Oil & Gas In Turkey

Overview of the Oil & Gas Industry in Turkey and Developments

Turkey, strategically positioned between Europe and the Middle East, plays a significant role in the global oil market despite not being a major oil producer. The country's geographical location at the crossroads of key energy transit routes has turned it into a crucial energy hub for the transportation of oil from the Caspian, Middle Eastern, and Russian oil fields to Europe and beyond.

Turkey's strategic location, its energy transit routes, and its growing oil and energy infrastructure make it an attractive destination for investors looking to establish an oil company.

Registering an oil company in Turkey requires compliance with several legal and regulatory frameworks that govern the energy sector, specifically oil exploration, production, refining, and distribution.

This article provides a comprehensive analysis of the oil industry in Turkey, covering domestic production, oil imports and exports, Turkey's role as a transit hub, its refining capacity, and the impact of oil on the Turkish economy and energy security and also guide to registering an oil company in Turkey, covering the legal requirements, the steps to establish a company, regulatory bodies, and opportunities in the Turkish oil sector.

Overview of the Oil & Gas Industry in Turkey

1. Importance of Oil & Gas in Turkey

Turkey is not a major oil producer but is highly dependent on imported oil to meet its growing energy demand. Despite limited domestic production, Turkey has become a key player in the global energy market due to its location as a transit hub for oil transported from the Middle East, Russia, and the Caspian Sea to Europe.

The Turkish Petroleum Corporation (TPAO) is the state-owned entity responsible for much of the oil exploration and production in the country. However, private sector participation is encouraged, particularly in exploration, production, and the oil services sector.

2. Opportunities in the Oil & Gas Sector

Turkey's strategic location and evolving energy policies offer various opportunities for businesses in the oil industry. These include:

Exploration and production: Onshore and offshore oil exploration, particularly in the Black Sea and Eastern Mediterranean.
Refining and processing: Developing refinery infrastructure to meet growing domestic demand.
Oil transit: Leveraging Turkey's position as a hub for transporting oil from neighboring regions to international markets.
Oil services: Supporting activities such as drilling, logistics, and equipment supply.

3. Oil Production in Turkey

Domestic Oil Reserves:Turkey has limited domestic oil reserves, located mainly in the southeastern region of the country, near Batman, Diyarbakır, and Adıyaman. These reserves are relatively small compared to global standards, and production volumes are insufficient to meet the country's growing oil consumption needs. According to estimates, Turkey's proven oil reserves are around 300 million barrels.
Domestic Oil Production: Domestic oil production in Turkey is modest, with the state-owned Turkish Petroleum Corporation (TPAO) being the primary operator. Turkey produces around 60,000 barrels per day (bpd), a fraction of its consumption, which is over 1 million barrels per day. Most of the oil produced comes from the Southeastern Anatolia Basin and is mainly used for domestic consumption. Although Turkey's domestic production only meets a small portion of its demand, the country has been making efforts to boost exploration and production, both onshore and offshore, particularly in the Black Sea and Eastern Mediterranean regions.

4. Offshore Exploration Efforts

In recent years, Turkey has intensified its efforts to discover new offshore oil and gas reserves. The Fatih and Yavuz drilling vessels have been deployed to explore offshore areas, particularly in the Eastern Mediterranean and the Black Sea. In 2020, Turkey announced a major natural gas discovery in the Black Sea, but its oil exploration efforts are still ongoing.

5. Oil & Gas Imports and Exports

Oil Imports: Given its limited domestic production, Turkey relies heavily on oil imports to meet its energy needs. The country imports more than 90% of its oil, primarily from countries like:
- Russia
- Iraq
- Saudi Arabia
- Iran

In recent years, the diversification of import sources has become a key priority for Turkey, particularly as geopolitical tensions and sanctions have disrupted oil flows from Iran and other countries in the region.

Oil Exports and Re-Exports: While Turkey is not a significant exporter of oil, it plays an important role as an oil transit hub. Through its key pipelines and ports, Turkey facilitates the transport of crude oil from neighboring producing regions to international markets.
Crude Oil Pipelines: Several major crude oil pipelines pass through Turkey, including:
- Baku-Tbilisi-Ceyhan (BTC) Pipeline: One of the most important pipelines transporting Caspian Sea oil to global markets. The pipeline runs from Azerbaijan through Georgia and Turkey, terminating at the Ceyhan terminal on the Mediterranean coast. The BTC pipeline can transport up to 1 million barrels per day.
- Kirkuk-Ceyhan Pipeline: This pipeline transports Iraqi crude oil from the Kirkuk oil fields to the Ceyhan port in Turkey. It has been a critical route for Iraqi oil exports but has faced periodic disruptions due to security issues in Iraq.
- Trans-Anatolian Pipeline (TANAP): Although primarily a gas pipeline, TANAP is part of Turkey's broader strategy to enhance its energy transit role, with oil also playing a role in this corridor.

6. Turkey's Role as a Transit Hub

Strategic Location:Turkey's location between oil-rich regions and major consumer markets in Europe makes it a natural energy corridor. The country's ports and pipelines serve as important conduits for oil transport, and this transit role has strategic and economic importance.
- Ceyhan Port: Located on the Mediterranean coast, Ceyhan is a key terminal for oil shipments to Europe and global markets. It handles crude oil from the BTC and Kirkuk-Ceyhan pipelines, as well as other oil flows.
Energy Security and Geopolitical Significance: As an oil transit hub, Turkey is a critical player in the global energy supply chain. This role provides Turkey with geopolitical leverage, allowing it to influence oil flows and participate in international energy diplomacy. However, this strategic position also exposes Turkey to geopolitical risks, including regional conflicts, sanctions, and disruptions in neighboring countries, which can impact the stability of oil supplies transiting through its territory.

7. Oil Refining Capacity in Turkey

Refineries:

Turkey has a well-developed oil refining sector. The country's largest oil refining company is Tüpraş (Turkish Petroleum Refineries Corporation), which operates four refineries with a total capacity of over 600,000 barrels per day. These refineries are located in:

İzmit Refinery: The largest refinery in Turkey, located near Istanbul.
İzmir Refinery: Situated on the Aegean coast.
Kırıkkale Refinery: Located in central Turkey.
Batman Refinery: Focused on processing domestic crude oil from southeastern Turkey.

Refinery Products:

Turkey's refineries produce a wide range of petroleum products, including gasoline, diesel, jet fuel, and petrochemicals. These products are used to meet domestic energy demand and support the country's industrial sector. Some refined products are also exported, mainly to European and Middle Eastern markets.

8. The Economic Impact of Oil & Gas in Turkey

Oil and the Turkish Economy: Oil plays a crucial role in Turkey's economy, not only as a vital energy source but also as a key factor in its energy security and trade balance. The country's dependence on imported oil makes it vulnerable to fluctuations in global oil prices, which can significantly impact its current account deficit and inflation.
Oil Revenues and Investments: While Turkey is not a major oil producer, its role as a transit hub and its refining industry contribute to the economy. The fees and revenues generated from oil transportation, refining, and re-exports support Turkey's energy infrastructure and attract foreign investment in the energy sector. Additionally, ongoing exploration efforts and the development of new oil fields, particularly in offshore areas, hold potential for increasing domestic production and reducing Turkey's dependence on imports.

9. Oil and Energy Policy in Turkey

Diversification of Energy Sources: Turkey's energy policy aims to reduce its dependence on oil imports by diversifying its energy sources. This includes increasing investments in renewable energy (such as wind, solar, and hydropower) and natural gas exploration. While oil will continue to play a critical role in the short to medium term, Turkey is working to shift towards a more sustainable and energy-secure future.
Strategic Partnerships: Turkey's oil strategy also involves strengthening its relationships with major oil-producing countries, particularly those in the Middle East, Russia, and Central Asia. Turkey seeks to maintain stable and secure oil supplies through diplomatic and trade relationships, while also playing a role in international energy forums.

Legal Framework for Registering an Oil & Gas Company in Turkey

1. Main Regulatory Laws

The Turkish oil sector is regulated by several laws and regulations, the most significant of which are:

Petroleum Law No. 6491: Governs the exploration and production of petroleum resources in Turkey. This law sets out the rules for obtaining exploration and production licenses, as well as the obligations of oil companies operating in the country.
Turkish Commercial Code (TCC) No. 6102: Regulates the establishment and operation of companies in Turkey. Any business entity, including those involved in oil, must comply with the TCC.
Energy Market Regulatory Authority (EMRA): Regulates the downstream oil market, including the licensing of activities related to oil distribution, refining, and storage.
Foreign Direct Investment Law No. 4875: Provides a framework for foreign investors, ensuring equal treatment and facilitating investment in sectors like oil and energy.
Turkish Petroleum Corporation (TPAO): The Turkish Petroleum Corporation (TPAO) is the state-owned entity responsible for oil exploration and production. While TPAO plays a dominant role in the industry, private companies are encouraged to participate in the exploration and production of oil resources.
Energy Market Regulatory Authority (EMRA): EMRA is the primary regulator for downstream oil activities in Turkey. It is responsible for issuing licenses for refining, distribution, and storage, as well as ensuring compliance with market regulations.
Ministry of Energy and Natural Resources: The Ministry of Energy and Natural Resources oversees the overall energy policy in Turkey, including oil exploration and production. It also plays a role in approving licenses and permits for energy-related activities.

2.Licensing Requirements

To operate in the oil sector in Turkey, companies must obtain licenses based on their specific activities, such as:

Exploration License: Required for companies engaging in oil exploration activities.
Production License: Needed for companies extracting and producing oil in Turkey.
Refining License: Companies involved in refining petroleum products must obtain this license.
Distribution and Storage Licenses: For companies engaged in distributing or storing oil and petroleum products within Turkey.

4. Environmental Impact Assessment (EIA)

If your company is involved in exploration, production, or refining activities, an Environmental Impact Assessment (EIA) is required. The Turkish government mandates that all oil-related activities comply with environmental standards to protect ecosystems and communities.

5. Steps to Register an Oil & Gas Company in Turkey

Choosing a Business Structure: The first step in registering an oil company in Turkey is choosing the appropriate business structure. Common structures include:
- Limited Liability Company (LLC): The most common type of business entity for small to medium-sized enterprises. It requires at least one shareholder and one director. A LLC requires a minimum capital of 50,000 TRY and allows for the issuance of shares.
- Joint Stock Company (JSC): Suitable for larger corporations, especially those planning to engage in large-scale oil operations. A JSC requires a minimum capital of 250,000 TRY and allows for the issuance of shares.
Registering with the Turkish Trade Registry: Once you've decided on the business structure, the next step is to register the company with the Turkish Trade Registry. The registration process involves:
1. Drafting the Articles of Association (AoA): This document outlines the purpose and structure of the company and must comply with the Turkish Commercial Code.
2. Opening a Bank Account: A corporate bank account must be opened to deposit the minimum capital required for your chosen business structure.
3. Submitting Registration Documents: The Articles of Association, proof of capital deposit, and identification documents must be submitted to the Trade Registry Office.
4. Obtaining a Tax Number: The company must register with the Tax Office to receive a tax number and comply with Turkey's tax obligations.
5. Social Security Registration: You must register the company and its employees with the Social Security Institution (SGK).
Licensing and Permits: Once the company is registered, you must apply for the relevant licenses and permits from authorities like the Ministry of Energy and Natural Resources and EMRA, depending on the company's activities in the oil sector. These include:
- Exploration and production licenses
- Environmental permits for oil operations
- Compliance with health and safety regulations

Click the link of Company Registration in Turkey for more details

Taxation and Financial Reporting Requirements for Oil & Gas Industry in Turkey

The oil industry in Turkey, while offering immense opportunities due to the country's strategic position, comes with specific taxation and financial reporting requirements that companies must adhere to.

Turkey's government regulates the sector through a series of tax laws, incentives, and financial reporting obligations designed to ensure compliance, transparency, and effective resource management.

1. Corporate Income Tax

Oil companies in Turkey are subject to corporate tax on their profits, just like any other business entity.

Corporate Tax Rate: The standard corporate tax rate is 25% on taxable profits for 2023. However, this rate is subject to periodic adjustments based on government policies and fiscal requirements.
Tax Deductions: Oil companies involved in exploration and production activities may benefit from various tax incentives under the Petroleum Law (No. 6491), including deductions for capital expenditures, exploration costs, and infrastructure investments.
Tax Loss Carry Forward: Losses incurred during the exploration phase can be carried forward for up to five years, which helps reduce future taxable income when the company starts generating revenue.

2. Value-Added Tax (VAT)

Turkey has a well-established Value-Added Tax (VAT) system that applies to the sale of goods and services.

Standard VAT Rate: The general VAT rate in Turkey is 20%. This rate applies to most goods and services, including petroleum products.
Exemptions: Some specific activities related to oil exploration and production might be VAT-exempt or subject to reduced VAT, especially for operations critical to national interests like oil drilling and offshore exploration.
VAT Refunds: Companies engaged in export activities, such as the export of petroleum products, may be eligible for VAT refunds under certain conditions.

3. Excise Duties

In addition to corporate taxes and VAT, companies involved in the distribution and sale of petroleum products must also pay excise duties on refined oil products. These duties apply to:

Fuel products: Including gasoline, diesel, kerosene, and other fuel derivatives.
Import duties: For oil products imported into Turkey, specific excise taxes apply depending on the product type and volume.

The excise duty rates are updated regularly, and companies must stay informed of the latest rates applicable to their operations.

4. Withholding Taxes

Turkey imposes withholding taxes on various types of payments made by oil companies, such as:

Dividends: A withholding tax of 15% is applied to dividends paid to foreign shareholders unless reduced under a double taxation agreement.
Interest and Royalties: Payments for interest and royalties are also subject to withholding taxes, with rates ranging from 10% to 20%, depending on the nature of the payment and the applicable tax treaty.
Service Fees: The oil companies operating in Turkey subject to a 20% withholding tax for certain services provided by Freelancers, such as Accounting, Tax, Legal Services and Translation services.
Leases: Oil companies operating in Turkey are subject to a 20% withholding tax on the rent they pay for any real estate they rent for their needs, such as distribution stations, offices, and warehouses.

5. Customs Duties on Imports

Oil companies importing equipment and machinery for exploration and production activities may be subject to customs duties unless exempt under special regulations for oil companies. However, certain exemptions or reduced duties may be available for essential goods used in oil exploration, such as drilling rigs, specialized machinery, and tools.

6. Financial Reporting Requirements

All oil companies operating in Turkey are required to maintain accurate and transparent financial records in accordance with Turkish Financial Reporting Standards (TFRS), which are largely aligned with International Financial Reporting Standards (IFRS).

Annual Financial Statements: Every company must submit an annual financial statement to the Tax Office detailing their income, expenses, profits, and tax liabilities.
Independent Audits: Large oil companies, particularly Joint Stock Companies (JSCs), are subject to independent audits. The audit report must be submitted along with the financial statements. This audit ensures compliance with financial regulations and the accuracy of the company's reporting.
Consolidated Reporting: Oil companies with subsidiaries or joint ventures may need to prepare consolidated financial statements that include the financial performance of all related entities operating under the company's umbrella.
Tax Compliance Reporting: Along with financial reporting, companies must also file regular tax declarations, including VAT returns, excise duty declarations, and corporate tax filings.

Incentives & Transfer Pricing Regulations for Oil & Gas Companies in Turkey

Incentives:

To promote oil exploration and production, the Turkish government offers a range of tax incentives and support mechanisms:

Investment Incentives: Companies investing in oil exploration may qualify for VAT exemptions, reduced corporate tax rates, and customs duty exemptions for imported equipment.
Regional Incentives: Investments made in less developed regions of Turkey may be eligible for additional tax breaks and incentives, including land allocation, lower social security contributions, and interest rate support.

Transfer Pricing:

Oil companies operating in Turkey that engage in related-party transactions, especially with foreign affiliates, must comply with transfer pricing rules. These rules require that transactions between related entities be conducted at arm's length and properly documented to avoid tax evasion.

Transfer Pricing Documentation: Companies must maintain detailed records of their intercompany pricing strategies and submit them as part of their tax filings. Failure to comply with transfer pricing regulations can result in hefty fines and penalties.

Challenges and Opportunities for Oil & Gas Industry in Turkey

1. Challenges

Geopolitical Risks: Turkey's proximity to conflict-prone regions can create risks for oil companies operating in or transiting through the country.
Regulatory Compliance: Navigating Turkey's legal and regulatory framework for oil operations can be complex, particularly for foreign investors unfamiliar with local laws.
Environmental Regulations: Stringent environmental laws and the need for Environmental Impact Assessments can slow down project approvals and increase costs.

2. Opportunities

Growing Demand: Turkey's rising oil consumption offers opportunities for refining, distribution, and oil-related services.
Strategic Location: Turkey's role as an oil transit hub between key producing regions and Europe provides opportunities for logistics, storage, and trade in petroleum products.
Offshore Exploration: Recent discoveries of natural gas in the Black Sea and potential oil reserves in the Eastern Mediterranean make offshore exploration an attractive investment opportunity.

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.