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Maersk Explorer in Baku. Photo: oilrig-photos.com
Maersk Explorer in Baku. Photo: oilrig-photos.com

Ever since the beginning of its most recent oil boom in 2005-06, Azerbaijan has been posting record-high economic growth rates, averaging at nearly 20 percent annually. This is not the first instance when fortunes are made from Azerbaijan's oil. At the beginning of the 20th century, Azerbaijan was, for a short time, the world's leading petroleum producer, producing more than half of the world's total output.

In the recent years Azerbaijan's economy has experienced some of the highest economic growth rates in the world. In 2000, the country's GDP was US$5.3 billion. In 2005 it was $13.2 billion, in 2008 $46.4 billion and by 2010 it was estimated to be $54.4 billion (which corresponds to $90.4 billion in purchasing power parity terms).[1]

Take a close look at Azerbaijan's economic boom though and the figures tell a more troubling story.

Table 1: Total oil production in Azerbaijan, thousand barrels per day, 2000-2010[2]

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

288.59

308.86

315.42

325.17

317.63

440.01

646.58

849.07

876.15

1012.25

1040.92

Source: U.S: Energy Information Administration

As Table 1 shows, oil production in Azerbaijan has experienced very fast growth since 2005. Today, with over 1 million barrels of oil produced daily, Azerbaijan is the world's 20th-largest oil producer. By comparison, Russia, which ranks first, produces 9.5 million barrels of oil per day, Saudi Arabia 8.3, Norway 2.1, Libya 1.7, and the UK, which ranks no. 19, 1.3 million barrels per day. [3]

Table 2: Net exports of oil in Azerbaijan, thousand barrels per day, 2000-2010[4]

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

151.70

188.97

205.01

214.40

205.03

324.66

532.21

739.67

771.15

912.25

N/A

Source: U.S: Energy Information Administration

Not only is Azerbaijan an important oil producer, but it also exports over 90 percent of the oil it produces. Azerbaijan's oil exports started growing from 1995 onwards, following the signing of the "Contract of the Century", which brought foreign direct investment by international oil companies into offshore oil exploration. However, as Table 2 shows, the steepest rise in the oil exports has taken place since 2005-2006. This was the time when the Baku-Tbilisi-Ceyhan pipeline became operational, supplying oil to Western markets. Nearly all Azerbaijan's exports are energy-related.

The rapid increase in Azerbaijan oil exports took place against the backdrop of a strong (although not uninterrupted) rise in oil prices over the past 10 years. Crude oil prices more than doubled from $24.54 per barrel in July 2001 to $57.58 in July 2005. After peaking at $145 in July 2008, they experienced a sharp drop in the second part of 2008, bottoming out at some $30 in December 2008. Since then, however, oil prices have recovered, passing the $100 threshold in January 2011.[5] Thus, over the past six years, Azerbaijan has been exporting more oil than ever before, and selling it at much higher prices. Taken together, these two developments explain why Azerbaijan's economy and budget have experienced such stupendous growth.

Table 3: Azerbaijan's exports, 2005-2009

Year

Exports (total, million USD)

Energy

 Non-energy

Energy share,  percent

2005

3,168

2,247

921

71

2006

6,372

5,390

982

85

2007

6,058

4,931

1,127

81

2008

47,756

46,363

1,393

97

2009

14,688

13,639

1,049

93

         

Source: International Trade Center, Index Mundi

(Note: the drop in the value of exports from 2008 to 2009 is due to the sharp drop in the oil price which took place during the global financial crisis. Since then, oil prices have recovered.)

 

Azerbaijan's new oil boom

The story of Azerbaijan's most recent oil boom began on 20 September 1994 when then president Heydar Aliyev signed a major deal with 11 international oil companies, The contract granted exploration and operation rights in the Azeri-Chirag-Guneshli (ACG) complex of Caspian Sea oil fields, situated some 120 km off the Azerbaijan shore.  The deal was soon dubbed "the contract of the century' and is due to run until 2024.

Dr Hoşbakt Yusufzade,[6] a senior Azerbaijani geologist who was in charge of drawing up Azerbaijan's energy strategy, recalls the process leading to the decision on what to do with undrilled fields in the early 1990's:

"When the USSR collapsed, technology and money were needed to drill the Azerbaijani oil. We could either wait 30 years until we had the money and means or we would invite foreign companies. Aliyev chose the latter. There were people who objected. They said "we can do it ourselves." But it was a risky and expensive work and having international partners was a very good idea."[7]

Several months after the contract was signed, the oil companies formed the Azerbaijan International Operating Company (AIOC), an 11-strong consortium which included SOCAR, the Azerbaijan state oil company, and which was led by BP. The composition of the shares in the consortium reflected a wide range of national interests; BP gained the largest stake at 17.12 percent and second was Amoco from the US with 17.01 percent. Other companies included Russia's Lukoil (which would later sell its stake), Norway's Statoil, and Turkiye Petrolleri, the Turkish state oil company. Subsequently, Exxon and two Japanese companies joined AIOC as well.

AHTS Om & AHTS Islay: Anchor Pre-lay of Baku, Azerbaijan. Photo: British Petroleum
AHTS Om & AHTS Islay: Anchor Pre-lay of Baku, Azerbaijan. Photo: British Petroleum

The contract signed with the Azerbaijani government was a Production Sharing Agreement (PSA) type. The agreement specified that the foreign companies would utilise their own resources, capital, technology and personnel, conducting exploration at their own risk. In case of success, the companies would use revenues from oil sales to compensate their investment costs and then share the profits with the government. It was estimated that $7.5 billion of Foreign Direct Investment would then flow into the country. According to the World Bank,

"The PSAs were the cornerstones of Azerbaijan's forthcoming development as they generated a significant amount of FDI in the country, raised demand in the economy, and generated confidence for future investments."[8]

The signing of the PSA was followed by concluding Joint Operating Agreements (JOA). These were made directly between the companies, to outline their rights, responsibilities and liabilities. The first, so-called "early" oil from Azeri-Chirag-Guneshli (ACG) fields was extracted in November 1997. It was exported via the newly refurbished pipeline to the city of Novorossiysk on the Black Sea coast of Russia. This route, however, was not sustainable for a number of reasons: Russia imposed high tariffs and mixed ACG Light crude oil with its own lower-grade oil before shipping. The admixtures negatively affected the price. According to one energy expert, the loss in price due to the mixing reached 4 to 5 USD per barrel.[9] (This was significant, given that the world crude oil prices fell precipitously in late 1997 and throughout 1998, from some 19 USD per barrel in November 1997 to approximately 10 USD per barrel in December 1998[10]). From Novorossiysk, the oil would have to be transported through the already very congested Bosphorus strait. Finally, the pipeline went through the territory of Chechnya. There was also a concern in Azerbaijan about the inherent dangers of Russia's monopoly on Azerbaijan's oil exports.[11]

In addition to the Baku-Novorossiysk pipeline, another pipeline was completed for transporting smaller amounts of "early oil"

March 2011

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