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Driving the growth: Azerbaijan’s oil and gas revenues exceeding forecasts

BAKU, Azerbaijan, July 26. The oil and gas
industry continues playing a crucial role in Azerbaijan’s economy,
which has established itself as a reliable energy supplier to world

According to the State Customs Committee, Azerbaijan’s natural
gas accounted for 40.26 percent of total exports from January
through June 2022 (18 percent in the same period of 2021). During
the reporting period, the country boosted natural gas exports by
9.5 percent against the same period of 2021 (10.379 billion cubic
meters), up to 11.365 billion cubic meters.

In the reporting period, the share of crude oil and oil products
in Azerbaijan’s total exports amounted to 50.66 percent against
65.19 percent a year earlier. Azerbaijan has exported over 12.9
million tons of crude oil and oil products worth $9.361 billion
compared to 13.5 million tons ($5.744 billion) year-on-year.

All this is also reflected in the state budget revenues of the
country. In particular, receipts from the oil sector exceeded the
forecasted amount in the first half of 2022, which is directly
related to the tax revenues received through SOCAR.

Thus, during this period, tax income from SOCAR totaled 932.5
million manat ($549.09 million), which was 265 million manat
($156.04 million) or 39.7 percent more than the projected amount
(667.5 million manat, or $393.05).

Moreover, the profit tax on contractors for crude oil exports
produced at the Azeri-Chirag-Gunashli field under the production
sharing agreement reached 624.7 million manat ($367.8 million),
rising above the forecasted volume (330 million manat, or $194.3
million) by 294.7 million manat ($173.5 million) or by 89.4
percent. In addition, the profit tax through contractors for gas
exports from the Shah Deniz gas condensate field amounted to 543.4
million manat ($319.9 million). Forecasts on tax revenues from the
mentioned field have not been made.

The export prices for crude oil and natural gas on global
exchanges turned out to be higher than the 2022 budget forecasts.
Sharp volatility of oil prices poses serious problems for
developing and implementing macroeconomic and fiscal policies, as
well as macro-fiscal planning and forecasting, and leads to
significant deviations between forecasts and actual indicators.

As estimated, every $10 drop in oil prices leads to an annual
average reduction of 2.6 billion manat ($1.5 billion) in total
budget receipts. While calculating the budget parameters for the
medium term, the average annual price of oil should be provided at
the level of $50 to prevent risks regarding the oil prices.

Furthermore, when drawing up the state budget, the State Oil
Fund’s (SOFAZ) transfers to the state budget are carried out in
national currency, reducing the direct impact of price risks on the
state budget.

The upgraded budget rule, effective from January 1, 2022, will
help reducing the budget’s dependence on oil revenues, and
strengthening fiscal stability, financial discipline, and will also
keep the assets of the state oil fund at target levels.

The foreign exchange reserves accumulated in SOFAZ and the
Central Bank are exceeding the state debt in foreign currency by
over 7 times, building the confidence of creditors in

International rating agencies and financial institutions are
giving positive forecasts regarding Azerbaijan’s budget as well.
Thus, according to the World Bank’s forecasts, state budget gains
will grow by 8.8 percent in nominal terms compared to the previous
one. This growth reflects higher projected non-energy tax revenue
due to expected higher activity and higher taxes from oil companies
as the fundamental oil price for the budget is raised to $85/bbl
(from $50/bbl in previous budget).

S&P Global Ratings raised its forecast for Azerbaijan’s
state budget surplus for 2022 from three percent to six percent of
GDP. This forecast reflects the more favorable dynamics of oil

So, the growth of Azerbaijan’s budget in both forecasts is
related to high oil and gas prices. The energy resources continue
to be the drivers of Azerbaijani export growth, and given the
growing demand for the country’s oil and gas, high prices for them
will bring high dividends to the country.

Follow the author: @Lyaman_Zeyn

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