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In-depth Review of the Investment Climate and Market Structure in the Energy Sector of Azerbaijan

Published in 2005


The Energy Charter completed in 2004 an in-depth review of the investment climate and market structure of Azerbaijan, one the main producer countries that is a Contracting Party to the Treaty and published in 2005. Extraction and processing of oil and gas-related activities already make up more than 30% of Azerbaijan's Gross Domestic Product, and hydrocarbons account for 85% of exports. The energy sector has the potential to be a crucial driver of economic and social development.

Azerbaijan has been successful in attracting foreign investments to its energy sector; this represents a major achievement, underscoring not only Azerbaijan's hydrocarbon potential and the commitment of investors to developing this potential, but also the Government's ability to negotiate and carry through complex investment projects. The amount of investments is expected to increase in the coming years as major projects are implemented and as new opportunities emerge as a result of continued domestic reforms. However, investment outside the energy sector remains very modest, and it is a continuing challenge for Azerbaijan to attract capital in areas such as agriculture, manufacturing and services.

The review provides a detailed examination of the legislative framework for investment, as well as the status of restructuring and privatisation in the energy sector. It concludes that essential steps have already been taken to create a favourable and non-discriminatory investment climate, but encourages the Azeri authorities to undertake further efforts, for example with regard to the transparency and consistency of the legal framework, administrative obstacles, and remaining restrictions regarding the ownership of land and participation by foreign investors in the privatisation process. The study also recommends further action in energy sector reform, such as the introduction of cost-reflective tariffs and prices, the improvement of collection rates and the establishment of an independent regulator.

Considering the results of the review, the Energy Charter Conference also welcomed the considerable efforts undertaken by Azerbaijan to improve and diversify international transportation routes to export oil and gas, in particular through the construction of two new pipelines to Turkey (the 'Baku-Tblisi-Ceyhan' oil pipeline and South Caucasus gas pipeline), the development of regional interconnection and transit capabilities, and the harmonisation of cross-border legal and regulatory frameworks for energy flows in accordance with the principles of the Energy Charter Treaty.

The material for the review was prepared by the Energy Charter Secretariat in cooperation with the Azeri authorities. Representatives of the Czech Republic and Ukraine were the examiners for the review, and assisted the Secretariat in the development of the conclusions that were adopted by the Energy Charter Conference in December 2004.

The In-depth Review of the Investment Climate and Market Structure in the Energy Sector of Azerbaijan is available in English.