Articles

Oil Regulation

2005, Contributor to “Oil Regulation in 11 Jurisdictions” (published by Global Competition Review in 2005)
          Victor Kipiani, Partner, Irakli Mgaloblishvili, Partner, Mikheil Gogeshvili, Lawyer and Mariam Antia Associate

General
1. Describe, in general terms, the key commercial aspects of the oil sector in your country.

Currently there are 15 oil deposits in the territory of Georgia. Estimated oil reserves for 1 September 1995 amounted to 580 million tons (383 million is accounted to onshore oil deposits and 107 offshore (Black Sea) deposits). An increase in estimated oil reserves has not been observed in Georgia for the last decade.

The following companies are involved in oil exploration and extraction activities in the country: Saknavtobi, Anadarko, Frontera and Canargo. For the first time in Georgia horizontal drillingexploration is initiated and being held by Canargo.

During 2004 to 2005, Anadarko conducted seismic offshore explorations (in the Black Sea waters). The results and materials obtained during the said exploration are under elaboration and interpretation.

In the year 2004, oil refining amounted to 36 276 tons. In 2005, refining activities have been temporarily halted.

In 2004 oil exploration amounted to 97 574 tons. None of the current oil deposits are located on the state borders of Georgia.

2. What percentage of your country’s energy needs is covered, directly or indirectly, by oil—as opposed to gas, electricity, nuclear or non-conventional sources? What percentage of the petroleum product needs of your country is supplied with domestic production? What are your country’s energy demand and supply trends, especially as they affect crude oil usage?

Nuclear energy source is non-existent. Likewise, the share of nonconventional sources of energy are very low. Industrial refining of crude oil was stopped in 2005. Petroleum products are mainly

supplied from neighbouring countries.

3. Does your country have an overall policy regarding oil-related activities and/or an overall energy policy?

Governmental policy in the power and energy sector, including oil, is defined by the Ministry of Power and Energy. The Ministry: determines the concept of development of the power and energy sector as a unite technical-economic field (including its separate branches); encourages investments in the sector; fosters competition and participates in the privatisation process of power and energy objects; conducts monitoring of the local market for power and energy resources; leads international cooperation in the sector;

and participates in the preparation of the legislative basis for power and energy field etc.

Regulation overview
4. Describe the key laws and regulations that make up the overall legal framework regulating oil activities?

The Law of Georgia on Oil and Gas, dated 16 April 1999, sets out the main regulatory provisions with respect to oil operations.The law defines the state oil and gas resources controlling agency, and sets out: oil and gas prospecting and production rights to the investor; the procedures for granting licences for oil and gas resources usage; and the issues related to the transportation of produced oil, rights and respective duties of the investor.

The Order of the Head of the State Agency for Regulation of Oil and Gas Resources of Georgia, dated 9 January 2002, on the national regulations for oil and gas operations in Georgia, sets out detailed rules applicable to all entities carrying out oil and gas activities within the territory of Georgia.

The Order of the Head of the State Agency for Regulation of Oil and Gas Resources of Georgia, dated 8 May 2002, is the establishing statute setting out the rules of defining and disposal of regulation price for oil and gas operations, defining regulation prices, (ie the prices paid to the said agency by the operating company (investor) for covering expenses related to the operation of the agency).

5. Identify and describe the government regulatory and oversight bodies principally responsible for regulating oil activities.

State supervision over oil and gas operations in Georgia, including oil refining and transportation, is carried out by the State Agency for Regulation of Oil and Gas Resources of Georgia (SAROGRG). SAROGRG is responsible for the preparation of contracts, negotiations and signing agreements on behalf of the state. SAROGRG’s functions also include the issuance of licences for oil and gas operations to the investor on behalf of the state, as well as the approval and issuance of all necessary authorisations, allotments, and permission certificates. SAROGRG is also responsible for setting and disposing of the regulation price.

Another agency which can be regarded as a government oversight/regulatory body is the National Oil Company of Georgia (Saknavtobi). Its functions include, among others: participation in the preparation of oil agreements; disposal of government shares of oil produced within the territory of Georgia; and thecreation of the coordination committee in cooperation with the investor for the purposes of the oversight and administration of commercial and maintenances issues with respect to the oil operations in terms of production sharing agreements.

6. How does your country manage appeals of government regulatory decisions?

According to article 18 of the Georgian Law on Independent National Regulatory Agencies, decisions of the independent regulatory bodies, including SAROGRG, can be subject to appeal in the constitutional court or the court of general jurisdiction.

Only decisions of SAROGRG, having a normative nature, may be appealed before the constitutional court. According to article 15 of the Georgian Law on Normative Acts, dated 29 October 1996, such a decision shall be issued in the form of resolution. Therefore, only the resolution of the SAROGRG can be subject to appeal before the constitutional court. This type of dispute can arise on the grounds that the SAROGRG resolution contradicts the provisions of the Georgian Constitution.

All other types of disputes are resolved by the courts of general jurisdiction. These disputes are also resolved by the Tbilisi regional court acting as a court of first instance in administrative proceedings.

With respect to SAROGRG resolutions and decisions having the status of administrative-legal acts, the question of their lawfulness is resolved by means of administrative litigation, under the Administrative Procedural Code dated 23July 1999.

The regional court makes a decision with respect to the dispute within two months following the submission of the lawsuit. If the dispute is classified as complicated, the time necessary for the hearing can be prolonged for up to five months.

The decisions of the court can be subject to cassation in the Supreme Court of Georgia. The time necessary for discussing the case in cassation court is the same as that of the court of first instance ie the Tbilisi regional court.

7. What standards are employed for oil measurement and oil facility equipment? Are the standards voluntary or compulsory? Are the standards established by a government body?

It has to be mentioned that the operating company can start its activities with respect to oil exploration only after SAROGRG verifies that the oil measurement systems and related equipment are in compliance with the standards set out in the Law on Oil and Gas, the Regulations for Oil and Gas Operations in Georgia and the relevant contract. Operating agencies can also refer to the standards approved by internationally acknowledged standardisation and certification organs, such as IADC, IAGG, OGP, UN, API, ISO, SPE, WPC, IMO, ABS, DNV, IP, and the EU, if the latter are in full compliance with the above-mentioned law, regulations and the contract.

8. What government body maintains oil production, export and import statistics?

According to article 8 of the Georgian Law on Oil and Gas, SAROGRG is responsible for the creation and management of the informational bank, containing all the information with respect to the oil resources and operations. Therefore, oil production, export and import statistics are provided by the above-mentioned agency.

Natural resources
9. Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved? Is there a legal distinction between surface rights and subsurface mineral rights?

Under the law of Georgia on Oil and Gas, all oil resources in the territory of Georgia are owned by the state. It has to be mentioned that title over the land does not imply the right of ownership nor exploitation of the oil resources in the depths of the land.

As for the mineral rights on private and public land, there is no specific provision regarding these in Georgian legislation.

10. What is the overall character of oil exploration and production activity conducted in your country? Are there areas off-limits to exploration and production?

Georgian environmental legislation, notably the Law of Georgia on the System of the Protected Areas dated 7 March 1996, provides some restrictions for the exploration/usage of natural resources in national parks and other protected areas, subject to licensing by the Georgian Ministry of Environmental Protection.

11. What government body regulates oil exploration and production in your country? What is the character of that regulation—licensing or concession regime, state oil company, production-sharing agreements, or some combination thereof?

The regulation of oil exploration and production activities is the responsibility of SAROGRG. An agreement granting the investor the right of oil resources exploitation and usage of oil depths, is signed between the state and the investor/winner of the tender or auction carried out by SAROGRG. Agreements that could be signed by the state and the investor include, but are not limited to:

  • A production sharing agreement, under which the investor is granted an exclusive right to conduct oil operations in a defined area in Georgian depths and/or continental shelf on the grounds of compensatory relations within the determined period
  • A risk service agreement, under which the investor is granted a right to conduct oil prospecting in a certain area within a specific period of time
  • A  service  agreement, which  can  be  signed  with  respect  to  separate  or  complex activities (oil exploration, exploitation of resources, repair of
    drilling facilities, marketing, etc)

Within a month of signing an agreement between the state and the investor, the latter is granted a licence for usage of oil resources by SAROGRG.

12. If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production?

Royalties do not differ between offshore and onshore production. The royalty rate, established by the Georgian Law on Fees for the Usage of Natural Resources dated 24 December 2004, is GEL21 per ton of oil.

13. What is the customary duration of oil leases, concessions or licences?

The maximum duration of the agreement and the respective licence for usage of oil and gas resources is 25 years. An agreement can be prolonged with the initiative of the investor for the period of time necessary for rational production of oil. If the prolongation of the agreement is necessary once the 25 year time period expires, it can be prolonged for no more than five years. It has to be noted that prolongation of the agreement automatically prolongs the licence for the usage of oil and gas resources.

14. For offshore production, how far seaward does the regulatory regime extend?

For the purposes of oil production, ‘offshore’ implies the water and the adjacent coastal area of the Black Sea basin of which the subsoil and seabed appertain to Georgia and the area subject to its jurisdiction and control. It has to be mentioned, however, that under article 4 of the Georgian Law on Oil and Gas, Georgia has the sovereign and exclusive right of exploration/usage of the oil resources on its land and continental shelf.

15. Who is permitted to perform exploration and production activities? What criteria and procedures apply in selecting such entities?

According to the Georgian Law on Oil and Gas, oil operations can be performed by the state and natural or legal persons based on the agreement, signed in accordance with the mentioned law and the licence for the usage of oil and gas resources.

SAROGRG draws the rules for conducting tenders and auctions, and registers them in the Ministry of Justice of Georgia one month prior to the tender or auction announcement.

Investors interested in participating in the mentioned tender/auction have to present the following documentation:

  • Forms and parameters for oil exploration and/or production
  • Address of the applicant and its business contacts including production and financial partners
  • Information on the owners of the applicant and the managerial staff
  • The financial statement of the applicant and possible sources for funding the oil exploration and/or exploitation activities
  • Technical and technological capacities of the applicant and its partners
  • Experience of the applicant and the list of countries where the latter has been working for the past five years
  • Proposal of the applicant on carrying out the oil exploration and/or exploitation activities
  • Guarantee that the applicant shall provide the SAROGRG with complete information regarding oil operations
  • If necessary, prior approval of the owner of the land to be used for oil operations

The applicant that fully complies with the tender requirements and presents an economically and technically developed application will be considered as the winner.

16. What is the legal regime for joint ventures?

Joint ventures for the purposes of oil production/exploration are not common in Georgia.

17. How does reservoir unitisation apply to domestic reservoirs/cross-border reservoirs?

No statutory regulation exists in this respect.

Transportation
18. How is transportation of crude oil and crude oil products regulated within the country and across national boundaries? Do different government bodies and authorities regulate pipeline, marine vessel and tanker truck transportation?

According to the Georgian Law on Oil and Gas, transportation has to be available on a non-discriminatory basis, in accordance with the normative acts of SAROGRG. Investors are entitled to hold negotiations on the usage of state-owned pipelines on a commercial basis. Licence-holders have to ensure the availability of unused power of the pipeline for other transporting agencies on non-discriminatory grounds.

19. What are the requisites for obtaining a permit/licence for transporting crude oil and crude oil products?

Holders of a licence for the use of oil and gas resources, an affiliated company or another person, can submit an application for obtaining the transportation activity licence to SAROGRG for transportation of crude oil and oil products, processed by the mentioned entity itself.

The application should contain:

  • the name and the address of the applicant, identification number issued by the tax agency, the place of registration and the registering entity of the representative office of the legal person
  • in Georgia, if necessary; and  the names of the persons owning 5 per cent or more of the shares, or percentages from the applicant’s profit. 

The following information has to be attached to the application form:

  • A detailed description of the activities the applicant plans to carry out
  • A detailed description of the technologies and methodology which are planned to be used by the applicant
  • A detailed description of crude oil/oil products used in the factory or transportation facility
  • Information on the financial condition of the applicant and the source of the money used for the activities under the licence
  • A document on the applicant’s experience and a list of countries where it/they has worked for past five years;
  • If necessary, prior approval of the owner of the land to be used for oil operations

Health, safety and environment
20. What health, safety and environment requirements apply to oil-related facility operations? What government body is responsible for this regulation; what enforcement authority does it wield? Are permits or other approvals required? What kind of record keeping is required? What are the penalties for non-compliance?

The operating company has to present to SAROGRG the following two documents with respect to the environmental issues:

  •  An evaluation report on the impact on the environment
  • A plan for environmental protection including:    

             - a plan for environmental monitoring;

             - a plan for prevention of oil pour;

             - a plan for storage, transportation, cleaning, refining, and locating of oil extracts;

             - procedures for the re-cultivation of the area after completion or liquidation of the oil operations;

             - evaluation procedures for discovered historical, cultural, and natural monuments; and

             - other information on environmental protection requested by SAROGRG

As for the safety and health, the operating company is obliged to carry out its activities in accordance with the technical safety and health protection plan, which has to be submitted to the SAROGRG. SAROGRG evaluates the plan and puts together a report on its compliance with the agreement and applicable laws and regulations for oil and gas operations.

The plan has to ensure the protection and safety of personnel as well as the population, provide safe operation of the equipment and make sure the personnel is adequately prepared in the field of safety and health protection.

21. What health, safety and environment requirements apply to oil and oil product composition? What government body is responsible for this regulation; what enforcement authority does it wield? Is certification or other approval required? What kind of record keeping is required? What are the penalties for non-compliance?

See answer 20 above.

Labour
22. What government standards apply to oil industry labour? How is foreign labour regulated? Are there anti-discrimination requirements? What are the penalties for non-compliance?

Regulations for oil and gas operations in Georgia entail that an operator shall make all reasonable effort to employ citizens of Georgia and to use local materials and services, if such materials and services are competitive in terms of cost and quality compared to those imported. Issues with respect to the salaries, safety and the social insurance of Georgian workers hired by the investorare regulated according to the Georgian labour legislation, which, as a general rule, offers equal protection to, and treatment of, local and expatriate employees.

Taxation
23. What is the tax regime applicable to oil exploration, production, transportation, and marketing and distribution activities? What government body wields tax authority?

According to the Tax Code of Georgia, the agency responsible for tax matters is the Tax Department of the Georgian Ministry of Finance and respective tax inspections.

Georgian tax code imposes the following tax exemptions for oil operations:

VAT

The import of equipment, transportation facilities and materials necessary to carrying out oil operations, and/or the provision of goods/services to the investors and operating companies for the purposes of carrying out oil and gas operations in accordance with the licences for oil operations, are subject to a VAT exemption.

Excise tax

The import and/or supply of oil products necessary for carrying out oil activities, under the Georgian Law on Oil and Gas, are subject to an excise tax exemption.

Social tax

The following are subject to a social tax exemption: the income gained from hiring by the non-resident who stays within the territory of Georgia for less than 90 days during the tax year, if the mentioned income is allocated by the non-resident hirer on its behalf and by the entity of non-resident; and the income of the foreign citizens, hired for oil operations according to the Georgian Law on Oil and Gas.

Property tax

The property used for oil and gas operations under the Georgian Law on Oil and Gas is subject to property tax exemption.

The tax rate for income of the non-resident sub contractors obtained while carrying out oil activities, as defined by the Georgian Law on Oil and Gas, is 4 per cent.

Commodity price controls
24. Is there a mandatory price-setting regime for crude oil or crude oil products? If so, what are the requirements and penalties for non-compliance?

The Georgian Law on Oil and Gas points out that every agreement between SAROGRG and the investor should contain provisions regarding price-setting for oil. Therefore, the question is resolved according to the agreement signed by SAROGRG and the investor.

Competition, trade and merger control
25. What government bodies have the authority to prevent or punish anticompetitive practices in connection with the extraction, transportation, refining or marketing of crude oil or crude oil products?

SAROGRG has an authority related to the prevention of anticompetitive practices with respect to oil operations. However, the rules governing anti-competitive policies and the regulation of monopolies and mergers are not elaborated in detail within the respective legislation.

26. What is the process for procuring a governmental determination that a proposed action does not violate any anti-competitive standards? How long does the process generally take?

No statutory regulation exists in this respect International.

27. To what extent is regulatory policy or activity affected by international treaties or other multinational agreements?

International treaties and multinational agreements to which Georgia is a party, provided they do not contradict the Constitution of Georgia, prevail over domestic legislation.

28. Are there special requirements or limitations on the acquisition of oil-related interests by foreign companies or individuals?

No special requirements or limitations exist with respect to the acquisition of oil-related interests by foreign companies/individuals.

29. Do special rules apply to cross-border sales or deliveries of crude oil or crude oil products?

Domestic customs and tax regulations along with international treaties/multinational agreements (eg Energy Charter, WTO regulations and respective host government agreements) may apply on cross-border deliveries of crude oil/oil products. 

                                                              


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