EUROPE MUST BE WISE AND FURTHER DIVERSIFY ITS ENERGY RELATIONS "Baku-Tbilisi-Erzurum must be put into operation as soon as possible," Minister of Energy and Natural Resources of Turkey Hilmi Guler says.

CASPIAN ENERGY (C.E.): Mr. Guler, how do you view the energy strategy of Turkey in the XXI Century?

Hilmi Guler: The energy demand of Turkey has been growing at approximately 6% per annum for many decades in line with economic development and increase in welfare. Presently, around 30% of the total energy demand is being met by domestic resources, the rest coming from a diversified portfolio of imports. Increasing the utilization of domestic resources in a cost-effective manner is one of the most important pillars of our energy strategy. Diversification of import sources, on the other hand, has also been given high importance in that regard.

In general terms, Turkey’s energy strategy is set to supply energy in a manner that is time-reliable, cost-effective, environmentally sound and of high-quality. With the advent of the XXI Century, Turkey has undertaken a new mission of becoming an energy hub in its surrounding region. For this purpose, several cross-border energy projects have been introduced and implemented so far, with the ultimate aim of forming an energy bridge between producers and consumers.

C.E.: What does the Caspian region presently mean to Turkey?

Hilmi Guler: Located at a crucial geopolitical region Turkey lies adjacent to regions possessing around 73% of the world’s proven oil reserves and 72% of the world’s proven gas reserves and is thereby expected to form a natural bridge between the energy rich countries of the Caspian Region, The Central Asia, The Middle East and the consumer markets mainly located in Europe.

The Caspian Region’s oil and gas potential has attracted considerable attention since the break up of the Former Soviet Union in early 1990’s. With its increasing domestic energy demand and taking into account its own security of supply, Turkey has been in the Caspian Region together with the international oil and gas companies over the last decade both as an investor and business partner. In this context, the concept of an "East-West Energy Corridor" has been elaborated which envisages production of energy resources of the East and simultaneous transportation of those to the West through environmentally sound, commercially profitable and sustainable means. Turkey strongly believes that pipelines being constructed or planned to be constructed with the ultimate aim of delivery of such energy resources to world markets will strengthen independence and prosperity of the new Caspian States. This will be done by ensuring the free flow of hydrocarbons to the world market, encourage market economy and democratic developments, stabilize the region by building the economic linkages between the countries and finally help in diversifying and securing the energy supply of Turkey and our partners.

C.E.: What is your estimate of the output of the energy corridor among energy-rich countries of the Caspian, Central Asia, Middle East and world markets?

Hilmi Guler: Surprisingly, Turkey’s current or potential role in oil transportation is considerably less important than its current or potential role in gas transit since oil is more flexibly transported than gas. Geographically speaking, Turkey is located in an arc from the Caspian Sea through the Middle East and the Gulf to Egypt. Taking a glance at the European Union, on the other hand, one can simply observe that it is already the world’s largest gas import market while also being one of the world’s fastest growing energy markets. Though it has a variety of import sources-notably Russia and Algeria, it is but naturally seeking to diversify supplies. The recent gas deal between Ukraine and the Russian Federation showed that the next decade will be marked by a delicate balance in which Europe remains dependent on Russian gas, while Russia's need for export revenues will also make it dependent on Europe. The lesson from the Ukraine episode taught Europe needs to be wise in building greater diversity in her energy relationships. In this context, Caspian gas possesses a strong potential in meeting Europe’s steadily increasing gas demand, provided secure transportation systems are established.

With the ultimate aim of meeting both our domestic and world market’s increasing energy demand, Turkey has been extending its oil and natural gas network systems along with several international oil and gas transit projects.

At present, the natural gas transmission network is composed of approximately 7,000 kms of transmission and distribution lines. The total length of the network will reach about 10,000 kms with the completion of pipelines, both planned and under construction.

As mentioned previously, while on one hand Turkey develops projects to meet its own gas demand, on the other hand it also envisages to serve for meeting the European Union’s increasing demand by opening several other arteries to the continent via Turkey. The first of these is the Turkey-Greece Natural Gas Pipeline Project which is planned to be extended up to Italy afterwards. Interconnection of the Turkish-Greek Natural Gas Pipeline pipelines is due to be completed in 2006 with some initial deliveries. The other route is the Turkey-Bulgaria-Romania-Hungary-Austria line which is known as the Nabucco Project. Studies are well underway among the respective institutions of the countries for the implementation of the project in a cooperative atmosphere. Related preparatory work for the basic and detailed engineering studies is underway. However, it should be noted that these two projects are not competing against each other but rather complementary to each other. Additionally, extension of blue stream natural gas pipeline to Israel is under discussion as well.

In this context, the enlarged European Union will additionally need approximately 300 bcm of gas that is not contracted yet. It is estimated that as much as 100 bcm of gas can be supplied through Turkey in the long term and Turkey has been studying pipeline projects to transit some 40 bcm of natural gas to Europe in within a short to medium term period.

C.E.: What is the current demand for Turkish gas and what are forecasts for its consumption in the near future? Which countries currently supply gas to Turkey and which are those that will supply gas in the near future?

Hilmi Guler: Natural gas consumption started in the mid-1970s with utilization of limited domestic natural gas production by a few industrial plants. Imported natural gas sales started at 500 mcm in 1987 and reached around 27 bcm in 2005. Turkish natural gas consumption is expected to reach 37 bcm in 2010 and 42 bcm in 2015.

Turkey is a net importer of natural gas and is currently importing from different sources & countries based on the diversification strategy being implemented for many years. At present BOTAS (Petroleum Pipeline Corporation of Turkey) has 8 long-term sales and purchase contracts with 6 different supply sources (3 contracts with the Russian Fed. and 1 contract each with Algeria, Nigeria, Iran, Turkmenistan and Azerbaijan).

With the ultimate aim of domestic supply diversification and exporting a certain amount of gas to Europe via Turkey, we also consider Egyptian gas as an important alternative for this purpose, provided the gas price is reasonable to create a whole value chain.

C.E.: What do you think of the balancing of gas demand and proposal’s policy in the Turkish market, and through which directions will the Caspian gas be re-exported?

Hilmi Guler: In line with the policy of energy source diversification, environmental and economic reasons, use of natural gas has gained pace in the Turkish energy sector. The usage of natural gas has been expanded mainly in the power sector, while there has been a shift towards natural gas in industry and fertilizer sectors as well. Furthermore, the market liberalization process has been fostering the expansion of natural gas usage and strengthening the economic efficiency and the productivity of the natural gas sector.

Turkey has limited domestic gas reserves and local gas production which corresponds to approximately 3% of the total demand. Consequently, nearly 97% of the natural gas demand is imported by BOTAS.

Consequently, Turkey is a net importer of natural gas and importing from different sources & countries based on the diversification strategy being implemented for years. The geographical situation of Turkey enables her to act comfortably.

Based on these, the objectives of Turkey in natural gas sector are establishing a liberal and competitive natural gas market, increasing the use of natural gas, mainly in residential and industrial sectors, expanding gas transmission and distribution networks, supporting participating the international and national the exploration and production activities, diversifying the import sources for the security of supply, and developing reliable and cost-effective transit infrastructures between Caspian Region, Middle East, Caucasus and Europe.

C.E.: At what stage is the construction of the Baku-Tbilisi-Ceyhan pipeline in Turkey? How are the barriers being solved for its realization, which resulted with the postponement of the pipeline’s commissioning and rise in price of the project in general?

Hilmi Guler: Within the concept of the East-West Energy Corridor, Turkey currently undertakes two major projects, which would serve the energy security of the European and world markets. The Baku-Tbilisi-Ceyhan Main Export Oil Pipeline Project is the crucial element of the said corridor which will be soon carrying 50 million tons per year primarily of Azeri and partly Kazakh oil to the Turkish Mediterranean oil terminal in Ceyhan. The first tanker is scheduled to leave from Ceyhan in May this year.

The Baku-Tbilisi-Ceyhan Crude Oil Pipeline Project is one of the biggest energy projects of the 21.Century. It should be noted that from the very initial stages, Turkey has been one of the pioneers and fully dedicated to timely completion of the project.

As you might appreciate, the pipeline with a total length of 1760 kms lies across three countries and many contractors and sub-contractors are in charge of the construction. During the construction phase of this project, like in any other energy project of this scale, we have encountered some problems on account of certain technical changes of the pipeline, several route changes, bad weather conditions, etc. which, in some way was not possible to be forecasted in advance. We’ve also experienced some serious overall project management problems. As a matter of fact, just like a chain reaction, a problem at some point has adversely affected the entire pipeline operations. However, due to a very good cooperation atmosphere established so far among the all parties involved (state-to-state, investor-to-state), we were able to overcome all such obstacles and are currently very close to the commercial operation of the pipeline.

At this stage, the Azeri and Georgian section of the pipeline have already been filled with oil, and in the Turkish section, which is 1076 km. long, BTC oil has entered into Turkey as of 18 November 2005 and is currently proceeding towards Ceyhan.

The second project is the Baku-Tbilisi-Erzurum-BTE (South Caucasus Pipeline) Natural Gas Pipeline Project that is envisaged to bring Shah Deniz gas to Turkey. The BTE Project is not only important from the perspective of meeting the domestic gas demand of Turkey but also in meeting the certain part of the European Union’s fast growing need for gas. The BTE will have an initial capacity of 7 bcm – 8 bcm per year with an eventual capacity of up-to 20 bcm per year.

In order to meet part of this demand, Azeri gas has been given most importance by Turkey within the concept of East-West Energy Corridor. As you might recall, Turkey had declared its intention to receive the Shah Deniz gas soon after it was discovered and consequently concluded the necessary agreements.

Especially following the Russian Federation and Ukraine gas dispute, we believe that the importance of Azeri gas both for Turkey and Europe has been highlighted once more. To sum up, BTE should come into operation as soon as possible and Turkey is dedicated to receive this gas.

Leaving aside the fulfillment of the terms of the existing contract, in the years ahead it should come as no surprise if a second contract for increased gas deliveries from the Shah Deniz Phase II Project would be concluded. That is to say, Turkey is fully committed to receive Azeri gas.

Originally, Azeri gas had been envisaged to be delivered to Turkey in the year 2005 but due to known reasons, there has been a one year delay that occurred beyond our control. For the time being, construction of the pipeline is underway in Turkey, Azerbaijan and Georgia. In the last quarter of this year, the pipeline will be commissioned with some initial deliveries.

C.E.: Is there an existing arrangement on transit of part of the Kazakhstan’s oil via Baku-Tbilisi-Ceyhan (BTC)? What prevents solving of the Bosphorus strait’s utilized capacity and does not it mean reduction of future amounts of oil transportation by Caspian Pipeline Consortium (CPC) to Novorossiysk? In this aspect, what are the roles of BTC and CPC?

Hilmi Guler: BTC is technically ready to provide its transport infrastructure for the delivery of the Kazakh oil to world markets. Indeed, Kazakh oil has already been connected to the BTC Project through participation of several international oil companies (ENI, Inpex etc.) in the BTC Project that is operating in Kazakhstan.

For some period, Azerbaijan and Kazakhstan have been negotiating on the Intergovernmental Agreement, which would eventually form a legal background agreement for the commitment of Kazakhstan to the BTC Project. We expect finalization of the Azeri-Kazakh Intergovernmental Agreement negotiations in a very short time. It should be noted that Turkey has been strongly supporting this idea from the very beginning.

As I shortly discussed in the previous sections, the Turkish Straits could no longer be used as a pipeline due to previously congested shipping traffic. Although some arrangements have been made to improve and control the oil tanker traffic on the Turkish Straits and the International Maritime Organization (IMO) has imposed high standards for heavy vessel transportation, these would not eliminate the important risks that the city of Istanbul faces everyday.

In this context, we consider that BTC is a by-pass line that will permit large volumes of crude oil to be shipped directly to world markets, avoiding the already congested traffic situation in the Turkish Straits.

As for the oil pipelines, I find it necessary to mention here that the amount of transported crude oil via the Turkish Straits is gradually increasing. This trend seriously threatens the environment of Turkey and specifically the world heritage city of Istanbul. Just to give you some insight, in the year 2000, the amount of transported crude oil was 150 million tons which is expected to reach around 190-200 million tons in the year 2009.

This natural waterway, which is vital for the Black Sea countries for transportation of important goods, can no longer be used as a pipeline. A major accident could cause significant environmental damage and shipping could be suspended for a prolonged period of time.

However, recent operation of the Odesa-Brody oil pipeline towards the Black Sea on account of the BP - TNK company decision coupled with the increasing amount of Kazakh Oil being produced in Tengiz field further increased the existing risks on Turkish Straits enormously.

In this respect we are fully supporting the by-pass projects, which will get rid of heavy tanker loads off Turkish straits. Taking into account the cost, environmental and strategic elements of the Samsun-Ceyhan Project, we consider this as the most appropriate and advantageous line. When the project is complete, the North-South Energy Corridor will be accomplished together with the East West direction. Furthermore, with this project it would be possible to transport the oil carried via CPC Pipeline to the Mediterranean Sea which in turn will make it environmentally safe and economically sound. Studies are underway for the project implementation. The port of Ceyhan is already designed and constructed to meet joint capacity of Kirkuk-Ceyhan, Baku-Tbilisi-Ceyhan and Samsun-Ceyhan pipelines. Ceyhan will then become the largest oil outlet terminal in the Eastern Mediterranean.

C.E.: Have negotiations been held with Turkmenistan for construction of the Trans-Caspian gas pipeline? What is the possible way to supply Turkmenistan’s gas to Turkey through Iran?

Hilmi Guler: In order to complete the East-West energy corridor in a proper sense, the Turkmen gas needs to be connected to the Shah Deniz project via the pipeline to be constructed along the Caspian seabed as originally planned. Not only is Turkmen gas important for Turkey’s domestic gas demand but also for gas deliveries to Europe.

Turkey sees no obstacle other than fair resolution of the problems between Turkmenistan and Azerbaijan. As it used to be in the past, Turkey still considers that the Trans-Caspian Gas Pipeline Project as feasible and conducts several negotiations with the both countries.