Azerbaijan expects to channel more than $52 billion during 2008-15 into its recently established national oil fund through its production-sharing agreements on the giant Azeri-Chirag-Guneshli and Shah Daniz fields in the Caspian Sea.
But Samir Sharifov, executive director of the Azerbaijan State Oil Fund, warned last week that the vast potential oil wealth from the offshore province-where 18 PSA sites are under consideration for development-must be managed carefully to avoid the pitfalls experienced by other oil-exporting nations.
Speaking at the Caspian Oil & Gas conference in Baku earlier this month, Sharifov said the oil fund was established last De cember and is due to be activated at the end of June.
Spiking oil revenues
"The new phase of Azerbaijan's oil and gas sector development points to a substantial inflow of oil revenues into the country's coffers," Sharifov 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 nonoil Azerbaijani businesses and a loss of international economic competitiveness.
Sharifov said projections (including BP PLC's) that peak oil production from the ACG fields alone during 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-export ing countries and derive necessary les sons," he added.
He said that the examples 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 it is to find the right answer of how to efficiently manage oil wealth."
To ensure that revenue from Caspian Sea oil production over the 2 decades was invested for the long-term benefit of the country, he said that 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."
