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Transfer and Granting of Rights under Turkish Petroleum Law: Freedom of Contract versus Regulatory Requirements

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Especially after the drop-in oil prices the companies that are in early stage of their investments have begun to get position aiming to turn into an advantageous investment and started to look to what extent the regulations allow them to transfer and grant their rights under Turkish Petroleum Law. This may be deemed also as an exit strategy for some from operational perspective as it parallels with the tendency around the world and has direct relation with oil prices.

As per the data provided from General Directorate of Petroleum Affairs, as on 31 December 2013, 54 companies have been granted exploration licenses for 35.676,412 hectares and 122,681 meters under 67 exploration licenses and 2.398,454 m/tons crude oil has been produced in Turkey.  In comparison to 2012 ratios there is slight increase in number of exportation licenses which reflects the dynamics of oil prices and potential of Turkey.

In Turkish law exploration and production licenses are allowed to be divided into shares and be subject of contracts on immovable and granted rights necessitating the utilization of petroleum rights. However, the General Directorate of Petroleum Affairs has right to reject the requests of transfers and granting to persons whom deemed as insufficient for operations on basis of financial and technical capacity and lack of sector experience of those. The legislation requires assigning a joint representative in cases more than one person own an exploration and production license.

Turkish Petroleum legislation imposes strict liability to each petroleum right holder in transfer and granting contracts, where the rights are owned by more than one person or when a separate person owns the right necessitating the utilization of one of those rights and in case of any acts against the Petroleum Law, particularly the clauses related to exploration license, royalty, surface and water rights, relinquishment, additions to fields and removal and transference of facilities, employment of foreign personnel, force majeure, notifications, registration and announcement and prohibitions notwithstanding their bilateral commitments in the contract.  The consequences and sanctions resulting from the non-performance of the obligations and liabilities arising out of the legislations shall be imposed to the petroleum right holders in proportion to their shares and the scope of the rights.

Since the parties are free to enter any transfer or right granting contract freely in petroleum industry, the legislation addresses the liabilities and set the principles in enforceability of commitments by law as impeding the validity of liability related clauses in bilateral contracts in some certain issues. The royalty, surface and water rights are some of those as they are crucial to know before entering such a contract since bilateral commitments are not affected against regulatory requirements. Accordingly, the transferee of a petroleum right is recommended to know that it be liable to pay a royalty corresponding to one eight of the petroleum produced however no royalty will be collected from the petroleum used in petroleum operations in relation to exploration or production licenses. The royalty payable by a petroleum producer shall be calculated per barrel, for crude oil produced on a unit of petroleum, based on the market price for local crude oil provided. The production license holders whom combined their petroleum operations as their fields were partially or completely included in the same petroleum field are allowed to pay single royalty.

One of the others issues that contracting parties are recommend to know is about surface and water rights as set out in the legislation. Accordingly, the transferee should know that it may obtain obtain the utilization rights of a land in its exploration or production license or in the vicinity rights only by a contract if the land is privately owned or by expropriation in case of disagreement or by leasing or obtaining usufruct rights.  The legislation imposes right owners to be liable to conduct and exercise every survey, investigation and research projects in order to ensure the protection of surface, ground, coastline and sea waters in terms of quality and quantity during the petroleum exploration and production activities.

In cases where the exploration or production license is granted in a neighboring position with another exploration or production licensed field, upon the assent of the General Directorate of Petroleum Affairs and on the condition that the transferee cannot receive a written consent of the neighboring license holder, the transferee may collect data from the field of his neighbor up to the length of the layout or half of the field effected by the operation for the collection of seismic data, provided that none of the operations under the neighboring license is prevented. Projection of the target level coordinates of an exploration well drilled in a licensed area to the surface may be 300 meters to the border of neighboring licensed area for the crude oil and at least 1,000 meters away for the natural gas. Drilling a well with a less distance shall be subject to the permission of the General Directorate. In terms of the open seas, the distances shall be determined by the General Directorate of Petroleum Affairs later, depending on the construction. In the event that the land and sea licenses are for neighboring areas, the transferee holding the sea license may establish the drilling location within the borders of the licensed neighboring land with the approval of the General Directorate of Petroleum Affairs provided that the target levels of the drilling are covered by its license. In this case, the relevant transferee should not hinder the activities of the neighboring land license holder and should comply with the limits envisaged in the relevant legislation on Coastal Law.

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