Turkey’s new petroleum law: general framework and incentives

June 2014 | EXPERT BRIEFING | SECTOR ANALYSIS

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Turkey has been enjoying a steady rate of growth for the past decade, which has created a strong economy but also significantly increased the demand for energy. In line with recent economic growth, Turkey announced a set of ambitious targets to be reached by 2023, which will mark the centenary of the Republic. Key goals for 2023 include becoming one of the top 10 economies of the world; increasing exports to $500bn and foreign trade volume to $1 trillion; increasing per capita income to $25,000; and reaching an annual GDP of $2 trillion.

The recently published 2014-2018 Development Plan also mirrors the 2023 Vision and provides milestones to be achieved by 2018. Energy is one of the key industries singled out for further development. The primary aim of the government is to reduce the country’s heavy reliance on imported energy and advance toward energy self-sufficiency. This is intended to be achieved through increasing domestic supply of oil and gas as well as diversifying domestic energy supplies, which entails greater use of nuclear and renewable energy resources. Therefore, the Turkish parliament has been adopting a series of legislative reforms in order to provide a more favourable climate for domestic and international energy investors. The general philosophy of the legislative reforms is to liberalise the energy markets and foster competition.

In parallel with the government’s energy policies, electricity market liberalisation has been enacted through a significant privatisation program aimed at reducing the state’s role in both generating and distributing electricity. In 2013, privatisation of electricity distribution was completed and the privatisation of electricity generation assets is currently ongoing with tenders scheduled for the coming months. The new Electricity Market Law, adopted in March 2013, regulates the electricity market, which is now accessible for smaller investors and has also become an attractive opportunity for foreign investors. The draft Natural Gas Market Law is also eagerly anticipated by investors. Under the draft law, BOTAŞ, the national petroleum pipeline corporation, will be further privatised and help create more opportunities for investors wishing to become more active in this market.

One of the most significant recent developments in the Turkish energy sector is the new Turkish Petroleum Law No. 6491, which officially passed into law on 11 June 2013. Historically, the right to explore and produce petroleum in Turkey has either been exclusively owned or managed by the state. However, as the country’s consumption of fuel – which could not be fed through domestic supplies – steadily increased, the strict governmental regime started to loosen up with a view to establish a competitive market where the state is now playing more of a regulatory role rather than acting as the main player. Therefore, the adoption of the new Law has been a welcome boost for the industry.

The new Turkish Petroleum Law

The main objective of the new Turkish Petroleum Law is to remove the barriers for foreign investment. As such, the Law aims to minimise bureaucracy; simplify application procedures; produce incentives for exploration and production operations; reduce the costs of such operations; and create a more competitive environment.

The major changes included in the new Law that are of interest to foreign investors can be summarised under three headings. First, the new Law removed the restriction existing under the previous Law, which limited persons acting for and on behalf of a foreign state from engaging in petroleum activities in Turkey. Second, it provides incentives for foreign investors. Third, whereas the regime under the previous law separated the country into 18 different geographical regions this is now replaced by a much simpler onshore and offshore regime. Under the new system the latter is subdivided into territorial and non-territorial waters.

Licensing

There are three types of permits and licences recognised under the Law which regulate different phases and activities of Exploration & Production: (i) search permits; (ii) exploration licences; and (iii) operation licences. All three types of permits and licences are described as ‘petroleum right’ under the Law. Those eligible to apply for permits and licences have also been described within the Law and with reference to Turkish legislation regulating companies.

The new Law provides changes to licensing procedure as well as the duration of licences which can now be granted for longer periods.

Rights and incentives

The new Turkish Petroleum Law offers a wide range of incentives to investors, which vary from fiscal incentives to those concerning employment. Fiscal incentives include capping the income tax liability of petroleum right holders and exemption from customs duty, and levies and stamp tax for oil and gas field equipment imported and supplied locally. There is also an exemption from certification of compliance for imported goods. Further, the rights of repatriation of registered capital and keeping income in return for exportation of petroleum have also been recognised under the new Law. The Law provides rights in relation to the use of land such as consolidation, expropriation, lease, easement and water rights. Upon request, permission to build pipelines for the purpose of transferring petroleum is also included in the incentives.

Finally, under the new Law foreign employees of a petroleum right holder have been granted exemption from standard work regulations for a period of six months, and they are able to work in Turkey by obtaining a residence permit.

Obligations

The regime of obligations introduced by the new Turkish Petroleum Law is quite straightforward and easy to navigate. Financial obligations consist of the fee that the search permit holders are obligated to pay and the state royalty. Investors are also responsible for providing collateral for both investment and loss and damages.

Further obligations include the approval from the Ministry of Energy and Natural Resources for share transfer transactions that would cause a change in the control of the petroleum rights holding company; compliance with the public authorities’ requirements; protection of the environment and the compensation of landowners.

Umit Akin is a managing partner at Akin Law Office. He can be contacted on +90 212 351 5455 or by email: umit.akin@akinlawoffice.com.

Umit Akin

Akin Law Office