A HYDROCARBON FIND AT THE SHAKH DENIZ CASPIAN TEST WELL WILL RESULT IN THE SECOND OIL AND GAS BOOM IN AZERBAIJAN, ILHAM ALIYEV IS SURE OF THIS
Mr. Aliyev, five years have been passed since the 20th of September, 1994 when the Contract of the Century was signed. What events coupled with the contract bring back your recollections of the past days and what events impressed themselves on your memory especially strongly ?
It is natural that there were lots of reminiscences. However, most of them have already escaped my memory during the five years and it seems to me that everything was so easy and simple. Though if one remembers of how it began, at this time very few of us were confident that Azerbaijan would manage to attract foreign companies because they have showed an interest in developing, particularly, the Azeri, Chirag and Guneshli fields, if I do not mistake, only since 1991.
Experts from BP and Amoco came here and held any negotiations with us, then to some extent the process has intensified from the year 1991 to 1992 and even a draft contract was prepared but by good fortune the then things did not allow to sign it. This deal, which was ready to be signed in 1992, as you know, favored our interests very slightly. Then as from February 1993 negotiations have started again; they carried on for a long time and were very hard. The latest draft for the agreement was sealed in September 1994. Just at this time, I occupied the post of the first vice president for SOCAR and next day I left for Istanbul. A final stage was held in summer of 1994. We were in talks within about two months. Three tasks were then set to solve.
The first target was to sign the contract, the second goal was to get the best economic and legal advantages for Azerbaijan and the third aim was that the contract had to enter into effect at once after its signing.
If you allow for the position into which Azerbaijan had found itself at this moment and how it was vulnerable, you might envision how it was difficult for us to accomplish the objectives set.
However, I think that in general we coped with the tasks. The main thing was that a very crucial time came during the final negotiations when we started deliberating the date of the contract coming into effect. Overseas companies pushed for the contract to launch to work not after its signing and even not after it is enacted into law but after the thorny problem of the Caspian's legal status is resolved.
Surely we could not agree to the terms because we realized well that in case if the restrictive provision was incorporated in the contract, it would never begin to work. We have grappled with the provision within a week and, in the end, when we understood that all of our attempts had failed, a decision was made on my meeting with Bill White, the then deputy US Secretary of Energy, who now leads the Frontera Resources company.
When I explained to him that the provision in the contract in essence made it invalid and it would not work, the USA government applied some pressure on foreign companies to meet SOCAR halfway.
Just imagine what would have happened to the deal if this provision had been preserved in the body of the contract. It would mean that the production sharing agreement virtually remained on the paper only.
How do you assess the contract today? Are you pleased with its preliminary results?
Yes, I am satisfied with the outcomes. To say that I am pleased means nothing to say. We virtually succeeded beyond our wildest expectations. There were misunderstanding and unbelief amidst most of people. Not a few thought that we had signed something without knowing our own mind and what is what.
I believe that a flurry of recent years' activity in developing Azerbaijan's infrastructure, the mass construction and paid consumer services would be impossible without signing the deal. If the PSA had not been entered into, another 18 contracts would have not been sealed either. It is hard to say about the situation which Azerbaijan would have found itself into. Therefore, I think that we achieved all of the goals set.
Of course, over the past five years there have been lots of disputes and discussions with our foreign equity partners. There have been many arguments we did not agree to. As it is becoming clear, some mistakes were also made by overseas oil companies.
For example, an error refers to the cost overruns which the oil companies did not budget for building the western pipeline that is currently the only export line. The project has been plagued by cost overruns.
We did not cover the cost difference and each of the opponents feels very strongly about it.
Do you know of an incident occurred here? After a decision on the Baku-Supsa pipeline construction has been made, we came up with a suggestion to build a 42-inch pipeline, if not up to Supsa, the more especially as it does not need to be extended to Supsa, though to be to the border with Georgia or to the turning point.
I again went to Washington where I met Mr. Federico Pena, the then US Secretary of Energy, and there I talked and explained to him the case with a wealth of detail and he perceived much of what I said. If the decision had then been made, today a basic part of the main export pipeline would have already been completed.
By the way, so far, I am not sure why our foreign equity partners then did not go to the same expenses to deliver the pipeline project offered by us. That is why we are currently faced with the following situation : the present pipeline construction can require more expenditures than our project, to which they did not agree in due course.
The current cost of the Main Export Pipeline (MEP) construction project edges up to US$2.4 million. Is Turkish party ready to give appropriate guarantees to cover all cost overruns by which the fixed sum could be overspent ?
On the one hand, the figure was presented by our Turkish colleagues, on the other hand, it was based on an independent expertise made by the US governmental bodies authorized to do it. Do you remember when the MEP construction cost of US$3.7 billion was made public ? We did not agree to it and the appropriate US governmental organs carried out a study of their own. As a result, they put the construction cost at US$2.4 billion, and the figure is seen by us as real.
As to the above guarantees, the key question outstanding now at the negotiations with Turkey is what guarantees will be given by Turkish side to recoup possible overspending. The guarantees also must be enacted into law by the official Turkish bodies. We secured no financial commitments from US to be on the safe side. We are in talks with the World Bank, IMF and International Financial Corporation on a question of as to whether Turkish guarantees in the Turkey-proposed form will provide the funding for the MEP. If yes, we will be pleased with it, if not, the guarantees will have to be reconsidered.
If the decision is favorable, a packet of agreements will be signed soon. The package will consist of an intergovernmental accord and a contract entered into by and between the economic entities of the countries which the pipeline will go across. After this, a pipeline company will be founded. It virtually will be engaged in building the pipeline. I can only say with certainty today that a controlling packet of shares (50 percent plus one share) in the pipeline consortium will be owned by Azerbaijan.
I believe that not all of the companies, which are the project's shareholders, will want to participate in the MEP construction. They can sort out the problem among themselves. It is of importance to us that the companies, which operate in the east of the Caspian Sea, in Kazakhstan and Turkmenistan, should be incorporated into the consortium. It is vital for the pipeline to be supplied with the guaranteed oil volumes to flow from there. We hold talks on the matters with such companies as Mobil, Chevron, Texaco, Total. And to a certain extent, the negotiations were launched on their own initiative.
As a result, we are getting additional guaranteed export volumes and the trans-Caspian scheme will work to capacity. In doing so, it should be noted that the Kazakh pipeline consortium, which is being formed, is unable to entirely pump Tengiz oil out to world markets if for no other reason than the limited throughput of the Black Sea Straits. For this reason, the companies aim to design multiple options for its crude export.
And the quicker we solve our problems in the process of negotiations, the more intensive the trans-Caspian project is brought into effect. I think that the consortium will be formed immediately after we sign the underlying agreements on the MEP.
What is your attitude to the opportunity to set up the Caspian oil cartel of the countries producing oil and gas like a mini OPEC to influence a price environment, if only, on near markets?
As yet I do not believe in its reality because the oil amounts we are going to produce depend on how effectively other oil fields yet awarded to foreign oil companies on the contractual basis will be operative. Let us suppose that Azerbaijan will produce 50 million tons of oil per year in six years. By this time, Kazakhstan will produce more.
I do not think these oil amounts are so considerable to have sway on oil price, and so there is no necessity for establishing a structure like OPEC. Of course, we would want to have such an organization but we have to take the reality into consideration.
Mr. Aliyev, how do you evaluate the impact of the Azerbaijan-signed contracts on a geopolitical situation in the region?
First of all, we are pleased to note that nearly all the countries surrounding the Caspian Sea have accepted the principle of dividing the Caspian Sea into separate national sectors. You probably keep in mind the time when even Kazakhstan and Turkmenistan, let alone Russia and Iran, frowned on this idea. Now everyone appears to come to his senses, and it raises hope. And here Azerbaijan's role cannot be overrated.
Firstly, it is because we have thrown open the Caspian to foreign investors and, in essence, de facto, got the division of the Caspian Sea into sectors.
Secondly, I again believe that due to Azerbaijan's successful investment politics, there were attracted foreign oil companies as investors. The same process takes place in both Turkmenistan and Kazakhstan. That is, there is a large flow of investments now, which naturally leads to what the countries of the Caspian region are compelled to take part in the regional cooperation.
The pathways for the transport of Kazakh crude via Azerbaijan and Georgia have already been tested to date. A question of a subsea Caspian gas pipeline construction has already come up really. Although as long ago as last year it was not understandable to where Turkmenistan plans to lay its own gas pipeline, a chief role here I think belongs to Azerbaijan and it is very positive.
Even during a visit of dignitaries from these countries to Baku, the question of the trans-Caspian gas pipeline is on the agenda on a par with the Baku-Ceyhan oil pipeline project.
How do you value Azeri gas in regard to its competitive ability as both Turkmenistan and Russia as well as the Middle Eastern countries have aimed at Turkish market ?
There are certainly lots of potential gas exporters in the region. If 2-3 years ago it was a high-stakes rivalry among them for what route would be selected for laying a main pipeline, now the grand rivalry takes place for control over Turkish market because there is not so attractive gas marketplace as Turkish one in the region. Therefore Russia aimed at the market today, with it having not only the Blue Stream project. In addition to it, it worked out a new project for building a Transcaucasus pipeline running through Georgia.
Turkmenistan is currently already ready to export gas. The more so, it has already signed an agreement with Turkey over delivery of 16 billion cubic meters of gas. Azerbaijan also, it has recently become real, has huge gas reserves. Therefore we are in very serious talks with the companies which plan to build a gas pipeline stretching from Turkmenistan to Turkey.
PSG, the company, which is authorized by the Government of Turkmenistan, has recently been involved in this project. PSG encompasses Bechtel and Shell. Of course, we above all must serve our interests. To escape relatively unscathed, we first of all must provide a marketplace for our gas but it does not mean that we want in some way to thwart Turkmenistan's project because we think Azerbaijan and Turkmenistan must join forces.
As to our gas competitive ability, I can to pick up your mood - Turkmen gas is unable to compete with Azeri gas in Turkish market.
It is first of all because our gas will be much cheaper.
Secondly, we have competitive advantage over our rival in a distance to be covered by gas to the intended destination. So in this case there is no sense in competing with Azerbaijan. We can be without problem in competition with Turkmenistan on Turkish market, but Turkmenistan will face difficulties without us. The winners are thus clear : Azerbaija will steal the lime light from Turkmenistan.
How you think will Russia react to this? Sure enough, will our northern neighbor to start mounting political pressures on us?
Over these five years, just in case, the first half of the period we have been exposed to strong pressure on Russian side. Do you remember what occurred after the deal has been signed immediately after two weeks and further. Therefore I do not rule out the possibility. Though I do not believe in any successful result of this actions because the five-year period showed that by pressing and other unfriendly ways one can only increase a gap between the two countries.
As a matter of fact, Russia and Azerbaijan could have benefited much from their cooperation in many fields of activity. The more especially as there is a room for the cooperation where everyone can gain profits. It is only enough to cite an example of the northern shelf of the Caspian Sea. In general, I think such a big-power politics toward Azerbaijan is incorrect not only from the point of view of open pressure on our country but that of Russia's interests of its own.
By the way, as far as that goes, Russia also must blame itself for what Tengiz oil is currently moved through Azerbaijan and the movements yields multi-million dollar profits to Azerbaijan rather than Russia. If Russia had not put restrictions on the amounts of Tengiz oil carried by Kazakhstan, all of the crude would have been shipped to Novorossiysk. As soon as the actions were taken, I am again not sure why it was done, an alternative way was found right now. There are no hopeless situations. It is known who won (Azerbaijan and Georgia) and it is also clear who lost. So, it is time one got rid of any old slogans and survivals.
Was SOCAR's investment policy influenced by fluctuations in oil prices in the past two years?
It is likely to have had a great impact on SOCAR's activity. Not only SOCAR but the republic's budget were hit hard by a precipitous drop in oil prices. You are likely to know that 50 percent of revenues to the budget come from SOCAR. So, when it came to the crunch, the tension was arisen with paying of wages and pensions. Now the problem is sorted out as an up-tick in oil prices is marked.
Of course, I cannot say that the unfavorable price environment had no repercussion on the investment activities but, on the other hand, I cannot agree to what that instable prices for crude oil reflected upon an influx of investments to the republic. If you look on the run of signing the contracts, it can be seen that there are not great intervals between the occasions. Each is followed by other at the approximately equal intervals of time. Therefore even at a time when some stories were being written and the buzz was beginning to go around that there was no oil in Azerbaijan and that Azerbaijan bought a pig in a poke and defrauded and so on, we were sure of our actions being right and the practice proved that there were no grounds for these arguments.
A few of people, especially some of local media, so have gone to seed that blamed SOCAR for lack of oil at the Karabakh field. But cannot one put the blame on SOCAR for what is within the competence of Our Lord ?
Over three years we have drilled a few wells. For this time, we have also discovered a field. If we want, we will tap the field within three years and produce 50 or more million tons of oil.
Of course, there was a campaign of joy and gloating over any failure in Azerbaijan itself. It is understandable that there are various political interests but it is connected with the nation's interests and as for the nation's interests, here everyone must have the same position on the matter and everyone must be interested in that Azerbaijan should have lots of oil, gas. This will provide the future welfare to both our nation now and the generations to come after us.
I am not aware of how they can be pleased with what at the Karabakh and Dan Ulduzu fields the oilmen failed to find commercial levels of oil. On contrary, the people must be unhappy about the present developments.
So, I an sure that the latest hydrocarbon find at the Shakh-deniz Caspian well will result in the second oil and gas boom in Azerbaijan, like what took place in 1994 - an influx of investments and a keen interest of various companies in the Azerbaijan upstream oil industry. Therefore I believe that it will give the second, very strong impact on development of projects in all of the Caspian countries.
Mr Vice President, if SOCAR's upcoming privatization used to stir up a stormy discussion, today as if the process abated. What does the future hold in store for the process?
As for the second stage of the privatization, I think that it must be passed by the parliament and some of SOCAR's separate divisions will be provided for privatization.
In the first place, I think, there must be privatized the enterprises, the number of which is considerable at SOCAR and those which provide services. The companies will offer us their services at a real price.
As to larger businesses, firstly, who will want to deal with the mammoths. I believe that the the term of SOCAR's privatization would be coupled with the second privatization program to be passed by the country's parliament.
But the main thing is that it is needed to clearly provide for some things not to arise during the privatization and after its completing. I am afraid that a such case is possible that, for example, a certain enterprise functioned effectively before it has been privatized but after the sell-off it will cease to work in general.
Unfortunately, there are not a few of facts like this in Azerbaijan. For example, a state-owned enterprise existed and operated with no success. Its personnel produced something. However, after the destatization its production switches to a quite new kind of goods or in general closed down
That is, each privatization program must have clear obligations for those entities which are being privatized. If in the certain period an enterprise does not honor the obligations taken on itself during the privatization, appropriate sanctions must be applied against them. Otherwise, business will be hard to do.
Will the Fuel and Energy Ministry be formed in Azerbaijan?
The Cabinet Minister was commissioned to decide the matter and as far as I know, SOCAR submitted its proposals like other organizations and institutions connected with energy sector. The formation of the Ministry is not end in itself and how it will be named it does not matter to us. One needs to found out what functions the ministry will perform. The more especially as huge oil revenues in terms of foreign exchange will flow to the republic's budget and everything must be recorded, and oil cash must be collected elsewhere. There is lots of business to be done here.
I think that it is necessary to create an organ on the yet available basis. It will have to oversee all the contracts signed - assets, liabilities, expenses, incomes and so on. This year, as you know, Azerbaijan still derived nothing from oil industry. As from next year, large oil revenues will be begun to flow. First, an accounting system will be required, secondly, distribution. The most thing here is that we should do so that such was not the case : oil revenues will flow to the budget and we again will patch any natural or artificial holes in the budget with the petrodollars.
We need as early as today to prepare an reinvestment program on the basis of information about oil revenues. It not necessarily will apply to oil businesses. The investments can go for development of different sectors and new enterprises.
This much is certain, foreign investments are a good thing. We need for them now and they will be necessary in future. But we cannot live on only investments all the time and cannot change them into money only for living expenses. Let us suppose that we received, for example, $100 million per year. A question arises immediately how we must distribute them next. If we invest the money in other sectors of economy, developing thereby them, we will decide a strategic task - to overcome our dependency on oil after a certain period of time. If we cannot do it, we will be contingent upon oil all the time. Oil price will fall, oil fields will be depleted and we always will suffer. Well, we live well within 5-10 years. What next?
There is an experience, in this event, in Dubai close to us. They produce a small amount, some 9-10 million tons of oil per year. The earnings from the oil sales enabled them to build a huge infrastructure. The example shows experience that must be of use.
So, a program for reinvesting petrodollars in the national economy must be sketched and adopted now. If it is not done, we will spend all our money on food. SOCAR cannot be engaged in this directly. We certainly will give our suggestions but our today's task is to overcome dependency on oil in future.