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Economic situation and country risk

Even in 2009 - despite the difficult international economic situation - Azerbaijani economy has continued to grow, although at a lower pace than in previous years (+26, 2% in 2005, +34.5% in 2006, +25% in 2007, +10.8% in 2008). According to State Statistics Committee in fact, GDP grew at the beginning of this year by 4.1%, reaching, in monetary terms, an amount equal to about 50 billion dollars. In addition to the slowdown in growth there is a decrease in inflationary pressure. At the beginning of the year, there is a deflationary phenomenon due mainly to the decrease in domestic demand. The Azerbaijani economy is driven by the energy sector, which provides over 80% of export revenues and 36% of tax revenues. Since 1994, the Azeri government has signed 21 contracts for exploration, development and production of hydrocarbons, based on Production Sharing Agreements that allow the Government to remain owner of the reserves and to share exploration costs and sale revenues. As far as oil is concerned, the potential output of the Country is currently equal to about 1 million barrels a day. In regard to gas, the transition to the operational phase of the Shah-Deniz 2 Field will enable Azerbaijan to produce over 16 billion cubic meters of gas a year. The project has still two open questions: the first is connected with the large investment (about 20 billion dollars) needed to extract the gas, the second concerns the outcome - still uncertain - of the ongoing negotiations with Turkey for the definition of transit fees for gas that will be exported. In order to mitigate the risks of an excessive dependence on the energy sector, the Authorities are trying to diversify the national economy. However, the results are still far from reaching. This is also due to the difficulty of contrasting the income position acquired by some local monopolies. Moreover, the entrance of Azerbaijan in the WTO (an objective pursued by the Government for over ten years) is instrumental in reducing the dependence on energy resources.

The current negotiation is further complicated by the request of Baku to be admitted to the Organization of Geneva with the status of Developing Country, in order to obtain a more favorable treatment and the possibility of supporting some sectors of the national economy – thus protecting them from international competition.

The agricultural sector plays an important role in both the economy and the society of Azerbaijan (1/3 of the national workforce and the second richest sector after oil). The main agricultural resources are: cotton, wheat, grapes, dried fruits, citrus, vegetables, oil, tea and tobacco, while cattle, sheep and - to a lesser extent - swine breeding is widespread. In the first 8 months of 2009, the agricultural sector accounted for approximately 6.3% of GDP, continuing the trend of development of rural areas started in 1999, when the reform that allowed applicants to become owners of small plots was passed.
Construction and Services sectors (hotel and telecommunications) contribute significantly to the overall growth, benefiting from the incomes of exports of energy.

The local currency, the new Azerbaijani Manat (AZN) is connected (though not officially) to the U.S. dollar. Thanks also to the intervention of the Central Bank, the Manat has maintained a stable rate in recent months, despite the sharp decline of revenues in valuable currency caused by the contraction of oil prices. Among the factors that prevent further a growth of the Azerbaijani economy there are: the unresolved territorial issue of Nagorno-Karabakh due to the long dispute with Armenia (with which Azerbaijan has not diplomatic relations and with which exists since 1994 a cease-fire agreement), instability in neighbouring Georgia, a country through which the pipeline "BTC" passes, and proximity to the Russian regions of Dagestan and Chechnya, involved in widespread phenomena of crime and in recurrent terrorism acts. Domestically, the consolidation of a truly competitive system is seriously affected by the opacity of the entire economy and of the administration of justice.

Economic, financial and commercial relations

According to Azerbaijani official statistics, over the past four years Italy has been ranking first in trade with Azerbaijan (in 2008 it was the first among the importing countries, especially for energy products, and eleventh among the exporting countries). Despite international crisis, our oil imports from Azerbaijan in 2009 increased making the country become our third largest supplier of oil, after Russia and Libya (40% of Azeri oil exports is directed in Italy).

Huge quantities of Italian goods, particularly clothing, footwear and accessories, get to the Azerbaijani market through alternative channels (Turkey, Georgia, Dubai and Russia) while the share of components for heating and ceramics is increasing in our exports, due to an higher construction activity.

The agricultural sector is an important voice of Italian exports to Azerbaijan and fits, in terms of value, directly behind clothing and machinery. In fact it is the sector of live plants and floricultural products which registered the highest growth rate of sales, from 176,915 euros in 2007 to 3,505,373 in the first half of 2009 (Data provided by the Italian Institute of Statistics). The agricultural sector now seems very promising for Italian investments, which may access public funds as part of government plans to diversify the national economy and to revitalize the agricultural sector.

Also in January-April 2010 Italy has confirmed to be the largest importer of Azerbaijan, State Customs Committee of Azerbaijan reported.
In four months the exports to Italy reached the amount of $ 2,176,706,420, or 34.85% of total exports of the country. According to the same source, the list of top ten importing countries includes Israel, $ 553,503,160 (8.86%), France - 536,779,550 (8.59%), Indonesia - $ 382,313.27 (6.12%), Malaysia ($ 301,821,870 (4.83%), Ukraine, $ 252,846,790 (4.05%), Croatia - 231 337 940 (3.7%), United States - $ 231,090.05 (3.7%), Russia - 192,762 $ .290 (3,09%), Cina168.489.780% (2.7%).

Oil and Gas:

Azerbaijan is consolidating its position of major exporter of oil and natural gas and strengthening its strategic role in the energy transport corridor to Europe.

Oil

Azerbaijan’s proven crude oil reserves are estimated at 7 billion barrels (BP data).The country’s largest hydrocarbon basins are located offshore in the Caspian Sea, particularly the Azeri Chirag Guneshli (ACG) fields, which accounted for over 80 percent of Azerbaijan’s total oil output in 2008.

The State Oil Company of Azerbaijan Republic (SOCAR) is Azerbaijan's state-owned oil and natural gas company and is responsible for producing oil and natural gas in Azerbaijan, operating the country's two refineries, running the country's pipeline system, and managing the country's oil and natural gas imports and exports. Although the Ministry of Industry and Energy handles with exports as well as exploration and production agreements with foreign companies, SOCAR is a part of all of the international consortia developing oil and gas projects in Azerbaijan.
The Azerbaijan International Operating Company (AIOC) is a consortium of 10 petroleum companies which have signed extraction contracts with Azerbaijan. AIOC includes: British Petroleum (BP), Chevron, Devon Energy, StatoilHydro, Turkiye Petrolleri, Amerada Hess, ExxonMobil, Inpex, Itochu, and SOCAR. AIOC has made significant direct investments in the development of the ACG fields, as well as the construction of the South Caucasus Pipeline (SCP) and the Baku-Tbilisi-Ceyhan (BTC) pipelines. BP is the largest foreign investor and has been involved in Azerbaijan since 1992.

Oil production is approximately 1.033 000 barrels per day (data end 2009). Figures show a very high estimated annual growth of production (13.5% between 2008 and 2009). While production is growing, domestic consumption is generally declining, from 74,000 barrels per day in 2008 to 60,000 in 2009.

The ACG extraction fields are the largest of Azerbaijan, they are located 62 miles east of Baku in the Caspian Sea. There are currently five offshore production platforms, a sixth, Chirag Oil Project, is under construction and expected to start in 2013.

Azerbaijan had estimated net oil exports in 2008 of 749,000 bbl/d, according to EIA, more than double of 2005 exports. According to EIA, the United States imported more than 62,430 bbl/d between January and June 2009, compared with 44,505 bbl/d during the same period of 2008. Most of Azerbaijan's oil is exported via pipeline, but small amounts are shipped by truck and railway. During the period January-August 2009, Azeri sources reported that 16,240 bbl/d of oil products were exported by rail to the port of Batumi, Georgia on the Black Sea.

Azerbaijan has three main export pipelines.

Pipline image

BTC

The majority of oil exports pass through the BTC pipeline system, which runs 1,110 miles from the ACG fields in the Caspian Sea, via Georgia, to the Mediterranean port of Ceyhan, Turkey. From there the oil is shipped by tankers mainly to European markets, with Italy reportedly being the largest importer of Azeri crude in 2008 at about 40 percent of crude exported. The pipeline began exporting in July 2006; it is operated by BP, the largest shareholder, and owned by AIOC members. The capacity of the pipeline is 1 million bbl/d. The BTC pipeline is also used to export Kazakhstan oil, which travels by tanker across the Caspian to the pipeline head at Sangachal Terminal, near Baku. It was reported that Kazakh crude oil exports from the Tengiz field began in October 2008 at 350 bbl/d and had increased to 4,800 bbl/d by February 2009.

Baku-Novorossiysk

The 830-mile long, 100,00-bbl/d-capacity Baku-Novorossiysk pipeline runs from the Sangachal Terminal to Novorossiysk, Russia on the Black Sea. SOCAR operates the Azeri section and Transneft operates the Russian section. 2008 exports were estimated at 29,000 bbl/d by Argus FSU. In April 2009, SOCAR announced plans to nearly double exports to 50,000 bbl/d of oil in 2009 as the BTC is close to capacity because of production growth in the ACG oil fields as well as increasing throughput from Kazakhstan.

Baku-Supsa

The Baku-Supsa pipeline has an estimated capacity of 145,000 bbl/d and runs 520 miles from Baku to Supsa, Georgia on the Black Sea. It is operated by BP and owned by AIOC members. The pipeline was shut down for repairs from October 2006 to August 2008, but due to safety concerns during the Russia-Georgia conflict it was not restarted until November 2008. Argus FSU reported that only 13,000 bbl/d were exported to Supsa in 2008. Azeri sources report that 55,000 bbl/d were exported through this pipeline during the period January-August 2009. The pipeline is used by ExxonMobil Company to export its share of oil from the ACG fields

Natural Gas

Azerbaijan has proven natural gas reserves of roughly 1.3 trillion cubic meters (data from BP 2009).

Azerigaz, a SOCAR subsidiary, is responsible for natural gas processing, transport, distribution, and storage, mainly in the domestic market. Azneft, another SOCAR subsidiary, is responsible for exploration, development and production from the older onshore and offshore natural gas fields owned directly by SOCAR. AIOC is the largest foreign joint venture in association with SOCAR, and is involved in the development of the ACG oil and gas fields and the Shah Deniz gas field. Shareholders in the Shah Deniz consortium are: BP (25.5%), StatoilHydro (25.5%), Total, Lukoil, SOCAR, Naftiran each hold 10%, and TPAO (9%). StatoilHydro and BP are the operators, responsible for commercial and technical operations, respectively.

In 2009, Azerbaijan produced 14.8 billion cubic meters of natural gas and consumed 7.7 billion cubic meters. Almost all of Azerbaijan's natural gas is produced from offshore fields. The country's leading natural gas fields are the ACG and the new Shah Deniz natural gas and condensate field, which started up in 2007. The Guneshli field, part of the ACG oil and gas fields system, provides associated gas to the Azerigaz system for domestic use via an undersea gas pipeline to Sangachal Terminal at Baku. The Sangachal Terminal, located south of Baku, is one of the world's largest integrated oil and gas processing terminals. It receives, stores, and processes both crude oil and natural gas from the ACG fields and from Shah Deniz, then ships these hydrocarbons through the BTU and SCP pipelines for export.

Azerbaijan's major natural gas production increases in the future are expected to come from the continuing development of the Shah Deniz field. Industry analysts estimate that Shah Deniz is one of the world's largest natural gas field discoveries of the last 20 years. Shah Deniz is located offshore in the Caspian Sea, approximately 60 miles southeast of Baku. Phase 1 of the Shah Deniz field's development was completed in 2007 and includes a fixed offshore platform, 2 subsea pipelines to bring the hydrocarbons ashore, and a new onshore gas-processing terminal adjacent to the existing oil terminal at Sangachal, near Baku. The Shah Deniz consortium members (most of these are also members of AIOC) began producing natural gas for export during spring 2007. Phase 1 is expected to reach 8 billion cubic meters per year; Phase 2 should provide an annual production of 16 billion cubic meters, but its completion is being delayed from 2013-2014 to 2016 due to the delay of the signing of a transit agreement between Turkey and Azerbaijan which occurred on June 7 of 2010, creating the conditions for the start-up of substantial investment (about $ 20 billion) needed to start to work on the field. In parallel, contacts are underway between the Azerbaijani government and some international companies for the construction of new infrastructure to bring gas to Europe. Currently under discussion are three potential projects: Nabucco Interconnector Turkey-Greece-Italy (ITGI) and Trans Adriatic pipline (TAP) (see details below).

Azerbaijan became a net exporter of natural gas in 2007 with the startup of the Shah Deniz natural gas field; in prior years it had been importing natural gas from Russia.

The main export pipelines, operating and planned, are the following.

Operating pipelines:

SCP or BTE

The main conduit for Azerbaijan's natural gas exports is South Caucasus Pipeline (SCP), also known as the Baku-T'bilisi-Erzurum pipeline (BTE), which runs parallel to the BTC oil pipeline for 429 miles, most of its route, before connecting to the Turkish gas pipeline network at Horasan. The pipeline began exporting in 2007 with an initial capacity of 8.8 billion cubic meters per year, which is to be increased in the future to 20 billion cubic miters with the addition of compression stations. The Shah Deniz consortium owns and operates the pipeline.

Planned pipelines:

Nabucco

The Nabucco pipeline would run for 2,050 miles from Erzurum, Turkey to Baumgarten, Austria, passing through Bulgaria, Romania, and Hungary. The pipeline's feasibility rests on its ability to tap into the large natural gas resources of the Caspian area. Six are currently the members of the Nabucco project (in order of transit): Botas (Turkey), Bulgargaz (Bulgaria), Transgaz (Romania), MOL (Hungary), OMV (Austria), RWE (Germany). An agreement between the European countries involved was signed July 13, 2009 in Ankara. Although Azerbaijan has expressed support for Nabucco, Azerbaijan is not currently a part of the Nabucco Consortium.

South Stream

The South Stream pipeline provides transportation of Russian and Caspian natural gas to Europe via a pipeline running under the Black Sea, through Turkish territorial waters, with terminals ending in Italy and Austria. It is a project jointly developed by Gazprom and Eni. Even the French EdF has recently acquired a stake of 10%. Azerbaijan is not a part of the South Stream pipeline agreements negotiated between Russia and its pipeline transit Countries. However, on June 29, 2009 Azerbaijan and Russia signed a contract for Azerbaijan to export natural gas into southwestern Russia starting in January 2010. A Soviet-era gas pipeline between Baku and southern Russia that runs 200 km along the Caspian coast is being modernized.

ITGI

It 's a project to build a pipeline to transport natural gas from the Caspian Sea, the Caucasus and the Middle East zone to Italy via Turkey and Greece. ITGI Corridor will allow, from 2012, the import into Italy of about 8 billion cubic meters per year.

Corridor requires reinforcement of the Turkish network and the creation of links between Turkey and Greece (ITG project) and between Greece and Italy (Project IGI). The realization of Interconnection Greece-Turkey is supported by a bilateral intergovernmental agreement between Turkey and Greece signed in February 2003.

The Interconnection Greece-Italy is subject of an intergovernmental agreement of November 4, 2005.
The IGI Project is composed of two sections: Section Onshore (Zeus pipeline) in Greek territory from Komotini to the coast of Thesprotia, made by DESF and included in the Greek National Transport System of Gas; Section Offshore (Poseidon pipeline) between the coast of Thesprotia and Otranto, made by Edison and DEPA through a joint venture.

TAP

The Trans-Adriatic pipeline (known by the acronym TAP, Trans Adriatic Pipeline) is a project to build a new pipeline which will connect Italy and Greece via Albania, allowing the flow of natural gas from the Caucasus, the Caspian Sea and, potentially, the Middle East zone. It is a project developed jointly by the Norwegian StatoilHydro and Swiss EGL. In May 2010 the German EON joined the consortium. The pipeline will start from the Greek territory near the town of Salonicco, where it will connect to existing Greek transmission network. It will be long about 520 km, of which 115 km offshore in the Adriatic Sea.

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