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A new era for Turkey’s energy market

Article - October 8, 2014
For a nation which is reliant to the tune of $60 billion on energy imports, it is essential that regional relations are set to increase energy security and turn Turkey into an energy hub for both domestic and regional requirements.
Energy is undoubtedly one of the most important sectors in Turkey and most promising for investors. Since 1990, energy demands have grown even faster than Turkey’s growing economy, says Minister of Energy and Natural Resources Taner Yıldız, with electricity consumption increasing 7 percent year-on-year. Over the course of the next decade, analysts predict that power consumption will rise by 6 percent per year.

In order to meet this rising demand, the Turkish government is looking to private enterprise for support. Over the past few years it has been successfully paving the way for the privatization of state-owned electricity distribution and generation assets. “In 2013, Turkey earned $13 billion from the privatization of 21 regional electricity distribution grids,” says the energy minister. “In 2014, we will focus on the privatization of the electricity generation plants.”

The government has introduced strategic incentives (such as VAT exemption, corporate tax reduction and land allocation) to improve the business climate. Foreign investors can expect to greatly benefit from this growing market, in which attractive opportunities exist in oil and gas, renewables and nuclear energy.

FDI in Turkey’s energy sector stood at $2.55 billion in 2013, and İlker Aycı, President of the Investment Support and Promotion Agency of Turkey, believes that the energy sector will once again be the largest recipient of FDI in 2014.

Wadie Habboush, president and CEO of the Habboush Group, a Turkish company with significant investments in the energy sector, concurs. “We believe that Turkey will continue to grow. If you just look at the macroeconomics, the demographics, the industrial movement and the demand for energy in Turkey, the growth potential is tremendous. I am optimistic about energy-related investments in Turkey,” he says.

Capable only of meeting a small fraction of its energy demand with its own hydrocarbon resources, Turkey’s greatest challenge is finding affordable, accessible and reliable energy sources. In order to mitigate the impact on the environment, the government has put a lot of emphasis on sourcing and producing clean renewable energy domestically. Over the last decade, renewable energy generation has increased by 90 percent and by 2023, Mr. Yıldız expects 30 percent of the energy supply will come from local renewable sources.

Longstanding government objectives in renewable energy have led to new incentives and improved legal infrastructure to attract investors in this area. Recent analyses indicate that a 30 percent cost reduction is estimated on wind power projects as a result of new regulation, whilst updated laws on non-licensing electricity production will also propel solar projects. Investments by companies such as Enerjisa and AkEnerji are focusing on renewable sources such as hydropower, while the World Bank’s International Finance Corporation (IFC) has significantly increased its financing of renewable energy projects over the last five years, investing $2.3 billion in five projects in the power generation sector.
Despite increased power generation from renewables, Turkey still needs to import oil and gas to meet its energy demands. While the country itself is not rich in these hydrocarbon resources, its neighbor to the south certainly is. “I believe that it makes the most economic sense to look at the next-door neighbor. Iraq is probably the last frontier of its size in the world for natural resource exploration and production, and the huge majority of that sits in southern Iraq. These abundant natural resources are just a step away from Turkey,” states Mr. Habboush.

The CEO says that he is bullish about Turkey-Iraq relations, adding that he would be delighted to see a large increase in energy cooperation. Recent comments from Baghdad indicate the opening of a new chapter for Turkey-Iraq bilateral economic relations. “We support and seek to increase our oil and future natural gas exports to Turkey,” Iraqi Deputy Energy Minister Hussain al-Shahristani told the Turkish al-Andalou news agency in December.

While the Iraqi minister signals the ushering in of a new era for Turkey-Iraq relations, Turkish companies working within the energy sector such as Habboush and Genel Energy have been operating oil and gas fields in Iraq and transporting output back to Turkey for some years now.

“We have one foot in Turkey and one foot in Iraq,” explains Mr. Habboush. “We are present in southern Iraq where we are executing projects in the oil and gas fields there. We have formed strategic alliances with notable international energy and infrastructure companies. We believe that Iraq should be a valuable source of energy for Turkey and Europe. Turkey, likewise, is a valuable market for Iraq’s energy supply as a consumer and transit point.”

Genel Energy, a joint Turkish-British venture headed up by former BP boss Tony Hayward as CEO, has concentrated in oil and gas exploration and production in the Kurdistan region of Iraq since 1999. President and founder of Genel, Mehmet Sepil, spotted a lucrative opportunity to export oil and gas from Kurdistan to his homeland. The Turkish billionaire became the first person to sign a production sharing agreement with the Kurdistan Regional Government (KRG) in 2002.

“My partners and I did not know anything about the oil business. We decided to take the leap,” recalls Mr. Sepil. “So far it has been very gratifying. In the end, our country’s high level of growth helped us to a great extent, as Iraqi Kurdistan turns into one of the major sources from which Turkey aims to get its oil and gas.”

Ties between the KRG and the central Iraqi government have been strained on account of disputes surrounding ownership and revenues from Kurdistan’s oil and gas resources, which had led to a blocking of an agreement between Turkey and the KRG on a new oil pipeline.

However, for the first time, Mr. al-Shahristani backed an oil deal between the KRG and Turkey in December last year, by supporting a deal which has seen the opening of the new pipeline from the Genel-operated Taq Taq oil field in Kurdistan to the Turkish port of Ceyhan. The pipeline will cut transport costs in half (as Genel had up to recently had to rely on road transportation) and will be able export 1 million barrels of oil per day by 2015.

Taking full advantage of Iraq’s oil resources in partnership will not only support Turkey in meeting its energy demands, but – along with the ambitious multi-billion dollar TANAP oil pipeline project that will see oil transported from a massive field in Azerbaijan to Europe via Turkey – could turn Turkey into an important energy corridor through which Europe will procure its power.

“This situation makes Turkey a bridge between energy-rich countries and Europe, which spends $300 billion on energy imports. For this reason, while Turkey develops projects for meeting its own energy demand, it also aims to serve as the most appropriate [energy] route that opens to Europe and global markets,” said Turkish Customs and Trade Minister Hayati Yazıcı at the opening ceremony of the third Caspian Forum in Istanbul in December.