State Oil Fund of Azerbaijan

State Oil Fund of the Republic of Azerbaijan
Founded December 29, 1999
Headquarters Baku, Azerbaijan
Key people
 Shahmar Movsumov (Executive Director)
Website www.oilfund.az

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) is a special purpose state organization in which Azerbaijan's revenues from implementation of oil and gas agreements are accumulated, managed and preserved for future generations.

History

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) was established by Decree № 240 of the President of the Republic of Azerbaijan dated 29 December 1999 "On Establishment of the State Oil Fund of the Republic of Azerbaijan". Statute of SOFAZ was approved by the Decree of the President of the Republic of Azerbaijan № 434 dated December 29, 2000. SOFAZ began operating after approval of the Decree on "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan" by the President of the Republic of Azerbaijan dated June 19, 2001. Establishment of the Oil Fund is a main part of the oil strategy of Azerbaijani National Leader Heydar Aliyev.

The cornerstone of the philosophy behind the Oil Fund is to ensure intergenerational equality with regard to the country's oil wealth.

Goals and objectives

SOFAZ is a special purpose state organization in which Azerbaijan’s revenues from implementation of oil and gas agreements are accumulated, efficiently managed and preserved for present and future generations. It was founded in order to efficiently manage the Azeri oil and gas income, as well as to invest them in development of social-economically important projects. The main objectives of the Oil Fund are the following:

Management

SOFAZ's activities are overseen by a supervisory board of six members. The board reviews the Fund’s reports on the draft annual budget prepared by the SOFAZ’s Executive Director, annual reports and financial statements along with independent auditor's opinion and provides its comments. Members of the supervisory board are appointed by the President of Azerbaijan and shall represent both state bodies and civil society.

SOFAZ is headed by the Executive Director, who is appointed and dismissed by the President of the Republic of Azerbaijan. The Fund's Executive Director represents the Fund, carries out operational management of the Fund's activities, appoints and dismisses employees of the Fund in a manner as determined by the legislation, ensures the management and investment of the Fund’s assets in accordance with the guidelines approved by the Republic of Azerbaijan. Deputy Executive Director is appointed and dismissed from his position by the president and accomplishes tasks assigned by the Executive Director and bears personal responsibility.

Execution of SOFAZ’s budget is implemented on the basis of comments provided by the supervisory board in accordance with the SOFAZ budget approved by the proper Ordinances of the President of the Republic of Azerbaijan. SOFAZ assets are managed in accordance with Investment Guidelines approved by the Presidential Decree on "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan" No.511 dated June 19, 2001.

The sources of the formation of the revenues

  1. Proceeds generated under production sharing agreements from sales of the Republic of Azerbaijan's share of hydrocarbons;
  2. Bonuses paid under the terms of production sharing agreements;
  3. Acreage fees paid by foreign investors for use of the contract areas in connection with the development of hydrocarbon resources;
  4. Dividends paid under the terms of production sharing agreements;
  5. Revenues generated from the transit of oil and gas over the territory of the Republic of Azerbaijan;
  6. Revenues generated from the transfer of assets from investors;
  7. Revenues from management of SOFAZ assets;
  8. Grants;
  9. Other incomes according to the legislation.

Directions of the expenditures of SOFAZ

In compliance with the Statute of SOFAZ, the Fund's assets may be used for solving major problems affecting the nation, and for construction and reconstruction of strategically important infrastructure to support socio-economic progress.

Transfers to the state budget constitute a significant component of the Fund's outflow. A very small portion of the Fund's assets is utilized to cover operational costs. As per the Law "About Budget System" of the Republic of Azerbaijan, all SOFAZ expenditures, except operating expenditures, are incorporated as part of an annual consolidated government budget presented to the Parliament for approval. In compliance with this Law, SOFAZ can only execute expenditures envisaged by its budget. Execution of all expenditures except operating and management expenditures is being realized by the Central Treasury of the Ministry of Finance of the Republic of Azerbaijan.

To improve the effectiveness and efficiency of utilization of oil and gas revenues, “The Long-Term Strategy on the Management of Oil and Gas Revenues” was approved by the Decree of the President of the Republic of Azerbaijan Ilham Aliyev No.128 dated September 27, 2004.

Major projects financed by the Oil Fund

SOFAZ is funding major projects of national scale. They are:

  1. Azerbaijan's equity share in the Baku-Tbilisi-Ceyhan Baku-Tbilisi-Ceyhan (BTC) oil pipeline project; (completed)
  2. Building of housing and improvement of socio-economic conditions of refugees and internally displaced persons who were forced to flee their native lands as a result of Armenian-Azerbaijan conflict;
  3. Oguz-Qabala-Baku water supply system; (completed)
  4. Reconstruction of the Samur-Absheron irrigation system;
  5. Formation of the statutory capital of the State Investment Company (completed)
  6. Financing Baku-Tibilisi-Kars railway
  7. Financing “The state program on the education of Azerbaijan youth abroad in the years 2007-2015”
  8. Financing of the construction of high speed fiber-optic network providing a broadband internet access to all settlements of Azerbaijan;
  9. Financing of the share of Azerbaijan Republic in the construction of new Oil, Gas Processing and Petrochemical Complex (OGPC);
  10. Financing of the share of Azerbaijan Republic in the construction of the STAR oil refinery project in Turkey;
  11. Financing of the share of Azerbaijan Republic in the construction of the Trans-Anatolian gas pipeline project;
  12. Financing of the share of Azerbaijan Republic in the construction of new drilling rigs in the Caspian Sea.

Asset management

The new investment policy of the Fund was adopted in accordance with the amendments under the Presidential Decree № 519 dated October 27, 2011 made to "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan", for the purposes of increasing profitability and diversification of Oil Fund’s investment portfolio. According to the new investment policy a maximum 5% of the investments can be allocated into each of the new asset classes such as gold, equities and real estate.

Currency composition of the investment portfolio of the Fund consist of the 3 main currencies: 50% invested in assets denominated in USD, 35% invested in assets denominated in EURO and 5% invested in assets denominated in GBP.

Besides, SOFAZ is allowed to invest up to 10% of investment portfolio in assets of member countries of the G7, European Monetary Union, denominated in Turkish lira, Russian rouble and currencies of countries with sovereign credit rating of not less than “A”.

Gold

Starting from February 1, 2012 Oil Fund started the purchase of 25 gold bars conforming to the requirements of London Bullion Market Association (LBMA) per week (10,000 troy ounces) from the banks which are market-maker members of LBMA. In order to reduce the risks associated with price fluctuations, Fund has been implementing a strategy, according to which the overall amount of gold planned to be purchased will be bought on a weekly basis in equal amounts within two years. 30175 kg of gold (970 146 troy ounces) was included into SOFAZ investment portfolio as of December 31, 2013.

Real estate

By SOFAZ investment policy up to 5% of the investment portfolio can be invested in real estate. SOFAZ purchased buildings in several countries as part of its strategy to build a diversified real estate portfolio consisting of high quality, prime assets in major cities of the world. In December 2012 SOFAZ realized its first real estate investments in London, Moscow and Paris. Fund purchased an office complex at 78 St James Street, in London’s West End for £177 350 000; "Gallery Actor" mixed-use office and retail complex located in Moscow central business district at 16 Tverskaya street for $133 million. Furthermore, Fund has reached an agreement to buy the prime office and retail property, 8 Place Vendôme, in Paris for €135 million.

Equities

SOFAZ invests in equities to increase the diversification and profitability of the investment portfolio. The Fund started its investments in equities by passive replication of MSCI World Index.

SOFAZ and transparency

The Oil Fund always pays attention to transparency in its activities. A key measure to promote transparency within the Oil Fund's reporting system and operation is a regular audit of the Fund's financial activities by a reputable firm of international auditors.

Information and press releases, and both quarterly and annual statements, in Azerbaijani and English, about the Fund's revenues and expenditures are regularly published in the local press and posted on the website to reflect developments in varying areas of the Fund's activities, and also to promote transparency in the utilization of revenues from oil.

In development of its media relations, press-conferences are held regularly to provide direct, accurate and professional briefings on Oil Fund activities.

Azerbaijan and the EITI

In June 2003 the government of Azerbaijan decided to join the EITI and support the international efforts for higher transparency in the extractive industries and Azerbaijan volunteered to become a pilot country. Three following reporting forms were adopted at the conference: 1) report on receipts of the host government from the foreign and local extractive industry companies; 2) report on payments of the foreign extractive industry companies to the host government; 3) report payments of the local extractive industry companies to the government.

President Ilham Aliyev instructed to establish an interagency committee on EITI to implement obligations taken at the EITI Conference. Cabinet of Ministers of Azerbaijan established the Committee on EITI by its Ordinance No.224 dated November 13, 2003. The Committee, chaired by the Executive Director of the Oil Fund Mr Shahmar |Movsumov, consists of representatives of the ministries of Foreign Affairs, Economy and Industry, Energy, Finance, Taxes, Ecology and Natural Resources, the State Statistical Committee, the State Oil Company and others.

The Executive Director of SOFAZ is also overseeing the work of the EITI Secretariat of Azerbaijan which is hosted by the Oil Fund and responsible for the day-to-day running of EITI in Azerbaijan.

A significant step to implement the EITI in the Republic of Azerbaijan was taken on November 24, 2004. The National Committee on EITI, foreign and local extractive industry companies and the NGO’s Coalition for Increasing Transparency in Extractive Industries signed a Memorandum of Understanding (MOU) for realization of the implementation mechanism of the EITI in Azerbaijan. This MOU is the first document of this type.

EITI reporting

On March 15, 2005 Committee on EITI released the first government reports examined by independent auditor – “Deloitte & Touche” company. The document was the first published report of this kind in the world. So far 17 EITI reports were reconciled and disclosed in Azerbaijan (on years 2003-2012).

Azerbaijan and international management of the EITI

Azerbaijan has been actively participating in the management of the EITI process worldwide by participating at the various high level meetings and conferences and sharing its experience with other resource rich countries. The 2nd International EITI London Conference in March 2005 established an International Advisory Group (IAG) to guide the further work of the International EITI Secretariat on defining and refining proposals on the future of the EITI. Being pioneer of the EITI implementation process and having tremendous experience in the EITI implementation the Executive Director of the State Oil Fund, Chair of the National Committee on EITI was elected as IAG member to represent Azerbaijan. The 3rd International EITI Conference held in 2006 in Oslo established the multi-stakeholder Board to manage EITI at the international level and to oversee the future implementations of EITI principles and criteria. Providing Azerbaijan’s demonstrated leadership in the implementation of EITI it was not surprising that the country was unanimously elected to the EITI Board at the Conference. Azerbaijan’s membership in the EITI Board which is selected every two years corroborates the country’s leading role in implementation of EITI. The Executive Director of the State Oil Fund, chair of the Committee on EITI Mr Shahmar Movsumov is representing the government of Azerbaijan in the EITI Board. In order to give a strong backing to EITI process and rise it’s momentum at the international level the Government of Azerbaijan initiated and tabled United Nations General Assembly Resolution on EITI, which on 11 September 2008 was adopted by consensus. Azerbaijan’s strong belief that transparency is a crucial factor in sustainable development and active participation in EITI since the launch of the Initiative were grounds for it to initiate a United Nations General Assembly Resolution in support of transparency.

Azerbaijan is the first Compliant country

The EITI is recognized as the international brand of transparency in extractive industries and in order to safeguard this international brand the Validation process has been launched. Validation is an essential element of the EITI process and central to the Initiative’s status as an international standard. The objective of Validation is to provide an independent assessment of the progress achieved by implementing countries during the implementation of the Initiative and what measures they may need to take to make better and faster progress. At the 3rd International EITI Board meeting held in Oslo September 2007, Azerbaijan obtained an EITI Candidate status as a result of fulfilment of initial EITI requirements. Based on the decision of the EITI International Board, Candidate countries willing to become an EITI Compliant country should pass through Validation. Azerbaijan was designated as the EITI Compliant country by the International Board at the 4th EITI International Conference, held on February 16–18, 2009 in Doha, Qatar. Thereby Azerbaijan became the first EITI Compliant. Awards -The State Oil Fund of the Republic of Azerbaijan for the successful implementation of EITI became a winner of the 2007 United Nations Public Service Award in the category of "Improving transparency, accountability and responsiveness in the Public Service". Oil Fund is the first governmental agency in the Eastern Europe and CIS countries winning such a highly recognised award. -“EITI Award 2009” for Azerbaijan’s commitment to EITI principles and criteria and its achievements in EITI implementation was awarded to Azerbaijan.

Multi-stakeholder group (MSG)

MSG is the main decision-making body in the EITI implementation country. The MSG composed of the Memorandum Parties (Group of Companies, NGO Coalition and Committee) was established in 2010 with an intention to further improve the EITI process, permanently implemented in Azerbaijan within the framework of the Memorandum and to ensure stronger and more effective oversight and management on the EITI process. Each of the parties appoints 3 primary and 1 alternative members each having equal rights to the MSG (total 9 primary members + 3 alternative members) . Chairman of the Committee becomes the member of MSG on behalf of Azerbaijan government and chairs these meetings.

EITI Activity reports

The first report on implementation of the EITI in Azerbaijan and activities of the MSG covering 2011 was issued in 2012. Starting from that year this type of reports are disclosed in an annual basis. The activity reports reflect general info about the EITI, MSG meetings, decisions, events improvements in the EITI implementation etc.

SOFAZ - Sovereign Wealth Fund

A Sovereign Wealth Fund(SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments that is formed from revenues from natural resources. The term sovereign wealth fund was first used in 2005. The International Working Group of Sovereign Wealth Funds (IWG) announced its establishment in April 2009 in the city-capital of Kuwait.

SOFAZ cooperates with other SWF's within the framework of International Forum of Sovereign Wealth Funds (IFSWF). IFSWF is a voluntary group of SWFs, which meets, exchanges views on issues of common interest, and facilitates an understanding of the Santiago Principles and SWF activities. The inaugural meeting of IFSWF was held in Baku on October 8–9, 2009 and it was hosted by SOFAZ and the Government of the Republic of Azerbaijan. According to the Principle 24 of SP , SOFAZ has prepared its first self-assessment report on the implementation of SP and intends to review it on an annual basis.

General appearance of logo describes a man holding something dear and valuable in his hands symbolizing Funds main activity to preserve Azerbaijan's wealth for future generations.

Hands of the figure are described as two buta giving to the logo inimitable national flavour.

Area between hands is described as the eye of the Omniscience directed to the future of the country and the nation in which SOFAZ plays important role.

Also, this eye is directed to the inside of the depicted figure. Sphere between the hands is described as the heart symbolizing Oil Fund's transparency.

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