Electricity
Turkey introduced the Electricity Market Law in 2001 to liberalize the energy market. The Energy Market Regulatory Authority (EMRA) which regulates and supervises energy market activities (including electricity, oil and gas) was established as a result of this new law. The secondary legislation regarding the Electricity Market Law was enacted by EMRA during 2002 and 2003. The main piece of secondary legislation is the Electricity Market Licensing Regulation which sets out the licensing process.
Scope of licences
The licences envisaged are generation licences, transmission licences, distribution licences, wholesale licences, retail licences, auto-producer licences and auto-producer group licences. Separate licences will be required for each market activity engaged in by the operator and for each facility where that activity is carried out. Except for distribution licences, there are no regional limitations imposed on licences. Electricity transmission activities will be conducted by the state-owned monopoly Turkish Electricity Transmission Company (TEIAS).
Term
All electricity licences may be granted for up to 49 years with a minimum term of 10 years for generation, transmission and distribution licences. Renewal of licences by up to a further 49 years is permitted upon application to EMRA. It takes into account the licensee's market performance, its relations with other licensees and consumers, complaints made and sanctions and penalties applied against it.
Activity limitations
Licensees other than auto-producers are subject to certain restrictions with regard to activities unrelated to the electricity market. Until 2005, distribution companies could not purchase more than 20% of the electricity they distributed during the previous year (within the area specified in their licence) from affiliated generation companies. However, an amendment made to the Electricity Market Law lifted this restriction.
Modification
Licences may be modified at the request of the licensee, subject to EMRA's consent, or at the request of EMRA for reasons specified in the Electricity Market Licensing Regulation, or due to changes to the applicable legislation. If the licensee fails to comply with the terms of the modified licence within the period determined by EMRA, the licence may be suspended and the relevant facilities of the licensee confiscated.
Cancellation
Grounds for revocation include the bankruptcy of the licensee. The Electricity Market Licensing Regulation provides that EMRA must take necessary measures to prevent adverse consequences for consumers and the market, where it determines that the licensee is threatened by bankruptcy.
Requests by a licensee for the cancellation of its licence must be made at least 180 days in advance and may be refused or delayed if EMRA deems that cancellation will lead to adverse consequences for consumers or the market. In case a distribution licensee applies for termination of its licence before the expiry of its term, this request shall not be granted until a new legal entity is granted a licence to perform the activity covered by that licence.
Transfer and assignment
Licences may not be transferred to third parties. However, if the banks and/or finance institutions provide limited or non-recourse project financing to the licensee, as per the provisions of their loan agreements, the related banks and/or financial institutions may request from the EMRA that another legal entity be granted the related licence – provided that they assume all obligations of the related licensee in line with the provisions of the Electricity Market Licensing Regulation. The legal entity proposed by such institutions may be granted the related licence provided that they comply with the provisions of the Electricity Market Licensing Regulation. The licensee may assign the rights under its licence with the prior written approval of EMRA.
Provisions regarding existing energy projects
The Electricity Market Law does not provide for any exemption for the build-operate-transfer (BOT); build-operate-own (BO); and transfer of operating rights (TOR) model projects which operate under their existing concession contracts (which are administrative law contracts) and implementation contracts (which are private law contracts) executed with the Turkish government in relation to licence requirements.
Consequently, the existing project companies were required to apply to EMRA for licence. So far, all of the existing project companies have applied to EMRA to obtain a licence. EMRA has not yet issued licences to any of these project companies. Pursuant to an amendment made to the Electricity Market Licensing Regulation, the existing energy project companies which have applied to EMRA to obtain a licence can lawfully operate in the market until their licence applications are finalized by EMRA.
Current developments
Privatization of electricity distribution
TEDAS, the state-owned electricity distribution company, operates in 20 electricity distribution areas. Within the framework of the strategy paper signed with the World Bank in 2004, the Turkish government is required to privatize 20 distribution areas during 2006. However a number of amendments are required to be made to the Privatization Law and the Electricity Market Law in order to establish the legal basis for such privatizations. The draft law which envisages the required amendment to the relevant laws has been on the parliamentary agenda for a long time but has not yet been enacted. According to recent news in the press, the Privatization Administration plans to announce the tenders in May 2006.
Natural gas
After several of attempts to liberalize the natural gas market in Turkey, Law 4646, concerning the natural gas market, was enacted on May 2 2001. This is known as the Natural Gas Market Law. After the enactment of the Law in 2001, various secondary legislation was adopted.
Aim of the Law
The Law aims to form a liberal natural gas market by enabling private investors to take part in the natural gas sector in Turkey by limiting the role of BOTAS (Turkish State owned pipeline corporation), which is a state-owned natural gas company in the Turkish market. For years BOTAS' monopoly in importing natural gas and selling the imported natural gas in the Turkish market has been the major obstacle for foreign investors trying to enter into the Turkish gas market. The Natural Gas Market Law regulates the activities of production, transportation, distribution, wholesale, import, export, trade and storage of natural gas by private investors or public entities, and abolishes Statutory Decree 397 concerning the use of natural gas. This was the basis of BOTAS' monopoly in the sector and contained certain other limitations applied to natural gas activities.
Licences
To undertake activities in the natural gas market, companies are required to obtain a licence from the EMRA for each market activity and for each of their facilities. Import, production, transmission, storage, wholesale, export of and distribution of natural gas within the cities and distribution and transmission of pressurized natural gas all require a licence. Both domestic and foreign private investors can carry out natural gas market activities within certain limitations provided by the Law.
Term
Licences are granted for minimum of 10 years and a maximum term of 30 years. Clear deadlines are imposed on EMRA for the assessment of applications, and the granting of new licences is subjected to several criteria, addressing not only the project itself but also the financial and technical credibility of the project sponsors.
Separate accounts
The natural gas market allows participants to operate in more than one of the fields of activities. Under the Natural Gas Market Law, companies doing so must keep separate accounting records for their activities. The principle of the separation of accounts for each market activity and facility and the prohibition of cross-subsidization by licensees are also repeated in the regulations, as are the rules requiring EMRA approval for any share transfer of 10% (or for public companies 5%) or more of the capital of the licensed company. Also, none of the market participants is allowed to sell more than 20% of the consumption estimates of EMRA for the current year.
Free consumers
Companies purchasing gas for electricity generation and co-generation facilities which generate electricity and heat energy are regarded as free consumers under the Law. EMRA, at the licensing stage only, is authorized to determine the threshold for annual consumption, a requirement that needs to be met in order to be qualified as a free consumer. Subject to certain exceptions, legal entities which carry out natural gas market activities are obliged to permit other legal entities or free consumers to enter the system.
Gas release obligation of BOTAS
Pursuant to the Natural Gas Market Law, BOTAS is under obligation to transfer annually a certain number of natural gas supply contracts to the private sector. This ensures that by end of 2009, BOTAS' aggregate share of annual imports has fallen to 20% of the annual consumption amount.
The transfer will be effective once the legal entity winning the tender obtains the consent of BOTAS and the counterparty (the seller), and executes a new contract. If the consent of the seller cannot be obtained, then a back-to-back arrangement between BOTAS and the legal entity winning the tender will be executed, provided that the entity agrees to perform all cross-border liabilities of BOTAS and the natural gas price is not less than the natural gas price determined by the said bilateral agreement.
BOTAS has announced tenders for six of its natural gas supply contracts. The first set of tenders was realized on November 30 2005. So far, only the Turusgaz contracts have found interest from bidders. The amount of natural gas transferred by the first set of tenders is 4 billion m3. No other tender has yet been announced in relation to the transfer of the natural gas importation contracts of BOTAS.
Existing BOT and BO Projects
The Law is unclear about existing BO and BOT projects and its intention is not clear. The most reasonable interpretation seems that the BOT and BO companies are granted a right to obtain natural gas from cheaper sources once the international gas supply agreements of BOTAS are transferred to the private sector companies. However, if they execute agreements with private sector companies to that end, they are required to waive the treasury guarantees they had obtained in the context of the project.
Restructuring of BOTAS
BOTAS will be restructured until 2009. After that date, one part of it will remain a party to the gas supply agreements and continue to be named BOTAS. The other entities resulting from the split will be privatized within two years.
Current developments
IGDAS
IGDAS is an affiliate of the Istanbul Metropolitan Municipality and the sole natural gas distribution company in Istanbul. It has 3 million subscribers. The privatization of IGDAS has been on the agenda for a few years. No date has yet been set for the project to be officially launched, but this is expected during 2006.
Turkey – Azerbaijan Natural Gas Pipeline Project
The aim of the project is the transportation of gas from Azerbaijan to Turkey. The Turkey section of the project will start from the Georgian border and end at Erzurum. The Turkey section will involve a 225 kilometre long pipeline. BOTAS will invite tenders for the construction of the pipeline. However, the tender date has not yet been determined.
LNG Receiving Terminal
There have been reports in the press over the last six months that Turkey plans to announce a tender for construction of an LNG terminal in Ceyhan. No announcement has been made by the government in this regard yet.
Natural gas distribution tenders
EMRA President Yusuf Gunay has announced that EMRA plans to conclude the tenders for 50 natural gas distribution licence areas until the end of the current year. The number of major cities having access to natural gas will increase to 55 in 2006, particularly in the Black Sea, eastern and south-eastern Turkey. The three regions for which pre-qualification applications for the in-city natural gas distribution may still be made are Van, Ordu-Giresun, and Seydizehir-Cumra.
Salt Lake (Tuz Gölü) storage project
BOTAS has developed the Salt Lake Natural Gas Storage Project for storage of large quantities of natural gas. The Turkish Ministry of Energy and Natural Resources has clarified that the project will start with a capacity of 1 billion m3 in volume, to be increased to 5 billion m3 in the near future. The project is expected to be completed within five to six years. The World Bank approved a credit for the amount of $325 million for the project. This project will be the second natural gas storage facility in Turkey. The other is the North Marmara Storage Facility.
Oil
Turkey's location makes it a natural energy bridge between oil-producing areas in the Middle East and Caspian Sea regions, and consumer markets in Europe. Turkey's oilfields are mostly in the south-eastern part of the country, specifically the Hakkari Basin. Some exploration activities in the Black Sea shelf region are undertaken by the government-owned Turkish Petroleum Corporation (TPAO) and BP. TPAO is the main explorer and producer of oil in Turkey, with a share of 69% of total oil production. Foreign operators such as Shell and Exxon Mobil are also active in Turkey. TPAO does not have any legal monopoly on any segment of the oil business and is, similarly to private Turkish and foreign companies, subject to General Directorate of Petroleum Affairs (PIGM) control and regulation. Because domestic oil production is limited in Turkey, most of the demand must be imported, mainly from the Gulf region, the Caspian Sea area, Libya, Algeria and Russia. Refining in Turkey is wholly dominated by the Turkish Petroleum Refinery Corporation (TUPRAS) which owns all oil refineries in Turkey. Oil distribution is carried out by private companies, among which POAS has the biggest station network (3,999 stations) and market share (almost 40%). Its biggest competitors are Shell, BP and Total but also Turkish-owned OPET and Turcas.
Midstream and downstream
Midstream and downstream activities are regulated by the Petroleum Market Law and the related secondary legislation. The Law designates the EMRA as the regulator for the Turkish midstream and downstream markets.
Activities in the petroleum market are subject to the obtaining of the appropriate refinery licence, distributor licence, free consumer licence, processing licence, lubricants production licence, storage licence, transmission licence, transportation licence, bunker delivery licence, and dealer licence.
Liberalization
The Petroleum Market Law reduced government intervention in oil price. The automatic pricing system was abolished as of December 20 2004. The prices are now formed based on free market conditions and the ex-refinery prices are adjusted on a daily basis.
Under the previous law, some import restrictions applied to distributors, which were required to procure at least 60% of their supply from national sources. This restriction has been lifted by the Petroleum Market Law.
Apart from these, the refineries are now allowed to own distribution companies. In general terms, the conditions for starting a new distribution business in the petroleum market have been lowered by the Petroleum Market Law.
New regulatory requirements
A new communiqué regarding the national marker requirements has been issued by EMRA. Refineries and distributors must add a marker to petroleum products sold in Turkey. The marker must be added at the exit of the oil from the refinery and at Customs entry points.
The petroleum market share of a distributor cannot exceed 45% of the total Turkish petroleum market.
The distributors can operate their own oil stations, however, the sales made through these stations cannot exceed 15% of a distributor's total sales.
In accordance with the International Energy Agency's requirements, the Petroleum Market Law sets out the obligation for the distributors to keep a petroleum stock of 90 times the average daily consumption of the previous year.
Under the current system, oil commerce between distributors is subject to EMRA permission. EMRA has regularly issued such permissions, which have applied on a national level.
Upstream activities
Upstream activities (exploration and production of oil) are also subject to the Petroleum Law. The General Directorate of Petroleum Affairs issues exploration licences and operating licences on that basis. However, a draft of the New Petroleum Law is being discussed at the parliament's commissions and its enactment is expected to occur in the following months. This draft law liberalizes the upstream markets.
Current developments
Samsun-Ceyhan Oil Pipeline
The Turkish Calik Group and Italian ENI have announced that they intend to undertake construction and operation of the Samsun-Ceyhan Oil Pipeline. The project is being discussed before the Council of Ministers.
Tupras Privatization
On April 6 2005, the Privatization Administration (PA) adopted a decision to privatize the state-owned refinery Tupras through a block sale of a 51% stake. The Koc Group formed a consortium (the Consortium) with Shell to participate in the tender. The Consortium was awarded the bid and the share purchase agreement was signed on January 26 2006. Finally, the share transfer was concluded and the Consortium paid the purchase price to the Turkish treasury. However, the Union of Petroleum Workers had filed three administrative lawsuits with the Council of State as a result of which the Council of State rendered that the tender specifications and the PA's decision to conclude the sale were not in compliance with the Privatization Law, so that their execution shall be stayed. In the light of the previously concluded sale, this has raised a legal discussion which is still continuing.
OMV's acquisition of POAS shares
POAS is the biggest oil distributor in Turkey. OMV has acquired 34% of POAS shares from its majority shareholder Dogan Holding with which they have established strategic cooperation in the field of oil and gas.