OIL MARKET LAW IN TURKEY

A general overview on Oil Market Law in Turkey Att. Arzu ONGUR ERGAN1 I. Introduction

Nowadays, the oil sector is on a voyage of major change all over the world and in particular in the European Union. Turkeys role in the transit of oil supplies to Europe from Russia, the Caspian region and the Middle East is increasingly important. Following the start of the Blue Stream, BakuTblisi-Ceyhan and on-going Nabucco pipeline projects, Turkey has become an integral part of the international oil and gas market. Turkey, as an energy corridor, has been following the recent developments in the sector, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for both nationals and foreign investors. In this respect, many local and international investors request to obtain more information as regards Turkish Oil Market Law. The main aim of this article is to ensure a brief overview on Oil Market Law in Turkey and accordingly to inform the readers concerning essentials of the legal structures such as the sources of oil market law, the type of oil market licenses, administrative procedures, administrative fines and sanctions, the pricing conditions, expropriations, security of supply and competition, II. Development of the Oil Market Law in Turkey The first legal framework of the Oil Market in Turkey was regulated by the Law numbered 726 and dated 1926. The Law provided a few provision as to oil exploration and operation; however, no provision as to transmission and distribution of oil was provided. In this respect, it was described by the doctrine as an insufficient law. In that period, oil market structure was totally state-orientated. Turkey tried to develop the oil market by direct state activities until 1954. Although some limited success was obtained in that period, the importance of private entities and requirement of liberalization was recognized by the government in time. Accordingly, in 1954, an updated Oil Market Law which had an innovative concept was brought into force. It provided right of entrance to the oil markets for both national and international private investors. In spite of innovative Law concept, the state intervention has been observed after the 1954 as well. However, by the effect of rapidly increasing oil demand, the state needed to take necessary measures in order to provide enough supply to the customers. Hence, as it observed in many contemporary jurisdictions, Turkey also preferred to apply liberal oil market model. Consequently, in 1994, both foreign companies and Turkish companies were permitted to operate in Turkish oil market, regardless whether 51% of their shares are owned by Turkish state or not. There are some important factual elements that are effective on legal structure of the energy market in Turkey. First of all, Turkey has a significantly important strategic-geographical position in terms of access to the energy sources. Secondly, by the accession process of EU, Turkey has amended

Attorney Arzu ONGUR ERGAN L.LM registered to Ankara Bar Association. More information about the author is available on: http:// www.ongurergan.av.tr

its legislations in comply with EU Legislations. Thirdly, Turkey is an important partner of the international community that request quick adoption of global market requirements such as liberal and competitive oil market structure. By the effect of all these factors a new Oil Market Law numbered 50152 entered into force in 2003. [Hereinafter referred to as Oil Market Law] The general objective of this law is to obtain an oil market which is transparent, non-discriminatory, sustainable, secure, cost efficient, competitive and equitable.3 As it is known, these features are significant indications not only for the oil market, but also for any types of markets. Therefore, these elements are crucial to obtain a well-functioning oil market and EU legislation aims to obtain an oil market with these features as well. The functions of Oil Market Law are to provide guidance, surveillance and supervision. As a result of concentrate steps taken during the liberalization process the share of private sector in Oil refining and distribution activities has reached almost 100%. III. Constitutional Background Regarding the Regulation of Energy Markets The Turkish Constitution puts forward general provisions concerning creation of wellfunctioning and competitive market structures which are applicable in the energy market as well. Accordingly, Article 167, 168 and Article 47/4 consist constitutional background of the energy market. According to the Article 167 of Turkish Constitution, the State has taken some measures concerning capital markets, credits, goods and services to obtain well-functioning and systematic markets.4 According to the Article 168 of Turkish Constitution, the natural sources are under the control of the state. The right of exploration and processing of natural resources are owned by the state; however, the state can transfer there rights to real and legal persons for a defined time period. The state can regulate the conditions of these transfers by Law, and in the event of transfer of these rights, the state has the right to put these markets under surveillance and supervision. 5 According to the Article 47 of Turkish Constitution, the state defines the public services which shall be undertaken by private entities. In this case, the state can regulate the type of the services which has to be fulfilled under private contracts by real and legal persons.6

Published in the Official Journal dated 20.12.2001 and numbered 25322 Oil Market Law, Article 1:The objective of this Law is to regulate the guidance, surveillance and supervision activities in order to ensure the transparent, non-discriminatory and stable performance of market activities pertaining to the delivery of petroleum supplied from domestic and foreign resources to consumers, directly or after processing, in a reliable, costeffective manner within a competitive environment... 4 The Constitution of Republic of Turkey, Article 167: The state shall take measures to ensure and promote the sound, orderly functioning of the money, credit, capital, goods and services markets; and shall prevent the formation, in practice or by agreement, of monopolies and cartels in the markets... 5 The Constitution of Republic of Turkey, Article 168: Natural wealth and resources shall be placed under the control of, and put at the disposal of the state. The right to explore and exploit resources belongs to the state. The state may delegate this right to individuals or public corporations for specific periods. Of the natural wealth and resources, those to be explored and exploited by the state in partnership with individuals or public corporations, and those to be directly explored and exploited by individuals or public corporations shall be subject to the explicit permission of the law. The conditions to be observed in such cases by individuals and public corporations, the procedure and principles governing supervision and control by the state, and the sanctions to be applied shall be prescribed by law.
3 6 The Constitution of Republic of Turkey, Article 47, para.4: Those investments and services carried out by the State, State Economic Enterprises and other public corporate bodies which could be performed by or delegated to real or corporate bodies through private law contracts shall be determined by law.

IV. Energy Market Regulatory Authority The Energy Market Regulatory Authority [hereinafter referred to as EMRA] is an independent regulatory authority with administrative and financial autonomy. It doesnt have direct control of any public authorities as it has to be fully independent in terms of political effects. EMRA was established on 19th November 2001 by the Law numbered 4646 in Turkey. It regulates all energy markets which are electricity, natural gas, oil and LPG markets. The fundamental objective of EMRA is set forth in its founding documents as to ensure the development of financially sound and transparent energy markets operating in a competitive environment and the delivery of sufficient, good quality, low cost and environment-friendly energy to consumers and to ensure the autonomous regulation and supervision of these markets. V. Oil Market Licenses in Turkey License, issued by Energy Market Regulatory Board, is a certification that allows real or legal persons to display activities in the Oil market. Accordingly, there are 10 types of oil market licenses in Turkey which are refining license, processing license, lube oil production license, storage license, , , , , , transmission license, eligible consumer license, bunker license, distributor license, transportation license and vendor license. The regulations regarding licenses are governed by Article 3 of the Oil Market Law. In principle, any market player should grant the relative type of license before commencing activities. With the ratification of Oil Market Law in 2003, the following ten segments restructured as to-be licensed: Transportation of crude oil via domestic pipelines, refining, processing, lubricant production, storage, transportation of crude oil and Oil products via sea and railway, eligible customer status, bunker delivery, fuel distribution and fuel dealership. The oil market licenses are grantable for maximum 49 years. 7 However, Energy Market Regulatory Board may decide that no license needs to be granted for some exceptional activities which are stated in Article 6 of Oil Market License Regulation as follows: Procedures on adding organic and inorganic additives for improving characteristics of oil; Blending procedures which comply with technical specifications and not providing any additional characteristics in terms of oil, It is not necessary to grant any transmission license for transportation activities to facilities/storages, which are owned by the individuals who do not provide services for third parties or directly purchase oil from refinery, via pipeline.8 Energy Market Regulatory Board has all the authorities concerning procedures and bases of licenses. Accordingly, it has authority to award, amend and cancel licenses. Market players, who request a license, should apply to the Energy Market Regulatory Board with a written statement. During the application, the applicants should submit information and documents stipulated in the legislation. According to the Law, Private law legal persons to perform the

7 8

Oil Market License Regulation, Article 13 Oil Market License Regulation, Article 6

activities specified within the scope of a license shall be subject to the provisions of Turkish Commercial Code. 9 In Turkish legislation, the foreign companies who display activities in Turkey are subject to the same legal status as the Turkish companies. Hence, there is no difference for foreign companies in the process of license application. EMRA examines license application regarding the principals and measures stated in Oil Market License Regulation, in a multidimensional manner. It shall assess the technology of the applicant for entrance to the market, quality, and security as well as sustainability of the service and the company structure of the applicant. All applications to the administration should be completed within 60 days in any case that is not limited with energy market.10 Accordingly, license applications should be concluded within 60 days at the latest.11 If the administrative authority does not conclude the application regardless, weather in a positive manner or not, the applicant shall have the right to apply to the relevant court.12If there is any absence of required documentation, the applicant shall have an additional period for completion of the documents within 10 days at the latest.13 If the applicant fails to complete the missing documents, the application shall be null and void.14 The applicant shall pay 1% of the total amount of license fee according to the type of license required.15 The following points should be stated in the license document: Name of the real or legal person granted the right, type of activity, facility type, geographic position, technology, quantities and duration of the license. VI. Basic Rights and Liabilities of the Licensee Basic rights and liabilities of the licensee are regulated in Article 4 of the Oil Market Law. Accordingly, the licensee should avoid any kind of activity that will result in malicious intent or unsafe activities. Also, the licensee shall take any necessary measures to eliminate any undesirable situation. Briefly, the licensee shall comply with the legislation and prevent environmental risks. At this point, the law emphasizes two important issues. The first of these issues is the malicious intent and the second is unsafe activities. In case of infringement of these issues, administrative sanctions and fines can be imposed. The licensee shall follow the legal procedures and additional requirements as to license obligations that are regulated in the Oil Market Regulations. In practice especially foreign investors faces some legal problems during their activities due to lack of knowledge or misinformation as regards maintenance conditions of the license. Therefore, it is necessary to take into account that the licensee is obliged to follow up regularly his license conditions and to receive relative permissions and extensions during their activities in Turkey. Furthermore, the licensee must inform relative public authorities concerning the ordinary course of their activities as regards their licenses.

Oil Market Law, Article 3 GZBYK, eref,-DINER, Gven, dari Yarglama Usul Hukuku, Ankara,1996 p.14 11 Oil Market License Regulation, published in the Official Journal dated 17.06.2004 and Numbered 25495, Article 10 12 Code of Administrative Procedure, Article 10 13 Oil Market License Regulation, Article 7, para. 9 14 Oil Market License Regulation, Article 7, para. 10 15 Oil Market License Regulation, Article 8
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As to expiration licenses, if the period given for license is expired, the license becomes null and void. Secondly, in the case of infringement of the legislation by the licensee, EMRA may cancel the license. Thirdly, in the case of inefficient usage of eligible consumer license, the license can be cancelled as well. Last but not least, the license will be cancelled if the contract between the vendor and the distributor expires and another contract with a new distributor is not concluded within 3 months by the vendor. VII. Administrative Fines and Sanctions

The penalties and administrative sanctions are stipulated in Article 19 of the Law. There are three types of administrative fines. If a market player infringes the market regulation, the market player shall be sanctioned to pay administrative fine that ranges between 62.000TL 740.000TL. EMRA is empowered to de-regulate and increase the amount of the fines annually. Besides mentioned fines, the Energy Market Regulatory Board has the authority to impose administrative sanctions to said market players. These administrative sanctions are regulated in Article 20 of the Oil Market Law. Accordingly, there are two main types of administrative sanctions. Firstly, the Board can suspend the activities temporarily between 30 to 180 days, and secondly, the Energy Board can terminate the activities permanently. Furthermore, Article 274 of Turkish Criminal Code is applicable for market players if necessary. In case of repetition of the infringement for two subsequent years, the Board may double the fines. In addition, if the Energy Board realizes that contraband product is used or sold, or submission of false statement during license application period, the Board may cancel the license. In the case of vendors, the law maker has provided some exceptional regulations. For example, administrative sanctions to be applied for vendors shall be one fifth of regular fines. Certain administrative sanctions are also regulated for vendors in accordance with Article 20 of the Oil Market Law. Under normal circumstances, the Board shall give 30 days to the relevant market players to defend themselves. However, in two cases, administrative sanctions can be applied without defense statement of the relevant market players. Firstly, if any illegal products are determined in the process of regular auditing by the Board during routine controls; and secondly, maintaining market activities without license. Relevant market players may bring a lawsuit against the decision taken by the Board. The Law stipulates that the Council of State shall act as a Court of First Instance for these types of energy cases. Normally, the Council of State is a High Court in accordance with Turkish Administrative Law; however, taking into account the specific feature and technical dimension of energy cases, the Council of State is defined as a Court of First Instance. The Council of State has to resolve these kinds of cases as a matter of urgency. VIII. Pricing

The pricing is a very important issue on oil markets. The Article 10 of the Oil Market Law regulates pricing conditions in the oil markets. In principle, the market price is self-defined according to supply and demand in oil markets, however, the State intends to intervene pricing for certain reasons. Firstly, the State aims to support national raw Oil by this intervention. Secondly, the State is interested in pricing due to high indirect taxes on oil products. Also, the Energy Board has the right and authority to intervene in pricing if infringement of Competition Law no. 4054 with regards to pricing is determined. 5

IX.

Expropriation

Another important subject is expropriation concerning oil market activities. The private entities may need some lands, estates and buildings during their activities in the market. The Oil Market Law provides an exceptional right to private entities in terms of their requirements. The State can expropriate the needed lands, estates and buildings in favor of private enterprise. In such a case, the procedure and methods stipulated in Expropriation Law no. 2942 is applicable to private entities. In that case, right of usage of expropriated immovable shall be awarded to the private entity and the right of ownership shall remain in the possession of the State. X. Security of Supply

Security of supply becomes a significant issue as dependence on foreign sources in Turkey is too high. Also, it is important for the national security reasons. Therefore, 90 days of oil stock requirement is stipulated in Article 16 of the Oil Market Law. The main reason of this regulation is firstly to provide sustainability in the market and prevention of crisis; secondly, to comply with EU oil stock Regulation thirdly, to fulfill requirements of International Energy Program Agreement, and last but not the least, to protect the market after the liberalization and privatization process. The second important issue that assures security of supply is the national marker application. National marker is a sign that ensures to identify the products put on the market legally within the country.16 National marker indicates that the product is legally produced or imported in Turkey, and it is defined by EMRA according to National Marker Implementation on Oil Market Regulation. As it is commonly known, the oil products directly enter into the market from refineries or indirectly from customs. In both cases, the product put on the market is significantly important in terms of quality, security and tax evasion. XI. Competition When it comes to competition in the oil market, the general conditions concerning competition is stipulated in the Act on the Protection of Competition in Turkey. This Law applies within the oil market as well. The Competition Regulatory Board has an authority to intervene the market structure in the oil market as well. Three important situations are controlled by Competition Regulatory Board; first, agreements which considerably prevent, restrict and distort competition, second abuse of dominant position, and lastly, mergers and accusations. Referring to the competition in the oil market, there are two crucial authorities which are Energy Market Regulatory Board and Competition Regularity Board. In compare with the Competition Board, the Energy Board has a limited authority concerning providing competition in oil market. XII. Conclusion Turkish Oil Market has improved in the liberal manner since the enactment of Oil Market Law dated 2003, and the legal structure is harmonized with EU legislations as of 2011. Turkish government transferred its main role to the private sector in oil market activities; and established an independent authority named Energy Market Regulatory Authority in order to protect and develop the transparent,

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ASLAN, Ylmaz, Enerji Hukuku, Cilt II: Petrol Piyasasnda Rekabet ve Reglasyon, Ankara, 2008 p.89

non-discriminatory, sustainable, and secure, cost efficient, competitive and equitable character of the oil market. In oil sector, the foreign companies who display activities in Turkey are subject to the same legal status as the Turkish companies. Hence, there is no difference for foreign companies in the process of license application. The authorized administration regarding the licenses is EMRA. The actors of the oil market and their activities are examined by EMRA in order to ensure that they act in compliance with relevant regulations. In case of infringement of these regulations, particularly those regarding the malicious intent and unsafe activities, Energy Market Regulatory Board is authorized to impose administrative fines and sanctions. Protection of competition is also of the essence in oil market, and the related authorized administration is Turkish Competition Authority. Consequently, Turkey has been following the recent developments in the oil market law, and making required laws and regulations in order to sustain the development of energy market, and make Turkish market attractive for nationals and foreign investors.

Bibliography:
1. 2. 3. ASLAN, Ylmaz, Enerji Hukuku, Cilt II: Petrol Piyasasnda Rekabet ve Reglasyon, Ankara, 2008 GZBYK, eref,-DINER, Gven, dari Yarglama Usul Hukuku, Ankara,1996 Turkish Energy Market: An Investors Guide 2011 http://www.epdk.org.tr/documents/10157/1bda767e-9e95-40308e49-baabbb4af698 The Constitution of Republic of Turkey Oil Market Law [No:5015 and dated 2003] Oil Market License Regulation [17 June 2004 dated and No:25495 Official Journal] Code of Administrative Procedure [No: 2577 and dated 1982] National Marker Implementation on Oil Market Regulation [12 April 2006 dated and No:26137 Official Journal] Expropriation Law [No: 2942 and dated 1983]

4. 5. 6. 7. 8. 9.

10. Turkish Criminal Code [No: 5237 and dated 2005] 11. Turkish Commercial Code [No: 6762 and dated 1956] 12. The Act on the Protection of Competition [No: 5054 and dated 1994]