Turkey's electorate goes to the polls on 12 June. ICIS Heren looks at the natural gas market unbundling dilemma that the newly elected administration will face. The natural gas sector of the Turkish gas market is a notoriously opaque environment. Despite the existence of a 2001 law that created the legal framework for the unbundling of the sector, little has been achieved towards that goal. BOTAŞ, the gas incumbent, continues to control around 90% of the market, negotiating long-term contracts with traditional suppliers - Russia, Azerbaijan, Iran and to a lesser extent Algeria, Nigeria and Egypt - for liquefied natural gas (LNG). Although BOTAŞ's gas distribution monopoly ended in 2007 when Royal Dutch Shell and Bosphorous Gas - a joint venture of Russia's Gazprom and a local outfit Tur Enerji - started to sell natural gas to the market, analysts say that it is unlikely that BOTAŞ's remaining assets would be further unbundled. The future government will have to weigh up its foreign policy options against its national security constraints. On the one hand it may come under increased pressure from Azerbaijan, one of its main suppliers, to allow access to the market and also access to Turkish power producers with gas generation in their portfolio. This, in turn, may produce a favourable environment for the creation of independent, rather than regulated, price mechanisms. Some sources point out that the natural gas agreements signed by Turkey with Azerbaijan in April, May and June 2010 no longer include the hitherto traditional proviso that BOTAŞ should secure 15% of Azerbaijani gas on preferential terms and resell it at market price. This, they say, is an indication that prices are becoming less regulated. In fact, on Tuesday, Azerbaijani gas company SOCAR told local press that it was interested in participating in tenders to buy stakes in Turkish gas distribution company Içdaş. Additionally, BOTAŞ said that it was looking to transfer 6 billion cubic metres (Gm³) to the private sector this year, a potential increase of 2Gm³ on previous years. "The current size of the market is about 30Gm³ and the 6Gm³ they are now talking about could represent quite a lot of the market," Graham Freedman, senior European gas and power analyst at consultants Wood Mackenzie, said earlier this year (see ESGM 7 January 2011). On the other hand, the state is keen to retain its ownership over BOTAŞ for strategic reasons. Highway Thanks to its geography, Turkey is already an energy highway, with oil and gas pipelines criss-crossing its territory. However, the question facing the new government is whether it should push this status further to create an energy hub - a place where multiple suppliers and customers meet in an open transparent marketplace. Ahmet Kılıçdaroğlu, leader of the CHP opposition party, told local press recently that he would turn Turkey into a logistics hub, insisting at the same time on the need for investment in the petrochemicals sector. Although no further details were released, one could assume that Turkey would consider the creation of an energy hub at Ceyhan, the Mediterranean terminal in the Baku-Tbilisi-Ceyan oil pipeline. Specialists have previously mooted the idea of producing a much-needed benchmark crude, a blend that could include supplies from Russia, Kazakhstan, Iran, Azerbaijan and Iraq. This blend would be used as a regional pricing standard against which other crudes emerging on the Mediterranean market could be measured. The value of such a hub could be enhanced by adding refined products to the market or opening up a third LNG terminal at Ceyhan. Last year Fazil Şenel, BOTAŞ's general manager told ICIS Heren that the company was looking to resurrect plants for the Ceyhan liquefaction terminal after discussing with the Iraqi government the possibility of contracting up to 30Gm³/year of gas within the next 10 years, a quantity that could be increased up to 50 Gm³/year in the long term (see GLM 29 October 2010). Agreement Such a vision looks increasingly possible as Iraq has signed agreements with Turkey's national oil and gas company Turkiye Petrolleri AO (TPAO) and Korea Gas (KOGAS) for the development of the Siba field in the Basra region. The two companies have a 20-year licence on the field and are committed to producing 100 million cubic feet of gas within the next six years. The terminal could also handle Azerbaijani, Russian and Iranian volumes, Senel said. Given Turkey's strategic position and the multitude of pipelines crossing or expected to cross its territory, it is likely that the new government will consider introducing a tax to protect the infrastructure from terrorist attacks, illegal tapping or sabotage. Unlike Georgia, which charges around $5m/year for protection and security of the Baku-Tbilisi-Ceyan line, Turkey does that at almost no cost, analysts say. Whatever the outcome of the 12 June elections, it is hard to believe that energy-related issues will not top the agenda of the new government. What matters is whether the new administration will seek more involvement in the Turkish energy sector or will balance its foreign policy and strategic interest against the free market principles already at work. AS

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