Oil and Gas Operations under the Georgian Law

December, 2000. Victor Kipiani, Partner at MKD

It is beyond any doubt that contemporary Caucasian states are becoming of increasing importance for the global economy due to potentially substantial energy resources of Caspian area. Needless to say, that Baku-Tbilisi-Ceyhan and Transcaspian Natural Gas projects occupy daily worldwide news, thus emphasizing special significance for studying relevant legislation of Azerbaijan, as the main oil supplier to the world market, and Georgia, as the main transit country and key pillar for successful implementation of the above politically and financially important projects.

Moreover, recent exploration of the Georgian soil and Black Sea continental shelf seem to be very promising for further expansion of business activities of widely known companies like Frontera, Anadarko, Ramco and others as well as for inviting of others to the Georgian and Caucasian market.

The aim of this article is to highlight oil and gas legislation of Georgia and to introduce foreign investors to the main principles governing subsequent activities and advantages in oil and gas energy sector as provided under the laws of Georgia.

The special law on oil and gas adopted by the Parliament of Georgia is effective from April 16, 1999. The purpose of the law is creation of universal legal basis of development of oil and gas resources, implementation of the single state policy in the sphere of develop0ment of oil and gas resources as well as promotion of investments in the Georgian oil and gas sector and protection of legal interests of entities participating in oil and gas operations. Oil and gas resources existing in the depths of the territory of Georgia are the state ownership, however, the ownership on produced oil and gas is determined in accordance with the relevant contract. As far as the State is concerned, the supervision over oil and gas operations in Georgia is carried out by the State Oil and Gas Resources Controlling Agency. Among the main functions of the Agency is to arrange and hold tenders and auctions to reveal the winner for the area offered to investors for conducting oil and gas operations and to issue licenses on conducting oil and gas operations to investors on behalf of the State. Although, as far as the contracts are concerned the State is represented by National Oil Company of Georgia (Saknavtobi) as the contracting party.

The principal types of the contracts, along with others, to be concluded under the current legislation on oil and gas are: product sharing contract, risk service contract and service contract. It is worth to note, that if after effective date of the special law on oil and gas the legislative acts change or establish such provisions which may worsen the economic status of oil and gas operation entity, there may be made amendments in the contract as a result of which this entity will get appropriate compensation in order to prevent the worsening of his economic conditions thereof.

The law has very important economic effects for oil and gas operation entities. Thus, the investor is guaranteed to take his shares, compensatory and profit oil and gas outside the customs territory of Georgia without any restriction and without payment of value added tax, unless the contract provides otherwise; to pay profit tax, tax on use of natural resources, land tax, payments to appropriate state funds for social and medical insurance only at the rate applied by the moment of signing the contract and effective through the whole term of the contract; the contracts should provide for the customs and value added tax, if the facilities, equipment and materials attracted by the investor and operating entity for oil and gas operations under the agreed project and exempted from the custom tax and value added tax, are sold or otherwise disposed or used for another purposes and also provides for value added tax only and if the investor sells his shares in gas and oil operations in the customs territory of Georgia; it should be also mentioned, that import of facilities, equipment, spare parts and materials intended for oil and gas operations under the contract and agreed project onto the territory and their  export from the customs territory of Georgia are exempted from the customs tax and value added tax; oil and gas operations conducted by the investor and operating company in accordance with the contract are exempted from all other taxes.

The law clearly stipulates, that the contract between investor and the State may provide for the stabilisation conditions, under which the State can out in the product sharing agreement the provision that if after effective date of the contract there are made some amendments in the law of Georgia (other than amendments concerning protection of environment, cultural heritage and production safety) that may worsen the tax liabilities of investor, the State agrees to make the appropriate amendments in the effective contract in order to preserve for the investor the same economic conditions which were obtained before modification of the law.

The contract made with the investor may provide waiving the judicial immunity of the State in case of a dispute arising. International arbitration rules in case of such a dispute are also fully applicable.

Finally, few words on basic licensing principles. The maximum term of the contract and appropriate license on use of oil and gas resources is 25 years. Although, this term may be prolonged under the relevant conditions of the law. The terms and conditions of the contract and license are not effective in case of force majeure. As mentioned already, the license shall be issued by the Agency on the ground of the contract within one month from its signing. In accordance with the license on use of oil and gas resources the Agency concurrently will give to the investor the permit on use of the land allotment. However, if the land is privately owned, the investor shall made the contract with the landowner on transfer of the exclusive right on use of this land to the investor. And, if this contract can not be made, the investor has the right to apply to the Agency for institution of eminent domain proceeding. The law allows assignment of respective rights under the license.

Even this brief outline of legal aspects on oil and gas operations in Georgia clearly demonstrates that uniquely liberal business regime for relevant companies and gives a good signal that the Georgian State welcomes and supports investments in oils and gas sectors on legislative level. 


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