THE REGIONAL GAME-CHANGERS

Energy, Investment and GeopoliticsSait Halim Pasa Yalısı, Istanbul, Turkey

12 December 2013

the launch meeting summary and future agenda

www.bosphorusenergyclub.org

building bridges and forging partnerships in regional energy

!e Bosphorus Energy Club is an exclusive membership-only gathering of the key shakers and movers in the energy, "nance and geopolitical world of Eurasia, the MENA, and the Gulf, and Southeast Europe. It aims at fostering e#ective partnerships and collaboration at government and corporate level in a dynamic and discreet setting. Where possible and desirable, the Club also serves as a Track-II diplomacy channel building on existing initiatives and producing real value-added and tangible outputs.

in a nutshell

1. In the words of one senior business executive, “!e Bosphorus Energy Club has produced what it set out to do” as was said at its launch meeting and ensuing dinner debate on 12 December 2013.

2. Around 90 executives from China, Japan, Germany, France, the United States, the United Kingdom, Bulgaria, Poland, Russia, Ukraine, Azerbaijan, Georgia, Kazakhstan, Italy, Norway, Nigeria, Libya, Morocco, Iran, Iraq, the United Arab Emirates, Qatar and Turkey took active part in the discussions.

3. Ministers, company CEOs, bankers, think-tank directors, and top leaders of International organisations gathered without protocol on an equal footing to partake in open-minded and unhindered exchange of views and opinions.

4. !e Turkish Minister of Energy and Natural Resources Taner Yildiz summed up his verdict after attending the 12 hour-meeting from beginning to end: “!e Club has proven its value and passed the critical test for its raison d’être as far as I am concerned. We will provide our strong support for its continuation”. !is was echoed by other members and guests.

5. Minister Yildiz has also accepted the invitation to become the honorary chairman of the Club, which is resolved to serve as a regional initiative. Members have called for the designation of six regional co-chairs in due time representing each major region of importance to the BEC, i.e. Eurasia, the Middle East, the Gulf, the Asia-Paci"c, Africa and the Southeast Europe.

building bridges and forging partnerships in regional energy

flexible and rolling agenda6. Most participants at the inaugural meeting were of the view that the Club provided a valuable platform

where “we de"ed all the conventional conference rules and actively engaged in substantive and enjoyable exchanges”.

7. !ere was a heavy, but free-wheeling agenda to give a foretaste of all the issues on the drawing board of governments and businesses. Moderator Mehmet Ögütçü (Chairman, Global Resources Corporation) did not stick to a formal agenda when it was felt that participants wanted to spend more time on a particular issue.

8. Media were permitted only at the outset for the opening session and then were asked to leave. Chatham House rules allowed for the discussion of some “taboo” issues in a discreet manner. Measured media coverage was achieved.

key highlights9. Key highlights of the Club’s roundtable and dinner debate were as follows:

historic and majestic setting of the Sait Halim Pasa Yalisi on the shores of the Bosphorus, bridging Asia with Europe and Russia with the Mediterranean – signifying symbolically why Istanbul was chosen as the venue for the launch of the Club.

Minister Yildiz’s attendance and engagement in the meeting and discussion was an appreciated hallmark. He held 11 one-to-one separate discussions with his international peers and business leaders. So did other participants with their counterparts in special rooms allocated to them.

to play a meaningful bridging role on critical energy dialogue and partnership between Asian, European, CIS and MENA/Gulf regions. A particular point was made on how to reconcile the Club’s de"nition of “our region” with that of China’s.

informal dialogue between the US and Iranian senior o#cials on the understanding that the fragile and sensitive process currently in progress should not be impaired.

allowed, the discussions were so lively, an eye-opener at times and so fascinating that I couldn’t leave to relieve myself for fear of missing out on something important.

international partners and other like-minded groups as appropriate to avoid duplication and achieve mutual synergies.

were driving business agenda in the east. It is important to strike the right balance between the two so that business and politics will not become a hindrance to one another.

going forward: the club’s future agenda

10. Based on discussions and following up the recommendations from its members, the Club has resolved to focus on areas and issues where it can make a genuine contribution and bring added value.

11. !ere was a widespread consensus for the BEC to address seven major issues in its follow-up activities in 2014 and beyond:

Russia as a next area of attention as this remains a powerful energy player in the region. !ere are fresh attempts at a fundamental reform of its energy industries, trading, investment patterns and governance in the face of the “game-changing energy powershift” in regional and global markets.

Iran’s rapprochement with the West, a possible lifting of the economic sanctions against Iran, an emerging dialogue on the Gulf region, Iraq, Lebanon and Syria and rami"cations of all these for the region’s energy and geopolitics, as well as investment opportunities.

new sources of unconventional funding for energy investments at a time when the global "nancial markets are in trouble.

East Mediterranean region to reach its full energy supplying potential and help remove the political obstacles.

conventional and unconventional natural gas: market liberalisation, pricing, competitiveness, trade and geopolitics in our region?

regional Energy Exchange and its bene"ts to the wider neighborhood. What are the prerequisites for a genuine regional hub for energy $ows from Russia, Caspian/Central Asia, Iraq/KRG, Iran, and the Eastern Mediterranean?

New policies to promote renewables, climate change and technology innovation in a budget-stringent era.

next steps12. Special thanks go to !e Club’s founding members (Turkey’s Ministry of Energy and Natural Resources,

Ege Gaz, Genel Energy, Tüpraş, Aygaz, Opet, Socar, BP, Shell, Chevron, HSBC, PwC, Global Resources Partnership, TPAO, BOTAS, Bayegan Group) for their con"dence and support. !ey have suggested that the Club membership should not expand too quickly and the major player criteria in a regionally and sector balanced manner should be taken into account.

13. !e Club will be $exible in responding to the new energy, "nance and geopolitics issues of the day and organise ad hoc lunch or dinner debates with VIP government, business and thought leaders visiting Turkey and our region.

14. !e annual $agship Club event will be held in the autumn of 2014 at Sait Halim Pasha Palace. !e exact date and main themes will be determined after consultations with members.

15. Please feel free to share your interest in future activities, ideas and proposals with !e Bopshorus Energy Club’s Executive Chair at mehmet.ogutcu@bosphorusenergy.org

some of the discussants and participantsTaner Yildiz, Minister of Energy and Natural Resources, Turkey, Amos J Hochstein, the US Deputy Assistant Secretary of State for Energy Diplomacy, Seyed Ali Mohammad Mousavi, Secretary-General of the D8 Economic Co-operation Organisation, Traicho Traikov, Bulgaria’s former Minister of Energy, Nuri Balrwin, Chairman, Libya National Oil Corporation, Friedbert P$üger, Director of European Center for Energy and Resource Security at King’s College London and Germany’s former Deputy Minister of Defence,

Bolat Akchulakov, Deputy Minister of Oil and Gas, Kazakhstan, Xiaojie Xu, Energy Investment Advisor of CNPC and Director of World Energy at the Chinese Academy of Social Sciences Institute of World Economics and Politics, Gustaf Nobel, Chairman, Nobel Sustainability Trust,Jaroslav Kinach, former advisor to the Prime Minister of Ukraine and Iskander Energy CEO

Mehmet Sepil, President of Genel Energy plc, Haydar Colakoglu, Chairman, EgeGaz, Erol Memio%lu, Chairman, Energy Group, Koc Holding, Erdal Aksoy, Chairman, TURCAS, Bud Fackrell, President of BP Turkey, Kenan Yavuz, President/CEO of SOCAR Turkey, Luigi Barberis, President of ENI Turkey, Ahmet Erdem, President, Shell Turkey, Mehmet Fatih Baltacı, CEO, Akfel Group,

Patrick Target, Director, Chevron, Sami Demirbilek, Chairman, Energy and Mining Group, Ciner Holding, Bekir Sami Acar, Managing Director, EWE Turkey Holding A.S., Charles Bland, Senior Executive at HMG and former Executive Vice-President of BG Group, Ersin Ozince, Chairman of Turkiye Is Bankasi and Sise Cam, Ahmet Tohman, Project Finance Director, Garanti Bankasi

Jean-Arnold Vinois, Honorary Director of Energy at the European Commission, Tatsuo Masuda, former Director of the International Energy Agency, Ardic Durdu, Director, KazEnergy, David Rekhviashvili, Director of Vitol S.A., Alan Gelder, Vice-President, Wood Mackenzie, Michael Davey, Director, EBRD, Amin Ajami, Director of Strand Investment Partners,

Luc Hanon, Managing Director, Rothschild & cie, Sedef Karagöz, Energy Sector Leader, Siemens, Ian Walker, Managing Director of Windsor Energy Group, Alfred Kovacı, Director, Business Integration Partners, Ali Kibar, Chairman, Kibar Holding, Erdal Bahcivan, İSO Chairman of the Board, Mehmet Aktas, CEO, Yasar Holding, Erik Houlleberghs, Vice-President of BG Group UK.

Wang Yeqi, Director of China Petroleum Center at CNPC, İlham Aliyev, Director, Azerbaijan Investment Corporation, Reha Denemec, MP, Justice and Development Party, Marat Terterov, Executive Director of Brussels Energy Club, Dimitar Bechev, Director of the European Council on Foreign Relations, Danila Bochkarev, Senior Fellow at the East-West Institute, Oktay Tanrisever, Director, Area Studies, METU Elmira Ramazanova, Vice-Chair, Azerbaijan Oil Committee,

Sefa Sadık Aytekin, Deputy Undersecretary, Turkey’s Ministry of Energy and Natural Resources, Berris Ekinci, Deputy Director General at Turkey’s Ministry of Foreign A#airs, İbrahim Said Arınç, Deputy CEO, BOTAS, Adnan Nas, Board Member, Global Yatirim Holding, Haluk Yalçin, PwC Turkey Senior Partner, Vanessa Raine, Director of Business at the European Azerbaijan Society, Zeynep Dereli, APCOWorldwide Turkey Director.

!e Club’s international partners include Amadeus Institute of Morocco, Azerbaijan Oil Committee, ASEAN Council on Petroleum, Brussels Energy Club, D-Group, D-8 Economic Co-operation Organisation, Emirates Center for Strategic Studies of Abu Dhabi, Energy Charter, Energy Intelligence, European Council on Foreign Relations, International Energy Forum, Kazakhstan’s KazEnergy, Paris Energy Club, Russia Energy Security Fund, Windsor Energy Group and Woodmackenzie.

DISCUSSION NOTES!e launch meeting of the Bosphorus Energy Club has identi"ed key global and regional game-changers that are likely to shape and inform critical investment decisions, policy choices as well as energy diplomacy in the region. It has also provided thought for food regarding the Club’s future orientation.

global game-changers1. Energy is no longer a simple commodity – it is an instrument of national security, economic prosperity and competitiveness,

and should be treated in a multi-disciplinary fashion.

2. What makes the world energy somehow unstable are mostly the “above-the-ground factors”, such as technological breakthroughs, revival of nuclear power, new renewable initiatives, price volatility, emergence of a new Atlantic energy market, massive need for investment, shifting trade $ows, resource nationalism, and novel forms of IOC vs. OC

3. Two key megatrends will shape our world out to 2030: demographic patterns, especially increasing young population in developing world, aging population in the OECD world; and growing resource demands which, in the cases of food, energy and water, might lead to scarcities.

4. In the period ahead, we will likely face further vulnerabilities such as the geopolitical, security and social ones that occur in the Straits of Hormuz, the Malacca Straits, the East China Sea, the Caspian Sea, the KRG vs. Baghdad, and the Eastern Mediterranean as well as the domestic instabilities triggered by the Arab Spring, the Nigerian labour strikes, the attacks in Algeria and the ongoing unrest in Iraq.

5. !e energy demand growth will continue to grow, albeit at a di&erent pace. China will continue to be the strongest demand growth country if it deals with its debt problem and boosts productivity. !e US is expected to experience its fastest growth in a decade, driven by a reduction in "scal austerity, a resurgent housing market, and the favourable condition of American corporate, bank, and household balance sheets. Europe has stabilised sovereign debt markets and systemic risk is for now substantially reduced, but energy demand growth will be slow.

6. New suppliers are emerging on the world energy map beyond conventional producers in the Gulf, Latin America and Eurasia. !e US could surpass Saudi Arabia as the world’s biggest oil producer in 2017, and it could eclipse Russia as the world’s largest natural-gas producer by 2015. Australia is currently the third largest LNG producer in the world, behind Qatar and Malaysia, and could become the largest in a few years. !e Arctic region is widely believed to hold the Earth’s sole remaining signi"cant deposit of untapped hydrocarbon reserves and competition over the region is becoming "ercer.

7. Resource nationalism is on the increase as resource countries insist on equitable sharing of the risks and upsides. !ere is need for a new form of partnership between IOCs and NOCs. Seven major state controlled energy corporations (i.e. Saudi Aramco, Gazprom, PDVSA, China’s CNPC, Iran’s NIOC, Petrobras of Brazil and Petronas of Malaysia) presently control over 30 percent of the global oil and gas production and over 30 percent of reserves, while. ExxonMobil, BP, Chevron and Shell now control just 10 percent of production and 3 percent of reserves.

8. While resource countries become tough (particularly in high-price environment) and also expand their investment to other resource regions, industrialised energy importing countries are resorting to what is called “economic patriotism” to protect their strategic sectors. Regionalism, characterised by the Transatlantic Trade and Investment Partnership, ASEAN, APEC, GCC, NAFTA, Shanghai Co-operation Organisation, African Union and like, is gaining added impetus and substance, thus further eroding the pillars of globalisation.

9. In this dynamic global context, the real game-changer is the rising gas production in North America from shale basins, which is transforming the global gas market. !e shale gas “revolution” has redrawn the US energy landscape and kick-started a re-industrialisation of its economy, providing a competitive edge to US companies. It will also have geopolitical implications. Energy intensive industries now potentially have a bigger energy cost advantage when located in the US than the labour cost advantage China holds. !e North American success is di(cult to replicate in other shale gas-rich parts of the world.

10. “Energy democracy” is gaining ground. !e public worldwide has taken a strong interest in how their energy future will be shaped, as they are likely to be a#ected seriously from climate change, local pollution, high-energy prices, energy poverty, and geopolitical con$icts. Today, the leaders in Beijing feel the need to take into account local protests on heavily polluting fuels, nuclear power plants, fuel price hikes, and low carbon/cleaner energy. One discussant emphasized the importance of focusing our e#orts on “energy for peace and future generations”.

11. !e “golden age” for natural gas has been repeatedly mentioned. From electricity to transportation to LNG, natural gas is revolutionising the world markets. By 2035, natural gas demand will outpace that of any other individual fuel, resulting in nearly 50 percent higher than in 2011. Power generation continues to be the largest source of gas demand, accounting for around 40 percent of global demand. It has both commercial as well as geopolitical consequences. If the US shale gas "nds its way to world markets in increased volumes, the implications will be profound.

12. !e “nuclear renaissance” has not dithered away; it has simply shifted to the east. Today there are some 435 nuclear power reactors operating in 31 countries plus Chinese Taipei, with a combined capacity of over 370 GWe. In 2011 these provided about 13.5 percent of the world’s electricity. Nuclear power capacity worldwide is increasing steadily, with over 60 reactors under construction in 13 countries. Nuclear generation will increase by two-thirds, reaching 4,300 TWh in 2035, led by China (around half the global increase), South Korea, India, and Russia. Signi"cant further capacity is being created by plant upgrading.

13. Renewables have su&ered in recent years. Rising US natural-gas output and relatively lower natural gas and coal prices have put severe downward price pressure on wind and solar power. However, it is likely that nearly half of the increase in global power generation will be from renewables by 2035. !at will put it ahead of natural gas and just behind coal as the leading fuel.

14. Renewables are seen as the logical choice for fast-growing, energy-hungry economies because they are quick to assemble, highly predictable, easy to integrate and have no adverse impact on the environment. China’s total renewable output by 2035 will likely be more than in the EU, the US, and Japan combined. Germany o#ers a di#erent story in renewables. Energiewende (energy transition) has put Germany on a radical footing - as it looks to de-carbonise its economy and lead the race for green growth.

15. !roughout the discussions, “where to source money for energy "nance” was frequently asked. To meet the rising energy demand, huge amounts of investment (to the tune of $37 trillion between now and 2035) are needed. !e answer: !ere is no shortage of funds if the right projects with right commercial fundamentals and right partners could be developed.

16. !e conventional "nancial sources are not adequate. Sovereign Wealth Funds, private investors, Islamic Finance and Public-Private Partnerships are the way to go. Islamic "nancial instruments are set to play a growing role in energy "nance – in the Muslim world and beyond. Norway’s Sovereign Wealth Fund, the world’s largest, will inject signi"cant capital to the renewable energy sector. China continues its shopping of energy assets around the world.

Regional game-changers17. Although Russia’s in$uence has somewhat declined recently due to the “game-changers”, the Putin leadership has promptly

moved to reverse this situation by taking a series of strategic decisions. Seemingly, it is losing its edge against the changing gas market. Both abroad and inside Russia, the key impact has been that Gazprom, Russia’s main “energy arm”, has lost some market share and faced price renegotiations. !e independent gas producers as “unbounded” companies are seen as more “compatible” with the EU Internal Energy Market. Moscow’s top concern is its vulnerability to $uctuations in the price of energy and regain the lost ground in the markets.

18. Russia requires its oil and gas income both to project its in$uence abroad and keep domestic stability and prosperity, not least via such projects as the Nordstream and the South Stream. A reduction in government income, and thus in government expenditures, would be likely to have enormous political consequences domestically.

19. With half of the Russian budget coming from energy revenues (80 percent is from oil and 20 percent from natural gas), the government could be in a di(cult position. !is situation could be changed if innovation and liberalisation could be introduced into Russia’s oil and gas sector, especially LNG and relevant infrastructure.

20. Today, China is the most obvious power on the rise, likely to challenge the US more energetically as the world’s economic superpower over the next two decades if things progress as widely predicted. China is the most populous country on earth with 1.3 billion citizens. It already consumes more oil than any other country save the US. And it’s set to soon surpass the US as the world’s largest oil importer. China is on international oil and gas shopping spree. So far in 2013, over 20 percent of oil and gas deals globally involved a Chinese "rm. Beijing is not alone: India and other dynamic Asian economies now boast growth rates that could outstrip those of major Western countries for decades to come.

21. !e Middle East and the Gulf will remain fundamental energy players. US preferences for providing energy security abroad can diminish, but this is unlikely to result in a strategic retreat from this region. For major net exporters such as Qatar, Libya, Bahrain, Saudi Arabia and Kuwait, the contribution of fuel to GDP exceeded 50 percent of GDP in 2013. Conversely, the economic impact of the energy system on net importers like Morocco, Lebanon, Jordan and Tunisia is severe.

22. !e lowest performer, Jordan, for example, spends nearly 20 percent of GDP to import 96 percent of its energy needs. 8.5 percent of regional GDP was spent by these countries on subsidies. Net importers such as Morocco and Tunisia are rolling out renewable energy capacity in a bid to reduce the economic impact of imports and mitigate against $uctuating fossil fuel pricing.

23. As the US demand for this region’s natural gas and oil exports wanes due to the “shale revolution”, the importance of Asian markets will grow. Some projections indicate that up to 90 percent of Gulf oil exports could be destined for India and China. Further evidence of the Gulf ’s orientation eastwards is evident in Saudi Arabia and Kuwait’s funneling of investments into re"neries located in China, Indonesia, Vietnam and India, where consumption of Gulf hydrocarbons and petrochemicals is expected to continue rising.

24. !e critical investment decisions regarding TANAP and TAP, it was stressed, did not represent a “silver bullet” for European energy diversi"cation yet because we are only talking about 10 bcm against the current demand of 500 bcm.

25. With only one supplier, depressed European demand and other alternatives available, it is di(cult to speak yet of a genuine Southern “Corridor”. Azerbaijan is the best option to deliver gas to the South European markets because it is not a direct rival of Russia. To ful"ll the potential of the Southern Corridor, gas from new sources such as Turkmenistan, Iran, Iraq and Eastern Mediterranean should be mobilised.

26. With regard to Iran’s re-emergence in the world energy markets as a full player, the consensus view was that it is too early to speculate but the potential for Iran to return to oil markets could particularly shake up OPEC and the global outlook. !e sanctions are not lifted in any real way yet, which will come when the next stage of agreements is reached. In order to reverse the decline in Iranian oil output and to speed up the relatively slow pace of gas production, it is not enough simply for Tehran to secure a resolution of the nuclear issue and an end to sanctions.

27. At the same time, the Rouhani administration has to implement a major overhaul of Iran’s domestic oil and gas production policies. It will have to secure major foreign investment in a way that balances its own deep - seated rejection of production sharing agreements with the desire of international companies to secure agreements based on balancing risk and reward.

28. !e nuclear deal would open the way for Iran to be recognised as a legitimate regional power alongside Turkey, Egypt, Iraq, Saudi Arabia, Israel and Pakistan, and address boiling domestic social and economic discontent. If all goes well, it will take some time for the international energy groups to feel safe enough to go back or expand production and purchases in Iran.

29. Discussants concurred that despite risks, the plan to build one gas and two oil pipelines directly from Kurdish-controlled northern Iraq to Turkey with or without the approval of Baghdad will likely go ahead, thus for the "rst time providing the Kurds direct access to world markets. !e KRG would o#er Turkey a high quality low cost energy alternative to Iran and Russia while Turkey might serve as a conduit for KRG energy exports to Europe.

30. !e oil pipeline deal will allow the Kurds to export up to one million barrels per day, but it might also make reconciliation between Erbil and Baghdad harder to achieve or indeed easier to agree to a genuine deal. Turkey is not keen on losing investment in southern Iraq, which holds the country’s largest explored oil and gas reserves, and endangering its regional balance of power interests.

31. !e commercial case for selling Eastern Mediterranean gas to Turkey is overwhelming, both in terms of cash returns and of regional contributions towards development of the Southern Corridor. !e Eastern Mediterranean countries only have a very narrow window of opportunity before they would face increasingly competitive new supplies to Europe set to come online over the next several years.

32. A settlement could help promote several major objectives: energy cooperation in the Eastern Mediterranean; the enhanced energy security of Europe though further development of the Southern Gas Corridor, and resolution of the Cyprus question. And that, in turn, would vastly transform the atmosphere for any resumption of negotiations for Turkish entry into the EU.

33. What Turkey possesses to compensate for its energy supply de"ciency is the best geographical position between the world’s second-largest natural gas market, continental Europe, and the substantial gas reserves of Russia, the Caspian and Black Sea basins, the Middle East/Gulf and the Eastern Mediterranean. Turks are not content only to be a simple “bridge” over which energy $ows; they aspire to becoming a regional “hub”. Yet, being a regional energy hub is not just about having pipelines crisscrossing your territory.

34. Turkey must be able to import enough gas to satisfy both domestic demand and any re-export commitments. It should also liberalise the markets, develop an integrated multi-disciplinary energy system management, pursue “soft-power diplomacy” avoiding sharp confrontations, invest in human capital and technology innovation, build “energy champions” operating like successful international peers, and put in place right governance structures and sound physical infrastructure.