We use cookies to customise content for your subscription and for analytics.
If you continue to browse the International Law Office website, we will assume you are happy to receive all of our cookies. For further information please read our Cookie Policy.

Fuelling the Petroleum Market: Recent Changes - International Law Office

International Law Office

Energy & Natural Resources - Turkey

Fuelling the Petroleum Market: Recent Changes

December 13 2004

Introduction
Regulatory Authority
Licensing
Proprietorship and Expropriation
Formation of Prices and Pricing
Comment


Introduction

Studies into the liberalization of the Turkish petroleum market have resulted in the enactment of the Petroleum Market Law (5015). The law was passed on December 4 2003 and published in the Official Gazette on December 20 2003. This update highlights the major issues dealt with in the law.

The purpose of the Petroleum Market Law is to (i) create an environment in which commercial petroleum is supplied safely from domestic and external sources to consumers through a transparent, fair and consistent market, and (ii) ensure the necessary supervision to achieve that purpose.

The Petroleum Market Law was prepared by envisioning regulatory, supervisory, monitoring and controlling mechanisms to provide consistency and efficiency in petroleum market transactions. Refining, processing, transmission and other similar activities are no longer governed by the former Petroleum Law (6326) - instead these activities have been combined with distribution activities, and are now regulated under the same legal framework. The new law aims to separate each phase of the market activities and as a result present petroleum products to customers through a competitive medium with a corporate structure. It sets out certain precautions in order to improve the quality of petroleum products and prevent unfair competition in the market.

The Petroleum Market Law covers four major issues:

  • the regulatory authority to monitor and control the activities in the market;

  • licensing;

  • proprietorship and expropriation; and

  • formation of prices and pricing.

Regulatory Authority

The Petroleum Market Law amended the Electricity Market Law to give new powers and duties to the Energy Market Regulatory Authority (EMRA).

EMRA is the independent regulatory authority for the electricity, natural gas, petroleum and liquefied petroleum gas markets in Turkey. EMRA was initially set up by the Electricity Market Law as the Electricity Market Regulatory Authority. EMRA consists of the Energy Market Regulatory Board, the presidency and various service units. The board is the authorized representative and decision-making body of EMRA.

In addition to other responsibilities, EMRA is entitled to:

  • implement the provisions of the Petroleum Market Law;

  • make any and all necessary regulations regarding petroleum market activities;

  • impose the sanctions stipulated by the Petroleum Market Law; and

  • monitor general developments in the market.

The draft petroleum market law had foreseen the establishment of a Petroleum Market Regulatory Authority as an independent public legal entity, represented by the Petroleum Market Regulatory Board, but this provision was omitted from the final version.

One of the most important duties of EMRA is to finalize licence applications and determine licence fees. Licence applications should be evaluated within 60 days of the application date, and the applicant should be notified thereafter. Unsuccessful applicants should be given a proper reason for the rejection of their applications. EMRA is also entitled to update and terminate licences temporarily or permanently.

EMRA is also responsible for carrying out pre-investigation and investigation activities, imposing penalties and initiating lawsuits against violations or breaches of the law and licence conditions, in order to ensure compliance and discipline in the market. In addition, EMRA has the right to review the audited financial statements of companies in the petroleum market, and is responsible for monitoring the actions of international organizations and institutions.

Licensing

The Petroleum Market Law sets forth various types of licence that must be obtained by investors according to the intended market activity. Entities carrying out activities that require a licence are required to submit an application to EMRA for the required licence within a year of the law's enactment. All permits and rights granted prior to the enactment of the law will be deemed void, unless an application for the aforementioned licence is made within this period.

The Petroleum Market Law also provides for the introduction of a Petroleum Market Licence Regulation, which was enacted recently,(1) in order to regulate the procedures and conditions to obtain licences.

The Licence Regulation sets forth ten different licences to be granted by EMRA for a maximum period of 49 years. These include:

  • refinery owner licence;

  • distributor licence;

  • retailer licence; and

  • other licences (ie, for transportation, processing, storage, transmission, mineral oil, independent consumer and bunker companies).

Refinery owner licences
Refinery owner licence holders may carry out activities involving oil processing within or around their facilities, and store and transport oil through pipelines to other facilities nearby (provided that these two activities are provided for in their licences). They may also distribute fuel products through their own distribution company.

This licensing structure allows vertical integration. A refinery owner licence holder must also apply the conditions enjoyed by its own distribution company to other distributors. Furthermore, refineries are obliged to provide and secure the production needs of strategic fuels used by the Turkish military forces upon demand. The production and delivery of fuel and other products necessary for national security take priority.

Distributor licences
Distributor licence holders have the right to distribute fuel products to the retailers (fuel stations) that they own or to their contracted retailers. They may also distribute wholesale fuel products to independent consumers and transport fuel products through pipelines to facilities located near storage facilities. Finally, distributor licence holders may perform bunker delivery, storage, mineral oil and transportation activities without obtaining the relevant licences for such activities, provided that these activities are registered with their distribution licences.

The Petroleum Market Law prohibits distributors from distributing fuel products to the retailers of other distributors. Another limitation is that a distributor's sales through the stations it operates may not exceed 15% of such distributor's domestic market share. Furthermore, the domestic market share of a distributor cannot exceed 45% of the total domestic market, and distributors cannot subsidize the fuel stations they operate directly and cannot discriminate against fuel stations of other retailers. Distributor licence holders are obliged to maintain quality control monitoring of any activities being carried out under their registered trademarks and to notify EMRA of any terminations made with their retailers, stating the reasons for the terminations. In other words, distributors must be able to provide good reasons to EMRA for the termination. This provision of the law is particularly beneficial to retailers.

Retailer licences
Retailer licence holders acting as fuel or bunker stations according to the definitions in their licence, and acting as retailers with or without stations according to the category of their licence, may sell fuel or bunker that they receive from their distributors. Retailers must carry out retailing activities under a centralized sale agreement to be entered into with their distributors. Retailers must not procure fuel products from other distributors or their retailers, and must avoid adding improper solvents to fuel products. The Petroleum Market Law also provides that the distance between two fuel stations shall not be less than 10 kilometres (km) on highways and 1km within cities.

The board can establish retailer categories considering technical and economic criteria. In such event, the retailer licences will be issued accordingly.

Retailers and distributors may commence operating the stations established under their licences upon notifying the board. Fuel stations may perform sales (excluding sale of liquefied petroleum gas) for the needs of the agricultural sector through tankers or village pumps.

Other licences
Finally, the Petroleum Market Law sets forth the licences for transportation, processing, storage, transmission, lubricant production, independent consumer and bunker companies. However, instead of the law itself providing sufficient information regarding these licences, details are set out in the licence regulation.

Processing licence holders may operate processing facilities and produce new products, and/or change the type and quality of petroleum and other chemical substances, apart from the production of mineral oil.

Mineral oil licence holders may perform produce and import mineral oil as defined in their licence within the market.

The storage licence grants holders the right to operate a storage facility where petroleum products can be stored.

Transmission licence holders have the right to transmit petroleum via pipelines and to operate transmission facilities.

Independent consumer licence holders, depending on the type of consumption, may procure furnace oil, fuel oil and diesel directly from the refineries or distributor licence holders. However, in order to obtain an independent consumer licence under the Licence Regulation, the consumer must have a minimum annual consumption of 5,000 tons of any of the petroleum types mentioned above. Licensed independent consumers do not necessarily have to buy fuel from retailers. On the other hand, distributors cannot conduct sales from their stations to independent consumers whose furnace fuel, fuel oil and diesel consumption per year is below the amount to be determined by EMRA, which must not be less than 5,000 tons.

The last type of licence set out under the Licence Regulation is the bunker delivery licence, which enables its holders to (i) procure bunker locally or from overseas from refineries, distributors or other bunker delivery licence holders, and (ii) deliver bunker that is subject to transit regime or that has entered into free circulation to consumers or other bunker delivery licence holders.

Requirements on licence holders
According to the Licence Regulation, all licence holders must have insurance for the compensation of any possible physical or real damages that they may cause to third parties. Holders of refinery owner, storage and transmission licences must provide all-risks insurance for their petroleum and facilities.

With the exception of independent consumer licence holders, all licence holders are obliged to pay an annual contribution fee, which is calculated by multiplying the annual net sales amount of a licence holder by the contribution ratio (to be determined by the board each year). The contribution fee shall not exceed 0.001% of the holder's income or $2 million. The board, in a decision of December 26 2003, held that individuals and legal entities that operate in the petroleum market are obliged to deposit 0.1% of their net sales as a contribution fee for the year 2004.

The licence regulation provides that individuals or legal entities can apply for a licence if they are:

  • domiciled in Turkey;

  • registered with a trade or industry registry; and

  • income or corporate taxpayers.

Private legal entities that are defined as capital companies pursuant to the legislation of foreign states, and that perform their activities within the Turkish market, will be deemed domiciled in Turkey under the Law on Protection of the Value of Turkish Money.

Furthermore, the licence regulation states that entities that would like to obtain a refinery owner, transmission, storage, processing, distributor or bunker delivery licence should be established as either a joint stock corporation or a limited liability partnership as defined under the Commercial Code.

Proprietorship and Expropriation

The Petroleum Market Law sets forth that any right or proprietorship regarding the land, realty and buildings necessary for the facilities within the scope of the law should initially be acquired by way of agreement. However, if necessary, certain acquirements can be made by way of expropration, as set out in the Expropriation Law. These acquirements are:

  • refinery and licensed storage facilities;

  • establishment of a servitude right on land and realty, and other buildings and immovables considered as integral parts thereof, which coincide with transmission lines; and

  • processing facilities determined by EMRA.

In such cases the property of the immovable that has been expropriated will belong to the Treasury and the licence holder that has paid for the expropriation fee will have the right to use the immovable.

Formation of Prices and Pricing

The current automatic pricing mechanism, as provided under the previous legislation, will remain in force until January 1 2005 and the Council of Ministers may extend this term for up to six months. The new system of setting prices will be in accordance with market conditions instead of an automatic pricing mechanism, and is an important step for the establishment of a free market and for ensuring competition in the market. The Petroleum Market Law further provides that the purchase and sale price of crude oil will be set in accordance with global free market conditions. With regard to local crude oil, the prices in the nearest refinery or delivery destination will be deemed to be the market price. In order to provide crude oil and fuel from abroad, one must hold a refinery, distributor or bunker delivery licence. Only refinery owners and producers can conduct domestic trade of crude oil.

Refinery owners shall buy local crude oil at the minimum price formed by the proposals of crude oil producers, and they shall give priority to the purchase of local crude oil. Refinery owners should respond in writing to the minimum prices set by the crude oil producers (and price offers above these) within 15 days. The board is authorized to evaluate and settle matters arising from the application of the market prices within 30 days.

Prices in relation to marketing activities performed within the scope of the refinery owner or distributor licence will be determined by considering the nearest global free market price formations, and these will be designated by EMRA as the maximum prices.

The tariffs to be prepared by the licence holders in relation to the transportation activities conducted within the scope of the transmission licence, and licensed storage activities in relation to the facilities connected to these transmission lines, will be applicable upon the board's approval. The board must evaluate tariff approval requests within 30 days of the application.

Another issue introduced by the Petroleum Market Law is the establishment of a national marker to be mixed with the fuel that the refinery owners and distributors will be marketing within the market. The national marker will be mixed with the fuel at the refinery exit or customs entry in the amount and condition to be determined by EMRA. The aim of this provision is to prevent illegal sales of petroleum products that are imported from abroad.

Furthermore, the Petroleum Market Law requires that a certain amount of petroleum be reserved so as to maintain consistency in the market, prevent crises or risks and meet the obligations undertaken through international treaties. National petroleum storage is maintained by storing 20 times the average daily amount delivered by refinery owner and distribution licence holders.

Comment

It is expected that the Petroleum Market Law will fully liberalize refined oil product pricing, and will create a transparent and competitive market that performs on commercial principles. By granting extensive powers to EMRA, the law also envisages a high level of supervision in the market. In this regard, EMRA is authorized to determine minimum or maximum prices and to take other necessary measures, for a term not exceeding two months in each case, on the occurrence or establishment of any agreement or practice that prevents or restricts competition in the procurement of goods or services in the Turkish petroleum market.


For further information on this topic please contact Senem Iºmen at Hergüner Bilgen Özeke by telephone (+90 212 310 1800) or by fax (+90 212 310 1899) or by email (sismen@herguner.av.tr).


Endnotes

(1) Official Gazette, June 17 2004, No 25495.



Comment or question for author

ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.