Caspian Business News, 21 March 2005

BAKU, Azerbaijan - Azerbaijan has taken a step towards transparency within the oil and gas industry by disclosing revenues following the UK-led Extractive Industries Transparency Initiative (EITI) on March 15.

In June 2003 the Azeri government committed itself to the initiative, which was first muted at the Earth Summit in Johannesburg in 2002 by British Prime Minister Tony Blair. Under EITI, countries rich in mineral resources are urged to disclose information about the revenues that the host governments receive from companies in the extractive sector while the companies themselves publish information about payments they make to the governments. Azerbaijan has become the first nation to publish an EITI report examined by an independent auditing firm and the first to involve civil society groups in implementing this initiative.

The publication of Azerbaijan's EITI report follows the signing of a Memorandum of Understanding (MoU) on Nov. 24, 2004 between the government of Azerbaijan, foreign and local oil companies and a coalition of some 32 local non-governmental organizations (NGOs) for Increasing Transparency in Extractive Industries to implement the EITI in Azerbaijan.

According to the report prepared by Deloitte - Touche, the government received various payments in 2003 that amounted to $131.4 million from international oil companies and 1.71 trillion manat ($349 million) from local companies, in addition to 6.6 million barrels of oil and 794.881 million cubic meters of gas through its stakes in production sharing agreements and joint ventures. In addition, during the first six months of 2004, the Azeri government received $13.3 million and 1.19 trillion manat ($243.7 million) from international and local oil companies respectively as well as 2.8 million barrels of oil and 453.521 million cubic meters of gas.

In the report, it was noted that some figures submitted by the government and the oil companies did not match, which was explained by the auditors on the fact that either some companies reported wrongly its taxes paid to the tax ministry, or that the mismatch was caused by payments from companies that are not party to the MoU. However, overall the auditors considered their to be close correlation between the figures presented by the government and the companies and did not identify any serious discrepancies.

Colin Wells, Charge d'Affaires at the British Embassy in Baku, in a statement released on Mar. 16, describing the event as "an important milestone on the path to greater transparency," said that "the fact that the independent accountants found areas where figures did not agree confirms the importance of the involvement of an independent audit company in the EITI process."

"But this is just the start. Now is a crucial time to establish ongoing transparency in the reporting of Azerbaijan's oil revenues, which are set to rise significantly from this year on with the full development of the country's major offshore oil and gas resources," Wells said in the statement.

In a joint statement prepared by the MoU parties, Samir Sharifov, chairman of the Committee on EITI, said: "Publication of the first report on Government revenues from the extractive sector … has evidenced continued commitment of the authorities of Azerbaijan to transparent management of revenues accruing from extractive sector and to encouraging active involvement of civil society in this process".

Speaking on behalf of foreign oil companies David Woodward, Associate President of BP, said: "As these are the first reports of this kind in the world there will, I'm sure, be ways in which we can improve the process further, but this should not detract from the importance of what has been achieved by the Azeri government working effectively and efficiently with oil companies and civil society''. Sevgim Rahmanov, a representative of the NGO coalition, said in the statement that [the coalition] looks forward to working with both the government and extractive sector companies for further improvements in the process".

In an address to participants of the second EITI conference in London on Mar. 17, the president of the European Bank for Reconstruction and Development Jean Lemierre said that "Azerbaijan's painstaking and inclusive approach to establishing its reporting process won it a great deal of credit even before it issued its first revenue report this week."

In strong support of EITI, James Wolfenshon, departing president of the World Bank, said the International Finance Corp., the World Bank's private investment arm, had already decided not to proceed on any financing where the initiative's principles were not applied.