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Europe's Fastest-Growing Economy Needs More Oil

Friday, 17 Aug 2012 | 9:44 AM ET

Turkey’s dependence on imported oil is hampering its growth, and is likely to continue doing so as the country’s prosperity increases, regional analysts and energy experts say.

Turkey's Energy Minister (2R), Turkish Cypriot leader Dervis Eroglu (4R) and Turkish-Cypriot Prime Minister Irsen Kucuk (R), attend a ceremony an oil rig platform during a ground-breaking ceremony in the village of Sygkrasi, near Famagusta, where the state-run Turkish Petroleum Corporation (TPOA) bored their first onshore probe on April 26, 2012.Turkey began its first exploratory oil and gas drilling in the breakaway northern sector of the divided Cyprus on April 26, amid a dispute over rights t
Birol Bebek | AFP | Getty Images
Turkey's Energy Minister (2R), Turkish Cypriot leader Dervis Eroglu (4R) and Turkish-Cypriot Prime Minister Irsen Kucuk (R), attend a ceremony an oil rig platform during a ground-breaking ceremony in the village of Sygkrasi, near Famagusta, where the state-run Turkish Petroleum Corporation (TPOA) bored their first onshore probe on April 26, 2012.Turkey began its first exploratory oil and gas drilling in the breakaway northern sector of the divided Cyprus on April 26, amid a dispute over rights t

Although Turkey produces some oiland holds 270 million barrels of reserves, mostly located in the Hakkari Basin in the south east, the country's fast-paced economic expansion and growing population means demand far exceeds domestic supply.

"Ninety percent of what Turkey uses has to be imported — both oil and gas. It is a growing economy that needs a lot of energy," Frost & Sullivan Energy Analyst Enguerran Ripert said.

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He estimates Turkey consumes around 670,000 barrels of oil per day, of which 580-590,000 barrels are imported, primarily from Russia but also from Iraq and Azerbaijan. Prior to the latest set of international sanctions, Iran also supplied oil to Turkey.

One consequence for Turkey is an energy bill, which is not only sizeable, but highly sensitive to increases in international oil prices.

“Our assumptions of tight supply due to booming demand in emerging markets is clearly a risk for the country,” U.K. research firm Business Monitor International (BMI) said in its energy report for the third quarter of 2012.

BMI forecasts the OPEC (Organisation of the Petroleum Exporting Countries) oil price basket will reach $111.47 per barrel in 2012, up from $107.52 in 2011, “creating downside risk for the Turkish macroeconomic outlook.”

Turkey’s reliance on energy imports is also a major factor behind its bloated current account deficit, which peaked in May 2011 at $86.6 billion. “Every $10 increase in average oil prices adds $4 billion to the current account deficit,” said Goldman Sachs Managing Director Ahmet Akarli, who co-heads the firm’s New Markets research team.

“You finance the deficit one way or the other, usually through debt — and foreign direct investment and equity — but mostly debt. This means Turkey’s balance sheet deteriorates… The stickiness of the energy bill is compromising a lot of growth (explain this),” he said.

The problem is likely to worsen rather than improve in the near-term, warned Akarli. “As income levels go up, energy needs increase and the steepest increase is when average income rises from zero to $25,000 per annum. This is what is happening in Turkey at the moment.”

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On current trends, the BMI forecasts Turkey’s oil consumption will top 711,000 barrels per day by 2016, with at least 655,000 barrels per day coming from overseas, at a cost of $23.67 billion.

Investment Opportunities in Turkish Energy

While substantial oil reserves may exist under the Aegean Sea on Turkey’s west coast and the Black Sea on its north, exploration efforts have been hindered by ongoing disputes with Greece over who has rights to the oil.

Instead, Turkey should focus on improving its energy efficiency, said Akarli. “There is a lot of leakage in the system. For instance, there is a lot of illegal use of electricity, especially in more undeveloped areas, but even in some industrial zones.”

In addition, Turkey could work to diversify away from oil to renewable energy, said Frost & Sullivan’s Ripert. Renewables currently supply less than 1 percent of the country’s energy requirements.

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Ripert believes wind energy in particular is a viable alternative to oil for Turkey. “Wind is very cost-effective compared with gas,” he said. “You need some attributes in your country, such as consistency of wind, which Turkey has. It borders a lot of the (Mediterranean) Sea, the Black Sea, and has a landscape that is quite hilly in parts.”

He added that the nascent wind energy sector in Turkey could also provide interesting investment opportunities for foreign investors.

“Renewable energy is a key area for Foreign Direct Investment, which some of our clients are looking into. Turkey offers as close to European stability as you can have, with still very good growth prospects and a more-or-less open economy that has improved dramatically,” said Ripert.

However, Akarli doubted wind energy’s scope for meeting Turkey’s requirements. “For industrial and household consumption, the best way to go would be nuclear. That is politically complicated however,” he said.

Turkey’s Economic Prospects Still Sound

Despite these difficulties, Richard Odumodu, fixed income investment director at Silk Invest, said Turkey’s reliance on energy imports was a challenge rather than a bar to future growth.

He highlighted Turkey’s success in decreasing its trade deficit in recent months, despite still high levels of oil imports. “The narrowing trade deficit on the back of strong-ish export growth, with the continued rebalancing of export destinations supported by a strong trend in net tourism revenues, are all positive mitigating factors,” said Odumodu.

— By CNBC.com's Katy Barnato

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