Policy decisions regarding the allocation of rights to extract natural resources can either lay the foundation for successful sector management or set countries on a path towards misuse. Governance challenges associated with the allocation of rights includebribery of public officials to gain access to extractive rights; license and/or contract allocations to politically exposed persons; foregone social and economic benefits resulting from poor negotiation of fiscal, social and economic terms; and lack of oversightof the fulfillment of contract terms.
Licenses and contracts detail the commitments between governments and companies that determine the net public benefits derived from extraction, and citizens need access to these agreements to understand these obligations and monitor whether they are being met. Disclosure of license holders, including the beneficial owners of extracting companies, guards against manipulation of allocation processes as well as the misuse of shell companies.
EITI reporting in this area could contribute to reforms including the installation of more open and competitive bidding rounds for the allocation of extraction rights; developing local content requirements for new contracts; and increasing parliamentary oversight of contracts before and after signature.
a) The term license in this context refers to any license, lease, title, permit, or concession by which the government confers on a company(ies) or individual(s) rights to explore or exploit oil, gas and/or mineral resources.
b) Implementing countries are required to maintain a publicly available register or cadastre system(s) with the following timely and comprehensive information regarding each of the licenses pertaining to companies covered in the EITI Report:
i. license holder(s);
ii. coordinates of the license area;
iii. date of application, date of award and duration of the license; and
iv. in the case of production licenses, the commodity being produced.
It is expected that the license register or cadastre includes information about licenses held by all entities, including companies and individuals or groups that are not included in the EITI Report, i.e. where their payments fall below the agreed materiality threshold. Where there are significant legal or practical barriers preventing such comprehensive disclosure, this should be documented and explained in the EITI Report, including an account of government plans for seeking to overcome such barriers and the anticipated timescale for achieving them.
c) Where the information set out in 3.9(b) above is already publicly available, it is sufficient to include a reference or link in the EITI Report. Where such registers or cadastres do not exist or are incomplete, the EITI Report should disclose any gaps in the publicly available information and document efforts to strengthen these systems. In the interim, the EITI Report itself should include the information set out in 3.9(b) above.
EITI Report Data
2.3. Register of licenses
According to the President Decree numbered 782 on “the Regulations on special permit (license) of some types of activities within the Republic of Azerbaijan” and “the list of the activities requiring special permits (license) and the state fee to be paid for the special permit (license)” were approved on 2 September 2002. The Decree determines the single license registry to be carried out by the Ministry of Economy. The Order on “Rules for a single license registry in the Republic of Azerbaijan” was prepared in accordance with the Order numbered 68 dated 30 September 2002 of the Ministry of Economy. All the registry of licenses issued in the Republic of Azerbaijan is publicly available. In accordance with the legislation, information on issued license, except for licenses which include of state and commercial secrets is open to the government agencies, entities and individuals with the purpose of obtaining general information
Licenses regarding exploration or exploitation of oil, gas and minerals resources do not fall within the scope of the list above and under Azerbaijan legislation there exists no procedure for obtaining such licenses.
At the same time, according to Presidential Decree No. 310, dated 28 March 2000 exploration and exploitation of oil and gas belongs to exclusive competence of the state and may be conducted only by state entities or state controlled joint stock companies.
Licenses to engage in activities regarding the exploration and exploitation of oil and gas may be granted to third parties by way of signing Production Share Agreements between the state (represented by state company) and third parties and these PSAs enter into effect after the official confirmation (in the form of special law acts) by the National Assembly of Azerbaijan Republic.The law acts confirming the PSAs explicitly stipulate that the participating parties to PSA are granted all permits and licenses to operate within the scope of PSAs (including explore or exploit oil, gas and minerals resources) and this law is publicly available.
In accordance with the clause of 2.3. EITI Standard, the register of active companies that joined PSAs in the Azerbaijan Republic is established and is a matter of public record.
According to the requirement of the standard, the relevant information was indicated within the established register:
Coordinates of the contract areas;
Date of application, date of award and duration of the contract; and
a) Implementing countries are required to disclose information related to the award or transfer of licenses pertaining to the companies covered in the EITI Report, including: a description of the process for transferring or awarding the license; the technical and financial criteria used; information about the recipient(s) of the license that has been transferred or awarded, including consortium members where applicable; and any non-trivial deviations from the applicable legal and regulatory framework governing license transfers and awards.
b) Where licenses are awarded through a bidding process during the accounting period covered by the EITI Report, the government is required to disclose the list of applicants and the bid criteria.
c) Where the requisite information set out in 3.10(a) and 3.10(b) above is already publicly available, it is sufficient to include a reference or link in the EITI Report.
d) The multi-stakeholder group may wish to include additional information on the allocation of licenses in the EITI Report, including commentary on the efficiency and effectiveness of these systems.
EITI Report Data
2.2. Allocation of licenses
There is no any relevant law regulating oil or production sharing agreements (“PSA”) in the Republic of Azerbaijan; therefore there are no any criteria in the law on selection of potential investor.
In accordance with the existing practice, the selection of potential investors for development of hydrocarbon reserves is conducted directly as the result of negotiations between such investors and the authorised state body. Nevertheless, there are different form of internatiolan best practice on bidding process and the common used are the tenders. The PSA contracts have been chosen for development of the hydrocarbon exploration projects with foreign partners in Azerbaijan. The best practice of PSA was set up by signing the Azeri-Chirag-Gunashli on 20 September 1994 and since that time more than 30 PSA have been signed. The current implementation of PSA consists of the following procedures:
The negotiations on the preparation of contracts on development of the hydrocarbon reserves are held between SOCAR which represents the Government of Azerbaijan Republic and has the legal power to issue Decrees related to hydrocarbbon reserves on one side and various interested investors on the other;
A Memorandum of Intentions (“MOI”) is signed as an initial agreement after negotiation;
SOCAR executes MOI with the party (foreign oil company), whose offer is considered reasonable and acceptable by SOCAR;
After MOI us signed, SOCAR starts negotiations with that party on relevant terms and conditions of prospective PSA;
The inquiry for the delegation of authorities to SOCAR for negotiations on and signing of the PSA is submitted to the President of Azerbaijan Republic and such authorities are put in effect by appropriate statute of President;
Principles and conditions of further partnership agreed on the basis of Memorandum of Intentions;
Agreement signed on key principles and commercial terms of PSA;
PSA project agreed by the basis of an agreement of key principles and commercial term;
PSA signed and submitted to the Parliament of Azerbaijan Republic for ratification; and
PSA becomes effective after Presidental decree.
The signed PSA’s are submitted to the President of the Republic of Azerbaijan and then sent to the National Assembly (“Milli Majlis”) for ratification in the form of legislative initiative. Upon completion of negotiations by the energy and natural resources protection committee and after necessary procedures prescribed for the draft laws, the PSA is ratified. Upon ratification, the President of the Azerbaijan Republic signs the relevant Law of the Azerbaijan Republic and PSA is considered to come into effect
On 22 December 2014, BP and SOCAR signed a new PSA to jointly explore and develop potential prospects in the shallow water area around the Apsheron Peninsula in the Azerbaijan sector of the Caspian Sea, according to the Order of the President of Azerbaijan Republic numbered. 944, dated on 22 December 2014, SOCAR, BP Exploration (Azerbaijan) SOCAR Oil Company Limited and Affiliates ("SCA") signed an agreement. The bill on the President's decree dated 14 April 2015 entered into force.
SOCAR was entrusted to prepare and sign the agreement “on rehabilitation, exploration, development and production sharing from oilfield block Muradkhanli, Jafarly and Zardab” based on the Order of the President of Azerbaijan Republic numbered 1439, dated 7 October 2015. SOCAR and Zenith Aran Oil Company signed a deal on exploration, development and production sharing which comprises Muradkhanli, Jafarli and Zardab fields on 16 March 2016.
a) It is recommended that implementing countries maintain a publicly available register of the beneficial owners of the corporate entity(ies) that bid for, operate or invest in extractive assets, including the identity(ies) of their beneficial owner(s) and the level of ownership. Where this information is already publicly available, e.g. through filing to corporate regulators and stock exchanges, the EITI Report should include guidance on how to access this information.
b) Where such registers do not exist or are incomplete, it is recommended that implementing countries request companies participating in the EITI process provide this information for inclusion in the EITI Report.3
c) It is required that the government and/or state owned enterprises disclose their level of beneficial ownership in oil, gas and mining companies operating within the country, and any changes in the level of ownership during the accounting period covered by the EITI Report (Requirement 3.6(c)).
d) Definition of beneficial ownership: A beneficial owner in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity.
3.6 Where state participation in the extractive industries gives rise to material revenue payments, the EITI Report must include:
c) Disclosures from the government and SOE(s) of their level of beneficial ownership in mining, oil and gas companies operating within the country’s ’s oil, gas and mining sector, including those held by SOE subsidiaries and joint ventures, and any changes in the level of ownership during the reporting period. This information should include details regarding the terms attached to their equity stake, including their level of responsibility to cover expenses at various phases of the project cycle, e.g. full-paid equity, free equity, carried interest. Where there have been changes in the level of government and SOE(s) ownership during the EITI reporting period, the government and SOE(s) are expected to disclose the terms of the transaction, including details regarding valuation and revenues. Where the government and SOE(s) have provided loans or loan guarantees to mining, oil and gas companies operating within the country, details on these transactions should be disclosed in the EITI Report.
EITI Report Data
2.5. Beneficial ownership
The “Beneficial ownership” concept is not recognised in the law of Azerbaijan and there is no publicly available registry of beneficiary owners of cooperative enterprises in Azerbaijan. State registry of legal entities reflects the registered owners of shares of cooperative enterprises, not the beneficial owners of such enterprises. Thus no publicly available registry in Azerbaijan reflects information on beneficial ownership and therefore submission of such information by governmental or state enterprises does not seem to be possible. In addition, according to the law dated 12 June 2012 about changes to the law "On state registration and state registry of legal entities", information relating to the founder of legal entities has been considered to be a commercial secret. Such information may be obtained by third persons only with the consent of shareholders of these enterprises.
Taking into consideration that there is no legal obligation on the disclosure of the beneficial ownership in Azerbaijan, disclosure of information on beneficial ownership shall not be binding obligation for companies participating in Extractive Industries Transparency Initiative.
One of the new requirements for implementing countries stipulated in the EITI Standard of 2016 is to maintain a publicly available register of the beneficial owners of the corporate entities which bid for, operate or invest in extractive assets, including the identities of beneficial owners (according to the EITI Standard, individuals who own a corporate entity either directly or indirectly or those who manage it) and the ownership level. Therefore, it is the requirement for implementing countries to maintain documentation of the government’s policy on disclosure of beneficial ownership in the EITI Reports. Such documentation should contain information on the relevant legal provisions, actual disclosure practices and any current and upcoming reforms associated with beneficial ownerhsip disclosure. In this regard, the MSG which ensures a stronger and more effective multilateral surveillance and governance to be imposed over implementation of EITI within the country is required to publish the “Roadmap for disclosing Beneficial Ownership Information” by 1 January 2017. In addition, starting from 1 January 2020 the implementing countries are required the companies to disclose, beneficial ownership information that should be reflected in the EITI Report.
A review of work commenced in Azerbaijan in this regard and detailed information on obtained results will be included in the EITI Report for 2016.
a) Implementing countries are encouraged to publicly disclose any contracts and licenses that provide the terms attached to the exploitation of oil, gas and minerals.
b) It is a requirement that the EITI Report documents the government’s policy on disclosure of contracts and licenses that govern the exploration and exploitation of oil, gas and minerals. This should include relevant legal provisions, actual disclosure practices and any reforms that are planned or underway. Where applicable, the EITI Report should provide an overview of the contracts and licenses that are publicly available, and include a reference or link to the location where these are published.
c) The term contract in 3.12(a) means:
the full text of any contract, concession, production-sharing agreement or other agreement granted by, or entered into by, the government which provides the terms attached to the exploitation of oil gas and mineral resources;
the full text of any annex, addendum or rider which establishes details relevant to the exploitation rights described in 3.12(c)(i) or the execution thereof; and
the full text of any alteration or amendment to the documents described in 3.12(c)(i) and 3.12(c)(ii).
d) The term license in 3.12(a) means:
the full text of any license, lease, title or permit by which a government confers on a company(ies) or individual(s) rights to exploit oil, gas and/or mineral resources;
the full text of any annex, addendum or rider that establishes details relevant to the exploitation rights described in in 3.12(d)(i) or the execution thereof; and
the full text of any alteration or amendment to the documents described in 3.12(d)(i) and 3.12(d)(ii).
EITI Report Data
Production Sharing Agreements concluded between the host governments (Azerbaijan) and a contractor regulate the exploitation of oil, gas and minerals in Azerbaijan and these PSAs are effective only after the ratification by the Parliament of Azerbaijan Republic. However, the Azerbaijan government and the contractors act as commercial counterparties in the scope of such PSAs. The Government of Azerbaijan Republic accepts itself and the contractors to be regarded as equal commercial parties.
Together with the main pipeline agreements, PSA enacted after being approved by the National Assembly of Azerbaijan Republic. These agreements regulate the accounting and tax regimes of the operating companies, contractors and sub-contractors’ activities.
There exists no requirement or restriction pursuant to the Azerbaijan legislation for the PSAs to be officially disclosed, but may be disclosed based on mutual consent of the parties thereto. Under the law of Azerbaijan Republic, the party disclosing a commercial secret to third parties in violation of the confidentiality clause shall be responsible before its counterparty (Article 7 of the Law No. 224-IIQ of Azerbaijan Republic on Commercial Secret dated 4 December 2001).
The EITI Secretariat of Azerbaijan Republic conducted surveys among extractive industry companies in 2013 and 2016 in order to disseminate the PSAs for public use. There are six PSAs that were uploaded after surveys and they are available to public on the official website of EITI in Azerbaijan. In addition, the PSA register was uploaded on the official website of EITI in Azerbaijan.