Azerbaijan Oil and Gas Report Q3 2007

The latest Azerbaijan Oil & Gas Report from BMI forecasts that the country will account for 2.22% of Central and Eastern European (CEE) regional oil demand by 2011, while providing 8.63% of supply. CEE regional oil demand rose to 5.30mn barrels per day (b/d) last year and should average 5.45mn b/d in 2007, before reaching 6.06mn b/d by 2011. Production of 12.41mn b/d last year is forecast to reach 15.06mn b/d by 2011. CEE gas consumption in 2006 was 594bn cubic metres (bcm), with demand of 720bcm targeted for 2011. Production last year of 685bcm should reach 758bcm by the end of the period. Azerbaijan's share of consumption in 2006 was 1.62%, while its share of production was just 0.92%. By 2011, its share of demand is forecast to be 1.946%, with the country accounting for 2.64% of supply. Global oil demand growth is expected to be around 2.0% this year, with Asia/Pacific and the CEE regions dominating. This is an encouraging rate of market expansion, given a relatively uncertain economic picture and high commodity prices. Our oil price projections for 2007 as a whole are revised upwards from the last quarterly report. We are now assuming an OPEC basket price average of US$59 per barrel, compared with the US$55 estimate provided by our last two quarterly reports. Based on recent price differentials, this implies Brent at US$62.83, WTI averaging US$61.25/bbl, and Urals at US$59.42/bbl. Azeri real GDP growth is now forecast by BMI at 24.7% for 2007, following 31.8% in 2006. We are assuming 22.5% growth in 2008, followed by 16.9% in 2009, 15.0% in 2010 and 11.5% in 2011.

Domestic consumption, having tumbled since the 1990s, should now have resumed a growth tack, estimated at an average 7% per annum. By 2011, the country could be using 135,000b/d of oil. Main government vehicle Socar currently accounts for half of domestic oil production but, in partnership with international oil companies (IOCs), should raise national output from 654,000b/d last year to 1.3mn b/d by 2010/11.

In the BMI Business Environment Ranking matrix, Azerbaijan receives a lower composite score of 38, which now ranks the country second out of 12 states included in the CEE region. The country's overall business environment can be considered very attractive in a regional context, thanks to exceptionally high levels of oil and gas output growth potential, substantial untapped resources, a healthy competitive framework and better-than-average licensing/production sharing terms. Long-term economic risk is seen as exceptionally high, with political risk also above average. However, the international oil and gas industry seems prepared to overlook this in exchange for an exceptional hydrocarbons outlook.