Danila Bochkarev, Senior Fellow, EastWest Institute (Brussels)
Mehmet Öğütçü, President, the Bosphorus Energy Club (London/Istanbul) 

Clearly, energy is Turkey’s softbelly and it needs to be enhanced through new sources including shale gas. The country is in dire need of energy supplies to fuel its rapidly growing economy – despite some difficulties Turkey’s GDP still grew 4 % to $826 billion last year.

However, the picture is not as rosy as it looks at first sight. Turkey’s balance of payments remains in red. The current account deficit increased from $49 billion in 2012 to $65 billion in 2013. This ‘financial gap’ is mostly driven by the country’s “energy bill” – the country’s oil & gas imports alone reached $56 billion in 2013. Turkey buys abroad up to 98 % of its demand in natural gas and up to 93 % of its oil consumption.

Ankara knows how to cope with this challenge. Drastic reduction of hydrocarbon imports is one of the three major energy goals for the decade to come. While Turkey is unlikely to become energy self-sufficient in the near future, the new sources of imported and domestically produced energy supplies are vital for sustaining the Turkish economy’s growth and competitiveness.

The domestic production – both conventional and unconventional – is therefore crucial for Turkey’s energy security. Unconventional hydrocarbon total reserve base potentially reaches 5.8 trillion cubic meters (tcm) in three provinces.

There is already a significant presence of foreign companies, knowledgeable in the unconventional production: TransAtlantic Petroleum Ltd., has already drilled 31 horizontal and deviated wells, while Shell and TPAO are jointly drilling into the Dadas shale formation in eastern Turkey.

At this point, it is difficult to forecast Turkey’s shale gas “breakeven price” – each of unconventional wells has de facto its own “geology” and “economics”. While the shale gas might not be cheaper than Russian or Azeri imports, it might be less expensive than Iranian gas and LNG cargos and will be produced at home.

However, environmental and regulatory challenges seem to be, at present, the biggest barrier on the way to Turkey’s potential “unconventional revolution”.

Environment and water issues

The issue of water usage and water/aquifer pollution is particularly important for the unconventional gas industry. Hydraulic fracturing is a water intensive process. Certain wells require the usage of more than 10 million of liters of water during their lifetime, which rarely extends longer than 5 years. The amount of water used (and wasted water produced) explains public concerns, especially in the water-scare areas.

The countries are considered water rich if their annual per capita water consumption exceeds 10.000 cubic meters, while in Turkey this number barely reaches 1500 cubic meters and the country just cannot afford to deal with polluted aquifers. Turkey is already facing serious problems caused by the water deficit and high soil salinity.

Turkey’s lakes’ surface continues to diminish in the face of unregulated irrigation, lack of long-term water management policy and climate change. Turkey’s alimentary sector is also heavily dependent on constant freshwater supplies and national agricultural productivity is primarily dependent upon sustainable irrigation.

Current debates in the U.S. show that the water usage issue might be a particularly sensitive topic – both from political and environmental point of view. It can affect political campaigns and change the fate of politicians. This issue is, therefore, should not be neglected.

What tools are necessary to deal with the water issue? – Technology and regulations, with regulations possibly being more important than purely technological component. The regulation of shale gas is an evolving landscape as the industry has developed so rapidly that it has often outpaced the availability of information for regulators to develop specific guidance.

Kingdom for a series of new regulations?

In principle, Turkey has all necessary legislation to proceed with the unconventional hydrocarbon production. A new version of the Petroleum Law, adopted in June 2013 has raised the hopes for the country’s energy sector. Indeed, combination of relatively low Royalty Tax (12.5 %) and Corporate Tax (20 %) create an investor-friendly fiscal regime.

However, existing legislation is missing some important points – flexible fiscal regime — similar to the fiscal incentives offered in the UK or the US – and specific fracking disclosure laws, securing safe development of unconventional hydrocarbons.

The land-owners in Turkey – unlike in the U.S. – do not own the subsurface mineral resources and are only compensated for their land. This certainly reduces the interest level of local population in shale oil & gas production. Turkey also misses a special shale gas fiscal regime, with special incentives for the companies and local communities, similar to one recently proposed by the UK.

So far, debates on fracking in Turkey have paid little attention to the development of separate legal framework for shale gas. More precise regulation might be necessary to establish universally acceptable and mutually beneficial “rules of the game” for the unconventional oil & gas industry.

Commercially-based unconventional oil and gas production is in principle compatible with Turkey’s two key energy priorities – security of supply and access to affordable energy supplies, but is it compatible with the country’s environmental sustainability?

All will depend on a proper application of a comprehensive and environmentally- sound project management mechanisms. This process will be also impacted by population’s willingness to pay “environmental premium”, future development of Turkey’s national energy mix, security of supply perceptions and availability of affordable energy imports.

The views expressed in this op-ed are those of the authors and do not necessarily represent those of any organization with which they are associated.