Revenue Sharing Arrangements in Azerbaijan

=Overview=

In practice there are four basic types of contractual arrangements commonly used for oil and gas exploration and development: concessions, production sharing agreements, service contracts and joint ventures. These differ in the level of control given to foreign contractors over operations and production, the sharing of revenue and the level of governmental involvement. In the case of Azerbaijan, the arrangements offered are Production Sharing Contracts (PSCs) and traditional Joint Ventures (JVs).

PSCs have emerged in the past number of decades as a popular form for structuring oil and gas contracts between resource-endowed countries and international oil companies (IOCs), particularly in the transitional economies of the former Soviet Union, and the mechanism has become influential in the development of Azerbaijan's hydrocarbons industry.

In comparison with concessions, which give the foreign entity full ownership of the resources and through which the government earns revenues through taxes and royalty payments, PSCs give the government more control over the extraction of hydrocarbon reserves. The PSCs provide a physical mechanism for rendering to the Azerbaijani state its share of the profits, while allowing international companies to recoup their investments.

=History of PSAs in Azerbaijan=

During the 1990s, when Azerbaijan's economy was in a very weak state following the breakup of the Soviet Union, the country lacked the modern infrastructure and needed considerable foreign investment in order to be able to exploit its hydrocarbon resources. At this stage the government replaced JVs with PSCs. Given the scarcity of financial capital available, Azerbaijan found itself unable to apply other types of contract, and due to its low credit rating it was unable to secure long term loans from foreign credit institutions to fund oil and gas activities. PSCs later became the most common contractual arrangements for exploration and development in Azerbaijan.

Under PSA contracts in Azerbaijan, the state is represented by state oil company SOCAR and foreign companies by the Azerbaijan International Operating Company (AIOC) consortium. The first PSA signed was the so-called 'Contract of the Century' in 1994. Between 1994-2010 a further 32 PSAs were signed between SOCAR and the AIOC.

=Sharing of revenues under PSAs=

Taking the example of the Azeri-Chirag-Gunleshi (ACG) fields, where production-sharing began in 1999, the initial revenue split was 30/70, with 30 percent of production going to the state. Hence during the initial stages the investors received a larger share of the oil than the government, as reimbursement for the heavy capital investment costs they had invested in development. However once most of the capital costs had been reimbursed the ratio changed, and in 2008 the split was 45/55, with 55 percent of production going to the state and 45 percent going to investors.

Production bonuses (paid upon the achievement of certain levels of production) are also common in Azerbaijan. The largest series of production bonus payments received by the Azerbaijani government is thought to have totalled US $300 million, accrued under the production sharing agreement for the ACG fields. The bonuses were paid in stages and the biggest paid out was in 1995 when the government sanctioned the start of the Chirag field development.

=External Links=

EITI Azerbaijan: Production sharing agreements (selection to download)

=References=