TO REHABILITATE TRANSCASPIAN GAS PIPELINE IS POSSIBLE TODAY – MINISTER OF INDUSTRY AND ENERGY OF AZERBAIJAN, MR. NATIG ALIYEV

Caspian Energy (C.E.): Mr. Natig, for many years on the post of a President of the State Oil Company of the Republic of Azerbaijan you have been dealing with implementation of oil-and-gas strategy elaborated by the national leader of Azerbaijan Heydar Aliyev. Will you keep on developing this direction now being on the post of a Minister of Industry and Energy of Azerbaijan?

Natig Aliyev: Indeed I have headed the State Oil Company of AR over 12 years. My colleagues and I have been working on implementation of the oil-and-gas strategy elaborated by Heydar Aliyev, the national leader of Azerbaijan; we have always had a very clear and precise program. First of all this program was based on studying the potential of Azerbaijan, its energy resources, perspective areas appropriate for exploring and developing. Then considering the results of these studies we dealt with attraction of foreign investments. The work was difficult as it was quite new for us. But through cooperation with such largest world-famous companies as Amoco, BP, Statoil, Lukoil we managed to create a team capable of settling technical matters, I mean matters related to exploring, development, commercial order, juridical relations not only between the state and investors but also SOCAR with those companies that entered the consortium.

I think that period was the most interesting. Having concluded the first contract covering geopolitical, oil and political factors we managed in a short space of time to expand geography of states involved in developing of the oil industry of the republic on the one hand and involve other large companies having wide experience in the deep-water sector of the world ocean on the other hand. And as you remember at first the special emphasis was laid on the USA, Great Britain, Norway, Turkey, Russia, later we involved Italy, France, and Japan. Expansion of the geography of states strengthened the image of Azerbaijan as a reliable partner. The oil strategy justified itself as it is quite successful now. At present everybody recognizes this. Without implementation of the oil-and-gas strategy of Heydar Aliyev Azerbaijan could not have been as successful as it is now.

That is why within all these years we have signed 26 PSA (production sharing agreements). I shall not speak of results as it is a long talk. I just want to stress that for Jan. 1, 2006 there were 1 billion 374 million USD accumulated in the National Fund against 0 USD in 1993 in spite of the fact that the Fund had outlays. In 2006 we expect to gain in average 1,5 billion USD (plus/minus 500 million USD) depending on prices at the oil market.

C.E.: Some experts claim profits could have been higher …

Natig Aliyev: I agree with you, profits could have been higher and within the limits of contracts.

In 1994 capital investments were planned on a lower level, that time they were estimated as 8-9 billion USD. Actually the investments in only Azeri, Chirag and deep-water area of Guneshli (ACG) made approximately 20 billion USD. Quite possible the companies to some extent purposely set outlays too high …

On the other hand, it is impossible to consider everything, within 10 years the market, its structure and the world conjuncture change, and this is one of reasons. At the same time there is another factor that positively influenced the project; of course this is the price on oil. If in 1998 the price on oil went down to 10 USD per barrel, today this indicator makes as minimum 50 USD according to the most pessimistic forecasts.

Of course we have "pluses" and "minuses", but the amount of "pluses" is much higher. Let us take just resources. If earlier we spoke of 511 million tons of recoverable reserves at ACG deposit, at present the supplementary exploration proved presence of such reserves in the volume of about 1 billion tons. Many factors will change in the course of time. I hope that Azeri, Chirag and Guneshli will give lots of new pleasant surprises. Besides, now the associated gas that we gratis receive from the contract area already plays a significant role in satisfying the needs of the republic.

C.E.: By the way, now we purchase gas from Russia as before…

Natig Aliyev: It is a specific question related to energy security of the republic. Today the countries that care of their energy security have diversified sources of energy supply. Today some states sell something, others buy something and resell something else, some states buy gas for domestic consumption is it meets commercial requirements of transactions. Today we import gas from Russia within the limits of an effective commercial bargain. 4,5 billion cubic metres of purchased gas arrive at the power stations. Thus we save certain amount of black oil the price of which is much higher than that of gas. Effectiveness of this transaction is evident.

C.E.: Does not SOCAR overpay while transiting oil through Baku-Novorossiysk pipeline, plus light oil of Azerbaijan mixes with heavy sorts extracted in Siberia and Ural?

Natig Aliyev: I do not think that we overpay. Transiting of 1 ton of oil costs 15,67 USD and includes all assessments to the federal and local bodies, port charges. If to compare the cost of the same service rendered by Transneft to Russian companies, the intergovernmental agreement signed between Azerbaijan and Russia in 1996 is very profitable for us. That is why within the last 3-4 years the Russian side has been striving to change volumes of piped oil and conditions of the agreement at the sessions of the Azerbaijan-Russian intergovernmental commission. This agreement has an intergovernmental status. Transneft intends to make it commercial which implies varying tariff of transit. Of course it is unprofitable for us. That is why when the Russian side brings up a question of changing rules, reached agreements, we have a counter-question, whether we should pump the oil through Novorossiysk?

As for oil quality, you watch the oil quotations, Urals oil is always sold on lowered rates that make 3-4 USD compared to high-quality sorts. On the other hand for a long time Baku-Novorossiysk has been the only route through which Azerbaijan could export crude oil to the world markets. As Baku-Supsa is completely filled with oil of AIOC (operator on development of ACG contract area), the pipeline operates at full-load.

C.E.: But in spite of expedience Baku-Novorossiysk is not filled completely...

Natig Aliyev: Through Baku-Novorossiysk we pipe as much oil as necessary. The rest oil covers those minimal capacities of petroleum refineries which are necessary to satisfy the needs of the country in oil products. We should take into consideration the needs of our republic in aviation gasoline, diesel fuel etc. That is why I consider this route profitable for us; we should use it in a flexible way depending on prices at the world market and geopolitical situation. In addition we do not want to cease our economic relations with Russia in such areas as oil transportation, import of gas, purchase of energy, where we work in a parallel regime. All these are the components of our energy security.

C.E.: Mr. Natig, do you have new commercial offers from Russian companies, for example from Gazprom?

Natig Aliyev: It does not depend upon SOCAR; it depends upon a portfolio of offers that we have. Unfortunately we do not still have offers from Gazprom.

C.E.: Does SOCAR have a portfolio of offers today?

Natig Aliyev: Yes, SOCAR has a quite solid portfolio. We have business offers from Japanese companies, many business offers from Chinese companies, Turkish company, BP which are being viewed today. Last year we got only one offer from Lukoil with regard to fields (Karabakh, Dan Ulduzu, Ashrafi located in the north area of the Absheron peninsula) already operated by Lukoil. Offers should be received from an investing company; in this case we start working. If a company has excessive demands or sets too high standards of effectiveness or profitability considering definite parameters (reserves, capital investment), we conclude a memorandum for a period of 3-6 months depending upon complexity of an object. Then everything depends on talks. I consider the fields Karabakh, Dan Ulduzu and Ashrafi appropriate for developing. If in 1995 Pennzoil categorically refused to develop these fields, now considering present price conditions works at these fields are expedient.

C.E.: It means that you forecast return of companies to other structures such as Lenkoran Deniz, Kurdashi and others?

Natig Aliyev: Of course, it is quite possible. The current world price conjuncture when upward jump of prices can be expected any time will make companies revise the previous results of exploring. As for the results of exploring in Azerbaijan, they are based on rather poor information obtained from the results of drilling of one hole. At the same time, the companies did not want to risk and invest in exploring because of existence of fields with large easily extracted resources. Under existing conditions when prices on hydrocarbons climb up the companies will have to reconsider their exploration portfolio and some of them can come back…

The oil-and-gas industry is well-established today; we have 26 PSAs. I think all this is enough to develop our gas-and-oil producing industry according to the world standards.

This enables opportunity to gain large revenue. But I cannot unambiguously say whether we will do it ourselves or attract foreign investments. Increasing of a number of areas given in exploration does not guarantee quality and profitability. Today we are going to explore new structures with the assistance of foreign companies; I think we have to treat this with caution. Why…

In 1994 Azerbaijan had nothing and was experiencing economic and informational blockade. Due to lack of technical level, quality and finances that time (1993, 1994, 1995) Azerbaijan was not able to explore such amount of fields which are being developed now with the assistance of foreign companies. At the same time resting upon finances, technology and equipment of investors Azerbaijan removed all financial risk to the shoulders of foreign companies. It will be enough to say that over 1 billion USD have been spent by foreign companies on prospecting work at the fields which were given back then.

C.E.: Geologists of SOCAR certainly have reserves that can be developed with the assistance of the State Oil Fund of AR?

Natig Aliyev: The point is that geologists know who is who and what is what, which fields are to a greater or lesser extent perspective. When we evaluate a deposit, of course we use definite criteria which give us necessary information, whether this field is effective by 70%, 50% or 90%. Chances to discover beds change depending upon these or that features of a structure. Nearness to already discovered deposits, prospecting work of deep-hole drilling and other factors define profitability of a field. But still there is risk which is called geological risk. That is why if you invest gains of the National Fund in prospecting you can spend all its revenue…

These gains must be used on oil industry rather than on prospecting. This is large risk.

I think that the gains of the National Fund should be directed to the oil fields where all parameters are known.

C.E.: Would you give an example?

Natig Aliyev: These are all onshore deposits, which are being developed now. We lay down the following conditions: if a foreign oil company within 1 or 3 years (depending on the reached agreement) increases production by 2,5 times against the current volume, SOCAR starts investing itself, whether using credits or own resources. It is necessary to study conditions of credits. We are very often criticized because we deposit our money under 3-5 % interest rates, and draw credits under 9% annual interest rates etc. But each transaction depends upon many factors. That is why we carefully approach to the use of Oil Fund’s means. It is inexpedient to use revenues of the Oil Fund on risky projects.

C.E.: What reliable projects are there in the production, for instance petrochemical?

Natig Aliyev: A reliable project is a deposit where hydrocarbons are already being extracted. You know, in order to start using revenues of the Oil Fund it is necessary to accumulate critical mass of this money. For example, in the nineties Norway accumulated over 30 billion USD at the expense of its oil revenues. Every year profits from these funds comprised 5-6 billion USD. Now the revenue of the Oil Fund of Norway exceeded 100 billion USD. It means that the Fund has certain critical mass of funds that can be used for investing. Let us imagine that we take money from the Oil Fund and invest in the petrochemical industry, begin to reconstruct it and use new technologies... Outlays on organization of good production process at each plant will be more than 10, 20 or 30 million USD. Projects related to the petrochemical production require several hundred million dollars. In these branches we should apply wide experience in the sphere of upstream oil industry. We should create favourable conditions (as in case of PSA) in order to attract foreign companies. That time PSA has been introduced virtually owing to efforts of Heydar Aliyev.

- Why did we initial all agreements at the parliament at that time?..

- Because it were demands of the times.

- Why do we say that they will be out of production import duty, and different taxes?

- Let us imagine that there are $10 billion capital investment only on "ACG", 65-70% of that, or maybe more – is the spending on import production. Let’s suppose that they might have imported equipment, machinery, derricks and paid 15% more the government for the import…

- We have been able to make the process irreversible for 12 years, but the budget will change by 5-10% in one or another direction, no one is going to turn the works back. In the first half of the year Baku-Tbilisi-Ceyhan will be put into operation, South Caucasus gas pipeline is built up practically, Shah-Deniz is being worked up…

- So the main task for Azerbaijan today is to develop oil sector, as we’ve told already. Otherwise if we don’t improve all industry, the most part of the population will change into exterior observers, and will wait for the oil comings, so as to be apportioned with welfare through the budget. It will make big inflation, "Holland syndrome", "Spanish syndrome" and so on.

- On the other hand, I don’t agree with those who say that the resources will exhaust… - Of course, if the resources exhaust, it is collapse, but I don’t think that they will exhaust. If the resources might exhaust, then we might have not extracted oil in Azerbaijan for 150 years. If before last century Azerbaijan had two oilfields on land intended for 15 years exploitation, then these are new open oilfields on land and later on the sea. We used to extract oil at a depth of 20-40 meters in the sixties, then from the wells at the depth of maximum 4500 meters, now - 7500-8000 meters. So can never say that the resources will exhaust. At present we know about the resources of which we are aware today. We are provided for the resources in the republic on current oil production for 60 years, but it doesn’t mean that there will be no new resources in 5-10 years.

C.E.: How is the construction of Baku-Tbilisi-Erzurum going on, what are the perspectives of engaging new governments, for example Kazakhstan,in the project?

Natig Aliev: - We have set a task to take "Shah Deniz" and "Azeri" gas to the border with Georgia by September. We must deliver gas to the border of Turkey and Georgia. We are going to fulfil the task, as the construction on "Shah Deniz" is going on in compliance with the schedule. I think that Baku-Tbilisi-Erzurum will be built up on term. The platform TPG-500 will be mounted on "Shah Deniz" in May-June, the platform itself will be set up and the drilled wells will be landed on the deck of the platform in June-July, then the gas pipeline will be filled up. We don’t see any particular problems, since even if Turkey won’t be able to receive the gas, I think, Azerbaijan and Georgia will use the gas with pleasure.

Azerbaijan’s need for gas grows from year to year, so if we use "Shah Deniz" gas for ourselves in compliance with the present agreement on market price, we can reject Russian gas completely.

C.E.: Do you mean that the price will be below Azerbaijan pays for the imported gas?

Natig Aliyev: - You know that we purchase Russian gas at the price of $110 thousand cub.m., the price will climb up further. And "Shan Deniz" gas will be cheaper for us first of all, on the other hand, our economy will be reinvested by using privileges of governmental share plus SOCAR’s share. It is profitable for us to develop extraction, to move economy on "Shah Deniz gas", provide Georgia, Turkey, if it is profitable for us. So, I think, the arrangement with Russia on gas will turn inexpedient commercially for us at some moment.

- As regards Kazakhstan gas , I’ve heard many ideas for the last 12 years, some people told that we would go to the north, some people - to the south, to the west and etc. But we have implemented the project which the reality claims today. For example, Kazakhstan went to China thus demonstrating that they diversified energy resources delivery to world market. Kazakhstan doesn’t want to get caught in an endless loop in Russian direction supposedly, they have turned to us with the project Actau-Baku. Though Kazakhstan calls Actau-Baku a priority-driven project, but they are negotiating about exporting energy resources to Iran at the same time. Which direction will be the first depends on geo-political situation, as well. But when we are speaking about gas, it is very hard to deliver it first of all, and what scope of gas do we speak about?

- Georgia declares that he has agreed with Kazakhstan about gas delivery, and Georgia doesn’t consume more that 3 billion cub.m. a year. Half of the scope he will get from Russia, a little from "Shan Deniz" – from 500 million till 1 billion, and the rest from Iran, quite a little remains, and is Kazakhstan going to lay Trans-Caspian gas pipeline for this sake? I don’t believe in it.

If Kazakhstan declares that bring the extraction to 100 billion cub.m., if pessimistically – 50 billion. If Kazakhstan wants to export 30 billion cub.m. out of these 50 not to Azerbaijan and Georgia, but to Ukraine, Eastern Europe, to Italy via Turkey. That is another matter – the project is provided by gas resources, but there aren’t any gas resources as yet, no one will invest for transportation.

- Why constructing Byrgas-Alexandrupolice oil-pipeline has been talked about since 1993 and only today the parties are thinking about it really and engaged in it seriously, as the conditions have matured today.

- And why we began constructing Baku-Tbilisi-Ceyhan whan there are two pipelines already, because we understood the importance of taking oil to world markets, we knew that as soon as full-scale exploitation of "ACG" starts, neither Baku-Supsa, nor Baku-Novorossiysk will satisfy transport requirements of the producer, Azerbaijan and other contractors in this case.

So, if Kazakhstan makes corresponding proposals, we will work on creating conditions, provide a corridor, establish acceptable conditions for investments ad do our best for transporting Kazakhstan gas, but not more. Really, I think, it is the matter of future.

C.E.: How do you think about future Trans-Baltic North-European Gas-pipeline (NEG) from the point of its competition with South Caucasus transport corridor Baku-Tbilisi-Erzurum further to Europe?

Natig Aliyev: - First of all, North-European gas-pipeline is far from us, second – it will be constructed for Russia to diversify its export direction to Europe, third – Russian export to Europe is 150 billion, 80% of them are transported via Ukraine, NEG is intended for 35 billion cub.m., and the rest on other routes. NEG demonstrates that Russia can be flexible in providing gas delivery to Europe on different directions. For example, the well-known incident between Russia and Ukraine, in other words it demonstrates that "we are ready to stand one more year or more than that, but we can manage without You". The same Ukraine – Russia doesn’t give gas, we are going to bring Iran gas out to Europe via our territory. So to speak, there is a struggle for energy security.

Azerbaijan scopes of gas will never be compared with Russian scopes of deliveries, the maximum production that we can figure on is 15-16, maximum 20 billion cub.m. a year from "Shah Deniz" by 2015. We don’t have any other sources yet. If only there wouldn’t be any problems in exploitation of "Araz", "Alov", "Sharg" for instance, Exxon detected gas scope on "Zafar-Mashal", "Nakhchivan", then our strategy might change fully.

C.E.: But can Azerbaijan transport Turkmen gas, too?

Natig Aliyev: We are ready to work with Turkmenistan. Our gas-pipeline, basically, is intended for 30-32 billion cub.m. pipe capacity. On the first stage Azerbaijan will send from 7 to 9 billion cub.m. for export till 2012, today the gas-pipeline is planned on 20 billion. That is to say if Azerbaijan will be able to send 9 billion cub.m for export, 11 billion cub.m are free pipe capacity taking into account that 10 more can be added. Turkmenistan has an agreement with Turkey about purchase and sale of 16 billion cub.m. That is in the current conditions of high demand for gas in Europe, Turkmenistan is in earnest about the problem that is provided with both European Commission of EU, and foreign companies’ support.

For Turkmenistan, to my mind, it is the most real direction of gas export. Of course, it is possible to sell all gas to Russia, that is the first-rate gas exporter in the world himself, to Iran, that brings gas out to Europe himself…

C.E.: Is there any more project to Arabian Sea via Afghanistan and Pakistan?

Natig Aliyev: I think, it is appropriate to remember that the project has been exaggerated since the end of nineties, from the time that American Unocal suggested Azerbaijan to export his gas to Afghanistan and Pakistan. Since then few things have change in political plan, and I think, these projects are risky enough and won’t be supported by world community yet.

There is an opportunity to reanimate the project of Trans-Caspian gas-pipeline, as there is South-Caucasus corridor already, it exists. Second, Turkmenistan doesn’t need to invest heavy funds for gas-pipeline construction from Eastern or South Turkmenistan where he has gas deposits, then lay a pipeline to Europe via Caspian Sea, Azerbaijan, and Turkey. Today he needs only to bring his pipeline into Sangachal (Baku) and he already runs into South Caucasus gas-pipeline, thus fulfilling the agreement with Turkey, and everything is working. Then make bridges with Turkey, Greece and Italy, Balkan Mountains. Meanwhile Russia has already proposed his outlet project to Balkan Mountains.

C.E.: Is there any progress on Caspian Sea status problem?

Natig Aliyev: There is nothing new. The working groups which have been working on investigating and solving of the problem for a long time, have approached the problem from the point of standard acts accepted in world practice of division methods, Caspian Sea adaptability, they have done very much and exhausted themselves. Why? - For instance, if You don’t want to agree with me, I say, that it is black – but You say, no, that it is white, other tints don’t exist, yet.

- Though we drew the day near as far as we could, Iran considers the problem from different point of view absolutely, Turkmenistan – from different point, there should be a political will. Summit can resolve everything.

- For instance, Kazakhstan and Russia – in the presence of the president’s will, the experts reconsidered, appreciated, and introduced the problem for consideration of the presidents which arrived at a decision and divided the field.

C.E.: Why can’t we do it like this?

Natig Aliyev: - We have suggested first to do it like this. According to Azerbaijan’s position, we say, let us lay a way first of all, corresponding to world practice, then we can consider Your claims, which fields or areas You pretend to, and discuss it together. But there wasn’t any response, because all the question is the method, as soon as everyone accepts the method it will be clear who has this or other field…

C.E.: Natig muallim, could You sum up how it is necessary to improve the industrial sector?

Natig Aliyev: - First of all I would like to say that we must be engaged in SOCAR, "Azerigas", Azerenergy", - these are large scale subdivisions of our economy today, which have their own regulations, organized staff, and they are developing themselves. There are great successes in power-engineering, electric power production, Azerbaijan president Mr. Ilham Aliev has recently opened a modular station, that will supply Astara, Lenkeran, Masalli with power, such stations will function in Nakhchivan, Guba, Khachmas, Sheki, as well. These modular stations which will do much for supplying the regions with power, big plans on the North HPS, Mingecheviir electric power station, Vaykhir. The program in power-engineering is functioning, we need investments. We know our weak spots – it is necessary to get credits, change the depreciated equipment and above all these to eliminate all the defects existing today in TEC. And that is, first of all, heavy losses during extraction, transportation, in distributing nets, during injection to Calmass gas-holder. All together it is about 600-800 million cub.m of gas losses. So not always the gas reaches the consumer in adjusted scope because of physical losses. The same in electric nets, plus non-payments.

- I think, today the biggest development directions are – chemical industry, mechanical engineering, metallurgy. Having analyzed the activity of more that 1000 enterprises, I have found out that about 400 of them are not functioning. This is closed enterprise in fact, the fortune of which should be examined.

- It is necessary to investigate the resort basis of the republic first of all, no one has been engaged in it so far. Any branch that tries to work efficiently, if there isn’t any resort basis, it will have to bring raw materials and the branch can not stand it.

So it is necessary to raise the branches in the republic, which are provided with raw materials even if for 10-15 years forward. What we are rich in today – polymetallic ores, gold, iron ore, zinc, all these are at the heart of the large-scale metallurgy. If we join the investments to working out with mountain concentrating mill or the enterprise, then all it will function. If we invite an investor, for instance, to the chemical industry, he will investigate the resort basis. So we have created a working group together with the minister of ecology and natural resources Huseyingulu Bayramov, we will consider the resort basis first of all, its state, whom these or another resources have been given and which perspectives are there, on the basis of the analyses we will decide what can be developed. Then the branch program, business-plans on each enterprise will start. I think, we must work hard on drawing foreign investments under governmental guarantee, creating privileges, different tax vacations, free areas, it is impossible to raise the industry in the usual manner, even more so, we don’t have it today practically.

C.E.: And what about the product sale markets?

Natig Aliyev: We must provide competitive industry, if You are not able to put it in the foundation of your business-plan, then You don’t need to be engaged in the project. If You are not competitive, it will be out of question. On the one hand, it is double-edged weapon when even the craftsman can be out of job. It is a very serious aspect. There must be a business-plan for competitive product on the enterprise on branch program for justifying foreign investments plus the margin determined for this branch. In this case the enterprise can have rights to exist. We can’t keep any enterprise in forcing frame and support it on government. Either it must be liquidated, or if it is able to survive, we must support it.