Saturday, January 03, 2015

TURKEY: Energy & Infrastructure Forecast 2015, Risks and Opportunities

Dear Energy Professional, Dear Colleagues,

Now is the time for our traditional annual forecast for our local energy markets in the New Year 2015. Please do note that economy and business are always shaped by expectations. Market expectations are important in the economic forecasts. At the beginning of each year, there are many economic forecasts made by the nationwide daily newspaper columnists, however as we all see there are almost none made in energy markets other than this one you are now reading. Within our professional capacity, we have tried to outline a draft forecast albeit maybe somewhat irrational/ unfair for the New Year. anyhow it is better to have one, rather than none. Here are our expectations for the New Year 2015;

Local power generation capacity could have reached to +69K MWs in year 2014, and consumption peak is recorded as +39K in last August. Turkey is still at very low annual per capita electricity / production / consumption with approximately +3300 kWh, EU current average is +10K; North American average is +12K.
Electricity demand growth slowed down in 2014. Slowdown in local demand for electricity in the first quarter 2015 will continue. Other than early winter shortages, electricity prices will not increase in throughout 2015.
Privatization of nationwide electricity "Distribution" and "Generation" are almost completed in 2014. "WholeSale market" and "Unbundling" process are ongoing. National electricity "Retail" systems will develop in 2015.

Local Gas consumption is expected to be +50 billion Sm3 in year 2014. In 2015, Iran may not cut-off Natural Gas flow due to excessive needs of during harsh winter conditions in her own domestic market. In case of any winter interruption, Russians will increase supply capacity in the Blue Stream for a substantial premium as usual.
Gas flow from Iran to Turkey will be easier since US sanctions over Iranian exports are expected to be lifted soon after finalization of Nuclear talks in Geneva. That may cause more uninterrupted gas from Iran for long term, although gas price will not be reduced, but stay stable for medium term. Gas is still too expensive. Western Gas is now approx. 11.00 US Dollars per MMBTU as of Dec-2014 at our western border. Turkish natural gas demand will begin to fall due to counter measures taken, probably by the second half of the year. Accelerated increase in local fuel prices, is expected, after the general elections which will take place in June 2015.

Part of Western natural gas pipeline supply by Russia's Gazprom is placed to local companies. We expect market share wars between them.
TransAnatolian Pipeline Tanap project is in fast-track agenda. Nabucco is closed.
New "South Stream" underwater pipeline from Russia to Thrace border, is recently announced. It needs time for full realization.
Northern Iraq oil and gas pipelines are on hold due to civil war in Syria.

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 can not be realized overnight. On the other hand, "Shale gas" boom in the USA will reduce gas prices in the spot market for sure. Europeans are reluctant since cracking process may trigger earthquakes, and huge amount of injection water is polluted.

Gas fired Combined cycle power plants
We expect less number of investments for new natural gas fired  Combined Cycle power plants due to increasing Current Account Deficiency. There are still new investments in Kırıkkale, Thrace Çorlu, Adapazarı, Ankara Kazan, Kırşehir, Bandırma, Mersin, Kırklareli, Izmit on gas fired combined cycle power plants.
We do not know who will supply the necessary gas for these new gas fired plants, and at what price.

Iranian Nuclear talks
Iranian Nuclear strike capability makes Israel nervous. Although "G5+ Iran" has already agreed on nuclear settlement for non-aggressive nuclear use, Israel may still initiate surprise attack to Iran which may lead to global energy crises in the world. So we should be on the safe side and we should have increased underground gas storage capability and fuel storage facilities.

Russians started to outsource all non-critical equipment for Akkuyu Nuclear Power plant, starting from local civil works, high capacity steam turbines, instrumentation and controls, due to experience on serious shortage of available commercial financing. Environmental Impact Assessment (EIA) report approval is received in late 2014.
Since the ongoing nuclear project is not commercial, but purely political, political financing for that gigantic figure is not so easy. Political risks of a nuclear power plant project cannot be properly estimated; hence non-commercial project has no commercial meaning.
Hot seawater will be a chronic problem for plant cooling system in Akkuyu.
Sinop Nuclear power plant project is awarded to "Japan+ French" consortium. An Inter-Governmental Agreement (IGA) was signed between Government of Republic of Turkey, and Government of Japan on 3rd May 2013 for the construction of Sinop NPP.
We suspect if Japanese commercial companies can secure approx. 22 plus billion US Dollar project financing. We shall wait and see the outcome. They may face financing difficulties, although local public company EÜAŞ will get 35% equity partnership.
Sinop Nuclear Plant site is in the thick forest. Local "Forest Law" and compensation for demolished "trees" would be a great burden on the project budget in the long term.
Cold sea water is better for overall efficiency and for nuclear power plant cooling systems. Therefore the next nuclear power plant sites are expected to be on the BlackSea coast line, maybe 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 consideration. French, Korean, Chinese Nuclear companies may participate to these new nuclear power plant investment projects in future.

3x210 MWe Yatağan- 2x210MWe Yeniköy- 3x201MWe Kemerköy thermal power plants in southwest of Turkey are privatized in 2014. After plant sales, renovation, rehab, re-power or complete demolition are expected by the investor.
Imported coal firing 2x600 MWe new thermal plant could be build at seaside Kemerköy plant site in the long term. Summer holiday facilities can also be considered at the plant site with complete reutilization.
Local hard coal firing 2x150 MWe Çatalağzı-B thermal power plant in Zonguldak county on the BlackSea coast is also sold. Orhaneli 210 MWe, Tunçbilek 430MWe thermal power plants are also privatized in late 2014.
Due to low investor appetite both local and international, privatization strategy will be reconsidered in order to increase the ongoing high income based tendering process.

We expect new investment initiatives on new found coal mine fields in Konya Karapınar, Afyon Dinar, Eskişehir-Alpu in order to build new thermal power plants under locally developed clean coal technologies.
Local coal firing new thermal power plant constructions in Bolu Göynük, Eskişehir Mihalıccık, Bursa Keles (EIA reactions), Manisa Soma, Adana Tufanbeyli (two separate plants 700 MWe and 450 MWe) are in construction progress.
Thermal power plant investments in NorthWest BlackSea coast are expected to be on hold for a while due to  ongoing EIA scheme, and due to high reaction of local environmentalists. 
Local Regulation of foreign personnel employment is changed, so cheap foreign employment from FarEast countries is not possible any more.
Situation in Soma for new 510 MWe thermal power plant seems to be on hold due to local reactions to olive tree deforestation. Investor company should look for nearby empty land to build new  thermal power plant.
Moreover there are a number of imported coal firing new thermal power plant applications for Bay of Iskenderun, Soma, around Sea of Marmara, Bay of Aliağa but public authorities are quite reluctant for approval due to high impact of imported coal on "Current Account Deficit (CAD)".

Afşin Elbistan

Due to ongoing high environmental pollution, no sufficient filters, no desulphurization, no rehab, it is our sincere recommendation that existing Unit Afşin Elbistan-A group, should be shut down, dismantled and sold as scrap. However A-group is now in longterm hand-over process in privatization. After take-over, new plant installation is strongly recommended.
Elbistan Çöllolar coal fields landslide disaster was forgotten after the event. Reutilization will be enforced after legal procedures are completed. De-watering- drying of the landslide region is continued. Hurman Creek riverbed is changed, it will flow from north without passing through the mine field.
Çöllolar coal mine field will be in preparation by the end of next year, and only after normalization of coal fields in Çöllolar, then AfşinElbistan-B plant can work at higher capacity factor.
Afşin Elbistan Coal is supplied to the plants at about 1.75-1.80 US Dollars per MMBTU, which is quite competitive. But 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 local nearby coal. However two units are now out of operation. Second unit had fire accident in boiler dust filters. Third unit had steam turbine break down. Repair works are recently tendered. It will need at least minimum two years for complete operation.
New international partners are sought for Afsin Elbistan C-E. We presume that the tender activity is a long-term wishful thinking.

Investment appetite in Wind capacity is almost saturated, Environmental concerns will be on the agenda. High voltage transmission lines are missing. Huge investment is needed for those new transmission lines for more aggressive wind power integration. However investments will continue at a moderate level at about 300-500 MW per year.

Investment in Solar energy is relatively little. Without making local fabrication of the solar equipment; one cannot go further with expensive electricity generation. Only household small scale electricity generation could be implemented.
Electric cars / buses are in agenda, but we shall all ask who will be paying high cost of new transformers due to additional heavy pulse load.

HEPP investment projects receive severe reactions of local people, and reactions will continue on all legal platforms.

Climate change
Nationwide CO2 emissions will increase ever more with the ongoing coal firing investments. It is a great national dilemma difficult to solve in our energy hungry local market. How do we run away the climate change obligations? We shall have low profile participations of the public sector.

Local fabrication
Although there are a number of preliminary meetings in the Ministry, in the local fabrication associations, in various NGO groups, still local design, local fabrication, local engineering for thermal power plants do not exist yet. New public tendering procedures give price advantage to proposals with local fabrication.

Electricity Transmission lines
Construction of Thracian HV AC Submarine transmission crossing Dardanelles Channel will be completed soon. New crossings are planned. 
Construction activities for Submarine 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". "Precious loneliness" is too costly foreign policy. No hostility is foreseen between democratic countries Greece, Israel and Turkey, however pushing for fair share of nearby natural resources is the rule of the game in international politics. Democracies do not make war between each other. Public forces/ votes force them to compromise.

Offshore East Med
East Med Cyprus offshore drilling work did not reveal expected results. Offshore Contractor Company is not comfortable with the early results. South Cyprus media and their government with wishful thinking still push positive expectations, trying to keep the case in international investment agenda with high hopes, but the situation seems not so promising, the investor does not want to gamble any more, return is not earlier than 10 years in time.
Israel Offshore fields are proven but they have production storage and transmission problems. These problems can not be solved before we have stable peace on East Med waters.
Black Sea Offshore drilling is a never-ending story at our end, everyone is talking about very large reserves, but there is nothing in reality.

Change of power in Syria is not foreseen in the short term. However influx of refugee number will get increased to 2 million soon. It is too alarming situation. We shall need approximately 10 billion US Dollars in 2015 for the Syrian refugees. This is a great burden on our economy. Our streets are full of desperate Syrian refugees. Street crime is on rise. Drastic changes in the current international relations policies are deemed necessary.

We should participate to Transatlantic Trade and Investment Partnership, TTIP. That is vital task in 2015 for all public & private authorities. It is too costly to stay outside.

Not only the Ministry of Environment but also the Government is expected in reshuffle. Change in top posts will not be a surprise prior to general elections in June 2015.
The secondary legislation of the Energy Ministry is still in preparation. Some of new regulations in preliminary nature are released for public review. The Minister may leave his post in the next municipality and general elections due to party restrictions.
We expect reorganization as well as restructuring in Ministry of Energy and Natural Resources in order to reduce staff, to reassess duties and responsibilities...
EMRA needs to be reorganized and restructured, and Agency may be divided into two, maybe three. EMRA licensing will go on with reduced speed, copy / paste applications for license overrun archives. Rejection is still less than 2%. Most projects are on hold.
Each and every incentive/ every good intention are abused with extreme care”, so political power is reluctant to issue new energy incentives, especially on imported fossil fuel firing new power plants.  Current account deficit (CAD) is in sever situation due to increased spending on imported coal and imported natural gas purchases, at intolerable levels. Increased use of domestic coal / energy sources  should be encouraged.

We are happy to see that "High Speed Train" investments are on track. Ankara- Istanbul railway is completed in 2014. Ankara- Izmir, Sivas, Erzurum are in progress. We hope to have more intercity metro line constructions.

General Elections
Turkey will enter into a period of nationwide frenzy general elections in year 2015. In new general elections, all of 3-term MPs will leave Parliament and Ministerial posts. Ministries of Energy, Economy, as well as Treasury will miss their strong leadership.  That is a great risk in macro economy administration.

Investment Environment
Almost all existing thermal power plants are in privatization, but investment appetite is low because of the ongoing global economic crisis and impact of June 2013 Gezi Park public uprising. The same tendency may continue in the second half of next year.

Western Foreign investors have lost their appetite in our energy markets; and domestic investors do not have money. International investors are looking for simple legal terms in the environment, such as "rule of law", and "transparency". On the other hand investors of oil rich Middle East countries may still have increased appetite.

Local real estate bubble may face difficulties and few bankruptcy may appear.
We face project finance difficulties on controversial mega projects. We have growing "current account deficit". Drastic measures" on public spending will continue in 2015. 

In recent popular social media, in tweeter, facebook, whats-up, investors are more or less incorrectly/ but implicitly represented as negative profiles, it is alarmingly too deceptive. That public profile should be corrected.

Consolidation in electricity generation business will increase with M&A's. Few bankruptcies may take place. In principle, we would recommend individuals to reduce expenditures, reduce spending, reduce borrowing, and stay cash, stay liquid.  Everyone in business environment says that 2015 will be another difficult year. We were able to predict this much.

We shall be too pleased to receive your comments/ contributions in the New Year. 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 2014,


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