In December 2003, a petroleum market reform bill was passed by Turkey's]] parliament. The Petroleum Market Law aims to remove state controls on the hydrocarbon sector, liberalize pricing of oil and oil products, end restrictions on vertical integration, and integrate pipeline, refining, and distribution functions. Also, as a result of this law, price ceilings and import quotas on petroleum products were lifted in early 2005.

The majority of Turkey’s oil reserves are located in southeastern part of the country and in the Thrace region in the northwest. The oil fields in the southeastern Hakkari Basin, Turkey’s main oil producing region, are mature and output has declined over the last decade. Furthermore, production costs for oil reserves in the Hakkari Basin are considered higher than average international levels. International oil majors Royal Dutch Shell and ExxonMobil are the largest foreign oil producers in Turkey.

Recent oil exploration activities have focused on Turkey’s offshore regions, where the country holds oil prospects in the Black, Mediterranean, and Aegean Seas. Although some reports suggest the Aegean Sea could hold sizeable oil reserves, potential oil reserves in the region have not been explored due to conflicting Greek claims over the area. During 2005, TPAO and its international partners drilled the country’s first exploration wells in the Black Sea. The TPAO-Torreador-Stratic joint venture oversees the Western Black Sea Exploration and Development Project, while the TPAO-BP-Chevron joint venture runs the Eastern Black Sea Offshore Project (for more information, visit the exploration and production section of the TPAO website ).

In concert with the recent trend of national oil companies (NOC) looking overseas to secure oil interests, TPAO has also acquired exploration and production assets abroad through its subsidiary, the Turkish Petroleum Overseas Company (TPOC). One of the company’s most significant overseas oil production assets is the Azeri-Chirag-Guneshli (ACG) Project in Azerbaijan, which holds 5.4 billion barrels of proven oil reserves. TPAO has a 6.75 percent interest in the ACG Project, which produced an average 350,000 bbl/d of oil at the end of 2005. TPAO is also part of the Alov Exploration Project in the Azeri part of the Caspian Sea, which holds an estimated 5 billion barrels of recoverable oil reserves and sizeable natural gas reserves. The first exploration well in the Alov project is expected to be drilled in 2006 (for more information on exploration and production activities in the Caspian Sea, see the Caspian Sea Regional Brief).

During 2005, TPAO signed a Production Sharing Contract (PSC) for Block 147 in. TPAO has also operated Blocks 188 and 189 in Libya since 2000. In November 2005, TPAO signed a Memorandum of Understanding (MOU) with the state-owned Syrian Petroleum Company to jointly conduct exploration and production activities in Syria.

Turkey, which lies between the energy-rich countries of the Caspian Sea and Persian Gulf regions and net energy importing countries in continental, is increasingly important for oil transit. Turkey has established or considered a number of pipeline projects that would transport oil into Turkey without relying on the crowded Bosporus Straits.

The construction of the BTC Pipeline was carried out by an integrated project team that simultaneously led the construction of the Southern Caucasus Pipeline (SPC), which will transport natural gas parallel to the BTC for most of its route before connecting to the Turkish gas pipeline network near the town of Horasan. The BTC Pipeline passes a considerable distance through rugged terrain, reaching an elevation of more than 9,000 feet when traversing the Caucasus Mountains. Security was a key factor considered in the design of the BTC Pipeline, with the entire length of the line buried to help protect against possible sabotage.

Turkey’s port of Ceyhan is also the destination for oil exports from northern Iraq in the Kirkuk-Ceyhan oil pipeline. The 600-mile dual pipeline consists of two parallel lines that have a maximum throughput of around 1.6 Mmbbl/d. However, Kirkuk-Ceyhan has been a major target for sabotage since June 2003, and is only open sporadically. Most recently, on July 9, 2006 both lines were closed down after being severely damaged in a sabotage attack. On July 31, 2006, just as Kirkuk-Ceyhan was set to reopen after repairs, another attack ruptured the pipeline and delayed the restarting of the export line (for more information, see the Oil Section of the Iraq Country Analysis Brief).

The 17-mile long Bosporus Straits, only a half mile wide at its narrowest point, is one of the world’s busiest shipping lanes. The straits are also increasingly an important oil transit point, with oil tankers bringing shipments from the Black Sea to the Mediterranean for export. The Turkish government has raised concerns that increased oil tanker traffic through the narrow and twisting Bosporus heightens the risk of an oil spill. Exports through the Bosporus have grown substantially since the breakup of the former Soviet Union. One project that will increase oil transit through the Bosporus is the Russian-backed Northern Route Export Pipeline, a 990-mile pipeline that transports oil from Kazakhstan’s Caspian Sea area oil deposits to the Russian Black Sea port of Novorossiysk. The pipeline, built by the Caspian Pipeline Consortium (CPC), is expected to deliver up to 650,000 bbl/d of oil by year-end 2006. After reaching Novorossiysk, oil for export is then loaded onto tankers and shipped through the Bosporus onto world markets.

Proposed Bosporus Bypass options (full size image). (Source: US Government)

To ease increasing oil traffic through the Bosporus Straits, a number of Bosporus bypass options are under consideration in southeastern Europe and Turkey itself (for more information, see the Southeastern Europe Regional Analysis Brief). The BTC Pipeline is the first of several bypass projects under consideration over the last decade to have materialized.

Several other possible Bosporus bypass options are being examined, some of which do not involve Turkey. One proposal that has received significant attention is a pipeline that would pump crude oil from Bulgaria’s Black Sea port of Bourgas to Greece’s Mediterranean port of Alexandropoulos, known as the Bapline project (for more information, see the Southeastern Europe Regional Analysis Brief ). Other possible bypass routes across the Balkans have also been explored (see the Balkans Regional Analysis Brief).

According to OGJ, Turkey had a total refining capacity of 714,275 bbl/d as of January 2006 at 6 facilities. Tupras is the leading refiner in Turkey, which operates three large refining complexes at Aliaga near Izmir (226,440 bbl/d capacity), Izmit (251,600 bbl/d), and Kirikkale (113,220 bbl/d) as well as a smaller facility at Batman (22,015 bbl/d). The largest privately-owned refinery in Turkey is run by Anadolu Tasfiyehanesi AS (Atas), which is owned by ExxonMobil (51 percent), Shell (27 percent), BP (17 percent), and Marmara Petrol (5 percent) and has a capacity of 95,000 bbl/d.

Several companies are considering new refinery projects in Turkey, reflecting the country’s emerging status as a regional energy hub. As of mid-September 2006, Turkish government energy regulators have only received one formal application for a new refinery. A joint venture of Calik Energy and Indian Oil Company (IOC) has proposed the construction of a 300,000-bbl/d refining and petrochemical complex at Ceyhan, at a reported cost of $4.5 billion. Also in Ceyhan, Petrol Ofisi AS (POAS) has proposed the building of a $2 billion, 200,000-bbl/d facility. Russia’s Lukoil is currently drafting a feasibility study for a possible plant along Turkey’s Black Sea coast. Although the plans are tentative, media reports suggest that the site would be either Samsun or Zonguldak, and have a capacity between 160,000 and 200,000 bbl/d. Tupras has not announced plans to build any new refining facilities, but has long studied the possibility of expanding existing plants.

Prior to 2001, Turkey’s natural gas market and infrastructure were almost entirely dominated by state-owned Botas. In May 2001, Turkey enacted a new Natural Gas Market Law with the intent to liberalize the natural gas sector, encourage foreign investment in energy infrastructure, and harmonize its energy policy with that of the EU. Among other things, the law will abolish the Botas monopoly, separating the company into units for natural gas import, transport, storage, and distribution by 2009. At that point, the various components (except for transport) are to be privatized. However, this process has proceeded slowly, and many expect the 2009 deadline to be pushed back. Turkey’s Energy Market Regulatory Authority (EMRA) is responsible for implementing the Natural Gas Market Law, and also now sets natural gas prices in Turkey.

Historically, much of Turkey’s natural gas production occurred at sites where crude oil was also produced. Over the last decade, however, several non-associated natural gas fields have been discovered. The largest non-associated natural gas find is Marmara Kuzey, an offshore field that came onstream in 1997 located in the Thrace-Gallipoli Basin of the Sea of Marmara. Turkey’s small natural gas production is carried out primarily by state-owned TPAO, which accounts for roughly 63 percent of the domestic output.

TPAO has partnered with several international oil and natural gas firms for ongoing exploration and production activities. TPAO’s priority for the last few years has been for exploration at offshore natural gas basins. In March 2002, Amity Oil announced a natural gas discovery at the Gocerler-3 well in the Thrace-Gallipoli Basin, and has since announced several other discoveries in the region. During 2006, the company averaged 50 million cubic feet per day (Mmcf/d) of natural gas output, although production sometimes rose to 70 Mmcf/d. In September 2004, TPAO said that it had found a viable gas deposit at the Ayazli-1 and Ayazli-2 wells off the western Black Sea coast. Since then, a joint venture of TPAO (51 percent), Toreador (37 percent), and Stratic (12 percent) has conducted extensive exploratory drilling and seismic testing in the region. Estimates from Toreador have put recoverable natural gas reserves in the Western Black Sea Project at 1.4 trillion cubic feet (Tcf). The project is expected to begin commercial natural gas production by the end of 2006, with initial flows of 60 to 70 million cubic feet per day (Mmcf/d). The success of this project, which might eventually contribute significantly to Turkey’s domestic natural gas production, has encouraged other offshore exploration projects in the Black Sea. The TPAO-Toreador-Stratic consortium has announced several new natural gas finds in the South Akcakoca Sub-basin (SASB) during 2006, including at the Bayhanli-1 and Akkaya-3 wells. In the Eastern Black Sea, TPAO has partnered with BP and Chevron where ongoing testing occurs at several wells.

The Blue Stream natural gas pipeline transports Russian natural gas to Turkey via a 750-mile pipeline, 246 miles of which extends underneath the Black Sea. The project was carried out by Russia’s Gazprom, Italy’s Eni, and Botas at an estimated cost of $3.2 billion. The line reaches the Turkish port of Sumsun and extends to Ankara. At its lowest point, the pipeline reaches underwater depths of 7,050 feet, which posed significant technical challenges and contributed to the project’s relatively high cost. Construction of the line was completed in December 2002, with an initial schedule of delivering 71 Bcf of natural gas in 2003. However, in March 2003, Turkey halted deliveries through Blue Stream, invoking a clause in the contract allowing either party to stop deliveries for six months. Turkish authorities cited weak domestic demand, and declared their intentions of renegotiating the price and volumes of natural gas imports from Russia through the line. After Russia filed suit in Stockholm's International Arbitration court, the two sides came to an agreement in November 2003 and the supply of natural gas to Turkey resumed in December 2003. Blue Stream’s formal inauguration took place in November 2005 at a metering station in Samsun, Turkey.

The Blue Stream pipeline has a capacity to pump 565 Bcf per year of natural gas to Turkey, although this level is not scheduled to be reached until 2010. For 2006, Turkey has contracted to purchase 283 Bcf of Russian natural gas via Blue Stream, with import levels rising by 71 Bcf every year until the line reaches maximum capacity. Turkey already receives additional piped natural gas imports from Russia via a Western overland route that transports natural gas to Turkey, passing through Moldova, Ukraine, Romania, and Bulgaria (commonly referred to as the Trans-Balkan Pipeline). This line has a capacity to deliver 494 Bcf per year of natural gas to Turkey. For 2006, Turkey has contracted to import about 850 Bcf of natural gas from Russia, representing 67 percent of total Turkish natural gas imports. On this account, several Turkish energy analysts have criticized the Blue Stream project for significantly increasing Turkey’s dependence on Russia for natural gas, and thereby crowding out other planned or proposed pipeline projects that would diversify the country’s energy sources.

In January 2002, Iran and Turkey officially inaugurated a natural gas pipeline link between the two countries, following several years of delays. The line runs approximately 750 miles from Tabriz in Iran to Ankara, the Turkish capital. The pipeline has a maximum capacity to pump 495 Bcf per year of natural gas, although since the project began, annual levels have generally been within the 100 to 150 Bcf range. There have been several supply disruptions on the Tabriz-Ankara line. On January 19, 2006, Iran reduced natural gas flows through the line to 423 Mmcf/d, citing “technical problems” caused by cold weather at the Tabriz natural gas field. At that time, the line should have been exporting 955 Mmcf/d of natural gas to Turkey. When natural gas flows through the pipeline had not returned to normal in February, Turkey began purchasing additional natural gas from Russia through the Blue Stream pipeline.

In August 2006, the Iran-Turkey link was damaged in a sabotage attack by members of the separatist Kurdistan Workers’ Party (PKK), which is designated a foreign terrorist organization by the U.S. Department of State. Turkish government officials reported that the line was quickly repaired, and natural gas flows returned to normal within days. Turkey has increased security along the pipeline to help ward off further supply disruptions.

On account of various supply interruptions and disputes over Turkish natural gas pipeline links with Russia and Iran, Turkey has looked to other natural gas-rich countries in the region to diversify its import sources. However, serious questions remain over whether or not Turkey is able to absorb the large natural gas imports it has contracted to buy. A number of natural gas import projects are either under construction or in various stages of planning.

Turkey has signed an agreement to import natural gas from Azerbaijan’s large Shah Deniz field. The line is variously known as the South Caucasus Pipeline (SCP) or Baku-Tbilisi-Erzurum (BTE), and will run parallel to the crude oil BTC pipeline for most of its route before connecting to the Turkish pipeline network near Horasan. Construction on the $1.3 billion project began in late 2004, and the pipeline is scheduled to be completed during the first quarter of 2007. The line is initially expected to carry 233 Bcf per year of natural gas to the Turkish market, and can be increased to 700 Bcf with future additions of compressor stations. BP and Norway’s Statoil each hold a 25.5 percent stake in the project and serve as co-operators, with the State Oil Company of Azerbaijan Republic (SOCAR), Russia's Lukoil, Turkey's TPAO, France's Total, and Iran's NICO holding around 10 percent each.

In July 2005, Turkey and Greece began construction on a 186-mile pipeline connecting the two countries. Greece has established a natural gas purchase agreement with Azerbaijan, and Azeri natural gas from the SCP pipeline will be pumped from Bursa in Turkey to Komitini in Greece. The pipeline is expected to be complete by the end of 2006, although the project’s start-up date is tied to the start of commercial operations on the SCP. Eventually, the Turkey-Greece Interconnector will be linked to the planned pipeline connecting Greece and Italy (the Greece-Italy Interconnector). As of October 2006, the Greece-Italy segment has been agreed upon, but financing for the project has yet to be secured. Current plans call for a $1.3-billion, 500-mile pipeline from northern Greece to southeastern Italy (for more information, see the Italy Country Analysis Brief). The Turkey-Greece Interconnector is expected to pump an initial 28 Bcf per year beginning in late 2006, eventually transporting up to 407 Bcf per year by 2012 (see the Greece Country Analysis Brief).

In May 1999, Turkey's Botas signed an agreement to build a 1,050-mile natural gas pipeline from Turkmenistan that would travel underneath the Caspian Sea, across Azerbaijan and Georgia, and on to Turkey. The so-called “Trans-Caspian Pipeline” project has been effectively killed, owing to the discovery of the Shah Deniz natural gas field in Azerbaijan. There is still a possibility that Turkmen natural gas might reach Turkey through the South Caucasus Pipeline.

Turkey and Egypt have long discussed the possibility of Egyptian natural gas exports to Turkey. Most recently, in May 2006, energy ministers from Turkey, Egypt, Jordan, Lebanon, and Syria discussed the possible expansion of the “Trans-Arab Pipeline” to Cyprus and Turkey, and possibly onward to Western Europe. To date, no specific project has been agreed upon.

Another possible project that seeks to deliver natural gas across Turkey to European markets is the “Nabucco” project, which would which would transport natural gas from the Caspian, Central Asia, and possibly the Middle East to Austria. In June 2006, energy ministers from the five countries backing the project (Turkey, Austria, Bulgaria, Hungary, and Romania) and EU Energy Commissioner Andris Piebalgs signed a joint declaration to accelerate commercial, regulatory, and legal work to build the pipeline. While there is no final agreement on the project, plans are for $5.8-billion, 2,050-mile pipeline that would reportedly transport an initial 280 to 460 Bcf per year of natural gas in 2011, rising as high as 1,100 Bcf per year by 2020.

Under the "take-or-pay" provisions of natural gas supply contracts with countries like Iran and Russia, Turkey theoretically could be forced to pay cash penalties of up to $1 billion per year if it fails to purchase contracted gas. In this context, Turkish energy officials have discussed the possibility of storing surplus natural gas in underwater depots beneath the Sea of Marmara or under the Salt Lake (Tuz Golu) in central Anatolia.

In 2004, Turkey had total installed electricity generating capacity of 35.6 Gigawatts (GW), a 36 percent increase since 2000. The country produced 143 billion kilowatthours (Bkwh) of electricity in 2004, while consuming 133 Bkwh. Conventional thermal sources comprise the largest share of Turkey’s electricity supply, contributing 68 percent in 2004. Hydroelectricity generation makes up almost all of the remainder. Although Turkey does not currently produce any nuclear energy, the country’s first nuclear power plant is expected to begin electricity generation in 2012.

After the passage of the Electricity Market Law, TEAS was split into separate state-owned companies: Turkish Electricity Generation Company (EUAS), Turkish Electricity Transmission Company (TEIAS), and Turkish Electricity Trading and Contracting Company (TETAS). Before the 2001 reforms, EUAS operated 91 percent of Turkey’s power supply. However, EUAS will sell off most of its power plants and other holdings under the government’s privatization plan. In June 2003, 27 state-owned coal and hydropower plants were transferred to a government holding company in preparation for privatization, accounting for 28 percent of the Turkish power generating market. The government of Turkey originally set a goal of 2006 for the total privatization of EUAS, although this has proceeded more slowly. To date, the privatization process has wavered due to lack of investor interest and political uncertainty, although external institutions have kept the process on track. In July 2004, Turkish authorities withdrew a bill that was proposed that would have weakened the country’s power sector liberalization program after receiving heavy criticism from the World Bank, EU, and others.

In August 2006, the EPDK approved the privatization of Turkey’s 20 regional electricity grids. The EPDK has approved a new electricity tariff structure, the final step before Turkey can invite tenders to auction the distribution grids. The power grids are expected to be sold in groupings of up to 6 regional grids at a time to encourage economies of scale and greater efficiency.

Conventional thermal sources have historically been Turkey’s largest power source. Natural gas-fired power plants have increased substantially in the last decade and now comprise more than half of the country’s conventional thermal generation. However, in July 2006, two natural gas-fired power plants ceased operations, with the operator AK Enerji citing increasing natural gas costs. The company complained that natural gas prices for power producers have risen by 50 percent over the last year while the government-set electricity tariff for consumers has not changed. Still, plans for natural gas-fired power stations abound in Turkey, especially given that the country has contracts to purchase significant amounts of natural gas in the future. Turkish authorities have worked to privatize the country’s electricity grid network, which they hope will resolve the current market problems.

Coal-fired power stations also remain an important energy source for Turkey, and there is renewed interest in exploiting Turkey’s domestic coal resources following large natural gas price increases. In August 2006, tenders were offered by EUAS for the construction of two new 1,200-MW coal-fired units at the existing Afsin-Elbistan power plant. The Afsin-Elbistan region holds 3.3 billion short tons of lignite reserves, or 40 percent of Turkey’s domestic total.

Over the last few years, several new conventional thermal power plants have come online. However, except for the recent EUAS tender, few new power stations are currently scheduled to be built in Turkey.

Turkey has significant hydroelectric power resources, with more than 100 total plants and total installed hydroelectric generating capacity of 12.6 GW. Turkey is also developing a great deal more of hydropower plants, especially as part of the $32-billion Southeastern Anatolia Project (GAP) along the basin of the Tigris and Euphrates Rivers. Under the GAP project, which is considered one of the most ambitious water development projects ever undertaken, Turkey will erect 22 dams, 19 hydroelectric power stations (with around 7.5 GW of generating capacity), and an expansive network of tunnels and irrigation canals covering 1.7 million hectares of land. The GAP project is overseen by the Southeastern Anatolia Project Regional Development Administration (for more information, see a June 2006 GAP RDA Project Update Report). By the end of 2005, 8 hydropower plants had been completed, representing 74 percent of total planned energy projects under the GAP scheme. The 8 power stations generated 18.7 Bkwh of electricity in 2005, adding substantially to the share of hydroelectricity in Turkey’s energy mix. The entire GAP project is scheduled to be completed by 2010.

In April 2006, the head of Turkey’s Atomic Energy Agency (TAEK) confirmed that Turkish Prime Minister Recep Tayyip Erdogan had chosen the Black Sea port of Sinop to be the site of the country’s first nuclear power plant. The site was one of eight identified by TAEK as a potential location for the power plant following a careful technical evaluation. The 1,800-MW power plant, which will cost an estimated $2.7 billion to construct, is scheduled to come online in 2014. Turkey originally hoped to build three new nuclear plants totaling 5,000 MW, but plans have been scaled back. Although Turkey is proceeding with its nuclear ambitions, there are still numerous obstacles facing the Sinop project. Turkey has tried to move ahead with plans to build a nuclear power plant for more than 30 years, but the plans have been blocked by difficulties attracting sufficient financing, legal issues, and opposition from environmental and anti-nuclear groups.