Azerbaijan

Statement on the impact of the EITI on the Southern Gas Corridor

Since the establishment of the EITI, Azerbaijan was a pioneer of this initiative and fully committed to the EITI and its principles and constantly took steps to underpin positive environment for the smooth implementation of the initiative. In the recent years, however, the mandate of the EITI has significantly shifted away from transparency and accountability in extractive sectors and is being used instead as a political lever by certain groups. After a number of years of “compliance” with the EITI, Azerbaijan was first downgraded from “compliant” to “candidate” status in 2015, before being suspended in March 2017 by the EITI International Board. The decision to suspend Azerbaijan from EITI was based on the assessment of the progress on corrective actions set forth by EITI International Board following the first downgrade of the status of Azerbaijan. The EITI Board concluded that whilst Azerbaijan had made meaningful progress in implementing the 2016 EITI Standard, it had not fully met the corrective actions related to civil society matters prescribed by the Board in October 2016. Therefore, the decision to suspend Azerbaijan was not motivated by transparency related issues, but rather due to progress on civil society.

In the lead up to the Bogota meeting on 8-9 March 2017, according to the reported information, 94 organisations from 140 members of the NGO coalition on increasing transparency in the extractive industries appealed to the International EITI Board1 calling it to not suspend Azerbaijan’s membership since as per their assertion the EITI is a useful platform for civil society cooperation with the government and is important for local NGOs. The coalition members also emphasized in their letter that many of the issues have been eliminated, grant registration and rules for regulating the activities of donors have been simplified.

The government has indeed taken important steps to ensure enabling legal and operational environment for civil society representatives. The Decree signed by the President of the Republic of Azerbaijan dated 21 October 2016 on the Application of “One-Stop-Shop” Principle in the Procedure of Provision of Grants by Foreign Donors on the territory of the Republic of Azerbaijan was a starting point in this regard. It facilitates the issuance of grants by foreign donors and ensures the transparency and effectual direction of allocated funds. The Decree was followed by the Decision of the Cabinet of Ministers dated 11 January 2017, on amendments to the “Rules on Registration of Grant Agreements (Decisions)” which paved way to ease the grant registration process. Moreover, on 24 January 2017 the Cabinet of Ministers adopted another Decision on amendments of the “Rules on Obtaining the right to provide grants in the territory of Azerbaijan by foreign donors”. Amendments made by the Cabinet of Ministers have noticeably simplified the registration process of grants by foreign donors.

Due to the efforts made by the government, as outlined above, the government disagrees with EITI Board’s opinion related to the lack of satisfactory progress on civil society engagement and considers the decision on suspension of Azerbaijan as “unfair one”.2 As a result, Azerbaijan announced that it was leaving the EITI on 10 March 2017.
Notwithstanding the decision to leave the EITI, State Oil Fund of the Republic of Azerbaijan (SOFAZ) has reiterated that Azerbaijan signed up to the principles of revenue transparency, governance and accountability in extractive industries and for that reason the government announced that it would continue to disclose all the information related to revenues received from extractive industries to the full extent via the web portal of SOFAZ, as has been done since 2005.

Southern Gas Corridor CJSC (SGC) remains committed to the transparency and through its wholly owned subsidiary has been submitting the EITI reports to SOFAZ since its establishment. SGC has been externally audited on a consolidated basis since its inception by reputable international firm (Ernst & Young) and discloses its financial statements in the public domain. SGC has made available its annual financial statements for the years ended 2014 and 2015 as well as its reviewed financial statements for the 6 months ended 30 June 2016 and 11 months ended 30 November 2015 and 30 November 2016, respectively, in the relevant prospectuses of its Eurobond issuances. SGC shall continue to make available its annual audited financial statements to its investors via Irish Stock Exchange, where SGC’s Eurobonds are listed. Moreover, as part of its Eurobond issuances, SGC has compiled extensive prospectuses in March 2016 and 2017 (available in the public domain), describing, amongst other things, its business, its corporate structure, its constitutional documents, its financials, its revenue flow, the projects it is involved in, the risks affecting the projects.

SGC has already attracted several loans from the international financial institutions (IFIs) and continues the discussions with certain other IFIs who are scrutinising SGC thoroughly and are conducting an in depth due diligence of its projects. SGC remains compliant with applicable regulations, rules and policies that it has agreed to adhere to.

Post EITI exit announced on 10 March 2017 by the government, SGC has already closed a successful deal on 15 March 2017 through an additional US$1bln 144A/RegS tap of its existing US$1 bln 6.875% notes due 2026. The notes, as in the inaugural deal, are guaranteed by the Republic of Azerbaijan. The transaction was priced with a final yield of 5.80%, well inside the original reoffer yield of 7.00%, underlining the improved market sentiment for SGC and the Republic of Azerbaijan. The tap increased the total size of the 2026 notes to US$2bn, making it the largest Eurobond from the country. The transaction generated significant investor demand with the US taking the largest share at 45%, followed by the UK at 40%, the rest of Europe accounting for 13% and Asia & Middle East accounting for 2% of the orderbook. The issue was well-oversubscribed and enabled a diversified distribution among high-quality institutional investors, with fund managers constituting about 90% of the offering.

At the same time, as of today, the negotiations with IFIs are progressing as before. Together with the successful tap of the 2026 notes, this reinforces investors’ confidence in Azerbaijan’s strong economic fundamentals and its commitment to develop transportation infrastructure for one of the world’s largest gas fields.

The Southern Gas Corridor project constitutes a multi-stakeholder value chain that is not dependent on Azerbaijan/SGC alone. SGC is a majority shareholder only in Trans Anatolian Natural Gas Pipeline (TANAP) project, while in the other three projects of the Southern Gas Corridor, SGC, through its subsidiaries, holds non-controlling interest. SGC’s partners are globally renowned, reputable companies and leaders in oil, gas, and energy generation and distribution industry. SGC is an investment-holding company and does not exercise operatorship in any of the projects. The day-to-day operations of the projects are conducted by respective project operators or specially designated project companies. Since there are a number of countries involved in the whole value chain from owners to end-users, the projects carry significant global strategic importance, hence full transparency is maintained not only before all partners, but also before the society as a whole, represented by multistakeholder groups.

SGC is confident that Azerbaijan’s exit from EITI will not impact the progress or the construction of any of the project along the Southern Gas Corridor value chain, as all of the partners have committed to finance the project, with currently estimated investment cost of US$43bln. SGC is also of the opinion that given the progress made with many of the IFIs and the recent support expressed by the investors in the debt capital markets, the EITI exit should not inhibit its ability to raise financing from the external sources for the value chain. Notwithstanding that, as per the Decree of the President of the Republic of Azerbaijan #287 dated 25 February 2014, SOFAZ stands ready to provide all necessary long-term financing to SGC for the successful completion of the Southern Gas Corridor project.

1 ‘94 NGOs urged the EITI not to stop Azerbaijan’s participation in this organization’: http://www.contact.az/docs/2017/Social/030700185050en.htm#.WMucmmXVVf1  (accessed 16 March 2017).
2 ‘SOFAZ statement on future of EITI in Azerbaijan’: http://www.oilfund.az/uploads/statement-en.pdf (accessed 15 March 2017).