Turkey to Loosen Grip of State Energy Explorer With New Law

Turkey, which gets almost all of its energy from abroad, will debate a bill today that seeks to lure foreign companies to explore for oil and gas by ending the preferential treatment of state-run TPAO Turkiye Petrolleri AO.

The draft legislation eases rules for hiring foreign workers, extends license periods and cuts the top tax on profit from 55 percent to 40 percent.

Turkey wants to step up exploration after Israel and Cyprus reported gas discoveries in Mediterranean waters in the past three years. The country’s imports of oil and gas, amounting to $60 billion in 2012, were the main cause of its $47.5 billion current-account deficit last year, the world’s third-largest.

The law reflects “Turkey’s impatience to find out as quickly as possible whether it has serious oil and gas potential,” said Berfu Aksoy, a petroleum lawyer at Aksoy Law Office in Ankara. “Major oil companies want to see the potential for commercial oil and gas before entering the Turkish market.”

There have been no major energy discoveries in Turkey, a country crisscrossed by active fault lines that make it more difficult to find large reserves compared with neighbors like Iraq and Iran, according to the Energy Ministry.

Saudi Arabia produces 9 million barrels of oil a day while Turkey produces 45,000 barrels, although they have an equal number of operating wells, Energy Minister Taner Yildiz told Haberturk television yesterday.

Shale Gas

Just 20 percent of onshore areas and 3 percent of offshore areas have been explored, and the country’s shale-gas potential is unknown, the Energy Ministry said.

“We have made an agreement with Shell, which is right now working in Diyarbakir” in southeastern Turkey on shale gas, Yildiz told Haberturk. “We are open to proposals to work on shale gas both from local and foreign investors.”

The proposed law seeks to encourage foreign explorers by allowing them to compete with TPAO on an equal footing. The bill no longer defines TPAO as the national company charged with searching and drilling oil and gas reserves. It also ends the practice under the existing 1954 law of giving licenses to TPAO without auctions when terms expire.

Operators also would no longer have to partner with TPAO for every offshore license, though it is up to the Turkish Cabinet to decide who gets offshore licenses.

Conflicting Claims

Royal Dutch Shell Plc has formed partnerships with TPAO to drill in the Mediterranean this year and Black Sea in 2014, Deputy Exploration Manager Coskun Namoglu told an oil conference in Ankara last month. Chevron Corp. will start Black Sea drilling with TPAO in coming years, according to the government.

Turkey’s exploration in the Mediterranean has been encouraged by the recent offshore finds by Israel and Cyprus, nations with which the Turkish government has strained ties. Relations with Israel remain chilly after it apologized for killing nine Turks in a raid on a Gaza-bound ship in 2010.

Some of Cyprus’s offshore reserves are disputed by Turkey, which invaded the northern part of the island in 1974 after a coup aimed at uniting it with Greece. Turkey sent an exploration vessel accompanied by warships and jets to stop Cyprus drilling for oil and gas in 2011.

Exploration areas declared by Turkey and Greek Cypriots largely overlap in the south and west of the island, according to the Turkish energy ministry.

‘Avoiding Tensions’

“The sustainable policy is to carry gas from Israel or southern Cyprus via Turkey to Europe,” Yildiz told Haberturk yesterday. “For cooperation with southern Cyprus, our foremost condition is that Northern Turkish Cypriot Republic gets its share from these resources. We believe that energy can be used for peace, avoiding tensions.”

Yildiz said during a debate on the law in parliament in March that the government is considering privatizing TPAO, which holds two-thirds of all licenses and 100 percent of rights to offshore drilling.

“Let TPAO join the competition,” Yildiz told the oil conference April 10.

The law “offers terms more in line with international norms to encourage private sector exploration,” analysts Naz Masraff, Will Pearson and Elena McGovern at Eurasia Group said in a note on May 10. “Companies like Petrobras, Statoil, BP and Chevron, which previously showed interest in the Turkish energy sector, may revisit their interest.”

National Interest

Turkey imported about 92 percent of the oil it consumed in 2011 and 98 percent of its natural gas, according to the U.S. Energy Information Administration.

A previous bill aimed at attracting foreign explorers was vetoed in 2007 by then-president Ahmet Necdet Sezer on the grounds that it was contrary to the national interest. The current bill has the support of the ruling Justice and Development Party and is likely to pass with minimal changes, the Eurasia Group analysts said.

Joe McClintock, general manager of Canadian explorer Foinavon Energy Inc., was “deeply disappointed” that proposed measures to permit tax losses to be carried forward for 10 years have been cut from the bill. “This is a very high-risk business, and sometimes long lead times are required to bring commercial projects to profitability,” he said.

McClintock, whose company is exploring for gas in the Akcakoca sub-basin of the Black Sea, said he welcomed a requirement for license-holders to post a 2 percent bond for onshore programs or 1 percent for offshore programs. It will “weed out speculators and companies that are either under-capitalized or lack knowledge,” he said.

Masraff at Eurasia Group said the new law, while welcome, won’t guarantee investment.

“We’ve seen lots of large companies coming in and exploring, like Exxon and Petrobras,” she said during an interview in Ankara on May 21. “They’ve all left with nothing, so the legal change, in and of itself, is not enough.”

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