This article aims to provide an overview of the latest status of the oil and natural gas legislation in Turkey in the wake of spring 2014 period.
Natural Gas Market Figures
Turkey has long held a strategic role in the natural gas map of the world.
The last decade has witnessed a significant rise (almost three times the 2002 figures) in natural gas consumption: Turkey consumed a total of 46.3 billion m3 of natural gas in 2012 alone.1 1.36 per cent of this consumption was supplied by the domestic production and 98.64 per cent of it was imported. An overwhelming portion of this import being carried out by State-Owned Petroleum Pipeline Corporation (Boru Hatları İle Petrol Taşıma Anonim Şirketi or "BOTAŞ").
17 per cent of the total import consisted of the LNG imports processed through the two currently existing LNG terminals in Turkey.
Furthermore, natural gas is the primary source of energy in Turkey's electricity market. According to 2011 figures, 52 per cent of national natural gas consumption was drawn by gas cycling power plants alone.
In an effort to address this growing potential for production, import and consumption, and the need for a liberalised natural gas market capable of competing with more cost-effective markets in other countries, the Turkish Government has successfully staged various legislative instruments in the recent years.
The underlying legislation governing the exploration and the exploitation of natural gas is primarily the petroleum and gas trading activities are regulated under the Natural Gas Market Law (published in the Official Gazette dated 2 May 2001 and numbered 24390).
The Petroleum Law has been recently enacted in June 2013 replacing the former Petroleum Law of 1954 and a draft natural gas market law was also prepared in 2013 by the MENR, which is currently pending parliamentary enactment.
Oil Market Figures
Turkey has witnessed an increase in crude oil consumption over the last decade in line with its economic growth. The petroleum consumption rate for civil use was 19.5 million tonnes in 2012 alone, with the refinery capacity utilisation having increased from 74.8 per cent to 78.7 per cent between the years of 2011 and 2012.
On the legislative front, mirroring the legislation applicable to the natural gas market, the petroleum market activities are also governed by a set of investment-friendly rules and regulations.
The foremost of the business-friendly novelties brought by the Petroleum Law has been to strengthen the entry conditions into the exploration and exploitation market for third-party applicants against the de facto market monopoly of the Turkish Petroleum Corporation (Türkiye Petrolleri Anonim Ortaklığı or "TPAO") acting on behalf of the State (TPAO being a State-owned business enterprise).
II. DEVELOPMENT OF OIL AND NATURAL GAS
The regulatory framework applicable to the oil and natural gas sector overlaps on certain activities. While downstream regulation is distinctively divided into a separate set of rules under the Natural Gas Market Law (published in the Official Gazette dated 2 May 2001 and numbered 24390) and the Petroleum Market Law (published in the Official Gazette dated 20 December 2003 and numbered 25322), when it comes to upstream activities (exploration and exploitation) both the oil and natural gas sector are jointly regulated under the Petroleum Law. The Petroleum Law, commonly refers to crude oil and natural gas as "petroleum products", i.e., hydrocarbons reserved underground (henceforth jointly referred to as "hydrocarbons").
Key Governmental Authorities
The key governmental authorities active in the natural gas sector (LNG included) are the following:
(i) The Ministry of Energy and Natural Resources ("MENR") is the ministry responsible for the oil and natural gas sector.
(ii) The General Directorate of Petroleum Affairs ("GDPA") of the MENR remains the regulatory authority for all upstream activities of all hydrocarbons and also for the transit passage of hydrocarbons.
(iii) The Energy Market Regulatory Authority ("EMRA") is responsible, among others, for granting licences to conduct market activities such as distribution, again capturing both natural gas and (crude and fuel) oil.
The market entry is deliberately encouraged with a number of incentives, e.g.:
(i) Licence Holders are granted the right to request expropriation of their project sites and the lands occupied by their connection lines.
(ii) Foreign participants or Turkish participants with foreign shareholdings, can equally apply for exploration and exploitation licences.
(iii) The restriction on the number of exploration licences that can be individually held by licence holders has been revoked, enabling all participants to apply for an unlimited number of exploration licences.
(iv) Total taxes collectable on the revenues of Licence Holders are capped at 40 per cent, in comparison with the earlier cap of 55 per cent.
Among others, the Petroleum Law provides for two separate kinds of major licences for hydrocarbon upstream activities. These are (i) the exploration licence (arama ruhsatı), and (ii) the exploitation licence (işletme ruhsatı).
Applicants are initially required to apply to the GDPA to obtain an exploration licence the utmost term of which is five years for onshore explorations, and eight years for offshore explorations. In any circumstance, the extension period cannot exceed nine years for onshore exploration and 14 years for offshore exploration. Exploitation licences are granted for a maximum term of 20 years, which may be extended twice, each time not exceeding a term of 10 years.
State owns 12.5 per cent of the hydrocarbon production exploited by the licence holders.
Hydrocarbon exploitation and exploration right holders are allowed to transfer their revenues to offshore accounts in the form of foreign currency.
Transfer of Interest
Share and licence transfers for upstream activities require prior approval of GDPA, whereas those
concerning downstream activities are subject to the prior approval of EMRA.
Among others, developers of hydrocarbon reserves are primarily required to obtain the following permits:
(i) an environmental impact assessment report ("EIA Report") for hydrocarbon exploration projects provided that the Ministry of Environment and Urban Planning ("MEUP");
(ii) an EIA Report for projects involving drilling for crude oil in an amount corresponding to 500 tonnes/day and drilling for natural gas in an amount corresponding to 500,000 tonnes/day;
(iii) for transportation lines exceeding 40 kilometers in length and 600 millimeters in diameter; and
(iv) specific environmental permits for crude oil and natural gas production activities (water discharge permits, emission permits, etc.).
Land Utilisation Rights
As it is also the case for their project site, applicants would be required to secure the utilisation rights of the lands on which their transportation line crosses or their exploitation site is to be stationed, i.e., private acquisitions settled with private land owners or requesting expropriation of the same, or obtaining leasehold rights from the State via easement or land allocation permits. Applicants resorting to the expropriation option must file their applications with the GDPA.
III. IMPORT AND EXPORT
Import and Export of Natural Gas
In the natural gas market, trading may be conducted by the holders of one or more of the following licences: (i) import; (ii) export; or (iii) wholesale. Licensees, except generation licensees, are prohibited to sell more than 20 per cent of the national natural gas consumption forecasted for the relevant year. This includes export sales.
No new gas purchase agreements can be executed by any licensee with a country which has an ongoing contract in place with BOTAŞ. These countries include Turkmenistan, Russia, Azerbaijan, Nigeria, Algeria and Iran.
In an effort to grant market access to other players, the Natural Gas Market Law prohibits BOTAŞ from executing new natural gas import agreements until its import levels are reduced to 20 per cent of the national consumption amount. Note that the current market level of BOTAŞ is still over the 80 per cent scale. Again in an effort to decrease BOTAŞ's market share, BOTAŞ routinely assigns portions of its existing import contracts to interested bidders.
Note that the above restrictions are not applicable for the import of LNG.
Import and Export of Oil
Holders of oil refinery licences, oil distribution licences or bunker delivery licences may engage in oil import activities without being subject to further licensing. Import can only be conducted through certain authorised customs points that are equipped with necessary measurement capabilities. Export of oil is permissible but is capped at 35 per cent of hydrocarbon produced onshore and 45 per cent of hydrocarbon produced offshore.
IV. NATURAL GAS DOWNSTREAM ACTIVITIES
The transportation of natural gas through BOTAŞ's pipelines is regulated under the Transmission Network Operation Regulation (published in the Official Gazette dated 26 October 2002 and numbered 24918) and the Transmission Network Operation Principles ("Network Code," published in the Official Gazette dated 22 August 2004 and numbered 25561). BOTAŞ operates the transmission network, and manages and coordinates the access of third parties to the network.
Contracts for Transportation of Natural Gas
Applicants wishing to transport natural gas through pipelines of transmission and distribution license holders must enter into a standard transportation contract ("STC") with the licensee, which shall be in conformity with the mandatory provisions of the Network Code.
Applicants wishing to use BOTAŞ transmission network for transportation of natural gas should first apply to a capacity allocation at an entry and exit point.
The Network Code does not set any explicit limitation on the extent of negotiability of the STCs. In practice, it is our experience that STCs are in general non-negotiable from BOTAŞ's perspective.
Below are some of the other major limitations, on the freedom of contract on the natural gas transportation:
(i) No provision of the STCs can override or conflict with the Network Code.
(ii) EMRA has the sole authority to issue the transportation pricing tariffs.
(iii) A transportation capacity allocation is granted only for one year.
(iv) The shippers must warrant the quality of the natural gas they deliver to the exit point.
Emergency and Force Majeure Measures
If, due to an emergency case, BOTAŞ is unable to entirely or partially accept the natural gas supplied by the shipper for delivery, it will be entitled to adopt necessary measures, including interrupting the transport.
Dispute resolution by EMRA
EMRA acts as the authority to resolve disputes between BOTAŞ and shippers regarding capacity allocations. The parties may appeal EMRA's decision before the Administrative Court of Appeals.
V. OIL DOWNSTREAM ACTIVITIES
In order to participate in fuel oil distribution and dealership market activities, a distribution and/or dealership licence must be obtained from EMRA.
Distributors are entitled to delegate their sales rights (save for wholesales) to licensed dealers by way of executing franchise contracts. Each dealer can engage with only one distributor.
Should they prefer so, distributors can sell directly to the consumers without involving dealers as intermediaries, but sales made via distributor's own stations cannot exceed 15 per cent of its total sales amount. Furthermore, a distributor's market share in the national distribution market cannot exceed 45 per cent.
VI. FOREIGN INVESTMENTS
The Petroleum Law clearly states that applications for upstream hydrocarbon activities can be filed by both foreign and Turkish companies. Applications for downstream oil and natural gas licences, however, must only be filed by Turkish companies, i.e., companies established in Turkey. That said, there is no limitation prohibiting the applicant Turkish companies to be fully or partially foreign-owned by foreign individuals and/or entities.
VII. PROSPECTIVE LEGISLATION
In 2013, the two new draft laws prepared by the MENR were at the centre of attention, with one being set to replace the current Petroleum Market Law by extending its coverage to LPG and CNG, and the other set to amend the current Natural Gas Market Law significantly. Although the two drafts are in relation to different markets, currently they have some overlapping provisions in relation to CNG. While the draft laws have been provided to the public (as draft for comments), there is no official information as to the initiation of their enactment processes.
Below are some of the significant novelties that may be introduced by these new draft laws:
Fuel Market Law draft
The current draft law proposes that the fuel market activities be directly placed under the supervision and monitoring of the MENR, thus abolishing all supervisory authority of EMRA over the current petroleum market.
If the Fuel Market Law is adopted as is, the MENR would be entitled to create several dealer classes (whereas no classes exist currently) by taking into account technical and economic qualifications. Supervision and inspection of dealers will be handled by Governorships.
Natural Gas Market Law Draft
The amendments proposed by the draft law primarily relate to the licensing scheme whereby the Turkish Government is planning to restructure the licensed market activities.
LNG terminals are currently operated under LNG storage licences. The draft law, if enacted, will treat storage and terminals separately. Accordingly, the operation of a LNG terminal would become a separate natural gas market activity subject to licensing, and any existing storage licence for a LNG terminal would be replaced with a LNG terminal operating licence.
The draft law also aims to resolve the vertically integrated legal entity status of BOTAŞ. Accordingly, within one year following the entry into force of the draft law, BOTAŞ would be restructured as three companies. Following the restructuring, one of the three companies would engage with transmission activities only, one would be responsible for conducting the operation of the LNG facilities and performance of storage activities and the other one would conduct the remaining activities.
All these in overall pave way to a more investor friendly oil and gas environment for Turkey in 2014. The energy market community is excited to see a widening horizon of transaction opportunities the new legislation promises to bring to the table. Along with the opportunities new legal challenges will surely arise. These, energy law experts of Hergüner Bilgen Özeke are ready to address and propose neat solutions.
1 Kindly note that official 2013 figures had not yet been announced as of the date of this article.
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.