Turkey aims to become a regional energy hub, in terms of both production and transit of hydrocarbons. In particular, and largely in response to recent large gas discoveries by nearby Cyprus and Israel, the Turkish Government plans to increase exploration in its territorial waters with a view to increasing domestic production and reducing the country's dependence on imports of oil and gas that amounted to $60 billion in 2012. It also has its eye on potential shale gas opportunities.

The Turkish Government seeks to achieve its goals by attracting foreign investment into Turkey's energy sector. It recognizes that the current Petroleum Law of 1954 poses a number of obstacles to foreign investment and needs to be updated in a number of areas.

A new draft Petroleum Law of 2012 (No. 5486) ("New Petroleum Law") was presented to the Turkish Parliament for approval on 21 December 2012, and in March 2013 it was adopted by the Parliamentary Commission on Industry, Trade, Energy, Natural Resources and Information Technology. It is expected to be passed by the General Assembly of the Turkish Parliament in the forthcoming weeks.

Objectives of the New Petroleum Law

Attracting Foreign Investment

The pending New Petroleum Law removes perceived obstacles to foreign investment under the 1954 Petroleum Law in the following areas:

Role of TPAO: The New Petroleum Law removes the preferential rights of the state petroleum company, Turkish Petroleum Corporation (TPAO), so that it will compete in future licensing rounds on the same terms as other companies, thereby leveling the playing field for foreign investors. These moves are not guaranteed to succeed. The role of TPAO has already been reduced over the last decade through privatisation of part of its business and some groups have expressed concerns that taking away the privileges currently afforded to TPAO will further weaken the organization.

Income Tax: The ceiling for income tax is reduced from 55 percent to 40 percent under the New Petroleum Law.

Government Royalty: The Government share in oil and gas, payable as a royalty (in cash or in kind), remains unchanged at 12.5 percent. The Government considers it to be a reasonable "take" and comparable to other oil producing countries. Some commentators have remarked that lowering the Government share could provide a further incentive to foreign investors.

Other Incentives: The New Petroleum Law also contains the following incentives for foreign oil and gas companies: tax breaks, simplification of licence application procedures, enhanced provisions relating to the extension of exploration licences, removal or reduction of tax on imported oil and gas field equipment, easing labour laws for hiring foreign workers, and removal of barriers on repatriation of registered capital.

Commitment to conduct Exploration Activities

The New Petroleum Law seeks to prevent companies acquiring licences solely for the potential to sell on without making an investment in exploration activities. It would require an applicant for an Exploration Licence to provide a bond equal to 2 percent of the financial commitment in the work plan in the Licence application. A reduced rate of 1 percent applies to offshore exploration where the financial investment is expected to be higher. The requirement to post a bond is intended to ensure that only investors with the requisite financial and technical capability apply for Exploration Licences.

Harmonisation with EU Law

Turkey is a candidate for full membership in the EU. Discussions between Turkey and the EU regarding Turkey's accession to the EU have been beset by a number of domestic and external problems. In 2007, Turkey stated its intent to comply with EU law by 2013. The New Petroleum Law aims to bring Turkey's petroleum legislation in line with EU laws in order to help facilitate Turkey's accession to the EU.