Concerns over Turkey’s new petroleum law

There are growing woes on the part of opposition parties in Turkey regarding the draft bill on petroleum law that was adopted in March in the parliamentary commission on industry, trade, energy, natural resources and information technology. It will be likely discussed in the general assembly next week and will in all likelihood pass with the votes of the ruling Justice and Development Party (AK Party) that holds the majority of seats on the floor.

The main concern focuses on what impact the law will have on the state-owned Turkish Petroleum Corporation (TPAO). Looking at the 29-article draft bill, it is obvious that TPAO’s powers and privileges in the Turkish domestic market have been trimmed considerably, paving a way for international oil and gas companies to exploit opportunities in Turkey more strongly than ever before. This was not unexpected seeing that the AK Party government has been under pressure for almost a decade now to modify its code on petroleum, especially by major oil and gas companies backed by their governments. I heard on many occasions that the embassies representing the interests of these global oil companies have been lobbying government circles in Ankara.

The last attempt to liberalize the oil and gas extraction/exploration licenses was thwarted by former President Ahmed Necdet Sezer, who maintained that national interests were overlooked by the law. The neo-nationalist president said he partially vetoed the law because of the apparent lack of power given to governmental authority and the exclusive rights bestowed on foreign investors. At the heart of the dispute was a provision which stipulated that the state will get half of the oil revenues and transfer the other half to the local budget of the province where the oil is extracted. This had even pitted the nationalist deputies against deputies from predominantly Kurdish regions in the Southeast within the AK Party.

The party leader and Prime Minister Recep Tayyip Erdoğan weighed in the favor of nationalists in the dispute, chiding then-energy minister Hilmi Güler for including such a provision in the bill. Erdoğan was happy because the pressure he was getting from the West, primarily the US, was lifted since the blame was shifted to Sezer. That provision was against a key element of Turkish foreign policy with Iraq at the time, which said oil revenues in Iraq should be administered centrally. The concern was that oil revenues from the disputed city of Kirkuk might have fallen within the control of the semi-autonomous Kurdish administration running northern Iraq rather than the federal government in Baghdad. In the revised draft following the veto, the government dropped this provision from the text. The same provision is not in the current petroleum code either. By the way, it is interesting that the Turkish position on the Iraqi oil and gas dispute has somewhat changed since last year, with the government supporting Kurds in Iraq to tap into what Kurds claim (and Turks agree) to be constitutionally-recognized rights in sharing oil and gas potential and revenue.

In the draft bill sitting on the floor now, there are many provisions that will make foreign oil and gas companies happy, for example: tax breaks, reduction in royalty payments for licenses, simplification of license application procedures, making the duration of licenses longer, stimulus packages for extraction and exploration activities, lifting or reducing the tax burden on imported oil and gas field equipment, easing labor laws for hiring foreigners, and removing barriers on repatriation of registered capital by oil companies through eliminating corporate withheld taxes and income taxes. The government believes that with all these changes it will attract more foreign investment in oil and gas exploration and extraction. It is hoped that this will bring know-how, technology and capital, for it is a long-held government view that there is an untapped potential in Turkey’s reserves, especially in off-shore fields.

No doubt that the petroleum law, adopted in 1954, is outdated and stands in conflict with the oil and gas market laws that were adopted later. It had to be revised to realign Turkey’s code with the EU norms for a candidate country. The government also needs foreign funds to finance these extraction and exploration activities. Considering that drilling land costs around $3 to $5 million per well and $10 to $200 million off-shore depending on the depth, luring foreign investors into investing in Turkish oil and gas potential will help Turkey allocate its resources somewhere else. But the key question here is whether the government should do this at the expense of weakening TPAO, which carries out oil exploration on behalf of the state, against competition from international companies. The bill does not even mention TPAO’s name, which, according to opposition, is another hint that the interests of foreign companies was the primary concern driving the government to push this bill into adoption.

Turkey’s record on oil/gas exploration has been a lackluster performance at best, picking up speed only in the last couple of years. For example, the number of license applications for oil and gas exploration/extraction in Turkey since the was first law adopted in 1954 stood at 5,040. The bulk of these license applications (63 percent) were made by Turkey-based foreign companies, whose numbers are reported to be over 350. In the last decade, there has been noticeable interest in Turkey from foreign oil/gas companies for exploration rights, even though it was claimed that the country does not enjoy a rich hydrocarbon geology. Some believe that the potential for hydrocarbon is high in off-shore areas where Turkey has rights in extended territorial waters, a continental shelf and exclusive economic zones. By the end of 2012, some 30 percent of all licenses the government had given were used to successfully explore 1,770 wells. As a result, 174 (120 oil and 54 gas fields) extraction sites were discovered.

The intense drilling with government-backed funds has started to challenge the commonly-held view that Turkey has poor oil and gas reserves. There is tremendous excitement in government circles that there could be underdeveloped potential in oil and gas, especially in shale-gas opportunities. The current outlook is dimming that expectation, however. For example, Turkey extracts only 2.4 million tons of oil from domestic wells, compared with the annual consumption of oil for Turkey which is 30 million tons. According to 2011 projections, the oil reserves are estimated to have around 1 billion tons of oil in the country, but only 18 percent of this can be feasibly and profitably extracted. Some 1,000 wells across the country are pumping an average of 45 barrels each on a daily basis.

The government adopts a reasonable share in oil and gas extraction in what is referred as “state’s right.” It has the option to waive this right in areas where the extraction is not so economically feasible in order to not discourage potential bidders in such fields. The bill states that the government gets 12.5 percent of oil from the total amount extracted by a company in any given field. The practice in different countries for state’s right varies from 8 percent to 25 percent. In the last decade, the state’s right has earned the state TL 1.9 billion ($1.1 billion) from oil extracts and TL 376 million ($209 million) from gas.

I believe the government has good intentions in submitting this bill to Parliament, but it needs to make sure the national oil company will not get hammered with these new provisions. TPAO has come a long way, and it has become one of 12 largest oil companies in the world with a capability for deep-sea off-shore drilling. It has exploration/extraction agreements overseas, including Azerbaijan, Iraq, Libya and other countries. However, unlike many global oil companies that are vertically integrated and operate in all areas of the oil and gas industry, TPAO has been trimmed over decades by successive governments in Turkey that let different units of the company privatize parts of distribution, consumer filling stations and refining and petro-chemical processing plants. Today, all these privatized companies are sort of money-making machines with huge profits they are posting each year.

If the new bill further weakens TPAO in what is left in its portfolio, i.e. the extraction and exploration areas, then the legitimate goal of luring foreign companies in terms of capital and technology investment will deal a heavy blow to Turkey’s national oil company. This may be the worst timing for Turkey when it needs a strong TPAO to play a role in sorting out differences in the Eastern Mediterranean today — and possibly in the Aegean in the future. The bill should include safeguards for that, or a new bill on TPAO, which Energy Minister Taner Yıldız said is forthcoming, should be submitted to Parliament by the government as soon as possible.

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