Turkey: Turkey’s New Petroleum Law: General Framework And Incentives

Last Updated: 17 November 2014
Article by AKIN Law Office

I. INTRODUCTION

Historically, the right to explore and produce petroleum has either been exclusively owned or managed by the Turkish State. However, in recent years the strict governmental regime started to loosen up with a view to establish a competitive market where the State is now playing more of a regulatory role rather than acting as the main player.

This presentation provides a brief account of the current legal framework concerning petroleum and the incentives that have been introduced in order to attract more foreign investment to engage in petroleum activities in Turkey.

II. HISTORICAL BACKGROUND OF THE TURKISH PETROLEUM LEGISLATION

It is helpful first to look at the previous Turkish petroleum legislation in order to better understand the new Turkish Petroleum Law No. 6491 that was adopted in June 2013.

1. Petroleum Law No. 792 (1926)

The first Turkish legal regulation concerning petroleum is the Petroleum Law No. 792 that was adopted in 1926.

According to the Law No. 792 the Turkish State retained exclusive authority to conduct petroleum exploration and production activities. As such the Law did not include any incentives for foreign investment.

On 14 February 1941 Petroleum Office was established as a public corporate body under the Ministry of Trade to undertake petroleum-related activities.

2. Petroleum Law No. 6326 (1954)

Petroleum Law No. 792 was replaced with Petroleum Law No. 6326 which came into force on 16 March 1954.

The same year the Turkish Petroleum Corporation("TPAO") was established. The activities of the TPAO was the purchase, sale and distribution of petroleum and petroleum products as well as exploration, drilling, production, refining and transportation of petroleum.

An important aspect of the new Law was that it enabled domestic and foreign companies to engage in petroleum acts in Turkey.

However, Petroleum Law No. 6326, as progressive as it was for its time, still did not prove to be enough of an incentive for attracting the desired levels of investment into the petroleum exploration and production activities in Turkey.

This was largely due to the fact that legal restrictions and bureaucratic obstacles still persisted. Therefore the Turkish legislative sought to replace the Law with a new one that could respond to and also provide incentives for the investors.

3. Turkish Petroleum Law No. 5574 (2007)

On 17.01.2007 the Turkish Parliament adopted the Turkish Petroleum Law No. 5574 in order to provide a more accessible and competition-friendly legal and regulatory framework.

However, the Turkish President vetoed the Law on the grounds that it did not sufficiently protect the national interests of Turkey. The reasons for the veto were as follows and it can be easily noted that much of the concern was with regards to the "national interests" of the country:

  1. The text of the Law did not contain a reference to the national interests of Turkey as opposed to Law No. 6326.
  2. Similarly, the Law did not provide that the review of an application for a petroleum right should be in line with the national interests of Turkey as opposed to Law No. 6326.
  3. Thirdly, the Law did not provide any measures regarding the protection of national interests as opposed to Law No. 6326.

Finally, the fact that the new Law did not contain an obligation for the retaining of a certain amount of the petroleum that is produced in Turkey for the need of the country as per national security and national interest was also one of the reasons for the President's veto. The previous Law No. 6326 had provided for this obligation.

III. THE NEW TURKISH PETROLEUM LAW NO. 6491

The new Turkish Petroleum Law No. 6491 officially passed into law on 11 June 2013 and replaced the previous Petroleum Law No. 6326 that was adopted in 1954.

The aim of the new Petroleum Law is to ensure that "the petroleum resources of the Turkish Republic are explored, developed and produced in a swift, consistent and efficient manner in accordance with the national interests."

The main objective of the new Petroleum Law is to remove the hurdles to attracting foreign investment. As such the Law aims to minimise bureaucracy; simply application procedures; produce incentives for exploration and production operations; reduce the costs of such operation; and to create a more competitive environment.

The major changes included in the new Law that concern foreign investors can be summarised as follows:

  1. Firstly, the new Law removed the restriction existing under the previous Law, which limited the person(s) acting for and on behalf of a foreign state from engaging in petroleum activities in Turkey;
  2. Secondly, it provides incentives for foreign investors;
  3. Thirdly, whereas the regime under the previous Law separated the country into 18 different geographical regions this is now replaced by a much simpler onshore and offshore regime. Under the new system the latter is sub-divided into territorial and non-territorial waters.

IV. LEGAL STATUS

According to the Law, the petroleum resources within Turkey are under the sovereignty and disposal of the Turkish State. Although it is not defined within the Law, the expression of "being under the sovereignty and disposal of the State" is generally accepted to mean that it does not allow for the establishment of private property. It is an expression that is often used in Turkish public law. Therefore, the petroleum resources within Turkey cannot be subject to private property.

As such it is not possible to engage in any petroleum activities without first obtaining relevatn permits and licenses.

The authority of the State includes the territory and the territorial waters of the country and the seas beyond the territorial waters.

V. LICENSING

According to the new Petroleum Law all permits and licenses for search, exploration and operation activities under the new Petroleum Law are granted by the General Directorate of Petroleum Affairs.

Such permits and licenses are described as 'petroleum right' under the Law. Those who are eligible to apply for a petroleum right are described by the Law as follows:

"Search permits, exploration licenses and operation licenses may be granted to capital companies or private law legal entities established as capital companies in accordance with a foreign state's legislation provided that they are in compliance with the principles of this Law."
(Article 22/5)

The latter company is a foreign stock company that is established outside Turkey. However, these companies are deemed to be located in Turkey for their activities in Turkey as per the regulations concerning the protection of Turkish Lira. This means that whether a foreign legal entity is eligible to qualify as a capital company will be determined in accordance with the Turkish Commercial Code.

It can also be noted here that the Law does not require the companies to have been incorporated exclusively for the undertaking of petroleum activities.

Permits and licenses under the new Turkish Petroleum Law are as follows:

  1. Search permit grants the right to analyse the land by gathering data from the ground or air through topographic, geological, geophysical, geochemical and similar methods for petroleum exploration purposes and also to perform drilling works, except for exploration drillings, in order to gather geological information.
  2. Exploration License includes the exploratory drilling and appraisal drilling activities. The license grants its holder the right to carry out search and exploration activities within a given area, to produce petroleum from the said area and to submit an application for discovery.

    It is also possible that exploration for certain areas, which are determined at the discretion of the General Directorate, is granted through auctioning rather than licensing.

    Under the new Turkish Petroleum Law on shore licenses are now granted for five years (rather than four under the previous Law) and eight years (rather than six under the previous Law) for territorial waters. They can be extended by two and three years respectively.

    However, the duration of onshore licenses (including extension) cannot exceed nine years and the duration of licenses for territorial waters (including extension) cannot exceed fourteen years.
  3. Operation license can be granted if petroleum is discovered during the exploration phase and it is a type of permission that is valid for the duration of the license. Therefore the operation license includes the conditions that are valid at the time of the granting of the exploration license.

    Operation license is granted for the exploration and production of petroleum and the sale of the produced petroleum. Thus it covers the activities of production drilling and development, extraction of petroleum, pre-processing of petroleum, storage of petroleum in the field or in the vicinity of a field, transportation of petroleum to the storage facilities, a transmission line or to a refinery through pipeline or other means.

    Operation licenses can be granted for up to twenty years and it is possible to renew them twice provided that the production plan that is attached to the request for extension has been approved.

VI. RIGHTS and INCENTIVES

Below is a summary of the incentives introduced by the new Turkish Petroleum Law. They are quite wide-ranging, varying from fiscal incentives to those concerning employment.

  1. Income Tax: The sum of the income tax deductions that the petroleum right holder is liable for on its net income and the income tax it is required to withhold on behalf of its shareholders will not exceed 55 per cent.
  2. Tax Exemption: Companies are exempt from customs duty, levies and stamp tax for oil and gas field equipment imported and supplied locally. In the event that the materials that are subject to exemption are transferred upon the approval of the General Directorate from a petroleum right holder to another petroleum holder the exemption may still continue.
  3. Exemption from Certification of Compliance for Imported Goods: A conformity assessment of Turkish Standards Institute marking shall not be sought for materials that a petroleum right holder has imported to use in petroleum operations that have approved by the General Directorate.
  4. Foreign Employees: They are now exempt from the standard work regulations for a period of six months and they can work in Turkey by obtaining a residence permit.
  5. Permission to Build a Pipeline: Upon request an operation license holder may be granted a permission to build a pipeline for the purpose of transferring the petroleum that it produces.
  6. Merger: The operators whose production fields are partially or wholly located within the same petroleum containing land can combine their petroleum procedures.
  7. Request for Expropriation, Right to Lease and Use: The petroleum right holder shall be able to obtain the utilisation right in respect of the field required for petroleum transaction in or in the vicinity of its exploration and operation license by agreement if the land is privately owned or by expropriation if there is a dispute, or by leasing it from the Ministry of Finance in consideration for the relevant sum, establishing easement right or by obtaining utilisation right and having the same registered in its license if the land is owned by the Treasury or under the rule and disposition of the State. The ownership right of the expropriated land shall belong to the Treasury and the utilisation right shall belong to the petroleum right holder who paid the expropriation fee. In this case, the Ministry of Finance shall grant easement right to the petroleum right holder free of charge for the duration of the license period.
  8. Water Rights: The explorer and operator shall have the right to search for water through several methods including drilling and to use the water found and to use such amount of the existing water that is necessary for its own operations, without violating the rights of others who may have rights on such water.
  9. Right to Repatriation of Registered Capital: Barriers on repatriation of capital have also been removed by the new Law. The petroleum right holder may, by filing an application with the General Directorate, transfer abroad, tax free, either in cash or in kind, and after having put aside the sum required for the payment of any taxes, duties, charges, and royalties owed to the State; their cash funds and rights thereto, and other economic assets included in capital assets.
  10. Right to Keep the Income in Return for Exportation of Petroleum Outside Turkey: A petroleum right holder can keep abroad the foreign currency generated from the export of the petroleum. This amount shall be offset against the remittance of the capital imported to Turkey and the transfer of net values exceeding it.
  11. Right to Export Petroleum Products: Petroleum right holders are entitled to export a certain amount of the petroleum and natural gas (35% for onshore and 45% for offshore) that they produce in fields discovered after 1 January 1980. The remaining part and the whole petroleum and natural gas produced in the fields discovered before 1 January 1980 shall be reserved for domestic use. The Council of Ministers has the authority to regulate the procedures and principles on the redetermination and implementation of these ratios.

VII. OBLIGATIONS

The obligations regime introduced by the new Turkish Petroleum Law are quite straightforward and easy to navigate. They can be summarised as follows:

  1. Financial Obligations: There are two main financial obligations under the new Law. These are:

    1. Search permit holders are obligated to pay a fee in the amount of fifty Kurus per hectare of the search area. This fee is payable once. According to the Law the fee will be adjusted annually in accordance with revaluation rates. For 2014, it will increase by 3,93%.
    2. State royalty: The State share in oil and gas, payable as a royalty (in cash or in kind) remains unchanged at one-eight of the petroleum extracted in any given field (about 12.5 per cent). However, the calculation of the royalty has changed. It will now be calculated based on the market prices for crude petroleum and the wholesale prices for natural gas, which differs from the previous regime that used pit top prices.

      It can also be noted that the new Law abolished the payment of the State right which was taken as an annual fixed fee over the exploration and production activities conducted on a particular field.
  2. Commencement of Operations: Upon a discovery made within the exploration license the license holder is obliged to commence the development of the site and also production without any delays. The rule is to start production and operations as soon as possible in accordance the program. That is of course if there are no force majeure conditions that might cause a delay.
  3. Collateral: There are two types of collaterals that are required under the new Law.

    1. Collateral for Investment: The Law requires an applicant for an Exploration license to provide a bond equal to 2 per cent of the financial commitment in the work plan as submitted in the License application. For offshore exploration where the financial investment would be higher the rate is 1 per cent of the financial commitment.
    2. Collateral for Loss and Damages: The payment of an additional collateral before obtaining a petroleum right in order to cover any potential loss and damages that may occur during the petroleum activities is compulsory. The rate for search permits is 0,0005% of the search charge; 0,0001% of the exploration license charge for the exploration licenses; and 0,005% of the operation license charge for the operation licenses.
  4. Approval for Change in Capital: All kinds of share transfer transactions that would cause a change in the control of the company, which is a petroleum right holder, are subject to the prior approval of the Ministry of Energy and Natural Resources.
  5. Obligation to Act With Caution: Petroleum right holders are obliged to refrain from acts that may cause a damage to the people living nearby, environment, nature, the quantity and quality of the underground, shore or sea waters, and other petroleum right holders, or put them in danger. As such they are also required take the necessary measures.
  6. Obligation to Keep Records and Provide All Information to Relevant Public Authorities: Petroleum right holders are obliged to keep records, accounts, information, documents related to the petroleum operations as stipulated by the law and submit them to the General Directorate of Petroleum Affairs.
  7. Obligation to Inform the General Directorate: Petroleum right holders are responsible to inform the General Directorate of Petroleum Affairs of any petroleum findings or discovery.
  8. Obligation to Assist with Inspections: Petroleum right holders are obliged to cooperate with the Ministry or those appointed by the Ministry who may iniate an inspection of their operations.
  9. Obligation to Compensate Land Owners: Petroleum right holders are liable to compensate all damages (including damages to the land and facilities on the land) incurred by land owners which sall include loss of product or the operational profits that the land owner has been deprived of.

VIII. PUBLIC AUTHORITIES GOVERNING THE PETROLEUM MARKET

There are four main public authorities in relation to petroleum activities in Turkey that concern the petroleum activities. These are:

  1. The Council of Ministers:The role of the Council of Ministers is to decide on the incentives that are to be applied to the investments of petroleum rights holders and to issue permits and licenses for non-territorial waters.
  2. The Ministry of Energy and Natural Resources:The role of the Ministry is to regulate; to decide on the cancellation of permits and licenses; to decide on auctions, expropriation, and settlement of disputes between petroleum rights holders and applicants; and to approve the change of control of any petroleum right holder.
  3. General Directorate of Petroleum Affairs:The role of the Directorate is to issue permits and licenses; to review and to supervise; and to implement penalties, including administrative fines and take necessary measures.
  4. Competition Authority: This institution has the authority to review all acts, agreements, mergers and acquisitions that may distort competition in all markets of goods and services, and to implement sanctions.
  5. Energy Market Regulatory Authority: This institution has the authority to issue licenses for the sale and distribution of petroleum and petroleum products; to regulate, to conduct audits and supervisions and to implement penalties, including administrative fines and take necessary measures.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Herdem Attorneys at Law
King & Spalding LLP
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Herdem Attorneys at Law
King & Spalding LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions