Turcas: A culture of patient preparation

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Patience is said to be a virtue. For Turcas, a leading Turkish petroleum distributor, it is about to pay dividends.

Turcas began in 1931 as a chain of petrol stations serving Turkey’s domestic market. Today it is on the brink of becoming a significant regional energy company, thanks to a series of joint ventures that promise to transform its retail operations into a portfolio of investments that include refineries and petrochemical plants, power plants and electricity distribution networks.

For Erdal Aksoy, chairman of Turcas, this expansion is all part of a long-term plan. “We’ve been planning 15 years for this, following all the changes in EU and global markets, and working to understand how the new market systems worked, and lobbying for the same changes in Turkey,” he says.

Mastering the new global regulatory environment for the energy sector meant Turcas was even able to give occasional advice to the Turkish authorities on energy sector legislation.

The past seven years have seen the liberalisation of Turkey’s energy markets, allowing Turcas to capitalise on its early preparation to be first in line to apply for the new licences. It was also able to take advantage of longstanding relationships with international operators to form joint ventures that give it access to the resources and expertise it needed. “Long-term co-operation has always been central to our corporate culture,” Mr Aksoy says, pointing to 50-year partnership deals with companies such as BP, Shell and Mobil.

A good example of the way Turcas approaches its business is the merger last year of its petrol distribution network in Turkey with that of Shell, under the Shell banner. This created what Turcas claims is the best-organised and most profitable distribution chain in Turkey, and gave Turcas equal control of the venture even though it owns only 30 per cent of it. The merger also released both cash and resources to pursue other activities, most prominent of which is a joint venture with SOCAR , the state oil company of Azerbaijan.

Mr Aksoy explains: “We never wanted to sell our distribution operations. We prefer to create synergies with new businesses.”

The Socar joint venture began as a plan to build an oil refinery at Turkey’s Mediterranean oil hub of Ceyhan. The plant would be supplied by crude from the Azeri company through the Baku-Tiblisi-Ceyhan oil pipeline. Now the project has expanded. The original plan for a refinery with a capacity of 10m tonnes a year now includes a new petrochemical plant. Turcas and Socar are awaiting the approval of Turkey’s energy regulators before construction is due to get under way in 2010. In addition, the two companies joined forces to buy a 51 per cent controlling stake in Petkim, a petrochemicals company, for just over $2bn. The deal was completed at the end of May. Another partner in the deal was Injaz Projects, a Saudi Arabian company with experience in both petrochemicals and port operations. Petkim owns one of the largest and least-used port facilities on the Aegean.

Mr Aksoy says: “Petkim was not in our sights originally, but the refinery project with Socar meant we could produce the feedstock Petkim uses.”

Plans for Petkim include the possible construction of a dedicated feedstock refinery on its extensive site, after the completion of the planned refinery at Ceyhan.

There is also a proposal to build an 800MW power plant burning imported coal, to be constructed in a joint venture with German power giant Eon. The two are also building an 800MW gas-fired plant.

A second joint venture, with Innovative Wind Power of Dubai, has seen Turcas submit applications to build six wind farms at sites across Turkey generating a total 400MW, with the company already collecting data on its chosen sites.

Investment in power generation is a timely move. The slow pace of reform in Turkey’s electricity market has discouraged the construction of new generating plants, which means that the country will face a supply shortfall as early as next year.

Its interest in the electricity sector is not confined to generation, however. Turcas is teaming up with Iberdrola of Spain to submit joint bids in the privatisation of Turkey’s 20 state-owned electricity distribution regions, the first four of which are due to be sold this year.

Nor do Mr Aksoy’s plans stop at Turkey’s borders. Although still playing his cards close to his chest, he offers some hints, pointing to the partnership with Socar and the absence of any upstream activities in the company’s portfolio as a possible new direction, one that would take activities outside the country.

“To succeed in the modern business environment you have to have integrated operations and you have to think ahead. Even now, with all these existing projects, I’m looking at market projections for 20, 30 years ahead and planning our next moves.”

All eyes on privatisation of Izgaz

Gas consumption in Turkey has risen fourfold in the past 10 years,yet the country’s distribution infrastructure remains in domestic hands. Now, as part of an ambitious government privatisation plan, foreign interest in the sector is about to be tested with the imminent sale of Izgaz, the municipally-owned gas company in Izmit, an important industrial hub 100km east of Istanbul.

With Turkey’s gas market being liberalised, Izmit offers a sizeable market for any international operator with gas to sell. The city’s consumption, at 1.5bn cubic metres a year, is expected to almost double in the next six years.

“Izmit is Turkey’s industrial heart,” says Kemal Altunel, head of investment strategy at Izmit municipality, who has overseen the growth of Izgaz for the past five years. “We are home to many international companies, and we expect many more to join them, maybe even as the owner of Izgaz.”

There is a great deal riding on the success of the Izgaz sale. Turkey’s current account deficit, which could reach $45bn this year, needs to be financed by inflows of foreign capital. The privatisation programme is designed, at least in part, to do that, with its list of state assets up for sale including highways and energy distribution infrastructure. At the same time, the Izgaz sale will test foreign investor appetite for a once-booming emerging market that is facing tougher times because of a slowing economy and the global credit squeeze.

Ozan Ozcan, a banker at EFG Istanbul Securities, who has just returned from an overseas roadshow for the Izgaz sale before its July 10 close, says interest is strong, and there is “serious interest” from European and Middle Eastern investors. “In a few years, gas distributors will be able to import their own gas, offering a chance to improve margins,” he says.

One attraction of Izgaz for investors is its high margins – 6.5 cents per cu m, which will fall to 6.1 cents per cu m after privatisation. These are a legacy of its creation as a municipal body before the gas market began to be liberalised. Margins for newly established regions were fixed by the “underbidding” tender system used by Turkey’s energy regulator, with the result that 39 of the country’s distributors enjoy margins of 1c or less, while those of Izgaz will remain Turkey’s highest.

The high margins have allowed Izgaz to invest in its distribution infrastructure – expanding the network from 1,000km to 2,500km in the past five years. Customers include a who’s who of Turkish and international groups including Ford and Hyundai. Tupras, Turkey’s only oil refiner, will also buy 660m cu m of gas a year from Izgaz starting in 2013.

The Izmit municipality is selling its entire stake in Izgaz in a block deal. Analysts expect the sale to raise between $1bn and $1.3bn

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