1. The changes, which had been planned in favour of our country during the reporting period, have not been noticed as expected.

Firstly, seeing the year of 2006, which had been covered by the report, as having appeared to be a crucial year in the history of oil & gas incomes of Azerbaijan, we would like to refer to the planning several years ago of substantial changes to be formalised, at the end of the indicated reporting period, in favour of our country under the production-sharing agreement on Azari – Cirag – Gunasli oil fields. On the other side, the analysis of the 5th report has shown that contrary to what had been envisaged, the Azerbaijani side, as compared with its multinational petroleum partners, has fallen short of the anticipated efficiency, since there was a surge in ACG project costs in the first half of 2006. Despite we expressed our stance on this issue in our previous conclusive statement, we reiterate, having considered the importance of the existing situation and the steady-state tendency, that the analysis of the current report hasn’t revealed any sign of major improvement with respect to an effective rise in the share (of profit) of the Azerbaijani side. During the latest reporting period, covering 2006, only 13 percent of the entire crude output of the Azerbaijan International Operating Company (AIOC) has fallen to the share of the Government of Azerbaijan. That proportion has constituted just 11.8 percent over the past six months. The proof lies in the corresponding report by BP – the company has stated that AIOC’s overall capex (capital expenditures) and opex (operating expenses) throughout 2006 had amounted to 2,477 and 234 million U.S. dollars respectively. Also known is that some 22.5 million tons – 166.5 million in barrel equivalent – of crude oil have been produced during the indicated reporting period in the framework of the ACG project. Given that the annual price of crude oil averaged at 52 U.S. dollars per barrel in 2006, following the deduction of corresponding transit and incremental costs for Azerbaijan, the resultant revenue was generated at 8,658 million U.S. dollars. The profit oil, to be distributed (among project partners), was retained at 5,947 million U.S. dollars, since the capex and opex were to be deducted from the gross revenue. As is show in the report, the matching share of the Government of Azerbaijan has footed up to 1,013 million U.S. dollars (896.3 million manats*1.13). The share of profit oil of project contractors made up 4,934 million U.S. dollars, but that could be reduced down to 4,441 million U.S. dollars should the list hadn’t included the State Oil Company of the Azerbaijan Republic (SOCAR). Correspondingly, some 972.958 million manats or 1,100 million U.S. dollars were paid in profit tax by foreign companies.

2. Despite the acceleration of the pace of production, Azerbaijan still fails to benefit by it adequately.

The production (of crude oil and associated gas) from the ACG concession in 2006 grew 50 percent as compared to the previous year’s performance. Nevertheless, the profit oil sharing scheme is still in favour of companies. Still remaining unanswered is a question concerning the failure to calculate the share of the State on the basis of RGN > 16.75 percent proportion as set out in the corresponding provision in ACG PSA. The analysis of the information, which has been obtained from different sources, shows that the dominant cause for that might be linked to the fact that, contrary to what has been anticipated during the reporting period, capital expenditures haven’t been fully recovered. In accordance with the counting work, which we have carried out appropriately, the capital expenditures have worked out to 13.04 billion U.S. dollars since 1996 through 2006. To the same point, to be reckoned, while signing the ACG agreement, it was stated that the approximate amount of capital expenditures wouldn’t exceed 12 billion U.S. dollars – lest there by any doubt today about the capital expenditures to reach 14 billion U.S. dollars. Considering that price hikes on the global market could be a well-grounded consequence for such a deviation towards a cost increase is not enough to validate the over-estimation of project costs in general, as the unfair situation refers directly to serious errors in calculations themselves. The currency of the latter argument intensifies yet higher against the background of recent developments in the Kashagan field, offshore Kazakhstan.

3. Excessive squandering on the sharing of the produced oil among projects partners.

The analysis of the information, which has been submitted for the reporting period, shows that the facts of squandering become apparent on the amount of expenditures going beyond the scheduled figures. On the other side, there is a sheer difference in the factual market price of crude oil and the corresponding amount of money which has been indicated in the report. A logical consequence is that the Government is called in question against its declaration of the sale price – as complied with that – of the profit oil of separate contractors, and against the effectiveness of its control over the entire process in general.

4. In 2006, Azerbaijan gained more in profit tax rather than the sharing of profit oil. During the reporting period, the amount of profit tax surpassed the worth of the share of the State in profit oil.

While foreign oil companies remitted a total of 1.1 billion U.S. dollars in profit tax to the state budget, the exclusively profit oil share of the State, without considering that of SOCAR, constituted just 524 million U.S. dollars, thereby reaffirming the share of the State in profit oil – a crucial source of receipts – as being of less-than-expected importance. Meanwhile, the philosophy of the production-sharing agreement makes provision for the sharing of profit oil as a major pillar of the overall incomes of the State as a party to PSA.

5. A difference between the accrual basis and the cash-based accounting leaves a gap in the accounts reported.

Of controversial nature were the statements last year by the Ministry of Taxes concerning the contribution by foreign companies to the state budget. On the one side, profit tax was imposed on ACG contractors since the last quarter of 2005. On the other side, a difference in the amounts of quarterly tax remittances, which had been declared by different sources, has been substantiated by the existing practice of a mismatch between the taxes which foreign taxpayers calculate and pay. For the time being, a majority of companies keep their accounts on an accrual basis. It means that irrespective of money payment, the company has to post every single fact of debt that arises in case of a purchase of any service/commodity/work or the accrual of a tax obligation. Consequently, the cost of any service/commodity/work is declared as expenditure, thereby leading to the accrual of a debt. Then the debt is paid back and taken off the accounts. The cash-based accounting does mean that the fact of expenditure is accrued in money obligations, whereas the debt is not reflected in the corresponding accounts at all. While preparing a report on EITI, some companies have declared the debts which are classified into the category of accrued (in return for money obligations), but yet not repaid debts. In this case, a difference between two methods of accounting leads to a significant gap in accounts and creates additional difficulties. Eventually, this sets up conditions for the repetition, on a year-on-year- basis, of problems linked to the on-time and full payment of profit tax, i.e. the amount which foreign taxpayers calculate and pay.

6. SOCAR’s dual status in the Production-Sharing Agreements leaves more room for manipulation and reporting distinctions.

The independent analysis of the results of the audit under the 6th report has shown that the continuation of SOCAR’s dual status in the Production-Sharing Agreement – an ‘issue of tradition’ – and the submission of a consolidated, rather than separate presentations by the Government and SOCAR respectively, report on the amount of crude oil falling to the share of Azerbaijan yet complicates precise calculations and makes it impossible to identify the sole share of the State in profit oil. Therefore, the ITEI coalition of civil society institutions comes up with two scenarios as a solution to the existing issue: compliance of accounting and reporting systems with international standards, which, in its turn, will put an end to SOCAR’s dual status and reaffirm the company’s status of a local partner in the Production-Sharing Agreement, and the separate submission by SOCAR of corresponding reports. The realisation of the first scenario does mean an end to the mixing by foreign oil companies, participating in the Production-Sharing Agreement, of SOCAR up with the State, while the second option could streamline the analysis and yet clarify the results of the reports on EITI.

The ITEI coalition of civil society institutions urges the following action to be taken as a consequence of the audit under the 6th report:

1. An Agreement on the amendments to and alterations in the Memorandum of Understanding must be submitted for discussion among the parties to the memorandum (the text of the Agreement is enclosed);
2. Proceeding from the requirements of the current Memorandum and assuming the entering of the Production-Sharing Agreement into a new phase of qualification, discussions must open among the respective parties over the improvement of the existing reporting system;
3. SOCAR must follow the practice of other companies with respect to the submission of corresponding reports on an individual basis, while the State Commission must support the initiative in this respect;
4. Taking into consideration the expansion of the scope and repetition of the same problems which the companies have caused unintentionally, a training course on the compilation of reporting templates must be organised for the company staff;
5. Taking into consideration the interests of the parties to the Memorandum and provided that the above-proposed recommendations are met, preparations must be arranged for the development of the Action Plan to get validated beginning from the next year and clearly outline the duties and responsibilities of the respective parties within a specified timetable.

Sənədin sonuncu korrektə tarixi: 7/7/2008 - 11:29:11