Overview

Why we’re in Turkey

 
Prospectivity 

  • Proven petroleum systems
  • Under-explored & under-exploited conventional & unconventional plays
  • Opportunity to deploy modern technology (3D seismic, horizontal drilling, multi-stage fracs)
  • Thrace Basin main gas producing region
  • Anatolia Basin main oil producing region in Zagros Thrust and Fold belt
  • Major IOCs and NOCs returning to Turkey (offshore, onshore unconventional)

Positive Business Environment

  • G-20 country and NATO member
  • Coup attempt by elements of military on July 15, 2016 was put down by government
  • April 16, 2017 constitutional referendum approved
  • Attractive fiscal regime: 12.5% royalty & 20% corporate tax
  • New Petroleum Law June 30, 2013 (removes restrictions on maximum acreage holdings, amongst other changes)
  • Available infrastructure and oil field equipment at competitive cost
  • No fracing restrictions
  • Strong energy demand growth
  • More than 92% and 99% reliant on imports of oil & natural gas, respectively
  • Exposure to world oil prices and premium natural gas prices linked to cost of imports
  • Energy corridor to Europe

Introduction 

Turkey’s location at the crossroads of Europe and Asia has shaped its history and people and made it a country of significant geostrategic importance. In more recent times, the strong growth of Turkey’s economy and its role as a key energy transit hub have seen it recognised as regional power.

Following the adoption of financial and fiscal reforms as part of an IMF program early in the decade, Turkey’s economy grew strongly from 2001-2008, averaging more than 6% annually. In 2010 and 2011, Turkey’s economy was one of the fastest growing in the world with annual GDP growth rates of 9.2% and 8.8%, respectively. During this same period, Turkey had seen the fastest growth in energy demand in the OECD driven by this economic growth as well as the urbanisation of the population. According to the International Energy Agency, this is set to continue with energy demand expected to double over the next decade. The GDP growth moderated in 2012, 2013, 2014 and 2015 averaging 2.1%, 4.1%, 5.2% and 6.1%, respectively. In 2016, the GDP growth rate as estimated by the World Bank was 2.9%.

As well as being a major energy importer, Turkey is a key energy transit hub between the demand centres of Europe and the major producing regions in Russia, the Caspian region and the Middle East.

Location

The Republic of Turkey is located in southeastern Europe and southwestern Asia (that portion of Turkey west of the Bosporus is geographically part of Europe), bordering the Black Sea to the north, between Bulgaria and Georgia, and bordering the Aegean Sea and the Mediterranean Sea to the south, between Greece and Syria.

 

Facts

Land Area: 783,562 km2

Capital City: Ankara

Population: 79.4 million (2015)

GDP: USD 718 billion (2015)

GDP composition by sector:

  • agriculture: 9.1%
  • industry: 27.7%
  • services: 64.2% (2015 est.)

Government: Republican parliamentary democracy

President: Recep Tayyip Erdo─čan

Prime Minister: Binali Yildirim

Turkey is a member of the G20 and a founding member of the United Nations and NATO.

Source: CIA World Factbook

 

Energy Sector Organization

Outlined below are some of the key entities involved in Turkey’s energy and upstream oil and gas sector:

Ministry of Energy and Natural Resources (MENR)

  • responsible for the preparation and implementation of energy policies, plans and programmes in co-ordination with its affiliated institutions and other public and private entities

General Directorate of Energy Affairs (EIGM)

  • the main policy-making body within MENR. It is tasked with executing national energy policy and it also conducts studies on energy policy, energy markets, efficiency, and environment

General Directorate of Petroleum Affairs (GDPA)

  • responsible for regulation of exploration and production activities in the oil and gas sector

Energy Markets Regulatory Authority (EMRA)

  • the independent regulatory body for the electricity market

Turkish Petroleum Corporation (TPAO)

  • the national oil company and the main exploration and production entity in Turkey

Petroleum Pipeline Corporation (BOTAS)

  • the state-owned vertically integrated gas utility, involved in the construction and operation of oil and gas pipelines, as well as holding a dominant position in the purchase of imported gas and resale to the wholesale market in Turkey

 

Fiscal Regime

Turkey’s fiscal regime for oil and gas licences is presently comprised of royalties and income tax. The government royalty rate is 12.5% and the corporate income tax rate is 20%. Additionally, a 15% withholding tax is applied on any dividends distributed to foreign entities. However, the withholding tax may be reduced to 10% depending on the bilateral treaties signed between Turkey and the home country of the petroleum rights holder in Turkey. 

Licensing Regime

The licencing process in Turkey for oil and gas concessions occurs in three stages: permit, licence and lease.  The New Petroleum Law (Petroleum Law No. 6491) dated June 30, 2013 was adopted by the Turkish Government replacing the longstanding predecessor Petroleum Law No. 6326 adopted in 1954.  For a detailed discussion of the licensing regime under the New Petroleum Law, see Valeura's 2016 Annual Information Form (“2016 AIF”) filed on SEDAR and also available on this website. 

Energy Infrastructure and Pricing

Pipeline Infrastructure

BOTAS, a state company, owns and operates the national crude oil pipeline grid and the national natural gas pipeline grid in Turkey (see maps below).

With regard to major natural gas pipelines, BOTAS owns and operates the national gas grid which connects essentially all the major population centers and is within easy access to the Company’s existing and planned operations in the Thrace Basin of western Turkey. At the end of 2010, the BOTAS natural gas pipeline network consisted of 11,593 kilometres of various pipelines sizes from 10-inch to 48-inch diameter.

With regard to major crude oil pipelines, BOTAS owns and operates the following infrastructure: the 18-inch Batman to Dortyol crude oil pipeline, which services the prevalent crude oil producing areas of the southeast Anatolia region; the 24-inch Ceyhan to Kirikkale crude oil pipeline, which supplies mainly imported crude oil to the Kirikkale refinery east of Ankara; and the Turkey portion of the twin 40-inch and 46-inch Kirkuk to Ceyhan oil pipeline delivering Iraqi crude oil to the port city of Ceyhan for export. It also operates the Turkish portion of the Baku to Tbilisi to Ceyhan crude oil pipeline delivering Azeri crude oil to Ceyhan for export.

Pricing and Marketing

Turkey imports approximately 99% of its natural gas and 92% of its crude oil energy needs and as such any new production has a ready market. Consequently, the Company does not foresee any major concern with the marketing of crude oil or natural gas from its operations.

Crude oil pricing in Turkey is determined under the Petroleum Market Law No. 5015 (Gazetted on December 12, 2003). The pricing for the sales of crude oil is established according to the nearest accessible global free market condition. The domestic crude oil price is linked to world market factors with the base market price being the price at the nearest delivery port. Customary transportation and crude oil quality premiums or deductions, as the case may be, are applied to determine the crude oil price at the custody transfer point. Domestic purchasers and refiners are to give priority to domestic crude oil under the above pricing process.

Total natural gas demand in Turkey in 2015 was approximately 4.65 Bcf/d. BOTAS is the major importer and distributor of natural gas in Turkey. Although some import contracts have been released to private operators, BOTAS currently controls approximately 80% of Turkey’s natural gas imports. Given the very small domestic production of approximately 0.07 Bcf/d, there is a robust market for additional domestic natural gas production. Due to the dominance of BOTAS in the natural gas market in Turkey, the BOTAS pricing structure effectively sets the domestic market price. In 2015, Russia supplied approximately 56% of Turkey’s natural gas imports followed by Iran at 16%, Azerbaijan at 11%, LNG from Algeria, Qatar and Nigeria at 16% and spot and other at 1%. Accordingly the BOTAS cost tracks world reference pricing and in turn indirectly influences the price available to domestic producers, translated into TL, at some discount. BOTAS regularly posts prices in TL and its Level-2 wholesale tariff (“BOTAS Reference Price”) was reduced by 10% effective October 1, 2016 to 0.704145 TL/m3. This BOTAS Reference Price (in TL) remains unchanged as of the date hereof and was equivalent to $7.10 per Mcf at an average exchange rate in Q3 2017 of approximately $1 = 2.79 TL. BOTAS along with a number of other privately owned natural gas distributors in Turkey are expected to be the main potential purchasers of any new domestic natural gas production. The Company expects the BOTAS Reference Price to continue to be indirectly linked to the weighted average cost of imported gas to Turkey and government policy with respect to the level of consumer subsidies, if any.

The Company expects natural gas pricing under its current and future contracts to continue to be at some negotiated discount to the BOTAS Reference Price (0% to 15% discount, dependent on reserve size, the magnitude of daily gas volume deliverable and the nature of the contract). The Company’s natural gas production from the TBNG JV lands are purchased by more than 55 local customers directly tied in to the Company’s sales gas distribution system at an average discount of approximately 2% to the BOTAS Reference Price in Q3 2017. The Company’s natural gas production from the Banarli Licences is currently tied-in to the TBNG JV facilities and is being purchased by the TBNG JV, net of a transportation and marketing fee (of which Valeura receives 81.5% as a partner in the TBNG JV).