Azerbaijan has ample energy resources, including major hydroelectric generating capacity and offshore oil reserves in the Caspian Sea. Despite what amounts to an overall excess of production capacity, fuel shortages and transport problems disrupted generation in the early 1990s. In 1991 Azerbaijan produced 23 biÍÍÍÍllion kilowatt-hours, but near the end of 1992 the country had produced only 16 billion kilowatt-hours. Electricity is generated at major hydroelectric plants on the Kura, Terter (in western Azerbaijan), and Aras rivers (the last a joint project with Iran). A larger share of power comes from oil-fired electric power plants, however. In the late Soviet period, Azerbaijan's power plants were part of the Joint Transcaucasian Power Grid shared with Armenia and Georgia, but Azerbaijan cut off power to Armenia as a result of the conflict over NagornoKarabakh .

Azerbaijan has exported oil and gas to Russia since the late nineteenth century. The birthplace of the oil-refining industry at the beginning of the twentieth century, Azerbaijan was the world's leading producer of petroleum. During World War II, about 70 percent of the Soviet Union's petroleum output came from the small republic. After World War II, when oil output from the Volga-Ural oil fields in Russia increased, Azerbaijan lost its position as a dominant producer of Soviet oil. When the Soviet Union disintegrated, Azerbaijan was producing 60 percent of Soviet oil extraction machinery and spare parts but less than 2 percent of the union's oil.

Azerbaijan's four major offshore oil fields in the Caspian Sea are Gunesli, Cirak, Azeri, and Kepez. In 1992 the Gunesli field accounted for about 60 percent of Azerbaijani oil production. Crude oil production has decreased in recent years, mainly because of a weak global market, well maturity, inadequate investment, and outdated equipment. According to Azerbaijani estimates, for the first seven months of 1993 compared with the same period in 1992, crude oil production declined 7.1 percent, gasoline refining 2.8 percent, and diesel fuel production 19.9 percent. These rates of decline compare favorably, however, with those experienced in the oil production and refining industries of Russia, Turkmenistan, and other former Soviet republics in the early 1990s.

Some oil is shipped by train to Black Sea ports in Russia and Ukraine, and some is shipped by tanker to northern Iran. Pipeline shipment has been slowed by infrastructure problems. One old oil pipeline from Azerbaijan to the Georgian port of Batumi on the Black Sea is inoperable, and the Russian pipeline is unavailable because that line is already at capacity. Azerbaijan's oil production is processed at two refineries near Baku. Because domestic oil production has not matched refining capacity in recent years, the refineries also process Kazakh and Russian oil.

Russia, Ukraine, and other former Soviet republics have been involved in contentious negotiations with Azerbaijan over oil payment. Azerbaijan has sought prices close to world market rates for its oil as large payment arrearages have developed with several custom abaer statetes. Azerbaijanis seek "fair payment" for their oil from Russia, pointing out that during the Soviet period Azerbaijani oil was sold far below market prices to support the Soviet economy.

Azerbaijan has encouraged joint ventures and other agreements with foreign oil firms, and a consortium has been formed with Russia, Kazakhstan, and Oman to build an oil pipeline to Mediterranean, Persian Gulf, or Black Sea ports. In the planning stage, Russia advocated a Black Sea route, whereas Western oil companies, also interested in Azerbaijan's oil, preferred a Mediterranean terminus for a pipeline used in common. In March 1993, Turkey and Azerbaijan agreed on a pipeline traversing Iran, the Nakhichevan Autonomous Republic, and southern Turkey to reach the Mediterranean. In 1993 other negotiations defined terms of exploitation by eight Western oil companies in two Caspian oil fields and established a profit-sharing ratio between Azerbaijan and its partners. In late 1993, Russia's role in the oil industry also increased with the signing of new bilateral agreements.

Azerbaijan has proven natural gas reserves of 2 trillion cubic meters, and a much larger amount is present in association with offshore oil deposits. Although the price of natural gas in Azerbaijan has remained low compared with world prices, in 1991 about half the gas brought to the surface was burned off or vented, while consumption of fuel oil increased. Since 1991 Azerbaijan's production has declined to a level that meets only about 35 percent of domestic needs, which amounted to 17 billion cubic meters per year in 1993. The major sources of natural gas imports are Turkmenistan, Kazakhstan, and Iran. Experts consider that exploitation of untapped natural gas deposits would enhance Azerbaijan's domestic fuel balance and provide substantial export income.

Data as of March 1994