Weekly actual topics in Azerbaijan (Aug.6-11)

Analysis Materials 15 August 2012 11:29 (UTC +04:00)

Azerbaijan interested in building refineries in foreign countries

Azerbaijan has received more proposals for the construction of oil refineries in foreign countries in recent years. And what is remarkable, interest in building refineries in their territory is more often shown by countries that do not have oil resources, or have them in small quantities.

So, at various times Kyrgyzstan, Tajikistan, Ukraine and Georgia turned to SOCAR for the joint construction of oil refinery projects. These countries are seeking to build refinery in their territory in order to reduce dependence on oil products supplies from other countries, to ensure their own energy security and export products abroad. Some of them call construction of the refinery a social project which will allow to create more jobs, increase incomes and, therefore, increase taxes to budget.

Appeal of these states to Azerbaijan is justified, because the country has vast experience in the oil sector. But at the same time, Azerbaijan, as the oil-producing country, and possessing all the necessary resources, has itself priority plans for modernization of existing oil-refining capacity and building new refinery.

Azerbaijan produces today oil products on the basis of two Baku refineries with total capacity of 20 million tons a year. Both refineries are part of SOCAR, which annually processes approximately seven million tons of oil from onshore and offshore fields at its own expense. In 2014 SOCAR intends to increase the depth of oil processing at its own refineries to 95 per cent.

At the existing refineries the production of fuel that meets the Euro 3 standard is ensured, but the fuel of Euro 5standard is expected to be produced at a new oil refinery complex, which will operate in Azerbaijan by the end of 2020. Creation of a new complex for oil and gas processing and production of petrochemical products (OGPC) involves the construction of a petrochemical plant with capacity of ten million tons a year, as well as gas processing plant with capacity of 10 billion cubic meters a year.

It is expected that Azerbaijan, jointly with foreign partners will invest $17 billion in the construction of this modern complex which will not only fill in the domestic market by oil products of own production, but also will also meet the demand for petroleum products in foreign markets.

Around $6 billion will be invested in the construction of STAR refinery of SOCAR in Turkey. The main purpose of the construction of the enterprise is providing raw material for petrochemical complex Petkim, which is the most important of the external assets of SOCAR. Annual production of naphtha at STAR refinery, which Petkim will use as the main raw material will be 1.66 million tons. Currently, more than 80 percent of the needs of Petkim in the naphtha is met through imports. With the introduction of a new refinery dependence on imports will be reduced to zero.

Azerbaijan's activity in the construction of refineries will not be limited by this. On the contrary, the country is interested in export of investment, which, in particularly can be invested in the construction of oil refineries in Kyrgyzstan, Tajikistan, Georgia, Ukraine and even in Latin America. The only thing that SOCAR demands from its future partners is economically viable and valid projects. The company should know the answers to such questions as the source and the price of oil, which will be processed to make a decision on the construction of the oil refinery. If the feasibility study shows that the return on investment can be carried out within two to three years, the project can be considered as effective.

Quite possibly, the time will come when SOCAR itself will decide on the purchase of existing or construction of a new refinery in a number of these countries, when the interests of the company focus on the Asian market or strategy works to expand refining capacity in Georgia or Ukraine. The time will show.

In any case, stimulus measures should be taken to attract investments of Azerbaijan, as for example, Turkey did. Thus, under the Turkish project to encourage investment, which began in April 2012, investment in oil refineries of SOCAR in Turkey will not be subject to VAT.

Raising requirements to Azerbaijani banks' capitalization to become signal for brand banks

The main reason for increasing by the Central Bank of Azerbaijan (CBA) of the minimum capital requirements to Azerbaijani banks is due to the fact that after the global financial crisis, there was a shortage of liquidity, and many bank shareholders have refused to support these structures, the country's banking circles believe. To date, eight banks operate at a loss.

By the decision of the Central Bank of Azerbaijan (CBA) on July 25 this year, the minimum total capital of existing banks, as well as the capital of newly established banks was increased from 10 to 50 million manat. Terms of bringing capital to the new standard level for existing banks are set prior to January 1, 2014.

Currently, nearly 92 percent of the banking market in the country is formed by banks within the top twenty.

"This decision is intended to ensure that shareholders have supported their banks, which indirectly affects the pace of consolidation in the banking market of the country," banking experts say.

According to one of them, first of all, it will lead to activation of emission of shares by banks, and they will not delay its placement, which will be certain fed for stock exchange, brokers, and so on.

"At the moment a new regulatory requirement of CBA can be followed by 15 banks [there are 43 banks in the country]. Banks, whose shareholders are individuals, will have another reason for a positive decision towards a merger. The banks that are members of the holding will not have a problem, since this issue will be resolved by holding, banks with foreign capital won't face problems either," experts noted.

According to market participants, there shouldn't be problems with banks that have level of capitalization exceeding 30 million manat, and the banks with capital below this level face entirely different situation.

Even before the global crisis there were rumours on increasing the capitalization and not by chance that many Azerbaijani banks have already formed the required level of capital.