Turkey: Turkey's New Petroleum Law

Last Updated: 23 September 2013
Article by Nina Howell

Turkey enacted a new Petroleum Law in June to help attract international investment in its offshore oil and gas resources in the manner currently being experienced in neighbouring Cyprus, Israel and Lebanon. Nina Howell, counsel in King & Spalding's London office, discusses the new law amid growing interest in the east Mediterranean.

The Levant Basin, a deep marine basin in the east Mediterranean between Cyprus, Israel, Lebanon and the Palestinian Territories, has historically been overlooked as an area for hydrocarbons. But recent gas discoveries in the region have changed that perception, and interest among gas players is growing. In 2010 the US Geological Survey suggested that the basin may hold up to 3.5 trillion cubic metres of natural gas.

Update on the east Mediterranean


In May, Noble Energy unveiled a natural gas discovery at the Karish prospect in Israel, with estimated gross resources of between 1.6 and 2 trillion cubic feet (Tcf ).

Israel has already seen discoveries in the Leviathan and Tamar fields in recent years. These discoveries led the government of Israel to review its hydrocarbons laws and publish new regulations and guidelines in 2010 and 2011. The new regulations enhance the legal regime under the Petroleum Act 1952 relating to exploration and production, marketing and distribution of oil and gas and taxation of hydrocarbons.


Lebanon opened its first international tender for offshore gas exploration in 2013. Gebran Bassil, Lebanon's energy minister, has predicted gas reserves of up to 30 Tcf in Lebanon's territorial waters. Exxon Mobil, Chevron, and the National Iranian Drilling Corporation are among the 52 international energy companies submitting applications to participate in the first offshore gas round.

In anticipation of the opening up its hydrocarbons sector to foreign investment, Lebanon introduced the Offshore Petroleum Resources Law and Petroleum Activities Regulations in 2010. Amongst other things, the new law introduced a new petroleum administration body and allowed the Lebanese government to issue licences to any joint stock company wishing to partake in petroleum activities, subject to entering into an exploration and production agreement with the government.


In Cyprus, Noble Energy also discovered large gas reserves in Block 12 in late 2011 under a production-sharing contract (PSC) awarded under the Cypriot government's first licensing round. Noble and its partners in Block 12 propose to develop an LNG plant, which will be the first LNG export project in the EU, to monetise gas produced in Block 12

As an EU member state, Cyprus is subject to EU laws applying to the hydrocarbons sector. Although the domestic oil and gas laws of Cyprus provide an overarching legal and regulatory framework, a substantial amount of detail is likely to be required for Cyprus to develop as an exporter of hydrocarbons.

Earlier this year the Cypriot government also concluded its second licensing round. After successful negotiations with the Council of Ministers, a consortium between Italy's Eni and Korea's Kogas signed three PSCs (in relation to Blocks 2, 3 and 9) offshore Cyprus, and Total signed two PSCs (in relation to Blocks 10 and 11). The PSCs are based on a new model form production-sharing contract published by the Cypriot government in 2012.

It is no surprise that expectations for discovery – and ultimately export – are growing. The potential to provide the EU with a stable energy supply is an attractive proposition and could hand the east Mediterranean countries billions of dollars in revenue, which in the case of Cyprus in particular would be a major boost to its economy.

Turkey's approach

As a result of the discoveries, competition among these east Mediterranean neighbours to become the latest regional energy hub has suddenly intensified. This scenario has given one of the Mediterranean's main emerging economic powers, Turkey, reason to review its own approach to the regional oil and gas market.

On a political level, tensions still remain between Turkey and its neighbours, especially in relation to the sovereignty of Cyprus. There have already been skirmishes between the Turkish and Cypriot governments over the locations of drilling. On a practical level though, Turkey desperately needs to increase domestic production and reduce its dependence on imports.

According to the International Energy Association, Turkey produced just 44,900 barrels per day of oil against a demand of 670,300 barrels per day in 2012; an import dependency rate of 93.3 per cent.

The situation with natural gas is even worse with just 632 million cubic metres per year of production against 45 billion cubic metres per year of demand; a 98.6 per cent dependency rate.

Turkey, however, remains pivotal for the international gas market despite its lack of domestic production. The country is the meeting point for Russian and Middle Eastern resources and the key European wholesale markets. It is a hub for key pipelines, notably the Blue Stream gas pipeline from Russia, the Baku-Tbilisi-Ceyhan oil pipeline from Azerbaijan and the Kirkuk-Ceyhan oil pipeline from Iraq.

The Turkish government, largely in response to the recent large gas discoveries in neighbouring Israel and Cyprus, has stated it plans to increase exploration in its territorial waters. The government recognised that the previous Petroleum Law 1954 was perceived to pose a number of obstacles to foreign investment and would need to be updated in order to attract investment from outside Turkey.

Indeed, the current Turkish government, led by the Justice and Development Party, attempted to overhaul the law with new legislation in 2007, but certain provisions proved controversial so it was ultimately vetoed.

However, a new draft Petroleum Law was presented to the Turkish parliament for approval on 21 December 2012. It was adopted by the Parliamentary Commission on Industry, Trade, Energy, Natural Resources and Information Technology in March 2013 and was officially passed into law on 11 June.

Turkey's new Petroleum Law

The new legislation aims to remove the hurdles to attracting foreign investment. The old system that separated the country into 18 differing geographical regions has been replaced by a much simpler onshore and offshore regime, with the latter sub-divided into territorial and non-territorial waters.

The preferential rights of the national oil company, Turkish Petroleum Corporation (TPAO), under the 1954 Petroleum Law have been removed. TPAO will now compete in future licensing rounds on the same terms as other companies, thereby leveling the playing field for foreign investors. The change also paves the way for TPAO to be privatised.

While Turkey has historically welcomed international entrants, only a limited amount of the majors have so far invested substantially in the country. Last year, for example, TPAO teamed-up with Shell to begin exploring for shale gas. TPAO has also entered joint undertakings in Turkey with other foreign entities, such as NV Turkse Perenco, Thrace Basin Natural Gas Corporation, Amity Oil International and Foinavon Energy.

The Turkish government has also made the permit and licensing regime more attractive. Companies can now be issued with a "search permit" to collect geological and geophysical data. The search companies will be able sell the data collected under the permit to interested parties for a period of eight years. Multiples search permits can be issued for a single field.

Exploration licences can be granted for up to 56,000 hectares for onshore and territorial waters and 1 million hectares for non-territorial waters. The Turkish government has also increased the duration of a licence. Onshore licences are now granted for five years (rather than four) and eight years (rather than six) for territorial waters. These licences can be extended by two and three years respectively.

Operation licences of 20 years will be issued if petroleum is discovered during the exploration phase. These can be extended by a further 10 years on two further occasions. Between 35 per cent (onshore) and 45 per cent (offshore) of the petroleum produced can be exported.

The new Petroleum Law seeks to prevent companies acquiring licences solely for the potential to sell on without making an investment in exploration activities. It requires an applicant for an exploration licence to provide a bond equal to 2 per cent of the financial commitment in the work plan in the licence application. A reduced rate of 1 percent applies to offshore exploration where the financial investment is expected to be higher. The requirement to post a bond is intended to ensure that only investors with the requisite financial and technical capability apply for exploration licences.

There are also fiscal incentives for investors. The new Petroleum Law reduces the ceiling for income tax from 55 per cent to 40 per cent. In addition, companies are exempt from customs duty, levies and stamp tax for equipment imported and supplied locally. Barriers on repatriation of registered capital have also been removed.

Under the new Petroleum Law, the government's share in oil and gas payable as a royalty (in cash or in kind), remains unchanged at 12.5 per cent. The government of Turkey considers it to be a reasonable "take" and comparable to other oil-producing countries. Some commentators have remarked that lowering the government share could provide a further incentive to foreign investors.

However, the calculation of the royalty has changed. The old regime was based on the well head price (i.e. the unregulated wholesale price at the point of production).

For oil, the new law states that the calculation shall be based on the market price of domestic crude petroleum per barrel, as arranged in article 10 of the Petroleum Market Law (the law was dated 4 December 2003 and numbered 5015) for crude petroleum produced on the basis of one petroleum unit.

In terms of natural gas, the calculation is based on the selling price to distribution companies.

Finally, the new Petroleum Law is intended to bring Turkey's petroleum regulation in line with EU Law. Turkey is a candidate for full membership in the EU, although discussions regarding Turkey's accession have been beset by a number of domestic and external problems.

In 2007, Turkey stated its intent to comply with EU law by 2013. The new Petroleum Law aims to harmonise Turkey's petroleum legislation with EU laws in order to help facilitate Turkey's accession.

This article was first published in the Global Energy Review online news, 6 August 2013.

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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