Oil and gas projects are implemented through contractual arrangements between the state, as the owner of mineral resources, and international oil companies possessing the technical expertise and financial capacity required for exploration and development. These agreements establish the legal, fiscal, and operational framework governing the exploration, production, and commercialization of hydrocarbon resources.
The overarching objective of oil and gas agreements is to ensure an appropriate allocation of risks and rewards between the state and contractors, while safeguarding the long-term economic interests of the country.
Key Principles
Under Oil and Gas Agreements , contractors are fully responsible for financing and executing exploration and development operations and bear the entire exploration risk. In the event that commercial discoveries are not made, contractors are not entitled to cost recovery or compensation.
Oil and Gas agreements define a clear production sharing mechanism, under which produced hydrocarbons are allocated between the State and the contractor in accordance with agreed contractual terms. Agreements provide for a cost recovery mechanism, under which contractors are entitled to recover eligible exploration and development costs from a defined portion of produced hydrocarbons, subject to limits specified in the agreement. These agreements also establish a fiscal framework, including applicable taxes, royalties, and other payments, forming the taxation basis governing project operations. Foreign contractors are subject to taxation only on their corporate income linked to hydrocarbon operations.
Oil and Gas agreements clearly set out the rights and obligations of both the State and the contractor, covering operational responsibilities, cost recovery, environmental and safety standards, reporting requirements, and compliance with applicable legislation. Ownership of hydrocarbon resources and production facilities remains with the State throughout the project lifecycle.
Framework in Azerbaijan
Azerbaijan has adopted oil and gas agreement–based contractual models as the foundation of its upstream oil and gas sector. Azerbaijan uses both Production Sharing Agreements (PSAs) and Risk Service Agreements (RSAs) for upstream oil and gas projects. RSAs have been applied to certain field developments and allocate specific development or service risks to contractors under terms ratified by the state. The PSA/RSA legal framework in Azerbaijan is designed to ensure stability and investor predictability. PSAs are typically ratified by the Milli Majlis (Parliament), granting them quasi-statutory status and shielding long-term hydrocarbon contracts from frequent legislative changes. This contractual model has proven well suited to Azerbaijan’s large, capital-intensive offshore projects, as it provides a stable fiscal and legal environment, enables cost recovery and staged profit sharing, and aligns state and investor incentives. To date, more than 20 PSAs have been concluded, covering major offshore and onshore hydrocarbon fields.
Azerbaijan’s oil and gas sector is developed through a portfolio of strategic projects, including Azeri–Chirag–Gunashli, Shah Deniz, Absheron, and other offshore and onshore developments. These projects are structured as investor-oriented arrangements and generally operate within an integrated value chain, under which midstream infrastructure and oil and gas service capabilities are developed and coordinated to support upstream operations, ensuring the effective implementation and overall success of projects. The State’s share under oil and gas agreements includes profit hydrocarbons, royalties, taxes, bonuses, and other contractual payments. These revenues are accumulated by the State Oil Fund of the Republic of Azerbaijan (SOFAZ), which acts as the beneficiary of the State’s oil and gas income. SOFAZ manages these proceeds in line with its mandate to support fiscal sustainability, macroeconomic stability, and intergenerational equity.
The contractual framework applied in Azerbaijan is designed to provide a stable and investor-orientedenvironment while fully preserving state ownership of hydrocarbon resources and related installations. This model has been instrumental in attracting long-term foreign investment, enabling the development of large-scale energy projects, and generating sustainable revenues that support the country’s macroeconomic stability and the effective management of sovereign wealth.
Azerbaijan’s Tax Code recognizes a special tax regime for entities operating under PSA/RSAs, which differs from the general statutory regime applicable to most companies. Under this regime, contractors are liable for profit tax on income derived from oil and gas activities in Azerbaijan. Foreign contractors and their agents are often exempt from import duties on goods imported into Azerbaijan for hydrocarbon operations.