Will $14 Billion in Oil Revenues be Used to Fund Corruption?
COP 29 Meeting in Azerbaijan Highlights History of Corruption, Disclosures Provide New Data on Oil Revenue Flows
By Simon Taylor
When Azerbaijan was chosen as the host for the 29th United Nations climate conference, President Ilham Aliyev called the decision a “big honour,” and said that he considered it “a sign of respect from the international community to Azerbaijan and what we are doing.” He did not mention a more dubious honor: out of 180 countries measured by the Corruption Perceptions Index, Azerbaijan ranks 154th, suggesting that the international community regards it as one of the most corrupt countries in the world.
The appointment of a major fossil fuel producer as the COP host for a third time—following Egypt and the U.A.E.—calls attention to the link between oil and gas extraction and corruption and repression risks. In general, petroleum resource extraction is prone to fueling corruption and propping up authoritarian regimes – and very often in my experience, this is due to an opaque and seemingly Faustian pact between extractive companies and regime elites. The result is often a situation of complicity, one where the extractive companies, in effect, aid and abet the crimes of these regimes. The concentrated nature of large-scale oil and gas extraction in a small number of companies combined with opaque contracts and payments make it hard to trace where money is flowing, and can concentrate significant wealth in the hands of government leaders. As one commentator said to me, on that occasion with respect to Angola, “You have to understand, Simon, the oil companies are dangling T-bone steaks…”
While the fossil fuel industry has spent considerable effort across the globe to keep its operations in the dark, new data disclosed through the U.S. Securities and Exchange Commission on companies’ payments to governments is shedding new light on the relationship between extraction and corruption. (This is why civil society watchdog groups like Oxfam and its Publish What You Pay allies (and for disclosure, I am one of the co-founders of the Publish What You Pay Campaign) have been calling for payments-to-governments disclosures for decades.) And there are few places where this link is more troubling than in Azerbaijan.
Corruption Crisis
Nearly two-thirds of Azerbaijan’s government revenue comes from oil and gas. Most of this money flows through the State Oil Company of the Republic of Azerbaijan (SOCAR) and the State Oil Fund of the Republic of Azerbaijan (SOFAZ).
In the face of “numerous accusations of human rights abuses and corruption,” SOCAR has maintained that the company and its subsidiaries “abide by Azerbaijani and international anti-corruption laws” and that they are “regularly audited by state authorities while also carrying out internal due diligence procedures.” But the idea that the company is subject to rigorous government oversight is undermined by the fact that its board is appointed directly by President Aliyev, who himself was named the first ever “person of the year” by the Organized Crime and Corruption Reporting Project, for his family’s secret ownership stakes in the country’s largest businesses.
SOFAZ is supposed to channel fossil fuel revenue into economic development and preserving wealth for future generations. But analysis of their operations in a landmark report in 2020 found that “revenues from the sale of Azerbaijani oil have not reduced the unemployment rate, have not alleviated poverty, and have not liberalized, diversified, or modernized the national economy.” Rather than making long-term investments, SOFAZ has been used as a slush fund to balance government budgets, with more than 85% of its expenditures going to support the state budget between 2003 and 2018.
The government has not received this criticism well. The leader author of the report on SOFAZ, Gubad Ibadoghlu (whom I am honored to consider a friend for now more than 20 years), an academic and expert on fossil fuel corruption in Azerbaijan, was jailed by the government in appalling conditions. And he was not alone: the government has arrested “hundreds of people on politically motivated charges,” (there are now more than 300 political prisoners in Azerbaijan) and critics of the government living abroad have even been murdered. This repression intensified in the run-up to COP 29, and has continued since, with a recent round of arrests during December.
Dissidents are far from the only ones to suffer. Regular Azerbaijanis have suffered from intense political repression and severe pollution from practices like gas flaring. Protests seeking relief have simply been met with violence. Thousands have been killed and tens of thousands of ethnic Armenians have been forced to flee their homes by Azerbaijan’s military operations in Nagorno-Karabakh, paid for by fossil fuel wealth.
Corporate Complicity
SOCAR, SOFAZ, and the Aliyev family are not the only actors involved. Azerbaijan relies heavily on multinational companies to extract and process their fossil fuel wealth. And though such companies can be reluctant to highlight their relationships with corrupt, authoritarian regimes, the new data made available by the U.S. Securities and Exchange Commission’s Dodd-Frank 1504 disclosure rules help make their involvement clear. Following more than a decade of wrangling and rulemaking, extractive companies listed in the US now have to disclose payments they make to governments, including Azerbaijan’s.
This data release reveals that just four US-listed companies made payments of over $14 billion to Azerbaijan in 2023 alone. These were mostly in the form of “production entitlements,” that is, shares of the fossil fuels extracted paid in kind to SOCAR or SOFAZ. By far, the largest payer is BP, with $12.6 billion worth of production entitlements and another $1.3 billion in taxes, bonuses, and fees. The second largest is Equinor, the state oil company of Norway, with $485 million in production entitlements, and smaller amounts by ExxonMobil and TotalEnergies. (Data for BP and Equinor had been disclosed in past years as well, in accordance with European payments-to-governments disclosure laws.)
The 1504 data allows us to trace the flows of money, oil, and gas in a famously opaque system. Taking BP as an example, since they are by far the largest, we can use 1504 data to see where production entitlements (PE) are going. SOCAR itself only receives $185 million worth of PE. Subsidiaries receive more, like ACG Ltd. ($1.1 billion) and Shah Deniz Ltd. (431 million). But by far the majority of PE value goes to SOFAZ: $9.5 billion worth, not to mention $452 million in bonuses and fees.
Like SOCAR, BP has defended itself from accusations of involvement in corruption by pointing to its good governance practices: “A BP spokesperson said the oil giant carried out due diligence on its partners according to its ‘internal policies and procedures, which reflect both local and international legal requirements,’ along with audits to ensure that ‘payments to entities appropriately reflect the contractual terms for the relevant goods or services provided.’”
This defense is less reassuring, however, given that Azerbaijan left the main international oil, gas, and mining transparency mechanism, the Extractive Industry Transparency Initiative, which requires contract disclosure, back in 2017 after being suspended for failure to comply with its terms. Since then, according to the Ibadoghlu report, “access to information about the management of oil revenues and transparency and accountability standards has dramatically decreased” and the country “has refused to participate in international initiatives such as beneficial ownership, project accountability, contract transparency, and transparency of purchase contracts on raw materials.”
Simply having these data won’t end or undo corruption in Azerbaijan. But they provide another crucial resource for activists trying to monitor the fossil fuel industry, and to understand how and to whom they make vast payments. For example, knowing which subsidiaries receive how much money can be helpful for untangling the complex web of cross-ownership that characterizes this sector. It could also be a helpful resource for action in the home countries of multinational firms. The international oil and gas company Equinor, for example, is owned by the government of Norway. According to the Corruption Perceptions Index, Norway has the 4th best corruption rating in the world. Yet, via Equinor, Norway is funding one of the most corrupt governments in the world to the tune of half a billion dollars a year. This is consistent with a general—and worrying—pattern where countries with low corruption ratings are often economically entangled with corrupt practices elsewhere, belying their clean reputations. If this disclosure can put pressure on companies like BP and Equinor, and highlight their complicity in corruption and repression, that would be better for Azerbaijan than yet another opportunity to launder their reputation.