Turkish Energy Market

Growing Demand but Limited Domestic Supply

Demand

The Turkish energy market is characterised by rapid demand growth driven by the country’s strong economic performance, which is currently met almost entirely by imports. Current domestic reserves are limited, with estimates for 2009 of 300 million barrels of oil and 220 billion cubic feet of gas reserves reported by the government agency for exploration and production. Electricity demand in Turkey is expected to more than double from 2008 to 2020, with 55% of power generation currently met by gas. Gas has become the fuel of choice for power generation, growing from 6% of energy in 1990 to 31% currently. Oil and gas demand will continue to grow, with gas demand is expected to reach 61 billion cubic metres by 2020.

Supply

On the supply side, 98% of gas is imported, of which 52% comes from Russia. Gas is imported under long term supply contracts, with the majority set to be renegotiated in the next 1-3 years. Domestic gas production is estimated at 1 Bcm with only 6 Bcm of reserves. Oil is 30% of the energy share, with 91% coming from imports (Iran and Russia accounting for 2/3rds). Local oil production peaked in 1991, and currently there is only 48,000 barrels per day of production.

Infrastructure and Regulation is improving

Turkey has seen a rapid expansion of the gas pipeline network in last 20 years, managed by BOTAS, the national grid operator, with almost 12,000km of gas pipeline at the end of 2010, compared to just 845km in 1989. The regulatory regime for exploration and production is well-defined by long-established legislation with ongoing efforts to reform and liberalise. The GDPA (General Directorate of Petroleum Affairs) governs exploration activities granting 4 year exploration licences (extensions of up to 8 years) followed by 20 year production licences upon discovery. The EMRA (Energy market Regulation Authority) governs production and has responsibility for granting distribution licenses for the sale of CNG and pipeline natural gas. Fiscal terms are extremely attractive compared to other exploration markets, with a royalty of 12.5% and tax of 20%.

Competition is limited in the country. The GDPA has granted 393 licenses, where TPAO, the national oil company, has 37% of blocks while ARAR is ranked among the top independents with 21 licences. All other players are substantially smaller with only a handful of licenses and limited scale. Super-majors have traditionally focused on large-scale offshore Black Sea blocks in partnership with TPAO.