By Sinem Vardaryildiz
Turkey’s demand for energy will increase in the next 15-20years,according to the International Energy Agency’s latest country analysis briefs. To deal with this matter, Turkey has to ensure diversified suppliers for domestic consumption. That effectively requires the privatization of the state-owned Turkish Pipeline Company (BOTAS) to abate the overwhelming monopoly and establish a transparent and competitive natural gas market. In this respect, the process of the liberalization of the European energy sector, which started in the ‘90s, is an important example for Turkey. Indeed, the EU Gas Directives applications in the regional energy market liberalization process played a key role in the formation of a competitive environment. In this context, inspired by these directives and achieving compliance with the EU legislation, the Law on the Natural Gas Market (4646) was enacted in April 2001. It was an important step for BOTAS in abolishing the monopoly and liberalizing the gas market.
European Natural Gas Directives
To address the growing energy demand in the EU, the first steps toimprove the overall competitiveness were taken in the 1990s by establishing an integrated domestic market, securing the energy suppliers, and protecting the environment. Until liberalization directives were adopted in 1996 (electricity) and 1998 (gas), the energy sector was shaped by national policies. But transposed into member states’ legal systems, these directives assist in forging an integrated gas entity. However, with the legal and functional gaps in the first Gas Directives, the second Gas Directives were introduced in 2003 with complementary clauses. Thus, late in 2007, the vast majority of EU countries had been settled by market liberalization.
Nevertheless, it is difficult to talk about the emergence of a competitive market within the EU, because suppliers could not be diversified and pricing mechanisms could not be avoided. Introducing new regulations and policies, the Third Energy Package published in 2009 aimed to further enhance the open, integrated and competitive energy market by separating energy production from distribution. In practice, however, a full liberalization of the energy sector has still not occurred. As an example, France, which was promoting the implementation of the directives, is opposing ownership unbundling which requires gas companies to create a separate subsidiary for conducting gas infrastructure business. In this regard, France attempt to avoid the necessary investments required in the future. Also in Germany, there is a significant lack of autonomy on the part of independent regulatory agencies. On the other hand, the incompletion in countries such as Germany of legal regulations regarding communication networks through which third parties initially excluded from contracts were granted access by 2004 clearly demonstrates the flaws in the liberalization process with in the energy markets of the EU.
The formation of the natural gas market in Turkey
As stated by Altan Kolbay, General Secretary of PETFORM, although having not yet fully achieved the liberalization aimed for, the European Union is struggling to fulfill the directives. When it comes to the Law on the Natural Gas Market (no. 4646) entered into force in 2001, Turkey falls behind European countries. The main objective of Law no. 4646 wasto develop a fair, transparent and competitive natural gas market in the country. The Natural Gas Market Law, which divides the market into seven types of licenses, covers the import, transmission distribution, storage, marketing, trade and export of natural gas and the rights and obligations of all read and legal persons related to these activities. With such a distribution, wholesale and LNG import activities are largely targets, but it is hard to say the same for the rest of the activities.
Between these developments in the liberalization process, the public agenda was most occupied by the import licenses. In fact, the target for the end of 2009 was to reduce the market share of BOTAS to 20 percent by contract and volume release methods. However, Turkey confronts a challenge to increase competition in the market because of past decisions, such as long-term take-or-pay contracts signed by BOTAS. In the Amendment of Natural Gas Market Law No. 5367 adopted in 2005, the approval of the selling party being made a pre-condition for participation in the auction constituted another challenge that explains the realization of only one contract release in more than ten years. In addition, by selling the natural gas below its cost as a subsidiary by BOTAS and not having realized the accounts, property and corporate unbundling as envisaged is promoting barriers for the liberalization anticipated under law 4646.
Even if the liberalization process was not fully accomplished, some promising steps were taken in this direction. The first contract release auction was concluded between the end of 2007 and first quarter of 2009, and four new importers entered the market with an annual total volume of 4bcm. A second important step was taken in August 2012 when Gazprom signed 6bcm per year supply contracts with four Turkish companies. This agreement replaced the contract between Gazprom and BOTAS, which dated back to 1986 and expired in December 2011. According to a statement released by the Energy Market Regulatory Authority (EMRA), the companies that signed the agreements with Gazprom are Akfel Gaz, Bosphorus Gaz, Kibar Holding and Batı Hattı.
Thus, the 9 percent share of importation for the private sector today will undeniably increase with regard to the new agreements within the market share. However as BOTAS is far from completing its objectives, this can give a hint on how slow the process of liberalization will be realized. According to the article “Research of the Natural Gas Sector” issued by the Competition Authority on July 2012, the delay by BOTAS is because the company did not operate as a “profit seeking independent venture.”The legal and functional separation as initially envisaged was not accomplished yet and a contract release was chosen instead of an amount release method.
As a result, there has been a drastic change in the gas sector and in the position of state monopoly due to the privatization of BOTAS. However up to now, except for the distribution services transfer, the objectives set out in the law have not been achieved yet. With the latest signings, the market share of BOTAS declined to 78 percent. This result demonstrates the incompatibility between the point of origin and the intended liberalization.
Sinem Vardaryildiz, USAK
*Original Turkish version of the piece was published in ANALIST Journal on October 2012