Set up in 1992, Socar is the state oil company in charge of managing all the oil sector. It is Azerbaijan’s number one taxpayer and its largest employer with a staff of 62,000.

or oilmen, the word Balakhani has a mythical ring. Oilfields like Balakhani set off the Great Game in the mid-19th century, and Azerbaijan suddenly became the center of a global rush for petroleum resources. It involved derrick technology, geo-political intrigues and prodigious amounts of money. In 1873, the Nobel family invested in oil development projects, followed by the Rothschilds in 1885. Azerbaijan was producing 11.5 million tons of oil per year by 1901, the bulk of world demand. It was the beginning for Azeri light crude, a low-sulfur premium quality crude oil.

In Baku, city architecture along Neftchiler Avenue still bears witness to the early age of exploration and production. Today, it is home to Socar (INTERVIEW), the State Oil Company of the Azerbaijan Republic. In a replay of events, the Baku-Tbilisi-Ceyhan (BTC) pipeline has repositioned the country on the global energy map. Multinationals have joined Socar at several production sharing agreements (PSAs) in the Caspian offshore. The deepwater fields were left relatively untouched by Soviet geologists. This means the region qualifies as a new oil province, with reserves comparable in size to those of the North Sea.

As a result of this new capitalization of resources, Azerbaijan’s GDP grew up to $10.2 billion in 2004. Foreign direct investment (FDI) rose 30 percent to $4.4 billion that year as major projects went on-stream. According to the U.S. Department of Energy (DoE), the effective management of the BTC coupled with Azerbaijan’s hydrocarbon wealth guarantees future economic growth. The State Oil Fund, created by former president Heydar Aliyev in 1999, might soon be worth $30 billion. The DoE estimates proven crude oil reserves in Azerbaijan between 7 and 13 billion barrels. The increase in production since 1997 is due to an international consortium known as the Azerbaijan International Operating Company (AIOC), with 11 different partners. AIOC is responsible for 70 percent of oil exports, mainly drawn from the Azeri-Chirag-Gunashli (ACG) mega-structure.

In 1994, Azerbaijan signed what has come to be known as ‘the contract of the century’ for ACG. Worth $10 billion, the deal was seen as a consolidation of power for the former president, Heydar Aliyev. It also put an end to the 60 percent GDP contraction that followed the Soviet collapse in 1991. Socar, established in 1992 from the merger of the two state oil companies, is largely responsible for Azeri light crude’s comeback. The company is the largest taxpayer in Azerbaijan and its largest employer, with 62,000 employees. With the BTC pipeline, Socar faces a new age of capital investment in its offshore sector. By 2010, economists estimate the region will produce 3-4.7 million barrels per day (mbd), exceeding annual production in Venezuela.

Long-run economics, however, tip the balance in favor of natural gas. Proven gas reserves in the Caspian are estimated at 232 trillion cubic feet (Tcf), which compare to those of Saudi Arabia. With the global switchover at electricity generating plants from coal to natural gas, this treasure trove means Socar will be competing with Russia’s Gazprom, which has a stranglehold on the western European market. An export pipeline will soon transport Caspian natural gas west via Erzurum in Turkey. No longer landlocked, Azerbaijan is a paradigm for regional energy cooperation.

“The environment is one of the top government priorities. The oil industry has been our main economic agent for 150 years. Now we are paying the price for the careless approach,” says Huseyngulu Bagirov, Minister of Ecology and Natural Resources. In 2003, Azerbaijan was one of the first oil-producing nations to sign the Extractive Industries Transparency Initiative (EITI). Socar has set up its own environmental department and works together with NGOs to apply strict directives at offshore PSAs. Together with the World Bank, it is also taking part in a $20 million scheme to clean up damaged sites.

Exports to grow by 128 percent

According to Socar’s Marketing and Economic Operations Department, Azerbaijan’s state oil company exported two million tons of oil products between January and July 2006. While the amount was equivalent to the previous year, prices per ton of gasoline had risen by $46 to $754.75. In terms of gross exports, the share of diesel oil was largest with 904,526 tons, followed by Mazut with 715,661 tons and gasoline products with 170,410 tons. From 2006-2009, oil exports are projected to grow by an average of 128 percent.

High prices boost State Oil Fund

World crude prices skyrocketed last summer during the war in Lebanon. Socar transferred the additional revenue from sales of Azeri light crude to the government budget and the State Oil Fund. As a result, Azerbaijan’s oil fund revised its capital stock upward to $1.5-2 billion. The head of Azerbaijan’s Price, Economic and Financial Department, Oktai Hagverdiyev, had previously forecast overall stock to remain stable at $1 billion.

More gas from Gobustan

A pipeline connection to the fourth well of the Gobustan contract area, south of Baku, will increase the amount of natural gas delivered to Socar. Construction of the pipeline link to the Duvanniy field was finalized last summer. High pressure at Duvanniy means special equipment is needed to deliver gas. Currently, the three other wells in Gobustan deliver an average of 40,000 cubic meters of gas per day. The tapping of two more wells means that Socar could see a rise of 400,000 cubic meters of gas per day.