Energy & Infrastructure Forecast 2013: Risks and Opportunities Haluk Direskeneli Haluk Direskeneli printable version 6 December

2012 Dear energy professionals and colleagues, We would like to forecast our local energy markets for 2013. The economy and business future are always shaped by expectations. These are evaluated by economists, and there was one Nobel Prize in 1995 for shaping the future with expectations. Market expectations are important in the economic forecasts globally as well as locally. At the beginning of each year, there are many economic forecasts made by nationwide daily newspaper columnists, however as we all see there are almost none made in energy markets. Within our capacity, we tried to outline a draft forecast albeit maybe somewhat irrational or unfair for the coming year. Anyhow it is better to have one rather than none. Here are expectations for 2013. In the early days of 2013, Iran will again cut off natural gas flow due to excessive needs during harsh winter conditions in its own domestic market for at least one month. The Russians will increase their supply capacity in the Blue Stream for a substantial premium as usual. The "gold for gas" barter between Iran and Turkey may end due to U.S. sanctions on Iran. That may cause gas shortages from Iran in the long term. Turkey should look for alternative energy sources. The Iranian nuclear strike capability makes Israel nervous. So Israel may initiate a surprise attack on Iran which may lead to global energy crises around the world. So we should increase underground gas storage capability and fuel storage facilities. Each and every incentive or every good intention is abused with extreme care, so political power is expected to be reluctant to issue new energy

incentives. Russians will outsource the Akkuyu nuclear power plant, starting from local civil works, high capacity steam turbines, and instrumentation and controls, due to experiencing a serious shortage of available commercial financing. Since the project is not commercial, it is now purely political. Political risks of a nuclear power plant project cannot be properly estimated, hence the non-commercial project has no commercial meaning. The Sinop nuclear power plant project will be evaluated by interested parties including the Chinese, South Koreans, Canadians, and French. We suspect whether commercial companies can secure approximately twenty billion U.S. dollars in project financing during the euro zone credit crunch and with the fiscal cliff in the U.S. We expect new investment initiatives in new-found coalmine fields in order to build new thermal power plants under locally developed clean coal technologies. New local coal-firing thermal power plant constructions are in progress. We expect a lesser number of investments for new natural gas-fired combined cycle power plants due to an increasing current account deficit. Thermal power plant investments in the northwest Black Sea coast are expected to be on hold for a while due to an EIA scheme and the intense reaction of local environmentalists. The local regulation of foreign personnel employment has changed, so cheap foreign employment will not be possible. The situation in Gerze seems to be getting out of control. The smart investor should stop further pushes and direct available investment funds to some other sectors. The Black Sea hard coal underground mining fields leasing scheme is finalized. Companies will look for nearby empty seaside land to build new thermal power plants. New local lignite-firing thermal power plant investments will be initiated.

The current account deficit (CAD) is in a severe situation due to increased spending on imported coal and imported natural gas purchases, at intolerable levels. An increased use of domestic coal and energy sources will be encouraged. Almost all existing thermal power plants are undergoing privatization, but the investment appetite is low because of the ongoing global economic crisis. The process will continue in the second half of next year. Turkey still displays a very low annual per capita electricity production and consumption with approximately 3000 kWh. The current EU average is 10K, and the North American is 12K. Local market needs more generation. Western foreign investors have lost their appetite in our energy markets, domestic investors do not have money, but on the other hand investors of rich Middle Eastern countries may have an increased appetite. Local design, local production, and local engineering do not exist yet. Western natural gas pipeline supply through Russia's Gazprom will be placed to local companies. The Ministry of the Environment will be restructuring. The secondary legislation is still pending. The minister may leave his post in the next general elections due to party restrictions. We expect reorganization as well as restructuring in the Ministry of Energy and Natural Resources in order to reduce staff, and to reassess duties and responsibilities. In recent popular social media, investors are more or less incorrectly but implicitly represented as negative profiles, and it is alarmingly too deceptive. How will that profile be corrected in the public? Due to ongoing high environmental pollution, no sufficient filters, no desulphurization and no rehab, Unit Afsin Elbistan-A should be shut down, dismantled and sold as scrap. However there are still negotiations for privatization. The Elbistan llolar landslide disaster was forgotten after the event. Reutilization should be enforced after legal procedures.

The Afsin Elbistan C-E tendering is in document preparation at the central procurement department with foreign consultants, anyhow too much time, effort and money is being consumed if not wasted. The rehabilitation of public thermal power plants is almost completed, and their privatization will be completed in 2013. The construction of the Thracian HVDC submarine transmission which will cross the Dardanelles Strait will be completed. The East Mediterranean Cyprus offshore drilling work did not reveal the expected results. The offshore contractor company is not comfortable with the early results. The South Cypriot media and government still push positive expectations, trying to keep the case on the agenda, but the situation does not seem so promising. Investors do not want to gamble anymore, as the return will not take less than ten years time. No hostility is foreseen between democratic countries Greece, Israel and Turkey. However pushing for a fair share of nearby natural resources is the rule of the game in international politics. Generally, democracies do not go to war with one another. Public forces and votes force them to compromise. Black Sea drilling is a never-ending story. Everyone is talking about very large reserves, but there is nothing in reality. The investment appetite in wind capacity is almost saturated, but environmental concerns will be on the agenda. Investment in solar energy is still very little. Without the local fabrication of the solar equipment, one cannot go further with expensive electricity generation. The EMRA needs to be reorganized and restructured, and the agency may be divided into two, maybe three. EMRA licensing will go on with reduced speed, with copy and paste applications for license overrun archives. Rejection is less than 2%. Electric cars and buses are on the agenda, but we shall all ask who will be paying the high cost of new transformers due to the additional heavy pulse

load. How do we run away from the climate change obligations? We will have the low-profile participation of the public sector. The Trans-Anatolian Pipeline project is on the fast-track agenda. Nabucco is almost forgotten. Oil prices per barrel may rise next year due to ongoing financial risks. A slowdown in demand for electricity in the first quarter is expected. HEPP and thermal projects received severe reactions from local people, and reactions will continue on all legal platforms. Construction activities for submarine HVDC cable, gas and water supply pipelines from Turkey to Northern Cyprus will continue. A change of power in Syria is not foreseen in the short term. However an influx of refugees will increase their number to 1 million by the end of 2013. It is an alarming situation. We will need approximately 4 billion U.S. dollars to be spent for the refugees within our territory per year. This is a great burden on our economy. Turkish natural gas demand will begin to fall due to counter-measures taken, probably by the second half of the year. An accelerated increase in local fuel prices is expected. Due to low investor appetite, the privatization strategy will be reconsidered in order to increase the ongoing high income-based tendering process. Turkish oil laws will be re-evaluated, again. The euro is expected to depreciate, while the U.S. dollar will appreciate. The U.S. fiscal cliff will be on the annual agenda. Turkey will enter a period of nationwide frenzy over the general elections in 2014. In the new general elections, all of the three-term MPs will leave

parliament and their ministerial posts. The Ministry of Economy as well as the Treasury will miss strong leadership. That is a great risk. The euro zone crisis and U.S. fiscal cliff will continue in 2013. So reduce your expenditures, reduce your spending, reduce your borrowing, stay cash, stay liquid. We are able to predict this much. Everyone in the business environment says that 2013 will be another difficult year. We will be too pleased to receive your comments and contributions in the new year. A happy and prosperous New Year to you all! *Haluk Direskeneli, is a graduate of the METU Mechanical Engineering department (1973). He worked in public, private enterprises, U.S. and Turkish JV companies (B&W, CSWI, AEP), in fabrication, basic and detail design, marketing, sales and the project management of thermal power plants. He is currently working as a freelance consultant and energy analyst with thermal power plant basic and detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of ODT Alumni and the Chamber of Turkish Mechanical Engineers Energy Working Group. "Statements of facts or opinions appearing in the pages of Journal of Turkish Weekly (JTW) are not necessarily by the editors of JTW nor do they necessarily reflect the opinions of JTW or ISRO. The opinions published here are held by the authors themselves and not necessarily those of JTW or ISRO. Materials may not be copied, reproduced, republished, posted without mentioning the mark of JTW or ISRO in any way except for your own personal non-commercial home use. For the news and other materials republished by the JTW you must apply the original publishers. JTW cannot give permission to republish this kind of materials."