Azerbaijan Production Sharing Agreements

With this new treaty, Azerbaijan is creating an environment for foreign companies to invest in its oil fields. On the other hand, the extension of the existing contract before its maturation is also in the best interest of the CICs, since they are sure of the existence of real reserves in the contractual territory and that they present almost no risk. Every energy company wants stable production in the region, with which it is already familiar. Cost coverage in Azerbaijani PSAs includes operational expenses (current expenses for the purchase of materials, fixed expenses and other operational expenses) and capital expenses (drilling costs, equipment, purchased platforms and pipeline). The cost of oil (a portion of the oil produced collected annually by the operator to cover its operating costs) to cover operating costs is 100%. In addition, it is necessary to know the price of oil to calculate the percentage of oil that will be spent on these expenses. The cost of capital must not be recovered on more than 50% of the total remaining production after the removal of operating costs. After deduction of the operating and investment costs of the gross production, the remaining part of the so-called “profit” oil is divided between SOCAR (State share) and the foreign contractor. The profit of oil is calculated on the basis of the real yield (adjustments due to inflation and other external factors) and the R factor (ratio of revenue to expenditure) in Azerbaijan.

All calculations are performed quarterly. Differences of opinion on contracts often lead to requests for renegotiation arising from the increase in the profitability of the natural resource, issues related to the taxation of the foreign company, or issues related to cost hedging and revenue distribution between the enterprise and the host government. This is especially true when oil prices are high. In practice, however, contractual conditions and the risk of losing future foreign direct investment severely limit state actions to renegotiate. It is preferable to establish contractual provisions to determine when or in what cases the cost recovery conditions can be renegotiated. However, the benefits of Azerbaijani AA agreements are not limited by the above-mentioned agreements. All Azerbaijani PPE is subject to exemptions from import and export duties, no customs duties are imposed and there is a zero VAT system. BP and its partners signed a PSA in 1996 for the development of the shah Deniz condensate field in the Caspian Sea and production began in 2006.

The second most important phase of the field`s development, Shah Deniz 2, is expected to begin this year. There are four basic types of contractual agreements that are usually used for oil and gas exploration and exploitation: concessions, production sharing agreements, service contracts and joint ventures. The difference between them lies in the control granted to foreign contractors over operation and production, the degree of government participation and the share of revenue between foreign contractors and the government. In comparison, PPE gives the host government more power over control over the exploitation of hydrocarbon reserves. However, how the host government exploits its energy resources (public and private ownership, state control or lack of control) is also decisive. Even the same type of agreements may vary from one contract to another, depending on the contractual terms agreed between the host State and foreign companies. . .


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