Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.

Exploration and production

Rights

Who holds the rights to oil and gas reserves in your jurisdiction?

The exclusive rights to oil and gas reserves in Azerbaijan belong to the state.

Is there a distinction between surface and subsurface rights?

There is a legal distinction between surface rights and sub-surface mineral rights. Individuals and entities may have ownership rights in land; sub-surface rights, as stated, belong to the state.

What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?

Under the Subsoil Law, no person or legal entity may engage in oil or gas exploration and production without a licence (ie, an activity permit for a particular area). The law clarifies that a production licence must be issued for a particular subsoil block and is the ultimate deed granting subsoil use rights in that block.

An exploration licence can be issued for a term of up to five years and a production licence for up to 25 years. A combined exploration and production licence can be issued for up to 30 years. An extension can be granted for a term agreed between the subsoil user and the licensing authority.

Unlike the Subsoil Law, the Energy Law provides that production rights for a specified block are granted exclusively on the basis of an energy contract. Notwithstanding the regimes set out in the Subsoil and Energy Laws, and underlining the strategic importance of oil to the country, most major oil deals in Azerbaijan have been and are approved by the country’s legislature. In the absence of a production sharing agreement (PSA) law and a law on petroleum, every oil deal in the form of a PSA – the main form of oil agreement in Azerbaijan – is approved into law that prevails over any other conflicting Azerbaijani law (arguably, this is everything except for the Constitution, acts adopted by public referenda and international agreements).

What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?

Under Decree 310/2000, the production and processing of oil and gas can be conducted only by state enterprises and joint stock companies in which the controlling stake belongs to the state. It is debatable whether this limitation contradicts the Subsoil Law; as neither the licensing regime set out in the Subsoil Law nor the contract regime established in the Energy Law has been implemented in practice, this contradiction has not been tested in court. The ownership limitation in the decree does not extend to PSAs.

Joint ventures

Are there any special legal provisions applicable to joint ventures?

No, except that joint ventures are separate taxpayers and are formed as Azerbaijani legal entities – rather than pass-through entities, as investors might be used to. Historically, joint ventures must also include a foreign partner.

Joint ventures with foreign partners were popular in the Azerbaijani oil industry in the early and mid-1990s, when a total of four joint ventures were formed. Another upstream venture in the form of a local entity was formed in 2008 – principally to explore the Umid offshore structure.

Following the first approval of a PSA into law, most subsequent oil deals have been concluded as PSAs. One joint venture was subsequently converted into a PSA regime and the field united with a neighbouring field under a PSA regime. Some of the remaining joint ventures are also expected to be transferred to the PSA regime.

Third parties

Can exploration and production rights be transferred to third parties?

Under the Energy Law, the transfer of rights under an energy contract to third parties and the signing of subsequent agreements require a special permit from the Ministry of Energy. Without such a permit, a contractor is liable – either solely or jointly with the successor – for its non-fulfilment of contractual obligations. 

Under the Subsoil Law, the right to use subsoil is transferred to another party in the case of a change of legal-organisational form or reorganisation of the business entity using the subsoil. In case of a change of control by way of a company’s separation from or merger with another company, the new entity will be regarded as the new holder of the licence.

Under a production sharing agreement, a transfer of interest (except for internal reorganisation) typically requires approval from the government, represented by the State Oil Company of the Republic of Azerbaijan. Arguably, the company’s consent does not exclude the need for other regulatory consents and compliance, including anti-monopoly and tax, where applicable.

Fracking

Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?

It is not regulated, although it does take place.

Click here to view the full article.