AZERI GOV'T EAGER TO INCREASE FUEL PRICES IN 2006

This is the answer by the Azerbaijani Ministry of Finances to last week media reports on possible twice-rise of retail prices of petrol in the country by the end of April. Moreover, discussions in this respect are not even held, while financiers are currently working over correction of budgets forecasts for 2006, which will be changed with consideration of increase of tariffs for diesel fuel, light kerosene, aviation kerosene and stove fuel in January.

In its turn, the head of the economic, financial and tariff policy department of the Cabinet of Ministers, Oktai Hagverdiyev, considers expedient to increase any price (consumer and prices set by natural monopolies) in 10-15 years when living condition of the population will be better and consequently, the tariffs will be increased to acceptable level. Even within 20 years the energy prices in Azerbaijan will be cheaper than those in Germany and France.

Meanwhile, impetuous rise in prices of fuel is a worldwide spread case, which threatens even the oil producing Azerbaijan. The analysis shows that objective reason for reconsideration of the situation with the domestic prices of oil products is the majority and the increase of their cost in line with the word tariffs is inevitable to provide for price balance in the local market.

First, lets consider the world practice for change of fuel prices. Many European and word leading publications have repeatedly written about the price rise for fuel, in particular, petrol. However, the difference with the local approaches to the estimation of the developments is striking. The price formation for fuel in Europe and America is a long-history and transparent phenomenon. Some big companies (for instance, British Petroleum) openly publish principles for formation of fuel prices. Р"авно извесС'РЅС‹ РІСЃРµ компоненС'С‹ ценообразования - РёС... СЃРїРёСЃРѕРє РєСЂР°С'РѕРє Рё РїРѕРЅСЏС'ен: СЃС'РѕРёРјРѕСЃС'СЊ сырья, перерабоС'РєРё, С'ранспорС'РёСЂРѕРІРєРё, С...ранения, акцизы, HР"РЎ Рё РґСЂСѓРіРёРµ РЅР°Р"РѕРіРё. Таким образом, обсуждаюС'СЃСЏ реаР"ьные причины подорожания Рё РґРµР"аюС'СЃСЏ РїСЂРѕРіРЅРѕР·С‹, РєРѕС'орые базируюС'СЃСЏ РЅР° РІРїРѕР"РЅРµ осязаемыС... С"акС'Р°С....

In Azerbaijan rise in the fuel prices is under the governments competence. The last rise in prices of petrol took place in November 2004, when the retail price of petrol AI-96 made up 0.4 manats, AI-93 0.36 manats, AI-76 0.34 manats. There is no direct correlation between world oil prices and fuel prices. The local fuel market does not reply to fluctuations in world quotations. In Europe the prices in the filling stations can change every day the market replies the changes in-the-fly. The comparison shows that over the past 10 years fuel prices rose 1.5 times in Europe and twice - in America (besides, the most art of rise falls on 2004-2005).

The second reason, which can cause a rise in fuel prices, is the state of local oil refinery plants (ORP). Even the European commentators consider not the oil prices, but acute insufficiency n refining powers amid growing demand as an important reason causing increase of fuel prices.

Even 6.1 million tons of crude delivered to the ORP for further refinery is enough to cover domestic demand of Azerbaijan (consumers and industrial enterprises. The Energy Minister urges that at present it is more profitable to deliver oil for export. Owing to use of the Baku- Novorossiysk pipeline by the AIOC for oil pumping last year, the SOCAR delivered its crude to local ORPs. According to calculations by the Ministry, in case of crude oil export the SOCARs profits might comprise more than $45m.

Export of Azerbaijani oil products abroad is not profitable. Russia, Iran, Kazakhstan and Turkmenistan possess own oil products and sale of Azerbaijani products to these countries is possible in case their prices are lower than those existing in these countries. An only country in the region which is ready to acquire oil products is Georgia, whilst the market of this country is very limited. Sale of oil products to far foreign countries is also unprofitable due to high transportation fees, which include delivery by rail, refinery at ports, freight and insurance expenses.

At present 2 ORPs functioning in the country are taking measures for increase of quality of the output with regarded to bring them in line with the international standards. The quality of the produce can be improved in two ways either through purchase of new devices, which requires considerable funds, or upgrade and renewal some part of the equipment to decrease the launching of toxic substances to air. According to Aliyev, several million dollars are required for the reconstruction of the ORP in he country for the output of oil products in compliance with the international standards. However, the European market well defends itself. No one can guarantee that Europe will stop increasing the standards, the minister alarmed.

At present Azpetrol is the biggest buyer of gasoline produced at the ORP. It is followed by LUKoil. HР° РёС... РґРѕР"СЋ РїСЂРёС...РѕРґРёС'СЃСЏ примерно 60-70% РѕС' РїСЂРѕРёР·РІРѕРґРёРјРѕРіРѕ объема, Р° 25-30% закупаеС' УправР"ение внешнеэкономическиС... связей Р"HРљРђР .

According to the State Statistics Committee, the production of gasoline in the first quarter of 2006 rose 11% as compared to last year.

In ths tons

January March 2006

January March 2005, in %

Store reserves 01.04.06

Gasoline

165,7

111,0

40,3

Kerosene

199,6

126,4

14,0

Fuel mazut

897,2

130,3

60,9

Diesel fuel

532,8

132,1

65,1

Oil bitumen

13,2

125,7

1,0

Lubricants

11,3

156,9

15,8

Naphta

113,9

149,5

0,6

As the third pre-condition for increase of prices of energy resources in Azerbaijan it is necessary the recommendations by the International financial institutes. A version that namely the International Monetary Fund (IMF) insists on rapid rise in prices of petrol was rejected. Thus, Hagverdiyev noted that such recommendations are not in the IMFs competence. In accordance with the agreement between the IMF and the government, the proposals can be forwarded by the international experts in respect to structural reforms and in general, the cooperation can be of constructive character. Azerbaijan has already passed the period when the government was obliged to make compromises to the international financial institutes and implement their demands in order to receive the installments. The government has refused from the commitments attached to credits.

The current meeting held with the IMF experts focus on the study of impact pf the January price rise on budget revenues. The Baku office of the IMF also confirmed that the IMF had not presented new recommendations on the rise of prices of oil products.

The IMF is major supporter of bringing the domestic retail prices of oil products in Azerbaijan in line with the world prices. Welcoming the January rise in process of oil products, the head of the Baku Office, Basil Zavoico, noted that the users in Azerbaijan ought to use to right consumption of hydrocarbons in order not to get deprived of it when the deposits exhaust. According to the IMF, in this stage it is necessary to increase prices in order to alter the existing production system in Azerbaijan, which depends on low prices.

In its turn the EBRD continues insisting on increase of electricity tariffs. I know that the issue linked with increase of tariffs is very difficult, but they should be fair and we attach great importance to this issue. The EBRD is in Azerbaijan not to earn money, bit deliver better services at low pricesРј. Therefore, we supported the development of this project through grants allocated by the donor countries. We offer maximally slow rise in tariffs up to the level covering the expenses for electricity generation in order to finance equipment and premium quality of services, Jean Lemierre, the had of the EBRD. At the advice of the EBRD, the Tariff Council is to attentively observe over the evolution of tariffs to avoid the tariffs to yield, or exceed the expenses.

Moreover, the Azerbaijani government undertook a World Banks commitment on a doubled increase of tariffs for some services by 2010. The prices of energy resources are expected to be among them.

No matter how the situation with the prices of oil products is, the balance should be observed unilaterally and any change should occur gradually following rise in the living conditions of Azerbaijan. The European commenter note the demand will not brake due to high fuel prices. Though definite effect is observed in the private sector (for instance, the number of those desiring to travel by cars during the holidays will certainly fall), nothing changes in the sphere of services the automobile carriers do not turn their business, but try to lay the expenses on the consumers shoulders. It is even unnecessary to go to Europe for peculiar example it is enough to mention the recent illegal rise in fairs following the rise in the diesel fuel prices.

Lets straighten our shoulders.

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