Caspian Energy (CE): Mr. Nassirov, SOCAR currently ranks among the top 50 companies globally. How would you evaluate the Company’s position in the global energy market?
Elshad Nassirov, Vice President on Investments and Marketing, SOCAR: SOCAR (State Oil Company of the Azerbaijan Republic), the region’s major energy company, is a 100% state-owned company. Even during the former Soviet Union era, the company had well-defined material and technical infrastructure support systems in place. SOCAR was established having ambitious objectives and possessing broader tasks shortly after Azerbaijan gained independence. It is currently restructuring itself into a vertically integrated international company. Along with broad-scale activities carried out within the country, SOCAR is expanding its presence in other countries especially among its neighbors. Georgia was the first country SOCAR invested into and is currently the single largest tax paying company in Georgia. Investments made by Azerbaijan in Turkey have exceeded that made by the Turkish counterpart in Azerbaijan. Besides the Southern Gas Corridor (SGC), other large-scale plans are to be realized in Turkey. Notable among them are the TANAP (Trans-Anatolian Gas Pipeline project) to be built by 2018, ongoing construction of the Star Oil Refinery, expansion of the petrochemical plant Petkim as well as construction of a port in western Turkey. Other countries on the anvil of SOCAR’s expansion are Switzerland, Ukraine, Romania, United Arab Emirates, Singapore and Vietnam. SOCAR has representative offices in Germany, Greece, Austria, Kazakhstan, Iran, Russia, Romania and in other sizeable markets. In the global energy market SOCAR is a company which keeps growing regardless of the energy crisis caused by the decline of oil prices. SOCAR is growing horizontally as well as vertically.
CE: How do you assess investment dynamics of SOCAR in Turkey, Georgia, Ukraine and other countries?
Elshad Nassirov: SOCAR is pursuing diversification of its currency exchange earnings in-country and also in Turkey, Georgia, Ukraine and other countries. As we have our own oil resources, SOCAR is expanding its business not only in the exploration-production sector but also in refining, transportation and distribution of energy resources. SOCAR Trading SA, which was established several years ago in Geneva, trades in energy resources not only of Azerbaijan but also of third parties i.e. apart from selling our oil, it also focuses on purchase, sale and development of energy resources of third parties in other regions.
CE: To what extent has SOCAR justified itself, considering the stage that it has been through? Does SOCAR plan to extend its trading business?
Elshad Nassirov: This is a serious additional source of our earnings. Furthermore, it is vital for an emerging company to position itself in the market to improve its recognition. As an example, when we won a tender for the acquisition of the network of petrol filling stations of ExxonMobil in Switzerland, one could imagine the surprise of ExxonMobil employees who found out that they no longer worked for the largest energy company of the world but for a company belonging to a state that was little known during that period. However, after the meeting with the management team of the acquired company, we convinced them that this acquisition would not have any adverse effects on payroll numbers or employment conditions. SOCAR is not a company of the former Soviet Union, which would move its own employees to Switzerland. It is a Swiss company operated by the Swiss people, and it works for their welfare.
The acquired company is certainly a profitable one. In addition, there are many positive aspects that provide both Azerbaijan and SOCAR with advantages and benefits which would not exist had we not acquired this retail network. Switzerland is a Central European country that caters to numerous tourists and businessmen worldwide. As of today, the SOCAR brand is prominent enough on Swiss roads.
CE: SGC projects provide Azerbaijan with access to the world market for its gas supplies. At what stages are these projects?
Elshad Nassirov: The final investment decision of December 17, 2013 on the Shah Deniz-2 project can be considered to be the main turning point. This decision was not an easy one as it is one of the world’s largest, most complex and expensive projects in the energy sector. The complexity lies in the fact that this is not merely a gas supply project between two countries. This decision impacts the interests of seven countries. Hence, it was exceptionally difficult to reach agreements on simultaneous and parallel commencement including completion of four investment projects - upstream in Azerbaijan (Shah Deniz-2) and three pipelines to cross territories of participating countries. Synchronous completion of construction works on all four projects is vital, since delay in execution or completion of any single project will lead to disruption in the overall operation of the entire system. Thus, all SGC pipeline projects must be finished on schedule and supply of the first gas flow must be in tandem with the operational readiness of the pipeline systems for gas transportation.
The SGC is not merely important but vital for Azerbaijan and SOCAR. Azerbaijan being landlocked, seeks to transport its petroleum products in the most comfortable, reliable and profitable way. Transportation through pipelines is the most convenient method but not the only one. Therefore, the pipeline going through Turkey and entering EU markets provides us with an opportunity not to merely sell gas but also fulfill long-term obligations on gas supply to markets regulated by competitive laws. Consequently, these are not affected by bilateral agreements between consumers and our customers. In many instances, prices for fuel, transit tariffs and agreements on volumes change and/or are dependent on deals between producers, transit countries and customers. However, in our case, long-term agreements (up-to 25 years) on gas sales and its transportation are reliable and beneficial for all parties and are not subject to temporary fluctuations. Such mutually beneficial agreements certainly allow us to sanction the start-up, development and production of other fields in the Azerbaijani sector of the Caspian Sea. They also create opportunities in expanding the SGC system’s supply capacity to meet new markets demands with additional volumes exceeding Shah Deniz-2 capacity.
CE: You have mentioned several important aspects. What are the results of the first meeting of the SGC Advisory Council, held in Baku under the chairmanship of President Ilham Aliyev on February 12, 2015?
Elshad Nassirov: The gathering of the SGC Advisory Council and setting forth of the initial plan of action is a major achievement. Apart from discussing existing issues and problems facing the construction of this corridor, the advisory council declared a joint statement. This statement provides comprehensive and full support to the project, commitments and readiness of all parties in assisting problem solving in the territory of the countries party to the SGC. The document was supported and signed by representatives of all the countries that the SGC pipeline is to have passage through including those of the USA, United Kingdom and the Vice-President of the European Commission. Accordingly, the project has attained European status. Considering support from the USA, I would say that the SGC is turning out to be a project of global scale and importance.
CE: You referred to some existing problems. Is the SGC currently hindered by real problems? If yes, is it safe to say that SGC-related projects will be completed as scheduled, and that Azerbaijani gas will be delivered to the European market in time?
Elshad Nassirov: It is exactly what the SGC Advisory Council meeting intends to achieve i.e. to determine and solve current and potential problems by states represented by their respective ministers or representatives of ministries of energy. Undoubtedly, the major task is to solve all problems in a timely manner so as to avoid any potential delays in project implementation.
CE: A possible doubling of gas supply to the European market was touched upon at the SGC Advisory Council meeting. What is Azerbaijan’s position on this issue?
Elshad Nassirov: We welcome our customers’ desire to obtain larger amounts of alternative gas which is as natural as the desire of producers to gain maximum profit from sale of their respective products. Markets are changing, and so is the situation in the gas sector. In the meantime, according to observed trends, Europe will need more gas by the time our infrastructural system is completed. In case of favorable market conditions, we will certainly consider increasing quantities of gas supply, since such increases along the SGC pipeline will lead to a reduction in transportation costs per unit volume. It is early to specify amount of gas that we intend to supply to Europe due to the presence of other markets en-route to it. Gas production in Azerbaijan is set to grow and a pre-agreed quantity will be supplied to Europe.
CE: You cited laws of competition in the European markets. How does it rhyme with opportunities to simultaneously supply gas along the pipeline network and also get involved in sale and transportation of gas within domestic markets of Europe? Does the European legislation hinder the purchase of assets in the EU states, especially in Greece and Albania?
Elshad Nassirov: SOCAR refrains from doing anything that would violate laws or regulations of the European Union. Gas to be supplied to Europe will be transported and sold in accordance with the laws of the respective countries and organizations representing this market.
Coming to the issue of segregation of transportation and sale of gas, we have no conflict of interest or disagreements. The contract on acquisition of 66% shares of the Greek gas distributing company DESFA is not contrary to European regulations. Gas to be supplied to Greece from 2020 onwards belongs to the Shah Deniz consortium which comprises 7 owners. But the gas transportation system is not owned by the Shah Deniz consortium. The company is studying the possible claims of the European Commission regarding separation of transportation from sales. Meanwhile, we adhere to our opinion and legal assessments. The outcome of this process will fully meet requirements of European regulations and there is no other approach available.
CE: How do you assess the capacity of the European gas market amid its increase in procurement of supplies from the USA, East Mediterranean countries and Russia? To what extent can it change the situation in the energy market of South-East Europe?
Elshad Nassirov: The issue of U.S gas supply is getting less urgent one since decline of oil prices will lead to declining gas prices as well. Regarding possible supplies from East Mediterranean countries and Russia, demand and supply should be considered here. Piped natural gas is the cleanest fuel among all types of hydrocarbons. Considering the observed tendencies on toughening of environmental regulations, the demand for gas is set to grow. Considering the forthcoming decrease in nuclear energy production in Europe, our volumes even though incomparable with that of supply from Russia and Norway, will offset such gaps which emerge or will emerge at the time of completion of construction of the SGC infrastructure. Moreover, the European Union calls European countries for having at least three different sources of gas supplies. Taking this into account, there will be demand for alternative gas (in this case Azerbaijani gas) in many countries of the South-East Europe.
In general, we see no reason for getting concerned. The final investment decision on all projects of the Southern Gas Corridor has been made. All SGC related contracts have been signed for the next 25 years. The list of customers, who have accepted the obligation to buy gas has been issued. The countries transiting gas through their respective territories have also been determined including companies that shall perform construction, maintenance, etc. Non-SGC gas quantities available to South-East European customers will have to be diverted to other markets since gas to be produced by Shah Deniz-2 has already been sold to these customers in agreed volumes and prices.
CE: Europe is building an Energy Union. To what degree do the principles of the Energy Union tie with the plans of its suppliers, including Azerbaijan?
Elshad Nassirov: The European Union is in charge of creating the Energy Union. We think it will not affect our sales since Azerbaijani gas has pre-agreed customers. Introduction of new rules shall not affect signed long-term contracts. Our country can be seen as an example where no production sharing agreement has been changed despite naturally arising inclinations to change, for example, tax burdens or some terms in the contracts. As all agreements are subjected to ratification by our parliament, no part in these PSAs can be changed without permission of the parliament and investors. Therefore, the Energy Union should promote the improvement of energy supply system to Europe. Our supplies to Europe are aimed at the same target i.e. enhancing Europe’s energy security. For this reason, the two projects are not contrary to each other.
CE: How much will it cost to deliver LNG supplies in the Caspian region, especially from Turkmenistan?
Elshad Nassirov: It is a question to be addressed to the respective countries that want to export their gas. But in general, the issue of gas export from Turkmenistan should be discussed with Turkmenistan. Any option is acceptable including the pipeline project. From a legal standpoint, no obstacles exist for its implementation. However, it requires the consent and will of Turkmenistan. The producer naturally chooses the option of transportation depending on costs, reliability along with many other factors.
CE: Which measures are currently being taken within the framework of Trans-Caspian projects?
Elshad Nassirov: As you know, oil from Kazakhstan and Turkmenistan is transported through Azerbaijan by railroad and by the Heydar Aliyev Baku-Tbilisi-Ceyhan oil pipeline. Thus, it is possible to say that the Trans-Caspian projects exist and that they are operating. Moreover, they operate effectively enough to allow supply of energy resources from the Eastern Caspian region into world markets. Regarding the transportation of gas, this question can be addressed to countries considering possibilities of channeling gas through the Caspian. Azerbaijan does not intend to highlight this project as a bargaining tool.
CE: Does the company plan to increase its investment portfolio through foreign markets? To what extent does the existing rating of the company promote it?
Elshad Nassirov: SOCAR’s current rating does not hinder but rather promotes this process. We do plan to expand our portfolio in foreign markets but are not in dire need of it. Therefore, we carefully consider all projects emerging in different markets that involve joint production of hydrocarbons, transportation of hydrocarbons, sale of liquid and gaseous hydrocarbons. To summarize, the company has plans in this direction and systematically works on it.
CE: Are there plans to develop fields beyond Azerbaijan?
Elshad Nassirov: Certainly. Work in this direction is underway. Firstly, SOCAR is seen as a reputed company in many countries because it is a state-owned company. Many countries usually do not want to partner with private companies but prefer working with state-owned companies. Secondly, the company represents an independent state, which does not identify itself as a part of any block or energy organization. Thirdly, SOCAR is a dynamically developing company and is seen to be a reliable partner by those intending to undertake business with it.
CE: Which markets are of particular interest to SOCAR? Is the company ready to invest in non-European assets like Morocco and other countries?
Elshad Nassirov: I can confirm our interest in Morocco and we are considering prospective investments or conducting joint activities both in North and Central Africa. Many countries in Africa have expressed interest in working with us through joint ventures. We are considering possibilities of investing in some of these countries but have not limited our options to African states. The geography of sale of Azerbaijani oil starts from the western coast of the USA, Canada, Ecuador and Chile and ends with South Korea and Japan in the east. Apart from sales, geography of potential lucrative projects is not limited only to Europe or the Mediterranean region. Many countries are offering investment opportunities and joint activities. Of all these projects, choice will be made in favor of those that are calculated to be most reliable and attractive for SOCAR and Azerbaijan. Such projects are tied to Egypt and South-East Asia. Although all markets are of interest to us, those that are geographically located closer to Azerbaijan are of particular interest.
CE: You have touched on a very important aspect for Azerbaijan, the one involving oil prices. How did it affect the investment decisions of the company?
Elshad Nassirov: Oil prices directly impact the investment decisions since there is a need for favorable oil prices in order to find funds and invest in ambitious projects. Oil prices depend on seasons and undergo certain cyclical fluctuations. Its decline occurs regularly but its subsequent rise is surely observed. Therefore, during the first six months of next year, we will try and implement designated projects that had to be put on hold during the first half of this year.
CE: Is there a possibility to reconsider previously signed gas contracts amid the decline of oil prices?
Elshad Nassirov: It is impossible since, as I have already said before, these contracts have been signed for 25 years. It is possible to reconsider prices on some long-term gas contracts. But this reconsideration is carried out through joint consideration of buyer and seller in view of changes in gas markets. Such long-term contracts provide opportunities for buyers and sellers in case they face major changes in the market situation. However, both parties must take decisions on necessary changes. There is no sense in reconsidering signed gas contracts since the first gas volumes of Shah Deniz-2 will be supplied to Turkey and Europe only in 2018 and 2020 respectively. So, quite a different situation at the oil market will exist by the time these gas volumes are delivered to their respective gas markets.
CE: How do you assess the investment outlook of international oil & gas companies in the Azerbaijani sector of the Caspian Sea?
Elshad Nassirov: There has always been an interest in the Caspian since proven oil and gas reserves of the Caspian have been seen to grow as exploration continues. The construction of related infrastructure will help link the Caspian region with the European market. This interest will grow even in more dynamic degrees. Therefore, we cannot complain about the shortage of attention or interest of oil & gas corporations in our resources or other resources of the Caspian.
CE: Are there possibilities for supply of Azerbaijani energy resources in other directions, be it in the southern or eastern?
Elshad Nassirov: We do not rule out any options of transportation, production and sale of oil and gas which can bring profits to the company and income to the country. When we speak of geographic directions, Azerbaijan, as a state, is linked with the west, north and south via the pipeline systems despite the lack of direct access into the open seas. Regarding the eastern direction, crude oil and oil products are supplied from countries on the east side of the Caspian sea, and transported via Azerbaijan towards western, northern and south-western directions. Therefore, the situation is quite favorable to us.
CE: What are the marketing policy development plans of the company?
Elshad Nassirov: The company is implementing a successful multi-directional marketing policy on sale of liquid hydrocarbons. Trading Companies SOCAR Trading Geneva and SOCAR Trading Singapore, having commercial representative offices in the Near East, Africa, South-East Asia and Europe, were created in order to be closer to the markets. They are better equipped with more mechanisms and instruments for securing better sales of Azerbaijani oil products and oil as well as taking advantage of favorable situations in the market of trading companies. It enables the company in trading not only Azerbaijani oil products but also in that belonging to Switzerland, Romania, Ukraine, Georgia and Turkey. This should be followed by creation of a trading company, which is not limited only to pipeline gas. We have been taking steps to promote SOCAR not only as a company selling oil and oil products, but also as a company capable of selling natural and liquefied gas through various wholesale and retail markets.
CE: With regard to LNG, was the opportunity of implementing the Black Sea AGRI project discussed? Will the project remain on the agenda?
Elshad Nassirov: AGRI has always been the project catering to transportation of gas, and not its sale. It is one of the projects assigned for transporting gas from Shah Deniz-2 to Europe. It was considered alongside pipeline projects as Nabucco, ITGI, White Stream via the Black Sea and CNG (compressed gas). However, the most optimum project TAP, a part of SGC, was selected. I cannot say that TAP is the ideal project, but it has fewer drawbacks than other similar projects thus considered.
AGRI provides liquefaction of gas in Georgia and transportation of the same to Romania, Hungary and other European countries. Thus we obtain flexibility coupled with several options, which leads to diversification of transportation. It is possible to extend the SGC and use the AGRI project. Combination of options among them is possible. Speaking about gas sales, I can say that there should not necessarily be our gas, and markets shouldn’t be limited to those of the Black Sea only.
CE: Which non-energy projects does SOCAR promote in Azerbaijan?
Elshad Nassirov: There are a number of them, but I will mention one that is close to me. SOCAR is implementing many projects in different areas. But as commonly known, SOCAR is the general sponsor of the entire Azerbaijani football. Its support is not limited to the national team alone, but also extends to other national teams involving the youth, children, amateurs and others. SOCAR finances activities of the Azerbaijan Football Federation. The most interesting and discussed issue among most citizens of Azerbaijan, including oilmen, is the national football team. I think we are witnessing serious changes in the national team. Many fans demanded dismissal of Bertie Fox and this happened though neither the Federation nor SOCAR saw shortcomings in his work because he instilled qualities such as discipline, analytics and good physical readiness into our football team. We have now entered a new stage. We now have a young, relatively ambitious, fairly well-known coach, who also comes from the German Football School. What is important now is that continuity is observed. In addition we have several candidates that are being considered in the national team, who should improve the team’s performance and increase striking capabilities. Hopefully, these new players who are playing in some of the best clubs in Europe, will give us the opportunity to enjoy more seeing our team playing.
