Oil and Gas Law
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Legal and tax consultancy in the oil and gas industry as well as, energy and renewable energy industry in Azerbaijan are among our experience areas.
The petroleum industry in Azerbaijan is regulated by both domestic legislation and international treaties.
Domestic legislation applies to the extent international treaties allow. In other words, international treaties and agreements signed on behalf of the Azerbaijani government prevail over local laws.
Azerbaijan is one of the birthplaces of the oil industry. According to the historical documents, the oil was traded even in the 3rd century A.D. Throughout the history of Azerbaijan, especially, Absheron peninsula was famous for its flaming grounds because of petroleum.
During the Soviet period, Baku’s oil reserves were continuing its paramount role. In the years of World War, Baku was producing over 70 percent of the total oil production in the USSR.
After gaining its independence, oil production declined in the Republic of Azerbaijan. However, its rich resources attracted foreign investors to invest in the oil industry of Azerbaijan. Starting with the attraction of foreign investments in the oil industry, mass productions in oil reservoirs have started in 1994 via the Production Sharing Agreement (PSA) for Azeri-Chirag-Guneshli (ACG) field, since which over 30 PSAs have been signed.
Azerbaijan’s oil production was just about 9.5 million tons in 1994, and in 2010 it has reached a record number of 50.8 million tons. In recent years, the production declined to 38 million tons in 2017 and 2018.
Gas production in Azerbaijan was around 6.4 million cubic tons in 1994, and after projects such as Shahdeniz 1, Shahdeniz 2, and discovery of Umid and Absheron gas fields have resulted in the increase in gas production, being 26.3 million cubic tons in 2010, 28.6 million tons in 2017 and 30.5 million tons in 2018. Baku Tbilisi Ceyhan, Southern Gas Corridor, TAP, TANAP are among the main international projects in the transportation and export of Azerbaijani gas to foreign markets.
In 2000, Baku-Tbilisi-Ceyhan Host Government Agreement and in 2002, Southern Gas Corridor Host Government Agreement (HGA) were reached, which regulates the terms and conditions on the receipt, transportation and delivery of natural gas among Azerbaijan, Georgia and Turkey.
The petroleum industry in Azerbaijan is regulated by both domestic legislation and international treaties.
Domestic legislation applies to the extent international treaties allow. In other words, international treaties and agreements signed on behalf of the Azerbaijani government prevail over local laws.
Under the Azerbaijani Constitution, natural resources belong to the Republic of Azerbaijan, without prejudice to the rights and interests of individuals and legal entities. Main local legislative acts on this industry, namely “Law on Subsoil”, “Law on Energy” and “Law on Use of Energy Resources”.
The Law on the Subsoil, basing on the constitutional principle, ascribes the ownership over the subsoil to the government, provided that rights and legal interest of stakeholders are respected.
The subsoil is defined as the part of the crust located below the surface soil, bottom of water reservoirs, stretching to depths and consisting of rocks, mineral raw material resources, energy carriers (oil, gas, etc.), natural and artificial cavities, geological and technogenic parts.
Licensing in subsoil regulates oil-gas permission, primarily applying to geological surveys, extraction and production in oil and gas reservoirs, processing and transportation of oil-gas products via pipelines. The permissions for the use of subsoil (extracting natural resources) are issued up to 25 years, and 30 years where such use will cover geological exploration.
Subsoil operations, including operations in oil-gas fields, may be restricted or prohibited where these operations may cause a threat to national security, to the lives and health of people and the environment.
The right over subsoil use, including production and processing of oil and gas, are issued via competition, auction and direct negotiations. Further regulations, particularly regulations approved by the President prescribe the several rules about the subsoil use, auctions, fees regarding subsoil use, issuing expert opinions and several other procedural and technical matters.
In 2009, the Law on Application of Special Economic Regime on the Export Oriented Oil-Gas Operations was adopted by the Parliament. The Law, which is adapted for the initial period of 15 years, provides for specific rules for the export-oriented oil-gas operations beyond the Azerbaijani territories. Export-oriented oil-gas operation is defined as oil-gas operations beyond the territories of Azerbaijan and the territorial waters of the Caspian Sea, as well as the provision of works, services and delivery of goods in Azerbaijan related to these operations. It is expressly noted that this Law does not apply to any oil-gas fields and operations which are regulated by the production sharing agreements. The law provides for the specific regimes for taxation, customs, currency regulations, workforce and documentation of such issues, such as contractors and subcontractors covered under this law pay 5% profit tax, customs duties and import VATs are exempted upon obtaining a certificate from relevant authorities.
Besides domestic legal acts, most of the foreign oil companies operate under specific international treaties, called production sharing agreements in Azerbaijan.
The initial PSAs have been signed in 1994, after which many other PSAs were adopted with regard to several oil fields onshore and offshore.
On 14 September 2017, amended and restated Azeri-Chirag-Guneshli Production Sharing Agreement was signed. The term of the agreement was prolonged until 2050, BP being the operator and SOCAR's (State Oil Company of Azerbaijan Republic) share in the project was increased to 25% from 11%. As a result of this change, Azerbaijan’s direct participation in the profitable production amounted to 75%.
The legal regulation and tax regime of the PSA are different from the local laws. The PSAs prevail any other contradictory local laws, except Constitution or any other act accepted by the referendum. The Republic of Azerbaijan guarantees for the obligations of the SOCAR under PSA. PSA provides for lower withholding tax rates, at the same time exempting from the value-added tax, and providing for a simplified reporting and accounting procedures. Under Most PSAs, contractors are exempted from the payment of the mining tax. The general provision under the Tax Code defines a 26 percent rate applying to crude oil production and a 20 percent rate for natural gas production.
Azerbaijan mainly has accepted investments on the Upstream segment while the majority of the midstream and downstream segment is under control of the state through SOCAR (State Oil Company of Azerbaijan Republic). Considering the huge amount of foreign investments in this sector, Azerbaijan has joined several international treaties including, the UNCITRAL Convention on Recognition and Enforcement of Foreign Arbitral Awards, Convention on Settlement of Investment Disputes between States and Nationals of Other States, Energy Charter Treaty for guaranteeing these investments. Azerbaijan has concluded bilateral investment treaties and treaties on the avoidance of double taxation as well.
Moreover, in 2004, Azerbaijan ratified the International Convention on Oil Pollution Preparedness, Response and Co-operation (OPRC), The International Convention on Civil Liability for Oil Pollution Damage (CLC Convention) and 1976 Protocol thereto, 1992 Protocol renewing CLC Convention.
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