NEIGHBOURS ARE PRIORITY

Growth of world oil prices last year had a positive effect on transnational companies, allowing them to earn profit and plan investments in new projects.

Global trend

Average price of oil in 2018 was $71 per barrel compared to $54 in 2017. Therefore, BP Plc in 2018 increased its profit by more than twice compared to 2017, and Total SA  to $3.1 billion against $2.9 billion in 2017. The largest US companies Exxon Mobil Corp. and ConocoPhillips closed the year with a positive balance too.

In general, the market had a positive effect on Azerbaijani SOCAR - in 2017 and 2018, the company managed to raise its financial performance to the pre-crisis level and completed these years with a profit. Following the results of 2018, SOCAR's income reached ₼111.2 billion, which is 20.1% increase compared with a year earlier. Net profit of the company was ₼1.2 billion. “Last year, we had a positive balance thanks to rising prices on the world oil market. We also increased our income from petrochemical products due to the launch of the STAR refinery and SOCAR Polymer plant. We also could increase sales of natural gas as part of the Shah Deniz project. In the coming years, we will try to maintain this positive trend through the completion of new projects and sustainable operations,” SOCAR President Rovnag Abdullayev said.

According to the company's consolidated financial report for 2018, the bulk of the company's income last year were provided by operations in Switzerland – ₼94.5 billion, or 84.9% of total income in 2018 (20.2% growth compared with 2017). SOCAR's income from operations in Azerbaijan last year reached ₼6.6 billion (an increase of 23.1%), in Turkey - ₼5 billion (0.9%), UAE - ₼2.4 billion (77.6%) ), in other countries - ₼1.6 billion (44.5%). Company recorded decline in income only in Georgia (5.2%).

Currently, SOCAR’s foreign activities are mainly focused on oil trading, developing the network of filling stations, distributing gas, and creating petrochemical and oil refining capacities. At the same time, the company is carrying out the largest number of its projects in neighbouring Turkey. The number of these projects grows constantly.

SOCAR's new target

At the same time, a steady growth in profits allows SOCAR to expand international projects, involving more and more countries in its scope. Now the company has set its sights on the Russian market. We are talking about nothing less than the possibility of acquiring the Antipinsky Oil Refinery (AOR) owned by the Russian Sberbank in Tyumen. The plant with a capacity of 9 million tons of oil per year produces diesel fuel, petroleum coke, liquefied petroleum gas. The depth of oil refining at the enterprise in 2016 reached 98%. In September 2018, the Atyrau Refinery began the industrial production of gasoline grades AI-95, AI-92 and AI-80 of the Euro-5 quality standard. According to the Expert-Ural magazine, the Antipinsky Oil Refinery entered the top five exporters of the Urals and Siberia in the annual rating of Ural Export-100, taking the fifth position in 2018. At the same time, among the enterprises of the industry, the AOR took the second place, selling export products by $1.6 billion, which is 16% more compared to the previous year.

On May 23, 2019, Sberbank announced that it had acquired the shares of the Cyprus-based company Vikay Industrial Limited, which controls 80% of the shares of Antipinsky Oil Refinery JSC. The remaining 20% ​​of the plant is currently owned by lawyer Nikolai Yegorov. Before the sale to Sberbank, the Antipinsky Oil Refinery was the main asset of the New Stream Group of Dmitry Mazurov, the main creditor of which is Sberbank. According to recent data, the debt of the Atyrau Refinery to the bank is $2.9 billion. The lenders of the refinery, in addition to Sberbank, are Absolut Bank, Promsvyazbank, Intercombank, IBC and Credit Europe Bank. Sberbank made a decision on early collection of debts from the Antipinsky Oil Refinery and received ownership of the plant’s shares, which were used as collateral for previously issued loans. Later it turned out that the plant has unrecorded debts for another $1 billion. Now the plant has to go through the bankruptcy procedure stipulated by the legislation. In parallel, Sberbank promises to restore the plant’s operations as soon as possible.

First step

Sale of a non-performing refinery burdened with debts is not an easy task. The head of the Russian Lukoil, Vagit Alekperov, for example, stated in February 2019 that his company was considering any assets in Russia, “but this asset is quite complex. With that credit load, it iss not interesting for us.”

The head of Rosneft, Igor Sechin, also said that the company is not interested in buying the Antipinsky oil refinery.

Nevertheless, the head of Sberbank, German Gref, during the annual meeting of shareholders, said that the bank was already negotiating with several potential buyers of the plant and was looking forward to a deal in the near future. “Of course, if we sell it, then only to companies that have a lot of experience. We have interested parties, and I think that in the near future we will come to structuring the transaction,” Gref said.

According to Bloomberg, Sberbank is currently considering SOCAR as the most likely buyer of the Atyrau Refinery.

SOCAR President Rovnag Abdullayev noted that the company is indeed showing interest in purchasing Antipinsky Oil Refinery. “Negotiations are underway. The Russian market is very large, and we are interested in it,” R. Abdullayev said in his interview. At the same time, SOCAR, in the event of the acquisition of an oil refinery, does not intend to incur debt obligations of the plant.

Whether this interest will find the real features of the refinery's purchase and sale contract is not yet clear; nevertheless, the first steps to develop cooperation in this direction have already been taken. In particular, according to the Russian newspaper Kommersant, SOCAR and Sberbank established a trading joint venture, SOCAR Energoresurs LLC, to process oil at the Antipinsky Oil Refinery. In the new joint venture, 60% of the shares belong to SOCAR Russia Investments Ltd, the remaining 40% is owned by SBC Komplekt (Sberbank structure).

CEO of the new joint venture is Farid Jafarov, who heads the main Russian branch of SOCAR, SOCAR RUS LLC. It is assumed that the joint venture will be engaged in processing at the Antipinsky Oil Refinery, which is in a state of bankruptcy. According to the processing scheme, the owner of oil delivers it to the refinery, pays the plant for processing services, and then receives and sells the produced oil products. According to some reports, SOCAR expects to begin processing at the Atyrau Refinery by July 2019. It is assumed that the joint venture will buy oil from large oil companies, in particular, from LUKoil and Surgutneftegaz.

Such a complex scheme was invented to ensure that the refinery, which initiated the bankruptcy procedure, did not stand idle. After all, the plant was stopped in April, because it had no money to buy oil for refining.

Later, Sberbank officially announced that the newly founded SOCAR Energoresurs LLC became the owner of 80% of the shares of Antipinsky Oil Refinery. According to the bank, the company received control over the plant itself, as well as deposits in the Orenburg region, which belong to the enterprise.

In other words, the main tasks of the new owners at this stage are: launching the plant and ensuring its uninterrupted operation; supply of petroleum products to the local market and their export; maintaining stable tax revenues to federal and regional budgets.

"SOCAR is considering joining the project as an investors after conducting an audit of assets within the framework of established corporate procedures and evaluating operating activities," Sberbank emphasizes.

The largest asset

If, however, SOCAR decides to purchase the Antipinsky Oil Refinery, this will be the first major asset of the company in the Russian oil industry, which also has a license to develop fields. Earlier, SOCAR has already made unsuccessful attempts to enter the Russian market. In particular, according to media reports, SOCAR studied the issue of buying the oil company Polar Lights from Rosneft. Also, in December 2013, SOCAR RUS LLC received a license to study in order to find and evaluate hydrocarbon deposits in the North-Beshkulsky area in the Narimanovsky district of the Astrakhan region, but work in this direction did not continue.

Yet it is difficult to imagine that SOCAR signs a deal to acquire a refinery burdened with debts solely from a desire to enter the Russian oil market at any price.

SOCAR’s current successful foreign operations are the result of a well-planned investment policy, which brings the company considerable revenue. There is little doubt that in the case of the Antipinsky Oil Refinery, there will be exceptions to the detriment of company's own interests.

If SOCAR succeeds in negotiating the purchase of the refinery without debts, SOCAR can get a fully functioning asset that promises good profitability. This will not only be a good investment for the company, but will allow it to expand its downstream operations.

From North to Asia

Apart from Russia, SOCAR is expanding the geography of its activities in Central Asia and will soon be engaged in operations to increase oil production in Uzbekistan to search for new hydrocarbon reserves.

Recently, Uzbekneftegaz JSC and one of the divisions of SOCAR, NIPI NEFTEGAZ LLC, signed an agreement on joint activities. The document defines the main conditions for cooperation in increasing hydrocarbon production at the Garbiy Tashli and Sharqiy Tashli, Shimoliy Shurtan and Garmiston fields in Uzbekistan using advanced methods and technologies from SOCAR.

“This is the first such project of Uzbekneftegaz with SOCAR. We reached agreements on joint implementation in 2018. The development of cooperation between the two companies will increase the production of hydrocarbons in Uzbekistan and will affect the increase in the socio-economic development of the Kashkadarya region,” Uzbekneftegaz believes.

In addition, Uzbekneftegaz, SOCAR and BP signed a trilateral agreement to assess the exploration potential in three investment blocks in the Ustyurt region.

By the way, Kazakhstan also has plans on joint geological exploration activities with SOCAR. “According to the recently signed memorandum with SOCAR, we are planning to conduct onshore and offshore exploration projects in Azerbaijan and Kazakhstan with Azerbaijani geologists. According to the results of these studies, we will select areas for further exploration and production,” KMG Deputy Chairman of the Board Kurmangazy Iskaziyev said.

He also said that SOCAR was working on the issues of transporting Kazakh oil to world markets through Azerbaijan’s pipelines. “We consider the southern direction (through Azerbaijan. R+) to diversify oil exports from Kazakhstan. We have intensified work in this direction with SOCAR, but the volume of oil to be transported through Azerbaijani pipelines will depend on tariffs. The capacity of the southern direction is focused on exporting up to 30 million tons of Kazakh oil per year,” Ikaziyev said.

These are perspective plans. Currently, a concrete example of cooperation between the two companies is the agreement concluded with KMG in February 2019 on transferring the Satti Kazakhstani self-lifting floating drilling rig to SOCAR.

“We intend to further develop joint activities with our partners and support common projects. This leads not only to the expansion of opportunities for both parties, but also allows the competence and competitiveness of the Kazakhstani oil and gas sector to be improved,” KMG COB Alik Aidarbayev said.

The installation will be primarily used in the drilling of exploration wells in the shallow waters of the Absheron archipelago, with British BP as the exploration and development operator. The success of SOCAR in Turkey and the commissioning of the STAR refinery were also noticed by the leadership of Belarus, which invited SOCAR as an investor in the upgrade of Grodno Azot Plant.

“In Turkey, you built an oil refinery. We will welcome the arrival of Azerbaijani investors to Belarus and are ready for serious cooperation in strategic sectors,” Belarus President Alexander Lukashenko said during his visit to Baku last November.

According to Belneftekhim, the project targets the upgrade of the existing production plant and construction of a new nitrogen plant in Belarus. At the same time, the cost of upgrade of Grodno Azot is about $400 million, while the cost of building a new plant will exceed $1.3 billion.

It is always good to have an ability to choose from a variety of proposals, but one should not forget that this is also a big responsibility. Therefore, the decision must be reasonable, timely and bring maximum benefit.