Source: CIA World Factbook, IEA, Petform
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 programme early in the prior 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 rate has since moderated to between 2% and 6% per annum.
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.
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.
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 Mining and Petroleum Affairs (GDMPA)
Responsible for regulation of exploration and production activities in the mining and oil and gas sectors
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, including a large presence in the Thrace Basin
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
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 22%. 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.
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 (www.sedar.com).
BOTAS, a state company, owns and operates the national crude oil pipeline grid and the national natural gas pipeline grid in Turkey.
With regard to major natural gas pipelines, BOTAS owns and operates the national gas grid which connects essentially all the major population centres and is within easy access to the Company’s existing and planned operations in the Thrace Basin of north-western Turkey.
Turkey imports more than 98% 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 2018 was approximately 4.7 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 2018, Turkey imported approximately 98% of the natural gas it consumed, primarily from neighbouring countries. 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 increased in January, April, August, September, and October, 2018, resulting in a price of 1.3515 TL/m3. This BOTAS Reference Price (in TL) is equivalent to $7.32 per Mcf at year end 2018. 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. The Company’s natural gas production from the TBNG JV lands are purchased by 49 local customers directly tied in to the Company’s sales gas distribution system at discount which has historically been approximately 2 per cent. to the BOTAS Reference Price. 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).