Joint Ventures, tendering and bidding

SOCAR Group has dozens of joint ventures across the globe with companies across a wide range of sectors. These can be seen in SOCAR’s consolidated accounts and include joint ventures with companies such as BP, Lukoil, Foster Wheeler, Maersk, Saipem and Rosneft. Additionally, as is typical for an international resource company, SOCAR operates subsidiaries with minority shareholders in six countries.

The selection of joint venture partners is driven by the same economic principles which any of our competitors or fellow multinational companies apply when seeking to establish successful businesses. Such factors include:

  • Alignment of business objectives
  • Shared vision for the business
  • Relevant skills
  • Ability to agree mutually beneficial financial terms
  • Management capability
  • Ability to execute quickly
  • Past history of joint operations with SOCAR

Sitting alongside these business principles is the need to appropriately share risk and come to an agreement as to an appropriate legal framework and structure for the joint venture. Finally, given oil is a strategic asset in Azerbaijan, SOCAR places great emphasis on the ability to have control of its joint ventures where necessary and to create long term value for the state. The creation of SOCAR Trading is a good example – joint venture partners were partly selected because they agree to allow SOCAR both voting control and the ability to buy back the asset should it develop into a business which could generate long term profits for SOCAR.

SOCAR carries out a thorough evaluation as a part of the process of setting up a joint venture. SOCAR’s management gathers the expert opinions of the relevant divisions such as Investments Department, Economic and Accounting Department and Legal Department on the requests for cooperation or setting up a joint entity. A more in-depth analysis of the political, economic and legal aspects of the potential joint cooperation is carried out by a specialist commission set up by a special decree. If satisfactory, SOCAR signs a legally non-binding memorandum of understanding with potential partners. Common principles of cooperation, joint strategy and legal issues arising out of such joint activities have to be agreed by SOCAR and the potential counter partner in order to secure the approval of the Management Board of SOCAR, its supreme collegial body under Clause 5.9 of SOCAR’s Articles of Association.

Under Azerbaijani laws and SOCAR internal procurement procedures there is no requirement for public offerings or tendering for setting up joint ventures or cooperation with private investors and corporations. We refer to Clause 2.3 of SOCAR’s Articles of Association approved by Presidential Decree No 844 of 24 January 2003 which expressly stipulates that the issue of joint activities with third parties – either through setting up a joint entity or without doing so – falls under the competence of SOCAR.

Neither Azerbaijani laws nor the relevant international practice requires setting up joint ventures through public tendering. Under Azerbaijani laws, only procurement of goods and services fall under the requirements of conducting tenders (competitive selection) which is presently established by the Law of the Republic of Azerbaijan on Public Procurement of 27 December 2001. This regulation was developed following the State Procurement Agency learning from experience gained since the introduction of the very first regulation “On procurement of goods (works and services) by the budgetary organizations” approved by Decree 524 of the President of the Republic of Azerbaijan, dated December 19, 1996, and its later version of 1997; The State Procurement Agency also took into consideration the recommendations of the World Bank, existing documents of European Union countries on public procurements, the provisions of World Trade Organization agreements on the public procurement, to draft the present law.

According to Decree all public procurement of 50,000 manat and over are to be open to tender and if proposed cost of goods (works and services) is less than 50,000 manat, the procurement agency will use any procurement method. If the expected tender cost is over 1 million manat, and in budget funded organizations is over 300,000 manat or of a similar amount in hard currency, then members from the Ministry of Finance, the Ministry of Economy and Industry of the Republic of Azerbaijan and representatives of relevant central executive bodies related to the tender should be included in the Tender Commission.

There is no specified practice on conducting tenders or on setting up joint ventures with third parties by state-owned entities in the referred Law. Moreover, under the Digest of SOCAR Rules on Procurement approved by SOCAR President’s Order of 31 July 2009, public tenders are conducted only in case of procurement of goods and services. An example of this is the Bid Commission of State Oil Company of Azerbaijan Republic (SOCAR), the open bid for the provision of Project Management and Third Party Inspection Services (for the new Ammonia Urea Complex to be built in Sumgayit of Azerbaijan Republic) held under the Law on “State Procurements” has been extended until 30 May 2014. The extension was a result of official requests by major potential bidders requiring additional time to provide more competitive bids.

Therefore, it is crucial to differentiate between state procurement tenders and establishment of joint ventures with third parties.

For these reasons, any negotiations with prospective investors for the purposes of setting up a joint venture could be made by SOCAR only through private negotiations – which is permitted under domestic and international Azerbaijani laws.

SOCAR’s priority when searching for partners/investors with whom to set up SOCAR Trading, was to keep full control of the decision-making process in a new trading arm. Another challenging and difficult condition SOCAR insisted in certain circumstances potential partners accept under certain circumstances, was a requirement that permitted SOCAR to benefit from the possible buy-back of all the shares in the newly set up trading arm after five years. Under the terms and conditions of a special agreement, the shares would be sold back to SOCAR in the case that the trading entity was successful and effective. This condition was not acceptable to almost all of potential major partners/investors.

The procedures on signing and entering into Product Sharing Agreements (‘PSA’) fall under the scope of Azerbaijani law requirements and consist of a few stages. During the first stage, SOCAR considers offers received from foreign and local companies which express their interest in exploration and exploitation of Azerbaijani oil fields. Once such an offer is considered and analysed by SOCAR experts and a potential contractor passes compliance procedures, the parties sign a memorandum of understanding and commence activities on negotiating the PSA’s draft. During the second stage, the already agreed draft of the PSA is agreed upon by the relevant ministries (Ministry of Taxes, Ministry of Energy, Ministry of Economy and Industry, Customs, etc.). After completion of the consenting procedures with the aforementioned authorities, SOCAR and the contractor sign the PSA. At this stage the contractor also receives the Government Guarantee. The third stage is the final one and sees the ratification of the PSA by the Azerbaijani Parliament – which immediately enters into force once it is approved by the Parliament.

We urge you to refer to the independent professional opinion provided by an international renowned consulting company on the legitimacy of SOCAR’s tendering, joint ventures establishment and PSA practice.