Host country contracts in the energy sector: Azerbaijan-Turkey case study

The primary aim of this study is to examine the political risks, particularly of indirect expropriation in long-term energy investment contracts, focusing on stabilisation clauses and examining what driving force(s) influence host states to agree to insert such clauses in their host governmental contracts. The secondary aim of this work is to examine the political structure of Azerbaijan and Turkey and the guarantees available to foreign investors under their laws within those nations from a comparative perspective. The work dedicates particular attention to how effective internal factors in Azerbaijan and Turkey are in facilitating contractual stability in their respective energy investment projects. This study applies both comparative and empirical research methods, fieldwork and library based research. It seeks to provide a theoretical and comparative understanding of political regimes, foreign investment laws and constitutional guarantees and investment policies in Azerbaijan and Turkey. The work has provided that the driving forces behind why Azerbaijan and Turkey consented to insert stabilisation clauses in the host government agreements of Baku-Tbilisi-Ceyhan Project (BTC) can be attributed to each of these being in possession of: a weak bargaining position, weak formal and informal institutions, insufficient laws on foreign direct investment, absence of specific petroleum legislations and a keenness to promote investment and economic activities in their regional markets. It is imperative to lenders and insurers that the host state where the investment will be made is a stable environment. In order to be satisfied that this is the case and to future-proof themselves against risk, they require the insertion of stabilisation clauses in host government agreements. Credit-rating agencies assessments exercise influence over the terms to be agreed and, indeed over the investor’s decision whether to participate in a project. Further research into stabilisation clauses might invite the analysis of specific petroleum producing countries from different regions to better understand how internal and external factors are effective in providing stability. The transferability of the research findings could be further strengthened by surveying and interviewing more participants from petroleum companies, non-governmental organisations, law firms, financial institutions, political risk insurance providers, government bureaucrats and international academics.