Energy: Oil & Gas 2023 - Part 3

4. Foreign Investment

4.1 Foreign Investment Rules Applicable to Domestic Investments in Hydrocarbons

Applications for downstream oil and natural gas licences can only be filed by Turkish companies. That said, there is no limitation that prevents a Turkish licensee company from being wholly or partly owned by foreign individuals and/or legal entities.

The Foreign Direct Investments Law No 4875 (Doğrudan Yabancı Yatırımlar Kanunu) provides that all companies established in Türkiye are accepted as Turkish companies, regardless of the nationality of their shareholders. It also sets forth that companies with foreign investors must be treated the same as those with domestic investors. As such, foreign direct investments cannot be expropriated or nationalised, except as justified by public interest and only against payment of compensation and in accordance with the due process of law, which is available to Turkish citizens and foreign investors alike.

International arbitration is frequently used as a method of dispute resolution. Türkiye is a signatory to both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention on Settlement of Investment Disputes between States and Nationals of Other States. In addition, Türkiye has executed bilateral investment treaties with 98 countries, 76 of which are currently in force, including with the US; all EU member states, excluding Ireland; all OECD member countries, except Iceland, Canada, Norway, and New Zealand; a number of Asian countries, such as China, Japan and the Republic of South Korea; and Middle Eastern countries such as Lebanon, BAE, Qatar, and Iran. TPAO holds almost 80% of all exploration licences (including all offshore exploration licences) and almost half of all production licences, with relatively small foreign investment in the upstream sector.

The Turkish Petroleum Law, however, provides some tax incentives and low royalties in this regard. For instance, while the general VAT rate is 18%, deliveries of goods and services specifically related to petroleum exploration activities to persons carrying out such activities remain exempt from VAT. The Turkish Petroleum Law also provides for customs duty exemption related to petroleum operations: all imports of materials, equipment, and fuel, and land, sea, and air transport vehicles approved by the GDMPA are exempt from customs duties, either by a petroleum right-holder itself or by a contractor approved by the GDMPA. The Law also provides that contracts entered into by petroleum rightholders in relation to exploration and production activities are exempt from stamp duty. Furthermore, the withholding tax applicable to foreign companies for exploration services is applied at a rate of 5% instead of 20%.

4.2 Sanctions

No information has been provided in this jurisdiction.

5. Environmental, Health and Safety (EHS)

5.1 Environmental Laws and Environmental Regulator(s)

Environmental Law No 2872 (Çevre Kanunu) and its secondary regulations are the main pieces of legislation that govern environmental matters. In addition, the Turkish Petroleum Law, the Petroleum Market Law, the Regulation on the Implementation of the Turkish Petroleum Law, the Petroleum Market Licence Regulation, and the Natural Gas Market Law impose rules and standards relating to environmental protection, as follows.

• Environmental Law No 2872 – all related parties must prevent, stop, and take necessary precautions to mitigate the effects of pollution. The law sets forth a strict liability rule.
• The Turkish Petroleum Law – petroleum rightholders must not commit any dangerous act (as defined under the legislation) directly or indirectly during the conduct of petroleum operations.
• The Petroleum Market Law – persons who conduct petroleum market activities should take all necessary precautions to prevent damage to the environment and notify public authorities in the event of any risk of damage to the environment.
• The Regulation on the Implementation of the Turkish Petroleum Law – petroleum rightholders must take all necessary measures to protect the environment and cultural assets, and comply with the respective petroleum procedures provided in the regulation to prevent any adverse impact on the environment.
• The Petroleum Market Licence Regulation – persons who conduct petroleum market activities are obliged to refrain from any dangerous acts, and should take all necessary precautions to prevent any damage to the environment.
• The Natural Gas Market Law – the law sets the policy goal of providing natural gas to consumers in a secure, competitive, and cost-efficient manner without damaging the environment.
• The Environmental Impact Assessment Regulation (Çevresel Etki Değerlendirmesi Yönetmeliği) – petroleum refineries, natural gas facilities, and petroleum, natural gas, and chemical transportation systems and storage facilities are subject to an environmental impact assessment (EIA) process.
• The Environmental Permit and Licence Regulation – facilities where petroleum market activities are conducted are required to obtain an environmental permit or an environmental permit and licence certificate prior to the commencement of their activities.
• The Law Regarding the Principles of Emergency Intervention and Compensation of the Damages in Cases of Sea Pollution from Petroleum and Other Hazardous Materials No 5312 (the “Sea Pollution Law”) (Deniz Çevresinin Petrol ve Diğer Zararlı Maddelerle Kirlenmesinde Acil Durumlarda Müdahale ve Zararların Tazmini Esaslarına Dair Kanun) – as per the Sea Pollution Law, all vessels carrying petroleum products and all persons responsible for offshore facilities must take all necessary precautions to prevent damage. Furthermore, public authorities must be informed of any hazardous materials carried in vessels that may pose a pollution risk.
• The Law on the Transit Passage of Petroleum through Pipelines (Petrolün Boru Hatları ile Transit Geçişine Dair Kanun) – participants in pipeline projects are required to prevent environmental damage to the sea, air, lakes, flora, animals, and other natural resources. In the event of any damage, the project participants are required to provide compensation.
• The Regulation on Control of Soil Pollution and Contaminated Sites (Toprak Kirliliğinin Kontrolü ve Noktasal Kaynaklı Kirlenmiş Sahalara Dair Yönetmelik) – crude oil and natural gas production are regarded as potentially soil-polluting activities. Accordingly, facility owners/operators are required to cease any pollution-creating activities, to determine the effects of the pollution and to carry out activities in order to clean contaminated areas.
• The Industrial Air Pollution Control Regulation (Sanayiden Kaynaklı Hava Kirliliğinin Kontrolü Yönetmeliği) – this regulation sets out the principles with which crude oil facilities, petroleum refineries, and storage facilities should comply in relation to industrial air emissions.

The main regulatory authority regarding environmental safety is the Ministry of Environment, Urbanisation, and Climate Change (Çevre, Şehircilik ve İklim Değişikliği Bakanlığı, or MoE), the primary responsibilities of which are the protection of the environment, the prevention of environmental pollution, and the setting forth of standards and procedures for environmental safety.

5.2 Environmental Obligations for a Major Hydrocarbon Project

Major petroleum projects are subject to an EIA process, and are also required to obtain certain environmental licences prior to commencement of their upstream and midstream operations, such as refinery operations. The Environmental Impact Assessment Regulation requires an EIA report to be filed for certain projects, or an “EIA not required” decision to be issued for projects subject to the Selection and Screening Criteria (if applicable).

Accordingly, as per the Environmental Impact Assessment Regulation, projects that carry a high risk of environmental pollution are subject to an EIA process. With respect to projects falling within the scope of the regulation, unless an affirmative opinion or an “EIA not required” decision is issued, no approval, permit, incentive, or usage licence can be issued. The MoE has the authority to evaluate the application and make the final decision.

In addition, as per the Environmental Permit and Licence Regulation, facilities engaged in certain petroleum activities, as detailed under Annexes I and II of the Environmental Permit and Licence Regulation, are required to obtain a temporary activity permit (geçici faaliyet belgesi) prior to the commencement of their activities. However, they should obtain an environmental permit (çevre izni) or environmental permit and licence certificate (çevre izin ve lisans belgesi) within a maximum period of one year following the issuance of the temporary activity permit.

Furthermore, in order to prevent any possible accidents, licensees are also required to comply with various obligations imposed under specific legislation throughout the conduct of their activities, summarised as follows.

• The Regulation on the Protection of Employees from the Dangers of Explosive Environments (Çalışanların Patlayıcı Ortamların Tehlikelerinden Korunması Hakkında Yönetmelik) states that employers should prepare a document that sets out the health and safety precautions to be adopted for the protection of employees due to possible explosions in such workplaces.
• The Regulation Regarding the Prevention of Major Industrial Accidents and Mitigation of their Effects (Büyük Endüstriyel Kazaların Önlenmesi ve Etkilerinin Azaltılması Hakkında Yönetmelik) states that entities that keep hazardous substances should take all necessary precautions in order to mitigate the effects of major industrial accidents. Furthermore, the Regulation requires operators of entities that store hazardous substances to prepare a major accident prevention policy document (büyük kaza önleme politikası belgesi) and submit that document to the MoE within one year of the commencement of their operations.

5.3 Offshore Environmental, Health and Safety (EHS) Requirements

The Sea Pollution Law and the Regulation on the Implementation of the Law Regarding the Principles of Emergency Intervention and Compensation of the Damages in Cases of Sea Pollution from Petroleum and other Dangerous Materials (the “Sea Pollution Regulation”) regulate marine safety and the prevention of marine pollution.

According to the Sea Pollution Law, offshore facilities are obliged to prevent any pollution or potential hazard, and should mitigate any damage in the event that a polluting event occurs and provide compensation in respect of all damage caused. Such facilities are also required to hold liability insurance for damages covered under the Sea Pollution Law. Otherwise, offshore facilities will not be permitted to conduct their activities.

5.4 Decommissioning Requirements

As per the Turkish Petroleum Law and its secondary legislation, upon the expiry of an upstream licence, petroleum right-holders are required to reinstate the site to the physical status it held prior to the commencement of their upstream activities. Furthermore, if licence holders fail to remove any of the movable or immovable properties located on the site within a six-month period following the expiry of their licences, ownership of the movable or immovable property left on the site will pass to the owner of the site.

5.5 Climate Change Laws

Türkiye has undertaken a wide range of legislative initiatives and acceded to certain international agreements relating to climate change, the most significant of which are as follows:

• the Montreal Protocol, aimed at stopping the production of ozone-depleting substances;
• the Vienna Agreement for the Protection of the Ozone Layer;
• Law No 5627 on Energy Efficiency, aimed at promoting energy efficiency and preventing the waste of energy;
• the Regulation on the Increase of Energy Sources and Efficiency in Energy Use, promoting the efficient use of energy; and
• the Regulation on Reduction of OzoneDepleting Substances

As a non-EU member, Türkiye has not taken steps to implement the EU Climate Change Package. However, Türkiye recently became a party to the Kyoto Protocol, which shares the primary goals of the EU Climate Change Package, including a reduction in greenhouse gas emissions, increasing the proportion of energy produced from renewable energy resources, and a reduction of energy consumption compared with projected levels by way of improving energy efficiency. Türkiye is in the process of preparing legislation to conform to the requirements of the Kyoto Protocol, which will ultimately result in compliance with EU requirements. However, Türkiye is no longer among the Annex II signatories. Therefore, Türkiye’s status under the Kyoto Protocol is limited to general undertakings with out being bound by quantitative limitations on current emissions levels.

The Paris Climate Agreement, being the most comprehensive climate agreement agreed upon at the 21st UN Conference of the Parties on Climate Change (COP21) in 2015, was signed by Türkiye on 22 April 2016 in New York and entered into force upon ratification on 7 October 2021.

In this context, the MoE leads domestic climate change strategies and regulates the government’s National Climate Change Strategy and Climate Change Action Plan. Accordingly, the MoE introduced voluntary carbon emission markets in late 2010 in compliance with the UN Framework Convention on Climate Change and the Kyoto Protocol. The MoE introduced international carbon emission trading schemes and adopted corresponding national regulations through a board, namely the Climate Change and Air Management Co-ordination Council. Currently, there is no binding emissions reduction undertaking on a national level, and carbon emissions trading proceeds on a voluntary basis.

5.6 Local Government Limits on Development

As long as a producer holds the necessary licences and authorisations – whether market related (ie, upstream operations) or environmental, health, and safety related – and complies with the terms and conditions of such licences as well as the applicable legislation in all respects, then neither the government nor the relevant state authorities are entitled to limit oil and gas development or restrict the operations of the licence holder.

6. Additional Information

6.1 Unconventional Interests: Upstream

Unconventional upstream activities (such as the exploration for, and production of, shale gas, shale oil, aquiclude gas, gas hydrates, bituminous coal, and coal bed methane) are regulated under the Turkish Petroleum Law, the Regulation on Implementation of the Turkish Petroleum Law, and secondary regulations. It is worth mentioning that the Law and secondary regulations do not explicitly define unconventional petroleum. Furthermore, there is no special regime for unconventional upstream interests. In the absence of a special regime, unconventional upstream activities will nevertheless be subject to the regime set forth for conventional upstream operations.

6.2 Liquefied Natural Gas (LNG)

Activities concerning LNG fall within the Natural Gas Market Law as well as secondary legislation, namely the Natural Gas Market Licence Regulation, and the Regulation on the Principles and Procedures for the Use of LNG Storage Facilities (Sıvılaştırılmış Doğal Gaz Depolama Tesisi Temel Kullanım Usul ve Esaslarının Belirlenmesine Dair Yönetmelik). In order to conduct LNG activities, companies are required to obtain a relevant licence from EMRA. Furthermore, the Regulation on the Procedures and Principles for the Use of LNG Storage Facilities governs the process for the establishment of LNG storage facilities.

Moreover, as per the Council of Ministers’ Decree No 2012/3305 (Yatırımlarda Devlet Yardımları Hakkında Karar), LNG investments amounting to a minimum of TRY50 million are entitled to benefit from various regional incentives, including a VAT exemption, a customs tax exemption, a tax deduction, and advantages relating to social security premiums.

6.3 Energy Transition Considerations

Energy transition in Türkiye seeks to improve security of supply, whilst at the same time improving energy access and sustainability. Türkiye is assessing the feasibility of its first generation energy transition projects such as carbon capture and storage (CCS) and hydrogen electrolysis. All the while, oil & gas facilities such as refineries are developing renewable energy resources for self-consumption. Tüpraş is commissioning solar energy power plants at its refineries to increase the share of renewables in its energy consumption. In a study carried out to calculate CO2 emissions from thermal power plants with an installed capacity of over 500 MW, cement factories, the steel industry, sugar factories, and refineries in Türkiye and to determine suitable geological environments for CO2 storage in Türkiye, it was indicated that seven billion Sm3 CO2 has already been produced for the West Raman Enhanced Oil Recovery (EOR) project from the Dodan field, which hosts a natural CO2 reservoir that can be extracted from the ground using techniques similar to oil and natural gas. The know-how on CO2 injection gained from CO2–EOR applications at West Raman will enable future CO2 storage projects.

6.4 Unique or Interesting Aspects of the Hydrocarbon Industry

In line with Türkiye’s goal of establishing a liberalised oil and gas market capable of competing with markets in other countries, various legislative instruments have been brought into force over the past decade. These legislative instruments are aimed at establishing an environment conducive to the safe and secure supply of oil and gas from both domestic and foreign sources to consumers in Türkiye under transparent and regulated market conditions. Furthermore, Türkiye’s geographical advantages allow it to tap into wider regions where there are large energy reserves, such as the Middle East and Asia, while at the same time serving as a safe, cost-efficient, and reliable energy transit corridor for Western markets. Despite the fact that production activities in the Turkish oil and gas markets are rather limited, Türkiye long ago began to play a leading role as an internationally significant oil and gas transit state in major oil and gas pipeline transportation projects, some of which pass solely through, or terminate within, Turkish borders.

6.5 Material Changes in Law or Regulation

There have been a number of changes to the oil and gas legislation over the past year. Firstly, Natural Gas Market Law No 4646 established an Organised Wholesale Natural Gas Market (Organize Toptan Doğal Gaz Satış Piyasası). Accordingly, EMRA is authorised to promote or oblige natural gas producers to sell a certain amount of natural gas on the Organised Wholesale Natural Gas Market. The Natural Gas Market Law expanded the definition of “production” activities by including direct transportation of natural gas to the distribution network. Furthermore, EMRA has been authorised to determine purchase priority among distribution companies if and when connection to the transmission network is congested due to technical or financial reasons.

Other legislative changes have also been introduced to separate LNG and CNG distribution procedures. Distribution companies are now authorised to distribute LNG and CNG to feed in gas to areas that fall outside the distribution network. The natural gas importer concept is redefined in the law and, accordingly, importers are also authorised to import CNG.

Furthermore, through amendments to the Petroleum Market Law No 5015, petroleum distributors are now subject to certain procedural requirements, including the establishment of an internal audit system. Finally, administrative fines in both Natural Gas Market Law No 4646 and Petroleum Market Law No 5015 are adjusted upwards by 122.93% for 2023.

Overall, while there are still some anticipated legislative changes in the pipeline, especially with respect to crude oil supply by local producers, the past year’s legislative agenda has been characterised by limited modifications of the existing system, rather than substantial systemic changes being introduced.

* First published by Chambers and Partners.

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