Energy: Oil & Gas 2023 - Part 2
3. Private Investment in Hydrocarbons: Midstream/ Downstream
3.1 Forms of Private Investment: Midstream/Downstream
According to the Petroleum Market Law and the Natural Gas Market Law, a licence is required in order to perform market activities regulated under such legislation. Licence applications are made to EMRA. Licensees are entitled to benefit from the expropriation process if required by the licensed activities. Please see 3.11 Third-Party Access to Infrastructure for details on the legal framework for expropriation.
The Natural Gas Market Law states that BOTAŞ is the owner of all existing, under-construction, or planned sections of the national natural gas transmission network. However, the law permits new transmission companies to be licensed to construct new pipelines, to form a connected system with the existing lines for the purpose of transmission, and to operate such newly constructed pipelines. Legal entities holding licences for transmission activities are obliged to store natural gas in underground storage facilities at a rate determined by the Board equal to the import amount specified in their licences each year. As the only natural gas transmission licensee, BOTAŞ is effectively a monopoly in transmission activity. In terms of storage, the Silivri Natural Gas Storage Facility, Türkiye’s first underground natural gas storage facility, marks an important milestone. The facility has the capacity to meet one quarter of Türkiye’s daily gas demand during the harshest winter days with its daily back production capacity. The capacity of BOTAŞ’s Silivri Natural Gas Storage Facility, which is Türkiye’s first underground natural gas facility, was increased to 4.6 billion cubic metres from 3.2 billion cubic metres, with the completion of the second phase of the facility on 16 December 2022. On the other hand, expansion works continue at the Tuz Gölü Underground Natural Gas Storage Facility. The capacity of the storage, which is currently 1.2 billion cubic metres, will be increased to 5.4 billion cubic metres. The works are expected to be completed within two years.
While the Natural Gas Market Law provided for the full opening of the market to private companies in 2009, BOTAŞ maintains its dominant position in the importation of natural gas in Türkiye. Pursuant to current legislation, import companies cannot enter into new gas sale and purchase contracts (except for the purchase of LNG, compressed natural gas (CNG), and spot LNG) with countries that have effective gas sale and purchase contracts with BOTAŞ until such contracts expire. New entrants are not, at present, allowed to import gas from countries with which BOTAŞ has contracts, such as Russia, Azerbaijan, Turkmenistan, and Iran. This restriction on executing contracts with BOTAŞ’s existing counterparties is not applicable for LNG, CNG, and spot LNG imports. A further requirement was imposed on BOTAŞ, in order to decrease its dominant role in the market: to launch tenders until 2009 in order to transfer BOTAŞ’s existing natural gas purchase agreements to third parties for their access to the import system, entirely or partially.
BOTAŞ cannot execute a new natural gas purchase contract until the share of gas imported by BOTAŞ falls to 20% of the yearly national consumption. In addition, in order for a private company to import gas from other companies with which BOTAŞ does not have a contract, consent is required from the Energy Market Regulatory Authority Board (the “EMRA Board”).
Until and unless such restrictions on natural gas import activities are restructured and adapted to the current realities of market activity, BOTAŞ will continue to be a significant and dominant player in natural gas importation.
Since the liberalisation process started in the 1990s, the most significant type of off-takers of natural gas for power generation purposes have been natural gas combined cycle power plants. The build operate (BO), build operate transfer (BOT), and transfer of operation (TOR) models were all utilised in the development of these facilities. In 2001, EMRA was given the mandate to issue licences for electricity generation plants, succeeding the former state monopoly. As per the information provided on MENR’s official website, the total install capacity of Türkiye is 104,136 MW of which natural gas-fired plants constituted about 24.4% of the total capacity of commissioned electricity generation facilities as of the end of February 2023.
3.2 Downstream Operations Run by a National Monopoly: Rights and Terms of Access
In the natural gas market, companies holding transmission licences are not permitted to discriminate between third parties of equal status. Such companies may reject third-party access requests only on the basis of the grounds exhaustively listed under the Natural Gas Market Law.
Third-party access to the transmission network, and the activities of natural gas storage facilities, is regulated under the Transmission Network Operation Regulation (Doğal Gaz Piyasası İletim Şebekesi İşleyiş Yönetmeliği) and the BOTAŞ Transmission Network Operation Principles (İletim Şebekesi İşleyiş Düzenlemelerine İlişkin Esaslar) (the “Network Code”). In line with the Network Code, BOTAŞ operates the transmission network and manages and co-ordinates the access of third parties to it. In order to access the network, a connection agreement must be entered into between BOTAŞ, as the sole transmission licensee and owner of the existing national transmission network, and the respective import, wholesale, generation, or export company
Following the connection agreement, a standard-form transportation contract should be entered into for the transportation of gas through the transmission system, as well as for capacity allocation at an entry or exit point. The Network Code sets out detailed technical criteria and formulae for the calculation of tariffs applicable to the natural gas transmission activities of third parties.
3.3 Issuing Midstream/Downstream Licences
In order to conduct oil and gas market activities, licence applications should be made to EMRA, which will issue a final decision within a maximum of 60 days from the application date. If the relevant department of EMRA determines that the application is complete, it will notify the applicant to deposit the application fee in an amount corresponding to 1% of the licence fee.
Following payment, EMRA will review and evaluate the licence applications. EMRA will then prepare a report on its evaluation and submit it to the EMRA Board, which is the decision-making body of EMRA for licence applications, and for rendering the final decision on licence applications.
3.4 Fiscal Terms and Commercial Arrangements: Midstream/Downstream
As per the Petroleum Market Licence Regulation, the EMRA Board annually determines the specific revenue share (gelir payı) that should be paid by processing licence holders (as explained in 3.8 Other Key Terms: Midstream/Downstream) engaged in the production of biodiesels to refinery holders. The rates determined by the EMRA Board for 2023 are as follows:
- gasoline and ethanol supplied by gasoline – TRY15.96/m³;
- gas oil – TRY15.96/m³;
- aviation fuel – TRY15.96/m³;
- naphtha fuel – TRY15.96/m³;
- distilled maritime fuel – TRY15.96/m³;
- excess maritime fuel – TRY16.96/m³; and
- types of fuel oil – TRY16.96/m³.
Licence holders not engaged in the production of biodiesels are not required to pay any revenue share.
However, all licence holders should pay a contribution share (katılma payı) to EMRA on an annual basis in two equal instalments, except those that have eligible consumers. The amount of contribution shares is calculated by multiplying the total net sales of the licensee made in the relevant year by the annual contribution ratio as decided by the EMRA Board each year
In parallel to the foregoing, natural gas licence holders are also required to pay contribution shares to EMRA.
Tariffs and pricing policies in petroleum and natural gas activities are determined by EMRA under the Petroleum Market Pricing System Regulation (Petrol Piyasası Fiyatlandırma Sistemi Yönetmeliği) and the Natural Gas Market Tariffs Regulation (Doğal Gaz Piyasası Tarifeler Yönetmeliği), respectively.
3.5 Income or Profits Tax Regime: Midstream/Downstream
Downstream licence holders do not benefit from a special tax regime.
The only special tax incentive available is for activities involving the transportation of foreign crude oil and natural gas through transit pipelines and the construction and modernisation of pipelines; as such, these activities are exempt from VAT in accordance with the Value Added Tax Law No 3065.
3.6 Special Rights for National Companies
BOTAŞ’s natural gas-related receivables are subject to the Law on Collection of Public Receivables No 6183 (Amme Alacaklarının Tahsili Usulü Hakkında Kanun), which allows them to benefit from special treatment in terms of enforcement action in debt collection. However, private market players do not benefit from such a mechanism.
Furthermore, the relevant legislation imposes a restriction on the scope of market activities that may be conducted by licence holders. A natural gas market licensee performing activities in the natural gas market may only participate in one of the legal entities performing activities in a field other than its own field of activity. A licensee cannot participate in any other legal entity performing activities in its field of activity, nor establish a separate company. However, such a restriction is not applicable to BOTAŞ or its existing or future subsidiaries.
Please see 3.1 Forms of Private Investment: Midstream/Downstream regarding BOTAŞ’s dominant market position in relation to natural gas import activities.
3.7 Local Content Requirements: Midstream/Downstream
In parallel to upstream operations (as explained in 2.6 Local Content Requirements: Upstream), there are no requirements for the use of local goods and services, local employment, or training programmes in downstream operations.
3.8 Other Key Terms: Midstream/ Downstream
Pursuant to the Petroleum Market Licence Regulation, licences granted by EMRA may be summarised as follows:
- refinery licence holders are entitled to store and process petroleum;
- processing licence holders are entitled to produce new products from petroleum, biodiesel, HVO diesel from sustainable aviation fuel, and diesel types under the sub-heading of biorefinery and other petrochemical products, except for the production of fuel oil from waste of non-biological origin, besides those classified as hazardous waste under the relevant legislation in the waste subheading, and may also alter the quantity and quality of the product and operate a processing facility;
- lubricant oil licence holders are entitled to produce lubricant oil in the lubricant oil production facilities;
- storage licence holders are entitled to provide storage services and operate a storage facility;
- transmission licence holders are entitled to transfer petroleum via pipelines and operate a transmission facility;
- eligible consumer licence holders are entitled to acquire heating oil, fuel oil, and diesel from distributor licence holders;
- bunker fuel delivery licence holders are entitled to procure bunker fuel from refineries, distributors, and other bunker fuel delivery licence holders from Türkiye and abroad;
- distributor licence holders are entitled to distribute fuel to dealers, conduct wholesale of fuel to eligible consumers, transport fuel through pipelines to plants located near storage facilities, and import certain types of fuel;
- dealership licence holders are entitled to supply fuel (except for LPG), solely from their own distributors and third-party dealers; and • transportation licence holders are entitled to transport petroleum through vehicles
The Petroleum Market Law imposes a national petroleum storage (ulusal petrol stoğu) obligation, in order to secure the availability of petroleum against fluctuations in supply. To that end, refinery, fuel oil, and distributor licence holders are required to store fuel products in the amount of 20 times the daily average supply of the previous year in their own storage facilities.
Except for refinery licences, there are no domestic supply requirements. In the case of refinery licences, licensees are required to prioritise the procurement of crude oil from local producers as opposed to foreign suppliers.
All licences are granted for up to a maximum of 49 years. Licence holders must file an electronic application with EMRA for an extension to the licence term between two and six months prior to the expiry of the licence term.
Licences are terminated by the decision of the EMRA Board, upon the occurrence of the following events:
- bankruptcy of the licence holder;
- dissolution of the legal entity licence holder;
- death of a natural person licence holder;
- suspension of operations of refinery licence holders for a term of more than six months, except due to force majeure events or on reasonable grounds; or
- receipt of a termination request from a licence holder (except from refinery licence, transmission, and storage licence holders).
In the case of a voluntary termination, refinery, transmission, and storage licensees would be subject to the following additional requirements:
- refinery licence holders should complete the takeover of facilities and stock inventory in relation to national petroleum storage and income accounting;
- transmission licence holders should inform their dealers as well as EMRA at least three months prior to ceasing their activities; and
- transmission and storage licensees should submit documents to EMRA indicating that all commitments towards third parties have been satisfied.
Unless terminated earlier due to the foregoing termination grounds, licences terminate upon the expiry of the licence term.
The legislation further imposes certain insurance obligations on licensees. As per the Natural Gas Market Licence Regulation, the types of licences and authorities granted are summarised as follows.
- Import licence holders are entitled to carry out the activities of importing natural gas in the form of LNG, CNG, or gas from abroad for domestic sale or for export purposes. Importers must obtain a separate licence for each import connection.
- Transmission licence holders are entitled to plan, construct, and operate the transmission system. They are also responsible for connecting users to a suitable transmission line, and for making the necessary arrangements for the natural gas flow and operation of the system.
- Storage licence holders are entitled to operate, construct and design the underground and above-ground storage and LNG facilities.
- Wholesale licence holders are entitled to sell natural gas to export companies, eligible consumers, CNG companies, importers, distributors, and other wholesale companies.
- Distribution licence holders are entitled to sell and deliver natural gas to retail consumers and eligible consumers by providing access to the distribution system.
- CNG licence holders are entitled to compress natural gas, fill the CNG into pressurised containers and sell the same. Moreover, licence holders are authorised to transport CNG by means of special vehicles to cities that are out of reach of the transmission network.
- Export licence holders are entitled to buy natural gas from production, wholesale, or export companies, and to market the natural gas to foreign buyers. Legal entities wishing to export LNG may engage in LNG transport activities, provided that it is included in their export licences, however, they may not engage in domestic delivery activities.
- CNG licence holders are entitled to deliver CNG to the facilities where CNG fuelled vehicles are produced by legal entities in order to ensure that such vehicles can be tested and delivered to the delivery point.
Natural gas market licences terminate upon the expiry of the term of the licence, the bankruptcy of the licence holder, or a request for termination of the licence by the licence holder (except for refinery, transmission, and storage licences).
Natural gas market licences are granted for a term ranging between 10 and 30 years. Licensees may file an extension request with EMRA between nine months and one year prior to the expiry of the relevant licence. Similar to the petroleum market requirements, natural gas market players should also maintain sufficient insurance coverage.
The Regulation on Measures Regarding Natural Gas Market Distribution Licenses (Doğal Gaz Piyasası Dağıtım Lisanslarına İlişkin Tedbirler Yönetmeliği), which entered into force on 19 August 2023, provides a regulatory framework to secure the natural gas distribution service, prevent service disruption and protect consumers, mainly by imposing certain administrative measures on distribution license holders, under certain circumstances such as deterioration of licensee’s financial capacity of licensee, licensee’s recurring violations of applicable legislation or interruption of distribution activities (quality or quantitywise) due to such violations. In doing so, the EMRA Board shall have the discretion to implement the measures (and the extent of same) foreseen under the legislation, such as reappointment of some or all of the management and administrative staff of the distribution licensee, investigation over the licensee to assess its compliance with applicable legislation, and eventually license cancellation.
3.9 Condemnation/Eminent Domain Rights
In respect of publicly owned land, petroleum or natural gas licence holders may submit a request to EMRA to establish property rights other than ownership over publicly owned property (such as usufruct rights, servitude rights, or construction rights), or to lease the publicly owned property required for the licensed activities on a long-term basis. If EMRA approves the licence holder’s request, it will then procure the establishment of such rights in favour of the licence holder according to the needs of the project. Licence holders are required to pay the costs for the grant of those rights, and the term of such rights will be limited to the licence term. If, however, the land is private property, an expropriation process would need to be triggered, analogous to the common law process of eminent domain.
Both the Petroleum Market Law and the Natural Gas Market Law allow the expropriation of private property if it is required for licensed activities. Under the Petroleum Market Law, land rights necessary for petroleum activities where private property is affected should, in principle, be acquired through negotiation between the licensees and the landowners. If this is not possible, land rights may be acquired through expropriation. According to the Natural Gas Market Law, expropriation proceedings may be initiated to perform relevant natural gas market activities.
Following the expropriation process, under both the Petroleum Market Law and the Natural Gas Market Law, the state treasury becomes the owner of the property, which usually allocates the land directly to the licence holder by the granting of a contractual usage right or property right other than ownership over the relevant land.
3.10 Laws and Regulations Governing Transportation
As explained above, the legislation governing 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.
Law No 4586 of 23 June 2000 on the Transit of Petroleum by Pipelines (Pipeline Law) is the main legislation governing the transport of hydrocarbons. Domestic transmission and transport is also regulated by the Petroleum Market Law No 5015 dated 4 December 2013 and the Natural Gas Market Law No 4646 dated 18 April 2001.
While the Pipeline Law regulates the principles and procedures for projects (eg, expropriation, pipeline safety, third-party liability, and insurance), the inter-governmental agreements (IGAs) to be signed for the construction and operation of each project would typically feature more detailed, project-specific provisions that would supersede the law.
As part of the legislation on this subject, the Decree published on 11 November 2011 in the official gazette prohibits the import, export, and transit of petroleum by road and rail unless a special permit is obtained from the Ministry of Customs and Trade.
3.11 Third-Party Access to Infrastructure
Currently, BOTAŞ is the only natural gas transmission licensee and the sole owner of the existing transmission network. See 3.1 Forms of Private Investment: Midstream/Downstream and 3.2 Downstream Operations Run by a National Monopoly: Rights and Terms of Access for details on private parties’ access to the transmission network.
A large portion of state-owned distribution companies have been privatised (some have yet to be finalised), with a notable exception being the distribution company in İstanbul (İstanbul Gaz Dağıtım Sanayi ve Ticaret Anonim Şirketi, or İGDAŞ). EMRA is responsible for granting distribution licences for the supply of gas to cities with no natural gas distribution network. As BOTAŞ’s transmission network reaches a new city, EMRA organises a natural gas distribution licence tender for that city. Access to the distribution network is regulated separately under the Natural Gas Distribution and Customer Services Regulation (Doğal Gaz Piyasası Dağıtım ve Müşteri Hizmetleri Yönetmeliği). Distribution companies are required to connect all consumers within their designated region upon request. A connection agreement between the parties is executed and the technical connection and service lines are established. Subscription agreements, transportation service agreements and delivery services agreements may also be executed between the distribution companies, natural gas market licensees, and retail consumers (including eligible consumers).
3.12 Restrictions on Product Sales: Local Market
Pursuant to the Petroleum Market Law and the Petroleum Market Licence Regulation, a refinery, distributor, or dealership licence is required in order to conduct the distribution and/or sale of petroleum. Under the Natural Gas Market Law, the wholesale and distribution of natural gas is permitted by obtaining licences for such activities from EMRA.
Refinery licence holders are obliged to store petroleum/petroleum products equivalent to 20 times the daily average supply in storage facilities in order to satisfy the national petroleum storage obligation. Furthermore, distribution licence owners are obliged to realise white product (gasoline and diesel oil) sales of:
- 20,000 tonnes in the second calendar year;
- 30,000 tonnes in the third calendar year;
- 40,000 tonnes in the fourth calendar year; and
- 60,000 tonnes of white products annually as of the fifth calendar year,
in each case, following the date they obtain their licences.
Under the Natural Gas Market Law, the annual amount of imported natural gas held by any wholesale company cannot exceed 20% of the annual national gas consumption forecast, which is determined by EMRA on an annual basis.
Import licence holders may conduct the wholesale of natural gas without obtaining a separate wholesale licence. To that end, it is sufficient for such legal entities to inform EMRA about their suppliers of natural gas and the types of transportation methods they intend to use, as well as their technical and financial capabilities.
A producer of natural gas is entitled to sell the gas it produces directly to eligible consumers, as long as the volume of gas sold in such a manner does not exceed 20% of the national consumption forecast, as determined by EMRA, for that year. It may sell the excess quantity of natural gas to import companies, distribution companies, or wholesale companies. Producers may also export the gas produced, if they obtain an export licence. As for restrictions concerning significant off-takers from the oil and gas markets, concurrent ownership limitations and unbundling requirements apply to electricity generation and distribution licensees, which are licensed under Electricity Market Law No 6446 (Elektrik Piyasası Kanunu) and secondary legislation issued by EMRA.
3.13 Laws and Regulations: Imports and Exports
The Turkish Petroleum Law imposes an export capacity restriction: only 35% of petroleum, crude oil, natural gas, and petroleum products produced onshore and 45% of petroleum, crude oil, natural gas, and petroleum products produced offshore may be exported. The remaining yield must be retained in Türkiye to fulfil domestic demand. Furthermore, the Natural Gas Market Licence Regulation mandates that exports cannot interrupt local requirements or the supply system, which becomes relevant especially in the transfer of natural gas via pipelines. Exporters of natural gas must adhere to the technical specifications introduced by EMRA, taking into account the capacity of the transmission network and the export exit points.
In respect of natural gas exports, if a petroleum right-holder producing natural gas wishes to export its production, it should obtain a natural gas wholesale licence. Any other party wishing to export natural gas must obtain an export licence from EMRA. Accordingly, export licence holders are entitled to buy natural gas from production, wholesale or export companies, and to export the natural gas to foreign buyers.
As per the Petroleum Market Licence Regulation, crude oil and petroleum products may be exported freely. However, publicly available records reveal that no crude oil is currently being exported, solely petroleum products. In order to export petroleum products, various export authorisations must be obtained from the relevant state authorities, including GDMPA and EMRA, depending on the type of activity.
Pursuant to the LNG Market Licence Regulation, LNG distribution licence holders and refinery licence holders are entitled to export LNG; and LNG export licence holders will also be entitled to transport LNG provided that such transportation right is annotated to their licences.
There are no taxes or duties applicable for the export of these products. On the contrary, if export companies have purchased these products from local parties by paying VAT or special consumption tax, there are incentives available for the export companies to have these taxes reimbursed.
3.14 Transfers of Interest: Midstream/ Downstream Licences and Assets
The Petroleum Market Licence Regulation and the Natural Gas Market Licence Regulation prohibit the transfer of downstream licences, but both provide for an exception in favour of project lenders (ie, banks and other financial institutions). Accordingly, depending on the terms and conditions of the financing agreements, lenders are entitled to request EMRA to reissue the subject matter licence in the name of another legal entity, provided that all the initial licence holder’s undertakings in relation to the licence are transferred to that third party and the new licensee satisfies the criteria sought for licence applicants within the scope of the above-mentioned regulations.