The Basis for Conducting Oil and Gas Operations
In Georgia, oil and gas operations and natural hydrogen operations may be carried out wholly or partly by the state and by natural or legal persons on the basis of a contract concluded under the law and of a general licence for the use of oil and gas resources. The right to process oil, to process gas or to transport them belongs to natural and legal persons under the same law. The contract granting an investor the right of exploitation or of use of the oil- and gas-bearing subsoil of an area is concluded between the state and the winner of a tender or auction. The agency determines the rules of the tender and the auction and registers them with the Ministry of Justice one month before their announcement. The winner of a tender is the applicant submitting the most acceptable economic and technical bid, while the winner of an auction is the one offering the state the highest amount.
Procedural Deadlines of the Tender and the Auction
The procedure is governed by several strict deadlines. Negotiations between the agency and the winning investor for the conclusion of the contract begin within one month of the victory in the tender or auction, and if no contract is concluded within six months of the start of the negotiations, the results of the tender are deemed cancelled. To be admitted, the applicant pays a contribution determined by the agency,. Participation also requires extensive information: the forms and parameters of the operations, information on the owners, management, financial standing, financing sources and technical capabilities, and experience.
The Content of the Contract and Risk Service
Any contract between the agency and the investor covers the division of the term into exploration and production periods, the minimum volume of the agreed works, the conditions for the reimbursement of costs and the distribution of production, the method of determining the market price, the ownership of the extracted oil and gas, the status of the operating company, bonuses and taxes, the obligation to relinquish part of the area, the use of associated gas, environmental and safety requirements, and the dispute settlement procedure. The law stresses that the extracted oil and gas are the property of the state and the investor. A special form is the risk service contract: the investor bears all exploration and geological study costs and takes the risk of failure upon itself; in the event of success, the decision on production is taken by the agency; the state reimburses the expended capital with loan interest and an additional tax; reimbursement is normally in money, while by decision of the agency it may be made partly or fully in extracted oil and gas.
Terms, the Licence and the Land Question
The maximum duration of the contract and of the licence is 25 years, and the parties determine the durations of the operations within that framework. Extension is admissible at the investor's initiative where necessary for economically rational recovery. The general licence is issued by the agency on the basis of the contract within one month of its signature, and the conditions of the licence must be identical to those of the contract; the licence fee may not be reimbursed with compensation oil and gas. As to land, where the necessary plot belongs to a private owner, the investor concludes, before the signature of the contract, an agreement with the landowner on the transfer of the exclusive right to use the plot; failing agreement, an eminent domain case may be initiated before the court, in which the investor covers all costs, including the compensation determined by the court.
The Investor's Rights and Duties during Production
During the production period the investor must select the most effective methods and technologies in accordance with international standards, use the area only for the purpose defined by the contract, comply with the requirements of industrial safety and the protection of the environment and the subsoil,. The law establishes local content preferences on equal conditions: preference for equipment, materials and products manufactured in Georgia, for the services of Georgian enterprises including transportation, and for Georgian citizens —. Where other minerals are discovered on the area, the investor notifies the agency in writing within 30 days. It must pay taxes and the regulation fee in due time, participate in the development of social infrastructure, protect cultural and historical objects and restore the damaged land at its own expense. After the payment of mandatory taxes, the proceeds from the sale of its exported share may be taken out and kept abroad, and the currency may be freely converted at the free market rate without restrictions.
Frequently Asked Questions on Production
For what term are the contract and the licence granted?
The maximum term is 25 years. Extension is admissible to the extent necessary for economic recovery, and an extension needed before the expiry of the 25-year term is temporary and does not exceed five years. The licence is issued within one month of the signature of the contract.
What happens if the contract is not concluded in time?
Negotiations begin within one month of the victory; if no contract is concluded within six months of their start, the results of the tender are deemed cancelled.
How is the land question resolved?
For a private plot, the investor concludes a use agreement with the owner before the contract; failing agreement, an eminent domain case may be brought before the court, with the investor covering the costs and the compensation.
How We Help on Legal.ge
The Legal.ge team will accompany your oil and gas production project from inception to completion: we will assess the tender conditions, prepare the application and the draft contract, explain the differences between the risk service and other forms, and protect your interests in relations with the agency. Contact us with a brief description.