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

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

From 2013 to 2017, growth in gross domestic product (GDP) averaged 1.4% per year, down from 5.5% during 2008 to 2012. The country’s hydrocarbon sector was responsible for the bulk of the decline, as it contributes roughly one-third of GDP and makes up over 90% of total exports. The 2014 downturn in global oil prices and the ensuing decline in oil production pushed this contraction. Furthermore, the oil price drop also led to lower remittances from Azerbaijan’s hydrocarbon-rich trading partners.

Nevertheless, Azerbaijan’s economic growth recovered quickly after being severely hit by the Covid-19 pandemic, which caused the country’s economy to contract 4.3% in 2021 (5.6% according to the government). Strong performance in manufacturing, transportation, retail trade, and information and communications technologies supported recovery, and growth also continues to rebound in services, including the hospitality sector.

Oil and gas make up more than 90% of Azerbaijan’s exports, with production increasing 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’s renewable energy development potential is considerable. The country has excellent solar and wind resources and significant biomass, geothermal and hydropower prospects. Practical deployment has been limited, however, considering the scale of available resources and the country’s long-term ambitions.

Renewables also offer the most promising low-carbon solution to meet Azerbaijan’s climate targets. The country has committed to reduce its greenhouse gas (GHG) emissions 35% by 2030 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, Azerbaijan’s energy sector 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 as total energy supply [TES]) was 16.1 million tonnes of oil equivalent (Mtoe) in 2022 (according to preliminary data from the State Statistical Committee).
• Azerbaijan is a major producer of crude oil (32.7 Mt including natural gas liquids in 2022) and of natural gas (35.0 bcm in 2022).
• Because of its considerable hydrocarbon production, Azerbaijan has one of the world’s highest energy self-sufficiency ratios, with production exceeding demand almost four times.
• Electricity generation in Azerbaijan has increased by more than 50% since 2010, amounting to 29.0 TWh in 2022. It is mostly generated by natural gas (more than 90% in 2022).
• Azerbaijan’s sole refinery produced around 6.5 Mt of oil products from domestic crude oil and natural gas liquids in 2022.
  

• Azerbaijan is also a major exporter of crude oil (26.6 Mt in 2022) and natural gas (22.6 bcm in 2022).
  

• In 2021, Azerbaijan’s total final consumption (TFC) (excluding the transformation sector) was 11.5 Mtoe.
• The residential sector has the largest final consumption (4.1 Mtoe in 2021).
• Transport is the second-largest final energy consumer (2.6 Mtoe in 2021). Most oil products used in the transport sector are produced in Azerbaijan.
• TFC consists mainly of natural gas (43%) and oil products (39%), followed by electricity (15%).
  

• Renewable energy sources, including hydro, contributed 1.5% to total energy supply in 2022 and 6% (1.8 TWh) to electricity supply.
  

The Presidential Administration, the Cabinet of Ministers and the Ministry of Energy (MoE) are the energy sector’s main government institutions, while individual subsectors are controlled by several state-owned monopolies, including SOCAR (oil refining, natural gas distribution and supply [State Oil Company of the Republic of Azerbaijan]), Azerenergy/Azerenerji (electricity generation and transmission), Azerishiq (electricity distribution and supply) and Azeristiliktejhizat (district heating).

The President of the Republic of Azerbaijan holds executive power and 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.

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 scope of competence, meaning most areas within the energy sector except tariff regulation, which is under the jurisdiction of the Tariff Council.

The Tariff (Price) Council is the collegial executive body designated to determine retail and wholesale tariffs for electricity, gas, district heat and refined petroleum products, as well as purchase tariffs for renewable electricity. Decree No. 341 of December 2005, the Statute on the Tariff (Price) Council of the Azerbaijan Republic, confirmed its creation to meet the requirements of Decree No. 242 of May 2005 on Strengthening of Anti-inflationary Measures in the Azerbaijan Republic (Clause 4.2). The Minister of Economy is the chairman of the Tariff (Price) Council, and council members are the deputy ministers of Finance, Justice, Energy, Transport, Communications and Information Technologies, Agriculture, Health, Education, Labour, and Social Defence of the People; the vice-chairmen of the committees of Customs, and of State City Building and Architecture; and the deputy chairman of the State Tax Service.

In 2017, the President of Azerbaijan signed a decree establishing the Energy Regulatory Agency under the Ministry of Energy to regulate relationships among producers, suppliers and transmission system operators and distributors, as well as customers in the field of electricity, heat and gas supply. The agency’s main activities include state supervision of quality control and analysis, and the introduction of incentives to attract investment. Eventually, after the draft Law on the Regulator has been approved, all functions related to calculating and approving energy tariffs will be transferred from the Tariff Council to the Agency.

The Ministry of Ecology and Natural Resources, a central executive body implementing state policy on environmental protection, organises the effective use and rehabilitation of natural resources. The ministry ensures environmental safety, taking measures to avert any possible damage to natural ecological systems from economic or other activities.

The former State Agency on Alternative and Renewable Energy Sources (SAARES) was established by presidential decree on 16 July 2009 and was subsequently tasked with driving development of the country’s renewable energy resources and related projects. The agency’s status was altered by Presidential Decree No. 464 of 14 January 2019, making it part of the Ministry of Energy and transferring some of its activities. In September 2020, the President of Azerbaijan signed a decree establishing the Azerbaijan Renewable Energy Agency (AREA), reporting to the Ministry of Energy.

The Azerbaijani legal system is based on civil law. The Constitution carries the greatest legal weight in the country and is the foundation of the legislative system, which 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 to which Azerbaijan is a party 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 to which Azerbaijan is a party, provisions of the international agreement take precedence.

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

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 Azerbaijan, 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 by 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 the 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 system 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 oil and gas operations. Although the terms of PSAs vary, they usually last about 30 years. This period can be extended with SOCAR’s consent.

Azerbaijan’s juridical system comprises a Constitutional Court, a Supreme Court and a 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 activities 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, which 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.

Azerbaijan does not have an independent energy regulator. In 2017, the President of Azerbaijan signed a decree to establish an Energy Regulatory Agency under the Ministry of Energy. The Ministry of Economy regulates licensing procedures, 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 five 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 upon by 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).

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 is also responsible for settling disputes concerning price regulation and application.

Electricity tariffs subject to state regulation include purchases from 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 have been 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.

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 soon. 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 2020.

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.

The governmental standards (GOST) of the former Soviet Union are still in use in both Azerbaijan’s electricity and gas sectors. However, Azerbaijan is also 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 country’s reform agenda includes a national plan to convert mandatory standards to technical regulations and voluntary standards, a draft law on technical regulations, and draft laws on standardisation and accreditation.

Furthermore, 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 to 2015, 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 to 2020 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 to 2020. In May 2021, it also adopted the Law on Using Renewable Energy Sources in Electricity Production, providing a legal basis to develop renewable energy projects in the country. The law envisages the introduction of auctions and tenders as support mechanisms and also includes other draft legislative documents such as a power purchase agreement (PPA) and a connection agreement. In addition, rules on auctions and on net-metering and net-billing schemes are being drafted.

In June 2021, the Law on the Efficient Use of Energy Resources and Energy Efficiency entered into force, establishing rules for energy audits, energy management and energy services, as well as for production, transmission, distribution and storage efficiency, awareness raising and other activities. However, the government still needs to develop specific policies and incentive schemes to improve energy efficiency and must also elaborate a National Energy Efficiency Action Plan (NEEAP).

In August 2022, Azerbaijan’s Cabinet of Ministers approved a Decision on Requirements for the Energy Management System, which determines how economic entities may apply energy management systems. To implement energy efficiency measures, an economic entity may create, implement, maintain and constantly improve its own energy management system.

Azerbaijan’s State Commission on Climate Change was established in 1997, and the country has been in negotiations to accede to the WTO since then. 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 to 2017 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 monthly to annually through surveys on production, transformation and consumption, with respondents having the option of responding through online forms. Data are broadly aligned with International Recommendations for Energy Statistics.

Monthly data are available on large enterprise production, fuel stocks, aviation and marine bunkers, and energy distribution, whereas households are surveyed on an annual basis. Administrative data complement survey data, and the SSC has access to monthly trade data from the State Customs Committee as well as business registers and other enterprise surveys.

Every year, the SSC publishes Energy of Azerbaijan dedicated to energy statistics, available free of charge in PDF format. Data are also available on the statistics website in electronic format with the option 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 IEA through annual joint United Nations Economic Commission for Europe (UNECE)/IEA/Eurostat questionnaires. It also participates in the Joint Organisations Data Initiative (JODI) for oil and gas through the UNSD, contributing to global monthly oil and gas data transparency.

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

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