OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Azerbaijan

Energy resources and market structure

Azerbaijan is a country with rich deposits of oil and natural gas and has, over the last decade, become a major energy producer. As of 2019, the total proven oil reserves of oil and natural gas amount to 7 000 million barrels and 2.6 trillion m³, respectively. Oil production stood at 36.5 ktoe in 2021, roughly 31% less than the peak of 52.8 ktoe in 2010.

Azerbaijan’s energy sector is dominated by state-owned energy companies and international oil and gas companies. British Petroleum (BP), Chevron, ExxonMobil, Equinor, Petronas, Total, Lukoil and Mór all have stakes in upstream oil and gas production through production sharing agreements (PSAs), with the State-Owned Company of the Azerbaijan Republic (SOCAR), representing the government. Similarly, the same international companies also hold shares in export infrastructure, such as the Baku-Tbilisi-Ceyhan oil pipeline (BTC), which runs through Georgia to Turkey towards the Mediterranean Sea, and the Southern Gas Corridor under the Host Government Agreements (HGAs). An older and relatively low-capacity Baku-Supsa oil pipeline cuts through Georgia and the Baku-Novorossiysk oil pipeline through the Russian Federation, both of which terminate at the Black Sea coast. The Trans-Adriatic Pipeline (TAP), which transports Azerbaijani natural gas to Europe, was put into operation on 15 November 2020. Commercial natural gas transportation started on 31 December 2020. The TAP is the European branch of the Southern Gas Corridor, a junction project to supply 10 billion cubic metres (this capacity could be increased to 20 billion cubic metres per year) of gas per year from Azerbaijan to European markets.

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

In the mid- and downstream sector, SOCAR operates the two oil refineries in Baku inherited from the Soviet era (Heydar Aliyev Baku Refinery and Azerneftyagh Oil Refinery) and occupies a government-instituted monopoly. In addition, SOCAR is a majority owner of PETkIM, a major petrochemical company based in Türkiye, which has begun construction on a new refinery around Izmir. SOCAR owns petrol stations under the SOCAR brand in Azerbaijan, Georgia, Romania, Switzerland and Ukraine.

Gas transmission, distribution and sales are organised through SOCAR’s subsidiary AzeriGas, which is financially unbundled from SOCAR as part of a 2002 reform to isolate the cost of suppressed prices.

The electricity market is a closed market, operated mainly by the state-owned company, AzerEnerji JSC. AzerEnerji operates the country’s thermal and hydropower plants, with the exception of several small hydropower plants that have been privatised. Until February 2015, AzerEnerji operated as a bundled monopoly, managing electricity production, transmission, distribution and sales. However, on 10 February 2015, Bakielektrikshabaka Open Joint Stock Company, the regional distribution company established to supply electricity to the capital city of Baku, was renamed AzerIshig OJSC and made the nationwide electricity distribution company.

District heating is limited, provided mainly to Baku and the surrounding areas, where heat is supplied by the state-owned monopoly, Azeristiliktechizat.

The Coronavirus (COVID-19) pandemic since the beginning of 2020 and the resulting sharp fluctuations in world energy and stock markets stimulated the government of Azerbaijan to take measures to improve the efficiency of its state-owned enterprises. For this purpose, Azerbaijan Investment Holding (AIH) was established in August 2020. The purpose of the holding is to manage the state-owned companies and enterprises as well as the state-owned companies on the basis of common principles, to improve their activities, including increasing the transparency and economic efficiency of their investment programmes, increasing competitiveness, improving their financial health and sustainability.

The following companies operating in the energy sector are expected to be managed by the AIH: State Oil Company of the Republic of Azerbaijan, “Azerenergy” Open Joint Stock Company, “Azerishig” Open Joint Stock Company, “Azeristiliktechizat” Open Joint Stock Company

Energy prices and taxes

Energy tariffs are regulated by a national Tariff (Price) Council with the aim of ‘taking social consideration of the population into account’. The definitive criteria on how tariffs are set are currently unclear, with several proposals for tariff increases in recent years cancelled following interventions from the Azerbaijani Presidency.

According to the Ministry of Energy, in 2020, methodologies for determining electricity and heat supply tariffs were developed. In addition, the methodology for determining natural gas tariffs has already been prepared and submitted for consideration of the Cabinet of Ministers.

Figure 2. Total tax rebates and support for fossil fuels in Azerbaijan

 

 

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Recent developments and trends in support

The producer and consumer subsidy estimates for Azerbaijan show stable transfers to the country’s energy utility companies and commensurate amounts of support to refugees and internally displaced persons. PSAs and HGAs are enshrouded in uncertainty as terms are largely out of the public domain, complicating an objective assessment of possible upstream subsidies in Azerbaijan.

The fiscal cost of support measures for fossil fuels in Azerbaijan was estimated at AZN 295.96 million in 2022 (Table 1). Six per cent (6%) was directed at end user beneficiaries, as opposed to 94% directed to firms. Support was mainly given out in the form of direct transfers (AZN 295.96 million) accounting for 100% of the total fiscal cost of support measures.

The fiscal cost of support measures for fossil fuels has increased by 276378% since 2017. Since last year, direct transfers have increased by 10%, from AZN 270.55 million to AZN 295.96 million. All growth rate percentages above are expressed in terms of nominal national currency amounts.

Table 1. Fiscal cost of support measures for fossil fuels (in millions of national currency)

	2017	2018	2019	2020	2021	2022
Tax expenditures	0.000	0.000	0.000	0.000	0.000	0.000
Direct transfers	0.107	1525.347	1335.580	257.212	270.549	295.959
Total	0.107	1525.347	1335.580	257.212	270.549	295.959

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.

Table 2. Selected support measures for fossil fuels with a large fiscal cost (in millions of national currency)

Measures associated with large fiscal cost in 2022		2022	2017	Variation since 2017
Direct transfers
	State budget transfer to Azerenerji to cover accumulated losses and debts	184.397	0.107	184.290
	State budget transfers to SOCAR to cover losses of AzerGas	51.500	Started in 2018	-911.7
	State budget transfers to Azeristilik to cover deficits due to providing services below costs	41.395	Started in 2018	8.395

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 3. Description of selected support measures for fossil fuels

State budget transfer to Azerenerji to cover accumulated losses and debts	AzerEnerji is state-owned and the largest electric power producer in the country. Since the collapse of the Soviet Union, several reforms have been conducted to ensure effective budget support for the electricity sector. The mass installation of electric bill counters (electric meters) has reduced the use of electricity as residents have become more aware of their electricity consumption. The goal was to increase efficiency and reduce spending in this sector. However, as a result of nonpayment for its services and non-cost reflective pricing, AzerEnerji accumulates debts and cannot always respect its tax payment obligations to the state budget. AzerEnerji’s financial losses are covered (subsidised) by the state budget. The company received subsidies both to cover running deficits and as capital injections to cover accumulated losses and debt. Subsidies to AzerEnerji are confirmed by the company’s consolidated financial reports for the years 2015, 2016, 2017, 2018, 2020. For preceding years, estimates rely on public domain media reports.
State budget transfers to SOCAR to cover losses of AzerGas	State Oil Company of Azerbaijani Republic - SOCAR - is state-owned and the leading oil and gas extractor in the country. Budget transfers to SOCAR are primarily directed at covering the losses generated by its subsidiary AzerGas, the national gas utility. Because of non-payment for its services, AzerGas accumulates debts and cannot always respect its tax payment obligations to the state budget. AzeriGas financial losses are covered (subsidised) by the state budget and tax obligations compensated.
State budget transfers to Azeristilik to cover deficits due to providing services below costs	AzerIstilik is the state-owned district-heating company, providing district heating during winter months for small part of the population living in Baku. The company received state subsidies to cover its deficits from providing services below costs. The share of this subsidy in the overall energy subsidy landscape is insignificant. Nonetheless, media reports, indicate debts generated by AzerIstilik to AzeriGas, have created problems with the functioning of both companies.

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.

The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.