State-owned EnterprisesSOE Transfers and Payments §3.6(a) & §4.2(c)SOE Expenditures §3.6(b)SOE Level of Beneficial Ownership §3.6(c)
State-owned enterprises (SOEs) can play dominant roles in extractive sectors, often influencing commercial, regulatory and policymaking spheres. In countries with a large national oil or mining company, extractive revenues nearly always depend whether these are well-governed, high-performing and accountable to the national interest. Governance challenges associated with SOEs include the retention of revenues meant for the treasury; the purchase or sale of state assets in a manner that fails to maximize returns to the nation; and the use of SOEs as vehicles for corruption and patronage.
Reform around SOEs can involve steps to commercialize the company and incentivize performance, such as through listing shares; improvements in oversight by the government, parliament and/or public; review of the suitability of quasi-fiscal activities; and, a definition of the SOE’s institutional roles that minimizes conflicts of interest.
3.6 Wherestateparticipationintheextractiveindustriesgivesriseto materialrevenuepayments, the EITI Reportmustinclude:
a) An explanation of the prevailing rules and practices regarding the financial relationship between the government and state owned enterprises (SOEs), g. the rules and practices governing transfers of funds between the SOE(s) and the state, retained earnings, reinvestment and third-party financing.
4.2. Defining which companies and government entities are required to report
c) State-owned enterprises (SOEs): The multi-stakeholder group must ensure that the reporting process comprehensively addresses the role of SOEs, including material payments to SOEs from oil, gas and mining companies, and transfers between SOEs and other government agencies.
EITI Report Data
The State Oil Company of Azerbaijan Republic (“SOCAR”) is an entity acting on behalf of the government to carry out its activities in the extractive industry. SOCAR was established on the base of “Azerineft” State Concern and “Azerneftkimya” Production Association under Decree dated 13 September 1992 of the President of the Republic of Azerbaijan for the purpose of using oil reserves of Azerbaijan Republic in accordance with single public policy, improving structure of management in oil industry and ensuring development of oil and energy complex. Under decree No.430, dated 22 December 2014 of President of the Republic of Azerbaijan amendments were made to the decree No.844, dated 24 January 2003 of Azerbaijan Republic and full official name of the Company was specified as State Oil Company of Azerbaijan Republic and short name as SOCAR.
At present, enterprises of SOCAR are functioning in every region (excluding the occupied territories) of the Republic of Azerbaijan as well as having offices in 22 countries across the world. In 2014, SOCAR had 54,714 employees and 22 legal entities. It is the largest company in the country and held a major place in the economy of the Republic of Azerbaijan. It is a partner for PSAs Azerbaijan.
SOCAR is an oil company engaging in exploration and development of oil and gas fields in the territory of Azerbaijan, production, refining of oil and gas and the sale of oil and gas and petrochemical products in domestic and foreign markets.
SOCAR’s relationship with relevant Government agencies:
SOCAR implements its activity in accordance with The Constitution of the Republic of Azerbaijan, legislation, the decrees and orders of the President of the Republic of Azerbaijan, the decisions and orders of the Cabinet of Ministers of the Republic of Azerbaijan, other normative-legal acts, international treaties of the Republic of Azerbaijan and international agreements on oil and gas exploration and production areas approved by the laws of the Republic of Azerbaijan and the Regulations.
SOCAR continually reports to the appropriate state authorities on its activity. This list includes the Ministry of Ecology and Natural Resources, the Ministry of Emergency Situations, the Ministry of Finance, the Ministry of Taxes, the Ministry of Economy, the Ministry of Labour and Social Protection of Population and the State Statistics Committee of the Republic of Azerbaijan.
In accordance with the decree No.906-IIIIQ dated 26 November 2009 all income and expenditure figures and estimations of the investment programs of state-owned companies are affirmed with the Ministry of the relevant area, as well as the Ministry of Finance and Ministry of Economy of the Republic of Azerbaijan until 25 February of each year. SOCAR must submit the reports on forms prepared by the Ministry of Finance and the Ministry of Economy related to the amount of funds received in bank accounts and usage of these funds during the previous month by the 15th of the following month. SOCAR has tightened financial discipline and taken effective measures to avoid delays in payments from creditors related to consumption of oil and gas products and submits reports to the Cabinet of Ministers on a quarterly basis.
According to Clause 6 of the main Charter ("accounting, reporting and control in a company"), approved by Decree No 844 of the President of the Republic of Azerbaijan and dated 24 January 2003, SOCAR prepares its annual financial statements and submit it to the Ministry of Taxes of the Republic of Azerbaijan in accordance with the Tax Code of Azerbaijan Republic and conducts accounting procedures in accordance with the law of the Republic of Azerbaijan on “Accounting”. The Company also prepares “Official statistics” in accordance with the relevant legislation and submit it to the State Statistical Committee of the Republic of Azerbaijan. The Company's consolidated financial statements together with the auditor's report is published in the official website no later than 30 June of the subsequent year. SOCAR and its subsidiary companies must report to the Ministry of Finance of the Republic of Azerbaijan when engaged in receiving a state loan or while participating in the projects in order to settle the government debt as well as the projects involving allocation of subsidies, subventions and grants.
Based on previous experience, the process of fund allocation to SOCAR by the government is carried out by the means of share capital and loans allocation. Under the state guarantee the Central Bank acts as a lender, the Azerbaijani banks act as a borrower and SOCAR acts as re-borrower of the loan. The Central Bank of the Republic of Azerbaijan, the Ministry of Finance of the Republic of Azerbaijan, SOCAR and Azerbaijan Banks sign an agreement which is guaranteed by the Ministry of Finance who acted on behalf of the Government.
According to Clause 6 of the main Charter ("accounting, reporting and control in a company"), approved by Decree No 844 of the President of the Republic of Azerbaijan and dated 24 January 2003 any request from the government agencies on relevant reports and information must be prepared and submitted by SOCAR to them.
SOCAR’s payments to the State Budget
Additional Paid in Capital
During 2014, the Government contributed to the charter capital of SOCAR in the amount of AZN 178 million. The increase in charter capital was not registered as of 31 December 2014.
Distribution to the Government
In accordance with the decision of the Government the state budget, various government agencies and government implementation projects invested in cash or financing form by SOCAR. These kinds of investments were accounted for as a reduction of capital. Distributions in the form of cash are recorded in the carrying amount of the assets transferred. The amount of such direct cash transfers to the Government amounted to AZN 476 million.
SOCAR is one of the biggest taxpayers in the Republic of Azerbaijan. The Company has made a record contribution to the budget in the amount of AZN 1,855 million in 2014.
Revenues from the crude oil sales are stated net of price margin tax which is levied in the Republic of Azerbaijan on the margins between the international market and the internally regulated price on crude oil. The difference between the market price and the internally regulated price is taxed at the rate of 30% and the amount of tax is transferred to the State Budget. Revenue from sales of oil products amounting to 458 million manats (2013: 570 million) manats are shown net of excise tax.
Economic indicators of SOCAR in 2012-2014 (mln. AZN)
Review of the NGO Coalition
Article 3.6 of the third requirement of the Standard states it is important to include information on participation of the state in the extractive industry into EITI reports. Information in accordance with this requirement of the Standard is stated in Section 3.5 on “State Participation in the Extractive Industry” of the Report. The opinion of the Coalition related to the report of the previous year had most remarks on this section. The current report has the following information in accordance with requirement 3.6 of the Standard: general information on SOCAR, the national extraction company; very generic and short information on the relations between SOCAR and state agencies, 3-year dynamics of certain financial indicators, affiliate and subsidiary companies of SOCAR, its beneficiary ownership in joint ventures and changes in beneficiary ownership in 2014, loans and guarantees of the Company, its standards and short information on quasi-fiscal expenses, allocations to the state and enlargement of SOCAR activities in foreign markets. Though minor, still some changes (for instance, expansion of certain information, additions in the changes of beneficiary ownership, activities in foreign markets and short information on quasi-fiscal activities) have been made to this section of the report.
The evaluation carried out suggests that similar to the report of the previous year, this year’s Report too lacks most of the information required in this subsection of the Standard: for instance, information on the relationship between SOCAR and Ministry of Finance, Oil Fund, Social Protection Fund, Central Bank and International Bank of Azerbaijan and its liabilities is very generic. Due to fact that the mechanisms of these relationships are not revealed, the information is not easy to comprehend.
Information in the Report on the relationship between SOCAR and state agencies has been expanded (page 37-38) – remark in article 2.5.1 and recommendation 1.7 of the Coalition Opinion have been partially considered. However, it should be noted that SOCAR-related information of the Report does not fully meet the requirements of EITI Standard.
Information on the mutual relations of SOCAR and Ministry of Finance, Oil Fund, Social Defense Fund, Central Bank, International Bank of Azerbaijan and the obligations of the former shall be presented in a more detailed form and the mechanisms of these relations shall be included into the report
We consider it is important to include the obligations deriving from the agreement between Ministry of Ecology and Natural Resources of Azerbaijan Republic, the legal heir of Azergizil State Company, and R.V. Group Services LLC USA into “State Participation in Extractive Industry” section of the report.
b) Disclosures from SOE(s) on their quasi-fiscal expenditures such as payments for social services, public infrastructure, fuel subsidies and national debt servicing. The multi-stakeholder group is required to develop a reporting process with a view to achieving a level of transparency commensurate with other payments and revenue streams, and should include SOE subsidiaries and joint ventures.
EITI Report Data
Disclosure of quasi-fiscal expenditures
Starting from 2007, the wholesale and retail domestic prices for oil and gas products are subject to the state regulation and this regulation is a responsibility of Tariff (Price) Council of Azerbaijan Republic. The new wholesale and retail price for oil products within the domestic market is regulated with the New Tarif (Price) Council Decision No.1, dated 10 February 2014. The new decision is a result of ammendments applied to the he Tariff (Price) Council Decision No.14, dated 2 December 2013.  The prices determined for oil, gas and oil products by the Council were lower than the market prices. This means that in 2014 compared with the world market prices SOCAR has offered lower prices to dometic consumers for oil, gas and oil products. Since 2007 in accordance with the law of the sate budget during the export of products produced in the country with the state regulated price the difference between the contractual (sale) price (excluding export expences) and the wholesale price across the country is subject to collections by the State (in the form of the export tax). As a result of price change in 2014 SOCAR transfered AZN 311.7 million to the state budget.
SOCAR is engaged in investment into different areas of provision of social services, creation of public infrastructure, quasi-fiscal expenditures etc. The main directions of charity and social assistance has included:
Social assistance and protection;
Support to education, culture and sports initiatives;
Support to healthcare
Support to other state social programs; and
Other events envisaged in the internal documents of the Company.
SOCAR payments for charity, social and sponsorship purposes in 2014:
As stated in Coalition Opinion on 2013 Report the coalition studies revealed that SOCAR activities probably include 3 quasi-fiscal operations out of 4 determined by IMF for the energy sector. Following the discussion of the study at MSG meeting, it was submitted to SOCAR and the company was requested to provide necessary information to be included into EITI Report. However, no additional information was received from the Company in this regard during the reporting period. Nevertheless, unlike the report for the previous year, the 2014 Report not only confirms the presence of quasi-fiscal operations by the Company, but even mentions that the wholesale and retail sale price of oil and oil products are regulated by the government (Tariff (Price) Council) and that the prices appointed were below 2014 international market prices, in other words oil and oil products were sold at below-market prices to local consumers. This section also includes generalized information on social expenses of SOCAR as well.
Despite all this, we consider that studies related to the quasi-fiscal opertions of SOCAR shall be continued and EITI report of the following years shall include more detailed information on this. The sharp decrease of oil prices in international markets followed by the severe cut of SOCAR revenues and the possible concerns due to its financial condition, as well as the necessity for more efficient utilization of company funds make this issue even more relevant.
Studies on quasi-fiscal operations of SOCAR shall be continued and future EITI Reports shall include more comprehensive information in this regard;
c) Disclosures from the government and SOE(s) of their level of beneficial ownership in mining, oil and gas companies operating within the country’s ’s oil, gas and mining sector, including those held by SOE subsidiaries and joint ventures, and any changes in the level of ownership during the reporting period. This information should include details regarding the terms attached to their equity stake, including their level of responsibility to cover expenses at various phases of the project cycle, e.g. full-paid equity, free equity, carried interest. Where there have been changes in the level of government and SOE(s) ownership during the EITI reporting period, the government and SOE(s) are expected to disclose the terms of the transaction, including details regarding valuation and revenues. Where the government and SOE(s) have provided loans or loan guarantees to mining, oil and gas companies operating within the country, details on these transactions should be disclosed in the EITI Report.
EITI Report Data
The level of beneficial ownership in mining, oil and gas companies operating within the country’s extractive industry
Joint ventures and associates, the participating interest and changes in participating interest in the reporting period, revenue, assets and borrowings of SOCAR during 2014 are shown in the table. (əlavə edilir)
Changes in the level of beneficial ownerships (joint ventures and associates)
In March 2014, the State Oil Company of the Azerbaijan Republic and its subsidiaries (the “Group”), together with Ministry of Economy of the Republic of Azerbaijan, established a new company, Southern Gas Corridor Company (“SGC”). The Group Invested AZN 38 million into charter capital of SGC to obtain 49% share in SGC;
In May 2014, The Group acquired additional 18.5% of its associate, SOCAR Turkey Yatirim A.S (“STYAS”), for the amount of AZN 50 million and made additional contribution in share capital of the entity in the amount of AZN 24 million (2013: AZN 144 million). At the same time shareholders of STYAS signed a new shareholding agreement. According to new shareholding agreement the Group has joint control in STYAS. As result of this transaction the Group transferred the Associate to joint venture;
During 2014, The Group has made additional contributions in share capital of its associates, AzSCP and AzTAP in the amount of AZN 55 million (2013: nil) and AZN 11 million (2013: AZN 33 million), respectively, and insignificant contributions to other joint ventures;
On 23 July 2014 the Group has sold its Subsidiary AzTAP to Sounthern Gas Corridor Company. At the date of sale the carrying value of TAP amounted to AZN 43 million. Before the sale the Group, through its subsidiary AzTAP, owned 20% of TAP, which was accounted as an associate as of 31 December 2013;
During 2014, the Group has made additional contributions in share capital to its joint ventures, SOCAR Umid LLC in the amount of AZN 40 (2013: AZN 84 million), Azerbaijan Rigs LLC in the amount of AZN 14 million (2013: AZN 19 million) and STYAS in the amount of AZN 192 million, respectively, and insignificant contributions to other joint ventures;
There were no changes in the level of the Government’s ownership of SOCAR during the reporting period; and
The Equity Method was used in the process of treating equity investment in associate companies.
Review of the NGO Coalition
Information on beneficiary ownership and any changes in this ownership has been copy pasted (even the financial reporting language was kept) into EITI report from SOCAR financial report which makes this information incoherent and difficult to use (for instance existence of the Group is mentioned, but nothing about its members). Therefore, it can be said that this information does not meet the requirements of the Standard. Future EITI Reports shall focus on the improvement and more comprehensive introduction of this information.
Information on the beneficiary ownership level of SOCAR and changes in this ownership shall be adjusted to the requirements of the Standard and also this information shall be improved and presented in a clear format;