Kamil Valiyev

Legal Department

SOCAR

Brief overview of the country’s

energy consumption

Gas Production in Azerbaijan

Year SOCAR

(in million m3)

AZERBAIJAN

(in million m3)

2011 7084.2 25752.9

2010 7178.9 26349.6

2009 6903 23681.6

Legislation� Two major laws:

� Law on Gas Supply (30 June 1998)

� Law on Energy (24 November 1998)

� Overarching provisions:

� In respect of gas production, storage and transportation.

� Contradiction in respect of the duration of energy contracts.

Authorizations for gas activities

Licensing

Conclusion of the energy contract

Gas supply activities

Licensing� Gas activities are allowed upon issuance of

the special permit(license).

� Gas Supply Activities include: production, processing, storage, transmission, distribution, liquefaction and use of natural gas, as well as construction, use, control, testing and certification of industrial and consumption infrastructure.

� Special permits for the sale of gas products are granted by the Ministry of Industry and Energy.

� Licenses for the installation and operation of facilities for liquid and natural gas infrastructure – by the Ministry of Emergency Situations of Azerbaijan.

Energy Contracts� Licensed individuals and companies are allowed to enter into energy

contracts.

� Energy contracts include:

� Gas field development and production contracts

� Construction of gas transportation networks and their utilization

� Gas distribution contracts

� Establishment of subsoil gas warehouses, their exploitation and reconstruction.

� Energy contracts are concluded with the Ministry of Industry and Energy or SOCAR.

Key players: Ministry of Industry and Energy

• Setting state policy and regulation in the industrial and fuel-energetic complex.

• Providing the protection of the interests of the state • Determining the perspective directions of the relevant

field, working out of state and field programs of the directions, the development concepts.

• participates in the preparation of international agreements on cooperation in the area, of industry and energy,

• Ensures implementation of international agreements, joined by Azerbaijan within its power, and coordinates the work done in this area.

• Licensing of the sale of oil and gas products. • Control over efficient use of the energy resources.

Key players: State Oil Company of Azerbaijan

Republic

• Acts on behalf of the Republic of Azerbaijan granting sole and exclusive rights to the contractors to conduct petroleum operations within and with respect to the contract area.

• Operates the states shares in the respective oil and gas contracts • Operate three production divisions, two oil refineries and one gas

processing plant, an oil tanker fleet, a deep water platform fabrication yard, two trusts, one scientific-research institution and one university in Azerbaijan.

• oversees the petroleum operations; examines, revises and approves contractors’ annual work programmes and budgets; supervises the accounting of costs and expenses; reviews, revises and approves training programmes, and abandonment plans.

Gas production and distribution� Individuals’ and private companies’ participation in gas

production and sales is allowed(Law on Energy).

� Ownership of gas networks by private parties is allowed (Law on Gas Supply).

� Gas transportation agreements are subject to the approval by MIE.

� In accordance with the energy contract, a distributor must supply gas in accordance with the order of any party and procure distribution of the requested volume of the gas and ensure good quality.

TPA and Unbundling � The Law on Gas Supply does not contain any requirements or procedures

for the operation of a private gas distribution network. � Third parties are allowed to operate the gas distribution network owned by

Azerigaz on the basis of a contract signed between the operator and SOCAR (Law on Gas Supply).

� Operators of gas networks are required to meet the demands of any third party on transportation of natural gas (Law on Gas Supply).

� Natural monopolies must publicize information on any changes in terms and prices of the proposed goods and services 30 days prior to such changes (Law on Natural Monopolies).

� Irrespective of the origin, destination or ownership of the gas, operators of the gas networks obliged to accept orders from third parties (Law on Energy)

� No limitation in ownership of gas transportation networks by the gas producers and distributors (Law on Gas Supply).

Natural monopolies

� The state recognizes the existence of natural monopolies , inter alia, in the following areas (Law on Natural Monopolies, dated 15 December 1998):

� Pipeline transportation of natural gas;

� Storage of natural gas;

� Distribution of natural gas.

� Supervision and control over the activities of natural monopolies are carried out by the Ministry of Economic Development.

Regulation of natural monopolies

The state regulates activities of the natural monopolies by the following means:

� Regulation of the prices (tariffs) of the commodities and products;

� Provision of the compliance of the production (sales) volumes;

� Determining which customers the natural monopolies must serve to and (or) are required to provide with the minimum supplies;

� Review of the investments made by natural monopolies;

� Issue of permits for effectuating certain types of transactions.

Gas Prices� Prices for services for the pipeline transportation, storage

and distribution of natural gas are determined by the TCand approved by the Ministry of Economic Developmentand the Ministry of Finance.

Local gas prices Inc. VAT(1 AZN ≈ 1 EURO)

wholesale purchase of natural gas to big consumers (min. 15mln. m3)

AZN 42/1000 m3;

fixed fee to big consumers AZN 3/1000 m3;

processing of natural gas AZN 5.5/1000 m3

transportation of natural gas per 100 km AZN 2/1000 m3

retail sale of natural gas residents and industry AZN 100/1000 m3

Azerigaz

� Azerigaz (wholly owned by SOCAR) is responsible for the pipeline transportation and storage of natural gas, with SOCAR being natural monopoly with respect to the entire gas distribution network.

� Azerigaz:� carries out the transportation of gas by main transmission pipelines.

� The regional transportation and supply of gas is organised through its regional divisions.

� the local distribution is provided by Azerigaz and its regional divisions.

� Gas is distributed to consumers to the regional gas departments, which are responsible for distributing gas to their local divisions, which in turn supply consumers.

� The entire gas distribution network of Azerbaijan is operated by Azerigaz.

Privatization of the sector

� According to the Action Plan 2011-2015, approved by the President for the implementation of the State Program on Poverty Reduction and Sustainable Development 2008-2015(adopted by Decree No 3043, dated 15 September 2008) the country will begin privatization of enterprises in the fuel and energy sector.

� The Action Plan prescribes the State Committee for Property Affairs and the Ministry of Industry and Energy to consultations in 2011-2015 on the privatization of enterprises in electric power, oil and gas industries, based on sales of oil and petroleum products.

Kamil Valiyev, LL.M

Head, Division for the Legal Support of International ProjectsLegal DepartmentState Oil Company of Azerbaijan Republic

Tel: (+994 12) 521 01 02 Int. Ext.: 10 102Mobile: (+994 50) 287 57 10E-mail: kvaliyev@socar.az