The purpose of the following is to explain the formation of SOCAR Petroleum CJSC and its relationship with A.P. International.
SOCAR Petroleum CJSC was established in 2008 as a joint venture between SOCAR and A.P. International. The purpose of SOCAR Petroleum was to manage the sale and purchase of petroleum products in Azerbaijan through the operation of filling stations across the country. The shareholder structure of SOCAR Petroleum CJSC granted SOCAR a 51% ownership stake, while A.P. International held the remaining 49%.
A.P. International was a subsidiary of Union Grand Energy – one of Mr Alizade’s core companies. A.P. International was invited by SOCAR to partner in the SOCAR Petroleum CJSC entity based on advantages that A.P. International possessed at the time. A.P. International held valuable assets in property and land which were suitable for the construction of terminals, stations and other facilities. Additionally, based on experience with Mr Alizade, SOCAR was confident of his financial capacity to invest in the project.
Along with the share capital, both shareholders paid tens of millions as investments into the company. A.P. International also contributed to the joint venture through the transferal of terminals and specific lands necessary for the construction of a chain of petrol stations.
SOCAR Petroleum’s activities are in the storage, distribution and retail sale of oil products in the Azerbaijani market. SOCAR Petroleum is made up of a total of 23 petrol storage depots (PSD) and 17 petrol stations (PS) in Baku and in the regions of Azerbaijan. SOCAR Petroleum’s PSDs operate in Baku and the regions. The PS segment includes 17 petrol stations, 11 of which were located in Baku, with the other seven located in the regions. The PSD segment includes 11 operating oil depots: one located in Baku, with the other 10 located in the regions. The PSD in Baku buys its products directly from the Baku oil refinery through pipelines. However, for PSDs in the region, petrol products are delivered by rail and a fixed delivery charge per ton is charged. The Company started to separate PSD consumers into two groups based on the regulated selling price: distribution to Petrol stations and direct sales to retail customers (generally corporate clients). The PS segment began in 2010. Products are delivered to the stations from PSDs by trucks owned by the Company. The product range includes main petroleum products (AI-92, AI-95, AI-98, and diesel fuel) as well as limited sales of natural gas. Sales of AI-92 petrol have the largest market share.
The Company purchases oil products from SOCAR at government regulated prices – which is open to all retailers in Azerbaijan – to distribute to PSs (Company and non-Company petrol stations) and through direct sales to corporate clients. The petrol stations provide a range of services in addition to gasoline sales, including mini-markets, café, auto repair and maintenance and car wash services.
In 2013, SOCAR purchased the 49% ownership stake from Mr Alizade through the purchase of A.P. International for US$ 47 million, which represented the book value of the investments made by Union Grand Energy Group in the joint venture. Since 2013 SOCAR has held sole ownership of SOCAR Petroleum CJSC.
Mr Alizade and A.P. International were vital to the establishment of SOCAR Petroleum CJSC. A.P. International supplied substantial financing and infrastructure at a time when SOCAR would not have been able to supply the financing by itself. SOCAR is now the sole owner of SOCAR Petroleum CJSC and is able to manage the sale and purchase of petroleum products in 17 petrol stations across the country.
The independent business valuation of SOCAR Petroleum performed by “Big Four” advisory firm indicates that as of 31 December 2013, the estimated fair value of SOCAR’s 51% equity interest in SOCAR Petroleum stood at more than $95 million. On the basis of this valuation it can be seen that due to SOCAR’s effective market strategy, Mr Alizade’s shares in SOCAR Petroleum were purchased by SOCAR at effectively half its fair value.