Azerbaijan doubles oil products exports keeping EU market as priority Caliber.Az review

The war in Ukraine which has been lasting for almost a year and a half and the sanctions standoff between the West and Russia do not contribute to normalization of the European market facing a shortage of fuel and petroleum products. At the same time, the market of oil products is indirectly affected by the focus on limiting oil production conducted by the countries participating in the OPEC+ agreement.

In the emerging circumstances, in addition to increasing revenues from oil and gas exports, Azerbaijan gets additional bonuses at the expense of increasing supplies abroad of fuel and refined products. Thus, in January-May this year total exports of petroleum products almost doubled, while their deliveries to the EU market significantly increased.

Complex processes in the oil and gas market directly influence world trade in oil products and fuel. Growth of commercial reserves of liquid hydrocarbons in the USA, recession in the EU, as well as overloading of oil terminals in India, China, and some other countries of South-East Asia, where discount Russian oil was sold liberally since the beginning of the year, caused a decrease in demand for raw hydrocarbons. This resulted in high volatility of oil prices and, as a consequence, corresponding fluctuations in the fuel market and in other segments of oil refining.

To stabilise the oil market, at the meeting of the ministerial committee of OPEC+ countries in April this year, they adopted a decision on voluntary coordinated reduction of oil production by 1.66 million barrels per day (bpd) during the period from May to December 2023. And in early June in Vienna, cartel members, as well as representatives of other countries within the OPEC+ agreement, decided to reduce the level of oil production quotas for 2024 by another 1.4 million bpd.

The steps taken by OPEC+ have to a certain extent helped to strengthen stability and balance in the oil markets, but so far this effect is not fully in line with expectations - oil prices rose only slightly in the first half of June. Moreover, on Tuesday, June 20, the world oil prices were slightly down: the price of August futures of Brent fell to $75.94 per barrel, while that of North American WTI fell to $71.16.

The expert community forecasts an increase in oil prices only from the second half of this year, taking into account changes in demand in the US and EU markets. Another growth driver is China, which is one of the largest consumers and importers of oil. Investors' expectations jive closely with the economic recovery in the Celestial Empire. This prospect is evidenced by the decision made the day before by the People's Bank of China (for the first time since August 2022) to reduce the one-year loan prime rate to first-class borrowers (LPR, loan prime rate) to 3.55%. Thus, the Chinese financial regulator gave a signal to support the country's economy, which will inevitably affect the growth of demand for hydrocarbons.

So far, in the first half of this year, there is still high volatility in oil prices. However, despite this, the demand for petroleum products and fuel remains relatively high in several markets. We are talking in particular about the European Union which faced serious problems with supply and demand balance following the embargo on Russian petroleum products which came into force on February 5, 2023.

Until recently Russian oil products accounted for about 40% of the total consumption of oil products and about a quarter of the fuel market in Europe. For comparison: last year about 142 million tons of such products were delivered here. Having been deprived of Russian fuel and petroleum products, the EU countries are trying to make up for the shortage by purchasing them in India, the Persian Gulf countries, South America, and the United States, but given the too-long shipment distance and other overhead costs, importing these products is considerably more expensive.

One way or another, the demand for petroleum products in the energy-deficient European market is still high, which encourages many producing countries to increase supplies of fuel and other refined products to the EU. Azerbaijan has advantages from these global processes.

According to the State Customs Committee, in January-May this year the country exported over 479.451 thousand tons of oil products worth over $284.470 million. The value of oil products sent to foreign markets in the reporting period has almost doubled, and the volume has increased by 95.5%. Azerbaijan mainly exports diesel fuel, jet kerosene, pyrolysis resin, petroleum coke, and others. In particular, during the first third of the year, it exported 77.038 thousand tons of petroleum coke for $49.786 million to China only.

This is a very positive trend, since during the previous period the volume of exports and the nomenclature of domestic oil products sold abroad slightly decreased. In particular, last year there was an 18.8% decline in exports of oil products (a total of $527.3 million worth of processed products was exported to foreign markets), which mainly affected the production of naphtha, diesel fuel and lubricating oils, as well as furnace fuel oil, bitumen, and petroleum coke.

The reason for last year's decline in refining was purely technical, due to scheduled maintenance work conducted from April 4 to May 27 at the Baku Heydar Aliyev Oil Refinery (BHAOR). It also affected the activities of technologically interdependent petrochemical enterprises of Azərikimya, part of the State Oil Company of Azerbaijan (SOCAR).

It is noteworthy that this year the republic has noticeably increased the export of petroleum products to the European market as well, where mainly crude oil and gas are supplied. Thus, according to the statistics department of Eurostat last year the EU countries increased imports of petroleum products from Azerbaijan by 34.5% - up to about 17.6 thousand tons. And in 2023, these figures have increased several times, reaching only in January-April 34,061 tons, and there was a significant increase during the reporting period in monetary terms: the value of the supply amounted to 21.964 million euros.

So far the deliveries of oil products are carried out mainly to Greece, Cyprus, Bulgaria, the Netherlands and in insignificant amounts to other European countries. Of course, in comparison with oil and gas deliveries worth many billions of euros the export of Azerbaijani oil products looks insignificant, but what matters here is the general trend, the readiness of EU countries to purchase refined oil products from our country.

The recent negotiations between SOCAR and PKN Orlen (Poland) testify to the presence of such a demand. Besides oil export perspectives, potential opportunities for cooperation on oil products, and liquefied petroleum gas (LPG) deliveries were discussed during the negotiations.

Export markets for domestic oil products will expand further after SOCAR will start production of automotive gasoline under Euro-5 environmental standards at BHAOR facilities tentatively in the first quarter of 2024. Earlier SOCAR had planned to start production of Euro-5 gasoline during 2023, but modernization and reconstruction works are still underway at the refinery.

The large-scale modernization and reconstruction project recently implemented in recent years is close to completion: approximately at the turn of 2024-2025, SOCAR plans to complete major work on the refinery, as a result of which the annual capacity of the refinery will increase from 6.5 to 7.5 million tons and its service life will be extended until 2040.

Upon completion of the works, the refinery will be capable to process all Caspian region countries' oil grades and producing 2 million tons of motor gasoline a year instead of 1.2 million tons presently, 2.9 million tons of diesel fuel a year instead of 1.9 million tons presently, 1 million tons of jet fuel instead of 600 thousand tons presently, 390 thousand tons of petrochemicals instead of 112 thousand tons presently.

At the same time, improving the characteristics of the fuel produced in Azerbaijan will solve the problem of import substitution, ridding the country of the need to import high-octane varieties of gasoline and high-quality diesel fuel. Moreover, the modernization of BHAOR will contribute to the multiple expansion of the geography of Azerbaijan's fuel and petroleum product exports, including to the highly demanding European market.