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Azerbaijan - Energy Base.

The energy base of Azerbaijan has been shrinking since 1990. In each of 1989 and 1990, Azerbaijan's energy consumption used to average 22.9m tons/year of oil equivalent. This has dropped to 15.9m t/yoe in 1995 and to 12.1m t/yoe in 2003. In 2006 energy consumption rose to 14.6m t/yoe and in 2007 this reached about 16m t/yoe. In 2008. the figure rose to 17.7m t/oe and in 2009 it reached over 19m t/yoe, still well below the 1990 figure. An APS source in Baku says in 2010 the figure is likely to be between 20.3-20.5m t/yoe - more than 2m t/yoe below the level of 1990.

Azerbaijan's energy base can have a cleaner source of fuel from Camelina Sativa, a plant which can grow in abundance in the Caspian region. This can potentially price fossil-fuel based sources of energy out of the regional market if proper investment is made in planting the camelina. Camelina is attracting increased scientific interest for its oleaginous qualities, with several European and American companies already investigating how to produce it in commercial quantities for biofuel (see down1AzerCasp-July5-10).

Azerbaijan is positioning itself to become a major player in the energy world this century. In the early 1990s the country emerged from the Soviet era with a teetering economy, environmental degradation and a conflict with neighbouring Armenia. The recession ended in late 1995, but it was only in 1999 that economic recovery began to accelerate.

Azerbaijan is rich in natural resources. It has a wide range of minerals, including iron, aluminium, zinc, copper, arsenic, molybdenum, marble and fire clay. Scanty reserves of gold in the Armenian-occupied Kelbajar region has been extracted by Armenians. Azeri reserves of oil and gas are more than enough to meet domestic demand in the long-term (see omt2AzerProdJuly12-10 & gmt2AzerProd-July12-10).

Azeri scientists consider the Abseron Yasaqligi (Absheron Peninsula), including Baku and Sumqayit and the Caspian Sea, to be the most ecologically devastated area in the world because of severe air, water, and soil pollution. Soil pollution results from the use of DDT as a pesticide and from toxic defoliants used in the production of cotton. A switch from cotton to camelina will not only be more profitable but also essential for improving the environment in Azerbaijan and the other Caspian countries, particularly in Kazakhstan, Caucasian/Caspian parts of Russia, Turkmenistan and Uzbekistan (see this volume's Kazakh's Nos. 4-6, Russia's Nos. 7-11, Turkmen Nos. 12-14 & Uzbek Nos. 15-17).

Azerbaijan, a Muslim but secular state allied to the US and wedged between Russia and Iran, is a key partner in a Western-backed corridor of oil and gas pipelines built in recent years to deliver Caspian energy resources to the West. Western energy companies, led by BP, have invested heavily in the country's energy sector. Boosted by soaring global energy prices, Azerbaijan's economy grew by 25% in 2007, one of the highest rates of economic growth in the world. Inflation has also soared, however, and hit 16.7% in 2007. GDP and inflation growth continued through the first eight months of 2008, but the subsequent period saw a global recession as severe as the Depression of the 1930s.

Since becoming independent in 1991, Azerbaijan has attracted significant international interest in its petroleum reserves. Foreign investors are helping the country develop its rich oil and gas reserves in the Caspian Sea basin, making Azerbaijan an important energy exporter over the next decade. Azerbaijan is capitalising on the Caspian's sizeable, but still mostly untapped, hydrocarbon resources.

Azerbaijan's real GDP grew by an impressive 31% rate in 2006, driven by growth in oil and gas production. Impressive real GDP growth rates followed in 2007 and in the first eight months of 2008. But after the crisis hit the world, Azerbaijan suffered as in the case of other oil and gas exporting states; while GDP growth fell sharply, the rate of inflation did not decline at the same pace.

Azerbaijan's hope for sustained economic growth in the coming years rests in large part with its management of the petroleum resources and the resulting revenue stream and -more important - non-petroleum diversification. After the first commercial oil flows through the Baku-T'bilisi-Ceyhan (BTC) pipeline in the summer of 2006 and the increasing oil production from the Azeri-Chirag-Guneshli (ACG) complex, however, oil revenues did not contribute to a doubling of Azerbaijan's GDP in that year as Baku planners had hoped. Although the oil sector represented around 10% of Azerbaijan's GDP in 2005, it doubled to almost 20% of GDP in 2007.

To manage the revenues, former President Heydar Aliyev created a State Oil Fund (SOF) in 1999, which was designed to use money obtained from oil-related foreign investment for education, poverty reduction, and efforts aimed at raising rural living standards. By end-2006, the SOF reported assets of almost $2bn, but the fund's assets did not rise to $36bn by 2010 as had been forecast before Aliyev died in late 2003. Yet hs son and successor as president, Ilham, has managed to reduce the negative effects of the global recession on the Azeris in the period since October 2008.

Economists at the IMF had warned Azerbaijan while the oil boom was at its height that institutional reform and economic liberalisation were necessary for the country to sustain its petroleum wealth. As oil revenues rose sharply in 2003-07 and in the first eight months of 2008, Ilham Aliyev's regime increased spending. In combination with a partial accommodating of monetary policy, these factors led to rising inflation.
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Publication:APS Review Downstream Trends
Date:Jul 12, 2010
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