Azerbaijan must not squander oil wealth, says fund director

The director of the Azerbaijani oil fund said the nation should get more than $52 billion between 2008-15 from production of giant Caspian Sea fields, and needs to invest it carefully to avoid pitfalls some other oil-producing nations have experienced.


Darius V. Snieckus
OGJ Online

BAKU, June 8 -- Azerbaijan expects to channel more than $52 billion between 2008-15 into its recently established national oil fund through its production sharing agreements on the giant Caspian Sea Azeri-Chirag-Guneshli and Shah Deniz fields.

But Samir Sharifov, executive director of the Azerbaijan State Oil Fund, warned Thursday that the vast potential oil wealth from the offshore province -- where 18 PSA contract sites are under consideration for development -- had to be managed carefully to avoid the pitfalls experienced by other oil-exporting nations.

Speaking at the Caspian Oil & Gas conference, Sharifov said the oil fund was established last December and is due to be activated at the end of June.

"The new phase of Azerbaijan's oil and gas sector development points to a substantial inflow of oil revenues into the country's coffers," he said. "[This] revenue will definitely have a serious impact on the country's economic situation and thus necessitates timely formulation of sound policies to address it."

He stressed that the 1997-98 wave of "hard currency inflows" into the state -- during which import spending soared -- resulted in the "crowding out" of many non-oil Azerbaijani businesses and a loss of international economic competitiveness.

Sharifov said projections (including BP PLC's) that peak oil production from the ACG field alone between 2008-15, at $25/bbl, could translate into revenue of $5-6 billion/year emphasized the importance that Azerbaijan have an oil wealth management strategy.

"On this path, Azerbaijan must carefully study the experience of other oil exporting countries and derive necessary lessons," he added.

He said the example of the Netherlands, where a hard currency-driven rise in imports undermined the domestic economy's international competitiveness, and Indonesia and Iran, where oil revenues were spent on "ambitious but unviable public projects" without a long-term view "proved how important its is to find the right answer of how to efficiently manage oil wealth."

To ensure that revenue from Caspian Sea oil production over the two decades was invested for the long-term benefit of the country, he said the new oil fund would "not be designed to finance deficits" in the national budget.

"Oil sooner or later will run out. So it is necessary to use our oil wealth to create conditions for permanent income from nonoil sectors for the country once the oil has been exhausted," noted Sharifov. "The major objective of the oil fund is to only finance investment projects aimed at construction and reconstruction of infrastructure with nationwide significant for future generations in Azerbaijan."

The oil fund, he said, will be a separate legal entity, subject to scheduled, publicly available audits. Regular reports on the oil fund would be made to both a supervisory board, as well as to the Azerbaijani president.

By the end of June, the fund's asset management regulations will be drafted, said Sharifov, giving the fund's supervisory board "the necessary rights and powers, while creating the framework needed to invest the assets of the oil fund."

Contact Darius V. Snieckus at dsnieckus@ogjonline.com

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