Azerbaijan offered to build refineries abroad

Azerbaijan has received proposals for building oil refineries in other countries in recent years. Remarkably, interest in the construction of refineries is more often expressed by countries that do not have oil resources or have them in small quantities.

So, at different times Kyrgyzstan, Tajikistan, Ukraine and Georgia turned to the state energy firm SOCAR for joint implementation of oil refinery projects. These countries are seeking to build refineries on their soil in order to reduce dependence on oil product imports, to ensure their energy security and sell goods abroad. Some of them regard construction of a refinery as a socially-oriented project which will allow to create more jobs, increase revenues and, therefore, increase tax transfers to the state budget.

These states' proposals to Azerbaijan are justified, because the country has vast experience in the oil sector. But at the same time, Azerbaijan, as an oil producer possessing all the necessary energy resources, itself, has plans for modernization of the existing oil refining capacities and building new refineries.

Azerbaijan currently produces oil products at two refineries in the capital Baku with total capacity of 20 million tons a year. Both refineries are part of SOCAR, which annually refines about 7 million tons of oil from onshore and offshore fields at its own expense. In 2014, SOCAR intends to increase the depth of oil processing at its own refineries to 95 per cent.

At the existing refineries the production of fuel that meets the Euro 3 standard is carried out. Fuel of the Euro 5 standard is expected to be produced at a new oil refinery complex which will operate in Azerbaijan by the end of 2020. The project on creating a new complex for oil and gas refining and production of petrochemical products involves the construction of a petrochemical plant with capacity of 10 million tons a year, as well as a gas refinery with annual capacity of 10 billion cubic meters. It is expected that Azerbaijan, jointly with foreign partners, will invest $17 billion in the construction of this up-to-date complex which will not only meet the domestic demand for oil products, but will also export petroleum products to overseas markets.

Also, around $6 billion will be invested in the construction of STAR refinery of SOCAR in neighboring Turkey. The main purpose of building the enterprise is to supply raw materials to the petrochemical complex Petkim, which is the most important of SOCAR's external assets. Annual production of naphtha at the STAR refinery, which Petkim will use as the main raw material, will be 1.66 million tons. Currently, more than 80 percent of Petkim's needs for naphtha is met by imports. The introduction of a new refinery will eliminate the dependence on imported products.

Azerbaijan's involvement in the construction of refineries is expected to include investments abroad. In particular, the resource-rich South Caucasus republic may invest in the construction of oil refineries in Kyrgyzstan, Tajikistan, Georgia, Ukraine and even in Latin America.

The only requirement of SOCAR for its future foreign partners is economically viable projects. The company should know the answers to such questions as the source and the price of oil, which will be refined, to make a decision on the construction of an oil refinery. If the feasibility study shows that the return on investment takes two to three years, the project can be considered effective.

Quite possibly, the time will come when SOCAR itself will decide on the purchase of existing or construction of new refineries in a number of countries, when the interests of the company focus on the Asian market or a strategic expansion of the refining capacities in Georgia or Ukraine.

In any case, stimulus measures should be taken to attract Azerbaijani investments, as for example, Turkey did. Thus, under a Turkish project to encourage investment, which began in April 2012, investment in the oil refineries of SOCAR in Turkey will be exempt from VAT.