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 Press release - World Bank Group Approves First Loan To Azerbaijan (WB)

 Press release date: 21.04.1995

  FOR IMMEDIATE RELEASE 
The World Bank
1818 H Street, NW, Washington, D.C. 20433, USA
IDA News Release No. I95/57ECA

Contact: Jan Pakulski
Phone: (202) 473-1797; Fax: (202) 676-0585
E-mail: JPakulski@Worldbank.org

WORLD BANK GROUP APPROVES FIRST LOAN TO AZERBAIJAN

Fueling growth and investment in Azerbaijans petroleum sector

WASHINGTON, April 21, 1995 - The World Bank Group yesterday approved its first loan to Azerbaijan to finance a Petroleum Technical Assistance Project. The loan, in the form of a credit of SDR 14.3 million (US$20.8 million equivalent1), is provided by the World Banks affiliate organization, the International Development Association (IDA). The credit will finance advisory services to create a framework for encouraging foreign private investment in petroleum and for tackling the many problems of Azerbaijan's petroleum industry.

Azerbaijan is now the third largest oil producer among the nations of the Former Soviet Union. It is also one of the oldest oil producing regions in the world, and provided most of the oil supplies for the Soviet Union until shortly after the Second World War. There are still substantial resources remaining in the country, as well as large offshore deposits located in the Caspian Sea.

Azerbaijan is a net oil exporter, with oil accounting for about one-third of total export receipts. However, in recent years deteriorating infrastructure and technical difficulties with production have led to a decline in output, which may force Azerbaijan to import oil for the first time in its history.

Future oil revenues to pay for social expenditures

"Attracting foreign investment for petroleum development is critical to Azerbaijan's prospects for economic recovery; increased oil production would help to pay for much-needed expenditures on health, education, and essential infrastructure," according to Jonathan Brown, Chief of Infrastructure, Energy and Environment Division.

Azerbaijan has recently signed agreements with major international oil companies to develop offshore oil fields. The IDA credit will finance advisors to assist Azerbaijan in developing oil reserves in cooperation with foreign companies and in addressing the question of constructing an oil export pipeline. Such a pipeline is crucial if Azerbaijan and other states bordering the Caspian Sea are to export substantial quantities of oil to world markets.

A key component of the project will provide assistance to the Azerbaijani Government to develop a Petroleum Law, which will help to establish a framework for foreign investment in petroleum exploration and production. Most of the financing from the World Bank will be used by the State Oil Company of Azerbaijan Republic (SOCAR) to hire advisors to tackle a range of urgent issues confronting Azerbaijan's oil industry. In addition to studies and advice, the credit will finance training for SOCAR staff in commercial aspects of oil industry management and installation of personal computing and communications systems.

The largest element of the project will assist in financing advisory services for a scheme to halt declining production in the Guneshli oil field. This field- developed under the Soviet Union in the 1980s- provides about 60 percent of Azerbaijan's production. The technical assistance financed by IDA will help SOCAR to design and supervise a project which would be financed by the international oil industry or commercial banks.

The credit will also assist SOCAR to plan for the restructuring of its oil fields. Many Azerbaijani fields began producing in the last century and have produced most of their initial reserves. Addressing the environmental and economic problems of these oil fields will be among the top priorities of the project. The oil fields, which are located around the capital Baku, and offshore in the Caspian Sea, cause substantial pollution due to spills, inappropriate disposal of toxic water and drilling fluids, and the large amount of abandoned and deteriorating infrastructure. The productivity and efficiency of these fields could be enhanced by directing drilling and investment to the most productive areas. Down-scaling production in inefficient fields will require solutions to environmental and labor retraining issues. The project will help to formulate practical schemes for investments in these fields, including joint ventures with foreign companies.

The credit is extended at the standard IDA terms and carries no interest for 35 years, with a 10-year grace period.

IDA is an affiliate of the World Bank, established to provide assistance for the world's poorest countries on highly concessional terms. Azerbaijan joined the World Bank in September 1992.

BACKGROUND NOTE: AZERBAIJAN'S PETROLEUM INDUSTRY

Azerbaijan is one of the oldest oil producing regions in the world. Small-scale oil extraction, through wells dug to access oil near the surface, was first practiced in the Baku area several centuries ago. The modern industry, however, started in the late 19th century, when Azerbaijan rapidly became one of the world's major oil suppliers. By 1905, the Russian empire, due to the growth of production in Azerbaijan, accounted for 25 percent of the world's oil production, second only to the United States. Foreign capital, through firms such as Nobel, Rotschilds and Royal Dutch (the precursor of Shell), accounted for a large part of investment at the time.

Early oil development was concentrated in a relatively small area around Baku (Azerbaijan's capital, with a population of about 2 million). Most of the oil fields developed in the early phase of the industry are still in production. Old oil fields surround the city on all sides, and there is considerable environmental damage from oil spills, formation water, toxic materials and abandoned production equipment.

Three Largest FSU
Crude Oil Producers, 1994

Russia 305.7 million tons

Kazakhstan 20.3 million tons
Azerbaijan 9.6 million tons

Azerbaijan remained the main source of oil supply for the Soviet Union through the Second World War, and rapid development of the fields around Baku was a key part of the early Soviet industrialization campaign. Production reached 22.2 million tons in 1940 (60 percent of Soviet production). However, after the War, the focus of the Soviet oil industry shifted away from Baku, as new oil regions were opened up in the Volga-Urals region and in Western Siberia. While Baku remained an important center of the Soviet petroleum industry, including in the areas of education, research and equipment manufacturing, investment resources were focused on the newer oil regions in Russia. As a result, Azerbaijan was for a long time probably denied the full investment needed to maintain output and exploration. This accounts in part for the poor conditions of the industry today. Output in Azerbaijan has fallen rapidly to 9.6 million tons in 1994, just 3 percent of production in the Former Soviet Union. In the older fields in Azerbaijan, about 10,000 oil wells produce an average of 0.7 tons per day, and many wells are either shut down for lack of spare parts, or are uneconomic due to their low productivity. Nonetheless, these oil fields employ over 30,000 people, and are important in sustaining many communities around Baku. Moreover, even though Azerbaijan has produced about 1.3 billion tons of oil over the last century, significant reserves remain which could be efficiently recovered using techniques widely applied in old oil fields in North America and elsewhere.

Initial oil development in Azerbaijan was all onshore. The turning point in Azerbaijan's production came with the development of the giant offshore Oil Rocks field in 1949, which was among the world's first offshore developments. In 1980, another large field, Guneshli, was brought on stream, and offshore production now accounts for 80 percent of output. However, the Soviet Union did not fully exploit the oil resources of the Caspian, due to shortfalls in technology and financing. As a result, large fields which were discovered in the past 20 years offshore Azerbaijan still remain undeveloped.

In September 1994, Azerbaijan signed an agreement with a consortium of major international oil companies from six different countries (United States, United Kingdom, Russia, Turkey, Norway and Saudi Arabia) for development of the Azeri and Chirag oil fields, as well as the deep-water portion of the Guneshli field. These fields contain recoverable reserves around 500 million tons, and production could reach around 35 million tons per year (worth about $4 billion per year) within 10 years. Development of these fields will however require resolution of several complex problems. Firstly, a route for a new oil export pipeline will have to be agreed, to take oil to world markets. Possible transit countries include Turkey, Georgia, Armenia, Iran and Russia. Secondly, the legal regime for petroleum exploitation in the Caspian Sea would have to be clarified, following the break-up of the Soviet Union.



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