The Mining Law Review Third Edition Editor Erik Richer La Flèche

Law Business Research

The Mining Law Review

The Mining Law Review Reproduced with permission from Law Business Research Ltd. This article was first published in The Mining Law Review - Edition 3 (published in October 2014 – editor Erik Richer La Flèche). For further information please email [email protected]

The Mining Law Review Third Edition Editor

Erik Richer La Flèche

Law Business Research Ltd

THE LAW REVIEWS THE MERGERS AND ACQUISITIONS REVIEW THE RESTRUCTURING REVIEW THE PRIVATE COMPETITION ENFORCEMENT REVIEW THE DISPUTE RESOLUTION REVIEW THE EMPLOYMENT LAW REVIEW THE PUBLIC COMPETITION ENFORCEMENT REVIEW THE BANKING REGULATION REVIEW THE INTERNATIONAL ARBITRATION REVIEW THE MERGER CONTROL REVIEW THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW THE CORPORATE GOVERNANCE REVIEW THE CORPORATE IMMIGRATION REVIEW THE INTERNATIONAL INVESTIGATIONS REVIEW THE PROJECTS AND CONSTRUCTION REVIEW THE INTERNATIONAL CAPITAL MARKETS REVIEW THE REAL ESTATE LAW REVIEW THE PRIVATE EQUITY REVIEW THE ENERGY REGULATION AND MARKETS REVIEW THE INTELLECTUAL PROPERTY REVIEW

THE ASSET MANAGEMENT REVIEW THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW THE MINING LAW REVIEW THE EXECUTIVE REMUNERATION REVIEW THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW THE CARTELS AND LENIENCY REVIEW THE TAX DISPUTES AND LITIGATION REVIEW THE LIFE SCIENCES LAW REVIEW THE INSURANCE AND REINSURANCE LAW REVIEW THE GOVERNMENT PROCUREMENT REVIEW THE DOMINANCE AND MONOPOLIES REVIEW THE AVIATION LAW REVIEW THE FOREIGN INVESTMENT REGULATION REVIEW THE ASSET TRACING AND RECOVERY REVIEW THE INTERNATIONAL INSOLVENCY REVIEW THE OIL AND GAS LAW REVIEW THE FRANCHISE LAW REVIEW THE PRODUCT REGULATION AND LIABILITY REVIEW THE SHIPPING LAW REVIEW THE ACQUISITION AND LEVERAGED FINANCE REVIEW

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PUBLISHER Gideon Roberton BUSINESS DEVELOPMENT MANAGER Nick Barette SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee, James Spearing ACCOUNT MANAGER Felicity Bown PUBLISHING COORDINATOR Lucy Brewer MARKETING ASSISTANT Dominique Destrée EDITORIAL ASSISTANT Shani Bans HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Jo Morley SUBEDITOR Matthew Hopkins MANAGING DIRECTOR Richard Davey Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2014 Law Business Research Ltd www.TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of October 2014, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected] ISBN 978-1-909830-26-4 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112

ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book: ANDERSON & ANDERSON LLP ASHUR LAW FIRM BOOKBINDER BUSINESS LAW CARCELÉN, DESMADRYL, GUZMÁN, SCHAEFFER & TAPIA – ABOGADOS CGA – COUTO, GRAÇA & ASSOCIADOS CRA – COELHO RIBEIRO & ASSOCIADOS EKVITA LLC EMERY MUKENDI WAFWANA & ASSOCIATES PC ENGLING, STRITTER & PARTNERS ENSAFRICA (EDWARD NATHAN SONNENBERGS INC) GENI & KEBE SCP HERBERT SMITH FREEHILLS HERGÜNER BİLGEN ÖZEKE ATTORNEY PARTNERSHIP HOLLAND & HART LLP MAYER BROWN INTERNATIONAL LLP MINTER ELLISON LAWYERS MIRANDA CORREIA AMENDOEIRA & ASSOCIADOS PÉREZ BUSTAMANTE & PONCE

i

Acknowledgements

PINHEIRO NETO ADVOGADOS QUINZIO & CÍA ABOGADOS REM LAW CONSULTANCY RICAURTE RUEDA ABOGADOS RSM BOGARÍN Y CÍA SC SALAZAR & ASOCIADOS ABOGADOS SQUIRE PATTON BOGGS (AU) STIKEMAN ELLIOTT LLP TABACKS ATTORNEYS AND CORPORATE LAW ADVISORS ŢUCA ZBÂRCEA & ASOCIAŢII VÁZQUEZ, SIERRA & GARCÍA SC WILLIAM FREIRE ADVOGADOS ASSOCIADOS

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CONTENTS

Editor’s Preface

��������������������������������������������������������������������������������������������������vii Erik Richer La Flèche

PART I

MINING LAW�����������������������������������������������������������������1–317

Chapter 1

ANGOLA������������������������������������������������������������������������������������1 João Afonso Fialho and Marília Frias

Chapter 2

AUSTRALIA�����������������������������������������������������������������������������12 Rob Merrick and Nathan Colangelo

Chapter 3

AZERBAIJAN���������������������������������������������������������������������������25 Ilgar Mehti

Chapter 4

BOTSWANA����������������������������������������������������������������������������37 Jeffrey Bookbinder and Chabo Peo

Chapter 5

BRAZIL������������������������������������������������������������������������������������51 William Freire

Chapter 6

CANADA����������������������������������������������������������������������������������65 Erik Richer La Flèche, David Massé and Jennifer Honeyman

Chapter 7

CHILE��������������������������������������������������������������������������������������76 Marcelo Olivares

Chapter 8

COLOMBIA�����������������������������������������������������������������������������86 Margarita Ricaurte

iii

Contents

Chapter 9

DEMOCRATIC REPUBLIC OF CONGO�����������������������������97 João Afonso Fialho and Marília Frias

Chapter 10

ECUADOR�����������������������������������������������������������������������������109 Jaime P Zaldumbide and Jerónimo Carcelén

Chapter 11

GHANA����������������������������������������������������������������������������������115 Innocent Akwayena and Enyonam Dedey-Oke

Chapter 12

GUINEA���������������������������������������������������������������������������������130 Stéphane Brabant and Yann Alix

Chapter 13

IVORY COAST����������������������������������������������������������������������143 Raphaël Wagner

Chapter 14

MEXICO��������������������������������������������������������������������������������154 Alberto M Vázquez and Humberto Jiménez

Chapter 15

MONGOLIA��������������������������������������������������������������������������172 Sebastian Rosholt

Chapter 16

MOZAMBIQUE��������������������������������������������������������������������189 João Afonso Fialho and Nuno Cabeçadas

Chapter 17

NAMIBIA�������������������������������������������������������������������������������202 Axel Stritter

Chapter 18

PORTUGAL���������������������������������������������������������������������������220 Rui Botica Santos and Luis Moreira Cortez

Chapter 19

REPUBLIC OF CONGO�������������������������������������������������������231 Emery Mukendi Wafwana, Nady Mayifuila, Sancy Lenoble Matschinga, Antoine Luntadila Kibanga and Kékéli J Kodjo

Chapter 20

ROMANIA�����������������������������������������������������������������������������242 Ciprian Dragomir and Bogdan Halcu

iv

Contents

Chapter 21

SENEGAL�������������������������������������������������������������������������������253 Mouhamed Kebe

Chapter 22

SOUTH AFRICA�������������������������������������������������������������������262 Modisaotsile Matlou

Chapter 23

TURKEY���������������������������������������������������������������������������������282 Safiye Aslı Budak and Yavuz Selim Günay

Chapter 24

UNITED STATES������������������������������������������������������������������294 Karol L Kahalley, David I Stanish and Robert A Bassett

Chapter 25

UZBEKISTAN������������������������������������������������������������������������306 Anvar Ikramov

PART II

CAPITAL MARKETS���������������������������������������������������321–431

Chapter 26

AUSTRALIA���������������������������������������������������������������������������321 Simon Rear, Clare Pope, Chris Rosario, Ben Stewart and Pasan Wijesuriya

Chapter 27

BRAZIL����������������������������������������������������������������������������������334 Carlos Vilhena and Adriano Drummond C Trindade

Chapter 28

CANADA��������������������������������������������������������������������������������342 Erik Richer La Flèche, David Massé and Jennifer Honeyman

Chapter 29

COLOMBIA���������������������������������������������������������������������������353 Juan Carlos Salazar T

Chapter 30

MONGOLIA��������������������������������������������������������������������������362 Sara K Phillips and David C Buxbaum

v

Contents

Chapter 31

MOZAMBIQUE��������������������������������������������������������������������379 Pedro Couto, Jorge Graça, Paulo Ferreira, Márcio Paulo and Gisela Graça

Chapter 32

NAMIBIA�������������������������������������������������������������������������������384 Axel Stritter

Chapter 33

SOUTH AFRICA�������������������������������������������������������������������398 Catharine Keene, St Elmo Wilken, James Cross, Melissa Grobbelaar, Candice Gibson and John Mankoe

Chapter 34

TURKEY���������������������������������������������������������������������������������412 Safiye Aslı Budak and Yavuz Selim Günay

Chapter 35

UNITED KINGDOM�����������������������������������������������������������420 Kate Ball-Dodd and Connor Cahalane

Appendix 1

ABOUT THE AUTHORS�����������������������������������������������������433

Appendix 2

CONTRIBUTING LAW FIRMS’ CONTACT DETAILS���453

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EDITOR’S PREFACE

I am pleased to have participated in the preparation of the third edition of The Mining Law Review. The Review is designed to be a practical, business-focused ‘year in review’ analysis of recent changes and development, and a look forward at expected trends. This book gathers the views of leading mining practitioners from around the world and I once again warmly thank all the authors for their work and insights. The first part of the book is divided into 25 country chapters, each dealing with mining in a particular jurisdiction. Countries were selected because of the importance of mining to their economies and to ensure broad geographical representation. Mining is global but the business of financing mining exploration, development and – to a lesser extent – production continues to be concentrated in a few countries, with Canada and the United Kingdom being dominant. As a result, the second part of this book includes 10 country chapters focused on financing. The advantage of a comparative work is that knowledge of the law, developments and trends in one jurisdiction may assist those in other jurisdictions. Although the chapters are laid out uniformly for ease of comparison, each author has complete discretion as to content and emphasis. From my vantage point, the past year was marked by two trends: first, uncertainty continues to weigh down the mining sector, and second, in Canada and a few other jurisdictions, extractive industries are being asked to share in a meaningful way the fruits of their activities with local communities and indigenous peoples. The world economy continues to progress at a very deliberate pace. Commodity prices have come down from their lofty heights. Investor appetite for mining stocks has not returned to 2008 levels and large mining companies have publicly identified assets for divestiture. Private equity has raised substantial amounts in 2013 and 2014. Heavy industry, often encouraged by governments, remains on the lookout for opportunities to secure raw materials at competitive prices. In previous economic cycles, the foregoing would have ushered in a period of lower valuations combined with an active M&A market, but this is not happening now. Valuations for ‘quality assets’ are stable. Sellers hope that the world economy will resume

vii

Editor’s Preface a higher growth trajectory. Buyers have access to money but are cautious; they are unclear as to the direction of the world economy, including – most importantly – the US and Chinese economies, and are sceptical of current valuations. In other words, there is no consensus as to where things are going and this is inhibiting transaction activity in the mining space. Until there is clarity from the United States and China, this state of affairs is unlikely to change. The other trend deals with ‘place-based’ resource development. In Canada and a few other jurisdictions, mining companies, communities and indigenous peoples are adopting local approaches to resource development. Place-based resource development refers to a participatory process that begins early in the project life cycle. The process recognises, implicitly or explicitly, that acceptance by local communities and indigenous peoples is a condition precedent to a project. This is more often than not reinforced by laws or policies at the national, state or provincial level. A place-based development model also recognises that communities and indigenous peoples should derive substantial economic benefits from a project. In some cases, local communities and indigenous peoples will want to invest and be partners in a project. At other times they will limit their involvement to the preferential provision of labour, goods and services. In all cases, however, local communities and indigenous peoples are no longer content merely to accommodate projects in exchange for limited social and infrastructure benefits: they want meaningful participation and greater benefits. A place-based approach means, inter alia, that the promoter of a project will enter into an agreement with the local community or indigenous people. These agreements have become quite sophisticated. This type of agreement rarely has to be made public and this naturally hinders the transfer of knowledge. To remedy this, some communities and indigenous peoples have prepared negotiation and drafting guides. One of the better ones is the Walter & Duncan Gordon Foundation IBA Community Toolkit (http:// gordonfoundation.ca/north/iba-community-toolkit). I strongly recommend it to anyone working on project planning, negotiation and development. As you consult this book you will find more on topics apposite to jurisdictions of specific interest to you, and I hope that you will find this book helpful and relevant. Erik Richer La Flèche Stikeman Elliott LLP Montreal October 2014

viii

Chapter 3

AZERBAIJAN Ilgar Mehti 1

I OVERVIEW According to official government statistics, in 2013 the total amount of foreign investment was US$10,540.9 million of which US$4,935.2 million are attributable to the oil industry.2 The non-oil sector of the mining industry is still developing. Azerbaijan produces a range of metals and industrial minerals, including aluminium, copper, steel and zinc. In 2013, approximately 1,619kg of gold were extracted.3 Additionally, a few large entities, as well as a significant number of small and medium enterprises, are engaged in sand, gravel, stone and salt extraction and production. Azerbaijan’s extractive industries, however, are significantly dominated by oil and gas, which account for more than 39 per cent of the country’s GDP.4 The bulk of Azerbaijan’s natural resources law is therefore directed towards the regulation of oil and gas activities. Azerbaijan is considered one of the birthplaces of the oil industry in general: it is claimed that the very first oil well in history, as well as the first offshore oil well, were both drilled in Azerbaijan. Azerbaijan’s history of oil activities dates back to ancient times.5 In the early 1900s Azerbaijan was producing more than half of the world’s oil (11 million

1 Ilgar Mehti is managing partner at Ekvita LLC. 2 State Statistical Committee of the Republic of Azerbaijan, ‘Azerbaijan in figures’, Baku, 2014. 3 Ibid. 4 Ibid. 5 Marco Polo was referring to Baku’s oil in his writings: ‘… stream of oil, in such abundance that a hundred ships may load there at once.’ Wikipedia (http://en.wikipedia.org/wiki/Petroleum_ industry_in_Azerbaijan).

25

Azerbaijan tonnes or 212,000 barrels (33,700 cubic metres) of oil per day).6 According to the *Oil and Gas Journal Azerbaijan’s proven oil reserves are estimated at 7 billion barrels (January 2014) and proven natural gas reserves are roughly 35 trillion cubic feet (January 2014).7 In 2013, Azerbaijan produced 881,000 barrels of oil per day,8 and a total of 43.4 million tonnes of oil and 29.2 billion cubic metres of gas.9 The discovery in 1999 of significant amounts of gas in Shah Deniz field (offshore Azerbaijan) transformed the country into a major gas exporter. It shall also be noted that, the Shah Deniz Consortium – SOCAR, BP and Total – has made the final investment decision on the second phase of offshore gas condensate field development. A final investment document on a project to supply European buyers with gas from Azerbaijan’s Shah Deniz-2 field was signed in Baku on 17 December 2013.10 II

LEGAL FRAMEWORK

Azerbaijan is a civil law jurisdiction and as such the country’s law is codified. There is, however, no overarching, unified law (mining law, petroleum law or similar) regulating the mining industry. Instead, the industry is regulated by miscellaneous laws enacted by the Parliament as well as various decrees, rules and regulations passed by the President, the Cabinet of Ministers, the Ministry of Economy and Industry, the Ministry of Energy, the Ministry of Ecology and Natural Resources (MENR), the Ministry of Emergency Situations (MES) and other relevant government agencies. The main statutory instrument setting out the legal framework for the mining industry is the Law on the Subsoil (the Subsoil Law) dated 13 February 1998. The Subsoil Law determines the main rights and obligations of persons engaged in subsoil extraction and development, sets the rules for issuing licences, etc. The Subsoil Law sets out the following main principles of government regulation of the mining industry:11 a safe, effective and holistic approach in using subsoil; b protection of the environment; c expansion and strengthening of subsoil raw materials base; d transparency in subsoil use; e creation of a suitable environment to attract investment in subsoil use; and f ensuring subsoil use in return for due compensation. The Subsoil Law is not specific to the oil and gas sector alone – its general principles, and other provisions relating to the issue of licences and permits, are also equally applicable

6 Ibid. 7 www.eia.gov/countries/analysisbriefs/Azerbaijan/azerbaijan.pdf. 8 Ibid. 9 State Statistical Committee of the Republic of Azerbaijan, ‘Azerbaijan in figures’, Baku, 2014. 10 www.azernews.az/oil_and_gas/62613.html. 11 Article 2.

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Azerbaijan to other sectors. The Subsoil Law provides expressly that the regulation of energy issues will be subject to a specific energy law (Article 3); the Law on Energy was thus passed on 24 November 1998 (the Energy Law). The Energy Law further elaborates the main principles of government regulation as set out in the Subsoil Law. While the Subsoil Law regulates different aspects of mineral resources, which by definition covers not just oil and gas but also other sectors such as iron ore, sand and gravel extraction, etc., the Energy Law – as the name suggests – is more specific to energy resources. Another relevant statutory instrument regulating the energy industry is the Law on the Use of Energy Resources, dated 30 May 1996. This law, however, is of a general nature as it sets out the social, economic and legal foundations of the state regulation of energy resources. The Law on the Protection of the Environment, dated 8 June 1999 (the Environmental Protection Law) also establishes legal, economic and social grounds for the protection of the environment. This Law regulates the efficient use and restoration of natural resources and other pertinent matters. In addition to these enacted legal acts, the legal framework of the oil and gas industry is significantly influenced by production-sharing agreements (PSAs) – by far the most common and prevailing form of government concession granting subsoil use rights. More than 20 PSAs have now been concluded between the State Oil Company of Azerbaijan Republic (SOCAR) and foreign oil companies (FOCs). It should be noted while PSAs were initially designed to regulate oil and gas projects, currently they are also actively used for non-oil minerals such as gold, metal ore etc. For example, several new PSAs have been concluded between MENR and foreign investors in relation to gold deposits, such as a PSA for the Garadagh, Chovdar, Goydagh, Daghkesen, Kohnemeden and Kurekchay deposits. Likewise, ‘Azerqizil’ State Company has concluded a PSA with RV Investment Group Services, LLC (USA) on exploration, development and production sharing for the Gadabay, Gosha, Ordubad group, (Piyazbashi, Agyurd, Shekerdere, Kalaki), Soyudlu, Gizilbulag and Vejnali perspective gold deposits. By its nature, a PSA is a commercial contract, although admittedly it has a hybrid status since, following its execution, a PSA would typically be enacted into law (approved by the parliament). The first and most significant PSA (also described as ‘the contract of the century’) was concluded in 1994 in relation to the Azeri, Chirag and Guneshli fields (the ACG PSA). Many subsequent PSAs derive their terms from the ACG PSA, although occasionally there are significant variations. The ACG PSA, as well as many other PSAs, contains provisions that broadly reflect the government’s main principles in regulating the oil and gas industry: a PSAs and the rights, benefits and privileges granted to FOCs (or, in some cases, their eligible subcontractors) thereunder prevail over conflicting provisions of any other laws, rules and regulations of Azerbaijan (except, understandably, for the

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Azerbaijan

b c d e

Constitution, legal acts adopted via public referenda and international treaties joined to or concluded by Azerbaijan);12 if the rights and privileges granted under PSAs are diluted by virtue of any new legal act, the government of Azerbaijan undertakes to provide reasonable compensation to FOCs;13 SOCAR will, by lawful means, assist FOCs in obtaining all required permits, licences and approval from various government agencies by FOCs in the course of hydrocarbon or petroleum activities;14 FOCs (and in some cases, their eligible subcontractors) are entitled to import and export goods, materials and equipment necessary in hydrocarbon or petroleum activities free of any customs tariffs and duties;15 FOCs (and in some cases, their eligible subcontractors) are exempt from payment of VAT (VAT assessed at zero rate) and pay a different (flat) rate of tax for their profit gained from hydrocarbon or petroleum activities.16

The operating rules under the PSAs are so unique that they have established a coherent and reasonably effective regulatory regime operating, for the most part, separately and independently from the main statutory regime set out under the Subsoil Law and the Energy Law. Azerbaijan is a signatory to the Energy Charter, the ICSID Convention, the MIGA Convention, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and some other significant international treaties. III

MINING RIGHTS AND REQUIRED LICENCES AND PERMITS

i Title According to the Constitution of the Republic of Azerbaijan,17 all natural resources belong to the state, without prejudice to the rights and interests of any legal entity or natural person. Other pertinent laws further confirm that the subsoil belongs to the state of Azerbaijan18 and that Azerbaijan has ‘exclusive property rights’ to energy resources.19 The vast majority of oil and gas production (more than 90 per cent) is made offshore in the Azerbaijani sector of the Caspian Sea. For this and other historical reasons, private ownership of mineral resources and the use of private mining licences are not common in Azerbaijan.

12 13 14 15 16 17 18 19

Article 23.1 of the ACG PSA. Article 23.2 of the ACG PSA. Article 3.2(a)(ii); 9.2(b) of the ACG PSA. Article 28, 18.1 of the ACG PSA. Article 12.2, 12.6–12.7 of the ACG PSA. Article 14. Article 4 of the Subsoil Law. Article 5 of the Energy Law.

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Azerbaijan Private landowners may, however, engage in the extraction of ‘abundant mineral resources’20 for the satisfaction of their personal needs on the depth of up to five metres without carrying out any blasting works and construction of underground facilities, as well as drilling and operation of wells in the first unpressurised aquatic layer not constituting centralised sources of water in accordance with the procedures established by the relevant authority and within boundaries of their land plots.21 ii

Surface and mining rights

The dichotomy of statutory regulation described above has influenced the rules pertaining to the granting of surface and mining rights. On the one hand, PSAs operate both as the enabling commercial concession granting the subsoil use rights and as a rather comprehensive set of rules regulating nearly all aspects of oil and gas extraction and development. On the other hand, the Subsoil Law and the Energy Law set out separate rules on subsoil licensing. Under the Subsoil Law,22 both local and foreign persons obtain subsoil use rights on the basis of special permits (licences) granted following a tender, auction or direct negotiation.23 Under the Energy Law, the right to extract and develop energy resources may be granted pursuant to ‘energy contracts’. While not expressly stated, such references to energy contracts seem to capture the PSAs. It should, however, be emphasised that Azerbaijan does not have a dedicated law regulating PSAs, as is the practice in some neighbouring jurisdictions. The Subsoil Law and the Energy Law are not sufficiently detailed to permit regulation of most PSAs. Therefore, PSAs would typically be negotiated and agreed separately. Similar to the Energy Law, the Environmental Protection Law requires conclusion of a contract with ‘relevant authority’24 for the use of natural resources. It also requires obtaining a relevant licence without which the contract for the use of natural resources would be deemed void. In case of discrepancy between the terms of the licence and the contract, the licence shall prevail.25 In the issue of licensing, other notable legal acts are the Resolution No. 111 on Approval of Cases where a Special Permit (Licence) for Subsoil Use is Granted Pursuant to Direct Negotiations, issued by the Cabinet of Ministers of the Republic of Azerbaijan on 30 June 2000 and the Decree No 310 on Measures to Improve the Issuance of Special Permits (Licences) for Certain Types of Business Activities in the Republic of Azerbaijan, issued by the President of the Republic of Azerbaijan on 28 March 2000.

20 21 22 23 24 25

Such as, sand, gravel, clay, quartzite, limestone, dolomite etc. Article 17 of the Subsoil Law. Article 13. While the law allows for tenders (open or restricted), in practice, most concessions are granted via direct negotiations. The ‘relevant authority’ is SOCAR, for oil and gas, and MENR, for other minerals (Presidential Decree No. 392 of the Republic of Azerbaijan, dated 30 August 2000). Article 15.

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Azerbaijan Despite all these general rules, however, in practice, most exploration and production licences are granted in the form of PSAs. Typically, the President would issue a special decree or order nominating SOCAR (or, in limited cases, the Ministry of Energy or MENR) as the government representative to negotiate or sign a particular PSA. Most PSAs contain conditions precedent requiring SOCAR or other government representatives (as the case may be) to implement such actions as may be required to approve PSAs into the law of the country. Therefore, following the execution of a PSA, SOCAR would, via the Cabinet of Ministers, submit the recommendation to the parliament. The parliament would then issue a special law approving the PSA and endorsing its unique regulatory regime. The time limits for geological survey (exploration) of the subsoil are up to five years, and for development, up to 25 years.26 These time limits generally match up with the exploration and production lifecycle of most PSAs. Extensions beyond these terms are generally prohibited,27 but under the Energy Law such extensions may be documented via a separate (new) agreement awarded through a new tender.28 iii

Additional permits and licences

Special permits (licences) or other forms of governmental approvals are required in connection with mining activities. Specifically, all hazardous equipment used in the mining industry is subject to separate approval by the Ministry of Emergency Situations. Thus, pursuant to Article 2 of the Law on Technical Safety, dated 2 November 1999, assets that are potentially dangerous to public safety and the environment (potentially hazardous assets) must be registered with the MES in the manner determined by the Cabinet of Ministers. The use of vessels is subject to mandatory approval and certification by Azerbaijan’s State Maritime Administration acting as the flag state representative. Other specific approvals and licences may often be required depending on the type and nature of the activity involved. iv

Closure and remediation of mining projects

The Energy Law mandates development of comprehensive remediation plans that must be included in energy contracts.29 Remediation works must be undertaken by the contractor responsible for field development prior to expiry of the contract period. The respective government agency may require mandatory accumulation of preagreed funds in certain deposit accounts dedicated to remediation works. Alternatively, the contractor may be requested to provide a bank guarantee for an amount sufficient to cover its obligations with respect to remediation works. Most PSAs contain similar – or perhaps more detailed – remediation obligations. It is common practice to allocate certain funds to an abandonment account or remediation works at the end of a field’s life cycle.

26 Article 12 of the Subsoil Law. 27 Article 24 of the Energy Law. 28 Ibid. 29 Article 27.

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Azerbaijan IV

ENVIRONMENTAL AND SOCIAL CONSIDERATIONS

i

Environmental, health and safety regulations

The Constitution provides for basic guarantees of environmental safety, which include a right to live in a healthy environment, and a right to demand compensation for damage caused to one’s property as a result of a breach of environment-related laws. These basic principles guide and dictate the environmental policy of Azerbaijan. One of the most important and directive provisions of the Constitution states that no one can cause more danger or damage to the environment and natural resources than is allowed by law. Certain norms and regulations, adopted in line with these basic Constitutional principles, set limitations on pollution of the environment. Likewise, a number of laws have been passed that generally apply to mining projects. As previously mentioned, there is no specific law in Azerbaijan that would comprehensively cover the effect of mining projects on the environment or third parties. The main laws in this area are the Energy Law, the Environmental Protection Law, the Law on Industrial and Domestic Wastes, dated 30 June 1998, and the Law on Ecological Safety, dated 8 June 1999; these laws apply to all energy resources and products, as well as their extraction and processing activities in Azerbaijan, which includes the impact of these activities on the environment. The Law on Protection of Atmospheric Air, dated 27 March 2001, and the Law on Protection of Greenness, dated 2 May 2014, are also important legal instruments regulating relations with respect to environmental protection. One of the notable legal acts in connection with the environment is the National Programme on Environmental Sustainable Socio-Economic Development in Azerbaijan, approved by the Decree of the President, dated 18 February 2003. This Programme is still in force even though it covers an action plan relating to 2003–2010. According to applicable laws, all legal entities and individuals are obliged to maintain the productive use of energy resources, comply with rules on their use, and refrain from pollution above the limits allowed by law. This obligation also extends to design, installation and exploitation of energy plant and machinery. Upon application for obtaining a licence for subsoil use, one of the conditions for licence issuance is satisfying an ecological assessment carried out by the MENR. The main purpose of the ecological assessment is to measure the hazard level of the projects that are ready for commencement, or have already commenced, and affect, or may affect, the state of the environment and health and safety of the population. The law requires that legal entities or individuals engaged in mining projects must present mitigation measures for the recovery of the environment from any negative effects. In some projects of governmental importance, however, the MENR has the right to free the requesting entity from compulsory requirements of the law for a maximum of five years. Along with the measures to be taken to avoid potential threats to the environment and people’s health and safety, laws also provide for damages already caused to third parties. In particular, project owners must pay compensation for such damages. If a project causes death or injury, or damage to personal property or to the environment, the owner must bear liability, pay compensation and mitigate or remove the consequences of such damage in line with the law. This also applies to events

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Azerbaijan occurring due to the installation, exploitation and technical service of the energy plants as part of a project. If the damage caused by the energy plant is proven, the owner must present reports to an appropriate state authority about the event in order to determine the amount of compensation due to the affected parties. Certain types of mining projects require compulsory insurance for potential damage that may be accidentally caused to the environment, the subsurface or people’s health and safety. It may be required by laws to keep the insurance for a certain period when such danger is real, even after termination of the project. At the time of writing, there is still no coherent legislation mandating compulsory environmental insurance, although discussions are ongoing.30 V

OPERATIONS, PROCESSING AND SALE OF MINERALS

i

Processing and operations

According to the Customs Code, a state authority may impose restrictions on importing to or exporting goods from Azerbaijan, which must be done in accordance with Azerbaijani law and international agreements. Customs clearance of restricted goods is also subject to the requirements of Azerbaijani law and international agreements. The Customs Code lists applicable custom payments. These include customs duties, import VAT and customs collections. Customs duties apply based on the requirements of relevant customs procedures. The Law on Customs Tariffs,31 dated 13 June 2013, lays down the rules on setting and applying customs tariffs. According to the Law, such tariffs apply to imported or exported goods. Rates of both import and export customs duties are set by the Cabinet of Ministers. Rate limits of such duties on goods from countries with which Azerbaijan has a favourable trade regime are set by the parliament. The Customs Code regulates import VAT in accordance with the Tax Code. The amount of payable import VAT is 18 per cent. Finally, customs collections relate to general administrative work done by the customs authorities and such fees are set by the appropriate state authority. The Law on Application of Special Economic Regime to Export-Oriented Oil and Gas Activities, dated 2 February 2009, provides for privileges for contractors as well as local and foreign subcontractors involved in such activities. For this purpose, the activities must relate to oil and gas operations performed outside of Azerbaijan, including the Azerbaijani sector of the Caspian Sea. Contractors and subcontractors must obtain a licence for each agreement under which they carry out activities.

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It should be noted that the Law on Compulsory Ecological Insurance was repelled by the new comprehensive Law on Compulsory Insurances, dated 24 June 2011. This new law does not state that environmental insurance is compulsory. With the entry into force of this new Law, the previous Law on Customs Tariffs, dated 20 June 1995, has ceased to have effect.

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Azerbaijan Customs regimes under most PSAs differ substantially from the general rules. In most cases, FOCs and their subcontractors operating under the PSAs are entitled to import and re-export from Azerbaijan, free of any restrictions and in their own name, all materials and equipment necessary to their petroleum operations. PSAs require that contractors give preference to local suppliers with respect to the purchase of imported materials and equipment where local suppliers are competitive in price, quality and availability with those available from other sources.32 Contractors, their customers and carriers of both may freely export the portion of petroleum to which contractors are entitled under the respective PSA.33 Subject to the foregoing, all imports or exports carried out under the PSAs must comply with the procedures required by the applicable customs laws and regulations, and be duly documented, and contractors must pay any customs service or documentation fees. Employment of foreign employees in Azerbaijan is regulated by the Migration Code that entered into force on 1 August 2013. The Migration Code allows the employment of foreign nationals, subject to their obtaining work permits, which must be obtained beforehand. Work permits are not required for heads and deputy heads of branches and representative offices of foreign companies and for foreign nationals arriving on a business trip to Azerbaijan if the duration of secondments within a year does not exceed 90 days in the areas specified by the relevant government authority.34 Prior to the end of each year, the Cabinet of Ministers sets a migration quota for the subsequent year determining the maximum number of foreign employees that can be engaged in each respective industry. Foreign employees exempted from the work permit requirement may be employed irrespective of the quota. Under the PSAs, FOCs and their subcontractors may freely employ such personnel as, in their opinion, are required for the purpose of carrying out petroleum operations. PSAs require preference to be given, however, to employing Azerbaijani citizens provided that they have the required knowledge, qualifications and experience. ii

Sale, import and export of extracted or processed minerals

Pursuant to Presidential Decree No. 782 on the Improvement of the Rules for the Issuance of Licences (Special Permits) for Certain Types of Activity, dated 2 September 2002, the international, inter-city and intra-city transportation of goods by means of water, air and motor transport is subject to licensing approved by the Azerbaijan State Maritime Administration, State Civil Aviation Administration and the Ministry of Transportation. Transportation of hazardous substances must be authorised by the MES. No special licence is required for the sale, import and export of minerals under the PSAs.

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Article 18.1(a) of the ACG PSA. Article 18.2 of the ACG PSA. Article 64 of the Migration Code.

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Azerbaijan iii

Foreign investment considerations

The Law on the Protection of Foreign Investment sets legal and economic principles for foreign investment in Azerbaijan. According to the Law, legal regimes for foreign investors may not be less favourable than those available to local investors.35 Foreign investment is fully and unconditionally protected. If investment conditions worsen because of a change or an amendment to the Azerbaijani law, and unless such change relates to certain matters (e.g., national security or public order), the law that existed when an investment was made will continue to apply for 10 years. The law provides for nationalisation and requisition of foreign investment but, should this occur, foreign investors are entitled to reasonable compensation. Foreign investors are also entitled to reimbursement for losses (including loss of benefit) suffered due to unlawful acts by the state authorities or their officials. If an investment is terminated, a foreign investor may receive part of its investment and related income in the form of money and goods, taking into account a realistic price on the termination date. Foreign investors may transfer their incomes as well as other amounts abroad (such as compensation and reimbursement) subject to the applicable taxes and duties. Similarly, Central Bank Rule No. 12, dated 27 May 2002, dealing with the currency operations of residents and non-residents, provides for free (i.e., without paying any taxes and duties) repatriation of investment by foreign companies, branches and representative offices of foreign companies (Rules 3.2.2.e). The law also allows foreign employees to transfer their wages abroad subject to paying personal income tax as set by the Central Bank.36 According to the Law on Protection of Foreign Investment, rights with regard to the exploration and development of mines are granted to foreign investors on the basis of concessions concluded between them and the Cabinet of Ministers, and approved by the parliament. As has already been mentioned, however, most oil and gas projects in Azerbaijan that involve foreign investments are regulated by the PSAs. Most PSAs provide for economic stabilisation rules similar to those previously described. VI CHARGES i Royalties The Tax Code provides for the payment of a mining tax (royalty) in respect of minerals extracted on the territory of Azerbaijan, including the Azerbaijani sector of the Caspian Sea. The royalty is based on the wholesale price at the rate of 26 per cent for crude oil, 20 per cent for natural gas and 3 per cent for all types of metals. Since the royalty is calculated on the basis of wholesale price, it is considered revenue-based.

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Article 5. Law on Currency Regulation, dated 21 October 1994 also governs rights and obligations of legal and natural persons with respect to possession, use and disposal of currency.

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Azerbaijan ii Taxes As previously explained, PSAs establish their own standalone and unique statutory regulation in relation to hydrocarbon activities. This uniqueness expresses itself manifestly in the regulation of taxation. The benefits and privileges granted under the PSAs are subsequently detailed in specific tax protocols executed between FOCs and the Tax Authority. Under the PSAs and the protocols, FOCs pay a flat-rate profit tax (e.g., in the ACG PSA,37 of 25 per cent) in connection with their hydrocarbon entitlement. As the name suggests, the flat profit tax is profit-based. The PSAs typically guarantee that the profit tax rate remains fixed for the duration of the PSA (30 years in the case of the ACG PSA). PSAs lay out very detailed tax and accounting procedures relating to taxable profits, deductible expenses, submission of returns, etc. As a rule, the PSAs provide total exemption from a number of taxes. According to the ACG PSA, for example, all FOCs are entitled to full and complete exemption from all taxes (existing or future) in respect of their hydrocarbon activities except for the aforementioned flat profit tax. Further, FOCs are entitled to freely repatriate their profits outside Azerbaijan without payment of any branch remittance tax on profit, interest, fees and charges in respect of any debt, any royalty, lease payment or management fee. In other words, the flat profit tax of 25 per cent fully satisfies FOCs’ tax liability in respect of their hydrocarbon activity under the PSA. Finally, FOCs engaged in hydrocarbon activity under the PSAs are also exempt from VAT on all (1) goods, works, and services supplied to or by them, (2) their exports of oil and gas, and (3) imports of goods, works and services acquired by them. Foreign subcontractors providing services to FOCs in connection with hydrocarbon activities also have certain tax benefits. First, the VAT exemption on goods and services supplied applies across the entire value chain to the service providers. Second, the gross payments received for works or services performed in Azerbaijan by foreign subcontractors are subject to a withholding tax at a rate of 5 per cent.38 Payment of withholding tax satisfies foreign subcontractors’ corporate (profit) tax liability in Azerbaijan. iii Duties There are certain state duties39 payable with respect to matters requiring governmental approval (for example, a duty for a construction licence, for a certificate of origin, etc). These duties are generally insignificant. As previously explained, goods imported to and exported from Azerbaijan are generally free from any customs duties under the PSAs. Occasionally, certain administrative processing fees are charged, but such fees also tend to be nominal.

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Article XII. Subsequent PSAs have varying levels of taxation – often, 8 per cent. Law on State Duties, dated 4 December 2001 regulates some issues related to duties.

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Azerbaijan iv Indemnification Most PSAs, including the ACG PSA, provide for full indemnification of expenditure (cost recovery) incurred by FOCs in the development stage of the field’s life cycle. However, costs incurred during exploration activities aimed at discovery of commercially attractive oil and gas reserves are typically not recoverable. Further, to ensure steady cash flow, most PSAs provide for a certain cap on cost recovery. For instance, under the ACG PSA, cost recovery is achieved through use of the total amount of oil produced (total production). At first, all operating costs for the thencurrent year are subject to cost recovery. The remaining portion of total production is then used to recover capital expenditure, but only up to 50 per cent of the remaining total production. VII

OUTLOOK AND TRENDS

Generally, the dichotomy of statutory regulation (PSAs as opposed to general law) is perhaps the most salient feature of Azerbaijan’s legal framework with respect to the oil and gas industry. The benefits and privileges granted under the PSAs have established a unique legal regime that has so far operated reasonably smoothly compared with other neighbouring jurisdictions. PSA regulation in Azerbaijan has survived the period of high and low oil and gas prices as well as the recent (ongoing) economic recession. It is reasonable to believe that it will continue to maintain its position as the prevailing form of statutory regulation.

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Appendix 1

ABOUT THE AUTHORS

ILGAR MEHTI Ekvita LLC Ilgar Mehti is managing partner of Ekvita LLC, which specialises in legal and tax consulting services. He has practised law as a lead in-house lawyer in a multinational energy company and as associate lawyer in a major international law firm. Mr Mehti holds bachelor’s and master’s degrees in law from Baku State University as well as an LLM from Northwestern University Law School in the United States. He is fluent in Azeri, English, Russian and Turkish.

EKVITA LLC 4/189 Hasan Aliyev St Falez Plaza, 6th Floor Baku 1078 Azerbaijan Tel: +994 12 480 47 89 / 90 Fax: +994 12 596 01 09 [email protected] www.ekvita.com

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