In the last 20 years, demand for oil and natural gas in Turkey has increased exponentially, and the country has developed into a significant consumer within the energy markets; however, the demand conditions coupled with insufficient natural resources have spiked Turkey’s energy import bill to alarming levels. The International Energy Agency (IEA) anticipates Turkey’s energy demands to increase by over 200% in the next ten years (IEA). To mitigate future costs and address the current $60 billion energy debt the country faces, Turkish officials have been negotiating a comprehensive oil and gas agreement with the Kurdish Regional Government (KRG) (Reuters).

The centralized government of the semi-autonomous KRG in Baghdad has not been shy about voicing their resistance to this agreement. Nonetheless, on November 27, 2013, the Kurdish Regional Government agreed to a multi-billion dollar energy deal to supply oil and gas to Turkey at a lower cost, while expanding Iraqi-Kurdish economic impact in the oil market of that region (Reuters).

Energy Demand in Turkey

Since 2001, oil consumption in industry sectors has steadily grown, with imported product meeting much of the demand. Net energy imports in 2012 were 712 kb/d of liquid fuels, where 55% of this consisted of crude oil and 45% were other refined products. In comparison, the production of liquid fuels was only 45 thousand barrels per day and has remained fairly consistent in the last ten years (IEA).

Turkey Consumption2

Figure 1: Turkey’s net energy imports for crude oil and other refined products
Data Source: EIA

The essential infrastructure investments in Northern Iraq will be crucial for managing Turkey’s growing energy needs and developing the Kurdish region. Key changes regarding the transportation and extraction of oil will include the following:

  • Construction of a new pipeline to increase global oil exports by 1 mb/d by 2015 and 2 mb/d by 2019 (Reuters)
  • Operation of 13 exploration sites backed by the Turkish Energy Company (TEC) and U.S. oil giant Exon Mobil (XOM.N) to investigate KRG’s estimated 45 billion barrel reserve (Bloomberg)

In 2011, Turkey imported an average of 447 kb/d from Iraq. With the KRG’s involvement, the nation’s capacity to import is expected to double by 2015, and quadruple by 2019 (IEA). Under the new agreement, Turkey is entitled to purchase up to 50% of KRG’s crude, which will be transported through the new pipeline; KRG is responsible for marketing and bargaining the remainder of its supply with potential buyers.

Basic supply and demand curves dictate that the oil future market will decrease the Brent crude spot price as more resources enter the market. However, market sentiment towards this historically volatile region may dictate otherwise, and place upward pressure on prices. Political issues between the stakeholders surrounding the agreement could create barriers for the delivery of oil contracts.

Baghdad’s Stance

The Iraqi government is a key player within this agreement, holding control of the current oil pipeline to Turkey. The KRG assuming full autonomy over oil resources has been deemed illegal by Iraq, and previous Kurdish efforts for oil autonomy have been halted (Bloomberg). These measures are an attempt by the Iraqi government to avoid being sidelined; in order to reach a tri-lateral agreement between the various stakeholders, the following terms have been proposed (Reuters):

  • Allocating 83% of oil revenue to the Iraqi government and 17% to the KRG
  • Controlling oil exports through metering processes
  • Increasing transparency by opening transactions to international and internal audits

The successful concordance of these conditions may help ensure the prompt delivery of contracts and decrease volatility in oil prices.

Final Words

The implementation of the Turkey-KRG energy deal will see approximately 200 kb/d of oil imported to Turkey throughout 2014 (Rudaw). Concurrently, negotiations are in process between KRG and Iraq to reach a comprehensive revenue allocation agreement which would result in a new participant entering the global oil market. As Iraq’s total exports are set to increase in the coming year, prices are anticipated to change accordingly based on Turkish demand, regional instability, and infrastructure capabilities.

During 2013, with Iraq’s increased exports to Asia, there have been inconsistencies in the delivery of contracts due to issues with transportation infrastructure; as a result, Brent’s premium over Dubai increased (Gulf). Moving forward to 2014, the global markets could further see a change in this premium depending on how the distribution of oil is accounted for from the increase in demand.

brent-dubai-swap

Figure 2: NYMEX Brent Crude Oil and Dubai Crude Oil Futures Swap

The corporate and state investments in this deal are working to strengthen the KRG’s market position, which will be beneficial to Iraq in handling the distribution of their oil. In addition, concurrent events regarding Iran’s nuclear program are another step towards Turkey increasing oil imports from their current largest supplier.

The shifting political climate in the Middle East, confidence in contract delivery, and growing demand of energy imports for the foreseeable future have the potential to stabilize premiums for this year’s end. At ZE we facilitate the collection of data from major global natural gas and oil hubs. Our industry acclaimed software, the ZEMA suite, provides powerful tools to automate the collection, analysis, and integration of  derived data sets, ensuring that market participants receive the optimal end-to-end enterprise data management solution.