Publication of the Report ''Azerbaijan Anonymous'' by ''Global Witness'' We hereby find the statements contained in a report named ''Azerbaijan Anonymous'' dated December 10, 2013 and published by ''Global Witness'' (hereinafter the ''Report'') with respect to the activities carried out by the State Oil Company of Azerbaijan Republic (hereinafter ''SOCAR'') in connection with the selection of business partners substantively prejudiced and distorted, with the effect of undermining SOCAR's growing reputation.
The relationship between SOCAR and a group of subsidiary and affiliate companies has been chosen as the ''object'' of the Report. It should be pointed out that to ensure the quality and completeness of any research, it is necessary to use proper research tools and effective methods relying on an accurate source of information. As will be shown below, the report from ''Global Witness'' relies on inaccurate sources of information while some of the information used in the Report is false or outdated.
SOCAR is a vertically integrated energy company involved in all types of upstream, midstream and downstream projects, exploration of oil and gas fields, production, processing, and transportation of oil, gas, and gas condensate, marketing petroleum and petrochemical products in domestic and international markets, and supplying natural gas to industries and the public in and outside of Azerbaijan. Being one of the largest oil and gas companies in the region and in the world in the course of carrying out its projects in Azerbaijan and abroad SOCAR attracts partners with extensive business experience. Depending on the size of the projects being carried out, typically SOCAR's partners include large companies or holding groups. This is typical for many enterprises in a similar position as SOCAR. In addition, in contemporary practice it is necessary to establish different specialized firms in order to hedge trade, production and other risks in the course of conducting business. This is why SOCAR cooperates with a large number of firms. We note that the practice of using such a diversified structure is employed by many big oil firms consolidating different firms established in various countries. All of the above mentioned is provided to set in context the number of the companies that SOCAR cooperates with. Now, we would like to inform you about the quality issues regarding the selection of partners in implementation of SOCAR's various projects.
Commencing from 2007, SOCAR made a commitment and decision to diversify its trading activities. Up until then, volumes of crude oil were marketed FOB Ceyhan, an oil terminal in Turkey, through international trading and supply companies. While this practice continued Azeri oil sold at a discounted price to Brent with a poor return. In 2008, SOCAR decided to take control of marketing Azeri crude to end users and to deliver these volumes directly to end users worldwide, in particular, across Europe, Asia and the Americas. Thus, the company has increased the value of Azerbaijan's crude exports and captured additional margin for the SOCAR group. In order to further optimize and diversify its trading operations, SOCAR has employed more than 100 employees and has housed offices in world trading centers, including Geneva, Singapore, Vietnam, Dubai, Lagos, New York, Cairo and Istanbul. Given the start-up nature of the projects and lack of readiness to calculate risks properly ex ante, it was necessary to engage joint international partners due to their extensive experience and readiness to procure financing on better commercial terms for our projects. After duly and thoroughly examining appropriate proposals received for this objective, the proposals put forth by an Azerbaijani businessman Anar Aliyev were found beneficial turning out to be successful subsequently.
SOCAR Trading was established as a trading vehicle (joint venture) of SOCAR and upon initiative by Anar Aliyev. Valeriy Qolovushkin as a person of great experience and having been occupied executive positions within Lukoil was hired as CEO of the company. As a result of works carried out within short period of time the trading company delivered Azeri oil for the first time to the world stock markets under its own brand name. Azeri oil which for a long period of time has been sold for prices falling below that of any other brands now is sold for prices higher than Brent oil and for very high premiums. Another important feature of this cooperation is that SOCAR Trading is specialized in trading not only Azerbaijan oil, but oil from other countries as well. This in turn serves the purpose of maximizing profits from additional sources. As a result of the financial inputs and assets of the above mentioned partners, SOCAR Trading now owns specialized network in many countries where the oil markets are located. Within a short period of this joint venture which was initially deemed a quite risky undertaking by many internationally renowned firm specialized in this field proved a great success. Nevertheless, upon the prior agreement with the partners, for long period of time (5 years) no dividends were paid from the project and after this the shares of the joint venture have been transferred to SOCAR. Currently SOCAR exercises control over a trading company with extensive network and great experience. SOCAR highly appreciates the results achieved together with these partners and continues cooperation on mutually beneficial terms in the other projects as well.
Regarding the scheme reflected in the Report, it should be noted that each international commercial company establishes its own effective financial schemes for implementation of its project and carries out its activities based on these schemes. SOCAR as a company targeting to carry out its activity through creation of effective financial schemes is no different. In accordance with the Report SOCAR sells its oil to itself. However the reality is that Marketing and Economic Operations Department of SOCAR in order to deliver oil to the world markets sells the oil to the SOCAR's 100% subsidiary SOCAR Overseas LLC (D?FC) (UAE) and this company in turn upon the marketing agreements for the delivery of the oil to the world markets passes the oil to the another 100% subsidiary of SOCAR, SOCAR Trading so that thus SOCAR can exert price control over the sales of the oil. [The financial-tax scheme has been agreed with the relevant tax authorities outside of Azerbaijan and has received positive opinion.] The use of UAE companies actually enables SOCAR to minimize costs, whether for letter of credits at foreign banks or otherwise . During the exportation of Azeri Light marked crude oil from foreign countries (UAE), reduction of applicable taxes to zero saves millions of dollars in such activities, which, in turn, results in additional revenue for the state budget. [Nevertheless, "Global Witness" chose not to unveil the substance of this well-reasoned scheme, instead chose to depict SOCAR as the "seller of its own oil," thereby creating a misleading impression and undermining SOCAR's business reputation.
In respect of the joint cooperation between SOCAR and Azerbaijani businessmen, it should be noted that in the past few years, business relationships have been forged with hundreds of companies whose shareholders are the Azerbaijani citizens, including the company whose shareholder is the Azerbaijani citizen Anar Aliyev; in addition, efforts to boost local businesses have been undertaken and planned to be continued in the same direction in the future. Indeed SOCAR like other National Oil Companies is mandated by the State to maximize the use of Azer services and goods. Thus, SOCAR finds support for business activities of the Azerbaijani businessmen in Azerbaijan and abroad to be in line with the country's strategic interests. For this reason, a significant part of the projects worth of billions that are being implemented lately within the scope of Azeri-Chiraq-Guneshli, Shah Deniz and other similar large projects in the country is directed at attracting local businesses, similar to the newly developed projects dealing with technoparks.
With respect to the financial information set forth in the Letter regarding the activities of SOCAR, we find them materially unreliable, baseless and inaccurate. Ernst & Young, one of the most internationally renowned and reputable accounting firms, annually audits financial statements and reports of SOCAR in accordance with the best practices of the international financial reporting standards (IFRS). For the 5 consecutive years, SOCAR has been receiving clean opinions from Ernst & Young. It should be noted that SOCAR bases its activities on the principles of transparency and detailed and extensive information about the company's activities are reflected in the form of "Annual report" on the web-site of the company. In addition, the Republic of Azerbaijan is a founding member of the Extractive Industry Transparency Initiative ("EITI") task force subjecting the reviews of SOCAR to thorough examination and auditing. From the day of signing of the Memorandum of Understanding, SOCAR is actively cooperating with the civil society within the framework of EITI for greater transparency and social responsibility. In the past two years, SOCAR has issued Eurobonds in the amount of over 1.5 billion USD at foreign markets. In connection with the issuance, SOCAR has received positive assessment from influential credit rating agencies such as Fitch, Standart&Poor and Moody's Investors Service which, have assigned a stable Ba1 rating to SOCAR's notes reflecting SOCAR's robust financial metrics. Moreover, in the prospectus provided to the international investors in the process of the Eurobonds issuance and used by "Global Witness" itself as source all the information reflected in the Report and these information have went through examination of renowned, international law firms, audit firms and rating agencies. We are cooperating with international financial institutions, which are also monitoring our activities and carry out our activities in a transparent manner. All other information is readily and publicly available at our website.
SOCAR carries out all of its functions and takes all decisions in compliance with the laws of the Republic of Azerbaijan, as well as the internal policies and procedures of SOCAR, which were prepared in accordance with the highest international standards. While becoming a multinational company, in addition to acting in compliance with applicable laws and regulations, implementation of international norms and standards has become customary at SOCAR. One of the examples of this is adoption and strict application of Anti-corruption and transparency policies and procedures adopted on 10 August 2012, which are in force from 1 January, 2013. It is important to note that, SOCAR's main aim is to carry out its activities while creating viable partnerships with third parties. One of the internal standards which was created as part of the set of standards on anti-corruption and transparency is the standard number SOCAR 008.2012 (on Examination of Counterparties during procurement), application of which ensures, along with economic stability minimization of corruption risks and provision of economic security as well as research and checks on the reliability of suppliers of goods, services and works with which SOCAR plans creating legal and contractual relations. Additionally, the mentioned standard requires checks on the 'zero tolerance' of those parties to whom SOCAR provides sponsorships, humanitarian and social aids, and prevents unethical and illegal use of the funds provided by SOCAR to such parties.
In light of the matters mentioned above, we would like to note that, all the agreements and business projects outlined in the report of "Global Witness" were executed in compliance with our internal checks and standards mentioned above. Moreover, as pointed out in the previous letter of the company addressed to "Global Witness" , development of the local companies and establishment of favorable conditions for the local entrepreneurs is reflected in the local laws of Azerbaijan and is considered to be one of the national priorities. In view of this special attention towards the local companies, SOCAR (in accordance with the local laws and regulations) engages in the cooperation with all companies which are able to ensure the effectiveness and efficiency of the operations, including Azerbaijani companies and those established outside of Azerbaijan by entrepreneurs of Azerbaijani origins. As practice shows, such kind of collaborations increase efficacy and profitability of the projects implemented by SOCAR, ensure that profits stay in Azerbaijan as well as turning losses from some projects into profits. There seems to be underlying tone in the Report to portray in a negative way and with envy the increasing influence of SOCAR. "Global Witness" has caused confusion in the society by giving the impression that this publication exposes new facts. The information contained in the is submitted by SOCAR itself annually to internationally renowned audit firms and this information is examined in accordance with the legislation, international audit norms, and anti-corruption principles as well as within the framework of SOCAR's anti-corruption and transparency standards, thus, if any illegalities would have been identified, SOCAR would not be provided with final transparent reports, as mentioned above. This information is regularly announced via different resources and SOCAR's official internet web-site.
As an evident proof of this, before publication of this Report "Global Witness" has addressed a letter in respect of the mentioned information to SOCAR dated May 3rd, 2013. In its turn, SOCAR replied by the letter dated May, 24, 2013, 01/MX-89YN with responses to these questions. By ignoring SOCAR's responses, "Global Witness" has proved that it is subjective and bias. Additionally, "Global Witness" admitted itself that SOCAR carried out its activities in accordance with the local legislation and as such has not committed any breach of laws. In addition, we would like to underline that some of the contracts signed by SOCAR are even approved by the Parliament of the republic of Azerbaijan and only after this enter into legal force.
"Global Witness" has failed to objectively analyze the information collected in respect of the perspectives of the projects implemented by SOCAR and the potentials of its partners. Furthermore, the methodology of collection of the information employed by "Global Witness" also cannot be taken seriously.
There have never been any companies belonging to Anar Aliyev among the beneficiary owners of the Kulevi terminal owned by SOCAR today. In another cases the organization publicizes outdated information causing confusion in public. Thus, SOCAR is a sole shareholder for a long period of time in many of the companies which the Report states are owned jointly by Anar Aliyev and SOCAR.
SOCAR being committed to the principles of transparency has always supported an open dialogue with society and showed its preparedness to respond to all questions addressed to it in respect of its activities. Thus, SOCAR has been responded to the questions which have been asked by "Global Witness" in the Letter. We were confident that we have clarified all the questions that "Global Witness" has been interested in via a constructive dialogue. However, after 7 months of silence "Global Witness" has issued its Report without apparently taking account of the information provided by SOCAR.
In recent months, significant achievements in the projects like Shah Deniz 2, TANAP, TAP, agreements about sales of gas to Europe despite the company's exposure to a variety of threats, harassment and interventions caused outrage of some forces and increased their efforts to discredit and stir SOCAR's reputation in the light of the forthcoming Final Investment Decision for the Shah Deniz 2 project. However, we hereby declare our readiness to fight against these ugly intentions taking full advantage of the progressive legal tools and international practice.
SOCAR hereby criticizes this action by "Global Witness" due to the untrue nature of this Report and the fact that it damages the business reputation of SOCAR. SOCAR declares once again that it is committed to ensure the transparency, responsibility and unity in its operations. Moreover, SOCAR reserves the right to resort to all appropriate legal measures and remedies against "Global Witness" for protection of its business reputation in accordance with the principles of law.