Oil is the locomotive of Azerbaijan’s economy

Mahmud Mamedguliev, Vice Minister of Foreign Affairs of Azerbaijan

The first contract between the Government of Azerbaijan and the International Oil Consortium was signed in September 1994. Today, another twenty-one contracts, for oil field engineering in the Caspian Sea, have also been signed. Out of the $7B of foreign funds invested in the country’s economy over the past 5 years, about $5B have been directed to oil industry development. So far, oil extraction volumes are rather low, and it is being conveyed well mainly via the pipelines Baku — Supsa (Georgia) and Baku — Novorossiysk (Russia), each of which are only capable of up to 10M t throughput per annum. But as early as 2010—2012 total oil extraction volume should reach 60M t a year.

Preparing to big oil extraction and transport, the Consortium proceeded with the first phase of the Baku — Tbilisi — Ceihan pipeline, which is designed to convey 50M t of oil annually. The route’s precision works have been carried out basically and in detail, which cost around $200M. In late summer 2002, the very construction of the pipeline can begin. The deadlines are rather tight since the pipeline is expected to go into operation by 2005. Presumably, 30% of these works are financed by the companies, themselves, who are party to the project, with the remaining 70% funded by international financial institutions.

The arrival of these large financial companies to Azerbaijan was intended, primarily, to create more favourable economic conditions in the country. Every contract is approved by the Parliament, and therefore gains full legal status. The companies have privileged conditions for importing equipment, with simplified customs regulation. Moreover, Azerbaijan has adopted a strategy of production sharing agreements which, essentially, works as follows. The proceeds from extracted oil go, firstly, back to the investors; after 2—3 years, a part of them will belong to Azerbaijan and, thereafter, Azerbaijan’s share will gradually increase. 

Sometimes we are accused of having ‘brought Western imperialism’ to the shores of the Caspian Sea, and of thus being ‘threatened by foreign companies’ domination’ — but these are groundless accusations. The fact is — we do know how to begin counting all the benefits gained from this policy. To begin with, the first contract, known as ‘the contract of the century’ due to its high cost ($8B), by provisional assessments, will earn us $100B of net profit. A quarter of this will go to the Western companies, but the rest of it will be reaped by Azerbaijan. What’s more, add to this all the new jobs, tax revenue, and so on. But the essential point is that Azerbaijan could not, by itself, have mustered multibillion investment needed for oil fields engineering and oil industry development. Incidentally, experts assert that $1 invested in the latter, should earn $3 for Azerbaijan.

The incomes from oil extracted by Azerbaijan on its own, do go directly to the state treasury. As for the profits gained from ‘consortium contract’ oil, they go to a special fund, which is a kind of second treasury in our country. This fund was established 1.5 years ago, and now holds over $500M. These moneys are banked in order to accumulate interest in the best banks around the world. After a certain sum has been thus accumulated, it will go towards funding social and economical programs. 

Moving on, as well as the said oil pipeline, the gasline Baku — Tbilisi — Erzerum (Turkey) project has also started rolling. From the outset, Turkey will receive 2B cu. m of gas annually; and this quota will rise year by year. Now, additionally, the idea is developing of extending this pipeline to Greece, and even further on to the Balkan countries — and then to Western Europe to join up with the EU’s gasline network. 

In my view, the time is coming to create similar conditions for attracting investors to our agriculture, primarily in the agro-processing industry. This sector of Azerbaijan’s economy ranks second in importance after oil. Today, some 3M people, half our population, are employed in agriculture. Thanks to the fact that our country comprises 9 climatic zones — from subtropical to temperate continental climate — we can produce a very wide range of agro-products. In former times, the republic ranked first in the USSR with respect to grape production, and was among the leaders in growing cotton, vegetables and fruits, and subtropical crops. Then the hard times came; but we have since managed to stabilize the situation through land privatization. 

For example, we did have a critical situation with meat production; but now our livestock is almost doubling year by year. And the price of bread has even begun going down because of increased competition. 

All of this shows that Azerbaijan can also become a powerful, agricultural products exporter. No other republic of the region has the climatic advantages we do. Thus, they as well as Georgia, Iran and Russia are all potential consumers of Azerbaijani agricultural products.

As for transport, communications, tourism etc., our country’s potential in these sectors is not less rich than the above.

Therefore, I address all businessmen: investment opportunities in Azerbaijan are enormous. Don’t miss your chance.