INVESTING IN SECURITY

ne of Turkey’s most pressing economic and geopolitical concerns is largely out of its control. Energy security—or lack thereof—influences a number of Turkey’s trade relationships and development plans because of the country’s relative lack of hydrocarbon reserves. But, as is often the case with scarcity, innovation and targeted investment are Turkey’s tools of choice for decreasing its dependence on imported energy sources.

Outside of Izmir on a piece of land jutting out into the Aegean Sea lies the newly opened STAR Refinery, built by Azeri state oil company SOCAR. Its USD-6.3 billion price tag makes it the largest ever foreign investment in Turkey and its 10-million-ton annual crude oil processing capacity will decrease Turkey’s current account deficit by USD1.5 billion. SOCAR’s investment also breaks the oil refining monopoly held by Tüpraş, which also has a major refinery on the same piece of land.

While the STAR Refinery certainly decreases Turkey’s dependence on imported refined products, it doesn’t fix the root of the issue - lack of raw hydrocarbon reserves. Turkey’s state-owned oil company TPAO has been tasked with helping solve this issue, and it has recently ramped up its exploration efforts in a number of areas to boost its own hydrocarbon production. One of those promising areas is in the waters surrounding the

OTurkish- and Greek-held island of Cyprus, where TPAO has deployed two offshore drill ships and a seismic exploration vessel to begin development of the offshore gas fields there. Turkey’s exploration in these waters is not without controversy though, and overlapping claims have bubbled into a growing diplomatic dispute between Turkey and the EU.

The private sector has also been involved in the development of Turkey’s nascent hydrocarbon industry. In the Thrace region, where the majority of the country’s natural gas reserves exist, Valeura Energy - a Canada-based company - is expanding its operations. Though natural gas production has existed in Thrace for decades, Valeura’s exploration has uncovered some promising unconventional gas plays that the company intends on developing over the next couple years.

Turkey’s renewable energy sector—long a dandy among global investors and environmentalists—has come under hard times recently due to financial and regulatory constraints. On the financial side, renewable energy companies have struggled to meet their euro or dollar debt obligations since the value of their lira receivables plunged as the currency depreciated. The regulatory landscape has not been accommodative enough, and these companies are undergoing debt restructurings to stay afloat. ✖

Mesut İlter

GENERAL MANAGER, SOCAR - STAR REFINERY

Can you give us an overview of Valeura’s operations in the Thrace Basin, and how the basin’s distinct geology impacts exploration?

There has been oil and gas production from the Thrace Basin for a number of decades now. It has been heavily explored and developed, so there is a long history there. Valeura came in with a partnership with Transatlantic when we purchased Thrace Basin Natural Gas in 2011. At the time, we recognized that the reservoirs there were quite tight with low permeability, and we thought that by drilling horizontal wells and stimulating them we could increase production in the existing fields. For the first three or four years, there was a lot of activity to work our way toward gas production in the area. While we were doing drilling and research on these reservoirs, we found the potential for a deep unconventional gas play. In 2017, we brought in Statoil, which is now known as Equinor, as a partner to help the company fund and explore for that deeper unconventional gas play. Once we drilled the discovery well, Yamalik-1, in 2017 we then brought in our reserves auditor DeGolyer & MacNaughton, which conducted an evaluation and came up with a prospective resource estimate ranging between 3 and 20 trillion cubic feet of recoverable gas. It really speaks to a potential worldclass gas opportunity, though we still have work to prove this and demonstrate that we can flow this gas commercially.

Beyond funding, what role does Equinor play in the operations at Trace Basin?

It is a funding partnership, though

Equinor also puts in a great deal of technical work. We recognized the potential for this play but also understood that we needed large amounts of capital to drill these deep wells and stimulate and test them, which is when we looked to bring in a partner. There were several companies who put offers on the table, but Equinor was the best at the time. Once it has fully earned its interest, Equinor has the right to request Valeura to transfer the operatorship of the deep unconventional play to it. If it does so, Valeura will retain a working relationship with approximately a 50-50 split with Equinor and maintain operatorship of all the shallower sections and production facilities, while Equinor would have operatorship of the wells that are drilling deep into the unconventional play.

“If we look at upscaling this project and its potential to be extremely large, exporting is an option.”

What pricing risks do you face here due to the volatility of the Turkish lira?

Pricing is extremely important. Currently, the prices are set by BOTAŞ and are in lira. For foreign investors in different sectors this might create uncertainty given the volatility around the lira, but when converted to dollars, the BOTAŞ price has historically closely tracked the euro gas price in the region. One positive step in 2018 was a new monthly review and update of the price by the government. We have been pleased with the new Minister of Energy and Mining and how he has communicated with the entire oil and gas industry. He sat down and listened to the issues the industry is facing and the list of things we need to support it.

If we look at upscaling this project and its potential to be extremely large, exporting is an option. Having a pipeline like TANAP that will run into Europe creates that opportunity. However, we tend to run all our economic and development scenarios assuming the gas is going into the Turkish market, which is a captive market with great fiscal terms where 98% of gas is currently imported. ✖