A RATHER GREEK MARRIAGE

Amidst the global oil crisis accompanied by the biggest decline in investments into this sector of economy, finding investors is a luxury. This is particularly relevant when the country is drowning in debt and international lenders are pressing for debt repayment. In such circumstances, Greece refused to Azerbaijani SOCAR in the privatization of its state gas distribution company DESFA. Four years of ongoing negotiations with SOCAR on sale of 66% of shares in DESFA ended inconclusively.

This infamous story began in the summer of 2013, when the Hellenic Republic Asset Development Fund (HRADF) approved SOCAR’s proposal for the purchase of 66% stake in DESFA for €400 million, and an agreement on the sale of shares was signed in December of the same year.

A little was left to do, namely to get the approval of transaction by the European antitrust authorities. However, the process was delayed. Furthermore, the left coalition SYRIZA came to power in Greece on the wave of the economic crisis. As a result, SOCAR had to negotiate with the new Greek government while trying to convince the European Commission (EC) that the purchase of shares in DESFA along with plans for delivery of Azerbaijani gas to Greece through the Southern Gas Corridor will not lead to monopolistic position of SOCAR. But SOCAR failed to fully convince EC and agreed to reduce its stake in DESFA to 49%. Italian Snam had to purchase the rest (17%) of the shares.

And when it seemed there were no more obstacles to complete the transaction, the Greek government has presented another surprise. In particular, the Greek Parliament passed a legislative amendments to DESFA’s tariff policy. These included limiting the growth of the transport tariff for the next few years, while originally intended to increase tariffs by 68%.

According to the Greek Minister of Energy, the government intended to limit the growth of gas tariffs, which to a greater extent carries a social burden. However, SOCAR has indicated that the gradual increase in transportation tariffs to 68% would entail only a 3% rise in gas prices, only for a few years. This means that DESFA tariff policy does not bear a particular social burden. However, the decision to limit the growth of tariffs would lead to a 50% decline in profitability of the Greek operator. In such circumstances, SOCAR insisted on the need to reduce the cost of DESFA shares.

According to Greek media, SOCAR offered to reduce the price of shares from €400 to €260 million. In addition, the company has put forward a compromise - to pay €300 million in the first stage, and the remaining €100 million from the long-term revenues DESFA activities... However, even this option has not received approval from the Greek side and negotiations finally reached a dead end.

According to the Greek Department of Energy and the Environment, “in recent months, the Greek government was continuing discussions with SOCAR and the Italian Snam on selling 66% of DESFA stake. Nevertheless, the proposals made by these companies did not suit us”.

According to the ministry, the alternative proposals of potential buyers also were not accepted. In return, SOCAR and Snam did not accept the Greek proposals on improving the financial situation of DESFA. “On the basis of this decision, we have taken a decision to stop discussions on the sale of 66%”, says the ministry.

Of course, the Azerbaijani company had some hopes on Greek assets. According to expert opinion, in addition to distribution in Greece, the acquisition of the Greek operator by SOCAR would provide access to the Greece-Bulgaria gas pipeline and the possibility of selling gas in the country.

Nevertheless, SOCAR is optimistic about its future activities in the Balkan region. According to the company, the termination of negotiations on DESFA will not affect future investments of SOCAR in Greece and the region.

The Greek authorities still have to decide on the further destiny of DESFA. It is obvious that the company will be re-offered for privatization under new conditions. The Greek media announces that the government hopes to retain up to 51% stake in DESFA selling only 25-30% of shares to strategic investors.

According to the online edition of the Greek Kathimerini, there are new contenders for the purchase of Greek company - the Belgian Fluxys and the Romanian Transgaz. Interestingly, Fluxys has shown earlier an interest in DESFA shares and even negotiated with SOCAR the repurchase of 8% of the Greek operator, but then gave up giving green light to the Italian Snam. Now the Greek media optimistically declares the intention of Belgians to get 51% stake in DESFA. According to Kathimerini, the Romanian company is willing to pay for DESFA pack the same amount that SOCAR was ready to give earlier, namely €400 million. But we need to clarify one important detail - the entire market value of Transgaz is 3.5 billion Lei, or about €780 million, a total of two times more than the cost of DESFA package... Although Transgaz plays an important role in the development of infrastructure linking the countries of Central and South-Eastern Europe, the question remains open: will the Romanian company be able to find funds for the purchase of DESFA?

Most likely, the Greek side through such a PR-campaign is just putting on a good front, demonstrating that the departure of SOCAR and Snam does not prevent their plans for the privatization of DESFA, and even with the new requirements, there is still a demand for the company.

Anyway, the Greek government has demonstrated its unreliability as a partner. It is hard to imagine that in such a situation the Greek government is able to achieve privatisation without any concessions to the new buyer. The unstable economic situation in the country, the spontaneous decisions of government that can bury the attractiveness of a particular investment project can scare anyone willing to participate. It is unlikely that any company would want to risk a lot of money for most of the organizational work and develop the gas distribution system in Greece without having a controlling interest and special benefits...

Incidentally, the failed deal with SOCAR has caused an irritation of international creditors, from which Greece expects to receive regular financial assistance. Now, the financial institutions require more stringent mechanisms from the Greek side regarding the sales of other state-owned enterprises engaged in the provision of utility services (power distribution, water, DEPA, etc.). Greece has to raise €3.7 billion in 2016 and another €1.3 billion in 2017 only through the sale of assets under the terms of the third credit assistance program. In the budget for 2016, the revenue from the sale of assets valued at €1.9 billion. However, the country is unlikely to reach its objectives with such an approach to the privatization.

In short, as far as the losses are concerned, Greece lost the battle for profits from the sale of DESFA. SOCAR can channel the investments in countries with more favorable investment climate.

As to Europe, SOCAR is still interested in investing in the economy of Albania. This was openly declared by the President of Azerbaijan Ilham Aliyev at the meeting with the newly appointed Ambassador of Albania to Baku Genti Gazheli in November.

“The development of relations in the energy sector will create good opportunities for cooperation in other areas, including investment, commercial and transport sectors”, said President Aliyev.

In addition, Croatia offers SOCAR participation in the construction of an LNG terminal on its territory with a capacity of 4-6 bcm of gas. During her visit to Baku, the Croatian President Kolinda Grabar-Kitarović said that the construction of such a facility in the town of Krk can be promising for Azerbaijan.

To expand its investment activities, SOCAR is actively considering the African continent. As a result of these efforts, SOCAR is now a member of the CI-GNL consortium with a share of 26%. The consortium will build a terminal in Côte d'Ivoire for the import of LNG. Total will be the operator of the terminal with a capacity of 3 million tons of LNG per year.

SOCAR has also developed a number of energy projects for Burkina Faso and Benin, which will further support energy resources of these countries, especially in oil and oil products. SOCAR had already initial talks with the leaders of these countries and presented them the projects for review. SOCAR and Benin also discussed the possibility of constructing the port of Cotonou, as well as a set of other infrastructure projects.

There are many possibilities, now it is important not to make a mistake but a right choice.

SOCAR’s INTERNATIONAL INVESTMENTS

As of January 1, 2016, total SOCAR investments in international projects amounted to $4 billion 486.9 million, of which $3 billion 334.3 million in Turkey, $414.5 million in Switzerland, $386 million in Georgia, $280.8 million in Ukraine, and $71.3 million in Romania.