Contribution of new supply sources and transit routes for establishing a TR gas hub Dr. Cenk Pala, TAP Government Affairs Advisor Turkey

OUTLINE Turkey’s Excellent Geographical Location on Gas Map Short History of 4th Gas Corridor TANAP/TAP Opening up the Southern Gas Corridor Current Supply Sources to Turkey With Only Small Idle Capacities Turkish Natural Gas Market is Tight Turkish Natural Gas Demand and Supply Developments Import Projects to Turkey/Europe – Fundamental for Becoming a Gas Hub Liberalising Turkish Natural Gas Market Is Indispensable The Answer The answer is on the title of my speech is yes, but when and how? I will structure my views on that issues as follows:

Turkey’s Excellent Geogrophical Location on Gas Map Turkey is surrounded by vast natural gas reserves......... Azerbaijan Reserves : 0.9 tcm (Total share : ~0.5%) Consumption : 8.5 bcm Production : 15.6 bcm Russia Reserves : 32.9 tcm (Total share : ~17%) Consumption : 416 bcm Production : 592 bcm ..but becoming a real gas hub will require more: there is a stoney way to first become a gas corridor and then develop to a gas hub Turkmenistan Reserves : 17.5 tcm (Total share : ~9.3%) Consumption : 23.3 bcm Production : 64.5 bcm Turkey is surrounded by 63% of World NG Reserves Iran Reserves : 33.6 tcm (Total share : ~18%) Consumption : 156.1 bcm Production : 160.5 bcm Iraq Reserves : 3.6 tcm (Total share : ~1.9%) Consumption : - bcm Production : 0.8 bcm The starting points: TR already represents the 4th largest gas market in Europe TR is located in between huge gas reserve regions and European consumption markets with high gas import needs Algeria Reserves : 4.5 tcm (Total share : ~2.4%) Consumption : 30.9 bcm Production : 81.5 bcm Israel Reserves : 0.9 tcm (Total share : ~0.5%) Consumption : 2.6 bcm Production : 3 bcm Qatar Reserves : 25.1 tcm (Total share : ~13.4%) Consumption : 26.2 bcm Production : 157 bcm Source: BP Statistical Report 2013

History: Gas to Europe – Southern Route Downstream Upstream DISQUALIFIED IN FEB. 2012 Gas from Caspian Region Azeri, Turkmen etc... Midstream Marmara Sea Crossing IGI ITG Adriatic Sea Crossing Gas from Middle East Iran, Iraq, Egypt, Syria etc... Greece Section DEPA) Turkish Section (BOTAŞ) Botaş, Depa, Edison Gas In total 12 bcm : Greece (3.6) & Italy (8) Start with late 2006 to reach plateau capacity in 2012

SCALED DOWN AS NABUCCO WEST IN 2012 Gas to Europe - NABUCCO the ORIGINAL Azerbaijan 10-15 bcm/y Iran 20-30 bcm/y Iraq 10 bcm/y Syria/Egypt 6+2 bcm/y SCALED DOWN AS NABUCCO WEST IN 2012 Botaş, Bulgargaz, Transgaz, MOL, OMV Gas 25-31 bcm target market Start with 2011

TANAP/TAP Opening up the Southern Gas Corridor TANAP and TAP supports the EU’s initiative to enhance Europe’s energy security by connecting to new sources of natural gas in the Caspian Sea TANAP and TAP will be the first pipeline to open the Southern Gas Corridor Pipeline Construction TAP Selection TANAP/TAP will be the first pipelines to open up the Southern Gas Corridor to transport gas from Shah Deniz 2 to Turkey and EU countries FIDs have been taken 17 December last year Both pipelines support the EU initiative to enhance Europe’s energy security by connecting to new sources of natural gas in the Caspian Sea Region 6 bcm/a are sold to Turkey, 10 bcm/a to EU countries So the first step towards a gas hub is taken ; but becoming a real gas hub will require more: there is a stoney way to go from a gas corridor to a gas hub Let’s have a closer look into the Turkish gas market 2013 2014 2015 2016 2017 2018 2019 Q4 2013 Resolution to Construct Q4 2013 Shah Deniz II FID End of 2014 Final Contract Award Jan 2019 First gas TAP starts operation

Southern Gas Corridor Complete Value Chain - investment of approx. USD 50 bln 8 6 4 7 3 5 1 2 1. Drilling of wells 2. Offshore production 3. Onshore processing Sangachal Terminal 4. SCP 5. TANAP 6. TAP 7. Expansion of Italian network (SRG) 8. Further transport to western Europe Crossing 6 countries – 4,000 km; more than 10 energy companies involved

TAP's key features ? ? ? Aligned with EU’s energy policy objectives Designed to expand from 10 to 20 bcm (plus) per year Built-in physical reverse flow and potential gas storage Connecting directly to TANAP on the Turkish-Greek border Interconnection with various existing and proposed pipelines providing energy security in South Eastern Europe Providing Bulgaria with a new source of gas through IGB or Kula-Sidirokastro Interconnector Delivering gas and interconnecting to multiple markets in Western and Central Europe ? ? ? Title, Revision Number, Confidential/Internal/External

Current Supply Sources to Turkey with Only Small Idle Capacities Turkey has access to major supply sources through 4 import pipelines and 2 LNG regasification terminals. WEST LINE - BOTAŞ 4 bcm 2023 - Private-I 4 bcm 2023 - Private-II 6 bcm 2043 AZERBAIJAN - BOTAŞ 5.4 bcm 2022 - SOCAR* 1.2 bcm 2022 BLUE STREAM - BOTAŞ 16 bcm 2028 ALGERIA - BOTAŞ 4 bcm 2024 NIGERIA -BOTAŞ 1.2 bcm 2021 IRAN - BOTAŞ 10 bcm 2026 LNG (Spot ) Current specifics of TR gas market 4 pipeline gas import points 2 LNG import facilities 58 % share of Russian gas, 12 % share of AZ, % 20 % Iran and 10 % LNG from Algeria and Nigeria   But TR gas market faces some challenges: Tight supply/demand balance with deceisively growing gas demand No seizable free import capacities upstream the inlet points Insufficient transport and storage infrastrucuture within TR This means: TR needs significant domestic investments and new import contracts to satisfy own growing gas demand Let’s have a closer look to the figures: *Note: 1.2 bcm is a volume transfer from Azeri BOTAŞ contract to Socar.

Peak Daily Demand vs Total Daily Turkish Natural Gas Market is Tight Long term import contracts have become insufficient to meet winter demand bcm *All Values are in standard cubic meters at 9155 kcal/m3 Blue Stream West Line Iran Azerbaijan Algeria Nigeria 17 31 36 37 35 38 44 45 46 21 23 27 48 Turkish Natural Gas Demand 2002-2013 LTC Supply 2013 Power Industry Residential Peak Daily Demand vs Total Daily Send Out Capacity mcm Daily Peak Demand Capacity 193 215 TR gas consumption had a tremendeous growth, on average by 10 % last 10 years And no new supply contracts were entered into Turkey is currently short on gas: on an annual basis it’s tight, winter supplies are insufficient as December ’13 and February ’14 events have shown Reasons are: - too low daily max. import volumes - insufficient infrastructure, especially with regards to storage (2.6 bcm working gas representing only 5 % of demand) - facing a significant temp. dependent demand What will happen now? Supply problems were already faced during peak demand periods due to insufficient supply and infrastructure capacites Source: EMRA, Turkey

Turkish Natural Gas Demand and Supply Developments LNG, Azeri SD Phase II, Iraqi, Black Sea and Israeli volumes will compete to fill the gap between demand and supply after 2019 bcm Demand 57.9 bcm 51.9 bcm Contract totals if GazProm and Sonatrach contracts extended Contract totals if Shah Deniz I is extended. 6bcm Shah Deniz II volume reflected as of 2019 Demand will further increase, on lower level than in the past and capped by growth in availibility of supplies Drivers for consumption growth are GDP and population growth as well as increase in electricity consumption which will at least partially be fuelled by natural gas. And on the supply side? There is a huge gap building up; how to close that? Note: Values are in 9155 kcal/m3 Source: IHS CERA, 2013

Import Projects to Turkey/Europe – Fundamental for Becoming a Gas Hub 2013 2014 2015 2016 2017 2018 2019 Iraq 10-20 bcmpa Azerbaijan 16 bcmpa Israel 8-10 bcmpa Black Sea Gas 6 bcmpa IMPORT PROJECT EXPECTED START YEAR END YEAR VOLUME Azerbaijan (Shah Deniz II) 2019 2044 16 bcmpa Iraqi Gas 2017 2037 10-20 bcmpa Israeli Gas 2039 8 to 10 bcmpa Black Sea (Romanian) Gas   6 bcmpa Only firmly contracted new volumes are the 6 bcm/a from SD II, not arriving before 2019. Plus 10-20 bcm/a from KRI – according to statements of the TR Government – but facing some political challenges to be overcome But as described before, TR is in a lucky situation being surrounded by plenty of gas reserves The key is mobilization of these reserves. Further candidates for supplies are Israel offshore gas, Black Sea volumes, further volumes from AZ, Turkmenian and maybe additional Iranian gas This mobilization will not happen to the extent needed unless the TR gas market will be fundamentally liberalized.  

2020 PIPELINE TARGETS OF TURKEY-BOTAS Transbalkan 14 BCM Azerbaijan Türkmenistan Kazakhstan 30-40 BCM Blue Stream 16-32 BCM TR Gas Demand Iran 30-40 BCM SUPPLY POTENTIAL TRANSIT POTENTIAL 65-70 BCM 126-166 BCM 64-104 BCM LNG 12 BCM Egypt-Iraq 15-20 BCM

Liberalising Turkish Natural Gas Market is Indispensible Current Framework Major Requirements Subsidized Tariffs are set by the government, no market fundamentals / cost reflectiveness - Gas costs to be reflected on prices. - Complete abolishment of regulated tariffs BOTAŞ controls 80% of wholesale volumes and import points - No restrictions for gas imports for private players independent of the source Insufficient infrastructure - Attractive and reliable legal/regulatory framework to incentivize necessary infrastructure investments such as underground storages an LNG receiving terminals Priority to BOTAŞ Non-discriminatory access to infrastructure

THE ANSWER Turkey has an excellent potential to become a major European gas hub but not expected before 2025 …. and not w/o starting now to do its homework concerning gas market liberalization thus providing a stable regulatory framework to attract foreign investments and new supply sources Main challenges within the next years for TR on the way to establish gas hub/exchange: The prerequisite for a workable hub/exchange is liquidity. This can be secured with enough supplies, means freeing-up of gas imports is a must. Cost based gas pricing mechanism should be introduced All kind of subsidies should be lifted-off immediately. .