Rich hydrocarbon reserves of Azerbaijan will provide energy security of the country for the years and decades

to come. Heydar Aliyev National Leader of Azerbaijan

Energy projects succesfully implemented in Azerbaijan serve the national interests of the country. Ilham Aliyev President of the Republic of Azerbaijan

I. OIl sTRATEgy lEAds AzERbAIjAN TO NEW vICTORIEs

Today Azerbaijan lives the period of durable socio-economic rising. The new oil strategy founded by nationwide leader Heydar Aliyev is continued by the President of the Azerbaijan Republic Ilham Aliyev. Azerbaijan is already known as leader state of the region in all world and plays the important part in geopolitical processes happening in the region. Now the interest to oil and gas which is considered relatively clear energy resource is great. Events happening in the basic energy regions of the world today attracted international attention in the Caspian littoral region, which is politically stable. Increasing potential of Azerbaijan as energy producer and its transit opportunities upgrades the interest to our country. The volume of affirmed oil reserves of our republic is 2 billion tons, gas reserves 2,2 trillion m3. We export oil and oil

Oil production of Azerbaijan Republic (mln. ton)

60 50 40 30 20 10 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
9,1 11,4 13,8 14,0 14,9 15,3 15,4 15,6 22,2
In Azerbaijan Republic

50,4
Consortium
SOCAR

44,5

50,8

42,6 32,3

products to 33 countries of the world, including UsA, China, brazil, Chile, Thailand. The geography of gas export is expanding. The south gas corridor project offered by European Union opens great possibilities. The projects carried out in the framework of new oil strategy strengthened the position of the country as oil, gas and oil chemistry products exporter. 50,8 mln. tons oil, 26,3 billion m3 gas were produced over country in 2010. sOCAR got great achievement by producing of 8,5 mln. tons oil and 7,3 billion. m3 gas. since last year, our company has carried out geological exploration works at Umid perspective structure independently and discovered a new gas condensate field. Drilling of first well #8 at stationary platform in the depth of 58 m of the sea resulted by intense gas flow production in the depth of 6006 m. due to preliminary calculations the structure reserves is estimated as 200 billion m3 gas and 40 mln. tons condensate. Umid is the first field discovered after restoration of independence of Azerbaijan Republic. This is very great success and shows new stage of sOCAR development. On the other hand, this discovery upgrading productivity perspective in the Azerbaijan sector of the Caspian sea increased possibility of new fields discoveries. The reserves of Babak are estimated as 400 billion. m3 gas and 80 mln. tons condensate. We expect greater perspectives at Nakhchivan, zafar, Mashal structures.

Oil production on SOCAR (mln. ton)

9,0 9,0 8,9 9,0 8,9 9,0 8,8 9,0 8,7 8,5
1, 2

0,

1,

0,

0,

1,

0,

1,

0,

1,

8,1

8,1

8,2

8,0

7,6

8,4

8,3

7,8

7,4

7,3
2009

2000

2001

2002

2003

2004

2005

2006

2007

2008

2010

n Azneft PU

JV/OC

sOCAR also works on reconstruction of supplying system of the republic. According to state programme of social economic development of regions of Azerbaijan Republic in 2009-2013wide range construction-installation and repair-restoration works are implemented allover of our republic by Azerigas PA, gas are given to the dwellings still not supplied by blue fuel. The expansion and restoration works were implemented at siyazan booster station to ensure transportation of export gas in required volume and pressure and additional compressor units were installed. Construction of new gas compressor station in Astara was completed successfully to supply regions and Nakhchivan Autonomous Republic with natural gas and to export gas to neighboring country according to the contract between Azerbaijan Republic and Iran Islamic Republic and put into operation by the participation of the president of our republic Mr. Ilham Aliyev on April of current year. All necessary works on inlet gas regulation, pressing in 2 steps, cooling, measuring, injecting to main line were implemented, the daily amount of gas transported by existing compressor station totaled 3,5 mln. m3. The power of compressor station is considered to amount to 5 mln. m3 at next stage.

7,3

1,

8,5

Gas production in Azerbaijan Republic (billion m 3) 30 25 20 15 10 5 0

97 998 999 000 001 002 003 004 005 006 007 008 009 010 2 2 2 2 2 2 2 2 2 2 19 2 1 1
In Azerbaijan Republic Together with the foreing companies SOCAR

23,4

26,3

23,7

17,0

6,0

5,7

6,4

6,1

5,9

5,5

5,5

5,6

6,5

9,0

Increasing of capacity of underground gas storages was carried out in time to meet demands of people and industry, this task was given by the president of Azerbaijan for sOCAR. A new compressor station was put into operation at garadagh underground gas storage, the existing compressor station was repaired and modernized, well stock was restored, additional wells were drilled, active gas capacities totaled 3,1 billion m3 for the first time in the history. 2010 was successful for SOCAR refinery complex. 6148,8 thousand tons crude oil was refined and the forecast was fulfilled 102,5%. The coefficient of efficiency increased at oil refinery plants. The production percentage of refined oil products increased 2,7%. The works have been continued successfully to increase refinery depth of oil in recent years, the scale of those indications amounted to 92,6%. After joining of Azerikimya to sOCAR by the decree of the President of Azerbaijan Republic, the measures were taken to increase productivity and upgrade products quality. The PA enterprises were overhauled. The production increase, amounting to project norms, loss decrease in EP-300 ethylene -propylene production was observed. For the short period of time production activity without obstacle on raw material- semiproduct-finished product principle was achieved. Currently 90 % of

oil chemistry products are exported. sOCAR-Turcas alliance is going to construct Egey oil refinery plant attached to Petkim company to meet demands to raw materials (mainly naphtha) and prevent import dependence. The products of the plant is planned to be exported to the Mediterranean sea, southern Europe markets together with Turkey market. This will be the most ecologically clear oil refinery enterprise of Turkey. Oil refining capacity is planned to amount to 10 mln. tons, oil chemistry production to 6 mln. tons at Petkim, it will ensure to meet 40 % of oil chemistry demands. Petkim will turn into the greatest production complex of Turkey and will be one of the leading enterprises in Europe. sOCAR takes an active part in gas distribution and oil products retail sale market of Georgia. Up to this day more than 65 fuel filling stations were constructed and put into operation. 6 fuel filling stations are under SOCAR brand in Azerbaijan. This figure is planned to be 30. The experience of oil products sale in Azerbaijan

and Georgia will be used in the construction of Ukraine fuel filling station. For this purpose 20 stations were bought and re-branding works are going on now. The analogical works are considered in Rumania. sOCAR Trading enterprise founded in switzerland continued activities successfully in international oil and oil products markets, especially in the eastern and south-western Europe, northern and western Africa, south-eastern Asia and Mediterranean basin by Geneva and Singapore offices and representations in United Arab Emirates, Nigeria and vietnam in 2010. The enterprise with more than 30 foreign clients obtained an agreement about foundation of sOCAR-Aurora joint venture for construction of oil products terminal at Fucayra port of the United Arab Emirates. sOCAR gives great importance for taking worthy place in the world markets, expanding of the activities and being diversification. The construction of the Shipyard

founded last year was begun, preparation for construction of Oil Gas Refinery and Oil Chemistry Complex was accelerated. International audit of sOCAR has been implementing within last years. One of important successes of the company is to give international ratings to our company by Fitch Ratings and Moodys - one of the authoritative audit companies of the world. besides production achievements, sOCAR always focuses attention on carrying out of social and ecological projects and contributes the progress of the country. sOCAR grows from year to year, strengthens position gradually, increases its authority, this is the result of selfless labour of oil industry workers.

Rovnag Abdullaev The president of sOCAR

II. ORgANIzATION sTRUCTURE OF sTATE OIl COMPANy OF THE AzERbAIjAN REPUblIC

Council of SOCAR

President

Head office of SOCAR

"Azneft" Production Association "Azerkimya" PA Geophysics and Geology Department Investments Department Oil Pipelines Department H.Aliyev Baku Oil Refinery "Azerigaz" Oil Refinery H.Aliyev Baku Deep Water Jacket Factory (BDWJF) Marketing and Economic Operations Department Security Department Development of Work conditions norms Georgian representation Representation in Turkey Representation in Romania Representation in the Austria republic Representation in Switzerland "Gobustan" LLC "Alibayraml" LLC

"Azerigas" Production Association Ecology Department IT and Communication Department Gas Export Development Caspian Sea Oil Fleet (CSOF) Oil and Gas Construction Trust Gas Processing Plant Complex Drilling Work Trust "OilGasScientificResearchProject" Institute Social Development Department "Azerbaijan Oil Industry" magazine Representation in the Kazakhstan Republic Representation in Great Britain Representation in the Iranian Islamic Republic Representation in Germany Representation in Ukraine Azerbaijan (South Caucasus pipe line) LLC Azerbaijan (Shah-deniz) LLC "Azerbaijan (EySc)" limited "Azerbaijan (BTC)" limited LLC

"Salyanneft" LLC

III. jOINT vENTUREs, OPERATINg COMPANIEs ANd AllIANCEs FOUNdEd by sOCAR ANd FOREIgN COMPANIEs
The following sOCAR and foreign company joint projects were implemented in 2010: I. Oil and gas production: Joint Ventures: 1. Azgerneft jv Operating companies: 1. Azerbaijan International Operating Company (AIOC) 2. bP (shah-deniz) OC 3. salyan Oil OC 4. Karasu OC 5. gobustan OC 6. binagadi Oil Company 7. surakhani Oil OC s.A. 8. Petro-HongKong Pirsaat Oil limited Oil Company 9. garachukhur OC 10. Kura valley OC 11. Absheron OC 12.shirvan OC 13.Neftchala OC 14. bahar OC II. Joint Venture on insurance: 1. Ateshgah Insurance Company III. Joint Ventures on drilling: 1. Azeri-drilling llC 2. Caspian drilling Company 3.sOCAR-AQsh llC 4 sOCAR- Umid llC 5 sOCAR- UgE llC IV. Engineering-works sector: Joint Ventures 1. Azeri-Fuqro jv V. Joint Venture on barite production, drilling mud production: 1. Azeri-MI drilling Fluids jC VI. Construction sector activities : Joint Ventures: 1. AzFen jv 2. Azneftgastikinti llC 3. bosshelf llC 4. Caspian Offshore Fabricators llC 5. Caspian shipyard Company llC 6. sOCAR AsM llC 7. sarmatia llC Alliance: 1. socar Mcdermott VII. Laboratory activities: Joint Ventures: 1. Azlab jsC joint venture IX. Gas compression and sales:

Joint Ventures: 1.Azturgas jv X. On ecology: Joint Ventures: 1. Ecol Engineering services CjsC 2. socar baglan llC XI. Production of the explosive materials: 1.Energy solutions group CjsC XII. Media: 1.Interfax Azerbaijan llC XIII. Joint Venture on geophysical surveys: 1. Caspian geophysical Company XIV. Joint Venture on oil and gas service equipment: 1. Oil & gas Proserv llC 2. sOCAR - KPsh llC XV. Joint Venture on transport works 1. gross Cas pian and gas logistics llC XVI. Oil Product Sales: 1.sOCAR Energy georgia llC (georgia) XVII. Control of Oil Terminal: 1.Carlina Overseas Corporation. XVIII. Operating companies on pipe transport:

1. bTC Co. 2. south Caucasian Pipeline XIX. Alliances on ship management: 1.sOCAR CsOF - bUE 2.sOCAR-CMs XX. On Logistical Support: Joint Ventures: 1.Caspian Pipe Coatings llC Alliances: 1.sOCAR-AsCO 2.sOCAR-HC XXI. Engineer-Project works: Joint Ventures: 1.Azerbaijan john brown XXII. Joint Ventures on sales of oil and oil products : 1. supra Holding XXIII. Implementation of new projects in Turkey. Joint Ventures: 1.sOCAR-TurkAz Anonym Company XXIV. Oil-gas treatment and marketing. Joint Ventures: 1. sOCAR-Petroleum llC XXV. Diving operation sector Alliance: 1. sOCAR-saipem

10

Iv. gEOPHysICAl ANd gEOlOgICAl sURvEys

I. Geological-Exploration Works geophysical and geological-exploration works were carried out by geophysics and geology department offshore and onshore in 2010. On geophysical prospecting works. There carried out works to the extent of 3d seismic overall 83 km2, 2d seismic with 645,15 and 540,15 inline km total depth point method (TdPM) and 105 inline km with wave breaking jetty method (WbjM), seismic works with 282,5 km overall small rate zones - wave breaking jetty method for survey of top part of the section, 150 inline km gravity studies and vertical seismic profiling (VSP) works (9190 m) in five wells by Geophysical and Geology department (Prospect geophysics Unit and geophysics sRI) in 2010 3d within 25,64 km2 volume, 2d seismic materials within 1088,85 inline km volume and 9190 m volume vertical velocity survey materials have been processed at accounting period. At the same time conducted 3d seismic works and vsP materials in galmaz gas storage area after the interpretation the report was drown up and defended. There conducted 3d seismic works at 76,4 km2 in bahar-2 area offshore (customer Azneft PA) and 6,6 km2 in Khilli area onshore (customer Neftchala Operating Company lTd). There were conducted 2d seismic works on regional profiling: Onshore in Jahandar-Tersdeller-borsunlu within 375,45 inline km using TdPM, 141 km using sRz-Wbj, in Nothern Naftalan-Naftalan-godekboz area within 137,6 inline km using TdPM, 105 inline km with Wbj, 141,5 km using sRz-Wbj (customer Azneft) and in Hajiveli area within 27,1 inline km volume using TdPM (customer-gobustan Operating Company lTd). gravimetric works: onshore within 150 inline km volume in Northern Naftalan-Naftalangodekboz area (customer Azneft). vertical velocity survey works are conducted

11

in: Onshore -6350 m in galmas gas storage area (wells No.622, 259, 282, 10), and 2840 m (well No.433) in garadagh gas storage area (customer Azneft). Processing works: onshore -within 25,64 km2 volume 3d seismic, 1088,85 inline km 2d seismic materials in galmaz gas storage area (customer Azneft), including 495,25 inline km in jahandar-Tersdeller area, 171,3 inline km in Nothern NafthalanNafthalan-godekboz area (customer Azneft), and offshore - 422,3 inline km in shah-deniz area (customer bP) have been processed. vsP materials within 6350 m volume in galmaz gas storage area, within 2840 m volume in garadagh gas storage area have been processed. There carried out the following main geological results on geophysical prospecting works in 2010: As the result of 3D and VSP works fulfilled in Galmaz gas storage area the structure maps on horizons are constructed according to Aghjagyl, Absheron, Productive layer (Pl) I, II, III, Iv, v and Pont sediments, and time-response characteristic, tectonics of the area are defined, three-dimensional model of the area have been defined on the basis of complex analysis of the materials: Tectonics structure of the jahandar and Tersdeller areas are defined, structure maps on seismic horizons corresponding to the Upper Cretaceous sediments, middle Eocene, lower parts of Maikop sediments and bottom of Aghjagyl sedimentary beds are constructed and noted seismic horizons on jahandarTersdeller-Borsunlu regional profiling are correlated conforming with well information. seismic materials on Central Caspian basin in general, and different structures such as shah-deniz, shafaq-Asiman, zefer-Meshel of south Caspian basin, and on gazanbulaqziyadkhan areas of gence NQR onshore were complexly interpreted. On mining geophysics - there drilled wells onshore of our country and in Azerbaijan sector of the Caspian and in total, 3863 customs (in 1030 wells) performed in oil & gas and water wells being under operations by geophysical and geology department (Prospect geophysics Unit and geophysics sRI) according to the orders of Azneft Production Association and Complex drilling Works Trust, Operating Companies and extraneous offices in 2010. As well as geo-

12

physical survey and perforation works were carried out in 3819 oil-gas wells (1368 in open hole, 2451 cased hole), and 44 water wells (in open hole). borehole geophysical survey and perforation (buried shot) works were carried out in 49 zones, including oil and gas in 48 zones and water in 1 zone (Oghuz). Oil and gas works were carried out at 15 areas offshore (Absheron bank, bahar, bulla-deniz, Chilov island, darvin section area, duvani-sea area, Alat sea area, gunashli, gurgansea, Neft dashlary, gum-sea, Palchig Pilpilasi, Pirallahi, Umid and 8 March) and well is drilled at 33 areas onshore (Atashgah, balakhani, bayimdagh-Takchay, bibiheybat, binagadi, boyukduz, buzovna, jahandar, jafarli, dashgil, delimemmedli, Khilly Kurovdagh, gala, galmaz, garadagh, garachukhur, gobustan, gushkhana, lokbatan, Muradkhanly, Nardaran, Neftchala, Puta, Ramani, saadan, surakhani, shikhkaya, shurabad, suleyman-Akhtarma, zagly, zarat and zayva). As a result of borehole geophysics, survey was conducted on the bases of 2774 order (in 588 wells), 6404 diagram is measured, 3802 layer is estimated, including 1184 layers as an industrial important oil and gas-bearing, 13 layers as indefinite, 2605 layers as watery in 2010. There was carried out complex geophysical survey in (drilled in 128 wells and constructed 73 wells) the wells, including 468 orders fulfilled in 298 wells to control field processing by geophysical methods, and there was carried out gas logging and geological- geochemical- technological control works in 15 wells (in the wells No. bayimdaghTakchay-31, bulla-deniz-89, Alat-deniz-64, gunashly-56,57,59,79,80,311,312,313, shikhkaya-1, Pirallahi-1200, Umid-8 and 8 March-731), formation testing in 2 wells (jahandar-zarat-1Mz and delimemmedli) in 2010. In reporting period 1089 customs (in 708 wells) perforation (buried shot) works were performed. There were drilled 109651 holes in the layer. The following basic results have been received on mining geophysics work in 2010: There carried out perforation in 131 layers on the result of borehole geophysics conducted in 2010. besides from 121 formations estimated as oil bearing there were conducted perforation works and was produced oil, from 8 formations estimated as water bearing and water was produced as the result of perforation works, and from 2 formations estimated as uncertain there was produced oil from 1, without flow from the second one. On geotechnical survey there was carried out in total 400 m exploitation drilling, 1785 m test drilling (by order of Azneft PA), 7352 m geotechnical survey (4432 m by the order Azneft PA and 2920 m on the basis of other orders), 1755,5 km (by order of Azneft PA) continuous seismic profiling (CSP), 4149,3 km (2802,3 km by the order Azneft PA and 1347 km by the order of Oil Gas Scientific Research Project Institute) sonar planning and 3899,2 km (2799,2 km by the order Azneft PA and 1100 km

13

by the order of Oil gas scientific Research Project Institute) hydrographical survey (bathymetry) by Integrated geological prospecting and mapping Unit of geophysical and geology department in 2010. Exploitation drilling works were carried out onshore in Bibiheybat field up to 400 m (120 m in the well No. 3742, 280 m in the well No. 3743). Test drilling works were carried out onshore in suleymanAkhtarma area (250 m in the well No. 104, 523 m well No. 1) up to 773 m and in shikhkaya area up to 1012 m (212 m in the well No. 1, 800 m in the well No.1A). geotechnical survey was carried out offshore up to 1000 m in Agburun West Absheron- goshadagh, 300m in babek, 1000m in bulla-deniz, 330 m in gunashli, 1000 m in Khara-zira, 802 m in Neft dashlari (customer Azneft PA), 2070,5 m in the Russian sector of the Caspian sea (customer Morinjgeology jC of the latvia republic), and onshore up to 599,5 m in Olimpia stadium, 250 m in zire (customer social development department of sOCAR). Continuous seismic profiling works were carried out offshore up to 1473,5 km in Agburun West Absheron- goshadagh, 281 km in babek and 1 km in Neft dashlari (customer Azneft PA). sonar planning was carried out offshore up to 1619 km in Agburun West Absheron- goshadagh, 628 km in babek, 51 km in darvin kupesi, 20 km-guneshli, 407 km- Khara-zira, 43,8 km in Neft dashlari, 28 km in Palchiq Pilpilesi, 5,5 km in shimal girishigi (customer Azneft PA) and up to 4 km in seaside boulevard, 1343 km from Umid to Garadagh (customer Oil Gas Scientific Research Project Institute). Hydrographical (bathymetry) survey was carried out offshore up to 1480 km in Agburun West Absheron- goshadagh, 662,5 km in babek, 40 km in darvin kupesi, 42 km-guneshli, 487 km- Khara-zira, 22,7 km in Neft dashlari, 15 km in Palchiq Pilpilesi, 32 km in Pirallahi island, 18 km in shimal girishigi (customer Azneft PA) and up to 22 km in seaside boulevard, 1078 km from Umid to garadagh (customer Oil gas Scientific Research Project Institute). The following main results on geotechnical works were obtained in 2010:

14

- In the wells no. 3742, 3743 in Bibiheibet field where exploitation drilling works finished, 2-3 tons of oil were produced daily and delivered to balance of Bibiheibet OgPd. - Perforation works at 3 intervals in the well No.104 in suleyman-Akhtarma area were carried out where test drilling works were finished and daily average production was 0,2-0,3 tons of oil from each interval and perforation works were carried out in the well No.3 at 3 intervals and daily average production was 8-15 thousand m3 of gas from each interval and they were delivered to well stock of OgPd named after A.Amirov. - Seafloor topography and sea depth of the area has been investigated as the result of conducted geotechnical survey in babek area. - Tectonical fault deformation, gas shows, gas saturation zones, stratifications, uplift and uplift zones of structures have been identified and included to the map as the result of conducted works in goshadagh-Agburun-West Absheron areas. sea-bottom relief and sea depth of the areas have been investigated. Scientific-research and thematic works: In 2010 geophysical and geology department (geophysics sRI, Integrated geological prospecting and mapping Unit) performed 16 scientific-research and 5 thematic works on 21 subjects. 9 scientific-research works are performed according to order Azneft PU and 7 - scientific-research works are carried out in the instruction of Geophysical and Geology Department. Scientific-research works were completed on 10 subjects in reporting period, and performed works delivered to customer and on 6 subjects will be continued. Thematic works on 5 subjects (executor Integrated geological prospecting and mapping Unit) are implemented according to order of Azneft PU. II. Exploratory-prospect drilling works In 2010 sOCAR was carried out exploratory-prospect drilling works at countrywide onshore and offshore sites (oil & gas fields and exploration targets) by its force and together with foreign operating companies. In whole SOCAR conducted exploratory-prospecting drilling works on five sites - exploratory-prospect drilling works were performed in 12025 metres volume onshore in Bayimdag -Tekchay area, offshore Pirallahy island field, Bulla-deniz field, Umid structure and Shah-deniz field. In the current year 6681 m exploratory-prospect drilling works were performed offshore site in Umid (well No. 8), bulla-deniz (well no. 89), Pirallahi (well No. 1200), and onshore site in bayimdagh-Tekchay area (well no. 31) and 5344 m exploratoryprospect drilling works were performed in Shah-Deniz field by BP Company.

15

Within a year one well was drilled up in Umid structure (well No. 8), one well wa spud in Shah-Deniz field (SDX well No. 6). bayimdag -Tekchay structure, exploratory well No.31 (target depth 1850 m, target horizon valangin). The well was completed up to 1220 m depth by 2010. Overall 415 m drilling works were fulfilled in the course of a year. The well was completed with 1635 m depth by 2011, at present well is in conservation because of devices change over. Pirallahy island field, exploratory well No. 1200 (target depth 2050 m, target horizon Productive strata Qald). depth of well was 1677 m in 01.01.2010. Overall 181 m drilling works were fulfilled in the course of a year. Well has been drilled to 1858 metres depth. Well has entered to deposits below productive layer and well opened 1050-1445 m interval Miocene deposits, 1445-1858 m interval Maikop sediments. At present the well is to be abandoned because of geological cause. Bulla deniz field, exploratory well No. 89. (target depth 2050 m, target horizon VIII horizon of Ps ). The well was completed with 2800 m depth by 2010. Overall 2719 m drilling works were fulfilled in the course of a year. The well came through 2011 with 5519 m depth . Umid structure, exploratory well No. 8. Well was drilled from the fixed platform No.1 (depth of the sea is 58m, target depth is 6500 m, target horizon is vII horizon of Ps). The well came through 2010 with 2640 m depth. Overall 3366 m drilling works were fulfilled in the course of a year. The well has entered to VII horizon of PS in 5923 meter. As the result of geophysical survey conducted in the well, vII (5923-6006) and v (5475-5582) horizons of Ps were determined to be gas-saturated. There was obtained gas flow in the VII horizon of PS. The well came through 2011 with construction. Shah Deniz field, exploratory well SDX No.6. Drilling of the exploratory well SDX No.6 started in 28.07.2010 with Istiglal ydQQ (sea depth 71m, target depth 6285 m, target horizon Pereriv formation of Ps) and overall 5344 m drilling works were fulfilled in the course of a year. Geophysics research works were carried out in the well. The well came through 2011 with 5344 m depth. As the result of the conducted exploratory-prospect drilling, geological structure and oil-and-gas-bearing aspects were surveyed. The most basic achievement reached in geological investigation is a discovery of giant gas-condensate field- Umid in the Azerbaijan sector of the Caspian. Hydrocarbon resources of Umid structure are evaluated up to 200 billion m3 of gas and 40 million tons of condensate due to preliminary appraisal. Discovery of Umid field is especially significant due to the fact that it increased the oil-gas bearing prospects of the region and led to the probability of discovery of new oil-gas formations and layers.

16

v. dEvElOPMENT OF OIl ANd gAs FIElds

Presently, hydrocarbons are produced from 58 oil & gas fields of the SOCAR, and out of them 41 are onshore, but 17 are offshore site of Azerbaijan. There produced 1707,6 million tons oil & condensate and 1707,6 billion m3 gas at the fields being in operation in Azerbaijan Republic from the beginning of development up to 01.01.2011. In 2010, 50795 th. tons of oil & condensate and 26350 million.m3 of gas are produced in Azerbaijan Republic. There produced 7279 th. tons oil & condensate, 7021 million.m3 gas by the sOCAR, 40487 th. tons oil and 12278 million.m3 on Gunashly- Chiraq Azeri field operating of AIOC (including, 3439 million.m3 from gCA for sOCAR), 1848 th. tons condensate and 6893 million.m3 gas on shah-deniz field (including, 1792 million.m3 from Shah Deniz field for SOCAR), 1181 th. tons oil & condensate and 158 million.m3 gas onshore joint ventures and operating companies. Comparative table of production indicator of SOCAR in 2009-2010
Table V.1
2009 th.t On Republic sOCAR OgPd ll ACg shah-deniz 50419,25 8543,26 7301,41 1241,85 40224,25 1651,74 2010 th.t oil+ cond. th. ton 50795,4 8459,6 7278,9 1180,7 40487,4 1848,4 gas million.m3 On republic sOCAR OgPd ll ACg shah-deniz 23681,13 6903,04 6801,62 101,42 10522,58/3901,75 6255,51/830,42 26349,6 7178,9 7021,1 157,8 12277,5/3437,8 6893,2/1792,3 111,3 104,0 103,2 155,6 116,7 110,2 2668,47 275,86 219,48 56,38 1754,92 637,69 Changing temp % 100,7 99,0 99,7 95,1 100,7 111,9 +, - 376,15 -83,66 -22,51 -61,15 263,15 196,66

17

Oil and gas production over the Republic in 2009-2010

50419,25 min t 60000 50000 40000 30000 20000 10000 0 Oil Gas 2010 23681,13 mln m
3

50795,4 min t

26349,6 mln m3

Graphic V 1

2009

18

In total 221,9 million tons oil, 54,3 billion m3 gas are produced from the beginning of development (from 1997) on Gunashly- Chiraq Azeri field by AIOC. For prevention of a pressure decline of overlying beds of the fields from May 2000. In total 134,7 million m3 water and 23,0 billion m3 gas were injected to 01.01.11. In 2010, plan actions on drilling are remained in (144379 m) 8055 m, 31858 m few drilling works are performed in comparison with the past year. 88 drilled wells became producing ones over PU. 85 of them are exploitation wells, but 3 of them are gas-injection wells (galmaz gas storage) in 2010. There produced 143,9 thousand tons oil from 85 exploitation wells, including 14,2 thousand tons for onshore from 24 new wells, 129,7 thousand tons oil for offshore from 61 new wells. 110 new wells were put in operation by the sOCAR (including 20 wells on joint ventures and operating companies). Analysis of results of the operation drillings carried out during the last years proves drilling and bringing on-stream new wells to be one of the main conditions for stabilization and enhancement of production on wells. Well network under development is partially recovered through operation drilling, old wells out of operation are replaced with new ones and subsequently, there emerges opportunities for necessary technological operation of any field. In comparison with the past year balance of wells excluded from and included to onstream well stock the sOCAR overall up to 01.01.2011 is as follows: 385 wells were included in the stock, 825 wells excluded from it in 2009 (-440 wells), and 356 wells were included in the stock, 387 wells were excluded from it in 2010 (-31 wells).

For prevention of a pressure decline of overlying beds of the fields on OGPD of Azneft PA, water of 4632,1 thousand m3 instead of 8013,8 thousand m3 were injected to the beds and 180,7 thousand tons of additional oil were produced against plan of 194,4 thousand tons. Accordingly in offshore sites water to the extent of 1848,9 thousand m3 was injected for forced impact into the beds and as the result, 114,2 thousand tons of additional oil was produced. Also, accordingly in onshore sites water to the extent of 2783,2 thousand m3 was injected for forced impact into the beds and as the result, 66,5 thousand tons of additional oil was produced. In 2010 there produced 369,3 thousand tons oil from water injected targets the sOCAR overall, including 114,2 thousand tons oil offshore and 255,1 thousand tons oil onshore. There produced 10,8 thousand tons oil against plan of 26 thousand tons on Azneft PA through other methods (III methods) for enhancement of oil productive capacity, including additional oil to the extent of 0,2 thousand tons onshore and 10,6 thousand tons offshore. Azneft PA carried out 914 geological actions against plan of 791 actions. As the result of the actions taken, 393,5 thousand tons of additional oil was produced instead of 325,8 thousand tons. 225 geological actions were carried out on offshore fields against plan of 177 actions that, as the result of the actions taken, 326,3 thousand tons of additional oil was produced instead of 263 thousand tons. Also, 689 geological actions were carried out on onshore fields against plan of 614 actions that, as the result of the actions taken, 67,2 thousand tons of additional oil was produced instead of 62,8 thousand tons.

Number of geological measures on "Azneft" PA in 2010 "Forecast"

914 791 689 614

1000 900 800 700 600 500 400 300 200 100 0 177 225

"Actual"

Graphic V - 2

Total

offshore fields

onshore fields

19

Additional oil purchased as the result of geological measures in 2010 on "Azneft" PA

350 300 250 200 150 100 50 0 62,8 67,2 344,9 291,8 263
"Forecast" "Actual"

326,3

Graphic V - 3

Total

offshore fields

onshore fields

20

vI. dRIllINg
There were performed drilling works at 136324 m instead of 144379 m in 2010 that, including, it totalled to 127858 m (plan 131356) on operation drilling, but 8466 m (plan 13023 m) on exploratory boring. 86 well (plan 93) are completed, 82 well on operation, 4 on exploratory with construction in 2010. In total 92348 m drilling works were performed offshore instead of 97466 m, including 86263 m (plan 90006) on exploitation drilling, 6085 m (plan 7460 m) on exploration drilling. Only 41 exploitation wells of 47 exploitation and 2 exploration wells assumed to be constructed, have been finished. In total 43976 m drilling works were performed onshore (plan 46913), including 41595 m (plan 41350) on exploitation drilling, 2381 m (plan 5563) on exploration drilling. 45 wells drilled up for construction in 2010 (plan 46), 41 well (plan 38) drilled up on exploitation drilling, 4 wells on exploration drilling (plan 8). Offshore- exploitation drilling works were carried out in gunashly, Neft dashlari, Alat-deniz, bahar, gum-deniz, bulla-deniz, darvin section area, Pirallahy section area, Palchig Pilpilasi, 8 March fields and exploration drilling in Umid, Bulla-deniz fields. Onshore- exploitation drilling works were carried out in balakhany, bibiheybat, Galmaz, Lokhbatan, Pirallahi, Puta, Jafarli, Muradkhanli, Zagli, Seadan fields and exploration drilling in Pirallahi, Bayimdagh-Takchay fields. 147848 m drilling works were performed instead of 147397 m which planned by Complex Drilling Works Trust. plan was carried out on both objects by 94,4%, on exploitation drilling was fulfilled as 96,4 %, drilling works performed 102211 m instead of 105976 m. Exploratory drilling was fulfilled as 71,3% over the year and there were performed drilling works at 6681 m instead of 9373 m. drilled up well for construction was fulfilled as 92,4% on Trust. Total 73 wells (-6) instead of 79 well were handed over. 13 wells (-1) instead of 14 well in Bayil Port DKQ, 4 wells (+1) instead of 3 wells in gum Adasi, 18 wells (-2) instead of 20 wells in Neft Dashlary, 33 wells (+1) instead of 32 wells in Absheron Q, 5 wells (-2) instead of 7 wells in Gobustan KQ were handed over to exploitation. geophysical and geology department didnt perform drilling plan in 2010. There were performed drilling works at 2185 m instead of 4030 m. It makes 54,2 % of

21

SOCARs drilling (without JV and OCs), ths meters

250

200

Onshore
101,1 98,1 48,6 105 99

Offshore
150
40,2 73,6 75,0

52,4

23,6

30,2

30,5

52,8

68,6

100

69,0

82,7

72,5

69,7

68,0

66,1

69,2

70,4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Grafphic VI - 1

annual plan. 7 wells were intended in the plan, have been finished and delivered to the customer (100%). SOCAR AGC LLC performed drilling plan as 101,0 % in 2010. There were performed drilling works actually at 25247 m instead of 25000 m. 6 wells were handed over to exploitation instead of 7 wells. Concrete works were fulfilled on modernization of technical methods, using of new and modern technology area for development drilling works in 2010. New modern drilling rigs and drilling equipment produced by UsA and China companies was installed in Umid 8, Bulla deniz field, exploratory well No. 89. Using of this equipment effected positively to technical-economic indicators of drilling works. New gas condensate field was discovered at the 6006 m depth using modern technologies in the exploratory well Umid No.8. Using of new and modern technology in the wells (high effectively hydro monitor PdC chisel, well bottom motors, MWd devices, stabilization, jar, drill pipes with thick wall, polymer and oil-based mud) increased spread of drilling and prevented from risk and accident during production process. MWd devices are used for drilling of controlled directional wells and to control parameter of well.

22

59,7

64,7

76,5

89,3

50

92,348

43,976

Drilling works plan of SOCAR in 2011: 175 381 m drilling works and delivering of 101 wells was forecasted. Proposals on drilling area relating to improvement of SOCARs productive-financial conditions: Wide range using of state-of-the-art technology, relevant organizing of drilling works in conformity to international standards is necessary for safety and productive progressing of sOCARs drilling works. Realization of the following measures were planned for achieving of forthcoming goals: drilling of exploitation wells must be carried out by available offshore drilling rigs for keeping stability of annual oilgas production in gunashli, Neft dashlari, 8 March, Alat-deniz, Bulla-deniz fields; Field infrastructure development must be continued in Umid structure and preliminary works must be started on babek structure; drilling equipment park must be renewed according to modern demands ; Improving drilling parameters using state-of-the-art technology and working in cooperation with qualified subcontractors; Adequate choice of specialists, accommodation of personnel and personnel development; Participation in seminars and conferences holding in foreign companies and organizations, organization of company-internal seminars and discussions. (grafphic vI 1)

23

vII. OIl ANd gAs PROdUCTION

Growing rate of oil-gas production in Azerbaijan was continued in 2010. 50,8 million tons of oil and 26.3 billion m3 of gas was produced in Azerbaijan. Oil production is 0.4 million tons higher, gas production is 2.7 billion m3 higher than the production in 2009. Execution of Chirag-Oil project is aimed at drilling of additional wells on Azeri-Chiragguneshli project and production enhancement: It is planned to start first oil production on the basis of this project in 2013. Works on intending project Phase-2 have been in completing period for more intense exploitation of shah deniz field. 8459.7 thousand tons oil (with condensate), 7178.9 million m3 gas was produced in the oil gas fields exploited by sOCAR, including 1718.0 thousand tons oil and 195/0 million m3 gas onshore, 6741.7 thousand tons oil and 6983.9 million m3 gas offshore was produced. Oil Production on SOCAR
Table VII-1 2010 forecast sOCAR - Azneft PA - OC/jv 8450.0 7219.3 1230.7 actual 8459.7 7278.9 1180.8 +/9.7 59.6 -49.9 % 100.1 100.8 95.9 2009 actual 8543,3 7288.2 1255.1 2010/2009 difference +;-83.6 -9.3 -74.3

Oil Production in 2010 on SOCAR

SOCAR 8543,3 SOCAR 8459,7

OC/JV; 1255,1

OC/JV; 1180,8

Azneft PU; 7288,2

Azneft PU; 7278,9

8459.7 thousand tons oil was produced in the wells exploited by sOCAR and as the result more than 9,7 thousand tons or 100.1 % forecast was realized. 0.98 % less oil was produced in comparison with 2009 year. 40487.4 thousand tons in ACG field, 1848.4 thousand tons condensate in Shah-Deniz field has been produced in 2010.
Graphic VII - 1

2009

2010

24

40487.4 thousand tons in ACG field, 1848.4 thousand tons condensate in ShahDeniz field has been produced in 2010. Gas production was carried out as 97.0% (7178.9 million m3) on sOCAR in 2010. It is 275.8 million m3 more than in 2009.
Table VII-2

Gas Production on SOCAR 2010 forecast actual 7178.9 7021.1 157.8 +;-221.1 -199.3 -21.8
3

million m3

% 97.0 97.2 87.9

2009 actual 6903,0 6739.8 163.2

sOCAR - Azneft PA - OC/jv

7400.0 7220.4 179.6

2010/2009 in difference +;275.9 281.2 -5.4

In reporting period 3437,8 million m gas was produced from ACG field, but 1792,3 million m3 gas from shah-deniz field by SOCAR. 96,9%-of the produced oil shares to current declining well stock, 2,3%-to new wells and 0,8%-to wells of non operating stock:
Graphic VII - 2

Gas production on 2009-2010 in SOCAR million m3

SOCAR 6903,0
OC/JV 163,2

SOCAR 7178,9
OC/JV 157,8

Azneft B 6739,8

Azneft B 7021,1

2009

2010

Table VII-3 including: Total oil production, thousand ton On current declining well stock
Production, th. ton Percentage in total production, %

wells of non operating stock

Production, th. ton Percentage in total production, %

On new wells
Production, th. ton Percentage in total production, %

SOCAR -Azneft PA - OC/jv

8459.7 7278.9 1180.8

8197.8 7068.9 1128.9

96.9 97.1 95.6

66.0 48.6 17.4

0.8 0.7 1.5

195.7 161.3 34.4

2.3 2.2 2.9

25

Distribution of production of 2010 due to well stock on SOCAR 8197,8 96,9%

195,7 2,3%

66,0 0,8%

Stock wells on a temporary (ths tons) Inactive wells on the fundfrom (ths tons) New wells on (ths tons) Graphic VII - 3

23,8%- of the total oil production shares to flush, 56,3%-to gas lift and 19,9%-to submersible pump method:
Table VII-4 including:
Total oil production, (th. ton

Flush
Production (th. ton) Percentage in total production, %

gas lift (air-lift)

Production (th. ton) Percentage in total production, %

submersible pump method

Production (th. ton) Percentage in total production, %

sOCAR AzneftPA - OC/jv

8459.7 7278.9 1180.8

2016.6 1965.5 51.1

23.8 27.0 4.3

4761.1 4650.4 110.7

56.3 63.9 9.4

1681.8 662.8 1019.0

19.9 9.1 86.3

26

Oil production on operation methods on SOCAR in 2010 (th. ton)

gaslift 4761,1 56%

borehole pump 1681,8 20% Flush 2016,6 24% Flush gaslift borehole pump

Graphic VII - 4

Well stock shown in the following table on sOCAR for 01.01.2011: Operating well stock-9385 wells (including 177 gas wells), producing-well stock- 6664 wells(including 118 gas wells):

Table VII-5 Operating well stock 01.01. 2010 AzneftPA OC/jv SOCAR UGS 5937 3562 9499 159 01.01. 2011 5748 3637 9385 153 Producing-well stock 01.01. 2010 4421 2274 6695 118 01.01. 2011 4385 2279 6664 137 Non-operating well stock 01.01. 2010 1491 1284 2775 41 01.01. 2011 1339 1355 2694 16 Well development after drilling 01.01. 2010 25 4 29 0 01.01. 2011 24 3 27 0

27

Well stock on SOCAR

9499
6000

9385

5937

5748

5000

6695 4421 4385

6664

4000

3000

3562

3637

2274

2279

1491

2000

1000

1284

1355

1339

2275

2694

25

24

01,01, 2010

01,01, 2011

01,01, 2010

01,01, 2011

01,01, 2010

01,01, 2011

01,01, 2010

01,01, 2011

Operating well stock

Shifting well stock

Non-shifting well stock

Well development after drilling

"Azneft" PU

OC/JV

Graphic VII - 3

Technically defective and non-restorable 1337 wells were liquidated over the well fund in OgPd for the past three years by increasing observation. Project development of the fields was optimised, perspective areas were defined in view of oil and gas resources, additional wells were drilled, efficient geotechnical actions were carried out, infrastructures were reconstructed, research scientific works were carried out in the wide spectrum, state of the art technology will be tested and applied in the production for partially stabilizing oil and gas production on sOCAR: 107 producing wells and 3 wells in underground gas storage have been transferred from drilling to exploitation. 195,7 thousand tons oil, 435,5 million m3 gas was produced from oil-gas wells; 200 wells from non-operating stock came on-stream and in total, there produced 99,3 thousand tons oil; 470,8 thousand tons oil was produced as the result of 5167 geotechnical actions; Reconstruction and modernization works of the oil-gas production areas were expanded, and scientifically, technically and economically sounded new programmes and projects have been implemented for this purposes;

28

29

27

 Project and construction works were expanded for rehabilitation of old fields, reconstruction works were carried out for optimising of oil-gas collection and transfer system and utilization of brine water. The first stage of reconstruction of underground gas storages have been finished, new compressor station has been commissioned in garadagh underground gas storage by means of implementing complex programme, reconstruction and repair-and-renewal operations have been carried out in existing compressor station in galmaz, well stock has been restored, 3 additional wells have been drilled and for the first time active gas volume has reached to 3,1 billion m3 on both gas storages. Currently measures aimed at determination of new wells drilling, definition of the geological reserves at the expense of seismic and geophysical researches, identification of appropriate potential due to rising demands are carried out. In different areas of the gas supply system 4250 km of additional gas pipes were laid and 1180 km of pipelines underwent overhaul repair. Gas has been given to 39 settlements located in 18 administrative territories, totally 67 272 subscribers gas supply was restored in 2010. Construction works were performed for enlarging with 3,6 million m3/day throughput of 4 gas turbine aggregates in Neft Dashlari SKS 2 ; Installation of vacuum compressor continued for gathering of low pressure gas in Neft dashlari OgPd, the number of compressors reaches 55, but collected and transported daily gas volume has been amounted to 850 thousand m3. Installation of 2 million m3/day throughput of compressor station consisting of 2 gas turbines in the platform No. 4 reached the termination stage for transportation of low pressure gas on Gunashli field; New compressor station was constructed and comissioned and it was possible to increase the volume of daily injected gas up to 7,0 7,5 million m3. Injected gas pressure rose up to 150 atm as the result of reconstruction and repair-and-renewal operations in galmaz Underground gas storage compressor station; Reconstruction and repair-and-renewal operations were carried out in Siyazan compressor station aimed at provision of gas transportation exported to Russian Federation of required volume and pressure in future. As the result of this it is intended to export up to 2.0 billion m3 gas to Russian Federation. Expansion works were carried out by installation of additional compressor aggregates aimed at provision of gas transportation exported to Iran of required volume and pressure in future.

29

vIII. COllECTION ANd TRANsPORTATION OF gAs

The following actions are performed on Collection and transferring of gas: - Construction works finished for enlarging with 3,6 million m3/day throughput of 4 gas turbine aggregate (in TAURAs type) in Neft dashlari sKs 2, compressors were put in compression; - Installation of 2 million m3/day throughput of compressor station consisting of 2 gas turbines in dWjNo4 continued for transportation of low pressure gas in Gunashli field by gathering to Neft Dashlari SKS 2 ; - Installation of OgC type vacuum compressor continued for gathering of low pressure gas in Neft dashlari OgPd. so, totally 55 OgC type of vacuum compressors were assembled in OgPd and was returned returning to system by gathering 840 - 850 thousand m3/day associated gas; - gas pipeline (diameter 1000mm, lenght 24.0 km, project pressure 55 atm) were laid between Sangachal Bash Gurgulari and 47th km; - 1000 mm gas pipeline was laid between sangachal bash gurgulari and gazimammad CS (2nd turn: 23rd km- Gazimammad CS); - Construction of second gas line (diameter 700mm, length 42.0 km, calculated pressure -55 atmosphere) between Hajigabul Compressor station galmaz Ugs 14th km part between 47th km Galmaz UGS have been finished. - Repair-and-renewal operations were carried out in Hajigabul Compressor station; - the same works were performed on gathering and delivery of gas onshore OGPD; - Reconstruction works have been continued for garadagh Underground gas storage expansion. Within performed works 5 new compressor stations consisting of MKs12 type compressors have been constructed. It was possible to increase the volume of daily injected gas up to 7.0-7.5 million m3. - Repair-and-renewal operations were carried out in galmaz Ugs compressor station. so 10 QKN type 16 gas-engine compressors exploited in Cs were repaired, 13 of them were operated as the 1st stage, 3 of them were reconstructed for working as the 2nd stage and additional 3 compressors were installed for operat-

30

ing in Cs. It is provided to inject gas with 150 atm. pressure to Ugs during gas injection time. - As the result of performed works in garadagh and galmaz Ugs 3.1 billion m3 gas storing was possible. - Reconstruction and repair-and-renewal operations were carried out in siyazan compressor station, compressors exploited in the Cs restored to service for provision of gas transportation exported to Russian Federation within required volume and pressure in future. As the result of this it is intended to export up to 2.0 billion m3 gas to Russian Federation. - Expansion works were carried out by installation of additional compressor aggregates aimed at provision of gas transportation exported to Iran within required volume and pressure in future.

31

Gas supply measures within the Republic PA Azerigas sOCAR was founded due to decree of the President of Azerbaijan Republic of 01 july 2009 N366 Enhancement of the control mechanism in oil and gas industry on the material and technical basis of CjsC Azerigas. PA Azerigas realizes transportation, distribution and marketing of natural gas. PA Azerigas supplies gas, produced by sOCAR to Islamic Republic of Iran, georgia and Russian Federation. PA supplies 12.6 bln m3 of gas abroad and within the Republic. PA Azerigas possesses great significance in the field of power industry. PA provides all thermal power stations within the country with natural gas. 13929 employees (for the period of 01.01.2011), including scientists, engineers, workers and technicians work at 6 departments and enterprises within PA, engaged in production. Planning and design office of PA Azerigas realizes front end engineering design and budget preparation for provision of gas supply to apartments, domestic

32

household and industrial (commercial entities) in baku and regions, countries and settlements. Construction and repair works and provision of gas supply to apartments, commercial and industrial premises on the territory of the Republic, based on individual designs through replacement of mechanical meters by smart-card type gas meters, are realized by repair and construction departments of PA. PA Azerigas provides overhaul for 236 pieces of cathodic protection units for gas lines corrosion protection, their efficient utilization and remedial works. Gas supply department of PA Azerigas provides efficient utilization of natural gas by consumers on the territory of the Republic, elimination of gas losses, control instrumentation and automation devices, gas meters at all gas using plants, installation and maintenance of industrial and household gas meters, their metrological control and testing. Scientific and technical potential of Production Association supplies gas to about 1.3 mln. of consumers at different regions of our country. We possess an optimal control mechanism for the infrastructure involving 8 main gas lines, 7 compressor stations, 67 gas exploitation areas, 79 automation gas-distribution stations, 77 gas-distribution stations, 35 gas-distributing points, 44 372 km total length pipelines, including 3 290 km length main gas lines and other technologic objects. In 2010 totally 1558 km of gas lines and 17 gas-distribution stations underwent overhaul, including 64 km of main gas lines, 536 km of regional gas supply system, 958 km of baku gas supply system. In 2010 totally 4242,1 km length of new gas line was constructed, including 98,6 km of main gas lines, 3767,8 km of regional gas supply system, and 375,7 km of baku gas supply system. Totally 158561 pieces of mechanical and smart-card type household gas meters were installed and replaced, including 51882 pieces in baku and 106679 pieces in the regions. generally, rate of gas consumers over the Republic, provided by gas meters, has reached to 98.2%. 33349 pieces of smart-card type household gas meters were installed and replaced, including 21344 pieces in baku and 12005 pieces in the regions. Rate of gas consumers has reached 76713, including 50158 men in baku, 26555men in the regions. The following diagrams (diagram vIII-1 and diagram vIII-2) show the number of consumers supplied with gas during this year and the number of natural gas consumers.

33

The number of subscribers provided by gas in 2010

7671 The number of subscribers provided by gas In regions in 2010 7671

In Baku 26 555 35% In Baku 26 555 Graphic VIII - 1 35%

50 158 65% In regions 50 158 65%

In regions

In Baku

In regions

In Baku

The number of subscribers using of natural gas has been 1259065 as of 01.01.2011, and also in regions -660033 subscribers, in baku-599032 subscribers.

Number of subscribers using of natural gas to 01.01.2011 Number of subscribers using of natural gas 1259065 to 01.01.2011
In regions 660 033 52% In regions 660 033 52%
In regions

1259065

In Baku 599 032 48% In Baku 599 032 48%

In Baku

Graphic VIII - 2

In regions

In Baku

34

IX. OIL-GAS REFINERY AND PETROCHEMIsTRy

Oil refinery and production of petroleum derivatives: 6220,6 thousand tons of crude oil were refined on SOCAR in 2010, the forecast performed at 103,7 %. 100.5% car gasoline, 113,5% kerosene and diesel oil produced in the course of a year. As a result of using of treatment plants 71,9% of light oil products percentage amounted instead of 69,2 % which intended in forecast 2010. As a result different kind of products more than 322.9 thousand tons have been produced in indicated time. In comparison with 2009 year volume of oil refinery is more than 3.1%, light oil products percentage more than 0.7%, automobile gasoline production more than 1.1%, kerosene and diesel oil more than 6.7%. As the result of efficient usage of heavy oil fractions retreatment plant power, processing depth scale reached to 92,6% and this is 1,1 % more than the last year. (Graphic IX 1).

Oil refining compared with 2009-2010

69,2%

71,9%

91,60%

92,60%

2009

2010

2009

2010
Graphic IX - 1

Qaliq production of refined oil production (%) Dig depth indication of oil refining (%)

35

Information about oil refining and production of petroleum derivatives in Oil Refinery (thousand ton).
Table IX-1 (thousand ton) 2010 Oil and Oil Products Fact 2009 Forecast 3 6000,00 4200,00 1800,00 1492,30 1242,30 60,00 1162,30 20,00 250,00 250,00 0.0 2660,3 4152,60 250,60 347,80 64,60 149,00 251,60 195,20 93,70 Fact 4 6220,56 4406,81 1813,75 1453,24 1248,92 43,43 1185,74 19,75 204.32 161,25 -1.39 3020,14 4471,99 214,00 65,83 86,54 220,64 241,46 267,50 92,60 113,5 107,69 85,4 18,9 134,0 148,1 96,0 137,0 98,8
Compared with forecast % Compared with 2009 %

1 Oil Refining HAliyev Baku Oil Refinery "Azerneftyagh" Oil Refinery Petrol Including automobile petrol From it A-95 A-92 A-80 pretreatment gasoline Including primary fuel for chemistry stove oil Kerosene and diesel oil Light-oil product liquid gas Motor Fuel dT lubricants Commercial stove fuel, total Oil bitumen Oil coke Depth of processing %

2 6032,79 4053,09 1979,70 1467,60 1235,04 54,48 1160,32 20,24 232,56 232,56 -0.46 2829,38 4296,52 173,30 145,27 44,18 272,44 236,36 220,84 91,63

5 103,7 104,9 100,8 97,6 100,5 72,4 102,0 98,8 81.7 64,5

6 103,1 108,7 91,6 99,3 101,1 79,7 102,2 97,6 89,3 69,3 -0.93 106,7 104,08 123,5 45,3 195,9 81,0 102,2 121,1 101,1

36

Oil refining dynamics over plants, mln ton

4,780

4,279

4,180

3,923

3,190

3,469

3,118

3,172

3,325

2,568

4,053

4,407 2009 1,980 2010 1,814

2004

2005

2006

2007

2008

Graphic IX - 2

Baku Oil Refining Plant named after H.aliyev

Azerneftyagh Oil Refining Plant

Information shows that, there was produced 1248,9 th. Tons of benzine from crude oil was processed in 2010, including 1248.9 thousand tons of automobile petrol, 204.3 thousand tons pre-treatment gasoline, 3020.1 thousand tons of kerosene and diesel oil, 214.0 thousand tons of liquid gas, 220.6 thousand tons of stove fuel and 661.3 th. tons of others (coke, bitumen and oils). Considering the dependence of petroleum derivatives production from capacity of technological installations operated in the processing plants, information about them was specified in the following Table.

37

Information on operation of technological installations in refinery complex of the SOCAR (thousand ton) Table IX-2 2010 devices In Baku Oil Refinery: installation 21 installation 31 installation 43 installation 55 section 100 In "Azerneftyagh" Oil Refinery: installation 202 installation 305 installation 701 installation 401 lubricant production 252,86 85,65 242,62 92,70 96,0 108,2 237,79 63,14 102,0 146,8 800,00 1000,00 873,05 969,34 109,1 96,9 1104,63 878,67 79,0 110,3 4200,00 533,30 929,50 1790,30 2103,00 4433,57 564,92 1077,91 1797,65 2028,92 105,6 105,9 116,0 100,4 96,5 4089,74 591,45 997,80 1690,43 1953,70 108,4 95,5 108,0 106,3 103,9 Forecast Report % Report 2009 (thousand ton) % Percentage in 2010 compared to 2009

Information shows that, in 2010 compared to 2009 all technical devices were loaded with raw material except of catalytic reformer device of bOR named after H.Aliyev and oil refinery device No. 202 of Azerneftyagh Oil Refinery. Catalytic reformers underuse is caused by 26 days maintenance works in May-june, but equipment deficiency is caused with increasing demands to bitumen due to more oil production in comparison with prognosis in 2009. Considering of the influence of products yield to increase capacity of oil products in technological installations in the processing plants, information about them was specified in Plants.

38

Information on products yield in technological installations Table IX-3 2010 forecast 46,0 83,0 84,0 58,0 52,4 53,6 99,5 actual 46,9 83,0 85,6 55,0 55,0 54,2 99,4 difference 0,9 0,0 1,6 -3,0 2,6 0,6 -0,1 actual 46,2 83,0 83,6 53,2 52,5 51,8 99,4 (thousand ton) 2009 difference 0,7 0,0 2,0 1,8 2,5 2,4 0,0

Technological installations In Baku Oil Refinery: installation 21 installation 31 installation 43 installation 55 In "Azerneftyagh" Oil Refinery: installation 202 installation 305 installation 401

Information shows that, in 2010 compared to 2009 whole foods yield is increased in all technical facilities of bOR named after H.Aliyev and Azerneftyag OR. As the result of this growth raw-materials consumption of whole foods were decreased as 30.0 thousand tons, in installation number 21, 21.6 thousand tons, in installation number 43, 32.4 thousand tons, in installation number 55, 45.0 thousand tons in installations number 202 and 305. Commodity production was exported near and far abroad in 2010. 56,6 %- of oil products was exported to the interior of the country and 43,5 %- to near and far abroad. On losses of oil and petroleum derivatives. data are shown in design and command & control documents of each technological facility operated in oil refinery complex regarding norms of losses emerged during refinery process and these are substantial for generation of them. generation of quantity of the losses at the plants both in forecast and actual activity depends on volume of crude to be refined in pre-processing and reprocessing facilities. volume of the losses of oil and petroleum derivatives at H.Aliyev Baku Oil Refinery Plant was less as 2.8 thousand tons or 0.05% than the quantity expected under norms set for actual processed crude and on Azemeftyagh Oil Refinery Plant as 4.2 thousand tons or 0,23% in 2010. Total quantity of the losses of overall refinery complex was less 7.0 thousand tons than the quantity expected under forecast norms set for actual processing.

39

On concentration of catalyzator and reagents. various reagents are used for normal functioning of each process under regularly scheduled basis at processing installations operated in the plants. Information on concentration of catalyzator and reagents at the processing installations operated in overall refinery complex according to the sOCAR and plants in 2010 is presented in the following table. That concentration of catalyzator and reagents at Baku Oil Refinery Plant and Azemeftyagh Oil Refinery Plant in reporting year was less accordingly as 2,0 and 3,6 thousand tons than the quantity expected under forecast norms set for actual processing. In reporting year various catalyzators and reagents to the extent of 5.6 thousand tons were saved in oil refinery plants that 4.0 thousand tons out of them is shared by caustic soda, sulphate acid, gumbrine. On consumption of fuel and energy resources. In reporting period, the analysis of information related to consumption of fuel and energy resources. There were saved 80,5 million tons kWh electricity and 313,8 thousand kcal heat energy in overall oil refinery complex of the SOCAR as a result of various organizational-technical actions taken in declining of fuel and energy resources in oil processing plants. The cause of more usage of fuel resources than the normative indicators was retreatment of fuel oil and displace fuel oil with flammable natural gas in stoves which intended to use as process fuel in the plant installations with the aim of increasing depth of cultivation and improving environmental indicators in reporting year. Gas treatment and gas treatment products. Main aspects plan of natural gas treatment and finished products production on Gas Processing Plant in 2010 was specified as following:
Table IX-4 2010 Products name unit measure mln m3 mln m3 Th. ton Th. ton Plan 4380,0 4305,0 20,0 26,1 actual 4096,4 4030,5 25.4 28.1 % 93,5 93,6 127,0 107,7 2009 actual 3899,9 3824,2 21,8 27,2
comparatively 2009 %

Crude gas 1 2 3 Cleaned dry gas Technical production of bhutan Natural gasoline (naftha) production

105,0 105,4 116,5 103.3

40

Gas processing and gas processing products on 2009-2010

10000
4096,4

100 10 1
25,4 28,1 21,8 27,2

2010

4030,5

2009

Graphic IX - 3

raw gas (mln m3) purified dry gas (mln m3) production of commercial butane (thous. ton) Naftha production (thous. ton)

Production of petrochemicals. Information about the production in Azerkimya Production Association establishments in 2010 has been shown in the table IX 5.

3824,2

1000

3899,9

41

Information about the processing of raw materials and production of marketable products in Azerkimya PA in 2010. Table IX-5 Product name Raw material Ethylene Propylene Polyethylene bbF Caustic soda liquor liquid chlorine sulfuric acid Propylene oxide Polyester resin Azote Pure isopropyl alcohol Pyrolysis resin Hard resin Unit measure ton ton ton ton ton ton ton ton ton ton mm3 ton ton ton 2009 actual 189471 43452,9 22967,3 42248,8 17005 7690 3933 4242,6 3819,7 2131 13882,4 9967,7 45695 10509 2010-cu il Forecast 250000 60751 31876 59092 23500 28000 14000 8250 14000 9000 20800 19588 62500 10000 Actual 224295 55007,8 28556,2 53517,5 21612 7105 2658 4652,7 3376,2 814,5 15099,5 10532,5 52693 13076 Compared to forecast % 89,7 90,5 89,6 90,6 92,0 25,4 19,0 56,4 24,1 9,1 72,6 53,8 84,3 130,8 Compared with 2009, % 118,4 126,6 124,3 126,7 127,1 92,4 67,6 109,7 88,4 38,2 108,8 105,7 115,3 124,4

224.3 thousand tons of raw material and 83.6 thousand tons of ethylene-propylene monomers were produced in ethylene-propylene plant of Azerkimya PA in 2010. It exceeds the amount 34.8 and 17.2 thousand tons produced in 2009. Mean capacity rate of ethylene and propylene was increased by 2.2% and has reached 37.3% in pyrolysis plant. As the result of raw-materials consumption for production of 1 ton ethylene and propylene has reduced by 0.17 tons compared with 2009 in PA, but production of isopropyl alcohol has increased by 5.7%, polyethylene 26.7% and volume of marketable product of Association has increased by 10.9%. As the result of works carrying out for expansion of raw materials base of the same plant, definite amount of liquid gas and natural gasoline of Garadagh Gas Refining Plant completely purchased in the EP-300 device of Azerkimya PA. According to this year 4.5 thousand tons of liquid gas and 16.6 thousand tons of natural gas has been processed in pyrolysis plant. 14.5 % of Petrochemicals intended for selling were realized internally and 85.5% were exported.

42

X. PRIME COST
The last and basic products of the SOCAR are oil, gas and petrochemicals. 85-90% of prime cost of oil products amounted the expenses spent for crude oil. Therefore, analyses of prime cost of oil and gas is important. Prime cost investigates only on oil and gas production departments of sOCAR. In 2009 overall prime cost of commodity of oil production amounted 554850 thousand manats, prime cost of 1 ton of oil is 76.63 manats. Estimate of oil production actual costs was given on sOCAR in the following table:
Table X-1 Cost items 1 Using material and components 2. salary 3. social insurance and expenses of pension fund 4. Depreciation of fixed assets -total 5. Repair and maintenance expenses 6. Exploitation of transport and means of transportation 7. security service 8. Electric power 9. Mine tax 10.Other taxes 11.Communal expense 12.Other expenses Including: support costs Total production costs Changing of unfinished production remains Prime cost of commodity production Total product defrayed expenses for 1 ton product Transportation expenses of oil given to refining Commodity product defrayed expenses for 1 ton product Changing of remains in NKI system Defrayed expenses for commodity product Considering changing of remains in NKI system Defrayed expenses for 1 ton informed to Oil Refinery. Unit measure Thousand man. --------------ton manat Thousand man. ton manat Thousand man. Thousand man. ton manat 2009 30700 97116 19432 73792 50762 28788 13469 10459 78731 16307 2359 22292 8865 444207 --623 444830 7288186 60.95 15694 7251532 63.51 -1079 461603 7278105 63.42 Specific weight 6.9 21.9 4.4 16.6 11.4 6.5 3.0 2.4 17.7 3.7 0.5 5.0 2.0 100.0 2010 41022 94041 19176 96383 86489 42703 14658 10460 80791 20244 2135 33290 12498 541391 1654 539737 7278713 74.38 16041 7240601 76.76 928 554850 7240616 76.63 Specific weight 7.6 17.4 3.5 17.8 16.0 7.9 2.7 1.9 14.9 3.7 0.4 6.2 2.3 100.0

43

Expenditure estimate of oil production on SOCAR in 2009-2010(thousand manat)

19176 41022 94041 96383 19432 30700 97116 73792 553890
Social insurance and pension fund expenditures used material and components salary capital consumption

Total production expenditure 444207

Total production expenditure 541391

Specific weight of salary costs in the composition of total output expenses spent for oil production the sOCAR overall amounted to 17.4%, social insurance benefits to 3.5%, depreciation of fixed assets to 17,8%, material costs to 7,6%, mine tax to 14,9% and miscellaneous expenditures to 6,2%. Overall prime cost of commodity gas amounted 248584 thousand manats in 2010 on the Company. Prime costs of 1000 m3 gas increased as 40.07 manats. Estimate of gas production actual costs was given on sOCAR in the following table:

232032

all other expenditures

2009

2010

Table X-2 Cost items 1 Using material and components 2. salary 3. social insurance and expenses of pension fund 4. Depreciation of fixed assets -total 5. Repair and maintenance expenses 6. Exploitation of transport and means of transportation 7. security service 8. Electric power 9. Mine tax 10.Other taxes 11.Communal expense 12. Miscellaneous expenditures Including: support costs Total production costs defrayed expenses for commodity product Total product defrayed expenses for 1000 m3 product Commodity product defrayed expenses for 1000 m3 product Defrayed expenses for commodity product Defrayed expenses for 1000 m3 gas Unit measure thousand man. -------------thousand m.3 manat thousand m3 manat thousand man. manat 2009 18449 27866 5946 80312 36110 26855 8346 2421 41159 6575 954 15216 1322 270209 270209 6739826 40.09 5981054 45.18 270209 45.18 Specific weight 6.8 10.3 2.2 29.7 13.4 10.0 3.1 0.9 15.2 2.4 0.4 5.6 0.5 100.0 2010 16934 25426 5052 73271 36219 22886 5484 2507 40768 7379 523 12135 4630 248584 248584 7021087 35.41 6204175 40.07 248584 40.07 Specific weight 6.8 10.2 2.0 29.5 14.6 9.2 2.2 1.0 16.4 3.0 0.2 4.9 1.9 100.0

44

Expenditure estimate of gas production on SOCAR in 2009-2010(thousand manat)

Total production expenditure 444207 Total production expenditure 541391

5946

27866

5052
25426

80312 73271 18449 Social insurance and pension fund expenditures used material and components salary capital consumption 137636 127901 all other expenditures

16934

2009

2010

Graphic X - 2

Specific weight of salary costs in the composition of total output expenses spent for gas production the SOCAR overall amounted to 10.2 %, social insurance benefits to 2.0%, depreciation of fixed assets to 29,5%, material costs to 6,8%, mine tax to 16,4% and miscellaneous expenditures to 4,9%. Prime costs of 1000 m3 gas decreased as 5.11 manats (11.3%) in comparison with 2009 on SOCAR. In this connection, let us compare production cost of total output unit (without mine tax) indicators on table.
Table X-3 Production cost of total output (without mine tax ), manat 2010 1. Oil, 1 ton 2. gas, 1000 m3 63.28 29.60 2009 50.15 33.98 In comparison with 2009 % 126.2 87.1 +,13.13 -4.38

45

As graphic shows, the prime Production cost of total output in 2009-2010 cost of oil has increased, but prime cost of gas has decreased on sOCAR. Increasing of prime cost of oil was obtained in accordance to increasing of depreciation of fixed assets and miscellaneous expenditures in Oil 1 ton comparison with the last year. so, amortization costs of oil inGas creased -22591 th. manats 1000 m (30.6%), miscellaneous expenditures of oil increased 10998 th. manats (49.3%). Decreasing of 2009 2010 prime cost of gas was obtained in Graphic X - 1 accordance to decreasing of expenses. so, amortization costs of gas was reduced -7041 thousand manats, salary -2440 thousand manats, used materials -1515 thousand manats, miscellaneous expenditures -3081 thousand manats. Analysis shows that, increasing of oil prime costs is connected with increasing of total prime costs and decreasing of total production.
Oil 1 ton; 50,15 Gas 1000 m3; 33,98 Oil 1 ton; 63,28 Gas 1000 m3; 29,6
3

46

XI. PERSONAL AND SALARY

In 2010 average number of employees in the sOCAR overall totalled to 75502 persons, average monthly salary amounted to 559.38 manats. In comparison with 2009 average number of the employees increased as 6791 persons, average monthly salary increased as 25.72 manats. In reporting year annual wages on sOCAR overall reached 506.81 million manat that is higher as 44.3 million manat or 9% compared to the last year. Increasing of wage fund is related to growth of sOCAR employees number, including increasing of category salaries of 15 and higher category employees as the result of levelling between labour remuneration categories. In comparison with 2009 the number of the employees in main office of SOCAR increased as 36 persons, Azerigas PA increased as 236 persons, in geophysics and geology department as 69 persons, in Oil Pipe line department as 18 persons, in gas Refining Plant as 18 persons, in Social Development Department as 969 persons, in security department as 133 persons, in gas Export department as 10 persons, in Caspian sea Oil Fleet as 10 persons, in Oil and gas Construction trust as 122 persons, in Oil Gas Scientific Research Project Institute as 81 persons and in Work condition norms development department increased as 14 persons (total 1716 persons). Azerkimya state Company was renamed Azerkimya Production Asossation and was placed under the Companys authority according to the Order number 829 On improving of controlling mechanism in the oil and gas industry dated 02 April, 2010 of President of Azerbaijan Republic.
Average list and salary dynamics of employees on SOCAR
600 500 400 300 200 100
114

75,502 71,585

74

69

Monthly average salary, manat

63,229 60,430 58,509

122 134 164 220

64,794 58,157 61,725 59,091 58,541

318 444 564 534 559

64 the number of average list of employees, thousand person

Graphic XI - 1

59

54

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

47

In the following enterprises the number of the employees was reduced, i.e 784 persons in Azneft Production Association, 264 persons in Marketing and Economic Operations Department, 135 persons in Azerneftyagh oil Refinery, 127 persons in H.Aliyev Baku Oil Refinery, 96 persons in H. Aliyev Baku Deep Water Jacket Factory, 251 persons in Complex drilling Works Trust (total 1657 employees). The appropriate changes were made in the statue On payment of average monthly salaries in sOCAR according to structure changes of the sOCAR and organization structure, staff table of enterprises and organizations were prepared and were affirmed. due to sOCARs Order of 30 december 2009 N 103 and N 07-81 some changes and additions were included into Provisions about Azerbaijan Republic state Oil Companys employees salaries in 01.01.2010 about levelling the balance between salaries of 15 and higher degree employees, and this is the next step in remuneration system improvement. For implementation of decree of the President of Azerbaijan Republic of 22 April 2010 N 258 development of sOCARs structure and sOCARs Order N58 of 28 April 2010 about foundation of the structure of PA Azerkimya the appropriate changes and additions were included into Provisions about Azerbaijan Republic state Oil Companys employees salaries, and since 01.05.2010 the system of payment in PA Azerkimya was equated to SOCARs system of payment. Staffing specifications and organization structures were made up in accordance with rules and approved by sOCAR. Within Provisions about Azerbaijan Republic state Oil Companys employees salaries employees working at refineries and oil and gas recovery sphere at equal positions and equal degrees were applied different Pricing plan. Thus, refinery workers were paid 40% more than the workers of oil and gas recovery sphere. Difference from 01 july, 2010 were liquidated according to Order number 85 and 0904 from 06.07.2010 Regulation about labour remuneration of sOCARs employees. Base rate of employees working in oil production sphere was increased 40%. This concerns more than 3000 employees and it was average monthly amounted to 5.0 million manats. Standing commission was created for definition and confirmation of worktime standards, organization structures, staffing specifications, incomes, and cost estimates of sOCARs organizations management structure according to Order number 103 Activity control of worktime standards, organization structures, staffing specifications, incomes, and cost estimates of management structure of SOCARs organizations from 12 August, 2010. Most of documents entering the department

48

are presented to committee meetings after control and documents are registered after discussion by members of a commission. besides information about the state of working hours usage balance in sOCARs organizations was collected and analysed by Personnel and salary department. Thus, in sOCAR maximum amount of possible working time made 16052750 person/day in 2010 and 95% or 15226873 person/day of this time was used efficiently. Average monthly working time for one person is 17 person/day, work more than duty hours makes 235936 person/day or 1.5% for one person. Accreditation was carried out in 3760 work places of sOCAR organizations due to sOCARs Order No136 from 25.08.2008 Accreditation schedule of sOCARs organizations and enterprises and more than 472 work places with excessive harmful production factors were revealed. Adequate measures were carried out for labour force optimisation in sOCARs organizations in 2010.

49

Staff on the payroll and pay packet and information about the average wages of the employees of the SOCAR enterprises Table XI-1 staff on the payroll, average wages, in pay packet persons manats in 2010,ths. manats 01.01.2010 01.01.2011 2009 2010
Main office of SOCAR Azneft PA Azerigas PA Azerkimya PA geophysics and geology department Oil Pipeline department Mark. and econ.oper.depart. Investments department "Azerneftyagh" Oil Refinery H.Aliyev Baku Oil Refinery H.Aliyev baku deep Water jacket Factory gas Processing Plant social development department security department Ecology department gas Export department. Information Technologies and Communications department Caspian sea Oil Fleet "Oil & gas Construction" Trust Complex drilling Works Trust Oil Gas Scientific Research Project Institute development of labour condition norms department Azerbaijan Oil Industry journal Total

298 20140 12133 1725 1078 1005 45 2463 2597 1878 619 6023 3991 296 154 840 5112 4961 5175 957 76 19 71585

334 19356 12369 3867 1794 1096 741 44 2328 2470 1782 637 6992 4124 298 164 828 5122 5083 4924 1038 90 21 75502

4676.07 148935.2 58467.68 16827.82 13128.8 6499.73 4042,11 471.68 14173.83 15087.98 12351.53 4084 35261.23 25308.12 1919.64 1196.71 4924.17 43703.74 43944.17 43416.3 7595.75 607.78 187.04 506811.08

914.38 615.47 334.07 586.65 469.7 335.18 797.83 506.34 500.25 577.72 520.35 322.92 514.86 12.45 596.24 458.24 726.92 696.51 681.21 564.75 545.8 663.15 533.66

1166.68 641.21 393.91 362.64 609.85 494.20 454.58 893.33 507.37 509.04 577.61 534.28 420.20 511.4 536.81 608.08 495.59 711.05 720.44 734.77 609.81 562.76 742.22 559.37

50

Note: annual average number of employees and average monthly earnest were shown for employees included into the list, and the wages fund was shown for all employees.

XII. MECHANICS AND ENERGETICS

Appropriate measures connected with continuos, reliable and rhythmic work of equipment and extension of the equipment operating life and overhaul period have been undertaken together with the analysis of the mechanical and energy economy equipment performance which play a key role in performing of the governmental works on oil and gas production, treatment, transportation and processing in 2010. Preparatory works were carried out for autumn-winter season of 2009-2010 years. Overhaul and current repair, corrective maintenance and pre-commissioning works were duly carried out in the power equipment, mechanical and energy devices and also power transmission lines. Running repairs of reversing machines, pumping plants and their control panels were carried out according to the plan and where required the electric motors were replaced with new motors. Test-repairing works in the amount of 2755273 manats were carried out at 35/6kv and 6/0,4kv substations and distribution installation of internal electrical network of the sOCAR enterprises and overhaul works in the amount of 37240604 manats were conducted for increasing of development period of mechanic and energetic facilities.
Table XII-1 overhaul works total (th. manats) 37240.6 Repair of mechanic devices (th. manats) 31910.1 Repair of electric devices 2575.2 test- repairing works (th. manats) 2755.3

Oil and gas wells after drilling were supplied with well casing timely and this has positive influence on to oil-gas production. In the result of carried out measures lack of power supply was eliminated and power reserve was increased and there were no cases of equipment beforehand failure.

51

For improvement of electricity supply of Palchiq--pilpilesi in Neft dashlari reconstruction works were finished in 10 6/0,4kV substations, conductive devices were put on stream, and there was provided safe power supply. Works on construction of heat power station were carried out according to the Order number 181 from 06.11.2006 and negotiations were held about plant selection and arrangement. 2x10MvA power transformers overhauled in plant conditions being in operation in marine conditions for a long time in QTEs-48. gas-turbine power plant replaced by repaired one and put into service, average load of the station was increased up to 16.5 MW. For improvement of electric supply in Gunashli field underwater cables were repaired and cable vaults were secured, 2x10MvA power transformers were repaired in plant conditions, 35 kW and 6 kW oil key holes were replaced with new modern type vacuum key holes, 6/0,4 kW substation and bKNs device (2x1600 kW) in dWOP -9 were put into operation, sKs were provided with electric power in dWOP -4. Passing works from 2 kW to 6 kW of the intra-field electric networks of number 1 and 2 OgPds in OgPd named after H.z.Tagiyev have been continued. Installed new modern electric facility put into operation timely and intra-field electric network was provided with 10 kW tension due to transmission of 35/6 kW substation number 87 to 110/10 kW tension suppling OgPs number 1 of OgPd named after A. Amirov being in usage of bakielektrikshebeke OsC (Open stock Company). 41 wells (totally 42442 m) were drilled and put into operation by consuming of 362,7 kvt/hour per 1 meter transition in the wells drilled by electric drive and presently 6 wells are being drilled by electric drive. Electric supply of OgP area No 4 of bibiheibat OgPd was thoroughly reconstructed for improving ecological state and the reconstruction works on electric supply were continued in the areas number 1,2 and 5. Refurbishment works are going on due to the sOCARs order number 121 from 11.08.2008 about the reconstruction of electricity supply project of oil-gas production department of Azneft PA and joint venture of sOCAR. In general 1076276 kWh of electric energy has been purchased from external organizations on the contract basis in 2010. Including; 851701 thousand kWh from bakielektrikshebeke OsC, 149421 thousand kWh from sumgaitelektrikshebeke OsC, 74715 thousand kWh from Azerenegy OsC and 439 thousand kWh from other organizations; (It has been shown in diagram). Own production makes 163552 thousand kWh

52

Table XII-2 Including Name of enterprises Totally obtained

bakielektrikshebeke OjsC

sumgaitelektrikshebeke OjsC 5 85 143556

Azerenenrgy jsC 6 45397 21797

From depatment of the sOCAR 7 389 14 1415

From outside organizations 8 2

Own production

2 Azneft PA Azerigas PA (aug-dec) Azerkimya PA Azerneftyagh ORP H.Aliyev bORP H.Aliyev bdWjF Oil Pipelines department Marketing and EOd geophys. and geology dep. social develop. depart. security department Information Tech.and Cd Ecology department Complex drilling Wor. Trust Caspian sea Oil Fleet Oil and gas construc. Trust gas export department Oil Gas Scientific Research Project Institute gas processing plant (oct-dec) Total : Total on sOCAR:

3 344072 26254 143556 61086 360615 20124 23374 1375 2738 39043 333 1878 449 27726 16384 9888 16558 336 28463 1109027 1076276

4 298286 4356 59671 358831 20124 15101 521 2108 34940 333 1536 233 5150 12951 7520 267 1310 28463

9 118437 45115

82 5441

5 2380 854

1691 145

6 307

37

108 3933

485 170 314 216 28

172

158

22246 3433

62 48 21

2210

96

23 32751 149421 74715 74715 439 163552 439 163552

851701

149421

53

Electric energy purchased by SOCAR (th. kVt/hour)

Graphic XII - 1
Total: own production of SOCAR 1076276 163552 851701

Bakelektrikshebeke OJSC Sumqaytelektrikshebeke OJSC Azerenerji OJSC From outside organizations

74715 149421

439

Including; Azneft PA -118437 thousand kWh, (QTEs 48 110337 thousand kWh and dEs 8100 thousand kWh). Azerkimya PA -45115 kWh. (It has been shown in table and diagram).

Table XII-3 Consumed electric energy 3 462509 26254 188671 61086 360615 20124 23374 1375 2738 39043 333 1878 449 Including (thousand kWh) Production processes 4 387780 26086 187351 57528 359050 13316 23358 1375 2124 39022 333 1800 449 sold to population 5 227 32 1320 the sOCAR enterprises 6 31781 67 3467 1563 16 393 221 21 78 sold to outside organization 7 42721 69 91 6808 0.023 consumed electric energy to per ton of product 8 38.2

Name of enterprises

2 Azneft PA Azerigas PA (aug-dec) Azerkimya PA Azerneftyagh ORP H.Aliyev bORP H.Aliyev bdWjF Oil Pipelines department Marketing and EOd geophys. and geology dep. social develop. depart. security department Information Tech.and Cd Ecology department

54

Name of enterprises

Consumed electric energy 3 27726 16384 9888 336 1333 28463 1272579 1239828

Including (thousand kWh) Production processes 4 25251 15911 9702 336 1333 28278 1180383 1187484 1579 1579 70 39852 115 50765 50765 sold to population 5 the sOCAR enterprises 6 1925 324 166 sold to outside organization 7 550 149 20

2 Comp.drilling Wor.Trust Caspian sea Oil Fleet Oil and gas construc.Trust gas export department Oil Gas Scientific Research Project Institute gas processing plant (oct-dec) Total: Totally on SOCAR:

consumed electric energy to per ton of product 8 362.7 0.00005

Power consumption of SOCAR on 2009-2010 (th kVt/hour)

50765 4,1%

1579 0,1%

Total 1239828

Spent for production Sold to outside organizations Sold to people

Graphic XII - 2

1187484 95,8%

Totally in 2010 1180383 thousand kWh of electric energy was spent to production processes in the sOCAR, 507765 thousand kWh were sold to external organizations and 1579 thousand kWh - to population/public demands. (It has been shown in diagram.)

55

Power consumption and sold electric energy of SOCAR in 2010 (th. kVt hour)

1180383
Consumed electric power Electric power sold to outside organizations Electric power sold to people

50765

1579

Graphic XII - 3

Relevant actions were taken in respect to efficient use of electrical energy and running electricity equipment were replaced with relatively small-scale high-power units by selecting options in compliance with more optimum operation modes. Ferrous metal scraps to the extent of 50905 thousand tons were handed over under the contract and about 60 tons nonferrous metal scraps were procured resulted from write-off unfit plants and equipment in 2010. Electricity equipment and part of electric transmission line in OgPd named after H. z. Tagiyev and OgPd bibi-Heibat were replaced with modern electricity equipment, reconstruction works were carried out. Test- repairing works were carried out in power transformers of Azerkimya PA, including in electric conductive devices and accumulators were repaired. New closed-type 35/6 kW substation was constructed and commissioned, part of 6 kW and 10 kW electric equipments were replaced with new modern type equipment in Hajigabul and Garadagh CS, Baku Oil Refinery named after H.Aliyev and Gas Processing Plant. Even if shutdowns are caused by electric system and network accidents, openings due to the fault of energetic service staff should be avoided. shutdowns caused by preliminary equipment casualty and lack of spare parts should be avoided. Appropriate fire-fighting and fire-prevention works were conducted. There were provided permanent maintenance standby of fire extinguisher Vixr type vessel in the oil and gas field. The installation of foam fire extinguishing has begun. All enterprises were provided with fire extinguishing means.

56

Splashing water system, round fire-fighter water line, fire stops, submersible pump shafts were repaired in the most parts of dWOP. Complex Activity Program in sOCAR on labour safety and safety technique was drawn up and performed according to Order number 61 on enhancing security in threat source of production areas from 07.05.2010. In 2010 21 wells in garadagh Ugs, 51 wells in galmaz Ugs underwent maintenance and well casings were replaced with new ones. KEg-12/18 type cranes, 6 number rescue boats AT-30, AT-42 type and its plinths were repaired in DWOP of Gunashly field in 2010. 17 pieces of 42 person rescue boats made in China were purchased and their installation has started in dWOP-s. Appropriate electricity supply was provided to drilling objects due to the gas production enhancement program. DWP No.1 constructed in Umid field was set up and outfit with drilling and oilmining equipment and installation works were completed. drilling works are going on. 10 sets of NbO-160 type drilling devices were purchased for maintenance of wells in Gunashli field of 28 May OGPD. Their derrick tables are under construction and will be put into service during 2011. Causes of power drops were investigated and it was identified, that main electric equipment possesses parts which do not reply modern standards. Adequate measures were carried out on improving electric supply system in oil field areas in 2011 for reconstruction or renewing of electric equipment. - Construction of gas Turbine Electric Power Plant at Neft dashlari, - Reconstruction works of electric supply in dWOP number 2 in 28 may OgPd, replacing of 6/0,4 kW substations electric equipment with new modern equipments in dWOP number 13 and 19, - Reconstruction of offshore facilities electric supply in OgPd named after N. Narimanov, reconstruction of a part of (under water part) 35 kW air wire line between 110/35/10kW duvanni-dartici substation and 35/6 kW sangachal-burnu substations. - Reconstruction of existing 110/6 kW substation in Hajigabul Cs of Azerigas PA and 35/6kW substation in siyezen Cs on the basis of project. - Performance of reconstruction works at dashgil 35/6kv substation of garadagh Oil Pipelines Department, installation of automated foam fire extinguisher system at Dubandy oil field battery of tanks. #11. Transforming of 2kv network to 6kv one at OgPd named after A.Amirov, reconstruction of 35/6 kV substation # 532. Reconstruction of the substation on the basis of developed design for improve-

57

ment of power supply of Baku Oil Refining Plant named after H.Aliyev for replacing of outdated electric equipment with modern ones at 220/110/6kv 204P and 204N substations. These issues have to be carried out in 2011: - To strengthen fire protection control measures. - Purchase two pieces of new zj70/4500 dzM model drilling equipment and three Pz-11 type boring pumps. - Saving of spare parts of fuel-lubricating materials and oil field equipment. - Maintenance of drilling and oil field equipment at the expense of internal opportunities. - Placing of necessary spare parts at baku ship-repairing Plant of Caspian sea Fleet. - Removing of outdated equipment from the balance and delivering of them as ferrous and non ferrous metal pieces. - Purchase of Us production cranes of KEQ 12/18 type at deep Water Platforms.

58

XIII. INVESTING AND OVERHAUL

The investing program for sOCAR in 2010 was planned as 990846,4 manat, including 254485,1 thousand manat for drilling, 587859,4 thousand manat for construction, 141967,6 thousand manat for equipment not to be required to install, 6534,3 thousand manat for geologic exploratory works. In 2010 actual investments for the SOCAR were fulfilled as 1274626,1 thousand manat (128,6%), including 391794,9 thousand manat for drilling (154,0%), 522402,2 thousand manat for construction (88,9%), 358706,5 thousand manat for equipment not to be required to install (252,7%), 1722,5 thousand manat for geologic exploratory works (26,4%).
Actual fixed investment in 2009-2010 in SOCAR
2009 2010

302721,3 38,6%

522402,2; 41,0%

358706,5; 28,1%

317815,3 40,5%

1483,7 0,2%

163037,3 20,8%

391794,9; 30,7%

1722,5; 0,1%

on drilling equipment requiring of installation

on construction on geological exploration

Graphic XIII - 1

59

Table XIII-1

Comparison of key indicators included to the investment structure with 2009 (thousand manat)
planned 990846,4 254485,1 11424,1 243061,0 6534,3 587859,4 141967,6 848878,8 107221,1 21377,9 100,0 3500,0 79020,6 3222,6 1225,0 38747,6 5146,2 35,0 49,0 159,7 2010 actual 1274626,1 391794,9 42340,9 349454,0 1722,5 522402,2 358706,5 1215341,3 59284,8 14166,0 % 128,6 154,0 370,6 143,8 26,4 88,9 252,7 143,2 55,3 66,3 planned 1179288,3 268509,6 38858,3 229651,3 2703,0 744888,3 163187,4 1133494,1 45794,2 13070,4 100,0 1500,0 30673,8 450,0 7665,6 25880,4 345,6 2009 actual 785057,6 317815,3 11581,5 306233,8 1483,7 302721,3 163037,3 744200,5 40857,1 6965,5

th. manat % 66,6 118,4 29,8 133,3 54,9 40,6 99,9 65,7 89,2 53,3 511,0 84,4 76,8

Investment including: drilling - exploration - operation geologic exploration works Construction Equipment not to be installed Investment in industry construction Investment on nonindustry construction including: - housing construction - public utilities construction - education - health - culture

60

Table 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Performance of investment for SOCAR enterprises in 2010 is as follows: (th. manat)

XIII-2 Azneft PA Azerigas PA Azerikimya PA Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev gas Processing Plant Oil Pipelines department baku deep Water jacket Plant Marketing and Economical Operations depart. geophysics and geology department social development department Investments department security department Ecology department gas Export department Information Technologies and Communication Caspian sea Oil Fleet Oil and gas Construction Trust Oilgasscientificresearchproject Institute Complex drilling Works Trust Name of enterprises Planned 581341,0 137260,0 13929,0 19587,1 5913,4 6712,0 6268,0 600,0 4580,0 116758,4 40,0 590,0 7170,8 6151,0 10687,6 38994,6 17155,2 5950,0 11158,3 th. actual 623159,2 330505,7 493,7 7659,9 17825,6 2533,5 4466,1 1129,4 127,8 18996,3 109272,1 13,2 667,5 7743,0 2197,7 8289,6 8478,1 9441,3 5289,2 116337,2

manat % 107,2 240,8 55,0 91,0 42,8 66,5 18,0 21,3 414,8 93,6 33,0 113,1 108,0 35,7 77,6 21,7 55,0 88,9 10,4d

Comparison of delivery indicators of fixed assets for SOCAR with 2009 Table XIII-3 th. manat 2010 2009 Planned actual % planned actual % delivery of 846814,1 1157751,4 136,7 1253805,5 731637,9 58,4 fixed assets including: - drilling 239693,1 373539,0 155,8 242612,9 257577,4 106,2 - construction 470153,4 422492,1 89,9 858005,2 309937,9 36,1 -equipment 136967,6 358706,5 261,9 153187,4 163037,3 106,4 -geologic exploration 3013,8 1085,3 works

As evident from the table, delivery of fixed assets for the SOCAR was 1157751,4 thousand manat in 2010. It is 4261 13,5 thousand manat higher than the figure of 2009. Delivery of fixed assets for drilling was 257577,4 thousand manat . It is 76835, 0 thousand manat higher than the figure in comparison with 2009. Fixed assets for construction were delivered as 422492,1 thousand manat, it is 935,7 thousand manat higher than the figure of 2009. Delivery indicators of total fixed assets for SOCAR enterprises in 2010 was as follows

Table XIII-4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

th. manat
Name of enterprises Plan 427265,1 123346,0 22618,6 27848,2 6003,9 4501,0 6431,6 475,0 4612,8 133847,0 40,0 590,0 8528,7 6228,9 10730,6 32655,0 11621,3 5950,0 13520,4 Actual 650532,6 176147,6 493,7 10944,2 24687,5 2427,4 4953,0 688,5 53,5 18629,5 123351,7 13,2 667,5 1142,2 786,6 8287,7 5716,6 10001,9 2922,3 115304,2 % 152,3 142,8 48,4 88,7 40,4 110,0 10,7 11,3 403,9 92,2 33,0 113,1 13,4 12,6 77,2 17,5 86,1 49,1 852,8

Azneft PA Azerigas PA Azerikimya PA Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev gas Processing Plant Oil Pipelines department baku deep Water jacket Plant Marketing and Econ. Operat. depart geophysics and geology department social development department Investments department security department Ecology department gas Export department Information Technologies and Communication Caspian sea Oil Fleet Oil and gas Construction Trust Oilgasscientificresearchproject Institute Complex drilling Works Trust

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Obtaining of equipment not to be required to install for sOCAR enterprises in 2010 are as follows: Obtaining of equipment not to be required to install for SOCAR enterprises (2010)
Table XIII-5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Azneft PA Azerigas PA Azerikimya PA Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev gas Processing Plant Oil Pipelines department baku deep Water jacket Plant Marketing and Econ. Operat. depart geophysics and geology department social development department Investments department security department Ecology department gas Export department Information Technologies and Communication Caspian sea Oil Fleet Oil and gas Construction Trust Oilgasscientificresearchproject nstitute Complex drilling Works Trust 2575,0 5397,2 2400,0 2800,0 1398,0 475,0 3824,9 12000,0 40,0 590,0 1807,0 600,0 4567,0 30904,0 8688,3 3000,0 10020,4 th. manat Name of enterprises Planned 29705,3 16175,5 Actual 58917,1 70163,8 493,7 1958,7 14919,6 2427,4 2252,9 688,5 53,5 18629,5 45462,7 13,2 667,5 1142,2 786,6 8287,7 5716,6 7957,2 2863,9 115304,2 76,1 276,4 101,1 80,5 49,2 11,3 487,1 378,9 33,0 113,1 63,2 131,1 181,5 18,5 91,6 95,5 11,5d % 198,3 433,8

In 2009 there handed over 21178 m2 residential building for SOCAR. This figure was 11575 m2 in 2009.

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XIV. OVERHAUL
The volume of overhaul works carried out in 2010 for sOCAR was 435500.2 thousand manat (225550.7 th. manat planned). The performance of the overhaul of fixed assets of SOCAR enterprises in 2010 is shown as follows: : Table XIV-1 th. manat
-si 1 1 2 3 4 5 6 7 8 9 10 11 Azneft PA Azerigas PA "Azerikimya" PA Baku Oil Refinery Plant named after H.Aliyev "Azneftya Oil Refinery Plant gas Processing Plant baku deep Water jacket Plant named after H. Aliyev gas Processing Plant Marketing and Econ. Operat. depart geophysics and geology department social development department including: 11.1 For sOCAR enterprises 11.2 Overhaul works performed over regions On the basis of the letter of baku city 11.3 Executive Power 12 security department 13 14 15 16 17 18 19 20 Information Technologies and Communication Ecology department Investments department gas Operations department Oil and gas Construction Trust Complex drilling Works Trust Caspian sea Oil Fleet Oilgasscientificresearchproject Institute Total over SOCAR: 12000,0 5000,0 43000,0 180,0 1161,3 398,8 0,0 0,0 850,1 2000,0 2723,8 3000,0 225550.7 24302.77 33665.09 116005.3 0,0 157.6 58.1 0,0 17,8 1148,1 153,3 3508,2 1498,8 435500.2 8816.28 12713.18 74511.89 0.0 54.3 251.0 0.0 1178.6 905.4 613.4 1177.5 1842.0 195034.7 Name of customer enterprises 2 Program for 2010 3 60000,0 33511,5 16545,3 17000,0 10000,0 5000,0 2000,0 8000,0 1500,0 1679,9 60000,0 Performed in 2010 5 94518,4 109963,0 7135.2 12047,8 11849,7 4999.1 2544,9 11277,3 250,9 389,9 173973.2 Performed in 2009 6 59952.9 1532.4 7361.7 6703.9 5015.8 1089.4 10914.7 11.4 378.9 96051.4

63

Overhaul works on SOCAR in 2010 (th. manat)

435500,2

225550,7

2010 plan

2010 fakt

Graphic XIV 1

As evident from the table important works have been done in drilling of high production wells, collection, processing and transportation of produced oil and gas, reconstruction of existing system by applying of modern drilling technologies in 2010. The offshore oil pipeline Neft dashlary dubandi of 500 mm was overhauled in 2010. The overhaul works amounted to 94518,4 thousand manat in gunashli, Neft Dashlariy, Palchig Pilpilesi and other offshore fields in the area of oil and gas pipelines of different diameters and appropriate communication systems. 53375,7 thousand manat overhaul works were fulfilled on offshore oilfield hydrotechnical equipments. Totally l=2174 pm pier and s=10155 m2 squares were fully overhauled and approved by state admission commission. The overhaul works of dwelling blocks at Deep Water Platforms #5 and 8 were completed. At the same time 109963.0 thousand manat works were done in 2010 for overhaul and reconstruction of existing infrastructure, compressors, gas distributing stations, equipments for uninterrupted and safe gas supply in the Republic in 2010, including: - siyazan Cs overhaul was completed. - Hadjigabul Cs overhaul was completed. - Changing of corrosive gas pipelines 1558 km - Overhaul of more than 10.5 km part of 1200mm Astara-gazimammad and gazimammad Mozdok main gas pipeline

64

- Overhaul of 10.5 km part of Evlakh-shaki-balakan gas pipeline - Overhaul of gas pipelines of 700mm towards different directions- 15.5km - Mounting of gas counters 141628 pieces In the processing area the overhaul works of communication systems for storing and transporting of the fuel were principal. The amount of overhaul works makes 28896.6 th. manat in oil and gas processing field in 2010. The equipment of primary oil refining equipment in H.Aliyev Oil Refining Plant, coke equipment and reagent equipments were overhauled (12047.8 thousand manat). The overhaul works carried out in 2010 on hydrocleaning equipments of oil (# 43), bitumen equipment (#401), equipments # 202 and 305 of Azerneftya plant (11849.7 thousand manat) An amount of 7135.2 th. manat was spent for overhaul works carried out on technological devices, electric and social facilities of Azerkimya PA in 2010. besides the overhaul of sOCAR balance funds (173973.2 th. manat) in 2010 the overhaul works were carried out in the regions of Azerbaijan Republic and the same were done over social projects of Executive Power of baku city by social development department: - The overhaul of sOCAR facilities - 24302.77 th. manat - over Executive Power of baku city - 116005.3 th. manat - over social objects of regions - 33665.09 th. manat On project estimate documents expertise department. In 2010 project estimate documentation of 34 objects was submitted by department for expertise. The documents were studied at the department, discussed, the insufficiencies were removed and submitted for approval. A project estimate of one object was rejected, one was returned due its incompleteness, another one was not approved as the construction of the object was not expedient. The value of construction-installation works of approved objects was decreased with amount of 995,32. th. manat in comparison with 1991 basis values as the result of decreasing of over-calculated scope of work and correction of expenses which do not meet the demands. Out of submitted project estimate documents 4 objects are ecological, 5 objects are social. One project estimate document was prepared by the private design organization and 33 by Oilgasscientificresearch Institute of SOCAR. In 2010 project task of 224 objects was carried out by the department, 15 of them was not approved, 209 ones were studied and the rebukes were looked through. In 2010 the normative document of Caspian sea Oil and Gas fields hydrotech-

65

66

nical devices operation Ms 1669347-13-2009 Enterprise standard was studied and returned to the institute for development, after coordinating with appropriate structures of sOCAR was submitted for approval. The other works which includes the department functions were carried out in time and in required level during the report year. The function of Control on Construction-Repair Works division of Investment department includes the control of the works done by sOCAR structures in time, qualitatively and in correspondence with project estimate documents. during the report period Azneft PA, geophysics and geology department, Oil Pipelines Department, Oil Refining Plant named after H.Aliyev, Azerneftyagh Oil Refining Plant, Baku Deep Water Jackets Plant named after H.Aliyev, Azerikimya PA, social development department, Ecology department, Caspian sea Oil Fleet, Complex Drilling Works Trust, Gas Processing Plant, Oilgasscientificresearchproject Institute were engaged in overhaul and construction works and they control drilling construction works done together with contractor organizations. Reconstruction of station transferring of 2kv electric power to 6kv electric power of the oil fields #1 and 2 in Gala area of OGPD named after H.Z.Taghiyev of Azneft PA, overhaul of 530mm Oghuz gas pipe branch of Azerigas PA, movement of pipeline to safe place in 0-5km Turan village due to illegal construction, construction of solvent and benzoyl based tank by Complex drilling Works Trust, overhaul of 9 stored production bulk by Oilgasscientificresearchproject Institute, construction of 5 stored laboratory building, seed plots in 9.3 ha area of OgdP named after H.z.Taghiyev and ecological park in the area of OgdP named after H.z.Taghiyev, repair of vessels 257/1 and 257/2 in the potable and technical water area of workshop # 9, overhaul of the roofs of workshops # 9 and 6 of Baku Deep Water Jackets Plant named after H.Aliyev, dubandi-boyukshor d300mm, d500mm and d700mm oil pipelines repairing by Oil Pipelines department, acceptance and registration of works at Repairing of mechanical workshop at auto repair shop #3 of Transportation workshop, the quality of construction drilling works was revised directly in place. The investigations shown that there were several insufficiencies characteristic for all organizations in objects. so the construction installation works were not documented correctly, in some objects the works were carried out without compiling of project estimate documentation, in some situation the requirements of Construction Organization Plan do not meet till the end, there exist defects in quality of construction repair and used materials. besides, in some places works are carried out without Works Execution Plan by the contactors. All these causes increase of prime cost of construction and extension of construction period. so, capital construction and overhaul program was analyzed at the organizations in 2010, so, the measures

were taken for removing of factors causing of value increase and for more qualitative works. during its functioning time the department guided the existing laws of the Azerbaijan Republic, other normative-legal acts, orders, decision and decrees of state Oil Company of Azerbaijan Republic, tasks and instructions of President of the state Oil Company of Azerbaijan Republic and chief of Investment department.

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XV. LOGSTCAL SUPPORT

The main duty of the supply department is to analyze the general order, forecasting, supply of the inventory and help methodically in procurement actions. Obtaining of the reports about monthly procurement operations on inventory required for stable oil and gas production, construction, drilling, processing and other works in 2010 in due time was provided and the correctness of the reports was examined by the department.

Work process of forming procurement groups controlled procurement actions in enterprises of the Company in order to ensure direct control over implementation of procurements for the sOCAR in accordance with Normative documents on formation and controlling of procurements of sOCAR. The proposals frequently offered to the sOCAR by several providers and manufacturers were reviewed and proper structural bodies were informed about it. Price indices obtained from the same proposals and internet sites of the manu-

68

facturers were analyzed by the specialists and they were used as price control factor during participation of structural divisions in procurement groups. There carried out continuous control over storehouses in the related points in order to ensure appropriate use of residue stock of inventories being in storehouses of the sOCAR enterprises, avoidance of inventory purchase generating remainder and purchasing of necessary resources in compliance with the allocated funds. An amount of 901954,18 thousand manat was spent for procurement of inventory by structural divisions of the sOCAR in 2010.
Table XV-1 Name of structural divisions "Azneft" Production Association H.Aliyev Baku Oil Refinery Plant "Azerneftyagh" Oil Refinery Plant H.Aliyev baku deep Water jacket Plant Caspian sea Oil Fleet social development department geophysics and geology department Marketing and Economic Operations department Information Technologies and Communications department gas Export department Oil Pipelines department Ecology department security department Complex drilling Works Trust "Oil & gas Construction" Trust Oilgasscientificresearchproject Institute Azerigas PU gas Processing Plant Total for SOCAR: Amount spent for inventory within the year (th.manat) 163602,4 22559,65 3712,98 23097,99 44789,98 70502,8 26203,64 158,6 27576 1513,3 4779,74 2171,87 324,5 98677,21 289303,01 807,45 113998,12 8174,94 901954,18

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Amount spent for inventory within the year (th.manat)

Total on SOCAR 901954,18 mln man
Gas Processing Plant Azerigas PU Oilgasscientificresearchproject Institute

Graphic XV - 1

8175 113998 807

"Oil & Gas Construction" Trust Complex Drilling Works Trust Security Department Ecology Department Oil Pipelines Department Gas Export Department Information Technologies and Communications Department Marketing and Economic Operations Department Geophysics and Geology Department

289303 98677 325 2172 4780 1513 27576 159 26204 70503

Social Development Department Caspian Sea Oil Fleet H.Aliyev Baku Deep Water Jacket Plant "Azerneftyagh" Oil Refinery Plant H.Aliyev Baku Oil Refinery Plant "Azneft" Production Association

44790 23098 3713 22560 163602

70

XVI. SCIENCE AND TECHNIQUE

Two scientific research and design institutes are functioning as part of SOCAROilgasscientificresearchproject Institute and Geophysics SRI. 1264 persons are employed by these institutes, 150 of them obtained scientific degrees, including 28 persons who are titled to degrees such as doctor of science and 122 persons to doctor of philosophy, as well. These figures on the institutes are shown in the following table:
Table XVI-1 Name of Institute Oilgasscientificresearchproject Institute geophysics sRI Total Number of employees 1096 168 1264 Number of employees with scientific degree doctor of doctor of total science Philosophy 23 116 139 5 6 11 28 122 150

The employees with scientific degrees at SOCAR institutes in 2010

1096 number of employees Doctor of Philosophy Doctor of Science 116 23 168 6 5

OilGasScientificResearch Project Institute

"Geophysics" SRI

Graphic XVI 1

71

The doctorates arranging of high qualified staffs function under Oilgasscientificresearchproject Institute and Geophysics SRI. Currently 22 personnel are prepared at these doctorates. The theme plan about scientific research, practice-test, normative documents confirmed by SOCAR is compiled at the beginning of every year for the purpose of controlling of scientific research works at SOCAR enterprises.

Carried out research works by SOCAR enterprises and outside organizations in 2010 Table XVI-2
Information Technologies and Communication Oilgasscientificresearch-pro jects "Azerigaz" PA total amount of works by SOCAR enterprises in 2010: 136 including: transition works - 29 new works - 107 Outside organizations "Geofphysics Institute

trans

new

trans

new

trans

new

trans

new

trans

new

trans

total
new

"Azneft" PA "Azerigas" PA "Geophysics and geology" Department "Complex drilling" Trust "Field geophysics" Trust Baku Deep Water Jacket Plan named after H.Aliyev "Oil Gas Construction" Trust "Gas export" department Oil pipelines department SOCAR TOTAL:

trans. new trans. new trans. new trans. new trans. new trans. new trans. trans. new trans. new trans. new trans. new

15

51 2

2 1 1

18

23 0 2

77 4 1 11 2 1 3 0 1 7 107 136

100 4 3 13 3 1 3 1 1 7 136

1 1 2 3

2 1 0 0 1

1
1

1
18 84

0 0 29

2 66

6 15

0 4

0 1

5 32

5 27

72

There carried out research works on 107 new themes, and 33 previous running projects by Scientific Research Institutes and Information Technologies and Communications department, Azerigaz PA of sOCAR and outside organizations in 2010. The norms (standards, rules, instructions and etc.) covering various activity lines of the SOCAR were included in the theme plan. These figures are specified in the following table:

The number of scientific research works done in 2010 (Total: 136 works; 107 new and 29 transition)
Total: 84
new transition

66 0 0

Total: 32

Total: 15
10 9 10 6 "Oilgasscientificresearchproject" Institute "Geology" SRI

Total: 4
4 10 ITCI 10

Total: 1
1

27

18

10 5

"Azrigas" B

Outside Organizations

Graphic XVI - 2

73

besides, there implemented research works on 32 themes (27 new and 5 transition) by 13 outside organizations of the Republic, including geotechnical problems of oil-gas and chemistry Research Institute (sRI) of Azerbaijan state Oil Academy, Institute of oilchemistry processes of Azerbaijan National Academy of sciences (ANAs), Oil and gas Automation, Azerbaijan state labour Protection and safety Engineering sRI, Information and Communication Technologies Center , Azerbaijan Engineering Academy, Azerbaijan Technical University, Institute of Geology of ANAS, East SRC, Ustad firm under the order of different departments and organizations of sOCAR. As evident from the Table, total 136 scientific research works were done by Azneft Production Association (100 projects) together with OgPds, geophysics and geology department (3 projects), Complex drilling Works Trust (13 projects), Field geophysics trust (3 projects), baku deep Water jacket department named after H.Aliyev (1 project ), Oil & gas Construction Trust (3 projects), gas Export department (1 project), Oil Pipelines Department (1 project), Oilgasscientificresearchproject Institute (84 projects) by the order of SOCAR main office (7 projects), Geophysics SRI (15 projects), Azerigaz PA (1 project), Information Technologies and Communication department (4 projects) and outside organization (32 projects). Activity of the SOCAR institutes in 2010 is briefly shown as follows: In 2010 on the basis of income and expenditures budget of Oilgasscientificresearchproject Institute the scientific research, design- exploration-development works with the amount of 19292 thousand manat were carried out instead of planned 18581 thousand manat, including 19040 thousand manat by its own cost, 252 thousand manat by outside organization. 89 scientific research works of 8483 thousand manat amount were carried out by the

74

institute, the main part of them i.e. 6045 thousand manat over 64 themes belongs to Azneft PA in 2010. The amount of scientific research works over 14 themes by 18 contracts signed between the institute and other sOCAR enterprises was 1855,711 thousand manat. The planned tasks over design exploration works were carried out 106,8%. So the planned design- exploration-development works with the amount of 10120,903 thousand manat consisted by the amount of 10808,350 thousand manat. geophysics sRI carried out 15 works (6 transition, 9 new) over thematic plan and 1 new out of thematic plan. Out of them 9 (3 transition, 6 new) were financed by Azneft PA, 7 (3 transition, 4 new) by geophysics and geology department. The research works on 8 projects were completed within reporting period. Information reports were listened on 2 themes and the works were delivered to the customer- Field geophysics Department by the proper act. A part of the scientific-research works on remaining 6 projects was planned to be performed in duration of 2011 in accordance with working program of 2010. In 2010 scientific research and experimental works of 1748827 manat were conducted. These works totaled 1 333 167 thousand manat on Azneft PA, 238 827 thousand Manat on geophysics and geology department and to 210 thousand manat on Field geophysics department. The institute did not conducted any work with outside sOCAR organizations in 2010. Thematic Plan about using and application of scientific-research, design-constraint and standard documents on the sOCAR enterprises were discussed, appropriate amendments were recommended and scientific-technical and technological news were discussed at the meeting of Scientific-Technical Council of Main office. The application of new technique and technology was planned at 740 facilities under 59 titles in 2010, including 31 on Oilgasscientificresearchproject Institute, 5 on Institute of geotechnical problems of oil and gas and chemistry sRI (AsOA), 4 on Azneft PA, 12 on Oil and gas Automation sPC, 2 on AzINMAsH, 1 on Neftemash sCb, 3 on OgPds and 1 on Construction Automatics Services LLC for enhancement of oil production efficiency at Oil & gas Production departments of Azneft PA. Application of new technique and technology under 59 titles was planned in 2010, out of them 43 actions were fulfilled entirely, 6 actions partially and implementation of 10 actions was not possible due to non-availability of necessary equipment and reagents. 49 fully and partially performed actions were applied at 740 facilities and completed with 828 operations. Participation in the international exhibitions and conferences is exclusively essential in promotion of achievements of the sOCAR, studying technological innovations and advanced foreign experience. In this regard a particular attention should be paid to 17th International Exhibition & Conference Caspian Oil, Gas, Oil Refining and Petrochemistry which traditionally held in baku city on 1-4 june 2010. The sOCAR took part actively in organization and arrangement of this Exhibition & Conference.

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sOCAR closely took part in organization and holding of this Exhibition-Conference. There presented exhibit items, models and updated booklets reflecting the Companys activity and its achievements in the exhibition held at the sOCAR pavilion. More than 260 companies (including 138 foreign companies) from 22 countries throughout the world, more than 10000 guests, including 70000 representatives of business circles and interests took part in the exhibition. Pavilion of the sOCAR was awarded by a special certificate for its active participation in the exhibition. On july-August 2010 sOCAR also took part in Izmir International Conference the main topic of which was Energy, on October 2010 at XVIII Kazakhstan International Oil and gas Exhibition and Conference in Almaty, and at Azerbaijan National Exhibition on November 5, 2010. The pavilion of sOCAR caused interest for exhibition participants. The questions interesting the participants were answered thoroughly by sOCAR representatives. sOCAR was honored by the prize of The best pavilion design between national oil and gas companies at the exhibitions held in baku and Kazakhstan. In 25.11.10 SOCAR main office hold the technical meeting dedicated to confirmation of hydraulic automatized well top equipment for operation of geyzer wells by the oil well pumps of Russian Federation PSM-MPEKS LLC production with the participation of specialists of appropriate institute and enterprises. The booklet, brochure reflecting of companys achievements, technical-economic indicators in 2010, annually report for 2009 was delicately prepared, published and delivered to appropriate organizations and higher authorities.

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XVII. HUMAN RESOURCES MANAGEMENT

1. On employees of Head office of SOCAR and leading employees of SOCAR enterprises The number of employees on Head office of SOCAR was 361 persons by January 01, 2011. 58 persons were employed to SOCAR head office, 25 persons of them are at SOCAR enterprises. Because of their first employment, the labor books were provided for 4 newly employed persons. 15 persons were dismissed within this period. Out of the employees within administrative staff, 353 persons are leading employees and specialists and 8 persons are technical workers. 112 persons are women, 27 persons pensioners and 74 persons who are under 29 age. 342 persons of overall employees are highly educated and qualified, out of them 3 persons are doctors of science and 23persons candidate of science. 167 persons signed a labour contract by President of sOCAR and Human Resources Management Committee in 2010, the contract of 57 persons was changed, 79 persons made an end of labour contract, including, 63 persons with their initiative, 2 persons due to expiry of contract, 12 persons due to abolition of enterprises or staff reduction, 2 persons due to death made an end of labour contract. Totally, 330 orders of sOCAR and 271 decisions were prepared and approved on personnel related to Head office and nomenclature in 2010. 330 persons were employed by companys structural divisions by the order # 02 dated 11 January, 2006 and # 72 dated 03 January, 2010 of SOCAR, the Personnel records of 7 persons were returned as their appointment was not expedient. HR module of sAP ERP system applied on sOCAR and today automating of personnel accounting was supplied with this system in the sOCAR enterprises. The information of employees of sOCAR was included to base of the system, the holiday, business trip, employing, employing on other works, dismissing orders, different reports and statistical information are managed by sAP ERP system. The labour-books of the leading employees of the SOCAR Head office and nomenclature are kept, the necessary notes and registration are made at the Human recourses department.

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2. The number, category, dynamics and personnel stream of SOCAR employees On january 01, 2010 the actual number of the employees working for the state Oil Company of Azerbaijan Republic totaled 79569 persons that is more than 10001 persons of last year. This is related to joining of Azerikimya state Company the SOCAR structure by the Decree # 829 dated 20 April, 2010 of the President of Azerbaijan Republic. At the same time the number of employees increased 2525 persons in Azerigas PA, 1038 persons in social development department, 650 persons in security department.

Table XVII-1

Actual number of the employees of the enterprises included in the SOCAR structure is as follows:
(person) Name of enterprises Head office of SOCAR Azneft PA Azerigas PA Azerkimya PA geophysics and geology department Oil Pipelines department Marketing and Economic Operations department Investments department "Azerneftyagh" Oil Refinery Plant H.Aliyev Baku Oil Refinery Plant H.Aliyev baku deep Water jacket Plant gas processing plant 01.01.2010 318 19505 11404 1661 1060 914 45 2326 2474 1827 626 01.01.2011 361 18694 13929 5775 1933 1143 754 47 2335 2516 1744 657

78

Name of enterprises social development department security department Ecology department gas Export department Information Technologies and Communications department Caspian sea Oil Fleet Oil and gas Construction Trust Oilgasscientificresearchproject Institute Office of Azerbaijan Oil Industry magazine development of Work condition norms department Editorial board of the magazine Azerbaijan Oil Industry Companies on international projects of the sOCAR: : - Azeri- Chiraq -gunashli - baku -Tbilisi -jeyhan - shahdeniz - south Caucasus Pipeline - salyanoil - Alibayramlioil - gobustanoil TOTAL:

01.01.2010 6093 3848 285 146 817 4976 4892 5137 1052 89 19 54 7 8 7 8 8 8 8 69568

01.01.2011 7131 4496 324 174 860 5266 5263 4900 1096 92 22 57 8 8 9 9 8 7 8 79569

Actual number of labour mix on sOCAR for january 01, 2010 is as follows: Actual labor mix (01.01.11)
Total laborers leadsing employees and apecialists Technical workers women pensioners highly educated 79569 53163 24413 1993 17665 6375 21760 % 66,8 30,7 2,5 22,2 8,0 27,3

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Actual number of employees in SOCAR (01.01.11)

53163 66,8%

7956

laborers leadsing employees and apecialists

1993 2,5%

24413 30,7%

Technical workers

Graphic XVII - 1

24168 persons were employed by the sOCAR enterprises in 2009 Including: - 10621 persons related to internal rearrangement in oil industry; - 13547 persons outside. Out of them: 786 persons temporary seasonal employees; 45 demobilized; 19 persons on the basis of assignment of the employment centers 196 persons due to expiry of contracts with the employees working for joint projects; 41 persons from training center of SOCAR 111 persons on Pensioner Program of the SOCAR 12349 persons in view of the production necessity; 20391 employees were dismissed within the year. Including: 7118 persons with their initiative; 223 persons due to absence without leave and unreasonable excuse and other labor violations; 526 persons due to expiry of contracts; 19 persons related to military service; 2769 persons related to job cuts; 301 persons due to death; 212 persons due to health; 9223 persons due to contracts with other employers and etc. Labor stream for the SOCAR amounted to 8,9 % in 2010. Annually number of the employees on the sOCAR in 2010 was 75502 persons, actual number of the employees of the enterprises are as the follows:

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Table XVII-2 (01 january, 2011) Enterprises Head office of the SOCAR Azneft PA Azerigas PU Azerikimya PA geophysics and geology department Oil Pipelines department Marketing and Economic Operations department Investments department "Azerneftyagh" Oil Refinery Plant H.Aliyev Baku Oil Refinery Plant H.Aliyev baku deep Water jacket Plant gas processing plant social development department security department Ecology department gas Export department Information Technologies and Communications department Caspian sea Oil Fleet Oil & gas Construction Trust Complex drilling Works Trust Oilgasscientificresearchproject Institute development of Work condition norms department Editorial board of the magazine Azerbaijan Oil Industry Companies on international projects of the sOCAR TOTAl: Actual number of employees to 01.01.2011 361 18694 13929 5775 1933 1143 754 47 2335 2516 1744 657 7131 4496 324 174 860 5266 5263 4900 1096 92 22 57 79569 (person) Annually average number of employees 334 19356 12369 3867 1794 1096 741 44 2328 2470 1782 637 6992 4124 298 164 828 5122 5083 4924 1038 90 21 75502

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82

Recently positive changes have happened in quality content of sOCAR stuff. Number of youth has increased in last 5 years. so, the number of youth up to age of 29 was 13345 persons to 01.01.2011. 19677, this amounted to 16,8 % of total number of the employees. The analysis shows that average age limit of the employees amounts 42 age on sOCAR for 01.01.2011. At the same time it should be noted that the number of pensioners was 6375 persons for 01.01.2011, this figure amounts 8 % of total number of the employees. Out of them 5150 persons retired by preferential terms, 1225 persons retired due to age. Another positive tendency is observed. The number of highly educated employees working in the field increases. So, the number of the highly educated constituted 22,4% of total number of the employees for 01.01.2006 on sOCAR, their amount totalled 21760 persons, 27,3% for 01.01.2011. It should be noted that 2,6 thousand persons out of working 24,4 thousand chief workers and specialists are without high education and more of them are with secondary-level education and specialized secondary education. In report period number of elderly employees (higher than 70) was 223 persons for 01.01.2011, majority of them work in Azerikimya PA and Oilgasscientificresearchproject Institute. seniority of sOCAR employees working for oil industry is as follows: up to 20 years 58,9 thousand persons higher than 20 years 20,6 thousand persons The number of the employees having academic ranks for sOCAR are 340 persons for 01.01.2011, out of them 40 persons are doctors of science, 300 persons are candidates of science.

Table XVII-3 doctor of science male 3 1 7 2 2 21 norms 1 1 38 condition female 2 2

(person) candidate of science male 21 21 8 15 13 2 4 5 3 11 1 25 1 11 2 4 1 2 5 94 1 3 252 female 2 3 1 2 1 1 2 1 8 2 25 48

Enterprises Head office of the SOCAR Azneft PA Azerigaz PA Azerikimya PA geophysics and geology department Oil Pipelines department Marketing and Economic Operations department Investments department "Azerneftyagh" Oil Refinery Plant H.Aliyev Baku Oil Refinery Plant H.Aliyev baku deep Water jacket Plant gas processing plant social development department security department Ecology department Information Technologies and Communications department Caspian sea Oil Fleet Oil & gas Construction Trust Complex drilling Works Trust Complex drilling Works Trust Oilgasscientificresearchproject Institute development department of Work

Office of Azerbaijan Oil Industry magazine Companies on international projects of sOCAR Total:

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17665 women are employed by sOCAR, it constitutes 22,2 percent of total number of the employees. 909 persons out of the working women are key employees, 5895 persons are specialists, 9072 persons are labourers and 1789 persons are technical workers. 1892 persons are under age of 29, 4524 persons or 25,6% of women are highly educated. 2279 persons of women are pensioners, age of 23 persons is higher than 70. Specific weight of the women is mainly shared by scientific-research institutes and Social Development Department 57%, Development of Work condition norms Department - 59,7 %, Azerikimya PA- 46,7%, Information Technologies and Communications Department - 41,8 %, Oil Refinery Plants 31-35 %. Out of 340employees with academic ranks for sOCAR 50 persons are women. 2 persons are titled to doctors of science and 48 persons to candidates of science. 632 persons out of the working women are internally displaced people and refugees, 47 women are production invalids, out of total number of the employees 221 persons are members of martyrs family, 3428 persons veterans of garabagh war, 3161 persons are internally displaced people and refugees to 01.01.2011. It should be noted that 525 invalids are employed by sOCAR enterprises, out of them 166 persons are invalids of garabagh war, 2 persons of 20 january tragedy, 13 persons of Afghanistan, 74 persons of Chernobyl and 270 persons disabled and production invalids. 3. Awards In view of the profession holiday of Azerbaijan oil-industry workers 3 persons were awarded the Order of Honour and 44 persons the medal of Progress according to the services in oil industry under the decree No 1101 dated 18 september, 2010 of the President of Azerbaijan Republic. Under the decree No 1102 dated 18 september, 2010 of the President of Azerbaijan Republic 4 persons were awarded Honoured engineer title, 2 old oil-engineers were granted an Individual pension of the President of Azerbaijan Republic for their immense merits in the development of Azerbaijan oil industry under the Presidential decree No1103 dated 18 september, 2010. The documentation was carried out by Human Resources department in connection with awards, the awarded employees were granted solemnly and appropriate minutes. Personnel records and registration sheets of the awarded employees were submitted to the Administration of the President of Azerbaijan Republic. 155 persons were awarded the Certificate of Honour of SOCAR for their immense merits in the development of oil industry in 2010. Out of them: - on the occasion of Oil-engineers day 132 persons - on the occasion of 30 th anniversary of putting into operation of catalytic reform-

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ing equipment at the Oil Refining Plant named after H.Aliyev. 10 persons - on the occasion of 135 th anniversary of Azerbaijan National Press 4 persons - different persons (according to anniversary and special services) 9 persons 4. Labor discipline Performance of adequate works continued in head office of the SOCAR and in all structural divisions in order to strictly follow labor and performance discipline in 2010. The monthly totals are reported to sOCAR from enterprises. Figures on discipline of the sOCAR enterprises for the outcomes of 2010 in comparison with 2009 are shown in the following table:

Table XVII-4 Indicators 1 2 3 4 5 6 7 8 9 10 11 Number of labor discipline violations (accident) violators of labour discipline Absence without any reason violators of production discipline leaving work place without reason The number of not fulfilled a task late for the work Attended in work place drunken violators of safety rules Reprimanded employees dismissed due to absence without leave and other labour violations 2009cu il 2359 4017 272 1385 107 1563 212 32 267 3971 250

(person) 2010cu il 3235 5093 343 2095 199 1348 375 78 398 4894 219

Increasing of number of labor discipline violations is connected with including of Azerigas PU to the sOCAR structure and strengthening the exactingness in the safety department.

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5. Control to appeals of citizens In 2010 3727 applications, appeals, different letters and other documents entered personnel department. From them 888 letters and applications entered from citizens, large majority of them related to employing on the sOCAR enterprises. Out of them 286 from Executive Apparatus of the President of the Azerbaijan Republic, 45 from the Parliament, 7 from the Cabinet of Ministers, 22 from other state organs and other organizations were sent to sOCAR. 741 appeals were analysed by employees of the departments and replied in writing to applications, 147 appeals were sent to organizations accordingly. Orally comments were given to citizens on 300 appeals by the employees of Human Resources department. 6. Awarding the title of Labor veteran Awarding of the title of labor veteran was performed according to decree No216 dated 22 september, 1995 and No 150 dated 24 september, 1999 of the Cabinet of Ministers of Azerbaijan Republic. All documents are controlled by the department according to Awarding title of Labor veteran and are made official with the order of the sOCAR. 19 orders were prepared on sOCAR, 64 employees were awarded the title Labor veteran, the lost and deteriorated certificate of 1 person was replaced with new one in 2010 in order to award title labor veteran. 7. On attestation of key employees and specialists There held personnel appraisal procedure for the employees at organizations of Azneft PA, Marketing and Economical Operations department, baku deep Water jacket Plant named after H. Aliyev, gas Processing department, social development department, security department, Caspian sea Oil Fleet, Oil and Gas Construction Trust, Complex Drilling Works Trust, and Oilgasscientificresearchproject Institute according to Decree #97 dated 23 May, 2001 on Approval of personnel appraisal rules in Azerbaijan Republic of the Cabinet of Ministers of Azerbaijan Republic. In the last year 2604 persons passed personnel appraisal instead of 3140key employees and specialists planned for the sOCAR enterprises. 2536 persons who passed the personnel appraisal complied with their positions, but 28 persons did

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not. As the result of the personnel appraisal, category of 72 persons preferred, 10 persons were downgraded, 15 persons were dismissed. 8. On using of vacations and temporary loosing of skills 299 orders and 707 decisions of Personnel Management Committee were prepared and signed by the management in connection with using of vacations of the SOCAR Head office and nomenclature employees in 2010. The employees of SOCAR Head office got a vacation 580 times in 2010. 2 persons were on vacation according to education and creative work, 2 persons got social vacation. 3211 calendar days compensation was paid to 120 employees of the SOCAR Head office instead of not used vacation. The number of days of not used vacations is 38434 on the sOCAR enterprises and organizations to 01 january, 2010. This number is 3322 calendar days on the SOCAR Head office. The number of days of not used vacations was 81077 calendar days on company in 2010. 27845 persons did not attend work during 442534 calendar days because of temporary loosing skills on the sOCAR enterprises in 2010. These numbers were 29182 and 404729 in 2009. 151 persons on SOCAR Head office presented medical certificate and did not attend work by this reason during 1945 days. Works on preparing of SOCAR personnel. The works on training of sOCAR personnel were done in 2 directions: Professional improvement of the existing personnel; Training of new personnel. In 2010 sOCAR employees took part in long and short term training courses abroad and inside the country for professional improvement. These courses were organized by Training and Education Centre of social development department, well-known companies (PriceWaterHouseCoopers, Infosystem-link llC, gustav Kaeser, Open University of great britain and etc.) and state high education institutions (state Administration Academy, Military Academy of Army Forces of Azerbaijan Republic and etc.). The improvement courses covered 2577 executives and specialists of the sOCAR, including 756 executives, 1606 specialists and 215 officials. Out of them 88 persons, including

87

26 executives and 62 specialists improved their professional skills in the foreign countries. vocational training courses involved 2158 laborers. Out of them 489 persons passed vocational trainings and 1696 persons advanced in their skills. 82 persons out of the laborers attended the vocational trainings were retrained, 219 persons were studied sideline (associated) and 188 persons were retrained. 991 persons improved their professional level in the employment enterprises. Issue on training of highly qualified personnel in organization of accounting system related to transition to International Accounting standards of the sOCAR and its structural enterprises has become actual since 2008 and continued in 2009 and 2010. In this regard, there arranged courses at Training, Education and Certification Division of Social Development Department and Information Technologies and Communications department. Furthermore, the sOCAR employees participated in the courses covering subjects of audit, law, marketing, ecology and human resources. Total number of the employees who involved in improvement and vocational training courses was 4762 persons. It equals to approximate 5.9% of the SOCAR employees. For this purpose the works were started to improve stuff qualification system. Up to now sOCAR did not have internal normative document for organization improvement of professional skills. Old normative documents of the former soviet Union were used. The unit Regulations were drawn up in 2008 taking into account of SOCAR financial-technical possibilities. Now works are going on over second edition of the Regulations. sOCAR carries out the expedient works on qualifying of specialists, rejuvenating and upgrading of stuff potentials. For the purpose of organization of education of the qualified and potential local students in advanced universities of foreign countries at the sOCAR expense, there adopted scholarship Programme by the sOCAR in 2006. More than 50 young persons have opportunity to study abroad. 121 young persons have been involved in the Programme up to the present. Out of them 23 students graduated or continue their education in germany, 23 students in great britain, 12 students in the UsA, 15 students in France, 6 students in Turkey, 2 students

88

in Canada, 2 students in Holland, 3 students in Norway, 1 student in Malta, 1 student in sweden, 1 student in Austria, 1 student in Russia. At present, 37 persons study for bachelors degree and 45 persons for masters degree out of 82 students whose education is being financed. It should be noted that 39 students who participated in the scholarship Programm of the sOCAR within 2007, 2008, 2009 and 2010 successfully graduated from their high institutes and returned to their native land. 1 of these students is now on military service, 2 persons are out of program by different reasons, 36 persons have been employed by sOCAR. sOCAR closely cooperates with dAAd (german Academic Exchange service) organization of germany, Oklahoma and Texas Universities of the UsA and through TOTAl company of France with Paris Oil Institute and other universities for education of the students in abroad within the framework of the scholarship Programme. For this purpose, a contract was signed on 18.04.2008 between the sOCAR and dAAd. As the result, majority of the students enrolled in the scholarship Programme continue their education in germany. Thanks to cooperation with TOTAl company of France, 9 persons out of the students involved in the scholarship Programm of the sOCAR presently study in different universities of France, but 6 persons completed their education. The works in this line are ongoing and it is planned to increase the number of foreign universities to be involved in cooperation in the forthcoming years. The appropriate specialists of SOCAR head office together with Social Development department Health division Oil and Central Oil-Engineers Hospital created relations with graduates of Azerbaijan state Medical University and about 60 specialist-doctors of Turkey Universities to complete Treatment-diagnostic Centres with qualified stuff. The doctors graduated from specialist degree in Turkey have right to work in any health institution of the world. Out of them are specialist doctors learning radiation oncology, ENT and Head- neck surgery, pediatric surgery, pediatric neuropsychiatry, neurosurgery, eye diseases and surgery, cardiologist, anesthesiologist, pediatrist and etc. The SOCAR carries out regular works for training of young qualified oil-en-

89

gineers and encouragement of students to acquire modern scientific-practical knowledge on oil-gas industry. The sOCAR approved Regulations on sOCAR scholarship to the students of Azerbaijan Oil Academy of Azerbaijan Republic on 08.05.2005. sOCAR has assigned a scholarship to the amount of 40 manat to 20 students with high knowledge on selected faculties (geology, Oil and gas Field, Chemistry Technology, Oil Mechanics, Energetic, Automatization of Production Processes, Economy, International Economic Relations and management) since the first course. SOCAR created the Contest Commission on selection of the best between the students. due to the Amendments to the Regulations dated 25.09.2006 the students get their scholarship by individual plastic cards opened by sOCAR from any bank. In the report year Abadli Farid enrolled to Norway science and Technology University( Norway), oil engineer faculty, Abbasli Tural to varvik University (great britain),computer sciences and its application faculty, Aghayev Huseyn to Edinburgh University, economics faculty, jafarov bakhtiyar to Nancy University, formation engineering faculty (France), damirov Anvar to Newcastle University, operations management and logics faculty(great britain), guliyev Kamal to Paris Oil University, oil economy and management France), dadashov Ali to RWTH Aachen University, electric power engineering (germany), salmanov Orkhan to Aberdin University, oil and gas engineering faculty (great Britain), Khaligov Nijat to Sheffield University, computer engineering (Great Britain) who got sOCAR scholarship at bachelor degree of Azerbaijan Oil Academy. SOCAR undertook the financing of their education abroad. This initiative contributed, so the weight of high background graduates increased, their interest for scientific-practical knowledge strengthened in oil and gas sector. Recently the priorities of sOCAR changed, new higher education institutions were established for preparing of young personnel. The sOCAR order # 93 dated 20.06.2008 was abolished the above mentioned Regulations and the Regulations about granting of sOCAR scholarship to students was adopted. The sOCAR assigned a scholarship to the amount of 70 manat. The amount has been raised to 100 manat since November, 2010. The contests are declared 2 times in a year after completion of semester exams. since 2009 the admission registration has been conducting by electron form. The contest is conducted in 2 rounds. In the first round the logics of bidders is examined by SCSE (TQDK)

90

through test exams, the students achieving appropriate points pass the individual interview by special sOCAR commission. The contest course is expressed on http://www.socar.az/tehsil.html. 140 students who were successful by the results of 2009-2010 academic year, first semester gained SOCAR scholarship and 119 student by the results of 20092010 academic year, second semester. The employees employed by scholarship program were ensured the improvement of accommodation condition. For the same purpose Heydar Aliyev Baku Oil Refinery Plant assigned a monthly scholarship to 29 highly educated students for third and fourth courses on faculties (Chemistry-technology, Oil-mechanics, Energetics and Automation of production processes) selected since 2004-2005 academic year. When the students who have been scholar of the Plant, enrol in full-time attendance of the magistracy compliant to their qualifications they are still given scholarship. Baku Oil Refinery Plant keeps such students in special focus and support them in gaining production experience in the Plant, determining projects of course and design activities, compiling such activities under actual data of the Plant and employment of the scholarship holder students. 113 talented Azeri students studying in georgia have been allocated 100 lari scholarship since january 2010. One of the sOCAR activities is to render material and moral support to participation of pupils in international Olympiads who are studying in secondary schools. As the result of such support, the pupils who participated in varioussubject Olympiads in the past 5 years which held in Taiwan, Romania, China, Turkey, Macedonia, brazil and Kazakhstan returned to the country with total 49 medals, including 14 golden, 17 silver and 4 bronze medals. Furthermore, I International Environmental Protection Project Olympiad (INEPO) dedicated to ecology, natural disasters and extreme cases was held on 5-7 April 2007, II INEPO Olympiad was held on 4-5 April 2008, III INEPO Olympiad was held on 1-5 April 200by financial aid of the SOCAR. The pupils from more than 33 countries (UsA, Turkey, Russia, India, Nigeria, slovakia, Tajikistan, Ukraine, Taiwan and etc.) throughout the world and advanced schools of Azerbaijan took part in the last Olympiad. Azeri pupils won 23 medals, including 5 golden, 7silver and 11 bronze medals. Top management of the sOCAR holds continuous meetings with the talented pupils and presents gifts and souvenirs to pupils who distinguished

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in several international tournaments. This year for the first time Azeri students educated abroad and in Azerbaijan passed summer holiday practice during summer holiday on specialties of oil and gas, oil and gas facilities, drilling, geophysics, geology, automatization of processes, computer, pipelines, ecology, oil chemistry, chemistry engineering, energetics, economy, programmist, management of human resources. The programm was conducted to increase knowledge on oil industry, familiarize with real work condition, test theoretical knowledge in practice, obtain more thorough information about work quality in sOCAR. summer holiday practice continued 1 or two months dependant on student desire. due to programm terms the student was signed temporary contract and was employed as specialist of the lowest category. The trainee got salary due to his work hours and position. All privileges for sOCAR employees concerned to trainees, too. The students graduated from 2, 3, 4 courses of Bachelors, first and second courses of Masters participated in the programm. 298 students from 21 high education institutions inside the country and abroad addressed this program. 126 students from 13 high education institutions were admitted. summer holiday practice was organized in Azneft PA, Azerkimya PA, Complex drilling trust, Oil and gas Construction Trust, Caspian sea Oil Fleet, geophysics and geology department, H.Aliyev Baku Oil Refinery Plant, Azerneftyagh Oil Refinery Plant, Gas Processing Plant, Information Technologies and Communications department, Oil Pipelines department, Ecology department. Taking into account of the demand for young stuff in the energy sector sOCAR summer school was organized. 30 Azeri young studying on automatics, pipelines, ecology, energetics, geological exploration, law, oil and gas field, drilling, economy, chemistry engineering, oil mechanics, construction and getting good or high grade participated in summer School this year for the first time. SOCAR Summer School was held on 29 August- 6 september at the hotel Ramada situated on shikh beach. summer School covered the energy sector fields- geology-geophysics of oil and gas fields, well drilling, oil and gas production, transportation, storage, oil chemistry, ecological norms and alternative energy resources, economy of oil and gas production and refinery, oil and oil products sale. Everyday Summer School participants were lectured, seminars were conducted, and excursions were organized.

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sOCAR vice-presidents met the school participants every evening and answered their questions. The school caused the increase of sOCAR authority among the young. The electron polling confirmed this after Summer School. In 2007 the human resources training department created scholarship Programm division site was created (www.socar.az/tehsil.html) for relations with students and pupils inside and outside Azerbaijan, to answer their appeals in time. All information: programm terms, contests, applicants and scholars, the list of universities and specialties, history, photo album, the most asked questions and answers, contact information is covered there and permanently updated.

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XVIII. OCCUPATIONAL SAFETY

There carried out considerable works at the sOCAR enterprises in order to create healthy and safe working conditions, to upgrade production sites, facilities and work places in compliance with the terms of up-to-date standards and to prevent injuries of casualties, accidents and occupational diseases in reporting year. In 2010 SOCAR planned to allocate financial means of 12 196 572 manat for occupational safety actions, facilitating of hand labour, mechanizing of production processes, but spent 14 407 463 manat, this is 118,1 % of planned amount. The employees were provided by special clothes, shoes and other protective means, and in majority of enterprises complete usage of these clothes and means are achieved. 9.480.500 manat was spent for the deputy on occupational safety of chief special clothes, shoes and other protective means of employees during the year. For strengthening of labour protection measures, the vacancy of deputy chief on occupational safety was created at Azneft PA,Azerigas PA, Azerkimya PA, Oil and Gas Construction Trust, Complex drilling trust, Azerneftyagh Oil Refinery Plant, H.Aliyev Baku Oil Refinery Plant, Caspian Sea Oil Fleet, Geophysics and Geology department, H.Aliyev baku deep Water jacket Plant, Oil Pipelines department and the vacancy of deputy of the chief engineer on occupational safety was created at Information Technologies and Communications department and Oilgasscientificresearchproject nstitute where the number of employees is more than 500 by using of Article 223 of labour code. The labour condition was controlled in 63 organizations of 15 enterprises and more than 100 safety rules breach were detected and appropriate measures were took by permanent commission of labour Protection and safety department. Enlightenment, instruction and professional improvement of the employees was in the spotlight in the enterprises in order to create healthy and safe working conditions and to teach works safety rules to the employees. safety means were substituted with new ones and 22 lifeboats were bought, their installation was started, a contract was signed for purchasing of additional 27 boats. The special courses were conducted at training simulator centers of Training Centers on protection of human life offshore which was created under Caspian see Fleet of sOCAR and about 1860 persons were trained (including 191 persons at courses

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of labour protection, 531 persons at courses of training of specialists on lifeboats, ferries, not speedy boats). The development of the rules, standards and norms on safety of the labour in Azerbaijan and provision of the enterprises with them was realized. Technical safety rules in main oil pipelines and labour protection rules in geophysical researches carried out at oil and gas wells were redeveloped by scientific research institutes by the participation of the department. At the same time the rules over 4 topics are redeveloped by Azerbaijan State Labour Protection and Safety Techniques scientific research institute together with labour Protection and safety department of the company. The knowledge of 9327 engineer-technical workers was controlled at the departments and enterprises in the current year. 19 accidents happened at sOCAR enterprises connected with production in spite of taken measures. 4 of these accidents resulted by death. Number of the employees who were brought to administrative discipline totalled to 609 persons, including 295 persons who were reprimanded, 151persons were severely reprimanded with final warning, 2 persons were dismissed and 161persons were imposed a fine due to violation of occupational safety rules and norms.

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XIX. ECOLOGY
In 2010 which the President of the Azerbaijan Republic declared year of Ecology the number of projects were implemented for the purpose of eliminating of ecological problems connected with current activities of the structure divisions of the state Oil Company of Azerbaijan Republic and inherited from the past. The scope of works in eliminating of oil, drilling mud, water storage, technological equipments unfitted for exploitation and substituting of open land channels with closed concrete channels increased in the oil field areas. The corrosive oil pipelines were overhauled and substituted by new ones to prevent oil and formation water leakage and 1020 m open land channel was substituted by closed concrete channels. 38,5 ha contaminated lands were cleaned biologically in Bibiheybat and Siyazan fields, 18,2 ha area was cleaned from industrial and domestic wastes, 13,6ha artificial pools and swamp lands were dried and improved. The bioremediation works are carried out in 61 ha area of balakhanineftand Absheronneft OgPd named after H.z. Taghiyev. The recultivation documents of 44 ha area were compiled. Up to now 91996 trees, 12100 bushes and flower seedlings were planted, 1880 square meter gazon was laid out in restored lands. Additionally 52322 trees, 2630 bushes and flower seedlings, 1600 square meter gazon was laid out in administrative territories of other sOCAR divisions. The planted trees, bushes and grasses were agrotechnically tended in the report year. The ecological park was laid out in 9,3 ha area of OgPd named after H.z. Taghiyev. 40% of electric power for heating and illuminating of it will be provided due to alternative energy. 8,4 ha park expansion is planned, 200 thousand tree seedlings and bush flowers will be planted in the area to be recultivated. The park will be served for ecological enlightment of our society and young generation, holding of scientific-practical conference, seminar and forums. The monitoring was conducted at production objects of Azerikimya PA of sOCAR, offshore pier squares, platforms, onshore areas and oil refining plants in April of this year for provision of fully utilization of wastes, especially formation water and drilling mud and for achievement of principle zero waste to environment.

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2 cleaning equipments of 7100 cubic meter /day productivity were purchased from Us for cleaning of formation water produced from Neft Dashlari and 28 May OGPD fields and injection them to underground horizons and for installation at oil collection point of Neft Dashlari. 128 wells unfitted to exploitation were abandoned and daily production of production water decreased 1400 cubic meter. The cleaning of equipments and facilities, huge metal constructions of expired operation period continued. It must be noted that special attention was paid to reasonable use of natural resources. so, reverse osmosis of 300 and 500cubic meter/day was installed for safe potable water transported to the fields by the vessels for desalination of sea water at Chilov island and Neft dashlary OgPd. The project estimate documents are prepared for installation of such equipments at Neft dashlary, 28 May, N.Narimanov and Absheronneft OgPds. The biological cleaning plants of 500 and 400 cubic meter/day power were constructed at Chilov island and Neft dashlary OgPd to reuse of cleaned domestic discharges. 18 mln. cubic meter of industrial waste water was deeply cleaned and reused, 22 thousand cubic meter of oil sludge was reprocessed and decontaminate and reconstruction of aeration system of biological cleaning equipments was going on.

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Bulvar-1 vessel with specific equipments was purchased to purify domestic wastes of different kind and oil slicks in baku bay aquatorium. Purchase of more huge vessels will be taken into account because of their effectiveness. Ecological measurement points were put into operation in gum adasi, balakhanineft, bibiheybat OgPds to control contaminants vented into the air by vehicles and 5479 vehicles were examined. These measurement points passed accreditation at the state Committee on standardization, metrology and patent of Azerbaijan Republic. Wastes management plan was confirmed this year. The plan takes into account grouping due to wastes type and toxicity degree and their reusing possibility. For this purpose US M-LLC Company which won the tender held on the basis of Grant Agreement signed between Trade and development Agency of UsA will present feasibility study for reconstruction of existing Waste Point in garadagh district.

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XX. TRANSPORTATION
a) Vehicles 6243automobiles and specific machinery existed at balance of SOCAR departments and enterprises up to 01.01.2011. Out of them 3311 work with auto-petrol, 2691 with diesel, 10 with electric power and 231 are trailers. Classification of motor-vehicle transport and specific machinery of the SOCAR departments and enterprises is shown in the following table:
Table XX-1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Name of enterprises
Azneft PA Azerigaz PA Azerikimya PA geophysics and geology dep. Oil Pipelines department. Marketing and Economical Operations depart. baku deep Water jacket Plant named after H.Aliyev Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev social development department security department Information Technologies and Communication Ecology department Complex drilling Works Trust Oil and gas Construction Trust Caspian sea Oil Fleet gas processing Plant Total on sOCAR

car 535 60 345 57 103 13 28 51 73 0 73 22 24 76 113 45 20 1638

bus 226 16 25 17 16 2 30 11 18 0 14 4 5 78 54 27 10 553

M/ bus 50 5 7 5 8 1 2 9 5 0 4 1 0 4 12 6 1 120

Truck 687 43 233 61 32 9 31 38 38 0 3 13 7 181 224 19 12 1631

Specific machinery 547 34 100 124 32 5 18 34 28 3 3 2 0 101 66 5 18 1120

Tractors 384 59 131 3 14 7 49 14 12 0 0 3 3 82 183 0 6 950

Trailers 61 10 31 6 8 2 10 11 4 0 0 0 0 47 40 0 1 231

Total 2490 227 872 273 213 39 168 168 178 3 97 45 39 569 692 102 68 6243

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There carried out considerable works on effective usage of vehicles, specific machinery and fuel-lubricants in reporting year. spare parts were timely delivered in order to ensure technical availability of vehicles and specific machinery and as the result, maintenance and repair works for them were fulfilled with high quality. Therefore, usage coefficient of park for vehicles and specific machineries totalled to 0.70 in 2010. 994 motor-automobiles and specific machinery standard operation of which expired, became obsolescent and old-fashioned and are not economically favorable to be operated and repaired, were written off and 727 new vehicles and specific machinery was purchased and put into service for sOCAR during 12 months of 2010. List of vehicles and specific machinery for the SOCAR enterprises written-off and newly purchased in 2010 is shown in the following table:
Table XX-2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Name of enterprises Azneft PA Azerigaz PA Azerikimya PA geophysics and geology dep. Oil Pipelines department. Marketing and Economical Operations depart. baku deep Water jacket Plant named after H.Aliyev Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev security department Information Technologies and Communication Ecology department Complex drilling Works Trust Oil and gas Construction Trust Caspian sea Oil Fleet Oilgasscientuficresearchproject Institute gas processing Plant Total on sOCAR Purchased in 2010 243 44 243 17 14 0 1 1 7 8 9 7 46 67 12 0 8 727 Written off 2010 437 76 181 19 34 11 11 27 21 6 3 0 113 26 18 3 8 994

100

17

According to instruction of the sOCAR administration the renewal of old vehicles and specific machineries is implemented gradually step by step taking into consideration the presence of old vehicles and specific machineries at balance of the SOCAR enterprises. There carried out certain works on usage of fuel-lubricants within reporting year. 3247.1522 tons of auto petrol and 13467.994 tons of diesel fuel were saved during 12 months of 2010 as the result of taken measures. As it is evident from the tables less fuel than allocated fuel fund for 2010 were used, as all departments and enterprises used the fuel economically.
Table XX-3
Auto petrol( ton) Name of enterprises 01.01.10 residual 204.047 19.233 31.909 36.6 0 0 20.148 1.179 1.0 0 1.249 0.36 0.24 36.1 73.854 1.077 0 0,006 0 427,002 4 quarters fund 11166.125 685.9 1684.0 566.44 504.0 35.36 375.74 332.426 480.4 1.0 349.6 111.0 88.0 2478.6 1847.64 516.5 0 0 210,0 21432,731 12 months fund 11166.125 685.9 1684.0 566.44 504.0 35.36 375.74 332.426 480.4 1.0 349.6 111.0 88.0 2478.6 1847.64 516.5 0 0 210,0 21432,731 Purchased in 12 months 9978.169 343.45 1424.66 581.54 400.57 34.383 316.641 310.941 395.8 1.0 325.337 98.224 77.265 1468.6 1830.511 430,904 0 0,035 171,8 18189,83 spending of 12 months 9971.281 360.66 1410.6098 578.29 399.57 34.383 319.003 311.04 395.9 0.07 325.252 98.344 77.249 1457.8 1844.253 430,736 0 0,041 171,1 18185,5788 spending +, - fund -1194.844 -325.24 -237.3902 11.85 -104.43 -0.977 -56.737 -21.389 -84.5 -0.93 -24.348 -12.656 -10.751 -1020.8 -3.387 -85,764 0 0,041 -38,9 -3247,1522 01.01.11. residual 203.334 2.023 45.802 20.05 1.0 0 17.786 1.083 0.9 0.93 1.334 0.24 0.256 46.9 60.112 1,245 0 0 0,7 403,695

Azneft PA Azerigaz PA Azerikimya PA geophysics and geology dep. Oil Pipelines department. Marketing and Economical Operations depart. baku deep Water jacket Plant named after H.Aliyev Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev social development dep. security department Information Technologies and Communication Ecology department Complex drilling Works Trust Oilgasscientufucresearchproject Institute Caspian sea Oil Fleet Oilgasscientificresearchproject Institute gas Export dep. gas Processing Plant Total on sOCAR

101

Table XX-4 diesel fuel (ton) Name of enterprises 01.01.2010 residual 889,8 12,577 51,026 52,73 0,065 0 9,909 5,815 9,1 13,755 0,563 0,63 8,663 689,7 102,138 5563,425 0 0,497 0 7410,393 4 quarters fund 18197,085 968,6 1769,0 731,19 708,9 102,2 644,62 316,692 638,5 137,0 139,0 66,1 168,8 16778,3 6053,812 39565,4 1,0 6,17 235,0 87227,369 12 months fund 18197,085 968,6 1769,0 731,19 708,9 102,2 644,62 316,692 638,5 137,0 139,0 66,1 168,8 16778,3 6053,812 39565,4 1,0 6,17 235,0 87227,369 Purchased in 12 months 15213,949 374,7 1149,907 700,98 705,378 82,993 609,007 294,699 391,5 113,074 139,035 61,5 129,889 12982,0 603,806 32894,31 0 6,267 185,4 72065,344 spending of 12 months 15105,803 381,357 1138,706 677,82 704,293 82,993 596,146 295,599 393,7 97,469 139,002 60,63 137,896 13164,7 5994,511 34598,007 0 6,043 184,7 73759,375 spending +, -fund -309128 -587,24 -630,29 -53,37 -4,61 -19,21 -48,47 -21,09 -244,80 -39,53 0,002 -5,47 -30,90 -3613,60 -59,30 -4967,39 -1,0 -0,13 -50,30 -13467,994 01.01.11. residual 918,334 5,87 62,101 63,79 1,15 0 22,77 4,915 6,9 29,36 0,596 1,5 0,656 507,0 138,433 3859,728 0 0,721 0,7 5624,524

Azneft PA Azerikimya PA Azerigaz PA geophysics and geology dep. Oil Pipelines department. Marketing and Economical Operations depart. baku deep Water jacket Plant named after H.Aliyev Azerneftyagh Oil Refinery Plant Baku Oil Refinery Plant named after H.Aliyev social development dep. security department Information Technologies and Communication Ecology department Complex drilling Works Trust Oil and gas Construction trust Caspian Sea oil fleet. Oilgasscientificresearchproject Institute gas Export dep. gas Processing Plant Total on sOCAR

102

Appropriate instructions were given to Azneft PA, Azerikimya PA, Azerigaz PA and Transport means and specific machinery division of Geophysics and Geology department to remove defects in the enterprises, while investigating usage of transportation and fuel-lubricants in the report year. The state of 994 automobiles was investigated and represented to be written off and the opinions were prepared for their writing off during the year. Moreover as distinct from last years, appeals from enterprises about purchasing of transport means and specific machinery were investigated by us, then the offers have been given to the administration for their purchase. Obtaining of all reports, offers and opinions is realized by the e- mail for increasing of efficiency. The following structural changes were made in management of transport means by appropriate order and decrees of sOCAR in the report year: 1. Transportation department was created as the organization not having the legal entity status on the Material Technical basis of Transportation workshop of Oil pipelines Department according to the order # 41 dated 17 August, 2010. 2. Transportation and specific machinery Department was created as the organization not having the legal entity status under Azerikimya PA according to the order # 53 dated 28 August, 2010. 3. some cars which were at the balance of baku deep Water jacket Plant named after H.Aliyev, Information Technologies and Communication, Caspian Sea oil fleet, Oil and Gas Construction Trust, Ecology Department, Azerneftyagh Oil Refinery Plant, gas Processing Plant were transferred to the balance of Transportation department of Azneft PA according to the order # 129 S, dated 29 November, 2010. 4. Transportation workshops Absheronneft and N.z.TaghiyevOgPds of Azneft PA were transferred to the balance of Transportation department of AzneftPA, according to the order # 58 of SOCAR, dated 16 June, 2010 Adequate actions plan is drawn up and implemented at the related points in order to prevent road accidents.

103

b) Sea transport The necessary help was rendered by department of sea Transport together with sOCAR departments and enterprises in 2010 in connection with oil and gas production, construction, geological, technological, diving works. There existed 275 floating crafts (ships, floating drilling rigs, flat-bottom boats and 3 floating shipyards, 4 floating workshops) at balance of the SOCAR departments and enterprises up to 01.01.2010 We may show them as follows:
Table XX-5 s.s Name of enterprises Number of ships being at balance (pieces) 253 Note 4 floating workshops and 3 floating shipyards were taken into account service boat RK-862 6 Khazar type, 3 shelf type in the peninsula Flat-bottom boats Flat-bottom boats 275

Caspian sea Oil Fleet . Aliyev baku deep Water jacket Plant Complex drilling Works Trust Azneft PA "Oil & gas Construction" Trust Total :

2 3 4 5

1 9 8 4

The suggestions about writing off the ships which physically and morally obsolescent, not economically favorable and the operation of which requires the great risk and were looked through by sOCAR and commented adequately. 12 floating crafts were written off the balance of the SOCAR enterprises in 2010, including 11 vessels were written off the balance of Caspian sea Oil Fleet and Absheron floating drilling rig off the balance of Geology and Geophysics Department. bulvar-1 ecological ship was accepted to the balance of Caspian sea Oil Fleet. There existed 253 ships of various types at the balance of Caspian sea Oil Fleet at overall lifting capacity of 82 323,6 tons and 411 143,2 horse power to 01 january, 2011.

104

Out of 253 ships 196 ships (77,5 %) in operation, (9 ships are in lease), 38 ships (15,0 %) in repair, 11 ships (4,3%) in repair expectancy and 8 ships (3.2%) were in write-off expectancy. The preliminary requires for diesel fuel and lubricant materials were investigated by the department specialists and offers were made. Cooperation with foreign companies The reports on cooperation with foreign companies, suggestions about creation of joint ventures or alliances were controlled. There gained profit to the amount of 15 874 159,0 thousand manat under the Contracts signed with foreign companies and joint ventures within 2010. It constitutes 16,2 % of total profit on the Fleet. The profit was 12 558 662,0 manat on this area in the same period of last year, i.e. the profit was 3 315 497,0 manat more than in 2009. The operating companies (AIOC and bP-shah -deniz) and their contractors (bUE Caspian, saipem, CMs and etc.) mainly working for Azerbaijan sector of the Caspian sea were rendered services in 2010. There proceeded services to foreign oil companies working for Azerbaijan sector of the Caspian sea through Caspian sea Oil Fleet/ bUE Alliance. 3 modern supplying tows were brought to Azerbaijan Republic, they were involved in the work at Azeri-Chirag-Gunashli and Shah- Deniz fields. According to Alliance Contract dated 20.11.200 between sOCAR and saipem s.p.A. the audit, technical service, repairing works, submarine technical operations on transportation and installation project were fulfilled during 2010. According to Alliance Contract signed between sOCAR and Caspian Marine services (UK) ltd. 31 ships of different type of Caspian sea Oil Fleet were involved for short term and long term project operations in Azerbaijan and other sectors of Caspian sea. Out of them were Ac.T.smayilov, I.Huseynov, Azerbaijan and general A.shikhlinski ships. 5 passenger ships of Alliance were given to the usage of customers. Repair works The help was rendered by the department for the drawing up of repairing programm for preventive maintenance and overhaul, repairing at shipyard at the

105

plants of outside organizations if it is impossible at shipyard by holding tenders. On the eve of repair, checking was held by specialists of the department. Making of offers and commenting on building of new ships, repairing, modernizing of the existing ships were provided There implemented ship repair works to the total amount of 30 955 330,41 manat in 2010, including repair works of 17 653 975,58 manat were done in sOCAR enterprises (16 165 265,0 manat at shipyard, 1 488 710,58 manat at repair workshops). Repair works of 13 301 354,83 manat were carried out in other organizations. The repair works of 15 272 612,96 manat were done in the enterprises of the Fleet in 2009. Out of them 13 846 492,0 manat were done at shipyard, 1 426 120,96 manat at repair workshops. Repair works of 9 429 565,42 manat were carried out in other organizations. 79 ships were repaired in 2010 (94 ships in 21009). Marine safety service Proper actions are assumed by Caspian sea Oil Fleet in order to ensure safe operation of ships and vessels, especially life-saving, urgent elimination of causes of the accidents, as well as prevention of marine environmental pollution on the basis of terms and provisions stipulated in International conventions adopted by International Maritime Organization and national standards and norms. 4 accidents occurred in the Fleet in 2010, this figure was 5 in 2009. guilty persons were dismissed, downgraded and assigned to down group ships. As the result of Automatic Identification System installation for the purpose of remote

106

recognition and observation of Caspian sea Oil Fleet ships, the number of ships observed through the monitor at the dispatcher point amounted from 85 to 89 in 2009 on the basis of Instruction on mobile marine communication and satellite communication services. According to the requirements of ship and Port means security Codex remote recognition and observation system was installed in 24 ships and they are observed by Morsvyazsputnik Federal state Unitary Enterprise monitoring centre of Russian Federation. Occupational safety and health The department specialists took part in investigation on occupational safety breach, diving and safe operation of ships and made adequate offers. There conducted 416 inspections in ships and vessels of the Fleet and onshore facilities in 2010. The knowledge and skills of 1049 engineers and technicians was tested within the year. One accident took place at Caspian sea Oil Fleet in current year. One accident took place in 2009. There allocated an amount of 1 123 500,0 manat to nomenclature actions planned for occupational safety and labour protection, but actually 1 127 020 manat were spent. Environmental protection The supervision of fulfilment of the ecological measures always was controlled for prevention of contamination of environment at ship and onshore objects and defects were removed by specialists with the help of department. The following works were carried out for environmental protection by Caspian sea Oil Fleet within the year: - There made lead sealing and certification works in emergency dewatering system and other drain valves of 63 undocked ships (in 2009 this figure was 85) ; - There carried out installation and expansion of domestic sewerage water vessels in the ships ofAtlet-5, Atlet-24,Aura, Nercha, Neftegaz-64,E.Xaligov - There erected tank upon closed sewage and fan systems in a ship with low water capacity. - Collection and handing-over of underfloor-produced waters contaminated with petroleum products in ships, sewage waters in offshore facilities, scavenge oil, dry refuses, oily rag and food waste to necessary points were ensured according to norms.

107

Diving and submarine operations In time conduction of diving services, purchase, test and application of new submarine technique was controlled by the department specialists. The application of the normative documents regulating the diving services was provided. The following works were carried out on diving and submarine operations in 2010: diving service for hydraulic structure water development works related to uninterrupted supply of oil production; repair of submarine trunk line, mining pipes and pipelines among deepwater offshore platform diving survey for fixed offshore platforms of hydraulic structure; troubleshooting of marine pollution sources; scouringout and study of hulls, other underbody bottoms and rudder-propellers screws; organization of salvage and rescue service in offshore facilities; pile reinforcement and study of submarine pipelines, vertical supports and down pipes, electric cables, trunks, communications supports and open wells; underwater study of metal structures, submarine pipelines, vertical supports and down pipes, electric cables, trunks with submersibles (HsA). Rescue Training Centre high performance is achieved accordingly by arrangement of courses responding up-to-date requirements for ensure life-saving of sailors (including sea oil-engineers) employed by the sOCAR enterprises, also by companies which are working as a contract partner with the sOCAR in compliance to international standards and provisions of International Maritime Convention in the Rescue Training Centre which established in the structure of Caspian sea Oil Fleet. The following works were fulfilled by the Training Centre: Totally 1903 persons took part in the courses in 2010 (taking into account oil industry workers and foreign companies), including: Training of ship crew - 275 persons (NBJS); International code on safety management;- 269 persons (MKUB); International code on security and protection of ships and port facilities 109 persons (OSPS); Extended course on firefighting of ship steering crew 176 persons (SOLAS); Safety communication system during global sea disasters 142 persons (QMSSB); Training courses on lifeboats and ferries -531 (XQSHK); New courses organized in 2010: - divers training,

108

Rendering of first aid, Manage of speedy boats, Preparing of ship drivers in electron cartography simulator Preparing of fire fighting simulator and appropriate training courses

Taking of the following measures by the department is necessary in 2011: - Taking measures on cutting off financial debts of Caspian Sea Oil Fleet and decreasing of prime cost; - Taking of strategical development measures of sOCAR till 2025 by the order #111 dated 30 August, 2011 of SOCAR - Continuing of fulfilment of task on risk management by the order # 91dated 12 july, 2008 - Continuing of contribution with foreign companies and alliances - Continuing of training in accordance with International standards and solas-74 Convention of International sea Organization. - Closed tank design in Training centre and starting of construction; - Continuing of adequate measures at ships and onshore objects for contamination of environment; - Continuing of taking measures on reasonable usage of fuel and lubricant materials and electric power. - strengthening of ship operations of sOCAR enterprises and departments. - Taking of appropriate measures to prevent breach of occupational safety rules - starting of preparation works in connection with autumn-winter season in 20112012 - Continuing of repairing works on schedule in shipyard. - Taking the measures on preventing of ships the operation period of which expired and substitution of them with other ones. - The purchase of new Air Mobile diving Complex to provide the submarine diving works at gunashli platform in time. - Providing of new Unmanned submarine diving Apparatus operation installed in Tabriz Khalilbayli ship. In 2010 the following works were done in sOCAR commerce delivery: The delivery of crude oil and oil products of sOCAR was done according to the schedule on the basis of the Contract # 237 dated 2 May, 2007 between SOCAR and Palmali International Holding Company limited. The delivery of crude oil and oil products of 3 000- 300 000 tons dead weight was provided by ships of different

109

Table XX-6

Services in 2010 were as follows Number of booked trips Number of actual trips Es-155 91 82 76 83 106 104 137 145 134 107 86 101 1 252 super Puma 4 31 36 4 38 4 36 40 30 223 M-8 201 190 214 225 206 215 189 201 217 205 181 184 2 428

date january February March April May june july August september October November december Total

Es-155 141 134 97 54 71 98 124 147 123 116 125 149 1 379

super Puma

MI-8 298 280 304 307 308 241 222 213 215 222 225 242 3 077

Number of passengers

weight (ton) 60,4 69,9 73,6 70,4 77,5 82,1 105,9 67,7 78,3 78,8 69,9 78,1 912,6

4 20 2 6 6 6 10 54

4 043 4 138 4 467 4 053 3 865 4 018 4 256 4 063 4 705 4 799 4 083 4 079 50 569

type to the safe ports. The operation coordination and control was carried out by Marketing and Economical Operations department of sOCAR. The helicopter services were rendered on the contracts signed between sOCAR and sW Helicopter services llC offshore platforms, Chilov island and Neft dashlary. Mainly helicopters of M-8, ES-155 and Super Puma type served to them. The daily orders were prepared by appropriate sOCAR organizations (Azneft PA, Complex drilling Works Trust) and dependant on air condition and existence of adequate helicopters the services were rendered. due to the contract between sOCAR and dassault Aviation about the purchase of Falcon 900 EX aircraft, its custody transfer was fulfilled on March, 2010. On the basis of the contract, Falcon 900 EX and Challenger 300 aircrafts of SOCAR managed by Palmali Hava Tashimachiligi Ash. will fly for the purposes of the company. The flies are coordinated by Commerce delivery department and the expenditures are controlled.

110

The negotiations were hold and consent was achieved between SOCAR (65% interests), Azerbaijan Investment Company (25%) and Singapore Keppel Singmarine Pte Ltd (Keppel) company (10 %) about construction of new shipyard in Azerbaijan. The contract was signed between shareholders on december 2010. The operator of the project is Keppel. Commerce delivery department takes part in realizations of the project by sOCAR. The feasibility study and business plan of the project was completed. The laying of the foundation ceremony was hold on March, 2010. The preliminary tender documents were drawn up for project works. Currently the tender processes are going on. The rocks and land in the territory where the plant will be constructed was analysed. besides, the processes happening in logistics of the world are observed and adequate analysis is carried out. The offers were made on creation of cooperation with foreign firms, Joint ventures and Alliances, the reports on activities of joint ventures and Alliances were controlled and the coordination of their activities was fulfilled by the department.

111

XXI. SOCIAL ISSUES

2,5 mln. square meter apartment fund (including 73 hostels), 40 child cares, Training and Educational Centre, 16 cultural centres and clubs, 15 sports complexes, hospital of 450 beds, 10 Cure-diagnostics Centers with 20 beds (lankaran, shirvan, zagatala, gabala, barda, gazakh, ganja, guba, shamakhi, jalilabad), Hygienic and epidemiology Centre, 15 recreational areas and other social objects are under sOCAR subordination. According to social-development Program for 2007-2010 years to improve social welfare of employees working at departments and enterprises of the state Oil Company of Azerbaijan Republic which approved by President of the sOCAR arrangements on 100 clauses were taken completely and on 64 clauses partially from overall 224 clauses to be executed and preparatory procedures are ongoing for commencement of other necessary works. so that New canteens in 18 sites were constructed to provide the employees with hot meal, the canteens were overhauled and provided by modern equipments in 56 sites. there purchased and erected 129 camp cars equipped with new facilities for improvement of living and household conditions of the employees working at special offshore jackets, trestles and other ashore production sites. The camp cars in some sites were overhauled and supplied with new domestic appliances. 6 hostels (24560 sq.m) at balance of Neft dashlari OgPd were overhauled and supplied with modern equipment. As a result of the overhaul the number of dwelling rooms totalled 1260 from 965 and 2320 bed spaces were created, additional 890 persons were provided with living space. Overhaul works are going on in 9-storey men block. Repair works are ongoing and air conditionings were installed, accessors were substituted with new ones in sanitary facilities at 6 deep-Water Offshore Platforms.

112

Construction works are ongoing in dwelling block of deep Water Offshore Platform # 10, new office building, hostel and guest house at Chilov island, 13 container refrigerators were installed. 2426 employees were provided with free daily qualitative and high calorie hot meal by shift work method at Deep Water Offshore Platforms of Gunashli field, Umid structure Deep Water Offshore Stationary Platform #1, compressor stations of 28 May OgPd Neft dashlary site. New modern office buildings were constructed for 5 departments, the office buildings of 9 departments were overhauled, the overhaul works are ongoing in 4 departments. - the shower rooms were constructed, repairing works were done in dressing rooms, new wardrobes were supplied at 28 workshops and sites. About 200 water dispensers were installed at workshops and sites.

113

- 3 medical points were overhauled, the new one was created due to the demands and they were provided by equipment. The divisions of first aid department of Central Oil-Engineers Hospital were created at Azerineftkimya PA and baku deep water jackets Plant named after H.Aliyev. - 36 buses were purchased to transport the employees from and to work places comfortably. The repairing works on 8389,5 m2 slating of domestic building, 32452,5 m2 roofing felt, 8389 p/m heating line, 784p/m waste water lines of sOCAR domestic buildings were done. The capital and current repair of domestic buildings, hostels, office buildings and other social objects, maintenance of electric boards of lifts, substitu-

114

tion of old cable lines with new ones, repair of electrical angle protectors, pumps of electric engines, erection of counters were carried out. Currently 15 stationary departments, policlinics, Neft dashlary Medical sanitary division, 8 doctor stations, 27 feldshers stations function under Central OilEngineers Hospital. 1228 professional employees care for the health of about 80 thousand oil industry workers, 69 persons took at dialysis department of Central Oil-Engineers Hospital. The angiographic examination was carried out for 399 persons, setting of cylinder and stands for 75 persons and operation of open heart was carried out in 59 persons at Central Oil-Engineers Hospital by sOCAR free of charge. The kidney transfer operation was carried out in this hospital for the first time. Up to now, 13 analogical operations were carried out at Central Oil-Engineers Hospital. lankaran, shirvan, zagatala, gabala, barda, gazakh, ganja, guba, shamakhi,

115

jalilabad Cure-diagnostic Centres renders high quality services for the people of those regions. Here 774 patients took hemodialysis. About 50 thousand children took part and got presents on New year and other holidays organized at 15 cultural centers the number of employees of which is 380 persons and the number of seats is 3700 and at clubs of sOCAR. About 3561 children are brought up in kindergartens under sOCAR, out of them 1761 persons are children of oil industry workers, 1000 privileged persons, 800 persons of non-oil sector workers. Capital and current repair was carried out at 12 kindergartens in 2010. About 4000 juveniles and young, also 1000 oil-industry workers are rendered physical training and sport services by 168 professional trainers over 28 sports in 10 fitness machines at Neftchi Sports-Health Centre of SOCAR Social Development department.

116

In 2010 the sportsmen of the centre took part in more than 200 competitions of different type, won 1582 medals, out of them 564 are gold, 419 are silver, 599 are bronze. As the result of high achievements, Neftchi sports-Health Centre was deserved the title of The best sport society of the year four years in sequence (2007-20082009-2010) by The Ministry of youth and sport. For efficient organization of rest of the employees and their family members, there arranged 2-3 day and multi-day recreations and rests for approximately 3 thousand persons at geophysic and Nabran recreation zone and about 6,3 thousand oil-engineers and their family members at other leisure zones. besides 980 oil industry workers were provided by sanatorium-resort therapy permits. In accordance with Regulations on rendering financial aid to employees of the State Oil Company of Azerbaijan Republic, the employees were rendered financial

117

aid and martyrs families and disabled war veterans were always paid attention in 2010. On the occasion of holidays there rendered food aid to the extent of 844,2 thousand manat to 22 070 internally displaced families in newly settled dordyol 1,2 and Tazakand villages in the territory of Agdam region, in Ahmadalilar, Mirzanaghilly and gazakhlar of Fizuli region under auspice of sOCAR and to 2100 internally displaced people in sumgait city and 3600 holiday presents were given to the children of internally displaced families by the de-

cree of President of Azerbaijan Republic in 2010. About 15 thousand internally displaced people are cared, who resettled in the buildings and social facilities being at the balance of enterprises and organizational structures within the sOCAR and 3006 persons out of them were provided with job places.

118

XXII. FINANCE

119

Table XXII-1 Note AssETs Current assets Cash and cash equivalents Restricted cash Trade and other receivables Corporate income tax prepayments Inventories Other current financial assets Total current assets Non-current assets Property, plant and equipment goodwill Intangible assets other than goodwill Investments in jointly controlled entities Investments in associates loans receivable from jointly controlled entities deposits deferred tax asset Other long-term financial assets Other long-term assets Total non-current assets TOTAl AssETs EQUITy Charter capital Additional-paid-in-capital Retained earnings Cumulative translation differences Equity attributable to equity holders of the group Non-controlling interest TOTAl EQUITy 27 27 14 36 15 16 17 18 9 33 13 12 8 9 10 11 13 31 december 2010 31 december 2009

1,000,161 617,793 2,405,691 26,581 808,572 12,312 4,871,110 8,244,627 123,448 499,813 248,870 351,085 280,259 399,011 408,972 79,148 220,640 10,855,873 15,726,983 632,732 236,526 6,691,653 (105,095) 7,455,816 704,279 8,160,095

773,506 53,844 2,110,644 28,921 707,458 7,178 3,681,551 7,946,556 106,905 521,237 103,061 315,353 311,891 873,169 645,623 74,068 254,147 11,152,010 14,833,561 622,726 6,778,784 (143,258) 7,258,252 782,809 8,041,061

120

Table XXII-2 Note 31 December 2010 31 December 2009

LIABILITIES Current liabilities Trade and other payables short-term and current portion of long-term borrowings Corporate income tax payable Other taxes payable Other provisions for liabilities and charges deferred acquisition consideration payable 21 23 26 19 20 2,445,829 996,832 90,892 190,233 199,077 272,935 2,087,755 388,080 102,503 187,295 102,292 36,687

Total current liabilities

4,195,798

2,904,612

Non-current liabilities long-term borrowings deferred acquisition consideration payable Asset retirement obligations Other provisions for liabilities and charges deferred income deferred tax liability Other non-current liabilities 20 26 22 23 24 33 25 2,062,844 324,632 282,194 101,183 509,140 91,097 2,463,894 272,267 170,727 356,506 105,778 478,027 40,689

Total non-current liabilities

3,371,090

3,887,888

TOTAL LIABILITIES

7,566,888

6,792,500

TOTAL LIABILITIES AND EQUITY

15,726,983

14,833,561

121

Table XXII-3 Note Revenue Cost of sales Gross profit distribution expenses general and administrative expenses losses on disposal of property, plant and equipment social expenses Exploration and evaluation expenses Research and development Other operating expenses Other operating income Operating profit Finance income Finance costs Foreign exchange losses, net share of result of jointly controlled entities share of result of associates loss on disposal of joint ventures and associates Profit before income tax Income tax expense Profit for the year Other comprehensive income: Currency translation differences Total comprehensive income for the year Profit is attributable to: Equity holders of the group Non-controlling interest Total comprehensive income attributable to: Equity holders of the group Non-controlling interest (16,363) (17,771) 875,807 890,307 3,271 893,578 862,670 13,137 875,807 33 31 32 16 17 29 29 29 29 29 30 28 29 2010 5,527,265 (3,293,415) 2,233,850 (198,031) (302,687) (23,915) (199,904) (6,742) (21,917) (326,270) 178,578 1,332,962 67,175 (175,191) (91,510) 6,390 99,080 (902) 1,238,004 (582,264) 655,740 2009 4,195,981 (2,078,209) 2,117,772 (155,230) (229,871) (8,511) (159,479) (11,298) (15,279) (313,883) 204,708 1,428,929 67,678 (163,211) (958) (12,887) 89,854 (40,062) 1,369,343 (475,765) 893,578

639,377 670,987 (15,247) 655,740 709,150 (69,773) 639,377

122

Table XXII-4
Attributable to equity holders of the parent Note Balance at 1 January 2009 Profit for the year
Other comprehensive income / (loss)

Additionalpaid-incapital

Charter capital 622,726 -

Retained earnings 6,432,136 890,307

-

Currency

Total

Noncontrolling interest 747,045 3,271

9,866

Total equity 7,686,286 893,578

(17,771)

(115,621) (27,637)

6,939,241 890,307
(27,637)

Total comprehensive income / (loss) for 2009 Acquisition of noncontrolling interest in subsidiary Acquisition of subsidiary Increase in charter capital of subsidiary distribution to the government Balance at 31 December 2009
Profit for the year Other comprehensive income

890,307

(27,637)

862,670

13,137

875,807

36 27 -

622,726
-

(257,621) (286,038) 6,778,784

670,987 -

(143,258)
38,163

(257,621) (286,038) 7,258,252

670,987 38,163

(6,327) 28,954 782,809

(15,247) (54,526)

(6,327) (257,621) 28,954 (286,038) 8,041,061

655,740 (16,363)

Total comprehensive income / (loss) for 2010 Acquisition of subsidiary Increase in charter capital distribution to the government dividends declared by subsidiary Balance at 31 December 2010 36 27 27

670,987

38,163

709,150

(69,773)

639,377

236,526 -

10,006 -

(228,356) (114,060) (415,702) -

(218,350) 122,466 (415,702) -

(8,757)

(218,350) 122,466 (415,702) (8,757)

236,526

632,732

6,691,653

(105,095)

7,455,816

704,279

8,160,095

123

Table XXII-5
Note Cash flows from operating activities Profit before income tax Adjustments for: depreciation of property, plant and equipment Amortisation on intangible assets Impairment of property, plant and equipment gain on release of provision for trade and other receivables Change in provisions Change in asset retirement obligations recognised in profit and loss losses on disposals of property, plant and equipment losses on de-recognition of jointly controlled entities Finance income Finance costs Foreign exchange rate differences share of result of associates and joint ventures Other non-cash transactions Operating cash flows before working capital changes decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in trade and other payables Increase/(decrease) in taxes payable decrease in provisions Increase in other assets Cash generated from operations Income taxes paid Interest paid Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary, net of cash acquired Purchase of property, plant and equipment Purchase of intangible assets Contribution in associates and jointly controlled entities deposits Financing provided to third parties Interest received dividends received Net cash used in investing activities Cash flows from financing activities Proceeds from long-term borrowings Proceeds from short-term borrowings Repayment of long-term borrowings 16 31 32 16,17 29 15 14 29 1,238,004 649,641 16,006 360,047 (288,435) 53,240 110,565 66,915 (67,175) 175,191 (34,236) (105,470) (38,946) 2,135,347 152,500 (51,421) 103,335 4,912 (64,820) (40,844) 2,239,009 (341,594) (106,356) 1,791,059 5,393 (1,419,838) (10,577) (42,942) (104,320) (15,459) 55,125 63,440 (1,469,178) 485,762 87,104 (361,354) 1,369,343 590,655 13,744 241,639 (523,671) (62,939) 77,568 74,712 39,114 (67,678) 163,211 8,126 (76,967) 1,846,857 625,666 41,889 (375,677) (185,624) (82,285) (23,730) 1,847,096 (478,009) (105,504) 1,263,583 (36,688) (1,142,261) (20,151) (19,221) (338,986) (161,636) 57,642 64,659 (1,596,642) 1,052,021 155,865 (337,713) 2010 2009

23

16,17 9

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Qeyd Repayment of short-term borrowings Increase in charter capital Change in restricted cash related to borrowings distribution to the government Purchase consideration paid

2010 (65,890) 99,986 35,301 (374,530) (32,992)

2009 (174,608) 200,000 68,366 (242,577) -

27 26

Net cash (used in) / provided by financing activities Net foreign exchange translation differences Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

8 8

(126,613) 31,387 226,655 773,506 1,000,161

721,354 (134,959) 253,336 520,170 773,506

1 The Group and its Operations The state Oil Company of the Azerbaijan Republic (sOCAR) was established by the Presidential decree on 13 september 1992 in accordance with Azerbaijani legislation and is domiciled in the Azerbaijan Republic. In order to improve its operational efficiency SOCAR has been restructured several times and now comprises of 20 business units dealing with their particular areas of business. sOCAR and the business units are involved in upstream, midstream and downstream operations. SOCARs main functions pertain to the extraction, refining, transportation of oil, gas and gas condensates, and sale of gas and oil and gas products. sOCAR is 100 per cent owned by the government of the Azerbaijan Republic (the government). On 2 April 2010, sOCAR acquired 100 per cent of the share capital of Azerikimya state-owned company, which is involved in production of petrochemicals in the Azerbaijan Republic. Following this acquisition, Azerikimya state-owned company was transformed into Azerikimya Production Union (Azerikimya PU) within sOCAR structure. For further details please refer to Note 36. On 1 july 2009, sOCAR acquired 100 per cent of the share capital of Azerigaz Closed joint stock Company (Azerigaz CjsC), a state-owned gas utility company in the Azerbaijan Republic. Following this acquisition, Azerigaz CjsC was transformed into Azerigaz Production Union (Azerigaz PU) within sOCAR structure. For further details please refer to Note 36.

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sOCARs registered address is 73 Neftchiler avenue, Az 1000 baku, the Azerbaijan Republic. 2 Basis of Preparation and Significant Accounting Policies

Basis of preparation. These consolidated financial statements of SOCAR and its subsidiaries, associates and joint ventures (collectively referred to as the group) have been prepared in accordance with International Financial Reporting standards (IFRs) as issued by the International Accounting standards board (IAsb). The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented. Basis for consolidation. subsidiaries are all entities (including special-purpose entities) over which the Group has control, being the power to govern the financial and operating policies so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. Business combinations from 1 January 2010. business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

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If the business combination is achieved in stages, the acquisition date fair value of the acquirers previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. 2 Basis of Preparation and Significant Accounting Policies (Continued) Business combinations from 1 January 2010 (continued). Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with International Accounting Standard (IAS) 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Business combinations prior to 1 January 2010. business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquirees identifiable net assets. business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill. When the group acquired a business, embedded derivatives separated from the host contract by the acquire were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. Contingent consideration was recognised if, and only if, the group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. subsequent adjustments to the contingent consideration were recognised as part of goodwill. Transactions with non-controlling interest after 1 january 2010 Changes in the groups ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (ie transactions with owners in their capacity as owners). In such circumstances the carrying amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by

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which the non-controlling interests are adjusted and the fair value of the consideration paid or received shall be recognised directly in equity and attributed to the owners of the group. Transactions with non-controlling interest - parent company model - prior to 1 january 2010 The group applies a policy of treating transactions with non-controlling interests as transactions with parties external to the group. Purchase of non-controlling interest result in goodwill, being the excess of the cost of consideration paid over the carrying value of non-controlling interest acquired. If the carrying value of the net assets of the subsidiaries exceeds the cost of consideration paid, the difference is recognised in the profit or loss. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. business combinations with entities under common control The group applies purchase method of accounting for business combinations with entities under the common control. Investments in associates. Associates are all entities over which the group has significant influence but not control. Investment in the associate is carried in the statement of financial position at cost plus post acquisition changes in the groups share of net assets of the associate less accumulated impairment of investments. goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. 2 Basis of Preparation and Significant Accounting Policies (Continued) Investments in associates (continued). The groups share of its associates post-acquisition profits or losses is recognised in profit or loss, the Groups share of changes in net assets recognised in other comprehensive income or loss is recognised in other comprehensive income or loss. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the groups share of losses in an associate equals or exceeds its interest in the associate, including any receivables, regarded to be in substance the extension of the groups investment in the associate, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the group and its associates related to transfer of assets are eliminated to the extent of the groups interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associ-

128

ates have been changed where necessary to ensure consistency with the policies adopted by the group. Interests in joint ventures. A joint venture is a contractual arrangement whereby two or more parties (venturers) undertake an economic activity that is subject to joint control. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers. A jointly controlled entity is a joint venture that involves the establishment of a company, partnership or other entity to engage in economic activity that the group jointly controls with its fellow venturers. The results, assets and liabilities of a jointly controlled entity are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, the investment in a jointly controlled entity is carried in the statement of financial position at cost plus post-acquisition changes in the groups share of net assets of the jointly controlled entity, less distributions received and less any impairment in value of the investment. The group statement of comprehensive income reflects the Groups share of the profit or loss of the jointly controlled entity and any income and expense recognised by the jointly controlled entity in other comprehensive income or loss. Financial statements of jointly controlled entities are prepared for the same reporting period as the group. Where necessary, adjustments are made to those financial statements to bring the accounting policies used into line with those of the group. The group ceases to use the equity method of accounting of the date from which it no longer has joint control over joint venture or significant influence in the associate, or when the interest becomes held for sale. Certain of the groups upstream activities which are governed by Production sharing Agreements (PsAs) are conducted through joint ventures where the venturers have a direct ownership interest in and jointly control the assets of the venture. such activities are accounted for as jointly controlled assets. Accordingly, the group recognises its share of the jointly controlled assets and its share in liabilities, income and expenses related to jointly controlled assets in proportion to the groups interest. PsA is the method to execute exploitation of mineral resources by taking advantage of the expertise of a commercial oil and gas entity. The government retains title to the mineral resources (whatever the quantity that is ultimately extracted) and often the legal title to all fixed assets constructed to exploit the resources. The government will take a percentage share of the output which may be delivered in product or paid in cash under an agreed pricing formula. The contracting parties

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may only be entitled to recover specified costs plus an agreed profit margin. It may have the right to extract resources over a specified period of time. Operating company is a legal entity created by one or more contracting parties to operate PsA. As a contracting party to various PsAs the group evaluates and accounts for the PsAs in accordance with the substance of the arrangement. It records only its own share of oil and gas under a PsA as revenue. Neither revenue nor cost is recorded by the group for the oil and gas extracted and sold on behalf of the government. The group acts as the governments agent to extract, deliver or sell the oil and gas and remit the proceeds. 2 Basis of Preparation and Significant Accounting Policies (Continued) Interests in joint ventures (continued). Costs that meet the recognition criteria as intangible or fixed assets in accordance with IAS 38 and IAS 16, respectively, are recognised where the entity is exposed to the majority of the economic risks and has access to the probable future economic benefits of the assets. Acquisition, development and exploration costs are accounted for in accordance with policies stated herein. Assets subject to depreciation, depletion or amortisation are expensed using the appropriate depletion or depreciation method stipulated by the present accounting policies over the shorter of the PsA validity period or the expected useful life of the related assets. Foreign currency translation. All amounts in these consolidated statements are presented in thousands of Azerbaijani manats (AzN), unless otherwise stated. The functional currencies of the groups consolidated entities are the currencies of the primary economic environments in which the entities operate. The functional currency of sOCAR and its 20 business units and the groups presentation currency is the national currency of the Azerbaijan Republic, AzN. However, Us dollar (Usd) and Turkish lira (yTl) are considered the functional currency of the groups certain subsidiaries, associates and investments in jointly controlled entities as majority of these investments receivables, revenues, costs and debt liabilities are either priced, incurred, payable or otherwise measured in Usd and yTl. The transactions executed in foreign currencies are initially recorded in the functional currencies of respective group entities by applying the appropriate rates of exchanges prevailing at the date of transaction. Monetary assets and liabilities not already measured in the functional currency of respective group entity are translated into the functional currency of that entity

130

at the appropriate exchange rates prevailing at the statement of financial position date. Foreign exchange gains and losses resulting from the re-measurement into the functional currencies of respective Groups entities are recognised in profit or loss. The results and financial position of the Group entities which functional currency differs from the presentation currency of the group and not already measured in the groups presentation currency (functional currency of none of these entities is a currency of a hyperinflationary economy) are translated into the presentation currency of the group as follows: (I) assets and liabilities for each statement of financial position are translated at the closing rate at the date of that statement of financial position; (II) income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (III) all resulting exchange differences are recognised as a separate component of equity currency translation difference. At 31 december 2010 the principal rate of exchange used for translating foreign currency balances was Usd 1 = 0.7979 AzN, yTl 1 = 0.5139 AzN, jPy 100 = 0.9798 AzN (2009: Usd 1 = AzN 0.8031, yTl 1 = AzN 0.5315, jPy 100 = 0.8713 AzN). 2 Basis of Preparation and Significant Accounting Policies (Continued) Financial instruments key measurement terms. depending on their classification financial instruments are carried at fair value, or amortised cost as described below. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arms length basis. Valuation techniques such as discounted cash flows models or models based on recent arms length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pric-

131

ing information is not available. valuation techniques may require assumptions not supported by observable market data. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs. Measurement at cost is only applicable to investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related statement of financial position items. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest re-pricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Financial assets. The Group classifies its financial assets in the following mea-

132

surement categories: a) financial assets at fair value through profit or loss; b) loans and receivables; c) financial assets held-to-maturity and d) available-forsale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. 2 Basis of Preparation and Significant Accounting Policies (Continued) Financial assets (continued). The subsequent measurement of financial assets depends on their classification, as follows: (a) Financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss are financial assets held for trading (a financial asset is classified in this category if acquired principally for the purpose of selling in the short term) and financial assets designated upon initial recognition as at fair value through profit or loss. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (b) Loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the statement of financial position. (c) Held-to-maturity financial assets. This classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the group has both the intention and ability to hold to maturity. Management determines the classification of investment securities held-to-maturity at their initial recognition and reassesses the appropriateness of that classification at each statement of financial position date. Investment securities held-to-maturity are carried at amortised cost. (d) Available-for-sale financial assets. Available-for-sale financial assets are nonderivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the statement of financial position date. Regular purchases and sales of financial assets are recognised on the trade date - the date on which the group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value

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through profit or loss are initially recognised at fair value, and transaction costs are expensed in the statement of comprehensive income. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. loans and receivables are carried at amortized cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the statement of comprehensive income within other gains/(losses), in the period in which they arise. dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of other income when the groups right to receive payments is established. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the statement of comprehensive income as gains and losses from investment securities. Interest on availablefor-sale securities calculated using the effective interest method is recognised in the statement of comprehensive income as part of other income. dividends on availablefor-sale equity instruments are recognised in the statement of comprehensive income as part of other income when the groups right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arms length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. 2 Basis of Preparation and Significant Accounting Policies (Continued) Financial assets (continued). The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-forsale, a significant or prolonged decline in the fair value of the security below its cost is

134

considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in other comprehensive income is removed from equity and recognised in the profit or loss. Impairment losses recognised in the statement of comprehensive income on equity instruments are not reversed through the profit or loss. Financial liabilities. The Group classifies its financial liabilities into the following measurement categories: (a) held for trading which also includes financial derivatives and (b) other financial liabilities. Liabilities held for trading are carried at fair value with changes in value recognised in the consolidated statement of comprehensive income in the period in which they arise. Other financial liabilities are carried at amortised cost. Derecognition of financial assets. The Group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Derecognition of financial liabilities. The Group derecognises financial liability when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts, together with any costs or fees incurred are recognised in profit or loss. Financial guarantee contracts. Financial guarantee contracts issued by the group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation.

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Trade and other receivables. Trade and other receivables are carried at amortised cost using the effective interest method. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. A provision for impairment of receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. 2 Basis of Preparation and Significant Accounting Policies (Continued) Trade and other receivables (continued). The amount of provision is recognised in profit or loss. The primary factors that the Group considers when determining whether a receivable is impaired is its overdue status and realisability or related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains; the counterparty considers bankruptcy or a financial reorganisation; there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; the value of collateral, if any, significantly decreases as a result of deteriorating market conditions. Trade and other receivables are derecognised upon cash receipts from customers and borrowers or other similar settlement. Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.

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Restricted cash. Restricted cash is presented separately from cash and cash equivalents. Restricted balances are excluded from cash and cash equivalents for the purposes of cash flow statement. Trade payables. Trade payables are accrued when the counterparty performed its obligations under the contract. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings. All borrowings are initially recognised at fair value of the proceeds received net of issue costs associated with the borrowing. borrowings are carried at amortised cost using the effective interest method. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. Property, plant and equipment. The group elected to measure property, plant and equipment at the date of transition to IFRs (1 january 2007) at their fair value and use that fair value as their deemed cost at that date. Fair value was determined by reference to market-based evidence and by using the depreciated replacement cost method. subsequent to transition to IFRs, property, plant and equipment are stated at cost as described below, less accumulated depreciation and provision for impairment, where required. The initial cost of an asset purchased after 1 january 2007 comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The assets held under finance lease are also included within property, plant and equipment. Exploration and evaluation costs. Property leasehold acquisition costs are capitalised until the determination of reserves is evaluated. If a commercial discovery has not been achieved, these costs are charged to expense. Capitalisation is made within property, plant and equipment or intangible assets according to the nature of the expenditure. The group accounts for exploration and evaluation activities, capitalizing exploration and evaluation costs until such time as the economic viability of producing the underlying resources is determined. Exploration and evaluation costs related to resources determined to be not economically viable are expensed through operating expenses in the consolidated statement of comprehensive income.

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2 Basis of Preparation and Significant Accounting Policies (Continued) Development tangible and intangible assets. Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of commercially proven development wells is capitalised within tangible and intangible assets according to nature. When development is completed on a specific field, it is transferred to production assets (oil and gas properties). The present value of the estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs, are recognised when the obligation is incurred and are included within the carrying value of property, plant and equipment, subject to depletion using unit-of-production method. All minor repair and maintenance costs are expensed as incurred. Cost of replacing major parts or components of property, plant and equipment items are capitalized and the replaced part is retired. At each reporting date management assess whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an assets or cash generating units fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss, if any, is recognised in the statement of comprehensive income. An impairment loss recognised for an asset or cash generating unit in prior years is reversed if there are indicators that impairment loss may no longer exist or may have decreased. gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and losses are recognised in profit or loss. Depreciation. Property, plant and equipment related to oil and natural gas properties are depreciated using a unit-of-production method. Depreciation of oil and gas assets is computed on a field-by-field basis over proved developed reserves or over total proved reserves, as appropriate. shared oil and gas properties and equipment (e.g. internal delivery systems, processing units, etc.) are depleted over total proved reserves. land is not depreciated. Property, plant and equipment other than oil and gas properties and equipment, are depreciated on a straight-line basis over their estimated useful lives. Assets under construction are not depreciated. The estimated useful lives of the groups property, plant and equipment (other than oil and gas properties) are as follows:

138

buildings and constructions Plant and machinery vessels

12 - 40 il 3 - 47 il 25 il.

The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. The residual value of an asset is the estimated amount that the group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the group expects to use the asset until the end of its physical life unless scrap value is significant. The assets residual values are reviewed, and adjusted if appropriate, at each statement of financial position date. 2 Basis of Preparation and Significant Accounting Policies (Continued) Operating leases. Where the group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit or loss on a straight-line basis over the lease term. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. When assets are leased out under an operating lease the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Goodwill. goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the groups cash-generating units that are expected to benefit from the combination, irrespec-

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tive of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Intangible assets. Intangible assets are stated at cost, less accumulated amortization and accumulated impairment losses. Intangible assets include rights and computer software, patents, licences, customer relationships, trade name, water rights and development projects. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of comprehensive income in the expense category consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. a) Rights and computer software software is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the estimated useful lives of such assets. land property rights consist of rights over the dam, factory site, port site, site development, site and the water transmission line. Intangible assets obtained at the acquisition of Petkim Petrokimya Holding A.s. (Petkim) (Note 26) were initially recognised at their fair values in accordance with IFRs 3 as of 30 May 2008 and amortised over their remaining useful lives commencing from the date of acquisition, except for the water transmission line which is not amortised as it is deemed to have an indefinite useful life.

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b) Customer relationships Customer relationships acquired as part of net assets of Petkim were initially recognised at their fair values in accordance with IFRs 3 as of 30 May 2008 and amortised over their remaining useful lives of 22 years commencing from the date of acquisition (Note 15). 2 Basis of Preparation and Significant Accounting Policies (Continued) Intangible assets (continued). c) Petkim trade name Petkim trade name acquired at the Petkim acquisition was initially recognised at its fair value in accordance with IFRs 3 as of 30 May 2008. Petkim trade name is not amortised as it is deemed to have an indefinite useful life (Note 15). d) Water rights Water rights acquired with the Petkim acquisition were initially recognised at their fair value in accordance with IFRs 3 as of 30 May 2008 and amortised over their remaining useful lives of 47 years commencing from the date of acquisition (Note 15). e) development projects development projects acquired with the Petkim acquisition were initially recognised at their fair value in accordance with IFRs 3 as of 30 May 2008 and amortised on a straight-line basis over their remaining useful lives of 5 years commencing from the date of acquisition. Cost incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be operational considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other expenditures on research and development activities are recognised as expense in the period in which they incurred. When there is an impairment, the carrying values of the intangible assets are written down to their recoverable amounts. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. Corporate income taxes. Corporate income taxes have been provided for in the consolidated financial statements in accordance with the applicable legislation enacted or substantively enacted by the statement of financial position date. The

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income tax charge comprises current tax and deferred tax and is recognised on the profit or loss unless it relates to transactions that are recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes, other than on income, are recorded within operating expenses. deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. deferred income taxes are provided in full on temporary differences arising on recognition and subsequent measurement of provision for asset retirement obligation and related adjustments to cost of property, plant and equipment. 2 Basis of Preparation and Significant Accounting Policies (Continued) Inventories. Inventories are stated at the lower of cost and net realizable value. Cost is assigned by the weighted average method. Cost comprises direct purchase costs, cost of production, transportation and manufacturing expenses (based on normal operating capacity). Government grants. grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the

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group will comply with all attached conditions. government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight line basis over the expected lives of the related assets. Government grants relating to income are deferred and recognised in profit or loss over the period necessary to match the, with the costs that they are intended to compensate. Asset retirement obligations. liabilities for asset retirement obligation costs are recognised when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made. Where an obligation exists for a new facility, such as oil and natural gas production or transportation facilities, this will be on construction or installation. An obligation for asset retirement may also crystallize during the period of operation of a facility through a change in legislation. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The cost of property, plant and equipment is also adjusted for amounts of estimated liabilities for asset retirement obligations. Any change in the present value of the obligation resulting from changes in estimates of the amounts or timing of future expenditures is reflected as an adjustment to the provision and the corresponding capitalized costs within property, plant and equipment. Changes in estimates of the amounts or timing of future expenditures to dismantle and remove fully depreciated plant or facility is recognised in the statement of comprehensive income. Changes in the present value of the obligation resulting from unwinding of the discount are recognised as finance costs in the statement of comprehensive income. Provisions for liabilities and charges. Provisions for liabilities and charges are liabilities of uncertain timing or amount. They are accrued when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be

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required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Distribution to the Government. distribution to the government represent cash distributions or financing which the Group may be required to make to the state budget, various government agencies and projects administered by the government based on the particular decisions of the government. such distributions are recorded as a reduction of equity. distributions in the form of transfers of nonmonetary assets are recognised at the carrying value of transferred assets. 2 Basis of Preparation and Significant Accounting Policies (Continued) Value-added tax. The tax authorities permit the settlement of sales and purchases value-added tax (vAT) on a net basis. vAT payable: vAT payable represents vAT related to sales that is payable to tax authorities upon recognition of sales to customers, net of vAT on purchases which have been settled at the statement of financial position date. VAT related to sales which have not been settled at the statement of financial position date (VAT deferral) is also included in vAT payable. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including vAT where applicable. The related vAT deferred liability is maintained until the debtor is written off for tax purposes. vAT recoverable: vAT recoverable relates to purchases which have not been settled at the statement of financial position date. VAT recoverable is reclaimable against vAT on sales upon payment for the purchases. Revenue recognition. Revenue comprises the fair value of consideration received or receivable for the sale of goods and services in the ordinary course of the groups activities. Revenue is shown net of vAT, returns, discounts, and other sales-based taxes, if any, after eliminating sales within the group. Revenues from sales of crude oil are recognised at the point of transfer of risks and rewards of ownership of the crude oil, normally when the oil is loaded into the oil tanker or other transportation facilities. Revenues from sales of petroleum products are recognised at the point of transfer of risks and rewards of ownership of the petroleum products, normally when the products are shipped. Revenue from sales of natural gas are recorded on the basis of regular meter readings (monitored

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on monthly basis) and estimates of customer usage from the last meter reading to the end of the reporting period. Natural gas prices and gas transportation tariffs to the final consumers in the Azerbaijan Republic are established by the Tariff Council of the Azerbaijan Republic. Revenues from sales of other goods are recognised at the point of transfer of risks and rewards of ownership of the goods. sales of services are recognised in the accounting period in which the services are rendered, by reference to stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Interest income is recognised on a time-proportion basis using the effective interest method. Overlift/underlift of crude oil. Overlift or underlift of crude oil occurs when the volume of oil lifted by a partner in a joint venture differs from its participating interest in the production. Underlift is recognised as a sale of crude oil at the point of lifting by the underlifter to the overlifter. Overlift is recognised as a purchase of oil by the overlifter from the underlifter. The extent of underlift is reflected by the Group as an asset in the statement of financial position, and the extent of overlift is reflected as a liability. The initial measurement of the overlift liability or underlift asset is at the market price of crude oil at the date of lifting. subsequent measurement of overlift/underlift liabilities and assets depends on the settlement terms of the related operating agreements. If such terms allow for a cash settlement of the overlift/underlift balances between the parties, the balances are remeasured at fair value at reporting dates subsequent to initial recognition. The overlift/underlift balances that are settled through delivery of physical quantities of crude oil are measured at the lower of carrying amount and fair value at reporting dates subsequent to initial recognition. Employee benefits. Wages, salaries, contributions to the social Protection Fund of the Azerbaijan Republic, paid annual leave and sick leave, bonuses, and nonmonetary benefits (e.g. health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the group. Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the groups chief operating decision maker. segments whose revenue, result or assets are ten percent or more of all the segments are reported separately.

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2 Basis of Preparation and Significant Accounting Policies (Continued) Related Parties. Related parties are defined in IAS 24, Related Party Disclosures Governmental economic and social policies affect the Groups financial position, results of operations and cash flows. The Government imposed an obligation on the group to provide an uninterrupted supply of oil and gas to customers in the Azerbaijan Republic at government controlled prices. Transactions with the state include taxes which are detailed in Note 33. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. It is the nature of transactions with related parties that they cannot be presumed to be carried out on an arms length basis. Carried interest arrangements. A carried interest arrangement where the group participate as carried party is an agreement under which the carrying party agrees to pay for a portion or all of the pre-production costs of the carried party on a project in which both parties own participating interest. If the project is unsuccessful then the carrying party will not be reimbursed for the costs that it has incurred on behalf of the carried party. If the project is successful then the carrying party will be reimbursed either in cash out of proceeds of the share of production attributable to the carried party, or by receiving a disproportionately high share of the production until the carried costs have been recovered. depending on the terms of the carried interest agreements the group recognises them either as financing-type arrangement or purchase/sale-type arrangement. The finance-type arrangements presume that carrying party provides funding to the carried party and receives a lenders return on the funds provided, while the right to additional production acts as a security that underpins the arrangement. In the purchase/sale-type arrangement, the carried party effectively sells an interest or a partial interest in a project to the carrying party. The carrying party will be required to fund the project in exchange for an increased share of any proceeds if the project succeeds, while the carried party retains a much reduced share of any proceeds. during exploration stage of projects when the outcome of projects and probability of the carrying party to recover costs incurred on behalf of the carried party are not certain the group does not recognise any carry related transactions and balances in the consolidated financial statements.

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Reclassifications. Certain reclassifications have been made to the prior years Consolidated statement of Financial Position, Consolidated statement of Comprehensive Income and corresponding notes to conform to the current year presentation. There was no material impact on the Groups financial position, results of operations and equity as a result of these reclassifications.

Consolidated statement of Financial Position Prior to reclassification Reclassification of cash and cash equivalents from restricted cash Cash and cash equivalents Restricted cash Reclassifications of trade receivables, other long-term assets, other short-term assets and other long-term financial assets Trade and other receivables Other long-term assets Other long-term financial assets Other current financial assets Consolidated statement of Comprehensive Income Reclassification of release of provision for doubtful debts from other operating income Cost of sales Other operating income 698,600 128,750 74,906 (74,906) 773,506 53,844 Reclassification After reclassification

2,129,774 316,263 -

(19,130) (62,116) 74,068 7,178

2,110,644 254,147 74,068 7,178

(2,898,902) 1,025,401

820,693 (820,693)

(2,078,209) 204,708

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Critical Accounting Estimates and Judgments

The group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on managements experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in this consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities at reporting date include: Estimation of oil and gas reserves. Oil and gas reserves are key elements in the groups investment decision-making process. They are also an important element of testing for impairment. Changes in proved oil and gas reserves, particularly proved developed reserves, will affect unit-of-production depreciation charges in the statement of comprehensive income. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of oil and gas reserves are inherently imprecise, require the application of judgment and are subject to future revision. Accordingly, financial and accounting measures (such as depletion and amortization charges and provision for asset retirement obligations) that are based on proved developed or proved reserves are also subject to change. Proved reserves are estimated by reference to available reservoir and well information. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans. In general, changes in the technical maturity or hydrocarbon reserves resulting from new information becoming available from development plans. In general, changes in the technical maturity of hydrocarbon reserves resulting from new information becoming available from development and production activities have tended to be the most significant cause of annual revisions.

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Critical Accounting Estimates and Judgments (Continued)

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are developed and being depleted. As a field goes into production, the amount of proved reserves will be subject to future revision once additional information becomes available through, for example, the drilling of additional wells or the observation of long-term reservoir performance under producing conditions. As those fields are further developed, new information may lead to revisions. Proved reserves of the sOCAR as of 1 january 2010 were based on reports prepared by independent reservoir engineers in accordance with society of Petroleum Engineers rules. For subsequent year end, the Company updated its reserves information based on work performed by its in-house geologists. Asset retirement obligations. As further discussed in Note 22, management makes provision for the future costs of decommissioning oil and gas production and storage facilities, pipelines and related support equipment and site restoration based on the estimates of future cost and economic lives of those assets. Estimating future asset retirement obligations is complex and requires management to make estimates and judgements with respect to removal obligations that will occur many years in the future. Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation. The group assesses its asset retirement obligation liabilities in accordance with the guidelines of IFRIC 1, Changes in Existing decommissioning, Restoration and similar liabilities. The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the statement of financial position date based on current applicable legislation and regulations, and is also subject to changes because of modifications, revisions and changes in laws and regulations and respective interpretations thereof. governmental authorities are continually considering applicable regulations and their enforcement. Consequently, the groups ultimate asset retirement liabilities may differ from the recorded amounts. As a result of the subjectivity of these provisions there is uncertainty regarding both the amount and estimated timing of incurring such costs. Estimated liability of dismantling oil and gas production and storage facilities, including abandonment and site restoration costs, amounted to AzN 324,632 at 31 december 2010 (2009: 170,727). Changes in any of these conditions may result in adjustments to provisions recorded by the group.

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Management determines discount rates used for discounting abandonment and site restoration costs as a pre-tax rate that reflects current market assessments of the time value of money and where appropriate, the risks specific to the liability. The discount rate used as at 31 december 2010 was 6.91 per cent (2009: 8.4 per cent). Management believes that this discount rate appropriately reflected all risks and uncertainties pertaining to oil and gas exploration, evaluation, development and distribution in Azerbaijan as of the reporting date. If the estimated discount rate used in the calculation had been 1 per cent higher / lower than managements estimate, the carrying amount of the provision would have been AzN 89,252 lower / AzN 151,395 higher, respectively. BOTAS contract price. Natural gas entitled to the group under shah deniz PsA (Note 17) is sold to bOTAs Company. As a result of price review settlement with bOTAs based on the letter Agreement dated on 4 june 2010 the contract price formula was changed. One of the components for gas sale price calculation is an average price of Gasoil 0.2 reference indicator officially published in monthly Platts Oil gram Price Report during six consecutive months immediately preceding the month of gas delivery. gasoil reference indicator ceased to be published from 31 december 2009 and consequently the contract price could no longer be calculated in the manner specified in the Gas Contract from 31 March 2010. Whilst there is no agreement on a replacement for the gasoil indicator which is no longer published, the last published gasoil indicator continues to be used to calculate a provisional contract price in accordance with the terms of the gas Contract. 3 Critical Accounting Estimates and Judgments (Continued)

Environmental obligations. As further discussed in Note 23, the group records a provision in respect of estimated costs of remediation of the damage historically caused to the natural environment primarily in the Absheron area both by the activities of the group and its legacy operations in periods preceding the formation of the group. The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the statement of financial position date based on current applicable legislation and regulations, and is also subject to changes because of modifications, revisions and changes in laws and regulations and respective interpretations thereof. governmental authorities are continually considering applicable regulations and their enforcement. Consequently, the groups ultimate liability for environmental remediation may differ from the recorded amounts. As a result of the subjectivity of these provisions there

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is uncertainty regarding both the amount and estimated timing of incurring such costs. Estimated liability for environmental remediation as of 31 december 2010 amounted to AzN 416,419 (2009: AzN 416,544). Changes in any of these conditions may result in adjustments to provisions recorded by the group. Management determines discount rate used for discounting environmental remediation costs as pre-tax rate that reflects current market assessments of the time value of money and where appropriate, the risks specific to the liability as of the reporting date. The discount rate used as at 31 december 2010 was 6.91 per cent (2009: 8.4 per cent). Management believes that this discount rate appropriately reflects all risks and uncertainties pertaining to oil and gas exploration, evaluation and development industry in Azerbaijan. Changes in any of these conditions may result in adjustments to provisions recorded by the group. If the estimated discount rate used in the calculation had been 1 per cent higher / lower than managements estimate, the carrying amount of the provision would have been AzN 7,091 lower / AzN 7,307 higher, respectively. Useful lives of property, plant and equipment and intangible assets. Management determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and intangible assets. This estimate is based on projected period over which the group expects to consume economic benefits from the asset. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or it will writeoff or write-down technically obsolete assets that have been abandoned or sold. The useful lives are reviewed at least at each financial year-end. Changes in any of the above conditions or estimates may result in adjustments to future depreciation rates. Deferred income tax asset recognition. The net deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future management makes judgements and applies estimation based on last three years taxable profits and expectations of future income that are believed to be reasonable under the circumstances. Impairment of non-financial assets. Management assesses whether there are any indicators of possible impairment of all non-financial assets at each reporting date based on events or circumstances that indicate the carrying value

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of assets may not be recoverable. such indicators include changes in the groups business plans, changes in commodity prices leading to unprofitable performances, changes in product mixes, and for oil and gas properties, significant downward revisions of estimated proved reserves. Goodwill and other indefinite life intangibles are tested for impairment annually and at other times when impairment indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management estimates the expected future cash flows from the asset or cash generating unit and chooses a suitable discount rate in order to calculate the present value of those cash flows. 3 Critical Accounting Estimates and Judgments (Continued)

In 2010, as the result of underperformance of some cash generating units (CgU) the group carried out a review of the recoverable amounts of those CgUs resulting in impairment charge amounting to AzN 360,047 (2009: AzN 241,639). These assets are used in the groups Oil and gas segment. In assessing whether impairment is required in the carrying value of a potentially impaired asset, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the assets fair value less costs to sell and value-in-use. given the nature of the groups activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment charges described below is value-in-use. The group generally estimates value-in-use using a discounted cash flow model from financial budgets approved by management. Key assumptions used in value-in-use calculations The calculation of value-in-use for oil fields is most sensitive to the following assumptions: Production volumes: Estimated production volumes are based on detailed data for the fields and take into account development plans for the fields agreed by management as part of the long-term planning process. It is estimated that, if all production were to be reduced by 10 per cent for the whole of the next 15 years, this would result in additional impairment charge in the amount AzN 95,984. Gross margins: Gross margins are based on previous years actual figures. These are increased over the budget period for anticipated inflation rate. Capital expenditures: Capital expenditures necessary to maintain estimated production volumes are based on long term development plans for particular oil field. Crude oil price: Forecast commodity prices are publicly available.

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Discount rate: The post-tax discount rate applied to the cash flow projections is 12.81 per cent (2009: 13.55 per cent). The discount rate calculation is based on the specific circumstances of the Group and its operating segments and derived from its weighted average cost of capital (WACC). In calculating WACC the cost of equity was estimated using peer group data and the cost of debt is based on interest bearing borrowings, the Group is obliged to service. Specific risks are incorporated by applying individual beta factors, market risk and size of the group. The beta factors are evaluated annually based on publicly available marked data. If the estimated WACC used in the calculation had been 1 per cent higher / lower than managements estimate, the aggregate amount of impairment loss would have been AzN 26,054 higher / AzN 11,899 lower, respectively. Inflation rate estimates: Rates used are International Monetary Funds (IMF) forecasts. Excise tax rate and export duties: Excise tax and export duties on oil and petroleum products are an important factor for Oil and gas properties and equipment. Impairment provision for trade receivables. The impairment provision for trade receivables is based on managements assessment of the probability of collection of individual customer accounts receivable. Significant financial difficulties of the customer, probability that the customer will suffer bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is potentially impaired. Actual results could differ from these estimates if there is deterioration in a major customers creditworthiness or actual defaults are higher than the estimates. When there is no expectation of recovering additional cash for an amount receivable, amount receivable is written off against associated provision. 3 Critical Accounting Estimates and Judgments (Continued)

Impairment provision for trade receivables (continued). Future cash flows of trade receivables that are evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.

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4 Adoption of New or Revised Standards and Interpretations and New Accounting Pronouncements (Continued) IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRs 3 allows entities to choose to measure non-controlling interests using the previous IFRS 3 method (proportionate share of the acquirees identifiable net assets) or at fair value. The revised IFRs 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer has to remeasure its previously held equity interest in the acquiree at its acquisitiondate fair value and recognise the resulting gain or loss, if any, in profit or loss for the year. Acquisition-related costs are accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer has to recognise a liability for any contingent purchase consideration at the acquisition date. Changes in the value of that liability after the acquisition date are recognised in accordance with other applicable IFRss, as appropriate, rather than by adjusting goodwill. The revised IFRs 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The group concluded that the revised standard does not have material effect on its consolidated financial statements. Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2, Share-based Payment (effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The Group does not expect the amendments to have any material effect on its consolidated financial statements.

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Eligible Hedged ItemsAmendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The group does not expect the amendments to have any material effect on its consolidated financial statements. IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRs 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The group concluded that the revised standard does not have any effect on its consolidated financial statements. Additional Exemptions for First-time Adopters - Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual periods beginning on or after 1 january 2010). The amendments exempt entities using the full cost method from retrospective application of IFRss for oil and gas assets and also exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4, determining Whether an Arrangement Contains a lease when the application of their national accounting requirements produced the same result. The amendments will not have any impact on the Groups consolidated financial statements. 4 Adoption of New or Revised Standards and Interpretations and New Accounting Pronouncements (Continued) Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are

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not within the scope of IFRS 2; clarification of disclosure requirements set by IFRs 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRs 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entitys own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAs 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. In addition, the amendments clarifying classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary published as part of the Annual Improvements to International Financial Reporting standards, which were issued in May 2008, are effective for annual periods beginning on or after 1 july 2009. Unless otherwise stated above, the amendments and interpretations did not have any significant effect on the Groups consolidated financial statements. (b) Amendments to standards adopted before their effective date The group adopted the amendment to IAs 1, Presentation of Financial statements, which was issued in May 2010 as part of the Annual Improvements to International Financial Reporting Standards. The amendment clarifies the requirements for the presentation and content of the statement of changes in equity. A reconciliation between the carrying amount at the beginning and the end of

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the period for each component of equity must be presented in the statement of changes in equity, but its content is simplified by allowing an analysis of other comprehensive income by item for each component of equity to be presented in the notes. (c) Standards issued but not yet effective and not early adopted by the Group Certain new standards and interpretations have been published that are mandatory for the groups accounting periods beginning on or after 1 january 2011 or later periods and which the group has not early adopted: 4 Adoption of New or Revised Standards and Interpretations and New Accounting Pronouncements (Continued) IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRs 9 issued in November 2009 replaces those parts of IAs 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entitys business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entitys business model is to hold the asset to collect the contractual cash flows, and (ii) the assets contractual cash flows represent only payments of principal and interest (that is, it has only basic loan features). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There

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is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated as at fair value through profit or loss in other comprehensive income. While adoption of IFRs 9 is mandatory from 1 january 2013, earlier adoption is permitted. The group is considering the implications of the standard, the impact on the group and the timing of its adoption by the group. Classification of Rights Issues - Amendment to IAS 32 (issued on 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. The group is considering the implications of the standard, the impact on the group and the timing of its adoption by the group. Amendment to, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 january 2011). IAs 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. The group is currently assessing the impact of the interpretation on its consolidated financial statements. IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 july 2010). This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in profit or loss based on the fair value of the equity instruments compared to the carrying amount of the debt. The group is currently assessing the impact of the interpretation on its consolidated financial statements.

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4 Adoption of New or Revised Standards and Interpretations and New Accounting Pronouncements (Continued) Prepayments of a Minimum Funding Requirement Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 january 2011). This amendment will have a limited impact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a minimum funding requirement. The group is currently assessing the impact of the interpretation on its consolidated financial statements. Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011) The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRs 1 was amended (i) to allow previous gAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRs standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquirees sharebased payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRs 3 (issued in january 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by

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clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAs 27 was amended by clarifying the transition rules for amendments to IAs 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entitys financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The group does not expect the amendments to have any material effect on its financial statements, except the amendment to IAs 1 which was early adopted by the group. Limited exemption from comparative IFRS 7 disclosures for first-time adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 july 2010). Existing IFRs preparers were granted relief from presenting comparative information for the new disclosures required by the March 2009 amendments to IFRs 7, Financial Instruments: disclosures. This amendment to IFRs 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRs 7. The group does not expect the amendments to have any effect on its financial statements. DisclosuresTransfers of Financial Assets Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 july 2011) The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entitys statement of financial position. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The group is currently assessing the impact of the interpretation on its consolidated financial statements.

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4 Adoption of New or Revised Standards and Interpretations and New Accounting Pronouncements (Continued) IFRS 10 Consolidated Financial Statements IFRs 10 Consolidated Financial Statements provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. The standard sets out requirements for situations when control is difficult to assess, including cases involving potential voting rights, agency relationships, control of specified assets and circumstances in which voting rights are not the dominant factor in determining control. In addition IFRS 10 introduces specific application guidance for agency relationships. The standard also contains accounting requirements and consolidation procedures, which are carried over unchanged from IAs 27. IFRs 10 replaces the consolidation requirements in sIC-12 Consolidationspecial Purpose Entities and IAs 27 Consolidated and separate Financial statements and is effective for annual periods beginning on or after 1 january 2013. Earlier application is permitted. Currently the group evaluates possible effect of the adoption of IFRs 10 on its financial position and performance. IFRS 11 Joint Arrangements IFRs 11 joint Arrangements improves the accounting for joint arrangements by introducing a principle-based approach that requires a party to a joint arrangement to recognise its rights and obligations arising from the arrangement. The classification of a joint arrangement is determined by assessing the rights and obligations of the parties arising from that arrangement. There are only two types of arrangements provided in the standard - joint operation and joint venture. IFRs 11 also eliminates proportionate consolidation as a method to account for joint ventures. IFRs 11 supersedes IAs 31 Interests in joint ventures and sIC-13 jointly Controlled EntitiesNon-monetary Contributions by venturers and is effective for annual periods beginning on or after 1 january 2013. Earlier application is permitted. Currently the group evaluates possible effect of the adoption of IFRS 11 on its financial position and performance. IFRS 12 Disclosure of Interests in Other Entities IFRs 12 disclosure of Interests in Other Entities issued in May 2011 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRs 12 is effective for annual periods beginning on or after 1 january 2013. Earlier application is permitted. Adoption of the standard will require new

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disclosures to be made in the financial statements of the Group but will have no impact on its financial position or performance. IFRS 13 Fair Value Measurement IFRS 13 Fair Value Measurement defines fair value, sets out in a single IFRs a framework for measuring fair value and requires disclosures about fair value measurements. The standard applies when other IFRss require or permit fair value measurements. It does not introduce any new requirements to measure an asset or a liability at fair value, change what is measured at fair value in IFRss or address how to present changes in fair value. IFRs 13 is effective for annual periods beginning on or after 1 january 2013. Earlier application is permitted. The adoption of the IFRs 13 may have effect on the measurement of the groups assets and liabilities accounted for at fair value. Currently the group evaluates possible effect of the adoption of IFRs 13 on its financial position and performance. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Groups financial statements. Amendment to IAS 12 In december 2010 the IAsb issued amendment to IAs 12 deferred Tax: Recovery of Underlying Assets.These amendments address the determination of deferred tax on investment property measured at fair value. The amendments introduce a rebuttable presumption that deferred tax on investment property measured at fair value should be determined on the basis that the carrying amount will be recovered through sale. The amendments also incorporate sIC 21 Income Taxes - Recovery of Revalued Non-depreciable Assets into IAs 12. The amendment is effective for annual periods beginning on or after 1 january 2012 with earlier application permitted.

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Segment Information

Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the management of the Group and for which discrete financial information is available. The group is organised into business units based on their products and services and has five reportable segments as follows: Oil and gas representing extraction of oil and gas products Refining representing refining of crude oil and gas condensate Construction representing construction of administrative premises and assets for extraction of oil and gas condensate sales and distribution representing transportation and marketing of crude oil, natural gas, oil products and gas condensate. No operating segments have been aggregated to form the above reportable operating segments. The groups segments are strategic business units that focus on different customers. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Transfer prices between operating segments are on an arms length basis in a manner similar to transactions with third parties. Management evaluates performance of each segment based on profit after tax. 5 Segment Information (Continued)

Information about reportable segment profit or loss, assets and liabilities segment information for the reportable segments for the year ended 31 december 2010 is set out below:

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5
2010 Revenues External customers Inter-segment Total revenue Finance income Other operating income Changes in inventories of finished goods and work in progress Raw materials and consumables used staff costs depreciation of property, plant and equipment Impairment of property, plant and equipment Impairment of trade and other receivables gains less losses on disposals of property, plant and equipment Utilities expense Transportation and vehicle maintenance Mining tax Taxes other than on income Repairs and maintenance expenses Fuel expenses Energy expenses Other Finance cost Foreign exchange losses, (net) social expenses share of result of jointly controlled entities share of result of associates Income tax expense segment result

Segment Information
Oil and gas Refining Construction sales and distribution Unallocated(*) Eliminations (**) Total

2,641,923 605,728 3,247,651 28,163 15,550 20,007 (584,806) (180,066) (322,505) (360,047) 32,100 207,015 (1,956) (124,481) (121,559) (29,234) (145,190) (1,245) (17,493) (505,213) (56,440) (11,168) (10,383) (251,110) 827,590

1,653,144 20,617 1,673,761 20,187 352,589 843 (1,272,576) (145,735) (131,342) (26,260) 86 (167,669) (2,575) (7,220) (29,858) (4,455) (19,577) (480,366) (83,905) (49,364) (14,995) 31,530 (356,901)

151,241 551,754 702,995 10 74,067 17,760 (312,992) (143,484) (57,651) (501) (18,314) (3,909) (55,880) (3,343) (68,318) (3,934) (1,174) (11,012) (1,625) (59) (2,762) (16,826) 93,048

1,079,421 263,430 1,342,851 1,886 802,219 6,019 (804,281) (87,192) (144,194) 196,579 (2,114) (220) (25,026) (24) (6,943) (38,608) (683) (2,617) (221,378) (12,622) (21,813) (42) 6,271 (285,441) 702,627

1,536 (2,132) (596) 55,198 693,250 402 (47,758) (128,597) (62,861) (1,665) (210,588) (3,993) (12,555) (15,582) (31,078) (78) (1,290) (403,339) (20,599) (10,008) (171,722) 43,077 92,809 (60,417) (297,990)

(1,439,397) (1,439,397) (38,269) (1,759,097) 1,356,749 129,984 68,912 (15,127) 6,199 105,369 67,087 3,681 1,322 1,236,640 (36,687) (312,634)

5,527,265 5,527,265 67,175 178,578 45,031 (1,665,664) (555,090) (649,641) (360,047) 185,126 (23,915) (171,548) (115,148) (121,583) (62,322) (245,965) (6,714) (40,829) (384,668) (175,191) (92,412) (199,904) 6,390 99,080 (582,264) 655,740

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(*) - These numbers include unallocated revenues and expenses related to research and development, IT, security and other functions that are not managed at the group level. (**) - Inter-segment revenues and expenses are eliminated on consolidation. Amounts shown as eliminations include intercompany transactions.

Segment Information (Continued)

Oil and gas Refining Construction sales and distribution Unallocated (*) 253,978 246,727 4,910,515 Eliminations (**) (5,326,097) Total

Investment in associates Investment in joint ventures Other reportable segment assets Total reportable segment assets

13 221 7,069,808

133 776,256

2 1,155,059

97,094 1,787 6,541,487

351,085 248,870 15,127,028

7,070,042

776,389

1,155,061

6,640,368

5,411,220

(5,326,097)

15,726,983

Other reportable segment liabilities Total reportable segment liabilities Capital expenditure (***) Additions sOCAR Additions -subsidiaries Acquisitions through business combination Total capital expenditures

(1,982,439)

(917,933)

(706,685)

(6,372,791)

(2,292,653)

4,705,613

(7,566,888)

(1,982,439)

(917,933)

(706,685)

(6,372,791)

(2,292,653)

4,705,613

(7,566,888)

615,260 194,539 -

43,422 52,831 48,316

125,761 359 -

397,152 53,955 327

136,730 11,919

1,318,325 301,684 60,562

809,799

144,569

126,120

451,434

148,649

1,680,571

(*) - These numbers include unallocated assets and liabilities related to research and development, IT, security and other functions that are not managed at the group level. (**) - Inter-segment balances are eliminated on consolidation. Amounts shown as eliminations include intercompany balances. (***) - Capital expenditure represents additions to non-current assets other than financial instruments, deferred tax assets and post-employment benefit assets.

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segment information for the reportable segments for the year ended 31 december 2009 is set out below:
Oil and gas 2009 Revenues External customers Inter-segment Total revenue Finance income Other operating income Changes in inventories of finished goods and work in progress Raw materials and consumables used staff costs depreciation of property, plant and equipment Impairment of property, plant and equipment Impairment of trade and other receivables gains less losses on disposals of property, plant and equipment Utilities expense Transportation and vehicle maintenance Mining tax Taxes other than on income Repairs and maintenance expenses Fuel expenses Energy expenses Other Finance cost Foreign exchange losses, (net) social expenses share of result of jointly controlled entities share of result of associates Income tax expense segment result Refining Construction sales and distribution Unallo-cated (*) Eliminations (**) Total

Segment Information (Continued)

2,440,400 182,046 2,622,446 23,423 179,050 8,615 (541,362) (194,635) (275,672) (228,981) 533,321 257,738 (2,587) (129,249) (120,508) (24,632) (105,985) (1,530) (17,456) (205,606) (53,530) (2,582) (11,386) 71 (265,120) 1,443,843

1,071,361 256,553 1,327,914 22,601 40,851 (320) (897,564) (38,087) (122,677) (28,736) 7,739 (31,072) (327) (37,317) (12,875) (2,575) (488) (101,569) (88,334) 7,192 (12,764) 11,246 42,838

51,591 474,083 525,674 464 58,521 13,412 (221,988) (125,684) (49,086) (3,009) (22,131) (2,414) (47,306) (11) (4,161) (52,510) (343) (110) (55,288) (2,443) (74) (1,190) (23,730) (6,713) (20,120)

515,051 443,892 958,943 (775) 118,476 (566,439) (126,898) (140,907) 31,318 (277,913) (501) (12,036) (6,865) (17,715) (52) (744) (93,297) (8,211) (7,995) (74) 10,649 (78,589) (219,625)

117,578 132,390 249,968 21,965 344,340 (1,005) (70,879) (130,385) (56,872) (13,000) (4,759) 26,056 2,800 (10,037) (4,592) (19,704) (81) (1,178) (636,534) (19,483) 2,501 (134,065) 10,843 79,134 (9,397) (374,364)

(1,488,964) (1,488,964) (536,530) 1,035,827 159,913 54,559 342 (4,465) 2,316 89,807 65,511 323 514 760,255 8,790 (127,192) 21,006

4,195,981 4,195,981 67,678 204,708 20,702 (1,262,405) (455,776) (590,655) (241,639) 523,670 (8,511) (31,458) (109,148) (120,519) (77,567) (143,278) (4,258) (19,462) (332,039) (163,211) (958) (159,479) (12,887) 89,854 (475,765) 893,578

(*) - These numbers include unallocated revenues and expenses related to research and development, IT, security and other functions that are not managed at the group level.

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(**) - Inter-segment revenues and expenses are eliminated on consolidation. Amounts shown as eliminations include intercompany transactions.

Segment Information (Continued)

Oil and Gas Refining 133 4,781,670 4,781,803 (3,985,358) (3,985,358) Construction 1 1,156,616 1,156,617 (785,999) (785,999) Sales and Distribution 107,516 601 2,969,379 3,077,496 (4,015,704) (4,015,704) Unallocated (*) Eliminations (**) (5,228,713) (5,228,713) 5,848,251 5,848,251 Total 315,353 103,061 14,415,147 14,833,561 (6,792,500) (6,792,500)

Investment in associates Investment in joint ventures Other reportable segment assets Total reportable segment assets Other reportable segment liabilities Total reportable segment liabilities Capital expenditure (***) Additions - sOCAR Additions subsidiaries Acquisitions through business combination Total capital expenditures

13 6,133,190 6,133,203 (2,259,113) (2,259,113)

102,326 4,603,005 4,913,155 (1,594,577) (1,594,577)

505,011 239,765 744,776

69,275 37,151 106,426

124,365 1,048 125,413

95,175 18,111 785,996 899,282

124,821 124,821

918,647 295,027 787,044 2,000,718

(*) - These numbers include unallocated assets and liabilities related to research and development, IT, security and other functions that are not managed at the group level. (**) - Inter-segment balances are eliminated on consolidation. Amounts shown as eliminations include intercompany balances. (***) - Capital expenditure represents additions to non-current assets other than financial instruments, deferred tax assets and post-employment benefit assets.

167

Segment Information (Continued)

Geographical information
Revenues for each individual country for which the revenues are material are reported separately as follows: 2010 Azerbaijan Turkey georgia Total consolidated revenues 3,484,201 1,583,968 459,096 5,527,265 2009 2,764,292 1,113,186 318,503 4,195,981

The analysis is based on domicile of the customer. Revenues from off-shore companies of Azerbaijani customers are reported as revenues from Azerbaijan. Revenues comprise revenues from core activities, interest income and other operating income. Capital expenditure for each individual country for which it is material is reported separately as follows: 2010 Azerbaijan Turkey georgia Other Total capital expenditures 1,616,361 11,498 33,168 19,544 1,680,571 2009 1,934,972 37,151 26,119 2,476 2,000,718

The analysis is based on location of assets. Capital expenditure represents additions to non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.

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Financial Risk Management

Financial risk factors. In the ordinary course of business, the group is exposed to market risks from fluctuating prices on commodities purchased and sold, prices of other raw materials, currency exchange rates and interest rates. depending on degree of price volatility, such fluctuations in market prices may create volatility in the Groups financial position. The Groups overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Groups financial performance. To effectively manage the variety of exposures that may impact financial results, the Groups overriding strategy is to maintain a strong financial position. Although there are no structured formal management procedures, management of the Group identifies and evaluates financial risks with reference to the current market position. 6 Financial Risk Management (Continued)

(I) Foreign exchange risk The group is exposed to foreign exchange risk arising from various exposures in the normal course of business, primarily with respect to Usd. Foreign exchange risk arises primarily from future commercial transactions, recognised assets and liabilities when assets and liabilities are denominated in a currency other than the functional currency. The majority of the groups borrowings and sales as well as receivables from foreign customers are denominated in USD. There has been no significant devaluation of Usd against AzN during the year ended 31 december 2010. However, due to significant USD denominated borrowings of the Groups subsidiary, STEA, the group experienced net foreign exchange loss recognised in the statement of comprehensive income of the group for the year ended 31 december 2010 in the amount of AzN 92,412 (2009: AzN 958). Management does not hedge the groups foreign exchange risk. The following table demonstrates the sensitivity to a reasonably possible change in the Usd, jPy exchange rates, with all other variables held constant, of the Groups post-tax profit:

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2010 Usd/AzN jPy/AzN Usd/yTl 2009

Change in rates(+/-) 8.35% 10% 10% Change in rates(+/-) 15.6% 10% 10%

Effect on post- tax profit 53,544/(53,544) (11,865)/11,865 (140,318)/140,318 Effect on post- tax profit

Usd/AzN jPy/AzN Usd/yTl

140,574/(140,574) (10,327)/10,327 (138,596)/138,596

The groups exposure to foreign currency changes for all other currencies is not material. (II) Commodity price risk Although significant portion of the sales of the Group are regulated by the Azerbaijani government, the group is still exposed to certain price risk due to volatility of oil market prices. Presently, the group does not use commodity derivative instruments for trading purposes to mitigate price volatility. (III) Interest rate risk The Group is subject to interest rate risk on financial liabilities with variable interest rates. To mitigate this risk, the groups management performs periodic analysis of the current interest rate environment and depending on that analysis management makes decisions whether it would be more beneficial to obtain financing on a fixed-rate or variable-rate basis. In case where the change in the current market fixed or variable interest rates is considered significant management may consider refinancing a particular debt on more favorable interest rate terms. 6 Financial Risk Management (Continued)

Changes in interest rates impact primarily debt by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the groups exposure should

170

be to fixed or variable rates. However, at the time of raising new debts management uses its judgment to decide whether it believes that a fixed or variable rate would be more favorable over the expected period until maturity. The floating rate for majority of interest bearing liabilities and assets exposes the Group to fluctuation in interest payments and receipts due to changes in LIBOR. The groups variable interest bearing assets include loan receivable from Carlina Overseas Corp., a jointly controlled entity, which exposes the Group to fluctuation in lIbOR. The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings payable and receivable.
Loans and borrowings, net of loans receivable 2010 2009 Increase/ decrease in basis points +100/-25 +100/-25

Effect on post- tax profit

9,100 / (2,275) 8,549 / (2,137)

Credit risk and concentration of credit risk. Credit risk refers to the risk exposure that a potential financial loss to the group may occur if counterparty defaults on its contractual obligations. The Groups financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, including restricted cash, trade receivables and loans receivable. The groups maximum exposure to credit risk is represented by carrying amounts of financial assets and is presented by class of assets as shown in the table below:
2010 Cash and cash equivalents (Note 8) Restricted cash (Note 9) deposits (Note 9) Trade receivables (Note 10) loans receivable from jointly-controlled entities (Note 18) Other receivables (Note 10) Other current financial assets (Note 13) Other long-term financial assets (Note 13) Financial guarantees given (Note 35) Total maximum exposure to credit risk Financial guaranteesamounts of guarantees of indebtedness of others Total exposure to credit risk net of guarantees received 1,000,161 617,793 399,011 1,785,191 280,259 654 12,312 79,148 383,062 4,557,591 (244,854) 4,312,737 2009 773,506 53,844 873,169 1,617,092 311,891 80,951 7,178 74,068 460,111 4,251,810 (200,268) 4,051,542

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The Group places its cash with reputable financial institutions in the Azerbaijan Republic. Overwhelming majority of the groups cash is placed with the International bank of Azerbaijan (IbA) which is controlled by the Azerbaijani government. The balance of cash and cash equivalents and restricted cash held with the IbA at 31 december 2010 was AzN 1,516,928 (2009: AzN 1,371,451). The group continually monitors the status of the banks where its accounts are maintained. 6 Financial Risk Management (Continued)

Trade receivables consist primarily of balances with local and foreign customers, including related parties, for crude oil, oil products and natural gas sold. sOCAR has an obligation to secure uninterrupted supply of crude oil, oil products and natural gas to certain customers under control of the Azerbaijani government, including such companies as Azerenerji jsC and Azal jsC, which operate important public infrastructure facilities in the Azerbaijan Republic. Actual settlement terms applicable to the groups relationships with these customers are affected to a large extent by the social and economic policies of the government of the Azerbaijan Republic. The groups credit risk arising from its trade balance with private sector and other third-party unrelated customers is mitigated by continuous monitoring of their creditworthiness. The group does not believe that it is exposed to high credit risk as the impairment provision has already been accrued in the accompanying consolidated financial statements for all debtors which are not expected to be recovered in a future. As at 31 december 2010, letters of guarantee and bank guarantees in total amount of AzN 244,854 (yTl 476,461,417) (2009: AzN 200,268 (yTl 376,797,795) were received from domestics and foreign customers of STEA for sales of thermoplastics and fiber materials. As fully described in Note 18, at 31 december 2010 the group has loans receivable from sOCAR Petroleum in the amount AzN 17,024 (2009: AzN 8,749) and Carlina Overseas Corp., a jointly controlled entity in the amount of AzN 263,235 (2009: AzN 303,142). In accordance with the share Pledge and Retention Agreement dated 28 december 2006 and share Charge and Retention Agreement dated 12 April 2007 between the owners of Carlina Overseas Corp. and the groups subsidiary Azerbaijan (ACg) limited (AzACg), the owners of Carlina Overseas Corp. pledged in favour of AzACg all of their rights and interest in all proceeds and funds received or receivable by Carlina Overseas Corp. and all of their shares and any other equity interests in Carlina Overseas Corp. balances with major state-controlled, private and other category customers are as follows:

172

Trade and other receivables, gross 2010 Statecontrolled customers Azerenerji jsC Azal jsC Azerikimya sC Other Total statecontrolled customers Private and other customers Total trade receivables 45,043 131,397 176,440 1,279,498 195,469 74,917 184,822 1,734,706 2009

Impairment loss provision 2010 2009

Trade and other receivables, net 2010 2009

(15,225) (29,004) (44,229)

(1,251,184) (154,108) (74,917) (19,294) (1,499,503)

29,818 102,393 132,211

28,314 41,361 165,528 235,203

1,790,132 1,966,572

1,564,536 3,299,242

(136,498) (180,727)

(101,696) (1,601,199)

1,653,634 1,785,845

1,462,840 1,698,043

Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The groups approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the groups reputation. In managing liquidity risk, the group maintains adequate cash reserves and debt facilities, continuously monitors forecast and actual cash flows. Prudent liquidity risk management includes maintaining sufficient working capital and the ability to close out market positions. Management monitors rolling forecasts of the groups liquidity reserve on the basis of expected cash flows. All of the Groups financial liabilities represent non-derivative financial instruments. The table below analyses the Groups financial liabilities into relevant maturity groupings based on the remaining period from the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months approximate their carrying values, as the impact of discounting is not significant.

173

At 31 December 2010 Total financial payables Interest bearing borrowings Other financial liabilities Total future payments, including future principal and interest payments

less than 3 months 2,318,949 98,347 2,417,296

3-12 months 272,935 977,443 15,606 1,265,984

1-5 years 1,856,868 10,620 1,867,488

more than 5 years 464,577 23,776 488,353

Total 2,591,884 3,397,235 50,002 6,039,121

The maturity analysis of financial liabilities as of 31 December 2009 is as follows:

At 31 December 2009 Total financial payables Interest bearing borrowings Total future payments, including future principal and interest payments less than 3 months 1,894,009 120,632 2,014,641 3-12 months 36,687 387,820 424,507 1-5 years 272,267 2,136,333 2,408,600 more than 5 years 595,430 595,430 Total 2,202,963 3,240,215 5,443,178

Capital management. The primary objective of the groups capital management policy is to ensure a strong capital base to fund and sustain its business operations through prudent investment decisions and to maintain government, investor and creditor confidence to support its business activities. The group considers total capital under management to be as follows:
2010 Total borrowings (Note 20) Total equity attributable to the groups equity holders less: cash and cash equivalents Total capital under management 3,059,676 7,455,816 (1,000,161) 9,515,331 2009 2,851,974 7,258,252 (773,506) 9,336,720

174

The Group is periodically mandated to contribute to the state budget and finance various projects undertaken by the government of the Azerbaijan Republic. 6 Financial Risk Management (Continued)

There were no changes to the groups approach to capital management during the year. Fair value of financial instruments. The estimated fair values of financial instruments have been determined by the group using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. The Azerbaijan Republic continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. (I) Financial assets carried at amortised cost. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. discount rates used depend on credit risk of the counterparty. Carrying amounts of trade receivables approximate fair values due to their short-term maturities. (II) liabilities carried at amortised cost. Carrying amounts of trade payables and due to related parties approximate fair values due to their short-term maturities. Carrying values of long-term borrowings approximate their fair values as virtually all debt has been obtained under market conditions, which were still applicable at period end.

175

Balances and Transactions with Related Parties

Key management of the group includes the President of sOCAR and its ten vicePresidents. All of the groups key management are appointed by the President of the Azerbaijan Republic. Key management individuals are entitled to salaries and benefits of SOCAR in accordance with the approved payroll matrix as well as to compensation for serving as members of the boards of directors for certain group companies. during 2010 compensation of key management personnel totalled to AzN 268 (2009: AzN 168). The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding are detailed below. At 31 december 2010, the outstanding balances with related parties were as follows:
Note The Government and entities under government control 176,440 (44,229) 176,935 1,345,666 435,441 26,581 6,040 (1,734,303) Associates and joint ventures 617,232 280,259 -

gross amount of trade receivables Impairment provisions for trade and other receivables Cash and cash equivalents deposit vAT and other taxes receivable Prepayment for corporate income tax Prepayment to suppliers loans receivable from jointly controlled entities Borrowings from IBA (fixed interest rates varying from 3 to 3.5 per cent and floating interest rates varying from lIbOR plus 2 per cent to lIbOR plus 3.5 per cent) borrowings from the Ministry of Finance of the Azerbaijan Republic borrowings from japan bank for International Cooperation loan through Ministry of Finance of the Azerbaijan Republic Trade and other payables Payable to the state Oil Fund of the Azerbaijan Republic (sOFAz) Other taxes payable Corporate income tax payable

6 6 8 8,9

18 20

20 20

(34,025) (143,825) (93,872) (1,109,362) (177,478) (88,913)

(418,536) -

176

The transactions with related parties for the year ended 31 december 2010 were as follows:
Note sales of natural gas sales of oil products services rendered Interest income on deposits Interest on loans from related parties Corporate income tax Excise tax Price margin tax Mining tax Other taxes Utilities costs Other operating expenses social security deductions social expenses Transportation expenses Ecology service and environmental security Purchases of property, plant and equipment and inventory dividends received from jointly controlled entities dividends received from associates The Government and entities under government control 210,622 243,487 19,647 24,737 (301,758) (389,549) (315,467) (121,583) (202,595) (65,972) (62,227) (105,380) (454,297) (6,487) (2,896) (34,098) 16 17 Associates and joint ventures 186,901 65,142 11,590 (655,721) (8) (17,388) (166,512) 5,692 57,748

8,9 18 33 28 28 29

27

At 31 december 2009, the outstanding balances with related parties were as follows:
Note gross amount of trade receivables Impairment provisions for trade and other receivables Cash and cash equivalents deposit vAT and other taxes receivable Prepayment for corporate income tax loans receivable from jointly controlled entities borrowings from IbA (contractual interest rates varying from lIbOR plus 2 per cent to lIbOR plus 3 per cent) borrowings from japan bank for International Cooperation loan through Ministry of Finance of the Azerbaijan Republic Trade and other payables Payable to sOFAz Other taxes payable Corporate income tax payable 6 6 8 8,9 18 20 20 The Government and entities under government control 1,734,706 (1,499,503) 185,093 1,200,072 307,078 25,813 (1,743,663) (132,403) (63,780) (1,098,830) (187,295) (102,503) Associates, joint ventures and operating companies 818,730 311,891 (198,980) -

177

At 31 december 2010 and 2009 amounts due to sOFAz were represented by proceeds transferred to the group by third parties for sale of crude oil on behalf of sOFAz and taxes related to differences in crude oil prices (Note 21). 7 Balances and Transactions with Related Parties (Continued)

The transactions items with related parties for the year ended 31 december 2009 were as follows:
The Government and entities under government control 298,809 231,336 29,094 21,951 (361,123) (362,209) (196,268) (120,519) (104,537) (52,761) (94,671) (79,692) (318,298) (15,588) (57,116) 16 Associates, joint ventures and operating companies 25 85,178 39,480 20,033 (3,194) (173,898) (99,438) (6,178) (58,481)

Note

sales of natural gas sales of oil products services rendered Interest income on deposits Interest on loans from related parties Corporate income tax Excise tax Price margin tax Mining tax Other taxes Utilities costs Other operating expenses social security deductions social expenses Transportation expenses Purchases of property, plant and equipment and inventory dividends received from jointly controlled entities dividends received from associates

8,9 18 33 28 28 29

27

Terms and conditions of transactions with related parties. The sales to and purchases from the government and entities under government control are made at market prices regulated by the Azerbaijani government. The sales to and purchases from other related parties are made at terms equivalent to those that prevail in arms length transactions. Outstanding balances at the year-end are unsecured and settlement occurs in cash. There have been no guarantees provided for any related party receivables or payables. Also, see Note 18 for collateral received from jointly controlled entity.

178

Cash and Cash equivalents

Usd denominated bank balances AzN denominated bank balances yTl denominated bank balances EUR denominated bank balances Other denominated bank balances Cash on hand Total cash and cash equivalents

2010 710,148 178,333 56,182 46,644 7,849 1,005 1,000,161

2009 618,971 83,055 28,267 36,848 4,660 1,705 773,506

Included in Usd denominated bank balances as at 31 december 2010 are two call deposits of AzN 240,513 and AzN 47,874 placed with IbA (2009: AzN 214,469 and AzN 112,434, respectively). Interest rates of these deposits during the years ended 31 december 2010 and 2009 were based on overnight rate less bank margin varying from 0.5 per cent to 1.5 per cent. In addition, Usd denominated bank balances at 31 december 2010 included call deposit of AzN 79,790 placed with IbA, bearing interest rate of 2.85 per cent per annum (2009: nil). At 31 december 2010 yTl denominated bank balances included time deposit of AzN 42,663 (2009: nil) placed with Halkbank maturing less than a month and bearing interest rate of 8.2 per cent per annum. Call deposits have original maturities of less than three months. All the bank balances and deposits are neither past due nor impaired. 8 Cash and Cash equivalents (Continued) At 31 december 2009 Usd denominated bank balances includes current account with bNP Paribas in the amount of AzN 60,233 which is used to accumulate proceeds received by the group from its customers from the sales of cost recovery petroleum (CRP) in accordance with the relevant Accounts Agreement signed between AzACg, bNP Paribas and sg on 23 december 2005 and syndication credit agreement signed with bNP Paribas. In accordance with this agreement, disbursements from the groups current account with bNP Paribas are limited mainly to the expenditures related to the groups participation in AzeriChirag-guneshli (ACg) PsA. see Note 20. In addition at 31 december 2009 Usd denominated bank balances included funds held on lalaben account in the amount of AzN 14,673 representing proceeds received directly from customers of the Group from the sale of the Reserved Profit Petroleum (RPP) (7,000 barrels of profit petroleum per day attributable to the Group) on the Groups account with bNP Paribas. In accordance with Advance Payment Agreement with lalaben llC (lalaben) the group uses these proceeds from crude oil sales to repay lalaben loan. The funds held on lalaben account with bNP Paribas under the terms of the respective agreements, are limited to the payments of profit petroleum tariffs, operating expenses, and profit taxes. during the year ended 31 december 2010 the group fully repaid bNP Paribas and lalaben loans.

179

9.

Restricted Cash and Deposits

short-term restricted cash and deposits

2010 deposit account with IbA in Usd Letter of credit for purchase of fixed assets Other restricted cash Total short-term restricted cash and deposits 578,478 21,026 18,289 617,793 2009 21,210 32,634 53,844

Long-term deposits At 31 december 2010 and 2009 long-term deposits with the carrying value of AzN 399,011 and AzN 873,169, respectively, were represented by the groups deposits with IbA. At 31 december 2010 total short-term and long-term deposits are represented by time deposits in total amount of AzN 977,489 with IbA (2009: AzN 873,169) to collateralize the groups obligations to IbA under the loan facilities obtained from IbA in May 2008 and May 2010 (Note 20). The deposits bear annual interest rate of lIbOR plus margin varying from 1.5 per cent to 3.35 per cent. The deposits will mature on 27 july 2014. 10 Trade and Other Receivables
2010 Trade receivables less impairment loss provision Total trade receivables vAT recoverable Prepayments Receivables for underlift of oil Other tax receivable Other receivables less impairment loss provision (other receivables) Total trade and other receivables 1,912,523 (127,332) 1,785,191 375,433 138,405 16,566 89,442 54,049 (53,395) 2,405,691 2009 3,167,702 (1,550,610) 1,617,092 295,706 97,005 19,890 131,540 (50,589) 2,110,644

Receivables mainly represent receivables for crude oil, oil products and natural gas sold to customers of the group. The group does not hold any collateral as security, except as described below.

180

At 31 december 2010 trade receivables of AzN 1,656,439 (2009: AzN 1,580,660) were denominated in foreign currencies, mainly in Usd. vAT recoverable relates to purchases which have not been settled at the statement of financial position date. VAT recoverable is reclaimable against VAT on sales upon payment for the purchases. Movements on the provision for impairment of trade receivables are as follows:
2010 At 1 January Additional provision provided during the year Receivables written off during the year as uncollectible Reversal of impairment for receivables At 31 December 1,601,199 60,543 (1,233,296) (247,719) 180,727 2009 2,462,576 297,022 (337,706) (820,693) 1,601,199

The impaired receivables mainly relate to overdue debts (in excess of 360 days) for oil, natural gas and oil products supplied primarily to state-owned entities. An analysis of the age of financial assets that are past due, but not impaired:
2010 1-30 days overdue 1-3 months overdue Over 3 months overdue Total overdue receivables 18,356 2,813 10,899 32,068 2009 1,675 2,118 8,308 12,101

At 31 december 2010 trade receivables of AzN 32,068 (2009: AzN 12,101) were past due, however the group holds guarantee letters and letters of credits in total amount of AzN 28,790 (2009: AzN 10,705).
11 Inventories
2010 Raw materials and spare parts Finished goods goods in transit Work in progress Crude oil Other Total inventories 469,201 153,664 67,642 56,027 53,142 8,896 808,572 2009 441,955 109,054 37,353 55,606 51,151 12,339 707,458

181

12

Other Long-Term Assets

At 31 december 2010 other long-term assets were mainly represented by longterm prepayments for purchase of property, plant and equipment in the amount of AzN 186,676 (2009: AzN 231,263) and receivables from carry arrangement in the amount of AzN 13,527 (2009: AzN 11,952). 13 Other Financial Assets

In accordance with the loan agreement with Palmali dated 5 October 2009 the group provided a loan dated 5 October 2009 in the amount of Usd 75 million (AzN 59,843) bearing annual interest rate of lIbOR plus 4 per cent and maturing on 30 september 2013. The loan and principal are payable on a quarterly basis. On 6 November 2009 the group signed an amendment to the loan agreement according to which, the amount of facility was increased to Usd 100 million (AzN 80,310). On 30 March 2010 the amount of facility was further increased to Usd 120 million (AzN 95,748) and the maturity extended to 30 september 2015. At 31 december 2010 and 2009 the carrying value of loan receivable from Palmali equaled to AzN 91,460 and AzN 81,246, respectively. In accordance with the share Pledge Agreement and Corporate guarantee dated 7 October 2009, signed between the group and owners of Palmali, the latter pledged 340 shares out of total authorized and issued 514 shares and any related equity interests in Palmali as a security for its obligations under the above-mentioned loan agreement. In addition, Palmali has assigned in favor of the group all of its rights and interests in all proceeds and funds received or receivable by Palmali under the transportation services agreement signed with one of the group subsidiaries on 20 March 2008 in relation to transportation of crude oil and oil products. The above security arrangements shall remain in force until Palmali fully repays its liabilities to the group.

182

14

Property, Plant and Equipment

Movements in the carrying amount of property, plant and equipment (PPE) were as follows:
Buildings and construction Oil and gas properties and equipment Plant and machinery

Vessels

Other

Construction in progress 672,361 566,912 55,203 (66,630) (344,999) (6,525) 876,322 732,500 9,305 (122,525) (458,406) (4,758) 1,032,438 (141,364) 307 67,239 (98,449) (172,267) 11,822 89,310 (167,990) 3 (239,122) 793,316 704,055 530,997

Total

Cost: 991,312 At 1 January 2009 Additions 14,678 Acquisition through 196,852 business combination disposals (47,305) Transfers (107,929) Translation to presentation 5,240 currency At 31 December 2009 1,052,848 Additions 45,463 Acquisition through 8,000 business combination disposals (1,438) Transfers 62,949 Translation to presentation (3,232) currency At 31 December 2010 1,164,590 Depreciation and impairment: At 1 January 2009 (183,709) depreciation charge (67,311) for the year disposals 26,341 Transfers 6,181 Impairment (158) Translation to (355) presentation currency At 31 December 2009 (219,011) depreciation charge (68,726) for the year disposals 3,429 Transfers (723) Impairment Translation to 299 presentation currency At 31 December 2010 (284,732) Net book value: 879,858 At 31 December 2010 At 31 December 2009 833,837 At 1 January 2009 807,603

3,896,943 456,593 517,774 (25,693) 401,240 2,676 5,249,533 588,916 327 (186,556) 297,032 (83,794) 5,865,458 (835,194) (385,466) 10,335 (68,156) (131,965) (90) (1,410,536) (410,921) 79,744 (83,374) (190,133) 2,437 (2,012,783) 3,852,675 3,838,997 3,061,749

1,648,496 91,245 9,504 (26,316) 43,652 9,363 1,775,944 80,955 42,830 (16,033) 89,609 (35,141) 1,938,164 (244,227) (153,575) 14,621 3,026 1,933 (1,950) (380,172) (166,519) 10,340 (2,617) (1,924) 5,939 (534,953) 1,403,211 1,395,772 1,404,269

398,598 25,304 (97) 81 423,886 34,515 (2,234) 61 456,228 (54,875) (28,456) 97 (37) (13,000) (96,271) (28,816) 1,002 (124,085) 332,143 327,615 343,723

875,058 38,791 7,711 (4,618) 7,955 6,188 931,085 127,264 99 (8,365) 8,755 51,108 1,109,946 (49,332) (28,013) 1,186 (8,253) (393) (84,805) (45,037) 5,582 (2,596) 334 (126,522) 983,424 846,280 825,726

8,482,768 1,193,523 787,044 (170,659) 16,942 10,309,618 1,609,613 60,561 (337,151) (75,817) 11,566,824 (1,508,701) (662,821) 52,887 (241,639) (2,788) (2,363,062) (720,019) 111,919 (360,047) 9,012 (3,322,197) 8,244,627 7,946,556 6,974,067

183

Included in the disposed property, plant and equipment as of 31 december 2010 were assets with net book value of AzN 54,049 (2009: AzN 43,451) which were transferred to governmental entities as part of social program approved by the government and recognised in the distribution to the government (Note 27). due to the fact that the assets are constructed/acquired and disposed to the government within the same year, management believe that their fair value at the date of transfer to the government approximate cost of construction/acquisition. Acquisition through business combination represents property, plant and equipment acquired through acquisition of Azerikimya sC state-owned company on 2 April 2010 (Note 36) and sOCAR bosphorus Energy on 25 February 2010 in the amounts of AzN 48,316 and AzN 12,245, respectively. 15 Intangible Assets other than Goodwill

The movement of intangible assets other than goodwill and related accumulated amortisation for the year ended 31 december 2010 was as follows:
Land and property rights Cost: At 1 January 2009 Additions Translation to presentation currency At 31 December 2009 Additions disposals Translation to presentation currency At 31 December 2010 Amortization and impairment: At 1 january 2009 Amortization charge for the year At 31 December 2009 Amortization charge for the year disposals At 31 December 2010 Net book value: At 31 December 2010 At 31 December 2009 At 1 January 2009 167,381 1,351 168,732 (5,237) 163,495 (2,578) (3,769) (6,347) (3,869) (10,216) 153,279 162,385 164,803 Water rights 200,794 1,630 202,424 (6,310) 196,114 (2,874) (4,203) (7,077) (4,383) (11,460) 84,654 95,347 197,920 Trade name 38,339 335 38,674 (1,281) 37,393 37,393 38,674 38,339 Customer relationship 101,766 755 102,521 (2,973) 99,548 (3,106) (3,770) (6,876) (4,662) (11,538) 88,010 95,645 98,660 Other intangible assets 13,813 20,151 16 33,980 10,577 (8) (189) 44,360 (2,792) (2,002) (4,794) (3,092) 3 (7,883) 36,477 29,186 11,021 Total 522,093 20,151 4,087 546,331 10,577 (8) (15,990) 540,910 (11,350) (13,744) (25,094) (16,006) 3 (41,097) 499,813 521,237 510,743

184

At 31 december 2010 included in the carrying value of intangible assets was AzN 37,393 (2009: AzN 38,674) trade name of Petkim acquired through business combination in May 2008 (Note 26). The carrying value of Petkim trade name at december 31, 2010 has been tested for impairment through comparison with its recoverable amount. Recoverable amount has been determined based on the relief from royalty approach. In applying this methodology, the group estimated the value of the trade name by capitalizing the royalties saved due to Petkim owning the trade name. The royalty rate of 0.2 per cent was used in the calculation and the discount rate of 10.6 per cent was applied in the impairment study based on the WACC for 11 years. As a result of the test performed, no impairment on the Petkim trade name has been identified. during 2010, total amortization expense amounting to AzN 16,006 (2009: AzN 13,744) have been allocated to cost of sales by AzN 7,474 (2009: AzN 6,910), marketing, selling and distribution expenses by AzN 5,300 (2009: AzN 4,395) and general administrative expenses by AzN 3,232 (2009: AzN 2,439). 16 Investments in Jointly Controlled Entities

The table below summarises the movements in the carrying amount of the groups investment in jointly controlled entities.
Note Carrying amount at 1 January 2010 Additions to investments in jointly controlled entities share of after tax results of jointly controlled entities dividends received from jointly controlled entities loss offset with receivables from jointly controlled entity de-recognition of jointly controlled entities Exchange differences Other Carrying amount at 31 December 2010 2010 103,061 104,113 6,390 (5,692) 154 40,844 248,870 2009 113,685 18,920 (12,887) (6,178) 18,788 (39,114) (78) 9,925 103,061

On 1 july 2009, Caspian drilling Company (CdC) repurchased 45 per cent of outstanding shares held by the other member of joint venture and the group effectively became the sole owner of CDC. Accordingly, CDC is classified as subsidiary effective from 1 July 2009. In October 2009 Anshad Petrol and shirvan Oil were closed. In 2010 Caspian Offshore Fabricators was liquidated.

185

At 31 december 2010, the groups interests in its principal jointly controlled entities and their summarised aggregate financial information, including total assets, liabilities, revenues and profit or loss, were as follows:
Noncurrent assets Noncurrent liabilities

Name Carlina Overseas Corp.

Current assets 61,573

Current liabilities

Revenue 32,835 26,640 551 36,008 34,297 594 95,812 3,442 3,424 14,736 17,501 185,856 70 144,028 595,794

Profit/ (loss) (53,373) 6,692 (255) 207 204 (171) 10,419 1,316 (99) 1,974 136 (1,756) (275) (687) 71,396 35,728

Interest held 51% 40% 60% 60% 50% 50% 51% 50% 30% 51% 20% 51% 97% 80% 25% 51% 51%

Country of incorporation british virgin Islands Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Poland Azerbaijan Azerbaijan

137,596 (147,181) (227,983) 22,644 112 6,340 460 872 3,614 620 132 11,460 1,450 47,899 13,023 2,820 3,542 (19,799) (339) (9,072) (13,766) (953) (41,463) (1,107) (763) (6,856) (259) (5,551) (1,445) (15) (522) (38,590) (37) (74) (613) (287) (34,569) (8,868) (46,308)

Azgerneft 18,365 Azeri Fugro Azfen bosshelf llC Azturqaz Azeri M.I. drilling Fluids sOCAR KPs Oil and gas Proservice Ekol Engineering services Caspian shipyard Company socar Petroleum CjsC sOCAR-UgE sOCAR Umid sarmatia sOCAR baglan llC 406 16,575 13,788 297 51,407 555 4,390 3,727 13,517 13,098 422 2,028 1,224 5,984

129,629 (18,123)

sOCAR AQs 226,638 Total 433,994

382,213 (305,804) (318,739)

At 31 december 2009, the groups interests in its principal jointly controlled entities and their summarised aggregate financial information, including total assets, liabilities, revenues and profit or loss, were as follows:

186

Name Carlina Overseas Corp.

Current assets 15,109

Noncurrent assets 200,615 18,023 42 3,581 404 859 17 2,938 289 222 7,156 2,201 3 24,773 12,605 8,505 2,783 285,016

NonCurrent current liabilities liabilities (112,841) (262,150) (11,920) (404) (10,644) (8,379) (827) (104) (33,541) (545) (133) (8,608) (721) (38) (80) -

Revenue 18,812 18,530 886 25,371 9,576 732 571 68,215 3,269 3,244 9,509 52,812

Profit/ (loss) (36,842) 3,080 (18) 128 54 (129) (15) 6,654 (37) 1,509 278 10,556 (15) 144 (1,405) (204) (1,524) 46,530 28,744

Interest held 51% 40% 60% 60% 50% 50% 50% 51% 50% 30% 51% 20% 51% 51% 97% 80% 25% 51%

Country of incorporation british virgin Islands Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Poland Azerbaijan

Azgerneft 15,520 Azeri Fugro 760 Azfen 20,703 bosshelf llC 8,217 Azturqaz 380 Caspian Offshore 1,120 Fabricators Azeri M.I. drilling Fluids 40,883 sOCAR KPs 324 Oil and gas Proservice 2,194 Ekol Engineering 4,462 services Caspian shipyard 17,774 Company Energy solutions group 59 socar Petroleum CjsC 9,965 sOCAR-UgE 124 sOCAR Umid 1,848 sarmatia 451 sOCAR AQs 111,366 Total 251,259

(507) (13,997) 81,928 (242) (2,165) (290) 79 (20,851) (19,411) 118,468 (226,719) (281,679) 412,002

In March 2010 the group entered into joint agreement with other participant to establish a jointly controlled entity named sOCAR CsCR. Total equity of the entity is AzN 0.1 and the groups share is 51 per cent. The entity was established in April 2011. There were no operations of this entity in 2010. In june 2010 the group entered into joint agreement with other participant to establish a jointly controlled entity named sOCAR CAPE. Total equity of the entity is AzN 100 and the groups share is 51 per cent. There were no operations of this entity in 2010. In september 2010 the group entered into joint agreement with other participants to establish a jointly controlled entity named AgRI lNg Project Company. Total equity of the entity is AzN 76 and the groups share is 33.33 per cent. There were no operations of this entity in 2010. The carrying value of the groups investments in Carlina Overseas Corp. and Energy solutions group is nil both at 31 december 2010 and 2009. At 31 december 2010 the groups share in unrecognised losses of Carlina Overseas Corp. that exceeds the groups interest in this investee is AzN 74,041 (2009: AzN 46,821). At 31 december 2010 Energy solutions group was in the process of liquidation.

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17

Investments in Associates

The table below summarises the movements in the carrying amount of the groups investment in associates.
Note Carrying amount at 1 January 2010 Additions to investments in associates share of after tax results of associates dividends received from associates derecognition of associates Exchange differences Carrying amount at 31 December 2010 7 2010 315,353 3,829 99,080 (57,748) (902) (8,527) 351,085 2009 292,732 301 89,854 (58,481) (948) (8,105) 315,353

In 2010 sOCAR Rodan and sOCAR AsM were liquidated. At 31 december 2010, the groups interests in its principal associates and their summarised aggregate financial information, including total assets, liabilities, revenues and profit or loss, were as follows:
Name Azerbaijan bTC ltd Caspian geophysical Azlab Azeri drilling Company Azerbaijan john brown Cross Caspian Oil and gas 12,788 logistics sOCAR AsM 4,305 Ateshgah Insurance Company 20,465 Caspian Pipe Coatings llC 7,712 supra Holding 2,442,178 south Caspian Pipeline Company 1,054,694 south Caspian Pipeline Company 19,820 Holding Company Azerbaijan gas supply Company 68,193 Total Total assets 764,572 4,544 918 11,523 128 Total liabilities (535,896) (80) (2) (89) (2) (100) (85) (3,699) (10) (10,211) (997,512) (19,189) (68,181) Revenue 273,569 6,123 733 20,037 414 108,224 14,750 16,734 3,024 15,775,048 169,213 1,209 145,967 Profit/ Interest Country of (loss) held incorporation 240,480 23% Cayman Islands (1,351) 45% Azerbaijan 61 50% Azerbaijan 7,890 35% Azerbaijan 16 40% Azerbaijan 126 2,344 326 47 68,290 60,475 1,176 34% 30% 10% 50% 50% 10% 10% 8% Azerbaijan Azerbaijan Azerbaijan Azerbaijan Malta Cayman Islands Cayman Islands Cayman Islands

4,411,840 (1,635,056) 16,535,045 379,880

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At 31 december 2009, the groups interests in its principal associates and their summarised aggregate financial information, including total assets, liabilities, revenues and profit or loss, were as follows:
Name Azerbaijan bTC ltd Caspian geophysical Azlab Azerbaijan john brown Cross Caspian Oil and gas logistics sOCAR AsM Ateshgah Insurance Company Caspian Pipe Coatings llC supra Holding south Caspian Pipeline Company south Caspian Pipeline Company Holding Company Azerbaijan gas supply Company Total Total assets 710,130 3,923 914 65 5,290 8,353 18,646 7,482 Total liabilities (52,815) (1,926) (237) (8) (5,208) (7,814) (11,905) (677) Revenue 266,223 8,891 741 236 65,493 30,309 14,359 795 8,359,374 169,173 1,403 50,013
8,967,010

Profit/ (loss) 241,033 1,916 154 (39) (176) 118 870 (2,232) 49,777 107,986 1,370 400,777

Interest Country of incorporation held 23% 45% 50% 40% 34% 30% 10% 50% 50% 9.8% 10% 8% Cayman Islands Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Malta Cayman Islands Cayman Islands Cayman Islands

1,489,456 (1,387,350) 1,096,686 21,091 9,396 (66,891) (614) (9,383)

3,371,432 (1,544,828)

At 31 december 2010 and 2009 the group holds 8 per cent interest in the Azerbaijan gas supply Company (AgsC). AgsC was established together with the Ministry of Fuel and Energy of the Azerbaijan Republic and contractor parties of shah deniz Production sharing Agreement (shah deniz PsA) related to the Exploration, development and Production of gas field on Caspian Sea where the Group has 10 per cent participating interest. AgsC is established for marketing, accounting, billing, payment and reporting of other administrative activities related to the sales of shah deniz gas and operates on no gain / no loss basis. The Group exercises a significant influence over AgsC.

189

18

Loans Receivable from Jointly Controlled Entities

loans receivable from jointly controlled entities represents balances due from sOCAR Petroleum and Carlina Overseas Corp. At 31 december 2010 the carrying value of the receivable from Carlina Overseas Corp. equals to AzN 263,235 (2009: AzN 303,142). The loan bears an annual interest rate of lIbOR plus 2.5 per cent payable on a quarterly basis. The maturity date of the loan is 28 december 2014. In accordance with the share Pledge and Retention Agreement dated 28 december 2006 and share Charge and Retention Agreement dated 12 April 2007 between the owners of Carlina Overseas Corp. and AzACg, the owners of Carlina Overseas Corp. pledged in favour of AzACg all of their rights and interests in all proceeds and funds received or receivable by Carlina Overseas Corp. and all of their shares and any other equity interests in Carlina Overseas Corp. Management of the group believes that the value of the collateral provides an adequate security for the carrying value of this receivable. Under the terms of the loan agreement, if Carlina Overseas Corp. fails to repay accrued interest at the end of quarter interest is charged at default rate of lIbOR + 4.5 per cent. Interest income accrued during the year ended 31 december 2010 and 2009 equalled to AzN 11,590 and AzN 20,033, respectively. Receivable from Carlina Overseas Corp. is past due as no interest payments have been received by the group from Carlina Overseas Corp. at 31 december 2010 and 2009. As a result, default interest rate of lIbOR plus 4.5 per cent was charged on the unpaid principal loan balance during 2010 and 2009. At 31 december 2010 and 2009 the overdue amount under this loan is AzN 64,504 and AzN 52,914, respectively. see Note 37 for the event after reporting date related to Carlina loan. In 2010 the group has recognized impairment provision related to this receivable in the amount of AzN 95,748 (2009: nil). loan receivable from sOCAR Petroleum in the amount of AzN 17,024 (2009: AzN 8,749) is on demand and does not bear any interest rate.

190

19

Trade and Other Payables

2010 2,191,712 111,272 15,965 2,318,949 39,796 48,163 38,921 2,445,829 2009 1,604,814 289,195 1,894,009 120,453 31,603 41,690 2,087,755

Trade payables Accrued liabilities Other payables Total financial payables liabilities for overlift of oil Advances from customers Payable to employees Total trade and other payables

Trade payables of AzN 1,670,226 (2009: AzN 1,513,741) are denominated in foreign currencies, mainly in Usd. Trade payables mainly represent payables for drilling, transportation and utilities provided by vendors of the group. Accrued liabilities represents groups share in the respective accrued liabilities reported by the operator of ACg PsA and shah deniz PsA. liabilities for overlift relate to the oil lifted by the group in excess of its participating interests in ACg PsA and shah deniz PsA and thus, represents the groups obligation to deliver physical quantities of oil out of its share of future production.

191

20.

Borrowings
2010 585,353 77,962 50,000 27,807 21,800 15,890 14,014 4,483 12,246 15,553 171,724 996,832 2009 16,065 64,248 93,002 28,010 16,005 6,883 16,773 147,094 388,080

Short-term borrowings International bank of Azerbaijan loan deutsche bank loan Xalqbank loan Akbank T.A. loan Ministry of Finance loan Turkiye Garanti Bankasi A. loan bank of georgia loan Export Import bank of japan loan Other short-term borrowings Accrued interest payable Current portion of long-term borrowings Total short-term borrowings and current portion of longterm borrowings Long-term borrowings International bank of Azerbaijan loans Akbank T.A./Turkiye Garanti Bankasi A. loan bNP Paribas loan japan bank for International Cooperation (jbIC) loan yapiKredi loan AbN Amro/Citibank loan West lb loan Natixis loan societe generale loan Ministry of Finance loan lalaben loan International development Association (IdA) loan Other long term borrowings Less: Current portion of long-term borrowings Total long-term borrowings Total borrowings

1,148,950 500,528 152,852 143,825 111,048 58,626 56,484 39,096 12,225 5,251 5,683

1,727,598 500,175 132,403 163,297 24,093 49,454 6,926 7,042

(171,724) 2,062,844 3,059,676

(147,094) ,463,894 ,851,974

192

deutsche bank loan. On 29 October 2009 the deutsche bank provided a loan to the Group for a 12 month period. The total amount of financing available under this facility agreement was Usd 80,000 thousand (AzN 64,000). The loan bears an annual interest rate of lIbOR plus 2 per cent. In October 2010 the group fully repaid the loan and entered into a new loan agreement with the bank for a 12 month period. The total amount of this facility is Usd 100,000 thousand (AzN 79,790) and bears an annual interest rate of lIbOR+ 1.5 per cent. At 31 december 2010 the total outstanding balance under this facility was AzN 77,962 (2009: AzN 64,248). International bank of Azerbaijan loan. On 21 May 2007, IbA provided a credit line with a Usd 50,000 thousand (AzN 39,895) limit to the group for the period of 36 months until 21 May 2010. The loan bears annual interest rate of lIbOR plus 2 per cent. The loan was fully repaid by the group as of 31 december 2010. On 24 October 2007, IbA provided a credit line with a Usd 60,000 thousand (AzN 47,874) limit to the group for the period of 36 months until 24 October 2010. The loan bears annual interest rate of lIbOR plus 3 per cent. The loan was fully repaid by the group as of 31 december 2010. On 6 december 2007, IbA provided an additional credit line to the group for a total amount of up to Usd 40,000 thousand (AzN 31,196) for the period of 36 months until 6 december 2010. The loan bears annual interest rate of lIbOR plus 3 per cent. The loan was fully repaid by the group as of 31 december 2010. On 22 May 2008, IbA provided a loan to the group of Usd 665 million (AzN 530,604) for the period of 36 months until 22 May 2011. The loan bears an annual interest of lIbOR plus 2 per cent. This borrowing is collateralized by a special cash deposit of Usd 665 million (AzN 530,604) placed with IbA (Note 9). The amount outstanding under this facility as at 31 december 2010 was AzN 528,335 (2009: AzN 532,186). during the period from 29 december 2008 through 30 september 2009 the groups subsidiary Azerikimya PU before its acquisition by the group obtained several loans from IbA in total amount of AzN 39,000. After combination with the group the terms of these loans were negotiated with the IbA. According to the revised terms these loans bear annual interest rate of 3 per cent and mature on 16 May 2011. At 31 december 2010 total carrying value of these loans was AzN 38,400. On 21 july 2009, IbA provided a loan to the group of AzN 750 million for the period of 84 months until July 2016 for the purposes of refinancing of existing loans and finance the Groups investment activities. The loan bears an annual interest rate of 3 per cent. The amount outstanding under this facility as at 31 december 2010 was AzN 750,000, including AzN 125,000 related to current portion of long term borrowings (2009: AzN 750,000).

193

On 27 july 2009, the group obtained a new loan from IbA amounting to Usd 420 million (AZN 337,302) with a fixed rate of 3.5 percent maturing on 22 July 2014. With the proceeds of this new loan, the group fully paid the debt to viani amounting to Usd 227 million (AzN 182,304) in 2009. As of 31 december 2010 the outstanding loan amount is AzN 335,118 (2009: AzN 337,302). This borrowing is collateralized by a special cash deposit of Usd 420 million (AzN 335,118) placed with IbA (Note 9). On 20 May 2010, the group obtained a new loan from IbA amounting to Usd 80 million (AzN 64,288) with an interest rate of lIbOR plus 3.5 per cent maturing on 20 May 2013. As of 31 december 2010 the outstanding loan amount is AzN 63,832 (2009: nil). This borrowing is collateralized by a special cash deposit of Usd 80 million (AzN 63,832) placed with IbA (Note 9). On 1 july 2010, the group obtained a new loan from IbA amounting to Usd 20 million (AzN 15,958) with an interest rate of 1.65 per cent maturing in April 2011. The proceeds from this facility were directed towards implementation of gasification program in the Azerbaijan Republic. The amount outstanding under this facility as at 31 december 2010 was AzN 10,639 (2009: nil). This borrowing is collateralized by a special cash deposit of Usd 20 million (AzN 16,019) placed with IbA (Note 9). On 4 August 2010, the group obtained a new loan from IbA amounting to Usd 30 million (AzN 23,937) with an interest rate of 14 per cent maturing on 4 April 2011. As of 31 december 2010 the outstanding loan is AzN 7,979 (2009: nil). On 14 May 2010, IbA provided a credit line to the group amounting to Usd 40 million (AzN 31,916) which was collateralised by the groups deposit with IbA in the amount of Usd 40 million (AzN 31,916). At 31 december 2010 this credit line was not used by the group. Akbank T.A. loan. On 4 December 2009 Akbank T.A.. provided a loan to the Group with maturity date of 6 April 2011. The total amount of financing available under this facility agreement was Usd 35,000 thousand (AzN 27,927). The loan bears an annual interest rate of 2.1 per cent. The amount outstanding under this facility as at 31 december 2010 was AzN 27,807 (2009: AzN 28,010) Akbank T.A../Turkiye Garanti Bankasi A. loan. In May 2008, the Group obtained a syndicated loan from Turkiye Garanti Bankasi A.. and Akbank T.A.. acting as lead arrangers for a total amount of Usd 625 million bearing annual interest of lIbOR plus 3 per cent from May 2008 through May 2012, and lIbOR plus 4 per cent from May 2012 through maturity in May 2017. The loan is repayable in 7 (seven) pre-defined annual installments commencing in 2011. Loan maturity date is 30 june 2017. In accordance with the terms of the loan, the funds were made available to the Group to finance the acquisition of Petkim (Note 26). The Group

194

pledged its 99.75 per cent interest in STEA, a subsidiary holding the Groups 51 per cent voting interest in Petkim as collateral for the amounts due under this facility. The amount outstanding under this facility as at 31 december 2010 was AzN 500,528, including AzN 16,585 related to current portion of long term borrowings (2009: AzN 500,175). Turkiye Garanti Bankasi A. loan. On 4 December 2009 Turkiye Garanti Bankasi A. provided a loan to the Group with maturity date of 4 April 2011. The total amount of financing available under this facility agreement was USD 20,000 thousand (AzN 16,005). The loan bears an annual interest rate of 1.95 per cent. The amount outstanding under this facility as at 31 december 2010 was AzN 15,890 (2009: AzN 16,005). AbN Amro/Citibank loan. In February 2008 the group entered into a loan agreement with a bank syndicate led by AbN AMRO bank N.v. london branch and Citibank N.A. london branch for a total amount of Usd 610 million (AzN 486,719) bearing annual interest of lIbOR plus 1.75 per cent and repayable in three semiannual instalments commencing in February 2010. loan maturity date is 1 April 2011. The proceeds from this facility were directed towards the acquisition of Petkim. The group has fully repaid the loan facility as at 31 december 2010 (2009: AzN 163,297). japan bank for International Cooperation loan. In April 2000, the Azerigaz CjsC, which became a part of the group since 1 july 2009, entered into a loan agreement with japan bank for International Corporation for a total amount of jPy 15,462,232 thousand bearing an annual interest rate of 1.5 per cent and repayable in 60 semi-annual installments commencing on 20 september 2009. loan maturity date is 20 september 2039. The proceeds from this facility were directed towards implementation of gasification program in the Azerbaijan Republic. The amount outstanding under this facility as at 31 december 2010 was AzN 143,825, including AzN 4,866 related to current portion of long term borrowings (2009: AzN 132,403). In 26 February 1998, Azerikimya, which was acquired by the group on 2 April 2010, entered into a loan agreement with japan bank for International Corporation for a total amount of jPy 9,150,250 thousand bearing annual interest of 2.5 per cent and repayable in 20 semi-annual installments commencing in 21 july 2001. loan maturity date is 21 january 2011. The proceeds from this facility were directed towards installation of steam generation facility. The amount outstanding under this facility as at 31 december 2010 was AzN 4,483. lalaben loan. On 20 july 2007, the group entered into an RPP Advance Payment Agreement with Lalaben LLC (Lalaben). Total amount of financing provided to the group in 2007 under the RPO Advance Payment Agreement was Usd 300 mil-

195

lion (AZN 240,930) (the RPO facility) for the purpose of financing upgrade and refurbishment of sOCARs gas production assets. lalaben in turn obtained a Usd 300 million (AZN 239,370) loan from a syndicate of banks and financial institutions led by bNP Paribas, AbN Amro bank N.v. and societe generale. The facility provided to the group under the RPP Advance Payment Agreement bears annual interest of lIbOR plus 0.6 per cent for the period from 20 july 2007 through 20 july 2010, lIbOR plus 0.75 per cent for the period from 20 july 2010 through 20 july 2011, lIbOR plus 0.9 per cent for the period from 20 july 2011 through 20 july 2012, and lIbOR plus 0.975 per cent for the period from 20 july 2012 until the maturity of the agreement. Interest and principal are payable at the end of each quarter. The RPP facility was due to mature on 20 july 2013. According to the terms of the RPP Advance Payment Agreement all proceeds from the sale of the RPP are transferred by customers directly to lalabens current accounts with bNP Paribas until the groups obligations to lalaben under the RPP facility are fully settled. Amount due to lalaben under the RPP facility was fully repaid as of 31 december 2010 (31 december 2009: AzN 49,454). Natixis s.A bank loan. On 16 december 2009, Natixis s.A bank provided a loan to the group in the amount of Usd 30 million for the period of 36 months. The loan is repayable in pre-determined instalments starting from 2010. The loan bears an annual interest of lIbOR plus 5 per cent. At 31 december 2010 the amount outstanding under this loan was AzN 17,409, including AzN 8,704 related to current portion of long term borrowings (2009: AzN 24,093). In May 2010 group entered in a new loan agreement with Natixis s.A bank for a total amount of Usd 50 million for the period of 36 month until 31 May 2013. The loan bears an annual interest rate of lIbOR plus 3.75 per cent. The amount outstanding under this facility as at 31 december 2010 was AzN 39,075, including AzN 13,298 related to current portion of long-term borrowings (31 december 2009: nil). International development Association loan. In july 1996 the Azerigaz CjsC entered into a loan agreement with International development Association for a total amount of Usd 17,234 thousand bearing annual interest rate applicable for World bank Currency Pool loans with interest rate of 7.79 per cent in the reporting period and repayable in 29 semi-annual instalments commencing on 15 december 2001. loan maturity date is 15 june 2016. The proceeds from this facility were directed towards implementation of gasification program in the Azerbaijan Republic. The amount outstanding under this facility as at 31 december 2010 was AzN 5,251, including AzN 131 related to current portion of long term borrowings (2009: AzN 6,926).

196

bNP Paribas loan. On 19 March 2010 the group entered into a new credit line agreement with bNP Paribas of Usd 250 million limit maturing in March 2013. Total drawn amount as per 31 december 2010 constitutes Usd 200 million. The interest rate for this loan is lIbOR plus 4 per cent per annum. The group borrowed this loan for general corporate purposes. The amount outstanding under this facility as at 31 december 2010 was AzN 152,852 (2009: nil). WEsT lb loan. In july 2010 the group entered into new loan agreement with WEsT lb bank for the amount of Usd 75 million maturing in july 2013. The interest rate on this loan is lIbOR plus 3.85 per cent per annum. The amount outstanding under this facility as at 31 december 2010 was AzN 58,626 (2009: nil). yapiKredi bank loan. In july 2010 the group entered into a loan agreement with yapiKredi bank for the amount of Usd 100 million maturing in july 2013. The interest rate for this loan is lIbOR plus 3.65 per cent per annum. The amount outstanding under this facility as at 31 december 2010 was AzN 79,790 (2009: nil). In August 2010 the group borrowed another loan in the amount of Usd 4,150 thousand from yapiKredi bank maturing in january 2012. The loan bears interest rate of 5.5 percent per annum. The amount outstanding under this facility as at 31 december 2010 was AzN 3,311 (2009: nil). In december 2010 the group entered into a new loan agreement for the amount of Usd 35 million maturing december 2013. The interest rate for this loan is lIbOR plus 4 per cent per annum. The amount outstanding under this facility as at 31 december 2010 was AzN 27,947 (2009: nil). societe generale loan. In december 2010 societe generale provided a loan of Usd 50 million for the period of 36 months until december 2013. The loan bears an annual interest rate of 4 per cent. The group took this loan for general corporate purposes. The amount outstanding under this facility as at 31 december 2010 was AzN 39,096 (2009: nil). Ministry of Finance loan. On 17 February 2003, the Ministry of Finance of the Azerbaijan Republic provided loan facility of AzN 12,400 to Azerikimya for the period of 3 years until 1 january 2008, however it was not repaid on due date, and no penalty was applied on it by the Ministry of Finance. The loan bears an annual interest rate of 1 per cent. The amount outstanding under this facility as at 31 december 2010 is AzN 12,400. On 20 November 2003, the Ministry of Finance provided loan facility for AzN 9,400 to the Azerikimya for the period of 4 years until 20 November 2007, however it was not repaid on due date, and no penalty was applied on it by the Ministry of Finance. The loan bears annual interest rate of nil per cent. The amount outstanding under this facility as at 31 december 2010 is AzN 9,400.

197

The group is negotiating with the Ministry of Finance a restructuring of these loan facilities, including their possible cancellation. The management of the group expects positive outcome of the negotiation. On 15 july 2009, the Ministry of Finance provided loan facility for AzN 8,584 to the Azerikimya for the period of 4 years until 1 december 2013. The loan bears a nominal annual interest rate of nil per cent and discounted using 2.5 per cent effective discount rates regarded as a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability as of the reporting date. The amount outstanding under this facility as at 31 december 2010 was AzN 8,021. On 19 April 2010, the Ministry of Finance provided loan facility for AzN 4,204 to the group for the period of 4 years until 1 june 2014. The loan bears an annual interest rate of nil per cent and was discounted using 2.5 per cent effective discount rates regarded as a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability as of the reporting date. The amount outstanding under this facility as at 31 december 2010 was AzN 4,204. bank of georgia loan. In july 2010 the group entered into a loan agreement with the bank of georgia for the amount of Usd 23,574 thousand maturing in december 2011. The interest rate for this loan is 13 per cent per annum. The amount outstanding under this facility as at 31 december 2010 was AzN 14,014 (31 december 2009: AzN nil). Xalqbank loan. In December 2009 the Group entered in a loan agreement with Xalqbank for a total amount of AZN 93,002 for the period of 1 month until 28 January 2010. In january 2010 group fully repaid its commitment under this facility. In July 2010 the Group entered in a new loan agreement with Xalqbank in the amount of AzN 50,000 for the period of 8 month until March 2011. The loan bears an annual interest rate of 3.15 per cent. The amount outstanding under this facility as at 31 December 2010 is AZN 50,000 (2009: nil). Amount due to Xalqbank was fully repaid in 2011.

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2010 borrowings denominated in: - Usd - AzN - jPy - yTl - gEl Total borrowings

2009

2,036,591 872,543 148,308 1,773 461 3,059,676

1,863,207 845,752 132,403 2,537 8,075 2,851,974

21

Other Taxes Payable

2010 2009 122,981 12,984 10,176 8,326 2,690 1,104 2,632 26,402

Payable to sOFAz Price margin tax payable vAT payable Property taxes and duties Payroll tax Tax penalties and interests social security deductions Other taxes payable

7122,834 18,317 12,809 10,895 4,851 2,255 1,211 17,061

Total other taxes payable

190,233

187,295

In 2008 apart from regular export tax the group was liable to transfer a certain share of proceeds from sales of crude oil priced at the level exceeding the price determined by the state budget (Usd 50 per barrel for 2009) to the sOFAz. No such taxes were imposed on the group in 2010 and 2009.

199

22

Asset Retirement Obligations

The group has a legal and constructive obligation with respect to decommissioning of oil and gas production and storage facilities and environmental clean-up. Movements in provisions for the related asset retirement obligations are as follows:
Note Carrying amount at 1 January Additions Unwinding of the present value discount Effect of change in discount rate Exchange differences Carrying amount at 31 December 2010 170,727 16,162 14,252 124,402 (911) 324,632 2009 86,201 (2,064) 6,865 79,911 (186) 170,727

32

The group makes full provision for the future cost of oil and natural gas production facilities retirement and related pipelines based on the present value of the installation of those facilities. The provision has been estimated using existing technology, at current prices and discounted using pre-tax discount rates that reflects current market assessments of the time value of money and the risks specific to the liability as of the reporting date. These costs are expected to be incurred over the useful life of the fields and properties ranging between 14 and 72 years from the reporting date. Included within the asset retirement obligations at 31 december 2010 was AzN 53,034 (2009: AZN 34,582) relating specifically to estimated site restoration liabilities. Estimated costs of dismantling oil and gas production facilities, pipelines and related processing and storage facilities, including abandonment and site restoration costs amounting to AzN 241,819 at 31 december 2010 (2009: AzN 102,579) are included in the cost of oil and gas properties and equipment. The following inflation rates were applied in calculation of discounted cash flows:
Year Inflation rate 2011 6.0% 2012 4.0% 2013 3.0% 2014 3.0% 2015 and later 3.0%

200

While the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of incurring these costs. Asset retirement obligations related to the PsAs are determined with reference to capital costs incurred by contractor parties. They are limited to 10 per cent the capital costs incurred by contractor parties and their payments are linked to maturities of respective PsAs. governmental authorities are continually reviewing regulations and their enforcement. Consequently, the groups ultimate liabilities may differ from the recorded amounts. 23 Other Provisions for Liabilities and Charges

Movements in other provisions for liabilities and charges are as follows:

Note Carrying amount at 1 January 2009 Change in estimate Utilisation Unwinding of the present value 32 discount discount rate change Carrying amount at 31 December 2009 of which: Current Non-current Carrying amount at 1 January 2010 Change in estimate Utilisation Unwinding of the present value 32 discount discount rate change Carrying amount at 31 December 2010 of which: Current Non-current Environmental obligations 446,925 (51,172) (50,118) 35,754 35,155 416,544 89,665 326,879 416,544 (12,284) (33,810) 34,990 10,979 416,419 179,879 236,540 Disability Payments 49,543 4,320 (8,564) 3,960 (9,838) 39,421 9,794 29,627 39,421 11,013 (7,647) 3,215 10,544 56,546 10,892 45,654 8,306 8,306 Unused vacation 6,990 19,264 (23,421) 2,833 2,833 2,833 28,836 (23,363) Total 503,458 (27,588) (82,103) 39,714 25,317 458,798 102,292 356,506 458,798 27,565 (64,820) 38,205 21,523 481,271 199,077 282,194

201

Under the Presidential decree number 1697 dated 28 september 2006 the group prepared and approved the Action Plan for Environmental Restoration with respect to the damage caused to the environment as a result of the groups activities within the Apsheron area. In 2009 the group amended the Action Plan in accordance with the Presidential decree dated 14 April 2009. Corresponding provision is recognised at the present value of future costs to be incurred for the environmental remediation. The group estimates that the related costs will be incurred from 2011 through 2013. The group has an obligation to compensate its employees for the damage caused to their health during their employment, as well as to compensate the families of the employees died at work. The compensation provided is linked to the salaries paid to the affected employees. The group calculated the present value of the disability payments to employees using a discount rate of 6.91 per cent. For the purpose of calculation of the lifetime payments to injured employees, the group estimated a life expectancy as 70 and 75 for men and women, respectively. The inflation rates in Note 22 were applied to match the escalation in average salaries. 24 Deferred Income

The Group obtained government grants aimed at gasification of Baku suburban area and regions of the Azerbaijan Republic and recognised them as deferred income:
2010 2009 110,178 (4,400) 105,778 Carrying amount at 1 January Acquisitions through business combinations Amortisation of deferred income to match related depreciation Carrying amount at 31 December 105,778 (4,595) 101,183

25

Other Non-current Liabilities

Other non-current liabilities comprise the following:

2010 Provision for employment termination benefits Provision for seniority incentive bonus Other liabilities Total non-current liabilities 39,529 1,730 49,838 91,097 2009 39,095 1,594 40,689

Under the Turkish Labour Law, the Group is required to pay termination benefits to each employee who has completed one year of service and whose employment is ter-

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minated without due cause, or who is called up for military service, dies or retires after completing 25 years of service (20 years for women). The amount payable consists of one months salary limited to a maximum of AzN 1 for each year of service as of december 31, 2010 and 2009. The liability is not funded, as there is no funding requirement. The provision is calculated by estimating the present value of the future probably obligation of the group arising from the retirement of the employees. IAs 19 requires actuarial valuation methods to be developed to estimate the enterprises obligation under defined benefit plan. Accordingly, the following actuarial assumptions were used in the calculation of the total liability:

Qeyd Discount rate (%) Probability of retirement (%)

2010 4.66 100

2009 5.92 100

The principal assumption is that the maximum liability for each year of service will increase in line with inflation. Thus the discount rate applied represents the expected real rate after adjusting for the anticipated effects of future inflation. Movement of the provision for employment termination benefits were as follows:
Qeyd Carrying amount at 1 January Actuarial loss and service cost Payments during the year Other Carrying amount at 31 December 2010 39,095 5,998 (6,031) 467 39,529 2009 44,233 4,032 (11,789) 2,619 39,095

The total of actuarial loss and the service cost amounting to AzN 5,998 (2009: AzN 4,032) was included in general administrative expenses. Other liabilities mainly relate to the groups payable to its partners under various oil and gas projects.

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26

Deferred Acquisition Consideration Payable

On 30 May 2008 the Group, through its subsidiary STEA, acquired 51 per cent of the voting share capital of Petkim Petrokimya Holding A. (Petkim), a leading petrochemical concern primarily involved in production and marketing of a variety of petrochemical products in the Turkish as well as international markets. Upon acquisition of Pektim the group deferred cash consideration in the amount of Usd 380 million (AzN 317,832) payable to the Republic of Turkey Ministry Privatization Administration for this acquisition. deferred consideration of Usd 40 million (AzN 32,992) was paid on 30 May 2010. The remaining amount is payable to the administration on 30 May 2011. The amount due to the administration bears annual interest rate of lIbOR plus 1 per cent. The carrying value of deferred purchase consideration at 31 december 2010 and 2009 amounted to AzN 272,935 and AzN 308,954, respectively. 27 Charter Capital and Retained Earnings

Charter capital Parent company of the group, sOCAR, has a legal status of a state enterprise. At the date of incorporation of the group, the government of the Azerbaijan Republic contributed AzN 22,726 to the charter capital. Under the decree of the Cabinet of Ministers of the Azerbaijan Republic number 436s dated 11 december 2008, the groups charter capital was increased by AzN 600,000, of which AzN 400,000 was received by the group in 2008 and the remaining amount has been received in 2009. during 2010 the groups charter capital increased by AzN 246,532. This increase partially relates to the acquisition of another state-owned entity Azerikimya sC (Note 36) as a result of which AzN 10,006 of Azerikimya sC charter capital was combined with the groups charter capital. The remaining increase of AzN 236,526 was made under the decree of the Cabinet of Ministers number 186 dated 22 October 2010. According to this decree, AzN 99,986 was contributed in 2010 by the government of Azerbaijan Republic in cash, AzN 22,480 offset with payables to the state budget and AzN 114,060 was transferred from retained earnings. The groups increased charter capital has been registered in january 2011. distribution to the government based on decisions of the government, the group is periodically mandated to

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make direct cash contributions or finance construction and repair works for the state budget, various government agencies and projects administered by the government. In 2010, such cash transfers and financing amounted to AZN 190,712 and AzN 224,990, respectively (2009: AzN 143,698 and AzN 142,340, respectively), mainly for repair and reconstruction of existing, as well as construction of new recreational, transport, educational and medical infrastructure of the Azerbaijan Republic. 28 Analysis of Revenue by Categories
2010 Oil products, net Petrochemicals Crude oil, net Natural gas Other revenue 1,748,931 1,651,468 1,160,595 766,735 199,536 2009 1,524,504 1,068,525 939,154 549,963 113,835

Total revenue

5,527,265

4,195,981

Revenue from crude oil sales is stated net of price margin tax which is levied on the margins between the international market price and internal state-regulated price on crude oil. The difference between the market price and the internal stateregulated price is taxed at the rate of 30 per cent and the amount of tax is transferred to the state budget. Revenue from oil product sales is stated net of excise tax of AzN 389,549 (2009: AzN 362,209). Revenue from sales of crude oil produced under ACg PsA and condensate produced under shah deniz PsA is not subject to excise and price margin taxes mentioned above.

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29

Analysis of Expenses by Nature

Note 2010 1,672,378 649,641 555,090 245,965 360,047 212,377 121,583 115,148 62,322 16,006 (288,435) 426,940 2009 1,266,663 590,655 455,776 143,278 241,639 50,920 120,519 109,148 77,567 13,744 (523,671) 257,532

Raw materials and consumables used depreciation of property, plant and equipment Wages, salaries and social security costs Repairs and maintenance expenses Impairment of property, plant and equipment Utilities expense Mining tax Transportation and vehicle maintenance Taxes other than on income Amortization expense Recovery of previously recognised impairment for accounts receivable, net Other Total cost of sales, exploration and evaluation, distribution, general and administrative, research and development and other operating expenses

14

15

4,149,062

2,803,770

In 2010 the group collected trade receivables of AzN 197,007 from various customers which were written off in 2009, partially by collecting cash and partially by offsetting with trade payables of the group to the customers. In addition, during 2010 the group recognised impairment loss provision in the amount of AzN 95,748 related to the loans receivable from jointly controlled entities (Note 18). 30 Other Operating Income
2010 sales of other goods and services rendered Insurance proceeds Other Total other operating income 138,956 10,996 28,626 2009 204,708 -

178,578 204,708

31

Finance Income
2010 2009 44,664 20,033 2,981 67,678

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Interest income on deposits and bank accounts Interest on loans to related parties Other Total finance income

45,100 11,590 10,485 67,175

32

Finance Costs
Note 2010 122,734 22 23 23 14,252 34,990 3,215 175,191 2009 117,460 6,865 35,754 3,960 (828) 163,211

Interest expense Provisions for asset retirement obligations: unwinding of the present value discount Environmental provision: unwinding of the present value discount Provision for disability payments: unwinding of the present value discount less capitalised borrowing costs Total finance costs recognised in the consolidated statement of comprehensive income

33

Income Taxes

Income tax expense comprises the following:

2010 Current tax expense deferred tax charge Income tax expense for the year 301,758 280,506 582,264 2009 361,123 114,642 475,765

A reconciliation between the expected and the actual taxation charge is provided below:
2010 Profit before tax Theoretical tax charge at statutory rate of 20 per cent (2009: 22 per cent) Effects of different tax rates for certain subsidiaries (25 per cent) dividends income taxable at 10 per cent Tax effect of items which are not deductible or assessable for taxation purposes: - Income which is exempt from taxation - Non-deductible expenses Carry-forward loss on which no deferred income tax asset was recognised in prior years Unrecognised deferred tax asset Correction of previous years current tax Impact of change in tax rate to 20 per cent Other Income tax expense for the year 1,238,004 247,601 18,931 (12,173) (71,714) 325,555 (18,713) 88,654 3,097 1,026 582,264 2009 1,369,343 301,255 7,104 (79,008) 199,440 13,238 (1,518) 41,514 (6,260) 475,765

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Non-deductible expenses are mainly comprised of the expenses related to nondeductible operations including social and employee-related expenses, as well as the provision for impaired receivables which are not expected to be deductible from taxable income in future. Unrecognized deferred tax assets mainly relates to the accumulated tax losses of the groups subsidiaries which are not expected to utilize these losses. At 31 december 2010 and 2009 cumulative balance of unrecognized deferred tax asset is AzN 163,187 and AzN 74,533, respectively. In accordance with Tax Code of Azerbaijan Republic, effective 1 january 2010 the enacted income tax rate decreased from 22 per cent to 20 per cent. differences between IFRs and applicable domestic tax regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below:

1 January 2010

Credited / (charged) to profit or loss

Translation differrence

31 December 2010

Tax effect of deductible/ (taxable) temporary differences Accrued revenue Carry forward tax losses Impairment provision for receivables Inventories Property, Plant and Equipment Provisions for liabilities and charges Trade and other payables Other Deferred tax asset

8,250 430,253 14,303 130,890 81,104 (19,177) 645,623

(7,301) 129,686 (377,901) 2,861 14,649 (43,623) 4,229 38,223 (239,177)

(3) 128 692 1,709 2,526

949 129,686 52,352 17,161 145,667 38,173 4,229 20,755 408,972

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1 January 2010

Credited / (charged) to profit or loss

Translation differrence

31 December 2010

Tax effect of deductible/(taxable) temporary differences Accruals Investments in associates and jointly controlled entities Impairment provision for receivables Inventory Property, Plant and Equipment Provisions for liabilities and charges Carry forward losses Employment termination benefits Other Deferred tax liability

(2,648) (74,821) 14,702 (469,250) 30,979 23,022 8,449 (8,460) (478,027)

9,490 (47,186) 56,271 (15,152) (38,425) (24,653) (13,233) 295 31,264 (41,329)

(32) 117 9,708 (52) (283) (290) 1,048 10,216

6,810 (47,186) (18,433) (450) (497,967) 6,274 9,506 8,454 23,852 (509,140)

differences between IFRs and applicable domestic tax regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below:
1 January 2009 Tax effect of deductible/ (taxable) temporary differences Accrued revenue Impairment provision for receivables Inventories Property, plant and equipment Provisions for liabilities and charges Other Deferred tax asset Credited / (charged) to profit or loss Trans-lation differ-rence 31 December 2009

46,095 441,019 11,652 53,472 106,602 52

658,892

99,816 1,504 (33,047) 18,025 13,094 99,392

(37,845) (110,582) 1,147 110,465 (43,523) (32,323) (112,661)

8,250 430,253 14,303 130,890 81,104 (19,177) 645,623

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1 January 2009 Tax effect of deductible/(taxable) temporary differences Accruals (5,970) Investments in associates and jointly (16,315) controlled entities Impairment provision for receivables (30,459) Inventory 12,872 Property, plant and equipment (475,005) Provisions for liabilities and charges 20,851 Carry forward losses 14,479 Employment termination benefits 9,432 Other (8,485) Deferred tax liability (478,600)

Credited / (charged) to profit or loss

Translation differrence

31 December 2009

15,461 16,315 (5,107) 1,830 (4,639) (8,133) 8,543 (983) (25,268) (1,981)

(12,139) (39,255) 10,394 18,261 25,293 2,554

(2,648) (74,821) 14,702 (469,250) 30,979 23,022 8,449 (8,460) (478,027)

The Group does not file a consolidated tax return. In the context of the Groups current structure, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other Group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. In accordance with the tax legislation of the Azerbaijan Republic, tax losses arising in one period can be carried forward for five years. The group is a participant to ACg PsA through its subsidiary AzACg. However, AzACG is not explicitly defined as a contractor party in the ACG PSA. As a result, its tax-payer status is not clearly determinable. based on current negotiations with relevant tax authorities, management believes that the status of the contractor party will be granted retrospectively and therefore AzACg has already assumed a tax-payer status. At the moment AzACg accrues and pays its income tax at the rate of 25 per cent in accordance with ACg PsA provisions. AzACg is charged with zero per cent vAT effective in the Azerbaijan Republic for a contractor party under the ACG PSA according to a VAT certification issued by tax authorities to AzACG and effective until 19 september 2019.

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In addition, the group is a participant to shah deniz PsA through its subsidiary Azerbaijan (shah deniz) limited (Azsd). According to the provisions of shah deniz PsA, respective government entity of the Azerbaijan Republic is liable for profit taxes of each contractor party. AzSD is exempt from certain ordinary operational taxes in the Azerbaijan Republic. Azsd is charged at zero per cent vAT effective in the Azerbaijan Republic for a contractor party under the shah deniz PSA according to a VAT certification issued to AzSD and effective until 3 June 2026. The group operates in the tax environment of Turkey through its subsidiary, STEA (Note 26). Income tax rate in Turkey is 20 per cent. In accordance with the tax legislation of the Turkey Republic dividends paid to non-resident corporations, which have a place of business in Turkey are not subject to withholding tax that is 15 per cent. Corporate income taxes are payable quarterly. besides that there are many exemptions in Corporate Tax law of Turkey regarding corporations including deduction of investment incentives from fiscal gains during determination of tax base up to 25 per cent. 34 Significant Non-Cash Investing and Financing Activities

Investing and financing transactions that did not require the use of cash and cash equivalents and were excluded from the cash flow statement are as follows:
2010 Non-cash investing activities Transfer of property, plant and equipment to the government Contribution of property, plant and equipment to investee Transfer of property, plant and equipment to third parties 2009

54,049 65,000 250

43,451 -

Non-cash investing activities

119,299

43,451

35

Contingences, Commitments and Operating Risks

Operating environment. The groups operations are conducted in the Azerbaijan Republic. As an emerging market, at the present time the Azerbaijan Republic does not possess a well-developed business and regulatory infrastructure that would generally exist in a more mature market economy.

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Whilst there have been improvements in economic trends in the Azerbaijan Republic, the country continues to display certain characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible in most countries outside of the Azerbaijan Republic. The tax, currency and customs legislation within the Azerbaijan Republic is subject to varying interpretations, and changes, which can occur frequently. The future economic direction of the Azerbaijan Republic is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory, and political developments. Management is unable to predict all developments in the economic environment which would have an impact on the groups operations and consequently what effect, if any, they could have on the financial position of the Group. The Azerbaijani economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. While the Azerbaijan government has introduced a range of stabilization measures, there continues to be uncertainty regarding the access to capital and cost of capital for the group and its counterparties, which could affect the Groups financial position, results of operations and business prospects. While Management believes it is taking appropriate measures to support the sustainability of the groups business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the groups results and financial position in a manner not currently determinable. These financial statements do not include any adjustments that may result from the future clarification of these uncertainties. Such adjustments, if any, will be reported in the period when they become known and estimable. Legal proceedings. From time to time and in the normal course of business, claims against the group are received. On the basis of its own estimates and both internal and external professional advice management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions that have been made in this consolidated financial statements. Tax legislation. Azerbaijan tax, currency and customs legislation is subject to varying interpretations, and changes, which may occur frequently. Managements interpretation of such legislation as applied to the transactions and activity of the group may be challenged by the relevant authorities. Fiscal periods remain open to review by the tax authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances such reviews may cover longer periods.

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The groups management believes that its interpretation of the relevant legislation is appropriate and the groups tax, currency legislation and customs positions will be sustained and potential tax liabilities of the group will not exceed the amounts recorded in these financial statements. Accordingly, at 31 December 2010 and 2009 no provision for potential tax liabilities had been recorded. Environmental matters. The enforcement of environmental regulation in the Azerbaijan Republic is evolving and the enforcement posture of government authorities is continually being reconsidered. The group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage above environmental obligation provision currently made by the group. see Note 23. The group is subject to numerous national and local environmental laws and regulations concerning its products, operations and other activities. These laws and regulations may require the group to take future action to remediate the effects on the environment of prior disposal or release of chemicals or petroleum substances by the group or other parties. such contingencies may exist for various sites including refineries, chemical plants, oil fields, service stations, terminals and waste disposal sites. In addition, the group may have obligations relating to prior asset sales or closed facilities. The ultimate requirement for remediation and its cost are inherently difficult to estimate. However, the estimated cost of known environmental obligations has been provided in the consolidated financial statements in accordance with the groups accounting policies. While the amounts of future costs could be significant and could be material to the Groups results of operations in the period in which they are recognised, it is not practical to estimate the amounts involved. The group does not expect these costs to have a material effect on the Groups financial position or liquidity. The group also has obligations to decommission oil and natural gas production facilities and related pipelines. Provision is made for the estimated costs of these activities, however there is uncertainty regarding both the amount and timing of these costs, given the long-term nature of these obligations. The group believes that the impact of any reasonably foreseeable changes to these provisions on the Groups results of operations, financial position or liquidity will not be material. Compliance with financial covenants. The Group is subject to certain fi-

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nancial covenants related primarily to its borrowings. Non-compliance with such covenants may result in negative consequences for the group including growth in the cost of borrowings and declaration of default. Management believes that, as of 31 december 2010 and 2009 the group was in compliance with all applicable financial covenants.

Guarantees received and given. The following table demonstrate guarantees received and given by the group at 31 december.
2010 Guarantees received letters of guarantee received bank guarantees within context of direct order collection system (dOCs) Other Total guarantees received 145,543 106,392 1,028 252,963 2010 Guarantees given letter of guarantee given for Petkim acquisition guarantee cheques given letters of guarantee given bank guarantees within the context of dOCs Total guarantees given 296,778 35,973 22,303 28,008 383,062 363,103 37,205 30,836 28,967 460,111 186,991 21,695 5 208,691 2009 2009

At 31 december 2010 the group had loan payable in the amount of AzN 500,528 (Note 20) received for the acquisition of Petkim (Note 26). According to these loan agreements 51 per cent of the shares of Petkim belonging to the group have been pledged in favor of the creditor banks (Note 20).

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With respect to the aforementioned credit facility obtained for the acquisition of Petkim shares, there are certain restrictions on the group related to the distribution of cash and non-cash dividends and related to investment of the dividends received from Petkim. In addition, the Group has to meet several financial and non-financial covenants. These financial covenants are mainly related with company gearing, consolidated debt cover, consolidated interest cover and debt-service coverage ratios. In the event that these covenants are not fulfilled, the aforementioned banks have the right to recall the outstanding borrowing. The group has obtained waiver for consolidated debt cover and consolidated interest cover. Another requirement brought by the same credit facility is that the group has committed to identify and complete the necessary work at Petkim in order to provide compliance of Petkim with the currently effective environmental regulations. based on the share sales Agreement, the group has accepted and committed to take the Administrations approval for any kind of stock transfer that will result in change in controlling interest of Petkim for the following three years after signing the share sales Agreement. The group has accepted and committed to make investments over a certain amount for infrastructure and services for Petkim harbour, increase production capacities of factories and establish new factories for the following three years after the share sales Agreement. The group also has accepted and committed to continue production in the Ethylene Factory and produce a certain amount for at least three years after signing the share sales Agreement unless there are unforeseen situations that do not involve the group. The group is responsible for all operations, all unrecorded receivables, payables and liabilities that are related to the period prior to the acquisition of Petkim. The group has accepted and committed that it has no right of application or rescinding that may result in binding of Administration or Petkim about aforementioned matters. This liability will be valid for continuing share transfers. Commitment of Azerigaz CJSC. Based on Presidential decree #80 dated 14 April 2009, directed to social-economical development of baku area and regions of the Azerbaijan Republic, Azerigaz CjsC has certain commitments with respect to improvement of gasification options in mentioned areas. According to this decree, Azerigaz CjsC would be engaged in restoration of old magisterial and local gas pipelines, gasification of new residential communities/regions/far locations, and renewal of old gas meters on magisterial gas traffic control points, industrial and personal meters for physical customers.

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Management estimates that the group will incur expenditures for implementation of this program during the years 2011-2013 in the amount of AzN 1,071,000. Gas purchase commitment. based on the gas sales and purchase agreement signed on 27 February 2003 between AgsC and the Ministry of Fuel and Energy of the Azerbaijan Republic (currently purchase rights under this agreement are executed by the group), the group has obligation to purchase sellers minimum annual quantity as indicated in the agreement. Monetary amount of commitment to purchase sellers minimum annual quantity is Usd 86,840 thousand (AzN 69,290). Participating interest in ACg PsA. Azerbaijan International Operating Company, the Operator of the ACg PsA has entered into a number of capital commitments and operating leases as of 31 december 2010. The group estimated its 10 per cent share of these commitments and operating leases to be Usd 820,162 thousand equivalent to AzN 654,407 (2009: Usd 480,815 thousand equivalent to AzN 386,143) and Usd 13,988 thousand equivalent to 11,234 (2009: Usd 64,585 thousand equivalent to 51,532), respectively. Participating interest in Shah Deniz PSA. bP Exploration shah deniz limited, the Operator of the shah deniz PsA has entered into a number of capital commitments as at 31 december 2010. The group estimated its 10 per cent share of these commitments to be Usd 54,041 thousand equivalent to AzN 43,400 (in 2009: Usd 15,559 thousand equivalent to AzN 12,415). Commitments related to participating interest in AGSC. As discussed in Note 17, the group holds 8 per cent interest in AgsC. In accordance with the agreements of AgsC the group has the following commitments relating to AgsCs activity: gas contract. AgsC is obliged under the agreement signed with bOTAs Petroleum Pipeline Corporation to make available a maximum of approximately 6.3 bcm from 2010 and onwards at a price calculated based on a formula established by the gas Contract. georgian gas obligation. AgsC is obliged under an agreement signed with georgian Oil and gas Corporation and the government of georgia to make available 0.3 bcm in 2010, rising to 0.5 bcm in 2011 and onwards, at a price which is calculated based on a formula established in the contract.

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sale and purchase agreement with baku-Tbilisi-Ceyhan Pipeline Company (bTC). AgsC is obliged under an agreement signed with bTC to make available approximately 0.23 bcm in the contract year starting in 2010 and during the following three years which is the Plateau period, at a price which is calculated based on a formula established in the contract. The performance of AgsC under the gas Contract is guaranteed under the Agreement between the Republic of Turkey and the Azerbaijan Republic Concerning the delivery of Azerbaijan Natural gas to the Republic of Turkey signed on 12 March 2001 (Azerbaijan-Turkey IgA), by the government. Commitments indicated above in respect of gas volumes to be delivered by AgsC are covered by the Upstream Purchase Agreements (UPA) signed with the shah deniz PsA contractor parties and the sOCAR (for and on behalf of the Azerbaijan Republic). The shah deniz PsA contractor parties and the group are obliged to deliver and sell to AGSC the necessary volumes of gas to fulfill AGSCs obligations listed above at a price resulting in neither a gain nor a loss to AgsC. In addition to the above, the shah deniz PsA contractor parties and the group are obliged to pay to AgsC all transportation charges and third party liabilities as stipulated in the UPAs. Oil shipment commitment. On 1 August 2002 the group and other participants under the ACg PsA (the shipper group) have entered into the ACg Field Production Transportation Agreement (ACg TA) with the bTC Company which was amended on 3 February 2004. Under this Agreement, the shipper group (including the group) have committed to ship through the bTC pipeline all of their crude oil entitlement from the ACG field, other than any production which each participant may ship through the Western Export Route. The group has agreed to transport its crude oil by rail unless baku-Tbilisi-Ceyhan pipeline is operating at its full capacity. However, in accordance with ACg TA the group has agreed not to use other transportation options if capacity of the BTC is sufficient. The bTC pipeline was put into operation in May 2006. A total of 10 million barrels of oil from the ACG fields was used to fill the pipeline and the first tanker loaded with oil which had flowed through the BTC sailed away from the Ceyhan terminal on the Mediterranean coast of Turkey on 4 june 2006. The bTC pipeline, with a throughput capacity of more than 1,000,000 barrels per day, is used as the shipper groups main export route.

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In accordance with the Transportation Agreement, direct Agreement entered into on 3 February 2004 by bTC, the shipper group, the group Representative, the lenders and security trustee to bTC, and the lenders and security trustee to certain of the ACG Shipper Group, the parties have agreed that payment of BTC tariff has a first priority claim on oil and oil sale proceeds. RPP. As discussed in Note 20, pursuant to the terms of the RPP Advance Payment Agreement signed with lalaben on 20 july 2007 all proceeds from the sale of the RPP should be transferred by customers directly to lalabens current accounts at bNP Paribas, until the RPP Release date. Project expenses reserve. during the effective period of the Intercreditor deed signed signed on 20 july 2007 between lalaben, blueprint Trading, AbN Amro bank N.v, bNP Paribas (including its branches in london and geneva), societe generale and the group, if the balances on the bNP Paribas CRP collection accounts are insufficient to finance the Groups share in ACG PSA, the Group must apply the proceeds from sale of profit petroleum to finance its share in ACG PSA. For this purpose, the Group shall maintain a float balance of USD 28,000 thousand equivalent to AZN 22,341 for financing of its project expenses and such reserve can be funded by both the available profit petroleum (APP) and RPP proceeds with the RPP release date. Project expenses reserves could also be used for payment transportation tariffs and AzACgs commission fees. As discussed in Note 8, during the year ended 31 december 2010 the group fully settled its obligations to lalaben under RPP Advance Payment Agreement. starting from that date the Intercreditor deed is ceased to have effect. Profit tax reserve. Under the terms of the Intercreditor deed and until the Intercreditor Release Date AzACGs profits taxes are payable out of the proceeds of profit oil. The proceeds of cost recovery petroleum cannot be used to pay profits tax. For this purpose, AzACg and lalaben are required to ensure that 110 per cent of the quarterly projected profit tax of the AzACG in respect of the RPP and the APP is maintained in the respective tax reserve sub-accounts on the lalabens RPP and AzACgs APP accounts at bNP Paribas. Tariff reserves. Under the terms of the Intercreditor deed and until the Intercreditor Release date, the group and lalaben have to maintain a balance of 110 per cent of the projected transportation tariffs for the next month related to the Profit Oil on the respective accounts at bNP Paribas.

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Limitation of disbursements from APP and RPP accounts (Profit Petroleum Accounts). during the effective period of Advance Payment Agreements (Note 20) and related Intercreditor Deed the funds held on Profit Oil Accounts shall be used in priority to funds held on the cost recovery petroleum proceeds account at bNP Paribas to meet the following payment obligations of the group: profit oil tariffs; operating expenses; and profit taxes.

direct Agreements relating to the RPP Advance Payment Agreement. during the effective period of the RPP Advance Payment Agreement the group have entered into the direct Agreement dated 20 july 2007 with lalaben, bNP Paribas (suisse) sA and bNP Paribas london branch. According to this agreement lalaben has assigned to bNP Paribas (suisse) sA all rights in respect of the RPP Advance Payment Agreement until RPP Release date. 36 Business Combination

Azerikimya state-owned company On 2 April 2010 the group acquired 100 per cent of the share capital of Azerikimya state-owned company. According to the Presidential decree dated 2 April 2010 On improvement of management framework in the petrochemicals industry Azerikimya state-owned company, which is involved in production of petrochemicals in the Azerbaijan Republic was transferred to sOCAR. based on the results of analysis of acquired rights sOCAR management concluded that 2 April 2010 should be considered as a date of transition of control over Azerikimya state-owned company. Following this acquisition, Azerikimya state-owned company was transformed into Azerikimya PU within sOCAR structure. Fair values of identifiable assets and liabilities related to Azerikimya PU acquisition are as follows:

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Assets Cash and cash equivalents Restricted cash Trade and other receivables Corporate income tax prepayments Inventories Property, plant and equipment Liabilities Trade and other payables short-term and current portion of long-term borrowings Corporate income tax payable Other taxes payable Other provisions long-term borrowings Total identifiable net liabilities at fair value

Fair value recognised on acquisition 5,382 10 63,364 49,693 48,316 166,765 (254,739) (71,193) (27,571) (17,714) (1,384) (12,514) (385,115) (218,350)

sOCAR obtained control over Azerikimya in the transaction under common control of the government of the Azerbaijan Republic without transfer of any consideration. According to accounting policy of the group, transactions under common control are accounted for using the purchase method of accounting. For this purpose the group estimated the fair value of business transferred. It has been concluded that the fair value of the business transferred is negative and equals to the fair value of net assets. The reasons for negative value of the business are the following facts that: Key production equipment is outdated, highly amortized, characterized by low productivity, high energy consumption rates and potential ecological problems; Some outputs do not find strong demand on the market or represent products with low added value; Azerikimya has poorer position from the point of regional transport infrastructure as opposed to a number of competitors which impose considerable restrictions on the supply channels and export routes. due to the fact that transaction was under common control the difference between the fair value of business acquired and consideration transferred (which is zero) was accounted for in equity as a distribution to owner. From the date of acquisition, Azerikimya has contributed AzN 88,785 of revenue and AZN 37,474 of loss to the net profit before tax of the Group. If the combination had taken place at the beginning of the year, the net profit from the continuing operations for the period would have been AzN 37,318 less and revenue from con-

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tinuing operations would have been AzN 114,722 more that the respective amount recognised in the consolidated statement of comprehensive income. Azerigaz CJSC On 1 july 2009 the group acquired 100 per cent of the share capital of Azerigaz CjsC. According to the Presidential decree number 366 dated 1 july 2009 On improvement of management framework in the oil and gas industry Azerigaz CjsC was transferred to sOCAR. based on the results of analysis of acquired rights sOCAR management concluded that 1 july 2009 should be considered as a date of transition of control over Azerigaz CjsC. The entity is involved in transportation of gas via gas pipelines between manufacturers, consumers and gas storages in the Azerbaijan Republic as well as transit of gas for export to Russia, georgia and Iran. Following this acquisition, Azerigaz CjsC was transformed into Azerigaz PU within sOCAR structure. Fair values of identifiable assets and liabilities related to Azerigaz CJSC acquisition are as follows:
IFRS carrying amount immediately before business combination Cash and cash equivalents Restricted cash Trade and other receivables Corporate income tax prepayments Inventories Property, plant and equipment Intangible assets Other non-current assets Trade and other payables short-term and current portion of long-term borrowings Corporate income tax payable Other taxes payable Other provisions deferred income long-term borrowings Asset retirement obligations deferred tax asset Net liabilities of subsidiary 3,398 403 684,998 32 72,756 601,283 14 5 (1,291,498) (17,209) (29,677) (164,915) (808) (110,178) (130,034) (330) (381,760) Attributed fair value

3,398 403 545,186 32 69,507 787,044 14 5 (1,265,163) (11,734) (43,835) (185,957) (15,371) (110,178) (130,034) (330) 99,392 (257,621)

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sOCAR obtained control over Azerigaz CjsC in the transaction under common control of the government of the Azerbaijan Republic without transfer of any consideration. According to accounting policy of the group, transactions under common control are accounted for using the purchase method of accounting. For this purpose the group estimated the fair value of business transferred. It has been concluded that the fair value of the business transferred is negative and equals to the fair value of net assets. The reasons for negative value of the business are the following facts that: Azerigaz PU is obliged to maintain and expand its pipeline network due to its monopoly nature which requires significant capital expenditures; Transportation tariffs used by Azerigaz PU for revenue calculation are regulated by the Government and expected to be regulated for indefinite period of time. The liberalization of the market is not expected in a foreseeable future; The management of Azerigaz PU does not expect quick improvement of the collectability of revenue and its own paying capacity. due to the fact that transaction was under common control the difference between the fair value of business acquired and consideration transferred (which is zero) was accounted for in equity as a distribution to owner. Other acquisitions. during 2010 the group has also acquired subsidiary in Turkey, sOCAR bosphorus Energy (during 2009 the group has also acquired a number of subsidiaries in georgia, Ukraine as well as controlling interest in Caspian drilling Company). These acquisitions did not have a material impact on the groups consolidated IFRS financial statements. Goodwill Movement in the carrying amount of goodwill is as follows:
2010 Carrying amount at 1 January Acquisition of subsidiaries Carrying amount at 31 December 106,905 16,543 123,448 2009 82,837 24,068 106,905

At 31 december 2010 and 2009 goodwill mainly relates to the acquisition of Petkim (Note 26). As a result of purchase of Petkim shares, the excess of consideration paid over the acquirers interest in the fair value of assets, liabilities and contingent liabilities acquired in the business combination has been accounted as goodwill in the consolidated financial statements.

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The carrying value of the goodwill at 31 december 2010 has been tested for impairment through comparison with its recoverable amount. Recoverable amount has been determined based on the value-in-use calculations of Petkim. Pre-tax cash flows projections used for this purpose are based on financial budgets approved by management covering 11-year period. Cash flows for 11-year period are based on existing long-term projects with duration until 2021. Management believes that these cash flows projections represent more accurate and reliable forecast. Cash flow projections beyond 11-year period are extrapolated by expected growth rates and then discounted to their net present value. The following key assumptions were used for impairment test of the goodwill: The valuation exercises are highly sensitive to the range of EbITdA/Net sales and WACC, which were taken into account by the group, as 8 per cent 16 per cent and 12.8 per cent, respectively. The EbITdA/Net sales ratio is in line with the groups budget for the year 2011 and onwards; whereas the WACC (12.81 per cent) is based on macroeconomic and sector specific parameters. Terminal growth rate used in the cash flow projections is 3 per cent. As a result of the test performed, no impairment has been identified. If the estimated discount rate used in the calculation had been 1 per cent higher / lower than managements estimate, the amount of estimated value in use would have been AzN 230 lower / higher, respectively. Agreement regarding sales of gas to Iran In january 2011 sOCAR agreed with National Iranian gas Export Company the main terms of the contract on Azerbaijani natural gas supply. Under the contract, which is expected to be signed for the period of 5 years, Azerbaijan will supply to Iran 0.75 in 2011 and 1 billion cubic meters in each subsequent year. borrowings In April 2011 the group obtained a loan in the amount of Usd 130 million (AzN 104,000) from deutsche bank and Usd 200 million (AzN 160,000) from INg bank A.S. In March 2011 the Group obtained a loan from Xalqbank in the amount of USD 100 million (AzN 80,000). In May 2011 the duration of the Loan Agreement between IBA and STEA in the amount of Usd 665 million (AzN 530,600) has been extended until 23 May 2014. Also, the group received additional Usd 50 million (AzN 39,895) loan under the same terms.

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TA b l E O F C O N T E N T s
I. II. III. Iv. v. vI. vII. IX. X. XI. XII. XIV. XV. XVI. OIl sTRATEgy lEAds AzERbAIjAN TO NEW vICTORIEs ORgANIzATION sTRUCTURE OF sOCAR jOINT vENTUREs, OPERATINg COMPANIEs ANd AllIANCEs FOUNdEd by sOCAR ANd FOREIgN COMPANIEs gEOPHysICAl ANd gEOlOgICAl WORKs dEvElOPMENT OF OIl ANd gAs FIElds dRIllINg OIl ANd gAs PROdUCTIONI OIL AND GAS TREATMENT AND PETROCHEMISTRY PRIME COST PERSONAL AND SALARY MECHANICS AND ENERGETICS OVERHAUL LOGISTICAL SUPPORT SCIENCE AND TECHNIQUE 9 11 17 21 24 30 35 43 47 51 59 63 68 71 77 94 96 99 112 119 1 8

vIII. gAs COllECTION ANd TRANsMIssION

XIII. INVESTMENT OUTLAY AND CAPITAL CONSTRUCTION

XVII. HUMAN RESOURCES MANAGEMENT XVIII. OCCUPATONAL SAFETY XIX. XX. XXI. ECOLOGY TRANSPORTATION SOCIAL ISSUES

XXII. FINANCE

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state Oil Company of Azerbaijan Republic 73, Neftchilar Avenue, baku, Az1000, Azerbaijan Republic Tel.: (99412) 521-03-32 Faks: (99412) 521-03-83 E-mail: info@socar.az Web site: www.socar.az