(MENAFN- Trend News Agency) BAKU, Azerbaijan, January 5. The revenues of
the State Oil Fund of Azerbaijan (SOFAZ) on the Shah Deniz project
reached the highest level in history in 2022-2023, said the CEO of
SOFAZ Israfil Mammadov during an exclusive interview with Trend .
"As it is known, the majority of SOFAZ's oil and gas earnings
come from the sale of the state's part of valuable hydrocarbons
within the scope of the Azeri-Chirag-Gunashli (ACG) and Shah Deniz
gas fields. The key factors impacting the dynamics of revenue
formation are, of course, field production performance and global
energy prices," Mammadov said.
According to Mammadov, despite the natural tendency of
production decline observed at ACG in recent years, high world
market oil prices of $101 per barrel in 2022 and $83 per barrel in
2023 have created the basis for achieving a higher level of
revenues under the project compared to budget forecasts.
"Because of the predicted $7 billion in income from the ACG
project, which accounts for around 76 percent of total oil and gas
sales, 2023 is expected to be the second most profitable year in
the post-pandemic period. ACG revenues have been significantly
impacted by $450 million in annual bonus payments received by the
Fund under the Production Sharing Agreement, which was renewed in
2018. Meanwhile, the successful completion of the Shah Deniz II
project, as well as the delivery of Azerbaijani gas to Europe via
the Southern Gas Corridor beginning in 2021, has resulted in a
large increase in SOFAZ's gas income," he said.
Amid the developments over the past two years, gas prices in
Europe have reached record highs. Additionally, the state share has
increased in light of the rising dynamics of gas production. As a
result, the Fund's revenues from Shah Deniz amounted to $1.4
billion and $1.3 billion in 2022 and 2023, respectively, which is
the highest in the history of the project," SOFAZ executive
director added.
As for the sources of the Fund's resources, Mammadov emphasized
that according to the SOFAZ Charter (paragraph 3), the Fund's
revenues are formed at the expense of oil and gas revenues, which
are attributable to the share of the Azerbaijani state by
production sharing agreements, revenues received from the Fund's
investment activities, and other revenues and receipts by the
legislation.
"For the first nine months of 2023, the total revenues of the
fund's budget amounted to $8.8 billion. In the structure of budget
revenues, income from the sale of profitable oil and gas amounted
to $6.7 billion, bonus payments amounted to $471 million, and
income from the management of the Fund's assets amounted to $1.6
billion.
According to projections for 2024, it is expected that $5.3
billion, or 75 percent, of the Fund's budget revenues will come
from the implementation of oil and gas agreements, including $4.8
billion from the sale of profitable oil and gas, $451.3 million
from bonuses, $14.2 million from transit revenues, $2.1 million
from license area fees, and $1.8 billion from revenues related to
the management of the Fund's resources," he said.
Speaking about the priority directions for spending the Fund's
resources, the Executive Director emphasized that the use of SOFAZ
resources is carried out by the main directions (program) approved
within the Fund's budget for each year in line with the orders of
the President of Azerbaijan, Ilham Aliev. The main directions for
expenditures of the Fund's resources for the current and future
years are the expenses related to the upper limit of transfer to
the state budget, Mammadov added.
"The Fund's expenses for transfer to the state budget for 2023
and 2024 are approved at the rate of 11.7 billion manat ($6.8
billion) and 12.8 billion manat ($7.5 billion), respectively. At
the same time, two educational programs are financed by the Fund,
and it is further planned to continue financing these programs.
The fund was allocated 38.5 million manat ($22.6 million) in
2023 to finance the "State program on increasing the international
competitiveness of the higher education system in the Republic of
Azerbaijan for 2019–2023." And 33.5 million manat ($19.7 million)
will be allocated in 2024. This program finances the implementation
of double diploma programs signed between prestigious foreign
higher education institutions and local higher education
institutions, as well as the doctoral studies of Azerbaijani
citizens abroad.
At the same time, 36.7 million manat ($21.58 million) has been
allocated to finance the "State Program for the Education of Youth
at Prestigious Universities of Foreign Countries for 2022-2026" in
2023, and 47.5 million manat ($27.9 million) is planned to be
allocated in 2024. Within the framework of this program, the costs
of education for 400 people will be financed, including 320 people
for master's studies and 80 people for bachelor's studies in
foreign universities," Mammadov said.
As for the Fund's plans to acquire a stake in any company or
project outside the country shortly, the executive director noted
that the Fund, in addition to transfers to the state budget within
the framework of budget expenditures, also finances various
strategically important socio-economic projects.
"The mentioned projects are determined under the main directions
and investment policy of using the Fund's resources within the
framework of the budget decree of the President of the Republic of
Azerbaijan. According to the document approved for 2024, no new
projects are planned to be financed. SOFAZ invests within the
framework of the investment policy in financial assets such as debt
and money markets, equities, real estate, and private equity by
using the benchmarks provided for each financial asset, taking into
account current market conditions," Mammadov said.
SOFAZ does not intend to finance any similar projects outside
the country beyond this framework. At the same time, the Fund will
continue to invest in the above-mentioned financial assets under
the Investment Policy and Regulations," he added.
Furthermore, Mammadov noted that the composition of the currency
basket of the fund's investment portfolio is determined based on
the investment policy.
"In this context, I would like to state that 65 percent of
SOFAZ's investment portfolio can be invested in financial assets
denominated in US dollars, 20 percent in euros, and 5 percent in
British pounds. The remaining 10 percent of the aforementioned
portfolio may be invested in financial assets denominated in other
currencies. According to the investment policy approved at the end
of 2023, there is no change in the currency allocation of the
investment portfolio for 2024," he said.
The fund's income is expected to be about $12.7 billion, or 21.5
billion manat by the end of 2023, he said.
"About $9 billion (71 percent) of these revenues are expected to
come from revenues related to oil and gas agreements and $3.7
billion (29 percent) from investment activities. According to the
decree of the President of Azerbaijan on the SOFAZ budget for 2024,
the budget revenues for 2024 amounted to $7.1 billion, or 12.1
billion manat. Regarding investment return expectations, the fund
is known to realize a strategic allocation based on a conservative
risk appetite, having assumed the main objectives derived from its
mission and portfolio management goals. SOFAZ formulates basic
assumptions for strategic allocation of funds based on forecasts
and advice from leading and influential organizations, and on this
basis, the return and risk performance of financial assets are
determined by the current parameters of market conditions," the CEO
said.
He emphasized that the optimal asset type weights and target
returns (benchmarks) are determined through internal models, and
the results are reflected in the investment policy.
"The return levels of the said optimal portfolio are calculated
based on internal models and return forecasts of various investment
banks, taking into account how the underlying characteristics of
financial assets will change over the long term. I note that the
projected returns on financial assets usually cover the medium to
long term and are taken on an annual basis as an average annualized
return. The public will be informed of the profitability figures at
the end of 2023, when the annual results will be announced," he
said.
Referring to the tensions seen in the Middle East and their
impact on the oil market, the SOFAZ CEO noted that the oil price is
formed based on the principles of supply and demand, which are the
foundation of a market economy.
"In addition to such fundamental factors, the impact of
geopolitical events can create an economic shock in the market,
which can result in significant changes in the oil price. In this
context, conflicts and other processes occurring at the
geopolitical level and the oil production decisions at the global
level agreed upon under their influence play an important role in
oil price forecasting. Note that the benchmark oil price used to
generate Fund revenues for 2024 is $60 per barrel, and an increase
in this price will affect the budget against a background of
unchanged expenditures. As a result, oil revenues will exceed
forecasts, and this will have a positive impact on the SOFAZ budget
balance," the CEO said.
Mammadov added that the Fund also carries out partnership
activities covering various spheres with several international
organizations.
"Therefore, experts from institutions such as the International
Monetary Fund and the World Bank regularly visit the SOFAZ office.
They exchange opinions on the dynamics of growth of the Fund's
foreign exchange reserves, the place and position of the Fund in
the development of the country's financial system and macroeconomic
regulation policy, as well as the possibilities of applying modern
financial mechanisms and SOFAZ's investment policy," Mammadov
said.
"It should be noted that the direct cooperation between SOFAZ
and the World Bank has lasted for more than 15 years, and within
this framework, seminars and trainings on various topics were
organized not only on the above-mentioned issues but also in the
direction of developing the knowledge and skills of the Fund's
staff. The mentioned trainings mainly covered important topics such
as portfolio management and investment policy, fixed income
securities management, as well as equity investment and risk
management," he added.
The CEO emphasized that the Fund's international partnership is
not limited to the above institutions.
"In the financial markets, SOFAZ has close cooperation with more
than 50 counterparties, 6 custodian banks, 7 foreign managers, as
well as the world's most advanced and influential fund managers in
real estate, private equity, infrastructure, and others in the
field of alternative investments. It is planned to further develop
this partnership in these areas," he emphasized.
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