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Contracting the Petroleum Operations under Turkish Petroleum Law: Scope and Limits of Liability on Petroleum Right Owners

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As exception to liberty of contracting and unlike a number of other industries, Turkey's petroleum industry imposes certain obligations to petroleum right owners in contracting the conduct of the petroleum operations.  At the first glance this seems that it aims to strengthen the management of hazards by enhancing the safety however the liability imposed to petroleum right owners in case of contracting the operations still remains unclear in terms of limitation.

In Turkish law, petroleum right owners wishing to have the exploration and production activities conducted through a contractor shall apply to General Directorate of Petroleum Affairs for approval and require to submit a commitment in which they accept the responsibility arising from non-competence of the contractor with the provisions of petroleum legislation together with the contract itself.

The General Directorate of Petroleum Affairs makes an evaluation of the contract on the basis of contractor’s technical knowledge and capacity and informs the right owner within one week.  The authority is also authorized to evaluate the amendments and extensions of such contracts. In essence, petroleum right owners are not allowed to assign any of its exploration or production operations to a contractor without approval and such contracts do not enure benefit of either party unless approved by the General Directorate of Petroleum Affairs.

In this regard, it is obvious that the approval from the authority shall be deemed as condition precedent in contracts between petroleum right owners and contractors and assuming that the approval has been granted the limits of liability in commitment letter provided by the petroleum right owner still remains as a question mark in minds.

In letter of the relevant clause it is understood that the commitment letter refers to the acceptance of responsibility of the contractor arising from non-compliance with only the Petroleum Law and Petroleum Law Implementing Regulation. This type of liability associates with the differences of suretyship and guarantorship but to which extent and in which scope? Are petroleum right owners not responsible for the acts of contractors that are not subject to petroleum legislation?

Basically, the answer is “Yes”.

Pursuant to the article 581 of the Turkish Code of Obligations the surety agreements require the existence of a valid main obligation and are not valid unless in writing and specifies the maximum limit of surety’s responsibility and the period of suretyship. In other words, the agreements in which the surety undertakes to be personally liable against the creditor for the consequences of which the obligor’s non-performance of the obligation or failure to fulfill the contractual duties are called surety agreements.

Pursuant to the article 128 of the Turkish Code of Obligations having the heading of “Third party undertaking”, those who undertake a third party’s obligation in favor of the other party, is liable to indemnify the damages arising out of the non-performance of this obligation.

It is obvious that the consistency in letter and spirit of laws helps the practitioners to enforce them easily. In consideration of the purpose and scope of the Petroleum Law and Petroleum Law Implementing Regulation and in the light of above definitions of those two institutions set forth in Turkish Code of Obligations, it can indisputably assert that the petroleum right owners are only responsible for the contractor’s unlawful act under Petroleum Law and Petroleum Law Implementing Regulation in a form of third party undertaking for an indefinite period of time rather than suretyship.

In that case the questions about the “time period of undertaking” arises; are petroleum right owners responsible for contractors’ acts for an indefinite period of time or is that limited with the effectiveness date of the licenses?  If yes, will petroleum right owner remain responsible even he terminated the contract and entered to a new one with any other contractor?  Which part and to which extent of the work will be on contractor if there are more than one contractor involved to the exploration and production operations.

That is for sure that the authority has optional rights to apply to the petroleum right owner and to the contractor due to the rights granted to it by law however mitigation of risk in more than one contractor involved projects is only possible with a well articulated contracts while contracting the petroleum operations.

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