Turkey: The New Petroleum Law

Last Updated: 14 June 2013
Article by Irmak Bademli

The new Petroleum Law has been adopted by the Turkish Parliament General Assembly on 30 May. The law brings new rules regarding the exploration and production of petroleum and natural gas in Turkey.

In the previous law, Turkey was divided into 18 "petroleum regions." In the new law, the Turkish territory is divided into two regions, onshore and offshore. The offshore regions are divided into territorial waters and non-territorial waters.

The new "search permit"

In the new law, a new "search permit" will be granted to companies to collect geological and geophysical data in licensed and un-licensed fields. The search company will be able to sell the data to interested parties for eight years, and after that the data will be accessible to all for a fee. More than one search permits as well as an exploration license may be granted to the same field.

Field data obtained during exploration will be open to public upon the expiration of the exploration license, whereas field data obtained during production will be open to public after five years.

New procedure for exploration license applications

License areas: The maximum exploration license area in onshore and territorial waters is 56 thousand hectares, whereas the maximum license area in non territorial waters is 1 million hectares. The fields, to which the exploration licenses are granted, have been harmonised with the international geographical grid system. Existing licenses will also have to be converted to the new system.

License period: The periods of exploration licenses have been increased from 4 years to 5 years for onshore licenses and from 6 years to 8 years for territorial waters. These periods may be extended by two years for onshore licenses and by three years for territorial waters, granted that the investor opens a new drilling well in this period and puts down 2% of the new investment into the well as collateral.

Application procedure: The fields, for which an exploration license application has been received, will be published, and other investors will be able to make applications for the same field for 90 days. These applications will be evaluated together based on the applicants' financial sufficiency and the applicant's work and investment plan. The evaluation principles in this context shall be laid out in a regulation. The law allows the General Directorate for Petroleum Works to exempt some fields from the application procedure and put them on tender.

Collateral requirement: Unlike the previous law, which had no collateral requirement for the exploration license, the new law contains a requirement for investors to put up a 2% collateral of their overall investments in onshore fields and 1% in offshore fields. Each year the share of this collateral corresponding to the works completed will be returned to the investor. In previously unexplored fields, fields with no/little sign of reserves or fields where untraditional exploration and production methods will be used, the cabinet will decide on whether collateral will be taken or how much this collateral will be (granted it is less than 2% of investment amount.)

Privatisation of TPAO? Significantly, the new law leaves out the provision, which gave the right to obtain exploration and operation licenses on behalf of the state to Turkish Petroleum Corporation (TPAO). The exclusion of this provision from the law supports Energy Minister Taner Yildiz's earlier comments that the TPAO may be privatised.

New rules for the calculation of state royalties

License period: If petroleum is discovered during exploration, an operation license is issued for the exploration, production and wholesale of petroleum. The operation license shall be granted for 20 years with the possibility to extend it twice for 10-year periods. According to the law, the production fields, the operation rights of which have expired, will be put on tender on the condition that TPAO does not wish to operate them.

State royalties: Under the previous law, the state royalty was calculated as 12.5% of the production based on pit top prices. Under the new law, state royalties will be calculated based on the market prices for crude oil and the wholesale prices for natural gas.

Gas storage: The new law also opens the way for using previous gas reservoirs for gas storage. The investor, which had been producing gas from the reservoir, will have priority for the operation of the field as a gas storage facility.

Noteworthy requirements and incentives

Taxes: 5% tax withholding shall be applied for independent professional service payments to limited taxpayers for petroleum exploration activities as per the provisions of Petroleum Law, pursuant to Article 30 of Corporate Tax Law. This rate had already been determined as 5% previously by a Cabinet decree. Now the withholding tax rate is being introduced into the new Petroleum Law.

In the case that petroleum right holders perform petroleum transactions defined in Petroleum Law and other activities based on general provisions, the accounting records are kept separately and the activities are taxed separately. In former Law, the petroleum right holders were also obliged to declare their activities related with petroleum transactions in separate tax returns.

Customs duty exemption and other incentives: The new law extends the customs duty exemption on imported equipment to locally-sourced equipment. The investor will be exempt from customs duty, levies and stamp tax for equipment imported and supplied locally. Expat employees will be exempt from the regulations under the Law No. 4817 for six months, reducing the bureaucratic burden. Foreign seismic, drilling and search ships and special equipment will be exempt from the restrictions of the Cabotage Law.

The law allows the Cabinet to determine the investment incentives applying to the holders of the petroleum rights.

Country needs: Holders of the petroleum rights are allowed to export 35% of the petroleum produced in onshore and 45% of the petroleum produced in offshore fields in fields discovered after 1 January 1980. The remaining amount in these fields as well as the petroleum produced in older fields have to be allocated to country needs. The law allows the Cabinet to re-determine the shares allocated to country needs.

Damage collateral: The amount of collateral against any damages to the environment or individuals have been determined based on the license levies set annually by the Finance Ministry. It corresponds to 0.05% of the levy for search permits, 0.1% of the levy for exploration licenses and 0.5% of the levy for operation licenses.

Penalties: Financial penalties will vary between TL 10 000 and TL 500 000, whereas the operations may be terminated temporarily (90 days-180 days) or the license may be annulled if the requirements are not met within the notice period.

Vested rights: Existing exploration and operation licenses will stay valid until the end of their license period. The operation licenses of TPAO will stay valid until production is finished in the field.

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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