Under the Turkish Petroleum Law No. 6491, the term “petroleum” includes both crude oil and natural gas.
Petroleum resources in Turkey are owned by and are at the disposal of the state. However, upstream interests are granted by way of licences with definite terms. In such cases, exploration licence and production lease holders must pay the state a one-eighth share (12.5%) as royalty for petroleum produced from an exploration or production area. Furthermore, under the Turkish Petroleum Law, petroleum right holders are entitled to export 35% of the total crude oil and natural gas produced in the fields discovered after 1 January 1980 for onshore activities and 45% for offshore activities, but the remaining yield and the total amount of crude oil and natural gas produced in the fields discovered before 1 January 1980 as well as the petroleum products generated from such crude oil and natural gas are required to be retained in Turkey in order to address domestic demand.
The Ministry of Energy and Natural Resources (Enerji ve Tabii Kaynaklar Bakanlığı – MENR) is in charge of the energy sector and responsible for the determination and implementation of energy policies, as well as the transit passage of petroleum. Presidential Decree No. 1 on Presidential Organisation is the governing legislation for the MENR’s organisation, authority and responsibilities (https://www.enerji.gov.tr/en-US/Mainpage).
The General Directorate of Mining and Petroleum Affairs (Maden ve Petrol İşleri Genel Müdürlüğü – GDMPA) is the main service unit/department of the MENR and the regulatory authority for all mining and upstream petroleum activities. Presidential Decree No. 4 on the Organisation of Affiliated, Related and Associated Institutions and Organisations with Ministries and Other Institutions and Organisations regulates the authorities and responsibilities of GDMPA, which mainly consist of the issuance and monitoring of permits and licences for the investigation, exploration and production of petroleum, along with mining-related authorities and responsibilities (http://www.mapeg.gov.tr/).
The Energy Market Regulatory Authority (Enerji Piyasası Düzenleme Kurumu – EMRA) is the agency that regulates and monitors energy market activities, grants licences to conduct market activities (such as the distribution of petroleum) and has the authority to impose administrative fines and cancel licences due to non-compliance with applicable legislation. EMRA’s organisation, authority and responsibilities are governed by the Law Regarding Organisation and Functions of Energy Market Regulatory Authority, No. 4628 (https://www.epdk.gov.tr/Home/En).
The Turkish Petroleum Pipeline Corporation (Boru Hatları ile Petrol Taşıma Anonim Şirketi – BOTAŞ) is a state-owned economic enterprise involved in the construction and operation of oil and gas pipelines. BOTAŞ does not have any authority to regulate market activities. The legislation governing the activities of BOTAŞ includes the Statutory Decree Regarding State Economic Enterprises No. 233. Its activities include construction; the transfer or lease of pipelines for the transportation of petroleum, petroleum products and natural gas; and the transportation, purchase and sale of petroleum, petroleum products and natural gas. BOTAŞ is subject to the Natural Gas Market Law No. 4646 and Petroleum Market Law No. 5015 with respect to its operations (https://www.botas.gov.tr/).
The Turkish Petroleum Corporation (Türkiye Petrolleri Anonim Ortaklığı – TPAO) is another state-owned economic enterprise involved in exploration, drilling and natural gas storage, as well as investing in crude oil and natural gas activities. The legislation governing the organisation of TPAO is the Statutory Decree Regarding State Economic Enterprises No. 233. TPAO’s activities include the import and export of crude oil, natural gas and petroleum products, and the distribution and marketing of petroleum as defined under the Petroleum Market Law No. 5015 (http://www.tpao.gov.tr/en).
TPAO subsidiary TP Petrol Dağıtım A.Ş (TPDD) is involved in fuel distribution activities, and was privatised at the end of 2016.
Petroleum-related upstream activities are mainly regulated by the Turkish Petroleum Law No. 6491, whereas downstream activities are primarily regulated by the Petroleum Market Law No. 5015, the Natural Gas Market Law No. 4646 and the Liquefied Petroleum Gas (LPG) Market Law No. 5307. The main laws regarding petroleum activities are summarised as follows:
Due to Turkey’s liberalised energy regime, the state-owned oil company – TPAO – no longer has the exclusive right to explore and produce petroleum. Private entities are entitled to acquire permits, licences and leases for upstream activities, mainly for the investigation, exploration and production of petroleum. Upstream activities are also open to foreign participation.
As per the Turkish Petroleum Law, three major types of licences and permits are required to conduct upstream activities: an investigation permit, an exploration licence, and a production lease.
The investigation permit grants the right to survey the land by gathering data from the ground or air through topographic, geological, geophysical, geochemical and similar methods for petroleum exploration purposes, and by performing drilling works in order to gather geological information. This permit does not grant its holder the right to drill a bore well or appraisal wells.
An exploration licence gives its holder the right to explore within the area defined in the licence.
Upon the discovery of a petroleum reserve for commercial production, an exploration licence holder should apply for a production lease that entitles the licence holder to develop and produce petroleum in the area defined in the licence, and also to transport and trade the petroleum to downstream licensees that hold a petroleum market activity licence issued by EMRA.
GDMPA is the authority in charge of applications for these licences.
GDMPA issues an investigation permit upon the execution of an agreement between the applicant and GDMPA, which sets forth the permit terms and conditions, the character of the applicant’s activities, and the rights and obligations of the applicant. Data gathered as a result of the survey should also be presented to GDMPA; this information is to be kept confidential for eight years. Furthermore, the applicant must make a one-time payment of TRY0.50 per hectare to GDMPA before executing the agreement. This fee is re-determined by GDMPA as per the re-evaluation rate announced by the Ministry of Treasury and Finance on an annual basis.
Exploration licences may be granted for onshore and offshore petroleum exploration. Exploration licence applications for grids available for petroleum exploration are published and announced in the Official Gazette, and all applications regarding the available areas, including business and investment plans, should be submitted to GDMPA. Exploration licences are based on map sections on a scale equal to 1/50,000 or 1/25,000. Applicants should provide a bank letter of guarantee to GDMPA in an amount equal to 2% of their total investment; this rate is 1% for offshore activities.
GDMPA examines applications and performs an overall analysis of the applicant’s business, investment plans, financial status, technical capacity, human resources, experience in the energy sector and achievements, if any. Upon its review, GDMPA issues its decision within a maximum period of 60 days. The maximum term for an exploration licence is five years for onshore activities and eight years for offshore activities, with a right of extension. In any event, the term of the licence, including any extension period, cannot exceed nine years for onshore exploration and 14 years for offshore exploration licences. GDMPA may also choose to forego the application process and have a public auction for a specific field.
Applications for production leases are also submitted to GDMPA. Production leases are granted for a maximum term of 20 years, which may be extended twice, up to ten years each time. Except for force majeure events, production lease holders are required to carry out their activities during the licence term without any interruption, or risk being exposed to administrative fines under the Turkish Petroleum Law.
If the lease term has expired and TPAO does not conduct production activities at that location, a public auction process may be held by GDMPA, with the approval of MENR, in order to issue a new production lease for the same field.
In addition to the above-mentioned sector-specific licences, environmental permits (eg, an environmental impact assessment report, environment permit and licence certificate) may also be required in order to conduct exploration and production activities. In addition, a workplace opening and operating licence should be obtained from the relevant municipality or governorship (depending on the location).
There are two different types of guarantees – namely, an investment guarantee and a loss and damages guarantee, which petroleum right holders should provide to GDMPA in the form of bank letters of guarantee.
Exploration licence applicants for onshore areas are required to provide an investment guarantee in an amount corresponding to 2% of the total investment required to realise the work programme, submitted together with their applications. If, however, the exploration licence application is in relation to an offshore area, the amount of guarantee will be equal to 1% of the total investment. In both onshore and offshore licences, guarantees are required for both the initial licence application and any licence term extension request. The amount of the investment guarantee corresponding to the annually realised rate of the committed work programme is returned to the petroleum right holder at the end of the relevant period.
Investigation permit holders, exploration licence holders and production lease holders are required to provide collateral to secure compensation for any damages that might be caused during their petroleum-related activities. The amount of the loss and damages guaranteed to be paid per hectare is 5/10,000 of the required application fee for investigation permits applicants, 1/1,000 of the required application fee for exploration licence applicants and 5/1,000 of the required application fee for production lease applicants. The President has the authority to increase or decrease this rate by 50%. This guarantee is returned to the licence holder one year after the announcement of the termination of the relevant petroleum licence in the Official Gazette, provided that no loss or damage has occurred and that no third-party claims have been made regarding this guarantee. In the event of any loss or damage, the amount of the guarantee that remains following the compensation of such loss and damage will be returned to the licence holder.
At the production stage, explorers or operators should also pay the state share (devlet hissesi) in cash on a monthly basis, which is equal to one-eighth (12.5%) of the petroleum produced from the area subject to the production lease.
Income generated from petroleum activities is subject to corporate tax. Petroleum right holders must make the necessary withholdings and declarations, as required under Income Tax Law No. 193 (Gelir Vergisi Kanunu) and Corporate Tax Law No. 5520 (Kurumlar Vergisi Kanunu). As per the Turkish Petroleum Law, the sum of the taxes that a petroleum right holder is liable to pay or withhold will not exceed 55% of the licensee’s taxable income.
Moreover, if a licensee imports materials, tools, fuel and transfer vehicles to be used for petroleum activities or procures such items from a domestic provider, the licence holder will be exempt from custom duties and levies and stamp tax, unless GDMPA categorises these items as being unsuitable or the President decides otherwise.
Expired production leases are not automatically returned to TPAO; these sites may be auctioned by GDMPA. However, TPAO has the right of first refusal in respect of such fields; therefore, MENR should initially confirm with TPAO whether it wishes to acquire the fields. If TPAO’s response is in the affirmative, the fields should be returned to TPAO.
As a state-owned entity, TPAO is subject to a simplified procedure for expropriation compared to private investors. TPAO files its expropriation requests directly with GDMPA, and GDMPA conducts the expropriation in favour of TPAO, provided MENR approval is obtained.
The old Petroleum Law No. 8659, dated 16 March 1954, previously imposed an obligation on petroleum right holders to provide vocational training or internships in relevant Turkish or foreign institutions to a certain proportion of their Turkish employees. The number of Turkish personnel benefiting from this obligation would not have been less than one-quarter of the total number of foreign personnel employed by that licensee.
However, unlike the old Petroleum Law, the current legislation does not impose any requirements for the use of local goods and services, local employment or training programmes in upstream operations.
The exploration licence holder has to notify GDMPA of any petroleum discovery made during the term of the exploration licence. GDMPA will then review the discovery application and either register the discovery or reject the application. If GDMPA registers the petroleum discovery submitted by the licence holder, the licence holder will be entitled to apply for the grant of a production lease.
Upon the registration of the discovery of petroleum, but before the grant of the production lease, the licence holder is under an obligation to continue with the production of the petroleum, develop the petroleum field and sell the petroleum produced. These activities will constitute the basis for the production lease. The licence holder must then submit a plan for the development of all discoveries in the petroleum field to GDMPA within six months of the registration date of the discovery with GDMPA.
Production leases are granted by GDMPA for a maximum term of 20 years, commensurate with the applicant's business and financial investment plans. If production does not commence within one year or is suspended at any stage and not resumed within the 180-day period granted by GDMPA, the relevant production lease will be cancelled.
In general, all administrative acts are subject to judicial review in Turkey, including the decisions of state authorities and administrative fines imposed by such authorities. MENR usually tries to find an amicable solution in any disputes that arise.
According to the Turkish Petroleum Law, all objections made by applicants or licensees, and all disputes arising between them, should be directed to MENR, which then concludes these applications. However, MENR’s decisions on licence applications, investigation permits, exploration licences or production leases can be challenged before the Council of State (Danıştay), which will act as the court of first instance for the relevant dispute.
Please refer to 2.1 Forms of Allowed Private Investment in Upstream Interests, 2.2 Issuing Upstream Licences/Obtaining Petroleum Rights and 2.3 Typical Fiscal Terms Under Upstream Licences/Leases for a general overview of upstream licences.
The obligations of petroleum right holders include refraining from any direct or indirect dangerous acts or activities that would jeopardise human health, the environment or cultural assets, and adopting all necessary measures in a manner to eliminate any circumstances that are potentially hazardous.
Petroleum right holders may relinquish their exploration licences, either in whole or in part, with at least one month's prior notice, and their production leases with at least three months' prior notice, by filing an application to the GDMPA and notifying any other public institutions that are associated with the relevant field. Any rights arising from the exploration licence or the production lease expire for the relinquished field on the date of such application.
Upon termination of their rights, petroleum right holders must reinstate the field to its previous condition. If the petroleum right holders move out of the field and fail to remove any movable or immovable properties on that field within six months of the termination date of the licences, the ownership of such properties shall transfer to the owner of the land. In addition, the licence holders must compensate fully and make necessary payments to the owner of the land for all losses incurred, as well as depreciations in production (eg, agricultural yield) or operating income to which the owner would originally be entitled.
Licence holders are allowed to export 35% of the petroleum, crude oil, natural gas and petroleum products generated from commercial discoveries made after 1 January 1980 if such products are produced onshore, and 45% if such products are produced offshore. Both the remaining volume of crude oil, natural gas and other petroleum products produced from commercial discoveries made after 1 January 1980 and all crude oil, natural gas and other petroleum products generated from the fields discovered before 1 January 1980 are reserved for domestic consumption.
There are two types of transfers:
The transfer of upstream licences upon the expiry of their terms will be made in accordance with the procedure detailed in 2.5 National Oil or Gas Companies.
If share transfers lead to a change of control in the licensed entity both the transferor and the transferee should file an application to GDMPA, prior to the proposed transfer, together with their reasoning for the proposed transfer. GDMPA will review the application and send it to MENR together with its opinion. If MENR provides its consent to the transaction, the closing for the transfer of shares should be completed within 60 days of the date on which MENR issued its consent. Evidentiary documentation showing such a change should be provided to GDMPA.
Exploration licences and production leases, as well as petroleum rights arising from them, may be subject to encumbrances in favour of third parties, provided that the prior consent of GDMPA has been obtained and that these pledges are registered with the petroleum registry kept by GDMPA.
The grant or transfer of exploration licences and production leases, as well as the establishment of any encumbrances on them, must be published in the Official Gazette and registered with the petroleum registry.
GDMPA may refuse to give its consent to the transfer of shares, licences or leases, or to the establishment of any encumbrance over the shares of a licensed entity or over the transfer of licences, due to reasons such as a lack of experience or a lack of financial and technical capacity.
Currently, upstream operations in the oil and gas business do not make up a significant portion of the Turkish market, as production rates are not very high. In line with the existing level of operations, no legal or regulatory restrictions are imposed on production rates. On the contrary, upstream activities are supported through various arrangements and incentives. Furthermore, Turkey is not a member state of OPEC or OPEC+ and therefore is not subject to OPEC quotas, OPEC+ or other restrictions.
According to the Petroleum Market Law and the Natural Gas Market Law, a licence is required in order to perform market activities regulated under such legislation. Licence applications are made to EMRA. Licensees are entitled to benefit from the expropriation process if required by the licensed activities. Please see 3.10 Rules for Third-Party Access to Infrastructure for details on the legal framework for expropriation.
The Natural Gas Market Law states that BOTAŞ is the owner of all existing, under-construction or planned sections of the national natural gas transmission networks. However, the law permits new transmission companies to be licensed to construct new pipelines, to form a connected system with the existing lines for the purpose of transmission, and to operate such newly constructed pipelines. As the only natural gas transmission licensee, BOTAŞ is effectively a monopoly in transmission activity.
While the Natural Gas Market Law provided for the full opening of the market to private companies in 2009, BOTAŞ maintains its dominant position in the import of natural gas in Turkey. Pursuant to current legislation, import companies cannot enter into new gas sale and purchase contracts (except for the purchase of LNG, compressed natural gas (CNG), and spot LNG) with countries that have effective gas sale and purchase contracts with BOTAŞ until such contracts expire. New entrants are not, at present, allowed to import gas from countries with which BOTAŞ has contracts, such as Russia, Azerbaijan, Turkmenistan and Iran. This restriction on executing contracts with BOTAŞ’s existing counterparties is not applicable for LNG, CNG and spot LNG imports. A further requirement was imposed on BOTAŞ, in order to decrease its dominant role in the market: to launch tenders until 2009 in order to transfer BOTAŞ’s existing natural gas purchase agreements to third parties for their access to the import system, entirely or partially. Various takeover tenders have been realised over the past few years, and, as a result, private investors’ market share in natural gas imports has been announced as more than 20%.
BOTAŞ cannot execute a new natural gas purchase contract until the share of gas imported by BOTAŞ falls to 20% of the yearly national consumption. In addition, in order for a private company to import gas from other companies, with which BOTAŞ does not have a contract, consent is required from the Energy Market Regulatory Authority Board (EMRA Board).
There are no other major legal or practical barriers that would apply to private investors for natural gas market entry. Nevertheless, until and unless the existing restrictions on natural gas import activities are restructured and adapted to the current realities of market activity, BOTAŞ will continue to be a significant and dominant player in the natural gas import.
Since the liberalisation process started in the 1990s, the most significant type of off-takers of natural gas for power generation purposes have been natural gas combined cycle power plants. The Build Operate (BO), Build Operate Transfer (BOT) and Transfer of Operation (TOR) models were all utilised in the development of these facilities. In 2001, EMRA was given the mandate to issue licences for electricity generation plants, succeeding the former state monopoly. As per the information provided on MENR’s official website, natural gas-fired plants constituted about 28.6% of the total capacity of commissioned electricity generation facilities as of the end of September 2019, with an installed capacity of 25,945 MW.
In the natural gas market, companies holding transmission licences are not permitted to discriminate between third parties of equal status. Such companies may reject third-party access requests only on the basis of the grounds exhaustively listed under the Natural Gas Market Law.
Third-party access to the transmission network and the activities of natural gas storage facilities is regulated under the Transmission Network Operation Regulation (Doğal Gaz Piyasası İletim Şebekesi İşleyiş Yönetmeliği) and the BOTAŞ Transmission Network Operation Principles (İletim Şebekesi İşleyiş Düzenlemelerine İlişkin Esaslar) (the Network Code). In line with the Network Code, BOTAŞ currently operates the transmission network and manages and co-ordinates the access of third parties to it. In order to access the network, a connection agreement must be entered into between BOTAŞ, as the sole transmission licensee and owner of the existing national transmission network, and the respective import, wholesale, generation or export company.
Following the connection agreement, a standard form transportation contract should be entered into for the transportation of the gas through the transmission system, as well as for capacity allocation at an entry or exit point. The Network Code sets out detailed technical criteria and formulae for the calculation of tariffs applicable to the natural gas transmission activities of third parties.
In order to conduct oil and gas market activities, licence applications should be made to EMRA, which will issue a final decision within a maximum of 60 days from the application date. If the relevant department of EMRA determines that the application is complete, it will notify the applicant to deposit the application fee in an amount corresponding to 1% of the licence fee.
Applicants should pay such fees within ten days of receiving EMRA’s notification. Following payment, EMRA will review and evaluate the licence applications. EMRA will then prepare a report on its evaluation and submit it to EMRA Board, which is the decision-making body of EMRA for licence applications, and for rendering the final decision on licence applications.
As per the Petroleum Market Licence Regulation, EMRA Board annually determines the specific revenue share (gelir payı) that should be paid by processing licence holders (as explained in 3.8 Other Key Terms of Each Type of Downstream Licence) engaged in the production of biodiesels to refinery holders. The rates determined by EMRA Board for 2020 are as follows:
Licence holders not engaged in the production of biodiesels are not required to pay any income share.
However, all licence holders should pay a contribution share (katılma payı) to EMRA on an annual basis in two equal instalments, except those who have free user licences. The amount of contribution shares are calculated by multiplying the total net sales of the licensee made in the relevant year by the annual contribution ratio as decided by EMRA Board each year.
In parallel to the foregoing, natural gas licence holders are also required to pay contribution shares to EMRA.
Tariffs and pricing policies in petroleum and natural gas activities are determined by EMRA under the Petroleum Market Pricing System Regulation (Petrol Piyasası Fiyatlandırma Sistemi Yönetmeliği) and the Natural Gas Market Tariffs Regulation (Doğal Gaz Piyasası Tarifeler Yönetmeliği), respectively.
Downstream licence holders do not benefit from a special tax regime.
The only special tax incentive available is for activities involving the transportation of foreign crude oil and natural gas through transit pipelines and the construction and modernisation of pipelines; as such, these activities are exempt from value-added tax in accordance with the Value Added Tax Law No. 3065.
BOTAŞ’s natural gas-related receivables are subject to the Law on Collection of Public Receivables No. 6183 (Amme Alacaklarının Tahsili Usulü Hakkında Kanun), which allows them to benefit from special treatment in terms of debt collection. However, private market players do not benefit from such a mechanism.
Furthermore, the relevant legislation imposes a restriction on the scope of market activities that may be conducted by licence holders. Accordingly, a natural gas market licensee performing activities in the natural gas market may only participate in one of the legal entities performing activities in a field other than its own field of activity. A licensee, however, cannot participate in any legal entity performing activities in its field of activity, nor establish a separate company. However, such a restriction is not applicable to BOTAŞ or its existing or future subsidiaries.
Please see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations regarding BOTAŞ’s dominant status in relation to natural gas import activities.
In parallel to upstream operations (as explained in 2.6 Local Content Requirements Applicable to Upstream Operations), there are no requirements for the use of local goods and services, local employment or training programmes in downstream operations.
Pursuant to the Petroleum Market Licence Regulation, licences granted by EMRA may be summarised as follows:
The Petroleum Market Law imposes a national petroleum storage (ulusal petrol stoğu) obligation, in order to secure the availability of petroleum against fluctuations in supply. To that end, refinery, fuel oil and distributor licence holders are required to store fuel products in the amount of 20 times the daily average supply of the previous year in their own storage facilities.
Except for refinery licences, there are no domestic supply requirements. In the case of refinery licences, licensees are required to prioritise the procurement of crude oil from local producers as opposed to foreign suppliers.
All licences are granted up to a maximum of 49 years. Licence holders must file a written or electronic application with EMRA for an extension to the licence term between two and six months prior to the expiry of the licence term.
Licences are terminated by the decision of EMRA Board, among others, upon the occurrence of the following events:
In the case of a voluntary termination, refinery, transmission and storage licensees would be subject to the following additional requirements:
Unless terminated earlier due to the foregoing termination grounds, licences terminate upon the expiry of the licence term.
The legislation further imposes an insurance obligation on licensees, under which licensees should maintain necessary insurance coverage for physical or material damages that may be incurred by third parties due to their activities. Apart from imposing a general insurance requirement on all licensees, the legislation specifies that refinery, transmission and storage licensees should maintain an all-risks insurance policy for their facilities, storage units and petroleum. Refinery licensees should further maintain financial liability insurance to secure their portion of national petroleum storage volume.
As per the Natural Gas Market Licence Regulation, the types of licences and authorities granted are summarised as follows:
Natural gas market licences terminate upon the expiry of the term of the licence, the bankruptcy of the licence holder or a request for termination of the licence by the licence holder (except for refinery, transmission and storage licences).
Natural gas market licences are granted for a term ranging between ten and 30 years. Licensees may file an extension request with EMRA between nine months and one year prior to the expiry of the relevant licence. Similar to the petroleum market requirements, natural gas market players should also maintain sufficient insurance coverage against possible risks that may arise during their activities. Apart from imposing a general insurance requirement on all licensees, the legislation specifies that transmission, distribution, CNG and storage licensees should maintain an all-risks insurance policy against natural disasters, fire and accidents, etc.
In respect of publicly owned land, petroleum or natural gas licence holders may request from EMRA to establish property rights other than ownership over publicly owned property (such as usufruct rights, servitude rights or construction rights), or to lease the publicly owned property required for the licensed activities on a long-term basis. If EMRA approves the licence holder’s request, it will then procure the establishment of such rights in favour of the licence holder according to the needs of the project. Licence holders are required to pay the costs for the grant of those rights, and the term of such rights will be limited to the licence term.
If, however, the land is private property, an expropriation process would need to be triggered, equivalent to the common law process of eminent domain.
Both the Petroleum Market Law and the Natural Gas Market Law allow the expropriation of private property if it is required for licensed activities. Under the Petroleum Market Law, land rights necessary for petroleum activities where private property is affected should, in principle, be acquired through negotiation between the licensees and the landowners. If this is not possible, land rights may be acquired through expropriation. According to the Natural Gas Market Law, expropriation proceedings may be initiated to perform relevant natural gas market activities.
Following the expropriation process, under both the Petroleum Market Law and the Natural Gas Market Law, the State Treasury becomes the owner of the property, which usually allocates the land directly to the licence holder by the granting of a contractual usage right or property right other than ownership over the relevant land. In some instances, the State Treasury makes such an allocation to the relevant state entity (such as BOTAŞ), which then extends the right to the licensee. In both cases, the licence holder pays the expropriation fees.
According to the Petroleum Market Law, expropriation may be limited to the following activities:
Unlike the Petroleum Market Law, the Natural Gas Market Law does not specify areas that may be subject to expropriation; such areas will be determined depending on the needs of the project.
Currently BOTAŞ is the only natural gas transmission licensee and the sole owner of the existing transmission network. Please see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations and 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly for details on private parties’ access to the transmission network.
A large portion of state-owned distribution companies have been privatised (some have yet to be finalised), with a notable exception being the distribution company in İstanbul (İstanbul Gaz Dağıtım Sanayi ve Ticaret Anonim Şirketi – İGDAŞ). EMRA is responsible for granting distribution licences for the supply of gas to cities with no natural gas distribution network. As BOTAŞ’s transmission network reaches a new city, EMRA organises a natural gas distribution licence tender for that city. Access to the distribution network is regulated separately under the Natural Gas Distribution and Customer Relations Regulation (Doğal Gaz Piyasası Dağıtım ve Müşteri Hizmetleri Yönetmeliği). Distribution companies are required to connect all consumers within their designated region upon request. A connection agreement between the parties is executed and the technical connection and service lines are established. Subscription agreements, transportation service agreements and delivery services agreements may also be executed between the distribution companies, natural gas market licensees and retail consumers (including eligible consumers).
Pursuant to the Petroleum Market Law and the Petroleum Market Licence Regulation, a refinery, distributor or dealership licence is required in order to conduct the distribution and/or sale of petroleum. Under the Natural Gas Market Law, the wholesale and distribution of natural gas is permitted by obtaining licences for such activities from EMRA.
Refinery licence holders are obliged to store petroleum/petroleum products equivalent to 20 times the daily average supply in storage facilities in order to satisfy the national petroleum storage obligation. Furthermore, distribution licence owners are obliged to have the technical capacity, equipment and financial capability to satisfy annual white product (gasoline and diesel oil) sales in the amount of 60,000 tons.
Under the Natural Gas Market Law, the annual amount of imported natural gas held by any wholesale company cannot exceed 20% of the annual national gas consumption forecast, which is determined by EMRA on an annual basis.
Import licence holders may conduct the wholesale of natural gas without obtaining a separate wholesale licence. To that end, it is sufficient for such legal entities to inform EMRA about their suppliers of natural gas and the types of transportation methods they intend to use, as well as their technical and financial capabilities.
A producer of natural gas is entitled to sell the gas it produces directly to eligible consumers, as long as the volume of gas sold in such a manner does not exceed 20% of the national consumption forecast, as determined by EMRA for that year. It may sell the excess quantity of natural gas to import companies, distribution companies or wholesale companies. Producers may also export the gas produced, if they obtain an export licence.
As for restrictions concerning significant off-takers from the oil and gas markets, concurrent ownership limitations and unbundling requirements apply to electricity generation and distribution licensees, which are licensed under Electricity Market Law No. 6446 and secondary legislation issued by EMRA.
The Turkish Petroleum Law imposes an export capacity restriction: only 35% of petroleum, crude oil, natural gas and petroleum products produced onshore and 45% of petroleum, crude oil, natural gas and petroleum products produced offshore may be exported. The remaining yield must be retained in Turkey to fulfil domestic demand. Furthermore, the Natural Gas Market Licence Regulation mandates that export cannot interrupt local need or the supply system, which becomes relevant especially in the transfer of natural gas via pipelines. Exporters of natural gas must adhere to the technical specifications introduced by EMRA, taking into account the capacity of the transmission network and the export exit points.
In respect of natural gas export, if a petroleum right holder producing natural gas wishes to export its production, it should obtain a natural gas wholesale licence. Any other party wishing to export natural gas must obtain an export licence from EMRA. Accordingly, export licence holders are entitled to buy natural gas from production, wholesale or export companies, and to export the natural gas to foreign buyers.
As per the Petroleum Market Licence Regulation, crude oil and petroleum products may be exported freely. However, publicly available records reveal that no crude oil is currently being exported, solely petroleum products. In order to export petroleum products, various export authorisations must be obtained from the relevant state authorities, including GDMPA and EMRA, depending on the type of activity.
Pursuant to the LNG Market Licence Regulation, LNG distribution licence holders and refinery licence holders are entitled to export LNG.
There are no taxes or duties applicable for the export of these products. On the contrary, if export companies have purchased these products from local parties by paying VAT or special consumption tax, there are certain incentives available for the export companies to have these taxes reimbursed.
The Petroleum Market Licence Regulation and the Natural Gas Market Licence Regulation prohibit the transfer of downstream licences, but both provide for an exception in favour of project lenders (ie, banks and other financial institutions). Accordingly, depending on the terms and conditions of the financing agreements, lenders are entitled to request EMRA to reissue the subject matter licence in the name of another legal entity, provided that all of the initial licence holder’s undertakings in relation to the licence are transferred to that third party and the new licensee satisfies the criteria sought for licence applicants within the scope of the abovementioned regulations.
Applications for downstream oil and natural gas licences can only be filed by Turkish companies. That being said, there is no limitation that prevents a Turkish licensee company from being wholly or partly owned by foreign individuals and/or legal entities.
The Foreign Direct Investments Law No. 4875 (Doğrudan Yabancı Yatırımlar Kanunu) provides that all companies established in Turkey are accepted as Turkish companies, regardless of the nationality of their shareholders. It also sets forth that foreign investors must be treated the same as domestic investors. As such, foreign direct investments cannot be expropriated or nationalised, except as justified by public interest and only against payment of compensation and in accordance with the due process of law, which is available to both Turkish citizens and foreign investors alike.
The settlement of disputes arising out of investment agreements may be settled by the local courts (having jurisdiction over the dispute) or through national or international arbitration or alternative dispute resolution, as the case may be, where the conditions in the respective legislation are met and subject to the mutual agreement of the respective parties.
International arbitration is frequently used as a method of dispute resolution. Turkey is a signatory to both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention on Settlement of Investment Disputes between States and Nationals of Other States. In addition, Turkey has executed bilateral investment treaties with 98 countries, 76 of which are currently in force, including with the United States; all European Union Member States, excluding Ireland; all OECD member countries except Iceland, Canada, Norway and New Zealand; a number of Asian countries such as China, Japan and the Republic of South Korea; and Middle Eastern countries such as Lebanon and Iran.
Environmental Law No. 2872 and its secondary regulations are the main pieces of legislation that govern environmental matters. In addition, the Turkish Petroleum Law, the Petroleum Market Law, the Regulation on the Implementation of the Turkish Petroleum Law, the Petroleum Market Licence Regulation and the Natural Gas Market Law impose rules and standards relating to environmental protection, as follows:
The main regulatory authority regarding environmental safety is MoE (https://www.csb.gov.tr/), whose primary responsibilities are the protection of the environment, the prevention of environmental pollution and the setting forth of standards and procedures for environmental safety.
Major petroleum projects are subject to an environmental impact assessment process, and are also required to obtain certain environmental licences prior to commencement of their upstream operations.
Accordingly, as per the Environmental Impact Assessment Regulation, projects that carry a high risk of environmental pollution are subject to an EIA process. Facilities that produce more than 500 tons of crude oil per day or more than 500,000 m3 of natural gas or shale gas per day, and facilities that transit petroleum or gas via pipelines that are longer than 40 km and have a diameter of at least 600 mm, are obliged to file an EIA report and receive an affirmative opinion from MoE before commencing any activity. With respect to projects falling within the scope of the regulation, unless an affirmative opinion or an “EIA not required” decision is issued, no approval, permit, incentive or usage licence can be issued. MoE has the authority to evaluate the application and make the final decision.
In addition, as per the Environmental Permit and Licence Regulation, facilities engaged in certain petroleum activities, as detailed under Annexes I and II of the Environmental Permit and Licence Regulation, are required to obtain a temporary activity permit (geçici faaliyet belgesi) prior to the commencement of their activities. However, they should obtain an environmental permit (çevre izni) or environmental permit and licence certificate (çevre izin ve lisans belgesi) within a maximum period of one year following the issuance of the temporary activity permit.
Furthermore, in order to prevent any possible accidents, licensees are also required to comply with various obligations imposed under specific legislation throughout the conduct of their activities, summarised as follows:
The Sea Pollution Law and the Regulation on the Implementation of the Law Regarding the Principles of Emergency Intervention and Compensation of the Damages in Cases of Sea Pollution from Petroleum and other Dangerous Materials (the Sea Pollution Regulation) regulate marine safety and the prevention of marine pollution.
According to the Sea Pollution Law, offshore facilities are obliged to prevent any pollution or potential hazard, and should mitigate any damage in the event that a polluting event occurs and provide compensation in respect of all damage caused. Such facilities are also required to hold liability insurance for damages covered under the Sea Pollution Law. Otherwise, offshore facilities will not be permitted to conduct their activities.
As per the Turkish Petroleum Law and its secondary legislation, upon the expiry of an upstream licence, petroleum right holders are required to reinstate the site to the physical status it held prior to the commencement of their upstream activities. Furthermore, if licence holders fail to remove any of the movable or immovable properties located on the site within a six-month period following the expiry of their licences, ownership of the movable or immovable property left on the site will pass to the owner of the site.
Turkey has undertaken a wide range of legislative initiatives and acceded to certain international agreements relating to climate change, the most significant of which are as follows:
As a non-EU member, Turkey has not taken steps to implement the EU Climate Change Package. However, Turkey recently became a party to the Kyoto Protocol, which shares the primary goals of the EU Climate Change Package, including a reduction in greenhouse gas emissions, increasing the proportion of energy produced from renewable energy resources and a reduction of energy consumption compared with projected levels by way of improving energy efficiency. Turkey is in the process of preparing legislation to conform to the requirements of the Kyoto Protocol, which will ultimately result in compliance with EU requirements. However, Turkey is no longer among the Annex II signatories. Therefore, Turkey's status under the Kyoto Protocol is limited to general undertakings without being bound by quantitative limitations on current emissions levels.
In this context, MoE leads domestic climate change strategies and regulates the government’s National Climate Change Strategy and Climate Change Action Plan. Accordingly, MoE introduced voluntary carbon emission markets in late 2010 in compliance with the United Nations Framework Convention on Climate Change and the Kyoto Protocol. MoE introduced international carbon emission trading schemes and adopted corresponding national regulations through a board, namely the Climate Change and Air Management Coordination Council. Currently, there is no binding emissions reduction undertaking on a national level, and carbon emissions trading proceeds on a voluntary basis.
As long as a producer holds the necessary licences and authorisations (whether market related – ie, upstream operations – or environmental, health and safety related) and complies with the terms and conditions of such licences as well as the applicable legislation in all respects, then neither the government nor the relevant state authorities are entitled to limit oil and gas development or restrict the operations of the licence holder.
Unconventional upstream activities (such as the exploration for and production of shale gas, shale oil, aquiclude gas, gas hydrates, bituminous coal and coal bed methane) are regulated under the Turkish Petroleum Law, the Regulation on Implementation of Turkish Petroleum Law and secondary regulations. There is no special regime for unconventional upstream interests.
Activities concerning LNG fall within the Natural Gas Market Law as well as secondary legislation, namely the Natural Gas Market Licence Regulation, the LPG Market Licence Regulation (Sıvılaştırılmış Petrol Gazları (LPG) Piyasası Lisans Yönetmeliği), the Regulation on the Technical Regulations Applicable to the LPG Market (Sıvılaştırılmış Petrol Gazları Piyasasında Uygulanacak Teknik Düzenlemeler Hakkında Yönetmelik) and the Regulation on the Principles and Procedures for the Use of LNG Storage Facilities (Sıvılaştırılmış Doğal Gaz Depolama Tesisi Temel Kullanım Usul ve Esaslarının Belirlenmesine Dair Yönetmelik). In order to conduct LNG activities, companies are required to obtain a relevant licence from EMRA. Furthermore, the Regulation on the Procedures and Principles for the Use of LNG Storage Facilities governs the process for the establishment of LNG storage facilities.
Moreover, as per the Council of Ministers Decree No. 2012/3305 (Yatırımlarda Devlet Yardımları Hakkında Karar), LNG investments amounting to a minimum of TRY50 million are entitled to benefit from various regional incentives, including value-added tax exemption, customs tax exemption, tax deduction and advantages relating to social security premiums.
In line with Turkey’s goal of establishing a liberalised oil and gas market capable of competing with more cost-effective markets in other countries, various legislative instruments have been brought into force over the past decade.
These legislative instruments are aimed at establishing an environment conducive to the safe and secure supply of oil and gas from both domestic and foreign sources to consumers in Turkey under transparent and regulated market conditions. Furthermore, Turkey’s geographical advantages allow it to extend to wider regions where there are large energy reserves, such as the Middle East and Asia, while at the same time serving as a safe, cost-efficient and non-stop energy transit corridor for western markets. Despite the fact that production activities in the Turkish oil and gas markets are rather limited, Turkey long ago began to play a leading role as an internationally significant oil and gas transit state in major oil and gas pipeline transportation projects, some of which pass solely through or terminate within Turkish borders.
There have been no material changes to the oil and gas legislation over the past year, but provisions of the Petroleum Market Law and Liquefied Petroleum Gas (LPG) Market Law in relation to the administrative fine amounts applicable in 2020 have been amended. On the other hand, there are a significant number of draft legislative pieces in the pipeline, mainly in relation to the importation of compressed natural gas (CNG) as well as industrial control systems security principles applied in the petroleum and natural gas markets and principles concerning the procurement of crude oil from local producers. As these drafts have not yet been enacted, further changes to the existing drafts are anticipated.
Since the start of the market liberalisation efforts in the 2000s, Turkey’s demand for energy has steadily increased. The main policymaking body of the energy sector, the Ministry of Energy and Natural Resources (MENR) predicts that Turkey’s energy use will increase by 50% over the next decade and that this trend is likely to continue in the long term. Despite these positive projections, the Turkish energy market has experienced its share of problems following the global lock-downs in response to the fight against COVID-19. However, the Turkish market is still optimistic that the country’s investment environment will soon return to normal given the ever-increasing need for energy and the measures being taken and expected to be introduced by the Turkish government to ensure political and economic stability.
There follows a brief explanation of the impact recent developments have had on the Turkish oil and gas industry, and an outline of some of the finalised and possible future oil and gas pipelines transiting through Turkey. The last section herein will analyse MENR’s new 2019-2023 Energy Strategy Plan in light of the current investments into the oil and gas sector.
The Impact of Global Supply and Demand Fluctuations on the Turkish Oil and Gas Industry
Global industry was hit hard when the spread of COVID-19 virus escalated to a pandemic and caused a drop in natural gas and oil demand. Soon afterwards, the Energy Market Regulatory Authority (EMRA) declared the situation a force majeure event, and various support mechanisms were made available to market players. One such mechanism was a time extension on investment incentive certificates as per a recent Presidential Decision. Accordingly, energy projects that were granted an investment incentive certificate before 11 March 2020 but that could not be completed due to the COVID-19 outbreak may be granted an extension of up to one year.
Given the unprecedented challenges the world is facing, some Turkish oil and gas companies may not be able to perform their obligations on time, and might decide that they have a higher chance of survival through mergers and consolidation. This is especially true for players in the Turkish fuel distribution industry, who suffered a loss of revenue due to the sudden fall in both individual and industrial demand. For investors with resources and an appetite for risk, these financially distressed companies can serve as profitable acquisition opportunities.
Oil and Gas Pipeline Projects
Turkey’s oil and gas production is minimal when compared to its naturalresource-rich neighbours such as Russia, Azerbaijan, Iran and Iraq. Coupled with its geographical position wedged between Europe, Russia and the Middle East, this gives Turkey strategic significance in becoming an energy hub between the eastern supply of oil and natural gas and the western demand for them. Nevertheless, it is hard to say that the country has reached its potential in terms of bringing together this supply and demand. A number of international oil and gas pipeline projects are already transiting Turkey, being constructed or in the planning phase.
One of the first major pipeline projects realised was the Baku-Tbilisi-Ceyhan (BTC) pipeline, which links the Sangachal terminal on the shores of the Caspian Sea to the Ceyhan marine terminal on the Turkish Mediterranean coast. BTC became operational in June 2006 and, by the end of the first quarter of 2020, the 1768 km long pipeline had carried a total of 455 million tonnes of crude oil to Ceyhan, which was eventually distributed around the world via tankers.
Another noteworthy project is the TurkStream Gas Pipeline, a landmark project bringing together Turkey and the Russian Federation, which started its operations and gas supply at the end of 2019, as planned. The TurkStream project consists of the construction, commissioning and operation of a new gas pipeline system to transport natural gas from the vast reserves at the disposal of the Russian Federation to Turkey and South-Eastern Europe. The project has a maximum technical design capacity of 31.5 billion cubic meter (bcm) per annum, approximately half of which is to be delivered to Turkey’s natural gas transmission network operator, BOTAŞ (Boru Hatları ile Petrol Taşıma Anonim Şirketi). The pipeline runs offshore for approximately 900 km through the Black Sea and lands onshore to reach the receiving terminal in the Kırklareli province of Turkey on the Black Sea coast, before it finally moves the natural gas further west to European markets.
Turkey and Russia have a track record of collaborating on offshore pipelines carrying natural gas, as demonstrated by the Blue Stream project, which became operational in February 2003 with a design capacity of up to 16 bcm per annum. TurkStream distinguishes itself from Blue Stream by its greater natural gas transportation capacity and its proximity to Turkey’s most industrialised areas scattered around Istanbul. However, the main aspiration behind TurkStream seems to be regional benefits, rather than solely targeting the Turkish natural gas market. This transit pipeline system is designed to extend to Turkey’s neighbouring countries for the delivery of Gazprom’s natural gas exports to clients in South-Eastern Europe, strengthening Turkey’s position as an oil and gas transit hub. This role can be maintained subject to the state of bilateral relations between Turkey and the Russian Federation, as well as the relationship between the Russian Federation and the European Union. The third and perhaps most significant factor in the equation on which the TurkStream project is built seems to be the growing natural gas demand seen in Turkey to support the country’s economic growth against a backdrop of very low domestic natural gas production.
Provided that the political rapprochement between Turkey and Russia continues at its current pace, their partnership in the energy sphere may continue to expand, perhaps increasing the volume of natural gas exports passing through Turkey and into Europe. The Russian Federation has given a clear signal that the transit of Russian natural gas through Turkey addresses its energy security concerns, which may lead to increased capacity and additional pipeline routes to satisfy European natural gas demand in the long run.
Furthermore, a trilateral international agreement was signed between Greece, Israel and the (Greek Administration of) Cyprus to build a 1,900 km submarine pipeline to carry natural gas from the Eastern Mediterranean’s gas fields to Greece and Italy on 2 January 2020 (EastMed). This would be a very long pipeline passing through very challenging marine areas from an engineering perspective: 700 km undersea to Crete, 200 km on land in Crete, and another 200 km to the Greek mainland. Estimates show that the cost of this pipeline would be at least EUR6 billion, and that the price of gas at the destination would need to exceed USD8/MMBtu to make the pipeline commercially viable. Considering that gas prices were around USD1.7/MMBtu at the time the agreement was made, economic feasibility might actually bring the relevant states around one table to agree on a new route for a pipeline passing through Turkey to transmit Eastern Mediterranean gas to the west, even though recent political tensions indicate that this kind of consensus between East Mediterranean governments is out of reach.
2019-2023 Energy Strategy Plan
According to EMRA, Turkey produced 34,712,676.927 tonnes of refinery petroleum products in 2019, a 38.84% increase compared to 2018. The total import of petroleum products in 2019 increased by 17.99% to 44,822,756.254 tonnes, whereas the total export of petroleum products in 2019 increased by 60.92 % to 14,281,813.497 tonnes compared to 2018. In terms of natural gas, in 2019 473.87 million Sm3 of natural gas was produced and offered for sale in Turkey. The amount of domestic production increased by 10.62% compared to 2018.
In order to maintain a sustainable increase in energy consumption, MENR releases a strategy plan every five years. The latest of these plans is the 2019-2023 Strategy Plan, which sets forth various objectives including strengthening the natural gas infrastructure, accelerating petroleum and natural gas exploration and production activities, continuing efforts to transform Turkey into an energy trading hub, and implementing strategies to improve co-operation and investment opportunities.
The increase of domestic oil and natural gas resource exploration activities is among the Turkish government’s objectives. Although many organisations in Turkey are involved in oil and gas exploration activities on various levels, the Strategic Plan focuses on intensifying these activities and increasing domestic players’ contact with foreign investors/sources for the purpose of domestic utilisation, further emphasising the importance of co-operation between private and public players to that end.
Being a country that depends on the importation of energy, Turkey’s reliance on natural gas leaves its economy exposed to fluctuations in gas prices. MENR aims to promote natural gas supply security by increasing the country’s total natural gas storage capacity to 10 bcm, which is also classified as a "primary performance indicator" in its new Strategy Plan. Accordingly, MENR will expand the capacities of the Tuz Gölü and Silivri underground gas storage (UGS) facilities and build a new Floating Storage Regasification Unit (FSRU) in Saros Bay.
Tuz Gölü and Silivri (Kuzey Marmara) Underground Natural Gas Storage Facilities
The Tuz Gölü UGS facility is being developed in the Sultanhanı district, 40 km south of Tuz Gölü in the Aksaray province of Turkey. The first six caverns of the UGS were put into service in February 2017. However, BOTAŞ is currently carrying out an expansion of the UGS to increase its capacity from 1.2 bcm to 5.4 bcm, which is expected to be completed by 2023. The first phase of the project was financed by the International Bank for Reconstruction and Development (IBRD) and the World Bank. Financing for the expansion project is being provided by the Asian Infrastructure Investment Bank (USD600 million), IBRD (USD600 million), the Islamic Development Bank (USD350 million) and others. The developer, BOTAŞ, is also investing USD735 million in support of the project. On a similar note, BOTAŞ aims to increase the working capacity of the Silivri UGS from 2.8 bcm to 4.6 bcm. The project is being undertaken by two major Turkish construction companies and is partly supported by the European Investment Bank. When completed in 2023, ongoing projects will raise Turkey’s storage capacity to 11 bcm – about 20% of its annual gas consumption. This would meet the 10 bcm target listed in the strategic plan while improving the country’s energy security.
Floating Storage and Regasification Units
EMRA defines FSRUs as a method to store natural gas in order to meet daily or seasonal fluctuations, and to compensate for natural gas shortage due to insufficiency or absence of supply. The Plan further aims to make Turkey an LNG supply centre in the Mediterranean district. Following the İzmir and Hatay/Dörtyol FSRUs, MENR plans to establish its third FSRU in the Saros Bay, which will have a regasification capacity of 20 million cubic meters per day. The project is envisaged to be completed by the end of 2022.
Oil and Gas Exploration and Production Activities
Considering Turkey’s dependency on the importation of energy, it is no wonder that the government has been working on various strategies to boost domestic oil and gas production for many years. Accordingly, MENR has devised a two-pronged strategy to tackle this issue in the Plan. The first step is to maximise extraction from existing oil fields by using unconventional methods. The Plan indicates that the oil produced by state-owned entities will increase from 36,923 to 70,000 barrels/day until 2023. The second step is to increase exploration activities. A major step taken in this direction has been MENR’s new strategy clearing the way for new business models in public/private co-operation to commence and increase production in explored reserves.
Spot and Derivative Markets
Interestingly, encouraging spot and derivative markets for trading oil and gas products comes into play as a scheme for market interaction, and the Strategic Plan lays out very promising targets that would help support Turkey’s role in the oil and gas market on a regional level if achieved. We will have to wait to see the details of the new tools that will be added to the government’s agenda in the forthcoming period to analyse whether the strategy will actually attract further foreign investors and support the transformation of the Turkish oil and gas sector to attract foreign investors.
It is also important to highlight the role and importance of EPİAŞ (Turkish Energy Exchange) at this point. EPİAŞ is an energy exchange incorporated under the Turkish Electricity Market Law and is responsible for operating energy commodities markets, including natural gas. With EPİAŞ and the transformation of the wholesale energy market, the reform process that started with the privatisations in the energy sector has taken another step forward toward liberalisation.
In line with the Strategy Plan, MENR generally intends to simplify the application and approval processes in the energy sector for investments, and plans to restructure the relevant legislation in a more investor-friendly manner. Having considered that the Turkish energy sector has attracted more than USD18 billion in foreign direct investment since 2002, it should come as no surprise if the Turkish oil and gas sector makes a V-shaped recovery in the fourth quarter of 2020.