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Cesran International

Turkey’s 2023 Energy Vision in the Context of the ‘Game-Changing’ Dynamics in World Energy

BY MEHMET ÖĞÜTÇÜ* | 19.08.2011

Imagine the world 12 years down the road – the world of 2023 which corresponds to the centenary of the founding of the Republic of Turkey. Then close your eyes to ponder about what kind of an energy world we could be living in then, and how we and the next generation should be preparing for the new opportunities and the ever increasing challenges.

vision_2023Given that the energy industry operates on the basis of long-lead times, today’s decisions and investments in energy will bear their fruits only in a decade or so. Also, transition to cleaner fuels and smarter industries or any attempt at change of fuels in energy mix cannot happen overnight – it requires considerable digestion and an adjustment period, up to at least 30 years. Hence, contemplating a 2023 vision for Turkey’s energy starting from today is not too far fetched.

The ultimate goal will remain unchanged – the provision of secure, cleaner, environment-friendly, technologically advanced, uninterrupted and affordable energy for our households, industry and transportation. Hence, Turkey’s future energy policy needs to be constructed around six core priorities: (i) economic competitiveness, (ii) security of supply, (iii) progressive transition to a low-carbon and smarter economy, (iv) creation of world-class energy “champions”, (v) favourable investment and financing terms for energy projects, and (vi) effective interplay of energy, foreign policy and economy.

In the midst of the critical developments in world energy, Turkey has emerged as an important actor to reckon with – as a consumer, transporter, investor, regional hub, and security provider in world energy and geopolitics. Rather than following the dictates from Washington or Brussels, Turkey is increasingly pursuing its own self-interest, and is contemplating a longer-term energy policy framework to meets domestic and global challenges.

  • How will the future dynamics of the global energy be shaped?

Crystal-ball gazers have been promising us space-age lifestyle inventions for decades — along with cures for cancer, supersonic trains, and other feats of technology. We are still waiting. Getting the future wrong is all part of the fun, of course. Maybe it is the innate human need to hope for the best and plan for the worst; maybe it is simple curiosity about how we will live, love, and get around in years to come.

Tectonic changes are occurring not only in the world financial system, trade and investment, geopolitics, and technology, but a fundamental transformation is also underway in the global energy system. Myriad trends indicate that the current system is far from being sustainable. It will be shaped by rising demand over the long term, dominance of fossil fuels, inaccessible supplies, price volatility, inadequate investment, geopolitical tensions, and climate change. The most pressing decision facing the next generation may be how best to accelerate the transition from a fossil fuel-based energy system to a system based on climate-friendly energy alternatives. No one country alone can address this mammoth challenge.

In today’s world, transition to a cleaner energy economy is not a choice; it is an absolute necessity. The current environmental system can hardly sustain our wasteful world energy order. Yet, there is no reasonable ground to be hopeful of alternative fuels that will come to our help in meeting this demand growth. In the foreseeable future, our dependency on fossil fuels will remain more or less at the same level. The overall share of the renewable energy sources including wind, solar and hydro-electrical energy within the global energy is 7.4 percent. Nuclear energy makes up only 6 percent.

Despite the “green energy” movement that works hard to convince the politicians of the virtues of renewables, more than 80 percent of the world’s energy supply still comes from fossil fuels. Experts disagree on what will actually keep the lights on in 2023. The nuclear renaissance is not going well, either; the accident in Japan slowed down the acceleration in nuclear energy development. Germany and Italy have decided to phase out nuclear energy altogether. It is now necessary to work extremely hard for the next ten years to reinstitute the level of progress in nuclear energy that existed before the accident.

Nuclear is poised for a comeback, though it’s unlikely that by 2023 the atom will provide much more than the 8.3 percent it offers today’s domestic energy market. Shale gas is also becoming a force for change. The “shale gale” sweeping across North America these past few years has more than doubled the size of the discovered natural gas resource in North America – enough to satisfy more than 100 years of consumption at current rates.

The global energy scene is going through a fundamental transformation that will not only change the rules of the game; it will also change the game itself, and its players. Profound changes expected in world energy include, inter alia:

First, with oil per barrel  decline from $147 in July 2008 to $40 per barrel six months later and then increasing to around $85-90 in August 2011, volatile prices shifted power significantly to financial market speculators and producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf, Russia, and Central Asia. These countries seek a changing or reshaping of the traditional rules of the game for the benefit of their national interests. Aware of their increasing power, many of the resource-rich countries either have re-nationalized their oil industries, or have established strategic control through further transfer of power into the hands of their governments. Production sharing contracts in many resource countries are in the process of being transformed into technical service contracts.

The energy guru, Daniel Yergin, has estimated that, at early 2008 prices, the U.S. is currently transferring about $1.3 billion to the oil-producing countries every day – or if you prefer, $475 billion a year. If we include China, the EU, India, and Japan in this calculation, every year the major oil consumers are transferring over $2.2 trillion to the oil producers. These massively increased energy revenues not only mean more economic power for the oil producers, but also, of course, increasing political power and influence in shaping the new global security order.

Second, there is an increasing concern over the security of the energy supply on the consumer side. Due to increased demand and depletion of domestic reserves, major consumers will have to rely more on imported oil and gas, from the politically unstable regions such as the Middle East, Africa, Russia and Central Asia, through long-distance pipelines, and vulnerable sea routes. This, combined with the fact that the international market is less stable and more prone to the disruptions of natural disasters, terrorist attacks, and isolated geopolitical acts, has increased the vulnerability of these consumer countries. We should also recognise the justifiable concerns of suppliers about demand security, particularly in the current climate of the depressed prices and lower demand in most OECD economies as a result of the economic recession.

Third, although the OECD countries are still the largest oil consumers, the current increase in demand for oil and gas is mainly driven by fast economic development in developing countries such as India and China, which account for one-third of the world population but only consume 17 percent of world energy. If things continue the way they are, we will have a hard time meeting the growing demand with the available resources.

What no one disagrees with is that demand is surging. The rapid growth of China and India matched with the developed world’s dependence on oil, mean that a lot more oil will have to come from somewhere. Today we consume an average of 85 million barrels daily. Let us consider one fact; The US consumes 25 barrels of oil per capita annually and Europe ten barrels. Each Chinese, however, consumes only two barrels a year, so even a small increase in Chinese consumption could have a massive impact on the market. According to the most conservative IEA estimates, that figure will rise to 113 million barrels by 2030.

Fourth, a rising concern for security of demand among major producer countries may prevent large scale investment from happening. To meet the rising energy demand, a huge amount of investment is needed – around $300 bn a year. Yet, energy investment worldwide has plunged over the past few years in the face of a tougher financing environment, weakening final demand for energy and lowering cash flow.

Furthermore, the resource owners want to earn more from the exploitation of their endowments. “Seven Sisters,” big Western oil conglomerates, are now losing ground vis-à-vis “Seven Brothers,” national oil companies like Gazprom, CNPC, Petrobras, Petronas, Aramco, SOCAR, KMG and ONG. The balance of interests is changing in favour of them, prompting calls for a new business model where the upsides and risks are fairly shared.

Fifth, geopolitical risks are on the increase, triggered by resource scarcity, marine piracy threatening oil and gas tankers, legal disputes, transit issues and technology and price issues. This new world order will witness fierce international competition for dwindling stocks of oil, natural gas, coal and uranium, as well as a tidal shift in power and wealth from energy-deficit states like China, Japan and the US to energy-surplus states like Russia, Saudi Arabia and Venezuela. In the process, the lives of everyone will be affected in one way or another – with poor and middle-class consumers in the energy-deficit states experiencing the harshest effects. Concerns over energy security are not limited to oil. Power blackouts on both the east and west coasts of the U.S., in Europe, and in Russia, as well as chronic shortages of electric power in China, India, and other developing countries, have raised concerns about the reliability of electricity supply systems.

The coercive manipulation of energy supplies, competition over energy sources, the tendency of energy producing countries to political instability, attacks on supply infrastructure, open sea piracy, terrorism, competition for market dominance, accidents, and natural disasters are all adding significant risks to global energy security.

Sixth, the protection of critical infrastructure is still going to a top priority. As western, domestic sources of energy start to dry up, oil companies are drilling in much more isolated and hostile environments, because technology makes extraction more commercially viable. More oil and gas is extracted from under the sea rather than from under the land. Tankers criss-cross the oceans delivering these products from one continent to another. Pipelines are getting longer and often pass through unstable areas. Over the past few months we have seen several examples of how easily these sophisticated supply networks can be threatened – in the Nigerian Delta, off the coast of Somalia, and in the Southern Caucasus.

Seventh, the climate change and environmental/safety concerns will continue to top the agenda in energy sector. Global warming is still a reality, but it is happening too slowly for people to maintain interest and get alarmed. As climate change impacts on energy exploration and transit routes, it will also increasingly impact our security. As the polar icepack melts, and the Northwest Passage to Asia opens up, an increasing amount of shipping will pass through one of the most remote and inhospitable parts of the world. Intervening in the event of an environmental disaster or even a terrorist attack would be very difficult indeed.

The future shape of  world energy will be gloomy unless new energy resources are discovered, massive investments channelled, revolutionary technological advances made, consumption curbed, environmental problems addressed and major improvements achieved in energy efficiency.

  • Prospects and Options for Turkey’s 2023 energy vision

If Turkey is serious about reaching the 2023 strategic goals in all sectors, energy has to play a pivotal role in driving its reform and growth engine. In execution, the highest level of political will, an integrated vision, effective project leaders and teams, investment in human capital and resources are essential ingredients. It should also be noted that the government cannot develop and implement such a vision by itself. Most actions require a timeframe beyond the life of a government. Therefore, a non-partisan (to the extent possible) approach should embrace the opposition, private sector, civil society and international organizations, based on shared goals.

It might be very useful to form a 2023 Energy Council of Turkey to bring together the doyens of energy world, managers, investors, businessmen, financiers, journalists, and analysts to forge a comprehensive Energy Road Map to 2023 and the Action Program along the following lines.

Hammering out an integrated energy management and vision. Turkey’s energy policy cannot be formulated and treated in isolation of a wider government vision. It is closely related to taxation, environment, competition, industry and investment, trade policies, foreign policy and security strategy, and needs to be tackled in an integrated way.

Management structures must be streamlined and made more effective and responsive to the needs of Turkey’s energy economy, finance and geopolitics. Competitive energy markets facilitate reduction of manufacturing costs, thus reducing the increase of fuel and energy prices. In this area the government should continue efforts to resolve the problem of excessive dependence on supply of gas and oil from one source, remove barriers for changing a supplier of electrical energy and gas, change the operating principles of platforms for trade in electricity and introduce market mechanisms in establishing prices of heat.

The human capital, too, must be enriched, as at the end of the day, everything boils down to the quality of our people, who can invent new energy technologies and fuels, manage complex policies, and engage with the external world.

Alignment of foreign/security and energy policies. Turkey’s external energy outreach starts from Chinas north-west province of Xinjiang – Uyghur Autonomous Region and extends to the North African tip of the Mediterranean, as well as from the Straits of Hurmus, all the way to the Arctic, where 22 percent of the worlds oil and gas reserves are located. As the virtual boundaries have been removed, Turkey is now facing the East, the North and the South directly. Those who define Turkey’s will to be part of the solution to the problems of the East with its self – formulated prescriptions as a ‘shift of axis in foreign policy’ are falling into the grave mistake of trying to read Turkey based on its erstwhile habits, both in foreign and security policy and in energy equations.

Being a regional energy hub is not having pipelines criss-crossing your territory. Turkey’s first priority must be to secure its own supply for its own citizens, uninterrupted, and at affordable prices. The new Turkish interest in non-western directions has been the outcome of Turkey starting to ‘read’ its neighbourhood and energy interests through its own lenses, from where it firmly dwells. Turks are not content only to be a simple “bridge” over which energy flows; they aspire to become a regional “hub,” extracting greater value for the oil, gas pipelines and power interconnections, and turn this role to economic and foreign/security policy gains.

Turkey is positioned to play an even bigger role linking gas producers in the Caspian and Middle East to consumers in south-eastern and central Europe with the proposed Southern Energy Corridor and a potential Iranian gas transit deal. For this reason it has been regarded as vital for the EU’s long-term strategy to boost supply security, yet it suffers from a couple of problems including the lack of an exclusively dedicated reserve base. For Turkey to function as a gas transit state, it must be able to import enough gas to satisfy both domestic demand and any re-export commitments, as well as provide enough pipeline capacity to transport Caspian and Middle Eastern gas across Turkey to Europe.

No matter what the political or economic problems are, Turkey must continue maintaining its credibility as a country over which energy flows will not be disrupted. It has become almost common place for Turkish government leaders to assert that energy transit to Europe via Turkey is not only an economic project but also a Turkish geopolitical project that strengthens Turkeys hand strategically vis-à-vis Europe and producing regions around it. Any misuse of Turkey’s energy transit role by the Turkish government for political leverage on the EU could diminish its value. Overplaying Ankara’s hand could, moreover, cast doubt on Turkey’s reliability as a transit country from a business perspective, quite apart from EU debates and European politics.

Yet, it should be borne in mind that Turkey’s top priority is to satisfy its own energy requirements and interests, rather than serving as a conduit of Europe’s energy supply security. This is a unique role Turkey could play – as a regional “hub,” rather than a “bridge” and this is what Washington, Moscow and Brussels should be supporting wholeheartedly, rather than worrying about.

Moving towards smarter and cleaner industries. Turkey should be a pioneer, rather than a follower, in solar, geothermal and hydro energy technologies. It should extend funding for short-term financing programs, which are proving their worth by jump-starting the development and construction of such clean energy projects. With the need to meet the rise in electricity demands, the necessity for the development of sustainable and viable renewable energy sources has reached a greater level of urgency than ever before. The time has come to move beyond discourse and embrace innovation; Turkey should be committed to maximising its technological expertise towards a ‘Smarter’ and ‘Cleaner’ economy.  It is also important to tackle new issues for Turkey’s ageing grid network, which is incapable of integrating large amounts of decentralised energy.

Substantial backup power capacity will be required to support higher levels of intermittent renewable generation even with transformational grid change and storage. These backup costs will be required not only in power capacity but also in the broader fuel supply chain, notably if gas is used as backup. The extension of renewables into the system will entail significant costs above lower-cost alternatives for many years. The need to incentivize private capital flow into clean energy development is greater than ever and will become more urgent with time. Subsidy supports are not expected to fall below today’s levels before 2035 at the earliest and could continue at high levels through to 2050. These costs need to be weighed against the wider benefits to the macro-economy and society. The big risk to power investment is that Turkish consumers could revolt and not pay for all of the decarbonisation costs or that the costs will make Turkey uncompetitive.

Energy efficiency improvements are the best energy security investment. Turkey should retool Turkish industry progressively to compete in a low- carbon economy and move away from energy- intensive and “dirty” sectors, such as iron-steel mills, cement, fertilizer and aluminium. It should be able to adopt a specific target to reduce the energy intensity of its economy by at least 2.5 per cent a year. There is a need to increase the effectiveness of its capacity to implement robust policies, market-based mechanisms, business models, investment tools, and regulations with regard to energy use, and recognize that improvements in energy efficiency remain one of the most effective means of both cutting carbon emissions and improving access to energy.

Funding Turkey’s energy projects. Investors and entrepreneurs often identify project funding as the biggest barrier to sustainable energy projects and technologies. Funding can come in a variety of forms for different types of projects. Some funding covers the whole project, while others cover specific phases (from feasibility through to capital expenditure).  Private banks put heavy conditions for project financing, more often than not higher than the international average, while the government hesitates to offer the necessary support for start-up clean energy projects. We propose the establishment of a €30 billion “Turkey Energy Investment Fund”, with political support from the government. At a time when Turkey seems to be the height of its international prestige and investor confidence, such a fund  could help finance Turkey’s 2023 vision energy projects, drawing on resources of around €30 billion from domestic, Western, Chinese and Gulf banks, sovereign wealth funds, investors, as well as  multilateral financial / development institutions.

Building Turkey’s world-class “energy champions”. As a major energy consumer and transit country, Turkey must create its own energy champions that will be able to play the game by international rules in oil, gas, electricity, coal, wind, geothermal and solar energy, to generate technology and improve the energy efficiency level in such a way so as to mobilize the private sector with its dynamism and international resources.

There is no black-and-white answer to the question, “Should the economy be left to the functioning of the market players or is there a need for strategic direction from the state?” It is not only resource-rich countries that are gaining the upper hand in the new energy game. Industrialized importing countries are also resorting to what is called “economic patriotism” to protect their strategic sectors. The expansion of government-owned companies from hydrocarbon importing developing countries such as China and India into oil and gas exploration activities on a global scale is gaining added momentum.

Given its large gap in energy supply, Turkey depends heavily on the world energy system to secure the necessary fuels for its rapid, but sustainable, economic growth. There is no credible choice other than importing natural gas and oil and boosting power generation including through renewable and nuclear energy projects, except for stepping up efforts to increase domestic energy production and invest in attractive foreign equity oil and gas.

Hence, to achieve this and succeed in the ongoing global competition, Turkey too must create its own national energy champions. The first step could be to achieve synergies between the Turkish Petroleum Corporation (TPAO), currently in charge of exploration and production, and the state-owned Turkish Pipeline Company (BOTAŞ), which looks after transmission and distribution. It should not reinvent the wheel but should learn from international oil companies and national oil companies’ best practices.

This suggestion might seem to be awkward given that there is a strong tendency to ensure the role of the state in the economy will be reduced and energy markets will further be liberalized. What’s proposed here is to bring to life a company that will operate under market rules and get backed up strategically by the state if needed. In terms of funding, it can be sustainably financed through an initial public offering up to 49 percent in the Istanbul Stock Exchange as well as in London, New York, Hong Kong and Dubai.

  • To Caesar What Is Caesar’s?

The ruling AK Party, currently in office for the third time consecutively, has significantly addressed Turkey’s overall vision deficit in recent years. It has forged its own brand of vision, trained cadres and devised a roadmap for the future that it believes in.

Prime Minister Tayyip Erdogan set out the “Turkey Ready – Target 2023” as the fundamental election manifesto for the 12 June 2011 general elections. There was a strong boost to hopes when other political parties too released their own future visions and made them the centrepiece of their election campaigns. In a climate where people have been engrossed in their daily preoccupations and endless polemics, it is gratifying to see how such future visions are competing, albeit in a superficial manner, and politicians, business world, civil society, even the military become an integral part of this much welcome transformation.

Of course, what counts here is not who owns the patent rights of the 2023 vision. What’s more important is to determine its substance, strategic orientations, feasibility, who will own and lead it, by which resources and how it will learn from the world’s best practices in this area without reinventing the wheel. It goes without saying that the 2023 vision set out by the government or those parties slated for power is the most important as it will have the greatest chance of being put into practice and delivered. Yet, one should not forget that the most desirable vision is the one, which will be owned and widely shared by all segments of society, the one that will contain hopes and expectations, and the one whose implementation will be wholeheartedly supported.

We need a vibrant and realistic vision that would remain alive every day. We all need solid goals, values, timelines and discipline that would serve as an anchor. We need a roadmap that would give people something to look forward to along the road to progress. We are in search of leaders with dreams who can competently transform them into strategic goals, and have abilities to communicate these goals effectively to the public, to the decision makers and the external world as well.

We cannot achieve our 21st century aspirations without such a comprehensive roadmap that reflects the whole picture and takes into account global developments likely to shape up our lives. We need a high-calibre education system, which encourages freethinking, creativeness, sharing, cultural enlightenment and respect for common values.

For future generations, and us today a new energy vision should be forged to focus on the country’s competitiveness, sustainability, cleaner environment as well as social dimensions. It should also take into account the ongoing transformation that will become more influential in the years to come in the world. If we ignore them and do not take bold steps beginning now, our roadmap could be decided elsewhere – perhaps in Brussels, Moscow or Washington.  With the right policies, institutions and leadership, Turkey could well sit on the management board of the new world energy order by 2023.

* Mehmet Öğütçü is a UK-based major multinational energy company director, former Turkish diplomat, OECD executive, fellow at LSE, Shanghai University, Reading University.