SOCAR in search of funding for its projects

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One cannot say that last year was lucky for the State Oil Company of Azerbaijan Republic (SOCAR). The fall in oil prices that was going on during the year caused the reduction of SOCAR’s revenues from exporting oil and oil products, impeded a number of projects and resulted in certain difficulties in fulfilling tax liabilities to the state budget and some other commitments.
According to SOCAR’s consolidated financial statement of 2015, the total income of the company last year fell by 16.6% as compared to 2014, sliding to 33,103 M manats; profit from operating activities went down by 28.5% and became as low as 1,287 M manats.
SOCAR’s revenues from oil sales in 2015 decreased in comparison to 2014 by 34% and made 14 815 M manats; revenues from oil product sales went down by 7.5% and amounted to 11,741 M manats.
The net loss of SOCAR in 2015 made 1,785 M manats while in 2014 its net profit was as high as 1,274 M manats. The company’s liabilities grew in 2015 1.9 times – up to 25,306 M manats. As of January 2016, the long-term liabilities were 15,059 M manats (2.5 times rise), and current liabilities made 10,247 M manats (rise by 48.7%).
When the oil price exceeded $100 per barrel the State Oil Company was ready to implement a number of major projects. But the drop in oil prices made the company revise its plans. The changes affected primarily financial issues because the funds available from the state budget and from the State Oil Fund were not enough while it was still hard to get external funding. As a result, SOCAR had to reconsider its out-of-pocket expenses, to postpone some of the projects till better days, and to modify the parameters of the others to make them more attractive for prospective investors.
Among these projects, one should mention the construction of the new oil and gas processing and petrochemical complex (OGPC) in the Garadag region of Baku. Earlier, at the best of times, the cost of this project was estimated at $14-15 billion, and the Azerbaijani government relied on it as one of the mega-projects whose implementation would create at least 10 thousand jobs.
Under the present conditions of economizing, this project seems less feasible since SOCAR has been unable to find investors for it for several years. In spring 2016, the State Oil Company even announced that it would suspend the active work on the project due to the lack of financing but later it changed the tone of its statements saying that it was choosing the most attractive terms offered by different investors.
In addition, funding problems forced the State Oil Company to revise the basic parameters of the project to make it cheaper thus facilitating the search for investors. As a result, the cost of the project’s first stage became somewhat lower. Today SOCAR assesses the construction cost of the new gas chemical facility as $4 billion versus the original assessment of $7 billion. On June 28, 2016, SOCAR Vice President Suleiman Gasymov said that the first stage still included the construction of both gas processing plant and petrochemical works. However, for the purpose of cost cutting, the capacity of the prospective gas processing plant is reduced from 12 billion cubic meters to 10 billion cubic meters.
At present, three groups of potential investors are under consideration. The first one is the China National Petroleum Corporation (CNPC): on June 1, 2016, CNPC and SOCAR signed a memorandum of intentions. SOCAR suggests that CNPC become an equity partner in the project and an investor, with the funds loaned from the Exim Bank and other Chinese banks.
The second group of investors includes the Russian Gazprombank, the Russian Agency for Export Credit and Investment Insurance (EXIAR), and the Italian agency for export credit SACE. They signed a memorandum of intentions on June 17. The Russian-Italian alliance is ready to allocate up to $5 billion for the project. If the funding is approved the construction of the complex could start already in 2017.
The third group of investors might include a pool of Japanese companies on which SOCAR originally placed its stake. In summer of 2015, the company’s top management even went to Japan to present the project and gain financial support of the Japanese. But the negotiations were unsuccessful: in view of considerable expenses, the Japanese companies considered the project unattractive. However, SOCAR believes that in case of the oil price rise the Japanese may get back to discussing the project.
According to local and foreign experts, the signing of memorandums does not necessarily mean that the funding for the project will eventually be found. Especially as the volatility in the oil market persists and, consequently, the financial problems of the State Oil Company will not fade away. Besides, SOCAR has to go to expenses on non-core operations involving financing major sports events both in this country and abroad, like the European soccer championship in France. According to western media, SOCAR paid for its ads at the championship at least 80 M euros.
To engage the Russian-Italian alliance as an investor seems more realistic today, particularly as SOCAR has already worked with Gazprombank: in June 2015, the State Oil Company acquired a loan from the bank in the amount of $489 million to finance the construction of facilities producing polypropylene and high-density polyethylene by SOCAR Polymer.
The issue of financing the construction of the carbamide plant in Sumgait is still unresolved. Nevertheless, the situation here looks much more optimistic: the plant management hopes to sign the respective loan agreement with the Export-Import Bank of Korea by October 2016. They plan to acquire the funds for a long term against the government guarantee.

soc-gazprombank

"The total cost of the project is 900-920 M euros. Taking into account the short-term loans already acquired – 100 M euros from the South Korean Exim Band and 50 M euros from Deutsche Bank, we will need up to 500 M euros for the continuation and completion of the job", says Khayal Jafarov, plant director.
Up till now, 320-330 M euros have been spent in the framework of the project. The estimated payback period is 7 to 8 years. Repayment of the loans will be made out of production profits.
As a reminder: for building the carbamide plant in Sumgait an area of 24 hectares was allotted. The construction started on Feb. 18, 2014. The plant will comprise three work centers: ammonia synthesis, carbamide production, and production of carbamide granules. The daily output will reach 1.2 K tons of ammonia and 2 K tons of carbamide.
At present, 70% of the project work is completed, including 20% of construction work. The estimated term of construction completion is September-October of 2017; the production of nitrogenous fertilizers and carbamide will start early in 2018.
The annual output capacity of the plant will be 650-660 K tons of carbamide, the domestic demand for carbamide in Azerbaijan being 150-200 K tons a year. SOCAR plans to export 2/3 of the plant’s products to neighboring countries, mainly to Turkey and Georgia.

"We can also export to South Europe. We do not expect any problems with carbamide marketing and sales. The produce of our plant will meet the highest standards and will be packed in 50-kg bags, so it will be easily exported and delivered to local farmers. We plan both to conclude both long-term sales contracts and make spot-sales", says Mr. Jafarov.
The plant’s management intends to start negotiations with its prospective customers in the first half of 2017.
It is worth mentioning that the above projects are among SOCAR’s key priorities up to 2026. In this period SOCAR will be also focused on upgrading the Heydar Aliyev Baku Oil Refinery and chemical works incorporated in the Azerkhimiya industrial group.
This work is also being done with borrowed funds, but from local banks. Thus, in 2015, the company reached an agreement with the International Bank of Azerbaijan of a loan in the amount of 1.2 billion manats for upgrading the Baku Oil Refinery and another 600 M manats for gas-well drilling in the fields of Bulla-Deniz, Umid, and Gunashli.

The funds will come in tranches over the period of 5 years. In 2015, the company acquired 69 M manats for the reconstruction of the Baku Oil Refinery and 200 M manats for well drilling. Besides, earlier SOCAR made a loan from the Central Bank of Azerbaijan (CBA) in the amount of 472 M manats to be used for the gas infrastructure development of the residential communities of the country. The funds were borrowed for the term of ten years and have already been spent. Now SOCAR plans to take an additional loan from the CBA of 198 M manats to be used for further gas infrastructure development.
Speaking of these loans, Suleyman Gasimov, SOCAR Vice-president for economic issues, mentioned that the total amount of the company’s debts to local banks is 1.095 billion manats. The consolidated bank debt of the company totals $ 6.3 billion or 9.4 billion manats. SOCAR’s development strategy for the years of 2015-2025 also includes a number of projects in oil and gas production, in particular, further development of the Azeri/Chirag/Gunashli field, search for oil in the Absheron archipelago, both in shallow waters and onshore, developing sea fields of Absheron and in future-oriented structures of Umid-Babek.
SOCAR’s plans up to 2026 include active participation in hydrocarbon exploration and production abroad. In this context, the company looks into the possibility of joint development of oil-and-gas fields on the Russian shelf and fields of hard-to-recover hydrocarbon reserves in Canada. Besides, taking into account the relief of international sanctions on Iran, SOCAR plans to take part in developing oil and gas fields in the Islam Republic.
In the opinion of the company experts, such projects are aimed at business expansion and diversification in the area of prospecting and extraction of hydrocarbon resources. However, the implementation of these projects requires not only will but also a stable market and high oil prices, i.e. conditions encouraging major investments in oil industry. But so far the oil price is hardly exceeding $50 per barrel and there are no prerequisites for its considerable growth.
"Over the past two years, major oil companies suspended many of their projects and investments of hundreds of millions dollars. The investment-oriented oil price is $60-70 per barrel. According to my estimates, the oil price will reach $60 per barrel by the end of the year, but this is not enough for substantial investments in the oil industry", admits SOCAR President Rovnag Abdullayev.
That is why SOCAR focused all its efforts in the upstream sphere on stabilizing oil extraction from old fields. In this context, before 2018, the company plans to build nine offshore platforms for drilling 81 wells.
In the framework of this plan, on March 14, 2016, platform No.7 in Gunashli shallow waters was commissioned; it will be used for drilling 20 operating wells including 6 gas wells and 14 oil wells.
In the Bulla-Deniz field, SOCAR plans to install five new offshore platforms before 2026 for drilling 26 wells. Already in 2017, the company intends to expand seismic investigations of this field.
Besides, before the end of 2016, prospecting at the Goshadash structure will be completed and, in case of positive results, drilling operations will start there.
After the launch of the new semi-submersible floating drilling unit scheduled for the beginning of 2017, we can expect stepping up of prospecting at the promising Babek structure, in the fields of Garabakh, Ashrafi, and others.
In a nutshell, SOCAR has a lot of exciting plans. Of course, one cannot foresee everything: life is unpredictable. But it has been well said that the basis for the future is the present, and this is what we call a plan.

Nigar Abbasova

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