Azerbaijan: For SOCAR, Bigger Means Better with Azerigaz Takeover

The Azerbaijani government's recent decision to make state-owned gas distribution company Azerigaz part of the mammoth State Oil Company of the Azerbaijani Republic (SOCAR) signals that Baku wants to transform SOCAR into an "economic symbol" similar to Russia's Gazprom or Kazakhstan's KazMunaiGas, experts say.

Reasons for President Ilham Aliyev's July 1 order remain hazy, however. No information was released that suggested that Azerigaz was losing money. The day before, at Azerigaz's request, Azerbaijan's Tariff Council had agreed to increase the consumer retail price of gas to a profit-making 100 manats ($124.36) per 1,000 cubic meters.

Some energy analysts had hoped that the takeover would mean greater efficiency at Azerigaz, a company of several thousand employees with a reputation for non-transparent management.

But those hopes were dashed on July 6 with an announcement by SOCAR President Rovnag Abdullayev that Azerigaz has a "good structure" and that the company's "system and employees will not change."

SOCAR has appointed the director of one of its two oil refineries, Akper Hajiyev, a relative unknown, as the new general director for Azerigaz.

SOCAR intends to implement "big changes" in Azerigaz's management via sizeable investments, Abdullayev said, without specifying an amount.

Baku economists and energy experts largely scoff at the promised changes.

Azerigaz's merger with another state-owned company does not bode well for its future efficiency, argued Azer Mehdiyev, director of the Public Union to Support Economic Initiatives.

"What happened looks more like a Soviet system of management," Mehdiyev said.

Rather, the takeover appears to signal that SOCAR's own business interests are being amped up for competition with other regional players like Russia's Gazprom or Kazakhstan's KazMunaiGaz.

With an employee payroll of more than 60,000 people, SOCAR, founded in 1992, is a far cry from a streamlined company. The company, Azerbaijan's biggest employer and taxpayer, annually produces about 9 million tons of oil and 8 billion cubic meters of natural gas. Aside from two oil refineries and a network of pipelines within Azerbaijan, the company is a partner in all major oil and gas exploration deals underway in Azerbaijan.

Mehdiyev believes that SOCAR's acquisition of Azerigaz was done to improve the energy giant's own finances. With crude oil prices at not even half their 2008 high of $150 per barrel, gas sales to Azerbaijan's domestic market can help bolster SOCAR's revenues, he noted.

With Azerigaz in hand, SOCAR can conceivably move "towards monopolization of the oil/gas sector in Azerbaijan," Gubad Ibadoglu, head of Baku's Economic Research Center, told Turan news agency not long after the Azerigaz decision. The company has already announced plans to set up a chain of 10 gas stations in Baku by the end of 2009.

A July 20 reorganization of the company has further bolstered expectations of SOCAR's plans.

Under new corporate statutes, approved by President Aliyev, SOCAR's registered capital was defined, for the first time publicly, as 600 million manats, or about $750 million. Its capital assets remain undefined, however.

Its "head office" -- never before defined -- is placed in Baku, with offices in London, Geneva, Istanbul, Bucharest, Astana, Tbilisi and Singapore.

The company now includes a board of directors as well as departments dealing with risk management, audits, procurement of oil and gas, and gas exports.

Independent energy expert Ilham Shaban forecasts that the statutes reaffirm the government's intentions to get SOCAR into fighting form as an international symbol of Azerbaijan's hydrocarbon might. "Enjoying political support from the state, SOCAR will become an instrument for acquiring not only economic, but also political dividends," Shaban said.

"[T]he company will try to expand in foreign markets further as, for example, Gazprom or KazMunaiGas does," agreed Ingilab Ahmadov, director of the Public Finance Monitoring Center. With holdings in Turkey and Georgia, this SOCAR campaign has already begun, he added.

"The president's decree just reaffirmed [government] intentions to continue this policy," Ahmadov said.

[The Public Finance Monitoring Center is financed by the Open Society Assistance Foundation - Azerbaijan. EurasiaNet.org is financed by the Open Society Institute's Central Eurasia Project.]