Reforming Turkey’s natural gas sector: a bureaucratic problem

The Turkish electricity market has made considerable progress since ICIS first started its in-depth coverage of the Turkish energy sector five years ago.

A Day-ahead platform was established in 2011 and will assume an even greater role, possibly by the end of this year when existing trading operations on PMUM will be transferred to the new EPIAS bourse.

The over-the-counter electricity market is also shaping up, with liquidity levels increasing, reflecting not only a rise in the physically traded volumes thanks to more generation coming online, but also companies’ growing risk appetite and sophistication.

The regulator EPDK has sought to work with the private sector and smooth out inherent glitches.

There are still entirely justified complaints about lack of data transparency, or fears that state companies may have access to information that the private sector cannot see. However, as the market develops, and pressures for more accountability grow, such issues are likely to disappear.

Not the same can be said about Turkey’s gas sector where progress, or even a semblance of it, remains elusive.

Two years after the idea of a balancing market was launched, the project is still at discussion level. Although the greatest part of the Turkish private gas sector backs the concept, there are a number of companies, admittedly a minority, that oppose it.

The establishment of a balancing market is not only a stepping-stone towards liberalisation, but, most importantly, a crucial tool in creating an efficient natural gas system, immune to disruption risks.

As experience shows, Turkey has been exposed to natural gas curtailments almost every winter in recent years.

And yet very little has been achieved to curb such occurrences, although all stakeholders are fully aware that interruptions harm the economy and deter investments.

There are three factors that are blocking progress: bureaucratic opposition to change, political disposition to centralisation and external pressures.

Reluctant bureaucracies

A supremely difficult task in the transition from centralised economies to free markets is the reinvention of bureaucracies across sectors.

This is the case in Turkey where state employees in the natural gas sector, used to the routine of their work and the guarantee of a safe income, cling on to the status quo.

But Turkey should not be singled out.

Margaret Thatcher’s extensive liberalisation and privatization programme initiated in the 1980s ran into fierce opposition from bureaucratic elites who fought the carve-ups.

British Gas, then Britain’s vertically integrated producer, transporter and supplier of natural gas, just like Turkey’s incumbent BOTAS, now, was reluctant to give up its market monopoly.

There is then the issue of employment.

In an interview with ICIS, a senior Turkish government representative admitted that the difficulties of reforming the company in a way that would allow its unbundling and create efficient, market-oriented entities stemmed also from the inflexibility of employment laws that made it difficult to hire and fire personnel.

It is true that faced with the unpalatable combination of inelastic employment laws and unwieldy state bureaucracies, a new Turkish government that will want to overhaul the gas sector, will have a particularly tough time.

And yet change happens – witness the examples of Mexico or Ukraine, which despite a long history of running closed, opaque gas sectors, have recently introduced reform and started to reduce the size of the state monopoly.

Internal and external pressures

If change does happen despite inherent difficulties, what then triggers change?

A modest answer to a difficult question would point to a combination of internal and external factors at a given moment in time.

For example, Ukraine started to enact reform in its gas sector once its dysfunctional subsidies system pushed it close to bankruptcy. On the other hand, the growing political influence exerted by Brussels following the removal of the Moscow-backed president Viktor Yanukovich may have also played role.

Organisations such as the Energy Community, which aims to extend the internal EU energy market to south-east Europe, had been instrumental in helping Ukraine to embed the liberal principles of the EU’s Third Energy Package into its own laws with a view to open up its gas market.

Pemex, a Mexican symbol just like the sombrero or the nachos, has come to see reform as its salvation, after heavy costs and losses have pushed the 76-year-old state company to shape up to emerging challenges.

A younger generation of politicians who came to power in 2012 and the impact of cheaper gas produced in neighbouring US and Canada thanks to the development of shale gas technology spurred Mexico to adopt market reform to regain its competitive edge as an oil and gas producer itself and to take advantage of new opportunities opening up.

Turkey has also seen a similar combination of factors where a new generation of politicians who came to power in 2002 committed themselves to carrying out market reform. There have also been external pressures such as EU requirements to candidate states such as Turkey to liberalise the energy sector.

And yet, reform has been elusive in Turkey’s gas sector. BOTAS, just like Ukraine’s Naftogaz is struggling under the weight of a cumbersome subsidies system while Turkey’s small private gas sector fights for survival. Why, then does Turkey strike a different note?

Elusive reform

There are two factors that stand out and which are arguably linked.

Firstly, Turks may find it hard to break away from the state’s “baba (Turkish for father) figure” status, caring for its subjects. The argument may have been true a decade ago when the economy was centralised. However, the vast privatization programme initiated by the majority AK Party after 2002 disproves the “baba” cult. Nevertheless, one of the few sectors, which has not been liberalised is the gas sector.

This is linked to the second factor, namely the perception of external pressures on Turkey’s energy security. By retaining control over the gas sector, the state retains control over its security.

Turkey’s principal vulnerability lies in its lack of oil and gas resources and its implicit dependence on imports, which exposes it to the political manoeuvrings in a volatile region.

This may be one of the reasons why the regulator EPDK insists on licensing every molecule of gas that enters the country.

Ironically, despite the state’s insistence on retaining central command of the gas sector to guarantee its security, Turkey’s energy security is weak.

Of course, there is also the fact that by retaining control over the gas sector the ruling political elite is not only able to respond to external pressures, but also in the position to consolidate its domestic power through gas subsidies to its electorate.

As Turkey looks set to hold early elections later this autumn after coalition talks failed, one inevitably wonders whether the new government will find the strength to take on its gas bureaucracy and open it up to the private sector.

It may, or it may not.

But then, there is always the chance of a good crisis that should not be allowed to go to waste. aura.sabadus@icis.com