SOCAR Diversification

Joshua Noonan
Second-Year MA Candidate at SAIS Washington

The State Oil Company of the Azerbaijani Republic (SOCAR) has been expanding its retail and refining presence in Europe. SOCAR has diversified its downstream operations most notably in Switzerland, Russia, Romania, Turkey, Georgia, and Ukraine.

In November 2011, SOCAR purchased Exxon-Mobile’s retail subsidiary Esso Schweiz, which has 172 service stations throughout Switzerland. SOCAR has been investing in new refining capacity in the Russian Federation, and plans to do so in Romania, where the company also has service stations. SOCAR’s own Baku-Supsa pipeline could feed these refineries. In Turkey, SOCAR represents the largest source of FDI with its multiple pipelines, refineries, and logistics investments. In the Republic of Georgia SOCAR dominates 72% of the petroleum and 61% of the diesel markets. On September 26th SOCAR-Ukraine announced that it was constructing more service stations in the country’s Cherkassy Region.  SOCAR hopes to expand its already sizeable footprint of 35 service stations to 100 by the end of the year.

As the revenue that SOCAR receives from deep-water oil production, historically its largest source of revenue, continues to decline secularly, purchasing downstream refining and retail capacity represents an effective diversification strategy. SOCAR is diversifying in the product category as well. The company has been producing significant quantities of gas, which it plans to export to Europe through the planned Trans-Anatolian Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP).

Despite these promising developments, the political nature of the firm, which receives massive loans from the state owned International Bank of Azerbaijan, may harm its long-term profitability. Moreover, systemic graft and politically linked non-core investments—e.g. the company recently announced plans to invest €258m in resorts—calls into question the efficacy of the SOCAR’s leadership. And while diversifying is strategically proper, how the company executes its plan and deals with its structural issues will dictate such a strategy’s success.