Remaking its institutions in its bid to become a full member of the European Union, and the reforms are paying dividends. During the past five years, the robust Turkish economy has grown by an average of 7.4% per year. Turkey’s $400-billion economy attracted $20 billion in foreign direct investment in 2006, a phenomenal increase from $600 million in 2002.

Growth requires energy, naturally. But despite its common borders with such oil-stuffed countries as Iraq and Iran, Turkey lacks significant energy resources of its own. Its leverage in the world energy game is its geography between Asia and Europe, and its control of the Turkish Straits, the umbilical cord of the Black Sea. Turkey may not be blessed with indigenous energy supplies, but it functions as a crucial energy bridge that connects flush suppliers to eager consumers.

There is one great frontier that still could yield substantial oil and gas reserves to Turkey, however. Exploration is in its earliest stages in the Black Sea, and Turkey owns 40% of the 423,000-square-kilometer inland ocean.

Domestic shortfalls

Turkey’s daily oil consumption of 618,000 barrels far outstrips its domestic production of some 43,000 daily barrels. And that production has been declining from a peak of 85,000 barrels per day reached 15 years ago.

Consequently, natural gas has become increasingly vital to the country’s energy picture. Consumption of the commodity has grown from 122 billion cubic feet (Bcf) in 1990 to 1.1 trillion cubic feet (Tcf) in 2006, according to the International Energy Agency. Annual domestic production during that same span rose from 7.4 Bcf to 31.9 Bcf.

Clearly, any hydrocarbons that Turkey can produce internally lighten its considerable imports. Today’s exploration and production efforts focus on the country’s vast and lightly explored offshore areas, particularly in the Black Sea.

Turkey administers its oil and gas resources through its General Directorate of Petroleum Affairs (GDPA), an arm of the Ministry of Energy and Natural Resources. Turkish petroleum law is based on a U.S.-style model, says Erdal Gulderen, GDPA general manager.

Turkey’s present petroleum law was drafted in 1954, and revised in 1971 and 1982. There’s been a push in Turkey during the past few years to revise the legislation again to encourage more upstream activity, especially in the deepwater Black Sea.

A new petroleum law that offers lower royalty rates and a more progressive tax regime has been proposed but not yet signed. “The new law has been delayed, but we are looking to 2008 for passage,” says Gulderen. “The petroleum authority and sector members are acting together to improve cooperation and communication. Turkey is moving to private-sector designs in all sectors of the oil business, from upstream through marketing and refining.”

Turkey is attractive because it is the most stable and safe country in its part of the world, and its growth rate has been well above that of its neighbors. “We have a huge land mass, and we are surrounded by seas on three sides. From an E&P point of view, Turkey is a virgin country and has not been adequately explored,” he says.

Indeed, just 1% of Turkey’s offshore and 20% of its onshore regions have been explored, and only 3,300 wells have been drilled in the country, which is larger than Texas. “We think that with today’s oil prices and exploration technology, Turkey offers attractive potential. It’s very clear to us that our country has big demands for energy and we need to find more domestic sources to narrow the supply gap.”

The welcome mat is out, says Gulderen: “Any company with capabilities is welcome in Turkey. We are working to provide suitable conditions to attract global capital to Turkey. We have desirable opportunities for serious, capable investors to help us grow our upstream.”

State partner

State-owned Turkish Petroleum Corp. (TPAO) accounts for about two-thirds of the country’s domestic oil and gas output. Although TPAO is a government firm, it is subject to the same laws and regulations as other companies in Turkey.

“We recognize that exploration is risky and we share the risk with other companies,” says Vedat Aydemir, Western Black Sea manager. Although major and independent companies, both domestic and foreign, can hold their own licenses in Turkey, open licenses are in short supply and TPAO controls an overwhelming percentage of prospective offshore acreage. In Turkey’s Black Sea, widely considered the country’s most promising province, TPAO’s 154,000 square kilometers of licenses encompass more than 90% of all available lands.

Hence, the main avenue for foreign companies to access opportunities in Turkey is through TPAO farm-outs. The state firm has already formed a number of partnerships with foreign companies, both onshore and offshore, and has more such deals in sight.

Interest in the Black Sea is particularly strong. “The Black Sea is Turkey’s largest sedimentary basin, but it is the least explored,” says Aydemir.

“We have potential, we have data and we have attractive terms,” says Huseyin Ekim, manager of the exploration department’s feasibility, joint ventures and financial control unit. More than $200 million has been spent on 3-D seismic in the Turkish section of the Black Sea, and all of the main structures have been shot. In all, Turkish Black Sea waters are covered by 60,000 kilometers of 2-D and 11,000 square kilometers of 3-D data.

The Black Sea is shaped much like a big bathtub, with narrow shelves, steep sides and a flat bottom. About 70% is in 2,000 to 2,150 meters of water, and exploration has been stymied by the great depths and the difficulties of fitting deepwater rigs beneath the bridges that cross the Turkish Straits.

To date, just one well has been drilled in more than 1,000 meters of water in all of the immense Black Sea. In 2005, #1 Hopa, a joint venture of BP, Chevron and TPAO, was drilled in 1,529 meters of water on the sea’s far eastern side. The 4,700-meter test, on the Turkish flank of the Georgia-Turkey border, used a drillship that BP brought from Texas to the Mediterranean. It had to take the derrick down to thread the ship under the Bosporus bridges.

The prospect was a huge structure that reportedly extended into Georgia’s sector, onto licenses held by Anadarko Petroleum, TPAO, BP and Chevron. The test was not commercial and was plugged and abandoned.

Prior to Hopa, Arco and TPAO had drilled two wells on the other side of the Black Sea, offshore Turkey’s Marmara district. The 2,755-meter #1 Limankoy and 3,326-meter #2 Limankoy were drilled in 1999 in 854 and 685 meters of water, respectively. One well recorded gas shows, but the other did not. Both were plugged and abandoned.

“We have four to five different play types in the deepwater Black Sea, and a few dry holes don’t mean anything,” says Aydemir. “It’s a very high-potential area.”

At present, TPAO has joint ventures with Brazilian firm Petrobras in Kirklareli Block in the same area as the Arco wells in the western Black Sea, and Sinop Block in the central Black Sea. Deepwater expert Petrobras operates the JVs and holds 50% interest in each.

Last year, the companies shot 1,000 square kilometers of 3-D seismic on Kirklareli. This year, they plan 500 kilometers of 2-D in Kirklareli and 3,000 kilometers of 2-D in Sinop. A well is scheduled on each block beginning in 2009, one in Kirklareli and one in 2,200 meters of water on Sinop.

Additionally, TPAO has data rooms open for more farm-outs. “As we go to deeper waters, we are looking for partners with experience in that environment.” According to the company, it will soon accept bids on two large offshore areas. Blocks 3923 and 3534 are in the eastern Black Sea, and include the area where Hopa was drilled. Late Tertiary clastic plays are believed to be highly prospective. In the western Black Sea, TPAO is looking for partners on Block 3921, which has prospects in Late Cretaceous and Paleocene carbonates.

TPAO also intends to keep considerable acreage in the deepwater Black Sea for itself and plans to drill wells in those blocks, says Aydemir.

Shallow waters

While the deepwater Black Sea holds promises of world-class discoveries, the narrow shelf area is already producing much-needed natural gas for Turkey. And that success has been driven by a small U.S. independent, Toreador Resources Corp.

A joint TPAO-Toreador-Stratic Energy project in the western Black Sea has been particularly fruitful. “This is our first exploration development in the Black Sea,” says Ekim. “We have accomplished a lot.”

Aydemir adds, “Initially, we perhaps underestimated Toreador’s financial and technical resources. But our venture with Toreador has become one of the big success stories in Turkey.”

Dallas-based, publicly held Toreador entered Turkey by way of Madison Oil Co., a small, internationally oriented E&P firm headed by executives formerly with Triton Energy Corp., which had major discoveries in Colombia, France, southeast Asia and offshore West Africa before it was sold to Hess Corp. in 2001.

Madison was interested in Turkey, which offered the attributes that it had been seeking in an international E&P destination. Turkey’s government was solid and its fiscal regime was favorable. It was a net importer of oil and gas. And, although hydrocarbons had been discovered in the country, the finds were not of the scale that automatically attracted major operators.

Madison decided to pursue the assets of Arco Turkey, which BP wanted to divest after it purchased Arco in 2000. Arco had long been involved in Turkey, and had a deep relationship with TPAO both onshore and offshore.

Offshore, shallow-water licenses were Madison’s focus. The independent evaluated data from just half a dozen wells that had been drilled in Turkish waters, along with some regional 2-D seismic.

Compelling points included two 1970s-era wells that TPAO had drilled on the Black Sea shelf. The #1 Akcakoca had flowed 3.7 million cubic feet of gas and 500 barrels of water per day on an open-hole drillstem test. Its offset, #2 Akcakoca, also had shows but was not tested.

Madison liked what it saw, and it soon became the proud owner of nearly a million acres on the western Black Sea shelf. Shortly afterward, Madison merged with Toreador.

In 2002, Toreador kicked off a 1,200-kilometer 2-D seismic shoot on the western Black Sea permit. It followed that with 223 square kilometers of 3-D seismic in late 2004, after its first discovery. It was classic, Gulf of Mexico-style, bright-spot prospecting. The independent identified a string of compressional structures with amplitude-versus-offset (AVO) anomalies that indicated gas.

The company’s first well was #1 Ayazli, drilled in September 2004 on a thrusted anticline five kilometers south of the key show well. Toreador moved toward shore from that key well to water depths amenable to a jackup rig, which was available in the region.

The discovery encountered four Eocene sands and tested 12 million cubic feet per day. Toreador operated and owned 36.75% of the permit on which the find was made. TPAO had 51%; Calgary-based Stratic Energy, 12.25%.

Since that discovery, the Western Black Sea JV has been on a roll. In 2005, it drilled five wells and started work on a production platform. “We fast-tracked our project,” says Roy Barker, regional general manager, Toreador Turkey Ltd. “We worked very closely with TPAO and had a high level of agreement. We were a small U.S. company and TPAO is a state oil company, and we had great respect for each other.”

In 2006, Toreador and its partners drilled nine more wells, including one in deeper water. The JV installed its first production platform, constructed onshore and offshore pipelines, and built an onshore gas-processing plant. Last year, it drilled two wells in deeper water and placed two more production platforms. All three tripods were manufactured in Turkey.

First gas flowed from the Black Sea shelf fields in April 2007. “It was an incredible accomplishment to establish production in a frontier, offshore area with harsh weather, limited support services and no previous infrastructure, and in just 31 months from discovery,” says Barker. “It was only possible through very hard, creative work by a dedicated, joint project-management team.”

To date, the TPAO-Toreador-Stratic partnership has drilled a string of 14 successful wells in the Turkish Black Sea, punctuated by just two dry holes. The wells are in two trends in a 50,000-acre sliver of their 962,000-acre Western Black Sea permit: one in less than 80 meters of water; the second, in 100 meters.

Geologically, the area is very complex, says William Moulton, Toreador technical vice president. “Gas is found in a series of interlayered sands; we have encountered as many as seven productive intervals in one wellbore.” The Akcakoca reservoirs are believed to be turbidite sands spread across a 300-meter interval; total sand thickness ranges from 175 to 200 meters.

“The AVO technique is sensitive enough that it can pick up gas-filled sands, and discriminate those from water-filled sands,” says Al Garcia, Toreador international geophysicist.

The first phase of offshore development has been in the shallower trend. Toreador operated Phase I, which included seven productive wells, until first gas was established. As per its contract, TPAO then took control.

Toreador and its partners sell their Black Sea gas under a three-year contract that kicked off in May 2007. The gas fetches $9.26 per thousand cubic feet, and there is no minimum requirement.

Recently, the JV suffered a setback when a fishing trawler damaged the subsea pipeline system that takes gas from one of the platforms to shore. Prior to the pipeline shutdown, the project was producing 17 million cubic feet per day.

Repair to the pipeline and hook-up of the third production platform are expected in this quarter. At completion, gross production is forecast at between 30- and 50 million cubic feet per day.

Second phase

Although Toreador met good success on its shallower-water prospects, in its estimation the real prize was in 100 meters of water near the old #1 Akcakoca. In 2006, the JV brought a semisubmersible rig into the Black Sea and kicked off a deeper-water campaign. The #3 Akcakoca tested 37.8 million a day and #4 Akcakoca made 26.9 million. The two rank as the most productive wells ever drilled in Turkey, says Barker. The JV subsequently drilled the #1 Guluc to the northeast of the Akackoca wells. That tested 16.8 million per day, and is the third most productive well drilled in Turkey.

The JV’s most recent success is #1 Bati Eskikale, which encountered 10 meters of net gas pay in a 37-meter interval. It flowed 8.8 million per day. The well extended the Akcakoca deeper-water trend northwest some 5.5 kilometers.

Going forward, Toreador is focused on funding its share of development costs needed to bring the deeper-water discoveries onstream.

TPAO operates the Phase II development. Currently, the companies are in a front-end engineering design study centered on the Akcakoca area. Gross development costs are pegged at $120 million through 2009 of which $44 million is net to Toreador.

“We’ll install a four-legged platform and tie the #3 Akcakoca and #4 Akcakoca wells into production,” says Steve Thornton, Toreador vice president. “Then we’ll drill up to four directional wells.” Additional plans include hooking up two nearby wells that are currently suspended at mudline.

First production from the second phase will be onstream in the second half of 2009. “We plan to have a drilling rig mounted on the platform, and we’ll do all the workover, completion and well-maintenance operations from that facility, which will be manned during operations,” says Thornton. Produced gas will be transported to the JV’s onshore Cayagzi plant, and then transmitted to the national grid system.

Production for the second phase is expected to be between 50- and 75 million cubic feet per day.

“Our project has provided a big economic boost to Turkey and its energy picture,” says Mike FitzGerald, Toreador executive vice president.

Turkey’s total domestic gas production was about 87 million per day before the Western Black Sea shelf project kicked off. The first development phase will add 50 million of daily output, and the second will add that much again, and likely even more.

“Many times along the way, people pointed out all the difficulties that we faced and tried to dissuade us,” says Edward Ramirez, Toreador senior vice president. “We were working in a new area, and we certainly had a lot of angst and pain along the way. But we have accomplished a great deal in the development of a significant gas discovery.”

And lucrative potential remains. Even after three years of steady drilling by the JV, less than 25 wells have probed Turkish waters in the Black Sea.

“Just within the immediate Akcakoca area, we’ve drilled fewer than half of the prospects that we’ve identified,” says FitzGerald. “This is still very much a frontier.”

Additional potential

Toreador holds additional licenses along the Black Sea shelf in the Thrace, central and eastern Black Sea regions, and in several onshore districts. It was recently granted a 964,000-acre permit in southeastern Turkey, in the Van district. The area is on trend with producing basins in Iran, says Barker. In total, Toreador has 2.4 million net of 3.5 million gross acres in Turkey. Its immediate focus is on its offshore development, however, so it has put further exploration on hold until that is completed.

Another U.S. firm has been involved in Turkey. Its work is a hunt for potential coalbed-methane (CBM) resources. In 1998 and 1999, Grand Junction, Colorado-based international consulting company Raven Ridge Resources Inc. assessed CBM resources in the Zonguldak Basin on Turkey’s Black Sea coast for Denver-based firms Dan Oil LLC and the Hamilton Cos., and a Turkish partner, DataSu.

Raven’s work drew from knowledge gained from active coal mining in the country. It did initial coal and CBM resource assessment, prospect generation, wellsite work, and desorption and adsorption testing. It also trained Turkish scientists and engineers.

“The Zonguldak is the only significant hard-coal basin in Turkey,” says Ray Pilcher, president. The Carboniferous, Westphalian-age (equivalent to the Pennsylvanian in North America) coal seams are thin, relatively pervasive and quite gassy. “Coal mines in the area have even recovered heavier hydrocarbons, evidence of a strong hydrocarbon kitchen.”

The Zonguldak coal sequences are essentially the same ones that exist in Ukraine and Bulgaria. Prior to the opening of the Black Sea, the deposits were contiguous. “Based on what we know from what’s been done in Ukraine and Bulgaria, the Zonguldak sequence of rocks has potential in both coals and associated sandstones,” says Pilcher.

Although a couple of wells were drilled on the initial project a decade ago, commercial production was not established. The operator had drilling and logistical problems, typical of first attempts with a new technology in an emerging area.

Raven Ridge has recently begun to work Turkey again for another client. This firm, a Turkish company, plans to complete and test several existing wells and follow up with new wells in an area not far from the original CBM project.

“I expect to see a lot more activity in the coming years. This whole part of the world is underexplored, and there’s a huge amount of work that still needs to be done.”

Corridor country

Turkey pursues a multi-pronged energy strategy. It wants to meet its future energy demands and diversify its sources, so promotion of domestic E&P is a high priority. At the same time, the country has no illusion that it will be able to discover enough oil and gas to come close to satisfying its internal needs. Indeed, Turkey grapples with the reality that it must import 90% of its energy from other nations.

That’s where geography comes into play. Turkey sits astride two continents, and is uniquely positioned between heavyweight oil and gas suppliers in the Middle East and Caspian Sea regions and European consumers. In addition to securing its own supplies, Turkey sees tremendous opportunity to expand its emerging role as an energy-transit country, which can bring with it many economic and political benefits.

Huge volumes of oil already move across Turkey, both through the Turkish Straits and via pipelines.

Tankers clog the Turkish Straits, which span 110 nautical miles and are comprised of the Istanbul Strait, Sea of Marmara and the Canakkale Strait. Since the collapse of the Soviet Union, oil shipments from Black Sea ports through the straits to the Mediterranean Sea have surged. In 2006, 38.5% of crude oil exports from former Soviet Union countries went through Black Sea ports: more than 2.2 million barrels per day. According to the Turkish Maritimes Pilots Union, an average of 28 tankers passed through the Istanbul Strait each day in the first seven months of 2007. A decade prior, tanker traffic averaged 11 per day.

Turkey is already home to 3,400 kilometers of crude oil pipelines. The longest is the Baku-Tbilisi-Ceyhan (BTC) line, which extends 1,076 kilometers across Turkey and carries crude from Azerbaijani fields to Ceyhan, on Turkey’s Mediterranean coast. BP and its partners in an international consortium spent $4 billion on the buried pipeline, which has a peak capacity of 1 million barrels of oil per day. First oil reached Ceyhan in May 2006.

Oil also flows into Ceyhan from northern Iraq’s massive Kirkuk fields. A 640-kilometer dual pipeline can carry 1.6 million barrels a day.

A project in the works is the Samsun-Ceyhan bypass, which would transport oil from Turkey’s Black Sea port of Samsun to Ceyhan, and bypass the eye of the needle at the Turkish Straits. The 560-kilometer, 1-million-barrel-per-day line is being developed by a 50-50 joint venture of Italy’s ENI and Turkey’s Calik Energy.

Turkey is expanding its gas infrastructure in similar fashion. Its pipeline network has mushroomed in recent years: pipelines sprouted from 845 kilometers in 1989 to 7,800 kilometers in 2005. When projects under construction are completed, the country will boast 12,000 kilometers of gas lines, according to Botas, the state distribution company.

Currently, Turkey imports Russian gas through the Trans-Balkan line, which traverses Moldova, Ukraine, Romania and Bulgaria. Additionally, the Blue Stream pipeline transports Russian gas to Turkey via a 1,200-kilometer line, 395 kilometers of which extend underneath the Black Sea. The $3.2-billion project was built by Gazprom, ENI and Botas.

A third major line moves Iranian gas from Tabriz to Ankara. In 2006, Turkey imported 197 Bcf from Iran and 682 Bcf from Russia, according to the IEA. Capacities on the lines were much higher, with potential to move almost twice as much gas.

From the seas, Algerian and Nigerian LNG also sail into Turkey at a number of points. Volumes are currently around 180 Bcf per year.

And gas use continues to rise. Botas predicted that imports for 2007 would total 1.2 Tcf, up substantially from 1 Tcf in 2006. Just in Turkey alone, demand growth is projected at between 13% and 15% annually.

But a future business that Turkey sees as quite attractive is the movement of gas across its borders to meet the European Union’s surging demand, which some estimates say will double by 2030. To that end, several additional lines are under construction or on the drawing board.

The South Caucasus line, which will run parallel to the BTC oil line for much of its route, will bring gas from Azerbaijan’s Shah Deniz Field. It will carry 230 Bcf per year, and capacity can be increased to 700 Bcf in the future. The gas will flow through Turkey to Greece and Italy, and pipelines to allow that are already being built.

Nabucco is a major project poised to transport gas across Turkey from the Caspian to European markets. Turkey, Austria, Bulgaria, Hungary and Romania are promoting Nabucco, which could span 3,300 kilometers and carry 280 to 460 Bcf per year by 2011, and grow to as much as 1,100 Bcf by 2020.

Furthermore, the country has proposed a Turkmenistan-Iran-Turkey line. Capacity could be 565 Bcf per year.

U.S. interests

For American companies, Turkey offers multiple attractions. In addition to its growing internal markets, it’s a door to markets in Central Asia, the Mediterranean, the Middle East and North Africa.

American firms wishing to work in Turkey can access the resources of the U.S. Commercial Service, says James Fluker, commercial counselor at the U.S. embassy in Ankara. “In general, the government of Turkey wants to move closer to the European Union, and has taken steps in a lot of different directions to liberalize markets,” he says. “Turkey is moving toward privatization and it offers stability and positive growth rates. It is a good area for investors.”

The commercial service provides market research, logistical planning and due diligence to U.S. companies. It also arranges introductions to Turkish businesspeople, and can assist U.S. companies that wish to bid in tenders.

Further work includes taking Turkish delegations to exhibitions in the U.S. and Europe, including the annual Offshore Technology Conference in Houston.

The government commitment to real reform has brought a sea change in foreign perception of Turkey, says Rebecca Neff, economic officer. “There was a $20-billion inflow of foreign capital into Turkey in 2006, which was a huge vote of confidence. American companies are increasingly interested in Turkey.”

One caveat: For U.S. firms considering work in Turkey, it’s essential to concentrate on personal relationships. “A mistake U.S. companies sometimes make is deciding that an okay from a ministry is sufficient,” says Serdar Cetinkaya, senior commercial specialist. “In Turkey, relationships at all levels are important. You have to establish good relations with provincial and local people as well as top officials.”

But once that foundation of mutual respect is established, work can proceed rapidly. As Toreador’s success attests, Turkey can be a hospitable and profitable country in which to do business, for companies of all sizes.