Azerbaijan's Oil Industry post-1991

=The Second Oil Boom=

Following the collapse of the Soviet Union Azerbaijan, along with the other Caspian states, relied almost entirely on oil and gas revenues to support their economies. However the infrastructure of these countries needed serious investment (roads, airports, communications and services). Azerbaijan's productive base was destroyed by the transition from a communist economy to a market-oriented one. As a result, between 1990-1995 output fell by 55 percent. The rapid growth seen following this period (between 2000-2008 annual real GDP grew by nearly 10%, accelerating to 23% in 2007) was focused mainly in the capital Baku and was driven by oil and gas production along with construction and services, sectors fed directly by the oil boom. Since 1991 the energy resources of the Caspian Basin have become a key force, driving greater international engagement in the region.

Rather than attempt to build its oil policy by nationalising or quasi-nationalising its oil assets, independent Azerbaijan continued to encourage major oil company investments in new exploration and production projects. This foreign involvement was understood by the government to constitute the pillar of the plans for economic development. Between 1991 and 2010, Azerbaijan signed 26 Production Sharing Agreements (PSAs) with a wide range of international oil companies (IOCs), which were attracted to the region by the size of hydrocarbon reserves and because Azerbaijan was in need of considerable foreign funding and expertise to exploit its natural resources. IOCs such as BP, Chevron and Statoil provided access to Western markets, technology and skills.

Between 1993-2007, production from Azerbaijani oil fields tripled, rising from 200,000 barrels per day (bpd) in 1993 to 868,000 bpd in 2007. By 2012 the country was producing 1.037 million bpd of oil. This in turn led to increasing levels of oil dependency in the country. The government has also been actively developing energy transport and transit infrastructure to position itself as an energy hub, with high profile projects such as the Baku-Tbilisi-Ceyhan (BTC) Pipeline and the proposed Trans-Caspian Oil Pipeline.

=The 'Contract of the Century'=

In 1994 the Azerbaijani government signed what is known as the 'contract of the century' with a consortium of international oil companies for the exploration and exploitation of three offshore fields.

For full article see The 'Contract of the Century'

=Governance Reforms=

The State Oil Fund of Azerbaijan (SOFAZ) was established as Azerbaijan's sovereign wealth fund in December 1999, the responsibility of which is to manage foreign currency and assets generated from oil and gas exploration and development.

In 2003 Azerbaijan became one of the first countries to sign up to the global Extractive Industries Transparency Initiative (EITI) and became the first to pass validation in 2009 to become an EITI Compliant country. The country has even been referred to as the EITI 'poster child' by some, despite reservations about the implementation of the transparency mechanism in the country.

=Beyond the Oil Boom=

According to a model developed by Chatham House, post-Soviet Azerbaijan in 2008 was still in the early stages of dominance by its hydrocarbon economy. This 'dependent' phase appears similar to the period of rapid growth in export revenues experienced by many petroleum exporting during the 1970s. Over this period government oil revenues are used to fund a growing fiscal deficit in the non-oil sector and finance a rapid expansion of imports for the non-petroleum sector. The surpluses created are used to pay off debts, or to invest using sovereign wealth funds and foreign financial assets.

The model foresees the next stage as the 'transition phase', during which export revenues will begin to decline, as rising petroleum consumption takes an increased share of plateau production. This in turn leads to a growing deficit in the government budget and in the country's current account. Azerbaijan's current account surpluses were predicted to begin declining in 2011 and deficits to be seen by 2020.

The final phase envisaged by the model is the 'sustainable phase', where petroleum production eventually declines and the non-petroleum economy must be sustained using rapidly diminishing petroleum revenues. Long term prosperity would depend on necessary adjustments to achieve growth in the non-petroleum sector in the face of a plateau in hydrocarbon production.

=References=