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Energy Market Liberalization and Regional Market Integration
Competition in the energy sector needs to be reinvigorated if an efficient energy hub is to emerge in Turkey. This was one of the conclusions of the workshop on Energy Market Liberalization and Regional Market Integration, organized in Istanbul on October 10th, 2016 on the sidelines of the World Energy Congress (WEC).

Dr. Todor Galev, Senior Analyst from Bulgaria’s Center for the Study of Democracy pointed out the importance of including civil society organisations and independent experts in the designing of the country’s energy security strategy. He added that the cooperation between private and public actors would be crucial for the implementation of the project’s recommendation for market liberalization, reduction of energy security risks and the improvement of regional energy cooperation.

Energy cooperation in the SEE region and Turkey is mostly in the electricity sector, according to Sohbet Karbuz, Director of Hydrocarbons, Mediterranean Observatory for Energy (OME). In terms of natural gas, he claimed, rather than cooperation there is competition between countries, which is the result of the aim of all the governments to become a transit point for a number of competing energy routes. Dr. Karbuz reminded that Turkey wants to become a hub for natural gas; however, he reminded that a hub is a virtual point for price benchmarking, which is determined under a supply/demand principle. A hub does not mean a collection and dispatching point although some governments in the region including the Bulgarian one understands in exactly this way.

Dr. Karbuz pointed out that the EU had had the objective of creating a gas hub in the Mediterranean region. Currently Turkey, Bulgaria, Greece, Italy, Cyprus, and Egypt are vying for this position. However, one of the big hurdles is the limited amount of different natural gas sources available in the region. Dr. Karbuz’s suggestion to this problem is better cooperation between the countries of the region to improve gas supply security. He reminded that Southeast Europe is the least prepared region to a halt in gas. Europe’s solution for this risk has been to promote the creation of one or two gas hubs in the region through joint cooperation in the framework of multilateral initiatives such as the Central and South Eastern Europe Gas Connectivity Group (CESEC);. The completion of the internal energy market by prioritizing gas trading exchanges is also part of Europe’s strategy to depend less on Russian supply.

Erdinç Özen, member of the Turkish National Gas Assembly and the Commercial Operations Manager of Trans Anatolian Natural Gas Pipeline Project (TANAP), stated that one of the biggest impediments to the gas market liberalization had been that BOTAŞ had had a virtual monopoly on the Turkish gas market. He claimed that if the gas sector was to be reformed, BOTAS’ stake should be diminished and the state-owned gas supplier restructured and fully unbundled. The gas market reform should also implement a new mechanism for subsidizing low income households, as the current model should be terminated. Another objective should be the expansion of the incentive mechanisms for gas infrastructure investments requiring a significant amount of capital. The authorities should follow EU regulatory models for designing similar incentive mechanisms. Mr. Özen further suggested that the natural gas market should be included as a separate trading segment on the Turkish power exchange.

Turkey will have a major advantage in becoming a major gas hub in the region due to state of its gas infrastructure in early 2020s. By 2022, it is estimated that Turkey will have the capacity to transit around 350 million cubic meters per day, up from circa 200 million cubic meter today. Özen stated that the physical upgrade of the transmission system should go hand in hand with the improvement of the legal framework and the strengthening of regional cooperation. He noted also that in terms of physical infrastructure, Turkey has enough onshore capacity but in terms of regional cooperation and interconnectivity, Turkey needs to develop further the cross-border infrastructure, hand in hand with the development of legal and contractual framework. Recently, some cross-border projects have already been implemented but the required legislation has left behind.

Eser Özdil, PETFORM’s Secretary General, Turkey would have to do a lot in order to achieve its objective of becoming an energy hub. Mr. Özdil emphasized that the mandatory gas purchases clauses in the long term gas supply agreements have been the chief obstacle before the liberalization of the energy sector. Long-term deals prevents spot gas trading to emerge, which makes price-setting mechanisms rigid and often the product of asymmetrical bargaining. In terms of regional integration, Mr. Özdil stated that the three main energy players in the SEE region have been the European Commission, Russia, and the US; thus, neither Bulgaria, for example, nor Turkey could fully implement their own energy strategy without considering others’ positions. When a country develops a strategy without close coordination with the other countries. He emphasized the common problem of all Balkan countries being unable to agree on a reference price for future alternative gas supplies. Last talks between Bulgaria and Turkey on this topic have been five years ago, he added. If the price benchmark is based on LNG deliveries, the clearing price should be somewhere between that of the US LNG, expected to be the most expensive in Europe, and the LNG from Qatar, which is expected to be cheapest option. Mr. Özdil added that Turkey should aim to be a trading hub, which not only distribute gas but also make reference prices. If it is successful on that, the country could strengthen its position as reference-price-spot for the CEE region.

Mr. Sohbet Karbuz reacted, stating that even now 66-67% of the gas market in CEE is based on spot-prices but this is mainly due to the market in the Central Europe, which is closed and well connected to the western gas hubs. Still countries like Bulgaria or Serbia rely only on prices determined by long-term contracts.

Martin Vladimirov from the Center for the Study of Democracy stated that there are several conditions that need to be met for a gas hub to emerge. Any successful gas trading hub instituted in Turkey must have two fundamental aspects: firstly, it must have the ability to import and export gas to the market, and secondly, there must be a mature consumption center, either through domestic demand or through the existence of markets easily reached from the hub. Turkey has the potential to satisfy both requirements. However, regional gas market integration would not depend only on making new diversification options possible, according to Mr. Vladimirov. It also depends on the creation of a new regulatory framework the encourages competitive entrants through the promotion of a gas volume release program through public auctions instead of a contract release method, which would increase the Turkish market’s liquidity and spot trading levels. The natural gas volume release program will encourage diversity of supply sources fostering the security of supply, especially in winter times. It will also forge a more dynamic gas supply and demand equilibrium than the monopolistic structure established by the state-owned company, BOTAS. Releasing gas volumes on auctions would also stimulate global capital investment and also the transference of financial risk to the private sector diminishing the burden on the budget already under significant strain.

In the second panel devoted to the practical implications for the development of energy trading hubs in Southeast Europe, Mr. Vladimirov emphasized that cooperation is a must if source diversification is wanted. He noted the need for the creation of viable mechanisms for trust building. Mr. Vladimirov pointed out that the establishment of a gas hub would require depth, width, and adequate capacity. Depth requires large liquidity that prevents severe price fluctuations at a virtual trading exchange; breadth refers to the inclusion of a large number of diverse market players trading spot, forward and futures contracts; immediacy requires the elimination of contractual congestion and a vibrant spot trading; and finally resilience relates to the ability of the hub to absorb external shocks including supply cuts that can be easily replaced by LNG, storage capacity or an alternative pipeline routes. To establish such a virtual trading point that could easily become a reference to the whole SEE region, Turkey would need to demonopolise the gas import and wholesale supply, increase storage capacity, optimize the use of LNG regasification facilities and launch a transparent electronic clearing system that would be open to all private market participants on equal terms. To prevent capacity bottlenecks, the transmission systems operator would have to ensure open access to capacity booking and efficient balancing mechanisms.

Silvia Bayer, International Energy Agency’s Desk Officer for Turkey, said that the dynamics in global energy markets had been changing dramatically in the past two years. The future of the EU natural gas market depends on the speed and nature of the process of coal and nuclear phase-out. She added that LNG supplies coming from the US and Australia indicate that the competition will increase significantly in the medium term. This would benefit Turkey already in the short term as the country benefits from its strategic position of being on the crossroad between major gas-producing and consuming region. However, to achieve its objective, Turkey would need to become more involved in regional cooperation, which would also require significant investment in infrastructure. At the moment, Turkey’s gas transmission capacity is not enough to meet its peak demand in winter, which creates significant risks before the reliability of energy supply and is also closely related to the security of electricity supply, which is significantly dependent on natural gas. Ms. Beyer added that the IEA’s recommendations for Turkey include diversification of gas supplies, gas infrastructure development, and, very critically, the completion of the natural gas market reform.

BP Turkey’s Natural Gas Marketing Manager, Zeyno Elbaşı, focused her presentation on the important example of the natural gas hubs located in Northwestern Europe, where countries have improved and liberalized the natural gas market, which has allowed for the efficient functioning of gas trading hubs with great depth in the region. The best examples to be found in Europe are the National Balancing Point spot trading hub in the UK and the Title Transfer Facility (TTF) in the Netherlands. Ms. Elbaşı added that the share of spot trading on the European gas market had risen from 15% in 2005 to over 50% in 2015. She added that the rate in SEE and Turkey is much lower as pricing is determined by political considerations and pricing mechanisms are non-transparent, which prevents the emergence of an efficient and liquid trading hub in the region.

What matters is the security and diversity of natural gas supply, rather than which country exactly hosts the gas hub, according to the last panelist, Julian Popov, Senior Fellow and Adviser to the European Climate Foundation. He pointed out several problems in the current structure of the natural gas sector. The first one is the overall decline of the natural gas demand caused by significant improvements in energy efficiency, the increase of the share of renewable sources in the power sector and the overall decline of industrial manufacturing. Ironically, the more gas demand declines, the more money on natural gas infrastructure are spent. He added that governments tend to ignore the overall decline in natural gas consumption when deciding on whether to join a pipeline project, which in the long-term could lead to a massive amount of stranded assets in the gas sector. Mr. Popov also argued that it would be consumers rather than producers that would determine the supply/demand dynamics on future gas exchanges. He went on to say that natural gas consumers have become more influential than the suppliers, since suppliers are in need to find markets to sell their product. From this perspective, Turkey appears to be the biggest player since it consumes most of the natural gas supply in the region.

Agenda (Adobe PDF, 927 KB)
Presentation by Sylvia Beyer, International Energy Agency’s Desk Officer for Turkey (Adobe PDF, 1.13 MB)

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