European Union: Petroleum Affairs In Turkey

Last Updated: 6 November 2009
Article by Akdogan | Uslas Attorneys At Law

Located at the crossroads of Europe, Russia, the Caspian Region and the Middle East, Turkey is an energy corridor linking the supplier countries to principal consumer markets and thus stands as a key player in ensuring energy security through diversification of resources and routes.

Pursuant to Turkish law, both exploration and exploitation of petroleum (i.e. upstream activities) are governed by (i) the Petroleum Law No. 6326 of 1954 (Petrol Kanunu) (the Law), which opened the Turkish petroleum market to domestic and foreign oil companies, and (ii) the Petroleum Regulation (Petrol Tuzugu).

Scope and Purpose of the Law

The purpose of the Law is to ensure expedient, continuous and effective exploration, development and appraisal of the petroleum resources of Turkey in accordance with the principle of national interest (milli menfaatler). According to such principle, TPAO (Turkiye Petrolleri Anonim Ortakligi), the national petroleum company of Turkey, enjoys certain privileges compared to other companies active in the Turkish petroleum industry.

Under the Law, the definition of "petroleum" includes: (i) hydrocarbons, in liquid or gaseous form, produced or producible from earth; (ii) asphalt and other solid hydrocarbons suitable for production with or dissolved in liquid petroleum or gas; and (iii) hydrocarbon products derived from the substances referred to under (i) and (ii). Accordingly, exploration and exploitation of both natural gas and crude oil are carried out subject to the Law.

"Petroleum right" is defined as any right that a permit1 (musaade), exploration license (arama ruhsati), exploitation license (isletme ruhsati) or certificate2 (belge) grants. The General Directorate of Petroleum Affairs (GDPA) and the Ministry of Energy and Natural Resources are the regulatory authorities with respect to petroleum rights.

It should be kept in mind that downstream petroleum activities (e.g. distribution, transmission, transportation, storage) are not within the scope of the Law and are regulated by the Petroleum Market Law No. 5015 of 2003. The regulatory body for downstream petroleum activities is the Energy Market Regulatory Authority. The same is true for natural gas except that downstream natural gas activities are carried out subject to the Natural Gas Market Law No. 4646 of 2001.

Petroleum Exploration Activities

Under the Law, petroleum exploration activities cover both "geological investigation" (jeolojik istiksaf) (also doable with a permit only) and "exploratory drilling" (arama sondaji). In order to engage in exploration activities, an exploration license must be obtained from the GDPA. The term of the exploration license is four years for on-shore exploration areas and may be extended for an additional two-year period. Upon the extension period's expiry, the exploration license holder may request a second extension up to two years provided that a security is submitted to the GDPA together with a drilling schedule for further works. The total term of an exploration license cannot exceed eight years for on-shore exploration areas. The aforementioned license terms and extension periods are subject to a 50% increase for off-shore exploration areas3 (deniz aramalari).

As a general rule, an exploration license holder is obliged to commence exploratory drilling within three years from the issue date of its petroleum exploration license granted for a specific petroleum district.

For each exploration area, the exploration license holder must pay an annual fixed-amount state right (devlet hakki) per hectare.

Petroleum Exploitation Activities

As specified in the Law, in order to carry out exploitation activities, an exploitation license must be obtained from the GDPA. An exploitation license is granted for a term of 20 years and may be extended twice, each extension being ten years at most. Thus, the maximum term of an exploitation license is limited to 40 years.

The Law stipulates a number of restrictions concerning the total exploitation surface that an exploitation license holder may hold in an exploitation area.

Same as in exploration, the exploitation license holder must pay an annual fixed-amount state right (devlet hakki) per hectare for each exploitation area.

Payment of Royalty (devlet hissesi)

In addition to the state right, exploration and/or exploitation license holders must pay as royalty to the Turkish State 12.5% of the value of the petroleum they have produced. The royalty amount shall be calculated once the expenses (i.e. income tax, corporate tax, other applicable taxes and charges etc.) are deducted from the market price of the produced petroleum.

Status of Foreign Investors

Turkey has one of the most liberal and investor-friendly legal systems for foreign direct investment. The recently enacted Foreign Direct Investment Law No. 4875 introduces the "equal treatment principle" which provides for the equal treatment of foreign investors with their Turkish counterparts. Consequently, save for a very few number of sector-specific exceptions, foreign investors may freely set up companies in Turkey.

According to the Law and the longstanding practice of the GDPA, in order for a foreign company to acquire any of the petroleum rights set forth under the Law, such company must establish either a subsidiary (i.e. a separate legal entity) or a branch office in Turkey. If the foreign investor does not have any official address in Turkey, it will not be granted any of the petroleum rights stipulated by the Law. The type of presence the foreign investor chooses to have in Turkey mostly depends on the applicable taxation rules.

Export and Transport of Petroleum

Pursuant to the Law, petroleum right holders may export (i) 35% of the total petroleum products in on-shore exploration areas, and (ii) 45% of the total petroleum products in off-shore exploration areas, extracted from the exploration areas discovered after 1 January 1980. The remaining amounts shall be retained in Turkey for "country needs".

According to the Petroleum Regulation, it is also possible for a petroleum right holder to transport petroleum via a third party's pipeline, yet an application to the GDPA must be made for that purpose.

Incentives

  • Under the Law, petroleum right holders are entitled to import materials; fuel; and land, sea or air transport vehicles required for their petroleum operations in Turkey, free of customs and other import taxes provided that such materials are (i) considered to be necessary by the GDPA, and (ii) used exclusively for petroleum operations. However, this incentive is not applicable to materials related to the construction, installation and operation of the petroleum right holders' building facilities and equipment, and to their administrative activities. The above exemptions shall be in effect until the end of 2020.
  • Throughout the entire term of their petroleum right(s), petroleum right holders are entitled to import to Turkey crude oil, which cannot be procured from local sources and is necessary for their market operations, at the market price and free of customs and other import taxes.
  • On the condition that all applicable taxes, dues, charges, state right payments and royalties are set aside, a petroleum right holder may, without any taxation, transfer abroad (i) cash funds and rights and (ii) other assets (in cash or in kind) in relation to its petroleum operations.

Joint Operating Agreements

In accordance with the Law, petroleum rights granted by licenses and certificates, when registered with the GDPA, may be the subject of legal transactions such as a sale or mortgage. This is conditional upon certain requirements in the Law being met. The holder of a duly registered right shall in proportion to its petroleum right enjoy the benefits and also be subject to the obligations of the petroleum right holder. In other words, separate entities might co-own petroleum rights.

The Law is flexible on different structures and thus enables privately owned petroleum companies to enter into what is called joint operation agreements (JOAs) with TPAO, the latter most of the time being the license holder4. The structure of JOAs is as follows: Short of capital, TPAO assigns a certain portion (usually 50%) of its petroleum rights under a license to the other party. In return, such party makes the necessary investment for petroleum production. The proceeds are shared between the parties.

To date, JOAs (based on the 2002 Model Form International Operating Agreement published by the Association of International Petroleum Negotiators) have been used in the Turkish upstream petroleum sector, particularly by TPAO when assigning petroleum rights under its oil exploration licenses to foreign partners in return for operating services. From a legal and practical point of view, JOAs are generally subject to the law of the country where exploration/exploitation licenses are issued (Turkey in the case at hand). Although the parties may also elect another law to govern the JOA itself, enforceability will still depend on the legal constraints set out by Turkish law.

Petroleum License as a Security

In case of eventual collaboration with Turkish petroleum right holders, foreign investors may request and obtain additional security over petroleum licenses apart from conventional ones such as share pledge, encumbrance over real property, bank account pledge or commercial enterprise pledge.

Although the Law is not specific on the establishment of an encumbrance over petroleum licenses, the Petroleum Regulation envisages such provided that the GDPA approves the encumbrance and the encumbrance is registered with the Petroleum Registry5.

New Petroleum Law

The Turkish Parliament approved a new petroleum law on 17 January 2007, which provides for significant changes in both exploration and exploitation regimes. The new petroleum law introduces a more liberal regime to attract foreign investors and to harmonize the national legislation with that of the European Community (i.e. Directive 94/22/EC of the European Parliament and of the Council).

The new law was expected to increase competition in the Turkish market and to ease exploration and exploitation of petroleum. Nevertheless, it has not been approved by the former President of the Republic of Turkey and, whether it will be re-approved is unknown. Once entered into force, however, it will bring crucial modifications to the present petroleum regime.

Footnotes

1. Permit grants its holder a petroleum right to carry out geological investigation only. Geological investigation does not include exploratory drilling.

2. Certificate means an authorization granted under the Law to conduct a petroleum operation other than exploration, discovery, development or production. A certificate may particularly be crucial when an exploitation license holder wishes to set up energy or water facilities necessary for the due conduct of its business.

3. The real property regime of off-shore exploration areas is a very contentious matter under Turkish law. Potential investors are particularly urged to seek specialist advice in this respect.

4. Involvement of TPAO in JOAs is not a must. JOAs may also be executed by and between private companies entitled to petroleum rights.

5. The Petroleum Registry is held by the GDPA and publicly available.

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
 
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
 
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