The purpose of the following is to explain and clarify the history and purpose of SOCAR Trading SA.
In 1992, following the restoration of an independent Republic of Azerbaijan, the State Oil Company of the Azerbaijan Republic (SOCAR) was established. Until 2007, volumes of Azeri crude oil were marketed through international trading and supply companies. While this practice continued, Azeri oil sold at a discounted price to Brent with a poor return. SOCAR decided to take control of marketing Azeri crude and to deliver these volumes directly to end users worldwide. In doing so, SOCAR has been able to increase the value of Azerbaijan’s crude exports and capture additional margin.
From 2006, SOCAR was in discussion with a number of trading companies with the aim of establishing its trading arm in a joint venture format. Given the start-up nature of the project, it was necessary for SOCAR to cooperate with international partners who possessed the experience and ability to procure financing on better commercial terms. However, negotiations did not meet with success as trading companies did not agree to terms ensuring that SOCAR would retain ultimate control over the joint entity and equally share the generated profit.
During the same period, Valery Golovushkin of Lukoil approached Azerbaijani entrepreneur Anar Alizade with a view to submitting a proposal to SOCAR. Messrs Alizade and Golovushkin agreed to SOCAR’s shareholder structure and SOCAR Trading SA was established in 2007 – under the parent company Supra Holdings Ltd (Malta) (now Socar Trading Holding Limited). SOCAR agreed on the referred structure with a Maltese entity as the holding company based on the professional advice provided by international consultants. Prior to incorporation of the aforesaid companies, KPMG and Loyens & Loeff, international advisors experienced in providing tax and business consulting services, were retained to elaborate on the matters related to establishment of a holding structure whereby SOCAR and its business partners would participate in the project. It was contemplated that a prospective holding structure should involve jurisdictions with a favorable investment regime, developed legislation and also providing efficiency for investors from a tax perspective. Right from the start of the project, parties set aside using ‘tax haven’ jurisdictions and opted for countries with legal systems providing for corporate transparency. Eventually, after considering various options for setting up the holding structure, each of the outside counsels submitted reports proposing incorporation of the holding company in Malta with its subsidiary company established in Geneva, Switzerland. Malta was selected as an investment platform in order to benefit shareholders of the holding company from tax advantages provided under the Maltese participation exemption system and the EU-Swiss Savings Agreement of July 1, 2005. Switzerland was selected due to being one of the global marketplaces for oil trading. Moreover, the referred structure was discussed and agreed with Swiss authorities upon obtaining the relevant tax rulings for SOCAR Trading SA.
In its report, “SOCAR Trading – Trading Performance Review (May 2014),” the Boston Consulting Group (BCG) confirmed that the “most successful energy trading companies have been created with experienced traders.”
The shareholder agreement divided ownership of Supra Holdings Ltd (and thus SOCAR Trading SA) between SOCAR, Mr Golovushkin and Mr Alizade. State-run SOCAR received 50% of company ownership, Mr Golovushkin held 25% through his company Renfrel Holdings and Mr Alizade held the final 25% ownership stake through his company, Heritage General Trading FZE. Messrs Golovushkin and Alizade were both appointed to the board of SOCAR Trading SA. Mr Golovushkin was positioned as CEO and Chairman of the Board of Directors for the 6 year period, resigning from the CEO role (retiring) in December 2013 and handing over the role to Mr Arzu Azimov, an Azerbaijani national who has previously acted as vice-president of the company.
The agreement between SOCAR, Valery Golovushkin and Anar Alizade specified that after five years SOCAR would hold the pre-emption rights to buy back all the shares in SOCAR Trading SA.
The financing for SOCAR Trading SA was to be provided by the three shareholders. However, in reality SOCAR found it difficult to raise money. In 2008 during the global financial crisis, banks were hesitant to supply credit lines – especially to an early post-Soviet state-run company. As a result, much of the financing came from Messrs Alizade and Golovushkin who were able to use their reputation and experience to obtain credit lines that SOCAR Trading would not have been able to secure otherwise. Moreover, Mr Golovushkin was a highly qualified executive professional well-known in the industry. Mr. Golovushkin founded Litasco, a trading house of Lukoil based in Geneva, which was a successful project and very similar to what SOCAR was aiming to create at that time. During the start-up period, traders showed little interest in working with SOCAR Trading SA. Both private shareholders assisted in building confidence amongst the market participants and bankers that the Azerbaijani origin trading company had a good future. Additional to his share capital contribution, Mr Alizade later supplied SOCAR Trading with additional funding (see below) through his company Union Grand Energy, against which the joint venture was able to increase its creditworthiness.
In 2010, SOCAR Trading SA required additional financing, which resulted in a restructuring of share ownership. SOCAR invested sufficient to maintain its 50% ownership stake in SOCAR Trading SA. Mr Golovushkin chose not to provide additional financing and his shares were diluted accordingly, to 10%. Mr Alizade provided the main part of the financing and thus saw his proportion of ownership increase from 25% to 40%. During this difficult financial period, Mr Alizade also provided an unsecured loan of $20 million to SOCAR Trading SA, which was repaid in full the following year.
The multibillion credit lines of SOCAR Trading were provided by over a dozen reputable international banks (worth $6 billion). As is customary, full diligence and compliance reviews were carried out at inception and have been conducted on an annual basis since. Without Mr Alizade’s financial support, SOCAR Trading SA would have had more difficulties with obtaining financing during global financial turmoil.
In 2011, dividends to the total of $50 million were distributed between the shareholders in accordance with their ownership stake. These dividends were the only such amount paid throughout the duration of the shareholder agreement and reflected the aggregate amount since the inception of the company. The division of the dividends reflected the structure of the ownership shares as listed in 2011.
In 2012, at the end of the five-year period, SOCAR signed the share purchase agreements to buy back all the shares in SOCAR Trading SA. In doing so, SOCAR Trading SA agreed to pay $103 million to Heritage General Trading FZE and $30 million to Renfrel Holdings, which reflected the significant increase in market value for SOCAR Trading shares by 2012. Mr Alizade stepped down from his position on the board of directors while Mr Golovushkin remained as CEO and Chairman of the Board until end of 2013. After retiring from his position as CEO at the end of 2013, Mr Golovushkin remained as a Chairman of the Board of Directors before stepping down recently. He is still a member of the Board.
Both the Boston Consulting Group and Wood Mackenzie have estimated in their reports that the establishment of SOCAR Trading SA resulted in additional crude oil revenues for Azerbaijan in the range of $1.7-1.8 billion during 2008-2013. An independent business valuation carried out by one of the ‘Big Four’ international audit companies indicates the estimated equity value of SOCAR Trading in excess of $305 million as at 30 June 2012 (i.e. before buyout) and in excess of $425 million as at 31 December 2013.
As a result of its joint venture with private individuals, Messrs Golovushkin and Alizade, SOCAR received the initial financing and all office facilities required to set up the successful SOCAR Trading entity. SOCAR Trading enabled SOCAR and Azerbaijan to make more money from its oil – and yet ultimately retain full control of the trading entity. It has gone from being a single office company based in Geneva with 10 employees in 2008, to one of the global trading houses in 2012 with 160 employees in 10 offices worldwide.