Analysis of Natural Gas Market Reform in Turkey
Turkey has signed contracts for much greater quantities of natural gas than it will be able to consume.

I. Introduction/Executive Summary Turkey is a rapidly growing importer and consumer of natural gas, due to the fact that it is surrounded by major gas-exporting countries in the Middle East and Central Asia, and interstate natural gas transport infrastructure leading to Turkey continues to be developed. Natural gas consumption levels in Turkey have witnessed a dramatic increase, from 150 Bcf in 1991 to 748 Bcf in 2003. 65% of this consumption is allocated to the Turkish power sector, as Turkey's accelerating development results in greater demand for energy.[1] With current natural gas pipelines and import contracts from Russia, Iran, Algeria, and Nigeria, and soon from Azerbaijan, Turkey is currently importing approximately 1.1 Tcf of LNG per year; this estimate is expected to increase to 1.8 Tcf by 2010. As natural gas becomes an increasingly central component of energy consumption in Turkey, the Turkish natural gas sector is undergoing major market structure reforms in order to dismantle the state-held monopoly which has historically controlled it. To this end, Turkey is pursuing a policy of unbundling and regulation under the strict guidance of the Energy Market Regulatory Authority, an independent entity with oversight capacity discussed in further detail below.[4] The impetus behind such reform ranges from the necessity for Turkey to harmonize its energy policy with that of the EU, to increasing efficiency and drawing foreign investment. Though reforms have only been semi-effective, in the sense that they are not occurring according to schedule, the EU has acknowledged that significant progress has been made under the auspices of EMRA.[5]

One of the greatest challenges facing the Turkish natural gas market in the near future, however, is an overcommitment to natural gas imports through the year 2010. Indeed, market reforms must include increasing Turkey's capacity to be a natural gas transit state, if Turkey is to avoid steep fines for not being able to honor its gas contracts.[6]

II.Analysis of Natural Gas Market Reform in Turkey

a)Motivation

(April 13, 2006) Turkey's motivation for restructuring its natural gas ownership and markets stems from its desire to fulfill European Union accession prerequisites in the energy sector, as well as an interest in improving efficiency, maintaining security of energy supply, and attracting foreign investment, particularly in infrastructure.[7]

Though Turkey has been praised by the EU for its initial regulatory and restructuring efforts in the natural gas market, the country is an estimated 10 to 15 years behind other candidate countries in its process of turning energy into a market commodity, and is under pressure to accelerate its reform process.[8]

Despite an economic downturn beginning in March 2001, Turkish natural gas consumption is projected to increase over the short and long run. The continuing recession, however, has caused shorter-term gas demand projections to be revised downward, which will create an excess of supply continuing through 2010, based on contracts having been established under the earlier, pre-recession projections.

b) Market Structure

Prior to 2001, Turkey's natural gas market and infrastructure were entirely controlled by the state-owned company BOTAS, which had the legal mandate to hold a monopoly on import, transmission, and sale and determination of natural gas prices.[9] In 2001, Turkey passed a Natural Gas Market Law, with the intent to end government control of the natural gas sector, in order to eliminate inefficiencies, harmonize its energy policy with that of the EU, and attract foreign investment in energy infrastructure.[10]

Specifically, the law intends to "establish a legal framework for developing a fair, transparent and competitive natural gas market through unbundling market activities and eliminating the monopolistic structure in the market"
additionally, it aims to ensure the existence of an independent regulatory and supervisory system in the natural gas.

According to the Natural Gas Market Law, BOTAS is to be divided into separate units for natural gas import, export, storage, and distribution by 2009. All of these components --with the exception of transport--will be privatized.[12] Additionally, under the "gas release" program, BOTAS is required to sell off 10% of its market share each year, thereby reducing its ownership in the natural gas market from 100% to 20% by the year 2009.

The Energy Market Regulatory Authority, or EMRA, is responsible for implementing the Natural Gas Market Law.[13] In the domestic market, EMRA is charged with ensuring a stable, transparent, and reliable regulatory regime, establishing security of supply, introducing competition, creating stable fair, and reasonable prices, and eliminating cross-subsidies.[14] As the sole regulatory authority in the natural gas market, EMRA issues licenses to engage in any natural gas market activity. Separate licenses must be issued for each market activity and facility, including import, transmission, storage, distribution, wholesale, and exports; these licenses are granted for a minimum of 10 years, and a maximum of 30 years.[15] Transmission and distribution companies must demonstrate the cost efficiency, effectiveness, and reliability of their operations; furthermore, they operate under the obligation to connect all users to the system.[16] Until sufficient competition has been established in the natural gas market, EMRA will implement tariffs, in the form of price ceilings, to regulate connection, transmission, wholesale, and retail sale of natural gas.

c) Status and Effectiveness of Reforms

Despite the promulgation of legal reforms in the natural gas market, implementation and effectiveness of these reforms has been limited for several reasons. Though increasing foreign investment in infrastructure is one of Turkey's objectives in reforming its gas markets, Parliament has stalled in approving amendments to lift restrictions on foreign investors entering Turkey's gas sector. Additionally, the Turkish Energy Ministry has been hesitant to relinquish its control over gas contracts. In June 2004, it proposed a bill reducing the share of contracts to be turned over to the private sector from 80% to 25% by 2009.[17] This bill was ultimately withdrawn, however, in the face of domestic and foreign opposition.

Furthermore, BOTAS has not maintained its 10% annual privatization targets. In March 2004, EMRA threatened to fine the company for its failure to reduce its market share by this agreed percentage. Indeed, as of June 2005, the "gas release" program prescribed by the Natural Gas Law had not commenced.[18] This is in part due to complications with Russia and Iran in renegotiating the terms of gas export contracts originally convened with BOTAS, and now being convened with private entities.[19]

Before suffering an economic crisis and implementing price deregulation in 2001, demand for natural gas in Turkey had been projected to sharply increase in the near future. Principal consumers were expected to be electric power plants fueled by natural gas, as well as industry.[20] However, due to the economic downturn beginning in March 2001, BOTAS reduced its projections for natural gas demand growth by approximately 45%, from 1.6 Tcf in 2005 to 0.9 Tcf.[21] Should these dramatic revisions in natural gas demand prove accurate, it means that Turkey has signed contracts for much greater quantities of natural gas than it will be able to consume. [22] Turkey has signed contracts securing 1.8 Tcf of natural gas imports per year in 2010, which is over 25% greater than BOTAS' forecasted demand of 1.4 Tcf in that year. Turkey faces the possibility of fines up to $1 billion if it defaults on its natural gas import contracts. [23] For this reason, Turkey will build large natural gas storage facilities in the underground caverns south of an area known Salt Lake, financed by the World Bank, and is considering the option of exporting its excess natural gas to Europe, whose demand for natural gas for power production is expected to greatly increase in the coming years.[24]

III. Conclusions and Prospects for the Future

Despite the inevitable setbacks associated with a major overhaul of the Turkish natural gas market structure and ownership, Turkey has madenotable progress in its privatization efforts. The existence of EMRA, as well as the necessary legal and regulatory structures, establishes a crucial foundation for continuing along a trajectory of reform. Likewise, though the European Union is expecting more from Turkey in terms ofimplementing its natural gas market reforms, its approval of Turkey's progress over the past few years bodes well for energy issues to not create an obstacle to Turkey's EU accession process. The EU's demands create a positive incentive for Turkey to maintain its strict adherence to natural gas market reform.[25]

The effects of Turkey's excess contracted gas upon market reform remain to be seen. However, this overcommitment to natural gas imports will not necessarily be negative. Turkey's historical problems with attracting foreign investment have the potential to decrease dramatically, should private entities seize the opportunity to invest in creating infrastructure and markets to export Turkey excess gas imports to Europe. Such a situation generates the possibility for Turkey to strengthen itself both economically and politically as an energy transport state. Furthermore, if adequate gas storage capacity is built in a timely fashion, Turkey may be able to create a reserve of natural gas that will prove useful in the event of a demand spike or emergency situation, such as Russia cutting off its natural gas supplies, as it has done in the recent past to Ukraine.

Footnotes:

[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005.Ð http://www.eia.doe.gov/emeu/cabs/turkey.html. Accessed 4-5-06.
[1] Ibid.
[1] Mert Arslanalp, "Turkey's Energy Policy and Global Trends Series: Turkey's role in the East-West corridor.
http://www.dispolitikaforumu.com/energypart2.pdf. Accessed 4-10-06.
[1]Country Information: Turkey, Energy Regulators Regional Association, Summer 2005.Ð
http://www.erranet.org/AboutUs/Members/Profiles/Turkey/News/LatestNews. Accessed 4-5-05
[1]Activities of the European Union/Summaries of legislation.ÐTurkey: Adoption of the Community Acquis.
http://europa.eu.int/scadplus/leg/en/lvb/e14113.htm. Accessed 3-31-06.
[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005. http://www.eia.doe.gov/emeu/cabs/turkey.html. Accessed 4-5-06.
[1] Hasan Ozkoc, "The New Natural Gas Market and the Role of Regulator." Energy Market Regulatory Authority of Turkey, May 2004.Ð
www.iea.org/Textbase/work/ 2004/investment/ses3-OZKOC.pdf. Accessed 4-10-06.
[1] Ozgur Sagmal, "Market rules will work in the energy sector." Turkishtime, 15 August-15 September 2004.
http://www.turkishtime.org/31/10_1_en.asp. Accessed 4-1-06.
[1] Hasan Ozkoc, "The New Natural Gas Market and the Role of Regulator." Energy Market Regulatory Authority of Turkey, May 2004.
www.iea.org/Textbase/work/ 2004/investment/ses3-OZKOC.pdf. Accessed 4-10-06
[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005. http://www.eia.doe.gov/emeu/cabs/turkey.html. Accessed 4-5-06.
[1] Hasan Ozkoc, "The New Natural Gas Market and the Role of Regulator. Energy Market Regulatory Authority of Turkey, May 2004.Ð
www.iea.org/Textbase/work/ 2004/investment/ses3-OZKOC.pdf.Є Accessed 4-10-06
[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005.Ð http://www.eia.doe.gov/emeu/cabs/turkey.html. Accessed 4-5-06.
[1] Ozgur Sagmal, "Market rules will work in the energy sector." Turkishtime, 15 August-15 September 2004.
http://www.turkishtime.org/31/10_1_en.asp.Є Accessed 4-1-06.
[1] Hasan Ozkoc, "The New Natural Gas Market and the Role of Regulator." Energy Market Regulatory Authority of Turkey, May 2004.Ð
www.iea.org/Textbase/work/ 2004/investment/ses3-OZKOC.pdf. Accessed 4-10-06.
[1] Ibid.
[1] Ibid.
[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005. http://www.eia.doe.gov/emeu/cabs/turkey.html. Accessed 4-5-06.
[1] Ibid.
[1] Ibid.
[1] Ibid.
[1] Ibid.
[1] Mert Arslanalp, Turkey's Energy Policy and Global Trends Series: Turkey's role in the East-West corridor.
http://www.dispolitikaforumu.com/energypart2.pdf. Accessed 4-10-06.
[1] Turkey Country Analysis Brief, U.S. Energy Information Administration, July 2005.Ð
http://www.eia.doe.gov/emeu/cabs/turkey.html.Accessed 4-5-06.
[1] "Recent Gas Dispute Stresses Importance of Gas Storage in Turkey." The World Bank, January 9, 2006.
http://www.worldbank.org.tr/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/TURKEY - Accessed 4-11-06.
[1] Activities of the European Union/Summaries of legislation. "Internal market for energy: common rules for the internal market in natural gas." http://europa.eu.int/scadplus/leg/en/lvb/l27006.htm, accessed 4-6-06.

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