The International Agreements signed with Foreign Investors in Azerbaijan Oil and Gas Industry:

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1 The International Agreements signed with Foreign Investors in Azerbaijan Oil and Gas Industry: Production Sharing and International Taxation Matters Bakhtiyar A. Aslanbayli Baku State University Department of International Relations

2 Content Overview Investment climate Agreements signed with foreign oil companies The ACG PSA Cost Recovery Sharing of Production International Taxation Matters PSA Tax regimes in Azerbaijan HGA Tax regimes in the region (Azerbaijan, Georgia, Turkey)

3 Foreign Investment in Azerbaijan The not-less-favored regime Foreign investors may be granted preferential rights 10-year moratorium for changes in legislation adversely affecting an investment Certain incentives are available to foreign investors engaged in energy sector

4 PSAa and HGAs signed in Azerbaijan The vast majority of oil and gas contracts concluded on the basis of PSAs The current PSAs are similarly structured and contain many standard articles: - Rights and obligations of parties - The contract area - Development and production period - Recovery of exploration costs and sharing of production -Taxation - Bonus payments Two HGAs signed with Azeri Government - The Baku-Tbilisi-Ceyhan Main Export Pipeline - The South Caucasus Pipeline Each PSA and HGA have the status of law

5 Azeri Sector of the Caspian Sea

6 The Azeri-Chirag Chirag-Gunashli PSA (ACG PSA) Covers the 30 year development of the ACG contract area Reserves billion barrels Several phases: EOP - Chirag (since 1997) ACG Phase 1 produced from Central Azeri since 2005 ACG Phase 2 - West Azeri and East Azeri scheduled to come on stream in 2006 and 2007 ACG Phase 3 - DW Gunashli sanctioned and expected to begin production in 2008 Source BP-Azerbaijan Press Release of 23 December 2005

7 Caspian Pipeline Network

8 The Baku-Tbilisi Tbilisi-Ceyhan Main Export Pipeline

9 ACG PSA Cost Recovery Contractor is entitled to recovery of petroleum costs as follows: A. Operating costs shall be first recovered from Total Production B. Capital costs shall then be recovered from a max. of 50% of remaining Crude Oil (Capital Cost Recovery Petroleum) Unrecovered balance of capital costs is aggregated on quarterly basis Contractor have the continuing right to carry over to subsequent quarters accumulated Petroleum Costs

10 ACG PSA Cost recovery (cont.) The unused Capital Cost Recovery Petroleum shall be treated as additional Profit Petroleum If the unrecovered accumulated Capital Costs and Operating Costs incurred (carried forward) in any quarter are less than the value of the remaining Capital Cost Recovery Petroleum Cost Recovery by Contractor is achieved by transferring to the Contractor title to quantities of Crude Oil of equivalent value to the Petroleum Costs

11 ACG PSA Sharing of Production The Total Production remaining after Cost Recovery shall be: calculated on a quarter basis shared between SOCAR and Contractors according to the cumulative after-tax real rate of return (RROR) as of the end of preceding quarter

12 ACG PSA Sharing of Production (cont.) CONTRACTOR'S SOCAR CONTRACTOR RROR Share Share Less than 16.75% 30% 70% 16.75% or more, but less than 22.75% 55% 45% 22.75% or more 80% 20%

13 PSA Tax Regimes Applies to all foreign investors and subcontractors involved either directly or indirectly in PSAs PSA provisions prevail over all conflicting provisions of Azerbaijan Law Taxes applicable to the foreign investors Profit Tax / WHT Social contributions

14 PSA Tax Regimes Profit Tax Applies to Contractor Parties Calculated under the PSAs Profit Tax rate varies from 25% to 32% Taxable Base revenues less operating costs and tax depreciation

15 PSA Tax Regimes Withholding Tax Applies to Foreign Subcontractors Tax rate varies from 5% to 8% Applicable to: Work & Services performed in Azerbaijan Mark-up, Handling fee on Goods sold in Azerbaijan Satisfies Subcontractors corporate tax liability

16 PSA Tax Regimes Other Taxes VAT exempt with credit (0%) Customs Taxes exempt, only processing fees are payable Personal Income Taxes payable by employees at a max. rate of 35% Contractor Parties are entitled to full and complete exemption from other taxes, such as royalties, property taxes, etc.

17 PSA Tax Protocols ACG SD Ina m Alov AZ BTC SCP GEO TUR AZ GEO PT FSC N/A N/A N/A N/A IE VAT FE -Agreed & Effective - In Negotiation Process - Submitted to Tax Office

18 HGA Tax Regimes Applies to all foreign investors and subcontractors involved either directly or indirectly in HGAs HGA provisions prevail over all conflicting provisions of Azerbaijan Law Taxes applicable to the foreign investors Profit Tax Social contributions

19 BTC Ownership Structure Amerada Hess BP ENI Inpex Itochu SOCAR Statoil TFE TPAO Unocal 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100% 100 % Amerada Hess Participa nt BP Participa nt ENI Participa nt Inpex Participa nt Itochu Participa nt SOCAR Participa nt Statoil Participa nt TFE Participa nt TPAO Participa nt Unocal Participa nt Investment Co. Class A/B Ordinary Shares BTC Co. Class A/B Ordinary Shares 97 % 3% BTC International Investment Co. BTC Co. Class C Ordinary Shares BTC Co. (Project Company)

20 BTC Profit Tax Summary Azerbaijan Georgia Turkey Base Profit Tax 27% of: revenue less operating costs and tax depreciation per Art 8 of HGA Base Profit Tax = 30% of taxable profit calculated per Georgia Tax Code Surtax None Surtax = $X/bbl less Base Profit Tax Total Profit Tax Profit Tax as above Maximum $X/bbl Corporation Tax = 30% of taxable profit calc. per Turkish CT Law Surtax = $Y/bbl less Base Corporation Tax Maximum $Y/bbl

21 BTC Profit Tax - Georgia Tariffs = Profit Tax Profit Tax Surtax Base Profit Tax

22 BTC - Turkey Contracting & Taxes MEP Participants Construction Contractors OPCO FLSC Turnkey Contract B-T-B 0% WHT 0% WHT =BOTAS FLSC 0% WHT An Other Contractors >$100,000 Construction Activities FLSC 0% WHT FLSC 0% WHT FLSC WHT >$250,000 0% WHT Contract G Contract E Contract A Contract B FLSC >$100,000 Construction Activities SLSC 0% WHT SLSC 0% WHT Contract H Contract F SLSC Contract C WHT >$250,000 Contract D 0% WHT SLSC Major Subcontractors Other Contractors

23 Useful Links