Leaked documents show two Azerbaijan state companies were set to siphon off $1.7 billion from Shah Deniz 2, which feeds the Southern Gas Corridor to Europe.

Key Findings

• Using fake charges and padded contracts, two companies owned by Azerbaijan’s state oil company looted the expansion of BP’s operations in the Caspian Sea, known as Shah Deniz 2.
• BP was repeatedly alerted to accusations of corruption on the project but took no action, multiple sources told OCCRP.
• Much of the money was set to be paid before any profits went to Azerbaijan’s state budget, meaning it would come from the public purse.
• Around the same time, the director of one of the state companies and his wife bought lavish properties worth over $10 million in Miami.
• Hundreds of millions of dollars disappeared as Azerbaijan carried out a broad clampdown on civil society and independent journalism.

In 2013, hundreds of laborers from a factory run by Bos Shelf, an Azerbaijani state-owned manufacturer of offshore oil and gas infrastructure, went on strike demanding higher wages and benefits.

“Our salary is very low,” Igbal Damirov, a factory worker, told Radio Azadliq, Radio Free Europe/Radio Liberty’s Azerbaijani Service. “We do not have health insurance, we are severely punished by foreigners for the most common mistake, we are fired, we are insulted.”

The State Oil Company of Azerbaijan (SOCAR), which owns Bos Shelf LLC, promised to investigate. But in 2017, the workers made a public appeal to President Ilham Aliyev to intervene, claiming that Bos Shelf was misappropriating their pay. They singled out its general director, Ikhtiyar Akhundov, alleging he stole “millions every month” and employed his family on inflated salaries.

“There is nepotism, landlordism, and gangsterism at the plant,” the workers said in a statement. “Workers who protest against this injustice are fired.”

Throughout those years Bos Shelf was a lead contractor on a multi-billion-dollar expansion of U.K. oil giant BP’s operations in Azerbaijan’s Caspian Sea. Named Shah Deniz 2, after the vast offshore field it draws from, the development is today pumping gas thousands of kilometers west to the European Union through the Southern Gas Corridor.

But as its workers were complaining they could barely make ends meet, Bos Shelf was cashing in. Documents from inside BP, analyzed by OCCRP, show that the company and another SOCAR subsidiary together stood to siphon off more than $1.7 billion from the Shah Deniz 2 project using padded contracts and artificial charges.

Much of the money was set to be paid before any profits went to Azerbaijan’s state budget, meaning that it was not BP but the public that would lose out. At around the same time, Bos Shelf’s director, Akhundov, and his wife started buying lavish beachside properties in and around the U.S. city of Miami, an OCCRP investigation found.

BP executives were repeatedly alerted to accusations of corruption, but took no action, according to three people who worked on Shah Deniz 2. A whistleblower reported BP to the U.K.’s Serious Fraud Office in 2014, but the agency said it had not received enough evidence to open an investigation.

“We stand ready to investigate and prosecute wherever we find clear evidence of serious fraud and corruption,” the office told OCCRP.

A BP spokesperson said the oil giant carried out due diligence on its partners according to its “internal policies and procedures, which reflect both local and international legal requirements,” along with audits to ensure that “payments to entities appropriately reflect the contractual terms for the relevant goods or services provided.”

He did not directly comment on the allegations of embezzlement by the SOCAR companies, saying only that these questions “are best addressed to those entities.”

SOCAR said it and its subsidiaries abide by Azerbaijani and international anti-corruption laws, and it is regularly audited by state authorities while also carrying out internal due diligence procedures. A spokesperson said it has a strict code of conduct that all employees must follow, “reflecting the principle of zero tolerance to all forms of corruption.”

Bos Shelf, the company said, had also been regularly audited by its partners, none of which “resulted in significant adverse findings.” In a statement, SOCAR disputed that the protests were related to corruption, saying workers had wanted their salaries to be calculated in U.S. dollars rather than the local currency, which was swiftly remedied.

 

“Azerbaijan is being used as an EU alternative to Russian gas, but this comes at the expense of the country's ecology and its citizens.”

– Patrick Bond, expert in development economics

OCCRP’s investigation found that hundreds of millions of dollars were siphoned off from the Shah Deniz 2 project in 2014 and 2015, at a time when Azerbaijan’s government was clamping down on civil society and independent journalism. In a September 2015 resolution, the European Parliament said the country had “suffered the greatest decline in democratic governance in all of Eurasia over the past 10 years.”

“Big Oil, particularly companies like BP, are dominant and direct partners to many of the world’s most authoritarian regimes,” said Patrick Bond, author of the Politics of Climate Justice and a specialist in development economics at the University of Johannesburg.

“These regimes could not exist without BP as their ‘investor’ and the revenue from resources like oil and gas are used to militarise and crush public resistance.”

Astronomical Bills

Publicly, BP has hailed Shah Deniz 2 as a major success, delivered on time and on budget, despite being built during a period of plummeting oil prices. The $33-billion Southern Gas Corridor that it feeds — one of the largest energy infrastructure projects in the world — is today a cornerstone of the EU’s attempts to diversify away from Russian gas and has won praise from U.S. politicians.

But emails, presentations, and letters from inside the early stages of Shah Deniz 2 show that behind the scenes, some BP officials were questioning unjustifiably high costs and inexplicable extra charges from the consortium that was building it. This included the two SOCAR-owned companies, Bos Shelf and Star Gulf FZCO, and a subsidiary of oil services company Saipem.

The charges were particularly problematic because BP had agreed to an unusual contracting setup with Bos Shelf and Star Gulf. A Master Agreement for one of the consortium’s largest contracts shows the companies were both guaranteed a 25 percent markup on all costs incurred during the building. Of that, nine percent was allocated as profit and the remaining 16 percent was classified as “corporate overhead.”

Normally, this category covers back-office costs like IT, administration, and office supplies — fixed expenses that should not depend much on the overall cost of the project. But, under the terms of BP’s agreement with the two SOCAR-owned companies, their profits and overhead charges automatically rose even when entirely unrelated costs increased.

Budget data from BP shows Bos Shelf and Star Gulf had already charged over $500 million in markup by mid-2015. Extrapolating from the data, this indicates that over the course of the Shah Deniz 2 project, which ran from 2014-2021, the companies would charge more than $1.7 billion in corporate overhead and profit across three contracts.

According to the ratios in the Master Agreement, more than $1.1 billion of this would be classified as corporate overhead. However, BP’s budget included $400 million for back-office costs that duplicated much of what Star Gulf and Bos Shelf were meant to provide.

“These contracts are rife with vague rules of thumb unrelated to actual costs or competitive benchmarks — like the 25 percent of net fixed costs arbitrarily allocated to Azeri elite-owned companies for ‘corporate overhead’ and ‘profit,’” said James Henry, a financial investigator and former chief economist at the U.S. management consulting firm McKinsey.

“They might as well call it ‘interior decorating,’” said Henry referring to the embellished financials, “because that is what it is.”

Other details in the BP documents raise questions about where the money paid to Star Gulf and Bos Shelf ended up. Records spanning several months show they tended to charge for the same line items, on the same days, in the same currencies. Invoices show the money flowed out of Azerbaijan in dollars to Star Gulf’s account in Dubai and Bos Shelf’s account in Luxembourg.

Star Gulf charged at a rate of between 35 and 50 percent of its sister company, the records show. But while Bos Shelf was apparently responsible for building the project’s vast subsea production systems, Star Gulf had no employees, listed no work-related expenditures, and its role in the construction is unclear. Because Star Gulf owned half of Bos Shelf, it got paid twice.

OCCRP could find little information on Star Gulf, which is registered in the United Arab Emirates. Henry described the country as “one of the top 10 most secretive financial havens in the world.”

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