GGP: Suspension of Azerbaijan’s EITI Membership: Repercussions for the Southern Gas Corridor
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
The article was originally published by The Jamestown Foundation March 28, 2017
The International Board of Directors (BoD) of the Extractive Industries Transparency Initiative (EITI) suspended Azerbaijan’s membership in the coalition. The decision came during the BOD’s 36th meeting (on March 8–9), in Colombia. The EITI promotes the open and accountable management of oil, natural gas and mineral resources with the involvement of governments, companies and civil society organizations (Eiti.org, accessed on March 26). According to the BoD’s pronouncement, “Azerbaijan did not fully meet the actions related to civil society” (Eiti.org, March 9). In response, Azerbaijan withdrew from the list of EITI implementing countries. According to the statement of the State Oil Fund of Azerbaijan (SOFAZ), the original mission and objectives of the EITI have significantly shifted away from transparency and accountability in the extractive sectors because of irrelevant facts periodically introduced by various advocacy groups (Oilfund.az, March 9).
Azerbaijan’s non-compliance with EITI standards (notably on transparency and civil society) and its subsequent membership suspension quickly raised concerns that they could negatively affect Baku’s ability to attract support from international financial institutions (IFI) for the Southern Gas Corridor (SGC). The SGC is a planned network of pipelines that will deliver Caspian-basin natural gas across the South Caucasus and Turkey to markets in Southeastern Europe. The decisions of the EITI are not legally binding, yet IFIs routinely evaluate countries’ performance in accordance with those standards (although this is not a formal procedure). According to the European Bank for Reconstruction and Development’s (EBRD) now former managing director for energy and natural resources, Riccardo Puliti, Azerbaijan’s progress on EITI standards is a key factor for the EBRD to advance financing for the Trans-Anatolian Natural Gas Pipeline (TANAP) project—a key link in the SGC. “If there is no progress, it will be quite difficult to justify a large amount of financing,” argued Pulitti. He added that this is also important for financing the Trans-Adriatic Pipeline (TAP—the westernmost SGC link), but particularly for TANAP because of the Azerbaijan State Oil Company’s (SOCAR) dominant share therein (Anadolu Agency, September 20, 2016).
In 2016, SOCAR demonstrated meaningful progress in implementing the requirements to meet the EITI Standard, with considerable improvements across several dimensions compared to the previous years (Eiti.org, October 26, 2016). Specifically, the Azerbaijani government unfroze the bank accounts of some non-governmental organizations (NGO) dealing with monitoring the transparency in the oil sector and dropped the travel bans and lawsuits against activists of those organizations. Furthermore, Azerbaijan’s President Ilham Aliyev signed a decree, in October 2016, to facilitate the issuance of grants (through the elimination of excessive administrative/legal procedures) by foreign donors to Azerbaijani NGOs (Azvision.az, October 21, 2016).
But after the suspension case, the EBRD noted that, “We have our own rigorous internal processes, which we adhere to before deciding to invest [in] any project.” The World Bank (WB) commented that it will continue to support Azerbaijan’s ongoing efforts to develop a transparent framework in the extractives industry. SOFAZ’s executive director, Shahmar Movsumov, said that the suspension was unfair because there is not a direct link between Azerbaijan’s EITI membership and loans for the SGC project. Azerbaijan, however, will not “withdraw from the principles of transparency and accountability in the extractive industries,” he added. BP, one of the SGC’s key stakeholders, merely expressed its disappointment with the decision suspending Azerbaijan’s membership despite the progress made (Financial Times, March 10).
The Southern Gas Corridor Closed Joint Stock Company (CJSC) commented that, the consortium has remained committed to transparency since its establishment by always making its business/corporate structure and revenue flows available in the public domain. As the SGC is a multi-stakeholder project comprising of different sub-projects with the involvement of numerous countries and energy companies, transparency is not dependent on SOCAR only. SOCAR holds a majority stake in the TANAP project only; in the other projects, it holds minor, non-controlling stakes. The SCG CJSC believes that given the progress made with the IFIs on financing of the Southern Gas Corridor, Azerbaijan’s withdrawal from the EITI will not hinder the construction of any of the SGC’s projects. Nor will it negatively impact SOCAR’s ability to raise financing from external sources (Natural Gas World, March 17).
The unperturbed stance of Azerbaijan and its SGC partners stems from the fact that the WB, the Asian Infrastructure and Investment Bank (AIIB) and the Asian Development Bank (ADB) had already approved the allocations of huge financial packages for various components of the SGC (see EDM, March 9). Indeed, long before the suspension case, SOCAR was in negotiations with the above-mentioned IFIs as well as the European Investment Bank (EIB) and the EBRD. The EBRD is expected to approve its credit line for the SGC soon; although the Azerbaijani side will still need to sort out some technical issues (Author’s interview, November 22, 2016).
Azerbaijan’s withdrawal from the EITI coincided with Board’s admittance of Armenia to the coalition (Eiti.org, March 9). After lengthy discussions, Armenia’s membership to the EITI was approved on the condition that Yerevan not include information in its EITI reports on production at illegal mining activities in the Armenian-occupied territories of Azerbaijan (Afn.az, March 9). Some major extractive companies—Zangezur Copper-Molybdenum Combine, Vallex-Group and GeoProMining Ltd, involved in illegal economic and mining activities in Azerbaijan’s occupied territories—are on the list of companies operating in Armenia and should therefore have been subject to EITI reporting (Eiti.org, March 9; Mfa.gov.az, 2016).
Ultimately, Azerbaijan’s loss of EITI membership seems to be part of the ongoing coordinated provocation against the SGC by external actors. Similar attempts were notably orchestrated last year by several European NGOs (CEE Bank Watch’s network and Counter-Balance), which also attacked the country’s human rights and environmental record in order to hinder external financing for the SGC. But these attempts eventually all failed (see EDM, December 16, 2016).
Although, Azerbaijan’s withdrawal from the EITI was interpreted as a blow to the country’s democratic credentials, apparently neither Baku’s partners nor IFIs are overly concerned by this development. The EITI is a voluntary coalition and its decisions are not legally binding. And several IFIs have already agreed to finance the SGC; thus, human rights or civil society concerns apparently will not play a key role here. Moreover, Azerbaijan can always try to seek out additional loans from banks that do not take into account EITI standards.
Ilgar Gurbanov, is a Research Fellow for the Centre for Strategic Studies (Azerbaijan)
The article was originally published by The Jamestown Foundation
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The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.