Oil Revenue Management in Azerbaijan
Oil Revenue Management in Azerbaijan
By Gubad Ibadoglu, Economic Research Center, Baku
The history of oil production of Azerbaijan dates back to ancient centuries. However, it is worth to mention that the production of oil with mechanical methods launched at the end of 19th century. So, Azerbaijan took the first place in the production and processing of oil in 1899 and accounted for 50% of the global oil production. At the beginning of last century the oil sector of Azerbaijan experienced the first boom of oil revenues. The oil production has had increased in Azerbaijan during Soviet regime. In addition, Azerbaijan accounted for 75% of oil produced in the Soviet Union during the Second World War.
After declaration of its independence Azerbaijan was able to implement oil production jointly with foreign companies. In 1994, Azerbaijan took first step in this direction and thus signed Production Sharing Agreement (PSA) with renowned world companies for joint exploitation of Azari-Chirag-Gunashli - the biggest oil well in the country. According to PSA agreement, the first production of oil had occurred in 2006.
In November 1997, Azerbaijan began producing oil under the “Contract of the Century”, an agreement signed in 1994 between the state and a consortium of international oil companies. This was soon followed by profit oil collection and sale of this oil, generating billions of menat for the government. But even before the oil money entered the country, IMF and World Bank were among the first involved in discussions on the efficient and transparent use of these oil revenues with the Government of Azerbaijan. They suggested creating a separate non-budgetary fund which would make it easier to monitor the collection and management of the revenues. Initially, the revenues from oil sales were collected in the accounts of the National Bank (now Central Bank) and that made the public supervision of the revenues almost impossible.
In 1999, December 29, the Presidential Decree #240 formalized the establishment of the State Oil Fund of the Republic of Azerbaijan (SOFAZ). The main objective of the Fund is to ensure the accumulation and effective management of foreign currency and other assets generated from the implementation of oil and gas exploration and development agreements as well as from the Fund's own activities, in the best interest of citizens and future generations of the Republic of Azerbaijan.
Fund is an extra-budgetary institution, a legal entity which has a settlement account and other accounts at banking institutions (all over the world), so the resources are deposited directly into the Fund’s own accounts without any reservation.
Furthermore, the peak level of oil production was reached in 2010. In this year, 50, 8 million ton of oil was produced in Azerbaijan. According to the results of 2012, the oil production has decreased and estimated 43 million ton.
SOFAZ’s objectives are: 1) Financing major national projects to support socio-economic progress; and 2) Ensuring intergenerational equality with regard to the country’s oil wealth and accumulate and preserve oil revenues for future generations. With regard to objective 1, Table 1 shows that, notwithstanding that these funds have been appropriated without parliamentary oversight and that spending is generally non-transparent, the objective has been more or less met. However objective 2 - ensuring fair allocation of oil wealth across generations – has been neglected so far. Priority has been given to spending resources instead of accumulating or investing them for long-term growth.
Table 1: SOFAZ withdrawals January 01, 2001 - 2013
Expenditure items Amount, mln. AZN
• Financing the participation of the Republic of Azerbaijan in Heydar Aliyev BTC Main Export Pipeline Project 297,9
• Settlement of the problems of refugees and internally displaced persons 1 157.8
• Construction of the Oguz-Qabala-Baku water supply system 779,6
• Reconstruction of the Samur-Absheron irrigation system 895.5
• Transfers to the state budget 35 085.0
• Formation of the statutory capital of the State Investment Company 90,0
• Financing "Baku-Tbilisi-Kars railway" 341.5
• Financing "The state program on the education of Azerbaijan youth abroad in the years 2007-2015" 54.8
• Repayment of State Oil Company's share in the project on joint exploration and development of Azeri, Chirag and Guneshli oilfields 87,6
• Total 38702,1
Let us examine the figures. $34 129.4 mln dollars has been accumulated since the establishment of the fund as of January 01 of 2013. Table 2 gives more detailed information about revenues and assets of the Fund since 2001. From 2001 to January 01, 2013, Azerbaijan collected over $83,86 billion USD revenue (including management revenues) from oil and gas sales obtained from Production Sharing Contracts. Calculations show that 59.3% of petroleum revenue was spent during this period. Please see the figire1. According to Table 3, in some years as much as 99.5% of petroleum revenues were spent. In fact, in spite of peak production in 2012, the government’s rate of spending could lead to a violation of the principle of saving a minimum of 25% of revenues envisaged under the “Long-term management strategy of oil and gas revenues”.
Table 2. Revenue and assets of State Oil Fund
Years Revenue of State Oil Fund (mln. AZN) Revenue transferred from SOFAZ to the state budget (million AZN)
2001 248.0 -
2002 295.0 -
2003 364.0 100
2004 317.0 130
2005 660.0 150
2006 986.0 585
2007 1 886.0 585
2008 11 865.0 1100
2009 8 177.0 4915
2010 13 089.0 5915
2011 15 628.0 9203
2012 13673.7 9905
Total 67188,7 35085