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The collapse of the Soviet Union and gaining the sovereignty by 15 new republics gave the new independent states not only freedom at first glance seeming easy but a multitude of economic problems which were highlighted at once. There have emerged matters regarding the development of priority segments in domestic economy without outside help. And as a consequence of the potential being lacking, two choices put each of new independent states in a dilemma : either to overcome the tough economic crisis without outside help or to count on a bailout and bid for outside help, creating favorable incentives and conditions for attracting foreign investments to stabilize an economic situation in the country. And Azerbaijan first took to heart too literally a well-known dictum - "Tis the duty of the wealthy man to give employment to the artisan".
The former has already meant to enter the same river twice. The latter was envisioned so tempting and at the same time deceptive that in order to resolve political twisters and to launch a process of attracting multi-billion investments in the republic's economy, a close combination of two considerations so rarely encountering at the same time was required.
They are a firm political will, which must determine priorities of a country's internal and foreign policy and a clear economic program aimed at providing a favorable climate for attracting investments.
It were the factors that Azerbaijan lacked at first. Because of its geopolitical position, after the USSR's break-up Azerbaijan became a hub of eternal struggle for a sphere of influence in the Caspian region. And under the circumstances, Azerbaijan had to take the button off the foil.
Large oil and gas reserves of Azerbaijan (only the explored oil reserves were in excess of one billion of tons) poured oil on the flame. Having already enjoyed the fruits of the Caspian oil boom of the beginning of the 20 the century, foreign investors rushed up to Baku as early as the 90s to secure chunks of Azerbaijan's offshore shelf. The western companies for the first time toe into Azeri waters. They aim to strengthen their foothold in Azerbaijan as well as in the Caspian region.
By this time, the Government of Azerbaijan has already had negotiations with some of large oil companies such as British Petroleum, Statoil, Amoco and Unocal.
PREHISTORY OF CONTRACT
In the winter of 1991 particular moves were taken to create conditions for development of oil on the Absheron peninsula. By a joint by-law of the USSR Oil & Gas Industry and the Azerbaijan SSR's Council of Ministers of January 18, 1991 a decision was made to issue a tender for founding a joint venture, including Production Association CaspMorNeft to explore and develop the offshore Azeri fields. The results of the bid competition were encouraging : one of the world's major oil companies - US company Amoco won in June 1991 a tender for carrying out a survey at the field.
Further the BP/Statoil alliance, Unocal McDermott and Ramco were involved in the project. Amoco preserved the lead and held 45 percent of all the shares owned by western companies. As a whole, the stakes in the contract was supposed to be distributed as follow : Azerbaijan retained a 85 percent interest in the project and the newly set up group took a 15 percent stake in the project.
However, the changes in the Azerbaijan authorities upset the applecart. The spring of 1992 is marked by a struggle for power, as a result of which the Popular Frons comes to power, which decided to bring about economic reforms. Oil business was spotlighted.
JUNE 1992 - APRIL 1993
Azneft, the state-owned oil production association, carried on negotiations with western companies over exploration and development of oil fields in the Azerbaijan sector of the Caspian Sea. The talks quickened their pace, and as early as June 1992 the first news appeared in U.S. mass media on crude oil jointly produced in Azerbaijan. True, the information concerned not offshore oil production but the onshore fields yet long ago discovered and currently in production.
On September 7, 1992 one more contract was entered into with, this time, the alliance of two European companies - BP and Statoil. The alliance was awarded an exclusive right to explore the Dostlug field and tap the Shakh-deniz area. The contractor parties had to hold equal fifty-fifty shares in the project. In addition, BP/Statoil agreed to pay off $30 million for the exclusive right to develop these fields.
In March 1993, the second, preliminary agreement was signed between BP/Statoil and SOCAR to work closely with each other on the Chirag field and Shah-deniz, as became it known later. By this time, BP has already took a 19 percent interest in the project for developing the Azeri field.
Soon after this, earlier October, 1992 the third agreement was signed this time with US company Pennzoil. Under the contract, the company was granted a right to participate in developing the Guneshli field, where Azeri oilmen have produced crude oil since 1980. Thus, foreign investors were offered four offshore fields - Azeri, Shakh-deniz, Chirag and Guneshli.
A project submitted by US company Unical to unite research works at all of three field was favored by SOCAR's brass. The proposal got further evolution in October, 1992. And as early as November five memorandums, precursors to full-fledged production sharing agreements, on a single procurement, a single system of undersea pipelines and terminals were signed with all of the contractor parties. Later some months, Azerbaijan advised Pennzoil, Amoco and BP of its desire to unite three projects into one project with a single management. The companies were lukewarm in their support of the news. However, none of them expressed their disagreement with the prospect of working together as members of a single consortium.
In the process of further talks, TPAO, Turkish oil company, was incorporated in the membership of the upcoming deal. BP assigned a part of its stake to the company. At the same time, Azerbaijan denied similar requests of such companies as Total, LUKOIL and Iran. It was one of many mistakes of the Popular Front. It further led to a change in a political situation in the republic.
By mid-May, the companies signed the latest, sixth memorandum of a single work program at all of three fields, and the matter of unification entered into its latest phase. By this time, among its members were BP/Statoil, Pennzoil/Ramco, Amoco, Unocal, TPAO, Mc.Dermott.
On June 5 SOCAR's Board of Directors accepted a declaration to unite all the works carried out in the Azeri, Chirag and Gunesli fields. Out of all the foreign companies only TPAO did not publicly announced its consent to SOCAR's plans but further it joined a common announcement. By the new terms and conditions, SOCAR retained a 70 percent interest in the project, the rest of shares were given to other participants of the Consortium.
A number of political mistakes resulted in what two neighboring countries bordering on Azerbaijan - the great powers Russia and Iran - were disagreed with the regime of the Popular Front.
In April 1993 Armenia started occupying Azerbaijan's districts adjacent to the Nagorny Karabakh and Armenia. Azerbaijan has arrived at a point of the hardest economic and political crisis.
A GLEAM OF HOPE
Under such circumstances, the trained policymaker Heydar Aliyev came to power and took the helm of the nation. Later he was elected Azerbaijan President.
The combination of experience and knowledge, drive and prudence with bulwark on the limitless trust of the nation allowed the present head of the state to correctly size up the situation and find stepping stones, to focus on the things permitting of no delay and sketch out the most priorities in both internal policy and foreign policy.
In turn, all this led him to a consequent success. President Aliyev managed exactly to reveal flaws in a draft oil project. In addition, it became clear to him that not proper people carry on negotiations with the prospective business partners and all this in common with a political turmoil in the republic caused him to make a decision to put off signing the contract. Investors themselves adopted a wait and see position and patiently awaited the end of the political uproar in the republic. It never occurred to them to abandon the oil business in Azerbaijan. They made a decision to give an incentive to the authorities in the oil contract and on June 22 eight oil companies reached an agreement to offer a $70-mil bonus to Azerbaijan for the account of the sums which were planned to be paid off after signing the contract. However, despite all of the tricks, the head of the state does not buckle to the veiled demands and a decision of striking bargain was postponed. Soon Aliyev gives new explanations to the delay for signing the contract, which seemed to have been ready for signing.
"I understand that oil companies operating in Azerbaijan have their own economic interest. It is quite natural. But at the same time, we must set our country's interests above those of the companies", Azerbaijan President announced when interviewing with Chicago Tribune.
He also clarified that he had been surprised at such a great worry of overseas companies about the government's desire to gain a more thorough insight into the prospective contract.
In the same interview a claim was made that the people, who are not competent authorities in this field, attended to the matter and that from now on more attention would be turned to the contract.
Apart from this, Aliyev made an unambiguous statement at his meeting with the representatives of the oil companies, which was held in Baku in August 1993. Its gist consisted in what "if oil companies of large countries show an interest in oil deposits of Azerbaijan, the governmental bodies of these countries also must show an interest in the current public and political situation in the republic". Further moves were taken by Aliyev to reach an agreement on a cease-fire, which included many tense diplomatic negotiations with all the countries participating in settling the Armenian-Azeri conflict, pacifying the internal opposition and improving the relations with Iran. But the main thing he managed to do is that he partly satisfied a desire of the northern neighbor and got a decision from the Azerbaijan Parliament for the republic to be incorporated into the C.I.S. and delayed the consideration of the oil contract.
In wake of the adjournment of the date of signing the contract, there was formed a special commission consisting of a number of foreign experts, which has had to conduct a thorough analysis of the contract. A radical purge of SOCAR's management team was effected, and the present president of SOCAR Natik Aliyev was appointed its leader.
Later a few months, negotiations with foreign companies continued. However, the terms and conditions somewhat changed, and now Azerbaijan has already awarded not three fields but only two of them. Guneshli was not on the list.
Members of the Azeri, Chirag group were Azerbaijan with a 80 percent interest in the project and a 20 percent stake was owned by foreign companies. Among them were Amoco - 24.3%, BP/Statoil - 36.7%, Pennzoil/Ramco - 17%, Unocal - 16%, Mc.Dermott - 3.5% TPAO - 2.5%. A bonus for the development of the fields was up to $500 million, which half has had to be paid off right now after the contract is enacted into law by the country's Parliament.
The changes did not raise the eyebrows of western foreign companies, although they did not take delight in them. It was natural to suggest the membership of the Consortium would be expanded inevitably.
However, above all one still needed to make some visits and to hold a host of political consultations. So, from the 19th to the 23th of December the head of the state took a trip to France (one of the member states of Big Seven), in the run of which a treaty on friendship and cooperation was signed between the two countries. President Aliyev offered there to Elf Aquitaine, the flagship of France's state-owned oil industry, to take part in oil business of Azerbaijan. Before the start of the visit, other French oil company Schlumberger was involved in carrying out additional geophysical surveys at the Guneshli field. On return from France, the republic's leader made a visit to friendly Turkey in the first decade of February 1994, and at once after this travel he have been in London from the 22nd to the 25th of February.
In the course of the visits he has enlisted support of the two countries for curbing Armenian aggression and expanding their involvement in the oil deal. In London the head of the state achieved a great success and signed eight agreements, among which are a treaty on friendship and cooperation and joint actions in oil industry. In return for this, Aliyev confirmed an earlier concluded agreement to grant BP an exclusive right to exploration and development of the Shakh-deniz structure.
Further, developing a political activity, Aliyev managed to attract NATO's attention to the republic's problems and signed a frame document Partnership for the World at the headquarters of the organization in Brussels, on May 3. At this moment, Armenian invasion extended outside beyond the bounds of the Nagorny Karabakh. The districts, through which a pipeline was planned to lay from Central Asia and Azerbaijan to Turkey and then to Europe were seized.
At the same time, Turkish authorities announce that they would demand the tougher regulations for use of the Bosporus as the strait is unable to handle such a considerable number of tankers. The current tanker traffic must be slow down for the environmental reasons and navigation safety , the Turkish statement continued. New schedule for tanker traffic was offered by Turkey in March 1994. It placed strong limits on oil tankers' dead weight tonnage and the number of tankers, which may pass through the strait. However, a convention signed in 1936 casts doubt on the legality of the regulations announced by Turkey. Under the convention, the Bosporus was announced open to all merchant vessels of all nations. Turkey reinforced its arguments with statistics : from the year 1988 to 1992 157 accidents took place in Turkish Straits. In addition, the passage of oil tankers or other hazardous cargoes through Istanbul threatens to more than 10 million people living along the Straits and the environment.
Such a statement of the matter sharply sapped Russia's hopes for laying an oil pipeline from Central Asia and Azerbaijan to the Black Sea port of Novorossiysk, where, under a blueprint, crude oil had to reloaded into tankers, which are expected to pass through the Turkish Straits to Europe. Russia appealed to UNO but on May 25 the International Marine Organization approved the Turkish schedule, and this June Turkish delegation handed over necessary information on the new regulations imposed on navigation in the Straits and refused to discuss the issue next.
In wake of this, the Russian policymakers raised a question about the legal status of the Caspian Sea. On April 27 the Russian Ministry of Foreign Affairs handed over to the British Ambassador Bryan Foll a note, in which Moscow lodged a protest about use illegal terms in a Memorandum of cooperation in the field of energy, which was signed between Azerbaijan and the Great Britain, particularly, a term of "the Azerbaijan sector of the Caspian Sea". In the document it was also said that any project relevant to development of oil fields in the Caspian Sea and its shipping to the European countries , will not have a legal force without preliminary dovetailing with all of the countries surrounding the basin. After receiving the note, the British Foreign Office held a number of consultations with the Azerbaijan Ministry of Foreign Affairs and a visit of the British Energy Ministry Tim Eggar was held to Baku, where he met with Azerbaijan President, Socar's execs and top officials of the Azerbaijan Ministry of Foreign Affairs. A decision was made not to take the Russian Ministry of Foreign Affairs' note into consideration, and the Great Britain made a statement that UK intended to carry on negotiations with Azerbaijan on joint development of offshore oil fields on the Caspian.
However that may be, a work on drawing up a new contract continued, and in May the joint venture Azeri - LUKOIL was founded, which included the Russian company LUKOIL in the process that has already come to an end. In June LUKOIL's representatives were to take part in the consortium's activities for the first time. At the same time, the Guneshli field again returned to the list of the fields under consideration.
In the meantime, in Russia there was not a single position on the policy pursued toward Azerbaijan. In the opinion of a US Professor Robert Borilsky, there were two strategies that run counter to each other in the Kremlin. One of them was backed up by Andrey Kozyrev, the then Foreign Minister of Russia, and Yevgeniy Primakov, director of outside intelligence service ( who then occupied a post of Russia's Prime Minister for a short time) and it suggested the hard-line policy toward Azerbaijan.
Other line was favored by Russia's Prime Minister V.Chernomyrdin, who represented the interests of the fuel and energy complex of the Russian industry and who leans towards the view that the relations with Russia's neighbors must be based on economic cooperation.
It was Chernomyrdin who was opposed to the pressure of Kozyrev and Primakov on Azerbaijan and who refused to pull the Russian company LUKOIL out of the Azeri contract. The information is confirmed by a President Heydar Aliyev's statement of having a call from Chernomyrdin. It came up in this conversation that Chernomyrdin had said that he knew nothing of this note. The Russian Premier told Aliyev that Azerbaijan could officially on behalf of him to issue the statement, in which it is necessary to point that the Russian Government did not raise a question of the legal status of the Caspian Sea.
The period from February to July 1994 was marked with a hard work on the terms and conditions of the contract as well as numerous meetings and consultations with all of the project's participants. They were held in Houston and Istanbul. Soon one more participant, Delta Nimir (Saudi Arabia) was added to the proposed consortium. The company managed to join the project after it has bought 15 percent of Unocal's shares (a 1.68 percent interest in the project). Everything was going smoothly. Mass media continued to make comments on the run of negotiations and to put forward its suggestions of the date of signing the project. But suddenly the exact date of the event was announced. It is September 20. Up to the latest moment there was no confidence in what it would take place, and at last the deal was struck. Its terms were:
Term of validity - 30 years;
The fields designed for production - Azeri, Chirag and Guneshli;
The estimated reserves - 511 million tons (later, according to the results from a test well drilled, the recoverable reserves in the contract area were increased by a third);
The republic's ownership - 250 million tons of oil and all casinghead assessed as 55 billion cubic meters belongs to Azerbaijan;
The foreign companies' ownership - 64 million tons of oil, 194 million tons of oil will go for offsetting running costs and transport costs;
Investments - $7.4 billion;
Azerbaijan's profit - $34 billion (without allowance for inflation);
The companies' profit - $8 billion.
The interests of the contractors parties are:
The republic has about 80 percent;
The stake of all the companies is about 20 percent.
In turn, the structure of distribution of the 20 percent share in the contract is:
SOCAR - 20%
British Petroleum - 17.1267%
Amoco - 10%
Pennzoil - 9.8175%
Unocal - 9.52%
Statoil - 8.5633%
McDermott 2.45%
Ramco - 2.08%
TPAO - 1.75%
Delta-Nimir - 1.68%
In addition, the republic was given a bonus of $300 million, out of which $60 million have already been paid off to the republic, $70 million were paid to the republic after the contract has been enacted into law by the republic's Parliament, another $75 million were paid after a daily rate of oil production hit 40,000 barrels. And last $70 million will be paid to the state after main oil flows through a pipeline. later 1994 - in the spring of 1995, not having the money for paying its stake in the contract, Azerbaijan offered Iran a 5 percent share in return for paying its fee of around US$1 billion in the contract. After Washington's protests, Baku was compelled to refuse the contacts with Iran and Azerbaijan found the wherewithal at the cost of transferring 5 percent of its stake to TPAO (Turkey) and a 5 percent share to US company Exxon.
Early in 1996 Azerbaijan successfully entered into an intergovernmental and technical agreement with Russia on the transport of early Azeri oil. After this and talks with AIOC and SOCAR, Itochu Corporation of Japan announces a transfer by US company McDermott International of 2.5 percent of its share in the contract of the century to the Japanese company at a price that some times exceeds an initial price. In the summer of 1996 Itochu concluded a contract with Pennzoil on assigning to the Japanese company of 5 percent more of share in the contract, the cost of which grows proportionally to a success of its execution. However, US companies Exxon and Unocal took advantage of the right as the members of the Consortium to a priority claim to a transfer of shares and took the wind out of the Japanese company's sails. As a result, out of the shares due to Itochu, Exxon took additionally a 3 percent share in the Azeri - Chirag - Guneshli project, Unocal 0.5 percent and Itochu retained 1.5 percent.
So, after the re-distribution of shares, the current equity participation of two new contractor parties looks as follow :Itochy - 3.9 percent, Exxon - 8 percent and Unocal - 10 percent.
In total, what tangible profits does the contract of the century bear to Azerbaijan? As it is known, Azerbaijan pursues economic goals, apart from political aims, while solving the oil problem.
Azerbaijan's leadership aims to get political dividends by providing an economic room to the countries that are the world's leaders. Oil money must help incline the world's public opinion to side with Azerbaijan in settling the Armenian-Azeri conflict.
Economically, Azerbaijan received the following outcomes :
- The project fulfillment enables Azeri oil to appear on European market. In turn, it creates a prerequisite for more profitable conditions to tap other promising areas through the yet tested and adjusted mechanism.
- Azerbaijan rose considerably in international investing and lending organizations' esteem and adopts increasingly stable position. It gives the republic a privileged position in the plan of bringing strategic projects into effect (the construction of MEP for exporting oil and gas to world markets);
- An opportunity appears for larger investments in the related oil fields;
- The republic will be able to accumulate foreign exchange reserves and to pursue its own investment policy;
- The process of integrating Azerbaijan into the global economic community is speeded up;
- A level of the country's technological development enhances;
Some of materials from an AIOC's book Azeri Oil
- Yesterday, Today, Tomorrow were used in the story.
