Turkey’s expanding energy outreach and its geopolitical implications

Mehmet OgutcuThe Brussels Energy Club

8 November 2012

Issues for discussion

• Changing dynamics in world energy and geopolitics• Turkey’s economic fundamentals• Energy emerging as a “soft-belly”• Quest for energy security

– Increased domestic production and efficiency improvements– Diversification of suppliers: Russia, Iran, Azerbaijan (and trans-

Caspian), Iraq, LNG and others as suppliers– Fuel diversification including renewables– Overseas investment in equity oil and gas

• Turkey’s EU accession and energy dimension• Turkish strategic energy priorities vs. foreign policy

actions• Key messages

2

Changing geopolitics: A new world order in the making?

• The talk of a new world order is no longer a fantasy. Happening.

• Failure after 9/11 to put in place an effective global policy, Iraq and Afghanistan setbacks, energy dilemma, food and water crisis, worldwide economic crisis and rise of the BRICs.

• All these have created much broader balance-of-power implications.

• We are back to great-power politics, shifting alliances and spheres of influence in favour of Asia-Pacific.

• The West is no longer in charge alone. Russia, China, India and the rest of G-20 are set to shape the new emerging world system in finance, politics, environment and energy.

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4

“Game-Changing” developments in world energy

• A powershift is underway in world energy, with the rise of new consumers and changing NOC and IOC balance of interest

• Tight supplies, but also new unconventional fuels, nuclear, LNG and technologies

• Environmental concerns and climate change are omni-present

• Energy security, yes but for whom

• Price volatility and underinvestment causing supply crunch

• New geopolitical dynamics and risks unfolding

5

World primary energy demand: up and up

Energy security, yes but for whom?• Various definitions, depending on

who’s talking: producers, transit countries, consumers or investors.

• “Reasonably priced, reliable, timely and environmentally friendly” energy.

• Energy security is intertwined with the environment, economic, foreign and social policies of an economy.

• Political vs. Financial costs; Opportunity vs. Risks involved.

• Malacca Strait, Strait of Hourmous, Bosporus, critical infrastructure

• New definition is required.

5

Energy Security

Natural gas as a “game-changer”

• With the advent of shale gas, LNG and emergence of new producers, new pricing arrangements, natural gas is becoming a key game-changer.

• It offers key advantages for promoting energy security– Gas is available and flexible – it can meet

energy needs in domestic markets or via LNG and long-distance pipelines

– Unconventional reservoirs are opening up new possibilities

– Many alternative suppliers dot the horizon– Fuel substitution to gas reduces emissions– New price mechanism away from oil-

indexation

7

8

EU-27 gas demand/supply outlook to 2030(SOURCE: ENI)

Indicative costs for potential new sources of gas delivered to Europe, 2020 ($/MBtu)

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Now our main topic…

Strategic location

IranIraq

Georgia

Syria

Bulgaria

AzerbaijanArmenia

RussiaRomania

Caspian Sea

CyprusMediterranean

Sea

Aegean Sea

Black Sea

Ukraine

Turkey

IstanbulAnkara

3

in case, you do not know where it is…

Sound economic fundamentals

• Nominal GDP (US$bn) and GDP growth (%) • Top 20 OECD Countries’ Real GDP Growth (2011E-2017E)

• GDP per capita (‘000 USD)

Source TUIK, SPO, Medium Term Economic Programme 2011-2013, October 2010

Source State Institute of Statistics, Treasury Source OECD Economic Outlook No:86

Avg. annual real GDP growth

Although economic conditions deteriorated

rapidly in early 2009, the come back was very strong

in 2010

Turkey is the fastest growing economy in Europe

with an 8.9% real GDP growth in 2010

2.6%

2.6%

2.8%

2.8%

2.9%

3.0%

3.0%

3.1%

3.1%

3.2%

3.5%

3.6%

3.8%

3.9%

4.1%

4.5%

4.7%

4.9%

5.0%

6.7%

0% 2% 4% 6% 8%

US

OECD

Switzeland

Poland

Iceland

Spain

Sweden

Ireland

UK

Finland

Norway

Greece

Mexico

Australia

Czech Rep.

Korea

Hungary

Slovak Rep.

Luxembourg

Turkey

3.54.6

5.87.0

7.6

9.210.4

8.6

10.110.6

11.4 12.2

1.5

3.5

5.5

7.5

9.5

11.5

13.5

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11E '12E '13E

526659 742

617736 781 847 913

6.9%4.7%

0.7%

(4.8%)

8.9%

4.5% 5.0% 5.5%

0

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011E 2012E 2013E (10%)

(5%)

0%

5%

10%

Nominal GDP (US$bn) Real GDP Growth (%)

• Foreign direct investment ($ in bn) • Current account & trade surplus / (deficit)

• Export Growth (Avg. annual growth rate 2001-2009)Source SPO, Medium Term Economic Program 2011 - 2013, October 2010Source Central Bank Republic of Turkey

Source Turkstat, IMF World Economic Outlook, April 2011

Despite a fall in foreign direct investments in the recent years current level remains much higher than

historical figures

Macroeconomic overview

54

11.9

3.4 3.2

11.3

0

2

4

6

8

10

12

14

World Euro Area DevelopingAsia

MENA LatinAmerica

Turkey

(6.1%) (5.9%) (5.7%)

(2.3%)

(5.4%) (5.4%) (5.3%)

(10.3%)(9.7%) (9.4%)

(6.3%)

(9.0%) (9.3%) (9.3%)

(12%)

(10%)

(8%)

(6%)

(4%)

(2%)

0%2006 2007 2008 2009 2010E 2011E 2012E

Current account balance/GDP Trade balance/GDP

1.1 1.7 2.8

10.0

20.222.1

19.5

8.4 8.9

0

5

10

15

20

25

1993-2002avg.

2003 2004 2005 2006 2007 2008 2009 2010

Collé en image

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Economic growth prospects• World’s 20 largest economies (GDP based on Purchasing Power Parity, USD trillion)

• Europe’s 20 largest economies (GDP based on Purchasing Power Parity, USD trillion)

Turkey is the 16th largest economy in the World in terms of GDP based on

PPP

Turkey is the 6th largest economy in Europe in terms

of GDP based on PPP

Source IMF, World Economic Outlook, April 2011

14.7

10.1

4.3 4.12.9 2.2 2.2 2.2 2.1 1.8 1.6 1.5 1.4 1.3 1.0 1.0 0.9 0.8 0.8 0.7

0

8

16

2.9

2.2 2.11.8

1.41.0

0.7 0.70.4 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2

0

2

4

6

Demographics

• Turkey’s population evolution (m) • Population breakdown by age groups (2010)

• Urbanization in Turkey • Population breakdown by age groups (2050E)

By 2025 the population will have risen to 85.4m,

growing with a CAGR of 1.2% over 30years

Turkey has one of the youngest populations in Europe with c.26% of

Turkish in the 0 - 14 age bracket

The average age of the 72m people is only 29 years,

against 40 years in the EU

Urbanization is an increasing trend in Turkey

with the share of urban population in total

increasing from 44% levels in 1980 to 76% in 2010

Turkey’s favourable demographic outlook is a key driver of future economic growth

Source UNSource Turkstat

Source Turkstat Source UN

CAGR ‘95 – ‘25: 1.2%

59.864.3

68.673.0

77.681.8 85.4

0

30

60

90

1995 2000 2005 2010 2015E 2020E 2025E

14%14%14%15%15%14%15%14%15%

26%

63%63%62%

65%63%

60%60%64%

66%64%

23%23%25%

20%23%

25%25%22%19%

10%

0% 20% 40% 60% 80% 100%

BulgariaUkraine

Czech Rep.Russia

RomaniaHungaryEuropePoland

Slovak Rep.Turkey

0-14 Age 14-60 Age 60+ Age

14%14%14%14%14%15%14%15%16%15%

46%45%46%47%47%49%49%46%

49%56%

40%41%41%39%39%36%37%39%35%

29%

0% 20% 40% 60% 80% 100%

PolandBulgaria

RomaniaSlovak Rep.Czech Rep.

UkraineHungaryEuropeRussiaTurkey

0-14 Age 14-60 Age 60+ Age

44%60% 65% 70% 75% 76% 76%

56%41% 35% 30% 25% 24% 24%

0%

20%

40%

60%

80%

100%

1980 1990 2000 2007 2008 2009 2010

Urban population Rural population

5

ISE Top 20 companies

• Market value breakdown• Sector breakdown of Top 20 companies by market

capBanking sector has the

highest weight in the ISE-100 index in terms of market capitalisation, accounting for

48% of the Top 20’s total

Note1 As of 23/06/2011

Source FactSet

1Company Mcap (USD bn) Sector

1. Garanti Bank 18.6 Banking

2. Akbank 18.1 Banking

3. Turk Telekom 17.4 Telecom

4. Isbank 13.3 Banking

5. Turkcell 12.2 Telecom

6. Yapi Kredi 10.3 Banking

7. Koc Holding 9.8 Conglomerate

8. Halkbank 8.7 Banking

9. Sabanci Holding 8.3 Conglomerate

10. Enka 7.5 Construction

11. Tupras 6.1 Oil & gas

12. Vakif Bank 5.3 Banking

13. Eregli 5.1 Steel & Iron

14. Emlak Konut REIC 4.1 Real estate

15. Arcelik 3.2 Consumer durables

16. TEB 2.8 Banking

17. Sisecam 2.7 Glass

18. Turkish Airlines 2.6 Transport

19. Koza Gold 2.0 Mining (Gold)

20. Petkim 1.5 Petrochemicals

Total 159.7

48%

19%

11%

7%

4%4%

3% 2%2%

Banking Telecommunications

Conglomerates Real estate / construction

Mining Energy

Industrial Production Consumer durables

Transport

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Turkey’s energy: low in supply&efficiency and high in demand• Energy is Turkey’s achilles’

heel and soft-bely for the next decades to come

• Limited domestic production and international investment

• Liberalisation agenda, still incomplete, with heavy subsidies and taxes

• Energy trade: biggest contributor to the current account deficit

Turkish Electricity Sector

Sector

State-owned Company, EUAS

Natural Gas is the primary source of electricity generation in Turkey. Especially, private sector relies heavily on imported natural gas. This trend should change in line with private sector’s increasing focus in hydro and coal-fired power plants.

Source: EÜAŞ

Coal, 27.9%

Hydro, 18.7%

Natural Gas, 49.6%

Other, 0.1%Jeo + Wind,

0.3%Liquid Fuels,

3.4%

Coal, 38.8%

Hydro, 33.6%

Natural Gas, 25.2%

Liquid Fuels, 2.4%

Jeo + Wind, 0.1% Other, 0.0%

Installed Capacity 2007 MW % MW %Thermal 27,272 67% 12,525 52%Hydro 13,393 33% 11,349 48%Geothermal 23 0% 0 0%Wind 146 0% 0 0%Total 40,834 100% 23,874 100%

Sector EUAS

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Wind Capacity and Utilisation

2006 2007 20080

50

100

150

200

250

300

350

400

450

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147

433

Turkey Wind Power Capacity

MW

Turkey’s Wind Atlas

Average annual solar radiation:1,311 kWh/m². Average annual sunshine duration:2640 hours. Technical potential :405 000 GWh, (DNI> 1800 kwh/m2-year). Economic potential :131 000 GWh, (DNI> 2000 kwh/m2-year). Solar energy is used especially as a thermal energy in Turkey.

• 400,000 Toe solar heating produced by 11 million m2 collectors, second in the world. • annual production capacity is 1 million m².

Total installed photovoltaics capacity is approximately 1000 kW and But it is expected to increase PV usage next future.

Solar Energy Potential

…and need for massive investments• Turkey needs to spend $128 billion on energy

investments by the end of 2020, including $92 billion on new power generation facilities, to keep pace with its rapid-growth economy, but the government can only set aside $500 million a year from its tight budgets.

• Electricity demand in Turkey has increased almost 10 percent, the world’s second highest growth rate after China. And half of it produced by gas-fired power plants.

• The government must spend about $4.5 billion annually on new power projects and $1 billion annually for power transmission to avoid an energy crisis.

• Privatization is viewed as the key for Turkey’s future energy development.

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Turkey’s “regional hub” credentialsBosporus Straits are a major

shipping "choke point" between the Black and Mediterranean

Turkey's port of Ceyhan is an important outlet both for current Caspian and Iraqi oil exports

Also, a growing gas destination for Russia, Azerbaijan, Iran and KRG as well as possibly Eastern Mediterranean Seas.

But it is not yet a hub as we understand it

For a genuine hub similar to Austria’s Baumgarten, much more remains to be done…regulatory framework, physical infrastucture, market liberalisation…

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At the juncture of energy routes

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Turkey's strategic location makes it a natural "energy bridge" between major producing areas in the Middle East, Russia and Caspian Sea regions on the one hand, and markets in Europe on the other.

Multitude of energy routes and supply sources•Turkey aims to meet growing domestic demand for energy by developing a multitude of energy routes, in particular the “Southern Corridor” •This is to ensure that sufficient supplies reach Turkey for its own consumption and that the country becomes an “energy hub” for Europe. •Turkey is expected to use 48-50 bcm of natural gas this year and around 70 bcm by 2020, making it one of the largest natural gas consumers in the world. •Russia, Iran, Azerbaijan, Qatar, Nigeria, and Algeria are the main sources of Turkey’s gas. Iraq’s KRG will add to Turkey’s gas supply in the future. •Turkey would have much to gain if gas from the eastern Mediterranean were also transported to Europe through its territory.

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Regional outreach in search of supply security

• Why are the Turco-Russian energy links still of paramount importance?

• Will TANAP and Trans-Caspian pipelines threaten Russia’s national security?

• Iran: how far can Ankara and Tehran endure the troublesome energy relationship?

• Crucial links with Iraq: Baghdad or Erbil?• Could the East Mediterranean

controversy turn into a hot confrontation?• Any room for Trans-Atlantic and

European partnership in energy?

Caspian exports reaching international markets

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TANAP, Light Nabucco, Trans-Caspian, Bosphorus By-pass, Iran, new Kazakh shipments

26

KRG oil and gas wealth: how to reach markets

TPAO was expelled from southern Iraq and Turkey set up a new national oil company for northern Iraq

The Eastern Mediterranean gas discoveries: collaboration or confrontation• From the melting and resource-rich Arctic to the eastern

Mediterranean, the South Atlantic to the East China Sea, legal wrangling, diplomatic posturing and military sabre rattling are all on the rise.

• Cyprus, split by one of Europe’s most intractable ethnic conflicts, is now the focus of another contest, over who will control the significant natural gas wealth found in nearby waters.

• Beneath the seabed of the Levant Basin near Cyprus is an estimated 122 tcf of gas, about as much as the world consumes a year.

• The northern part of the basin lies in Cypriot waters, with much of the rest in Israeli or Lebanese waters.

• So far, the EU has been eager to diversify its gas supply sources and routes, but it has been rather quiet on the eastern Mediterranean gas finds and their possible contribution to EU energy supply security, as a fifth gas corridor or as a new leg to the Southern Gas Corridor.

• The question is whether the gas discovery will become an incentive for the two sides to cooperate, or yet another obstacle to reunification of the island.

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EU’s energy security through gas• ¾’s of the gas traded across the EU arrives and

departs via pipelines.  Pipeline dependency leaves the EU vulnerable to supply shocks. 

• Whilst supply can be met by three predictable suppliers in the long run; Norway, North Africa and Qatari LNG much still depends on the presence of a steady supply of gas from Russia.

• Gas is the “simplest solution” to the EU’s energy security challenge as– Nuclear option is out of steam; construction of gas power

plant is easier than alternatives; – it is relatively clean in  terms of CO2 emissions; – it can be used as a back up to wind power and – it is interchangeable with coal fired plant.

• Sharp decrease is expected in EU gas consumption between now and 2020, with serious implications for supplier countries such as Russia. 

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Turkey’s EU accession and energy dimension

• Who wants to be a member, after all?• Better to divorce from the accession

strait-jacket and develop practical arrangements?

• Energy dimension of the Turkish-EU relations

• Southern Energy Corridor• Turkmenistan vs Azerbaijan and Russia• Energy chapter blocked• European Energy Community• Iran sanctions and alignment on Russia• Energy markets liberalisation and investment

opportunities for EU firms• Climate change

A better EU approach lies in better understanding Turkey’s drives and priorities and seeking alignment for a durable, “win-win” relationship with Ankara as well as using Turks’ leverage in the broader Middle East, Eurasia and Southeast Europe.

Conflict with foreign policy goals?• We cannot treat energy in isolation from geopolitics as

the recent history has shown.• Energy is just one, but a determinant, element of foreign

and security policies as the lifeblood of the economy.• There should be no room for threats or blackmail each

time a problem emerges to "cut back the flow of energy," "close down the borders" or "punish political actions by economic sanctions.”

• Today’s Turkey brings a lot more foreign policy capacity to the table, but it may not be an easy fit with the US and Europe’s interest in forging common strategies on Iran, Iraq, Syria and Russia.

• Turkey could face difficulties in expanding its influence without having a firm footing in the West at the same time.

• Turkey’s foreign and security policies are increasingly in competition with its energy interests that require alignment with Iran, Russia, Iraq/KRG, Israel/Cyprus on East Med.

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Key messages• Factor in the changing dynamics in

world energy system (and security) • No threats or black-mailiing to use

energy• Physical and legal/institutional

framework for regional hub• Investor friendly business environment• Alignment of foreign policy, energy,

environment, finance, trade/investment and technology strategies

• Develop “energy giants” through PPP and international alliances

• Develop fresh perspectives, human capital and not get stuck in obsolete paradigms

• Need for an integrated energy strategy and management