Overview of Hydrocarbon Regulation in Azerbaijan
As of 2009 there was no legislation in Azerbaijan specifically governing the oil and gas sector, though a draft law on oil and gas had been submitted to the parliament for approval. According to the United States Association for Energy Economics (USAEE), Azerbaijan also lacks a modern, independent regulatory agency to set basic modern rules and procedures on oil and gas operation, pipeline regulation and establishment of tariffs. The absence of oil legislation, pipeline legislation and tariff regulations in this respect puts Azerbaijan behind some of its Caspian oil neighbours, according to the USAEE.
Ministries and institutions
Ministry of Industry and Energy
The Ministry of Industry and Energy participates in the preparation and implementation of state policy in the areas of the production, transportation, and processing of oil. Specifically, based on the instructions of the president, the Ministry is responsible for preparing, negotiating, executing and overseeing the implementation of oil production sharing agreements (PSAs) and other contracts on behalf of the state with respect to the development of hydrocarbon reserves in Azerbaijan.
In reality however, according to the USAEE, the Ministry has been accorded only nominal responsibility for concluding PSAs, which, without an oil law in place, tends to lie at least as much with the State Oil Company of Azerbaijan Republic (SOCAR).
Main article: Azerbaijani Ministry of Industry and Energy
State Oil Company of Azerbaijan Republic (SOCAR)
The State Oil Company of Azerbaijan (SOCAR) is mainly responsible for the implementation of the practical, commercial side of oil projects, but the lack of an oil law has led to a complex, often contradictory relationship with the Ministry of Industry and Energy, described this way by Sabit Bagarov, SOCAR's former president: "SOCAR has its own share in all contracts and thus, is one of the contactors. At the same time, SOCAR represents the government in these contracts. As a contractor, SOCAR is interested in increasing the revenues of the subcontractor in the contract. But as a result, this might reduce the revenues of the government.
Meanwhile SOCAR’s participation in all contracts - and its direct dependence on Azerbaijan's president - make negotiations of contracts with foreign players relatively simple. As a result, according to the USAEE, foreign investors face relatively little the pressure during negotiation and implementation of contracts thanks to the straightforward structure of the government and the absence of veto players.
Main article: State Oil Company of Azerbaijan (SOCAR)
State Oil Fund of Azerbaijan Republic (SOFAR)
The State Oil Fund of Azerbaijan Republic (SOFAR) was established in 1999 to accumulate and manage Azerbaijani oil revenues.
Main article: State Oil Fund of Azerbaijan (SOFAZ)
Laws and regulations
Following the collapse of the Soviet Union in 1991, newly independent Azerbaijan began to develop its own legal framework for the regulation of oil and gas activities. Azerbaijan adopted a law on the use of energy resources (Law No. 94-IQ) in May 1996, followed by the Subsoil Law (Law No. 439-IQ) in February 1998 and the Energy Law (Law No. 541-IQ) in November 1998. In March 2000, President Heydar Aliyev issued Decree No. 310, under which the production and processing of oil and oil products can only be conducted by state enterprises or joint-stock companies in which the controlling stake belongs to the state.
Subsoil and energy laws
The subsoil law governs the exploration, use, protection, safety and supervision over the use of subsoil reserves, including but not limited to oil located both within Azerbaijan and on the Azerbaijani sector of the continental shelf of the Caspian Sea. The subsoil law superseded a previous law from 1976, which had specifically excluded oil and gas from the definition of subsoil reserves.
Although both the subsoil and the energy laws provide a general framework for exploiting energy resources, in many instances their provisions clash with each other, according to the USAEE, while it is also unclear whether the Energy Law has priority over the Subsoil Law, and whether most existing PSAs meet the provisions of these laws.
- "Analysis of Azerbaijan Oil and Gas Sector" United States Association for Energy Economics 2009.
- "Azerbaijan" Baker & McKenzie – CIS, Limited 2009.
- "Azerbaijan's Oil Revenues: Ways of Reducing the Risk of Ineffective Use" Coalition for Increasing Transparency in the Extractive Industries of the Republic of Azerbaijan January 2007.