THE "ENGINE" POWERS ON

The double fall in world oil prices since the middle of last year and the unnerving forecasts for oil producers are forcing many oil companies - and countries, too - to tighten their belts. Although there was a slight increase in oil prices last week (Brent was quoted on the London exchange as exceeding 60 dollars a barrel), the prospects for a long-term price increase remain unpromising. The US Energy Information Administration predicts that oil prices are unlikely to cross the 80 dollars a barrel mark in the next five years, mainly because of the increase in the production of energy resources in the US. Prices may rise to just 100 dollars before 2028, and the oil price may only break through the 140-dollar mark by 2040. 

For Azerbaijan, the period of low oil prices also presents certain difficulties. But the measures to diversify the economy and develop industrial potential are going some way towards nullifying the negative consequences of the reduction in oil prices.

It would seem that in such adverse circumstances the main powerhouse of the country's oil sector - SOCAR [State Oil Company of Azerbaijan] - would suffer the most. But the company's results for 2014 showed quite the reverse - a positive trend. According to SOCAR's Vice President Suleyman Qasimov, the company's revenues for 2014 were 40bn manats, and its profits - 1.1bn manats.  If you take into account the fact that at the end of 2013 the company's profits were about 980m manats, last year saw a growth of 12 per cent.  

At a business forum organized by the Caspian European Club, Qasimov explained that the low oil prices on the world markets were having a minimal impact on SOCAR's revenues because a large portion of the oil it produces is for the domestic market. "72 per cent of the overall volume of oil produced by the company goes to the domestic market and 28 per cent to export. Crude oil is sent for refining to meet the demand on the domestic market for petroleum products. The prices for gas and petroleum products on the country's domestic market are regulated by the state. This enables the company to finance its programmes to a certain degree, if not completely," he noted.  This year SOCAR will provide about 1bn manats just for projects linked with maintaining the level of oil and gas production, the country's gas infrastructure and the construction of other facilities. This equals the performance of recent years.

Another important area of capital investment is the large-scale reconstruction of existing oil refineries, which provides for the winding up of the Azerneftyag oil refinery and the transfer of some of its installations to the Heydar Aliyev oil refinery in Baku. Besides this, a number of installations are due to be built at the Baku oil refinery enabling production of petrol and diesel fuel to Euro-5 standards to go ahead from 2018. Total expenditure on this work is estimated at 1-1.3bn manats.  

Incidentally, SOCAR's decision to modernize the Baku oil refinery is most probably linked with the delay in the project for the construction of a large-scale gas treatment, petrochemical and oil refining complex (OGPC). Whereas it was previously assumed that the construction of the whole complex would be completed by 2020-2022, the launching of the oil refinery is now planned for 2030.

First and foremost, SOCAR plans to hand over the gas treatment and petrochemical plants for commissioning. But even this plan requires large-scale investment - about 7bn dollars. And this investment is required for the 2015-2020 period, for which SOCAR faces a peak in spending on a number of large-scale projects, including the construction of the STAR oil refinery in Turkey, Stage-2 of the development of the Sah Daniz [Shah Deniz] field and the construction of the Trans-Anatolia and Trans-Adriatic pipelines. So it is quite possible that SOCAR could, broadly speaking, defer its grand plans for the construction of the OGPC, bearing in mind the unfavourable situation with oil prices.

The launching of a separate project for the construction of a polypropylene production plant could be a confirmation of this supposition. An agreement on the construction of a plant costing 350m euros was signed last week between the SOCAR-Polymer company and the Maire Tecnimont S.p.A. (Italy) group of companies. The plant will be built on the site of the Sumqayit chemical industrial park. 

The capacity of the plant, which is due to be launched in 2017, will be about 180,000 tonnes of propylene annually. This will be the first polypropylene production plant in Azerbaijan. Propylene obtained from the cracking of naphta will be used as raw material at the enterprise.

SOCAR-Polymer's plans also include the construction of a polyethylene plant with a capacity of 120,000 tonnes annually, which is due to be launched in 2018. In total the construction of the two plants will cost 700m dollars, of which 40 per cent is being funded by SOCAR-Polymer and the rest will be covered by a loan of 420m dollars from Russia's Gazprombank, negotiations on which are already being completed, SOCAR-Polymer's deputy director Emil Eminov said.

Through this project SOCAR will significantly reduce its spending on the start-up of chemical production, especially as the state oil company owns 51 per cent of SOCAR-Polymer and the remaining 49 per cent is owned by Pasha Holding, Gilan Holding and Azersun Holding.

The capacity of these two plants is sufficient to fully meet the country's requirements in chemical production. Furthermore, about 40 per cent of the output produced will be supplied to the domestic market, with the rest being exported by SOCAR Trading.

Of course, the OGPC mega-project with its planned capacity of 860,000 tonnes of polyethylene and polypropylene cannot be replaced by two plants in the Sumqayit technical park. But these enterprises are capable of resolving short-term and medium-term tasks or, simply put, meeting domestic demand during the period of low oil prices.

This will enable SOCAR to avoid unnecessary spending when considerably more money is being spent on other vital projects which already require additional financial borrowing. It is fortunate that SOCAR does not have a problem with the procurement of loans because the company's credit status is at a high level. This was confirmed by the placement of the latest issue of Eurobonds in March of 750m dollars. Of this amount 500m dollars will go towards the construction of the STAR oil refinery in Turkey, and the remainder reserved for paying off the first issue of Eurobonds in 2017.

SOCAR's next creditor could be the Korean International Cooperation Agency (KOICA), with whom conditions are being negotiated for the funding of a project for the construction of a carbamide plant in Sumqayit, the company's vice president, Suleyman Qasimov, said. The cost of the project is 500m euros. The enterprise will include three production sections: ammonia production, carbamide production and the production of carbamide granules. Some 1,200 tonnes of ammonia and 2,000 tonnes of carbamide will be produced every day at the plant.

In total, Suleyman Qasimov said, SOCAR's consolidated debt at the start of this year was over 6.9bn dollars. "The structure of the debt is made up of 1.5bn dollars in Eurobonds, about 1bn dollars in SOCAR Trading's short-term debt for the buying and selling oil to third parties, we have attracted another 1bn dollars for projects in Turkey and about 1bn dollars have been attracted from Azerbaijan's State Oil Fund for the implementation of a number of projects," Qasimov pointed out.

As we can see, SOCAR is taking effective measures to continue its large-scale projects, despite the negative situation with world oil prices. At the same time, its principal direction remains an increase in export-oriented industrial production which will generally be conducive to the strategy for the diversification of the Azerbaijani economy.