EXTRACTIVE INDUSTRIES TRANSPARENCY ANNUAL REPORT 2017 Extractive Industries Transparency Annual Report 2017 1 Extractive Industries Transparency Content List of abbreviations 4 2.7.1 General information 44 Definitions 6 2.7.2 Relationship between state-owned Report of the Government of the Republic enterpirses and Government agencies 46 of Azerbaijan about aggregated receipts 2.7.3 Payments to the State Budget by from the extractive industries 8 state-owned enterpirses 48 Independent Auditor’s report 10 2.7.4 Financial performance and production data of state-owned enterprises 54 2.7.5 Joint Ventures, associates and subsidiaries of state-owned enterpirses 57 1. OVERVIEW 12 2.7.6 Transactions related to State owned enterprises 61 1.1. Introduction 12 2.7.7 State -Owned Enterprise activities 1.2. Scope of work 13 in foreign markets 62 1.3. Confidentiality of data 14 2.7.8 Loans and guarantees received by 1.4. Approach and Methodology 14 state-owned enterprises 66 1.5. Accounting policy 15 1.6. Compilation of EIT report and civil society participation 15 3. OVERVIEW OF THE MINING INDUSTRY 70 3.1. Summary of Mining Industry 70 EXTRACTIVE INDUSTRY, 3.2. Production volume 82 2. LEGAL AND FISCAL REGIME 16 3.3. The share of the export in the extractive industry 84 2.1 Exploration and extraction 16 3.4. Energy balance of Azerbaijan in 2017 85 2.1.1 Overview of extractive industry 16 2.2 Legal and fiscal regime 19 2.2.1 Legal regime 19 TAXES AND REVENUES TO BE COVERED 2.2.2 Fiscal regime 28 4. IN THE EIT REPORT 86 2.2.3 The structure of the state budget system 30 2.2.4 Roles and responsibilities of the relevant 4.1. Significant payments 86 Government agencies 34 4.2. The allocation and payments made 2.2.5 Main highlights of the extractive industry 38 to government and their description 87 2.3 Allocation of licences 41 4.3. Reconciliation results 88 2.4 Register of licenses in extractive industry 42 4.4 Payments made to Government 2.5 Diclosure of Contracts 43 according to PSA 92 2.6 Beneficial ownership 43 4.5. Extractive industry companies 94 2.7 State participation in extractive industry 44 4.6. Sale of the state’s share of production 2 Annual Report 2017 other revenues in kind 99 (foreign companies) 130 4.7. Infrastructure provisions and 7.2. Reconciliation by revenue stream barter arrangements 100 (local companies) 131 4.8. Transit revenues 100 7.3. Adjustments 132 4.9. Sub-national payments 107 7.3.1 Adjustments to cash transfers 132 4.10. Individual accountability 107 7.3.2 Adjustmens to the transactions in kind 136 4.11. Data quality and assurance 107 DISTRIBUTION OF EXTRACTIVE 8. SPECIAL AUDIT PROCEDURES 138 5. INDUSTRY REVENUES AND EXPENSES 109 5.1. Distribution of revenues and expenses 9. RECOMMENDATIONS AND RESULTS 140 of State budget and SOFAZ 109 5.2. Revenue management and expenditures 111 9.1. Independent Auditor’s Recommendations on the preparation and compliation of EIT Report for the year ended CONTRIBUTION OF THE EXTRACTIVE December 31, 2017. 140 6. INDUSTRY TO THE ECONOMY 9.2. Implementation of relevant OF AZERBAIJAN 113 recommendations on the EIT report for 2016 144 6.1. Social expenditures 113 6.2. Quasi-fiscal expenditures 116 ANNEXES 148 6.3. Industry and Field structure of GDP 117 6.4. The state revenue from the extraction Annex 1. Statement of the EIT Committee of the industry 118 Republic of Azerbaijan 148 6.5. Employment in the extractive industry 121 Annex 2. Reporting templates 149 6.6. Key regions (areas) where production Annex 3. Energy balance for the year 2017 is concentrated 123 (thousand NET) 153 6.7. Other information 125 Annex 4. Reconciliation sheets by 6.7.1. Environmental protection and rational extractive companies 155 utilization of natural resources 126 Annex 5. Bibliography used in compiling 6.7.2 Alternative energy sources 126 of the report 176 Review of the 2017 Extractive Industries 7. RECONCILIATION RESULTS 130 Transparency Report of the Republic of Azerbaijan by the Civil Society representatives 178 7.1. Reconciliation by revenue stream 3 Extractive Industries Transparency LIST OF ABBREVIATIONS A.S Aksjeselskap - Norwegian term for a stock-based company ACG Azeri–Chirag–Gunashli AGSC Azerbaijan Gas Supply Company AIOC Azerbaijan International Operating Company AZN Azerbaijani New Manat Bln Billion BOTAS Petroleum Pipeline Cooperation BTC Baku–Tbilisi–Ceyhan CBAR Central Bank of the Republic of Azerbaijan Commission Extractive Industries Transparency Commission (EIT Commission) Companies Extractive companies EIT Extractive Industries Transparency ERDPSA Agreement on the Exploration, Rehabilitation, Development and Production Sharing of Block GDP Gross Domestic Product HGA Host Government Agreement IMF International Monetary Fund JLA Joint Lifting Agreement JSC Joint Stock Company JV Joint Venture Kg Kilograms LLC Limited Liability Company m Metre m³ Cubic metres MEP Main Export Pipeline MERA Ministry of Economy of the Republic of Azerbaijan Mln Million MLSSP State Social Protection Fund under the Ministry of Labour and Social Protection of Population of the Republic of Azerbaijan MMBTU 1 million of British Thermal Unit NGO Non-governmental organization Nm³ Normal cubic metres PSA Production Share Agreements SC State Company SCP South Caucasus Pipeline Secretary Secretariat of EIT Commission 4 Annual Report 2017 SGC Southern Gas Corridor Sm³ Standard cubic metres SOA SOCAR Oil Affiliate SOCAR State Oil Company of Azerbaijan Republic SOFAZ State Oil Fund of the Republic of Azerbaijan STYAS SOCAR Turkey Yatırım A.S TANAP Trans Anatolian Natural Gas Pipeline TAP Trans Adriatic Pipeline TIN Taxpayer Identification Numbers TPAO Turkish Petroleum Anonim Ortaklıgı USD United States Dollars VAT Value added taxes WREP Western Route Export Pipeline VÖEN Vergi Ödəyicisinin Eyniləşdirmə Nömrəsi 5 Extractive Industries Transparency DEFINITIONS Oil and gas Hydrocarbon reserves - oil, gas, oil condensate, gas condensate Non-ferrous metal Gold, silver, gold in copper concentrate, silver in copper concen- trate, and other non-ferrous metals Independent Auditor An independent auditing company that distributes individual EIT reports from extractive industry companies and the state and pre- pares a common EIT report. State budget It is the form of accumulation and spending of money required by the law to ensure the fulfillment of state-owned functions through the relevant authorities. 1 Contractor companies This kind of activity, established under the laws of the Republic of Azerbaijan, related to the relevant territorial, infrastructure, techni- cal means, workforce, necessary technical, technological, admin- istrative and management knowledge and experience, financial resources, legal entities, direct contracts with foreign customers, including legal entities created with the participation of foreign investors. 2 1 Ministry of Justice Unified electronic internet database http://www.e-qanun.az/framework/4756 2 The official website of the Ministry of Taxes of the Republic of Azerbaijan, Law of the Republic of Azerbaijan on the application of special economic regime for export-purpose oil and gas activities http://www.taxes.gov.az/modul.php?name=qanun&news=287 6 Annual Report 2017 7 Extractive Industries Transparency Report of the Government of the Republic of Azerbaijan about aggregated receipts from the extractive industries Reporting period: 01.01.2017 - 31.12.2017 Proceeds AMOUNT* VOLUME - In concentrate of mln Gas AZN cubic copper dollar barrel) tonnes meters) Oil (mln ounces) ounces) mln USD (thousand gold silver als (thousand ounces) ounces) Gold (thousand Silver (thousand (thousand (thousand Non-ferrous met 1 2 3 4 5 6 7 8 9 10 1.1 Oil and condensate 32.532 131.682 1.2. Natural gas 0.243 6,301.853 1.3. Associated gas 2,993,969.118 1.4. Precious metals 0.213 1.5 Gold 6.366 1.6 Silver 2.978 1.7 Other receipts to the government, in total, including: 1.7.1. gold in concentrate of copper 0.686 1.7.2. silver in concentrate of copper 14.898 2. Receipts by the Host Government from local companies.Host’s Government Production entitlement in local company’s 2.1. Oil and condensate 2.2. Natural gas 2.3. Associated gas 2.4. Base metals 2.5. Gold 2.6 Silver 3. Other receipts of the State from foreign companies (including payments collected through a local government company) 3.1. Royalties 3.2. Profit tax 656.013 3.3. Other tax (excluding employee income tax,social tax anx with- holding tax) 3.4. Signing bonuses and other 1.405 bonuses 3.5. License fees,entry fees and other considerations for licenses 3.6. Other receipts,in total,including: 8 Annual Report 2017 Proceeds AMOUNT* VOLUME - In concentrate of mln Gas AZN cubic copper dollar barrel) tonnes meters) Oil (mln ounces) ounces) mln USD (thousand gold silver als (thousand ounces) ounces) Gold (thousand Silver (thousand (thousand (thousand Non-ferrous met 1 2 3 4 5 6 7 8 9 10 3.6.1. acreage fees 2.118 3.6.2. transit fees 10.456 3.6.3. proceeds resulting from price change in the gas sale agreement 4. Other host government receipts from local companies 4.1 Taxes: 4.1.1. Royalties 109.548 4.1.2. Profit tax 9.287 4.1.3. Value added tax 162.310 4.1.4. Land tax 26.969 4.1.5. Property tax 80.182 4.1.6. Difference in price 165.293 4.1.7. Other tax(excluding employ- 99.551 ee income tax,contributions to the State Social Protection Fund and withholding tax) 4.2. Signing bonuses and bonuses 4.3. License fees,entry fees and other considerations for licenses 4.4. Other receipts,in total,including: Total 46.754 1,309.153 131.682 3,000,270.971 6.366 2.978 0.213 0.686 14.898 9 Extractive Industries Transparency Demirchi Tower, 16th fl.