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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.

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

LIGHTMILLENNIUM.ORG #18th Issue
Summer-2006
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