Thursday, December 26, 2013

Energy & Infrastructure Forecast 2014

Risks and Opportunities-
Dear Energy Professional, Dear Colleagues,
It is now time for our traditional annual forecast on our local energy markets for 2014. The economy and the future of business is always shaped by expectations. Market expectations are important in economic forecasting. At the beginning of each year nationwide daily newspaper columnists make many economic forecasts. However, as we all see, there are almost none—besides the one you are reading—made for energy markets.
Irrational/unfair as it may be, we have tried within our professional capacity to outline a draft forecast for the new year. One, after all, is better than none. Here are our expectations for 2014:
Turkey’s power-generation capacity may have reached +63K MWs in 2013, and the consumption peak was recorded at +38.5K last August. However Turkey’s annual per capita electricity production/consumption of approximately +3000 kWh is still very low; the EU current average is 10K, the North American average is 12K.
New investments with a total 5195 MWe were 70% complete in 2013 and will be completed next year. However the growth in electricity demand slowed down in 2013. This slowdown will continue in the first quarter of 2014. Apart from early winter shortages, electricity prices will not increase in throughout 2014.
The privatization of nationwide electricity "distribution" was almost completed in 2013. The "WholeSale Market" and "Unbundling" processes are ongoing. National electricity "Retail" systems will be developed in 2014.
Local gas consumption is expected to finish the year at 47.6 billion m2. In 2014, Iran may not cut-off natural gas flow due to excessive needs in its own domestic market due to harsh winter conditions. In case there is a winter interruption, Russia will increase supply capacity in the Blue Stream—for a substantial premium, as usual.
Gas flow from Iran to Turkey will be easier since U.S. sanctions on Iranian exports are expected to be lifted soon after the completion of the nuclear talks in Geneva. That may cause more, uninterrupted gas from Iran over the long term—though gas prices will not fall but will stay stable over the medium term. Gas is still too expensive. As of December 2013 Western gas at our western border is now approx. $11.50 per MMBTU.
By the second half of the year demand for Turkish natural gas will probably begin to fall due to the countermeasures taken. Accelerated increases in local fuel prices are expected after the municipality elections scheduled for March 2014.
Part of the Western natural gas pipeline supply by Russia's Gazprom is distributed between local companies. We expect further market share wars between them.
The TransAnatolian Pipeline project (TANAP) is on the fast-track agenda. Nabucco is closed.
Oil and gas pipelines in Northern Iraq are on track. Pipeline Construction on connecting pipelines will be started. It is expected that all parties will agree on an oil flow with a max. capacity of 400,000 bpd in 2014. The sale price will not be changed. The key issue is the fair distribution of oil money between Baghdad and Erbil. Oil flow will relieve the oil shortage, and lend stability to the regional oil price. Prices per barrel could be stagnant due to the normalization of relations with Iran, which may lead to higher oil supply in the spot market.
Shale gas
It is too early to expect any substantial shale gas production in our country. There are two specific regions for exploration, but gas production cannot be realized overnight. On the other hand, the "shale gas" boom in the U.S. will surely reduce gas prices in the spot market. Europeans are reluctant since the “fracking” process may trigger earthquakes, and huge amount of the water injected is polluted.
Gas-fired combined cycle power plants
We expect fewer investments in new, natural gas-fired combined cycle power plants due to the increasing current account deficit. There are still new investments in Kırıkkale, Çorlu, Adapazarı, Kazan, Kırşehir, Bandırma, Mersin, Kırklareli, Izmit for gas-fired combined cycle power plants. Terme OMV and Denizli RWE are in operation. We do not know who will supply the necessary gas for these new gas fired plants, and at what price.
Iranian Nuclear talks
An Iranian nuclear strike capability makes Israel nervous. Although "G5+ Iran" has already agreed on a nuclear settlement for non-aggressive nuclear use, Israel may still initiate a surprise attack on Iran, which may lead to a global energy crisis. So we should be on the safe side and we should increase our underground gas storage capability and fuel storage facilities.
Russia has started to outsource all the non-critical equipment for Akkuyu Nuclear Power plant—starting from local civil works, high-capacity steam turbines, and instrumentation and controls— in accordance with experience. There is serious difficulty in commercial financing. Environmental Impact Assessment (EIA) report approval is expected in 2014.
Since the ongoing nuclear project is not commercial but it is now purely political, political financing for that gigantic figure is not so easy. The political risks of a nuclear power plant project cannot be properly estimated. Political project has no commercial meaning
Hot seawater will be a chronic problem for the plant-cooling system in Akkuyu.
The Sinop Nuclear Power Plant (SNPP) project was awarded to a French-Japanese consortium. An intergovernmental agreement (IGA) was signed between Turkey and Japan on May 3rd, 2013 to construct the SNPP.
We suspect Japanese commercial companies can secure the approx. $22 billion needed to finance the project. We shall see. They may face difficulties in financing, although the local public company EÜAŞ will get a 35% equity partnership.
The SNPP site is in a thick forest. Local "forest law" and compensation required for demolished trees would greatly burden the project budget over the long term.
Cold seawater is better for overall efficiency and for cooling systems in nuclear power plants. Therefore the next nuclear power plant sites are expected to be on the Black Sea coast line: perhaps in İğneada on the Northwest and Hopa on Northeast.
New nuclear power plants are expected to be close to metropolitan cities with heavy demand, so Kırıkkale (Ankara), Aliağa (İzmir), and even Kemerköy (Muğla) are possible new sites in long term considerations.  French, Korean, Chinese Nuclear companies may participate in these new nuclear power plant investment projects in the future.
The 3x210 MWe Yatağan, 2x210 MWe Yeniköy, and 3x201MWe Kemerköy thermal power plants in southwest Turkey will be privatized early next year. The combined price for the Kemerköy and Yenikoy plants is expected to be around $2 billion, and that for the Yatagan plant $1 billon. The plants will be sold; nearby mines will be on long-term lease. After the plants are sold, the investor will either renovate, rehabilitate, and repower or completely demolish them.
A new imported coal-firing 2x600 MWe thermal plant could be built at the seaside Kemerköy plant site in the long term. Summer holiday facilities are also possibilities.
Similarly, the local hard coal-firing 2x150 MWe Çatalağzı-B thermal power plant in Zonguldak on the Black Sea coast will be sold. There are no coal mines to be rented for the Çatalağzı-B sale. The estimated price is around $250-300 million. However, the price of local Çatalağzı hard coal by Turkish Hard Coal Public Enterprise TTK is too high (approx. $4/MMBTU) for electricity generation at this plant to be competitive.
Due to low investor appetite both locally and internationally, this privatization strategy will be reconsidered in order to increase the income. The strategy is placed as high income-oriented public tendering process.
We expect new investment initiatives on newly-discovered coal mine fields—Karapınar (Konya), Dinar (Afyon), Alpu (Eskişehir)—in order to build new thermal power plants under locally-developed, clean coal technologies.
New, local coal-firing thermal power plants are being built in Göynük (Bolu), Mihalıccık (Eskişehir), Keles (Bursa) (EIA reactions), Soma (Manisa), and in Tufanbeyli (Adana), where two separate plants, 700 MWe and 450 MWe, are under construction.
Thermal power plant investments on the northwest Black Sea coast are expected to be on hold for a while due to ongoing EIA activities and the loud reactions of local environmentalists. 
Local regulation on employing foreign personnel has changed, so that cheap foreign labor from the countries of the Far East is no longer a possibility.
The situation in Gerze on the Black Sea coast seems to be on hold. Smart investors should stop pushing any further and direct available investment funds to other sectors. A leasing scheme for Black Sea hard coal underground mine fields has been finalized. Companies will look for empty land near the seaside to build new thermal power plants.
Moreover, there are a number of applications for new, imported coal-firing thermal power plants in the for the Gulf of Iskenderun, Soma, around the Sea of Marmara, and around the Bay of Aliağa, but public authorities are quite reluctant to approve them due to their high potential impact on the current account deficit.
EIA applications now need local public approval prior to submission to authorities.
Afşin Elbistan
Due to the high environmental pollution, with no sufficient filters, no desulphurization, no rehabilitation, it is our recommendation that the existing Unit Afşin Elbistan-A group should be shut down, dismantled, and sold as scrap. A new plant can be installed.
The plant is almost 30 years old, and has nearly completed its useful life cycle. It has four 340 MWe capacity units but only one unit is in operation at 70% efficiency. It can barely earn enough money to pay its employees.
The Elbistan Çöllolar landslide disaster was quickly forgotten. Reutilization was enforced after the legal procedures were completed. The draining of the landslide region is being continued. The Hurman riverbed has changed, it will flow from the north without passing through the mine field.
The Çöllolar coal mine field will be in preparation by the end of next year, and only after the normalization of the coal fields in Çöllolar will the Afşin Elbistan-B plant be able to work at higher capacity.
Afşin Elbistan coal is supplied to the plants at about $1.75-1.80 per MMBTU, which is very competitive. But its calorific value is too low. So we need to have proven coal-firing technology for the local coal.
Afşin Elbistan-B plant has proven technology for firing locally-available coal. However two units are now out of operation. The second unit had a fire in its boiler dust filters. The third unit had its steam turbine break down. At least two years are needed to complete repairs.
Afsin Elbistan C-E tendering is still in document preparation in central procurement department of the authority with foreign consultant, anyhow too much time/ effort/ money is wasted. The Taqa company from Abu-Dhabi has postponed an investment decision. New international partners are being sought.

The investment market for wind power is almost saturated. Environmental concerns will be on the agenda. High-voltage transmission lines are missing. Huge investments in new transmission lines are needed in order to more aggressively integrate wind power. However, investments will continue at a moderate level—around 300-500 MW per year.
Investment in solar energy is still very low; one cannot go further with this expensive electricity generation without locally producing solar equipment. Only small-scale, household electricity generation can be implemented.
Electric cars/buses are on the agenda, but we shall all ask who will be paying for the high cost of new transformers due to the additional heavy pulse load.
HEPP investment projects receive harsh reactions from local people, and reactions will continue on all legal platforms.  
Climate change
Nationwide CO2 emissions are 124% higher than 1990 levels, and will increase ever more with the ongoing coal-firing investments. This great, national dilemma is difficult to solve within in our energy-hungry local market. How is it that we are running away from climate change obligations? We shall have low-profile participation from the public sector.
Local production
Although there are a number of preliminary meetings in the Energy Ministry, local design, local production, and local engineering for thermal power plants still do not yet exist in the local production associations or in various NGO groups. New public tendering procedures give a 15% price advantage to proposals with local production.
Electricity transmission lines
Construction of the Thracian HV AC underwater transmission crossing the Dardanelles Straits will be completed soon. New crossings are planned. 
Construction on underwater HVDC cable, gas, and water supply pipelines from Turkey to Northern Cyprus will continue.
International relations
Turkey is to return to her historical motto "peace at home, peace in the world" principle rather than "precious loneliness". A foreign policy predicated on "precious loneliness" is too costly.
No hostility is foreseen between the democratic countries of Greece, Israel, and Turkey; however, pushing for a fair share of nearby natural resources is the rule of the game in international politics. Democracies do not war against each other. Public forces/voters force them to compromise.
Offshore East Mediterranean
East Mediterranean Cyprus offshore drilling has not revealed the results expected. The offshore contracting company is not comfortable with the early results. The media and government of South Cyprus are still pushing positive expectations and trying to keep the issue on the agenda, but the situation does not seem so promising. The investor does not want to gamble any more, there will be no returns in the next ten years.
Israel’s offshore fields are proven but they have production, storage, and transmission problems. These problems cannot be solved without stable peace in the waters of the Eastern Mediterranean.
Black Sea offshore drilling is a never-ending story. Everyone talks about very large reserves, but in reality there is nothing.
A change of power in Syria is not foreseen in the short term. However, the number of refugees flowing into Turkey will reach one million soon. It is a very alarming situation. We shall need approximately $6 billion in 2014 for the Syrian refugees. This is a great burden on our economy. Our streets are full of desperate Syrian refugees. Street crime is on the rise. Drastic changes in current international relations policies are deemed necessary.
We should participate in the Transatlantic Trade and Investment Partnership (TTIP). That is vital task for all public and private authorities in 2014. It would be too costly to stay outside.
Not only the Ministry of the Environment but also the government is expected to be reshuffled. Changes in top posts prior to the elections will not be a surprise.
The secondary legislation of the Energy Ministry is still in preparation. Some of the new preliminary regulations have been released for public review. The minister may leave his post in the next municipality and in the general elections due to party restrictions.
We expect reorganization as well as restructuring in the Ministry of Energy and Natural Resources in order to reduce staff and reassess duties and responsibilities.
The EMRA needs to be reorganized and restructured, and the agency may be divided into two or maybe three. EMRA licensing will go on at a reduced speed, copy/paste license applications overrun the archives. The rejection rate is still lower than 2%. Most projects are on hold.
“Each and every incentive/every good intention is abused with extreme care”, so political power is  reluctant to issue new energy incentives—especially on new,  imported fossil-fuel firing power plants.  The current account deficit is at a severe, intolerable level due to increased spending on imported coal and imported natural gas purchases. The increased use of domestic coal/energy sources should be encouraged.
We are happy to see that high-speed train investments are on track. The Ankara- Istanbul railway will be completed in 2014. The Ankara-Izmir, Sivas, Erzurum projects are in progress. We hope to have more intercity metro lines.
Municipality and General Elections
Turkey will enter into a period of frenzy in the 2014 nationwide general elections. In new general elections, all of the three-term MPs will leave Parliament and their ministerial posts. The Ministries of Energy, Economy, as well as Treasury will miss their strong leadership. This is a great risk.
Investment Environment
Almost all existing thermal power plants are being privatized, but the appetite for investment appetite is low because of the ongoing global economic crisis and the June 2013 Gezi Park public uprisings. The same trend will continue in the second half of next year.
Western foreign investors have lost their appetite for our energy markets; domestic investors do not have the money. On the other hand the appetites of investors from oil-rich Middle Eastern countries may have increased.
The local real estate bubble may face difficulties, and a few bankruptcies may appear.
We face project finance difficulties on controversial megaprojects. We have a growing current account deficit. Drastic measures on public spending will continue in 2014. 
In new, popular social media—Twitter, Facebook, WhatsApp—investors are implicitly represented, more or less incorrectly. It is deceptive to an alarming degree. That public profile should be corrected.
Consolidation in electricity generation business will increase with M&A's.
A few bankruptcies may happen. In principle, we would recommend individuals to reduce expenditures, reduce spending, reduce borrowing, and stay cash, stay liquid. 
Everyone in the business environment says that 2014 will be another difficult year.
We predict 2014 forecast this much.
We shall be too pleased to receive your comments/contributions in the new year.    
A happy and prosperous new year to you all!
 Haluk Direskeneli, is a graduate of METU Mechanical Engineering department (1973). He worked in public, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as freelance consultant/ energy analyst with thermal power plants basic/ detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of  METU Alumni and  Chamber of Turkish Mechanical Engineers Energy Working Group.

Ankara, December 2013,



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