GAS MARKET DEVELOPMENTS IN TURKEY: GAS MARKET DEVELOPMENTS IN TURKEY H. Saltuk DUZYOL BOTAS Managing Director and Chairman of the Board Black Sea Oil and Gas Summit ‘07, 5-6 September 2007, Istanbul, Turkey


Strategic Objective for Turkey’s Gas Market: Strategic Objective for Turkey’s Gas Market BOTAS’ Perspective: “To provide for the expanding use, on an economic basis, of a secure supply of natural gas in an increasingly competitive domestic wholesale market, while maximizing Turkey’s business opportunities for transit and trade, and contributing to consumer surplus”


Natural Gas Market Law No: 4646: Natural Gas Market Law No: 4646 What is in it for BOTAS? Breaking up of BOTAS’s import and wholesale monopoly: No consent for entering into new SPAs Requirement for BOTAS to reduce its share of imports to 20 percent of the national consumption by 2009 by contract releases No distribution activities for BOTAS: existing distribution network is handed over to distribution license holders Restructuring of BOTAS with functional unbundling and moving toward full separation into legal entities serving its main functional areas of trading (importing and wholesale supply), transmission and storage Privatisation of trading and storage businesses


What is World doing?: What is World doing? In EU countries which have already established a competitive gas market, the proportion of supply controlled by the largest supplier ranges from about 50 percent in Germany and the U.K. to 75 percent in Italy and Spain and 90 percent in France. Volume releases rather than contract releases in EU Given the size of BOTAS’ contract portfolio, reducing BOTAS’ share to 20 percent by contract releases is very difficult in the foreseeable future (some 10% could hardly be released by BOTAS since 2001) Gas companies are growing by mergers and acquisitions to enjoy scale economies and vertically integrating to control the value chain and to generate funds for new business opportunities Many countries regret to have killed their national champions


Concerns for Turkish Gas Market under the Existing Legal and Regulatory Framework : Concerns for Turkish Gas Market under the Existing Legal and Regulatory Framework If contract releases (even volume releases) could lead to gas to gas competition in the market? If sale prices could be reduced without supply surplus? What about the bargaining power against sellers? What if sellers do not give consent for their contracts to be released to third parties? What if sellers use this opportunity to control the supply chain as a whole and become dominant power in the market place? What if third parties taking over the contracts do not supply gas to domestic market while their only motive is profit maximisation? If BOTAS could play the buffer role for the market while its trading activities are limited to only 20% of the national consumption? If Turkey could still be an energy hub in the region without a national champion vertically integrated and being able to generate funds for investing in new transmission infrastructures? Could prescriptions written for mature gas markets of the World really fit into a still emerging gas market ?


So What?: So What? For ensuring the security of supply, an amendment to Law No: 4646 is essential to enable BOTAS or other players to renew the existing import contracts that will expire in a near future Contract release model should be abandoned because it will very unlikely lead to desired benefits of liberalisation but only a redistribution of revenues among a number of players in an oligopolistic market Every year short-term import licenses for small volumes should be given to eligible companies to introduce competition in imports. Such partial liberalisation in imports will also help BOTAS manage its take or obligations BOTAS’ vertically integrated structure should be maintained to make it stay at competitive edge in international markets and to continue to generate necessary funds for new investments and universal services Restructuring of BOTAS should be limited to unbundling of its services only, to prevent abusive behavior of its dominant power


Some Facts: Some Facts Natural gas transmission network: 8.263 km (2006), (>10,000 km at the end of 2007) BOTAS LNG gasification terminal (6 bcma) in Marmara Ereglisi EGEGAZ LNG gasification terminal (6 bcma) in Aliaga TPAO underground storage facility (>2.5 bcma) in Silivri BOTAS Salt Lake underground storage facility (1 bcma with 4 bcma expansion potential) to be fully operational in 2013 Natural gas imports: 35 bcma (2007) Annual demand growth rate: 13-15% BOTAS contracted volumes (ACQ): 42.2 bcma (2007), 46.2 bcma (2008), 52 bcma at plateau level (2010) Natural gas consumption: Power generation (57%), residential (22%) and industrial (21%)


Slide8: Supply Sources (Plateau Period) Azerbaijan Iran RF (Blue Stream) RF (West) LNG (Algeria + Nigeria)


A SWOT Analysis of Turkey’s Gas Sector: A SWOT Analysis of Turkey’s Gas Sector STRENGTHS High demand growth potential Favorable supply geography and existing infrastructure Existing contract portfolio with export rights and flexibilities Extensive transmission backbone Lack of clean energy substitutes OPPORTUNITIES Access to multiple sources of supply incl. LNG Potential role as a transit corridor Potential social and economic improvement Potential for domestic and foreign investments WEAKNESSES Excessively concentrated industry High risk-bearing due to acceptance of major gas market risks and associated contingent liabilities, mainly through long-term gas import contracts with take-or-pay provisions; Lack of adequate gas storage Little indigenous supply THREATS Supply overhang of contracted imports (not an issue any more especially after 2012) High leverage of incumbent operator Possible unfair competition by Sellers with ambitions to become a downstream player Source: World Bank (2007) and BOTAS


Strategic Interests for Turkey: ACCESS TO CHEAPER GAS TRADE AND TRANSIT Strategic Interests for Turkey SECURITY OF SUPPLY Partial exemption from TPA for trading of excess volumes Removal of final destination clauses Balanced diversification of supplies supported by indigenous production Creating underground storage capacities to serve domestic and international markets Use of existing infrastructure and idle capacities to the extent possible Net back pricing with an option to buy for domestic use Distance related transmission tariffs Short-term import contracts


Gas Supply Opportunities to Europe: Gas Supply Opportunities to Europe High level of dependence of Europe on imports from Russia (45%), Norway (29%) and Algeria (21%) now Demand growth not to be met by existing supplies by 2030: 200-250 bcma Potential supply sources to meet this demand growth: Russian Federation : 18% Central Asia : 12% Middle East : 36% West and North Africa : 31% Americas (mainly Trinidad & Tobago) : 4% Source: IEA


Turkey as a Gas Hub: Turkey as a Gas Hub CEYHAN HUB: LNG AHIBOZ HUB NABUCCO PIPELINE ITG/IGI PIPELINE 12 bcma 31 bcma


Existing and Planned Gas Pipelines to Europe: Existing and Planned Gas Pipelines to Europe Source: OSW-Warsaw & BOTAS YAMAL-EUROPE TRANSGAS –EUROPE BLUE STREAM GAS TRANSIT-BALKANS BALTIC NABUCCO ITG/IGI SOUTH STREAM


Gains for Europe from gas transportation through Turkey: Gains for Europe from gas transportation through Turkey Easy and secure access to alternative supply sources in Caspian & Middle East through an alternative route Real supply diversity and enhanced supply security Real gas to gas competition and increased consumer surplus


Gains for Suppliers in Caspian and Middle East from gas transportation through Turkey: Gains for Suppliers in Caspian and Middle East from gas transportation through Turkey Easy and secure access to major consumption centers in Europe via pipelines at cost-based transportation tariffs Strengthening their position in a rapidly growing gas market: Turkey Increased potential to attract European oil and gas companies for investing in E&P activities and to create new business opportunities Improving economic cooperation and create inter-dependency and strong political ties with EU countries