Azerbaijan Oil & Gas
Azerbaijan’s oil and gas sector: the legal framework
In accordance with the legislation of Azerbaijan, ownership of all petroleum resources existing in their natural state in the underground and surface strata (including the portion of the Caspian Sea under the jurisdiction of Azerbaijan) is vested in the state of Azerbaijan.
Several international oil consortiums are engaged in the exploration and production activities in Azerbaijan’s sector of the Caspian Sea and in onshore exploration. Almost all offshore consortiums operate under PSAs; however, there are several risk service agreements (“RSAs”) signed for the new exploration and production areas.
There are substantial taxation differences between the PSA and non-PSA activities as the terms of a PSA typically include substantial tax reliefs for investors.
In June 2000, the first Tax Code of the Republic of Azerbaijan (the Tax Code) was ratified by Milli Majlis (the Parliament), coming into force on 1 January 2001. With a few exceptions, the Tax Code is the only document governing taxation in Azerbaijan. However, Article 2.7 of the Tax Code establishes the precedence of PSAs over the provisions of the Tax Code.
The vast majority of oil and gas contracts signed in Azerbaijan to date were negotiated based on PSAs. Each PSA has the status of a separate law and establishes contractual relations between the foreign operating companies and SOCAR in relation to the development of a specific oil and gas field.
Although the terms of each PSA are unique, all current PSAs are similarly structured and contain many standard clauses and provisions. These include:
· The rights and obligations of the parties
· The contract area
· Development and production period
· Recovery of exploration costs and sharing of production
· Bonus payments
Taxation in Azerbaijan
Azerbaijan’s tax system comprises three alternative taxation regimes: the statutory tax regime governed by the Tax Code, the tax regime established by existing PSAs, and the tax regime established by the two existing Host Government Agreements (HGAs).
The HGAs on BTC (Baku-Tbilisi-Ceyhan) and SCP (South Caucasus Pipeline) signed by the Government of Azerbaijan and Main Export Pipeline (MEP) Participants provide for different taxation rules.
In this guide you will find a general overview of these taxation regimes.