BUSINESS OPPORTUNIES IN THE TURKISH ENERGY INDUSTRY

1. BUSINESS OPPORTUNIES IN THE TURKISH ENERGY INDUSTRY Prof.Dr.Hasan Kazdağlı Prof.Dr.Mehmet Baha Karan Prof.Dr.Selçuk Geçim Hacettepe University, Turkey

2. CEVI ( CENTRE FOR ENERGY AND VALUE ISSUES) GOALS OF CEVI: • PLATFORM FOR ACADEMICS • PLATFORM FOR PRACTITIONERS

3. Introduction • The lands of Turkey are located at a point where Asia, Africa and Europe are closest to each other, and straddle the point where Europe and Asia meet, for which reason it is located in a geographical position of great strategic importance. • Turkey’s unique geo-physical location does not only connect two continents but also, makes it a natural "energy bridge" between major oil and natural gas producing areas in the Middle East and Caspian Sea regions and consumer markets in Europe.

4. Turkey is different from other countries currently queuing for EU entry: it is big, fast-growing andstrategically placed. • Turkey’s accession will add to the EU inmany ways: its young, dynamic economy could give a boost to an ageing, sclerotic EU market;it can helpthe EU to bring stability to the Middle East, the Caspian and the Caucasus; and it could add to the EU’senergy security by acting as a bridge to the resource-rich regions in its neighborhood. • Turkey’sdevelopment as a European energy hub looks natural, given its lucky location between countries thatharbour 70 per cent of the world’s oil and gas reserve to its east, north and south, and one of the world’sbiggest energy markets in the west.

5. After leaving 2001 economic crisis behind, the Turkish economy has managed to grow rapidly during the last couple of years. That brings higher energy demand and new investments needs which require better structured energy sector. • Although the current economic crisis slowed down the Turkish ecomomy, but high economic growth is expected after 2010.

6. Turkey and the Sides of Energy Bridge • Demand Side • The European Union • The United States • Supply Side • The Caspian Basin • Russia • The Middle East

7. Turkey’s Energy Strategy • Turkey has concentrated its efforts forthe transportation of Caspian oil and gas reserves to Western markets on therealization of the East-West Energy Corridor, often referred to as the SilkRoad of the 21st Century. • The pipeline projects linking the Caucasus andCentral Asia to Europe will be essential for the region’s integration with theWest. Secure and commercially profitable pipelines will help bring stabilityand prosperity to the region.

8. Pipelines and Energy Security of Europe

9. Turkey as an energy hub • Through the completion of the projects, it is anticipatedthat 6 to 7 % of global oil supply will transit Turkey by 2014 and then Ceyhanwill become a major energy hub and the largest oil outlet terminal in theEastern Mediterranean. The Ceyhan Terminal has already been designed toreceive the crude oil reaching Ceyhan from Kirkuk, Baku and Samsun.

10. Turkey’s Energy Profile • With a rapidly growing economy Turkey has become one of the fastestgrowing energy markets in the world (2001-2007). • The primary energy consumption, whichreached around 92 million tons of oil equivalent (toe) in 2006 will rise to 126million toe in 2010 and 222 million toe in 2020. • The limits of Turkey’s domestic energy sources in light of its growing energydemand have resulted in dependency on energy imports, primarily of oil andgas. • At present, around 30 % of the total energy demand is being met bydomestic resources, while the rest is being satisfied from a diversifiedportfolio of imports.

11. Turkey’s Energy Profile • Turkish energy policy has made impressive progress after the HelsinkiSummit of 1999 where Turkey was declared a candidate for accession totheEU. • Turkey attaches great importance to more efficient and rationalfunctioning of the energy sector for promoting the competitiveness of thenational economy.

12. Turkey’s Energy Profile • Substantial progress has been achieved in restructuringandliberalizing the Turkish electricity and gas markets in pursuance with the EUDirectives for the purpose of integration with the EU Internal Energy Market,since the enactments of the Electricity and Natural Gas Market Laws in 2001. • With the Petroleum and LPG Market Laws, competition oriented mechanismshas been put into place. • An independent regulator, The Energy Market Regulatory Authority (EMRA)has been established to be in charge of regulation and supervision of theelectricity, gas, petroleum and LPG markets.

13. Turkey’s Energy Profile • Concerning renewable energy sources, the Law on the Utilization ofRenewable Energy Sources for the Purposes of Generating Electricity hasbeen adopted in 2005 for promoting electricity production from the renewableenergy sources in liberalized energy markets. • A new legislation is preparing to support renewable energy sources (2009). • In order to use energyefficiently, prevent waste, mitigate the burden of energy costs on theeconomy, and increase the efficiency in the use of energy resources and toprotect the environment, the Energy Efficiency Law was enacted on 2 May2007. • Turkey aims at fully utilizing its indigenous hard coal and lignite reserves,hydro and other renewable resources such as wind and solar energy to meetthe demand growth in a sustainable manner. Integration of nuclear energyinto the Turkish energy mix will also be one of the main tools in responding tothe growing electricity demand while avoiding increasing dependence onimported fuels. • Nuclear power plants corresponding to a total installedcapacity of 5000 MW are expected to be constructed very soon.

14. Turkey’s Energy Profile • To meet the growing demand, Turkey needs lots of investments and that requires huge financial support. There are many license applications received by Turkish Energy Market Regulatory Authority (EMRA) especially for wind, hydro and coal. • Most of them are EU and US origin companies such as, International Power (British), Edison (Italy), EON (German), OMV Australia, BASF Verbung (German), Iberdrola (Spain), EnBW (German), Enel (Italy), Württemberg (German), AES (USA), GE Energy (USA), and Berggruen (USA). • Russian investors consider Turkey as an investment magnet. Russian companies’ investments in Turkey reached $3.5 billion in 2008.

15. Some Foreign Energy Companies Invest and Interest In Turkey

16. Turkey’s Energy Profile • Energy imports constitute one-fifth of the nation’s import bill. In 2007, Turkey spent $33.9 billion on the import of energy supplies, including fossil fuels, lubricants and related materials, according to the Turkish Statistics Institute. • Privatization is viewed as the key for Turkey’s future energy development. The government is also encouraging private companies to build power plants to meet their own needs, and construct larger power plants sell electricity to other neighboring companies and to the state and to take over existing government-run facilities to help maintain growth in energy.

17. Turkey’s Energy Profile • In addition to its power distribution companies, the government is planning to sell 26 large hydroelectric dams and coal-fired power plants and 56 small river dams that have completed their economic life span. It is encouraging private companies to build and operate new hydroelectric dams and natural gas-fired power plants, operate state coal mines and geothermal facilities. • Natural gas distribution rights are privatized in more than 154 cities, and began to transfer the multi-billion dollar natural gas import contracts of the state petroleum pipeline corporation BOTAŞ to private operators. • Turkey also wants private companies to build new oil refineries, in addition to the existing private oil refineries concern, Tüpraş, which operates the country’s four oil refineries.

18. Turkey’s Energy Profile • Electricity demand in Turkey increased 8.4 percent in 2007, the world’s second highest growth rate after China. • 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. • A crash program to develop power plants, with an increased role for private and foreign investors, is key to Turkey's continued economic growth, energy planners say. • Turkey will need a large infusion of foreign capital to increase its generating capacity.

19. Turkey’s Energy Profile • The government hopes to carry out many of the projects under Build-Operate-Transfer (BOT) or Build-Operate (BO) models, where contractors would line up financing for power plants, and build and operate them as a concession for certain period of time, such as 15 years, after which they would turn them over to the Turkish state.

20. Turkey needs to spend $128 billion on energy investments by the end of 2020, including $91.276 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,

21. Turkish Electricity Sector Electricity Demand vs GDP Growth Turkey has become one of the fastestgrowing energy markets in the world (8% yearly growth rate) Source: TEİAŞ Despite significant growth in recent years, Turkey still has the lowest electricity consumption per capita in Europe. Source: IEA

22. Turkish Electricity Sector Electricity Demand & Capacity Projections (TEIAS) Low-Demand Scenario (6.3% annual growth) Turkey is expected to face electricity supply shortage by 2011 based on low-demand scenario… Source: TEİAŞ

23. Turkish Electricity Sector Electricity Generation by Primary Energy Source (2007) Sector Natural Gas is the primary source of electricity generation (191,558 GWh in 2007) 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. State-owned Company, EUAS Source: EÜAŞ

24. Aims in Electricity Market More private sector presence in the market, Increase in foreign capital investments, Decrease in public sector investment budget, Increasing responsibility in the protection of environment, Increasing renewable sources in electricity production Formation of the energy prices in a competitive environment, Increase in efficiency, Increase in service quality, Improvement in availability,

25. Investment Opportunities In Electricity Production Market. Privatization of State owned generation. Thermal Power Plants Using Domestic and Import Coal. Hdroelectrical Power Plants. Wind Power Plants. Geothermal Power Plant. Solar Power Plants (Prosedure will be announced very soon) Purchasing shares or facilities of private investors (Mergers & Acquisition Transactions).

26. SUPPLY CONSUMPTION MARKETING Export Import Wholesale • Eligible Customers Domestic Production Distribution • Non-Eligible Customers NEW GAS MARKET STRUCTURE

27. Current Situation in Natural Gas Market NATURAL GAS DISTRIBUTION PUBLIC PRIVATE WHOLESALE NATURAL GAS IMPORT

28. SectoralGasConsumption Sectoral Consumption (2008) Natural Gas Consumption in 2008: around 36.8 bcm

29. DISTRIBUTION LICENSE TENDERS

30. Natural Gas Market The market opening level is 80 % Natural gas wholesale price is determined freely by the parties. LNG import is libearalized and the new amendments are on the way to import natural gas without any limitations.

31. OPPORTUNITY IN GAS DISTRIBUTION MARKET The infrastructure for reaching 40 million customers is completed. Foreign investors are interested in gas distribution, and there is a great potential for new merging and acquisitions. Such as; the shares in Kayseri, Bursa and İzmit municipality gas distirbution companies were already sold to foreign investors in 2008.

32. Why Shall Invest in Power Market ? High and rapid growth in demand Robust and well designed legal infrastructure regarding of primary and secondary legislation Compliance with the European Union Legislation Competitive, stable, financially reliable, and transparent business environment without discrimination Independent market surveillance and regulation by Energy Market Regulatory Authority (EMRA) which is independent in its decision making process, financially and administratively autonomous body Good governance principles Cost-reflective tariff system

33. Some Foreign Energy Companies Invest and Interest In Turkey

34. Turkey Wind Capacity and Utilisation Turkey Turkey’s Wind Atlas

35. Solar Energy Potential • 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. 35

36. New Draft Renewable Energy Law in Turkey

37. The General Investment Incentive System in Turkey • Incentives generally comprise a mix of tax and non-tax incentives. The investors may qualify for the following general incentives based on the location, scale, and other qualifications of the investment; • Investment allowance • Exemptions from customs duties and fund levies • VAT exemption for machinery and equipment • Exemption from certain taxes, duties and fees • Grant of subsidized credits

38. Incentives for priority development regions Incentives granted to investors are as follows:     • Free land allocation     • Income tax relief   • Employer's share for social security relief     • Energy support

39. WHY TURKEY? • More stable political environment. • Improved Economic and investment climate. • Strategic geopolitical position between Asia and Europe. • Main bridge between Energy Sources(Caucasia and Middle East) and Indusrialized Countries(Europe). • Friendly Bureaucracy. • Growing economy with increasing demand for energy.

40. WHY TURKEY? • Transparent Regulatory Environment • Available Infrastructure • Trained technical manpower available • Present gap and growing demand in electricity., • Sufficient wind and solar sources. • Comittment for the renewable energy investments.