Tremendous opportunities exist in Azerbaijan for developing oilfield equipment production
By Musa Suleymanov
Recently, there are serious reforms are implemented in the country on strenthening of industrial potential, improvement of business climate and important decisions are taken to support the exports and to minimize the dependence on import. Today, Ilham Aliyev, President of the country, personally outlines the importance of these steps for the country’s development. Stating high valuation of reforms implemented by international economic centers, Mr. President, during the World Economic Forum in Davos, has indicated in particular the 37th position Azerbaijan is holding in the Competitiveness Index. Mr. President, has actually said: “thirty seventh place in the world scale is a high historical indicator. Meanwhile, we are maintaining leading positions among CIS countries».
As we know, the oil production has been a cornerstone of Azerbaijani economy since late XIX century until today. Being the pioneer in many innovations introduced to petroleum industry, Azerbaijan, during Soviet era, had maintained the leadership in both oil production and equipment manufacturing. At that time 20 oilfield equipment production enterprises and several scientific and reseasrch institutions operated in Azerbaijan. Azerbaijan had covered 75% of needs of the Soviet petroleum industry in oilfield equipment as well exported the oilfield machinery and equipment to 30 countries worldwide.
Unfortunately, this massive production base has suffered the collapse and bankruptcy as a result of disintegration of the USSR and low petroleum prices during 1988-1993.
Azerbaijan oil industry has entered its new phase of development in 1994, when the price for barrell was in between 13-14 USD (figure 1), by signed “Contract of Century” with largest transnational oil companies, as a result of long-cited oil policy initiated by the national leader Heydar Aliyev. “Contract of Century” has brought a new breath to Azerbaijani economy, and even today our country enjoys the benefits of political and economic vision of that period. Political and economic direction set by national leader Heydar Aliyev, continues today under the leadership of President Ilham Aliyev.
President of country, keeping under control all sectors of industry, many times during his speeches outlined the importance of development of the oilfield machinery-building, announcing 2014 “Year of the Industry”.
Meanwhile, despite of multiple discussions on ways for development of oilfield equipment production industry, there is no significant progress. Enterprises, who have suffered during “transition period”, even today can’t settle their debts accumulated over the years. Despite the fact that some enterprises support their existence by their own resources and produce on old equipment, in several cases they have achieved the production under API (American Petroleum Institute). However, the financial standing and current production base does not allow these factories to maintain good positions even on domestic market. For instance, SOCAR (State Oil Company of Azerbaijan Republic), purchasing equipment from abroad at approximately 2 bln. USD per year, buys from 9 local enteprises only for 17 mln. AZN.
Under this situation, enterprises can’t get the funds not only from international financial donors, but even local banks.
Meanwhile, the volumes of perspective oil and gas development projects only in the Caspian region and their economic efficiency, indicate the need for immediate measures on restoration of Azerbaijani oilfield machinery building. Thus, according to US State Department and National Security Council, as well as forecasts of British Petroleum (UK), the total volume of oil and gas reserves of the Caspian are estimated at 335 bln. barrels of oil and 105 trln. cubic meters of gas (Figure 2). Gross market value of oil and gas reserves at current prices is 24 trln. USD (Figure 3).
According to statements of Caspian countries, 1 trln. 560 bln. USD (Figure 4) of investments on development of oil and gas fields are planned until year 2030, with following estimated breakdown:
- Russian Federations – 460 bln. USD;
- Islamic Republic of Iran – 500 bln. USD;
- Republic of Kazakhstan – 270 bln. USD;
- Republic of Turkmenistan– 180 bln. USD;
- Republic of Azerbaijan – 150 bln. USD
Some countries have already taken actual steps in realizing these plans. Islamic Republic of Iran has stated its plans to invest 200 bln. USD into offshore production in Caspian within next 4 years. Neighbor Kazakhstan has already invested 100 bln. USD into Kashagan field only. To take advantage of this situation, Azerbaijan shall restore its oilfield equipment production industry.
President of country also demands to develop the industry. Alternative ways of industry development shall be estimated. In my opinion, it should not be very hard to do for competent authorities.
First of all, the freedom of maneuvering shall be given to enterprise. For this, their burden of debts shall be cleared. Afterwards, options for their reformation can be considered. Following is proposed for rapid implementation of problem resolution:
- Application of German practice (after World War II, factories in Germany were privatized at 1 deutsche mark);
- Provision of privileged state loans to enterprises (to stimulate their technical upgrading);
- Consideration of privatization of enterprises by people holding operational experience in the sector;
- Upon marketing research of the region and procurement structure of SOCAR, to determine the specialization of 5-10 enterprises and provide them each with loans of 15-18 mln. USD (this will allow them to purchase new equipment and tools for modern production). Important role in this shall be given to the special coordinating body by the Head of State.
Plants may reach the phase one of upgrading within 2-3 years. Following phases shall include the attraction of local and international investment, invitation of high-quality engineering and management experts, achievement of production to international standards, API in the first place.
These actions will help to resolve the following issues:
- returning of highly qualified experts, who has left the country,
- minimize the costs of foreign purchases of oilfield equipment by SOCAR and other oil companies operating in Azerbaijan, minimizing hard currency outflow from the country,
- opening of new jobs,
- development of associated sectors, and most importantly
- maximum participation in generation of profits from investments planned in the Caspian region until 2030.
Even if 10% of planned volume of investment for Caspian basin is realized, it will make 150 bln. USD. For comparison, if Azerbaijan produces 40 mln. tons of oil annually within next 14 years at current oil prices, the gross cashflow until year 2030 will be at 120-125 bln. USD.
Average barrell price (monthly chart) in USD since 1988
Perspective and proven oil and gas reserves of Caspian region
Perspective and proven oil and gas reserves of Caspian region
At calculation price of oil 30$/barrel. At calculation price for gas - 160$/1000 m3
Gross volume of planned investments into oil and gas production in Caspian region until year 2030