TBY talks to Natiq Aliyev, Minister of Industry and Energy, on the Nabucco pipeline, privatization, and the development of the non-oil and gas energy sector.
TBY How has the Ministry of Industry and Energy tried to regulate the activities of Azerbaijan’s energy sector since its establishment?
NATIQ ALIYEV The Ministry of Industry and Energy is the central executive body conducting state policy and regulation in the industry and fuel-energy complex of the country. The Ministry aims to determine the perspective directions of the relevant area, to ensure the preparation and implementation of sector programs, as well as develop concepts to approve investment programs and to control their performance, to approve normative-legal acts and sector standards, and in general to conduct state control over the activities of state bodies functioning in the relevant field. By taking the principles of energy saving and the effective utilization of oil and oil products, gas, electricity, thermal energy, water, alternative, and renewable energy resources as a priority in regulating the sector, the Ministry coordinates the activities of executive bodies and enterprises, controls the reasonable use of budget resources, conducts state control and expertise over the effective use of energy resources, regulates and supervises security in the energy sector, and protects the environment using its authority. Moreover, the Ministry conducts the control over issuing special allowances for activities in the energy sector, signing contracts in accordance with the existing legislation and ensuring their implementation. The Ministry also participates in conducting state policy on attracting foreign investments to the country. In accordance with the economic policy initiated by the President, the Ministry has given priority to developing the non-oil sector to reduce the dependency of the national economy on oil production, to adjust the quality of oil products made by oil processing enterprises to European standards, to implement nanotechnologies in the oil and gas and petrochemical sectors, to create new enterprises and jobs as the result of the further processing of oil and gas products, to ensure the energy security of the country, and to support the energy security of Europe, as well as to use alternative and renewable energy resources at a maximum level depending on existing capacity. Consequently, more than 70%—or $9.3 billion—of investments made in the country in 2010 were directed towards the non-oil and gas sector. Additionally, more than 900,000 new jobs have been created in the last six years, and the construction of some enterprises to generate alternative and renewable energy, as well as equipment and spare parts, has been achieved. The quality of oil products has been completely adjusted to Euro-2 standards and regular steps have been taken to adjust the quality of oil products to Euro-3 standards.
According to some estimates, Azerbaijan is producing 1 million barrels of oil per day. What is behind such a rapidly increasing production rate?
Azerbaijan’s oil and gas production is increasing year by year. For instance, 50 million tons of oil and 25 billion cubic meters of gas were produced across the country in 2009, while 51 million tons of oil and 27 billion cubic meters of gas were produced in 2010. It should be mentioned that OPEC, the biggest oil organization in the world, also confirmed the annual increase of oil and gas production in Azerbaijan. According to OPEC estimates, oil production in Azerbaijan reached 1.12 million barrels per day, up by 0.13 million barrels, in 2010. As a result of the “Umid” gas field discovery by SOCAR in 2010, the volume of the approved gas resources of the country reached up to 2.5 trillion cubic meters. To professionally organize the exploration activities for discovering new oil and gas fields, to start the development of some onshore wells after their capital repairs, to implement nanotechnologies in this area to achieve higher effectiveness, to make huge additional investments in the big offshore oil fields to increase productivity, and to prepare the newly discovered fields for potential development are among the major factors stimulating the annual increase of oil and gas production in Azerbaijan. All these are incorporated in the Oil Strategy initiated by Heydar Aliyev, Azerbaijan’s visionary former leader.
The Nabucco pipeline is considered one of the most important plans of the region in terms of integrated energy supply. How much gas can Azerbaijan be expected to provide to this pipeline?
Azerbaijan has always expressed its desire to support the realization of the 3,300-kilometer Nabucco pipeline running from the Caspian Sea to Vienna through Georgia, Turkey, Bulgaria, Romania, and Hungary. The estimated capacity of the pipeline is 31 billion cubic meters per year, while the project will cost €7.9 billion. In this project, Azerbaijan can be both a supplier and a transit country, and so the project can be considered as a priority in terms of diversifying the routes of transferring natural gas. Based on the confirmed gas reserves of the Caspian region and the Near East, the Nabucco pipeline, which will deliver gas to European countries, will not face any shortage of supply. Iraq, together with Azerbaijan and Turkmenistan, is considered one of the potential gas suppliers for Nabucco as well. According to the information provided by BP, Azerbaijan had 1.2 trillion cubic meters of gas, Iraq 3.17 trillion cubic meters, and Turkmenistan 7.94 trillion cubic meters of confirmed gas reserves as of January 1, 2009. After the development of the second phase of the Shah Deniz gas field, it is forecasted to be able to produce 8 billion cubic meters of gas for the Nabucco gas pipeline in the first stage. Over the next several years this volume will, of course, increase year by year. It is necessary to conduct the East-West oil production project through the Caspian Sea, which will ensure the delivery of gas resources from Central Asian countries to the Nabucco pipeline. Azerbaijan will support the project with its infrastructure and other technical capacities and skills.
Major reforms in the energy sector started in March 2002. The target for the privatization drive was a 60% to 40% private-public ratio. How is this progressing?
The major reforms in the energy sector have begun and a 60-40 private-public ratio was set as a target under the privatization process in the framework of these reforms. Our aim is to serve in the interests of enterprises and move toward improved labor productivity, transparency, and sound competition, as well as enlarged production volumes and more sophisticated goods, and to increase the profitability of enterprises and investment inflows, which are among the major aspects stimulating economic development. Therefore, relevant measures are also being taken to conduct the privatization process in the energy sector in a normal way. For this purpose, many supporting enterprises and much infrastructure belonging to the energy sector have been announced open for privatization. Relevant measures are being taken to privatize the major areas. Currently, the private/public sector balance is 85.8% private, to 14.2% public in the oil production sector, 61.9% private to 38.1% public in natural gas production, and 1.4% private to 98.6% public in the power generation sector. In general, it can be claimed that more than 50% of activity in the oil and gas production and power generation sectors is being conducted by local and foreign private companies. All these can be accepted as major steps in privatizing major production enterprises operating in the energy sector.
What is the Ministry doing to encourage FDI in the energy sector and what level of attention have you seen?
Azerbaijan has become a geopolitical center not only for its oil and gas resources ,but also for its geographical location in the Caspian and Black Sea regions, where the interests of the US, EU, as well as Asian countries intersect. The “Contract of the Century” signed after independence on the development of the Azeri-Chirag-Guneshli (ACG) oil fields began a new era in the Azerbaijani oil sector, with many foreign companies participating. Extractable oil reserves in the ACG fields are estimated at 730 million tons, and up until now, investments made total $65 billion. In addition to its economic significance, the Contract of the Century has helped form the political landscape. The Baku-Tbilisi-Ceyhan line led to the establishment of friendly relations in the region, and this in turn has created opportunities for FDI. Azerbaijan is continuing its drive to attract FDI, and in 2009 $2 billion of the total $9.2 billion invested in the Azerbaijani economy came from abroad.
Oil and gas activities represent a large share of total GDP, while petroleum exports represent 85% of total exports. What is your outlook for non-oil and gas production in Azerbaijan?
The non-oil and gas sector experienced a high development trend in 2010, with a 34.2% growth rate in the chemical industry, a 7.9% increase in manufacturing equipment, a 23.3% increase in metallurgy, and 8.4% in oil processing. These figures are an indicator of diverse economic growth over previous years. In the coming years, the establishment of new oil and chemistry complexes with high production capacities and quality standards is planned. Comprehensive reforms in these areas will enable Azerbaijan to export oil, chemical, and industrial products in bigger volumes in the future.
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