Ercüment Erdem Prof. Dr. H. Ercüment Erdem

The Turkish Petroleum Law

August 2013


Turkish Petroleum Law No. 6491 (“Turkish Petroleum Law” or “the Law”) entered into force through publication in the Official Gazette dated 11 June 2013 and numbered 28674. Prior to the Law, Petroleum Law No. 6326 was in force for 59 years.

In this article, the important modifications enacted by the Turkish Petroleum Law shall be analyzed.

Purpose and Scope

The purpose and scope of the Turkish Petroleum Law is set forth under Article 1. Pursuant to said article, the purpose of the Law is to enable expedient, continuous and effective exploration, development and production of petroleum resources of the Republic of Turkey in accordance with the national interests. With this provision, the term “in accordance with the national interests”, which was subject to veto and criticism previously, has been maintained. Another issue subject to criticism is that this notion is not limited to the purpose and scope provision, but can be found in the relevant law in its entirety.

Exploration License, Application and Licensing

Articles 6-8 of the Law set forth provisions related to the exploration license, application and licensing procedure and operating license. Under Article 6 of the Petroleum Law No. 6326, it was set forth that the right to obtain a permit, exploration and operating license shall be exercised by Türkiye Petrolleri Anonim Ortaklığı (“TPAO”) on behalf of the state. On the other hand, the Turkish Petroleum Law does not contain such provision and abrogates TPAO’s right arising from the Law. In this way, private companies will be able to file a license application under the same conditions with TPAO concerning any field.

The Petroleum Law No. 6326, under Article 6, regulated that a permit, exploration and operating license could be granted in favor of stock corporations, including publicly traded companies, and to private law legal entities having the quality of a stock corporation in accordance with foreign legislation. Said legal entities could be granted a license by the Council of Ministers where it was deemed to be in accordance with the national interests. In other words, private companies were able to obtain a license with a decision of the Council of Ministers, differently from TPAO. On the other hand, the Turkish Petroleum Law does not contain such a provision related to the approval of the Council of Ministers.

Pursuant to Article 18 of the Turkish Petroleum Law, individuals who claim rights as per the relevant law are under obligation to provide an address in Turkey. An investigation permit, exploration license or operating license shall not be granted to those who do not provide an address.

Pursuant to Article 19 of the Turkish Petroleum Law, the petroleum right holder is obligated to provide, to the General Directorate of Petroleum Affairs, all records, accounts, information, documents and samples related to the petroleum transaction.

Exploration License

Pursuant to Article 6/5 of the Turkish Petroleum Law, the term of the exploration license is five years on land and eight years in seas. The license period may be extended for two years and for up to three years in seas, with the condition that the license holder submit the work and investment program which includes at least the performance of one drilling, as well as providing the corresponding two percent collateral. Additionally, the term of the exploration license of a petroleum right holder who has fulfilled their drilling program within the first extension period may be extended for up to two years on land and for up to three years in seas with the condition that they submit a new drilling and investment program, and provide the corresponding two percent collateral.

The period of the exploration license may not be more than nine years in onshore regions and fourteen years in intra-territorial waters, including the extensions made after the first effective date. However, an additional period of up to two years can be granted so that commercial evaluations can be made regarding a petroleum discovery made in the explored areas upon the expiry of the term of the exploration license.

Under the Petroleum Law No. 6326, the term of the exploration license was four years. In the event the exploration activities were continued in accordance with the relevant law and in good faith, the exploration licenses in the region could be extended up to two years. In the event that the activities of the explorer gave rise to the discovery of petroleum, and under the condition that an extension request has been made with an appropriate program, the Council of Ministers could extend the period for up to two years in exchange of a collateral. In any case, the exploration license period could not be more than eight years from the first date of entry into force. These periods could have been extended by fifty percent for sea explorations. With the Turkish Petroleum Law, the periods have been extended concerning both the first exploration license period and the total periods.

Another issue worth noticing is that no requirement of investment was sought for the extension of the period of license within Petroleum Law No. 6326. This meant that a license could be used for eight years without making any investment. However, the Turkish Petroleum Law prevents this inconvenience requiring the submission of an investment program.

Operating License

Pursuant to Article 8 of the Turkish Petroleum Law, where a discovery is made within the scope of an exploration activity, an operating license will be issued so that exploration and production are carried out, and the petroleum produced is sold during the license period. An operating license shall be issued for a period of twenty years as of the date of effect of the work and financial investment program that will be received pursuant to the regulation, depending on the request of the applicant.

The fields whose operating rights have expired can be put on auction upon the approval of the Energy and Natural Resources Minister, for the purpose of obtaining an operating license. However, before putting the same on auction, the Energy and Natural Resources Ministry will ask the TPAO whether it wishes this field to be subject to an operating license. Upon request of the TPAO, the field shall not be put on auction. Such a regulation suggests that the privilege of the TPAO has been maintained.

Surface and Water Rights

Pursuant to Article 10/1 of the Turkish Petroleum Law, the petroleum right holder shall be able to obtain the utilization right to the field required for petroleum transactions, in or in the vicinity of its exploration and operation license, by agreement if the land is privately owned or by expropriation if there is a dispute. Additionally, if the land is owned by the Treasury, the relevant land may be obtained by leasing it for the relevant sum, establishing an easement right or by obtaining a utilization right and having the same registered in its license. If the utilization right based on an agreement lasts for a period of more than three years, the land-owner or petroleum right holder may request that the field under private ownership be expropriated. The expropriation shall be made in accordance with the Expropriation Law No. 2942. Urgent appropriation may also be made in accordance with Article 27 of the Expropriation Law. The ownership right of the expropriated land shall belong to the Treasury and the utilization right shall belong to the petroleum right holder who paid the expropriation fee. In this case, the Ministry of Finance shall grant an easement right to the petroleum right holder free of charge for the duration of the license period.

Pursuant to Article 10/5 of the Turkish Petroleum Law, it is possible to conduct petroleum exploration and operation activities in license and permit areas that are located in places that are deemed as forests as per the Forest Law No. 6831; the conditions are that one must obtain permission and pay the relevant fees pursuant to the relevant legislation. During the preparatory period of the Turkish Petroleum Law, it was regulated that national parks may be open to petroleum exploration activities; however, this provision has been excluded from the Law.

Taxation

Pursuant to Article 12 of the Turkish Petroleum Law, the taxes that petroleum right holders are liable to pay on their net profits and the income tax, which they are liable to withhold on behalf of their shareholders, shall not exceed fifty-five percent. This percentage was set forth as forty percent during the preparatory period of the law and was subject to criticism since it would cause tax loss. As a result of this criticism, the former percentage has been maintained. However, as the actual percentage is below forty percent, this percentage would not cause a tax loss, on the contrary, it would be preferable in order to provide an assurance to investors.

Employment of Foreign Personnel

A petroleum right holder may employ foreign personnel who are required for the performance of the petroleum transaction for a period of at most six months. To do so, they must obtain a certificate of residence for employment purposes, to be issued by the Ministry of Internal Affairs upon the favorable opinion of the Ministry of Energy and Natural Resources. The conditions imposed are that the provisions of the special laws are reserved and the employer fulfills the liabilities arising from other laws. At this point, the provisions of the Law on Employment Permits for Foreigners No. 4817 shall not be applied. In the event the employment period exceeds six months, the permit will be obtained in accordance with the provisions of the relevant law.

Prohibitions and Special Provisions

Pursuant to Article 22/12 of the Turkish Petroleum Law, on the basis of the whole crude oil and natural gas produced by petroleum right holders in petroleum fields they discovered after January 1, 1980, petroleum right holders will be entitled to export 35 percent in onshore fields and 45 percent in offshore fields, in the form of crude petroleum or finished product. The remaining part and the whole of the crude petroleum and natural gas produced from the fields discovered before the date of January 1, 1980 and the petroleum products derived therefrom shall be set aside for country requirements. The power to re-determine these ratios and to specify the principles and procedures in this regard shall lie with the Council of Ministers.

Incentives

Pursuant to Article 26 of the Turkish Petroleum Law, the incentives that will be given for the investments that will be realized by petroleum right holders shall be determined by the Council of Ministers. This provision is a new provision, which did not exist in the Petroleum Law No. 6326. In this way, holders of petroleum rights are granted the right to benefit from the incentives for all other investments they make.

Conclusion

With the Turkish Petroleum Law, the national interest notion has been maintained in the purpose and scope of the law. With the abolition of the provision providing that the right of permit, exploration and operation license shall be in favor of the TPAO on behalf of the state, private companies will be able to enter the relevant field. New provisions have been adopted with regard to the period for which the exploration license may be granted. With the requirement to submit an investment plan with the extension request of the licenses, the cases where the license is extended without any investment are prevented. The requirement that the TPAO must be consulted before the fields whose operation licenses have expired can be put on auction has been adopted and TPAO has been granted a priority. The income tax deduction, whose reduction to forty percent has been subject to controversy, has been maintained as fifty-five percent. All these provisions aim to incentivize the exploration and production activities in the relevant field with a low cost, simplification of the operations and provide a competitive environment.