Message from the President

SUSTAINABLE DEVELOPMENT REPORT | 2016 Message from the President

in the oil industry, more challenging commitments and tougher technological criteria stimulate this transition. Today, we are also aiming to broaden the boundaries of our success and development beyond the national level and reach new heights on a global scale due to increasing globalization of oil and gas market. Azerbaijan is an exporter of crude oil and gas as well as petroleum and petrochemical products. The refined and petrochemical products are exported worldwide including the USA, Italy, Egypt and China. In recent years, the quantitative and qualitative requirements for fuel and chemical products have been continuously increasing SOCAR’s sixth sustainable development report and changing. The quality of diesel and automotive discusses its key achievements as well as the gasoline complying with European standards as well as opportunities and risks for 2016. the profitability and low environmental impacts are key Since the global fall in oil prices two years ago, our criteria for petroleum and gas products. Falling crude company has undertaken stronger commitments and oil prices have led to rising profitability of petroleum, made challenging decisions with regard to its capital gas and petrochemical products. This trend was clearly assets. Despite the challenges, we continue to prioritize observed in Petkim Petrochemical Holding (Turkey) that activities that benefit the environment, society and is our largest asset in Turkey. Today the Holding exports future generations with a focus on quality, safety and petrochemical production of around USD 500 million efficiency. to 40 countries and its net profit is annually increasing. “The Contract of the Century” marked a significant SOCAR is actively involved in environmental milestone giving new impetus to the Azerbaijan oil and initiatives that have recently gained popularity in gas industry. Firstly, 416 million tons of oil and 128 billion Azerbaijan. SOCAR also continues implementing large- cubic meters of gas have been produced by the end of scale projects to prevent the fields pollution (especially 2016 from the deep water areas of the Azeri, Chirag and the ones located in Azerbaijani sector of the Caspian Guneshli (ACG) fields in the framework of the Contract Sea) with oil and petroleum products as well as of the Century. The Company installed safe oil and gas emissions of greenhouse gases into the atmosphere. pipeline systems for gathering, storage and export of As we all know, climate change and global warming hydrocarbons to the global market. The commissioning are among the major concerns of the present generation. of the Baku-Tbilisi-Jeyhan Main Export Oil Pipeline SOCAR has cooperated with the World Bank’s Global gave a fresh impetus to the economy of Azerbaijan. Gas Flaring Partnership organization and joined the The value of this project should not be limited to the “Zero Routine Flaring by 2030” initiative since 2008. invested huge financial resources, but should also Our project on utilization of associated gas implemented consider more than 30 infrastructure projects for non- in “28 May” and “Neft Dashlary” (Oil Rocks) fields was oil sector development realized within this agreement. highly rated by the World Bank and received an “Award Currently, over 4000 local enterprises and companies of Excellence”. Over the reporting year, the Company have been involved in the ACG project. also managed to gather the associated gas emitted As the senior management of SOCAR, we into the atmosphere, which decreased by 10.8% as understand that our Company cannot survive in a compared with 2015. rapidly changing economic and social environment in Formation water is another principal source of the long term if a traditional business model is applied. environmental pollution. We could increase the volume Hence, as the company that has a significant role in the re-used formation water in a closed-cycle system from development of our country’s economy, SOCAR shall 88% to 100% this year. constantly seek for and use the most innovative methods Over the reporting year, the opening of Waste in its operations. New initiatives, growing competition 1 2016 | SUSTAINABLE DEVELOPMENT REPORT

Management Centre was officially launched. This center is the first and only regional facility with the annual capacity to handle and process 100 thousand tons of production wastes generated by the oil industry in the CIS and Caspian region. This Centre will provide additional capacity for processing and disposing the production and utility wastes produced by industrial companies in Azerbaijan. One of the main objectives of our company is to contribute to improvement of the living conditions of the local population. The gas provision of the regions throughout the country has increased from 62,3% in 2009 to 92% in 2016. The number of registered households (subscribers) has reached two million. Unfortunately, we also experienced a number of accidents during the reporting year. SOCAR is concentrating its efforts on analyzing the reasons and consequences of the accidents happened in 2015 and 2016 that were caused by extreme weather conditions as a result of which some employees tragically died. Dedicated groups continue to investigate the accident occurred in 2016 as well as necessary support is being provided to the families of nine deceased employees. SOCAR has also undertaken actions aimed at maintaining the serviceability of all process facilities and equipment in its entities to prevent accidents happening as a result of natural disasters. In addition, the Company has increased the number of safety officers in some of its entities to strengthen control over safe working practices and compliance with the safety rules. The Company continues to implement actions aiming to reduce the identified risks and enhance positive impacts associated with its operations. Our energy strategy that is implemented in compliance with the modern requirements significantly contributes to the country development.

2 SUSTAINABLE DEVELOPMENT REPORT | 2016 About the Report

The current report is SOCAR’s sixth sustainable of interest to our stakeholders, the main aspects of development report. The sustainability performance SOCAR’s annual performance covered by the mass results of SOCAR are published as a report on an media were analyzed, sustainable development reports annual basis. The report is issued to provide complete of fi ve international oil and gas companies were and transparent information on the activities carried reviewed, and interviews with employees responsible for out over the reporting year as well as to respond to different sustainability issues were organized. Material the comments and suggestions of stakeholders. The issues for SOCAR and its stakeholders identifi ed during sustainable development report of the Company for 2015 these analyses are included in the current report as was published in Azerbaijani and English languages specifi ed in Figure 1. Furthermore, the information on in August 2016. The report was communicated with identifi ed material aspects and their boundaries as well the Company’s internal and external stakeholders by as the reasons why these aspects are considered as distributing the hard copies as well as via the corporate material can be found in Table 1. website. As in the previous years, the annual report incorporates the key industrial and fi nancial indicators of SOCAR for 2016, including the sustainable development performance indicators of SOCAR Azerbaijan and its structural divisions as well as foreign representative offi ces and subsidiaries. Moreover, this year the report covers and discusses the performance indicators of SOCAR Energy Turkey in more detail. Although the Company has not developed and approved a formal stakeholder engagement policy, the report considers the interests of both internal and external stakeholders. To identify the topics that are

Figure 1. Materiality matrix

Ecosystem services Emissions Strategy Occupational health including blodiversity and analysis and safety Indirect economic Efﬂuents and waste Ethics and

high Employment impact Reserves integrity Diversity and Energy Water equal opportunity Training and education Products and Emergency Economic services Asset integrity and preparedness perfomance Involuntary process safety resettlement Sosial compliance Organizational Market presence proﬁle Stakeholder including local content eholders engegement Governance Supplier human Non-discrimination rights assessment Environmental Labor practices compliance Child/forced grievance mechanisms or compulsory labor Anti-competitive behaviour Transport low

alue to External Stak Freedom of association V and collective bargaining

low high Value to Internal Stakeholders

3 2016 | SUSTAINABLE DEVELOPMENT REPORT

Table 1. Boundaries of material aspects

Material Materiality of aspects for SOCAR Boundaries of material aspects aspects Well-conceived strategy along with the analysis of risks, Company, external stakeholders Strategy and impacts and achievements is the main pillar for analysis sustainable and long-term development. SOCAR ensures that the ethical code and standards Company, local community Ethical necessary for the sustainable development are complied behavior with. Sustainable and long-term development is possible if the Company, local community Economic business operations are properly organized and performance managed. Energy efficiency can lead to the improved environmental Company, local community, Energy and financial performance results. external stakeholders As water is a scarce resource, water efficiency is kept Company, local community, Water under strict control during all operations. external stakeholders Greenhouse gases should be controlled continuously as Company, local community, Emissions they are the main cause of the climate change. external stakeholders Hazardous and non-hazardous wastes generated by Company, local community, Effluent and SOCAR’s operations can have a negative impact on the external stakeholders wastes eco-system, employees and community. SOCAR is the largest employer in the country and thus Company, Company’s employees, Employment has a number of obligations to its employees. local community Considering the risks due to non-compliance with the Company, Company’s employees Occupational safety rules, the Company should ensure that health and occupational health and safety issues are under the safety constant control. The sustainable development of the Company largely Company, Company’s employees Training and depends on the professionalism of its employees and education their continuous development. As corruption impedes the development of society and Company, local community, Anticorruption the Company itself, particular attention should be paid to external stakeholders actions anticorruption practices. Emergency Emergency preparedness can considerably decrease the Company, Company’s employees preparedness number of injuries and fatalities due to accidents.

This report presents data on multiple aspects of Risk Management Department of SOCAR Head Offi ce the oil and gas industry in line with G4 Sustainability (Nicat.Hanifayev@socar.az), or Dilara Abdullayeva, Reporting Guidelines of the Global Reporting Initiative senior engineer ([email protected]). (hereinafter referred to as GRI guidelines) and its Oil and Gas Sector Supplement. The report content is defi ned based on GRI principles of materiality, stakeholder inclusiveness, sustainability context and completeness. The report also refl ects the principles of balance, comparability, accuracy, timeliness, reliability, and clarity. The independent audit and verifi cation of the report is performed by EY Company (for more detail, please, refer to the Independent Assurance Report on page 67). Suleyman Gasimov, Vice-President for economic affairs, is responsible for the organization of the independent audit of the report as well as its review and approval. Any questions, comments and recommendations regarding the report content can be addressed to Nijat Hanifayev, the lead economist of the

4 SUSTAINABLE DEVELOPMENT REPORT | 2016 About the Company

Scope of the Company Development of refining sector The operations of the State Oil Company of In the reporting year, significant works to develop Azerbaijan Republic (SOCAR) cover various areas the refining sector were carried out in Heydar Aliyev of oil, gas and petrochemical operations both in the Oil Refinery. The foundation of the bitumen blowing Republic of Azerbaijan and in international markets. In unit (BBU), was commissioned on September 19, Azerbaijan, SOCAR undertakes oil and gas field search, 2016. In addition, to meet domestic demand by 2030 exploration and development, production, refining and reconstruction and renovation works are continuing at transportation of oil, gas and gas condensate as well as the refinery. the sale of oil, gas and petrochemical products in the domestic and international markets. In general, SOCAR Economic impacts and industrial activities is the largest company in the country employing 50735 Being one of the largest tax payers in the country, people (52104 in 2015). SOCAR is the driver of the country’s economic In 2016, SOCAR operated 25 structural divisions development. In 2016, the Company’s payments to the in Azerbaijan including three production units, four budget were AZN 1 394 126,9 thousand (excluding factories, two trusts and one institute. All have legal profit tax). Due to a sharp decline in oil prices and fall entity status. Simultaneously, the Company is a partner in demand, tax payments decreased by AZN 90 435,7 in Production Sharing Agreements that cover fields in thousand or 6,09 % as compared with the same period the Azerbaijani sector of the Caspian Sea as well as in the previous year. onshore. Production development In 2016, targeted geological, technical, technological and organizational works were carried out to stabilize and increase output from oil and gas production. Proven oil and gas reserves

71 503 2016 ths. tons

51 978 1,802 mln. m3

Oil and gas production

7 522,40 ths. tons Equity capital of SOCAR in 2016, billion AZN 6 266,80 mln. m3

Oil and gas reﬁning 2016

6 009,40 ths. tons 1,394

3 000,70 mln. m3

SOCAR’s payments to the budget in 2016, billion AZN Note: As of 01.01.2017, oil and gas reserves are estimated and approved for four fields. Oil and gas fields included in the Report: Guneshli, Neft Dashlary, Bulla-Deniz and Umid-Babek. 5 2016 | SUSTAINABLE DEVELOPMENT REPORT

SOCAR's share in offshore ﬁelds in the Azerbaijani sector of the Caspian Sea

Shafag Asiman 50%

Absheron 40% Bahar and Gum-Deniz 20% ACG 11,65% Shahdeniz 10%

SOCAR's share in onshore ﬁelds

Mishovdag Kalamaddin 15% 50% 20% Pirsahhat

Padar 20% Neftchala and other ﬁelds K urovdag 25% 20% Bloc k 3 of South-West Gobustan M uradkhanli, Jafarli and Zardab

25% 20% Z ikh Hovsan Surakhani 20% Binaqadi and block of other ﬁelds 25% 20% Balakhani and block of other ﬁelds 25% Kursangi Garabagly

6 SUSTAINABLE DEVELOPMENT REPORT | 2016

Table 2. Economic indicators of SOCAR in 2016, thousand AZN SOCAR Azerbaijan Economic value generated 3 846 734 Revenues 3 846 734 Economic value distributed (2 426 761) Operating costs (877 822) Employee wages and benefits (572 645) Payments to providers of capital (321 521) Payments to government (437 192) Community investments (217 580) Economic value retained 1 419 973 SOCAR Energy Turkey Economic value generated 2 989 189 Revenues 2 989 189 Economic value distributed (2 415 585) Operating costs (1 928 326) Employee wages and benefits (172 505) Payments to providers of capital (216 463) Payments to government (98 291) Community investments 0 Economic value retained 573 604 SOCAR Energy Georgia Economic value generated 858 555 Revenues 858 555 Economic value distributed (777 670) Operating costs (719 910) Employee wages and benefits (34 057) Payments to providers of capital (17 693) Payments to government (6 010) Community investments 0 Economic value retained 80 885 SOCAR Energy Ukraine Economic value generated 280 485 Revenues 280 485 Economic value distributed (252 439) Operating costs (237 722) Employee wages and benefits (11 697) Payments to providers of capital (673) Payments to government (2 347) Community investments 0 Economic value retained 28 046 SOCAR Energy Switzerland Economic value generated 1 657 559 Revenues 1 657 559 Economic value distributed (1 563 719) Operating costs (1 484 445) Employee wages and benefits (75 597) Payments to providers of capital (646) Payments to government (2 869) Community investments (162) Economic value retained 93 840

7 2016 | SUSTAINABLE DEVELOPMENT REPORT SOCAR’s structure

DEVELOPMENT AND PRO CESSING PRODUCTION

Heydar Aliyev Oil Reﬁnery Gas Processing Plant

MARKETING GEOPHYSICS AND SALES AND EXPLORATION

DRILLING PROJECT AND CONSTRUCTION AND INVESTMENT

Integrated Drilling Trust Oil and gas Construction Trust

TRANSPORTATION AND LOGISTICS SERVICE

Transportation Department

OTHER FIELDS ALLIANCES

SOCAR- TGP SOCAR- SCNBY Baku Higher Oil Academy SOCAR-Maersk SOCAR-Optilan SOCAR-HC SOCAR-Petrofac

JOINT VENTURES

FOREIGN ACTIVITY

Representative Ofﬁce in Iran Representative Ofﬁce in Germany

1 Please visit http://socar.az/socar/az/company/joint-ventures/ ateshgah-insurance-company-cjsc for the expanded list of the joint ventures 8 SUSTAINABLE DEVELOPMENT REPORT | 2016

Our mission Oil refinery Our mission is to ensure energy security of Heydar Aliyev Oil Refinery successfully met its the Republic of Azerbaijan as well as meeting the annual targets set for 2016. A total of 6625,52 tons of strategic interests in oil, gas and petrochemical industry a raw material was processed by the refinery in 2016 development. Furthermore, our objective is to support including 6009,44 thousand tons of oil and 38,22 the development of the scientific-technical, economic thousand tons of different raw materials received from and intellectual potential of Azerbaijan by applying other parties (for more detailed information, please, advanced and environmentally friendly technologies. refer to Attachment 1). We aim to hold a decisive position in regional and Refineries production output in 2016, international energy projects and maximize the profit thousand tons from delivering the refined products to the domestic and international markets. Diesel fuel 1 881,90 Our vision Our vision is to become a vertically integrated, Automobile gasoline 1 139,58 large international company that aligns its operational efficiency, social and environmental responsibility with Jet engine fuel 627,34 the best international practice. To ensure the effectiveness of our mission, the sustainable and long-term strategic development, “SOCAR’s comprehensive plan for strategic Gas production, refining and sales development by 2025” that was approved in 2011 is To increase transportation capacity of the annually updated. natural gas infrastructure, as well as to ensure the safe operations and improve the gas supply, new gas Oil production pipelines of 7805,4 km in length were laid during the In 2016, SOCAR produced 7522,4 thousand tons year. Pipelines (279,4 km) were also refurbished. By of oil, 6234,8 thousand tons of which were produced January 01, 2017, the number of natural gas consumers by the “Azneft” Production Unit (PU) and the remainder reached 2004857 people, whereas the number of were produced in the fields where the Company holds subscribers increased to 1978964 people. In 2016, a share. In total, 80 onshore and offshore wells were 171707 new subscribers were registered, including commissioned during 2016. 29551 in Baku and 142156 in other regions.

Oil production in the Republic of Azerbaijan (RA) in Gas production in the RA in 2016, 2016, thousand tons million m3

in RA – 41 034,5 in RA – 29 367,3 2016 2016

18% 21% SOCAR - 7 522,4 SOCAR - 6 266,8

Other - 23 100,5 Other - 33 512,1 79% 82%

9 2016 | SUSTAINABLE DEVELOPMENT REPORT

Figure 2. The key importers of oil and petrochemical production

Russia Belarus Poland Kazakhstan Netherlands Ukraine Belgium Romania Georgia Uzbekistan Spain Turkey China Gibraltar Malta Greece Lebanon Afghanistan

Chemical industry from this high pressure field that will be located at a During 2016, Azerkimya produced 459 thousand depth of 450 m in the Caspian Sea. tons of chemical products. The quantity of exported In December 2016, SOCAR and Azerbaijan automobile gasoline, diesel fuel and other products International Operating Company (AIOC), an operator was 1815,4 thousand tons in 2016 (for more detailed of BP, signed the agreement principles to develop the information, please, refer to Attachment 1). The list of Azeri-Chirag-Guneshli field by 2050. This Agreement is the key importers of oil and petrochemical products is also known as the Contract of the Century and symbol provided in Figure 2. of the Azerbaijan oil industry. The Agreement covers the development of the Azeri-Chirag-Guneshli field and Expansion of overseas activities creates the opportunity to develop significant number In 2016, SOCAR and BP signed a Memorandum of of reserves by the mid- century. The field is located east Understanding on the joint implementation of geological of Baku at a distance of approximately 100 km and exploration works on the D230 block located in the covers an area of 432 km2 being the largest oil field Northern Absheron basin of the Azerbaijani sector of operated in the Caspian Sea. Over 3 billion barrels of the Caspian Sea. This memorandum laid the foundation oil have been produced from this field since November for a new joint offshore project between SOCAR and 1997 and USD 33 billion were invested. Production B P. of additional 4 billion barrels of oil is planned in the In November 2016, SOCAR and Total signed a upcoming years. Framework Agreement regulating the principles of the “Absheron” Project development. This Agreement South Caucasus Pipeline determined contractual and commercial terms of the The South Caucasus Pipeline (SCP) was first stage of the “Absheron” Project. Implementation commissioned in late 2006 to distribute gas from the of this project will make possible the production of 35 Shah Deniz field (Stage 1) to Azerbaijan, Georgia and thousand barrels of oil equivalent and gas condensate Turkey. It starts from the Sangachal terminal near to 10 SUSTAINABLE DEVELOPMENT REPORT | 2016

Baku and follows the same route as the Baku-Tbilisi the construction works. Azerbaijan citizens represented Jeyhan pipeline through Azerbaijan and Georgia to the around 90% of the workforce. In general, it is the first Turkish border where it is linked to the Turkey’s gas time that the construction of Shah Deniz 2 platforms distribution system. The length of the pipeline is 691 has been carried out fully by the local companies. km, with 443 km passing through Azerbaijan and 248 To meet the growing energy needs of Europe km through Georgia. the country encourages the distribution of gas and Expansion of SCP is planned via the framework of diversification of transportation routes. Overall, the the Shah Deniz development project. It includes laying proven gas reserves of the country are around 3 billion a new pipeline across Azerbaijan and constructing two m3. There are opportunities to increase gas production new compressor plants in Georgia. This will result in a to 40 billion m3 by 2025, excluding the gas injected into threefold increase in exported gas - up to 20 billion m3 the layers. This will enhance the position of Azerbaijan annually. By linking with another pipeline at the border in the regional as well as European countries energy between Georgia and Turkey it will finally deliver gas to security. Turkey and Europe. The second meeting of the Advisory Council for TANAP-TAP the Southern Gas Corridor held on February 29, 2016 TANAP, which will transport gas produced in the in Baku was one of the most important events of that Azerbaijani sector of the Caspian Sea in Shah Deniz 2 year. These meetings essential due to the political field to Europe, is an integral part of the Southern Gas discussions, discussion of possible challenges that Corridor. The pipeline is 1810 km and connects to the may occur during the implementation of the project SCP at the border of Turkey and Georgia and to the in the transit countries as well as joint efforts to find TAP pipeline at the border of Turkey and Greece. appropriate solutions. The part of the TANAP passing through Eskisheher is planned to be commissioned from mid 2018. Capital Shah Deniz field investment for the pipeline is estimated at USD 9,2 Shah Deniz gas field was discovered in 1999. billion. Azerbaijan plans to allocate USD 2,89 billion to Works at Shah Deniz’s operating Stage 1, and Stage 2 the Southern Gas Corridor project, 55,7% or USD 1,566 that is currently under construction were successfully billion of which will be spent on TANAP. In addition, the continued in 2016. Extraction of gas from this field total investment into the TAP during the construction for Azerbaijani, Georgian and Turkish markets was stage is expected to represent around 1,5% of GDP successfully continued in 2016. The gas produced annually in 2016-2017. from Shah Deniz Stage 1 is sold to Azerbaijan, GOGC Initial transportation capacity of the pipeline will be (Georgia), BOTAS and BTC companies. 16 billion m3, with an opportunity to further increase it to The production capacity of the existing facilities 31 billion m3. The initial stage of the TANAP construction within Shah Deniz Stage 1 is 29,5 million m3 per day or has been completed and the second stage construction 10,8 billion m3 per year. Over the last 10 years about 76 works have commenced. billion m3 of gas has been exported from this field to the The TANAP shareholding is as follows: Southern international markets through the SCP. Gas Corridor CJSC - 58%, Botas - 30% and BP - 12%. To export the gas produced from the Development Stage 2 of Shah Deniz project (Shah Deniz 2) to the SOCAR Turkey European market, expansion of the existing SCP is Being among the largest oil and gas companies underway. During 2016, 90% of the construction and in the world, SOCAR carried out large-scale activities engineering works were completed and the first gas is in 2016 worldwide. Projects in Turkey have the largest planned to be produced within by 2018. It is expected share in its international portfolio. SOCAR aims to attach that 16 billion m3 of gas will be produced with 6 billion m3 value to the strategic position and market potential of gas being transported to Turkey while the remaining of the country by building a fully integrated oil-gas 10 billion m3 per year will be delivered to European company in Turkey, which is considered as a key transit users. hub of the region. These projects will be carried out by A workforce of more than 5000 including SOCAR’s branch company SOCAR Energy Turkey A.S. subcontractors and specialized suppliers was involved in Investments in projects implemented in the 11 2016 | SUSTAINABLE DEVELOPMENT REPORT

Turkish oil and gas sector initiated by Azerbaijan have of certificates such as ISO 9001 Quality management exceeded USD 5 billion. Currently, its business in Turkey systems, OHSAS 18001 Occupational health and is estimated as USD 10 billion by international financial safety management system, ISO 14001 Environmental institutions. management system, ISO 50001 Energy management Since 2008, SOCAR Energy Turkey A.S has held system, IEC/ISO 27001 Information security 51% of Petkim Petrokimya Holding A.S shares, which management and TS/ISO 10002 customer satisfaction is the largest asset of SOCAR and the only producer of management, Petkim has also added a “Green Berth” the petrochemicals in Turkey. Due to SOCAR’s projects certificate. implemented in Petkim and continuous investments, its share in Turkish petrochemical product market will SOCAR Georgia continue increasing and reach over 40%. SOCAR is the largest investor in Georgia. Apart from the projects implemented at Petkim, Azerbaijan is aiming to increase gas exports to Georgia works in the following areas are continuing: by 5% every year. As a result of significant works to • STAR oil refinery with annual capacity of 10 develop the country’s economy and provide natural gas million tons of oil: part of the “Value-Site 2023” concept for its population, Azerbaijan exported 715,9 million m3 with an investment value of USD 5,6 billion; of gas to Georgia from January to September. • Container terminal with a capacity of 1,5 million Gas produced/supplied from the Shah Deniz field TEU; and gas from SOCAR’s sources are between 2,2-2,25 • Wind Power Plant as an alternative energy billion m3 in 2016. source and other projects. From 2009 to 2016, SOCAR Energy Georgia To allow the effective implementation of projects in constructed a new distribution network of 5360 km, Petkim peninsula, the government of Turkey has granted enabling gas supply to 209136 subscribers. In general, the status of “Special security area” and “Special project the Company has an investment obligation to build a area” to Petkim. 7000 km distribution network in Georgia by 2017. This In 2012, proposals from the world’s leading will provide 250 thousand subscribers with blue flame contractors for the construction of STAR oil refinery natural gas. 40 thousand more people will be provided were received. An EPC contractor was selected and, with the natural gas by the end of 2017. currently, 48% of construction works and 75% of In 2016, SOCAR Georgia GAS LLC opened its overall works (including engineering and procurement) renovated service center in the city of Kutaisi. The have been completed. About USD 3,2 billion has been office will ensure the high quality service to subscribers, invested in the refinery plant. The operations at this facilitate and accelerate procedures related to the fast plant should be commissioned in 2018. Given the great and accurate registration as well as other procedures. significance of the project, the government of Turkey Staff are trained on service quality standards. New awarded the STAR project with a “Strategic investment service centers are located in Batumi, Poti, Rustavi and encouragement certificate” for the first time in the Kutaisi. history of the Turkish Republic. Within the framework of an agreement signed with The STAR oil refinery is the first refinery project the government of Georgia, SOCAR Georgia GAS LLC implemented by the private sector in Turkey and the will continue the construction works to ensure the gas largest private sector project in the last 30 years. supply to the residential areas country wide including Stage 1 of the Container Berth was completed the Imereti region. in April 2016 and handed over to the global leader Based on the surveys conducted in Tbilisi by the responsible for its operation- APM Terminals. In the first “Georgian Times” media holding and GORBI social quarter of 2017, it is planned to complete Stage 2 of survey and marketing company, SOCAR Georgia Petkim Container Berth project, which is implemented Petroleum won the “National Business” award in 2016 as part of the cooperation with Petkim. Once working for nominations such as “The largest payer of taxes to at a full capacity, the berth will be the only one in the the state budget of Georgia”, “Company with the best Marmara, Aegean, Mediterranean seas that is capable fuel filling stations and infrastructure” and “The largest to conveniently accommodate vessels with the carrying employer”. SOCAR Georgia GAS LLC won nominations capacity of 11 thousand containers. In addition to the list such as “The best development strategy”, “The best 12 SUSTAINABLE DEVELOPMENT REPORT | 2016 service” and “The most innovative company”. Black Sea Terminal LLC,SOCAR’s terminal in Kulevi located on the shore of the Black Sea, won “The investor of the Year” award. In addition, SOCAR Georgia Petroleum won the Grand Prix award by majority vote.

SOCAR Ukraine SOCAR’s subsidiary, SOCAR Energy Ukraine, operates in the segment of wholesale and retail sales of petroleum products. Currently there are 59 fuel filling stations operating in Ukraine under the SOCAR brand. SOCAR Energy Ukraine emphasizes its efforts to become a market leader in quality of the service and compliance with the best practices. SOCAR tax payments between 2010-2016 exceeded UAH 2,5 billion. In 2016, SOCAR Energy Ukraine won a tender conducted by a state-owned company Ukrainian Railways to supply it with 14,08 tons of diesel fuel (worth over USD 10 million) until the end of the year. In 2016, SOCAR’s subsidiary SOCAR Energy Ukraine established a new company “SOCAR LPG” in Сherkassi to carry out the wholesale and retail sale of the liquefied petroleum gas.

SOCAR Switzerland SOCAR Energy Switzerland was established following the agreement signed between SOCAR and ExxonMobil in 2012 and transfer of the Esso Switzerland assets to SOCAR. The retail network of ESSO Switzerland consisted of 160 fuel filling stations, gas filling plants located in Vangen-Olten, jet fuel stations in Geneva and Zurich that continue to operate under the SOCAR brand.

13 2016 | SUSTAINABLE DEVELOPMENT REPORT Corporate Governance

The State Oil Company of Azerbaijan Republic To increase top management’s knowledge (SOCAR) is in the process of performing its long-term regarding social, environmental and economic aspects, planning related to the development of oil industry. the outcomes of various operations are being discussed This includes targeted and comprehensive scientific, during the meetings organized by top management and technical, economic and social programs as well as the Board. Other management bodies submit monthly implementing relevant actions in accordance with the and annual reports and develop and present relevant Charter approved by the President of the Republic of strategies and plans to senior management. Azerbaijan and legislative requirements. Overall, the Board of SOCAR took 65 Decisions in SOCAR applies a centralized management system 2016 some of which are listed below: that is based on corporate management principles. It has • Transferring investment shareholdings owned a Board, top management and respective committees. by SOCAR to the Swiss Streamtrade SA company; • Approving a pricing policy for the petrochemical The Board of the Company products of “Azerikimya” PU; Board members are Vice-presidents that are • Approving the annual work programs of appointed to their positions by the President of the SOCAR’s enterprises for 2016; Republic of Azerbaijan, heads of the certain structural • Approving the amounts to be paid to those divisions and the Chairman of the Azerbaijan Oil and awarded with the Certificates of Honor; Gas Industry Workers Trade Union. It is a collegial • Applying the Unified Classification to the management body which functions under the President products produced in the oil and gas processing and of the Company. petrochemical entities of SOCAR;

HR Management Committee is a collegial body which sets HR management policy, ensures control over HR management activities, and organizes scholarship programs for students studying in Azerbaijan or abroad. The Chairman and members of this Committee 1 are appointed by the President of SOCAR while the secretaries are appointed by the Chairman of the Committee.

Risk Management Committee regulates risk management and anti-corruption processes, activities of Internal Control System as well as controls Sustainable Development Report preparation process. The Chairman and members of these 2 Committees are appointed by the President of SOCAR while the secretaries are appointed by the Chairman of the Committee.

Procurement Committee ensures that procurement operations comply with relevant regulations, considers controversial cases, approves the list of bidders, and results of bidding. The Chairman and members of this Committee are appointed by the President of 3 SOCAR while the secretaries are appointed by the Chairman of the Committee.

Information Security Committee the primary goal of the committee is to protect SOCAR's interests against domestic or international risks as well as to ensure IT security. The Chairman and members of this Committee are appointed by the President of SOCAR 4 while the secretaries are appointed by the Chairman of the Committee.

Audit Committee determines policies and strategy of internal audit, approves internal 5 audit plans and controls the internal audit.

14 SUSTAINABLE DEVELOPMENT REPORT | 2016

• Awarding and paying scholarships to the its management staff and for the Administration and students of SOCAR’s Baku Higher Oil School (BHOS); Department managers of its Head Office etc. • Optimizing its financial position and management structure and organizing the routine Senior management activities of the Board; Following the internal changes introduced in 2016, • Establishing SOCAR Capital LLC and SOCAR the senior management of SOCAR is as represented GPS Limited; below: • Approving the additional remuneration for

President Rovnag Abdullayev

Vice-President First Vice-President Khoshbakht Yusifzade Suleyman Gasimov for economic affairs

Vice-President Vice-President Yashar Latifov for investment for wells development Elshad Nasirov and marketing

Vice-President Vice-President Bahram Huseynov for strategic Toﬁg Gahramanov for geology and geophysics development

Vice-President Vice-President for oil and gas transportation Rahman Gurbanov Badal Badalov for social affairs and gas facilities

Vice-President Vice-President David Mammadov Raﬁga Huseynzade for reﬁning for environment

Vice-President for Vice-President Mikayil Ismayilov human resources, work time Khalik Mammadov patterns and information technologies

15 2016 | SUSTAINABLE DEVELOPMENT REPORT

Management systems concept of enhanced transparency, each standard To ensure the correctness and accuracy of considers such issues as combatting corruption, the activities carried out by the Company, timely identifying conflicts of interests, and similar matter. The identification and prevention of potential errors, faults manual also includes a special anti-corruption strategy and losses, the reliability of operations and their and Code of Business Ethics. conformity to legislation, the systems noted below have Furthermore, the Company encourages all been established: employees and other parties to report any reasonable • Risk management; doubts and/or complaints regarding illegal or • Internal control system; unethical behaviour by the Company’s management • Anticorruption and transparency. representatives or incidents of corruption through the corporate Hotline. It also encourages employees to Risk management report other non- compliant behaviour that could result From 2008, the risk management system is based in financial losses and damage and/or the business on the International COSO Enterprise Risk Management reputation of the Company or its employees. framework. This system is aimed mainly at identifying, The Standard “Violations reporting system, analyzing and managing the possible risks. An efficient including breaches of SOCAR’s Code of Ethics and anti- risk management system has been integrated with the corruption requirements” published on the corporate management decision-making process. website 2 discloses the guidelines on the forwarding, Every year, the Corporate Risks Map describes all receiving and initial processing of incoming grievances risks to the Company including different sustainable through the SOCAR’s internal communications development risks and those related to the various channel. Based on this Standard, grievances can be business processes of the Company in the Caspian Sea. Email address In general, risk control and prevention are the essential (as deﬁned by the relevant structural division) areas of the Company’s risk management system. • [email protected] • The size of the data including attachments should Internal control system not exceed 10 Мb Senior management consider the implementation • Frequency of the review every working day • Possibility of anonymity of the internal control system as a means to switch to an advanced international management system. Corporate portal The integration between the finance and operational divisions ensures the efficient functioning of the • http://socar.az/socar/az/home/contact-us/email- us internal control system as well as building constructive • The size of the data including attachments should relationships within the Company. The Internal Control not exceed 10 Мb • Frequency of the review every working day System working group reports to the Risk Management • Possibility of anonymity Committee. Postal address (address of SOCAR's Head Ofﬁce) Anticorruption and transparency • Heydar Aliyev avenue, 121, Due to its involvement in the international finance Baku AZ1029, Azerbaijan markets, the Company applies the US “Foreign Corrupt • Once a week • Possibility of anonymity Practices Act”, UK “Bribery Act” and recommendations of the international non-governmental organization - communicated through the channels given below. “Transparency International” - while ensuring compliance In total, 10331 reports and grievances were filed with the international legislation, other regulatory and in 2016 via letters, email and telegrams, out of which legal acts. It also meets the normative requirements 86 reports were received through the “Hotline”. A larger of foreign countries as well as those specified by best proportion of the issues were resolved and response international practices. A manual of nine standards letters were sent to the reporters. The review and on Anticorruption and Transparency was approved on processing of the remaining grievances are still in 10 August 2012 and remains the regulatory basis for 2 http://socar.az/socar/assets/documents/en/socar-standards/ the above-mentioned processes. By focusing on the Anticorruption_Policy.pdf 16 SUSTAINABLE DEVELOPMENT REPORT | 2016 the process. Following an investigation of the reports, Stakeholder relationships appropriate instructions and tasks were assigned where Stakeholder relationships are based on the necessary. principles of open dialogue and transparency in Reports and grievances of the stakeholders accordance with the Code of Business Ethics adopted are responded to within 15 days. In the event that a in 2012. This ensures that mutual relationships and special investigation is needed, the response process interests of each stakeholder are protected equally. may take up to 30 days. If a grievance is related to the SOCAR has obligations to its shareholder and violation of law due to corruption, it is investigated by governmental entities engaged in a commercial activity. the authorized structural unit within 20 working days Thus, SOCAR provides regular reports to the Cabinet from the date of its registration, the complainant is of Ministers of Azerbaijan Republic, Ministry of Industry notified of the investigation results, and, when needed, and Energy, Ministry of Economic Development, Ministry appropriate instructions are given to the involved of Finance, Ministry of Taxes and State Statistical parties/departments. Committee of the Republic of Azerbaijan. The filed grievances and inquiries are processed in Additionally, in recent years SOCAR has compliance with the following laws and principles: cooperated with international institutions and carried • The Law of the Republic of Azerbaijan “On the out significant work aimed to increase transparency. Reports from Citizens”; As a result, the Company is currently a member of the • “Instruction on record keeping in the state Azerbaijan-France Chamber of Commerce and Industry bodies, state-owned legal entities and legal entities with non-governmental organization, American Chamber majority stake owned by the state, and state-financed of Commerce in Azerbaijan, Azerbaijan Chamber of organizations”; Commerce and Industry. • “Rules on the control of the reports record keeping”.

Figure 3. SOCAR’s main stakeholders

International Mass-media organizations

Company's Business employees partners

Suppliers and Competitors subcontractors

Government Society of the Republic of Azerbaijan

17 2016 | SUSTAINABLE DEVELOPMENT REPORT

SOCAR has also aligned its activities with the STAR oil refinery (owned by SOCAR Energy Turkey), International Financial Reporting Standards (IFRS), an environmental audit system and Environmental Global Reporting Initiative (GRI) and other international Performance Index were prepared and applied standards. accordingly. At the end of each audit, the report was shared with contractor representatives, contractors Cooperation with suppliers and contractors were also assigned an Environmental Performance We always prefer to work with local suppliers Index based on their environmental activities and and contractors in all our operational areas. Therefore, indicators. Subsequently a contractor ranking table SOCAR expands opportunities for employment and was prepared and discussed. In addition, the selected professional development for the local population. environmental performance indicators of the various SOCAR’s relationships with suppliers and contractors contractors are reviewed on a weekly basis and is regulated by the “Standard on the inspection of the appropriate reports are made in accordance with the third-parties” which was adopted in 2010. To ensure adopted system. By the end of 2016, 84 audits of 17 high quality of operations certain activities were carried contractors were conducted at the STAR oil refinery. It out with contractors in 2016. is important to note that the new control and evaluation It exerts strict control over the activities of system, which is being implemented, enables stricter contractors to ensure that they are ethical, transparent, and more regular control by senior management over reliable and safe. It prioritizes its cooperation with contractors. It also serves as a tool to encourage them organizations that understand and fulfill their to improve their environmental performance. environmental, social and economic obligations.3 Compliance of the contractors and suppliers performance with the SOCAR’s principles of minimum damage and availability of the internal policies and procedures ensuring safe and high quality operations are the key criteria. To improve control over the activities of its contractors within the Aegean Refinery Project in

3 For more details on the regulatory policies on tendering and procurement please visit http://socar.az/socar/az/company/socar-standards/socar-standards 18 SUSTAINABLE DEVELOPMENT REPORT | 2016 Human Resources

One of the main objectives of SOCAR is to become Following the staff reductions in 2016, 425 the most attractive and competitive employer in the employees were terminated, out of which 414 persons region. To achieve this objective, we focus on attracting received compensation of five-month average pay. Over the most competent and experienced specialists as the reporting year, 848 persons retired, out of which well as building long-term relationships with all our 555 persons received compensation of five-month employees. average pay. In general, the employees receive at least The Company’s Human Resources Policy serves a 2-month notice of any significant changes in the as a guideline for Human Resources management, corporate structure or staff reductions. including the attraction of new talents, employees’ Employee turnover rate was 3% in 2016. education and development. All our employees are covered by collective Taking into account the current economic situation, bargaining agreements. In addition, each employee is SOCAR continues to undertake a range of initiatives to provided with medical insurance in accordance with optimize costs and internal processes. We undertake the Voluntary Medical Insurance Agreement concluded a number of initiatives to minimize negative impacts between SOCAR and PASHA Insurance. This covers associated with the internal changes on affected emergency medical services 24 hours a day, 7 days a employees. week, in-patient and out-patient treatment as well as dental care. Furthermore, the retired oil workers can In 2016, 3009 people were recruited benefit from multiple healthcare services provided by in SOCAR entities including the Central Hospital for Oil Workers.

1089 employees through internal rotations

1920 new employees

19 2016 | SUSTAINABLE DEVELOPMENT REPORT

Total number of employees in Number of SOCAR's senior management SOCAR in 2014-2016 by average age in 2016 above 50 2770 52 104

below 29 106

29-50 50 735 54 714 3105

Number of hired and dismissed employees Number of employees by categories and in 2014-2016 in SOCAR gender in 2016 in SOCAR 5 461 hired employees Executives dismissed employees 520 21 2014 1 304 2 634 Technicians 258 2015 1 639 7 834 6 123 Specialists 2016 1 920 1 350 3 275

30 598 Workers 4 479

Employee turnover rate in 2014-2016 in SOCAR Growth dynamics of minimum and average monthly salary in 2014-2016 in SOCAR, AZN 15% average monthly salary minimum monthly salary

2014 882,08 149

5% 3% 2015 893 149 2016 968,1 164

Number of employees by gender Average age of SOCAR's senior managers in 2014-2016 in SOCAR in 2014-2016

42 203 2014 43 8 532 2015 44 43 163 2016 41 8 941 44 982

9 732

20 SUSTAINABLE DEVELOPMENT REPORT | 2016

Total number of employees in SOCAR Energy Number of employees by age in 2014-2016 Ukraine in 2014-2016 in SOCAR Energy Ukraine above 50 167 1 667

below 29 799

29-50 1 737 1 473 771

Number of hired and dismissed employees in Number of employees by categories and gender 2014-2016 in SOCAR Energy Ukraine in 2016 in SOCAR Energy Ukraine 102 hired employees Executives dismissed employees 60 198 2014 1 131 1 027 Technicians 338 2015 1 600 1 406 22 Specialists 2016 1 469 1 399 0

645 Workers 372

Employee turnover rate in 2014-2016 in Growth dynamics of minimum and average monthly SOCAR Energy Ukraine salary in 2014-2016 in SOCAR Energy Ukraine, AZN

average monthly salary 84% minimum monthly salary

2014 426 76 2015 379 60 70% 81% 2016 714 93

Number of employees by gender in 2014-2016 in SOCAR Energy Ukraine

967

770

971

696 947

526

21 2016 | SUSTAINABLE DEVELOPMENT REPORT

Total number of employees in SOCAR Energy Number of employees by age in 2014-2016 Georgia in 2014-2016 in SOCAR Energy Georgia above 50 1 109 4 118

below 29 937

29-50 4 253 4 166 2 207

Number of hired and dismissed employees in Number of employees by categories and gender 2014-2016 in SOCAR Energy Georgia in 2016 in SOCAR Energy Georgia 181 hired employees Executives dismissed employees 17 24 2014 815 608 Technicians 21 2015 846 894 693 Specialists 2016 631 504 331

2 449 Workers 537

Employee turnover rate in 2014-2016 in Growth dynamics of minimum and average monthly SOCAR Energy Georgia ⁴ salary in 2014-2016 in SOCAR Energy Georgia, AZN

average monthly salary 21,7% minimum monthly salary

2014 573 238 2015 548 178 14,6% 12% 2016 575 202

Number of employees by gender in 2014-2016 in SOCAR Energy Georgia

3 368

885

3 289

829 3 511

655

4 The employee turnover rate was calculated as the ratio of employees who left the company to the total number of employees. 22 SUSTAINABLE DEVELOPMENT REPORT | 2016

Total number of employees in SOCAR Energy Number of employees by age in 2014-2016 Turkey in 2014-2016 ⁵ in SOCAR Energy Turkey above 50 2 792 422

below 29 314

2 701 2 731 29-50 1 995

Number of hired and dismissed employees in Number of employees by categories and gender 2014-2016 in SOCAR Energy Turkey in 2016 in SOCAR Energy Turkey 20 hired employees Executives dismissed employees 2 332 2014 174 178 Technicians 42 2015 328 237 232 Specialists 2016 194 248 108

1 975 Workers 20

Employee turnover rate in 2014-2016 in Growth dynamics of minimum and average monthly SOCAR Energy Turkey salary in 2014-2016 in SOCAR Energy Turkey, AZN

average monthly salary 8% minimum monthly salary

2014 1 911 392 2015 2 500 639 7% 9% 2016 3 483 1 081

Number of employees by gender in 2014-2016 in SOCAR Energy Turkey

2 559

172

2 641

151 2 560

141

5 HR indicators for SOCAR Energy Turkey were reviewed and recalculated using a single categorization for all entities. 23 2016 | SUSTAINABLE DEVELOPMENT REPORT

Total number of employees in SOCAR Energy Number of employees by age in 2014-2016 Switzerland (SES) in 2014-2016 in SOCAR Energy Switzerland (SES) above 50 63 128

below 29 12

29-50 132 105 57

Number of hired and dismissed employees in Number of employees by categories and gender 2014-2016 in SOCAR Energy Switzerland (SES) in 2016 in SOCAR Energy Switzerland (SES) 22 hired employees Executives dismissed employees 4 13 2014 18 22 Technicians 18 2015 41 18 32 Specialists 2016 6 2 12

26 Workers 5

Employee turnover rate in 2014-2016 in Growth dynamics of minimum and average monthly SOCAR Energy Switzerland (SES) salary in 2014-2016 in SOCAR Energy Switzerland (SES), AZN 14% average monthly salary minimum monthly salary

2014 8 000 3 506 2015 9 786 4 800

21% 2% 2016 15 132 7 452

Number of employees by gender in 2014-2016 in SOCAR Energy Switzerland (SES)

35 87

24 SUSTAINABLE DEVELOPMENT REPORT | 2016

6 Total number of employees in SOCAR Energy Number of employees by age in 2014-2016 Switzerland (ROC) in 2014-2016 in SOCAR Energy Switzerland (ROC) above 50 52 586

below 29 126

29-50 582 581 404

Number of hired and dismissed employees in Number of employees by categories and gender 2014-2016 in SOCAR Energy Switzerland (ROC) in 2016 in SOCAR Energy Switzerland (ROC) 11 hired employees Executives dismissed employees 4 133 2014 307 347 Technicians 434 2015 301 296 0 Specialists 2016 190 194 0

0 Workers 0

Employee turnover rate in 2014-2016 in Growth dynamics of minimum and average monthly SOCAR Energy Switzerland (ROC) ⁶ salary in 2014-2016 in SOCAR Energy Switzerland (ROC), AZN 51% average monthly salary minimum monthly salary

2014 3 245 2 500 2015 4 324 3 384 60% 33% 2016 6 707 5 233

Number of employees by gender in 2014-2016 in SOCAR Energy Switzerland (ROC)

144

438

179

407 236

345

6 The employee turnover rate was calculated as the ratio of employees who left the company to the total number of employees. 25 2016 | SUSTAINABLE DEVELOPMENT REPORT

Transformation Program for human resources defined in job descriptions. Moreover, those employees management with higher performance results will have greater career SOCAR has also started applying innovative opportunities. solutions in its resources management system. The pilot version of the Transformation Program for human Training and development – Following the resources management covering all our employees was implementation of the project, the training needs of implemented in the administrative office of “Azneft” the employees will be determined more professionally. PU, “28 May” and “A. Amirov” Oil and Gas Production A development program will be prepared for each Departments (OGPD). This program will cover 51 employee considering their job specific and personal thousand employees including the senior management. characteristics. Moreover, the goals, targets and areas for imporvement Furthermore, self-service portal - service for each employee will be defined in the Individual portal is being prepared for the employees within Development Plan (IDP) that will be discussed and the Transformation Program for human resources approved by the respective line managers. The plan management. Currently, updates on this project implies the assessment of the employee competency implementation are posted in the “News” page of the and sets a timeframe for performance evaluation Human Resources Portal, and emerging questions against the specified performance indicators. This will are forwarded to the Career Planning and Employee help to ensure that the goals of the employees are Relations department. aligned with those of the Company as well as personal development targets are also agreed. The Company Relationships with employees will provide incentives for all employees based on the Over the reporting year 3284 grievances were unique methodology (depending on the duration of received from the employees working at and terminated employment) taking into considerations their career from the Company. Following the collection and review progression and performance indicators. of all the necessary information and documents, a To ensure that the carried out activities meet detailed response is provided to the complainant within international standards, we involved SAP MDB that is an 15 calendar days as required by legislation. international consulting company. The implementation Employee surveys (interviews) were conducted of this program covering the period of 2016-2019 is in some of SOCAR entities to determine employee accompanied by special software for human resources satisfaction and loyalty level, identify and eliminate the processes (SAP Human Capital Management). The factors causing employees to leave the Company, and purpose of using this software is to ensure that all collect information on the programs for attracting and processes are transparent. In general, the project covers developing the young specialists. Overall, 83 employees four areas listed below: were surveyed. Another survey mainly focusing on the Competency management – The competency reasons of termination was conducted monthly through management project is aimed at improving the the telephone calls and within a year covered 289 knowledge, skills and behavior of employees in line with people who left the company for various reasons. Company requirements. It is planned that 54 behavioral Based on the findings of the surveys, appropriate competencies will be evaluated for each position during statistical data was prepared in SPSS (Statistical the evaluation process. Package for the Social Sciences) while the questionnaires were scrutinized and submitted to senior Performance management – For performance management. management, specific targets will be determined Furthermore, 1406 formal and 977 electronic for each employee and the job performance will be requests were handled in 2016. In addition, 901 evaluated accordingly. Various rewards will be provided personal meetings were held with community to employees meeting their targets. representatives and employees. Their requests were analyzed and addressed by providing the detailed Employment Management – Once the key response. positions are determined, development plan to ensure the required personnel and competencies will be drawn. Ensuring equal opportunities The opportunities for career progression are clearly Ensuring equal opportunities to all employees is 26 SUSTAINABLE DEVELOPMENT REPORT | 2016 one of the enablers of the sustainable and long-term Chemical Technology, Petroleum Machinery, Energetics, development of the Company. Non-discrimination and Automation of Production Processes, Economy, equality among employees are regulated by SOCAR’s International Economic Relations and Management). In Code of Business Ethics. As a Company fulfilling 2016, we provided monthly scholarship to 40 students operations in foreign countries, we give priority to hiring (77 in 2015) and employment for 20 scholarship personnel from local communities. holders. Applications for the Internal Scholarship Program Developing and attracting young talent in the academic year 2016-2017 were submitted Understanding that the sustainable development electronically via website www.socar.az/tehsil in the of SOCAR largely depends on young specialists, we period of February 15 - March 15, 2016. implement the following programs and initiatives to attract talented students. Paid Summer Internship Program Since 2010, SOCAR has implemented the Paid Study Abroad Scholarship Program Summer Internship Program. The aim of this Program As in previous years, SOCAR has taken initiatives is to provide industrial work placement during summer to provide education opportunities for young specialists vacations for Azerbaijani students studying oil and gas in the academic year 2016-2017. In June 2016, we mining, oil and gas rigs, drilling, geophysics, geology, announced the enrolment for the Study Abroad automation of production processes, computer science, Scholarship Program. As a result, 24 applications were construction, pipelines, environment, petrochemical reviewed, out of which 11 candidates meeting the and chemical engineering, energetics, economy and required criteria were recommended to the Scholarship programming at higher educational institutions in Commission for Education Abroad (hereinafter referred Azerbaijan and foreign countries. to as the Commission). The program is implemented to enable students At the same time, we provided employment to increase their practical knowledge as well as to opportunities in multiple specialties to 23 graduates. experience a real working environment. Mostly, third and fourth year undergraduates as well as first and Study Abroad Scholarship Program second year master’s students studying for a degree in Admitted any of the above-mentioned disciplines at any university candidates are eligible to participate in the program. We hire 7 students for specialist position based on the temporary Applications employment contract. The interns receive salaries 24 depending on the duration of employment and position. Eligible In the meantime, interns can benefit all the privileges candidates available for our employees. 11 In 2016, 104 students were enrolled in the Paid Summer Internship Program. In 2016, 140 applications and 977 electronic applications were reviewed. In addition, meetings with SOCAR Summer School 2016 project 901 people, including employees were held where their Considering the high level of interest that students complaints were discussed and thoroughly addressed. and young specialists have in the energy sector, SOCAR has been organizing the Summer School since 2012. Internal Scholarship Program Thirty candidates demonstrating the best results SOCAR is focused on the development of during the interviews were selected. Since 2012, young experts and stimulating students to gain more SOCAR’s employees have been invited to participate in theoretical and practical knowledge in the oil and Summer School along with students. gas industry. Since the academic year 2004-2005, we have provided monthly scholarship to high- Types of Training performing undergraduate students studying at the 1. Expertise development selected faculties of Azerbaijan State Oil and Industrial 2. Retraining University (Geological Exploration, Oil and Gas Mining, 3. Awareness raising 27 2016 | SUSTAINABLE DEVELOPMENT REPORT

4. Refresher courses in 2016. Training programs for external parties were 5. Induction carried out in the following training centers:

Training of 507 employees of SOCAR on the • Center for organization of employee trainings; following topics was outsourced to external training • Gobustan regional training center; organizations in 2016: • Sumgait training and education center. • Business processes optimization and efficiency improvement; Human resources management in Turkey, • SAP HR; Georgia, Ukraine and Switzerland. • Updated standards; SOCAR Energy Turkey • Innovations and market regulations; SOCAR Energy Turkey focused on the following • Heavy crude oil quality improvement. issues in 2016: One of our main targets is to ensure a skilled and • Following the revision of the employment policy, qualified workforce for the oil industry in line with the the Working Group integrated the unified employment requirements of international standards . To achieve this, process in all SOCAR Turkey Group companies; we strive to upgrade quality of training and education as • A new system for performance evaluation was well as the quality of services provided by our training developed and applied; centers to the internationally accepted levels. • Corporate procedures were updated. As in previous years, our training centers provided development programs for workers of other companies

Table 3. Trainings organized in SOCAR’s training centers

Number of Number No Our training centers training of sessions trainees 1. Center for organization of employee trainings 304 5 632 2. Offshore maritime safety training center 43 3 052 3. Gala training and education center 5 724 4. Sumgait training and education center 57 833

28 SUSTAINABLE DEVELOPMENT REPORT | 2016

SOCAR Energy Georgia Average training hours The principal human resources management per employee in 2016 7 initiatives by SOCAR Energy Georgia in 2016 included: • Personnel training and development; • Better performance of personnel; SOCAR Azerbaijan • More efficient interaction between structural 8,6 divisions. SOCAR Energy Turkey SOCAR Energy Ukraine 21 SOCAR Energy Ukraine implemented the following programs in 2016: • Training for senior management on delegation SOCAR of authority and transfer of greater responsibility to Energy Average Georgia training hours employees in the various regions; 3,7 • Launch of a “Golden Customer” project aiming to improve the quality of the services provided at the sales points and to control the conduct of employees at workplaces; SOCAR Energy Ukraine • Launch of a project aimed to reduce the costs 198,7 associated with the management of human resources. SOCAR Energy As in previous years, the Company conducted Switzerland 8,3 regular training for its employees to increase their skills and professional competency. This included both off-job and on-the-job trainings as well as training conducted in the Company’s training center.

SOCAR Energy Switzerland As in previous years, the training and development of employees was the focus of SOCAR Energy Switzerland in 2016. Over the reporting year, the principal training topics were sales, safety, health and fire protection.

7 The reason for the high average of training hours per employee in SOCAR Energy Ukraine is due to high employee turnover in petrol stations. 29 2016 | SUSTAINABLE DEVELOPMENT REPORT Social performance and support to the regional development We understand our social responsibility and take Table 5. Breakdown of social expenditures an active part in the social life of the country and made in 2016, thousand AZN contribute to a variety of important socio-economic projects realized in Azerbaijan. Scope of assistance Amount In SOCAR we believe that positive social changes are possible if the social impacts caused by our Sports 335,000 operations are timely identified and managed as well Financial associations and 1019,520 as if an open dialogue with stakeholders is maintained. trade unions SOCAR’s major social activities cover the following Education 282,308 Culture and art 1820,144 directions: Financial support of individuals 463,723 Total 3920,7 1 Charity and sponsorship In 2016, the Company continued providing financial 2 Welfare of employees support to its employees and focused its attention on martyrs’ families and war invalids.

3 Positive public relationships Table 6. Payments based on type of assistance in 2016, thousand AZN Land allocation and involuntary Number 4 resettlements Type of assistance of Amount recipients 5 Support to sports, education and culture To family members of 188 394,080 deceased employees To employees for losing a 1446 759,170 Charity and sponsorship family member Monthly payments to The Company provides financial support to children of the employees development of different areas in accordance with the deceased in Karabakh war requirements of the Standard on “Charity, social and and on 20 January tragedy 6 58,013 until they are 18 (or until sponsorship support”, approved to realize Company’s the age of 23 if they receive charter objectives and achieve social results of a public a full-timeeducation) importance. In 2016, AZN 8078602 was allocated for Monthly payments to the deceased employees’ young different causes to people linked with SOCAR and children until they are 18 (or 958 2946,643 with consent of SOCAR’s President (for more detailed until the age of 23 if they information, please see Table 6). receive a full-time education) Approved by the president 191 3920,696 Table 4. Directions of social support in 2016, of SOCAR thousand AZN Total 2789 8078,602

Number of Type of support Amount Support of the social welfare of employees recipients Financial support SOCAR considers building positive relationships 679,711 142 of individuals with its employees as one of the key factors that trigger Charity 115,000 1 sustainable development. It continuously focuses on Social 562,365 4 initiatives to reduce the social challenges experienced Sponsorship 1734,326 6 Financial by its employees. The “Social Development Program for assistance to 829,295 6 2016-2020 to improve the social welfare of employees institutions working in SOCAR’s structural divisions” was approved Total 3920,7 159

30 SUSTAINABLE DEVELOPMENT REPORT | 2016 by the joint Order of SOCAR and Azerbaijan Oil and Gas persons and 1 injured person who were included on the Industry Workers Trade Union Republican Committee. waiting list for housing; Different initiatives to improve the work conditions • The debts of the deceased and injured persons in SOCAR entities were determined, as well as the to banks and tuition fees for their children were covered deadlines for these initiatives and required resources by SOCAR upon request. Pecuniary aid was provided to were determined in the framework of this Program. those families to improve their material positions. Social One of the initiatives within this program is the housing care of these families has always been under SOCAR’s provision to our employees. supervision; Unfortunately, the emergencies that occurred • In addition to the above-mentioned SOCAR in 2015-2016 caused unavoidable injuries. All the transferred 5000 AZN to the families’ accounts required actions were undertaken to address the social The State Labour Inspection Service under the challenges experienced by the survived employees Ministry of Labour and Social Protection of Population and families of deceased or lost employees as a result and special investigation group established by the order of the Cabinet of Ministers are conducting the Waiting list for housing in 2016 investigation of the accident caused by the extreme weather conditions in 2016. The results of the The number of people provided with investigation will be provided in the next Sustainability houses Report. Waiting list 322 for housing Baku 2999 Building public relations Regions Transparent and mutual relationships with local 442 The number of people provided with land communities are fundamental for our activities. It makes 104 continuous efforts to have a dialogue with the people of the accident that occurred at Guneshli 10 deep- residing in SOCAR’s operational areas to find out any water offshore platform of “28 May” OGPD and 501 issues and opinions related to projects and to ensure platform of “Neft Dashlary” OGPD on 4 December information exchange. Information obtained as a result 2015. Families of deceased and lost workers have been of these discussions is the foundation for relevant provided with insurance payments prescribed by the decisions and initiatives taken by SOCAR and gives an state law. Moreover, the families have been provided opportunity to prevent undesirable circumstances. with the following support: • SOCAR paid for hospital treatment and Usage of land plots and compulsory medication for 33 survivors as well as provided resettlement pecuniary aid for their additional treatment; SOCAR implements a comprehensive and strict • In accordance with the 10th decree of the control over the site selection to prevent adverse Cabinet of Ministers, 30 families of the deceased and health and lifestyle impacts on communities living lost workers of 10 deep-water offshore platform were close to SOCAR’s operational areas as well as any given 15000 AZN from the Reserve Fund of the State involuntary resettlements during the project planning Budget; stage. Multiple criteria such as availability, safety and • Each family of three deceased and lost workers other technical characteristics, as well as environmental of 501 platform of “Neft Dashlary” were provided with and social characteristics of potential land plots are 20 000 AZN; considered when the operational site needs to be • SOCAR provided pecuniary aid for 45 children selected. Based on the in-depth analyses an option of 20 oil workers, who meet the requirements of the that carries minimum risks is chosen. If physical or Regulations for pecuniary aid to SOCAR employees, economic displacement is unavoidable, an action plan is this was the equivalent of 2,5 times the minimum living developed and implemented to ensure that appropriate wage and will be paid until these children reach 23 housing conditions for resettled groups are recovered. years old; It should be mentioned that no resettlement was carried • SOCAR provided funding to cover the cost out in 2016. (AZN 134 124) of the apartments of 3 deceased 31 2016 | SUSTAINABLE DEVELOPMENT REPORT

Socio-economic support Information on social expenses in 2016, Within the framework of its cooperation with million AZN 8 Habitat Association, SOCAR Energy Turkey has developed Habitat Socio-economic Development 0,165 6,174 Program. The main aim of this Program is enhance the socio-economic development in three Turkish provinces, nearly 90 villages and a town through which the TANAP 148 10,121 pipeline passes. In the framework of the Bee-keeping Development Project, that is one of the agricultural activities of 9,144 2,693 the Black Sea region, in cooperation with Turkish SOCAR Azerbaijan Development Fund, the Company contributes to SOCAR Energy Ukraine agricultural diversification activities, an increase SOCAR Energy Switzerland (SES) of household income and economic activity of SOCAR Energy Switzerland (ROC) underprivileged residents in the areas where the TANAP SOCAR Energy Georgia pipeline passes. SOCAR Energy Turkey In the framework of the Development of Integrated 8 Organic Poultry Systems Project, that is implemented SOCAR Energy Turkey in cooperation with Turkish Development Fund, it is Sports support planned to ensure proficiency of production sources SOCAR Energy Turkey provides active support to to guarantee food safety and growth of the producer’s the sports development in the region. It is among the income. main sponsors of SOCAR UEFA EURO 2016 and the In cooperation with Seyitgazi Municipality the European qualifying tournaments. Company carries out the Renovation of Village Schools The coverage of SOCAR Turkey’s digital and social and Development of the Frig Valley Project, that is media platforms has reached 15 million people through aimed at developing the Seyitgazi district by preserving its #dostlukkazansin campaign. the socio-cultural heritage and promoting tourism. Petkim Sports Club, which is funded by SOCAR Energy Turkey and Petkim, is involved in basketball, volleyball, and football.

8 Amount of social expenses in 2016 were as following: SOCAR Energy Georgia – 3,989,932 GEL, SOCAR Energy Ukraine – 103,294 USD, SOCAR Energy Switzerland (SES) – 5,644 KCHF, SOCAR Energy Switzerland (ROC) – 3,811 KCHF, SOCAR Energy Turkey – 6,336,225 USD. These currencies were converted into AZN as per average exchange rate for 2016 (1 USD-1,5973 AZN, 1 GEL-0,6751 AZN, 1 CHF-1,6202 AZN). 32 SUSTAINABLE DEVELOPMENT REPORT | 2016 Occupational Health and Safety

The occupational safety policy of SOCAR aims Training on marine survival in emergency situations to prevent emergency incidents and life threatening that shows the correct and skillful handling of the situations that could adversely impact employee rescue equipment on platforms, was carried out for our health and safety, irrespective of the complexity of the offshore employees in the SOCAR’s Offshore Maritime production process. Safety Training Centre as listed below (Table 7) SOCAR’s occupational health and safety policies comply with the requirements of the regulations listed Table 7. Offshore safety courses carried out in 2016 below: • Unified occupational health and safety Namber of Name of training course management system in the oil industry of Azerbaijan; trainees • Safety rules for the oil and gas industry; Safety familiarization, basic training and instruction for personnel on • Requirements of other valid regulations for 2269 self-propelled mobile offshore occupational safety as well as guidelines developed and units applied in each of SOCAR entities. Professional training on the use of rescue boats and rafts as well as Introduction to international management fast rescue guard boats and slow- 220 systems speed rescue boats for the SOCAR continually applies international personnel of ﬁxed offshore management systems in its business entities. For platforms and ﬂoating drilling rigs example, the Company attempts to align the operations of Complex Drilling Works Trust, Administrative Safety procedures Department of “Azneft” PU and “Azerikimya” PU with The collective employment agreements concluded the requirements of OHSAS 18001 “Operational Health with members of the Trade Union cover the actions that and Safety Management System” and get relevant are taken to address the following issues: certificates. Re-certification audits were conducted • Providing employees with work places that by various certification bodies in some entities meet occupational safety requirements; and the existing certificates were renewed. These • Providing privileges for the employees, who entities included Training, Education and Certification work in severe and harmful conditions, in compliance Department, Environmental Department, “28 May” with the specified standards and regulations; OGPD of “Azneft” PU, Heydar Aliyev Oil Refinery, • Ensuring that the employees working in severe, Marketing and Economic Operations Department, harmful and hazardous conditions have regular medical Department of Geophysics and Geology, Information examinations; Technology and Communications Department, Gas • Providing employees with required sanitary Processing Plant, Azerigaz Production Unit, Complex and amenity facilities. Drilling Works Trust and Department of Labor Standards. Each year, the progress of implementing these collective employment agreements is discussed and Employee education decisions are taken as a result. In 2016, SOCAR developed the following To improve the working environment and health occupational health and safety procedures and indicators in production areas, SOCAR allocates at instructions that were communicated to the employees: least 3% of its payroll budget for the development and • Design and safe operation of pressure vessels implementation of the required action plans throughout used in oil, gas and petrochemical industries; all the entities. The Company also provides regular • Unified rules for safe diving works and medical medical examinations for employees who are exposed support for (the final edition is currently being prepared). to the dangerous working conditions, are involved in The Company strictly controls the correct overhead and other critical works. We also work to implementation of new rules and organizes the required ensure that the required and prompt medical treatment trainings in all of our entities. is provided to the injured employees.. In 2016, 23813 33 2016 | SUSTAINABLE DEVELOPMENT REPORT

employees underwent a scheduled medical examination. Insurance OJSC on the other, the insurer pays insurance Over the reporting year, SOCAR focused on safety in benefits to any employees injured in the production explosion and fire-hazardous facilities. For instance, in process or the family members of the deceased. 2016 we installed modern wellhead equipment for the In 2016, there were no female employees among production wells at offshore platforms. To ensure safety the injured, and there were no records of occupational in this area, a new and up-to-date oil-gathering station diseases in the structural entities of SOCAR. at “Neft Dashlary” OGPD was constructed. According to the formal analysis reports, the To minimize safety risks, the standing commissions main causes of all accidents and occupational injuries of SOCAR and its entities responsible for the occurred during 2016 are employee incompliance occupational safety carried out 490 audits over the with the safety rules, as well as severe storm and reporting year and undertook appropriate actions to extreme weather conditions. As mentioned above, the eliminate detected non-conformities. As a result of Company started to conduct safety training programs these audits, the following actions were implemented: more frequently to prevent any recurrence of such • The down-hole equipment of some wells at “28 incidents and carried out necessary refurbishment and May” OGPD was refurbished; maintenance works to eliminate the identified risks • The faults detected in the rescue boats in a on the platforms. More detailed information about number of production units were eliminated; preventive actions is provided in the section below. • The awareness level of the employees was The investigation of the accidents on 501 platform improved by providing additional training; of “Neft Dashlary” OGPD and Guneshli 10 deep-water • The technical condition of equipment, offshore platform in December 4, 2015 is continued installations and mechanisms was aligned with the by the specially established groups and committees, safety requirements. although the insurance benefits specified by legislation were provided to the family members of the 14 deceased Accidents and injuries and 19 missing employees (please, see “Social activity Unfortunately, despite the actions taken, 11 and Support to Regional Development” chapter for more accidents occurred in SOCAR entities in 2016, five details). Among the deceased and lost workers, four of which were fatal. In compliance with the Rule were employed by the SOCAR’s subcontractors. As the of “Investigation and registration of occupational official investigation of this accident is still in process, accidents”, the accidents were investigated by dedicated the number of employees injured in the major accidents investigation committees of the Labor Inspection of the that occurred in December, 2015 was not covered by Ministry of Labor and Social Protection of Population. the current report (please refer to Attachement 4). The circumstances and causes of these accidents were identified and appropriate actions were taken. Preventive actions In 15 December 2016, severe wind conditions SOCAR and its joint operating companies analyze caused the collapse of the offshore ramp at the cause and consequences of accidents and OilGathering Station No. 3 of “N. Narimanov” OGPD of emergencies, assess possible risks and take preventive “Azneft” PU, as a result of which 9 people died and 1 actions to avoid a recurrence of the incident. The person went missing. The incident is being investigated Company has increased the number of its safety officers by a dedicated investigation group and more detailed in some of its entities (Oil and Gas Construction Trust, information will be provided in the next Sustainability Gas Export Department, Gas Processing Plant and Report once the investigation results are available. Department of Geophysics and Geology) to strengthen SOCAR and other concerned entities are continuing to control over compliance with the safety rules directly in provide aid and support to the families of the victims. its production areas. Moreover, as per Resolution of the Cabinet of Minister of To prevent fire hazards and accidents caused the Republic of Azerbaijan which was adopted following by severe storms and natural disasters, SOCAR has this incident, financial aid is also being provided from the inspected the serviceability of all process facilities state budget, SOCAR and other affiliated institutions. and equipment, oil and gas pipelines, electrical Pursuant to the agreements concluded between cables and hydro technical facilities. It continues to SOCAR and its entities on one hand and PASHA Life implement actions to maintain them in an operational 34 SUSTAINABLE DEVELOPMENT REPORT | 2016 and serviceable condition. For instance, the Company has started refurbishment works in a number of hazardous production areas. Moreover, running the vehicles and machinery on the offshore ramps connecting the “Neft Dashlary” OGPD platforms have been prohibited. Following the unsafe conditions identified at Central Oil Gathering Station No2, it has been fully shut down. In addition, personnel working at some of the other hydro technical facilities that do not meet the technical requirements have been relocated to safer working places (i.e. 105 workers from “N. Narimanov” OGPD, 172 workers from “28 May” OGPD and 127 workers from “Neft Dashlari” OGPD were relocated). 9 10 11

Number of incidents per operating area in 2016 Table 8. Occupational health and safety expenditures in 2016, thousand AZN

Oil and Gas Occupational health and safety Construction 2016 Production expenditures 2 4 Total expenditures, including 22 018 Initiatives to improve working conditions 14 367 Oil and Gas Transportation Personal Protective Equipment (PPE) 6 401 eﬁning 1 1 Dairy products 1 042 Other 208 Oil-gas supply Drilling and transportation 1 2

Table 9. Occupational health and safety performance indicators in 2016

Occupational health and safety performance indicators 2016 Total number of accidents 11 including fatal accidents 5 Total number of injured employees 23 including fatalities 13 Total number of lost employees 1 Number of occupational diseases 0 Number of days lost due to production injuries 22529 Sick leaves 182814 Total average number of employees 50645 Total hours worked 77484840 Total days worked 9685605 Production injury rate (per 100000 hours worked) 0,030 Lost days rate (per 100000 hours worked) 2,9 Absentee rate (per 100000 days worked) 1887,5 Accident frequency rate (number of accidents per 1000 employees)10 0,217 Accident severity rate (number of lost days per accident)11 375,3

9 The number of lost working days in 2016 also includes the lost time due to accidents in 2015 based on the updates of the investigation process of these accidents. 10 The accident frequency rate indicates the total number of accidents per 1000 employees (source: “Single management system for occupational safety in the oil industry of Azerbaijan”, “A guidebook on the occupational health and safety of employees”). 11 The accident severity rate indicates the average number of lost time injuries per one accident (source: “Single management system for the occupational safety in the oil industry of Azerbaijan”, “A guidebook on the occupational health and safety of employees”). 35 2016 | SUSTAINABLE DEVELOPMENT REPORT

SOCAR’s foreign subsidiaries Senior management of SOCAR’s foreign subsidiaries has always focused on issues related to occupational health and safety while implementing actions to improve the working environment. SOCAR Energy Turkey considers employee health and safety as one of the top priority issues. The health and safety management systems applied on its construction sites are also in the focus of attention during the commissioning and operating of the facilities. The Company promotes a monthly incentive program for all on-site employees to draw attention to and raise awareness about health and safety matters. Senior management communicates the health and safety issues and achievements during the monthly award ceremonies where the supervisory and operating personnel also receive prizes for outstanding safety performance. The new occupational health and safety monitoring program introduced by STAR oil refinery in 2016 ensures that health and safety performance is regularly evaluated and onsite operations comply with the existing safety standards and requirements. In 2016, SOCAR Energy Ukraine, SOCAR Energy Switzerland and SOCAR Energy Georgia also implemented a number of initiatives on occupational health and safety, including fire safety and emergency response. Therefore, the regular evaluation of employee knowledge at sale points as well as provision of PPE and regular training is under the strict control of the management. 12 13 14 15 Table 10. Occupational health and safety performance indicators in 2016 12

SOCAR Energy Ukraine SOCAR Energy Turkey 13 Total number of injured employees 1 Total number of injured employees 14 45 Total number of fatalities 0 Total number of fatalities 1 Number of occupational diseases 0 Number of occupational diseases 0 Number of days lost due to 36 Number of days lost due to production production injuries 1704 Total average number of employees 1 737 injuries Total hours worked 3 336 002 Total average number of employees 2708 Sick leaves 8 936 Total hours worked 15 27983632 Production injury rate (per 100000 Production injury rate (per 100000 0,030 0,161 hours worked) hours worked) Accident frequency rate (number of Lost days rate (per 100000 hours 0,576 6,089 incidents per 1000 employees) worked) Accident severity rate (number of Accident frequency rate (number of 36,000 16,617 lost days per accident) accidents per 1000 employees) Lost day rate (per 100000 hours Accident severity rate (number of lost 1,079 38,727 worked) days per accident) SOCAR Energy Switzerland (SES) SOCAR Energy Switzerland (ROC) Total number of injured employees 2 Total number of injured employees 1 0 Total number of fatalities 0 Total number of fatalities 0 Number of occupational diseases 9 Number of occupational diseases 0 Number of days los t due to production injuries 0 Number of days lost due to 0 Total average number of employees 58 2 production injuries Total hours worked 102648 0 Total average number of employees 132 Sick leaves 1164 0 Total hours worked 227752 Production injury rate (per 100000 0,97 4 Sick leaves 1276 hours worked) Production injury rate (per 100000 Occupational disease rate (per 0,878 0,87 7 hours worked) 100000 hours worked) Accident frequency rate (number of Accident frequency rate (number of 15,151 17,18 2 incidents per 1000 employees) accidents per 1000 employees) 12 The report does not cover performance indicators of SOCAR Energy Georgia due to their immateriality. For all other subsidiaries, the total number of injured employees includes only those that resulted in the lost time injuries. 13 The indicators cover the performance of Petkim, STAR oil refinery, Petlim port. The indicators also include the performance of the contractors working in these entities. Due to the fact that some indicators for previous years were calculated using different approaches, several non-conformities were identified and revised . 14 The number of injured employees includes only those that resulted in the lost working time. 15 The high value of this indicator is because the contractor hours working at STAR Oil Refinery are also included. 36 SUSTAINABLE DEVELOPMENT REPORT | 2016 Environmental performance Environmental management in SOCAR Table 11. The list of SOCAR’s entities certified One of the main goals pursued by SOCAR is to with TSE-ISO EN 14001 standard Issue become a company compliant with global industrial Name of an entity date, year and environmental safety requirements. From 2008, Environmental Department 2012 SOCAR’s Environmental Policy has been the principal Gas Processing Plant 2012 guiding document for its environmental performance. The Department of Geophysics and Geology 2013 Policy defines the main directions of its environmental Azerigaz Production Union (PU) 2013 Department of Labor Standards 2013 protection activities in the short term. In addition, some Transportation Department 2012 supporting documents have been prepared based on Diving and Rescue Works Department 2014 this policy. This includes a Waste Management Plan, Baku Higher Oil School 2014 Reduction of Atmospheric Emissions of Associated Experimental Production Unit on Repair 2012 and Lease of Submersible Rigs of Gas, Potential Emergency Prevention Plan, Strategy “Azneft” PU for Reduction of Climate Change Impact until 2020, Oil Department of “Azneft” PU for the 2013 Spill Alert and Cleanup Plan and similar documents. operating of gas storages “28 May” OGPD of “Azneft” PU 2013 The Vice-President of SOCAR for the Environment, Gas Export Department 2013 the Division of Environmental Projects Management Complex Drilling Works Trust 2016 and the Environmental Department are responsible for managing environmental protection and risks of the Environmental Impact Assessment Company. In compliance with the international conventions In 2016, SOCAR spent 15,0 million AZN on as well as in accordance with the requirements of local environmental measures. There were no fines for non- and international legislation, seven reports on an Initial compliance with environmental regulations or waste Environmental Examination (IEE) and Environmental discharge in the reporting year. Impact Assessment (EIA) were prepared and approved for all projects implemented by SOCAR in 2016. In 2016, the Environmental Department prepared, Expenditures on waste management and land approved and submitted 17 environmental regulations rehabilitation, million AZN for SOCAR’s entities.

12,760 Environmental awareness and training SOCAR considers the environmental awareness of the employees as one of the pillars for sustainable Total development. 13,798 In 2016, the Education, Training and Certification 1,038 Department organized awareness-raising courses at its employee-training center on: • Environmental Policy of SOCAR.; Expenses on waste management • Waste Management.; Expenses on land rehabilitation • Oil Spill Response and so on.

International and local standards applied in Stakeholder engagement SOCAR To increase the environmental awareness of the SOCAR continues to apply international standards public and its employees, SOCAR participated in a for environmental protection management systems number of events in 2016 as in previous years. in its operations. Furthermore, the certification body In 2016, it participated in the following: conducts annual audits to verify the conformity to such • A seminar on World Marine Mammal Protection standards (e.g. ISO EN 14001), renews the certificates Day; and extends them for the next year. • The Earth Day campaign of the IDEA Public Union; 37 2016 | SUSTAINABLE DEVELOPMENT REPORT

• An event dedicated to World Environmental Protection Day (June 5); • A seminar dedicated to the International Day for the Preservation of the Ozone Layer, held at the School Lyceum Complex of Baku Slavish University; • “We clean the world” campaign conducted jointly by “28 May” OGPD and school students on Chilov island.

Environmental monitoring system To assess the impact of oil and gas production between business entities and governmental bodies as on the eco-system in the Caspian Sea, a number of well as encourages the joint research and application of monitoring activities are carried out throughout SOCAR. innovative solutions in this area. These cover a comprehensive analysis of the general To reduce climate change impact, SOCAR physicochemical properties of the aquatic environment, implements targeted actions to decrease the energy composition and amount of biogenic substances and consumption per unit of output in oil and gas production as petroleum products, composition of seabed sediments, well as in transportation and refining by applying energy- organic substances, taxonomy of micro-organisms efficient equipment and technologies.17 For example, to and planktonic flora as well as determine the level of provide smokeless combustion of gases emitted into anthropogenic impact. the atmosphere, the flare facility in “Azerikimya” PU was A total of 887 monitoring activities were conducted revamped. The flare tips were replaced and a return 16 by field monitoring groups in 2016 (for more detail, system was installed for the fuel gas, which is supplied please, see Figure 4). The monitoring results were to the flare stack during the drier regeneration process included in the Geographic Data System database. in the ethylene facility. The efficiency of air pollution management is Figure 4. Dynamics of offshore and onshore environ- directly related with the registration, inventory and mental monitoring in 2014-2016 control of emissions. The new methodology to calculate the amount of greenhouse gases (GHG) and other Total number of monitoring surveys pollutants from SOCAR’s stationary sources was Onshore developed in 2015 and agreed in 2016 by the World Offshore

7 Bank’s Global Gas Flaring Reduction Partnership and 8

8 Climate Change and Ozone Center formed by the 0 6 8 7

0 Ministry of Ecology and Natural Resources. 6 6 59 0 Turkey also implements procedures to calculate 6 6 4

43 GHG emissions and prepare regular reports. The first 7 6 29

1 legislation on the management of GHG emissions 244 2 (April 25, 2012) was No.28274 “Regulation on Monitoring of Greenhouse Gas Emissions”. As per the 2014 2015 2016 regulation requirements, Petkim was obliged to prepare and approve a report on produced GHG emissions in Global climate change 2015-2016. However, amendments to this regulation SOCAR continues to meet its relevant commitments were made twice during the year and as per the latest to the UN Framework Convention on Climate Change update given by the Ministry of Environment and Urban and within the framework of Paris Climate Agreement Planning (MEUP) of Turkey officials, the deadline for signed by the Republic of Azerbaijan on April 22, 2016. the GHG reporting has been extended up until October, To minimize the risks associated with climate change, the 2017. Paris Climate Agreement emphasizes the partnership

16 The number of monitoring activities in 2016 increased due to strengthening environmental control and stricter regulatory require- 17 For more detailed information, please, refer to SOCAR Sustaina- ments bility Report 2015, pages 45-47. 38 SUSTAINABLE DEVELOPMENT REPORT | 2016

GHG emissions produced by SOCAR, GHG emissions (indirect emissions) caused by 18 thousand tons of CO2-equivalent the electricity consumption of SOCAR Azerbaijan , thousand tons of СО - equivalent. SOCAR Azerbaijan 2

Direct emissions 5989,8 Structural divisions Indirect emissions 669,2 438,9

SOCAR Energy Georgia�� The total Direct emissions 0,342 for SOCAR Indirect emissions 3,434 669,2

SOCAR Energy Switzerland OCs and JVs Direct emissions 0 230,3 Indirect emissions 0,371

Direct emissions intensity ratio for SOCAR in 2014-2016, thousand tons of CO -equivalent per To meet the requirements of this regulation, Petkim 2 number of employees 20 signed a contract with a third party company accredited by MEUP in January, 2017. 18 19 0,116 The report will be published on SOCAR’s and Petkim’s corporate web sites once approved by the MEUP. The Company’s stakeholders will be informed about it through the corporate news.

Table 12. GHG emissions discharged by SOCAR 0,116 0,118 Azerbaijan, thousand tons of CO2-equivalent The reduction in GHG emissions is more evident GHG emissions 2016 in the gas production operations managed by SOCAR. Total for SOCAR 5989,8 including: The wells that can cause direct emissions into the emissions from stationary production 5891,1 atmosphere are connected to gas gathering stations, facilities the tubular annulus in low-debit wells is packed, and including: abandoned wells are sealed to prevent gas leakages in Structural divisions 5624,4 20 Operating companies and joint 266,6 compliance with the specified procedures. ventures (OCs and JVs) To improve the reduction of GHG emissions, emissions from mobile facilities 98,7 SOCAR prepared an action plan to decrease the amount including: Transportation Department 79,5 of associated oil gas in 2017-2022. It aims to continue OCs and JVs 19,2 these projects in the coming years. One of the actions in this scope is supplying the associated gas to the network by preventing the greenhouse emissions (for more detailed information please refer to Attachment 5).

18 The table does not include indicators from SOCAR Energy Ukraine due to limited production activities. SOCAR Energy Switzer- land produces only indirect emissions due to the limited scope of operations. 19 The amount of the indirect emissions of SOCAR Georgia associ- 20 Direct emissions intensity ratios for SOCAR Energy Georgia, ated with electricity consumption has been recalculated in this report Ukraine and Switzerland were not included in the table due to their using a single approach. immateriality. 39 2016 | SUSTAINABLE DEVELOPMENT REPORT

Environmental control over atmospheric GHG emissions as a result of SOCAR’s operations in Azerbaijan in 2016, thousand tons emissions discharged by vehicles and other special equipment

Methane (CH₄) From 2009, the Environmental Department has 127,7 controlled the level of harmful gases emitted into the atmosphere by vehicles and special equipment. Environmental labels were issued to 2915 vehicles that were found to conform to the standards when undertaking environmental measurements. 21 Carbon gas (CO₂) 3307,6 Energy consumption Energy security and energy efficiency are key Pollutants discharged into the atmosphere by solutions to climate change. Guided by its environmental SOCAR, our OCs and JVs policy on energy efficiency and energy saving, SOCAR In accordance with the country’s legislation, all continues to carry out various projects in compliance energy and industrial enterprises in the country, as well with the State Program on Alternative and Renewable as the structural divisions of SOCAR, must provide the Sources of Energy in the Republic of Azerbaijan. State Statistical Committee with annual data on the To increase energy efficiency, SOCAR installs amount of pollutants discharged into the atmosphere more energy efficient equipment in its entities as by its OCs and JVs. To prepare the environmental well as makes appropriate corrections to operating specifications, an inventory of the pollutants discharged procedures. The energy intensity ratio specified in into the atmosphere by SOCAR, it OCs and JVs is being Table 14 is calculated to measure the energy efficiency prepared. of the Company. Thus, an increase in the electricity To minimize any discrepancies, all the related intensity ratio in 2015 is caused by the reduction in reports, procedures and regulations are monitored the number of employees due to optimization process annually (for more detailed information please refer to implemented in the reporting year. The slight increase Attachment 5). Total amount of pollutants emitted into in the electricity intensity ratio demonstrates a need for the atmosphere is determined based on results of the energy-efficiency initiatives. Therefore, the Company monitoring (Table 13). uses an energy consumption recording system Table 13. Amount of pollutants emitted into the gathering data on energy use from all the structural atmosphere by SOCAR in 2016, thousand tons divisions as well as develops optimal patterns for energy Amount consumption. Furthermore, the following actions were Subsidiary of pollutants Total for SOCAR Azerbaijan taken during the reporting year: the obsolete pumps at including: 131,55 the “Absheronneft” OGPD oil wells were replaced with solid substances 0,23 new energy saving screw-type pumps, special actuators gaseous and liquid substances 131,32 were installed to adjust the speed of oil loading pumps Total for SOCAR Energy Georgia and out-of-date diesel generators were replaced with 0,43 solid substances more energy-efficient machinery. gaseous and liquid substances 0,43 Total for SOCAR Energy Ukraine including: 0,07 solid substances 0,02 gaseous and liquid substances 0,05

21 For more details, please, refer to SOCAR’s report on sustainable development, pages 48-49. 40 SUSTAINABLE DEVELOPMENT REPORT | 2016

Waste management Data on the electricity consumption of SOCAR in 2016, thousand kW/h SOCAR implements a centralized management of all wastes that are typical for oil, gas and chemical industries to comply with its principle of “zero waste. Its Waste Management Plan (WMP) covers the main SOCAR Azerbaijan 1079993 principles of waste management is applied to all departments and entities. SOCAR Energy Turkey Around 13127 tons of drilling sludge and 505,62 1029450 tons of industrial waste were transferred to the waste center in 2016. Pursuant to the agreement concluded between the environmental department of SOCAR and “econ industries gmbh” (Germany), two pieces SOCAR of VacuDry vacuum distillation units designed for the Energy Total for SOCAR, including Georgia 2160805 processing of drilled cuttings were installed in the 28615 waste center. The above-mentioned units are complex systems that combine components necessary to process drilled cuttings as well as operate automatically using up-to-date technology. SOCAR Energy To process the drilling sludge generated in Ukraine the production process and solid industrial wastes 9351 SOCAR the Garadagh Waste Recycling Center is used for Switzerland temporary storage. As specified in Figure 5, total drilling 13396 sludge increased by 11% due to increased number of 22 23 24 wells and drilling works as compared with the previous year. Oil sludge rose by 30% due to the repair and Fuel used by SOCAR Azerbaijan in 2016 24 decommissioning works carried out in old wells. Reusable materials accumulated in the Waste Center Gasoline, tons (such as wood, paper and rubber) are supplied to other 5826,57 organizations for specific uses or are recycled.25

Natural gas, ths. m³ 809218,235 ��

Diesel, tons 32119,125

Table 14. Energy intensity ratio in 2014–2016 (consumption of electricity (thousand kW/h) per an employee) 22

Enterprises 2014 2015 2016 SOCAR Azerbaijan 20,2 21,1 21,3 SOCAR Energy Turkey (Petkim) 23 360,59 428,12 433,82 SOCAR Energy Georgia 5,3 7,85 6,73 SOCAR Energy Ukraine 4,6 3,7 5,4 SOCAR Energy Switzerland 20,4 19,7 18,7

22 Energy intensity ratio indicates the amount of electricity consumed by one employee. 25 The total value of natural gas provided in the previous reports was 23 The environmental indicators of SOCAR Energy Turkey have been incomplete as it covered the amount of natural gas used by “Azneft” recalculated and revised accordingly using a single and approved PU for the heating of pipelines only. Therefore, the amount of the approach. natural gas consumed for production and household purposes by 24 This indicator shows the amount of fuel used by specialized equip- all SOCAR Azerbaijan entities was recalculated and amended in the ment and transport vehicles. current Report. 41 2016 | SUSTAINABLE DEVELOPMENT REPORT

Information about generated, utilized and Formation water management transferred waste can be found in Table 15. The The protection of the Caspian Sea basin is a priority breakdown of waste for hazardous and non-hazardous issue in SOCAR’s environmental policy. To prevent the is given in the Attachment 5. 26 27 28 29 spread of formation waters into the surrounding areas during the production of hydrocarbons, SOCAR has Table 15. Drilling sludge and oil sludge generated by SOCAR Azerbaijan in 2014–2016, used a formation water management system as well as thousand tons 26 a closed-cycle utilization of formation water. It continues its efforts aimed to assimilate and apply advanced Waste type 2016 technologies continuously. As part of the actions SOCAR Azerbaijan 27 taken in this direction, the Company applies state-of- Waste generated 60,98 art equipment (capacity of 3550 m3/day) designed for Waste utilized 0,91 closed-cycle utilization and injection of formation water Waste transferred to third-party 45,04 back into the bed. This technology is used on the deep- organizations Waste transferred to the Waste 13,709 water offshore platforms of the Guneshli field of “28 Disposal Centre May” OGPD and operational areas of “Neft Dashlary” SOCAR Energy Turkey 28 OGPD. Waste generated 30,72 The figure given below shows the amount of the Waste processed29 10,1 formation water produced by “Azneft” PU, OCs and JVs Waste transferred to third-party 21,1 organizations in the process of oil production in 2016. SOCAR Energy Ukraine Waste generated 2,13 Waste utilized 0 Formation water produced by SOCAR Azerbaijan, 3 Waste transferred to third-party 2,13 million m organizations “Azneft” PU 5,62

Total for Figure 5. Drilling sludge and oil sludge generated by SOCAR SOCAR Azerbaijan in 2014–2016, thousand tons Azerbaijan 18,87 25,059 15,7 OCs and JVs 13,1 19,439

10,06 8,97 8 Oil spill prevention and response As the operations of the Company are related to hydrocarbon products, the risk of oil spills increase. Drilling sludge Oil slude Therefore, it prioritizes the prevention of the onshore 2014 2015 2016 and offshore spills of oil and petroleum products. A working group established within the Emergency 26 The table does not cover the indicators of SOCAR Energy Geor- Committee of SOCAR is responsible for managing the gia and Switzerland due to their limited production activities. 27 The deviations from the indicators given in the previous year’s operations related to alerting and cleanup of spilled oil report occurred due to the different conversion coefficients used by and petroleum products. different SOCAR entities to convert some waste types expressed in m3 to metric tons.. Also, some entities classified hazardous metal The approved Oil Spill Alert and Cleanup Plan is wastes as non-hazardous last year. Following the clarifications and considered a guiding document. In accordance with reconsiderations made by the Environmental Measurements and Waste Management team of the Environmental Department, the the approved training schedule, basic training has been most accurate data on waste management for all 3 years are presented in the current report. conducted in those entities that encounter oil spill risks. 28 Due to the fact that some companies owned by SOCAR Energy Awareness-raising courses on oil spill response and Turkey are under construction (for example, STAR Oil Refinery etc.), the report covers only the performance indicators of Petkim. Dis- prevention have been organized in SOCAR’s entities. posed wastes include the wastes incinerated at Petkim. Corrosion and formation of holes in transportation 29 Processed wastes refer to the wastes incinerated at the Petkim site. pipelines are among the major causes of oil spills. 42 SUSTAINABLE DEVELOPMENT REPORT | 2016

To prevent ruptures in oil pipelines, various Along with formation water, SOCAR also pipelines with the length of 22886 m underwent a undertakes large-scale initiatives to manage sewage major overhaul in 2016 in compliance with the major water generated in the operational areas. It has installed maintenance program. This action helped to prevent oil operational biological treatment facilities to treat leakages. Over the reporting year, only small leakages sewage waters generated in “Neft Dashlary” OGPD occurred and no large-size ruptures or oil spills in the and Chilov island. 30 31 32 old pipelines were observed. The information exchange between the oil Amount of recycled and reused water in SOCAR, thousand m3 30 companies operating in the regions (BP Azerbaijan, Karasu Operating Company, Salyanoil Operating Company and others) enables a quick response to Reused water pipeline emergencies as well prompt response to any 2,5 rupture. SOCAR In 2016, no significant emergency oil spills Azerbaijan occurred. 270,97

Water management Recycled water �� To maximize the efficient use of water resources, 268,47 SOCAR implements actions aimed at the rational use of water resources and pollution prevention as well as Rehabilitation of disturbed ecosystems applies the most advanced innovations for efficient use SOCAR uses a multistage approach to rehabilitate of water resources in implementing new projects. ecosystems and re-cultivae processes. Its policy To meet the demand of its offshore operational enables the rehabilitation of polluted areas around Baku areas for water resources, SOCAR uses reverse and other strategically important areas at the first place osmosis facilities. More detailed information on the and the rehabilitation of polluted areas near residential amount of water consumed by sources can be found in districts at a later stage. Attachement 5. Rehabilitation works performed by SOCAR have resulted in a year-on-year decrease in the total area Water consumption in SOCAR in 2016, of the lands polluted with petroleum products and million m3 formation water (for more detailed information please refer to Attachment 5). SOCAR Azerbaijan 48,81 Table 16. Data on the lands polluted with the petroleum products by SOCAR, its OCs and JVs in 2016 as well SOCAR as the lands covered with formation water, ha 32 Energy Turkey 19,601 "Azneft" The causes of land pollution JV and PU OC The total area of lands polluted 971,35 1221,88 Land polluted with oil SOCAR 694,47 731,57 SOCAR total and petroleum products Energy Land covered with 68,811 276,88 490,31 Georgia formation water 0,19

SOCAR Energy Ukraine 30 There is no demand for recycled and reused water in the entities 0,12 located in Georgia, Turkey, Ukraine and Switzerland, therefore these SOCAR Energy indicators are not available in the current Report. Switzerland 31 The reductions in recycled water in 2016 are due to changes in 0,09 the calculation method applied by the the Gas Processing Plant . 32 No statistic reports on these indicators are prepared by SOCAR’s foreign entities. 43 2016 | SUSTAINABLE DEVELOPMENT REPORT

underway. Furthermore, the project on the enhancement Remediation of SOCAR’s lands polluted with oil, oil-containing water and other industrial of the energy efficiency of the road transport of SOCAR waste in 2016, ha 33 within sustainable transportation program has been OCs and JVs implemented. The organizational works on “SOCAR’s 25,1 program for associated gas capturing and supply to the end–consumer” are also underway. The total for SOCAR

Azerbaijan Cooperation with the World Bank’s Global Gas 44,8 Flaring Reduction Partnership (GGFR) organization “Azneft” PU In the framework of the cooperation with the World 19,7 Bank led Global Gas Flaring Reduction Partnership (GGFR) organization, SOCAR joined the World Bank’s 33 Hygiene and epidemiology services “Zero Routine Flaring by 2030” initiative. Joining The Hygiene and Epidemiology Centre of the this initiative has opened up new challenging and Environmental Department is responsible for employees momentous opportunities for SOCAR. occupational health, the prevention of occupational One of the goals of SOCAR within this initiative is diseases, compliance with the sanitary and hygiene to minimize the amount of the emissions of natural and norms in residential areas, the prevention of infective associated gases into the atmosphere. As a result, the diseases and implementation of epidemiological Company developed “The plan to reduce the associated response actions in all SOCAR’s entities. gas emissions discharged by SOCAR and in the joint In 2016, Sanitary-hygiene inspections were projects SOCAR” for 2017-2022. Currently, the basic conducted in 160 entities. Due to these anti-epidemic principles for reducing the amount of associated initiatives, 30 tuberculosis cases were registered gases emitted into the atmosphere by “Azneft” PU and and, following medical treatment, work permits were rehabilitation of polluted lands are being prepared. reissued to 26 employees. Furthermore, SOCAR Absheron is cooperating with the World Bank and other international organizations to Environmental cooperation recover lakes and promote sustainable management of Cooperation with the Global Environmental Fund organic waste. (GEF) and UN Development Program (UNDP) The “Nationally appropriate mitigation actions Cooperation with BP (NAMA) for low-carbon end-use in Azerbaijan” project Following a joint project initiative by SOCAR was approved by GEF in 2015 and the associated and BP Azerbaijan, gas flaring at the Chirag platform works commenced in 2016. was minimized. Successful cooperation between two To provide financial support for the project companies resulted in reducing CO2 emissions by implementation, GEF had a budget of AZN 3,55 million 265 thousand tons. The project was awarded with the in addition to the costs to be incurred by SOCAR, Certificate of Excellence 2015 in the 4th GGFR Global while UNDP allocated AZN 0,2 million. The project Forum. implementation covers the components listed below: Within the framework of the Waste Center • SOCAR’s Green Building Program; Expansion Project, SOCAR and BP Azerbaijan also • Sustainable Transport at SOCAR; established a working group responsible for selection of • SOCAR’s program for associated gas capture the equipment processing drilled cuttings in compliance and supply to the end–consumer. with the modern standards. SOCAR has already implemented several works In 2016, the Waste Centre Expansion Project was for each of the above noted three components of the continued. The opening ceremony of the renovated Project. It has identified buildings where energy-efficient Waste Centre was held in September 2016 with technologies will be applied within the scope of the representatives of the Ministry of Ecology and Natural Green Building Program. Currently, insulation works are Resources, BP, SOCAR and other oil companies operating in the oil and gas sector of the country. 33 SOCAR does not make such statistic reports for its oversees entities. Pursuant to an agreement signed between the SOCAR’s 44 SUSTAINABLE DEVELOPMENT REPORT | 2016

Environmental Department and BP, the drilled cuttings In 2016, SOCAR Energy Turkey successfully from BP’s operational areas are received in our Waste completed its ISO 14001:2004 re-certification for its Center and further processed in the special VacuDry petrochemical operations. The energy efficiency actions facility. implemented by SOCAR Energy Turkey were mainly related to petrochemical operations. The petrochemical Cooperation with Carbon Limits (Norway) operations of the Company were certified according to In 2016, SOCAR and Carbon Limits signed a ISO 50001 Energy Management Systems. Furthermore, memorandum of understanding (MoU) to determine total to ensure that water resources are used more efficiently, emissions of invisible gases. Instrumental measurement rain water accumulated in a special reservoir at Petkim works were carried out at the source leakages (gas undergoes several treatment processes and is re-used supply pipelines for furnaces, gas storage tanks, gas for production and household purposes. compressors) in the structural divisions of SOCAR. A STAR Oil Refinery prepared a management plan joint seminar was scheduled for May 2017 to discuss focusing on reduction of the negative environmental the findings. impacts. It launched a program for monitoring marine turtles and large marine mammals to protect the marine SOCAR Energy Turkey ecosystem and to control its biological diversity. The “SAFE” (SOCAR Aims For Efficiency) STAR Oil Refinery also uses a satellite surveillance guidelines of SOCAR Energy Turkey covers 16 basic system to control environmental impacts resulting from principles (e.g. risk management, control of contractor construction-installation works carried out at coastal operations, environmental assessment) on occupational areas. Moreover, the contact measurements of the health, safety and environmental management system factors negatively affecting the environment were as well as defines 100 related targets. The HSE risks implemented by the accredited third-party to assess related to the Company operations are continuously the environmental impacts of the construction works assessed and documented, and priority actions are carried out on site. specified for each identified risk. At least once a year, senior management reviews the completion status of SOCAR Energy Georgia specified priority actions and the efficiency of the HSE SOCAR Energy Georgia is cooperating closely with management system.. The results of the review are the Ministry of Environmental Protection and Natural discussed with all interested parties of the Company. Resources of Georgia (MEPNR). The Company’s 45 2016 | SUSTAINABLE DEVELOPMENT REPORT

Waste Management Plan was approved by the relevant ministry. Appropriate environmental monitoring was conducted at all petroleum depots. In 2016, waste inventories were prepared for all entities in compliance with the Waste Management Code. The reduction of natural gas losses caused a decrease in the amount of gas emissions discharged into the environment. The procedure for the electronic calculation of harmful atmospheric emissions was submitted for approval to MEPNR, after which it was completely assimilated and put into practice.

SOCAR Energy Ukraine The Ministry of Ecology and Natural Resources is the body that determines standards for atmospheric emissions and pollutants. SOCAR Energy Ukraine considers all environmental pollutants when planning the construction of sale points. Thereafter, all the construction plans receive relevant governmental body approval. At the same time, the Company applies the most advanced and environmentally friendly equipment and technology in its operations to minimize environmental damage. 34 35 36

The funds spent by SOCAR’s foreign subsidiaries on environmental activities in 2016 34 , million AZN 35

SOCAR Energy Turkey 3,717 SOCAR Energy Georgia 0,018

SOCAR Energy Ukraine 0,063

34 The table does not include environmental expenditures of SOCAR Energy Switzerland as these are inmaterials compared with the overall expenditures. 35 The exchange rates used for conversion of expenditures into AZN in 2016 are as follows: 1 USD-1,5973 AZN, 1 GEL-0,6751 AZN, 1 TL-0,5278 AZN. 36 This indicator covers only the environmental expenditures of Pet- kim and PETIM as environmental expenditures of STAR Oil Refinery were insignificant in 2016. The indicators for the previous years have been recalculated and included in this report by using a single and more appropriate categorization method. 46 SUSTAINABLE DEVELOPMENT REPORT | 2016 Key financial indicators, thousand AZN

2016 2015 2014 SOCAR Azerbaijan Total current assets 5 931 786 5 995 618 3 656 838 Total non-current assets 16 789 816 15 015 617 12 802 737 TOTAL ASSETS 22 721 602 21 011 235 16 459 575 Total equity (10 915 472) (10 337 788) (10 357 208) Total current liabilities (5 617 944) (4 018 250) (2 917 182) Total non-current liabilities (6 188 186) (6 655 197) (3 185 185) TOTAL LIABILITIES AND EQUITY (22 721 602) (21 011 235) (16 459 575) SOCAR Energy Turkey Total current assets 2 113 077 2 138 117 696 151 Total non-current assets 7 018 160 5 302 998 2 097 250 TOTAL ASSETS 9 131 237 7 441 115 2 793 401 Total equity (5 015 412) (3 746 829) (1 159 421) Total current liabilities (1 027 073) (984 681) (618 989) Total non-current liabilities (3 088 752) (2 709 605) (1 014 991) TOTAL LIABILITIES AND EQUITY (9 131 237) (7 441 115) (2 793 401) SOCAR Energy Georgia Total current assets 256 346 161 946 66 735 Total non-current assets 447 490 415 427 247 669 TOTAL ASSETS 703 836 577 373 314 404 Total equity 157 565 99 592 15 017 Total current liabilities (593 958) (409 730) (216 769) Total non-current liabilities (267 443) (267 235) (112 652) TOTAL LIABILITIES AND EQUITY (703 836) (577 373) (314 404) SOCAR Energy Ukraina Total current assets 61 259 61 081 47 395 Total non-current assets 128 520 135 019 88 673 TOTAL ASSETS 189 779 196 100 136 068 Total equity (171 648) (103 818) 28 337 Total current liabilities (13 980) (86 466) (90 166) Total non-current liabilities (4 151) (5 816) (74 239) TOTAL LIABILITIES AND EQUITY (189 779) (196 100) (136 068) SOCAR Energy Switzerland Total current assets 315 735 265 785 133 048 Total non-current assets 569 622 529 854 278 115 TOTAL ASSETS 885 357 795 639 411 163 Total equity (429 068) (395 599) (206 556) Total current liabilities (174 276) (124 214) (85 499) Total non-current liabilities (282 013) (275 826) (119 108) TOTAL LIABILITIES AND EQUITY (885 357) (795 639) (411 163)

47 2016 | SUSTAINABLE DEVELOPMENT REPORT

ATTACHMENT 1

About the Company 2014 2015 2016 Industrial indicators Proven oil reserves, ths. tons 72 053,0 74 336,0 71 503,0 Proven gas reserves, mln. m3 54 956,0 55 002,0 51 978,0 Oil production, ths. tons 8 300,0 8 160,6 7 522,4 Gas production, mln. m3 7 010,0 6 871,5 6 266,8 Oil refining, ths. tons 6 740,5 6 478,9 6 009,4 Gas reﬁning, mln. m3 3 655,3 3 401,8 3 000,7 Production output37,ths. tons, including 8 851,09 6 055,22 5 455,01 Automobile gasoline 1 238,25 1 223,92 1 139,58 Primary processing gasoline cut (to 217,30 195,33 173,58 “Azerikimya” PU) Hydrotreated gasoline (to “Azerikimya” PU) 203,96 0 0 Jet engine fuel 957,66 688,31 627,34 Diesel fuel 2 859,67 2 053,36 1 881,90 Propane(propylene cut 10,12 0 0 Butane(butylene cut 174,05 0 0 Light cycle oil 210,88 154,53 160,18 Heavy cycle oil 702,93 0 0 Furnace oil 249,17 313,02 398,62 Petroleum coke 260,06 254,78 206,59 Liquefied gases 184,17 157,62 185,62 Treated dry gas (to “Azerikimya” PU) 57,19 64,94 59,30 Hydrogen bearing gas 2,04 0 0 Vacuum gasoil 1 101,61 689,39 365,00 Engine fuel 106,13 63,61 68,41 Bitumen 262,85 171,77 179,13 Lubricating oils 53,05 24,64 9,76 Product produced by Azerkimya PU, ths. 480,1 484,01 459,61 tons, including Ethylene 104,04 106,65 103,36 Propylene 56,49 56,29 52,08 Butylene(butadiene fraction 30,16 24,79 22,17 Pyrolysis resin 71,77 73,35 69,99 Heavy resin 18,72 20,30 15,69 Propane 0,52 0,60 0,46 Fuel gas 86,10 85,47 86,16 Polyethylene 101,04 103,49 100,26 Purified Isopropyl Alcohol 10,57 12,25 8,94 Purified DIPE 0,69 0,82 0,50 SOCAR’s contribution to budget, bln. AZN 1,851 1,485 1,394 SOCAR’s charter capital, bln. AZN 1,496 1,614 1,802 Economic indicators, ths. AZN SOCAR Azerbaijan Economic value generated 4 849 165 4 619 975 3 846 734 Revenues 4 849 165 4 619 975 3 846 734 Economic value distributed (2 289 175) (2 272 379) (2 426 761) Operating costs (614 517) (530 183) (877 822) Employee wages and beneﬁts (542 197) (534 157) (572 645) Payments to providers of capital (137 810) (260 993) (321 521) Payments to government (369 067) (469 647) (437 192) Community investments (625 584) (477 399) (217 580) Economic value retained 2 559 990 2 347 596 1 419 973

37 The indicators for 2014 in Table 4 include Heydar Aliyev Oil Reﬁnery and Azerneftyag Oil Reﬁnery.

48 SUSTAINABLE DEVELOPMENT REPORT | 2016

SOCAR Energy Turkey Economic value generated 1 763 962 2 137 801 2 989 189 Revenues 1 763 962 2 137 801 2 989 189 Economic value distributed (1 591 621) (1 713 605) (2 415 585) Operating costs (1 472 948) (1 502 469) (1 928 326) Employee wages and benefits (73 178) (107 864) (172 505) Payments to providers of capital (45 126) (91 269) (216 463) Payments to government (369) (12 003) (98 291) Community investments 0 0 0 Economic value retained 172 341 424 195 573 603 SOCAR Energy Georgia Economic value generated 526 138 566 221 858 555 Revenues 526 138 566 221 858 555 Economic value distributed (484 904) (509 780) (777 670) Operating costs (460 502) (477 945) (719 910) Employee wages and benefits (15 139) (22 449) (34 057) Payments to providers of capital (7 692) (9 223) (17 693) Payments to government (1 571) (163) (6 010) Community investments 0 0 0 Economic value retained 41 234 56 440 80 884 SOCAR Energy Ukraine Economic value generated 231 209 180 191 280 485 Revenues 231 209 180 191 280 485 Economic value distributed (209 675) (165 855) (252 438) Operating costs (197 491) (153 913) (237 721) Employee wages and benefits (8 211) (7 431) (11 697) Payments to providers of capital (2 724) (2 787) (673) Payments to government (1 249) (1 725) (2 347) Community investments 0 0 0 Economic value retained 21 534 14 335 28 046 SOCAR Energy Switzerland Economic value generated 1 170 866 1 242 075 1 657 559 Revenues 1 170 866 1 242 075 1 657 559 Economic value distributed (1 134 837) (1 193 210) (1 563 719) Operating costs (1 081 460) (1 128 602) (1 484 445) Employee wages and benefits (51 244) (61 885) (75 597) Payments to providers of capital (748) (910) (646) Payments to government (1 304) (1 719) (2 869) Community investments (81) (94) (162) Economic value retained 36 029 48 865 93 840 Products exported by SOCAR, ths. tons, 2 029 581,58 2 280 949,78 1 815 420,71 including Gasoline A(92 9 432,54 0 0 TS(1 brand fuel for reactive engines 196 729,09 236 532,30 176 061,86 Diesel fuel L(62 965 329,67 921 718,87 799 451,15 Vacuum gasoil 504 577,74 723 690,60 385 220,73 Fuel oil 657,03 280,02 2 416,23 Depressor AKI 100 150,67 157 615,05 235 412,10 High(pressure polyethylene 87 269,90 88 330,03 84 540,00 Butylene(butadiene fraction 25 789,90 28 043,22 23 347,20 Propylene 45 585,07 43 455,05 40 902,50 Heavy pyrolysis resin 9 881,60 0 0 Liquid pyrolysis resin 73 249,39 0 57 577,17 Pyrolysis resin 0 69 869,10 0 Purified Isopropyl Alcohol 10 356,62 10 720,10 9 932,31 Purified DIPE 572,36 695,46 559,46

49 2016 | SUSTAINABLE DEVELOPMENT REPORT

ATTACHMENT 2

Human Resources 2014 2015 2016 SOCAR Azerbaijan Total number of employees, persons 54 714 52 104 50 735 Total number of employees recruited, persons 1 304 1 639 1 920 Total number of employees dismissed, persons 2 634 7 834 1 350 Total amount of training hours 188 574 317 999 436 061 Average training hours per employee 3,4 6,1 8,6 SOCAR Energy Turkey38 Total number of employees, persons 2 701 2 792 2 731 Total number of employees recruited, persons 174 328 194 Total number of employees dismissed, persons 178 237 248 Total amount of training hours39 100 426 145 177 57 461 Average training hours per employee 37,2 52,0 21,0 SOCAR Energy Georgia Total number of employees, persons 4 166 4 118 4 253 Total number of employees recruited, persons 815 846 631 Total number of employees dismissed, persons 608 894 504 Total amount of training hours 10 387 9 680 15 579 Average training hours per employee 2,5 2,3 3,7 SOCAR Energy Ukraine Total number of employees, persons 1 473 1 667 1 737 Total number of employees recruited, persons 1 131 1 600 1 469 Total number of employees dismissed, persons 1 027 1 406 1 399 Total amount of training hours 154 863 234 093 345 105 Average training hours per employee40 105,1 140,4 198,7 SOCAR Energy Switzerland Total number of employees, persons 686 714 714 Total number of employees recruited, persons 325 342 196 Total number of employees dismissed, persons 369 314 196 Total amount of training hours 6 328 6 700 5 946 Average training hours per employee 9,2 9,4 8,3

38 The indicators for SOCAR Energy Turkey were recalculated for all its using a single approach. 39 The reason of high value of training hours in 2015 is tthat more new employees were required in Petkim in 2015. 40 The reason of high average value of training hours per an employee in SOCAR Energy Ukraine is due to high employee turnover observed in petrol stations.

50 SUSTAINABLE DEVELOPMENT REPORT | 2016

ATTACHMENT 3

Social activities 2014 2015 2016 Social expenses, mln. AZN41 SOCAR Azerbaijan 153 143 148 SOCAR Energy Turkey42 0,746 5,772 10,121 SOCAR Energy Georgia43 1,566 1,298 2,693 SOCAR Energy Ukraine44 1,1 0,71 0,165 SOCAR Energy Switzerland (SES)45 4,5 3,95 9,144 SOCAR Energy Switzerland (ROC) 5,3 4,27 6,174 Types of assistance, ths. AZN, including 11 003,35 12 166,07 3 920,7 Financial support for individuals 949,376 1 958,218 679,711 Charity 405,16 780,913 115,000 Social 4 127,519 208 562,365 Sponsorship 3 224 3 404,18 1 734,326 Financial assistance for institutions 2 297,3 5 814,761 829,295 Scope of assistance, ths. AZN, including 11 003,35 12 166,07 3 920,7 Sports 4 527,344 7 694,761 335,000 Financial associations and trade unions 174,000 528,750 1 019,520 Education 244,160 622,765 282,308 Culture and arts 1 992,300 736,715 1 820,144 Governmental enterprises and bodies 2 868,359 1 050,000 0 Healthcare 15,500 0 0 Material assistance to individuals 1 114,369 1 468,023 463,723 Disabled veterans and persons 67,324 65,059 0 Payments based on types of assistance, ths. 3 944,56 4 723,93 8 078,602 AZN, including To family members of deceased employees 338,07 381,61 394,080 To employees for losing a family member 672,95 862,8 759,170 Monthly payments to children of the employees 172,56 113,51 58,013 deceased in Karabakh war and in 20 January tragedy until they are 18 (until the age of 23 if they are in full-time education) Monthly aid to each of children of tender age of 2 704,95 3 366,01 2 946,643 deceased employees until they are 18 (until the age of 23 if they are in full-time education) Approved by the president of SOCAR 56,03 0 3 920,696

41 Amount of social expenses in 2016 were as following: SOCAR Energy Georgia – 3,989,932 GEL, SOCAR Energy Ukraine – 103,294USD,SOCAR Energy Switzerland (SES) – 5,644 KCHF, SOCAR Energy Switzerland (ROC) – 3,811 KCHF, SOCAR Energy Turkey – 6,336,225 USD. These currencies were converted into AZN as per average exchange rate for 2016 (1 USD-1,5973 AZN, 1 GEL-0,6751 AZN, 1 CHF-1,6202 AZN). 42 Due to the fact that some of the subsidiaries of SOCAR Energy Turkey (Group), e.g., Petlim, included types of expenses that are not classified as social for previous years, they have been reca lculated in the current Report. Significant variations in the amount of social expenses are due to the increased exchange rate for USD to AZN and commitment to the annually defined social goals by the Group. 43 Social expenses in SOCAR Energy Georgia were recalculated and cover all applicable social expenses in the current Report. 44 The reason of decreased social expenses in SOCAR Energy Ukraine is a sharp fall in the UAH value and optimization of the expenses. 45 Although social expenses in SOCAR Energy Switzerland (SES and ROC) are stable in CHF, their equivalent in AZN has increased due to the changes in the exchange rates since 2015.

51 2016 | SUSTAINABLE DEVELOPMENT REPORT

ATTACHMENT 4

Occupational Health and Safety 2014 2015 2016 Offshore safety courses, number of trainees 955 1 549 2 489 Number of incidents in operating areas Oil and Gas Production 3 2 4 Oil and Gas Refining 1 1 1 Oil-gas supply and transportation 3 0 2 Construction 5 4 2 Transportation 0 2 1 Drilling 1 0 1 Occupational health and safety expenditures, ths. AZN Total expenditures, including 22 789 21 665 22 018 Initiatives to improve working conditions 16 481 15 956 14 367 PPE 4 625 3 964 6 401 Dairy products 1 216 1 332 1 042 Other 467 413 208 Occupational health and safety performance indicators Total number of accidents 13 9 11 Including fatal accidents 7 3 5 Total number of injured employees46 30 38 23 Including the total number of fatalities 12 15 13 Total number of lost employees 0 15 1 Number of occupational disease incidents 0 0 0 Working days lost due to occupational injuries 999 332 2 25247 Absence from work due to sickness 204 298 196 379 182 814 Average number of employees 56 389 52 380 50 645 Total hours worked 86 747 640 80 590 984 77 484 840 Total days worked 10 843 455 10 073 873 9 685 605 Injury rate (per 100000 hours worked) 0,035 0,047 0,03 Lost day rate (per 100000 hours worked) 1,15 0,4 2,9 Absentee rate (per 100000 days worked) 1 884,06 1 949,4 1 887,5 Accident frequency rate (number of accidents per 1000 0,231 0,172 0,217 employees)48 Accident severity rate (number of lost days per accident)49 166,5 55,3 375,3 Occupational health and safety performance indicators of OCs and JVs Total number of accidents 11 18 16 Including fatalities 2 2 3 Number of working days lost due to occupational injuries 607 490 476 Occupational health and safety performance indicators of SOCAR subsidiaries50 SOCAR Energy Turkey51 Total number of injured employees52 44 62 45 Total number of fatalities 0 1 1 Number of occupational disease incidents 0 0 0

46 Total number of injured employees in 2015 was updated based on the investigation report approved in 2016. 47 The number of lost working days in 2016 also includes the lost time due to accidents in 2015 as the investigation of these accidents were completed in 2016.. 48 The accident frequency rate indicates the total number of accidents per 1000 employees (source: “Single management system for occupational safety in the oil industry of Azerbaijan”, “A guidebook on the occupational health and safety of employees”). 49 The accident severity rate indicates the average number of lost time injuries per one accident (source: “Single management system for the occupational safety in the oil industry of Azerbaijan”, “A guidebook on the occupational health and safety of employees”). 50 The report does not cover performance indicators of SOCAR Energy Georgia due to their immateriality. For all other subsidiaries, the total number of injured employees includes lost time injuries only. 51 The indicators cover the performance of Petkim,STAR oil reﬁnery, Petlim port. The indicators also include the performance of the contractors working in these entities. Due to the fact that some indicators for previous years were calculated using different approaches, several non- conformities were identiﬁed andrevised. 52 The number of injured employees includes only those that resulted in the lost working time.

52 SUSTAINABLE DEVELOPMENT REPORT | 2016

Number of working days lost due to occupational injuries 680 1 329 1 704 Average number of employees 2 687 2 780 2 708 Total hours worked 53 8 792 720 137 627 60 27 983 632 Injury rate (per 100000 hours worked) 0,500 0,450 0,161 Lost day rate (per 100000 hours worked) 7,734 9,656 6,089 Accident frequency rate (number of accidents per 1000 16,375 22,302 16,617 employees) Accident severity rate (number of lost days per accident) 15,455 21,787 38,727 SOCAR Energy Ukraine Total number of injured employees 0 3 1 Total number of fatalities 0 0 0 Number of occupational disease incidents 0 0 0 Number of working days lost due to occupational injuries 0 98 36 Average number of employees 1 473 1 667 1 737 Total hours worked54 2 783 313 3 262 808 3 336 002 Absence from work due to sickness 6 961 8 936 Injury rate (per 100000 hours worked) 0 0,092 0,030 Accident frequency rate (number of incidents per 1000 0 1,8 0,576 employees) Accident severity rate (number of lost days per accident) 0 32,667 36,000 Lost day rate (per 100000 hours worked) 0 3,003 1,079 SOCAR Energy Switzerland (SES) Total number of injured employees 1 2 2 Total number of fatalities 0 0 0 Number of occupational disease incidents 0 0 0 Number of working days lost due to occupational injuries 0 0 0 Average number of employees 105 128 132 Total hours worked 226 676 228 497 227 752 Absence from work due to sickness 1 328 1 302 1 276 Injury rate (per 100000 hours worked) 0,441 0,875 0,878 Accident frequency rate (number of incidents per 1000 9,524 15,625 15,151 employees) SOCAR Energy Switzerland (ROC) Total number of injured employees 14 9 10 Total number of fatalities 0 0 0 Number of occupational disease incidents 23 14 9 Number of working days lost due to occupational injuries 0 0 0 Average number of employees 581 586 582 Total hours worked 1 059 240 1 037 400 1 026 480 Absence from work due to sickness 12 201 11 720 11 640 Injury rate (per 100000 hours worked) 1,322 0,868 0,974 Occupational diseases rate (per 100000 hours worked) 2,171 1,350 0,877 Accident frequency rate (number of accidents per 1000 24,096 15,358 17,182 employees)

53 The high value of this indicator is because the contractor hours working at STAR Oil Reﬁnery are also included. 54 SOCAR Energy Ukraine made some mechanical errors in calculati ng the total number of hours worked in previous years. Therefore the indicators are included in the current report after being recalculated automatically and are more accurate.

53 2016 | SUSTAINABLE DEVELOPMENT REPORT

ATTACHMENT 5

Environmental performance 2014 2015 2016 Environmental penalties and levies, mln. AZN For pollutant emissions within the established limits 0,165 0,1325 0 For violation of environmental regulations 0,01 0 0 Environmental protection costs, mln. AZN SOCAR Azerbaijan including: 14,0 23,0 15,0 Expenses on waste management 1,642 15,035 12,760 Expenses on land rehabilitation 0,694 1,038 SOCAR Energy Turkey56 1,243 1,157 3,717 SOCAR Energy Georgia 0,102 0,086 0,018 SOCAR Energy Ukraine 0,033 0,055 0,063 57 GHG emissions produced by SOCAR, ths. tons СО2–equivalent SOCAR Azerbaijan Direct emissions 6 364,0 6 061,0 5 989,8 Indirect emissions 697,0 694,0 669,2 SOCAR Energy Georgia58 Direct emissions 0,008 0,014 0,342 Indirect emissions 2,655 3,880 3,434 SOCAR Energy Switzerland Direct emissions Indirect emissions 0,387 0,389 0,371 GHG emissions discharged by SOCAR Azerbaijan The total for SOCAR, ths. tons of СО2–equivalent 6 412,0 6 061,1 5 989,7 including: emissions from stationary production facilities including: 6 320,7 5 943,6 5 891,0 Structural divisions 6 215,09 5 827,859 5 624,4 OCs and JVs 105,6 115,8 266,6 emissions from mobile facilities including: 91,4 117,5 98,7 Transportation Department 70,6 95,0 79,5 OCs and JVs 20,8 22,5 19,2 GHG emissions (indirect emissions) caused by the electricity consumption of SOCAR Azerbaijan, ths. tons of СО2–equivalent. The total for SOCAR including: 696,5 694,360 669,2 Structural divisions 696,5 448,4 438,9 OCs and JVs - 245,961 230,3 GHG emissions as a result of SOCAR’s operations Azerbaijan, ths. tons. Methane (CH4) 124,7 131,3 127,7 Carbon gas (CO2) 3 793,0 3 303,8 3 307,6 Amount of pollutants emitted into the atmosphere by SOCAR, ths. tons Total for SOCAR Azerbaijan, including: 125,52 121,82 131,55 solid substances 0,23 0,24 0,23 gaseous and liquid substances, including: 125,28 121,58 131,32 sulfur dioxide 0,657 0,502 0,54 nitrogen oxide 1,904 1,905 1,78

55 The amounts are specified according to currency exchange rates in 2016 (1 USD-1,5973 AZN, 1 GEL-0,6751 AZN, 1 TL-0,5278 AZN). 56 This indicator covers only the funds spent by Petkim and Petlim as environmental expenditure incurred by STAR Oil Refinery were insignificant. The indicators for the previous year have been recalculated in this report by using a single and more appropriate categorization method. 57 The table does not include indicators from SOCAR Energy Ukraine due to limited production activities. SOCAR Energy Switzerland produces only indirect emissions due to the limited scope of operations. 58 The amount of the indirect emissions of SOCAR Georgia associated with electricity consumption has been recalculated in this report using a single approach. 59 The reduction of the emissions produced by the stationary sources of SOCAR Azerbaijan of SOCAR Azerbaijan is caused by the suspended operations in Heydar Aliyev Oil Refinery due to renovation works. 60 Only the electricity supplied by external organizations was taken into consideration while calculating indirect emissions which reduced the value of indirect emissions produced by the structural divisions of SOCAR in 2015. 61 In 2016, the indirect GHG emissions from electricity consumption include the indicators of the OCs and JVs.

54 SUSTAINABLE DEVELOPMENT REPORT | 2016 carbon oxide 4,331 4,542 4,19 hydrocarbons (without volatile organic compounds) 110,45 105,13 115,55 volatile organic compounds 7,282 8,658 8,474 other gaseous substances 0,663 0,840 0,789 Total for SOCAR Energy Georgia, including: 0,341 0,666 0,434206 solid substances gaseous and liquid substances, including: 0,341 0,666 0,434 sulfur dioxide 0,002 0,005 0,003 nitrogen oxide 0,002 0,004 0,002 carbon oxide 0,007 0,015 0,007 hydrocarbons (volatile organic compounds) 0,33 0,642 0,422 volatile organic compounds Total for SOCAR Energy Ukraine, including: 0,6501 0,0718462 0,0721 solid substances 0,02 0,01194 0,0170 gaseous and liquid substances, including: 0,6301 0,0599 0,0551 sulfur dioxide 0,015 0,0001 0,0004 nitrogen oxide 0,1001 0,0002 0,0002 carbon oxide 0,15 0,0002 0,0010 hydrocarbons (without volatile organic compounds) 0,013 0,0166 0,0014 volatile organic compounds 0,051 0,0399 0,0449 other gaseous substances 0,301 0,0029 0,0072 Electricity Consumption, ths. kW/h SOCAR Azerbaijan 1 105 599 1 099 212 1 079 993 SOCAR Energy Turkey (Petkim) 868 655 1 049 747 1 029 450 SOCAR Energy Georgia 22 123 32 330 28 615 SOCAR Energy Ukraine 6 772 6 103 9 351 SOCAR Switzerland (ROC) (SES) 13 968 14 089 13 396 Fuel used by SOCAR Azerbaijan63 Gasoline, tons 8 560,463 7 526,087 5 826,57 Diesel, tons 35 811,438 34 572,273 32 119,125 Natural gas64, ths. m³ 907 002,738 845 608,717 809 218,235 Waste Management in SOCAR, ths. tons65 SOCAR Azerbaijan66 Waste generated, including: 85,25 75,1 60,98 hazardous 75,23 63,67 52,82 non(hazardous 10,02 11,43 8,16 Waste utilized, including: 0,02 0,86 0,91 hazardous 0,02 0,86 0,91 non(hazardous Waste transferred to third(party organizations, including: 68,62 73,10 45,04 hazardous 59.17 61,78 37,06 non(hazardous 9,45 11,32 7,98 Waste transferred to the Waste Disposal Centre, including: 21,822 11,969 13,709 hazardous 21,743 11,886 13,662 non(hazardous 0,079 0,083 0,047

62 The required corrections to the previous years’ indicators were made using correct units of measurement. 63 This indicator shows the amount of fuel used by specialized equipment and transportation vehicles. 64 The total value of natural gas provided in the previous reports was incomplete as in covered the amount of natural gas used by “Azneft” PU for the heating of pipelines only. Therefore, the amount of the natural gas consumed for production and household purposes by all SOCAR Azerbaijan entities was recalculated and amended in the current Report. 65 The table does not cover the indicators of SOCAR Energy Georgia and Switzerland due to their limited production activities. 66 The deviations from from the indicators given in the previous year’s report occurred due to the different conversion coefficie nts used by different SOCAR entities to convert some waste types expressed in m3 to metric tons. Also, some entities classified hazardous metal wastes as non-hazardous last year. Following the clarifications and reconsiderations made by the Environmental Measurements and Waste Management team of the Environmental Department, the most accurate data on waste management for all 3 years are presente d in the current report.

55 2016 | SUSTAINABLE DEVELOPMENT REPORT

SOCAR Energy Turkey (Petkim)67 Waste generated, including: 25,79 20,39 30,69 hazardous 19,2 12,16 18,52 non-hazardous 6,59 8,23 12,17 Waste processed, including68: 5,56 7,4 9,6 Hazardous 2,23 7,4 9,6 non-hazardous 3,33 0 0,00 Waste transferred to third-party organizations, including: 11,26 13,0 21,1 Hazardous 4,67 4,8 8,9 non-hazardous 6,59 8,2 12,2 SOCAR Energy Ukraine Waste generated, including: 1,903 2,33389 2,14 Hazardous 0,002 0,00085 0,01 non-hazardous 1,901 2,33204 2,13 Waste utilized, including: Hazardous non-hazardous Waste transferred to third-party organizations, including: 1,903 2,3329 2,13 Hazardous 0,002 0,00085 0,01 non-hazardous 1,901 2,33204 2,13 Amount of formation water, mln. m3 Total for SOCAR Azerbaijan, including: 24,657 25,384 25,059 “Azneft” PU 5,775 5,653 5,62 OCs and JVs 18,882 19,731 19,439 Data on leakages, clogging and losses in SOCAR’s entities Leakage 109,3 30,0 0 Clogging 109,3 30,0 0 Losses 0 0 0 Water consumption in SOCAR, mln. m3 SOCAR Azerbaijan, including: 55,36 50,64 48,81 surface water sources 5,78 5,76 5,5 subsurface water sources69 49,58 44,88 43,31 SOCAR Energy Turkey (Petkim), including: 14,808 18,503 19,601 surface water sources 14,808 18,503 19,601 subsurface water sources SOCAR Energy Georgia, including: 0,176958 0,189894 0,195739 surface water sources 0,166998 0,167034 0,178799 subsurface water sources 0,00996 0,02286 0,01694 SOCAR Energy Ukraine, including: 0,07 0,09 0,13 surface water sources 0,05 0,06 0,09 subsurface water sources 0,02 0,03 0,04 SOCAR Energy Switzerland, including: 0,048 0,045 0,09 surface water sources 0,048 0,045 0,09 subsurface water sources Amount of recycled and reused water in SOCAR Azerbaijan, ths. m3 70 Recycled water71 292,2 310,6 268,47 Reused water 11,8 2,775 2,5

67 Due to the fact that some companies owned by SOCAR Energy Turkey are under construction (for example, STAR Oil Reﬁnery etc.), the report covers only the performance indicators of Petkim. Disposed wastes include the wastes incinerated at Petkim. 68 Processed wastes refer to the wastes incinerated at the Petkim site. 69 Reduced water consumption is due to decreased production in the OCs and JVs. 70 There is no demand for recycled and reused water in the entities located in Georgia, Turkey, Ukraine and Switzerland, therefore these indicators are not available in the current Report. 71 The reductions in recycled water in 2016 are due to changes in the calculation method applied by the the Gas Processing Plant .

56 SUSTAINABLE DEVELOPMENT REPORT | 2016

Data on the lands polluted with the petroleum products of 2 312,98 2 244,13 2 193,23 SOCAR, OCs and JVs as well as the lands covered with formation water72, ha, including: “Azneft” PU 998,6 991,04 971,35 OCs and JVs 1 314,38 1 253,09 1 221,88 Area of lands polluted with oil and petroleum products “Azneft” PU 715,6 711,0 694,47 OCs and JVs 779,52 759,6 731,57 Area of lands flooded with formation water “Azneft” PU 283,0 280,04 276,88 OCs and JVs 534,86 493,49 490,31 Rehabilitated area of polluted lands, ha73, including: 95,6 71,8 44,8 “Azneft” PU 23,3 10,4 19,7 OCs and JVs 72,3 61,4 25,1

72 No statistic reports on these indicators are prepared by SOCAR’s foreign entities. 73 SOCAR does not make such statistic reports for its oversees entities.

57 2016 | SUSTAINABLE DEVELOPMENT REPORT Table of compliance of the Report with GRI Manual GRI General Standard Disclosures

External Index Guidance Note Section of the Report / Page Assurance

Strategy and Analysis

G4-1 Statement from the most Message of the President of SOCAR, Mr. senior decision-maker of the Rovnag Abdullayev / Page 1-2 organization

G4-2 Description of key impacts, Message of the President of SOCAR, Mr. risks, and opportunities Rovnag Abdullayev / Page 1-2

Organizational Profile G4-3 Name of the organization About the Company / Page 5 G4-4 Primary goods and services About the Company / Page 9-10 G4-5 Location of the organization’s About the Company / Page 5 headquarters G4-6 Number and names of the About the Company / Page 8; 10 organization's major business markets G4-7 Nature of ownership and legal Corporate Governance / Page 17 form G4-8 The markets served (including About the Company / Page 8; 10 geographic breakdown, sectors served, and types of customers and beneficiaries) G4-9 Scale of the organization About the Company / Page 5; Yes, p. 67 Human Resources / Page 20-25

G4-10 Distribution of employees by Number of Human Resources / Page 20-25 Yes, p. 67 categories employees by categories by SOCAR's subsidiaries are presented in the respective tables. G4-11 Number of employees covered The Collective by collective bargaining agreement covers agreement all employees of the Company. G4-12 Organization’s supply chain Corporate Governance / Page 18 G4-13 Significant changes during the About the Company / Page 10 reporting period regarding the Corporate Governance / Page 15 organization’s size, structure, ownership and the supply chain G4-15 International and local Corporate Governance / Page 17 initiatives, environmental and Environmental Activity / Page 44-45 social standards, and a list of principles that the organization is a member of G4-16 Memberships in associations Corporate Governance / Page 18; (such as industry associations) Environmental Activity / Page 44-45 and national or international advocacy organizations Identified Material Aspects and Boundaries G4-17 All enterprises included in the About the Company / Page 8 Yes, p. 67 organization's financial statements G4-18 Process for defining the report About the Report / Page 3 Yes, p. 67 content and the Aspect Boundaries G4-19 All the material Aspects About the Report / Page 3 identified in the process for defining report content

58 SUSTAINABLE DEVELOPMENT REPORT | 2016

G4-20 For each material Aspect, About the Report / Page 4 report the Aspect Boundary within the organization G4-21 For each material Aspect, About the Report / Page 4 report the Aspect Boundary outside the organization G4-22 Effects and reason of any About the Report / Page 3; restatements of information Environmental Activity / Page 50-51, 53, provided in previous reports 55

G4-23 Significant changes from About the Report / Page 3 previous reporting periods in the Scope and Aspect Boundaries

Stakeholder Engagement G4-24 Stakeholder groups engaged Corporate Governance / Page 17 by the organization G4-25 Basic processes and methods Corporate Governance / Page 17 to identify stakeholders to be involved G4-26 Organization’s approach to Corporate Governance / page 17 stakeholder engagement

G4-27 Key issues raised by Human Resources / page 26 stakeholder engagement and ways the organization responds to these topics Report Profile G4-28 Reporting period About the Report / Page 3 G4-29 Date of the most recent report About the Report / Page 3

G4-30 Reporting cycle (such as About the Report / Page 3 annual, biennial) G4-31 Contact point for questions About the Report / Page 4 regarding the report or its contents G4-32 The ‘in accordance’ option the About the Report / Page 4 Yes, p. 67 organization has chosen G4-33 Organization’s policy and About the Report / Page 4 current practice with regard to seeking external assurance for the report

Governance G4-34 Governance structure of the Corporate Governance / Page 14 organization, including committees of the highest governance body. Committees responsible for decision- making on economic, environmental and social impacts G4-35 Process for delegating Corporate Governance / Page 15 authority for economic, environmental and social topics from the highest governance body to senior executives and other employees G4-36 Executive positions Corporate Governance / Page 15-16 responsible for economic, Environmental Activity / Page 37 environmental and social issues; information on reporting by senior officials to the supreme governing body

59 2016 | SUSTAINABLE DEVELOPMENT REPORT

G4-37 Processes for consultation Corporate Governance / Page 14 between stakeholders and the highest governance body on economic, environmental and social topics G4-38 Composition of the highest Corporate Governance / Page 14-15 governance body and its committees G4-39 Whether the Chair of the The President of highest governance body is SOCAR is the Chair also an executive officer of the highest governance body and executive officer at the same time. G4-42 The role of the supreme Corporate Governance / Page 14 governing body in the organization's purpose, values or missions, strategies, policies and objectives in the formation, improvement and approval G4-43 Measures taken to develop Human Resources / Page 26; and enhance the highest Corporate Governance / Page 16 governance body’s collective knowledge of economic, environmental and social topics G4-45 Highest governance body’s Corporate Governance / Page 14-15 role in the identification and management of economic, environmental and social impacts, risks, and opportunities G4-46 Highest governance body’s Corporate Governance / Page 14; 16 role in reviewing the effectiveness of the organization’s risk management processes for economic, environmental and social topics G4-47 Frequency of the highest Corporate Governance / Page 14 governance body’s review of economic, environmental and social impacts, risks, and opportunities G4-48 The highest committee or About the Report / Page 4 position that formally reviews and approves the organization's sustainability report and ensures that all material Aspects are covered G4-49 Process for communicating Corporate Governance / Page 14; critical concerns to the highest Environmental Activity / Page 37 governance body Ethics and Integrity

G4-56 Organization’s values, Corporate Governance / Page 16 principles, standards and norms of behavior such as codes of conduct and codes of ethics G4-58 Internal and external Corporate Governance / Page 16-17 mechanisms for reporting concerns about unethical or unlawful behavior, and matters related to organizational integrity, such as escalation through line management, whistleblowing mechanisms or hotlines

60 SUSTAINABLE DEVELOPMENT REPORT | 2016

GRI Specific Standard Disclosures

Section of the Report / External Aspect Index Guidance Note Page Assurance

Economic Economic G4-EC1 Direct economic value About the Company / Yes, p. 67 Performance generated and distributed Page 7 About the Company / Page 5 Market G4-EC5 Ratios of standard entry level Minimum monthly wage Human Resources / Page Presence wage by gender compared to and average monthly 20-25 local minimum wage at wage by SOCAR's significant locations of operation subsidiaries are presented in the respective tables. Indirect G4-EC7 Development and impact of Social Activity and Economic infrastructure investments and Support to Regional Impacts services supported Development / Page 30 G4-EC8 Significant indirect economic There are several indirect About the Report / Page impacts, including the extent of economic impacts caused 5; Social Activity and impacts by SOCAR’s operations, Support to Regional for example improvement Development/ Page 30 of the social welfare of communities, job creation, local suppliers support, etc. Resources OG1 Volume and type of estimated About the Company / Yes, p. 67 proved reserves and production Page 5

Environmental Energy G4-EN3 Energy consumption within the Environmental Activity / Yes, p. 67 organization Page 41 G4-EN5 Energy intensity Environmental Activity / Yes, p. 67 Page 41 G4-EN6 Reduction of energy Environmental Activity / consumption Page 41; 55 Water G4-EN8 Total water withdrawal by source Environmental Activity /Page 43 G4-EN10 Percentage and total volume of Environmental Activity / water recycled and reused Page 43 Biodiversity G4-EN12 Significant impacts of activities, Environmental Activity / products, and services on Page 43; 45 biodiversity in protected areas and areas of high biodiversity value outside protected areas G4-EN13 Size and location of all protected Environmental Activity/ residential or restored areas Page 43

OG4 Number and percentage of Environmental Activity / significant operating sites in Page 45 which biodiversity risk has been assessed and monitored Emissions G4-EN15 Direct greenhouse gas (GHG) Environmental Activity / Yes, p.67 emissions (Scope 1) Page 39 G4-EN16 Energy indirect greenhouse gas Environmental Activity / Yes, p. 67 (GHG) emissions (Scope 2) Page 39 G4-EN18 Greenhouse gas (GHG) Environmental Activity / Yes, p. 67 emissions intensity Page 39

61 2016 | SUSTAINABLE DEVELOPMENT REPORT

G4-EN21 NOx, SOx and other significant Environmental Activity / air emissions Page 40; 54-55 Effluents and G4-EN23 Total weight of waste by type Environmental Activity / Yes , p.67 water and disposal method Page 42; 55-56 G4-EN24 Total number and volume of Environmental Activity / significant spills Page 43 G4-EN25 Weight of transported, imported, Environmental Activity / Yes, p. 67 exported, or treated waste Page 42; 55-56 deemed hazardous and percentage of transported waste shipped internationally OG5 Volume and disposal of Environmental Activity / Yes, p. 67 formation or produced water Page 42 OG6 Volume of flared and vented Environmental Activity / hydrocarbon Page 40 OG7 Amount of drilling waste (drill Environmental Activity / Yes, p. 67 mud and cuttings) and strategies Page 42 for treatment and disposal Products and G4-EN27 Extent of impact mitigation of Environmental Activity / Services environmental impacts of Page 38-40; 43 products and services Compliance G4-EN29 Monetary value of significant Environmental Activity / fines and total number of non- Page 37 monetary sanctions for non- compliance with environmental laws and regulations Transport G4-EN30 Significant environmental Environmental Activity / impacts of transporting products Page 39 and other goods and materials for the organization’s operations, and transporting members of the workforce Overall G4-EN31 Total environmental protection Environmental Activity / Yes, p. 67 expenditures and investments by Page 37, 46 type Environmental G4-EN33 Significant actual and potential Corporate Governance / Assessment of adverse environmental impacts Page 18 Suppliers in the supply chain and undertaken measures Environmental G4-EN34 Number of grievances about No such grievances were grievance environmental impacts filed, registered during the mechanisms addressed, and resolved through reporting period. formal grievance mechanisms Social / Labor Practices and Decent Work Employment G4-LA1 Total number and rates of new Human Resources / Page Yes, p. 67 employee hires and employee 20-25 turnover by age group, gender, and region G4-LA2 Benefits provided to full-time Human Resources / Page employees that are not provided 19 to temporary or part-time employees, by significant locations of operation Labor/Manage- G4-LA4 Minimum notice periods Human Resources / Page ment Relations regarding operational changes, 19 including whether these are

62 SUSTAINABLE DEVELOPMENT REPORT | 2016

specified in collective agreements

Occupational G4-LA6 Type of injury and rates of injury, Occupational Health and Health and occupational diseases, lost days, Safety / Page 35-36 Safety and absenteeism, and total number of work-related fatalities, by region and by gender G4-LA7 Workers with high incidence or Occupational Health and high risk of diseases related to Safety / Page 34 their occupation G4-LA8 Health and safety topics covered Occupational Health and in formal agreements with trade Safety / Page 33 unions Training and G4-LA9 Average number of annual Human Resources/ Education training hours allocated to one Page 29 employee by gender and worker category G4-LA10 Programs for skills management Human Resources / and lifelong learning that support Page 27-28 the continued employability of employees and assist them in managing career endings Diversity and G4-LA12 Composition of governance Data on the age and Human Resources / Equal bodies and breakdown of gender of the managers in Page 20-25 Opportunity employees per employee the main regions of category according to gender, SOCAR are reflected in age group, minority group the relevant tables. membership, and other indicators of diversity Supplier G4-LA15 Significant actual and potential No such impacts were Assessment negative impacts for labor reported during the for Labor practices in the supply chain and reporting period. Practices actions taken Labor G4-LA16 Number of grievances about No grievances on the Human Resources / Practices labor practices filed, addressed, labor practices were Page 26 Grievance and resolved through formal registered during the Mechanisms grievance mechanisms reporting period. Social / Human Rights

Non- G4-HR3 Total number of incidents of There were no discrimination discrimination and corrective discrimination incidents actions taken during the reporting period. Child Labor G4-HR5 Operations and suppliers No such cases were carrying significant risks in child reported during the labor and measures undertaken reporting period. to address child labor Compulsory or G4-HR6 Transactions and suppliers No such cases were forced labor carrying significant risks for reported during the compulsory or forced labor, and reporting period. measures undertaken to eliminate forced or compulsory labor Indigenous G4-HR8 Total number of incidents of There were no violations Rights violations involving rights of involving rights of indigenous peoples and actions indigenous people during taken the reporting period.

63 2016 | SUSTAINABLE DEVELOPMENT REPORT

OG9 Operations where indigenous SOCAR's does not communities are present or perform such operations affected by activities and where and activities. specific engagement strategies are in place Assessment G4-HR9 Total number and percentage of No activities in this operations that have been direction were subject to human rights reviews implemented. or impact assessments Supplier G4-HR11 Significant actual and potential No such cases were Human Rights negative human rights impacts in registered during the Assessment the supply chain and actions reporting period. taken Human Rights G4-HR12 Number of grievances about Corporate Governance / Grievance human rights impacts filed, Page 17 Mechanisms addressed, and resolved through formal grievance mechanisms Social / Society Local G4-SO2 Operations with significant Environmental impacts Communities actual or potential negative (emissions, waste) caused impacts on local communities by the operations of the Company are disclosed in "Environmental Activity" section of the Report. OG10 Number and description of There were no such significant disputes with local disputes during the communities and indigenous reporting period. peoples Anti-corruption G4-SO4 Communication and training on All the recruited new anti-corruption policies and employees are regularly procedures informed and guided on the anti-corruption policies and procedures. G4-SO5 Confirmed incidents of A number of measures to Corporate Governance / corruption and actions taken prevent the incidents of Page 16-17 corruption are regularly implemented in SOCAR. Public Policy G4-SO6 The total value of political About SOCAR/ support for the host country and Page 12-13 the country itself Anti- G4-SO7 Total number of legal actions for No such cases were competitive anti-competitive behavior, anti- registered during the Behavior trust, and monopoly practices reporting period. and their outcomes Compliance G4-SO8 Monetary value of significant No such cases were fines and total number of non- registered during the monetary sanctions for non- reporting period. compliance with laws and regulations Involuntary OG12 Operations where involuntary Social Activity and Resettlement resettlement took place, the Regional Development number of households resettled Support / in each and how their livelihoods Page 31-32 were affected in the process Process OG13 Number of process safety Occupational Health and Safety events, by business activity Safety / Page 33-34

64 SUSTAINABLE DEVELOPMENT REPORT | 2016

Grievance G4-SO11 Number of grievances about Corporate Governance / Mechanisms impacts on society filed, Page 16; Human for Impacts on addressed, and resolved through Resources / Page 26 Society formal grievance mechanisms Social / Product Responsibility

Customer G4-PR2 Total number of incidents of No such cases were Health and non-compliance with regulations registered during the Safety and voluntary codes concerning reporting period. the health and safety impacts of products and services during their life cycle, by type of outcomes Product and G4-PR4 Total number of incidents of No such cases were Service non-compliance with regulations registered during the labeling and voluntary codes concerning reporting period. product and service information and labeling, by type of outcomes G4-PR5 Results of surveys measuring No such activities were customer satisfaction performed during the reporting period. Marketing G4-PR6 Sale of banned or disputed No such cases were Communi- products registered during the cation reporting period. G4-PR7 Total number of incidents of No such cases were non-compliance with regulations registered during the and voluntary codes concerning reporting period. marketing communications, including advertising, promotion, and sponsorship, by type of outcomes Compliance G4-PR9 Monetary value of significant No such cases were fines for non-compliance with registered during the laws and regulations concerning reporting period. the provision and use of products and services

65 2016 | SUSTAINABLE DEVELOPMENT REPORT Terms and Abbreviations

ACG Azeri-Chirag-Guneshli oilfield DWP Deep water platform GHG Greenhouse gases GOA Gas Operation Area OGPD Oil and Gas Production Department ROC Retail Operating Company Schweiz GmbH SES SOCAR Energy Switzerland GmbH SOP Stationary offshore platform TANAP Trans-Anatolian Gas Pipeline TAP Trans Adriatic Pipeline

66 SUSTAINABLE DEVELOPMENT REPORT | 2016 Independent Assurance Statement

67 2016 | SUSTAINABLE DEVELOPMENT REPORT