Azerbaijan, a former Soviet republic, was the world's biggest oil-producing province in the early 1900s. Azerbaijan has attracted international interest by developing its potentially rich oil reserves in the Caspian Sea basin.

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BACKGROUND
Azerbaijan is in the midst of an oil boom brought on by the development of its vast hydrocarbon resources in the Caspian Sea region. It has taken great care to assure that multiple foreign powers and companies gain a stake in the oil boom in the hopes of achieving stability in the region, as well as gaining political advantage.

One goal has been to gain support in its conflict in the breakaway region of Nagorno-Karabakh. Populated by ethnic Armenians, Nagorno-Karabakh had been an autonomous region under Soviet rule. Soon after Azerbaijan's independence, Armenian separatists declared control of an area equal to about 20 percent of Azerbaijan's territory - displacing almost 1 million Azeris - and a bloody war followed. Although a ceasefire was declared in 1994, Azerbaijan continues its economic blockade of both Nagorno-Karabakh and Armenia. The United States responded to the blockade by restricting all bilateral U.S. aid to Azerbaijan under Section 907 of the Freedom Support Act.

Azerbaijan has also taken care to see that powerful neighbors such as Russia and Iran receive a share of the oil boom. President Aliyev, a former member of the Soviet Politburo, is attuned to Russia's desire to maintain a sphere of influence in the Caspian region and benefit from its oil boom. Iran is home to 20 million Azeris - more than 3 times the population of Azerbaijan, and is its neighbor and largest trading partner. Although Azerbaijan has taken a secular and pro-western course, it has treated Iran as a political and religious force to be reckoned with, and has allocated shares in international consortia to Iran as well.

ECONOMY
Azerbaijan's gross domestic product (GDP) has contracted about 60 percent since 1991. The downward trend finally was halted in 1996, and modest gains of 4-5 percent per year are projected over the next five years. These growth rates do not reflect the underground economy; the World Bank has estimated that this unofficial economic activity accounts for over half of Azerbaijan's overall economy.

Economic growth will be sustained by continuing investment in the oil sector and the start of oil production in Caspian Sea fields, and much of Azerbaijan's hope for future economic growth rests with successful development of its vast oil and gas resources in the Caspian Sea. Foreign direct investment increased from $15 million in 1993 to $546 million in 1996, with that figure expected to double in 1997. International oil contracts contributed 80 percent of total foreign investment, and foreign investment accounted for over 70 percent of total investment in Azerbaijan. Azerbaijan estimates that almost $40 billion worth of investments has been committed to developing its oil and gas resources.

Azerbaijan has made relatively slow progress towards a market economy since its independence from the Soviet Union in 1991, and reforms have lagged its neighbors. However, economic and legal reforms are being instituted. The economic focus is on reforming the tax regime, and several changes have been made, including: the introduction of a value-added tax, the abolition of the excess-wage tax, and a reduction in the top rate of the personal income tax. A bankruptcy law, drafted with the help of the European Bank for Reconstruction and Development, is also being considered.

The privatization program, however, is still not underway. The absence of a legislative framework has slowed the enactment of the voucher program. Voucher distribution covering two-thirds of state assets began in March 1997, although there has been no privatization of the underlying assets. The government has set up a commission to oversee the process.

Recently, Azerbaijan has begun to shift its trade pattern from the North (Russia and Ukraine) to the South (Iran and Turkey). Imports from countries outside the former Soviet Union rose from 36 percent of total imports in 1994 to over 70 percent by 1996. A member of the World Trade Organization (WTO), Azerbaijan has sought stronger commercial ties with the United States, the European Union, and Asia (including China, Japan, and Pakistan).

OIL
Azerbaijan, the oldest known oil-producing region in the world, experienced an oil boom at the beginning of the 20th century and later served as a major refining center in the former Soviet Union. Oil production peaked at about 500,000 barrels per day (b/d) during World War II, then fell significantly after the 1950s as the Soviet Union redirected resources elsewhere. Production has declined since Azerbaijan became independent in 1991, falling to an estimated 199,000 b/d in 1996.

Most of Azerbaijan's oil is produced offshore in the Caspian Sea. One field -- Guneshli, located 60 miles off the Azeri coast -- currently accounts for more than half of the country's oil production. Traditionally, all Azeri crude has been refined at Azerbaijan's two domestic refineries in Baku, so that only petroleum products are exported.

Development of new fields through joint ventures and production sharing agreements in the Caspian Sea will likely boost Azerbaijan's oil production well beyond its earlier peaks within the next 10-15 years. In what was described as "the deal of the century", an international consortium - the Azerbaijan International Operating Company (AIOC) - signed an $8 billion, 30-year contract in September 1994 to develop three fields -- Azeri, Chirag, and the deepwater portions of Guneshli -- with total reserves estimated at 3-5 billion barrels. The AIOC currently includes: British Petroleum (17.1%), Amoco (17%), the State Oil Company of Azerbaijan (SOCAR, 10%), Lukoil (Russia, 10%), Unocal (U.S., 10%), Statoil (Norway, 8.6%), Exxon (U.S., 8%), TPAO (Turkey, 6.8%), Pennzoil (U.S., 4.8%), Itochu (Japan, 4%), Ramco (U.K., 2.1%), and Delta (Saudi Arabia, 1.6%).

"Early oil" production from an existing platform at the Chirag field is projected to reach 80,000 - 100,000 b/d by end-1997. The AIOC plans to export this "early oil" via two pipelines - a northern route through Russia and a western route through Georgia. Each line will have initial capacity of 100,000 b/d, with the ability to at least double capacity with additional pumping facilities. The northern route reverses the flow on an existing pipeline north through Chechnya to the Black Sea port of Novorossisk, and oil exports are planned for end-1997. The western route is expected to be completed by end-1998, and requires building a new pipeline from Baku to Georgia, upgrading and refurbishing an existing pipeline from near Tbilisi to the Black Sea coast, and building a new oil terminal at Supsa.

AIOC expects production to peak at about 800,000 b/d within the next 15 years. This will require the building of a main export pipeline with a capacity of 1 million barrels/day. Several options for routes were presented for consideration to the Azerbaijan government in 1997, including pipelines from Baku to Ceyhan (Turkey), Baku to Supsa (Georgia), and Baku to Novorosiisk (Russia). However, a final decision is not expected until mid-1999 in order to allow time to assess early oil flows.

Azerbaijan's parliament has also approved four other megaprojects, with others under negotiation. The second megaproject was signed with the Caspian International Operating Company (CIOC) for a $1.2 billion venture to develop the 900 million barrel Karabakh field. CIOC stakeholders include: the Lukoil/Agip joint venture LukAgip (Russia/Italy, 50%), Pennzoil (U.S. , 30%), Lukoil (Russia, 7.5%), SOCAR (7.5%), and Agip (Italy, 5%).

The third megaproject ratified was the $4 billion Shak-Deniz project which has 700 million barrels of oil as well as large gas resources. Consortium members include British Petroleum (U.K., 25.5%), Statoil (Norway, 25.5%), Lukoil (Russia, 10%), Elf Aquitaine (France, 10%), SOCAR (10%), the National Iranian Oil Company (Iran, 10%), and TPAO (Turkey, 10%). U.S. firms are absent because of Iranian participation.The fourth mega project was the $1.5 billion North Aspheron Operating Company venture. The consortium was granted the right to explore a block containing the Ashrafi and Dan Ulduzu oil fields. Consortum members are: Amoco (U.S., 30%), Unocal (U.S., 25.5%), Itochu (Japan, 20%), SOCAR (20%), and Delta (Saudi Arabia, 4.5%).

The fifth megaproject ratified was the $2 billion project to develop the Lenkoran-Deniz and Talysh-Deniz fields. Stakeholders are: Elf Aquitaine (France, 40%), SOCAR (25%), Total (France, 10%), OIEC (Iran, 10%), Deminex (Germany, 10%), and Petrofina (Belgium, 5%).

In August 1997, President Aliyev visited the United States and signed four new agreements that now await ratification. Agreements were signed with Amoco (the exclusive right to negotiate for the Inam field), Chevron (South Aspheron field), Exxon (Nakicheban field), and Mobil (Oguz field). Negotiations are continuing for other fields.

One potential complication in Azerbaijan's plans for developing its Caspian Sea resources is the uncertainty over the legal status of the Caspian Sea -- specifically the territorial rights of nations bordering its shores (Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan). Azerbaijan has advocated the establishment of maritime boundaries into national sectors based on the equidistant division of the sea. Azerbaijan recently entered into a dispute with Turkmenistan over a field called Kyapaz by Azerbaijan and Serdar by Turkmenistan. Azerbaijan reached a preliminary agreement to develop this field in July, and Turkmenistan laid claim to it by including it as part of its Block 30 licensing in September. A final resolution of the Caspian Sea legal issues has not yet been made.

To support development of these major projects, SOCAR is also emphasizing redevelopment of its oil equipment and oil service industries. SOCAR already has a joint venture with U.S. company McDermott, named MacShelf, specializing in the construction of deepwater platforms. Other projects include construction of underwater pipelines and the reconstruction and retrofitting of ships for use in drilling and laying of underwater pipelines.

NATURAL GAS
Natural gas production declined by 5 percent in 1996 to 230 billion cubic feet. To meet domestic demand in the past, Azerbaijan had imported natural gas from Russia, Turkmenistan, and Iran. However, state Azerigaz announced in March 1996 that it did not intend to import any more gas and instead would develop new gasfields in the Caspian Sea to meet demand. Azerbaijan could be self-sufficient in gas within 5 years, following a complete overhaul of the gas supply system, including replacing worn-out compressors and upgrading gas pipelines. The European Bank for Reconstruction and Development is also studying a proposal for the Kalmas gas storage project.

Increased oil production in the Caspian is also expected to increase gas production because most of Azerbaijan's natural gas production comes from associated gas from offshore oil fields. Additional gas production could also come from the recently discovered offshore Nakchivevan field, with an estimated 900 billion cubic feet of reserves. Azerbaijan is also boosting natural gas production by reducing flaring. As a result, gas production could increase by as much as 1 trillion cubic feet/year by the end of the next decade, and Azerbaijan could become a net exporter of natural gas to its neighbors.

ELECTRICITY
Azerbaijan's power sector has a generating capacity of about 5 gigawatts consisting of eight thermal plants supplying over 80 percent of generating capacity, and 5 hydroelectric plants. Two-thirds of the thermal capacity is powered by Mazut (residual fuel oil), with natural gas as the secondary fuel. In addition to domestic power plants, Azerbaijan imports power from Georgia and Russia, and exports to these countries as well.

Economic conditions, high taxes, and non-payment by customers in Azerbaijan have left the power sector without sufficient working capital and investment funds. This has resulted in fewer repairs and less maintenance to aging power generation facilities. Over half of the turbo-generators and boilers have been in use for over 40 years. In addition, the energy efficiency and environmental adequacy of the power sector both need to be improved. The American Embassy in Baku has issued a report that estimates that the large-scale upgrades needed by the power sector will cost $2.5 billion.

President Aliyev issued a decree in 1996 to transform the state power company, Azerenergy, into a joint stock company. However, this will be delayed until it can generate sufficient revenues to pay its outstanding debts to the government. Although tariffs have been raised several times, rates are still low and collection is not adequate.

COUNTRY OVERVIEW
President: Haydar Aliyev (since 1993)
Prime Minister: Fuad Guliyev
Independence: August 30, 1991 (from Soviet Union)
Population (7/96E): 7.7 million
Location/Size: On the Caspian Sea between Russia, Iran, Armenia, and Georgia/33,400 square miles (about the size of Maine)
Major Cities: Baku (capital), Gyandzha, Mingechaur, Nakhichevan, Stepanakert, Sumqayit, Yevlakh
Languages (1995E): Azeri (89%), Russian (3%), Armenian (2%), Other (6%)
Ethnic Groups (1995E): Azeri (90%), Dagestani (3.2%), Russian (2.5%), Armenian (2.3% - nearly all in separatist Nagorno-Karabakh region), Other (2%)
Religions (1995E): Muslim (93.4%), Russian Orthodox (2.5%), Armenian Orthodox (2.3%), Other (1.8%)
Defense : Army, Navy, Air Force, Border Guard

ECONOMIC OVERVIEW
Currency: Manat
Exchange Rate (7/11/97): US$1 = 3,968 manats
Gross Domestic Product (1996E, purchasing power parity):$11.6 billion
Real GDP Growth Rate (1996E): -1.3%
Inflation Rate (1996E): 28%
Exports (1996E): $630 million
Imports (1996E): $960 million
Major Exports: Oil and oilfield equipment, cotton, wool
Major Imports: Machinery and parts, consumer goods, textiles, foodstuffs, natural gas
Major Trading Partners: : Turkey, Russia, Iran, United Arab Emirates, Turkmenistan, Germany, Ukraine, Georgia, Kazakstan, U.K., and the United States

ENERGY OVERVIEW
Proven Oil Reserves (1996E): 11 billion barrels
Oil Production (1996E): 199,000 barrels per day (b/d)
Oil Consumption (1996E): 156,000 b/d
Crude Refining Capacity (1/1/97): 441,808 b/d
Net Oil Exports (1996E): 43,000 b/d
Natural Gas Reserves (1996E): 11 trillion cubic feet (Tcf)
Natural Gas Production (1996E): 0.23 Tcf
Natural Gas Consumption (1996E): 0.23 Tcf
Net Natural Gas Exports (1996E): none
Electricity Generation Capacity (1996E): 5 gigawatts
Electricity Production (1996E): 17 billion kilowatthours
Net Electricity Imports (1996E): 0.2 billion kilowatthours
Proven Coal Reserves (1996E): none
Coal Production (1996E): none
Coal Consumption (1995): 0.02 Million Short Tons

ENVIRONMENT OVERVIEW
Total Energy Consumption (1995E): 0.56 quadrillion Btu
Energy Consumption per Capita (1995E): 75 million Btu (vs. 345.9 million Btu in U.S.)
Energy-Related Carbon Emissions (1995E): 9.4 million metric tons (0.2% of world emissions)
Carbon Emissions per Capita (1995E): 1.2 metric tons (vs.5.4 metric tons in the United States)
Major Environmental Problems: Local scientists consider the Abseron Peninsula (including Baku and Sumqayit) and the Caspian Sea to be the ecologically most devastated area in the world because of severe air, water, and soil pollution (from use of DDT as pesticide and toxic defoliants used in cotton production).

ENERGY INDUSTRY
Organization: State Oil Company of Azerbaijan Republic (SOCAR); Azerigas - State Gas Company; Azerenergy - State Electric Company
Major Oil and Gas Fields: Ashrafi, Azeri, Chirag, Dan Ulduzu, Dostlug, Guneshli, Kapaz, Karabakh, Lenkoran-Deniz, Shak-Deniz. Talysh-Deniz
Major Oil Ports: Baku
Oil Export Pipelines: Baku-Russia ("early oil" northern route), Baku-Georgia ("early oil" western route)
Major Oil Refineries (Capacities 1/1/97): Baku (238,978 b/d), Novo-Baku (202,830 b/d)
Major Power Plants: Azerbaijan (2100 megawatts or MW), Ali-Bayramy (1100 MW)

Links to other sites:
EIA - Country Information on Azerbaijan
1997 CIA World Factbook - Azerbaijan
U.S. International Trade Administration, Country Commercial Guide - Azerbaijan
BISNIS - The U.S. Department of Commerce's Business Information Service for the Newly Independent States
U.S. State Department Consular Information Sheet - Azerbaijan
American Embassy in Baku
U.S. State Department - Business and Commerce in Azerbaijan
U.S. Library of Congress Country Study - Azerbaijan

The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.

U.S.-Azerbaijan Council
Azerbaijan International
President Aliyev's Home Page

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File last modified: November 12, 1997

Contact:

Erik Kreil
ekreil@eia.doe.gov
Phone: (202)586-6573
Fax: (202)586-9753

URL: http://www.eia.doe.gov/emeu/cabs/azerbjan.htm