1.1 Introduction
Natural gas is a strategic sector for the Republic of Turkey (hereafter referred to as Turkey) given its direct and indirect impact on economic/social development and growth, and its control that has been mandated by the state for decades is shifting. Provided that liberalisation is the reverse process of protectionism (Hillman 2004) and mostly accompanied by liberal legislation, the reformative transformation of the Turkish gas market, with the onset of the Natural Gas Market Law (hereafter referred to as the 2001 Law or the NGML 2001), has been ongoing. Nevertheless, a number of challenges still remain unaddressed, although considerable efforts have been put in, in the industry by the government. Thus, the main rationale for undertaking this book is to examine the liberalisation process within the Turkish natural gas industry and to understand the limitations and key challenges the country has encountered in its transition from monopolistic to (semi)-liberalised gas market in the context of the European Union (EU).
Despite the complexity of the âliberalisationâ and âcompetitionâ concepts in the energy sectorsâwhich are composed of different elements, with every stage having its own intrinsic characteristics and consequencesâthey are believed to provide Turkey with access to the EUâs single energy market. This book is an attempt to analyse the Turkish natural gas industry and the chronological implementations of gas market reforms which have involved numerous stages to set up a competitive well-functioning sector with increased third-party participation and minimal government interference in all segments of the industry.
This book has two targets: firstly, it discusses natural gas market liberalisation in the context of the EU, providing a balanced discussion of the role of the EU energy directives; secondly, after addressing what the instruments of the EU gas regulations are trying to achieve, it takes the liberalisation debate a step further and attempts to draw some parallels between the developments in the European and the Turkish gas markets.
1.2 Natural Gas Reforms and Motivations
Since the late 1970s, a number of academic, financial, governmental and international institutions have been trying to better understand the factors which impact energy industries and challenges that they still confront today. Fundamentally, the core pillars of the energy sector constitute well-balanced systems in order to deliver secure and sustainable energy supplies at affordable prices. Energy is one of the most essential commodities that enable economic growth, social well-being and prosperity, and it is an imperative driving force behind essential investments and infrastructure developments worldwide. With this in mind, governments of both developed and developing countries strive to identify innovative developments to meet the requirements of their energy securities and efficiencies. Following the historical demonstrations of how volatility in energy prices and cuts in production/imports can impact major macroeconomic variables, for example, the 1973â1974 Oil Embargo1 imposed by Arab members of the Organisation of the Petroleum Exporting Countries (OPEC) against the US and its allies, a large body of research has been conducted to investigate the relationship between energy and economic development (e.g. Kraft and Kraft 1978; Contanza 1980; Hamilton 1983; Mork 1989; Hoa 1993; Cheng 1996, 1997; Glasure and Lee 1997; Asafu-Adjaye 2000; Stern 2004; Zachariadis 2007; Apergis and Payne 2010)2.
Given the inextricable link between energy and socio-economic developments, both developed and developing countries aim to liberalise their energy markets and substitute costly and environmentally unfriendly fossil fuel sources (e.g. coal, oil) with natural gas and renewable energy resources. Also as the energy output coming from renewable energy sources (RES) suffers from intermittency given that RES-based (electricity) generation heavily relies on weather/seasonal conditions, natural gas has by far been one of the most popular fossil fuels in the energy mix. In order to reduce greenhouse emissions and other intrinsically related kinds of pollution, to mitigate global warming and to reduce external reliance on energy supplies, countries have established ambitious reform programmes to set up fully fledged energy markets. In his seminal book, Competition in Energy Markets: Law and Regulation in the European Union, Peter Duncanson Cameron (2007, 33) defines liberalisation âas a process of market opening which at a minimum removes legal barriers to trade but in the EU context involves creation of an industrial structure in which competitive forces can work and a competitive ethos can be stimulatedâ and provides the definition of competition in the words of a leading competition lawyer, the late Daniel Goyder, as follows:
Competition is basically the relationship between a number of undertakings which sell goods or services of the same kind at the same time to an identifiable group of customers. Each undertaking having made a commercial decision to place its goods and services on the market, utilising its production and distribution facilities, will by that act necessarily bring itself into a relationship of potential contention and rivalry with the other undertakings in the same geographic market. (Goyder (2003) in Cameron (2007, 5))
Cameron examined the relationship between governments and electricity/gas markets which had undergone a dramatic change and distinguished three broad stages in the evolution of these relationships. Firstly, the intervention stage began with the creation of state-owned monopoly suppliers. This occurred due to the reconstruction and expansion after the Second World War, followed by the second stage, a period of uncertainty, during which the relationship was exposed to critical reassessment following the energy crises of the 1970s. In 1985, it entered a third stage, globalisation, resulting in the loosened of ties between governments and their energy companies via commercialisation or privatisation or both (ibid., 12â15). The drivers behind natural gas reform programmes have been widely divergent not only between developed and developing countries, but also between those who produce and/or export natural gas and those who do not.
In developing countries, for instance, the primary objective of the reforms has been to purportedly achieve economic efficiency by introducing competition into segments where it is most feasible3. This is supported by the reviews of the Organisation for Economic Co-operation and Development (OECD) on regulatory reform,4 according to which countries that take advantage of a crisis to engage in comprehensive regulatory reform fare better, and greater competition and openness increase their ability to recover more quickly from crises as well as increasing potential long-term growth (OECD 2010, 3). According to reform proponents, opening a market to competition would not only mean all competitors would have access to the market but it would also serve as an opportunity for countries (not least with underdeveloped infrastructure) to get those ameliorated by private firms which would not be possible as quickly by monopolistic national champions otherwise. In line with the corporatisation of state-owned enterprises, competitiveness of private firms in terms of price and service quality is also envisaged to provide more productivity and dynamic efficiency. Utilising market price signals and consumer choice as significant tools to match supply and demand, obliging private firms to achieve production efficiencies and ruling out the possibility of realising extra profit at the expense of consumers, resulting in end users reaping the benefits from the competition in the market, have been the other motivations for reforms in the developing world (Bernstein 1988; Sullivan 1990; Schram 1993; Bhattacharyya 1995; Dunkerley 1995; Caruso and Chen 1997; Arun and Nixson 1998; El-Banbi 1998; Stevens 1998; RosellĂłn and Halpern 2001; Vogelsang 1999; World Bank 2000; Zarrili 2003; Gabriele 2004; and Kessides 2004).
Like many other developing countries, Turkey has also learnt lessons from the implications of restructuring a reform programmeâsupported by the International Monetary Fund (IMF)âto attenuate the severe economic crises encountered in 1999 and 2001. The government used the crises to give the countryâs liberalisation process a concise direction and highlighted that privatisation in the energy sector was crucial both to realise receipts through transfer of operating right contracts and to foster investment and efficiency in the sector. Accordingly, legal amendments would be passed by the parliament to define energy as a sector subject to the Turkish commercial code as a prior action5. Indeed, since 2002 the rise of Turkey in the global arena led by successful economic reforms and the political stability instilled by successive governments led by President Recep Tayyip ErdoÄanâs Justice and Development Party (AKP) have been evident. The countryâs first and only NGML, which came into force in 2001, has achieved most of the hallmarks of a liberalised market integrating the EUâs energy reforms framework into Turkeyâs legislation, although the full implementation still remains unaccomplished.
In developed countries, motivations for reform are argued to hinge mainly upon the creation of vibrant competitive and well-functioning markets into which new players enter barrier-free. In other words, liberalisation is expected to encourage private participation, limit extensive market power of national champions, realise non-discriminatory access to common facilities, expand customer choice, encourage interregional (or cross-border) natural gas trade, and increase transportation capacity (Juris 1998; Cavaliere 2007; Melling 2010; Joskow 2005; Saluz 2011; UNECE 2012; Panebianco 2013; Stern and Rogers 2014; Corsini et al. 2014). The reforms are by and large expected to ameliorate the poor performance of state-run natural gas operators (e.g. unreliable supply, inability to meet the investment and maintenance costs of natural gas industry against accruing demands) as outlined by the United States International Trade Commission (USITC 2001). According to the Commission, the liberalisation reforms are also expected to provide new market access opportunities to private firms, allowing them to invest abroad in natural gas transmission, distribution and marketing sectors, with an aim to foster growth of international trade in services. However, Cameron (2007, 4) criticises assumptions based on such a positive vision of liberalisation, especially that which the European energy markets were introduced to. The author primarily argued that despite the high expectations that (particularly industrial) energy consumers would benefit from a greater choice of suppliers and possibly from lower prices, by the end of the first decade of âmanaged liberalisationâ in the EU, they were left with a number of issues to address, including consumer prices that appeared to be volatile and lacking in transparency; gas markets that remained segmented into national compartments; a marked absence of new entrants; continuously growing dependence on non-EU imports of gas for power generation; and, worse still, a new set of problems to deal with, such as large investments being required to modernise and expand the ageing network infrastructures.
In countries with abundant natural gas endowments, however, liberalisation reforms have generally been centred around gas prices (oil-linked regulated prices vs. market-based prices), structure of the export/import contracts (long-term take-or-pay contracts vs. spot contracts), and cultivating the involvement of the private sector in the upstream gas sectors (exploration and production [E&P] activities) in order to acquire the innovative technology and efficiency the sector requires (Zamani 2007; Adeniji 2013; Henderson 2013; Krane and Wright 2014; IEA 2014; Duncan 2015; Stevens 2015; Farchy 2016; EIA 2017). These countries rely heavily on the revenues ...