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Political,
Business, and Market Structure Developments
of
Oil Markets in Turkey
Executive
Summary/Introduction
73% of the world's proven oil reserves
are located in regions immediately
surrounding Turkey.
Though not a major oil producing
country itself, Turkey's importance
in relation to oil markets lies in
its strategic location as an "energy
bridge" between the Middle East
and Eurasian oil-producing regions
and European markets.
Turkey seeks to develop projects
to meet its own growing energy demand,
as well as reap the political, strategic,
and economic advantages of being the
energy highway between East and West.
As privatization of the energy
industry has increased, and Turkey's
economy continues to improve in the
wake of a series of recessions, the
political, market, and business structures
of the oil industry are undergoing
changes which will facilitate a steady
flow of energy to Europe while ensuring
that Turkey can meet its own energy
needs. Increased oil production in
Russia and the Caspian basin, the
completion of the Baku-Tbilisi-Ceyhan
pipeline, and European Union's interest
in securing its future energy supply
all indicate that Turkey's position
in international oil markets and energy
transport will only grow in importance
in both the short and long term.
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by Jeanene MITCHELL
LM Youth Representative,
and Student at Columbia University
Changes in internal and external oil markets
(March
2, 2006) Oil has the largest share of primary
energy consumption in Turkey at 39%, though
a rapid increase in the consumption of natural
gas has occurred due to efforts at diversifying
use of energy resources.
Approximately 90% of Turkey's domestic
oil supplies are imported; the primary suppliers
are Middle Eastern countries such as Saudi
Arabia, Iran, Iraq, and Syria.
Russia, too, is a primary supplier
of oil to Turkey.
Turkey's own dwindling oil reserves
are located primarily in Southeast Anatolia,
though the fields tend to be small, and
the oil is expensive to extract.
However, the government has granted
tax incentives to promote exploration by
the foreign companies already established
in Turkey, and regulations for new entrants
are expected to become increasingly less.
Demand within Turkey's internal oil market
is generally increasing, though price deregulation
measures implemented in June 1999, and a
particularly devastating economic recession
in March 2001, did result in a temporary
decrease in Turkish oil consumption and
imports.
In 2002, oil demand in Turkey averaged
30,000 bbl/d less than in 2000; however,
in 2004, demand increased by 30,000 bbl/d
to 685,000 bbl/d. This increase in demand has occurred in
spite of a tax hike in February 2004 on
diesel and unleaded gasoline, per the recommendations
of the IMF.
Currently, the tax on oil products
in Turkey is 15%.
External oil market developments greatly
affect Turkey in the sense that it is a
crucial energy transport country.
As production capacity increases
in Russia and the Caspian Sea, more oil
will be transported through Turkey via the
Turkish Straits, which are already a chokepoint
for marine transport.
The Baku-Tbilisi-Ceyhan pipeline
project (BTC pipeline), built to transport
up to 1 million barrels of crude oil a day
from Azerbaijan to the Turkish port of Ceyhan
on the Mediterranean, is hoped to decrease
the amount of tanker traffic in the Turkish
Straits. Furthermore, the European Union's
dependence on oil imports to satisfy its
energy needs means that Turkey is an indispensable
partner for ensuring a secure flow of oil.
Market structure developments
A
petroleum market reform bill was passed
in December of 2003, with the intent of
removing state controls, liberalizing
pricing and domestic content purchase
requirements of oil, lifting restrictions
on vertical integration, and improving
integration of pipeline, refining, and
distribution activities. The law ended import quotas and price ceilings
on petroleum products at the beginning
of 2005, and began the privatization process
of Tupras (Turkish Petroleum Refineries
Corporation) and Petrol Ofisi, Turkey's
largest retailer of petroleum products.
In 2005, the International Energy Agency
noted that Turkey had made significant
progress in liberalizing its once predominantly
state-owned energy markets and addressing
energy security and environmental issues.
Turkey has overcome its past difficulties
in complying with IEA stockholding obligations
for member countries, which stipulates
that 90 days of oil net imports must be
held for emergency situations.
This requirement also exists in
the European Commission acquis. Ability to comply with these obligations
can be maintained by development of Turkey's
stockholding capacity and defining stockholding
obligations of market participants.
Turkey's Energy Market Regulatory Authority
(EMRA) was established in 2001 as a financially
and administratively independent body
which regulates the petroleum market,
in addition to the electricity and gas
markets. Though EMRA has been effective in
driving the privatization transition for
Turkey's energy industries, it has also
been criticized for over-regulating the
oil market, and it has been suggested
that a lighter-handed approach to regulating
oil markets may be more effective.
The European Union, recognizing the value
of Turkey as an energy transport state
and link to the Middle East, has established
an energy cooperation agreement which
would create a single energy market among
the EU, Balkan countries, Moldova, and
Turkey.
Though the market has not yet come
into effect, its establishment will achieve
the EU's goal of securing a stable flow
of oil into the import-dependent EU.
From a political and economic standpoint,
there are significant benefits to Turkey
in creating energy market linkages with
the EU, discussed in further detail below.
Political
developments
Oil
transport and consumption has the potential
to smooth historically difficult political
relations with Russia, by increasing business
and trade connections between the two
countries.
However, tensions over navigation
in the Turkish Straits are a consistent
point of friction between Russia and Turkey,
with the former claiming that regulations
imposed in 1994 and 1998 violate freedom
of innocent passage guaranteed to ships
by the 1936 Montreux Convention.
The completion and coming on-line of the
BTC pipeline is a political gain for Turkey;
1,070 km of the 1,730 km pipeline is in
Turkish territory. The construction of the pipeline itself
was a political and strategic success
for Turkey, and was strongly supported
by the United States, who prefers to have
energy supplies flowing through the territory
of a long-standing ally rather than Iran
or Russia. In addition to the strategic advantages
of having a pipeline on its territory,
Turkey expects to earn billions of dollars
in oil transit revenues over the lifetime
of the pipeline. Three other main pipelines exist on Turkish
territory: the Iraq-Turkey crude oil pipeline,
which has recently resumed operation after
the lifting of sanctions upon Iraq; the
Batman-Dortyol pipeline, and the Yumurtalik-Kirikkale
pipeline. A Russian-supported pipeline also carries oil from the Caucasus
to the Black Sea port of Novorossiisk.
Likewise, the European Union is realizing
the importance of Turkey as an energy
corridor, and as an important link in
ensuring a steady supply of oil to EU
countries, which are highly dependent
upon oil imports. The linkages established between the EU and Turkey over energy
issues have the potential to aid Turkey
in its EU accession endeavors.
Turkey's need to meet EU environmental
standards in the accession process will
likely continue to improve Turkey's energy
efficiency and attention to the environmental
concerns of energy transport and consumption.
Business
developments
Privatization
efforts have been underway for several years,
resulting in greater percentages of state-owned
energy companies being held by foreign investors. Interested parties have included Russian
Tatneft, Lukoil, Eni, OMV, the Indian Oil
Company, and the Turkish military pension
fund (Oyak AS).
Currently, the majority of Turkish
oil production is dominated by the Turkish
State Petroleum Company (TPAO), Shell, and
ExxonMobil. TPAO, which is responsible for approximately
80% of Turkish oil production, currently
produces around 43,000 bbl/d; this statistic
is down from 90,000 bbl/d in 1991. With its Black Sea oil and natural gas
exploration projects, it seems unlikely
that TPAO will lose its predominance in
the Turkish energy business anytime in the
rear future.
Turkey's 7 refineries have the refining
capacity of 802,275 bbl/day; refining and
downstream operations are primarily dominated
by the still-partly state owned Tupras.
Tupras is currently implementing a modernization
program to change its refinery output to
lighter products, as well as meet European
standards. Since pipelines play an important role
in maintaining Turkey's ability to act as
an energy transport state, the national
pipeline company BOTAS owns 2400 kilometers
of oil pipeline in Turkey; this number is
expected to increase to 3500 kilometers
with the completion of ongoing projects.
Analysis/Conclusions
In sum, Turkey's strategic relationship
with the U.S., its desire to obtain EU
membership, and its geographical position
as an energy corridor between the Middle
East, Eurasia, and Europe make it a crucial
actor in regional energy issues.
As accession talks with the European
Union continue, Turkey will likely be
able to use its strategic position in
energy transport to Europe as leverage
in convincing the European Union of the
advantages to Turkish membership. Additionally, Turkey's increasing demand
for oil, based on its current economic
growth, means that securing future supplies
of oil will continue be an essential part
of Turkish energy and foreign policy.
As privatization of energy companies
continues, more foreign investors will
have ownership of the companies and infrastructure
used to transport and process petroleum
products, posing opportunities for greater
regional cooperation. However, the problems associated with
congestion of vessel traffic in the Turkish
Straits remains a problem that could ignite
tensions with Russia and other Black Sea
oil exporting countries.
_ . _
Also
by Jeanene MITCHELL @Light Millennium:
Analysis
of Natural Gas Market Reform in Turkey
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