Turkey and other countries of Southeast Europe play or will play important roles in the transit of energy to other destinations, but also aspire to become resource trading hubs. Such hubs might ultimately, like Rotterdam for the oil spot market and Baumgarten for gas in Europe, become important drivers of diversification and wealth. They can be a way to move up the value-added chain; for example, a Turkish-Azerbaijani joint venture near Izmir aims to develop opportunities in oil refining, petrochemical investment, and natural gas trading. How do energy exchanges work around the world, and what opportunities and risks do they present for investors? What government policies can facilitate (or hinder) the development of energy hubs/exchanges, and how important is broader energy market deregulation and liberalization? What human capital, financial and other infrastructure issues are priorities for developing robust energy exchanges and markets?

CHAIR: Ms. Zeynep Dereli, Director, Black Sea Energy & Economic Forum, Atlantic Council

PARTICIPANTS:

  • Mr. Batu Aksoy, Board Member and Chief Executive Officer, Turcas Petrol AŞ
  • Mr. Hüseyin Erkan, President, İstanbul Stock Exchange
  • Dr. Alan Riley, Professor, City University London and Associate Research Fellow, Center for European Policy Studies, Brussels
  • Mr. John Roberts, Energy Security Specialist, Platts
  • Dr. Brenda Shaffer, Senior Lecturer, University of Haifa

TRANSCRIPT

Location: Istanbul, Turkey

Time: 3:45 p.m.
Date: Friday, November 18, 2011

Transcript by
Federal News Service
Washington, D.C.

ZEYNEP DERELI: Can everybody hear me? (Inaudible) – thank you very much for being with us. I’d like to thank our participants, especially – (inaudible) – the audience. Without the audience, we would be – (inaudible).

And today we’ll be talking about energy exchanges and markets, and of course, we have very distinguished participants here. I’d like to welcome you all.

Mr. Batu Aksoy – he’s the board member and chief executive officer of Turcas Petrol company; Mr. Huseyin Erkan, the president of Istanbul Stock Exchange; and Dr. Alan Riley, professor of City University of London and associate research fellow, Center for European Policy Studies in Brussels; Mr. John Roberts, energy security specialist, Platts; and Dr. Brenda Shaffer – I hope I’m pronouncing your name right – senior lecturer, University of Haifa.

First of all, since the name of the panel is Energy Exchanges and Markets and we talk a lot about hubs versus exchanges, one thing that even perplexes me is what is a hub? What is an exchange? Are they synonymous?

And let’s start with Dr. Riley, please.

ALAN RILEY: Okay. Well, I think the point about this is that we can have an energy exchange, kind of a trading exchange, and an energy hub is a much broader commercial operation, which can include a whole series of actual, physical facilities, not merely a digital exchange. So that may well include energy facilities. You could see, for example – (inaudible) – developing not merely the oil terminal but also, for example, LNG terminals at all facilities, and those prospects developed (in Izmir ?).

We’re talking about a mixture of elements here, exchange and hub, but the exchange is one element of what would be a broader hub, including lots of physical assets. But I think that’s how you start off describing it.

MS. DERELI: I see. When we look at energy hubs versus exchanges, so then, first, would you look to have that energy hub status? Would you like to have all of the infrastructure necessary to be an energy hub, to be able to set up an exchange, or how does it go about it?

MR. RILEY: I think there are – I think the way you’ve looked at this is I think it’s sort of almost the wrong place to start. The place you start is about building a genuine functioning energy market in which you could then build in the exchange, including utility energy exchanges where you’ve got more – (inaudible) – liquidity marketplace; there’s more access to spot pricing.

And of course, then, as you’re actually building up your marketplace and you’ve got infrastructure coming in, you’ve got the others in the hub. Of course, that actually depends – whether you can be a hub will depend – you can’t just decide to be a hub; you have to have the geography. Of course, one of the great things for Turkey is you have great geography. In fact, in many ways, I think a lot of the narrative about modern Turkey is that it’s ambitious, and I think this is one area I think that Turkey’s lacking in ambition, because actually there is much more that can actually be done here.

And one of the (elements ?) – (inaudible) – is very important to understand is that the energy potential is really quite enormous. We just look at – (inaudible) – at the potential of the Caspian. We know the Turkmenistan gas resource space is now absolutely enormous. You know, we’re talking, you know, 26 trillion cubic meters of recoverable gas. There’s an enormous amount of gas there.

We’re also – it looks like there’s a lot of modern discoveries in the Caspian and this area above the Caspian, a very substantial additional gas supplies there. Turkey’s perfectly placed for this.

And one of the other elements that’s really important to understand is that the demand for gas is going to be enormous. Even with shale gas or LNG. Let me give you one example of why that is the case. One of the really big issues for Europe is how we deal with climate change issues, or how do you deal with climate change? And one of the really important points to understand is that a climate change ambient is not really going to impact on gas development, and let me explain why.

(Name inaudible) – has produced a report recently about how to get – (inaudible) – CO2, and what they were pointing out was that the load factor of gas line turbines in Europe is around 45 percent. What they were saying is that if you take a load factor of 45 to 75 percent, you’ve cut about 300 million tons of CO2 every year out of the atmosphere if you switch off the equivalent number of coal-fired power stations.

Now, the total amount of CO2 produced by coal-fired power stations in Europe is about a million tons of CO2, so you’re talking out about a third. Because – and of course, this can be done without spending a single penny of CAPEX. (Inaudible) – renewables; that would be between 18 and 120 billion euros worth of capital expenditure on renewables.

Now, given the austerity that we’ve got, the only real choice in town to cut CO2, I mean, any times, is by going down the route of using gas. So gas demand is going to increase. There is virtually, as the British Prime Minister Margaret Thatcher once said, there is no alternative.

MS. DERELI: So a good reason – (inaudible) – to cut CO2 emissions, we have to use gas more. But this is actually, we’re actually talking about the exchange – (inaudible).

MR. RILEY: Yes, but the point that I’m making is that the issue of Turkey is if you go down the line of actually building the infrastructure and building yourself up as a hub, the question you’ve got to ask is, is there a market? What I’m saying is that there is a market.

MS. DERELI: There is a market.

MR. RILEY: And this is – I’m sorry, it’s rather disconnected, but it actually is very important to understand that the demand will be there.

MS. DERELI: Okay. I think Mr. Riley has –

JOHN ROBERTS: I think one of the things is, first of all, Turkey is fantastically well positioned geographically, as Alan pointed out. You only have to – (inaudible) – different gas sources, and – (inaudible) – the point of the amount of people we want to export – (inaudible) – markets across Turkey using Turkish transit – (inaudible).

But there is one enormous problem. Turkey – you can look at gas in several ways. It is perfectly reasonable to look at gas as a strategic issue, as a core element in a nation’s security. That’s – (inaudible) – what I do. But if you want to have a market, you have to create a marketplace. You have to talk in the language of the market. You have to be discussing why Turkey would be attractive for companies wishing to trade gas, and at the moment we do not hear that at all.

We hear everything about how important it is for Turkey – sometimes they use the word – to control gas transit through the country. We hear it talked about as if, dare I say this, it is the same kind of language as Russia or Ukraine uses it about transit. It makes people nervous. That is the prime reason why Azerbaijan is so very keen to have a line not to Turkey, where it can trade, but through Turkey, so that it can trade beyond Turkey.

This doesn’t have to be like this. Turkey can become a hub, but to do that it needs a change of mentality. The liberalization process that was begun in 2000, part of the last major reform act was 2001, has still to be implemented in full. We’re still waiting for it. This is not encouraging if Turkey is going to become a real hub. At the moment, it’s a crossroads. It’s not a hub, and I’m not sure it’s going to be a hub in commercial terms for many, many years to come. It should happen, but I don’t think it is.

MS. DERELI: Thank you very much for those remarks. Actually, on that note I’d like to turn to Mr. Aksoy, because he’s been working on this, establishing marketplace for Turkey and from a commercial perspective.

So what do you think? Do you think Turkey’s ready, or do you think we’ll ever be ready?

BATU AKSOY: Well, I agree with Professor Roberts’ comments on the realities of Turkey, that Turkey’s not yet a marketplace and that Turkey is going pretty slowly on the organization of its gas market. This is a reality.

When the gas market in 2001 came out to (number 4646 ?) they apparently said – (inaudible) – market share is supposed to go down 20 percent by 2009, and today we’re in 2011 and market share worldwide is around 90 percent, around 85 to 90 percent.

So yes, there is no real performance in terms of marketplace, but I’m not as pessimistic as he is in terms of we will have a marketplace in many years. We are (kind of ?) optimistic that there will be a marketplace, at least there can be a marketplace in Turkey in a matter of five years.

It’s not just about the gas, but it’s also about the electricity and other energy alternatives. So when you look at it, this is looking at it from the down side, but when you look at it from the up side, Turkey is growing significantly, or has been growing significantly, and is still supposed to grow significantly as compared to the rest of the world until 2020, which means Turkey will need a lot of energy.

So despite the slow pace of liberalization of the gas market, there has been some, let me say, little better utilization in the electric situation, electricity markets, and we are in a more advanced situation there, and the gas is kind of following it up.

And so despite the realities of slow pace, there has been a lot of energy investments coming into Turkey, spending real cash, real financing, and investing in real installed capacities and megawatts. So when I look at that, Turkey has almost reached 50 – sorry, 40,000 – sorry, 50,000 megawatts of installed capacity, which is significant, and we are supposed to – (inaudible) – significant figure by 2020.

Now, I think we also have a lot of things on our shoulders and a lot of responsibilities as a private industry who has been investing. As local players, as foreign players, we do a lot of partnerships and everybody’s investing and spending their money, so we just want hope that Turkey will have a much better liberalized energy market, say, in a matter of five years’ time.

This is important, I think, because, you know, Turkish government has been a single-party government for the last nine years and our expectations that the strength of the government is it gives us more hope that they can do these reforms while there is still a lot of strength in the government, because it is a reform indeed.

The reason why – (inaudible) – so far I think is because of other priorities, potentially, but now we can get the fact that Turkey is really realized and successfully privatized almost all other assets but energy, I think this is now the time for energy privatization. So we can get that, I think, as the private investor, you have to push our policymakers significantly for the establishment of an energy exchange in Turkey, where both gas and electricity could find its place in the marketplace to be traded on a spot basis, not just on a day-ahead basis, where there’s a day ahead, month ahead, year ahead, five-year ahead, and that’s why we are doing a lot of – (inaudible) – neighbors to push this forward. I think our policymakers are supporting the idea. They do have some concerns regarding the short-term consequences of having an energy exchange, but I think we do have the right arguments to convince them that in the mid to long term this is definitely to the benefit of Turkey. This is for –

MS. DERELI: Okay. I think Ms. Shaffer wanted to say something.

BRENDA SHAFFER: I don’t think that Turkey’s actually very lucky that it’s actually liberalizing, or if at all slightly, because if you look at the experience of other countries that liberalized, especially the European Union, it’s actually – and it’s not a success story. It’s not about lower prices and it’s not – (inaudible) – security of supply. It’s actually brought centralization.

If you look at the recent report from the EU, looking at their own report of 10 years of liberalization of their energy markets, and they can talk about only that there have become less players and more disruptions and maybe prices are about the same when they translate.

So, I mean, I think we have to wake up and see we have sort of this ideological element that all energy markets have to be liberalized without looking at, does it really bring benefits? What we’re looking at three elements which are not only price but also security of supply and environmental sustainability.

And instead, I think most of our countries just embrace this market. We have no gas-on-gas competition except for the United States and a few sort of boutique markets in Europe. And why would you think a place like Turkey is going to really get to gas-on-gas competition when it has less conditions than those other markets?

And if so, what, and why is gas-on-gas competition better than something like low prices or security of supply?

MR. RILEY: I have to say, first of all, is I hate to – (inaudible) – to cast yourselves as a boutique market, but I think there is a couple of issues here. First of all is that the –

MS. SHAFFER: No, but it’s still 70 percent of the U.K. contracts are a long-term supply, so it has boutique markets in the U.K.

MR. RILEY: But let me just run through some of this. First of all is that the issue which completely destroys the traditional, vertically integrated market in Europe is simply the evidence of – (inaudible) – competition sector – (inaudible) – which was carried out between 2005 and 2008.

And if you read the gas and electricity market report, about (16 ?) pages long, they provide you with enormous amounts of evidence of dysfunctional, illegal market behavior carried out by all of the energy operators to the massive detriment of consumers across the continent.

I think one of the difficulties is, is that I can give you loads of critiques of – (inaudible) – market, but the point about the alternative is the alternative allows such degrees of – (inaudible) – and illegal – (inaudible) – behavior that you – (inaudible) – by the industry you choose and the commission has pretty much proved that.

We’ve had about 26 – (inaudible) – objections issued, prosecutions by the commission. Some of this is never – (inaudible) – demand, because what’s happened is when faced with the scale of illegality, the likes of – (inaudible) – both agreed to break up their electricity and gas networks because the problem with the prospect of basically – (inaudible) – decision with all the details of illegal behavior being made public and the prospect of massive damages claims by industry – (inaudible) – on top of the reputational damage, they all (voted ?).

So I think the point about this is that you can see a real problem with the existing system. Yes, there are – liberalization is usually not perfect. I think Turkey can learn – (inaudible). I also think – (inaudible) – and you can see this in some of the latest IEA gas reports about the way that the spot market is spreading and developing – (inaudible). It’s not complete, it’s not whole, it’s not perfect, but it’s there.

And the other point about this was the great critique, what I think is the great critique of the British liberalization and the European liberalization is that you can’t – even if you know – (inaudible) – local networks and you have a separate network and separate supply points, the fundamental problem is that you’re still dependent on a single or a couple of external supplies. How on earth will you have a really open, liberalized market?

One thing that has changed dramatically is, first of all, the growth of LNG supplies, the prospect of shale, the creation of potentially new additional pipelines, and it’s the potential diversity supply which I will – I think you will see in the medium term really making a difference with liberalization in a way that has a – (inaudible).

All the bits are slowly coming together, and what’s really interesting about I think the European experience is that yes, this has been an incredibly difficult challenge for the European Union, but they are actually getting somewhere. You can see the physical interconnectors being created across the continent with the EU’s, with the European recovery program putting in the funding for it to (connect ?). (Inaudible) – and we’ve got new – (inaudible) – supply.

But the commission is using its antitrust powers to break up the markets, and this is slowly but surely creating that market. And I actually think that we’re not that far away from something which is actually really quite functioning in a way which it hasn’t before, and that will impact right across the continent.

But – (inaudible) – opportunities for Turkey to participate in that as well.

MS. DERELI: Basically, I mean, what we’re seeing is to – (inaudible) – talking about, we’re actually doing any governance and supervision in terms of – (inaudible) – liberalizing the markets, and that’s one of the most important parts.

Then we do – (inaudible) – Turkey, we do have best practices that we could be looking over to them potentially and playing into our own economy, into when we’re planning on liberalizing our energy market.

But since Mr. Erkan is representing the Turkish Stock Exchange, I’d like to ask his opinion.

Do you think we’re ready in terms of our structural capabilities, for market liberalization?

HUSEYIN ERKAN: Oh, there are so many issues, believe me. I guess what I’m going to talk about is probably going to summarize most of the things that have already been said.

The idea of a hub versus an exchange, the two terminologies are not mutually exclusive. Being a hub will make it easier for a country to have an exchange, but not necessarily make the market work. It all depends on your regulation; it all depends on the continuity, the sustainability and the security of the delivering of the goods, of the contracts.

Whatever the contract is based on, if it’s – you can do it on a cash settlement. You don’t even have to have the petroleum going to Turkey, you can open up a commodity market and do cash settlements. It’s easy. Why do you need market participants, as both of the speakers before me have said.

Market participants – well, what do I mean by market participants? You need intermediaries. You need expertise in the intermediaries of commodity trading. You need expertise in portfolio management, wealth management, asset management. You need expertise in the securitization of these contracts. You need expertise in the delivery of the – (inaudible) – settlement in the risk management – (inaudible).

Now, I’m not an expert on energy. But I look at energy with its many different products as contracts, as commodities, anything that can be traded. You can do it, definitely. Physical delivery is what I prefer, and this is where Turkey has an advantage, because of its geographic location. If that is the case, then let’s concentrate on that, because if Turkey already has a few pipelines going through and a few more plan to go through it, obviously Turkey is a hub, or is building a hub, at least. It is a crossing network; it is a crossing country – (inaudible). As the investments that are being planned is really going to make Turkey a hub as long as it is well thought about.

Now, with that in place, then we can easily talk about an FOB, a Mediterranean coast delivery petroleum coming from The Caucasus, from the Middle East, instead of going around the Arabian Peninsula and going through the Red Sea and all of that, which is very costly and timely.

You know, you have all these pipelines pumping it into the Mediterranean and it can deliver it within a couple days to Europe, or even in the same day to Europe. Now, these are advantages, but market participants is extremely important.

On the capital market side, we have a sizeable market. We have a marketplace with lots of participants, but we still lack a lot of products, and we still do not have enough expertise in asset management, in – (inaudible) – management, in bringing about a variety of products into the market. I’m not talking about quantities or even just financials.

But that does not necessarily mean that Turkey’s not ready for it. Once Turkey offers the right infrastructure and the right regulation the international players will be here if the Turks – (inaudible), definitely. Now, if Dubai is – (inaudible) – over $85 billion of Omani oil, it’s not because Dubai has the expertise. Dubai does not have – (inaudible). It’s because yes, proximity is close, that’s one thing. But a lot of international investment banks are operating in Dubai, so you have the market participants. It’s not the emirates’ people that need these contracts, no, it’s the internationals, and they have presence in Dubai.

So all of these – when you talk about all of these we only come to one thing – right regulation. Comprehensive, simple, very understandable, and international standards have to be applied through the right regulation. Once you have the right regulation, the right oversight should also be in place on top of the infrastructure that will make Turkey a hub; then we will talk about a marketplace, and then it will bring in all the investments, all the international institutional investors into Turkey, offering these products.

I’ve always said that Turkey cannot grow with just capital markets. We have to have market-to-markets together with it. So far, we have a very fragmented structure. We have 105 commodity exchanges – (inaudible). You’d be very surprised – 105. And how many of them are nearly operational? How much volume that is going through them? Maybe 1 percent of the total production of Turkey in its commodities.

Why is that? It’s (not available ?). It’s based on physical delivery, no standards, no warehousing or internationally acceptable standards of warehousing, and all of this has been somewhat corrected. Last year the law passed through the parliament making it possible for licensed storage companies to come into – to business, international standards have been adopted, and there are now some initiatives to build internationally acceptable standards for warehousing and, with that, internationally acceptable contracts.

This is only part of the – (inaudible). It’s the same thing with the petroleum. It’s the same thing with the derivatives of petroleum. It’s the same thing with gas. Gas, of course, is a bit more difficult for physical delivery on the port, but Turkey has become a crossing country for gas pipelines.

Still, you can trade gas, gas contracts. Once you have oil, then you can easily trade gas contracts. So I think that I’m probably agreeing with most of the things that have been said – (inaudible) – everything together. Turkey needs comprehensive regulation, simple, understandable, internationally acceptable regulation and oversight, and make sure that the delivery of all these products are sustainable and assure the (continuity ?) of it, and the security of it.

MS. DERELI: Thank you. That leaves us – (inaudible) – move on to questions. Who would like to go first? (Inaudible.) If no one has questions – why don’t you – (inaudible)?

MR. AKSOY: Maybe I can – (inaudible) – my words on the energy – (inaudible) – idea. First of all, Turkey has – (inaudible) – Turkey has the infrastructure, Turkey has the gas pipeline connections with Russia, Iran, Azerbaijan and in the future – (inaudible) – and we do import gas from Algeria and Nigeria.

On the power side, Turkey’s now connected with Georgia, Iran, Iraq, Syria, Azerbaijan – I’m sorry, Armenia, and also on the western side with Bulgaria and Greece. (Inaudible) –generation of Turkey production as your consumption, it’s about 220 – (inaudible) – last year, this year, and 10 last year, and Turkey, when you look at all this area surrounding Turkey, all the neighbors, we’re talking about 1,400 – (inaudible).

This is much more than what Germany had 10 years ago when they were liberalizing their energy markets and establishing their energy exchanges. That means we do have the gas, that we do have the necessary gas and power infrastructure to build an energy exchange.

Why are we pushing so hard to build an energy exchange? It’s simply because we want to make Turkey a more investment-friendly place for new energy investments in order to meet the demand of power and energy demands of Turkey for the next 10 years, in order to – (inaudible) –with the – (inaudible) – Turkey.

Now, why would that make Turkey a better place to invest is because in Turkey, given the current problems, the gas market and the – (inaudible) – markets are too much – are the dominance of the Turkish state. The Turkish state controls more than 20 percent of the electricity price in Turkey and about 85 percent of the gas price in Turkey. Hence, in Italy they do control the prices, and this is the biggest problem ahead of us.

Now, in a market where the system’s supposed to work in a proper way, there should be reference prices undetermined by the state based on potentially voting the issues and also resulting from subsidization of – (inaudible) – to the other. But the reference prices should be determined by the supply and demand on the market. Hence, this is why we should – that’s why it’s like a chicken-and-egg situation.

We have to – (inaudible) – infrastructure to start an energy exchange. Of course, we don’t have everything fully in place, but we can start it, and in the meantime we can push the government to continue the privatizations, to lower its market share as low-risk dominance and the ability to affect the prices, and as well as liberalize the markets at the same time.

So I think Turkey can play a role of Germany, which is being played in Europe and northeast Europe, in southeast Europe as the attraction center, because I think we did establish – (inaudible) – energy exchange, which has to be regulated very appropriately by the energy market regulatory authority, by the capital markets board, but also be able to work in cooperation definitely with the established stock exchange and the clearing – (inaudible) – clearing house.

And at the same time it is very important that it is matching the physical deliveries and in coordination with – (inaudible) – i.e., the transmission system operator; in this case in gas it is both – (inaudible). We have to have an exchange where we come to have a supervisory board – (inaudible) – over the private sector, the state sector as well as the transmission system operators so that we don’t go through the problems which the European exchanges went 10 years ago when they couldn’t coordinate the physical deliveries with the financial deliveries as well as they should have.

And so we had to learn from the lessons because of being a little late, so I agree with your comment on that one fully. So I think Turkey can become a much more attractive energy place with maybe hundreds of billions of euros of new trade volume solely stemming from energy derivatives.

MS. DERELI: Actually, it’s very interesting, what you’re saying, because I know it’s contradictory to what Ms. Shaffer was saying, because you’re saying that – (inaudible) – the market is liberalized, because the masses will have more trust in the system.

But Ms. Shaffer was saying that it might be better for the end users, for the consumers, if they would – it could be. You were just (diagramming ?) that, that it could be better if the government was actually indeed, you know, determining at least a – (inaudible).

MS. SHAFFER: I mean, it doesn’t have to be the government or necessarily an issue of – (inaudible) – but the idea that gas is a commodity like everything else, like it’s beef or it’s fruit, there is no possibility to guarantee the physical supply without a different contractual relationship, but the market doesn’t guarantee the gas.

Again, the places where it guarantees where there is indigenous production, you’re talking about a place like Turkey where there is no indigenous production, where all the suppliers would be from state companies, you know, the state-owned companies, so there is no level playing field. There is no –

MS. DERELI: (Off mike.)

MS. SHAFFER: Yeah, I mean, there isn’t – it is not like let’s say the American market, where you have 1,000 – in the Northeast United States you have 1,000 major consumers, 400 major producers and it’s all indigenous. There’s no question of political elements around. So I mean look at even, for instance, in Turkey, like you take in the last week, you have the prime minister contemplating cutting electricity supplies to Syria; you have a senior official in the Ministry of Energy talking about stopping supplies in – (inaudible). This is a –

MS. DERELI: I’d like to step in there, because the energy minister said that they were never considering –

MS. SHAFFER: Okay, but the point is that – and you could have it on the supply side as well, whether you come from Azerbaijan, looking at those contracts, depending on Turkey’s relationship with Armenia, if they open the border or don’t open the border, and their relationship on the – (inaudible).

So to say that this is just like another commodity when gas is intrinsically linked to politics, and also that you can’t just substitute it. If you don’t – you pay a premium for the security of supply – (inaudible) – sometimes you go to, or mostly go to a long-term contract, because what do you do if the gas doesn’t arrive? It’s not like what do you do if the apples don’t arrive.

MR. ROBERTS: Can I actually – (inaudible)?

MS. DERELI: Go ahead.

MR. RILEY: One – (inaudible) – I agree with you in principle, but what my argument is, is that the global gas markets are so changing that that will no longer be the case, because the scale of the supply, if you look at the U.S.’s global gas initiative report looking at 32 different countries and looking at the – China apparently has the largest demand of technically recoverable shale gas on the planet.

You’ve got Argentina, you’ve got Africa, North Africa and South America – (inaudible). Now, the point about it is, is when you have that shale gas on top of potential offshore gas on export conventional onshore and you put that together, and you have the prospect of very substantial LNG growth between now and 2020, energy, global production growth, you move into a different world where gas does become a commodity, because I think one of my great criticisms of liberalization – like I have British – (inaudible) – so therefore I suppose I should support – (inaudible). But one of my great criticisms of liberalization has always been it didn’t count of where the upstream restrictions of gas supply. I think that’s been always a great criticism.

I wouldn’t entirely disagree with a lot of the continental criticisms with the European community supporting liberalization of the British approach, because it was easy for Britain because we have the North Sea.

Now, that, I think, that critique I think is difficult to sustain because of the onset of a huge amount of gas supply. Now, we’re not there yet, but I think we are moving in that direction. I think gas is going to become a commodity in a way which it hasn’t before. I gave a lecture at Johns Hopkins University – (inaudible) – D.C. in April and the title of the lecture was "Shale Gas: Is Gazprom Doomed?" And the outcome was that Gazprom is not doomed, but its business model is, because its business model is based upon there being limited – (inaudible) – supply and controlling a substantial amount of that limited supply.

Once you’ve got a substantial amount of supply from diverse sources, then you’ve got to change your business model. Gazprom has been a very successful and profitable business in Europe supplying to a much, much bigger gas market. But it is fundamentally different to the approach we’ve taken so far.

Now, we’re not there yet, and there’ll be lots of people – (inaudible) – on the way. That is the direction that we’re moving in. I think we have to look at it. General de Gaulle used to say look at what direction everything is moving in because – (inaudible). I think that’s a very good approach to Turkey as well.

MS. DERELI: Thank you. Okay, we haven’t even included renewables in this picture. We’ve been talking about all of the other energy sources, but, like, should we also be talking about that –

MR. ROBERTS: I was very struck by Alan’s comment on Gazprom controls (sources ?) of supply, because, of course, if they are not able to do that – and I would certainly agree that that is indeed what they’re trying to do – then they become an awful (cropper ?), in the English language. They just head for a massive fall because they will have expended all their effort in trying to prevent others doing something and not in focusing on developing their own resources.

I’m not sure we’re there yet. I think the diversification of gas may be a little slower than – (inaudible) – anticipates, but we do have an enormous range. It’s not just the question of whether a small amount of Kurdish gas is going to come up in the KRG; it’s not just a matter of whether you have to wait for longer volumes from Iraq proper. It’s not just a question of whether or not we can get trans-Caspian gas coming from – (inaudible).

We know that they’re all there, and we have to start thinking. We probably won’t get them all, but we might get some. We’re certainly going to get the next stage of Azerbaijani gas – (inaudible). Within the following four to eight years there will be another wave of Azerbaijani gas coming from Umid, Absheron – (inaudible) – ACG and probably a couple of other fields.

So all of this feeds into a booming – (inaudible) – Turkish market, but it also feeds through Turkey to other markets. The biggest thing at the moment – I mean, we haven’t really don’t much discussion of what markets there are so far, but as far as I can see at this conference there’s been very, very little discussion as to what is going to be the ultimate market for the first round of Azerbaijani gas, the round that Turkey has agreed – (inaudible) – that Turkey has agreed to transit. And one of the most striking things that we’re starting to see, finally, after a decade of wars in the Balkans, the recovering of genuine markets – very roughly, we’re talking about a market in southeast Europe, excluding Turkey, that was close to 60 BCM in 1990 and is now down to around 35 BCM.

It’s almost exactly the same size market as Turkey right now. And for the projections for the next 10 years or so, it marches in step with Turkey. Turkey and southeast Europe collectively become the most assured growth areas for gas, which is exactly why the Azerbaijanis are – (inaudible). Or, one should say more precisely, it’s exactly why BP started to try to come to the conclusion, well, given the current European uncertainties, is there a point in trying to sell gas into the Italian market? Is there a point in selling gas up the line – (inaudible) – Baumgarten in the north European market? Or indeed, has Russia’s policy of choking people off, the building of North Stream, et cetera, more or less taken the German market off the scene for a few years? Not permanently, just for a bit.

So you do have a very strange thing, which is a market on your doorstep which would benefit from Turkey as a partner, because what is the key facet of southeast Europe, is that it’s 89 percent dependent on a single supplier, and what’s more, it’s 89 percent on demand on a single supplier that doesn’t want to supply the market by the existing pipeline system that serves the market. It doesn’t want to export gas to its friends in Serbia via Ukraine. It wants to do is buy a brand-new pipeline. Okay, Russia’s – (inaudible) – build South Stream. No problem at all. If it wants to spend $25 billion or whatever it is that Scaroni said two years ago it’s going to cost to build that pipeline? That’s Russia’s own money. They’re perfectly free to do that.

It does have problems for the rest of the world, because to a large extent, not totally, but to a large extent, whatever money they put into that doesn’t go into developing the up-stream, doesn’t go into developing Russia’s massive but complex gas fields up-stream.

So one of the things that Turkey can do, as Turkey becomes – I hate to say this – a more reliable transit partner, and there are a few question marks in the past, the easier it is for not only south central Europe to rely on gas or anything else coming from Turkey, but the more it opens up markets in general.

And curiously enough, the more it does that, the less it prompts people to think strategically and the more it prompts them to think in commodities. And that, I think, is an indication, I would hope, of a degree of normality as opposed to constant worry that we need constantly to be thinking where’s – (inaudible) – Gazprom.

MS. DERELI: Well, one thing I’d like to – (inaudible) – today there was an agreement that was signed between Russia, Belarus and Kazakhstan, and I had just had – I just – (inaudible) – letter for Kazakhstan, so I know a little bit more about it. And so what does that affect in terms of, for example, because they’re really building up this new union, and it’s going towards – (inaudible) – after that, but they are really working towards it. It’s the second phase.

And where does Turkey stand amongst all of this? Because we’ve been talking about the different pipelines, we’ve been talking about the routes, market liberalization. If Russia and Belarus and Kazakhstan, and they extend this to different countries, do we think that the market, as we were just saying, is the market going to change further? Is it going to change for the advantage of Turkey, or to the disadvantage of Turkey?

MR. ROBERTS: No, and if Russia wants to bring Belarus into its commercial orbit any more than it is in its commercial orbit already, what –

MS. DERELI: Kazakhstan – (inaudible) – it goes to Turkmenistan? What if –

MR. ROBERTS: One fundamental – (inaudible). The Kazakhstan-Russian relationship is more interesting.

MS. DERELI: Exactly, that was –

MR. ROBERTS: But where does Kazakhstan export its products to, its goods? Its oil primarily goes west. It has problems with Russia in transiting Russia. It’s just suffered a six-year delay in getting what was supposed to be an automatic input in the capacity of the Caspian pipeline – (inaudible) – pipeline. But Kazakhstan is a very – you know, on the whole there are – any company will tell you it’s not any more of an easy place in which to do business, but it isn’t a stupid country. It doesn’t have a stupid government. It’s got a very sensible government in many ways.

It carefully balances relations with Russia and China, which any country with only 16 million people with those two as its most important neighbors is going to have to do. So therefore, improving economic trade links with Russia makes sense.

Do I think they will have a (fancy ?) union? I would put more money on the Kazakh tengi surviving than I would on the Russian ruble at this stage, at sort of roughly international – (inaudible) – levels.

Also, what is their alternative? They’ve got 3,000 miles of open border with Russia. It makes a –

MS. DERELI: They’re landlocked.

MR. ROBERTS: And they’re landlocked. It makes a lot of sense to ease your relations with Moscow as much as possible, given that you’re –

MS. DERELI: To this extent?

MR. ROBERTS: I suspect it’s going to be a lot less than meets the eye. I think it’s words, and if Putin believes that somehow this is going to convert into some great recreation of the Soviet Union, I somehow doubt it, though I ought to say one thing, of course: There was a thought that Gorbachev had in the last dying days of the Soviet Union, and he might – the first non-Russian prime minister of the Soviet Union as a certain – (name inaudible) – was in line for that position.

So it is just possible we might actually see the titular head of a new union coming from Kazakhstan, but I suspect the – (inaudible) – the fact that – (inaudible).

MS. DERELI: Is there anything you’d like to add?

MR. RILEY: Well, I was just going to say that they’re having a whole series of different customs unions and – (inaudible) – structures which have been put together over the years and have never made anything at all. I think there was somebody, I think, from the – (inaudible). We came up with about half a dozen different structures since 1991, none of which had actually stood any test of time or any scrutiny or substance.

So, you know, this may be number seven.

MR. ROBERTS: (Inaudible.)

MR. RILEY: Yeah, some – (inaudible).

MR. ERKAN: Well, just one thing that – we never talked about carbon emissions.

MS. DERELI: Yes.

MR. ERKAN: We talked about the energy exchange or energy markets, and there’s some – (inaudible) – talk about carbon emissions as well, and I guess 2012 is the year when Turkey’s going to make a decision on the – (inaudible). We are a signatory to Kyoto, but we have not decided on what to do about carbon emissions.

Cap and trade is one idea, and that creates opportunities in an exchange in the marketplace again, so adding all of this together, electricity in Turkey is a major player in the region for production of energy and for production of electricity, and there’s probably 6 or 7 billion dollars of investments going into energy production every year, and I think that over 80 percent of that is solely dependent on natural gas coming from these pipelines.

We still have not really touched upon the possibilities of the hydroelectricity enough in this country, or coal generators, and Turkey has a lot of coal reserves. But then the issue about carbon emissions becomes a very important issue.

So involving all of these contracts, I always look at these contracts as a commodity. The technical specifications, the technical details of you guys, I’m not an expert, but I see that as a very viable contract, both – (inaudible) – contracts and the gas contracts, as long as we do some investments in LNG in the south, we will have some prospects. Otherwise, Turkey will not be anything more than just a crossing country.

And with carbon emissions, to complete that series or that spectrum of investment vehicles, I still see them as an investment vehicle. Turkey is, yes, a broken country, and it will have a very large demand on energy in the future, so it is creating a critical mass of demand within this country, and that is quite important for it to become a hub, and that also offers these products as an investment vehicle as well, and as a engine mechanism. So after – not after, but with these plans ahead of Turkey, I think that we need to sit down and talk to other players on how we can make Istanbul a financial center altogether.

Turkey’s government has already made a decision on making Istanbul a financial center, and there’s been a lot of talks about it, there’s been a lot of preparations, and a very simple framework of regulation was issued and we need to fill in the details. And commodities, together with financials, will create its own market participants, and security and delivery is extremely important. Sustainability, social issues, environmental issues – this requires a comprehensive study. But Turkey has a great (prospective ?).

MS. DERELI: I see former Minister – (inaudible) – in the audience. I don’t know if – would you like to make a comment? Do you think Turkey, Istanbul, will become a financial center any time soon?

MR. : Yeah. I mean, contrary to all type of this population called Istanbul, shifting financial centers of Istanbul and others have actual issue. But what I would like to state, that the position here definitely, this is the crossroads of the continent, crossroads of the energy, crossroads of the cultures, crossroads of all the religions. So it is also crossroads of the finance. To be a center and if we have enough infrastructure to really accomplish that – also I remember that the U.K. was in the creation of – creating the free zone in the stock exchange in Istanbul. There was –this was an idea about 10 years ago. So I think definitely there is infrastructure now, and we can really add to that.

And so it’s just, you know, unbelievable. It will be a financial center, definitely, because between east and west, the time zone definitely focuses and also shows the same place. Thank you.

MS. DERELI: Thank you.

Does anyone have questions? I think David has a question.

MR. : David does.

MS. DERELI: David, could you use the microphone, please?

MR. : Is this working? The room is small enough probably that I can get by without needing a microphone.

Maybe John or Huseyin might – my question really is, you mentioned briefly – (off mike) – renewables, and I’m wondering in this development of marketplaces and market dynamics – (off mike)– enable the larger growth engine – (off mike) – about things like the example that comes to mind immediately – (off mike)– biomass exchange – (off mike).

Are these just intellectually interesting but very minor things passing by, or do these have real potential in a place like Turkey – (off mike)What are some of the other exotic – (off mike) – we may be seeing down the road? I saw John nodding his head, so –

MS. DERELI: We’ll direct the question to John, just because he’s sleeping. (Laughter.)

MR. ROBERTS: I actually am – almost was, if anything, nodding my head, because I was trying to think desperately what on earth could I possibly say since you’ve been suggesting that you would address the question to me. (Laughter.)

I think the only thing I would say is the blindingly obvious. If you have a successful commodity exchange, it covers all commodities. I have no idea on Turkey’s potential for biomass. I’ve got some idea – I can dig out material on the potential for wind power.

But there is no more, there’s no reason why any of these, ipso facto, should not become involved in exchanges if you go – (inaudible) – in the first place.

MR. ERKAN: That’s a prerequisite.

MR. RILEY: Yeah. I think one of the other issues is this is – (inaudible) – for renewables. And whether you go down a proper trade route or go down a – (inaudible) – route. My own view is always that keeping it simple is really important. That’s why I – (inaudible) – rather than, you know – (inaudible). But I think it’s – the problem I’ve got is that if you go back to the origin of cap and trade, when you’re looking at that – (inaudible) – and then taking out the noxious fumes and poisons in coal is that was a relatively easy cap and trade to deal with.

The trouble is if you extend it, extend it, extend it, and it gets much more difficult to actually deliver it. I actually think there is an argument that we may have taken the wrong route – (inaudible) – and I – (inaudible) – but I actually certainly think if you want to keep it simple, the carbon tax is the way there.

MS. DERELI: (Inaudible.)

MR. AKSOY: I mean – (inaudible) – answer your question. In a way, Turkey has potential in terms of trading or exchanging renewable energy sources, but, you know, I think we’re here to take baby steps, because when you say exotic, I think even having an energy exchange where we can trade regular commercial electricity sounds exotic to me, but I think hopefully next year’s Atlantic Council Black Sea Energy Forum, we should be talking about an established energy exchange, which I think the ministry is thinking of naming it – (in Turkish). And so it’s already being talked about, and I think there’s no reason why Turkish private-public partnership should not establish this within the – (inaudible) – the next six months, six to 18 months for sure. There’s no reason why we shouldn’t or we can’t, and why we should have a much more liquid market in Turkey in a matter of three to five years.

MS. DERELI: (Inaudible) – last comment, because I think we’re over time now.

MR. ROBERTS: The minute you start talking about exchanges – we’ve been talking about how the free market operates. In 90 years, what – (inaudible). But Brenda came up with the other, which is, what is the direction? What are the – (inaudible) – that the government can do, can use, or indeed what the directives it can employ to push energy in specific directions?

So – (inaudible) – you can make a financial incentive – financially incentivize energy efficiency. Turkey’s energy efficiency improved no end when it was forced in 2003 to start raising its gasoline prices very early. But you can also start thinking, what’s the infrastructure that’s necessary?

To go against my previous argument, did Turkey gain in terms of infrastructure development a cost – (inaudible) – essentially continued in control of gas and gas-related construction and new gas pipelines and distribution infrastructure in the last decade. Who’s going to build a national grid? Private companies aren’t, because to them, that drives down the price, which is the last thing that they want.

So I would just make the point – I would like to see Turkey become an exchange. But I also obviously want to see really good governmental regulation and oversight.

MS. DERELI: Thank you very much to all of the panelists and to the audience for being with us. Thank you. (Applause.)

(END)