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

By Trend

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 markets.

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 Azerbaijan.

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 prices.

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.