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
State participation in extractive industry
The State Oil Company of Azerbaijan Republic (“SOCAR”) is an entity acting on behalf of the government to carry out its activities in the oil and gas industry.
SOCAR was established on the base of “Azerneft” 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 the decree No.430, dated 22 December 2014 of President of the Republic of Azerbaijan amendments were made to the decree dated 24 January 2003 and full official name of the Company was specified as State Oil Company of Azerbaijan Republic and short name as SOCAR.
SOCAR functions in various sectors of oil, gas and petrochemical industry on the territory of Azerbaijan Republic and actively participates in the international market as well. 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. In 2015, SOCAR had 52,104 employees (compared to 54,714 in 2014). SOCAR being the largest company in the country occupies an important place in the economy of the Republic of Azerbaijan.
Procurement procedures of SOCAR, outlined in “a collection of documents on the procurement and management of the organisation”, are carried out in accordance with the Regulations. The regulation came into force according to the Decree of the President of Azerbaijan Republic No.844, dated on 24 January 2003.
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.
In 2015, “AzerGold” CJSC was established with the purposes of study, research, exploration, development, management of non-ferrous metal ore deposits of Garadagh, Chovdar, Goydagh, Dasghkesemen ore fields, Kohnamadan area and Kurekchay basin fields, including modernisation of material-technical base, its efficient use and carrying out other activities related to the development of this industry. However, “AzerGold” did not function in that year.
Relationship between state-owned enterpirses and Government agencies
The relationships between SOCAR and government agencies are outlined below:
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.
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.
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 submits 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 submits 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.
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.
Figure. Relationships between SOCAR and State agencies
The relationships between “AzerGold” CJSC and government agencies are outlined below:
The approval of the charter and structure, determination of the amount of the share capital of the “AzerGold” CJSC is carried out by the Cabinet of the Ministers of the Republic of Azerbaijan. Ministry of Economy of the Republic of Azerbaijan is responsible for the appointment and dismissal of the Board of Directors, Supervisory Board, Audit Committee and other members of “AzerGold” CJSC.
The Supervisory Board conducts the management and monitoring procedures of its activities and does not have powers of the executive body. The Supervisory Board is consist of representatives from the Ministry of Economy of the Republic of Azerbaijan (2 people), the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan (1 person), the Ministry of Finance of the Republic of Azerbaijan (1 person) and the State Committee on Property Issues of the Republic of Azerbaijan (1 person).
At the same time, the authority for the preparation of the annual reports, accounting balances, the approval and allocation of profit and loss, the number of employees, determination of payroll and approval of the state budget expenditures is given to the Ministry of Economy of the Republic of Azerbaijan. The Board of Directors of the “AzerGold” CJSC is its collegial executive body and carries out all the issues related with the Company, except for the powers granted to the General Comission, the Supervision Board and the Audit Committee in accordance with the Code, Order and Charter.
The Chairman and vice-chairman of the Board of Directors of the company are appointed and dismissed by the President of the Republic of Azerbaijan.
The activity of “AzerGold” CJSC is governed in accordance with the Constitution of the Republic of Azerbaijan, the legislation of the Republic of Azerbaijan, decrees and orders of the President of the Republic of Azerbaijan, the resolutions and orders of the Cabinet of Ministers of the Republic of Azerbaijan, other normative-legal acts and the Charter of the Company.
Payments to the State Budget by state-owned enterpirses
Financial data of SOCAR and the payments made to the state budget are shown below:
Share capital of SOCAR was equal to AZN 1,617 million in 2015 and this constituted an increase of AZN 121 million.
Additional Paid-in Capital
During 2015 the Government made a contribution to the charter capital of SOCAR in the amount of AZN 581 million and this transaction was recorded as an additional paid-in capital. The amount of cumulative additional paid-in capital was equal to AZN 1,423 million as of 31 December 2015.
Distributions 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 in 2015 amounted to AZN 339 million.
The total amount of SOCAR's retained earnings was AZN 6,191 million for the year ended 31 December 2015. Detailed information can be obtained from the "Consolidated statement of changes in equity" financial report of SOCAR.
Information on financial data of “AzerGold” CJSC was not included in this report due to fact that the company did not have any activity in 2015. However the company's share capital was approved by the Cabinet of Ministers of Azerbaijan Republic.
The share capital of “AzerGold” CJSC” is comprised of the carrying value of assets that are valued and authorised by the decision of the founder in accordance with the Company Charter. According to the resolution approved by the Cabinet of Ministers and dated 11 May 2016, the authorised capital of “AzerGold” CJSC is AZN 2 000 000 (two million manat). This capital is based on the nominal (par) value of shares and consists of 2 000 000 ordinary shares with the par value of one share equal to AZN 1 (one manat).
Financial performance and production data of state-owned enterprises
Economic indicators of SOCAR in 2013-2015
Revenues (million manats):
Total profit (million manats):
Budget payments (million manats):
Share capital (million manats):
Oil and gas production of SOCAR in 2013-2015
Oil production of the Republic of Azerbaijan (percentage):
Gas production of the Republic of Azerbaijanı (percentage):
Before the establishment of SOCAR Trading, SOCAR initially exported its crude through Georgia and Russia, until the much larger BTC pipeline was completed in 2005. The BTC allowed SOCAR access to the Mediterranean through Ceyhan, Turkey and allowed it to load Very Large Crude Carriers which gave SOCAR the opportunity to deliver Azeri crude to a wider range of customers, in the Mediterranean area, as well as further out to Asia and America.
SOCAR Trading was incorporated in December 2007 as the marketing division of SOCAR with a mandate to market Azeri barrels produced from the Azeri-Chirag-Guneshli field and other surrounding fields in Azerbaijan. Azeri crude is delivered through mainly two pipelines: the Western Route Export Pipeline in Georgia and the Baku-Tbilisi-Ceyhan pipeline in Turkey.
SOCAR Trading has successfully loaded near 1 billion barrels of Azeri Light crude on a global scale since its establishment in 2008. As a trading company, SOCAR Trading was able to successfully manage the sale of Azeri crude through increased pricing flexibility and the ability to adapt to volatile global needs.
SOCAR Trading facilitates the sale of crude oil volumes produced by SOCAR through Jeyhan port and transacts a wide range of third party crudes. The Company made efforts to develop business in Africa and Asia through long term relationships, the company is able to leverage its position as a major supplier of Azeri crude as well as its status as a state owned company to gain access to several opportunities worldwide.
Information on financial performance and production data of “AzerGold” CJSC was not included in this report due to fact that the company did not have any activity in 2015.
Loans and guarantees received by state-owned enterprises
The loans received and bonds issued by SOCAR during 2015 are provided below:
On 12 February 2015 and 29 March 2015 the Group received new loans from IBAR in the amount of AZN 13 million and AZN 50 million respectively. On 29 January 2015 the Group received a new loan in the amount of 52 million US dollars (AZN 41 million) from the Caucasus Development Bank.
Issuance of bonds
On 18 March 2015 the Group issued unsecured bonds (debentures) with preference rights attached to them on the London Stock Exchange in the amount of 750 million US dollars (AZN 787 million). The maturity date of the bonds was specified as March 18, 2030 and the annual interest rate was set as 6.95%. Associated interest expenses will be paid semi-annually.
Information on loans and guarantees of “AzerGold” CJSC was not included in this report due to fact that the company did not have any activity in 2015.
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
Acknowledging its social responsibility, SOCAR is actively involved in the social life of the country and contributes to a number of important socio-economic projects carried out in Azerbaijan Republic. SOCAR invests in provision of social services, establishment of public infrastructure and other similar areas.
Social assistance and protection;
Support to education, culture and sports initiatives;
Support to healthcare;
Support to other state social programs;
Other events envisaged in the internal documents of the Company.
Table 28: SOCAR payments for charity, social and sponsorship purposes in 2015
EITI Multi-stakeholder group defines the concept of “Quasi-fiscal expenditure” as follows:
Quasi-fiscal expenditures are fiscal activities that are carried out by state agencies on behalf of the Government and are not compensated for. Such expenditures are generally not required by the Law and are not accounted for in the state budget.
While determining the types of quasi-fiscal activities in the extractive industry and in accordance with the “Guide on Resource Revenue Transparency” of IMF, MSG has decided, after carrying out the analysis of presence of Quasi-fiscal expenditures in Azerbaijan to include in the EITI report the information on the following types of quasi-fiscal expenditures which are stipulated in the Guide:
Energy Quasi-fiscal activities: requirements for NRCs to provide products (particularly energy) at less than cost recovery or market price for domestic consumption;
Public expenditure Quasi-fiscal activities: requirements for NRCs or international companies to provide social services or other public goods normally provided by general government.
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 prices determined for oil, gas and oil products by the Council were lower than the market prices. As per “On regulation of tariffs of petroleum products across the country”, the Tariff (Price ) Council Decision No.14, dated 23 November 2015 and the amendments to the Tariff (Price) Council Decision No.2, dated 14 January 2015, new tariffs related to sales of oil products across the country were introduced. This means that in 2015, as compared to the world market prices, SOCAR offered lower prices to domestic consumers for oil, gas and oil products. Starting from 2007, in accordance with the law on the state budget, during the export of products produced domestically with prices regulated by the State, the difference between the contractual (sale) price (excluding export expenses) and the wholesale price across the country is subject to collections by the State (in the form of the export tax):
Revenues from the sale of crude oil are reported after deduction of relevant tax which is formed on the basis of the difference between international market price of crude oil and domestic price regulated by the government. The difference between the market price and the price regulated by the state is subject to the 30 percent tax rate and the amount of tax is transferred to the state budget. Revenues from crude oil production in accordance with ACG PSA and produced condensate in accordance with Shah Deniz PSA are not subject to excise and price difference taxes described above.
SOCAR transferred AZN 158.4 million to the state budget on the basis of revenues generated from the price change in 2015.
Based on decisions of the Government, SOCAR makes direct cash contributions to and funds the state budget, various government agencies and projects administered by the Government. During the year 2015, such direct cash transfers to the Government and financing (made in the form of payments to sub-contractors of governmental entities) amounted to AZN 140 million and AZN 186 million, respectively. Financing in the form of transfer of assets constructed by SOCAR amounted to AZN 13 million as of 31 December 2015.
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, associates and subsidiaries of state-owned enterpirses
Information on subsidiaries’ principal activities, country of incorporation and equity interes during 2015 are given in the tables below:
On 12 August 2015 the Group made a sale of newly issued shares representing its 13% equity stake in SOCAR Turkey Energy to Goldman Sachs International.
Information on participating interest in joint ventures and associates, the changes in participating interest during the reporting period, the revenue, assets and debts of SOCAR for 2015 is presented in the table below:
Table Joint ventures
* “Azgerneft” LLC is engaged in exploration, development and production of hydrocarbons, it was included in EITI Report for 2015.
Changes in the level of beneficial ownerships in joint ventures for 2015:
During 2015, the Group made additional contributions to share capital to its joint ventures, SOCAR Umid LLC in the amount of AZN 30 million (2014: AZN 40 million), Azerbaijan Rigs LLC in the amount of AZN 36 million (2014: AZN 14 million) and STYAS in the amount of AZN 607 million (2014: AZN 192 million), respectively; and, in addition to this, contributions in the amount of AZN 2 million were made to other joint ventures.
The Group signed credit agreements related to the construction of Star refinery (a subsidiary of STYAS) in 2015. The total amount of AZN 38 million including comission fees and interest was paid by the Group and accounted for as an additional investment in STYAS.
On 27 march 2015 SOCAR and KBR (KELLOGG BROWN & ROOT SERVICES B.V) signed a joint venture to establish a new engineering and support services company in Azerbaijan. The purpose of the Company is to provide design, engineering, technical, procurement, construction supervision and project management service for projects across the upstream, midstream and downstream oil and gas sectors, primarily in the Republic of Azerbaijan. The share ownership of SOCAR and KBR in this company is 51% and 49 % respectively.
During 2015, the Group made additional contributions to shareholders’ equity to its associates, SCPC in the amount of AZN 107 million (2014: AZN 55 million) and Southern Gas Corridor Company in the amount of AZN 665 million (2014: AZN 38 million) respectively; and, in addition to this, contributions in the amount of AZN 3 million were made to other associates.
In April 2015 the Southern Gas Corridor Company sold 30% of its shares in TANAP to Petroleum Pipeline Corporation for AZN 207 million and sold 12% of its own shares to BP for AZN 102 million. The Group recognized its share of loss from this transaction in profit or loss of the Southern Gas Corridor Company.
There was no change in the level of beneficial ownership between the Government and SOCAR during the reporting period;
Equity method is used to assess the accountability level of joint ventures and associates. Kapital Metodu.
Information on joint ventures, associates and subsidiaries of “AzerGold” CJSC was not included in this report due to fact that the company did not have any activity in 2015.