In terms of market assessment Turkey is in a good position to be an alternative for European supply due to its geographical location. In this context, Turkey's role as a transition area gains importance. Turkey is an important candidate to be the energy corridor in the transmission of the natural gas resources of the Middle East and Asia countries to the western market. In the past decade, Turkey has significantly increased its oil and gas pipeline infrastructure to accommodate its increased energy consumption. Naturally Turkish natural gas usage is projected to increase further in coming years, with the prime consumers being industry and power plants.

Natural gas consumption levels in Turkey have witnessed a dramatic increase, from 522 billion cubic meters (bcm) in 1987 to 35.064 bcm in 2007 (figures refer to Botas sales). Turkey has chosen natural gas as the preferred fuel for its massive new power plant capacity to be added in coming years. However current gas production in Turkey meets a limited number of the domestic consumption requirements. Therefore, Turkey has obtained its main natural gas needs from the Russian Federation. Turkmen and Iranian gas represent economically sound alternatives.

Turkey is in a strategically advantageous position in terms of its natural gas market. It can import gas from a number of countries and diversify its sources. Turkey's desire to fulfil EU accession prerequisites motivates its restructuring of natural gas ownership and markets. In the past decade, Turkey has made significant progress in reforming its energy sector. The legislative changes have been adopted to establish an adequate legal and regulatory basis for a competitive market structure.

Institutions

The statutory framework for the domestic natural gas sector is regulated by the natural gas market legislation, which comprises the decisions of the regulatory authority Energy Market Regulation Authority, certain regulations and the laws. The current legal framework for the natural gas sector including exploration and production is as follows:

• Petroleum Law 6326
• Law on Transit Passage of Petroleum via Pipelines 4586
• Natural Gas Market Law 4646 (NGML)
• Natural Gas Market Licence Regulation
• Regulation on Tariffs
• Regulation on Internal Installations
• Regulation on Certificate
• Regulation on Transmission Network Operation
• Regulation on Distribution and Consumer Services
• Regulation on Facilities
• Various Communications and EMRA Board Decisions (ex Network Code)

NGML was enacted to establish a competitive market structure in energy sector. The law was adopted in May 2001. It entered into force immediately, but its implementation was subject to a 12-month transition period, extendable to a maximum of 18 months.

Accordingly, the objective of the NGML is to establish a liberal, stable, transparent and competitive national gas market. Therefore, it establishes the rights and the obligations of natural and legal persons engaged in gas sector activities. The government's policy is to open the natural gas market to private companies and to establish a competitive natural gas market. In this context, the NGM legislation as a whole is considered a legal structure that aims to harmonise Turkish legislation with the EU energy aquis. Consequently all the natural gas market activities defined in the NGML depend on licences. All legal entities that intend to carry out activity in the natural gas market shall obtain the relevant licences.

NGML established an autonomous public authority, EMRA, which is an administratively and financially autonomous public regulatory authority in the energy sector. The Energy Market Regulatory Board is the decision making body of EMRA. The main duty of EMRA, which assumes regulatory responsibilities pertaining to the natural gas market, is to put in place and to implement regulatory measures to ensure the establishment of a liberal and competitive natural gas market. EMRA is responsible for granting licences and certificates that determine the rights and obligations of real and legal persons.

The Ministry of Energy and Natural Resources (MENR) is the main governmental entity that prepares, determines and implements national energy policies, plans and programmes. The MENR performs its duties in coordination with its dependent and related institutions and other public and private entities. The General Directorate of Energy Affairs of the MENR conducts long-term energy planning and develops different policy scenarios to support this work. It also carries out studies on general energy and environmental policies for renewable and energy efficiency. MENR reports directly to the Prime Minister. It is the main governmental body that takes decisions concerning the national energy policies.

Pursuant to the Natural Gas Market Law, the natural gas market activities are import, export, wholesale, transmission and distribution of natural gas. It does not cover exploration and production of the gas. According to the Natural Gas Market Law, all legal entities can carry out these activities under licence from EMRA. The procedures to obtain these licences are set out in the Natural Gas Market Law and in the Natural Gas Market Licence Regulation. The regulation covers the same rules set forth in the Natural Gas Market Law and provides further details regarding the licensing process. Types of licences that shall be granted by EMRA, based on the activities to be conducted are import licences, transmission licences, storage licences, wholesale licences, distribution licences, compressed natural gas (CNG) licences and export licences. Licences shall be issued to be valid for a minimum period of 10 and a maximum period of 30 years.

Natural gas production

Turkish natural gas consumption is projected to increase dramatically in coming years, with the prime consumers expected to be industry and power plants. Turkey has chosen natural gas as the preferred fuel for the new power plants to be added in coming years. An important proportion of electricity production depends on natural gas. Also, natural gas is the main source of residential heating in the biggest seven cities, including Ankara and Istanbul. According to the data provided by Botas, by December 2007, Botas supplied 35.064 bcm of natural gas in total. 19.658 bcm of this supply was delivered to the electricity production sector and 7.569 bcm was delivered to industrial entities.

Turkey has a limited amount of natural gas production, which is mainly produced by local companies. The natural gas exploration and generation activities are carried out in accordance with Petroleum Law 6326. Currently a new draft is being prepared by the government in order to provide a market in natural gas exploration. Thus it is possible to state that an amendment in the Petroleum Law is considered necessary to assure rapid, continuous and efficient exploration and improvement in processing the country's resources. The draft Petroleum Law also aims to clarify the identification of the procedures and principles of collection, evaluation and introduction for use of information and data in exploring and producing oil and natural gas. It will also clarify the regulation and promotion of oil and natural gas exploration and production activities in Turkey. Until the Petroleum Law is amended the state-owned Turkish Petroleum Company (TPAO) has a monopoly on research and production activities.

The Petroleum Law, dated March 7 1954, provides a definition of "petroleum" that includes natural hydrocarbons in gas state that are found in or extracted from under ground. Therefore the Petroleum Law applies to the exploration, development and appraisal of natural gas resources. The NGML also refers to the Petroleum Law 6326 stating that gas exploration and production activities should be conducted in accordance with the Petroleum Law. We should also state that the generation companies must comply with the regulations issued by EMRA regarding delivery rules, gas quality and tariffs. The relevant authority is the Directorate General of Petroleum Affairs. In order to execute such transactions, exploration and operation licences must be obtained from the Directorate General of Petroleum Affairs.

The pipeline

Under the NGML, the national transmission network or any part of it that already exists, is planned, or is under construction, belongs to Botas. Botas is a profit-seeking (economic) enterprise established by Council of Ministers Decree pursuant to a Statutory-Decree 233. The Undersecreteriat of the Treasury owns all shares on behalf of the state.

Legal entities that will be engaged in natural gas delivery by gas pipeline networks excluding gathering lines for generation purposes must obtain the required licence, whose validity is limited to a minimum 10 and maximum 30-year period. As a rule, the legal entities have to be established in the form of joint-stock companies or limited liability companies under the provisions of the Turkish Commercial Code. All shares have to be registered to names.

The Natural Gas Market Law defines system operation requirements for transmission companies. These include safe, secure and effective gas transmission, cost-effective operation, and approval of transmission investment plans by EMRA. They also include an obligation to connect any user upon demand within 12 months. Botas is the sole transmission company, so it is obliged to connect the users on demand within 12 months. According to the Regulation on Transmission Network Operation, issued under the provisions of the Natural Gas Market Law, the transmission licensee, that is, Botas, shall prepare the rules pertaining to network operation, including those related to system access. It shall submit them to the approval of EMRA, in line with the principles and procedures set forth in the Regulation on Transmission Network Operation and in the relevant legislation. The Network Code has been approved by EMRA. Third-party access (TPA) rules and the rules regarding the content and form of the agreement are set out in the Network Code.

Import, wholesale, generation and export companies are obliged to enter into transportation contracts with the transmission companies. Therefore, the transmission companies enter into delivery contract with generation companies, eligible customers, storage companies and other transmission companies. The access to the natural gas transportation system shall be conducted with taking into consideration the principles set out by EMRA and no provision that would prevent the system from running can be included in the contracts. The legal entities willing to transmit the natural gas may only connect to the system as a system user. A legal entity may apply for the connection to the system provided that it has an import, export or wholesale licence.

Import and export

According to the Natural Gas Market Law and the Natural Gas Market Licence Regulation, import companies conduct the activity of import of natural gas, in LNG or gaseous form, for the purpose of selling it to wholesale companies, eligible consumers or export companies or directly exporting it. In the event of an export of the natural gas, the company shall be required to obtain export licence as well.

For the import of natural gas, a separate licence is required for each import contract. The entity that applies for a licence must have the technical and economical capability for import and provide information and guarantee regarding the source, reserves, production facilities and transmission system of the natural gas to be imported. A separate guarantee must be provided to store a volume corresponding to 10% of the natural gas to be imported every year, on the national territory.

The import company must submit any information and documentation requested by EMRA relating to all contracts executed by the import company. Import companies must also inform EMRA concerning the term of a contract, the extension of a term, the envisaged annual and seasonal import volumes, and any changes in these volumes, and system security related obligations.

Import companies may market the imported natural gas to free consumers abroad, provided that they have obtained an export licence and transferred the natural gas to the wholesale companies or export companies within the country through sales contracts. However, the transfer made to the export companies may not release the liabilities of the importing company under its licence. According to the Natural Gas Law, annual natural gas amounts procured through import by any import company may not exceed 20% of the national gas consumption forecast determined by EMRA.

For gas export transactions, the Natural Gas Market Law requires information about the technical and economic capability of the exporter, the provision of information on destination country and means of transportation, and an obligatory insurance coverage. Export companies may purchase natural gas from production companies, wholesale companies or import companies.

Distribution

Distribution activity is defined under the term "city natural gas distribution" as transfer of natural gas for purposes of delivery to clients through local gas pipelines and its retailing within cities. The current status in Turkey regarding distribution can be separated into two categories. Accordingly, the distribution activities in the cities are carried out by private companies that have obtained distribution licences through bidding processes and municipality companies, most of which have been privatised. The NGML establishes that the distribution companies owned by municipalities should be privatised three years after the enactment of the law or within three years of the clearance of external debt backed by Treasury. However the municipalities will not totally withdraw from distribution activities; thus the companies holding a distribution licence must offer at least 10% of their shares to the municipality without payment.

The privatisation process of most of the municipality-owned companies has been completed. Therefore an important step in creating a competitive market has been taken. On the other hand EMRA has been granting distribution licences through tender processes. Intending to expand natural gas usage in the country, EMRA has been putting out tenders in various cities for urban natural gas distribution licences.

The privatisation process regarding the city distribution companies is almost complete. Baskent Gaz, which is the natural gas distributor of the capital Ankara, was privatised on February 26 2008. In this context only two distribution companies remain to be privatised – Izgaz and Igdas. Izgaz also declared its privatisation in March and the procedure is continuing. On the other hand Igdas, which is the distribution company of one of the world's biggest cities, Istanbul, seems attractive to foreign investors.

Competition and the market

Under the Law on the Protection of Competition (Competition Code), the Turkish Competition Authority is the relevant authority to regulate competition in all relevant markets. The Competition Authority is entitled to restrict anti-competitive behaviours and audit the dominant position in order to prevent abuse. The Competition Authority acts together with the EMRA, which also has powers in regulating the energy sector.

Briefly, the general terms of the Competition Code apply to the gas sector. Accordingly, agreements and concerted practices between undertakings and decisions and practices of associations of undertakings that have an objective or effect, or possible effect, on the distortion or restriction of competition, directly or indirectly, are prohibited and unlawful. The provisions regarding mergers and acquisitions and abuse of dominant position also apply to the natural gas market.

The standards for determining anti-competitive or manipulative behaviour are established in the relevant communiqués of the Competition Board. The Competition Board has the power to impose monetary fines to restrict the anti-competitive behaviour in the relevant market. The Board also may intervene in the transactions to establish a competitive market. Moreover some transactions in the market, such as M&A, are subject to the approval of the Competition Board.

The Competition Board is the relevant authority and has the power to approve or disapprove mergers and acquisitions or any change of control or asset transfers provided that the jurisdictional thresholds are exceeded. The existing threshold in M&A transactions is determined by their market shares or annual turnovers. Accordingly a transaction in which the total market share of the parties exceeds 25% in the relevant product market or the total annual turnover of the parties exceeds TL25 billion ($19 billion) is subject to the approval of the Competition Board.

Pursuant to the NGML there are certain restrictions regarding the market structure.

• No legal entity except for generation companies in Turkey may sell more than 20% of the national natural gas consumption forecast determined by EMRA for the current year.
• Any legal entity performing activities in the natural gas market may participate in only one legal entity performing in a field of activity other than its own.
• However it may not directly or indirectly obtain a majority of the capital or commercial assets – that is, it may not gain control of the legal entity it has participated in.
• The legal entity may not establish a separate entity to perform in a field of activity other than its own, or may not participate in such a legal entity.
• Pursuant to the relevant legislation and EMRA decisions, distribution companies may not practice distribution activity in more than 20 cities within Turkey.

Trends

Recent trends and developments in the regulation of the domestic natural gas sector may be defined as follows. The Natural Gas Market Law deals extensively with competition, data submission, and unbundling of accounts. It upholds freedom of competition, non-abuse of dominant position, and prohibits mergers and acquisitions that lead to uncompetitive markets. Licence holders must provide information on their activities; and the use of confidential information is prohibited. Licence holders must keep separate accounts for each market activity. Account unbundling is required between all natural gas market activities and also in the activities of the Botas. According to the Natural Gas Market Law, the separation of accounts of Botas regarding the transmission, storage, sales and import activities, shall be realised within 12 months of the end of the preparation term. At that point, the various components (except for transmission) are to be privatised. Account unbundling is required between all natural gas market activities and also between the activities of Botas.

Botas used to have monopoly rights on natural gas import, distribution, sales and pricing; these monopoly rights have been abolished by the Natural Gas Market Law. This law liberalises the natural gas market in Turkey. According to the Natural Gas Market Law, Botas will be restructured into units for natural gas import, transport, storage, and distribution by 2009. Botas will be structured as trade, transmission and storage companies after the year 2009.

In the meantime, Botas must conduct tenders for contract release for at least 10% of its existing contractual obligations, eventually getting it down from 100% to 20% each year until 2009. Botas must conduct its import contract transfers in compliance with this requirement.

The first tender for the release of the contract made between the Russian seller company Gazprom Export Limited Liability Company (Gazprom) and Botas was conducted in November 2005. Botas received four bids for 16 lots of import rights, which equalled to 4 bcm of natural gas from Russian Gazprom. The four bidders were Shell Enerji AS, Bosphorus Gaz Corporation AS, Enerco Sanayi ve Ticaret AS and Avrasyagaz AS. Gazprom and Botas together with Shell, the highest bidder in the tender, concluded a protocol on March 1 2007. According to the protocol, Shell will be able to directly purchase up to 250 mcm of natural gas annually from Russian gas monopoly Gazprom. Shell obtained the import licence for 15 years from July 12 2007. Shell will start the import on December 19 2007 according to the bid specifications.

The second protocol regarding the contract transfer was concluded on May 23 2007 between Botas, Gazprom and Bosphorus, the second highest bidder. Following the execution of the protocol granting Bosphorus the right to purchase up to 750 mcm annually from Gazprom, Bosphorus followed the same procedure with Shell. It obtained an import licence for 15 years from November 18 2007. The same process will be performed by Enerco and Avrasyagaz. Enerco will get a licence to import up to 2.5 bcm of natural gas; Avrasyagaz is to import up to 500 mcm of natural gas.

With the transfer of import contracts for 4 bcm of natural gas, Botas has transferred about 10% of its existing contractual obligation. It is required to reduce its share of imports to 20% by gas import contract transfers to the private sector. But this is not an easy target and has yet to be realised. Nevertheless, it appears that the transfer of a relatively significant volume of 4 bcm to the private sector has paved the way for further transfers.

Author biographies

Cüneyt Yüksel YükselKarkinKüçük Cüneyt Yüksel is a partner in YükselKarkinKüçük Law Firm. Yüksel's practice focuses on mergers and acquisitions, privatisations, energy, project finance, banking and finance, and intellectual property. Yüksel has considerable practice in arbitration, and he represented multinational clients in major international arbitration cases. Yüksel also worked in a major international law firm in the US on a substantial cross-border litigation case. Yüksel was a lecturer in the International Law Department of Istanbul University School of Law between 1996 and 1998. Yüksel obtained his LLM degree from the University of Leicester, UK, in European/International Trade Law in 1996. He graduated from Istanbul University School of Law in 1994. He is a member of Istanbul Bar Association. He speaks fluent English. Meryem Kübra Sivgin YükselKarkinKüçük Meryem Kübra Sivgin is an associate in YükselKarkinKüçük Law Firm. She focuses on mergers and acquisitions, energy and competition law issues and employment. Sivgin received an LLM degree from Ankara Univesity School of Law and graduated from Çankaya University School of Law. She also worked as a lecturer in Fatih University Faculty of Economics and Administrative Sciences. She is fluent in English.