Today, I will write about petroleum industry in Azerbaijan.

First, I would like to start with structural assumptions.

1. Number of sellers

There are some sellers of Azerbaijani oil, however, predominantly, the State Oil Company of
Azerbaijan Republic, British Petroleum, and Lukoil. Most of foreign companies were invited to
Azerbaijan in the year of 1995 through the “Contract of the Century”. There are substantial
barriers for entering to this industry.

2. Cost conditions

Costs are depended on how oil is extracted. Compared to the beginnings of 20th century, costs are
less now.

3. Buyers

There are many buyers of Azerbaijani oil. Mostly, it is sold to Turkey, Israel, and many
European countries, especially Italy and Germany. First three countries are Italy, Turkey, and
Israel. According to official statistics, 28.7 % of Azerbaijani oil exports go to Italy, 14.6 % to
Turkey, and 6.8 % to Israel.

4. Demand conditions

It is obvious that demand is so high and there are not many close substitutes. Since quality of oil
is well known to the world since the beginning of 20th century and its role in WW2 war, this is
evident that it does not have many substitutes.

Secondly, behavioral assumptions.

5. Objective function

There are many objectives. First and most obvious is Azerbaijan’s earnings from its oil industry.
Also, from political perspective, Azerbaijani oil is so important for European countries. Already,
some European countries are benefitting from this oil, which decreases their oil dependency on
Russia.

6. Strategic Variable

Quantity – approximately 873000 barrels of oil produced per day in country by SOCAR, BP,
Lukoil and by other companies in the year of 2013.

7. Expectation of rivals’ reactions

Companies that I mentioned before, importantly the State Oil Company of Azerbaijan Republic
(SOCAR), are so big in Azerbaijan. So, their goods have no substitutes by any other company in
the country.

Finally, although there are some monopolistic aspects in the oil industry of Azerbaijan, true
answer would be oligopoly, since SOCAR is not only company that operates in Azerbaijan. It is
a mistake to underestimate the power of Britain’s BP, Russia’s Lukoil, or some other big oil
companies.