Izmir: A Potential City for Energy and Investment

In this article, while explaining energy arbitration and international investment arbitration, the reason why the city of Izmir has an open-ended potential in this regard and why it can be the epicenter of future disputes on energy will be explained.


First of all, it is necessary to mention what these two upper concepts mean. Energy arbitration and international investment arbitration are types of arbitration with the same procedure and motivation in general, they differ from each other only in terms of subject.

In these two types of arbitration, one of the parties is the country hosting foreign investor called the “host state” and the other is the foreign investor investing in this state. However, it is interesting that in addition to these two sides, the state of origin of the foreign investor is also involved, which will be explained in more detail in the following lines.

Investment arbitration, which is an alternative dispute resolution procedure, is generally a procedure for resolving disputes between foreign investors and host states. It is a much more reasonable way for the foreign investor to resort to investment arbitration, which is shorter and less costly, rather than being subject to lengthy litigation processes in the courts of the host state in which they invest on the basis of disputes.

Energy arbitration, on the other hand, is generally the embodiment of this alternative dispute resolution in the energy sector.


Unlike commercial arbitration, investment arbitrations (including energy arbitration) do not look at disputes between two equals. Indeed, one of the parties is the host state, which has sovereign authority, and the other is the foreign investor investing within the borders of this state’s sovereignty.

As such, international investment arbitration seems to deal with disputes arising from asymmetrical contracts which is not the case. Generally, an investor-friendly attitude is displayed in international investment arbitration. As a matter of fact, in disputes between these two parties arising from bilateral investment agreements between the home state of the foreign investor and the host state, or a multinational investment agreement to which both parties are parties, only the foreign investor will be able to go to arbitration. In other words, the host state will not be able to go to international investment arbitration on the foreign investor based on such agreements.

This situation proves that this relationship is an asymmetrical relationship, but a relationship in favor of the investor. However, in commercial arbitration, both parties can bring their disputes to international commercial arbitration (ISTAC, ICC, etc.). At this point, the two types of arbitration differ from each other.

In addition, consent is required for arbitration. In other words, both parties must clearly express their consent to apply for this legal remedy. This consent may be given under an arbitration clause that they have included in the contract they have signed between them, or it may be given in a separate arbitration agreement. This is the case for commercial arbitration.

The wheels turn a little differently for investment arbitration. The issue of consent does not have to be present in the investment agreement between the foreign investor and the host state. Consent is sought in a bilateral investment agreement between the host state and the country of origin of the foreign investor, or in an international agreement to which both are parties.

Indeed, for example, for a dispute arising after an energy investment agreement between an Azerbaijani foreign investor and the Ministry of Energy (if there is a subject other than contractual obligations contrary to this agreement, for example, with an expropriation, a different outcome than the Azerbaijani investor’s expectation before coming to Turkey) consent to investment arbitration is not sought in this contract as a rule. This consent factor is sought in the bilateral investment agreement between Azerbaijan and Turkey, or by looking at the ECA (Energy Charter Agreement), which is an international agreement, to which both states are parties.


In addition, another difference between commercial arbitration and investment arbitration is that when arbitration is resorted to and then the enforcement and recognition stage is reached, there is no requirement the fact that the local courts of the relevant state must recognize and enforce this decision in investment arbitration, while this situation emerges as a condition in commercial arbitration. As a matter of fact, this situation arises from the fact that investment arbitration follows a policy in favor of foreign investors.

In the light of all this information, it is possible to say that foreign investors in the field of energy, while investing in the host state, enter into an international protection shield as soon as they enter the country. Indeed, before entering the country, the will and sovereignty of the host state gives all kinds of opportunities to the host state, and this situation shifts to the foreign investor from the moment the investment is made in the country.

As stated above, the main source of international protection for the foreign investor investing in the host state is the bilateral investment agreement between the country of origin of this investor and the host state. In other words, the legal relationship stemming from this investment does not consist of a bilateral relationship, unlike the customary one, on the contrary, it comes into being in the form of a triple trivet. All the factors of this trio of pillars (foreign investor, country of origin, host state) are of equal importance, and the absence of any of them will cripple this relationship, which is unlikely.

To sum up, the opportunities and advantages available to the foreign investor for energy investment are great because there is a very powerful way to resort to in case of a lack of meeting any expectations. In other words, it starts one zero ahead of the host state in this regard.


So, with all these disadvantages, what is the motivation of a host state to attract foreign investors to its territory? There are various reasons for this.

For example, it may be that the host state uses a technology or capital that is not in the possession of the host state within its borders through a foreign investor. Apart from this, the desire to increase bargaining power, certain political reasons, increased competition, etc. factors can be counted as the motivations of the host state to encourage foreign investment.

For example, the government policy of the Republic of Turkey is generally centered on promoting foreign investment, and the reasons behind this are the ones listed above.

The reason for a foreign investor to invest in the host government is to maximize its profits. Indeed, foreign investors, who cannot maximize their profits in the best way possible due to both taxes and certain regulations in their country of origin, invest in other countries.

In the field of energy, this factor is a little more diversified. For example, the geopolitical location of the host state, its proximity to energy fields, and the fact that it has a trans geography attract foreign energy investors. At this point, the port cities of the host states and the regions close to natural resources and even energy fields gain importance. This is the biggest reason why the city of Izmir has started to become a center of attraction for Turkish and foreign energy investors.


Izmir has a great potential in the field of energy investment, due to the fact that it has an internationally convenient and shallow port, and its proximity to trade routes and energy lines.

Many different city-based companies will have realized this potential, as they have opened many branches in various places in Izmir and continue to open. Especially the ports of Aliağa, Alsancak, Karaburun and Çeşme are very important ports in the field of energy and tourism.

Aliağa port, for instance, is a large international port with a capacity of approximately 10,000 (ten thousand) ships per year. Behind being such a frequent and busy port, there are factors such as being in connection with the ports of the Black Sea, Mediterranean and Southern European countries in import, export and transit transportation, and connecting to the Indian Ocean Road by following the Sueyss Canal and the Red Sea.

Hosting Turkey’s largest companies (PETKİM, HABAŞ, TÜPRAŞ) in the field of energy also makes this port and naturally İzmir an attraction in the field of energy investment. With the recent acquisition of PETKİM by the Azerbaijan-based SOKAR company, İzmir has gained a great momentum regarding foreign energy investment. Thus; It has succeeded in staying one step ahead of port cities such as Sinop, Izmit and Istanbul in the field of energy.

It is obvious that the potential of İzmir in the field of energy and foreign investment will increase geometrically day by day. It is an undeniable fact that domestic and foreign investors in this field will enter into a much greater competition than the current one. The fact that disputes will multiply and branch in this vicious and developing competitive environment should be taken into account.

The source of the disputes may be the investment agreement between the incoming foreign investor and the Republic of Turkey, or it is highly likely that they may occur in combinations of domestic and foreign companies or foreign and other foreign companies. Therefore, consultancy and law firms that dominate the regional and commercial atmosphere will be able to surpass other companies in this respect.

In conclusion, the field of arbitration regarding energy and foreign investment, which has increased due to the potential in the Izmir region, is of great importance and this issue needs to be addressed.


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Legal Intern Ömer Faruk KILIÇ 

Att. Muhittin KURNAZ

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