TURKEY S ENERGY PROFILE AND STRATEGY

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1 TURKEY S ENERGY PROFILE AND STRATEGY With a rapidly growing economy, Turkey has become one of the fastest growing energy markets in the world. Turkey has been experiencing rapid demand growth in all segments of the energy sector for decades. Over the last decade, Turkey has been the second country, after China, in terms of natural gas and electricity demand growth. Projections show that demand growth trend will continue. The limits of Turkey s domestic energy sources in light of its growing energy demand have resulted in dependency on energy imports, primarily of oil and gas. At present, around 25% of the total energy demand is being met by domestic resources, while the rest is being provided from a diversified portfolio of imports. The primary aim of Turkey is to realize its own energy security. To this end, Turkey aims to diversify its energy supply routes and source countries, increase the share of renewables and include the nuclear in its energy mix, take significant steps to increase energy efficiency, contribute to Europe s energy security. The total primary energy demand is estimated to reach 218 Mtoe by 2023 from the current level of 125 Mtoe. Currently, primary energy demand is met by natural gas (35%), coal (28,5%), oil (27%), hydro (7%), and other renewables (2,5%). Turkey s total electricity (power) demand has been increasing rapidly and it reached 264 TWh in According to the projections of the Ministry of Energy and Natural Resources, final electricity demand of Turkey is expected to reach at 416 TWh in Source: EMRA Natural gas accounted for 37,8% of total electricity generation in The structure of other energy sources used for electricity generation in 2015 was coal (28,4%), hydro (25,8%), wind (4,4%) geothermal (1,3%), fuel oil, diesel and naphtha (1,6%), and biogas (0,6%). Source: MENR By the end of 2015, the installed power capacity of Turkey has almost reached MW of which 35,4% consisted of hydro power, followed by natural gas (28,7%), coal (21,3%), wind (6,2%), multi fueled (5,9%), geothermal (0,8%) and other sources (1,7%).

2 Source: MENR Turkey imports nearly 99% of the natural gas it consumes. Over the last decade, Turkey has been the second country, after China, in terms of natural gas demand growth. In 2015, Turkey imported around 48,4 bcm of gas. 55,3% of the natural gas is imported from Russia, followed by Iran (16,2%), Azerbaijan (12,7%), Algeria (8,1%) and Nigeria (2,6%). Source: BOTAŞ and EMRA Turkey imports around 89% of its oil supplies. In 2015, Turkey imported 25 million tons of crude oil in 2015 mainly from Iraq (45,6%), Iran (22,4%), Russia (12,4%) Saudi Arabia (9,6%), Colombia (3,5%), Kazakhstan (2,6%) and Nigeria (2,1%). Enrichment of the National Energy Mix Source: EMRA Turkey continues its efforts to increase the share of renewable energy sources and add the nuclear power into Turkish energy mix with the purpose of reducing the energy dependence, maximazing the use of domestic resources, and combating climate change, Renewable Energy Thanks to its huge potential of renewable energy, Turkey is ranked 7th in the world in terms of geothermal potential. Alongside its geothermal power capacity, Turkey also places emphasis on developing wind and solar energy. In this context, as enshrined in the National Renewable Energy Action Plan for Turkey released in December 2014 by Ministry of Energy and Natural Resources, the share of renewables is planned to increase to 30% of electricity generation by increasing the installed capacity of hydroelectric power to MW, wind energy to MW, solar energy to MW and geothermal energy to MW. As an indication of the importance given to renewable energy, Turkey became a founding member of International Renewable Energy Agency (IRENA) in Bonn on 26 January Nuclear Energy Turkey aims to gradually add nuclear power into its energy mix by taking into due account of its positive impacts on environment and with a view to meeting its ever increasing energy demand as well as reducing its dependency on imported fossil fuels. By 2023, Turkey plans to generate 10% of the total electricity supplies from two nuclear power plants (NPP) which are to built in Mersin/Akkuyu and Sinop. Akkuyu and Sinop NPPs are Generation III+ plants which are to be designed and equipped with the most advanced safety systems. Their

3 safety measures are in accordance with the International Atomic Energy Agency (IAEA) standards. Recently developed Generation III+ reactors are designed to be 600 times safer than the Generation I reactors. (Chernobyl and Fukishima were Generation II reactors) TURKEY S VISION TO BECOME AN ENERGY TRADE HUB Turkey is geographically located in close proximity to more than 75% of the world s proven oil and gas reserves. Its unique location provides opportunities for Turkey in terms of ensuring its own energy supply security but also brings responsilibity to Turkey with regard to regional energy security. Turkey continues to take steps to assume its responsibilities in this regard. The goals of strengthening its position between East West and South North Energy Corridors and becoming an energy trade hub is thus duly reflected in its energy strategy. The East West gas pipeline projects which are envisaged to bring gas from Caspian and the Middle East to Europe through Turkey are referred to Southern Gas Corridor (SGC). South Caucasus Pipeline (SCP), Baku Tbilisi Erzurum Natural Gas Pipeline (BTE), Turkey Greece Interconnector (ITG) are existing pipelines while the Trans Anatolian Natural Gas Pipeline (TANAP) and the Trans Adriatic Pipeline (TAP) are planned projects within the context of Southern Gas Corridor. The delivery of gas to Turkey through TANAP will start in mid 2018 and to Europe in The groundbreaking ceremony of the TAP project which will connect with TANAP at the Greek Turkish border was held in Thessaloniki, Greece on 17 May Furthermore, thanks to its geopolitical location, Ceyhan (Yumurtalık) Marine Terminal is planned to be an oil trading hub. Following the construction of an oil refinery and an LNG terminal, Ceyhan Terminal, from where more than 1 million barrels of oil per day is currently exported to the global markets, is expected to be an important energy trade hub in the region. Turkey s efforts to establish an energy exchange market where oil and gas will be traded and priced, will further strengthen its position as a regional energy trade hub. In this context, Energy Exchange Istanbul (EXIST) was established in order to lead development of energy market through managing it in an effective, transparent and reliable manner on 18 March EXIST is currently administrating electricity exchange market. Its operations are expected to expand beyond electricity to include natural gas, oil and derivatives in the forthcoming period. In addition to establishing an Energy Exchange, efforts for increasing the national gas storage capacity are also underway. OIL AND NATURAL GAS PIPELINES / PROJECTS A. CRUDE OIL PIPELINES i. Kirkuk Yumurtalık Crude Oil Pipeline (Iraq Turkey Crude Oil Pipeline) The Iraq Turkey Crude Oil Pipeline system was constructed pursuant to the Iraq Turkey Crude Oil Pipeline Agreement signed on 27 August 1973 between the Governments of the Republic of Turkey and the Republic of Iraq in order to transport Iraqi crude oil to the Ceyhan (Yumurtalık) Marine Terminal. The first line which is 986 km long with an annual transport capacity of 35 Million tons was commissioned in 1976 and the first tanker was loaded on May 25, With the completion of the Second Pipeline, which is parallel to the first one, the annual capacity reached 70,9 Million tons as of The agreement and related protocols and letters are renewed for 15 years by a further bilateral agreement signed on 19 September ii. Baku Tbilisi Ceyhan Crude Oil Pipeline (BTC)

4 Baku Tbilisi Ceyhan Crude Oil Pipeline was contructed to transport crude oil (particularly the Azeri crude), produced in the Caspian Region to Ceyhan Terminal via Georgia in an economically viable and environmentally sensitive manner and to export the crude to global markets by tankers. BTC pipeline transports primarily the Azeri crude which is extracted in the Azerbaijan sector of the Caspian Sea as well as Turkmen and Kazakh crude to the Turkish Mediterranean oil terminal of Ceyhan. Total length of the pipeline is km of which km is within the Turkish territories. The capacity of the pipeline which extends from Baku and Tbilisi to Ceyhan is around 50 Million tones annually (1 million barrels per day). The very first crude which was transported to Ceyhan via BTC on 28th May, 2006 was loaded onto the tanker in the Ceyhan Terminal on 4 June The official inauguration ceremony of the pipeline was held in Ceyhan on 13 July On 11 August 2014, BTC celebrated the loading of the 2 billionth barrel of oil at the Ceyhan terminal in Turkey. Since its commissioning, more than 2,3 billion barrels of crude oil have been transported via the BTC pipeline. B. NATURAL GAS PIPELINES AND PROJECTS a. CURRENT PIPELINES i. Baku Tbilisi Erzurum Natural Gas Pipeline (BTE) Baku Tbilisi Erzurum Natural Gas Pipeline is a 690 km long pipeline which transports natural gas produced in the Shah Deniz field in the Azerbaijan sector of the Caspian Sea via Georgia to Turkey. An Intergovernmental Agreement between Turkey and Azerbaijan and the Natural Gas Sale and Purchase Agreement between BOTAŞ and SOCAR (State Oil Company of Azerbaijan) were signed on 12 March 2001 to transport 6,6 billion cubic meters (bcm) of Shah Deniz Phase I gas to Turkey. The construction work was carried out between 2005 and 2007, and the pipeline has been operational since July The Azerbaijan and Georgian sections of the BTE pipeline were designed at larger capacities than the contracted volumes (6,6 bcm annually) so as to enable gas transportation to Europe via Turkey in the future. A small part of the gas carried through the BTE pipeline has been transported to Greece via the Turkey Greece Interconnector which became operational on 18 November ii. Turkey Greece Interconnector (ITG) The Intergovernmental Agreement on natural gas transportation from Turkey to Greece was signed on 23 February The Agreement foresees interconnection of Turkish and Greek natural gas networks within the framework of the first phase of the Southern Gas Corridor, as developed under the EU s INOGATE (Interstate Oil and Gas Transport to Europe) Programme. Through the Turkey Greece Interconnector, the construction of which started in 2005 and became operational on 18 November 2007, the Azeri gas was delivered to Europe for the first time through an alternative route. Total length of the pipeline is approximately 300 km of which 209 km is within the Turkish territory. A part of the natural gas imported from Azerbaijan (Shah Deniz Phase I) is exported to Greece via the mentioned pipeline. iii. Western Route (Russia Turkey Natural Gas Pipeline) An Intergovernmental Agreement was signed on 18 September 1984 between Turkey and the former Soviet Union on natural gas supplies to Turkey. The pipeline transits Ukraine, Romania and Bulgaria and enters Turkey at Malkoçlar border point and passes through Hamitabat, Ambarlı, İstanbul, İzmit, Bursa and Eskişehir before reaching Ankara. The pipeline is 845 km long. Gas imports which started in 1987 have gradually increased and reached peak level of 6 bcm/year by The capacity of the pipeline was later on expanded to 14 bcm/year. iv. Blue Stream Natural Gas Pipeline The foundation of Blue Stream natural gas pipeline, the largest energy project ever between Turkey and Russia, was laid by the Intergovernmental Agreement on Russian Gas Supply to Turkey via Black Sea as signed on 15 December On the same date, BOTAŞ and Gazprom Export inked the Gas Sales and Purchase Contract which envisages annual deliveries of 16 bcm per year until the end of The gas deliveries through the Pipeline started in February 2003 and the official inauguration ceremony was held on 17 November Total length of Blue Stream is km of which 396 km lies at the Black Sea offshore section. The pipeline enables direct Russian gas supplies to Turkey.

5 v. Iran Turkey Natural Gas Pipeline A Gas Sales and Purchase Agreement was signed between Turkey and Iran in 8 August According to this agreement, Iran started to deliver 3 bcm of gas per year to Turkey in 2001 and the gas deliveries are expected to reach 10 bcm/year. b. NATURAL GAS PIPELINE PROJECTS i. Trans Anatolian Natural Gas Pipeline Project (TANAP) Turkey aims to contribute to its energy supply security and that of Europe through the Southern Gas Corridor which is envisaged to transport Middle East as well as Caspian Basin natural gas resources to Europe through alternative routes. Through Trans Anatolian Natural Gas Pipeline (TANAP), which is the backbone of Southern Gas Corridor, Azerbaijani and Caspian natural gas will be transported to the Western markets in vast quantities for the first time via an alternative route. The groundbreaking ceremony of TANAP project was held on 17 Mart The first gas transportation to Turkey through TANAP is expected in mid 2018 and to Europe in In the first phase, TANAP is foreseen to carry 16 bcm of natural gas to be produced from Shah Deniz Phase II, of which 6 bcm will be distributed wihin the Turkish domestic market while the remaining 10 bcm will be exported to Europe. The capacity of the pipeline, which will be 16 bcm in 2020, is expected to reach 23 bcm by 2023 and 31 bcm by TANAP project is managed by a consortium led by Azerbaijan State Oil Company (SOCAR). The shareholders of TANAP project are as follows: SOCAR 58%, BOTAŞ 30%, BP 12%. Efforts for additional sources that can be directed to the pipeline are in progress. On the other hand, Turkish Petroleum s share in Shah Deniz Field, one of the largest gas fields in the world, was increased from 9% to 19% on 30 May The partners and their shares are currently as follows: BP (UK) 28,8%, TP 19%, SOCAR (Azerbaijan) 16,7%, Petronas (Malaysia) 15,5%, Lukoil (Russia) 10% and NICO (Iran) 10%. ii. Turkey Bulgaria Interconnector (ITB) Bulgaria s natural sole gas provider, Bulgargaz, signed a gas purchase contract for 25 years with Shah Deniz consortium in September According to the contract, Bulgaria is expected to purchase 1 bcm of gas starting from Memorandum of Understanding regarding Turkey Bulgaria Interconnector (ITB) was signed in March Preparations on ITB preliminary feasibility report are in progress. According to the announcement by the EU Commission on 29 October 2014, Turkey Bulgaria Natural Gas Interconnector (ITB) was included in the projects supported by EU members under the "Connecting Europe Facility (CEF)" fund. OIL TRANSPORTATION THROUGH TURKISH STRAITS Turkish Straits play a distinctive role in terms of energy supply security since 3% of the global oil consumption passes through the Straits. The total amount of oil and oil derivatives transported through Bosphorus was 60 million tons in This amount reached a record level of 150 million tons in During 2014, 125 million tons of oil were transported through the Straits. Considering the busy traffic as well as the physical structure of the Straits; a maritime accident to be caused by oil tankers carrying hazardous material is highly probable risk. An accident in the Straits could cause not only a humanitarian and environmental disaster but also a disruption in the global oil supply. Therefore, alternative oil export options that by pass the Straits should be developed. One of the biggest maritime disasters occured in Bosphorus in 1994 M/T Nassia and M/V Ship Broker accident.

6 TURKEY EU ENERGY RELATIONS Energy is one of the most important subjects of Turkey EU relations. As an indication of the importance given to regional energy cooperation, Turkey joined the Energy Community with an observer status in (Energy Community which aims to have an integrated energy market supporting the competition between the EU members and non EU members of South East Europe as well as other neighbouring countries was founded in 2005.) Within the scope of Turkey s accession negotiations with the EU, the screening process of the Energy Chapter was completed in Energy relations between Turkey and EU constitute a positive agenda item. Turkey EU High Level Energy Dialogue was launched under the co chairmanship of the then Minister of Energy and Natural Resources, Taner Yıldız and Vice President of the Europen European Commission responsible for Energy Union, Maroš Šefčovič on 16 March 2015 in Ankara. The second High Level Energy Dialogue Meeting was held on 28 January 2016 in İstanbul. LONG TERM AGREEMENT BETWEEN TEİAŞ AND ENTSO E Trial synchronization operations started on 18 September 2010 between the European Network of Transmission System Operators for Electricity, ENTSO E and its Turkish counterpart upon completion of the necessary works and tests. Turkish Electricity Transmission Company (TEİAŞ) and ENTSO E signed a long term agreement on 15 April 2015 providing permanent physical integration of the Turkish and EU electricity markets. The integration of Turkish electricity system and market with those of Europe has hence been taken to a higher level.