SAFETY MARGIN

Amid hysteria on the world stock and currency markets, the price of OPEC's oil "basket" continues to fall, reaching 56 dollars per barrel at the end of October. This is the lowest figure since November 2006, when the average monthly figure for the "basket" was 55.42 dollars per barrel. Even OPEC's decision to reduce oil extraction did not change the situation, which boosts the belief of partners on the market that demand for oil will fall due to the economic decline.

There is no doubt that these events cannot but have a negative impact on Azerbaijan, which receives most of its revenues from oil. However, government circles assure us that there is no need to worry about the fall in prices, although they do not deny that state budget parameters for 2009 may be reconsidered. In the draft budget submitted to the country's parliament, a pessimistic price of 80 dollars per barrel is taken as the basic oil price. According to average expectations, the price of oil will be 100 dollars in 2009, while an optimistic scenario will see 125 dollars per barrel.

The forecast is falling

According to international experts, the emergency session of OPEC on 24 October, which decided to reduce oil extraction by 1.5 million barrels per day, will not yield the required results. A spokesman for the International Energy Agency, Eduardo Lopez, said that OPEC's decision is "useless" and was adopted in a serious recession which threatens oil consuming states. At its September conference, the organization was forced to reduce the volume of oil extraction by 520,000 barrels per day - to 28.8 million barrels - in order to maintain a price of 100 dollars per barrel. According to the chairman of the cartel and Algerian energy minister, Shakib Khalil, this decision was adopted due to the deterioration of the oil market. The chairman of OPEC said that the main reasons are lack of demand and the financial situation affecting buyers.

Incidentally, an OPEC report posted on the official website of the cartel also notes some changes regarding forecasts for Azerbaijan, and it is expected that supplies from our country in the fourth quarter of 2008 will total 1.09 million barrels per day. On average, according to the organisation's estimates, the volume of supplies from Azerbaijan in 2008 will total 980,000 barrels per day, an increase of 120,000 barrels per day. This figure is 21,000 barrels lower than OPEC's earlier forecast. 

It is probable that these corrections were made following the fall in extraction from the Azari-Ciraq-Gunasli (ACG) deposits. According to the government's forecast on oil extraction this year, the volume of crude oil should have been 52 million tonnes of oil. Of this, 8.7 million tonnes of oil were extracted by the State Oil Company of Azerbaijan and 43.3 million tonnes by the Azerbaijan International Operating Company (operated by BP) which extracts oil from the ACG deposits. Due to the shut down of the platforms, oil extraction from the deposit has fallen from 950,000 to 450,000 barrels per day. With the launch of the platform at West Azari, extraction increased.

BP, which operates the ACG deposits, suspended oil extraction from the Central Azari deposit on 17 September and evacuated its personnel from its platform due to a gas leak discovered in the sea. It also suspended extraction from the western section of the deposit - the West Azari platform - for security reasons. Extraction from the western section of the deposit resumed on 10 October, while the causes of the gas leak in the central section are still being investigated. Another factor in the fall in oil extraction in the country was the stoppage of the Baku-Tbilisi-Ceyhan pipeline, due to a fire in August. As a result, extraction from ACG was reduced.

The fall in the volume of extraction will definitely have an effect on the amount of oil dollars coming into the country, which will also affect the revenues of the State Oil Fund and the state budget. Coupled with the fall in oil prices on the world market, and therefore, the fall in the prices of oil exported from Azerbaijan, the situation looks quite gloomy for the Azerbaijani economy. However, the government is still optimistic and its optimism is supported by the predictions of international financial institutions.

The IMF recommends restraint

The International Monetary Fund's 'Regional Economic Outlook 2008' says that the state budget of Azerbaijan will not incur losses from the current fall in world oil prices below 60 dollars per barrel, because the breakeven point of the 2008 Azerbaijani state budget is 40 dollars per barrel. "The average breakeven point for countries in the region is 57 dollars per barrel. Only the UAE (23 dollars per barrel), Qatar (24 dollars) and Kuwait (33 dollars) have a better safety margin than Azerbaijan. The situation is slightly worse in Libya (47 dollars), Saudi Arabia (49 dollars) and Kazakhstan (59 dollars)," the report says. The worst situations have developed in Iraq (111 dollars), Iran (90 dollars), Bahrain (75 dollars) and Oman (77 dollars) (Trend news agency).

The price of a barrel of oil set in the country's state budget for 2008 is 70 dollars per barrel, which, according to Finance Minister Samir Sarifov, allows the government to "be confident of the implementation of the state budget". Commenting on the impact of the fall in world oil prices on the implementation of this year's state budget, Sarifov pointed out that the country's leadership always conducts a cautious policy when forecasting oil prices in the state budget, which has a positive impact on the current situation. According to forecasts, this year the oil sector was expected to secure revenues of 6.7 billion manats for the country's state budget (including the transfer of 3.8 billion manats from the State Oil Fund), which accounts for 63.9 per cent of overall budget revenues. However, these calculations were made before the events in Georgia and the explosion on the Turkish section of the Baku-Tbilisi-Ceyhan pipeline.

In principle, the high oil prices in the first half of this year allow the government not to worry, for the time being, about replenishment of the state budget. For example, from January-September 2008, SOCAR transferred 171,877,600 manats to the state budget from the difference between the contract (export) price and the domestic wholesale price. According to the new mechanism introduced in order to correct budget forecasts, SOCAR hands over 30 per cent of this difference to the treasury while, until recently, these transfers were carried out at a level of 25 per cent. Some 40,390,600 manats were received this way in September, 11,907,100 in August and 4,007,100 in July. Nevertheless, the company hopes that world prices will reach optimal level, said SOCAR President Rovnaq Abdullayev. "The optimal oil price is from 80 to 110 dollars per barrel. We do not expect an extremely high or low level," he said.

Amid events on the world oil exchanges, it would be quite logical to make changes to the forecasts and parameters of the state budget for 2009. However, at the end of October, when the draft document was examined by parliament, no official statements were made. Region Plus learnt that the government is divided on this matter and, in arguments about making amendments, more emphasis is placed on the possibility of a new surge in prices as a result of speculation on the market. For example, Minister of Economic Development Heydar Babayev said earlier that there is no need to reconsider the parameters of the 2009 budget yet. "Unfortunately, many speculative operations are being carried out on the market today, and they affect the fall in oil prices, but they can also cause a rise in prices," the minister said in conclusion.

Meanwhile, the IMF said in its report that in 2009, the deficit of Azerbaijan's non-oil budget will fall to 44.5 per cent of non-oil GDP from the record level of 2008 (-47.1 per cent). "At the same time, the budget surplus in Azerbaijan in 2008 is expected to be 25.4 per cent of GDP (a record since the beginning of economic reform) and even 29.2 per cent in 2009," the report said. In 2007, the state budget surplus in the country accounted for 2.6 per cent of GDP, while the deficit of the non-oil budget was 31.7 per cent of non-oil GDP.

"It is expected that government non-oil revenues in 2008 will account for 32.6 per cent of non-oil GDP against 32.5 per cent in 2007, and will fall to 32.3 per cent of GDP in 2009," the report said. On the basis of these forecasts, the IMF recommends that the government takes a more restrained approach to the spending of oil revenues for state budget purposes.