Turkey’s Unrealized Dream: Petroleum / Hıfzı Deveci, Retired Member of the State Supervisory Council

May 11, 2013 Sectoral Analysis –  Petroleum – Turkey is an energy poor country. It could produce only the %12 of the 20 million ton crude oil it consumed in 2011.([1]) As for natural gas, its situation is even more desperate: it had to import almost all of the 44 billion m³ natural gas it consumed in 2011, the amount it could produce was only 800 million m³.([2])

Naturally, the bill of country’s energy import is also too high: 54 billion dollars for 2011. The picture we get when we take a closer look at what this number means is: with exports of 135 billion dollars in 2011 and imports of 241 billion dollars, more than one fifth of the country’s total import is consisted by energy, and almost the half of the income earned from export is spent on this. But the main element that makes this serious foreign trade imbalance more alarming is that the increase in energy import, both in quantity and price, raises the increase of total export and import. In 2011, while total export of the country increased %18,5 and its import increased %29 compared to previous year; its energy bill increased %40,5 compared to previous year.([3]) If there were not the high bills it paid for energy import, rapid growth of the country(compared to the past)  in recent years would have reached to a more awe inspiring point. Prime minister (and other fronts of the government party) finds the credit rating that the Moddy’s, Fitch and S&P gave to the country insufficient, but these international credit rating agencies consistently (and righteously) ask “what about the current account deficit?”

The reason why Turks revolt against this poorness is that its neighbours wallow in petroleum and natural gas reserves but the nature was very ungenerous with them. They cannot find an answer to “Why do not we have the thing that is abundant in Iran, Iraq, Azerbaijan, Russia?” This revolt might not be harmful in itself; but there is another common sceptical thought that is applicable for all the underground resources, which really is a serious block for the efforts of petroleum and natural gas exploration works: Having an untreatable doubt against all those who want to extract the underground resources! You can see this complaint not only in village coffeehouses but also in serious political discussions and open sessions. For example, a foreign oil company drilled an oil well, but could not find oil or the well was unproductive of petroleum in economical quantities, so it closed the well with cement, then left. The locals would approach this incident as: “Actually they found oil, but to avoid us to benefit from it, they closed the well and left!” All the rational explanations you will make opposing this belief would be ineffective; you cannot make people believe that any private company, that found oil in an economic amount in the well which it drilled by spending millions of dollars, would not give up extracting it under any circumstances. Another very common and interesting belief among people is this: Actually, all the oil reserves and mineral resources in Turkey can be clearly seen even with the naked eye by the satellites, but foreigners conceal this information from us intentionally!

Overstatement and lottery fondness in Turkey are among the factors that spoil the scientific analysis. We had managing directors who said that these little natural gas reserves found from time to time are “as big as to save the entire country”. Most of the people continue to believe that one day, God will have the work in hand and we will discover uncommonly rich natural resources in our lands. (It already happened in the case of boron mines.) In brief, “in our home” it is not easy to make rational evaluations about petroleum and natural gas.

Sacred Petroleum, Holy National Interests

Nowadays, a new bill is introduced to the General Council of Grand National Assembly of Turkey (TBMM) to change the exploration of petroleum and natural gas regime which was valid for many years. Petroleum Law no. 6326 (let us call it “old” law) was introduced in 1954  including the most comprehensive ones in 1970 and 1983, it was changed for many times, but it became outdated. The “over protective” form was its most substantial feature.

According to the old law, exploration of petroleum in Turkey was almost a “holy” act, it could only be done by the national company Turkish Petroleum Corporation (TPAO), and other domestic and foreign companies were hardly licensed. “Compliance with national interests” criterion was overemphasized; and it was primary in the evaluation of the applications.

Foreign oil companies were perceived as “agents”. The old law formulated this suspicion with ambiguous statements such as: If there is a “financial interest” of a foreign country in the administration of a company, then it was not possible for that company to search for oil in Turkey. This kind of companies also could not carry out other activities that are related to petroleum, could not own movable and real estate properties for that purpose. (If really necessary, they could be licensed only by the council of ministers) Let us explain this provision like this: For example, if this provision was valid in Kazakhstan, then Turkish national company TPAO, not only would not be able to search for oil there but also would not be able to even open a liaison office! Petroleum companies could export %35 onshore and %45 offshore of the petroleum they extracted. They had to allocate the rest for “needs of the country”.

Old law granted privileges to the national oil company TPAO; TPAO could hold the operating licences it had indefinitely, also it was more advantageous than other companies with respect to the number of licences it could have. Oil fields that do not hold an operating licence were offered to TPAO without tendering for a contract, if TPAO accepted it then it would not be offered to another company. Production areas of the companies, whose term of licence is over, were assigned to TPAO without questioning.

Oil companies had to extend the return of their oil exploration/extraction spending a long period of time, and they were subject to high rated corporate tax. It was possible for upper tax limit to reach %55.

This kind of provisions would not pose a problem if they were applied in Iraq being rich in oil, but in Turkey it frightened the companies.Besides these rules that “frighten away the applicants”, the law was full of legal gaps and these gaps were opening a door for bad intentions. For example, exploration licences were not based on a working plan (and assurance), companies could wait until the term of the licence to end without doing anything and by keeping the oil field. Fake oilmen, who took advantage of this gap, were marketing their licences in the black market.

Did Protectionism Work?

The answer of “How did the balance of country’s oil searching-finding-operating evolve in this law’s validity period?” is not pleasant at all. In Turkey, from 1954 until now, only 4.103 exploration and production wells were drilled. As of 2011, only 2.3 million ton crude oil was extracted from the active 1.180 wells.([4])Average efficiency of all the wells in the country is 38 barrel/day. Daily output of the well with the highest production is 698 barrels and we even have wells that produce 1 barrel/day.([5]) All the natural gas we could extract in 2011 was from 283 wells. The high number of wells with the small amount of production indicates that Turkey is not that much of a “preferable” geography for oil companies. Number of wells that are drilled till now is insufficient for a country of 780.000 km². Our seas are still pretty much untouched; hence, we did not lose our hope of discovering “enormously productive” fields. But in the light of our experiences of more than four thousand wells, this is not likely to happen.

The President’s Veto, Apathy of the Parliament

Complaints about the old law continued for years. A bill was introduced to the Grand National Assembly of Turkey in June 2004, after waiting in parliamentary commissions for 2,5 years, it was accepted as late as  January 17, 2007. In the law no 5574:

    “Compliance with national interests” notion was not included.

    There was no the rule of allocating an amount of the extracted oil for needs of the country.

    The ban on companies which “have a financial interest with a foreign country” was removed.

    A progressive system was accepted in public securities which was %12,5 in the old law. The public securities were to be determined separately onshore and offshore, also they were to be related to the amount of production. A regime that is starting from %2 and up to %12 was proposed.

    %50 of the public securities derived onshore accepted to be transferred to the special administration of the province it was extracted.

This law was vetoed by the president of the time, with the reasons stated above in 5 points. The president was objecting to all the reformist points in the law. In the constitutional orders of the Turkish Republic, the president’s veto does not pose a real obstacle against the will of the parliament. If the parliament wishes, it can resist against the veto, and (without changing anything) oblige the president to pass it by introducing the bill again. Of course, it is also possible to reconcile with the president by making changes on the bill according to the reasons for veto. But the parliament did not do any of these for the Petroleum Law, it remained silent.

One of the president’s veto reasons was always found “appropriate and right” and it was the rule of “to leave half of the public securities derived from the produced oil to local authorities”. Indeed, it is not acceptable for a unitary state to distribute the natural resources “according to the province it was extracted”. But it is still unknown why the parliament did nothing about other changes on which every interested party agreed upon, and why waited to enact these.

New Law, New Term, and a Prediction: Nothing Will Change!

The new law introduced to the Grand National Assembly of Turkey is based on this “vetoed law”, which has been waiting since 2007, but it will not encourage the oil (and natural gas) exploration as much as we expect. Because, despite having many positive changes, it ignores the most critical problems and it even falls behind the 2007 bill in some points.

It is surprising that in account of public securities, the system projected in “vetoed” 2007 bill, which encourages offshore drilling specifically and has a graded rate for indexing public securities to the “extracted oil”, is renounced and the position in act 1954 was returned to. It will be possible to make little discounts only for low gravity oil.

Foreign company phobia leaked into few points in the new bill. The bill subordinates the capital movement that causes a change in the administration control of oil reserve holder company to the “prior approval” of the minister. (Nobody knows what monitoring the administration control of a giant world company whose stocks have been taken up and sold in New York Stock Exchange will bring to the daily production of wells in Turkey.) Another phobic leak is: According to the new bill, the foreign oil company must certainly be a “stock corporation”. The “government-owned” corporations, as is TPAO, may not be able to explore oil in Turkey from now on.

Basing the collecting public securities in cash on market price instead of per-well price, appears to become a source of inequity for producing companies. Because transportation of the extracted oil to the closest market expenses are included in the market price, and thereby the companies which pays the public securities by the well with oil will make more profit than the ones that pay in cash. New term has some positive anticipation too. Foremost, exploration licences must be grounded on working plans (and assurance). It will not be possible to remain as a licence holder without doing any activity for years anymore. Those who do it will be fined and lose their licences. Another positive development is that the export prohibition on a portion of extracted oil is removed. Companies will be obliged to sell only the amount of oil that is necessary in regard to Turkey’s security of supply, inside the country. In new term, unless companies retrieve their exploration costs fully, they will not pay taxes for their oil earnings. This is maybe the most important change in new term. But the most important factor that would encourage companies to explore is skipped: Tax reduction. Tax rate that can come up to %40 is notably high for extremely risky oil sector; Turkish geography increases this risk more with its reserve ratio. It would be good to provide opportunities for companies to consolidate their drilling expenses.

Position of TPAO

Maybe the most positive change of the new term, surprisingly, formed the focus of criticisms brought for the bill. National Company TPAO will have no difference than other licence holder companies anymore. Its privilege of “exploring on behalf of the state” is removed; “expiring” licences will no longer be assigned to TPAO without auction.

It will be better for professionals who prefer TPAO to keep its privileged position, to think about how this national company will become a “global player” with its present legal, administrative, (and of course financial) structure, it is impossible for TPAO to make a great number of searches with new technologies in risk areas. Except the Azeri-Çıralı-Güneşli oil income arose from the relationship between the leaders of Azerbaijan and Turkey (the company has a share in this production field as much as %6,5) the company has no overseas oil income, its domestic income is inefficient, the amount it spared is pretty small. Above all, it is unorganised in fields other than oil production (transmission, refining, etc.). The company that is unable to have income from sub-branches also cannot make sufficient resource transfer to the drilling works.


New oil regime proposes some favourable changes but what is essential is not amendment, it is change of perception. We must overcome the irrational fear. To form a privilege for the state is an outdated choice of “closed economy” and we have never benefited from it in the times it was implemented.Instead of basing the oil exploration/extraction on rules that are recognized in all the world markets like predetermining licence areas, evaluating technical capacities of the applicants properly, setting rational business plans for licensees, and taking away the licences of the ones who do not comply with these rules; grounding it on “national interests” was not reasonable.

At present, 24 foreign and 24 domestic corporations are exploring oil and natural gas in the fields of Turkey. It is necessary to increase the number of these companies, encourage them to drill more wells and to try expensive new technologies. It should not be forgotten that the most favourable oil for “national interest” is not the one inside the earth’s crust, it is the one “that is being extracted” in any way necessary.

Hıfzı Deveci, Retired Member of the State Supervisory Council, Public Administration Specialist and Author

Please cite this publication as follows:

Deveci, Hıfzı (May, 2013), “Turkey’s Unrealized Dream: Petroleum”, Vol. II, Issue 3, pp.24-31, Centre for Policy Analysis and Research on Turkey (ResearchTurkey), London, ResearchTurkey. (

[1] General Directorate of Petroleum Affairs (PİGM) Oil and Natural Gas Production Statistics, 2011.

[2] Petroleum Platform Association (PETFORM) Statistics, 2011.

[3] Turkish Statistical Institute (TÜİK) Foreign Trade Statistics, 2011.

[4] PİGM Petroleum and Natural Gas Statistics, 2011

[5] There are wells that produce 30.000 barrel/day in (Kingdom of) Saudi Arabia. 10.000 barrel/day production is not surprising for Iraq.