Nice Work If You Can Get It! Developments in the Turkish Petroleum Market
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www.pwc.com/tr/energy Nice work if you can get it! Developments in the Turkish petroleum market February 2011 Table of contents Introduction 3 Executive summary 4 Part I: Activities regulated under Petroleum Law No. 6326 6 Part II: Transportation of crude oil 9 Part III: Activities regulated under Petroleum Market Law No. 5015 12 Part IV: LPG market 18 Part V: Pricing and taxation 20 Part VI: Looking ahead 22 List of figures and maps 24 Abbreviations 25 References 25 Contact us 26 2 Developments in the Turkish Petroleum Market Introduction The pick-up in oil prices, the offshore by the sole Turkish refiner, which Looking at 2011, we are expecting disaster in the Gulf of Mexico, a instead kicked off new investments to see the outcome of the continued shifting focus from downstream to to meet sustained domestic demand. adjustment to the competitive upstream and elaborate discussions Approval for a second refinery downstream environment reflected on shale reserves have been the contributed to this decoupling of in intensive consolidation activity global headlines in 2010... But the Turkey from the European misery. to compensate for the erosion of issues topping the agenda in the margins. Although no clear sign Turkish petroleum market were Progressing along the value chain, exists, we are also optimistic over very different. storage operations have risen as concrete improvements on the the new star, not only on the back upstream regulatory front, such as In Turkey, 2010 started with of regulatory enforcements but the ratification of amendments to the celebration of the resumed also reaping the benefits of vertical the archaic Petroleum Law and more offshore activities in the Black Sea, integration. rationalised steps in the secondary along with positive signals for the legislation regulating daily life in the Mediterranean and Aegean. While leaving most of the distribution and retail segment. Mediterranean fuel retail markets, Discussions on enhancing the IOCs assigned a special status to the We hope our comments and outlook security of the Turkish straits and Turkish market as a unique growth will help illuminate your future plans negotiations for a second pipeline hub. This is a strong commitment targeting this unique market. to carry Caspian crude to global proved resilient first to the margin markets through Anatolia gained cap exercise by the regulator in 2009 momentum on an international (a move with ongoing psychological scale. impact throughout 2010) and the significant decision by the Deteriorating cracking margins Competition Authority to fight the on the back of sustained low anti-competitive impact of long- demand for petroleum products term usufruct and rental contracts meant mothballing and conversion between distributors and dealers. to storage facilities for many European refineries, whereas no such measures were even discussed Developments in the Turkish Petroleum Market 3 Executive summary Untapped reserves Straits to be handled More action for Ceyhan versus outdated with care please! legislation An estimated 50,000 vessels pass With its name linked with all The share of indigenous oil in the through the Turkish straits annually, the pipelines and possessing the domestic supply basket is now 20% of which are crude oil and potential to channel more than around 10%, but 80% of onshore petroleum product tankers. Even in 150 mn tonnes of crude oil to reserves and almost all offshore the best of weather, the Bosphorus global markets every year, Ceyhan reserves remain untapped. Although Strait is quite difficult to navigate, has gradually strengthened its investments by domestic and foreign as evidenced by the more than strategic position in the Eastern private players are growing, the 180 recorded collisions, resulting Mediterranean Basin. This was Turkish Petroleum Company (TPAO) in 47 deaths, between 1982 and underlined by the decision to retains absolute dominance over 2008. Pipelines have already declare the region an Energy exploration and production (E&P) become imperative to mitigate Specialisation Industrial Zone activities. Nevertheless, the market the risk to human and marine life, in 2007, although no details are is optimistic about further growth, given the growing oil production available regarding any related with greater regulatory efficiency in Russia and the Caspian region. incentives. expected following the long-awaited In this regard, the Baku-Tbilisi- amendments to Petroleum Law Ceyhan (BTC) pipeline constitutes Full-throttle dieselisation No. 6326. an important example, one to be followed by the Samsun-Ceyhan and embrace of pipeline, for the total transportation non-sulphur future of more than 150 mn tonnes of crude oil and petroleum products per annum, bypassing the straits. Although demand figures are often inconsistent with car park growth due to illegal fuel use, sweeping dieselisation is a confirmed fact, with the fuel holding an almost 66% share of automobile fuel consumption. The positive reaction of Turkish drivers to Euro IV standards seems likely to facilitate the shift to Euro V by 2011. 4 Developments in the Turkish Petroleum Market Secure market for sole Ususfructs unlikely to Tax incentives leave Auto- refiner settle soon LPG last segment standing Currently meeting around 60% of The Competition Authority (CA) Mainly thanks to favourable taxation, domestic petroleum product demand, marked a turning point in the history Turkey is the world’s second largest Tüpraş is the sole refiner in Turkey. of fuel dealership business in Turkey auto-LPG market after South Korea Although no limitation exists on with its decision to limit the duration and has the highest number of auto- imports by fuel distributors, the red of dealership contracts to five years as LPG stations in the world, with more tape, financial requirements and of 18 September 2010. than 8,500 dealers. Sharing the same infrastructure gaps create a de facto The retroactive character of this unfortunate fate as heating oil, on barrier. decision, and therefore its provisions the other hand, demand for bulk and The impacts of the planned refinery affecting contracts enacted prior to cylinder LPG has been severely hit by of the SOCAR-Turcas JV, together this date, resulted in the reshuffling the rise of natural gas in residential with growing consolidation of the cards in the market. The heating. and vertical integration in the preliminary impact has been the downstream segment remain to be pressure on the distributors’ share in seen in the mid-to long-term. the margins as a negotiation tool for the new contracts. Although the dust Proud to be price does not look set to settle soon, the champion? mid and small-size distributors and also the dealers are to emerge as the Recent discussions about the high winners of this process. fuel prices reminded us of the fact that Turkey tops the 28 European countries in the downstream segment with the highest gross margin and with no less emphasis on the share of tax hitting 67% and 57% of gasoline and diesel pump prices respectively. Looking forward, however, the discussion seems to ignore the taxation and to evolve more on the over-European average downstream margins, with an already open call by the Turkish government for lower figures and the regulator’s controversial decision to ban the promotion activities by the distributors to contribute to the expected erosion. Developments in the Turkish Petroleum Market 5 Part I: Activities regulated under Petroleum Law No. 6326 The existing legislation in the The share of indigenous oil in the 80% of onshore reserves Turkish petroleum market domestic supply basket, which was separates upstream activities, 20% two decades ago, is now 9%. remain untapped i.e., crude oil exploration and Nevertheless, the 13% YoY pick up production (E&P), from mid and in production in 2009 indicates an Turkey is divided into 18 onshore oil downstream activities. Petroleum end to a long-term hiatus in E&P exploration zones (see Map 1). Over Law No. 6326, which is now 77 activities. Please note that, as long the 77-year period since the first years old and recently been the as E&P companies are willing to drill, however, only three zones in subject of serious amendment sell, refiners have to give priority to south-eastern Anatolia (Zone 10, considerations, is the main body procurement of domestic oil. 11, 12) and one in Thrace (Zone 1) of legislation regulating the have received sustained investment upstream segment. The remaining 91% the demand is interest. mainly met by imports from Russia and Iran (see Part III for more detail). Although the total investment Share of domestic in oil and gas exploration grew crude oil in supply has seven-fold between 2002 and halved 2009, reaching US$716mn, only 20% of onshore reserves have been The first upstream activities in explored so far. Turkey started in the 1930s, but have not to date resulted in significant discoveries. Production peaked at 4.45 mn tonnes in 1991 and gradually Figure 1: Domestic crude oil production (mn tonnes) waned to 2.37 mn tonnes in 2009 by a CACR of 6% (see 5 25% Figure 1). On the demand front too, a gradual slowdown has 4 20% been the trend, not solely due 3 15% to the loss of steam in demand for oil products, but also on the 2 10% back of optimisation works in tonnes mn the domestic refinery facilities, 1 5% among other reasons. 0 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Domestic crude oil production (mn tonnes) (LHS) Share in domestic demand (%) Source: PIGM 6 Developments in the Turkish Petroleum Market TPAO retains absolute Map 1: Crude oil exploration zones in Turkey dominance Being just one of the 48 companies operating in this segment, TPAO holds 151 licences in full and 14 via partnerships, out of 415 in total, based on 2009 statistics.