Turkey takes foot off the gas

By bne IntelliNews March 21, 2012

David O'Byrne in Istanbul -

Back in the early 1990s it appeared a safe bet. Surrounded by countries with vast gas reserves available at bargain prices, pegged to an oil price then hovering at under $20 a barrel, Turkey opted to meet growing power demand and the need for a cleaner fuel for urban heating with imported gas. But 20 years on, with Turkey experiencing record demand for both gas and power (50% of that generated from gas), the wisdom of that move is being questioned.

The coldest winter in 33 years was arguably the worst possible time for gas cuts from two of the country's suppliers - Iran and Azerbaijan - together with an ongoing problem with a third, Russia. While the cut in supply by Azerbaijan was caused by a problem at the well head that was quickly resolved, Iran contrived to cut supplies for two periods of a week in January and February, sparking fears of widespread power cuts, and forcing Turkey to cut its gas transit to Greece.

Turkish officials have confirmed to bne that they have no reason to doubt Tehran's explanation that the cuts were caused by successive explosions at compressor stations. However, this in turn raises doubts over Iran's ability to adequately maintain its own gas-transit system in the wake of international sanctions, which bars western contractors from working on oil and gas installations, as well as the supply of equipment and materials.

It also comes at a time when talks between the two countries over the high price of gas that Tehran charges have broken down, prompting Energy and Natural Resources Minister Taner Yildiz to tell the media that Turkey plans to sue Iran in international court to seek a settlement. "The road to arbitration is being paved on March 16, and we will not wait for too long after that to file our complaint," Yildiz was quoted as saying by the daily Zaman.

On top of this, Turkey has been facing problems with the oldest of its gas import contracts - with Russia for 6bn cubic metres a year (cm/yr), which has just been renewed for one year, after its original 25-year term ended last December.

Plans for the contract to be transferred to one or more private sector companies by the end of its 25-year term in December had to be shelved after talks between Gazprom and a number of prospective buyers were not concluded in time. The contract has now been extended until the end of 2012, albeit with no clear indication again if private sector companies will be able to conclude deals in time.

Now with gas demand continuing to grow rapidly on the back of the commissioning of new gas-fired plant, Turkish officials estimate that demand for 2012 will top 48bn cm, perilously close to the 51.2bn cm maximum that Turkey's import contracts allow. Yildiz has announced plans to sign two new gas import contracts this year, but with no major new gas supplies likely to be available for five or six years, the only new gas available in the short term will be liquefied natural gas (LNG) - useful for ekeing out enough to meet peak demand, but not a long-term supply solution.

No surprise then that Yildiz has also announced that Turkey is looking to develop its own domestic resources of energy to meet growing power demand, and reduce dependence on imported gas from 50% of power needs down to 30%.

Diversification difficulties

That may not be as simple as it sounds. In the decade since the state stopped developing new power plants, private sector developers have shown a marked preference for quick-to-build, cheap-to-operate gas-fired plants.

Already around 17 gigawtts (GW) - a third of Turkey's generating capacity - is gas burning, and during the recent cold spell produced over 50% of the power the country used. "Even if we start now, it could take 20 years to reduce the percentage of power generated from gas to 30%," reckons Mustafa Karahan, head of Turkey's Electricity Traders' Association (RTD), pointing to the volume of new gas-fired plants under development.

Indeed, with a massive 13.5 GW already approved for construction, gas demand is set to actually rise for some time - even assuming that 64 plant totalling 19.5 GW whose license applications are pending are not approved for construction.

And alternatives are thin on the ground. Increasing opposition to hydroelectic power has seen many projects locked in long legal battles, with the negative publicity generated over high-profile projects like the ill-fated Illisu hydro dam causing western developers to steer clear.

Turkey's abundant wind resources are already under development, with 1.7 GW already generating, but few expect plans to reach 10 GW by 2020 to be realised, pointing to the difficulties selling variable wind power on Turkey's nascent power market, and problems connecting to the country's poorly maintained grid.

Inevitably given the recent hype globally about how shale gas is the answer to many countries' energy security problems, the unconventional gas source has also been mentioned. In March, state energy company TPAO said it has held talks with Exxon Mobil about exploring for shale gas in Turkey. The US Energy Information Administration, Turkey has 15 trillion cubic feet of technically recoverable shale gas.

But for Turkish energy analyst Haluk Direskeneli, the solution lies in Turkey's 12bn tonnes of reserves of low-grade lignite - the world's seventh largest, around 40% of which lies in one massive basin stretching across third of the country. "Local coal can be produced for as little as $2 per million British thermal units, compared to $4.5 for imported coal and up to $12 for imported gas," he explains pointing out that the main challenge if to develop local technology that can burn the low grade coal efficiently and cleanly.

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