Why do Azerbaijan and Kazakhstan expect a decline in oil production?

Why do Azerbaijan and Kazakhstan expect a decline in oil production?

The monthly report by the International Energy Agency, which was published in January, didn’t rule out a further decrease of oil prices due to lifting of the sanctions against Iran and its appearance on the world energy market, as well as due to the slow-down of the pace of growth of demand for energy in general. The falling oil prices have already caused economic difficulties in 2016, primarily in the exporting states. Devaluations of national currencies and the need to correct budgetary expenditures in 2016 are typical scenarios for the Caspian states. Russia is reducing its budgetary expenditure by 10%. Kazakhstan has spoken about taking “tough decisions on the budget.” The leadership of Azerbaijan had to take emergency measures for recovery of confidence in the national currency. A video bridge between Moscow, Astana and Baku took place yesterday within the project of IIA Russia Today ‘The Economic Sphere.’ The topic of the discussion was ‘Falling Oil Prices: Influence on the Economic Situation in the Caspian States.’ Ilham Shaban, Director of the Oil Research Center, spoke about dealing with the economic problems which were connected with low oil processing in the Caspian states.

“Regarding the Caspian region, in only two countries – Azerbaijan and Kazakhstan – is a decline in oil production expected in the current year. In Russia, Iran and Turkmenistan growth will continue.

In Russia last year an increase of 1.5% was recorded in the region, and if you look at the price segment in the current year, growth has halved, adjusted to the decline in the prices, first to $40 and now to $37. However, the cost of oil production for the largest Russian oil producers is below $10. Therefore, they will mostly lead to an increase in production,” Shaban predicts.

According to him, Iran will definitely go to growth in production, and the main question here is what this growth will be like: “Whether it will be 300, 400 or 500, as their government says that by the end of the year we will see a million barrels per day.”

The expert says that in Turkmenistan the production volumes are small, but they will grow: “It is in the interest of the producers, in the interests of the Turkmen state companies. The Turkmenbashi refinery was modernized at the end of last year; and now it has the ability to produce products to Euro-5 standards. In the third quarter it is planned to produce the same quality of gasoline and diesel fuel at the Seydi oil refinery. And then they will get very good margins, which will allow them to earn from their petroleum products on the world markets.”

According to Shaban, in Azerbaijan the decline in oil has objective reasons, because most of the fields are old: “Even the largest Azeri-Chirag-Guneshli field went into a period of intense development after 2010, and since this period the pace and volume of production has decreased by 18%. That is, a natural decline in production. And for the current year it is planned to decrease oil production by about 1 million tons.”

In Kazakhstan the situation is different. “There are fields where the cost of oil is very high, and therefore the companies reduce capital investment. And due to this the production volumes have fallen for the past two years. This has a very negative impact on the economy. This was particularly evident when the State Statistics Committee recently revealed figures on the gross domestic product. That is, the increase was only 1.1%,” the expert states.

Meanwhile, he believes that, in spite of the decline in revenues, despite the fact that oil prices are falling, there are plans to increase spending in the budget. But from what additional income is it planned to cover the deficit? The government decided for the first time since gaining independence to issue bonds for the external debt, that is, to take loans. Now let's see what the results will be,” Shaban says.

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