Valyrian Capital – Intro to Turkish Energy Markets
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VALYRIAN CAPITAL – INTRO TO TURKISH ENERGY MARKETS VALYRIAN CAPITAL 1 SEPTEMBER 2015 Turkey Aspires to Achieve Ambitious Goals by 2023 In 2013, the Turkish government allocated 30% of the total infrastructure investment budget to the transportation industry. Infrastructure investments are expected to reach TL36.6bn by 2023 Planned Major Projects 1 Körfez Bay 4 Euroasia 5 Euroasia st Bridge 1 Tunnel Tunnel Phase US$1.6bn US$1.6bn US$9.2bn 2015 2016 2017 2023 rd 2 3 Bridge 3 PPP 1 Körfez Bay in Istambul Hospitals* Bridge 2nd US$2.5bn US$7.7bn Phase US$10.1bn Infrastructure (TL bn) Energy and utilities infrastructure (TL bn) ₺40 CAGR: 12% ₺60 CAGR: 12% ₺35 Roads and bridges ₺50 Water infrastructure ₺30 Airports Oil and gas pipelines Railways ₺40 ₺25 Power plants and transmission grid Ports, harbors, waterways ₺20 ₺30 ₺15 ₺20 ₺10 ₺10 ₺5 ₺0 ₺0 Source: SOCAR VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 1 Targets for Turkish Energy Sector for 2023 Turkey has one of the fastest growing energy markets in the world in parallel to its economic growth registered over the last ten years – the total amount of investment required to meet 2023 energy demand is expected to exceed $130bn Turkey’s Vision for the 2023 Energy Sector: ▪ Lifting up installed power to 120,000 MW ▪ Increasing share of renewables to 20% ▪ Maximizing the use of hydropower ▪ Increasing power plants with 3,000 MW of solar energy and 600 MW of geothermal ▪ Extending the length of transmission lines to 60,717 km ▪ Reaching power distribution unit capacity of 158,460 MVA ▪ Extending the use of smart grids ▪ Raising the natural gas storage capacity to 5 billion m3 ▪ Establishing an energy stock exchange ▪ Commissioning nuclear power plants (Two operational nuclear power plants with third under construction) ▪ Building coal fired power plants with a capacity of 18,500 MW Source: SOCAR VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 2 Turkey: Crossroads of Production and Consumption Gas Production ▪ Although Turkey is limited in primary energy resources and is dependent on imported energy, it acts as a bridge between the worlds crucial supply and demand regions ▪ Having a position central to the regions of Europe, the Balkans, the Aegean, the Black Sea, the Caucasus-Caspian Basin and Central Asia, Turkey is a natural transit country for maritime and pipeline transportation of oil and gas Petroleum Production ▪ Turkey’s position is critical for the export and import of petroleum as it straddles the demand-rich west to supply-rich east Source: BP Statistical Review 2013 VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 3 Turkey Macro Outlook Macro Economic Framework Outlook Government Projections – Medium Term Plan ▪ Turkey’s economy reached a 4.2% growth in 2013 due to the strong support from the public Turkish 2013R 2014R 2015 2016 2017 sector Economy ▪ Growth was 2.9% in 2014 due in large part to Growth 4.2% 2.9% 4.0% 5.0% 5.0% net exports Inflation 7.4% 8.2% 6.3% 5.0% 5.0% Budget 1.2% 1.3% 1.1% 0.7% 0.3% Deficit/GDP ▪ According the governments “Medium Term Debt Plan”: 36.2% 33.1% 31.8% 30.0 28.5% Stock/GDP Growth ▪ Growth is estimated at 4% for 2015 Projections ▪ Inflation is expected to decline to 6.3% CA 7.9% 5.7% 5.4% 5.4% 5.2% ▪ YoY decline in debt stock GDP to 31.8% Deficit/GDP is expected in 2015 GDP & CPI Rate of Change (YoY %) 20 ▪ Turkey’s sovereign credit rating has been upgraded to “investment grade” by Fitch in in 10 November 2012 and by Moody’s and JCR in May 2013 Investment ▪ The current sovereign ratings are: Grade 0 ▪ Fitch: BBB- (stable) ▪ Moody’s: Baa3 (stable) 2Q14 4Q14 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 ▪ JCR: BBB- (stable) -10 ▪ Standard & Poor’s: BB+ (negative) CPI GDP -20 VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 4 An Introduction to Turkish Energy Markets Pg. 5 Turkish Energy Regulatory Structure A quick look at the regulatory environment and relevant public institutions Regulatory structure of the Turkish energy market ▪ Regulating and monitoring the energy markets ▪ Issuing licenses EPDK – ▪ Drafting, amending, enforcing and auditing performance ▪ Council of Ministers and/or High Planning Regulatory standards; distribution and customer services codes Council makes decisions in line with the spirit Body ▪ Setting out the pricing principles indicated in the law of the law (i.e. Strategy Papers, secondary ▪ Ensuing the development and implementation of an regulations infrastructure ▪ EMRA Board of Directors define operational EÜAŞ – ▪ Operating the generation facilities which have not been details as often as needed regarding the State transferred to private sector changing market conditions Generation ▪ EÜAŞ has several affiliates which operate specific thermal power plants in the privatization portfolio ▪ The main laws are as follows: Company ▪ Operator of state-owned DisCos, owner of DisCo assets 1 Electricity Market Law (EML) No: 6446 TEDAŞ ▪ Expropriation activities for distribution 2 Natural Gas Market Law No: 4646 TKİ – State ▪ Producing and usage of raw materials of energy such as Coal lignite, asphaltite, oil shale, peat, etc. 3 Petroleum Market Law No: 5015 Enterprise Ministry of 4 LPG Market law: 5307 Energy & ▪ General energy policy making Resources 5 Renewable Energy Law )REL) No: 5346 BOTAŞ ▪ General energy policy making 6 Nuclear Power Plant Law No: 5654 ▪ Carrying out sale and purchase agreements within the scope 7 Geothermal Law No:5686 TETAŞ – of its contracts State Owned ▪ Engaging organized wholesale markets for sale and purchase Wholesale agreements and conducting bilateral agreements Company ▪ Selling electricity to incumbent supply companies for regulate tariff consumers VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 6 Entryway into the Turkish Energy Sector The last few years were marked by the entry of major international players in the Turkish energy Sector Direct Foreign Investment Continues… New JVs in Generation & Distribution Companies ▪ The energy sector in Turkey has become one of the most ▪ E.ON – Enerjisa (2013) important sectors in regards to foreign direct investment ▪ Goldman Sachs – Aska Enerji (2012) Noteworthy investments in the sector include: ▪ Inter RAO – AEI (2012) Austrian OMV Company which acquired shares from ▪ EÜAŞ – TAQA (2013) 1 Petrol Ofisi and became one of the leading players in ▪ Akkuyu NGS and its Russian partner are now important downstream investors in the field with over $700mm in investments (2012) 2 US-based AES partners with Koç Entek (2010) ▪ A French – Japanese consortium is planning to build a second nuclear plant in Sinop (2013) 3 EDF entered a joint venture with Polat, a leading wind energy company (2008) 4 German RWE invested in a greenfield CCGT (2009) 5 Swedish Statkraft invested in hydropower (2009) Azeri SOCAR invested in a new refinery with Turcas 6 (2011) Chinese energy giant Harbin entered into a joint venture 7 with the Hattat Group of Turkey to operate a coal mine and a coal-fired power plant (2013) GDF Suez invested in natural gas distribution and is 8 operating a CCGT VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 7 The Turkish Crude Oil & Natural Gas Markets Pg. 8 Crude Oil: Turkey Turkey is an increasingly important transit hub for oil and natural gas supplies as they move from central Asia, Russia, and the Middle East to Europe and other Atlantic markets Turkish Straights Consumption & Imports Exploration and production Ports ▪ Includes the Bosporus ▪ In 2014 total liquid fuels ▪ Most of Turkey’s 296 million ▪ Ceyhan as become an waterway and the Dardanelles consumption average 712,000 barrels of oil reserves are important outlet for both waterway b/d located in the Batman and Caspian oil exports as well as ▪ Considered to be one of the ▪ <90% of total liquid fuels came Adiyaman Provinces in the oil shipments from northern busiest maritime chokepoints from imports southeast (where most of Iraq in the world ▪ Crude oil imports mainly come Turkey’s oil production occurs ▪ In 2014, Ceyhan handled more ▪ Significant volumes of Russian from Iraq and Iran, with each ▪ In 2014, Turkey produced an than 650,000 b/d of Caspian and Caspian oil move by supplying slightly more than a estimated 61,000 b/d of crude oil exports and more tanker via the Turkish Straits quarter of the country's crude petroleum and other liquids then 130,000 b/d of Iraqi crude to Western markets oil accounting for 9% of Turkey’s oil exports ▪ In 2013, an estimated 3 million oil consumption b/d flowed through the ▪ Aegean and Black Sea may be Turkish straights. hold oil production potential ▪ Approximately 70% of the for the future volume is crude oil Turkey’s Major Crude and Condensate Pipelines Capacity Total Supply Facility Status Destination Details (million b/d) length (mi) regions Azerbaijan & Baku-Tbilisi-Ceyhan Opening 1.2 1,100 Ceyhan oil port Started operations in 2006 Kazakhstan Started operations in 1976; Northern low annual throughput as the Kirkuk-Cceyhan Operating 1.5 620 Ceyhan oil port Iraq pipeline is frequently sabotaged Ceyhan oil port Kurdish Regional Government (KRG Northern Operating 0.6 250 via Kirkuk- Completed in 2013 Pipeline Iraq Ceyhan pipeline Russia/Centr Project was cancelled in 2013 Samsun-Ceyhan Canceled Up to 1.5 340 Ceyhan oil port al Asia as it was uneconomical VALYRIAN CAPITAL PROPRIETARY & CONFIDENTIAL Pg. 9 Natural Gas: Turkey Turkey has a strategic role in natural gas transit because of its position between the world’s second-largest natural gas market, continental Europe, and the