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Azerbaijan’s SOCAR could hinder Russian ambitions

SOCAR, Azerbaijan’s state energy company, is aiming to become an influential regional player in the Caspian Basin’s already crowded field.

The company’s emergence may bolster Azerbaijan’s ability to resist potential bullying by Russia, which currently enjoys a dominating advantage in the regional game over energy development and exports.

Flush with cash generated by record oil and gas production in 2007, SOCAR this year is in the midst of carrying out an ambitious plan to establish an international profile. Already, the company has opened offices in Britain, Romania, Switzerland and Turkey, and it is currently laying the groundwork to establish a refining presence in Central Europe.

It is the neighboring state of Georgia, however, that is the focal point of SOCAR’s initial move into foreign markets. The Azerbaijani company has established a Georgian subsidiary, and has renovated export facilities at the Georgian Black Sea port of Kulevi. It is also participating in the privatization of the Georgian gas distribution network, while planning to open 20 gas stations throughout Georgia.

Togrul Juvarly, an independent energy analyst in Baku, said economic and political motives were guiding SOCAR’s expansion. Investing abroad, he stressed, would help promote domestic tranquility in a country like Azerbaijan, which currently has a relatively low standard of living, but which is generating vast income via the rapid rise in energy exports. The sudden influx of petrodollars has some analysts worrying about the appearance of “Dutch disease” in Azerbaijan.
“The investment policy by SOCAR is good practice [in that it] decreases inflationary pressure and [the possibility of] overheating of the economy in the country,” Juvarly said. According to a February 4 report distributed by the Trend Capital news agency, officials in Baku have doubled the estimated revenue from energy exports that the state expects to receive through 2024 to $400 billion.

On the foreign front, SOCAR expansion has the potential to deal Russia a severe blow in the Caspian Basin. A mature SOCAR, possessing a strong distribution and refinery network in Central Europe, could help entice Central Asian producers Kazakhstan and Turkmenistan to participate in the long-planned Trans-Caspian Pipeline project. It could also infuse a long-directionless grouping of states, comprising Georgia, Ukraine, Azerbaijan and Moldova, known as GUAM, with a sense of purpose that would definitely run counter to Russia’s interests.

“SOCAR’s foreign activity … reinforces Azerbaijan’s political positions in GUAM,” Juvarly said to EurasiaNet on February 3.

The acquisition of the Kulevi oil terminal in early 2007 marked the start of SOCAR’s expansion. SOCAR President Rovnag Abdullayev told journalists in Baku on February 2 that the terminal’s official inauguration would occur in mid-February, with a capacity of handling 10 million tons of oil per year. The oil would be transported by rail then loaded on to tankers at Kulevi for shipment to European markets.

Beyond Kulevi, Azerbaijan has three other oil export avenues. The chief pipeline is the Baku-Tbilisi-Ceyhan (BTC) route, which transported 28.5 million tons of oil in 2007. Another connection between Azerbaijan and Georgia, known as Baku-Supsa, experienced a suspension in operations last year due to maintenance work. SOCAR officials indicate the company will continue to ship a small amount of oil via the fourth way, the Russia-controlled Baku-Novorossiisk pipeline.

SOCAR is also investing heavily in Turkey, a country with which Azerbaijan has close linguistic and cultural ties. In late November, the company obtained a majority stake in the Turkish petrochemical firm Petkim for $2.04 billion, thereby ensuring SOCAR a ready-made market for a portion of its gas production. Later in 2008, SOCAR plans to begin construction on a $4 billion oil refinery in Ceyhan, the Turkish port that is eclipsing Rotterdam as Europe’s main oil trading center. The refinery will be situated near the terminus of the BTC pipeline.

Moldova and Ukraine are shaping up as SOCAR’s main entry points into Central Europe. Under an inter-governmental accord, SOCAR conducted an initial assessment of Moldova’s oil and gas reserves in 2007 and in the coming year plans to make test drillings at several promising sites.

According to Natig Aliyev, Azerbaijan’s energy and industry minister, the Azerbaijani government is pushing SOCAR to develop refining capacity in Central European markets. “We [Azerbaijani officials] have already received offers from several countries – Ukraine, Romania, Bulgaria, Poland, and Belarus. However, conditions should be deeply considered. It [investment] may happen in the form of leasing, renting of facilities or establishing joint ventures,” Aliyev told a EurasiaNet correspondent in December 2007, referring to SOCAR’s move into Central Europe.

In January, Ukrainian President Viktor Yushchenko met with his Azerbaijani counterpart, Ilham Aliyev. Following those discussions, the Ukrainian leader announced that SOCAR planned to construct a modern oil refinery in Ukraine for consumption in that country.

Established in 1992, SOCAR activities and revenue generation accounts for approximately 15% of GDP. In 2007, it exported almost 8 million tons of oil. The company, which has over 50,000 employees, enjoys minority stakes in all 13 production sharing agreements for oil and gas exploration in Azerbaijan. The company achieved record volumes of natural gas production in 2007 – 5 billion cubic meters. In 2008 gas production is expected to reach more than 8 billion cubic meters annually.

The largest energy producer in Azerbaijan is the British Petroleum-led Azerbaijan International Operating Company (AIOC).

As part of SOCAR’s internationalization, company managers are taking steps align their practices with those in Western states. The company has never made a full accounting of its operations public. To allay outside concerns, Abdullayev, SOCAR’s president, announced that the company would submit to an independent audit, and would conform to international accounting standards.

Even if SOCAR improves its transparency image, several obstacles remain in its expansion path, according to Juvarly. For one, there is a question of whether there is enough oil to keep the Kulevi terminal, and the Ceyhan refinery, operating. “So far, no one has seen feasibility studies that show SOCAR will have enough oil in the future to ensure full capacity at these facilities, and to obtain a return on its multi-million investments,” Juvarly said.

Rapid growth could also exacerbate the problem of official corruption in Azerbaijan, and it could also strain SOCAR’s managerial capacity. “SOCAR already feels a lack of efficient managers, and the problem could become even sharper in future,” Juvarly said. (eurasianet)