A THIRD WIND

At the end of last year, which was declared the Year of Industry, President Ilham Aliyev approved the state programme for the industrial development of Azerbaijan for 2015-2020. The undertakings implemented by the government to upgrade and diversify the economy's non-oil sector among other things envisage the revival of the once extremely well developed petroleum machine-building sector. At the present time, a working group attached to the Ministry of Economic Development is drawing up proposals for the development of this sphere.

The country's oldest machine-building association, which specialises in the production of oil and gas well equipment and has today been transformed into the "Azneftkimyamas Joint Stock Company [JSC], was set up back in 1935. It is noteworthy that many of the company's enterprises date back to the second half of the 19th century when the metal-working and machine-building sector was beginning to  shape during the time of the first oil boom in Baku.

In the Soviet period this company's production satisfied something like 70 per cent of the USSR's needs in oil and gas equipment. What is more, a considerable part of its output was exported to 35 countries throughout the world. The enterprises got their second wind when they became part of "Azneftkimya-mash" after the implementation of structural reforms in 2001-2002, and also the programmes for technical upgrading proposed by the Norwegian INTSOK [Norwegian Oil and Gas Partners]  Foundation and by TACIS [Technical Assistance to the Common-wealth of Independent States] experts and specialists from the open joint stock company itself. In that period the state company "Azneftkimyamas" was converted into an open joint-stock company (OJSC). Over the last few years the 13 daughter companies and scientific institutions have been set up on the basis of it have been able to overcome the lengthy period of decline resulting from the breakdown of economic ties throughout the former soviet republics.

The essence of the structural reforms and the technical upgrade boiled down to the achievement of production profitability owing to the improved quality of the output which was on a par with world standards, the maintaining of accessible prices and ultimately always honouring contract commitments on time. By installing the latest equipment and optimising the production processes, they managed to bring many of the plants' standard items up to ISO [International Organization for Standardization] and API (American Institute of Oil) requirements. The Japanese External Trade Organisation (JETRO) has provided substantial technical assistance amounting 13m dollars' worth of free aid.

The low cost of energy, communal expenditure and raw materials have made it possible for the company to keep the prices several times lower than those of their foreign competitors for a sufficient length of time. Thanks to that the "Azneftkimyamas" enterprises have been able to become successful exporters of their own pumping equipment, reductors and spare parts for them, automatic storage tanks, oil fountain accessories, slide valves and other equipment to Russia, Ukraine, Kazakhstan, Uzbekistan, Turkmenistan and even Vietnam. The expanded portfolio of orders from abroad (in 2001-2007 they amounted to just under half of the total sales) and the growth in the needs of local oil extraction allowed the company's enterprises to bring their output up to 90.5m manats in the land-mark year of 2005. 

But the company's highly promising plans and expectations were dealt a tangible blow during the global economic crisis of 2008-2009. The colossal decline in world economic activity affected apparently stable bastions of the economy like the oil and gas sphere. The fourfold drop in oil prices has forced many states of the former Soviet Union to seek ways of cutting production costs in the extraction sector, including localising oil and gas equipment production on their own territory. This, in its turn, has done noticeable damage to "Azneftkimyamas's" export potential.

The problems on foreign markets as whole are connected with the specifics of world trade in oil-industry equipment: there is no stability here as there is in other production cycles, and the level of orders depends on the constantly changing market in raw materials. The drilling of new oil wells in the CIS [Commonwealth of Independent States] is not always on the increase; this also applies to technical re-equipment or repair work at oil and gas fields that have long been in operation.

Fiercer competition, primarily on the part of goods from Russian enterprises which have been applying maximum effort to strengthen their foothold on their own market have played a substantial role in reducing "Azneftkimyamas" exports in the period following the crisis. At the present time, oil and gas equipment is being produced at more than 200 Russian enterprises. Russia had been very important to the Azerbaijani market, considering that 10 years ago almost half of all the company's exports went to Russia. The development of petroleum machine-building is focusing on neighbouring Kazakhstan where approximately 35 enterprises are operating.in this sector.  

The Cabinet of Ministers statistics most clearly illustrate the present situation in this sector. Thus, last year the total output of all the machine-building enterprises in Azerbaijan amounted to 627.8m manats. But the share of the country's biggest petroleum machine-building complex in the overall figures for the industrial sectors was extremely low. According to the results for 2014, the output of "Azneftkimyamash" plants as well as its services amounted to a total of 23.8m manats. Today the company's main customer is SOCAR [State Oil Company of the Republic of Azerbaijan]. Last year equipment worth 15m manats was produced to meet orders from SOCAR. Unfortunately, the company's export activity at the present time is also several times less than its top figures 10 years ago. Last year the amount of equipment delivered to customers in Russia, Ukraine, Kazakhstan and Turkmenistan only amounted to something like 4m manats.

Obviously, the country's government cannot be satisfied with the situation obtaining in the petroleum machine-building industry. At the present time, Azerbaijan's Economic Development Ministry (MEP) is actively taking an interest in boosting production and subsequently exporting petroleum industry equipment. 

These issues were touched upon at the sitting of the working group for machine-building, instrument-making and the metal industry, which was held in April this year. A few days ago, the Ministry came out with an initiative for the comprehensive rehabilitation of the sector, and is prepared to involve SOCAR and the national energy distributor "Azerishyg" in implementing these undertakings.

Thus, according to Economic Development Minister Sahin Mustafayev, in compliance with the instructions of the head of state, the Ministry's experts are working up proposals for upgrading and developing petroleum machine-building. An analysis is being made of the current state of the sector and its needs in state backing, and soon a list of priority rehabilitation measures will be determined. "We believe that weighty assistance in supporting the sector can be provided by investment projects," S. Mustafayev stressed. Boosting cooperation between SOCAR and "Azerisig" and local petroleum machine-building enterprises is also extremely promising, in particular by boosting the number of orders for machines and equipment. This will help to enhance the sector's production for the local market and expand the volumes of exports on traditional foreign markets."

The revival of "Azneftkimyamas" enterprises is a completely possible task. Firstly, there is the necessary material and technical base here and highly qualified staff. But the most important thing is that the unique production and design experience accumulated over 10 years has not been lost. At the present time, the company's enterprises are producing something like 100 specifications of equipment and installations in almost 600 standard sizes. In particular, these are equipment, instruments and spare parts for geological prospecting, for drilling, oil extraction, oil well repairs and the reconstruction of oil fields. At the company's enterprises they are also producing various types of items intended for the chemical sector, agriculture and other sectors.

"Azneftkimyamas" experts are conducting work on designing items and mastering their production. Last year alone, the design documents were drawn up for 22 specifications of new equipment and trial samples of 11 types of constructions. 

The high quality and stable consumer-orientated specifications of the equipment produced by "Azneftkimya-mas" have not been forgotten abroad. During his trip to Baku in December 2013 Kazakh Vice Oil and Gas Minister Magzum Mirzagaliyev recalled this in particular. "The quality of the equipment produced in Azerbaijan for the petroleum industry in Kazakhstan is remembered from Soviet times. We are willing to work in this direction and help to make Azerbaijani products available on the Kazakh market," M. Mirzagaliyev said. The deputy prime minister and minister of industry and trade of Tatarstan (a Russian Federation subject), Ravil Zaripov, also stated a readiness to cooperate in the field of petroleum machine-building during a meeting with the SOCAR management in April this year.

In the more distant future, "Azneftkimyamas" experts do not rule out the possibility of marketing their products to more distant markets, in particular those in South America, Africa, Asia and even the oil-rich region of the Middle East.