Turkey’s Energy Policy - Too Often a Year too Late

Turkey’s Energy Policy - Too Often a Year too Late

In February 2008, President Abdullah Gul reached out to Moscow, suggesting that Russia should join in the construction of the Samsun-Ceyhan oil pipeline designed to divert oil traffic from the congested Bosphorus Straits. He also supported the extension of the Blue Stream natural gas pipeline linking Russia and Turkey under the Black Sea.

His remarks came a week after Foreign Minister Ali Babacan had said in Moscow that Turkey was ‘open to’ using “Russian” gas at certain stages in the Nabucco project, the plan backed by Turkey, the US and EU to carry gas through Turkey and SE Europe to Austria.

However, both invitations appear to come a year too late. Indeed, far from cooperating in Turkey’s vision of its becoming an energy bridge linking East and West, Russia is working to eliminate Turkey from a number of its future projects.

Where oil is concerned, in May 2007, President Putin threw his weight behind the Burgas-Alexandropolis oil line which connects Bulgaria to the northern Aegean. And since June 2007, Gazprom has been working with ENI of Italy on South Stream, a gas pipeline running under the Black Sea from southern Russia to Bulgaria and South East Europe.

Both these projects now have far more momentum than Nabucco which is suffering from what Eurasia Daily Monitor has termed a ‘cascade of defections’.

• Austria’s OMV - a member of the Nabucco consortium - has finalized agreements with Gazprom to turn Nabucco’s designated terminus and storage center, Baumgarten near Vienna, into a Gazprom-OMV 50%-50% company. OMV now proposes reserving half of the capacity of the Nabucco pipeline itself for Gazprom’s use. OMV is trying to take over MOL, the Hungarian partner in the Nabucco consortium.
• Bulgaria and the Bulgargaz state company - also a member of the Nabucco consortium - have concluded agreements with the Russian government and Gazprom to include Bulgaria in the South Stream project
• Hungary’s Prime Minister, Ferenc Gyurcsany, agreed in February with Russia’s then Deputy Prime Minister (now President elect) Medvedev in Budapest to extend the South Stream pipeline into Hungary. MOL has no part in this venture. The Hungarian government will create a state company in a 50%-50% partnership with Gazprom to build and operate South Stream’s Hungary section. This agreement was confirmed when Gyurcsany visited Moscow.

Turkey’s initial response to the announcement of South Stream was to sign a memorandum of understanding for transiting 20 billion cubic metres per year (bcm/year) of Iranian gas to Europe. The degree of wishful thinking in this was cruelly exposed in January and February this year when Iran turned off supplies due under its existing 9.6 bcm/year contract with Turkey.

With Samsun-Ceyhan marginalized and Nabucco apparently starved of gas, what went wrong with these two cornerstones of Turkey’s vision of becoming a regional energy player?

The short answer appears to have been that Turkey overplayed its hand. In the case of Samsun-Ceyhan, Russia, already irritated with Ahmet Calik, the project’s sponsor, objected to the financial conditions which Turkey sought. In the case of Nabucco, Ankara demanded that BOTAS, the state pipeline company, should take ownership of the gas shipped from Russia. A year later, it has realized that these demands were unrealistic. But Moscow is no longer listening.

A similar laggardly approach is evident throughout the energy arena. In 2007, the Government sought to enact a new law to encourage petroleum exploration. Vetoed by President Sezer in May that year, as of March 2008, it was still not back on the Government’s agenda.

Earlier, it had started on the privatization of Turkey’s electricity distribution and generation assets. Originally due to be launched in 2005, this ambitious process was never likely to be easy. In the event, it only started in December 2006 but was then aborted by Prime Minister Erdogan. It has still to be restarted. The Government has said this should happen in the second half of 2008, but has yet to complete the preconditions. These include updating the Energy Market Strategy Paper which it issued in March 2004 and introducing a new ‘automatic pricing mechanism’ for electricity.

This long delay has contributed to the overall uncertainty in the electricity sector and been one of the reasons why Turkey now faces a severe shortage of power. Electricity demand continues to grow at 7-8% per year, but capacity does not. This year, between 2,000 and 3,000 MW of Turkey’s installed base of 40,800 MW is out of commission because of required rehabilitation, and there are delays in starting the operation of plants already under construction.

A range of private sector companies have announced plans for a total of 25,000 MW of thermal capacity and 4,500 MW of hydro capacity. However, the earliest any significant new investment is likely to ease the situation is late 2010. Nor is there much advance where wind power is concerned. In November, various investors applied for a striking 78,000 MW of licenses. Then and only then, did the authorities realize that they needed a new law to handle the allocation of licenses in case of competition, and that law is still not enacted.
Symptomatic of the Ministry’s tortured approach to the situation is the tender it announced for construction of 2,400 MW of plants on the large C and D lignite fields of Afsin Elbistan. The initial tender was held in January 2007. But it was so badly prepared that no bids were made. Through 2007, investors tried to persuade the Ministry of the minimum conditions required to make the situation viable. Now, with these concerns only partially addressed, the tender is to be re-held in mid-2008.

In all this, the Government can rightly point to the way that Turks have been cushioned from the impact of rising oil and gas prices. The increases in electricity price in January 2008 were the first for five years and in gas prices the first for 14 months. But there has been a massive hidden cost due to the losses racked up by the state electricity companies which have had to be met from the budget, i.e. by the tax payer. Here, the Government has been more concerned about delaying increases in the consumer price index – an important element of its relationship with the International Monetary Fund – than in advancing liberalization in the energy sector.

The one positive development in this is the auction of Ankara’s natural gas distribution company, Baskent, which is due in March 2008. Less positive is the general delay in introducing competition at the level of imports and wholesale of natural gas. The Natural Gas Market Law of 2001 required BOTAS’s share of imports to be reduced to below 20% by 2009. This always seemed hard to achieved, but, on present indications, in 2009 BOTAS will still be handling 90% of imports. And now its General Manager, Huseyin Saltuk Duzyol, is calling for BOTAS to be kept as a national champion and, supported by TPAO, the state oil company, in calling for a reuniting of these two bodies.

This decade, successive governments have declared their commitment to liberalising Turkey’s energy markets, to ending state monopolies and to encouraging competition. The model followed has been that to which Europe aspires, but, as in Europe, implementation is proving a challenging task, with more clouds than sun on the horizon.