Turkey-EU Energy Relations, Speech delivered in the 5th Energy Arena, İstanbul, 27-28 April 2006

TURKEY-EU ENERGY RELATIONS

Text of the presentation

made by

Mr. Yaşar Yakış

Former Minister of Foreign Affairs and Chairman of the EU Commission in the Turkish Parliament

5th Energy Arena

Conrad Hilton, İstanbul

27-28 April 2006

I – Energy policy of the EU

 II- Energy policy of Turkey

III – Turkey-EU Energy relations

Energy is perhaps one of the most important chapters in Turkey’s relations with the EU, if not the most important one. This is an area where cooperation matters more for both Turkey and the EU.

Energy has several sub-titles such as oil, gas, renewable, coal and nuclear. The renewable sources of energy are divided, in their turn, into the following categories: biomass, hydraulic, winds, geo-thermal and solar.

Cooperation goes beyond these specific subjects and covers other areas such as the energy infrastructure, construction of the infrastructure, management of the energy sector and energy saving measures.

The subject does not consist of the supply and demand of the sources of energy only. It covers other dimensions such as energy efficiency, environmental impact and so on and so forth.

Turkey’s relations with the EU in the field of energy cover all of these areas.

EU’S energy Policy

The philosophy of EU’s energy policy is based on the integration of the energy markets of the member countries and on securing a sustainable economic and social development. This philosophy includes also the protection of the consumers. The main targets of this policy is summarized as follows:

– contribute to the competitiveness of the EU;

– ascertain the security of energy supply;

–  contribute to the protection of environment.

The EU aims at providing less expensive, uninterrupted and high quality energy to the consumers. The founding fathers of the Union were aware of the importance of energy already in early 1950s. When we remember that the nucleus of the EU was created with the establishment of the European Community of Coal and Steel, we will see that an important source of energy, namely coal, was one of the main elements of cooperation together with steel. The establishment of the EURATOM in 1957 is yet another indication of the importance attributed to energy by the European governments in 1950s.

Until the sharp rise of oil prices in 1972, the then EEC was not worried about the risks of over-reliance on oil as a source of energy. Therefore, energy did not become a priority issue of the Union. This coincides with the period of the first enlargement of the Union. In the newly enlarged Union it was not possible to develop a common energy policy until mid-80s. Two reasons contributed to the gaining of awareness in this subject: continuously rising oil prices and over-reliance on external sources.

It took several years, even decades, for these efforts to be reflected on an EU document in a structured manner. This document is called The Green Paper. Its full name is actuallyThe Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy. It is a consultation document issued on 8th of March 2006 and designed to stimulate ideas on what should be done to deal with practical challenges and problems. On the basis of the response to this Green Paper, the Commission will develop more concrete ideas on a number of energy issues. This consultation will be open for 6 months. The closing date is 24 September 2006.

Europe is entering a new energy landscape. Its import dependency is 50% today, and the trend is upward. Energy is becoming more expensive everywhere in the world. Funds needed over the next 20 years to meet expected energy demand and replace ageing infrastructure is estimated to be around 1 trillion EURs.

The EU Commission invites comments to the observations made in the Green Paper. It contemplates drafting a document that will be called Energy Policy Communication and publishing it in 2007. The Green Book and the Staff Working Document of the EU Commission on this subject contain several important suggestions that will shape the future energy policy of the EU. Some of these suggestions could be summarized as follows:

– develop the internal gas and electricity markets;

– revise the policies pertaining to the gas and oil stocks;

– establish an “observatory” to improve the transparency in energy demand and supply in the EU countries;

– improve network safety;

– support countries whose infrastructure needs improvement and develop a new mechanism to demonstrate solidarity with them;

– create a suitable environment for the discussion of various energy issues including the impact of different sources of energy;

– develop an action plan for energy efficiency aiming at similar goals or propose an international agreement on energy efficiency;

– draw up a road map for renewable sources of energy;

– design a plan for strategic energy technologies;

– develop an integrated foreign policy in the field of energy;

–  draw up a priority list for the construction of new infrastructures;

– extend the Treaty Establishing an Energy Community for the Countries of South Eastern Europe in a manner to cover entire Europe.

Creation of an Energy Internal Market in the EU

The liberalisation of the energy markets in individual member countries in the EU is not sufficient for the creation of an internal market at the EU scale. They have to be integrated also. The Electricity Directive of 1996 and the Natural Gas Directive of 1998 were the steps taken in this direction.

These Directives contributed to the liberalisation of the energy market and to the fall in the energy prices. However, the implementation varied from one EU country to the other and this difference constituted an obstacle to the competition in the internal market. The EU decided therefore to amend the Directive and to introduce deadlines for the implementation of the provisions of the Directives. According to the amended Directives, all consumers with the exception of households were to acquire by 1st of July 2004 the right to choose their supplier. Until 1st of July 2007, all consumers, including households, were to acquire the same right.

Furthermore the Directives brought in three more major innovations:

– Separate the transmission and distribution activities and open both fields to the access of third parties.

– Establish regulatory authorities for electricity and gas markets;

–  Announce the tariffs beforehand.

The completion of the internal market cannot be achieved by the full implementation of this acquis. It also requires the interoperability of the domestic networks, the interconnection of power grids, appropriate infrastructure and sufficient supply capacity. Several other pieces of legislation were enacted in later years to achieve these goals.

Apart from the natural gas and electricity, the EU takes several measures in other energy fields as well, such as oil, coal, nuclear and renewable sources of energy.

Oil

According to the statistics of the year 2000, the share of the imported oil in the EU-15 was 76 % ( 88.6 % in Turkey). The EU issued a Directive to make it compulsory to have a 90 day oil stock in order to smoothen the negative impacts of the fluctuations in the oil supply. Dependence on the foreign sources of energy is at present 50 % in the EU and it is estimated to reach 70 % in 20-30 years time.

Coal

Trade of coal was done according to the Charter of the European Community of Coal and Steel (ECCS) that remained in force for 50 years. After the expiration of the ECCS Charter, trade of coal has become like any other trade. The EU legislation regarding coal deals essentially with the State subsidies provided for coal.

Nuclear Energy

Despite the negative attitude of the EU public opinion, nuclear energy still constitutes a major part of the sources of energy in many EU countries. The EU Directives in this area are on the safety standards of nuclear power installations.

New and Renewable sources of energy

            In a White Paper published in 1997, the EU contemplates increasing the share of the new and renewable sources of energy from 6 to 12 %.  The EU made available 250 million EURs to support both the energy efficiency and the use of new and renewable sources of energy (Turkey does not participate in these programmes).

Energy efficiency and management of energy demand

Energy efficiency is important both for the savings that will accrue and for the environmental impact of lesser emission of CO2. Furthermore energy efficiency will improve the competitiveness

Turkey’s Energy Policy

Compared to the sophisticated network of measures being developed within the EU, Turkey’s efforts to rationalize the energy market remains modest. Turkey’s energy policy is based on classical principles that could be found in any country, plus additional parameters stemming from Turkey’s geographical location. The most important ones of these principles are the following:

– The policy should support the economic growth and social development.

– Energy should be supplied in a timely, economic and secure manner.

– The supply of energy should not damage the environment.

–  Domestic sources of energy should be utilized to the to the extent possible.

Turkey’s role as an energy corridor and hub should be promoted in a rational manner.

First steps taken to regulate energy market were made in Turkey by putting in force two laws; one, on the Electricity Market and the second on the Natural Gas Market. These two laws were basically aimed at the liberalizing the energy markets. A regulatory authority is established in 2001 under the title of Regulatory Board of the Energy Market.

Turkey-EU Relations in the field of Energy

Major part of Turkey-EU relations in the field of energy pertains to the legislative harmonization with the EU acquis in this field. In a document of 2003 called Accession Partnership, the EU made 9 observations regarding the energy sector. 5 of these observations were measures to be taken in short term, that is to say within one or two years. These 5 measures were the following:

– Establish a programme for the adoption of the energy acquis, particularly that concerning issues other than internal market.

– Ensure independence and effective functioning of the Regulatory Authority for electricity and gas sectors; grant the Authority the means to carry out its tasks effectively.

– Ensure the establishment of a competitive internal market, in compliance with the electricity and gas directives.

– Harmonisation with the EU legislation in the field of energy efficiency.

–  Establish a programme to increase the share of energy produced from the renewable sources.

4 measures contained in the Accession Partnership were to be taken in the medium term. They are the following:

– Opening up of the energy markets in compliance with the energy acquis by restructuring energy companies and strengthening the administrative and regulatory authorities.

– Complete the harmonisation of the national legislation with the energy acquis.

– Remove restrictions on the cross-border trade in energy.

– Encourage the implementation in Turkey of joint-venture projects contained in the documents called Trans European Networks-Energy.

The updated version of the Accession Partnership issued in 2005 underlined the need for almost the same measures. The differences were negligible. One may conclude therefore that the progress was slow in the adoption of required measures.

Financial support by the EU

            The EU provided financial support to several projects in Turkey in the field of energy. This support was provided within the framework of Pre-accession Financial Cooperation. The implementation of six of these projects has now been completed. Their financial scope is approximately 9 million Euros. The projects covered the following areas:

– A twinning project with Italy for the “Institutional Strengthening of the Energy Market Regulatory Authority (EMRA). The project was initiated within the framework of the financialprogramme of the year 2002 and it is now completed.

– Four projects were adopted in 2003. The beneficiary of one of them was the EMRA. It was aiming at the establishment of a regulatory information system for EMRA.

– Second project in 2003 was implemented in cooperation with France and Netherlands to increase the energy efficiency.

– The third project in 2003 was for BOTAŞ, Turkey’s State-owned gas network operator. One of the aims of the project was to facilitate the integration of Turkey’s natural gas market with the EU markets. Another aim was to help BOTAS fulfil its tasks in the field of the transport of natural gas in compliance with the EU practices and standards.

– The fourth project in 2003 was for the Turkish Electricity Transmission Company (TEİAŞ). The purpose of the project was to secure the synchronisation of the Turkish Power Grid with the UCTE.

– The last project was meant for the improvement of the frequency control performance of the Turkish power grid according to the UCTE criteria. This project has to be regarded as complementary to the previous TEIAŞ project.

There are two more projects submitted to the EU amounting to 12 million EURs and one project to be carried out within the framework of bilateral cooperation between Turkey and the Netherlands:

– One of the projects is aiming at raising the public awareness for the energy efficiency in the buildings. It is part of the 2005 financial cooperation package, but the project document is not yet signed.

– The second project is a twinning project, under the 2006 financial cooperation package, aiming at improving the conditions of the cross-border trade.

– Bilateral project with the Netherlands has a financial scope of 350 000 Euros and will improve the capacity of the Regulatory Board to monitor the energy market

Legislative harmonisation and institutional structures

  Turkey enacted in 2003 a Law on Petroleum Market that allows the EMRA to regulate petroleum market. It also regulates oil stocks. However the EU is not sure whether the methodology used by Turkey is consistent or not with the EU methodology.

The work is under way for the preparation of the law on energy efficiency.

A law is enacted on 18 May 2005 regulating the use of renewable sources of energy for power generation

In the field of the electricity market, the preparation of several Regulations is under way. They pertain to subjects such as licensing, tariffs, networks, distribution, import and export of electricity.

EMRA completed the preparation of several Regulations in the field of natural gas as well.

BOTAŞ will have to reduce the quantity of its gas import to 20 % of the total yearly gas consumption of Turkey. It has to transfer its sales or purchase contracts to achieve this goal by 2009. It is at present assessing the offers submitted in a tender opened for this purpose in November 2005.

Tenders are being opened for the licences to distribute natural gas in the urban areas. The distribution licences that are owned by the public authorities are either being privatised or planned for privatisation.

The training of the personnel that will be in charge of the implementation of the enacted laws and regulations are being carried out through twinning programmes.

Difficulties

An Agreement was signed in Athens on 25 October 2005 to establish an Energy Community composed of EU members and the South East European countries. Turkey supports this initiative but it did not sign the agreement for the following reasons:

a) Turkey could not agree to the principle of considering by 2008 all consumers outside the households as free consumers. Turkey’s position is to achieve this goal by 2010.

b) Article 86 of the Agreement deals with the public enterprises and other enterprises that have monopolistic rights in the field of energy.  Article 87 deals with state subsidies. Turkey has difficulties for the timing of the deadlines set in these two articles. Turkey has not yet regulated this subject and a regulatory authority does not yet exist in Turkey to monitor the implementation. Therefore these two articles could not be implemented in Turkey for electricity and gas.

c) Turkey cannot adopt yet the Directive on the Environmental Impact especially because of the cross-border dimensions.

d) The EU Directive 2001/80/EC on Reducing the Emissions Stemming from the Big size Burning Facilities provides that member countries have to abide by the provisions of the Directive by 2017 at the latest. Turkey will not be able to meet this deadline before 2020.

Turkey had participated in the discussions during the drafting of this Agreement and made these points at that stage. However these remarks were not taken into consideration.

Basic philosophy of Turkey’s Energy Strategy

            Turkey’s energy strategy is based on 4 parameters:

– Make Turkey a transit country both on the north-south axis and east-west axis.

– Transform the Ceyhan terminal into an energy trade centre.

– Try to become the EU’s fourth main artery after the completion of the Baku-Tbilissi-Erzurum and Trans-Caspian natural gas pipelines.

Another parameter of the strategy is to reduce the reliance on foreign countries by utilizing more efficiently the domestic sources of energy for the security of energy supply.

Turkey is located in a geographical area adjacent to the region that contains roughly three quarters of the world’s energy reserves. Turkey aims therefore to become an energy corridor between the countries of energy sources and the consumer countries.

Another parameter of Turkey’s strategy is to construct an LNG facility in Ceyhan by extending the Blue Stream pipeline up to Ceyhan. Furthermore, to construct an under-water pipeline from Ceyhan to Cyprus and from there to Israel, thus consolidate Turkey’s role as a north-south energy axis.

Projects drawn up in recent years and the liberalization of the energy markets made Turkey an important partner for the diversification of the energy supply sources and routes. The EU includes in its priority list the Caspian Basin-Middle East project that has to cross Turkey in order to reach EU markets. In other words the EU admits the rationality of  Turkey’s assuming a role of main artery in the transport of Caspian basin and Middle-Eastern gas to Europe.

    The recent natural gas crisis between the Russian Federation and Ukraine demonstrated once more the importance of Turkey for the security of supply.

What are Turkey’s assets?

Oil pipelines

a)      Baku-Tbilissi-Ceyhan oil pipeline

Baku-Tbilissi-Ceyhan is almost completed and it will start loading the oil tankers very soon. It has a capacity to carry 1 million barrel oil per day. This corresponds roughly to 50 million tonnes of oil per year. It will supply Mediterranean harbours and the east cost of the United States. Kazak oil may also join this pipeline in the future by crossing the Caspian Sea from Aktau to Baku.

b)      Kirkouk-Yumurtalık (Ceyhan) oil pipeline 

This is composed of two parallel pipelines with a total capacity of 1,6 million barrel per day, corresponding to 70.9 million tonnes per year.

2. Turkish Straits and by-pass pipelines

            3.7 % of the world’s oil transports are carried through the Turkish straits. Any mishap in the traffic of the Turkish straits will have an important impact on the world’s oil supply. Samsun-Ceyhan is designed to alleviate this heavy traffic.

                        a) Samsun-Ceyhan oil pipeline

 Several companies are interested in constructing Samsun-Ceyhan oil pipeline. This pipeline has the following advantages:

– The pipeline will cross the territory of one country alone;

-Between Sivas and Ceyhan, the project will use the corridor already expropriated for the Baku-Tbilissi-Ceyhan pipeline. This corresponds to 45 % of the route.

– Environmental impact analysis for Sivas-Ceyhan portion of the route has already been done. Therefore we may assume that the environmental hazards for this portion will be minimal.

– There is at present an unused oil storage capacity of 100 million tons in Ceyhan. This capacity will be used for the project.

– The offshore oil and gas exploration in the Black Sea close to Turkish coasts proved to be promising. In case substantial reserves are discovered, the north-south axis could be used for the transport of these products as well.

Natural gas pipelines

a)      Iran-Turkey natural gas pipeline

There is an existing pipeline that carries natural gas since 2001. Turkey imported 3.5 bcum natural gas through this pipeline.

b)      Baku-Tbilissi.Erzurum gas pipeline

This project of 690 km (225 in Turkish territory) is designed to carry 16 bcum natural gas from the Shahdeniz basin. The diameter of the pipes is selected bigger than the contracted gas capacity so that it could be used in the future for carrying gas to Europe. 14 % of the Azerbaijan portion and 30 % of Georgia portion of the project is completed.

c)      Turkey-Gereece-Italy natural gas pipeline

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