Foreign investment plays a major role in financing the development of much of Azerbaijan's industrial sector, especially the oil and gas-related industries. The 1992 Law on Foreign Investment provided many basic guarantees to foreign investors, including nondiscriminatory treatment, the repatriation of profits, guarantees against expropriation, and dispute settlement. The Privatization Law passed in 1995 allowed foreign investors to acquire shares in state companies and purchase real estate jointly. Starting in 1997, foreign tax privileges were revoked. As of 1999, foreign investors were required to obtain a license and pay a fee in order to open business in Azerbaijan.
Only about 100 joint venture projects were registered by mid-1992; these were dominated by Turkish firms and involved primarily trade and textiles. In the oil sector, preliminary agreements were signed with US, Scottish, British, and other foreign companies for the exploration and development of several major oil fields in the Caspian Sea. In 1992, Azerbaijan joined a consortium with Oman, Kazakhstan, and Russia aimed at constructing a pipeline through Armenia, Iran and Turkey, or Georgia. Little action was taken on these agreements, due to heightened political tensions. The Azerbaijan International Operating Company (AIOC), led by BP Amaco, signed an $8 billion contract in 1994 to exploit oil reserves at Azeri, Chirag, and Guneshli (ACG). Foreign direct investment leapt from only $30 million in 1994 to over $1 billion in 2002 (about 17% of GDP), with approximately 90% of FDI concentrated in the hydrocarbons sector. Although the US government had banned public aid to Azerbaijan in 1992, US investors played a large role in exploiting Azerbaijani oil reserves, increasingly so since January 2002 when the Bush administration waived the ban on public assistance (due to Azerbaijan's trade embargo against Armenia and Nagorno-Karabakh) because of Azerbaijan's support in the War on Terror. In the energy sector, by June 2002, the government had concluded Production Sharing Agreements (PSAs) with over 30 companies representing 15 countries. Over 90 US energy-related companies are currently resident in Baku pursing investment opportunities. Significant foreign investors in the energy sector included British Petroleum (BP)—the designated operator for both the ACG oil field and the Shah Deniz natural gas field—Unocal, ExxonMobil, Devon Energy (Pennzoil), Chevron, Conoco, Moncrief Oil, TPAO (Turkish Oil Company), Statoil (Norway), Lukoil (Russia), Itochu (Japan), Agip (Italy), and TotalfinaELF (France). The US State Department projects that as work on the BTC pipeline proceeds and development of Azerbaijan's oil and gas resources intensifies, foreign investment should increase from present levels of 15% to 25% of GDP to 50% of GDP in 2004. The US State Department also noted that data from Azerbaijan is not reliable, and only rough estimates can be made. On this basis, it reported that foreign investments in 2000 amounted to about $927 million, of which $546.1 million (58.9%) was in the energy sector. For the period 1994–1999, as reported by EC-TACIS, the main sources of FDI have been the United States (28%), the UK (15%), Turkey (15%), Russia (6%), Norway (6%), Japan (3%), Germany (3%), Iran (2%), and France (2%).