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Azerbaijan state oil group Socar targets Europe

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Posted / Last update: 21-06-2012
In the late 19th century Europe’s top oil barons – the Rothschilds and the Nobels – descended upon resource-rich Azerbaijan, anxious to get a piece of the country’s newfound oil reserves. Now, more than 100 years later, Azerbaijan and its state energy company are preparing to return the favour, moving into Europe’s backyard with deals that stretch from Romania to Switzerland. Unlike the 19th century oil barons, the State Oil Company of Azerbaijan, or Socar, is not after reserves, but prestige

By the end of the year, Socar will have assumed control of more than 170 petrol stations in Switzerland and be operating them under the State Oil Company of Azerbaijan brand name following Socar's $200m acquisition of a Swiss ExxonMobil unit.

The acquisition is one step in an ambitious plan for European expansion that could ultimately see Socar move beyond retail and refinery deals and take a share of the British gas market, Vitaly Baylarbayov, Socar's deputy vice-president, said in an interview.

Socar's new Swiss business and existing network of petrol stations across Azerbaijan, Georgia and Romania are “just the start of the story”, he insists. “The strategy of the state oil company is obviously to expand its geography, first with regional expansion and then further to Europe and the rest of the world.” It is a pronouncement that would have seemed ludicrous 20 years ago. Yet already it is starting to sound more and more like a reality.

In 2017, Azerbaijan plans to start operations at the second stage of its Shah Deniz gas field, a project that will treble the country’s annual gas production to as much as 30bn cubic metres by 2025 and reshape the geopolitics of European energy.

Thanks to Shah Deniz 2, Azerbaijan will be producing an additional 16bn cm of gas a year, at least 10bn cm of which will be sent to Europe. The additional exports will allow the continent to reduce its dependence on Russian gas – a crucial goal for countries that have had their gas supplies affected during pricing disputes between Russia and its immediate neighbours.

As the start date of Shah Deniz 2 approaches, Socar is expected to play a key role in choosing which route the Azeri gas will take to travel to Europe, a decision that will ultimately favour either central or southern Europe, while throwing a spanner in one major pipeline project: the BP-spearheaded SEEP project, or the Nabucco pipeline, which is led by a consortium including Germany’s RWE and Austria’s OMV.

A decision on which pipeline to go with will be made by Socar and its other partners in Shah Deniz this month.

For Azerbaijan, a former Soviet republic that was still relying on imported Russian gas as recently as a couple of years ago, this new decision-making power is a dramatic turnaround and one that the government and Socar are keen to leverage.

Mr Baylarbayov says one of the benefits of Shah Deniz 2 will be the possibility for gas swaps, allowing Socar to move into markets such as Britain, where it has already started talks with oil majors. “[The UK] is an extremely liberalised market which the State Oil Company of Azerbaijan never had the ability to be present in,” he says. “We are co-operating with companies who have significant interest in the gas production from the North Sea: BP, Statoil and Total. The idea is to swap what they have with what we will have and in this way become a player on the UK market.”

He says that Socar will also be focusing on an extensive 25-year, $35bn capital expenditure programme, funded by the company’s relatively high 18 per cent margin at the earnings before interest, tax, depreciation and amortisation level. About $6.5bn of the capital expenditure programme will be spent within the next three years alone, much of it going towards building up its refineries in Turkey and Azerbaijan.

Farther afield, Socar is looking to add a US representative office to a network that stretches from the UK to Germany to Iran. Socar Trading, the company’s trading arm, has set up operations in Geneva and Dubai, as well as in Singapore and Vietnam.

Julia Nanay, senior director at PFC Energy, the Washington-based consultancy, says deals like the Swiss petrol stations acquisition fit in with Socar's broader plans to expand its refinery and retail business in Turkey and Europe. Moving into gas swaps will be slightly trickier, she says. “On the oil side Socar has accumulated significant trading experience and expertise, while gas will involve a learning curve.” Operations at the first stage of Shah Deniz, for instance, only began in 2007.

Nevertheless, Ms Nanay says Socar has a good chance of leveraging its existing foreign operations to build up an overseas gas business as well. “In markets where Socar has oil trading activities, gas could follow,” she added.

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