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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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The Oil Nation That Squandered Its Wealth


Some of the world’s first ever commercial oil wells were operational near Baku in 19th century Imperial Russia in today’s Azerbaijan. The oil abundance produced some of the wealth that Alfred Nobel later put towards the creation of the famous Nobel Prizes for the sciences. Also, the enigmatic Calouste “Mr. Five Percent” Gulbenkian began his career in Baku.

After more than 150 years of extensive oil production activities, the new-found country’s energy-wealth hasn’t been depleted yet. Shortly after the Cold War the independent Republic of Azerbaijan struck a deal with western super-majors for what was dubbed “the deal of the century”. The country’s existing oil fields and future discoveries were supposed to lessen Europe’s dependence on Russian energy. Although Azerbaijan has failed to meet these expectations, the nation of 9 million souls has earned a tremendous amount of money over the past decades. The effectiveness of the positive cashflow, however, on health care, education and income per capita is questionable as the level of development is fairly similar to its neighbors who lack major energy deposits.

The Land of Fire

The Azeri-Chirag-Gunashili (ACG) complex of oil fields was discovered in the 80s but production didn’t start until the 90s. The majority, approximately 80 percent, of Azerbaijan’s oil exports originate from ACG. Therefore the lack of new significant discoveries and the depletion of existing fields is a significant threat. Production at ACG peaked in 2010 when 835,000 barrels per day were produced. The oil fields, however, are quickly losing steam. Last year the fields’ production decreased by 8.4 percent to 535,000 barrels and according to statements from BP, the lead operator of the project, decline seems to be accelerating.

Fortunately, some of the decline will be offset by a new platform, Azeri Central East, that is coming online in 2023. Also, Azerbaijan is ramping up the export of natural gas to Turkey and the EU from the massive Shah Deniz gas field. The new pipeline is of strategic importance to the EU where political leaders are desperate to diversify away from Russian energy. Related: Is This The Only Way To Stop Libya’s Oil War?

A striking development in Azerbaijan’s long energy-related history is the departure of major Western oil and gas companies. The exit of Exxon in 2018 and Chevron in 2019 could be a sign of worsening conditions concerning profitability for at least the ACG complex of oil fields.

Economic hardship

The new-found energy wealth was an opportunity for Azerbaijan to develop and modernize. And in some measures, it definitely did. The country’s economic performance between 2000 and 2014 was remarkable with GDP growth hitting 15 percent per year. Industrial areas sprung up across the country and modernization projects were underway with the billions earned from oil exports. However, the Azeri economy lacks the ability to compete on the international stage due to the low diversity of export products.

Azerbaijan’s dependency on the production of oil and gas is one of the highest in the word. With a whopping 95 percent of the country’s exports being hydrocarbons. Also, approximately 75 percent of the state’s revenue is generated by the oil and gas sector. Therefore, Azerbaijan is highly sensitive to fluctuations in global commodity prices.

The oil price crisis of 2014 was particularly problematic for Azerbaijan. The national currency, the Manat, was devalued twice. According to the World Bank, the country’s GDP was halved from around $60 billion in 2014 to just under $30 billion in 2016.

Data from the World Bank shows that GDP per capita in Azerbaijan decreased by almost 40 percent between 2014 and 2018. That means its income per capita, at $4,721, was roughly the same as the neighboring nations of Armenia and Georgia, with GDP per capita of $4,212, and 4,717 respectively. This was a staggering development as both Armenia and Georgia lack any significant energy resources of their own. The former’s situation is even more dire as its borders with Azerbaijan and Turkey have been closed since its independence in the nineties. Corruption and nepotism are major brakes on Azerbaijan’s development.

Inefficiencies and corruption

According to Transparency International, Azerbaijan is 126th of the 180 countries on the corruption index. The ruling family, the Aliyevs, have been in power since the country’s independence. The current president, Ilham Aliyev, effectively took over from his father and rumors have it that his wife is next in line. The dynastic rule was confirmed by the U.S. Embassy in Azerbaijan in leaked documents which compared the Aliyevs to the infamous Corleone family of the Godfather movies.


The country’s oil and gas industry is essential for maintaining stability and the concentration of power. Therefore, it is likely that Azerbaijan will remain an important energy producer despite falling oil production. Within this context, oil’s importance will decrease while natural gas’ share will increase. Also, expect the President and his family to maintain their hold on power while the country remains ‘not free’ (see Freedom House).

By Vanand Meliksetian for Oilprice.com

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