How and where to source fresh funds for energy?

Mehmet Öğütçü

The world energy industry needs around $37 trillion over the next two decades for new greenfield projects and to upgrade existing energy infrastructure. Turkey’s investment requirement is also colossal – minimum $130 billion only over the next decade to keep its growing energy economy fuelled and powered.

How will these projects be financed at a time when domestic sources of funding are dwindling, international conventional finance has become extremely difficult to attract, and political uncertainties and commercial risks abound both in Turkey and its immediate region?

Triple-digit oil prices, a renaissance of America’s natural gas and oil markets, constraints in renewables, climate change, continued unrest in the Middle East and North Africa, and the tragic disaster of Fukushima, have all shown how vital energy policy, security and supply are to global energy. They have also transformed energy markets beyond recognition.

The world’s energy demand and supply map has changed. Global energy consumption is expected to rise by 41 percent from 2012 to 2035 - compared to 52 percent over the last twenty years. Shares of the major fossil fuels are converging, with oil, natural gas and coal each expected to make up around 27 percent of the total mix by 2035 and the remaining share coming from nuclear, hydroelectricity and renewables. Among fossil fuels, gas is growing fastest. While renewables will grow rapidly, their share will reach just 7 percent.

Developed markets need to win back some of their competitiveness and regain some energy self-sufficiency. As the U.S. becomes increasingly self-sufficient in energy, so Asia is going to become the world’s big importer, followed by Europe.

Large differences in regional energy prices are set to affect industrial competitiveness, influencing investment decisions and company strategies. Natural gas prices in Europe, for example, are three times more expensive than in the U.S., and in Japan five times more expensive. Such differences will narrow, but will remain important until 2035. The same goes for electricity prices.

Above-the-ground risks, complexity and high costs are features of major capital energy projects. The implementation of Basel III will impact the ability of Banks to lend. They will typically look to the utility groups to provide long-term contracts. There are fewer participants willing to offer such lending. Traditional sources of finance for energy are in short supply.

Our neighbors are also in need of massive energy finance. FDI inflows to Russia jumped last year to $94 billion, making it the world’s third largest recipient of FDI for the first time ever – largely thanks to the acquisition by BP of 18.5 percent of Rosneft as part of Rosneft’s $57 billion acquisition of TNK-BP.

Baghdad is working with Iran to help it attract investment ahead of the possible lifting of sanctions. International energy companies are queuing up to win Iranian oil, gas, power and pipeline deals. The Kurdish Region of Iraq is on its way to becoming one of the major suppliers of oil and gas, but it is still constrained by Baghdad’s strong objection to sell its hydrocarbons independently via Turkey.

Another big energy investment in our region is the Southern Energy Corridor – all the way from upstream gas development through TANAP and TAP pipelines to the end-consumers. The total cost of the Shah Deniz Stage 2 and South Caucasus Pipeline expansion projects will be around $28 billion. Azerbaijan is likely to become Turkey’s largest FDI provider by 2018.

Other big ticket projects are the gas upstream and pipelines in Turkmenistan, reconstruction of Syria’s energy infrastructure, China’s energy Silk Road from Xinjiang to the Gulf and Turkey, nuclear projects and shale gas discoveries in Turkey, the Middle East/Gulf and southeastern Europe. The Eastern Mediterranean gas opportunities, particularly in Israel, Cyprus, Lebanon, Egypt and Turkey, open up vast investment prospects. Plus, the huge challenge of upgrading existing energy infrastructure before they become obsolete. There will also be a flurry of mergers and acquisitions in the energy space of our region including in Turkey, KRG, Georgia and South East Europe, offering attractive and competitively priced assets or equities for investors.

In the middle of the energy highway between producer and consumer nations, and as a huge consumer itself, Turkey must find creative and smart ways of raising finance for the massive energy requirements (not only of itself but also of its regional neighbors).

Creating alternative funding models for this purpose is the way forward. There is an increasing focus on using the multilateral lenders. Not relying only on institutions, which have traditionally provided the bulk of financing in this sector such as the European and Japanese banks, we should also tap non-traditional investors, including insurance companies, pension funds, sovereign wealth funds, private equity and Islamic finance institutions.

The Turkish government should pave the ground for investors to feel confident in a clear and stable framework, removing administrative barriers to investment, and aiming to create a minimum $50 billion energy fund to provide seed capital for energy entrepreneurs. Otherwise, the current uncertainties and risks are likely to lead to an investment hiatus and, long-term, patient investors will look elsewhere.

Mehmet Öğütçü is senior executive of the International Energy Agency, OECD, BG. He leads the Bosphorus Energy Club (www.bosphorusenergyclub.org), and chairs the U.K.-based Global Resources Corporation.