$ 1 billion oil money for each month

$ 1 billion oil money for each month

CESD: “SOFAZ is not adequately meeting its central objectives”

Budget revenues of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) for the period of January-September, 2012 reached 10,1 billion mantas ($ 12, 9 billion US) , while budget expenditures constituted 7,5 billion Mantas  ($ 9,7 billion US.) Since $ 9,7 billion US spent in the last 9 months of 2012, it means that more than $ 1 billion US spent in each month. Regarding to income, SOFAZ reported that revenue of 9 636.0 mln. manats was received from implementation of oil and gas agreements, including 9 625.7 mln. manats from the sale of profit oil and gas, 5.7 mln. manats as transit payments, 1.6 mln. manats as bonus payments, 2.8 mln. manats as acreage fees and 0.2 mln. manats from sale of assets received from foreign companies.

Center for Economic and Social Development (CESD) experts mentioned that SOFAZ is not adequately meeting its central objective – preserving oil money for future generations. It seems difficult to protect the money from the consumption appetite.  The transfers from SOFAZ to the State Budget have shot up from $ 686 million in 2007 to $ 11, 64 billion in 2011 and a decision has been taken to further raise the transfer to $ 12,538 billion in 2012.  It means that amount of transfers from the fund to the state budget is 18 times higher than in 2011 compare with 2007 which is barely credible in the oil countries’ experience in the world.

CESD researchers said that more than $ 19, 0 billion transferred only last 2 years (2010/2011) and $31,6 billion are transferred between 2010-2012 years which is more than total of assets of SOFAZ. The fund’s current assets are about $ 30 billion. CESD estimates prove that SOFAZ’s budget will be equal to zero if the government keeps this level of fantastic transfers from the fund to the budget. CESD assessment model also include tendency of decreasing of oil production in Azerbaijan. State Oil Company of Azerbaijan (SOCAR) produced 51 million ton oil in 2010. 46 million ton was produced in 2011 which 5 million ton less than 2010’s output. Oil output will be the lowest in 2012 since 2009 because 42,3 million ton oil production forecasted. Meanwhile, the latest predictions confirm that oil production will be decreased to about 35 million ton in 2015. Even with current prices of crude oil in the world market, SOFAZ’s assets will be totally spent within the budget lines in 2017 if current unbelievable transfers’ level kept. Keeping such fantastic transfers can result in negative consequences because of theatrical cutting of budget expenditure lines due to potential lack of financial resources.

CESD experts added that the existing policy framework and execution have clearly failed and a new one needs to be designed and implemented to ensure the efficient and ethical management of oil revenues. The technical challenge is to create the scheme such that the amounts withdrawn during the resource exploitation phase and the post-resource financial return phase are the same.  However, the details of the Permanent Income scheme have not yet been worked out and agreed to and it has not been implemented.  Thus, the pressure on SOFAZ to relinquish funds continues and intensifies. One of the difficult elements of the Permanent Income approach is that in order to determine the current levels of withdrawals, the value of the stock of oil in the ground must be known, and therefore knowledge of the future profile of oil prices until the resource is exhausted is necessary.  To date, this calculation has been based on “expected” or historical averages of oil prices, and several scenarios have been posited.  As the recent past has shown, oil prices can be extremely volatile and relatively unpredictable.  Thus, while considering average or expected oil prices is not unreasonable, it is only a starting point.   Another difficulty of the Permanent Income approach is that it is inherently unstable because of the volatility of oil prices.  That is, if the withdrawal amounts are set too high, and that amount is kept up, the oil fund will be exhausted.  This is a very realistic possibility since future oil prices are not known, and some sort of projection is required up front.  Given the volatility and uncertainty of future oil prices, it is almost inevitable that this projection will be wrong.  Thus, to avoid this outcome, the withdrawal amounts should be set in a sufficiently conservative manner or regularly reset.

CESD experts concluded that assessment should be done on how oil money has been used in the country rather than how much we gained. Lack of transparency and accountability remain a problem in usage of oil revenues which reducing impacts of usage of oil money. Transparency is considered an important prerequisite for establishing proper institutional  and regulatory structures, and for creating the conditions  in which abuses can be challenged.  The CESD experts recommend that sustainable long-term development needs to be a major focus and the only criterion for the use of oil money, as with any public resource. The short-term availability of this resource, however, makes the issue more subtle and brings additional concerns. The need for sustainable long-term development makes the macroeconomic concerns a priority. This is to say that the nation’s strategy for the use of oil money needs to focus on the long-term growth of GDP, fiscal stability and independence, and monetary concerns in order to avoid inflation, account for the capacity of the public sector and prevent the creation of an environment conducive to corruption. The strategy must clearly delineate the share and dynamics of national consumption, public investments, government expenditures and trade with other countries with the hydrocarbon resources deducted and oil money added to the national assets. A good strategy will measure and use the oil money not for separate consumption expenditures or investment projects, but in line with all public spending, while accumulating and saving that oil money separately. The diversification principle need to be prepared to illustrate the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, in each currency, each type of the business, and each company, as well as ceilings expressed in percentages of the invested company’s assets.

© CESD, 2012

Leave A Comment