THE FABLES AND FOIBLES OF AZERBAIJAN’S OIL POLICY
Sergei Smirnov, Senior researcher, Kazakhstan Institute of Strategic Research under the Kazakhstan President (Almaty)
Azerbaijan, like all post-Soviet states, has undergone global socioeconomic transformations during the past ten years. This period is characterized by an industrial slump, a breakdown in the financial system, de-industrialization, and disruption of the republic’s consumer market. For example, in 1995, the industrial production volume decreased to 72% of the 1990 level. According to official data, 1997 is considered a turning point in the reforms, and macroeconomic stability was achieved in the country. Nevertheless, the extremely high foreign debt, as well as the domestic debt, which exceeds the GDP, are still indications of serious difficulties.1 The country’s largest industry is still the oil and gas sector, which accounts for approximately 80% of all foreign investments and (according to different sources) between 53% and 75% of the state budget revenue. The latter is largely due to the fact that Azerbaijan is one of the oldest oil-producing regions not only in the Caspian, but also in the world.
According to the estimates of specialists, the republic will need at least $20 billion (not including the oil-producing sector) during the next 15 years in order to raise its economy to the level of developed countries. The republic itself can allot no more than 30% of the necessary funds to this end before 2005.2 The successful resolution of these problems is closely tied not only to the development of the oil business, but also to a change in the amount of investment in different industries, radical modernization of the basic enterprises (in particular, in metallurgy, petrochemistry, machine-building, and electric engineering) and, most important, restoration of lost capacities and reconstruction of the country’s energy system as a whole.
At the beginning of the last century, Baku was the center of the nascent oil industry and ensured more than 50% of the entire world oil production. Today, however, it provides only 0.3%. The results of more than 100 years of operation of “the leading oil nation of the world” are impressive: approximately 1.4 billion tons of oil and 445 billion cubic meters of gas have been extracted from the subsurface. But alas, this is all in the past. Now, most of the land-based hydrocarbon fields are at the final stage of their exploitation, and there are only 180 million tons of proven standard fuel supplies. In so doing, the average daily production rate of each of the more than 5,400 development wells on dry land is less than one ton of oil a day. The situation involving offshore production (despite the fact that all the main offshore fields have been developed since the 1950s-1970s) is much better: their proven recoverable supplies exceed 500 million tons, and the average daily productivity of each of the more than 1,730 wells is 14.4 tons.3
Today, the country produces 60 million barrels of oil a year, 55 million of which are recovered on the shelf. The key project is Azeri-Chirag-Gunashli (but the uncertain status of the Azeri and Chirag fields, which Turkmenistan is staking a claim to, is placing their full-scale assimilation by Azerbaijan in doubt, although it has already signed a contract for $8 billion). Other fields (Shakh Deniz, Ashrafi, Dan Ulduzu, and so on) have promising structures, but no proven supplies. What is more, the results of the drilling at the Lenkoran Deniz structure disappointed the companies which carried it out (France’s TotalFinaElf, Iran’s OEIC, and Germany’s Wintershall). Nevertheless, the directors of the Azerbaijan State Oil Company (SOCAR) stated that the Gum Deniz field has impressive residual supplies. A development program up to 2006 has been drawn up, which envisages doubling production and raising it to 300 tons of oil a day. At present, the production rate of the two main Gum Deniz wells (No. 453 and No. 454) amounts to 20 tons and 40 tons, respectively.4 It should be noted that most of these fields have already been explored and surveyed by Soviet geologists. But they were not developed due to the absence of technology for the large-scale production of oil at offshore fields and for environmental considerations (wells were drilled no deeper than 200 m, whereas at the Shakh Deniz field, for example, the oil is located at a depth of 200 to 700 m, and at Azeri and Chirag, between 200 and 400 m). In addition, the discovered oil supplies would not have justified the enormous expenses necessary for their development.
Azerbaijan is still suffering from a protracted energy crisis, the main reasons for which are the shortage of funds for developing new and rehabilitating old fields, for restoring infrastructure (almost all the equipment is physically worn out and morally outmoded and must be replaced), and so on. The decrease in hydrocarbon production during the past decade has given rise to a serious deterioration in the republic’s fuel and energy balance. The gas situation is particularly serious. Despite the presence of industrially recoverable supplies (more than 1.5 trillion cubic meters), at an annual consumption of 15 billion cubic meters, production supplies less than half of the necessary amount, since gas is being recovered from fields that are already sufficiently depleted (at many of them more than 80% of the supplies have been recovered). The maximum level of offshore oil production was reached in 1970 (12.9 million tons) and with respect to gas in 1982 (14.3 billion cubic meters).
At present, annual oil production has decreased 1.8-fold (whereby the Gunashli field, in operation since 1980, accounts for 70% of its total production), and gas production has declined 2.5-fold. Many regions of the republic have not been supplied with blue fuel for several years now. The prospects for developing the country’s gas sector depend on the assimilation of new fields, but, according to the oil contracts entered, petroleum gas will not be produced in significant amounts until 2005. It should also be noted that, first, essentially all of these contracts apply to prospective structures (that is, they may not provide the expected results), second, the conditions of the agreements do not envisage utilization, but only the gratuitous transfer of petroleum gas to the republic. But the capacities of the existing gas-compressor stations are not sufficient even to receive the associated petroleum gas currently produced. For example, of the 3.5 billion cubic meters of gas obtained by the Azerbaijan International Operating Company (AIOC) at the Chirag field, 1.5 billion cubic meters (totaling more than $150 million) have already burned in flares. But Baku tries not to draw attention to such blunders. Today, the republic is receiving natural gas from Russian companies—in 2001, the total volume of deliveries from Itera and Transneft amounted to 3.6 billion cubic meters. It is planned that in 2002, Itera will deliver 4 billion cubic meters to Azerbaijan (SOCAR produces only 5.5 billion cubic meters a year).5
Moreover, whereas during Soviet times, the republic had a developed system of gas pipelines, two major underground reservoirs, the Karadag and the Kalmaz with a total capacity of 3 billion cubic meters, and the Karadag gas processing plant (built in 1963 and designed to process approximately 4 billion cubic meters), nowadays the gas complex is in a serious state. The main problem with the gas transportation network is the shortage of purification and compression capacities: 60% of the gas from offshore fields goes into the distribution network unpurified and under low pressure. This dramatically increases pipeline corrosion, their throughput capacity decreases due to the accumulation of large amounts of liquid hydrocarbons and water, and the gas pressure is more than five-fold lower than it should be. Thus, the entire gas transportation complex is in need of reconstruction and modernization. But sources of financing for this work have still not been found, since foreign companies are placing top priority on oil.
A characteristic feature of investment policy until recently has been its orientation toward the exploration and development of offshore deposits. Since 1998, joint projects have been carried out to develop and restore several land-based fields, in particular, the Kurovdag field (the Azerbaijan-British Shirvanoil joint venture), the Ramany field (the Azerbaijan-German AzGerOil joint venture), and the Neftchala, Hilly, and Babazanan fields (the Azerbaijan-Turkish-Malaysian Anshad Petrol joint venture). But several serious problems have hindered not only the development, but even the very existence of these joint ventures. For example, with no access to the world market, the joint ventures were forced to sell the oil they produced to SOCAR at prices set by the government (for example, at a cost of approximately $150 per ton, Anshad Petrol sold it for $48). In addition, along with the essential absence of tax benefits for oil- and gas-producing joint ventures, SOCAR not only did not pay for deliveries, due to a shortage of funds, but often withheld financing of its share in the joint venture.
Land-Based Oil- and Gas-Producing Joint Ventures in Azerbaijan
Neftchala, Hilly, Babazanan, Durovtag
SOCAR (51%), Atilla Dogan (31,8%),
Land & General Berxard (17,2%)
SOCAR (51%), Grunnewald (41%)
SOCAR (50%), Petholding (50%)
SOCAR (49%), Whitehall (51%)
The results of this “activity” were not long in making themselves felt, and the government, rejecting the practice of creating joint ventures, shifted to implementing projects based on product-sharing agreements (PSA), which, along with legislative guarantees, envisage significant tax benefits for investors and price independence. But of the fourteen offshore PSAs, only the participants in the Shakh Deniz project succeeded in finding industrially valuable supplies of hydrocarbons (according to estimates, the field contains up to 200 million tons of gas-condensate). According to many experts, the residual explored oil reserves at the republic’s 38 land-based oil fields, which constitute a total of approximately 150 million tons, make it possible to forecast their very dubious commercial future due to the high cost of production. Therefore, the main attention is focussed, as before, on developing the Caspian shelf.
In addition, to signing PSA contracts, the AIOC already mentioned has been created in Azerbaijan with the participation of foreign companies, of which there are eleven, whereby the American share is 40%. It should be noted that of all the signed contracts, only one was entered on working fields (Azeri-Chirag-Gunashli), the rest envisage prospective structures (the presence of oil and gas in which is only indicated by the data of preliminary seismic exploration). This of course entails high risks and financial outlays on exploratory work. More than fifty years of experience accumulated by Azeri oilers in the Caspian indicate that of every five prospective structures identified by seismic exploration, only one proves to be oil-bearing. However, the signed multi-billion-dollar agreements (apart from the “contract of the century,” another dozen and a half contracts have been entered) are being implemented at such rates that their execution will apparently take two to three times longer than was anticipated. Experts assess the minimum expenses on oil and gas projects at $25 billion, whereas for the entire term of the contracts (until 2030 inclusively), the total spending could reach $135 billion.
In Azerbaijan, 231 prospective structures (38% on dry land and 62% on the shelf) have been explored and prepared for drilling, the forecasted minimum supplies at which amount to 2.4 billion tons.6 But in 2000-2001, explored wells which have essentially provided a zero commercial yield turned the fond hopes of foreign investors into bitter disappointment regarding several major projects. For example, the consortium headed by Italy’s Agip ceased exploration of the Kurdashi and Araz Deniz structures. The French company TotalFinaElf, Iranian OEIC and German Wintershall, who were conducting surveys, announced failures in the Lenkoran Deniz and Talysh Deniz sections. The exploratory well at the Apsheron structure (the Chevron- TotalFinaElf-SOCAR alliance) cost $79 million and yielded only a modest source of natural gas (at the second well envisaged by the contract, a new drilling installation DSS-20 will be put into operation, the assembly of which will be completed in two years at the earliest). The drilling results in the prospective Oghuz section (operated by ExxonMobil) did not confirm the “promised” 50 million tons of oil either. The drilling of a well at the Inam structure (operated by BP) began in 2000, but due to extremely high seam pressure was halted more than once and has now been postponed indefinitely.
These nonsuccesses continued the sequence of failures in foreign projects in the republic. They include Karabakh (Agip and LUKoil), Karadag (BMB Oil), Dan Ulduzu and Ashrafi (BP), Jafarly and Zardab (Ramco), and several others. In this way, of the 15 projects commercially attractive to foreign investors (today they are the only remaining hopes for an increase in oil production), only two remain: the Azeri-Chirag-Gunashli field (the production volume at which should reach 200,000 barrels a day by 2005 and 1 million barrels a day by 20087) and the Shakh Deniz gas field. But Turkmenistan is claiming rights to part of the first, and the activity of Iran’s naval fleet and aviation at the end of July 2001 put a halt to assimilation of the Southern Caspian structures until the territorial dispute is settled.
At the beginning of the 1990s, Azerbaijan’s potential resources were estimated at 6-7 billion tons of standard fuel (approximately 4% of the world supplies). But over time optimism about the estimated supplies vanished. According to some western experts, the republic’s explored oil resources are no higher than 0.8 billion tons.8 In this way, the forecasts are not confirmed (only Chirag is currently in operation, at which AIOC produced approximately 6 million tons in 2001; and 6.5 million tons is the maximum amount the Chirag-1 platform can produce). Surveys at several “prospective” offshore fields showed that there is no oil there, with respect to which investors are either freezing their projects until things take a turn for the better, or are completely closing down their businesses and looking to other countries. In particular, British HSBC Bank decided to curtail its activity in the republic since the hopes of western financial experts for rapid development of the oil business there were not justified, and the six years the bank was in operation in the republic brought it nothing but losses. This shows that the fable about Azerbaijan being a “second Kuwait” has most likely seen its day.
Oil is the main factor attracting foreign investors to Azerbaijan. Essentially all industry in the republic (due to the low competitiveness of its products and loss of traditional sales markets), with the exception of oil production, is on the verge of bankruptcy. The failure of the economy is demonstrated by the fact that up to 75% of the budget revenue comes from the oil industry, the total percentage of agriculture and industry (not counting oil production) in the state budget revenue does not exceed 5%. The rest comes mainly from commerce and an insignificant amount from customs fees and other tax collections.
Baku-Ceyhan: Life After Death?
After several of the consortiums working on the Azerbaijan shelf of the Caspian did not find commercial supplies of hydrocarbons in their sections and ceased their existence, the Baku-Ceyhan project appeared to be buried once and for all. But Azerbaijan fervently convinced and is still convincing everyone that their conclusions about the lack of prospects for the contract sections are premature and that they should continue working. Despite the fact that the state of the world oil market (prices are dropping more frequently) is raising doubts about the remuneration of major foreign investments in oil production, lobbying of the Baku-Ceyhan pipeline project, an agreement on the laying of which was entered between the governments of Azerbaijan and Turkey as early as March 1993, is still going on. But its construction, scheduled for June 2002, has still not begun. At the moment, the project participants include British BP (project operator with a 38.21% share), American Unocal (8.9%), Norwegian Statoil (9.58%), Turkish TPAO (7.55%), Italian ENI (5%), Japanese Itochu (3.4%), Saudi Arabian Delta Hess (2.36%), and SOCAR (25%). It is presumed that they will finance 30% of the cost of the work, and international financial organizations and commercial banks, with whom negotiations are currently underway, will bear 70% of the expenses. In particular, the European Bank for Reconstruction and Development has expressed the desire to participate in financing construction and allot $300 million to this end. Since the pipes will be purchased from the Japanese Itochu and Sumitomo companies, the Japan Bank for International Cooperation (JBIC) might also take part in the financing. The estimated cost of the work is $2.9 billion, but construction experience, for example, with the Baku-Supsa pipeline (which cost $590 million instead of the estimated $345 million) shows that these are the minimum and not the final expenses. What is more, according to high-ranking directors of AIOC, for each dollar invested directly in oil production, another three dollars must be invested to update Azerbaijan’s outmoded and dilapidated infrastructure. And this, correspondingly, will raise expenses on building the pipeline. On the whole, the Baku-Ceyhan project has more drawbacks than any other alternative project.
In particular, along with the seismic instability of the Ceyhan region, the conflict-prone factor of the territory through which the pipeline will pass, and the high construction cost, there is still not sufficient raw material at present to load the pipeline to full capacity or a definite sales market, since the production volumes and cost, as well as transportation fees and correspondingly the sales price of the oil, are still not known. Even forecasts of its production in the next decade will not ensure loading the pipeline to full capacity.9 In so doing, as already mentioned, the forecasts may not justify themselves, and the serious problems arising at several contract fields are also doing nothing to add confidence in the project. Many experts do not share Baku’s optimism, which has stated more than once that it has enough of its own resources to load the pipeline (this project will be profitable at an annual transportation volume of no less than 45-50 million tons for 40-50 years).
According to the forecasts of experts, the republic will only be able to produce 30 million tons a year by 2015, although the country’s leadership assures that it can achieve a better result, 35 million tons (up from the current 9 million tons) as early as 2005, and reach 60 million tons by 2010. But there are still no real prerequisites for this, just as there are no guarantees that Baku will be able to increase production 15-fold. Nor can Kazakhstan provide the amount of oil necessary to fully load the pipeline at present, since it can only pump oil from offshore fields at which exploratory work has only just begun. Certain concerns are also aroused by the physical and chemical parameters of Caspian oil, since expensive pipes with anticorrosion coating are needed to transport it. “The resinous asphalt substances and high paraffin content of Kazakhstan oil,” a report by the Institute of CIS Countries notes, “will require subsequent dilution or heating, as well as the construction of oil-purification installations… Azerbaijani sweet crude oil looks much better in this respect, which significantly limits the hypothetical possibility of Azerbaijan and Kazakhstan engaging in the joint transportation of raw hydrocarbons.”10
In addition, in 1998, the London International Institute for Strategic Studies published a special report which categorically denied the estimate of the Caspian’s hydrocarbon resources given by the U.S. Energy Information Administration. The report noted that this estimate was eight-fold higher than in reality, “the value of the Caspian’s energy resources is much lower than the authors of many analytical assessments believe.” In so doing, the cost of Caspian oil is one of the highest in the world. For example, spending to increase production by one ton at the “contract” fields on the Azerbaijani section of the shelf will reach up to $58, whereas in Iraq, it amounts to $3.7-$4.4, in Saudi Arabia to $0.65-$2.5, in Iran to $3.7-$31.5, in Kuwait to $6.3-$12.6, in Mexico to $16.4-$30.2, and in Russia to $30-$56.11
Studies conducted by independent scientific groups from Washington—the Cato Institute and the Carnegie Endowment for International Peace—confirmed the attractiveness of the Russian and Iranian routes for pumping Caspian oil and the economic inexpediency of the Baku-Ceyhan project. In particular, the experts came to the conclusion that the U.S. government would have to allot long-term subsidies ($200 million annually) to maintain its viability.12 Nevertheless, there were plans to invest up to $200 million in engineering design work until mid-2002 (approximately $25 million in preliminary engineering and more than $150 million in detailed layout of the pipeline).13 But this was in no way due to the desire to improve the technical and economic indices of the project, but to the change in the political situation in the region. The construction and functioning of major energy infrastructures is just a small technical problem. Primarily it is a question of politics and geostrategy. Strategic interests in the Baku-Ceyhan route, as in no other project, outweigh everything else. And this is understandable. In the event it goes into operation, the U.S. will reinforce its influence in the region, and Turkey will turn, in terms of oil potential, into an interregional nation (it will have control over Iraqi and Caspian oil, which will allow it to participate in determining oil prices and raising its role in Eurasian affairs). There is no doubt that the project’s fate depends on the standpoints of the U.S. and Russia, and on their opportunities to influence the situation in the region. At present, the Russian military contingents in both Central Asia and the Southern Caucasus are being expelled, and they could be replaced by NATO troops. If this happens, it will not be economists, but NATO generals who will ensure the “profitability” of the pipeline.
There Is Another Alternative
When reviewing the Baku-Ceyhan project, it should be kept in mind that it does not heed the interests of the European companies and China, which are actively striving to gain entrance to the Iranian market, not to mention Moscow and Tehran. In this way, whereas there are already many factors today hindering the implementation of this project, during the next few years their number with undoubtedly grow. For example, the European Union is increasingly orienting itself toward Russia in its long-term plans, counting on the constant increase in its hydrocarbon deliveries.
The “private sector,” by means of which the route is to be built, is inclined toward the Iranian route, as well as toward the Black Sea ports of Supsa and Novorossiisk. Hooking up existing pipelines from the Azeri fields to these ports and the route through Iran could fully ensure the export of the oil production volumes in the Caspian Region for the next decade.14 Supsa and Novorossiisk are particularly attractive in light of transit through Rumania, which is actively promulgating this possibility.15 There are plans to deliver fuel by tankers to the port of Constanţa (it has terminals with a capacity of 24 million tons and reservoirs of 1.7 million cubic meters in volume), and then along the Danube, or by rail to Western and Southern Europe. By 2010, the annual transit here could increase to 10 million tons. Construction of the Constanţa-Triest pipeline will not only raise this amount to 30 million tons and ensure access to the Mediterranean Sea, but also make it possible to connect up with the European oil pipeline system (TAL). The projected cost of the pipeline which will pass through Rumania, Hungary and Slovenia is $1.2 billion.
In addition, there are alternative projects—the Ukrainian (Odessa-Brody) and the Greek-Bulgarian (Alexandroúpolis). Of course, they could all complement each other and co-exist without conflict, but the limited throughput capacity of the Baku-Supsa route (6 million tons a year) is turning them into rivals. What is more, the Rumanian project advantageously differs from the other two, first, in the possibility of using river and rail supply lines already in operation along this route, second, in the lowest delivery cost of one barrel to the consumer, third, in the capacities of the sea terminals, and fourth, in the significantly large diversification of the oil flow along the transportation route. Doubling the throughput capacity of the Baku-Supsa pipeline and simultaneous use of the Baku-Novorossiisk route will not only make it possible for them to operate in harmony, but also become the main export alternative, thus depriving the Baku-Ceyhan oil pipeline of all prospects. Moreover, according to some experts,16 it is inexpedient in general to build additional pipelines before 2010, since the existing infrastructure can “absorb” the “extra” 75-80 million tons of oil: the Odessa-Brody and Druzhba-Adriia routes (their total throughput capacity is 55 million tons), the increase in regional consumption and processing of hydrocarbons (15-20 million tons), and the economically advantageous replacement of Arabian oil delivered to Bulgaria and Rumania with Caspian oil (up to 4 million tons).
Of course, Washington understands that these alternatives to the Baku-Ceyhan project are much cheaper, but for the moment politics is still running ahead of the economy. However, due to the decline in its own economy, the U.S. administration cannot allot major budget funds to implementing the project and is limited to small subsidies. For example, the Americans gave Azerbaijan a grant for $600,000 to study the possibility of modernizing several Baku enterprises for refining low-grade oil from the Eastern Caspian and “adding” it to the Baku-Ceyhan pipeline. Washington also gave the Kazakhstanian Oil and Gas Transportation Company a grant to study the pipeline project.
Socioeconomic and Political Foibles
In order to present a full assessment of the Baku-Ceyhan project, we must take an in-depth look at the political, economic, resource, technological, and environmental risks. It was not by chance that Azerbaijan stated at the beginning of April that it was giving up 20% of its shares in this project and was willing to part with half of the rest of its share, retaining only 12.5%. For by maintaining its 45% share, the republic would have to fork out at least $1.3 billion for the oil pipeline. It is obvious that this is related not only to the lack of its own financial resources, but also to its unwillingness to risk them even if it had them. It should be kept in mind that the lion’s share of the contracts will go to western companies, since Azerbaijan does not manufacture the technological equipment required for implementing the project. The country’s machine-building sector will be left with a mere pittance. Many foreign analysts (who are probably still intoxicated by the smell of “big oil”) are ignoring several important factors which could drastically change the situation in Azerbaijan (as in Iran in 1979, for example).
One of them is the extreme poverty of the republic’s population. According to the data of the Azerbaijan State Committee for Statistics, the official income of 97.5% of the country’s population is lower than the subsistence minimum: the average monthly wage in state institutions is $15-30, in commercial structures $50-70, and pensions amount to $10-12 (the subsistence minimum is $80-90). There has been a very high level of unregulated migration for a long time now. According to official data, in 1998, 10,498 people left Azerbaijan, in 1999, 9,142, and in 2000, 9,947.17 But the official statistics do not account for illegal emigration and so do not correspond to reality. Between 1.5 and 3 million Azeris of the country’s 8 million population have left for Russia alone. These people have often been illegally earning money for the upkeep of their families for years. According to many observers, more than 60% Azerbaijanis live on the earnings they make in Russia. The Azeri diaspora in Russia sends $1.5-2.5 billion home every year, which is more than the volume of foreign investments in the republic.18 In addition, in terms of integration rate into the Azerbaijani oil and gas sector, Russia’s LUKoil is not lagging behind the main leaders, British Petroleum and Amoco. This means that a deterioration in Russian-Azerbaijani relations could lead to far-reaching and extremely negative consequences for Azerbaijan. Therefore, the country’s government (some of its leaders have hypertrophied hopes of a “second Kuwait,” which have given rise to illusions about the possibility of conducting a foreign policy and economic strategy that disregards Russia’s interests and distances Azerbaijan as much as possible from this country) has been forced to increasingly take these factors into account in its foreign policy.
There is an enormous leak of capital into the “shadow” economy and abroad. This has its “historical” roots. Baku was considered one of the centers of the shadow economy in the Soviet Union. After it acquired its independence, most of the shadow capital filtered beyond the republic. For example, in 1997, the private investments of Azerbaijani citizens in Turkey alone amounted to approximately $800 million. International experts researching the petrochemical and other industrial enterprises of Sumgait came to the conclusion that most of them are engaged in underground production and the volume of illegal capital circulating here reaches millions of dollars.19 The results of an international audit of SOCAR conducted by Arthur Andersen revealed mass misappropriation of oil by several of this company’s directors and aroused the IMF’s discontent with its financial activity. And if the Azerbaijan government does not take urgent measures, the country is guaranteed socioeconomic and political instability. The most modest expert estimates show that the ratio of the shadow economy to the official GDP amounts to no less than 60%.20
According to former state secretary Neiman Panakhov, former parliament speaker Rasul Guliev owned assets throughout the world amounting to $1.75 billion from the illegal export of oil and petroleum products. And this is far from an isolated case. For example, in recent years, the prestigious areas of the republic’s capital have become “adorned” with the respectable villas of nouveau riche Azeris, who mainly made it rich from shadow oil revenue. As already mentioned, more than 80% of the population wallows in poverty and destitution, but despite the abundance of oil contracts and the launching of some of them, no major investments have yet been made in the economy. What is more, western companies are not showing any particular enthusiasm about fulfilling the contract obligations they have assumed and the real sums of investments in oil projects are much lower than expected. By mid-1999, foreign companies had invested only one third of the funds anticipated by this time. The insufficient volume of private investments is compensated by credit from international financial institutions. For example, the republic received a credit of $70 million from the World Bank for restructuring.
The overwhelming majority of invested funds goes to Baku, while a depressing situation is developing in the other regions of the country (particularly the rural areas). Whereas the republic had quite a developed economy with magnificent potential by the time it acquired its independence (in addition to oil production, metallurgical, petrochemical, chemical, and machine-building factories were in operation, and the light and food industries were intensively developing), now highly qualified specialists are leaving the country and the intellectual level of the population is dropping, whereby more than 60% of school-aged children do not go to school at all. People are mainly engaged in commerce, which does not require any particular knowledge or skills. Today, there is essentially only one branch of the economy in operation—oil production (which moreover is export-raw material in orientation), all the other industries are either on the verge of bankruptcy or have already collapsed due to low product competitiveness and the loss of traditional sales markets. According to independent experts, the republic’s economy is “as stable as a corpse: there are no internal sources of self-development, the banking system has essentially been destroyed, and all the basic industries are in a state of degradation.”21
Azerbaijan is becoming increasingly like Iraq, Nigeria, and other such countries where authoritarianism has an uncertain future and there is total corruption, an economic crisis, and so on. For example, based on a poll of directors of 100 major corporations in America, Britain, Germany, and the Scandinavian countries, the British Control Risk Group Consulting Service came to the conclusion that in terms of corruption level in the government structures, Azerbaijan occupies fourth place in the world.22 According to the rating of Transparency International, the corruption index for Azerbaijan in 2001 was 2 (on a 10-point scale).23 Essentially every job has its “shadow” price (from several hundreds of thousands to millions of dollars).24 Those opening their own business complain that approximately 30% of the profit goes to bribes alone. As a result, many businessmen either fail at the very outset or their circulating funds are immediately “eaten up.” According to many experts, corruption has engulfed all the government structures and is jeopardizing the country’s security.25
Azerbaijani society is unstructured and the interests of individual groups or clans (Nakhichevan, Baku, Karabakh, Gianja, and so on) prevail over the interests of the nation as a whole. The ongoing rise in unemployment and income inequality are making the socioeconomic situation in the republic unstable. It is highly likely that after Heydar Aliev leaves the political arena, events will occur which will deal a serious blow to the oil concessions and strategic goals of the United States, whereby not only in Azerbaijan, but also throughout the entire region. (Let us recall that the vector of political orientation in Iraq and Iran changed because domestic social problems were not taken into account, although Baghdad and Tehran actively exported oil and were loyal to Washington.)
All the same, Azerbaijan is a tragic record holder among the CIS countries in terms of number of state coups, and there is the danger that after Aliev leaves the presidency, national unity could be destroyed due to aggravation of the struggle between the main economic groups for possession of oil resources.26 What is more, in addition to Nagorny Karabakh, serious problems in the north of the country have not been resolved with the Lezghians who live there, in the south with the Talyshes who are drawn to Iran, and with the Nakhichevan Autonomous Republic, which is trying to withdraw from Baku’s control.
Oil Refining: The Patient Has Still Not Taken Its Last Breath
As early as Soviet times, two oil refineries were built in the Azerbaijan capital: the Baku and Novobaku plants, which reached their peak in 1975 by refining 23.43 million tons of oil. Today, they have not only been renamed (PO Azerneftiag and PO Azerneftianadzhag, respectively), but their production indices have decreased more than 2.5-fold. This is explained by the halt in large-scale deliveries of oil from Russia, Kazakhstan, and Turkmenistan (which was practiced during the Soviet era), as well as by the outmoded and worn-out equipment at the plants. The technological potential of PO Azerneftiag makes it possible to produce up to 1 million tons of engine, transformer, compressor, and other types of oil a year, and that of PO Azerneftianadzhag to produce approximately 7 million tons of petroleum products. We should also mention the negative role of current prices for energy resources, electric and thermal power, water, and so on, which is absolutely merciless toward the manufacturers.27 And although the government is trying to gradually lower tariffs on energy resources for industrial enterprises, acceptable prices are still a long way off. On 25 January, 2000, strict conditions for economizing on electric power were introduced in the country, within the framework of which electricity is cut off from 1:00 a.m. until 7:00 a.m. and from 12:00 p.m. until 5:00 p.m. The new conditions only apply to Baku, since in the rest of the republic electric power has not been supplied for more than 3-4 hours a day since 1993.28 What is more, in February 2000, SOCAR President N. Aliev had to announce that Baku was prepared to buy crude oil abroad.29
In 2000, Azerbaijan’s oil refineries processed only 8.3 million tons of crude oil, from which 525,000 tons of gasoline, 585,000 tons of aviation kerosene, almost 2 million tons of diesel fuel, 4 million tons of oil fuel, and 78,000 tons of mineral oil were obtained. At the current volumes of domestic consumption, the republic can export approximately 150,000 tons of gasoline, 400,000 tons of kerosene, and 1.8 million tons of diesel fuel a year. But, alas, only theoretically, since the export of these petroleum products to industrially developed countries is hindered by the low degree of refining (approximately 45%), which means they are low in quality. It should be noted that the volume of oil refining increased after the energy crisis in 1999. At that time, the shortage of gas and particularly of furnace oil fuel used at the country’s heat and electric power plants led to mass serial electricity cutoffs. In order to avoid this happening again, the Azerbaijan government was forced to drastically cut back the export of oil, which makes it possible to ensure the minimum level of fuel which keeps the country on the fragile brink of relative energy prosperity.
The industrial production at the Azeri field planned for the beginning of 2005 (whereby up to 4 billion cubic meters of petroleum gas will be obtained) and at several other fields should provide the republic’s heat and electric power plants with cheap Caspian gas. This will make it possible to reduce the consumption of oil fuel 2-2.5-fold, which means only 2-3 million tons of oil will be required for its production. Consequently, the oil-refining volumes at oil refineries, which at present mainly manufacture oil fuel, will drastically decline in 5-6 years and will unlikely top more than 4 million tons a year. This will be significantly promoted by the high liquidity and price speculation (up to $32 a barrel) of crude Azerbaijani oil, which cannot be said for the petroleum products manufactured in the republic. If the project is implemented, the Baku-Ceyhan oil pipeline will become the main performer of the “requiem” for Azerbaijan’s oil refineries, since each ton, if not drop, of oil will be of value for the pipeline’s rapid recoupment.
Apparently, the only way to prevent such a pitiful fate for Azerbaijan’s oil refineries is their immediate comprehensive reconstruction and modernization, as well as development of the chemical and petrochemical industry. But this will require significant investments. They can only be provided by foreign investors, but since even those petroleum products which are bought on the domestic market are frequently not paid for, the debts of domestic consumers are growing. For example, their indebtedness to SOCAR has already reached $1.5 billion. And this means that the export of crude oil is still more economically attractive than refining it, not only for foreign companies assimilating the country’s hydrocarbon resources, but also for SOCAR itself. In this way, what V. Akhundov, presidential advisor for economic issues, said as early as the end of 1996 still describes the republic’s economic policy to a tee: “It is better to export crude oil from Azerbaijan than to refine it.” And this could play a detrimental role. The country is losing its resource potential and will ultimately miss its opportunity to regain its oil clout. This is particularly true since the profit obtained from the export of oil will more likely go to covering the foreign debt (according to the estimates of independent economists, it will reach $10-12 billion by 201030), than to advancing the country’s development.
1 See: Mirovaia ekonomika i mezhdunarodnye otnosheniia, No. 1, 1998, p. 102.
2 See: A. Nadirov, A. Aleskerov, “Sotsial’no-ekonomicheskie sdvigi v khode ekonomicheskikh reform v Azerbaidzhane,” Obshchestvo i ekonomika, No. 5-6, 2000, p. 30.
3 See: V. Mishin, “Skol’ko nefti v Azerbaidzhane?” Neft i kapital, No. 2, 1998, p. 48.
4 See: Delovaia nedelia, 5 April, 2002.
5 See: GazetaSNG.ru, 14 January, 2002.
6 See: V. Mishin, op. cit., p. 52.
7 See: Maki Alan, “Neft’ i islamskiy fundamentalizm,” Rossia i musul’manskiy mir, No. 2, 2002, p. 63.
8 See: Ekspert, 23 November, 1998.
9 See: K. Guluzadeh, “Baku-Ceyhan: pora li pisat nekrolog?” Neft i gaz Kaspiia, No. 1, 1999, p. 122.
10 “Kaspiiskiy global’niy passians i rossiiskiie interesy. Doklad Instituta stran SNG, Sodruzhestvo SNG, No. 4, 1998.
11 See: I. Zonn, “Kaspiiskaia neftianaia piramida,” Armianskiy vestnik, No. 1-2, 1999.
12 See: A. Rasizade, “The Mythology of Munificent Caspian Bonanza and Its Concomitant Pipeline Geopolitics,” Central Asia and the Caucasus, No. 4 (10), 2001, p. 17.
13 See: Delovaia nedelia, 5 April, 2002.
14 See: Baku Sun, 9 September, 2000.
15 See: M. Guseinov, “Chernoe zoloto po Golubomu Dunaiu?” Neft i gaz Kaspiia, No. 1, 1999, pp. 123-125.
16 See: Delovoe obozrenie “Respublika,” 6 September, 2001, p. 9.
17 See: Ekho (Baku), 28 September, 2001.
18 See: Iu. Iudanov, “Zakavkazie: otsenki investitsionnoi privlekatel’nosti, Mirovaia ekonomika i mezhdunarodnye otnosheniia, No. 11, 1999, p. 105.
19 See: Azadlyg, 20 July, 1997; Mulkiyyat, 25 November-2 December, 1997.
20 See: I. Mamedov, “Ekonomicheskie preobrazovaniia v Azerbaidzhane: poiski strategii i perspektivy,” Tsentral’naia Azia i Kavkaz, No. 1(7), 2000, p. 110.
21 “Azerbaidzhanskaia ekonomika: mify i real’nost,” Monitor, No. 1, 1998, p. 16.
22 See: Zerkalo, 15 November, 1997.
23 See: Information of Transparency International at the following site [http://www.transparency.de/documents].
24 See: “Azerbaidzhanskaia ekonomika: mify i real’nost.”
25 See, for example: R. Musabekov, “Korruptsiia v Azerbaidzhane,” Tsentral’naia Azia i Kavkaz, No. 1 (7), 2000.
26 See: Financial Times, 18 January, 1999.
27 See: Nezavisimaia gazeta, 2 February, 2000.
28 See: Ibidem.
29 See: Nezavisimaia gazeta, 1 February, 2000.
30 See: Monitor, No. 4, January 1997, p. 9.