Where East Meets West

Turkey’s Energy Dependence and Independence Dilemma

By Ahmet Türker

From one side, Turkey is signing all sorts of pipeline contracts to diversify gas supplies. From the other side, the growing dependence on foreign energy sources is a concern. These two view points may be nurturing each other to cause the Turkey’s energy dependence-independence dilemma.

This week, Prime Minister Erdogan expressed his concerns for the cost of total energy imports. He said "Turkey's annual cost of total energy imports was $29 billion". The $16 billion of this amount was the cost for oil and oil products imported. The remaining $13 billion is paid for the natural gas imports.

The total energy imports is the two thirds of Turkey’s current account deficit which is around $48.8 billion. The account deficit has been jumped from around $26 billion in 2005 to $48.8 billion.

In 2006, 24 million tons of crude oil was imported. Only 2.2 millions of it was produced domestically. The crude oil exports and the corresponding costs are given as follows. Despite high prices the oil consumption is expected to be strong in the domestic market. Already high taxes on oil and cars, is diminishing the effect of rising oil prices. Whether the average price for oil this year is above last year does not make such a big difference, because the elasticity is expected to be very low in the short term.

Probably aware of this, Turkish policy makers are pushing more for nuclear energy while public seems more in favour of using national resources such as hydro power generation. As the numbers increase, the debate for using the national resources or nuclear is expected to increase. Yet none of them produced any viable answers to the PM’s concerns.

The Minister for Energy, Hilmi Guler has been against a rise in electricity prices for over 4 years. As a result, using electricity for heating homes has been much cheaper than using natural gas which has increased 60% last year. The public however seems like not being aware of it. This week also, to a question asked by a journalist about the possibility of electricity crises, Mr. Guler has given a political answer that “We are working hard to avoid it”.

Turkey has around 40000 MWs of power generation capacity and its peak consumption has been around 26500MW. With theoretically plenty of reserve margins, electricity shortages shouldn’t be such a concern for at least 3-4 years.

But the bells for a crises are ringing now. As electricity prices stayed same for such a long time and the big jump of gas prices during that time has pushed some natural gas power plants operated by auto producers to stop. Turkey is currently generating around 32% of its electricity from natural gas.

As shortages become more and more likely and as the policy to increase the inflow of foreign gas from different countries, Turkey is expected to use that gas for its own electricity production. Because two years is not enough to built enough hydro capacity (including licensing), the only viable future seems to be already readily available natural gas from pipelines.

More than that, while trying to be an energy hub, Turkey’s current contracts are not permitting re-exportation of the gas imported from foreign countries. One of the major agreements is with Russia in terms of take or pay. As a result of this agreement Turkey found itself highly addicted to “take” the Russian gas to avoid any “pays”.

The doubts about the unreliability of Iranian gas are another problem. This week on 24th January 2007, Vatan, Turkish daily newspaper, has reported that Iran is sending 16 million cubic meters less gas than expected. The newspaper claimed the source as an unnamed officer from Turkish pipeline company BOTAS. The problem has not panicked anyone thanks to mild weather around the country. To avoid any problems, Turkey is buying LNG to backup this capacity which is also adding to increasing extra cost of importing energy.

There is nothing wrong with importing from different sources. But if the contracts are not crafted correctly and if the countries exporting gas fail to fulfil the agreements, Turkey’s grand energy transit strategy may cost dearly to its tax payers and cause its economy to slowly stagnate. The concerns about growing cost of energy imports may not walk further from being a concern, if Turkish policy makers can not match their strategies with policies to increase incentives for the private entrepreneurs to invest in domestic sources.

Finally, Turkey acts slowly to use its domestic resources to built capacity, but the growing economy deficits the energy balance. Due to the energy corridor strategy, there is plenty of gas to produce electricity. As long as there is readily available gas around, the policy makers do not act accordingly and urgently to built capacity from domestic resources.

This commentary by Ahmet Türker is from USAK's Energy Review Newsletter