Azerbaijan – part one:

Published October 18th, 2000 - 02:00 GMT

Azerbaijan has attracted international interest in its potentially rich oil and natural gas reserves in the Caspian Sea basin.  

Note: information contained in this report is the best available as of May 2000 and can change. 

 

BACKGROUND:  

Soon after Azerbaijan's independence, Armenian separatists seized 20 percent of Azerbaijani territory, including the enclave of Nagorno-Karabakh, displacing almost 1 million Azeris, and resulting in war. A cease fire was declared in 1994, but Azerbaijan continues its economic blockade of both Nagorno-Karabakh and Armenia.  

 

In 1992, the United States passed section 907 of the Freedom Support Act, restricting U.S. government assistance to Azerbaijan until Azerbaijan takes "demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Nagorno-Karabakh."  

 

In October 1998, U.S. legislation was approved that permitted exemptions to section 907 for democracy assistance, humanitarian assistance, and preventing the spread of weapons of mass destruction.  

 

Exceptions also were made for economic assistance programs of the U.S. Foreign Commercial Service, the U.S. Export-Import Bank, the Overseas Private Investment Corporation, and the Trade and Development Agency. 

 

Azerbaijan's real gross domestic product (GDP) contracted by almost 60 percent from 1990-1995, before beginning a period of steady growth in the latter half of the decade.  

 

This decline does not, however, reflect the country's underground economy; the World Bank has estimated that "unofficial" economic activity accounts for over half of Azerbaijan's overall economy.  

 

Fueled by foreign investment in oil and gas, real GDP rose by almost 6 percent in 1997, 10 percent in 1998, and 7 percent in 1999. Gains of 5 percent -7 percent per year are projected over the next five years. 

 

Azerbaijan was minimally affected by the 1998 Russian ruble crisis, but falling world oil prices in the second half of 1998 severely curtailed investment by oil and oil related companies.  

 

Azerbaijan has taken great care to assure that multiple foreign powers and companies gain a stake in its oil boom for both economic and geopolitical reasons. Azerbaijan's hope for future economic growth rests with successful development of its vast oil and gas resources in the Caspian Sea region. 

 

These resources have drawn in foreign investors, with foreign direct investment increasing from $15 million in 1993 to $827 million in 1999, about 20 percent of Azerbaijan's GDP. The oil industry currently accounts for 70 percent -80 percent of total foreign investment. By 2010, investment in the oil and gas sector may reach $23 billion.  

 

Oil and oil products exports in 1998 also accounted for $418 million of the total $606 million in Azerbaijani exports, and oil equipment imports made up $435 million of Azerbaijan total imports of $1.1 billion in 1998.  

 

Oil-related revenue brought in nearly 50 percent of budget revenues, including 57 percent of total indirect taxes. To encourage additional investment, President Aliyev signed numerous treaties protecting the rights of foreign investors, and announced the creation of a new foreign investments agency that would become the sole institution responsible for carrying out state policy on foreign investments.  

 

Despite Azerbaijan's potential future oil wealth, the country still faces several years of tight finances, as Azerbaijan's oil revenues are likely to remain limited for the next five years or so. 

 

Azerbaijan has taken care to ensure that powerful neighbors such as Russia and Iran receive a stake in the country's oil development. President Aliyev is attuned to Russia's desire to maintain a sphere of influence in the Caspian region and to benefit from its oil boom.  

 

Iran, meanwhile, is home to 20 million Azeris and is Azerbaijan's largest trading partner. Azerbaijan has worked to increase economic cooperation with Georgia, Iran, and Turkey.  

 

Baku, Azerbaijan's largest city and port, is poised to become a major regional transportation and communications hub for the Trans-Caucasus and Central Asia.  

The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a European Union (EU) conference in 1993, and encourages the development of a transport corridor on an East-West axis from Central Asia, through the Caucasus, across the Black Sea, to Europe. 

 

Most of Azerbaijan's infrastructure, built during the Soviet period, is in poor condition. There has been inadequate public investment and maintenance of infrastructure since independence. 

 

Roads are inadequate and deteriorating, the power generation and distribution system is in poor condition, and gas, water, electricity, and oil product shortages are common in Baku. Azerbaijan faced a fuel oil shortage at the beginning of 2000, which resulted in problems at power generating plants and cutbacks in electricity to customers. 

 

In response, state oil company SOCAR redirected its crude oil exports during winter for domestic needs, and fired Azerigaz and Azerenergy energy officials for negligence. 

 

OIL:  

Azerbaijan experienced an oil boom at the beginning of the 20th century and later served as a major refining center in the former Soviet Union, while producing 70 percent of the former Soviet Union's oilfield equipment. 

 

Oil production peaked at about 500,000 barrels per day (bbl/d) during World War II, and then fell significantly after the 1950s as the Soviet Union redirected resources elsewhere.  

 

A century's worth of oil production has left the land heavily contaminated and the Caspian Sea with environmental damage, as scant environmental consideration was given to industrial and energy development in Azerbaijan. 

 

Most of Azerbaijan's oil is produced offshore in the Caspian Sea. One field -- Gunashli, located 60 miles off the Azeri coast -- accounts for more than half of the country's oil production. SOCAR's offshore output has been stable, but an inability to attract investment capital has led to declines in new drilling, as well as in production of rehabilitated wells.  

 

Azerbaijan expects to produce about the same amount of oil and gas in 2000 as it did in 1999. Development of new fields through joint ventures (JVs) and production sharing agreements (PSAs) in the Caspian Sea will boost Azerbaijan's oil production well beyond its earlier peaks, and Azerbaijani oil exports could exceed 1 million barrels per day (MMBD) by 2010 and 2 MMBD within 20 years.  

 

Two of the PSA consortiums, the Caspian International Petroleum Company or CIPCO, and the North Absheron Operating Company or NAOC, were unsuccessful and were dissolved in 1999.  

 

The majority of Azerbaijan's future oil production increases will come from just one project. In what was described as "the deal of the century", an international consortium - the Azerbaijan International Operating Company (AIOC) - signed an $8 billion, 30-year contract in September 1994 to develop three fields -- Azeri, Chirag, and the deepwater portions of Gunashli -- with total reserves estimated at 3-5 billion barrels. 

 

Almost all of Azerbaijan's production increases in recent years has come from the AIOC. Oil revenues from this project are projected to be roughly $80 billion over the thirty-year life of the AIOC. BP Amoco has since become the managing operator of the AIOC project. 

 

By the end of 1999, the AIOC had spent about $2 billion, with cumulative production of 51 million barrels of oil. The AIOC produced 96,000 bbl/d in 1999, with production from Chirag expected to reach 100,000 bbl/d in 2000.  

AIOC announced that the planned Phase-1 program to develop the Azeri-Chirag-Gunashli block, which will increase production to 400,000 bbl/d, will not begin until mid-2004-2005. 

 

In effect, full-scale development of the AIOC project will be delayed until a decision has been made on export options, including whether this oil will be exported via the proposed Baku-Ceyhan pipeline. 

 

Azerbaijan's JVs, all of which are located onshore, have been restricted in their ability to export oil. In August 1999, JVs were required to sell their oil through SOCAR, with exports through the shipping company Caspian TransCo. 

 

In January 2000, oil production by JVs was required to remain in domestic markets for use as feedstock at local refineries, where it was sold at rates far lower than in Mediterranean export markets. 

 

JVs also have had a greater tax burden than PSAs. Azerbaijan has decided to abolish JVs, and convert all of them to PSAs in 2000 in the hope that this will encourage greater investment and progress in these projects.  

 

The conversion agreements will include a requirement for a minimum compulsory program such as drilling new exploratory and development wells, purchasing equipment, and developing infrastructure. 

 

This conversion could require some of the joint ventures to find additional partners in order to meet these investment requirements, as joint venture companies have tended to be small. 

 

Refining:  

Azeri crude is refined domestically at two refineries: the Baku refinery with a capacity of 238,978 bbl/d, and the Novo-Baku refinery with a capacity of 202,830 bbl/d. Both of these refineries have been running at well below capacity, with overall refinery utilization rates at about 40 percent in 1997.  

 

 

Azerbaijan estimates that upgrades at the 2 refineries will cost $600 - $700 million. The U.S. Trade and Development Agency will finance a $500,000 feasibility study for upgrading the Azerneftyag production_ unit in Baku, as well as a $400,000 for a feasibility study to upgrade the petrochemical complex in Sumgait. 

Source: United states Energy Information Administration. 

 

 

 

© 2000 Mena Report (www.menareport.com)

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