Long viewed as a critical transit state on one of the world’s most active energy corridors, Turkey is now searching for hydrocarbons at home and abroad. Per capita energy consumption is still about half that of Europe, but increased wealth means that Turkey is one of the world’s leading growth markets. Demand for energy is rising 6% each year, second only to China and far outstripping the EU’s annual increase of 1.6%. The International Energy Agency has projected energy use in Turkey will double over the next decade, with an even faster rise in demand for electricity.

Imports will continue to provide the majority of energy supplies, but Turkey is expanding exploration both at home and abroad. However, regional instability – from the civil war in Syria to international sanctions on Iran to growing tensions with Cyprus – has made the quest to develop new energy sources more difficult. Navigating this complex geological and geopolitical landscape will require both exceptional engineering as well as deft diplomacy.

Domestic Exploration

To reduce its reliance on imported fuel, which accounts for more than 90% of consumption, Turkey is stepping up exploration and drilling efforts, both on- and offshore. In fact, with 34 rigs actively drilling for oil or gas, Turkey recently supplanted Norway as the leader among European states looking for oil. In early 2013, the Turkish Petroleum Corporation (TPAO) acquired the country’s first seismic-survey vessel from Norway, the $130m Barbaros Hayrettin Pasha, which Prime Minister Recep Tayyip Erdoğan said would soon begin exploring off of Turkey’s Black Sea and Mediterranean coasts.

To date, finds have been limited. Turkey has proven oil reserves of just 270m barrels and about 6.17bn cu metres of natural gas, according to the US Energy Information Administration (EIA). Oil production, centred in Turkey’s south-eastern region, peaked at 85,000 barrels per day (bpd) in 1991 but has since fallen to less than half that figure. Nevertheless, geologists expect new technologies to transform Turkey’s energy profile.

Shale Gas

Turkey could benefit from the global shift towards shale gas production. Unconventional oil and gas resources such as shale are often located in the same sedimentary basins as conventional oil and gas fields, as appears to be the case in Turkey. Advances in drilling and new hydraulic fracturing techniques have made previously marginal shale gas resources commercially viable. In south-eastern Turkey and the European region of Thrace, international and smaller local players are already looking for the fuel.

As part of a broader exploration agreement with Royal Dutch Shell, Europe’s largest oil company, state oil firm TPAO began exploring for shale gas in the SarıBuğday-1 field near the south-eastern town of Diyarbakır in September 2012. Shell has said it will begin drilling wells in 2013. TransAtlantic Petroleum and Valeura Energy, both Canada-listed companies, are also active, and government officials have been quoted as saying that British and US firms are seeking licences to explore. SarıBuğday is part of the Dadas shale basin, which could hold more than 100bn barrels of oil, according to TPAO, giving it the potential to revolutionise the local energy market.

Offshore activities have been mainly in the Black Sea, where an estimated 7m-10m barrels of oil may lie, according to the EIA. TPAO has expanded exploration, in collaboration with US-based ExxonMobil and Petrobras, the Brazilian energy firm. The government foresees starting commercial production in the Black Sea by 2016. However, the price has been high. TPAO has poured more than $4bn into Black Sea exploration since it began seismic studies in the 1970s; to start extraction may cost another $60bn, the company has said. A 50:50 partnership between Shell and TPAO in early 2013 means that four out of the five global supermajors have tried their luck in the inky waters of the Black Sea. Taner Yıldız, minister of energy and natural resources, announced the Anglo-Dutch company would spend around $200m to extract stubborn hydrocarbons over the next three years.

Regional Rivalries

Attention is turning south to the Mediterranean, where discoveries of massive hydrocarbons deposits by Israel and Cyprus spawned both excitement over the region’s potential and risks over disputed maritime boundaries and drilling rights.

Beginning in 2009, Israel announced discoveries in the Tamar and Levantine deposits, two enormous gas fields in the eastern Mediterranean. Meanwhile, Cyprus claims to hold 198.22bn cu metres of gas in a southern sea area bordering Israel. But Turkey has gone as far as threatening military action to stop it from drilling, worried its Turkish Cypriot allies on the divided island would not profit from the finds. A vessel chartered by TPAO has conducted seismic surveys in waters claimed by the Cypriot government, and in April 2012, TPAO begin drilling near the Turkish Cypriot town of Sınırüstü.

Turkey does not recognise the Greek Cypriot government, and Ankara insists that Turkish Cypriots also have rights over the deposits. The Republic of Cyprus has been in negotiations with the Italian energy giant Eni, which has pipeline interests in Turkey, among other companies, to develop four offshore blocks southeast of the island. However, in late May 2013 Taner Y›ld›z, the Turkish energy minister, said Turkey would be suspending ongoing projects with the Italian firm and not allow Turkish companies to partner with Eni unless it changed its stance on Cyprus. Paolo Scaroni, the CEO of Eni, told the press that while the Turkish government’s response was expected, he was not sure which projects would be cancelled. He said, “I am not sure what Turkey can interrupt. I hope relations with Turkey return to their previous excellent levels.”

Further Afield

Turkish drilling firms are expanding operations further afield. In Iraq, Turkey signed a $350m agreement in November 2012 to dig 40 wells in the southern Basra region and is negotiating with the central government in Baghdad to drill as many as 7000 wells across the country. However, deepening ties with Iraq’s semi-autonomous Kurdistan Regional Government (KRG) have put those deals at risk.

Besides the production activities of Anglo-Turkish Genel Energy in the Kurdistan region, Turkey and the KRG are close to a wide-ranging energy deal including exploration and exporting that could bring Turkey as much as 3m bpd and 10bn cu metres of natural gas a year, KRG and Turkish officials said in late 2012. However, the closer relationship worries Iraqi Prime Minister Nuri Al Maliki, who argues the energy deals undermine the central government’s authority.

TPAO has been exploring in Colombia since 2008 and is active in Kazakhstan and Azerbaijan. In Libya, it discovered oil in seven out of the 11 wells drilled there in 2009. The 2011 Libyan uprising brought those activities to a halt, but Turkey is hopeful the new regime will allow TPAO to resume its work. Libyan Prime Minister Ali Zeidan visited Ankara in February 2013, and Erdoğan said he pledged to compensate Turkish companies, which include construction firms, for the billions of dollars in lost projects.

Looking For Partners

Turkey needs international partners for their technical expertise and to share costs and risk. This has proven difficult, and Turkish officials speculate that regional tension and territorial disputes are to blame for the relative lack of interest. But with the race to exploit regional energy resources gaining pace, Turkey cannot afford to wait for calm.

International oil firms have expressed interest in partnering with TPAO, but none have applied for any licences. Chevron pulled out of a deal to drill for oil and gas in the Black Sea after it complained about favourable government treatment for TPAO. The government insists it treats the state-owned oil company like any other business and has submitted a draft petroleum law to parliament designed to speed the issuance of licences.

Turkey has considerable energy infrastructure in place, with four gas and four oil pipelines crisscrossing the country. Their routes are actually a legacy of Turkey’s role as transit state. Covering local demand will require expanding infrastructure and funding new efforts to develop energy resources at home. Turkish spending on exploration has increased from $42m to more than $600m over the past decade, and that figure is expect to grow even more in the years ahead.