ARMENIA FOLLOW-UP REView of the Investment Climate and Market Structure in the Energy Sector Energy Charter Secretariat 2008 ENERGY CHARTER ENERGY FOLLOW-UP REPORT ON INVESTMENT CLIMATE AND MARKET STRUCTURE IN THE ENERGY SECTOR ARMENIA UPDATED VERSION As of 28 May 2008 TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................. 6 A. OVERVIEW ......................................................................................................................... 8 1. Summary Information......................................................................................................... 8 2. Geography........................................................................................................................... 8 3. Environmental Issues.......................................................................................................... 9 4. Population and Employment............................................................................................... 9 5. State Structure..................................................................................................................... 9 6. Economic Situation........................................................................................................... 10 a) Performance of the Economy ..................................................................................... 10 b) Economic Outlook...................................................................................................... 14 c) Trade........................................................................................................................... 15 d) Privatisation................................................................................................................ 19 e) FDI Policy.................................................................................................................. 20 f) General Energy Policy of Armenia ............................................................................ 25 B. LEGISLATIVE FRAMEWORK FOR FOREIGN INVESTMENT IN THE ENERGY SECTOR .. 28 1. Summary of Legislation Relevant to Investment in the Energy Sector ............................ 28 a) Constitutional Provisions........................................................................................... 28 b) Establishment of Enterprises ...................................................................................... 29 c) Licensing .................................................................................................................... 30 d) Entrepreneurship and Corporate Laws ....................................................................... 31 e) Foreign Investment Legislation.................................................................................. 32 f) Legislation on Real Estate.......................................................................................... 35 g) Competition Legislation............................................................................................. 35 h) Taxation...................................................................................................................... 36 i) Legislation Regulating Conditions for Entry, Stay and Employment of Foreign Nationals ....................................................................................................... 42 j) Foreign Exchange and Securities Laws/Regulations.................................................. 42 k) Legislative Framework for Privatisation .................................................................... 43 l) Legislation Regulating the Publishing of Laws.......................................................... 46 m) General Measures for Ensuring Observance at Sub-National Levels ........................ 46 n) Legislation on Intellectual Property Rights................................................................ 47 o) Energy-Related Legislation........................................................................................ 47 2. Summary of Laws/Regulations Relevant to Investing in the Energy Sector .................... 61 3. Summary of Participation in International Organisations and/or Conventions................... 61 a) List of Bilateral Treaties on the Protection and Promotion of Foreign Investments ......... 61 b) List of Bilateral Treaties (Agreements) on Avoidance of Double Taxation............... 63 c) Free Trade Agreements .............................................................................................. 63 d) Membership in International Organisations ............................................................... 64 e) Important Conventions Concerning the Energy Sector, Investment Disputes or Intellectual Property Rights........................................................................................ 65 4. Exceptions to National Treatment..................................................................................... 66 - 3 - C. MARKET STRUCTURE AND PRIVATISATION BY SUB-SECTORS..................................... 67 1. Physical Features.............................................................................................................. 67 a) Overview .................................................................................................................... 67 2. Oil ..................................................................................................................................... 67 a) Exploration and Production........................................................................................ 67 b) Oil Products Trade, Distribution and Retailing, Oil Storage, and Emergency Planning.. 71 3. Coal................................................................................................................................... 74 4. Natural Gas....................................................................................................................... 76 a) Statutory Framework.................................................................................................. 76 b) Imports and Exports, Alternatives and Dependence, Transportation and Transit ........... 77 c) Storage........................................................................................................................ 80 5. Electricity.......................................................................................................................... 81 a) Generation .................................................................................................................. 81 b) Transmission and Dispatching, Export/Import, and Regional Network Agreements...... 88 c) Distribution and Retail Supply ................................................................................... 89 6. Renewable Energy Sources............................................................................................... 90 a) Biomass and Waste .................................................................................................... 91 b) Wind ........................................................................................................................... 91 c) Geothermal ................................................................................................................. 92 7. Nuclear Energy Sector ...................................................................................................... 93 a) Management and Oversight Bodies............................................................................ 93 b) Facilities ..................................................................................................................... 95 8. District Heating................................................................................................................. 97 ATTACHMENT 1 ...................................................................................................................... 99 LIST OF FIGURES Figure 1: Structure of GDP in 2001-2005 ............................................................................... 12 Figure 2: Annual Growth of Individual Sectors (% with respect to previous year) ................ 13 Figure 3: Index of Economic Freedom.................................................................................... 14 Figure 4: Main Trading Partners ............................................................................................. 17 Figure 5: Main Export and Import Products in Armenia for 2005.......................................... 18 Figure 6: FDI Flows in 2006 by Major Sectors of the Economy ............................................ 22 Figure 7: Petroleum Exploration Contract Areas .................................................................... 68 Figure 8: Petroleum Basins in Armenia .................................................................................. 69 Figure 9: Locations of Armenia's Coal and Oil Shale Deposits .............................................. 75 Figure 10: Abovyan Underground Gas Storage Site Plan....................................................... 80 Figure 11: Generation Mix Patterns ........................................................................................ 83 Figure 12: Rivers of Armenia.................................................................................................. 84 Figure 13: Fuel Use at Thermal Power Plants........................................................................