Azerbaijan marks 20 years since oil contract

Last edited: 22 September 2014

September marks two decades since Azerbaijan signed a landmark agreement with BP and 10 other international oil companies to open up the country’s vast hydrocarbon resources in the Caspian Sea

Dubbed the ‘contract of the century’, the deal to develop three major oil fields – the Azeri, Chirag and deepwater sector of the Gunashli – proved a turning point for the nation’s economy, as it emerged from the post-Soviet era. 

Here, BP Magazine talks to Vugar Bayramov, founder and chairman of the Center for Economic and Social Development, an independent economic think tank in Azerbaijan, about why the 20 September 1994 was so significant.

At the signing ceremony for the ACG development, BP’s John Browne, former chief executive, said “the investments will open new possibilities for Azerbaijan”. To what extent has this been the case?

The 1994 agreement was a crucial turning point in the rapid development of the Azerbaijani economy. During the next two decades, GDP increased sixteen times, reaching $75 billion today. The non-oil sector of the economy also increased tenfold and developed from $3.8 million in 1994 to $38.5 billion in 2013.

The agreement was accompanied by a rapid increase in foreign investment into the country. Over 20 years, the country has attracted $108 billion of investments, of which 43.4% or $46.6 billion came from outside of Azerbaijan. The non-oil sector also saw 45.3% or $21.1 billion of this total investment, showing that many areas of the economy could take advantage of the new opportunities.

Looking back to 1994, what was Azerbaijan like as a place to live and do business?

After the dissolution of the USSR, Azerbaijan was facing serious recession in 1994 – with the economy shrinking by nearly 12% from the previous year . The country could only hope that, someday, it would be able to reverse this negative trend.

The poverty rate was at its peak during that period, while the average monthly salary was $15. The annual state budget was only $100 million and the provision of wages and pensions was delayed for months. This had a negative effect on unemployment and the workforce was fleeing the country to find jobs elsewhere.

Azerbaijan was not considered an attractive place for foreign investment with less than $ 200 million coming into the country from outside its borders.

Azerbaijan’s oil industry has a very long history, but what advantages have there been to the country working with international business partners in this latest oil era?

The latest oil era created many privileges and opportunities for Azerbaijan. First of all, the nation was able to establish itself as a reliable partner to cooperate with international companies. Secondly, by inviting foreign counterparts into the country, Azerbaijan could also bring new technologies and innovation here. Thirdly, the latest oil era created opportunities to attract investments into the non-oil sector as well. Foreign investment started to spread to sectors which had great purchasing power. Finally, as a result of this cooperation, Azerbaijan turned into an investor country and became one of the leading countries in the Caspian region.

Fact file: How Azerbaijan has changed since 1994

The country’s economy is now among one of the fastest growing in the world, are other industries playing their part in this growth?

Azerbaijan’s President Ilham Aliyev has announced that diversification of the country’s economy is a priority. Tourism, information technology, communication and agriculture are all defined as prime sectors for development. Attention to the industrial sector also increased after he announced 2014 as ‘the year of industry’.

Obviously, oil is still the major driver of our economy. However, economic growth has been observed due to progress of the non-oil sector: since 2010, there has actually been a decrease in the contribution of the oil sector to the country’s economy, but this has not decreased the total GDP growth.

Meanwhile, although the contribution of oil to the state budget in 2013 represented 75%, it is set to decrease to 65% in 2014. This shows that the diversification process of the economy has begun. Economic diversification and a reduction of dependence on the oil sector will be vital in the post oil period of the country.

Why is the State Oil Fund of Azerbaijan significant for the country’s future?

Heydar Aliyev, the national leader of Azerbaijan, had the idea to create the State Oil Fund of Azerbaijan. The fund’s aim is for the government to hold all revenues in one account, increase efficient spending of these revenues and preserve the wealth for future generations. According to its existing guidelines, at least a quarter of the oil revenues will be preserved for future generations. This is very important to prevent the abuse of this income, during the oil production period.

Currently, the State Oil Fund manages the effective investment of the money abroad and has improved transparency of spending. Therefore, the creation of the Oil Fund was a vital step.
The Baku-Tbilisi-Ceyhan pipeline stretches 1,768 kilometres, the same distance as London to Madrid
The ACG field lies in water depths of 120 metres
More than 2,600 tankers with ACG crude have been loaded from Ceyhan terminal (Turkey)

How do you see Azerbaijan’s hydrocarbon industry evolving over the next 20 years?

Azerbaijan will be able to preserve its position as a leading energy country in the next two decades, even with a decline in oil production from 2017, as set out in the production sharing agreements.

However, operation and production of the full Shah Deniz field gas will balance the income of the country. In 2013, 43.5 million tonnes of oil and 29.5 bcm of gas were produced. After the start-up of Shah Deniz stage 2, it is predicted that gas production will increase to 40bcm per year.

By 2022, Azerbaijan is also planning to produce shale gas from the Absheron gas field, allowing the country to export shale gas in the near future. It is also very important to extend the period of the 1994 agreement - by doing that, Azerbaijan will be able to preserve its oil income for many years.

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