Energy: Oil & Gas 2023 - Part 1

1. General Structure of Hydrocarbon Ownership and Regulation

1.1 System of Hydrocarbon Ownership

Under the Turkish Petroleum Law No 6491, the term “petroleum” includes crude oil and natural gas. Petroleum resources in Türkiye are owned by, and are at the disposal of, the state. However, upstream interests are granted by way of licences with definite terms. In such cases, exploration licence and production lease holders must pay the state a one-eighth share (12.5%) as royalty for petroleum produced from an exploration or production area. Furthermore, under the Turkish Petroleum Law, petroleum right-holders are entitled to export 35% of the total crude oil and natural gas produced in the fields discovered after 1 January 1980 for onshore activities and 45% for offshore activities, but the remaining yield and the total amount of crude oil and natural gas produced in the fields discovered before 1 January 1980 as well as the petroleum products generated from such crude oil and natural gas are required to be retained in Türkiye in order to address domestic demand.

1.2 Regulatory Bodies

The Ministry of Energy and Natural Resources (Enerji ve Tabii Kaynaklar Bakanlığı, or MENR) is the central governmental body in charge of the energy sector and responsible for the determination and implementation of energy policies, as well as the transit passage of petroleum.

The General Directorate of Mining and Petroleum Affairs (Maden ve Petrol İşleri Genel Müdürlüğü, or GDMPA) is the main service unit/department of MENR and the regulatory authority for all mining and upstream petroleum activities. Presidential Decree No 4 on the Organisation of Affiliated, Related and Associated Institutions and Organisations with Ministries and Other Institutions and Organisations regulates the authorities and responsibilities of GDMPA, which mainly consist of the issuance and monitoring of permits and licences for the investigation, exploration, and production of petroleum, along with miningrelated authorities and responsibilities.

The Energy Market Regulatory Authority (Enerji Piyasası Düzenleme Kurumu, or EMRA) is the agency that regulates and monitors energy market activities, grants licences to conduct market activities (such as the distribution of petroleum), and has the authority to impose administrative fines and cancel licences due to non-compliance with applicable legislation. The EMRA’s organisation, authority, and responsibilities are governed by the Law Regarding Organisation and Functions of Energy Market Regulatory Authority, No 4628 (Enerji Piyasası Düzenleme Kurumunun Teşkilat ve Görevleri Hakkında Kanun).

1.3 National Companies

The Turkish Petroleum Pipeline Corporation (Boru Hatları ile Petrol Taşıma Anonim Şirketi, or BOTAŞ) is a state-owned economic enterprise involved in the construction and operation of oil and gas pipelines. BOTAŞ does not have any authority to regulate market activities. The legislation governing the activities of BOTAŞ includes the Statutory Decree Regarding State Economic Enterprises No 233. Its activities include construction; the transfer or lease of pipelines for the transportation of petroleum, petroleum products, and natural gas; and the transportation, purchase, and sale of petroleum, petroleum products, and natural gas. BOTAŞ is subject to the Natural Gas Market Law No 4646 and Petroleum Market Law No 5015 with respect to its operations.

The Turkish Petroleum Corporation (Türkiye Petrolleri Anonim Ortaklığı, or TPAO) is another state-owned economic enterprise involved in exploration, drilling and natural gas storage, as well as investing in crude oil and natural gas production. The legislation governing the organisation of TPAO is the Statutory Decree Regarding State Economic Enterprises No 233. TPAO’s activities include the import and export of crude oil, natural gas, and petroleum products, and the distribution and marketing of petroleum as defined under the Petroleum Market Law No 5015.

TPAO’s former subsidiary Türkiye Petrolleri Petrol Dağıtım AŞ (TPDD) is involved in fuel distribution activities and was privatised at the end of 2016.

1.4 Principal Hydrocarbon Law(s) and Regulations

Petroleum-related upstream activities are mainly regulated by the Turkish Petroleum Law No 6491, whereas downstream activities are primarily regulated by the Petroleum Market Law No 5015, the Natural Gas Market Law No 4646, and the Liquefied Petroleum Gas (LPG) Market Law No 5307. The main laws regarding petroleum activities are summarised as follows.

• The Turkish Petroleum Law No 6491 (Türk Petrol Kanunu) provides procedures and principles for the regulation, promotion, and supervision of petroleum exploration and production activities (both onshore and offshore) in Türkiye. The law regulates investment guarantees, exploration licences, production leases, royalties, and incentives, and aims to ensure that petroleum resources in Türkiye are rapidly, continuously, and effectively explored, developed, and produced, while preserving national interest.
• The Petroleum Market Law No 5015 (Petrol Piyasası Kanunu) regulates and provides guidance, oversight, and supervisory activities to ensure and improve the safe and regular operations of the petroleum markets and upstream activities. The law sets out provisions on licensing requirements and regulates EMRA’s authority in relation to the petroleum market.
• The Law on Transit Passage of Petroleum through Pipelines No 4586 (Petrolün Boru Hatları ile Transit Geçisine Dair Kanun) regulates the transit passage of petroleum and other hydrocarbons through pipelines, as well as procedures for the expropriation of lands, safety measures for the prevention of accidents, and insurance specific to transit petroleum pipelines.
• The Natural Gas Market Law No 4646 (Doğal Gaz Piyasası Kanunu) covers the import, transmission, distribution, storage, marketing, trade, and export of natural gas, the licensing requirements for these activities and the rights and obligations of all natural and legal persons involved in these activities
• The Liquefied Petroleum Gas (LPG) Market Law No 5307 (Sıvılaştırılmış Petrol Gazları (LPG) Piyasası Kanunu ve Elektrik Piyasası Kanununda Değişiklik Yapılmasına Dair Kanun) covers the distribution and trade of LPG, the licensing requirements for the distribution, transmission, storage, dealership, and other LPG bottle-related activities (such as production, filling, examination, maintenance, and repair), and the rights and obligations of market players with respect to these activities.
• The Regulation on the Implementation of the Turkish Petroleum Law (Türk Petrol Kanunu Uygulama Yönetmeliği) regulates the procedures and principles for petroleum surveying, exploration, production, reporting, taxation, supervision, and licensing.
• The Petroleum Market Licence Regulation (Petrol Piyasası Lisans Yönetmeliği) covers EMRA’s functions, responsibilities, and authorities with regard to licensing procedures, activities in the petroleum market, and the rights and obligations of petroleum market licence holders.
• The Liquefied Petroleum Gas (LPG) Market Licence Regulation (Sıvılaştırılmış Petrol Gazları Piyasası Lisans Yönetmeliği) covers the LPG licensing procedures and the supply process of LPG procured from domestic and foreign sources to the market in a safe, secure, and competitive manner, and determines the qualifications of responsible managers, tanker drivers, and other related personnel.
• The Natural Gas Market Licence Regulation (Doğal Gaz Piyasası Lisans Yönetmeliği) covers the principles regarding licensing procedures and the cancellation, termination, and renewal of natural gas licences.

2. Private Investment in Hydrocarbons: Upstream

2.1 Forms of Private Investment: Upstream

Due to Türkiye’s liberalised energy regime, the state-owned oil company, TPAO, no longer has the exclusive right to explore and produce petroleum. Private entities are entitled to acquire permits, licences and leases for upstream activities, mainly for the investigation, exploration, and production of petroleum. Upstream activities are also open to foreign participation.

As per the Turkish Petroleum Law, three major types of licences and permits are required to conduct upstream activities:

• an investigation permit;
• an exploration licence; and
• a production lease.

The investigation permit grants the right to survey the land by gathering data from the ground or air through topographic, geological, geophysical, geochemical, and similar methods for petroleum exploration purposes, and by performing drilling works in order to gather geological information. This permit does not grant its holder the right to drill an oil well or appraisal wells.

An exploration licence gives its holder the right to explore within the area defined in the licence.

Upon the discovery of a petroleum reserve for commercial production, an exploration licence holder should apply for a production lease that entitles the licence holder to develop and produce petroleum in the area defined in the licence, and to transport and trade the petroleum to downstream licensees that hold a petroleum market activity licence issued by EMRA.

GDMPA is the authority in charge of applications for these licences.

2.2 Issuing Upstream Licences/Obtaining Hydrocarbon Rights

GDMPA issues an investigation permit upon the execution of an agreement between the applicant and GDMPA, which sets forth the permit terms and conditions, the nature of the applicant’s activities, and the rights and obligations of the applicant.

Exploration licences may be granted for onshore and offshore petroleum exploration. Exploration licence applications for grids available for petroleum exploration are published and announced in the Official Gazette, and all applications regarding the available areas, including business and investment plans, should be submitted to GDMPA. Exploration licences are based on map sections on a scale equal to 1/50,000 or 1/25,000. Applicants should provide a bank letter of guarantee to GDMPA in an amount equal to 2% of their total investment; this rate is 1% for offshore activities.

GDMPA examines applications and performs an overall analysis of the applicant’s business, investment plans, financial status, technical capacity, human resources, experience, and achievements in the energy sector, if any. Upon its review, GDMPA issues its decision within a maximum period of 60 days. The maximum term for an exploration licence is five years for onshore activities and eight years for offshore activities, with a right of extension (up to nine years and 14 years, respectively).

Applications for production leases are also submitted to GDMPA. Production leases are granted for a maximum term of 20 years, which may be extended twice, for up to ten years each time. Except for force majeure events, production lease holders are required to carry out their activities during the licence term without any interruption, or risk being exposed to administrative fines under the Turkish Petroleum Law.

In addition to the above-mentioned sectorspecific licences, environmental permits (eg, an environmental impact assessment report, environment permit, and licence certificate) may also be required in order to conduct exploration and production activities. In addition, a workplace opening and operating licence should be obtained from the relevant municipality or governorship (depending on the location).

2.3 Typical Fiscal Terms: Upstream

There are two types of guarantees; namely, an investment guarantee and a loss and damages guarantee, which petroleum right-holders should provide to GDMPA in the form of bank letters of guarantee.

Exploration licence applicants for onshore areas are required to provide an investment guarantee in an amount corresponding to 2% of the total investment required to realise the work programme, submitted together with their applications. If, however, the exploration licence application is in relation to an offshore area, the amount of the guarantee will be equal to 1% of the total investment. The amount of the investment guarantee corresponding to the annually realised rate of the committed work programme is returned to the petroleum right-holder at the end of the relevant period.

Investigation permit holders, exploration licence holders, and production lease holders are required to provide collateral to secure compensation for any damages that might be caused during their petroleum-related activities. The amount of the loss and damages guaranteed to be paid per hectare is:

• 5/10,000 of the required application fee for investigation permit applicants;
• 1/1,000 of the required application fee for exploration licence applicants; and
• 5/1,000 of the required application fee for production lease applicants.

The President of the Republic of Türkiye has the authority to increase or decrease this rate by 50%. This guarantee is returned to the licence holder one year after the announcement of the termination of the relevant petroleum licence in the official gazette, provided that no loss or damage has occurred and that no third-party claims have been made regarding this guarantee.

At the production stage, explorers or operators should also pay the state share (devlet hissesi) in cash on a monthly basis, which is equal to an eighth (12.5%) of the petroleum produced from the area subject to the production lease.

2.4 Income or Profits Tax Regime: Upstream

Income generated from petroleum activities is subject to corporate tax. Petroleum right-holders must make the necessary withholdings and declarations, as required under Income Tax Law No 193 (Gelir Vergisi Kanunu) and Corporate Tax Law No 5520 (Kurumlar Vergisi Kanunu). As per the Turkish Petroleum Law, the sum of the taxes that a petroleum right-holder is liable to pay or withhold should not exceed 55% of the licensee’s taxable income. Moreover, if a licensee imports materials, tools, fuel, and transfer vehicles to be used for petroleum activities or procures such items from a domestic provider, the licence holder will be exempt from customs duties and levies and stamp tax, unless GDMPA categorises these items as being unsuitable or the President of the Republic of Türkiye revokes the exemption.

2.5 Federal or State Companies

Expired production leases are not automatically returned to TPAO; these sites may be auctioned by GDMPA. However, TPAO has the right of first refusal in respect of such fields. Therefore, MENR should initially confirm with TPAO whether it wishes to acquire the fields. If TPAO’s response is affirmative, the fields should be returned to TPAO.

As a state-owned entity, TPAO is subject to a simplified procedure for expropriation compared to private investors. TPAO files its expropriation requests directly with GDMPA, and GDMPA conducts the expropriation in favour of TPAO, provided MENR approval is obtained.

2.6 Local Content Requirements: Upstream

The current legislation does not impose any requirements for the use of local goods and services, local employment, or training programmes in upstream operations.

2.7 Development and Production Requirements

The exploration licence holder has to notify GDMPA of any petroleum discovery made during the term of the exploration licence. GDMPA will then review the discovery application and register the discovery or reject the application. If GDMPA registers the petroleum discovery submitted by the licence holder, the licence holder will be entitled to apply for the grant of a production lease.

Upon the registration of the discovery of petroleum, but before the grant of the production lease, the licence holder is under an obligation to continue with the production of the petroleum, develop the petroleum field, and sell the petroleum produced. These activities will constitute the basis for the production lease. The licence holder must then submit a plan for the development of all discoveries in the petroleum field to GDMPA within six months of the registration date of the discovery with GDMPA.

Production leases are granted by GDMPA for a maximum term of 20 years, commensurate with the applicant’s business and financial investment plans. If production does not commence within one year or is suspended at any stage and not resumed within the 180-day period granted by GDMPA, the relevant production lease will be cancelled.

In general, all administrative acts are subject to judicial review in Türkiye, including the decisions of state authorities and administrative fines imposed by such authorities. MENR usually tries to find an amicable solution in any disputes that arise.

According to the Turkish Petroleum Law, all objections made by applicants or licensees, and all disputes arising between them, should be directed to MENR, which then concludes these applications. However, MENR’s decisions on licence applications, investigation permits, exploration licences, or production leases can be challenged before the Council of State (Danıştay), which will act as the court of first instance for the relevant dispute.

Pursuant to Article 6 of the Petroleum Law, an exploration licence is issued on the basis of a 1/50.000 scale map on land borders and in the seas within the territorial waters. This licence has a five-year term on land and an eight-year term offshore. The term of the licence may also be extended up to two years onshore and three years offshore, as long as the licence holder fulfils the work programme and submits a work and investment programme including at least one drilling and a corresponding 2% guarantee. In the case that the operation period required for the completion of an exploration well drilled in the exploration area or the completion of production tests, if any, exceeds the duration of the exploration licence, an additional period of up to six months may be granted upon the request of the petroleum right-holder.

In order to obtain such licence, applications shall be submitted to the GDMPA. In the following 60 days, applications covering the same piece of land shall be evaluated and finalised. The applicant shall provide a guarantee of 2% of the investment amount required for the work programme given in the licence application and this guarantee shall be transferred to the GDMPA within thirty days following the finalisation of the licence grant.

2.8 Other Key Terms: Upstream

Please refer to 2.1 Forms of Private Investment: Upstream, 2.2 Issuing Upstream Licences/ Obtaining Hydrocarbon Rights, and 2.3 Typical Fiscal Terms: Upstream for a general overview of upstream licences.

Petroleum right-holders may relinquish their exploration licences, either in whole or in part, with at least one month’s prior notice, and their production leases with at least three months’ prior notice, by filing an application to GDMPA and notifying any other public institutions that are associated with the relevant field. Any rights arising from the exploration licence or the production lease expire for the relinquished field on the date of such application.

Upon termination of their rights, petroleum rightholders must reinstate the field to its previous condition. In addition, the licence holders must compensate fully and make necessary payments to the owner of the land for all losses incurred, as well as depreciations in production (eg, agricultural yield) or operating income to which the owner would originally be entitled.

Licence holders are allowed to export 35% of the petroleum, crude oil, natural gas, and petroleum products generated from commercial discoveries made after 1 January 1980 if such products are produced onshore, and 45% if such products are produced offshore.

2.9 Transfers of Interest: Upstream Licences and Assets

There are two types of transfers:

• licence transfers upon the expiry of their terms; and
• share transfers, which would result in a change of control in a company that holds a petroleum licence or lease.

The transfer of upstream licences upon the expiry of their terms will be made in accordance with the procedure detailed in 2.5 Federal or State Companies.

If share transfers lead to a change of control in the licensed entity, both the transferor and the transferee should file an application to GDMPA, prior to the proposed transfer, together with their reasoning for the proposed transfer. GDMPA will review the application and send it to MENR together with its opinion. If MENR provides its consent to the transaction, the closing for the transfer of shares should be completed before the end of the calendar year in which MENR issued its consent. Evidentiary documentation showing such a change should be provided to GDMPA.

Exploration licences and production leases, as well as petroleum rights arising from them, may be subject to encumbrances in favour of third parties, provided that the prior consent of GDMPA has been obtained and that these pledges are registered with the petroleum registry kept by GDMPA.

The grant or transfer of exploration licences and production leases, as well as the establishment of any encumbrances on them, must be published in the official gazette and registered with the petroleum registry.

GDMPA may refuse to give its consent to the transfer of shares, licences, or leases, or to the establishment of any encumbrance over the shares of a licensed entity or over the transfer of licences, due to reasons such as a lack of experience or a lack of financial and technical capacity

2.10 Restrictions on Production Rates

Currently, upstream operations in the oil and gas business do not make up a significant portion of the Turkish market, as production rates are not very high. In line with the existing level of operations, no legal or regulatory restrictions are imposed on production rates. On the contrary, upstream activities are supported through various arrangements and incentives. Furthermore, Türkiye is not a member state of the Organisation of the Petroleum Exporting Countries (OPEC) or OPEC+ and therefore is not subject to OPEC quotas, OPEC+, or other restrictions.

* First published by Chambers and Partners.

** The original version of the Article can be found at this link.