Azerbaijan Oil and Gas Report Q2 2008

The latest Azerbaijan Oil & Gas Report from BMI forecasts that the country will account for 2.31% of Central and Eastern European (CEE) regional oil demand by 2012, while providing 8.49% of supply.

CEE regional oil demand rose to an estimated 5.45mn barrels per day (b/d) in 2007 and should average 5.59mn b/d in 2008, then rising to around 6.23mn b/d by 2012. Production of an estimated 12.74mn b/d in 2007 is forecast to reach 15.31mn b/d by 2012. CEE gas consumption in 2007 was an estimated 612bn cubic metres (bcm), with demand of 744bcm targeted for 2012. Production of an estimated 701bcm in 2007 should reach 792bcm in 2012, which implies net exports falling from an estimated 89bcm in 2007 to just 49bcm by the end of the period. Azerbaijan's share of consumption in 2007 was an estimated 1.68%, while its share of production was 1.28%. By 2012, its share of demand is forecast to be 1.88%, with the country accounting for 2.52% of supply.

Global oil demand growth is now expected to have been 1.7% for 2007, rising to a little less than 2.0% in 2008. Asia and the CEE continue to dominate. The overall demand outlook for the period to 2012 remains healthy (average growth 1.8%), but subject to review if the macroeconomic outlook deteriorates. We are still assuming some easing of energy prices during the period, but from a much higher level than envisaged earlier. Supply growth is capable of matching demand expansion - but only if OPEC cooperates as non-OPEC forecasts are fragile. Between 2006 and 2012, we see supply rising by an average 1.7% per annum - subject to OPEC strategy. Our revised central view is that the OPEC basket price will rise from around US$69/bbl in 2007 to US$74 in 2008, before settling around US$71/bbl in 2009 and falling further to US$70/bbl in 2010-12.

Azeri real GDP growth is estimated by BMI at 18.6% for 2008, following an estimated 25.0% in 2007.

We are assuming 13.0% growth in 2009, followed by 8.0% in 2010, 5.0% in 2011 and 4.5% in 2012.

Domestic consumption, having tumbled since the 1990s, should now have resumed a growth tack, estimated at an average 7% per annum. By 2012, the country could be using 144,000b/d of oil. Main government vehicle Socar currently accounts for almost half of domestic oil production but, in partnership with international oil companies (IOCs), should raise national output from an estimated 850,000b/d in 2007 to 1.3mn b/d by 2011/12.

Azerbaijan occupies first place in BMI's newly revised Upstream Business Environment rating, comfortably ahead of neighbour Kazakhstan. Its oil and gas production growth outlook, asset immaturity, high reserves-to-production ratios (RPR) and competitive landscape work in the country's favour, but are undermined by a relatively unappealing risk environment. Long-term scope exists for Kazakhstan to close the gap on Azerbaijan. The country is just in the upper half of the league table in BMI's newly-revised Downstream Business Environment rating, although there are few particularly high scores and progress further up the rankings seems unlikely. The low level of retail site intensity represents a strong suit, along with region-leading oil demand growth prospects. The Czech Republic is alongside it in the regional rankings, and there is little chance of Hungary or Slovakia below challenging for Azerbaijan's share of sixth place over the medium term.