HOW TO GET THE BALANCE RIGHT

The large-scale popularity of car ownership, as well as the growing demand for fuel in the transport, agricultural, construction and other sectors of the economy has fuelled a dynamically rising demand for petroleum products in the country. Today the retail demand for petrol and diesel fuel is practically the same as the output of the refineries belonging to the State Oil Company of the Republic of Azerbaijan (SOCAR). In order to stabilise the fuel market, SOCAR has set about upgrading the catalytic cracking installation at one of its oil refineries. To avoid a temporary fuel shortage, the Cabinet of Ministers had abolished the excise and customs duty on petrol imports for a period of four months.  

Decisions aimed at improvement

Of late independent experts and SOCAR representatives have confirmed that there has been a marked increase in the demand for petroleum products on the country's fuel market. "Petrol consumption in the country is practically equal to petrol output. Moreover, the increasingly enthusiastic desire of the country's citizens to own a car has contributed to this considerably. In order to avert possible problems, SOCAR is intent on improving the situation on the fuel market: the reconstruction of the oil refineries will be speeded up, which will allow the total fuel output to be boosted in the next few years, in particular production of the Euro-3 grade petrol," SOCAR president, Rovnaq Abdullayev reported recently. 

So, the state oil company is to set about reconstructing the catalytic cracking installation at the Heydar Aliyev oil refinery in the very near future, as well as continuing to upgrade the entire production complex at the refinery. This work will subsequently allow the refining capacity to be increased from 2m to 3m tonnes, and petrol output to be boosted to 450,000 tonnes. The upgrading of the oil refinery is to be completed within two months, but the government has taken measures to rule out any hullabaloo threatening the stability of the local fuel market. In particular, in accordance with a recent Cabinet of Ministers' decision, excise duty on Ai-92 and Ai-95 petrol has been cut from 250 dollars to one dollar per tonne and the customs duty has been reduced from 15 per cent to zero per cent until June 2014. 

It is noteworthy that efforts to stabilise the country's fuel balance began to be undertaken sufficiently long ago, first and foremost by increasing the capacity of two oil refineries, namely Azerneftyag and the Heydar Aliyev oil refinery in Baku, whose total output is roughly 16m tonnes of oil per year. So, according to State Statistics Committee figures, last year 5.2m tonnes of petroleum products were produced for the internal market, which is 9.1 per cent more that the figure for 2012. In particular, by boosting the capacity of the refineries, according to last year's figures, the output of vehicle petrol was increased to 1.41m tonnes, which is 8.5 per cent higher than in the year before last. The output of diesel fuel also grew by 9.4 per cent. 

But the demand for vehicle fuel has been increasing just as dynamically as the growth in production. Last year demand for petrol at home grew by 10.2 per cent and, according to preliminary estimates, petrol consumption is expected to be approximately 1.4 to 1.6m tonnes. This means that the country's present demand for fuel is practically the same as the output of local refineries. If demand is going to continue to grow at these rates, this year or next there may be a petrol shortage on the home market. 

In order to satisfy the growing demand on the home market, back in the second half of 2012 SOCAR stopped exporting petrol produced both from its own oil, as well as from that imported from Kazakhstan. The small oil producers operating in Kazakhstan are faced with a problem when marketing small batches of oil on their internal market, since only major producers have access to the main export pipelines. As a matter of fact, these small producers send their crude to SOCAR's refineries for processing, and the petroleum products produced are subsequently exported. The fact that SOCAR's numerous Petroleum Georgia filling stations in Georgia are primarily selling Euro-4 grade petrol from Romania's Rom Petrol is the clearest indication of the existing situation. 

Would higher prices do any good?

However, reducing petrol exports and increasing output slightly are by no means the only mechanisms for optimising the overheating of the fuel market. One of the measures taken to stabilise petrol demand at home was the decision adopted by the Tariff Council on 3 December 2013 to raise the prices of the main types of fuel. In particular, the retail price per litre of Ai-95 petrol was fixed at 0.8 manats, Ai-92 and Ai-80 petrol at 0.7 manats, while diesel fuel is being sold at 0.6 manats in accordance with the new prices.

It is noteworthy that the last time the retail prices of fuel were reviewed in Azerbaijan was in January 2007 and, even after the transfer to the Euro-2 standard in 2010, no changes were introduced into the fuel tariff network at that time.

World-wide practice shows that a drastic rise in fuel prices is fraught with a risk of inflation, first and foremost due to the considerable multiplying effect on the economy. In order to avoid a scenario like this, the fuel price increase initiated by Azerbaijan's government did not on average exceed 30 per cent, and this was in spite of the state of the world oil market at the time. Moreover, even today  Azerbaijan's increased petrol prices are among the lowest in Eurasia. By comparison, the cost of a litre of Ai-95 petrol in an oil-producing country like Norway had risen to 2.43 dollars last autumn, in Italy and the Netherlands to 2.29 dollars and even in the former Soviet states, which are on a similar level to Azerbaijan in their economic development, petrol prices are not at all lower today. As far as the positive aspects of raising petrol and diesel fuel prices are concerned, these measures will not only help to balance supply and demand on the market, but also to increase the state budget receipts from excise duties, which amount to hundreds of millions of manats.

The decision to introduce the Euro-4 fuel standard from 1st April this year will be yet another long-term stimulus to changes in the state of affairs on the country's fuel market, as well as improving the environmental situation. Developed and introduced in the European Union back in 2005, this standard stipulates the content of harmful substances permitted in the exhaust fumes emitted by vehicles with diesel and petrol engines. For example, motor vehicles manufactured using the Euro-4 technology are fitted with catalytic converters or purification filters, which make it possible to cut harmful emissions by 50 per cent. But the main advantage of the new standard is the marked reduction in fuel consumption, which is quite important for achieving a fuel balance in our country.  

First and foremost, this decision will introduce a ban on imports of second-hand motor vehicles into the country which do not meet the required standard. But at the present time, SOCAR enterprises are not in a position to produce fuel of the required quality. "The refineries' current capabilities allow for the production of Euro-2 grade petrol and Euro-3 grade diesel fuel. It is not planned to get the production of Euro-3 standard petrol going until 2015," SOCAR's vice-president, Davud Mammadov, says. Therefore, for the moment such high-grade fuel has to be imported; in particular, Romanian-produced Ai-98 petrol can be purchased at Azerbaijan's filling stations today. 

Well, Azerbaijan will ultimately resolve its fuel problems when it begins the construction of a new oil refinery in Qaradag district roughly in 2023-2025, where it is planned to produce Euro-5 standard petrol. The application of state-of-the-art oil-refining technologies will allow up to 95 per cent of crude to be refined, and the output of light petroleum products will be no less than 85 per cent. The oil refinery with a capacity of 10m tonnes per year will satisfy the country's demand for strategic petroleum products over the subsequent two decades.

Once the new complex goes into operation, the technologically obsolete oil refineries built in Baku in the 1950s and 1960s will gradually be closed down. Besides the deterioration of their equipment, these enterprises, which are situated in the centre of the capital,  present a potential threat to the environment.  It is not to be rule out that they will be demolished completely as part of the programme to move industrial enterprises beyond the bounds of Azerbaijan's capital.