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From Oil Export to Capital Export. Why Azerbaijan and Kazakhstan Invest Petrodollars in Overseas Projects

Baku and Astana continue to allocate financial resources, derived from the sale of raw materials abroad, into industry-relevant assets overseas, including refineries, petrochemical plants, and gas stations. The objectives of such activities are to integrate into the global fuel market, increase the profits of core state-owned companies, and create profitable assets abroad that can generate revenue for the state treasury even after the hydrocarbon resources of the mentioned countries are depleted.

However, Baku and Astana lack the financial resources for extensive international expansion, and the global market has shown little need or even excess for new competitors. Consequently, these investment processes are visibly slowing down.

Initially a Sprint, then Running in Place

Baku initiated its capital export by investing in Georgia, a neighboring country heavily dependent on Azerbaijan for energy. In 2007, the State Oil Company of the Azerbaijan Republic (SOCAR) acquired a Black Sea oil terminal in Kulevi from a Georgian businessman for $300 mln. This terminal has a transshipment capacity of 10 mln tons of oil and petroleum products annually. SOCAR planned to transship significant volumes of oil and petroleum products from Kazakhstan, Turkmenistan, and Azerbaijan through Kulevi. Shortly before this deal, in June 2006, Presidents Ilham Aliyev and Nursultan Nazarbayev signed the "Agreement on the Support and Promotion of Oil Transportation from the Republic of Kazakhstan through the Caspian Sea and the Territory of the Azerbaijan Republic to International Markets via the Baku-Tbilisi-Ceyhan (BTC) System."

The Kazakhstan Caspian Transportation System (KCTS) was expected to transport up to 56 mln tons of oil annually, with a portion of these volumes, due to the BTC's capacity being maximized by Azerbaijani crude, directed to global markets via the Kulevi terminal. The Azerbaijan State Railway has the capacity to transport up to 20 mln tons of oil and petroleum products annually to Georgia in tankers, thereby ensuring 100% utilization of the terminal.

However, the anticipated "big Kazakhstan oil" (over 100 mln tons per year) did not materialize. Moreover, the foreign participants in the three major Kazakhstan Petroleum Projects – Karachaganak, Tengiz, and Kashagan – opted for the Caspian Pipeline Consortium as their export route. This pipeline, with a designed capacity of 67 mln tons annually, passes through the territories of Kazakhstan and Russia to the Black Sea port of Novorossiysk.

As a result, despite SOCAR's investment of over $200 mln in the modernization of the Kulevi terminal, including the construction of 27 reservoirs and 6 docks, its utilization has not reached full capacity. In the 15 years since the facility began operating, it has only transshipped 30 mln tons of liquid hydrocarbons, averaging 2 mln tons per year, equivalent to 20% of the terminal's capacity. SOCAR projects that the transshipment volumes will double to 4 mln tons by 2024, though the sources of this increase remain unspecified.

The second evident investment direction for SOCAR in Georgia was the fuel market. The company invested in expanding its network of gas stations, reaching 115 by the beginning of 2023. The total investment in Georgia's economy (terminal plus gas stations) amounted to $1 bln (see Table 1).

However, SOCAR's most substantial investment was in the Turkish economy. In 2008, SOCAR acquired the Petkim petrochemical complex for $3.6 bln. In 2018, the Star refinery with an 11 mln ton oil capacity was commissioned, involving an investment of no less than $6.7 bln. This plant fulfills 25% of Turkey's fuel market needs. Additionally, SOCAR acquired capacities in the Izmir port, a fuel storage facility, and trading structures. As a result, SOCAR's total investment in Turkey exceeded $18 bln, according to the company's official statements (see Table 1).

Plans were also in place to establish a nationwide network of gas stations in Turkey, selling gasoline and diesel fuel produced at the Star refinery. However, in 2012, SOCAR was unable to purchase a network of 599 Turkish gas stations from Azerbaijan's strategic partner BP, and in 2020, an attempt to acquire stations from Austrian OMV also failed.

In 2008, SOCAR had ambitious plans to penetrate the Ukrainian fuel market. The state company aimed to establish a network of 1,000 gas stations by 2025 and secure a position in the bunkering market (in the Black Sea ports, on the Dnieper and Dniester rivers). Additionally, there were plans to lease capacities at at least one Ukrainian refinery to process Azerbaijani oil, with the resulting petroleum products to be sold at local gas stations.

However, these plans did not materialize: SOCAR's oil was not admitted to Ukrainian refineries, and the company's network in Ukraine remained modest (60 units). SOCAR does own four fuel storage facilities and two bunkering vessels (the "Baku-1" operated near Kiev on the Dnieper, and the "Ganja" bunkered in Odessa). Instead of the anticipated billions of dollars in investments in the Ukrainian fuel market, SOCAR's investment barely exceeded $300 mln.

It's also worth noting that Azerbaijan did not secure the lease of Ukrainian chernozem for wheat cultivation, as Ukraine's arable lands are a prerogative of 'selected' companies, particularly from the USA.

In other European countries, SOCAR's investment successes are also modest. The company has small networks of gas stations in Romania (74 stations, $78 mln in investment), Austria (82 stations, over $100 mln), and Switzerland (170 stations, $378 mln). However, a significant return flow of dollars to Azerbaijan from the exported petrodollars has yet to be seen.

Table 1. SOCAR's Foreign Investments as of 2023, bln USD

Source: InfoTEK