector, MENR estimates.
Turkey is the world’s 20th-largest consumer of electricity. According to MENR, installed capacity was 69,520 MW in 2014, up 5.3% from 66,000 in 2013, following a jump of 13% over the previous year. Natural gas was the main resource firing electric plants (48%), followed by coal (29%), hydroelectric (16%) and wind (3%), according to MENR. Consumption during 2014 saw a modest gain of 4.1% year-on-year, up from a 2013 increase of just 1.3%. Demand is still expected to hit 450bn KWh by 2023, and in order to fulfil the requisite capacity, investment of some $100bn is required, according to the World Nuclear Association. The minister of energy and natural resources, Taner Yıldız, told local press in April 2015 that the government expected to add 4000 MW to its supply over the course of the year.
To fuel this growing demand, domestic coal sources are attracting renewed interest, as the Anatolian plateau is richer in coal than in any other carbon-based fuel source. The European Association for Coal and Lignite estimates Turkish reserves at 13bn tonnes. Proven reserves are 500m tonnes of hard coal and 9.8bn tonnes of lignite, or brown coal, which has low calorific value, contains more sulphur, produces energy less efficiently and pollutes more heavily than hard coal. According to the US Energy Information Association, approximately 75-90% of Turkish coal is lignite.
Plants using coal accounted for 21% of electricity capacity in 2014, with some 25,925 tonnes of coal mined that year. The push to raise domestic coal production has posed serious risks. In May 2014 in the western town of Soma, a fire in an underground coalmine created conditions that led to the deaths of at least 301 miners. It was Turkey’s worst industrial accident in history. Necdet Pamir, an instructor in energy policy at Bilkent University and former vice-president of TP, the state oil company, said mining engineers had warned about the dangers, particularly high levels of methane, at Soma but there is a rush to extract local resources. “The truth is that coal is an important resource to reduce our country’s energy dependence and to secure employment. But it has to be produced while meeting the highest standards of workplace safety,” he said.
Turkey is ranked 14th in world coal consumption and possesses the 17th-largest coal reserves, according to MENR. Large discoveries continue: the ministry recently found 1.8bn tonnes of lignite reserves near Konya in central Turkey. At present, just 37% of Turkish coal sources are tapped, but the government wants to boost capacity to 30,000 MW, or 30% of the overall mix, in 2023 from about 20,000 MW in 2014. About half of all coal is imported, costing Turkey $4.5bn a year, according to Pamir.
“The recent focus on coal production in Turkey is not necessarily a negative development. Given new technologies available, coal is a much cleaner source of energy than it used to be,” Mete Maltepe, GE Energy Turkey’s general manager, told OBG. “That said, the government and the market need to make sure that they carefully balance the benefits with the costs, with specific emphasis on managing the environmental impact of higher coal usage.”
Lignite deposits are scattered across Turkey, with the Afşin-Elbistan field accounting for 40% or more of the national total. China is interested in a $12bn deal to develop the field after Abu Dhabi National Energy Company effectively pulled out of the project in 2013, Reuters reported in May 2014. The project includes the construction of an 8000-MW coal-fired electricity plant.
“If lignite and renewable forms of energy are developed sufficiently over the next 5-10 years, Turkey could meet around 50% of its energy needs on its own, compared to 30% currently. If developed properly, lignite could account for 30-35%,” said Adil Tekin, Turkey’s country president for French energy and transport giant Alstom.
At present, power imports help cover a shortfall. According to Istanbul-based brokerage Oyak Securities, Turkey is a net importer of electricity, buying about 2% of its power from overseas suppliers. In 2013 net imports were 4.6bn KWh at a cost of $335m, Turkish daily Milliyet reported in May 2014. More than half – 2.5bn KWh – came from Bulgaria. Greece and Iran provided a further 1.2bn and 845m, respectively.
Imports are expected to rise, after Yıldız said in April 2014 that Turkey might purchase power from Iran, Georgia and Bulgaria to offset the impact of drought-like conditions that have halved capacity at national reservoirs. Greece’s state-run Public Power Corporation set up a company in Istanbul to begin selling power to the Turkish market and is in talks with authorities over licensing, Milliyet newspaper reported.
Some of the $900m GE is investing in Turkey includes power plants. So far, GE has supplied turbines for a 35-MW wind farm and gas turbines for an 840-MW power plant that will be run by its Turkish partner, Gama Energy. GE and Gama are also building Istanbul-based Akenerji’s $930m, combined-cycle, natural-gas power plant project in Erzin in southern Hatay Province. The plant has 904 MW of installed capacity and can generate an annual 6.7bn KWh on average, meeting 2.6% of Turkey’s total energy needs. The plant began operations in the third quarter of 2014.
Turkey could also boost supply more sustainably. Greenpeace says rehabilitating ageing infrastructure would save 16% of electricity wasted in transmission. Environmentalists also point to sunlight, wind, biomass and rivers as sources of relief. Green energy is only now being tapped, accounting for just 25% of the energy mix (nearly all from hydroelectricity), according to the state Electricity Generation Company.
Published at the end of 2014, the National Renewable Energy Action Plan outlines the country’s approach for developing renewable sources of energy. By 2023 Turkey wants to exploit all viable hydroelectric resources, up from the current 50%. The country has 1% of the world’s hydropower potential, and 16% of Europe’s. That could produce about 128bn KWh, according to state estimates. But hydropower rouses mixed feelings. Although it generates almost no carbon emissions, the damming of rivers harms biodiversity and local populations’ ways of life. The government appears to have taken a step back from its previous unbridled support for smaller hydropower projects, especially run-of-river dams. In late 2013 the Environment and Urban Planning Ministry said it would no longer back hydro projects with capacity below 10 MW. Environmentalists fear this may prompt the government to resume mega-dam projects, like the Ilısu Dam in south-eastern Turkey, which threatens to submerge the ancient city of Hasankeyf. A court in 2013 blocked its construction; however, activists report that work quietly continues, such as resettling residents, despite the injunction.
Turkey ranks 16th in wind-energy capacity worldwide, with installed capacity of 3.7 GW and another 11 GW in the pipeline. Its wind potential rivals that of Spain, according to MENR. “Wind energy is becoming increasingly important in Turkey. In the past, connection capacity limited the amount of wind licences that could be awarded, but now improvements in transmission and grid technology should result in an increase in the number of available licences,” said Serdar Nişli, chief executive at Aksa Energy, one of Turkey’s biggest power producers. “Improved wind-capturing technology has also resulted in higher capacity utilisation rates, making the economics of certain sites more viable.”
The Energy Market Regulatory Authority (EPDK) received over 1500 applications for 600-MW wind licences that were being tendered in 2014, according to local media. “Growth potential in the Turkish wind sector is higher than in Europe, as there are better wind sites available. That said, many of the best sites have already been developed, and lower-wind sites are harder to make economically viable. Turkey needs to concentrate on investing in developing better wind-capture technology,” said Maltepe. Wind turbines designed to capture more energy are needed for such lesser-rated sites. Turkey has a manufacturing base for blades and towers, but no turbine production; therefore operators must import key components. Better education is needed as some developers are using technology that is incompatible with their licensed site, Nişli told OBG.
New Costs & Delays
Changes to regulations governing forestry land could steeply raise rental costs for wind-farm operators on state-owned properties and ban certain regions outright that the Forestry Ministry wants to protect. Some €1.5bn of wind-energy projects are on hold, according to Mustafa Serdar Ataseven, chairman of the Turkish Wind Energy Association.
“Projects approved in the last quarter of 2011 were first hampered by problems with radar. After that was resolved, permission was suddenly required from the National Intelligence Organisation, which was also resolved, but then nationalisation from the prime minister’s office has slowed because of a backlog there. Trouble stemming from permission [to build] in forestland has been under way for a year,” Ataseven told trade magazine GreenPower in March 2014. Industry insiders say another 800 MW of wind power could become available if the forestry dispute is resolved.
Turkey’s raw solar potential rivals that of Europe’s sunniest nations, including Spain and Italy. It ranks 27th in the world for solar capacity. The aim is to lift capacity to 3000 MW by 2023, according to the Renewable Energy Law, ratified in 2011. Currently, expensive large-scale projects are mainly in the hands of state bodies, like the solar photovoltaic array covering 10,000 sq metres near the city of Izmir on the Aegean coast. It was expected to come online in mid-2014 and produce 493 KW to power three municipal facilities, Radikal newspaper reported, but at the time of writing had yet to begin production.
The EPDK held a second round of bidding for 2 GW worth of solar licences in January 2015, and as OBG went to press, the winners were awaiting confirmation of their award for the 5-MW and 8-MW projects in the Erzurum and Elazığ regions, respectively. There will be additional tenders for 302 MW of new solar photovoltaic capacity at the end of April 2015, according to the Turkish Electricity Transmission Company (TEİAŞ).
Additional market developments include the entrance of Germany’s energy firm Conergy, and a joint venture involving the UK's Belectric, which tendered successfully to TEİAŞ for two large-scale, ground-mounted solar energy projects. The two projects have a combined alternating current connection capacity of 32.4 MW, 14% of the tendered capacity.
Despite the larger-scale efforts, small individual instalments may promise the greatest potential in the solar segment. As the market matures, a shift from large-scale, government projects to smaller, individual-driven utilisation has been occurring. “Solar has considerable potential in Turkey, especially on the unlicensed side," Arda Beştaş, deputy general manager of marketing and sales at Enerya, told OBG, "As a licence is not necessary for a project of up to 1 MW, there are unlimited projects available within the 1-MW scope.”
Still, regulations of unlicensed panels could be loosened further. “The 1-MW ceiling for unlicensed solar panels is likely to be increased in the near future and could possibly reach 5 MW. Such a development would lead to significant growth of smaller-scale solar energy in Turkey, such as rooftop panels,” Evren Evcit, the CEO of Anel Enerji, told OBG.
Heat From Within
Turkey ranks seventh in the world and first in Europe for geothermal resources, the energy derived from the heat in the earth’s interior, according to the state Mineral Research and Exploration Agency. It has installed capacity of 250 MW, the world’s 12th biggest, and direct use potential is estimated at 31.5 GW. Recent ventures into geothermal include Sun Group of Turkey and Japanese-owned Italian turbine manufacturer Turboden agreeing in January 2014 to develop two geothermal plants in Çanakkale and Manisa. The deal covers planning, investment and technology transfer for two, 100-MW sites costing a total of €300m. Yeni Başak Enerji, a Sun Group company, has three geothermal drilling licences.
Many foreign investors remain on the sidelines amid questions about local partners’ strategic planning. “While Turkey has a very dynamic market for renewables, it is not necessarily the most compatible for foreign institutional investors. Many Turkish companies involved in the sector do not have long-term plans and cannot guarantee steady returns. That said, the upside potential for investors remains considerably higher than in many other markets, and high feed-in tariffs for wind mean that large amounts of money can be made in the area,” David DeLaire, a managing partner at DD Energy Services, told OBG. According to Nişli, renewables in Turkey should be profitable for the next decade or so given the current feed-in tariff regime, even if natural gas prices remain low. “That said, renewable sources will never be able to compete with gas or coal in terms of providing a dependable base load, so there will always also be demand for the latter,” he said.
Indeed, Turkey’s love affair with natural gas continues, even as the government seeks to reduce gas-fired power generation to below 30%. It is the only major European market that has shown strong growth in gas demand since 2009, with consumption reaching approximately 52bn cu metres in 2014 – putting it on par with France, according to a February 2014 report from the Oxford Institute for Energy Studies. Turkey is the world’s 20th-largest consumer of gas, and with domestic production meeting just 2% of requirements, Turkey is a major importer. It pipes in half of its gas from Russia, or about 20bn cu metres, on two links, according to natural gas purchase agreements posted on state pipeline operator Botaş’ website. Iran sells 10bn cu metres and Azerbaijan sends 6.6bn cu metres annually. As for liquefied natural gas (LNG), Algeria and Nigeria have contracts to ship 4.4bn cu metres and 1.2bn cu metres, respectively.
Political instability in 2014 and 2015 between Russia and Ukraine has yet to impact flows to Turkey. Since the last Ukraine-Russia gas dispute in 2009, Turkey has done virtually nothing to mitigate potential stoppages from Russia. At the time, all it did was temporarily increase supply volumes through Blue Stream and buy a few spot LNG cargoes from Algeria and Oman. Meanwhile, countries in Europe have built new routes and increased LNG terminal construction and cargoes. Turkey, by contrast, still only operates the same two LNG terminals and has not increased storage capacity above 3bn cu metres. Turkey has expressed support for the controversial Gazprom-led South Stream pipeline, including granting access for the link if Moscow wants to use Turkish territory. The South Stream pipeline would transport gas to Europe beneath the Black Sea. The $32bn South Stream is a rival to the Trans-Anatolian Natural Gas Pipeline Project (TANAP), though there are few signs of it moving off the drawing board, and there were discussions that it could be rerouted to Turkey and linked to TANAP as of December 2014.
Turkey takes about 90% of Iran’s gas exports, according to the US Energy Information Administration. Although Western sanctions against Iran for its nuclear programme do not apply to these gas exports, conducting business with Tehran still carries political risk for Turkey.
A 1996 take-or-pay contract with Iran expires in 2015, and the neighbours are negotiating how much and at what price Turkey will buy. In the meantime, Turkey has sought international mediation to force Iran to lower its prices under the existing deal. While Europe pays an average of $400 per 1000 cu metres of gas, Turkey pays Iran $492, Al Jazeera Turk reported in February 2014. Iran, which holds the world’s largest natural-gas reserves, may slash its prices if Turkey agrees to double the imports, according to Turkish media. That would, however, exceed consumption, so Turkey would likely resell the fuel, probably to Europe, if sanctions allow.
This, in turn, could spark a price war between Azeri and Iranian gas, and threaten the viability of TANAP, which aims to ship Azeri gas to Europe and is a major plank of Turkey’s campaign to become a transit hub, Olgu Okumuş, a lecturer in energy diplomacy at Sciences Po in Paris and the director of strategy development at LEO Advisors, wrote in Al Monitor.
Haldun Yavaş, secretary-general of the Istanbul-based think tank Caspian Strategy Institute, shrugged off the idea that greater Iranian supplies to Europe via Turkey could harm TANAP’s prospects. “TANAP is a commercially and economically well-studied project and its feasibility is proven. The project is not in any kind of competition with other potential suppliers to join the market,” he told OBG. “There may be other projects envisioned, but TANAP is the only one on the way to being realised with agreements and finances committed.”
Iranian gas is not the only fuel on offer. US exploration company Noble Energy made a big splash in the global offshore gas business in 2010 when it announced the discovery of a potential 540bn cu metres of gas from its Leviathan-1 well 130 km off the coast of Israel. The discovery has the potential to turn Israel into a regional energy power. Only 35 km west of Leviathan is the Aphrodite gas field in southern Cypriot waters, where Noble is again the operator. An exploratory well could contain 141bn cu metres of natural gas, it estimates. This string of discoveries has rattled Turkey, which, in turn, rattled its sabre at its arch foe Cyprus in response. Most recently, in February 2014, a Turkish naval vessel harried a Norwegian seismic ship operating in Cypriot waters. With such large reserves a stone’s throw from the Turkish maritime border, it was a given that Turkey would go looking for reserves of its own.
If Turkey can resolve its political differences with both Cyprus and Israel, it could offer both countries the most stable and viable export route for their gas. Turkey is itself a hungry customer. But strained ties over Northern Cyprus, where Turkey has kept 30,000 troops since 1974, and frosty diplomatic links with Israel since a diplomatic spat in 2010 are major obstacles to the monetisation of Eastern Mediterranean gas.
A New Friend
Iraqi Kurdish oil is already transiting Turkey to world markets, despite a dispute with the central government in Baghdad, which argues such trade amounts to oil smuggling. In May 2014 more than 1m barrels of piped oil from fields controlled by the Kurdistan Regional Government (KRG) were loaded for the first time onto tankers at Turkey’s Ceyhan port on the Mediterranean. Turkey had stored the crude for months at Ceyhan, but reversed itself on a pledge to await an agreement between Baghdad and Irbil.
An infuriated Baghdad immediately sought an international injunction against Turkey to stop the flow of Kurdish oil, warning that Ankara was pushing Northern Iraq towards greater independence and undermining Iraqi territorial unity. However, Ankara has maintained its relationship with KRG authorities and as of early 2015, some 550,000 barrels of oil a day were flowing into Ceyhan from the Kurdish region and Kirkuk. Some in Turkey warn that Ankara is not only testing ties with an important neighbour; stoking greater Kurdish autonomy in Iraq could kindle the same aspirations with its far greater population of Kurds, they say. “The plentitude of Northern Iraq’s hydrocarbons and the low costs of developing its fields are indisputable. But political stability is just as important. The central government is supposed to be Turkey’s interlocutor, not the regional administration in the north,” said Pamir.
Iraq supplies 17% of Turkish oil requirements, second only to Iran at 35%. Saudi Arabia covers 13% and Russia supplies 10%. Turkey is the world’s 26th-biggest consumer of oil, and consumption at the pump is rising. As of the end of 2014, oil production in Turkey was 17.1m barrels, 12.1m barrels of which was produced by the Turkish Petroleum Corporation. Domestic consumption was about 157.17m barrels. Approximately 60% of the total oil demand is imported as crude oil and then refined in Turkey. Foreign investment in the oil sector includes the planned $5.5bn Star Refinery, to be built on Turkey’s Aegean coast by Socar, Azerbaijan’s state oil company. Yıldız has said the plant will reduce Turkey’s current-account deficit by $2.5bn.
A willingness to undertake the delicate balancing act with Iraq and the KRG shows how resolute Turkey is in diversifying supplies as demand continues to rise relentlessly. Significant investment from the private sector and boosting renewables in its power-generation mix can help the government meet ever-rising demand for power. Procuring new sources of oil and gas, including from its own territory, while expanding its burgeoning role as an energy transit hub, remain central to its energy strategy. Whether it is Turkey’s own rapidly growing market or its ever-greater function in facilitating global energy trade, long-running aspirations to become an energy corridor are now within its grasp.
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