Azerbaijan energy profile

The Republic of Azerbaijan (Azerbaijan) is in the southern Caucasus region, bordered by the Caspian Sea to the east, Armenia and Georgia to the west, the Russian Federation (hereafter, “Russia”) to the north, and Iran to the south. Its population of 10.1 million occupies approximately 86 600 square kilometres; Baku is the capital and the largest city.

Azerbaijan has undergone significant economic transformation since its independence in 1991, with its large oil and gas reserves pushing it to strong growth in the 1990s and 2000s. However, heavy dependence on extractive industries has left Azerbaijan exposed to the negative effects of oil price volatility.

From 2013‑17, growth in gross domestic product (GDP) averaged 1.4% per year, down from 5.5% during 2008‑12. The country’s hydrocarbon sector was responsible for the bulk of the decline, as it contributes roughly a third of GDP and makes up over 90% of total exports. The 2014 decline in global oil prices and the ensuing decline in oil production pushed this contraction. In addition, the oil price drop led to a decline in remittances from Azerbaijan’s hydrocarbon-rich trading partners. These remittances, the bulk of which support the country’s rural population, fell by one-third. In 2017, Azerbaijan’s GDP barely saw any growth, but 2018 saw an increase of 1.4% (www.adb.org/sites/default/files/linked-documents/LD1%20ISGA.pdf).

Azerbaijan's GDP grew by 2.3% in 2019 and is expected to fall to ‑2.2% in 2020 due to the outbreak of Covid-19 and increase to 0.7% in 2021, according to updated International Monetary Fund (IMF) forecasts from 14 April 2020.

Oil and gas account for more than 90% of Azerbaijan’s exports. Oil and gas production increased considerably in the 2000s, following discovery of the Shah Deniz gas field, to reach record levels in 2010. The government and international companies have invested substantially in the energy sector, and the construction of several new power plants as well as rehabilitation and modernisation of the gas and electricity networks have improved reliability and security of supply.

Azerbaijan has strong potential for renewable energy development. The country has excellent solar and wind resources and significant prospects for biomass, geothermal and hydropower. Practical deployment has been limited, however, compared with the scale of the country’s available resources and long-term ambitions.

Renewables also offer the most prominent low-carbon solution to meeting Azerbaijan’s climate targets. The country has committed to reducing its greenhouse gas (GHG) emissions by 35% by 2030, measured from the 1990 base year set in its nationally determined contribution (NDC) under the Paris Agreement, which emphasises the use of alternative and renewable energy sources to achieve this target.

Despite widespread privatisation of the economy since the country gained its independence, the energy sector in Azerbaijan remains predominantly government-owned. Only a handful of small hydropower plants are in private ownership, and they account for less than 1% of electricity generation.

• Azerbaijan’s energy demand (measured by total primary energy supply [TPES]) was 14.4 million tonnes of oil equivalent (Mtoe) in 2018, which is roughly equal to that of Ireland.
• Azerbaijan is a major crude oil producer (37.5 Mt including natural gas liquids in 2019) and a significant producer of natural gas (24.5 bcm in 2019).
• Azerbaijan was the 24th-largest crude oil producer in the world in 2018 and the second among EU4Energy focus countries after Kazakhstan.
• Because of this large hydrocarbon production, it has one of the highest energy self-sufficiency ratios in the world: its energy production is more than four times its energy demand.
• Azerbaijan generates 26 TWh of electricity annually, mostly from natural gas (more than 90 % in 2019).
• Azerbaijan’s sole refinery produces 5.8 Mt of oil products from domestic crude oil and NGLs.

• Azerbaijan is also a major exporter of crude oil (30.8 Mt in 2019) and natural gas (11 bcm in 2019).

• In 2018, Azerbaijan’s total final consumption (TFC) (excludes transformation sector) was 9.2 Mtoe.
• The residential sector is the largest final consumer (3.3 Mtoe in 2018).
• Transport is the second-largest final-energy-consuming sector (2.7 Mtoe in 2018). Most oil products consumed in the transport sector are produced in Azerbaijan.
• Despite natural gas having the largest share in the TPES, oil is the main fuel in TFC with a 45% share in 2018. This is because most natural gas is consumed to generate electricity and heat.

• Renewables, including hydro, contributed 2% to total primary energy supply and 8% (2 TWh) to electricity supply in 2018.

The presidential administration, Cabinet of Ministers and Ministry of Energy are the main government institutions involved in the energy sector, while the State Oil Company of Azerbaijan Republic (SOCAR), Azerenergy (Azerenerji in Azerbaijani), Azerishiq and Azeristiliktejhizat are the main state-owned energy companies.

Executive power of the Republic of Azerbaijan is held by the president of the Republic of Azerbaijan (www.president.az), and the president assembles a Cabinet of Ministers to organise the work of the executive authorities. The Cabinet of Ministers is a superior executive body accountable directly to the president (www.cabmin.gov.az).

The Ministry of Energy is the central executive authority responsible for implementing state policy and the various regulations, orders and decrees issued by the government for the energy sector. The ministry board, approved by the Cabinet of Ministers, has the authority to issue orders within its area of competence, meaning most areas within the energy sector except tariff regulation, which is under the authority of the energy regulator, the Tariff (Price) Council (www.minenergy.gov.az).

The Tariff (Price) Council is the collegial executive body designated to implement the state regulation of tariffs, service fees and collections (“prices”) to which state regulation is applied. Its creation was confirmed by Decree No. 341 of December 2005, the Statute on Tariff (Price) Council of the Azerbaijan Republic, to meet the requirements of Decree No. 242 on Strengthening of Anti-inflationary Measures in the Azerbaijan Republic of May 2005 (Clause 4.2).

The Minister of Economy is the chairman of the Tariff (Price) Council, and council members are the deputy ministers of Finance, Taxes, Justice, Energy, Transport, Communication and Information Technologies, Agriculture, Health, Education, Labour, and Social Defence of the People; and the vice-chairmen of the committees of Customs, and of State City Building and Architecture (www.tariffcouncil.gov.az).

In 2017, the president of Azerbaijan signed a decree establishing the Energy Regulatory Agency under the Ministry of Energy. The agency will carry out the regulation of relationships among producers, transmission system operators and distributors, and suppliers as well as customers in the field of electricity, heat and gas supply. The agency’s main activities include state supervision of quality control, analysis and the introduction of incentives for attracting investment. Eventually, after the approval of the draft Law on the Regulator, all functions related to the calculation and approval of energy tariffs will be transferred from the Tariff Council to the agency. The draft law was submitted to the Cabinet of Ministries for inter-ministerial consultations in July 2019.

The Ministry of Ecology and Natural Resources is a central executive body implementing state policy on environmental protection; it organises the effective use of natural resources and their rehabilitation. The ministry maintains environmental safety, taking measures to avert any possible damage to natural ecological systems from economic or other activities (www.eco.gov.az).

The State Agency on Alternative and Renewable Energy Sources (SAARES) was established by a presidential decree on 16 July 2009, and was subsequently tasked with driving the development of the country’s renewable energy resources and related projects. The status of the agency was altered by presidential decree No. 464 of 14 January 2019 making it part of the Ministry of Energy, to which the Agency’s activities were partially transferred.

The Azerbaijani legal system is based on civil law. The Constitution has the greatest legal force in the country and is the foundation of the legislative system. The legislative system consists of the following normative legal acts:

• ·the Constitution
• acts accepted by referendum
• laws
• orders
• decrees of the Cabinet of Ministers
• normative acts of central executive bodies.

International agreements wherein Azerbaijan is one of the parties constitute an integral part of the legislative system. When there is disagreement between normative legal acts (except within the Constitution and acts accepted by way of referendum) and international agreements wherein Azerbaijan is one of the parties, provisions of the international agreement take precedence.

The legislative body of Azerbaijan is the National Assembly (Milli Məclis in Azerbaijani), a unicameral parliament whose 125 deputies are elected by direct election for a term of five years (citizens are eligible to vote at age 18 and to run for National Assembly at 25). The most recent elections for the National Assembly were held in February 2020 after parliament was dissolved in December 2019 (www.meclis.gov.az).

Under the Constitution, those having the right to submit drafts of laws and other questions for consideration by the National Assembly are: deputies of the National Assembly, the president of the Azerbaijan Republic, the Supreme Court, citizens’ groups presenting at least 40 000 signatures, the Prosecutor's Office and the National Assembly (Ali Majlis) of the Nakhichevan Autonomous Republic.

Drafts of laws are submitted to the president for signing within 14 days of their acceptance. If not specified otherwise in the law or the decree of the National Assembly, the law and decree become valid from the date of their publication.

A number of laws regulating oil and gas extraction have been adopted since Azerbaijan gained its independence:

• the Law on Use of Energy Resources of May 1996
• the Law on Subsoil of February 1998
• the Law on Gas Supply of June 1998
• the Law on Energy of November 1998 (the Energy Law).

Two basic regulatory regimes apply to oil and gas exploration and production in Azerbaijan: the regulatory regime established under the Law on Energy and implemented through energy contracts, and regimes particular to each case established by specific production sharing agreements (PSAs).

PSAs grant contractors the sole and exclusive right to conduct upstream oil and gas operations in the area specified in the PSA. PSAs also determine the participatory interests of the contractors and the specific conditions and terms under which the operations must be conducted. They therefore typically define the warranties, general rights and obligations of the parties, the scope of the work, and the procedures and rules for managing and implementing the oil and gas operations. The terms of PSAs vary, although they usually last about 30 years. This period can be extended with the consent of SOCAR.

The juridical system in Azerbaijan comprises the Constitutional Court, the Supreme Court and the High Economic Court, as well as district and municipal courts invested with general jurisdiction, including over commercial disputes.

The Supreme Court is the highest judicial body in civil, criminal, administrative and other cases referred by the general courts, and exercises general control over the activity of first-instance courts. However, appeals for economic disputes go to the High Economic Court, which is the highest appellate body for such matters.

Under the 1992 Law on Foreign Investment, foreign investors have the right to international arbitration of commercial and investment disputes with Azerbaijani state authorities or other entities only if the parties have agreed to arbitration. Under this law, foreign states, their legal entities and citizens, and international organisations engaging in investment activities in Azerbaijan are treated as foreign investors.

Azerbaijani law recognises the right of parties to refer a dispute to arbitration in another country or to a tribunal in Azerbaijan that will apply foreign law. The Law on International Arbitration of November 1999 (the International Arbitration Law) and the Civil Procedure Code of Azerbaijan, effective September 2000, govern the enforcement of awards issued by an international commercial arbitration tribunal and other related issues. Additionally, in 1992 Azerbaijan acceded to the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States that provides for arbitration at the International Centre for Settlement of Investment Disputes. In 1996 the country acceded to the European Convention on Foreign Commercial Arbitration, and in 2000 it acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (www.bakermckenzie.com). 

Azerbaijan does not have an independent energy regulator. In 2017, the president of Azerbaijan signed a decree on the establishment of an Energy Regulatory Agency under the Ministry of Energy. Licensing procedures are regulated by the Ministry of Economy, while tariffs are set by the Tariff (Price) Council, chaired by the Minister of Economy.

Under the Subsoil Law, no person or legal entity may engage in oil or gas exploration and production without a licence (i.e. 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 5 years, a production licence for up to 25 years, and a combined exploration and production licence 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 grants production rights for a specified block 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 are approved by the country’s legislature. In the absence of a 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 considered to legally prevail over any conflicting law (arguably everything except the Constitution, acts adopted by public referenda and international agreements).

Tariffs

The Tariff (Price) Council establishes tariff methodology, reviews the tariffs proposed by regulated companies (including but not limited to energy) and proposes changes to the legal framework related to pricing. It also is responsible for dispute settlements concerning price regulation and application.

Electricity tariffs subject to state regulation include purchases by producers, wholesale and retail sales, and import/export transactions. The Law on Electricity stipulates that tariffs cover the full cost of generation, transportation and distribution, and ensure the profitability of power enterprises. The electricity sector is almost entirely state controlled, and separate prices for wholesale electricity, transmission and distribution are assigned. 

There are no feed-in tariff incentives or special tariffs for foreign investors, although a feed-in tariff is included in the draft Law on Renewables.

Government bodies may modify decisions made by the Tariff (Price) Council, when this right is granted by legislation, and regulatory decisions may also be overturned by court ruling. Energy companies may appeal decisions of the Tariff (Price) Council, either directly to the council or through court action. 

Metering and collection

All electricity and natural gas consumption is metered in Azerbaijan. Metering systems comply fully with international standards, and distribution entities own all end-user meters. Electricity and natural gas tariffs for households and most commercial entities are differentiated.

Azerenergy’s programme for widespread installation of prepaid meters was taken over by Azerishiq in 2015 and is ongoing, with all consumers expected to be equipped with smart meters in the near future. Around 20% of the company’s 1.5 million customers have prepaid smart meters that improve tracking of consumption and prevent illegal connections, and collection rates have improved significantly: more than 93% for electricity and 100% for gas in 2018.

Cross-border flows are operated and metered by Azerenergy for electricity and by SOCAR for oil and gas. Metering on both sides is done electronically: both parties submit readings, reconcile the data, and prepare and verify metering reports. Bilateral agreements govern the transactions, and a working committee carries out investigations and resolves conflicts in data discrepancies.

Technical rules

The governmental standards (GOST) of the former Soviet Union are still in use in both the electricity and gas sectors in Azerbaijan. Azerbaijan is represented in international and regional standardisation organisations:

• the International Organization for Standardization (ISO) (member)
•  the European Committee for Standardization (affiliate)
•  the Interstate Council for Standardization, Metrology and Certification of the Commonwealth of Independent States of the Euro-Asian Council for Standardization, Metrology and Certification.

The reform agenda includes a national plan for converting mandatory standards to technical regulations and voluntary standards, a draft law on technical regulations, and draft laws on standardisation and accreditation.

Azerbaijan’s accession to the World Trade Organization (WTO) involves significant trade policy reforms. One of the key areas is standards and technical regulations: Azerbaijan particularly needs to ensure its compliance with the WTO Technical Barriers to Trade Agreement and is therefore in the process of reforms to guarantee harmonisation.

The 2004 State Programme on the Development of the Fuel-Energy Complex for 2005‑15, designed to support oil and gas developments and to ensure energy supply security, set out Azerbaijan’s main energy policy. As part of the programme, the government invested in capacity building, rehabilitation and natural gas extraction to reduce electricity shortages and improve energy supply security.

As a result, since 2005 electricity production capacity has increased, electricity and gas losses have been reduced, and the country became a net exporter of gas with the opening of the Shah Deniz field.

Although the programme’s term ended in 2015, there are plans for further field exploitations and capacity building. At the end of 2016, the government announced its Strategic Roadmap for the Development of Public Utility Services (electricity and thermal energy, water, and gas supply) covering Azerbaijan’s 2016‑20 development strategy, long-term outlook to 2025 and target vision after 2025. The roadmap was approved by the president in 2016 and updated through 17 July 2018. It sets several strategic targets, including for sustainability and efficiency.

Azerbaijan has significant untapped wind, solar, small hydro, biomass and geothermal potential. In 2004 the government adopted the State Strategy on the Use of Alternative and Renewable Energy Sources in Azerbaijan for 2012‑20. A new legislative framework for the support of renewable energy sources is currently under preparation: the draft law “On using renewable energy sources in electricity production” will provide the legal basis for developing renewable energy projects in the country. The draft law envisages the introduction of auctions and tenders as support mechanisms. It also includes other draft legislative documents, including a draft of a power purchase agreement (PPA) and a connection agreement. In addition, rules on auctions and rules on net-metering/net-billing schemes application are also being drafted.

For energy efficiency there are no specific policies or incentive schemes, but the topic is addressed in the strategic roadmap. Furthermore, the draft Law on the Efficient Use of Energy Resources and Energy Efficiency is expected to be submitted by the president to the parliament in the near future. The government is also developing a National Energy Efficiency Action Plan (NEEAP).

Azerbaijan’s State Commission on Climate Change was established in 1997, and the country has been in negotiations to accede to the WTO since that year. It ratified the Kyoto Protocol in 2000, became a member of the International Renewable Energy Agency (IRENA) in 2009, and is a non-Annex I Party to the United Nations Framework Convention on Climate Change (UNFCCC). In 2016‑17 Azerbaijan signed and ratified the Paris Agreement.

The State Statistical Committee (SSC) is responsible for official energy statistics and balances in Azerbaijan. Energy data are collected through surveys on production, transformation and consumption, with a frequency ranging from monthly to annually, with respondents having the option of online forms. Data are broadly aligned with the international recommendations for energy statistics. Monthly data are available on large enterprise production, fuel stocks, aviation and marine bunkers, and energy distribution; households are surveyed on an annual basis. Survey data are complemented by administrative data, and the SSC has access to monthly trade data from the State Customs Committee, as well as business registers and other enterprise surveys.

The SSC publishes Energy of Azerbaijan every year, dedicated to energy statistics. The publication is available free of charge in PDF format. Data are also available on the statistics website in electronic format with the possibility of creating charts, excel files and PDFs from the selection. Metadata are available in Azerbaijani.

Azerbaijan disseminates annual energy data internationally by sharing data with the United Nations Statistics Division (UNSD) and the International Energy Agency (IEA) through the joint United Nations Economic Commission for Europe (UNECE)/IEA/Eurostat annual questionnaires. Azerbaijan participates in the Joint Organisations Data Initiative (JODI) for oil and gas via the UNSD, contributing to the transparency of global monthly oil and gas data.

The SSC has established solid links with data providers and data users, among them the former SAARES, now part of the Ministry of Energy.

Azerbaijan was the first country of the Former Soviet Union to publish an energy balance according to the International Recommendations of Energy Statistics, and has done major work on methodological issues, including a full review of calorific values with the National Academy of Sciences (2011); an end use-consumption survey in households was conducted in 2017. It has hosted both Oslo Group (2013) and JODI meetings (2014), and development of a data set of energy efficiency indicators is planned.