Business & Economics:
UNREFORMED ECONOMY IMPERILS AZERBAIJAN'S CASPIAN DREAMS
Daan van der Schriek: 6/17/02

The Ninth International Caspian Oil and Gas Exhibition and Conference, in Azerbaijan’s capital, looked on the surface like a celebration. President Heydar Aliyev opened the show, welcoming European dignitaries and some 300 exhibitors. British Minister of State for Energy and Industry Brian Wilson, Greek Minister for Development Apostolos Athanassios Tsohatzopoulos, and Norwegian State Secretary of Petroleum and Energy Brit Skjelbred all attended. According to the organizer of the event, Spearhead Exhibitions, the Caspian show attracted over 300 exhibitors from 32 countries. This confirmed the Caspian’s role as a favored site of future exploration. But the conference also raised persistent worries about Azerbaijan’s ability to garner further investment.

Confident forecasts may have drowned out these worries for some. BP Azerbaijan Associate President David Woodward, the top executive working on the Baku-Tbilisi-Ceyhan pipeline, estimates total fuel reserves on the Caspian Shelf at 40 billion barrels of oil and 200 trillion cubic feet of gas. He also said that the consortium he heads, the Azerbaijani International Operating Company (AIOC), controls some 5.3 billion barrels of oil at the Azeri-Chirag-Guneshli fields – up from earlier estimates of 4.6 billion barrels.

Despite persistent skepticism from some observers [see related EurasiaNet story], Woodward said that construction of the Baku-Tbilisi-Ceyhan pipeline in Azerbaijan should start in the coming months. He also said the Shah Deniz gas field would produce revenue by 2005. His confidence may stem in part from a financing deal announced at the conference, which ran from June 4-7. European Bank for Reconstruction and Development representative Thomas Moser announced that the bank would match up to $150 million in pipeline financing. The bank will put up $150 million only if it successfully forms a lenders’ syndicate to provide another $150 million. That commitment would silence many doubters. But to create a lending syndicate, the bank would have to persuade other investors to bet on Azerbaijan. That will be a very difficult sell unless Aliyev takes steps to diversify his economy.

Even if the Azeri-Chirag-Guneshli and Shah Deniz fields deliver on their promises, they would be the only active fields in Azerbaijan’s Caspian territory. After 10 years of independence and several abandoned exploration projects, Azerbaijan has yet to attack corruption or build other industries. Even the bullish conference underscored oil projects’ fickle economics, as Norway abruptly announced its potential interest in pursuing a rival pipeline. Surprises like these can make pipeline consortia more unreliable and costly. Yet investment outside the oil and gas sector is dismal. This imbalance leaves Azerbaijan especially vulnerable to capricious oil and gas investors. It also makes the prospect of oil and gas investment less attractive.

According to Moser, the country suffers from malleable laws, difficult access to finance, and the threat of political instability. This assessment resonated when riots started in Nardaran, just north of Baku, during the conference. Nick Eisinger, Associate Director of Fitch Sovereign Ratings, warned of the need for further reform even after his agency upgraded Azerbaijan’s rating from B+ to BB- in 2001. Eisinger sees promise in the state’s oil fund, along with "the prospect of very large export earnings materializing in about five years," and the discipline of a new International Monetary Fund program. But Eisenger also warned that political chaos, weak civil institutions and limited economic vibrancy - especially in banking - could stall economic growth.

Editor’s Note: Daan van der Schriek is a freelance journalist based in Baku.