STATEMENT by the EITI Coalition on the 10th Report

STATEMENT
by the EITI Coalition of civil society institutions
on the (10th) Report of the Commission for the Extractive Industries Transparency Initiative in the Azerbaijan Republic and Independent Accountant’s Report for the one-year period ending on 31 December 2008

(Approved in the 17 July 2009 meeting of
the Council of the ITEI Coalition of civil society institutions)

The (10th) Report of the Commission on the Extractive Industries Transparency Initiative in the Azerbaijan Republic and Independent Accountant’s Report (Deloitte Audit) for the one-year period ending on 31 December 2008 were presented and released to public in a joint meeting of parties to the Memorandum of Understanding. The ITEI Coalition of civil society institutions (hereinafter – the Coalition) considers the release of the results of the audit on the 8th report an important development and an essential step, which the Government of Azerbaijan and the country-active oil & gas companies have jointly taken forward to increase transparency in the extractive industry.

It should be noted that this Report has an additional significance for the public because of the global financial crisis of 2008 and sharp changes of oil prices in global markets, as well as important events related to extraction and transportation of oil and gas in our country.

The Coalition as a party to the Memorandum of Understanding, looking into audit’s results concerning the tenth report, considers important to bring the following issues to the public’s notice:

I. Peculiarities of the reporting period

During the reporting period of 2008, the world and our country have witnessed following events and processes that have significantly affected revenues of the Government from oil and gas extraction industries, as well as the content of the Report on the Extractive Industries Transparency Initiative of Azerbaijan Republic:

In the first half of the year, a sharp rise in prices of energy and other natural resources in global markets had occurred. In the middle of the year (in July), the price of oil hit a record – 147 dollars per barrel. However, afterwards, worsening global financial crisis and sharp decrease in global demand for oil caused oil prices to plummet to 3-4 times low - 40-45 dollars per barrel. Regardless of all these, the average annual price of Azeri oil remained at 97.6 dollars per barrel level consistent with the government information.
Because of high oil prices in global markets and speedy rise of oil production within the framework of “Azeri-Chirag-Guneshli” (ACG) Production Sharing Agreement, in the beginning of the reported period, the proportions of profit oil sharing between the companies and the Azerbaijani Government have changed in favor of our country. If this proportion was 70:30 until the end of 2007, in the beginning of 2008, it was 45:55, and from the second quarter – 20:80. As a result of this, it was the first time that the share of the Azerbaijani Government in profit oil passed 150 million barrels in 2008 (for comparison, this share was 30.3 million barrels in 2007)
Because of an accident in Baku-Tbilisi-Ceyhan (BTC) Main Export Pipeline in the middle of the year, and an accident in ACG in September, it was not possible to raise daily oil production in the country to predicted one million barrel level. In the second half of the year, daily oil extraction was 250-300 thousand barrels less from predicted level.
A short-period war between Georgia and Russia erupted in the summer of 2008 was also a factor creating problems in transportation of Azerbaijani oil.
During the reporting period, payments to the government from the exploitation of another major carbohydrate field of Azerbaijan - “Shahdeniz” gas condensate have also started to rise, etc

As seen from the Report, share of profit tax in payments by foreign oil and gas companies has decreased in comparison with the previous year. This is related to increase in Azerbaijani Government’s share in distribution of profit oil as it was stated above. Thus, decrease in shares of foreign companies in profit oil has resulted in decrease of profit taxes they pay. We think that as incoming years will witness the rise of production in “Shahdeniz” and other fields, the decreasing trend in profit tax payments will slow down for some time.

We express again that with the start of payments related to “Shahdeniz” field, problem of monitoring revenues for the Coalition doesn’t lose its actuality, but also becomes complex with the rise of gas production.

II. Content of the Report:

As we noted before, the main financial indicator in the Report – profit oil is expressed only in kind, therefore, the Coalition has to state that it finds difficult to come across exact value expression of profit oil. The revenues of the State Oil Fund under this clause during the reported period were reported at 11.527 million AZN. This information creates little opportunity for people monitoring the revenues to compare it with the value provided in the Report. It is not clear from sales of what amount of raw oil did the revenues come from, and this even doesn’t correspond with the price of a barrel declared for the year. The government has declared the average annual oil price as 97.6 dollars per barrel in 2008. It is possible that the emerging inconsistency is related to expenses accompanying the sales of oil. Considering that the Extractive Industries Transparency Initiative is far from hypotheses, and is based on solid numbers and their comparisons, we again stress the need for improvement of the Report in this direction. In other words, the above problem can be solved, if the Report indicates the value expression of profit oil besides its expression in kind.
As seen from the statement, in many cases, inconsistencies between the reports regardless their technical character have covered big amounts. For example, in Note 3, the government indicates the amount of raw oil as 150.2 million, while companies indicate that as 195.6 million, and as a result we get a 30% error. Therefore, the Coalition is once again especially concerned with the careless work of companies. If auditing company singles out names of such companies in next report, it can both benefit the common cause and increase the responsibility of these companies.
The indication of both natural gas and accompanying gas in one clause does not create full picture in the Report. At the beginning, accompanying gas was not considered as a subject to Extractive Industries Transparency Initiative reports, but the government has been including it in its reports regularly. However, with the addition of natural gas to the report complicates the issue for monitoring people. After all, one must consider that accompanying gas is delivered free to the government, while natural gas is a subject to production sharing between parties of current agreements. Thus, economic essence of these two indicators differs from each other in a serious ground. Taking all of these into consideration, we think that in next report, they should be indicated separately.
Notwithstanding the fact that it is repeated in all recommendations and suggestions by the Coalition in regard to previous reports, the failure to implement of works required in line with prevention of differences of terminology nature found out in the reports submitted by the government and the companies (both local and foreign) is a factor causing vagueness in the opinion. For example, in Note 4, most of the differences between the numbers submitted by the government and the companies about the amount of gas have arisen from the difference in measurement standards.
The Report again has several technical and translation flaws. For example, in Note 5, the meaning of bonus in Azerbaijani language is given not correctly; however, it is very close to the truth in English. In order to explain the meaning of bonus to Azerbaijani public, it would be better if the auditing company used definitions from local legislature.
It is told that the difference in Note 6 concerning the transportation emerged from the government’s addition of its 0.1 million dollars to government tables; this payment was used to cover the transportation of government’s own oil share. We would like to see the clarity in following question – is SOCAR paying SOFAR as a company or a government representative. The share of the government in profit oil was much higher than the share of companies (approximately 3-4 times). Then why the amount of tariffs paid is the same? From the opinion and explanation of the auditing company there follow such a conclusion that 0.1 of 0.2 was used to cover the transportation of AIOC’s profit oil, while the rest 0.1 – Azerbaijan’s. How can this be logical if there is a 3 to 4 times difference between oil transported by the parties?
Indication of all taxes of local companies in one clause in Note 12 seems too general. We think that if these taxes are indicated in separate clauses it will create an overall picture about the tax system, as well as will enable the monitoring people to compare those indicators with similar ones from the execution of state budget.
In a report about total revenues earned by the Government of Azerbaijan from the extraction industries (Form C), indicators about gas do not correspond with similar indicators in other reports, which in turn the Coalition is seriously concerned. There are three data in the Report on the Extractive Industries Transparency Initiative (Form C) about gas extraction: 1) share of the government from extraction by foreign companies (in value expression) – 131.169 million US dollars (possibly, this is a government share from “Shahdeniz” gas); 2) share of the government from extraction by foreign companies (expression in kind) – 2.1 billion cubic meters (possibly, this is accompanying gas from ACG field and delivered to the government for free); 3) government owned gas produced through local companies (expressed in kind) – 9,7 million cubic meters. Besides, information from SOCAR’s website shows that in 2008, it has extracted 8.2 billion cubic meters of gas (7.6 billion – through Oil-Gas Extracting Department, and 590 million – SOCAR share from “Shahdeniz” field). According to the company information, joint ventures (JV) and operation companies (OP) have delivered 68.7 million cubic meters of gas in 2008. The company information also shows that last year 2.1 billion cubic meters of gas were delivered to SOCAR from ACG field for free, while “Shadeniz” sold 2.1 billion. Thus it is not clear whether 2.1 billion cubic meters of gas mentioned in the Report is accompanying gas delivered by partners from ACG or gas sold by “Shahdeniz”. Let us agree that SOCAR website shows this number as the gas sold by “Shahdeniz” to the company. On the other hand, SOCAR’s own gas production is indicated with a symbolic number – 9.7 million cubic meters, while its joint ventures have contributed as much as 68.7 million cubic meters. All these inconsistencies once again show that reports on gas production are less transparent than reports on oil production, and there should be serious improvements in this direction.
Besides the notes above, the inconsistencies in information about total amount of gas produced in the country are also concerning. According to the information provided by State Statistical Committee, 16 billion and 297.7 million cubic meters of gas was produced in the country in 2008. According to BP, ACG produced 2.1 billion cubic meters of accompanying gas, while “Shahdeniz” produced 7.1 billion cubic meters of natural gas. If we add 7.6 billion cubic meters of gas produced by SOCAR, as well as the gas produced by joint ventures, then we get an annual number of 16,9 billion cubic meters of gas produced in the country. Thus, we can conclude that 0.6 billion cubic meters of gas is missing from the official statistics. The Coalition would like to see the explanation to these inconsistencies.

III. In connection with matters of Procedural nature:

Our recurring concern with the fact that there is a delay in the disclosure of the Report is still valid. In accordance with paragraph (f) of Article 5 of the Memorandum of Understanding, dated November 24th, 2004, involving the Government Committee on EITI, local and foreign companies active in the production of mineral resources, and the ITEI Coalition, the final “Independent Accountant’s Report” shall be “submitted to all the Parties to this Memorandum within 30 days after the deadline for the submission of all reports to the auditor, with the proviso that any inconsistencies have been either resolved or agreed to be insignificant.” In the meantime, paragraph (c) of Article 5 of the Memorandum sets out that the half-year reports shall be submitted to the audit company by March 15th. As a matter of fact, independent accountants (the auditor) received the report thereof at the beginning of June (this year). In other words, two months later than the deadline stipulated in the Memorandum. On the same point, in the Independent Accountant’s Report, there isn’t any information on whether the EITI report by the Government Committee on EITI and the foreign and local companies’ reports have been submitted on time (March 15th as is stipulated for half-year reports) or with delay. In the case in question, the spending of such a long time on the resolution of inconsistencies in the report(s) and the inconsistencies, agreed as “insignificant,” is unclear. We think that the auditing company should increase its attention on shortening the period assigned to examination of such inconsistencies and timely submission of periodic reports. This issue should be under constant attention of the Extractive Industries Transparency Initiative Secretariat.

Taking into consideration the 10th report of Independent Accountants and the experience of previous reports, the ITEI coalition of civil society institutions puts in the forefront the following suggestions and recommendations in order to improve accountability process:

Taking into account the suggestions and recommendations adduced in the Report evaluating the Extractive Industries Transparency Initiative in Azerbaijan, the Report of Independent Accountants should undergo quality changes;
The report of Independent Accountants should include expedient and relevant explanation for any case of the failure of the Government, as well as local and foreign companies to submit their respective reports on the time stipulated in the Memorandum or any case of delay in the submission of relevant reports. The Coalition suggests that in the future, when the auditing company receives government and company reports, it should immediately notify parties to the Memorandum. At the same time, the auditing company should increase its attention on shortening the period assigned to examination of such inconsistencies and timely submission of periodic reports and provide the reasons for delays. The Memorandum should be amended in order to allow this procedure. Restrictions should be added to the Memorandum on preparation and presentation periods for audit reports;
Proceeding from the Memorandum of Understanding, new discussions need to be launched among the parties (to the Memorandum) in order to improve the existing reporting system;
In order to eliminate occasionally recurred mistakes of the companies while filling the report forms, names of companies repeatedly making mistakes should be disclosed as well as training should b conducted for their people responsible for preparation of reports;
With an aim of disclosing the individual reports of the companies, including SOCAR, the initiatives of both the government commission and The ITEI Coalition of civil society institutions should be expanded in a joint format;
In order to convey to the public in an understandable language the Country reports on the Extractive Industries Transparency Initiative and reports of Independent Accountants, it is recommended that these reports should be published in media.

The Coalition hopes that the Government Commission and companies would take these recommendations aimed at improvement of Azerbaijani experience of the Extractive Industries Transparency Initiative into account, and take some practical measures in the direction of their realization. This can play a significant role in raising the trust of the public in the Extractive Industries Transparency Initiative process and its accountability.

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Last correction date of the file: 26/12/2009 - 14:59:35

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