State budget immune to volatile oil prices

By: Gulgiz Dadashova

The global oil exporter countries faced this winter the lowest oil prices in five years as the “fair price” of oil fixed at $140 – $110 a barrel has become closer to $60-$70 a barrel.

WTI crude fell to $55.84 a barrel, after rising 3.4 percent yesterday. Brent oil lost 2.4 percent to $60.24 a barrel in London, Bloomberg reports. Brent oil dropped about 20 percent since OPEC decided to maintain output at its November meeting in Vienna.

Azerbaijan, an important oil and natural gas supplier in the Caspian Sea, also recorded a decrease in the prices of its oil. Azerbaijan’s energy giant SOCAR announced that the losses can reach about 400 million manat ($510,796 million), if the prices for oil in 2015 remain at the level of $60 per barrel.

“The figure of $400 million is a big difference for SOCAR, but not so serious. These losses may be covered by other regulatory costs,” SOCAR Vice President Suleyman Gasimov said on December 25.

Azerbaijan’s main export crude oil streams are Azeri BTC and Azeri Light. These two grades are fairly similar and are mainly sold to European and Asian markets. Also, the SOCAR-produced crude oil is blended in Russia and marketed as Urals blend because of its poor quality.

The price of AZERI LT CIF Augusta was $60.88 per barrel on December 24, or $0.53 per barrel less compared to the price on December 23. AZERI LT FOB Ceyhan oil price was $59.75 per barrel, or $0.53 per barrel less than the previous price. The price of URALS (EX-NOVO) was $54.72 per barrel or $1.01 per barrel less than the previous price.

Gasimov said the average cost of SOCAR crude oil is about 90-100 manat per ton, and in terms of barrels of it is about $15 per barrel. “The company’s export volumes are very small and oil production is mainly directed at providing domestic needs,” he said.

Speaking about the impact of oil prices on SOCAR revenues in the framework of the equity in the PSA-contracts, Gasimov noted that this percentage is low.

“If the annual dividend from the Azeri-Chirag-Guneshli project development was for approximately $300-$400 million, this figure could be reduced by about half. We are not afraid of much, from this point of view,” he said.

In addition, he noted that the realization of energy projects is underway and Southern Gas Corridor projects will be financed further.

Global oil supply is growing as the highest U.S. output in at least three decades led to a glut that Qatar estimates at 2 million barrels. Saudi Arabia’s Oil Minister Ali Al-Naimi said last week high-cost producers will have to make cuts if oil prices keep falling while United Arab Emirates Energy Minister Suhail Al Mazrouei urged producers from outside OPEC to trim output.

Saudi Arabia, the group’s biggest producer, doesn’t plan to pump less “whatever the price is,” Al-Naimi told the Middle East Economic Survey in report published December 22.

Meanwhile, the Azerbaijani authorities and independent experts assure that a lower price is not the end of the world.

Expert Ogtay Hagverdiyev said even if oil prices in 2015 is lower than $90 a barrel – indicated in the 2015 budget nothing bad will happen.

“The government will be forced to cut costs a little, that is, to save money on investments. Roughly investments worth $7 billion envisaged for 2015, of which $3 billion is directed to the inaugural European games and TANAP project. The rest provided to other projects, if necessary, they can be transferred to the following years. For example, the start of a petrochemical complex construction already in Alat was already postponed from 2015 to 2017,” he told local media.

The oil price was set at the level of $90 in the 2015 budget, indeed the government could indicate below the bar, but then it would be necessary to cut costs. “However, in case the oil price slows down $90 per barrel, the size of the budget deficit will grow, which is now at the level of $1.3 billion manat,” he said.

“Our budget can bear a lot. It is enough to remember 2008, when oil prices dropped to $37. The state could fulfill all the obligations it has undertaken. Under the budget system law, there are a number of protected items – salaries, pensions, benefits, the cost of drugs, which people get for free, etc. Therefore, the government makes saving on investment. The banking system suffered a little bit in 2008 because of absence of sufficient credit resources. Then, the situation was stabilized through directing 2 billion manats to the sector out of foreign reserves at the presidential decree. Therefore, in a pinch, you can count on this financial “cushion” of $54 billion,” he said.

Azerbaijan, being the largest economy in the South Caucasus, relies on oil for most part of its state revenue. The state budget depends on oil revenues by 65 percent. The oil price was set at the maximum price – $90 per barrel in the 2015 budget approved by the President in late December.

The state budget revenues are considered to be 19,438 billion manats for 2015 with an expenditure of 21.1 billion manats. The state budget deficit will make 1,662 billion manats or 2.8 percent of the GDP forecasted for 2015.

Samir Sharifov, Finance Minister said earlier low oil prices will not have a direct impact on the budget revenues in 2015. “The budget revenues are guaranteed to some extent. Consolidated budget revenues including revenues from the State Oil Fund, will however experience a significant decrease,” the minister said.

“The oil price in the budget was set at the level of $90 a barrel. This is higher than the current average price of oil on world markets at $12. Also, despite the decline in oil prices by 20 percent in the last three months, we will not face any problem to finance the budget expenditure in 2015,” he said.

The sources of financing the budget deficit are privatization receipts, placement of securities, foreign grants, as well as the balance on the treasury account of the state budget as of January 1, 2015.

The budget revenues will include 7.112 billion manats from the Taxes Ministry, 1.59 billion manats from the State Customs Committee, 10.388 billion manats from state oil fund SOFAZ, 7 million manats from the lease of state property, 300 million manats from extra-budgetary revenues of budget organizations, as well as 41 million manats from other incomes.

The budget expenditures will include over 1.778 billion manats of military expenditures, the investment making will reach 6.93 billion manats and the expenditures on the industry and construction field will amount to around 6.952 billion manats, and on education and health care around 1.711 billion manats and 777.7 million manats, respectively.

The upper limit of expenditures of the consolidated budget is determined at over 25.9 billion manats while the deficit at around 15.440 billion manats.

President Ilham Aliyev assured that in Azerbaijan, social-political situation is very positive, economic and political situation is stable.

Azerbaijani citizens will not feel the oil price decrease on the world market, President Aliyev said last week.

SOURCE: AZER NEWS