INVESTMENT IN THE FUTURE

Quite recently - some 10 or 15 years ago - Azerbaijan went to great lengths to persuade foreign companies that it would be profitable to invest in the development of oil and gas deposits in the republic. We often had to reconcile ourselves to conditions offered by new investors which were not so favourable and to the fact that some of them declared unprofitable deposits which local geologists believed to be productive.

The situation has changed drastically, thanks to the growing potential of the State Oil Company of Azerbaijan. SOCAR is now capable not only of the independent development of deposits turned down by foreigners, but also of investing in projects abroad. Further, the State Oil Company is being invited to participate in major pipeline projects; this will certainly boost its role in the world of oil and gas.

From trans-Caspian to Sarmatia

In 2007, SOCAR put out to tender a contract to prepare a feasibility study for a trans-Caspian oil and gas pipeline as part of a grant agreement signed in August 2007 between the State Oil Company and the US Trade and Development Agency (USTDA). In early March 2008 the tender process, in which 11 eleven companies had applied to participate, was successfully completed. As a result of the evaluation of proposals submitted, the US company Kellogg Brown & Root (KBR) was declared the winner. It has forged an alliance with the company Granherne and the subcontractors on the project will be SOCAR's Neftegazproyekt, McDermott and the companies Azekoservis and KazEcoProject. The winner of the tender will prepare the technical, commercial and legal aspects of the project and produce a preliminary design for the pipeline, identify a resource base, a trans-Caspian tariff and a tariff for the export market (the Aral and Black seas for oil and the European market for gas). As part of this project, it is planned to establish cooperation with relevant organizations in transit countries - Kazakhstan, Georgia, Turkey and potential buyers of "blue fuel" in Europe. It should be remembered that USTDA has allocated 1.7 million dollars for an evaluation of the construction of the trans-Caspian oil and gas pipelines. The first project plans to secure oil from Kazakhstan for further transit by the BTC pipeline to Europe, and the second to transport gas from Kazakhstan and other Central Asian countries along the Caspian seabed to Europe and the world market.

Another step to strengthen international cooperation and develop investment policy was taken with SOCAR's entry into the council of stakeholders of a limited liability company - the Sarmatia international pipeline enterprise. In order to implement a project to construct the 490 km Odessa-Brody-Plotsk sector of the oil pipeline, Ukrtransnafta and the Polish oil and transport monopoly Przedsiebiorstwo Eksploatacji Rurociagow Naftowych Przyjazn S.A. (PERN Przyjazn) set up a joint venture, called Sarmatia, on 12 July 2004. The main purposes of the joint venture are to prepare documents on project expenses, to attract investment and to secure construction work. In line with the project, the construction of the 500 km sector from Brody to Plotsk and Gdansk will be undertaken by the European Union.

Apart from the State Oil Company of the Azerbaijan Republic, Sarmatia also includes the Georgian Oil and Gas Corporation Ltd. (GOGC), Ukraine's Ukrtransnafta and Poland's PERN Przyjazn. At the end of February, Sarmatia stakeholders, apart from the Lithuanian AB Klaipedos Nafta, increased the percentage of their stake to 24.75 per cent. Even before this increase, SOCAR's stake in the joint venture was 23 per cent.

The State Oil Company of Azerbaijan's participation in the Sarmatia joint venture is no accident. The extraction of hydrocarbon reserves in the country is steadily increasing. For example, in this year alone, Azerbaijan will extract 53 million tons of oil and 18 billion cubic metres of gas, said Azerbaijani president, Ilham Aliyev, in Poland. The head of state confirmed his country's readiness to cooperate on the Baltic-Black Sea Region-Caucasus line. "The country has much greater energy potential," Ilham Aliyev said.

In other words, new markets and ways of selling oil and gas are very important to Azerbaijan, because it is constantly increasing its energy potential.

There are currently several options for the supply of Caspian oil to Europe by the Odessa-Brody-Gdansk pipeline. One of them runs through the Kulevi terminal in Georgia which belongs to SOCAR. This means that oil would be transported to the terminals in Batumi and Kulevi by rail or by the Baku-Supsa oil pipeline. SOCAR President Rovnaq Abdullayev believes that a project to construct a second pipeline parallel to Baku-Supsa could be considered if Kazakhstan officially expresses its desire to increase the volume of oil transported through Azerbaijani territory, with further access to the Black Sea via the South Caucasus transport corridor. Whatever route is taken, it is already clear that the European Union is intensifying its efforts to "involve" Kazakhstan in oil export in this direction.

Business in Georgia

Azerbaijan has given Georgia opportunities to participate in several transport projects, and the BTC oil pipeline and the South Caucasus gas pipeline are very important to its economy. However, Azerbaijan is gradually becoming a major investor in Georgia, and the main role here is played by SOCAR.

For example, in January 2007 the State Oil Company bought the terminal in Kulevi which is situated in Georgia's Black Sea sector between the rivers Tsiva and Khobi. (This facility used to belong to Georgian businessman, Badri Patarkatsishvili, who invested about 150 million dollars in the construction of the terminal but failed to find agreement with the authorities on the construction of a railway to Kulevi).

This step was taken by the State Oil Company in order to secure an alternative route for the transportation of oil and oil products by rail. The terminal receives, stores and loads crude oil, diesel fuel and fuel oil onto ships. Currently, the throughput capacity of the terminal is 10 million tons per year (3 million tons of oil, 3 million tons of diesel fuel and 4 million tons of fuel oil). The overall volume of the tank field is 320,000 cubic metres. It is planned to increase its throughput capacity to 15-20 million tons and the overall capacity of the tanks to 380,000 cubic metres. It is possible that the volume of transhipment could increase to 35 million tons.

The terminal, which was commissioned in the second half of 2007, is yielding a huge profit to Azerbaijan - tens of millions of dollars per year. What is more, the port of Poti, which is situated near Kulevi, makes it possible to receive tankers with a capacity of up to 150 tons of water. SOCAR intends to build oil refineries in Kulevi in the future, in order to process the crude oil which will be delivered to the Black Sea coast.

SOCAR is planning to expand its oil business in Georgia in other areas as well, including its chain of petrol stations.

Oriented towards Europe

The State Oil Company is also active on the European market. It is in ongoing negotiations for the purchase of one of the four major oil refineries in Romania, where a SOCAR branch has operated successfully since 2007. SOCAR also intends to build a chain of petrol stations there. The question of building a Constantia-Trieste pipeline to carry Caspian oil to Central Europe is also under consideration. Serbia, Croatia and Austria are extremely interested in the implementation of this project.

Baku is in successful ongoing negotiations with Greece on the establishment there of an enterprise to retail oil products. Israel, which is already in receipt of Azerbaijani oil, is also interested in energy cooperation with Azerbaijan. It has suggested the transportation of Azerbaijani oil from Ceyhan to the Red Sea via the Ashkelon-Eilat pipeline. From there oil would be supplied to the Indian and Chinese markets. Israel is also interested in refining oil at its own refineries.

But perhaps the biggest deal is the purchase by the State Oil Company of the Azerbaijan Republic of a controlling parcel of shares in the Turkish petrochemical holding Petkim (Petkim Neft-Kimya Holding A.S.) for 2.04 billion dollars. Having purchased these shares, SOCAR intends to develop the enterprise, modernize its production capacity, energy system and logistics and invest in the development of new products and spheres of activity. SOCAR representatives believe that they have an opportunity to develop an enterprise which has proven to be a leader in this field.

This acquisition proves the great confidence of major international companies, including Petkim, in SOCAR's potential, not to mention the fact that the Turkish market has huge potential for growth, which is why there are clear benefits from the State Oil Company's involvement in the Turkish enterprise.

Incidentally, SOCAR received a syndicated loan of 500 million dollars recently (in February this year). These funds will be directed towards the priority targets of SOCAR's own investment programme, including the drafting and implementation of domestic and foreign projects. "Part of the loan will also be spent on the process of privatizing the Turkish petrochemical holding Petkim," says SOCAR. The loan was allocated for a period of three years at an annual rate of LIBOR+1.75 per cent. The original sum of 300 million dollars was later increased to 500 million. This loan is the first large loan allocated to an Azerbaijani company without government guarantees; a fact already noted by international financial organizations.