Turkey: The Impact Of The New Draft Petroleum Law

Last Updated: 20 February 2013
Article by Nazlican Kartal and Nihan Seda Kisi

The new draft law of 2012 Numbered 5486 (the “New Draft Law”), has been presented to the Parliament for approval on 21 December 2012. This marks the first proper legislative action for the sector following the veto of the 2007 Petroleum Law by the President of Turkey which had been passed through the Parliament in 2007 and was Numbered 5574 (the “2007 Draft”). The New Draft Law is designed to get around the political issues raised in the 2007 Draft, and to increase domestic petroleum production, to improve the supply of national petroleum, to attract investors and to harmonise with petroleum legislation of the European Community.

The New Draft Law will also introduce new provisions that are designed to encourage companies to be more active in exploration, as well as opening up more licence areas by preventing companies acquiring licences just for trading on without making any exploration investment.

PROTECTION OF NATIONAL INTEREST

One of the criticisms of the 2007 Draft was that in contrast to the Petroleum Law 1954 Numbered 6326 which is currently in force (the “1954 Law”), it did not stipulate that “national interests” would be made a priority to achieve its stated purpose.

Details about how national interests would be protected were also excluded in other articles of the 2007 Draft. Thus, the 2007 Draft was vetoed by the President on the grounds of it being a risk to national security and that the proposal went against an article in the constitution which stipulates that no activity could be permitted which is above national security interests.

However, the New Draft Law adopts the wording of the 1954 Law, and thus national security will be made a priority when players seek to achieve the objective of exploring, developing and producing the petroleum resources of the country.

PAYMENT OF BONDS

Most importantly, the New Draft Law provides that any applicant for an Exploration Licence shall provide a bond equal to 2% of the financial investment amount specified in the presented work plan. This provision was also present in the 2007 Draft. However, the difference is that the New Draft Law provides a reduced rate of 1% for work plans focused on offshore exploration, since these projects will inevitably be of a higher value and therefore the acquisition by “speculators” will be less likely.

The bonds must be paid to the General Directorate within 30 days following the grant of the Exploration Licence or the finalisation of the extension time otherwise the Exploration Licence will be cancelled. The purpose of such provision is to eliminate those operators who obtain an Exploration Licence for speculation purposes so remain inactive in exploration and production activities in the field to which they have been granted a Licence. The Ministry of National Resources and Energy is making an effort to encourage only exploration companies which have a commitment to explore, and also wants to ensure fields can be proactively used by exploration companies who submit genuine and realistic investment plans.

On this basis Exploration Licences are more likely to be granted only to those investors with the necessary experience and financial standing to develop this particular sector. Relevant amounts under the bonds corresponding to the parts of the presented work plan which have been duly completed in that year shall be released to the relevant operators annually.

ROYALTY PAYMENTS

Another reason the 2007 Draft was vetoed was due to controversy over the royalty rates which are paid as a state share. It seems there were objections to these being reduced for off-shore exploration or difficulty of exploration conditions. Some commentators complained of ambiguity in the setting of the royalty payment levels for the oil produced in the country based on factors such as production rates, production from offshore areas, secondary production or low-gravity crudes.

With the New Draft Law, rates of royalties are determined as 1/8 of the total petroleum produced by the explorer or operator which amount is same as in the 1954 Law. This change is to be regretted since it now appears that there is no recognition or reduction of the royalty for more difficult exploration areas such as off-shore or deep well areas. A reduced royalty rate would have been an incentive to explorers to spend more on difficult exploration areas such as off-shore or deep well regions.

Also, in 2007 Draft, 50% of the royalty payments were required to be paid to the Governorship of the city area in which the Licence is located, whereas the New Draft Law does not make such a provision. Further, the 2007 Draft provides that the royalty payments must be made in cash, whereas the New Draft Law provides that payments can also be made in kind.

Furthermore, the States’ rental rights mentioned in the Article 18 of the 2007 Draft which was TRY 1 per hectare and at a rate of ¼ for off-shore for each Licence has been totally abolished in the New Draft Law.

INCOME TAX

In the 1954 Law, it stipulates that the corporate/income tax limit levied on the income of the licence holdersshall not exceed 55%, whereas in the New Draft Law, such limitation is reduced to 40% which is in line with the2007 Draft.

TERM OF THE EXPLORATION AND PRODUCTION LICENCES

Under the New Draft Law Turkey is divided into two petroleum regions, onshore and off-shore. The off-shore region is also divided into two regions, namely, interior and exterior territorial waters. Whereas in the 1954 Law the petroleum regions were divided into 18 regions located either on on-shore or off-shore.

The term of an Exploration Licence according to New Draft Law is 5 years for on-shore licences which can be extended two further periods of 2 years (total 9 (5+2+2)). Whereas, for off-shore areas the term of the Exploration Licence is 8 years and can be extended for two further periods of 3 years (total 14 (8+3+3)).

In essence, the term of the Exploration Licence, including the relevant extensions cannot be more than maximum 9 years for on-shore and a maximum of 14 years for off-shore. Up to this point the provisions in the relevant Articles in relation to the terms of the Exploration Licence are the same as the 2007 Draft. However, according to the New Draft Law, at the expiry date of the maximum term, the Exploration Licence can be given an additional extension period up to 2 years for on-shore and 3 years for off-shore in order to carry out commercial evaluation of the petroleum exploration.

Further, the New Draft Law stipulates that if the time period necessary to complete exploration well in an exploration field exceeds the Exploration Licence term, then the Exploration Licence can be given an additional extension up to six months upon the request of the petroleum right holder.

Production Licences will be granted for a period of 20 years (2007 Draft the period was 30 years) and can be extended only twice for a maximum period not exceeding 10 years (total additional 20 years) (2007 Draft was 10 years for each time with no maximum years) if the field is still in production.

Also, pursuant to subsection 4 of Article 8, the Ministry’s approval is required in order to extend Production Licences, whereas in the 2007 Draft the decision of Council of Ministers (or Cabinet) is required for the same.

Further, pursuant to the same Article, a permission to construct a pipeline in order to transport petroleum (oil or gas) produced by the Production Licence holder can be obtained from the Ministry upon the request of the Production Licence holder.

PROHIBITIONS AND SPECIAL PROVISIONS

In comparison with the 2007 Draft, the Article relating to the prohibitions and special provisions have been simplified in the New Draft Law. The 2007 Draft provides that the fees to be paid towards Investigation Permission and Exploration Licence are to be determined by the General Directorate, by taking into account the annual increase in the Production Price Index (ÜFE).

However, in the New Draft Law the fees for Investigation Permission and Exploration Licences are covered separately. The Council of Ministers (Bakanlar Kurulu) is authorised to increase or decrease the rate by 50%. Also, subsections 11 of Article 22 of the New Draft Law provides that all boundaries of prohibited army regions, historical areas and residential areas are to be determined by the relevant regulations to be put in place, whereas no mentioned of this is made in the 2007 Draft. The same applies to subsection 12 of the same Article which provides that the Council of Ministers is authorised to regulate the market prices of the petrol is sold to refineries.

ACQUIRED RIGHTS

The temporary article in relation to acquired rights has also been simplified. According to the New Draft Law, all Exploration Licences acquired before the New Draft Law coming into force will continue to be valid until their expiry date. Further, the rights and obligations under Exploration Licences owned by Turkish Petroleum Corporation (Türkiye Petrol Anonim Ortaklığı) (the “TPAO”) will continue to be valid until production is completed.

All applications in relation to renewal of the Exploration Licences will be subject to the New Draft Law following its enforcement. However, first time applications for an Exploration Licence will not be accepted in the first year of the New Draft Law coming into force.

TURKISH PETROLEUM CORPORATION (TPAO)

Under the 1954 Law, TPAO was designated as the national oil company responsible for searching and drilling oil and gas reserves. As the national oil company the 1954 Law provided certain privileges to the TPAO, for example an exploration company may hold at most 8 licences in one region at the same time, whereas a TPAO may acquire up to 12 licences in each region provided that the total number of licences does not exceed ten times the number of petroleum regions. However, the limitation on the number of licences per region has been completely removed in the New Draft Law. Further, TPAO no longer has any special privileges over other exploration companies, thus in theory TPAO will be treated like any other exploration company (same provision was proposed in the 2007 Draft).

PENALTIES AND ADMINISTRATIVE MEASURES

The Articles in relation to penalties and the administrative measures have been extended in the New Draft Law to set a more stringent set of rules.

CONCLUSION

The legislative changes set out in the New Draft Law aims to increase domestic petroleum production by attracting more investors into the sector. In order to achieve this the most important changes proposed by the New Draft Law are designed to encourage exploration companies which have the financial and technical ability to be genuine explorers. In essence the government wants to ensure fields can be proactively used by those exploration companies who submit genuine and realistic investment plans. Further, the removal of the privileges of TPAO over other exploration companies also aims level the playing field.

It is to be hoped that the New Draft Law will soon be passed and a new era in the oil and gas exploration can begin.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Nihan Seda Kisi
 
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