Turkey: TANAP: Vital Legal Considerations When Establishing Significant Energy Projects In Turkey

Last Updated: 19 March 2019
Article by Levent Lezgin Kilinc

Energy has become a critical factor in the growing economy of Turkey as it aims to reconfigure and broaden its energy mix. A key part of the country's evolving strategy, The Trans-Anatolian Natural Gas Pipeline (TANAP) is of increasing significance in developing its infrastructure. TANAP is not only a strategically important development for Turkey, but also for Azerbaijan: it simultaneously allows the first Azerbaijani gas exports to be delivered to Europe while further strengtheningTurkey's position as a regional energy hub.

The construction of the TANAP pipeline, which is 1,144 miles in length, began in March 2015 and was officially inaugurated in June 2018. When it is eventually completed in an estimated three years' time, TANAP will run all the way from Turkey's border with Georgia, through 20 different Turkish provinces, until it finally ends up at the Turkish-Greek border in the north western province of Edirne.

TANAP connects the Shah Deniz gas field in Azerbaijan to Turkey and Europe. As the longest part of a new energy route, the Southern Gas Corridor, it forms the key constituent element of this major infrastructure project. Two other pipelines also form part of the route: the South Caucasus Pipeline (SCP) which runs through Azerbaijan and Georgia to Turkey; and the Trans-Adriatic Pipeline (TAP) which runs through Greece, Albania and the Adriatic Sea to Southern Italy. In November 2018, TAP and TANAP completed the final "golden weld", which physically connected the two pipelines.

As a project, TANAP's aim is to transport natural gas that is produced from the Shah Deniz-2 gas field in Azerbaijan and other areas of the Caspian Sea, predominantly to Turkey, but also to various European countries. This will help to contribute to the EU's objective of increased diversification of gas sources. TANAP's ownership is comprised as follows: Southern Gas Corridor CJSC – 51 percent, SOCAR Turkey Enerji – 7 percent, Botas – 30 percent, and BP – 12 percent.

Given the size and scale of the TANAP project, it will come as no surprise that the numbers involved in its financing and production are equally substantial. By the time TANAP is completed, the pipeline will have cost $8.5bn with $800m in funding from the International Bank for Reconstruction and Development, a $500m loan from the European Bank for Reconstruction and Development and a further $1.15bn coming from The European Investment Bank. In July 2018, The World Bank also backed TANAP, by issuing a $1.1bn syndicated loan guarantee.

According to SOCAR, the TANAP pipeline has already delivered one billion cubic meters of gas to Turkey in the past year. In 2019, that figure is projected to rise to two billion cubic meters, doubling to four billion cubic meters in 2020, and ultimately reaching six billion in 2021.

Like any project that is developed on such a large scale over a considerable period of time, the construction and operation of TANAP has seen contractors, such as ABB, and multiple subcontractors taking part at different stages. Beyond the myriad demands of construction, TANAP has also required substantial levels of compliance to be arranged with a spread of national regulations and regulatory authorities. The latter play a critical role in determining and issuing the relevant licences that are needed prior to the start of construction and operation. When planning, launching and developing an energy project of the scale and complexity of TANAP, a significant number of legal compliance tasks, as well as the usual commercial considerations, need to be undertaken so as to ensure that everything satisfies Turkish legislative requirements.

In order to ensure that such an intricate and complex project becomes operational on time and on budget, many different aspects of Turkish Law must be considered so that everything works in parallel. Beyond the various legal considerations in relation to financing, these include: the drafting of vital engineering, procurement and construction (EPC) contracts, securing the appropriate trademarks, managing the overall reputation of the project and the company/companies involved, complying with a range of local energy laws, determining how regulations are enforced, as well as the assorted considerations of employment, health, safety, environment and stakeholder engagement, and multiple agreements with contractors and sub-contractors.

Turkish government energy policy centres on the liberalisation of the oil and gas industries, with the aim of creating a more competitive environment by allowing the entry of private entities into the domestic market. The Turkish Petroleum Law No. 6491 (TPL) and the Natural Gas Market Law No. 4646 (Natural Gas Market Law) comprise the main domestic legislation to be considered. These cover the terms and procedures regarding the regulation, management, provision of incentives for and auditing of petroleum and gas exploration and production activities in Turkey, as well as the compilation, evaluation and provision of necessary information and data for exploration and production.

Neither TPL nor the Natural Gas Market Law contain clauses or provisions that are unusually burdensome for foreign companies. Their overriding principle is defined in TPL: "the petroleum resources of the Republic of Turkey are rapidly, continuously and effectively explored, developed and produced by preserving the national interests."

The Turkish Constitution provides that the ownership and the right to explore, exploit and dispose of natural resources belongs to the Turkish State, which then delegates the right to explore and exploit those resources through licensing to assorted private sector companies. This is undertaken either by the Energy Market Regulatory Authority of Turkey (EMRA) or the General Directorate of Petroleum Affairs (GDPA), depending upon the type of activity involved.

Mandatory licences, which are required by entities planning to develop a project in Turkey, are issued by EMRA, the autonomous regulatory body that is responsible for regulating and supervising the downstream oil and gas markets. As well as issuing licences to energy market participants, EMRA is also authorised to implement and enforce the relevant legislation. Finally, it has an additional function: to impose sanctions in order to ensure that a competitive market environment is maintained and to set and preserve standards for market participants.

To make sure that their operational plans in Turkey are fully realised, developers and operators have to engage with several other arms of government. The first of these is The Turkish Ministry of Energy and Natural Resources (MENR), which is responsible for planning the country's strategic energy and natural resources requirements, determining both its short and long term needs and shaping the appropriate policy objectives in procurement. Like EMRA, it also has the role of market supervisor across a broad range of activities in Turkey's energy sector. These include: exploration, development, facility building, production, exploitation and distribution.

MENR supervises the other most important agency, GDPA, which has responsibility for the issuing of licences in relation to exploration and exploitation activities as well as for supervising the upstream petroleum and natural gas markets. Two other government ministries have an additional regulatory impact on companies which are active in the Turkish energy sector. These are the Ministry of Environment and Urban Planning (MEUP) and the Ministry of Labour and Social Security (MLS).

MEUP is Turkey's principal environment agency, which is responsible for setting and maintaining standards in order to protect the environment. To do this, it implements a range of legislation including waste collection, recycling and the inspection of relevant facilities. It also has the authority to impose sanctions and to conduct investigations in order to ensure that companies comply with appropriate environmental standards.

Finally, MLS has primary responsibility for the implementation, regulation, enforcement and supervision of all health and safety measures for employees and other workers, which have to be undertaken by employers in Turkish workplaces. In addition, it also has authority to impose sanctions and to conduct investigations. This is done to make sure that the appropriate occupational health and safety measures are correctly complied with in each workplace.

As part of Turkey's growth as a regional energy hub, renewable energy increasingly competes with traditional energy sources, such as coal, oil and gas. Now integral to Turkish government policy, it has a critical role to play in shifting dependence away from fossil fuels. Accordingly, the government is in the process of rolling out the adoption of renewable energy. In order to support this, it is also boosting the necessary infrastructure with plans in place to increase the overall share of renewable energy resources in electricity production to more than 30% by 2023. As another element of its renewable energy strategy, the government is implementing more supportive policies, such as feed-in tariffs and investment incentives.

The use of wind power is also being supported by the Turkish government. The total installed capacity of wind energy in Turkey increased from 20MW in 2002 to 4.4GW by 2015. Last year, wind energy accounted for 6 per cent of the country's overall electricity production. This seems destined to increase. There are currently 158 wind energy companies which are actively operational in Turkey at 207 wind energy plants with 6.5GW of installed capacity. In addition, a further 32 projects with 808 MW of installed capacity are presently under construction.

This article is published in World Pipelines

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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