This document discusses the possibility of establishing a natural gas trading hub in Turkey. It notes that Turkey's large gas market size, diverse supply options, and planned interconnectors make it well positioned to serve as a hub. However, its low current gas turnover ("churn rate") is a challenge. The document recommends liberalizing Turkey's gas market and integrating it into the European market to increase liquidity and the churn rate. It also identifies Greece, Italy, and Austria as potential competitors for establishing a hub to serve Southeast Europe and notes steps each has taken.

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Ömer Şenkardeş
Sales and Customer Relations Specialist
omer.senkardes@enercoenerji.com
Assessment ofthe Formation of a New Natural Gas "Hub" in Turkey
and Alternative Hub Candidates in South-Eastern-Europe
The tension between Russia and Western world, which came to light again with the
Ukrainian crises, has become a venture struggling especially on energy raw materials
and prices. In terms of natural gas, this struggling continues as the Russia's effort for
maintaining its dominant situation in the European natural gas markets and the
Europe's efforts for creating alternatives to Russian gas. When technical problems
occurring in Russia and Western Line (Batı Hattı) were added to this tensioned
environment in the natural gas markets in 2014, some curtailments happened in the
Russian gas flowing to Turkey through Ukraine in final quarter of the same year.
Relativelywarm temperatures during this period when curtailments occurred,
prevented emergence of a supply crises for Turkey. However, these incidents have
rekindled discussions on security of supply in Turkey again. In order to prevent
similar supply oriented problems that may happen in the future, it is an obligation
for Turkey to come up with alternative solutions and respective road maps
immediately. At this point, establishing a "commercial hub" in our country, where
gas from different supply sources come together and these gases are not only
transported but also traded, has gained a particular importance. Security of supply,
competitive import prices, increasing liquidity, new import opportunities, balancing facilities
and integration to the systems of other countries as well as strengthening international
commercial relations are among possible benefits of a correctly constructed and

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properly operated such a "commercial hub" formation just like it is in the cases of
European examples.
As detailed in Gas Target Model (GTM)1
of ACER, which is the union of European
market regulators, in order to establish a commercial hub that will run properly the
most important prerequisites are summarized as having a market larger than 20 bcm
annual, having a churn rate of at least 8 and at least three different suppliers in the market.
Our country is capable of satisfying the majority of these criteria under current
conditions. Moreover, size of our consumption volume (48,717 bcm in 2014)2
, our
potential in the consumption increases, supply diversity (number of importers and
gas entry points of the country), number of shippers, LNG and storage
infrastructures that are already existing and planned to be built, and market activities
that are increasing day after day confirm that we have the necessary market structure
in order to form a hub. More importantly, new gas contracts that may increase gas
flow to Turkish system from primarily Azerbaijan, Northern Iraq, Iran, Russia and
even Eastern Mediterranean Basin, seem to further revive the trade by ensuring
increase in the diversity in terms of supply. In this sense, the most problematic
consideration criterion to be improved is the churn rate (hand over rate of natural
gas). Natural gas market of Turkey is classified as a "basic market structure" and an
“illiquid market" with a demand-nomination-supply trio which constitutes an
inverse proportion with the size of the consumption volume. Churn rate which is
currently about 1,65 in Turkey, will come to the desired level only by increasing
liquidity by taking the steps necessary for market liberalization. At this point, in
order to increase our both domestic and international market depth, regulating the
tariffs applied for the final users in a manner that would cover cost principles, and
making legislative changes and technical investments that will ensure efficient
utilization of the interconnectors immediately, have great importance. In addition to
this, speeding up the process of integration to ENTSO-g which will ensure
1 2nd Acer GTM workshop 2014
2 EPDK- DPD_RaporYayin2014

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harmonization and integration of our gas market to European markets as soon as
possible, will play a great role in increasing the churn rate.
Another subject that may pose an obstacle before the formation of a properly
operating hub is the current storage capacity of Turkey. Storage facilities which play
critical roles in arbitrage, daily balancing and supply/demand imbalances and
ensuring necessary system balance, have a very important role in the functionality of
the commercial hubs. Although works for increasing the storage capacity are in
progress, relatively unfavourable geological formations of Turkey and inadequacies
in pricing mechanisms prevent these efforts to gain momentum. The short-cut
solution for this problem can be achieved by using interconnector connection
effectively, separating strategic storage activities that are essential to be established within
the country aside. Especially with the two-way flow to be provided through the
interconnectors, it will be possible for our country to benefit from the storage
facilities in the neighbouring countries, with which Turkey has already pipeline
connections. To give an example, total storage capacity of 2,77 bcm in 6 facilities in
Romania –(with the capacity up to 30 mcm withdrawal and 30,27 mcm injection3
)
can be operationally made available for usage in a rather short time..
3 GSE Storage Map Data July 2014

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Figure 1. Target regional trade zones in Europe.
The commercial hub to be established will not only contribute to the security of
supply of our country, but also allow integration of Turkish gas market to Europe,
which is among the primary energy strategy targets of Turkey. As it is also seen in
Figure 1.4
, Turkey forms a group with the countries in South-eastern European
Region (SEE) in European target model. Turkey, which is a larger market than its
neighbours, with its consumption of 48 bcm -Azerbaijan (8,6 bcm), Bulgaria bcm),
Romania (12,5 bcm) , Ukraine (45 bcm), Greece (4,1 bcm)5
- will play a central role in
natural gas trade in the region upon a commercial hub to be established. Moreover,
the fact that South Caucasus Pipeline (SCPx), Trans Anatolian Natural Gas Pipeline
(TANAP), Trans Adriatic Pipeline (TAP) projects, which are sub-branches of Şah
Deniz II project that is planned to start gas flow in 2018, connecting countries in the
region by carrying Azeri natural gas over Georgia-Turkey-Greece-Albania-Italy, will
make our country's role stronger (Figure 2). In addition to this, a commercial hub to
be established in our country will play critical roles in the market that will grow day
by day in the region upon the completion of the interconnector works in Bulgaria,
Romania, and Moldovia and demand increase in other Balkan countries.
Figure 2. Transmission lines that will deliver gas to be produced in Azerbaijan to Europe.
Alternative Gas Markets for Hub Formation in SEE Region
4 http://www.acer.europa.eu/Media/Events/3rd-Gas-Target-Model-Stakeholders-
Workshop/Documents/01.%20Boltz%20Opening%20IEM%20in%20gas%20strategic%20work.pdf
5 BP statistical reviewof World energy 2014 natural gas

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As we detailed previously, of course we are not the only country that is eager to form
such a commercial hub that will provide many benefits and opportunities. At this
point, Greece, Italy and Austria -which is known for its appetite in South-Eastern–
European market despite it is located in central Europe- can be counted as our
primary competitors for Turkey.
Greece is among the most important competitors with the support of the European
Union although it has an annual market size of 4,5-5 bcm. Along with Shell Gas and
ENI's shareholder status in the distribution company DEPA, procurement of %66
shares of Greek natural gas operator DESFA by SOCAR in 2013, shows the increased
appetite of international companies in the country. Despite of the chronic unhealthy
situation of the national economy and the fact that its market volume corresponds to
about one tenth of our country's volume, it has the potential to become a competitor
of Turkey in case of EU's support and persistence.
Italy is a potential hub region with its annual natural gas consumption of 70-80 bcm,
storage capacity of about 16 bcm, favourable geographical location and economic
power. Downfalls observed in the the country’s annual consumption due to the
economic problems that Italy has encountered since 2008. It is anticipated that the
share of natural gas in electricity generation, which is 46%6
, will decrease with the
investments to be made in renewable energy sources such as hydro, wind and solar.
Nevertheless, it is estimated that annual consumption of the country will be around
80 bcm. Italy stands as the most serious competitor of Turkey as it has various supply
options along with the political support that it may provide.
Austria perceives itself as in the center of the European gas flow with its strategic
location on gas transit lines of Central European Gas Hub (CEGH) and storage
facilities it owns. We can follow from various articles, news and presentations that
Austria also aims to play a dominant role in the South-eastern-European markets.
6 The Outlook for Natural Gas Demand in Europe, June 2014

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For example, Nabucco pipeline project that was completely put aside upon the
resolution taken by Şahdeniz Consortium in June 2013, was a result of these efforts.
Although it has lost its advantage recently, the Austria’s experience in gas business
makes it an important competitor of our country for the new hub formation.
In short, our country has a great opportunity for providing long term security of
supply and becoming a respected player in the international arena, with the recent
regional developments in the natural gas markets. Perhaps it is the first time that we
have a serious chance to materialize our geopolitical advantage that we have been
mentioning all along, into economic benefit with a "commercial hub" to be
constructed correctly. It is the duty of all players in Turkish natural gas market, from
the lawmaker to the final user, to take correct steps steadily but more importantly
immediately, to take advantage of this historical opportunity. It is critical to keep in
mind that competing countries, which are well aware of this opportunity and also
want to take advantage of it, have the determination to show every single effort
despite their disadvantageous positions compared to Turkey.