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    Liberalizing Turkey's Gas Market: BOTAŞ Loosening the Reins



The unbundling of Turkey's natural gas market is a process which has been in process since 2001. Big changes are in store if a law is passed this year.

by: Drew Leifheit

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Top Stories, Pipelines, Security of Supply, Trans-Anatolian Gas Pipeline (TANAP) , Turk/Turkish Stream, News By Country, Turkey, Balkans/SEE Focus, Expert Views

Liberalizing Turkey's Gas Market: BOTAŞ Loosening the Reins

Turkey's national oil company, BOTAŞ - Petroleum Pipeline Corporation, used to be the only name in the game when it came to the country's national gas market. But since 2001, Turkey has made baby steps towards opening up the gas market to private enterprise, and BOTAŞ still yields great influence over many segments of the business.

Turkey could soon have a truly liberalized gas market when it passes a draft of the so-called “Natural Gas Market Law” (NGML), according to Mr. Okan Demirkan, Partner, Kolcuoglu Demirkan Kcakli Attorneys at Law, one speaker on a panel covering liberalization of the Turkish gas market at the European Gas Conference in Vienna, Austria.

Mr. Demirkan explained the ins and outs of Turkey's natural gas market law (NGML), which he said entailed activities like gas imports, largely performed by Turkey's BOTAŞ.

Gas transmission, he said, is performed by BOTAŞ as the TSO, with 19-20 companies delivering LNG. Gas storage, he added, needs investment. The wholesaling of gas is largely done by BOTAŞ, according to Mr. Demirkan, at 77%. The company also handles 69% of distribution.

Prior to the NGML in 2001, he recalled that the state had controlled every aspect of the gas market. “We had BOTAŞ as the national oil company, importing 100% of the gas we imported to Turkey.”

Since that time, some progress has been made towards gas market liberalization, beginning with the privatization of gas distribution in 2003, the first import action by a private company in 2007, and more entities receiving licenses in 2011-12.

In mid 2014, reported Mr. Demirkan, the draft amended law for revising Turkey's natural gas law was submitted to the country's parliament. The future, he said, is the unbundling of BOTAŞ, which should happen after the government passes the law.

He commented, “We will hopefully have less barriers for entry for importing into Turkey, which will mean that we have more private players in the whole market.”

Still, he noted that Turkey had not been able to privatize Igdas, the gas distributor for Istanbul.

However, private companies' involvement in importing activities in Turkey, he said, had begun in 2004.

“The aim was to bring down BOTAŞ' share of imports to 20% of national consumption. Unfortunately, that hasn't been achieved – the share is still 80%.”

Meanwhile, while the company has eight living gas contracts, BOTAŞ is forbidden from entering into new contracts until it is brought down to that 20%. Mr. Demirkan offered, “It has managed twice to transfer some purchase contracts, but due to the take-or-pay obligations it hasn't gone as well as expected.”

He outlined the barriers to entry, which were favorable conditions for BOTAŞ, like private companies not being able to apply for a license to sell gas from a country with which BOTAŞ already has a contract. Furthermore, as the country's TSO, BOTAŞ must give approval to private companies that apply for import licenses; the company will remain Turkey's TSO, he added.

“For such a large country, and for one with a lot of demand for gas, unfortunately, we don't have sufficient facilities for storage of the gas – only 2.6 BCM of underground gas storage,” explained Mr. Demirkan, who said that a further 2 BCM of storage is pending.

The amended law, he reported, could pass before elections in Turkey in June. He opined, “I think the first positive novelty of the draft amended law will be that it will revoke the prohibition against private entities wanting to import gas from those from whom BOTAŞ is already importing.”

This means that private entities will be able to apply for import licenses from countries like Russia, Azerbaijan and Iran, freeing imports of natural gas into Turkey. Additional actions, according to Mr. Demirkan, could include the establishing of a spot market, contract transfers and the privatization of Igdas.

Not so long ago, Turkey was a market with a demand of 14 BCM/annum. Today, that figure has nearly tripled – to nearly 50 BCM - according to Mr. Burak Bastaci, Commercial Managment – Natural Gas, Enerjisa Dogalgaz a.s., the session's next speaker.

Mr. Bastaci said that since Turkey's natural gas sector liberalization law was enacted in 2001, the market had seen 10% growth in the gas every year. He showed Turkey's annual supply and demand balance for 2014: the country consumed around 49 BCM, while long-term contracts comprised just over 51 BCM/annum.

He offered, “If you consider Turkey has limited storage capabilities, it's technically not possible to offtake all these volumes from the demand destruction.”

Turkey, he noted, gets 48 BCM from pipelines and another 7-8 BCM from LNG to fill in the gaps.

“This shows how tight the market is and we've experienced in reference to 2015 supplies BOTAŞ was not accepting all the demand for contracts coming to them,” he reported.

Now, only 1-year contracts are being signed; daily demand of 193 MCM/day, he added, is also very tight.

Mr. Bastaci showed that BOTAŞ is expecting demand of nearly 70 BCM by 2020. “I personally think that this is a bit optimistic for Turkey,” he commented.

In terms of power demand, he contended it is obvious Turkey needs new volumes and infrastructure, “which means it needs to attract investors and new gas supplies if it's going to be done by the government.”

According to him, the country will move towards liberalization, removing subsidies, creating a marketplace to ensure transparent price formation, giving comfort to investors and customers alike.

Meanwhile, the low oil price, he explained, had translated into low gas prices due to oil indexation.

“This has given another chance for Turkey to sustain its low gas price levels until the realization of possible gas coming from the Kurdish region, volumes from the Trans Anatolian Pipeline, which will give us flexibility.”

Mr. Bastaci also mentioned the possibility of South Stream landing at Turkey (“Turk Stream”) rather than on Bulgarian shores, increasing his country's connection to Europe.

“If Turkey can establish a marketplace for establishing gas prices in this period, having additional volumes and flexibility, there will be a chance for attracting further volumes from other suppliers/countries.”

Also, he said, Turkey has the chance to renegotiate contracts with gas suppliers to turn to market-based pricing.

Session moderator Richard Tyler, Partner in the Energy and Natural Resources team, Hogan Lovells, asked about the likelihood of the NGML being passed before the elections coming up in June, to which Mr. Mehmet Ogutcu, Executive Chair, The Bosphorus Energy Club, responded: “It will be critical for the ruling party to keep voters happy – they don't want to have any significant change in the way markets are operating, so there might be some delay, because there are other top priority issues for the government to pursue.”

The speakers in the panel were also asked if there were any transit risks for Europe with Turkey's potential emergence as an important hub for natural gas.

There's not much risk in the EUR 45 billion Southern Corridor project, according to Mr. Bastaci. He explained, “Investment levels have already been determined, finance is available, and seven countries are more or less aligned, but as with any pipeline project if there's a little gap the whole project might go down.”

He added that latter possibility is more likely if the current difficulties in financial markets were to continue, coupled with sluggish gas market growth and competing projects. Still, the Southern Gas Corridor is a defined project, he said, while others were likely to be evolving.

-Drew Leifheit