DEVELOPMENT OF NATURAL RESOURCES AND THEIR TRANSPORTATION IN TERMS OF CONTRACTUAL ACTIVITIES OF THE AZERBAIJAN REPUBLIC
MAKHIR GAMBAROV, Graduate of the Azerbaijan Commonwealth University of Baku
Economic cooperation of the Azerbaijan Republic with western countries in organiz-ing and conducting geological exploration surveys and further tapping of oil and gas fields, especially, off Azerbaijan's Caspian coast, as well as the construction of mines and ore concentrating mills was much expanded in recent years.
Technical assistance lent by western oil companies to Azerbaijan may serve as one of examples of fruitful cooperation in exploring and tapping the natural resources of the Caspian Sea. The Azerbaijan upstream oil and gas industry was and remains the most devel-oped real sector. Monopoly in producing crude oil and its processing belonged to the Soviet oil industry. It was no access to liquid and solid natural resources production for foreigners. After Azerbaijan has been declared an inde-pendent state, the republic took a number of urgent measures to develop the extractive industry and upstream oil and gas industry, to grant appropriate rights to foreigners to pro-duce and mine for natural resources, to estab-lish large-scale state-owned enterprises of the extractive industry as well as to implement a wide program for geological surveys.
Technical assistance to the Azerbaijan Republic in geological prospecting of gas and oil was provided by appropriate intergovern-mental agreements. The US, British, Norwegian, French and other experts working in Azerbaijan use the latest accomplishments of the state-of-the-art geological science. To find natural resources, in particular, oil and gas within Azerbaijan (especially, in the Azerbaijan sector of the Caspian Sea), they do a wide vari-ety of works from offshore geophysical surveys to photo-geological, geographical and geo-chemical studies. To carry out the works, for-eign equipment and vehicles were delivered to Azerbaijan.
The first successful move in working closely together with foreign companies in oil indus-try and attracting foreign investment in the sec-tor was taken in 1994. After effective talks between the State Oil Company of the Azerbaijan Republic (SOCAR) and 10 well-known companies representing six foreign companies, on September 20,1994 a contract for joint development of the Azeri, Chirag and Guneshli fields was signed. The contract has 30 years to run.
For the period from September 1994, SOCAR has signed 18 more large contracts for joint development of oil and gas fields in the Azerbaijan sector of the Caspian Sea and onshore fields. The world's 32 large oil compa-nies representing 14 countries participate in the contracts. About $50 billion in investments are suggested to be put up for the projects sup-ported by 19 contracts. The contract areas are estimated to contain between 4 to 10 billion tons of oil.
After signing the contract of the century, the consortium was formed, which in 1995-1998 years produced early oil. For this, appropriate seismic surveys and exploration were carried out and three test wells were drilled. To pump oil on to shore, the Sangachaly terminal and a subsea pipeline long 179km were built.
A significant work was done to develop the country's oil industry. And the Azerbaijan Republic got the opportunity to export its oil to world markets. The work took three years and required more than $1 billion. Geologists dis-covered about 140 highly promising structures in the Azerbaijan sector of the Caspian Sea. According to the initial investigations, the areas hold significant hydrocarbon reserves. Delivering the yet signed by Azerbaijan of inter-national contracts will enable in the next 20-30 years to produce 1.5 billion tons of oil and 1.28 billion cubic meters of gas.
One of topical legal problems sparking the ever-increasing interest in the projects for joint use of oil fields and transport of hydrocarbons is to improve the economic and legal model of the cooperation. The total revenue generated by hydrocarbon production for the Azerbaijan state budget is contingent upon a pattern of the contracts entered into with the foreign oil com-panies. At present, all the concluded oil agree-ments and contracts are based on a model of "production sharing agreement" (PSA), which is a well-tried mechanism for sharing risk and earnings between a host government and for-eign oil companies. In other words, it is a pat-tern of sharing production widely-accepted worldwide. Under a PSC, the companies are in first place allowed to recoup their organization-al and overhead costs spent on delivering a project and design as well as operating costs from field development by obtaining a share of oil production ("cost oil"). The rest of production is seen as a profit and shared between the con-tract parties, i.e., the companies receive a share of production as "profit oil" to garner a return on their investments. It is natural that at the initial stage of oil production (about 10 years), after covering operating costs, 50 per-cent of the rest of production goes for recoup-ing the companies' investments originally con-tributed to a project. After this, all the rest of production is shared as a profit. The state is entitled to all oil not provided to the companies. If SOCAR were to be an equity partner in a pro-ject for developing a field by contributing to a share of the costs , it could be treated similarly to the foreign oil companies. In this latter case, the state budget revenue from oil would come, on the one hand, from the profit oil taken by SOCAR, and, on the other hand, from the direct share of Azerbaijani government in oil production. In practice, some (or even all) of SOCAR's share of the investment cost may be "carried" by the oil companies, which would recoup the costs through their "cost oil" entitle-ment. Under a PSA, the total volume of exports from Azerbaijan will include three separate components, under the PSC terms assumed : oil companies export of their share of produc-tion, SOCAR exports of some of its oil, and Azerbaijan exports of its oil entitlement.
It should be noted that there is a tendency to a decrease in operating and overhead expenses. At the same time it is attended by increasing a share of Azeri party in all interna-tional oil agreements. For example, by the terms and conditions of "the contract of the century", during 30 years a share of SOCAR in "profit oil" will rise from 10 to 90 percent. In total, the State Oil Company of the Azerbaijan Republic owns 50 percent of the total profit oil.
Given that 50 percent o'f produced oil will go for covering operating and investment costs, the volume of the profit oil to be received by Azerbaijan will amount to 150 million tons. A similar figure over the first nine concluded agreements will run up to around 400 million tons of oil and 420 - 450 billion cubic meters of gas. It is equivalent to USD 60 billion. It aver-ages USD 2 billion per year in terms of the cur-rent oil prices in world markets. It exceeds 2.5 times the annual revenue side of the country's state budget in the late 90's.
Another peculiarity of PSA's model applied in Azerbaijan is that, as it has been mentioned above, foreign companies are contractually committed to "carry" all of SOCAR's share of the investment costs. At the same time, so called "historical costs" (in tapping fields and promising structures) include payment of a bonus to Azerbaijan, which is paid as a project puts into practice.
Given that foreign companies take upon themselves the financial costs on discovery and use of a field and that the expenses must be spent earlier than their profit comes, the compamies are exempt from taxes (except for a tax on incomes of individuals). SOCAR will pay off taxes on its share of profit production according to a law of the Azerbaijan Republic.
A next problem pertaining to oil agree-ments, the solution to which is great value to Azerbaijan, is of how to provide a reliable export of the produced oil to world markets. If in the year 1994 to 1995 the challenge was seen as a problem No 1 for only members of the con-tract of the century, at present, more than 20 well-known western companies operating in Azerbaijan and representing 12 countries of the world as well as such countries as Kazakhstan and Turkmenistan, which are now in searches of the ways of selling their hydrocarbon reserves abroad, are interested in its success-ful resolving.
In the past three years the questions of selecting of economically sound and commer-cially viable routes for exporting crude oil have been highlighted by experts. In the period, the routes of Baku-Novorossiysk and Baku-Supsa were analyzed thoroughly and the sums need-ed to deliver "turnkey projects" from design, planning, supply and erection to their commis-sioning were fixed. USD55 million were sent in 1996-1997 years on the upgrade and construc-tion of the northern pipeline long 1412 km. From November 12,1997 early oil has flown through the pipeline.
At the same time, the construction of the Baku-Supsa pipeline and a terminal at Supsa was begun. The work were completed on April 17, 1999. It has been established that out of 926 km of pipes, 566 km of the pipes want repairing. 258 km of the pipeline must be replaced with new pipeline sections. As a whole, it was slated to complete all the works (the construction of pipeline and terminal, the installation of five pump stations, control and other systems) and spent not more than USD315 million on them.
The northern and western lines of pipelines (the throughput of each of them is 5 million tons per year) are able to ensure export of the oil that is expected to be produced before 2005.
When the first and other projects launch to work to capacity, oil ' production in the Azerbaijani sector of the Caspian Sea will edge up to 40-50 million tons per year. At the same time, more than 40 million tons of crude oil will be delivered to world markets from the Tengiz field alone in Kazakhstan.
The fields situated in Turkmen sector of the Caspian Sea when coming on stream will make the construction of export oil pipelines linking the Caspian region to the European countries still more challenging. Therefore a work on selecting optimum pipeline routes, which might have ensure exporting 1.2 million barrels of Azeri oil a day to world markets was carried out so thoroughly.
For Azeri oil, there are three main routes for building a main oil pipeline, which were scruti-nized:
a) the construction of additional pipelines -Baku-Supsa and Baku-Novorossiysk and the shipping of oil by tankers from the ports across the Black Sea and the Bosporus and Dardanelles Straits to the European countries;
b) the delivery of oil via the pipelines through Georgia and Turkey to the terminal at the port of Ceyhan on the Mediterranean coast and its further transport by tankers to the European markets; v) the shipping of oil through the addi-tionally built oil pipeline to the terminal of Alexandropolis on the Aegean Sea coast of Greece.
Despite the fact that "the contract of the century" provided for focusing on the Main Export Pipeline construction, picking up in oil production in the Caspian Sea and attracting the ever-increasing number of foreign compa-nies to the region sparks the laying of addition-al lines. It is due to favor the interests of all the firms and companies operating in the region.
An analysis of technical and economic per-formances of the above indicated routes shows that the Baku-Supsa and Baku-Novorossiysk pipeline projects are the most economically sound and commercially viable. Their costs are put at USD1.2 and USD2.1 billion, respectively. However, the limits set on the Bosporus throughput because of the environmental dan-gers of increased tanker traffic through the Bosporus reduce a chance of turning these routes into the main lines. As a matter of fact, the Strait is considered to be already full to capacity. There is considerable environmental weight behind the argument. Turkey says that because the 19-mile channel runs through the center of Istanbul, which is home to more than 10 million people, increases in tanker traffic are impossible.
Though the Baku-Ceyhan route long over 1500km is seen as an expensive one (USD2.4 billion) to be built compared to other alternative ways, the lack of the need for another oil termi-nals and the proximity of port to the European markets give an advantage to this project over other alternative options. The passage of the pipeline through the territory, in which an armed conflict has not yet been settled, can be one of considerations keeping a check on mak-ing a decision to build a pipeline. In the fore-seen future, the expanded scope of the works on rising in oil production in the Caspian region will increase a chance of transforming the route into one of the main export oil pipelines.
The length of the third route is 171 Okm. The route consists of the mixed transport (a pipeline is used on land, and part of way the oil is shipped by tankers). The oil delivery to the Aegean Sea coast is provided by three termi-nals. It can bring about increases in transport coasts and, consequently, the total route cost. In addition, a chance of incurring big losses during the oil transport .rises. The Baku-Supsa and Baku-Ceyhan routes are connected with Georgia somehow or other. Therefore Azerbaijan and Georgia established business teamwork aimed at the transnational oil pipeline construction.
The Baku-Supsa oil pipeline laid from the Caspian Sea to the Black Sea is of strategic significance to not only Georgia but all the countries of the region and the countries adja-cent to it, Georgian President Edward Shevarnadze announced when commenting on the Apr. 17,1999 inauguration of western route for shipping oil. In his speech Shevarnadze emphasized that the Baku-Supsa oil pipeline was one of basic elements of Great Silk Route. And in future the oil pipeline will be the ground for carrying larger projects into effect with a success.
It should be noted that Azerbaijan's ΜΕΠ, which will become further the main part of the subsea Caspian oil pipeline, also will be laid through Georgia. Participation of Presidents of Ukraine and Azerbaijan in the solemn ceremo-ny of the opening at Supsa of the western route for shipping early oil and a railcar-on-roll ferry passage at the port of Poti on April 17 was of great political value. Presidents of the USA, Turkey, Bulgaria, Uzbekistan, Greece, Kazakhstan as well as the British Prime Minister called the opening of the Baku-Supsa oil pipeline historic.
Making a speech at Supsa on April 17, 1999, Azerbaijan President Heydar Aliyev spoke about great difficulties and risk which the historic decision was linked to. But with com-missioning the Baku-Supsa oil pipeline, a mat-ter of the Baku-Tbilisi-Ceyhan main export oil pipeline construction was clinched. The west-ern pipeline is a bright example of economic, scientific and technical cooperation between Georgia and Azerbaijan , which has the great outlook for the future. For instance, in October, 1998 in Ankara, Georgia, Turkey and Azerbaijan signed Declaration on main aspects of the Baku-Tbilisi-Ceyhan project. With the USA administration's support, earlier this April the regular discussion of the Baku-Ceyhan pro-ject was held and a protocol of particular prac-tical measures to be taken to put the pipeline construction into practice was signed between and by Turkey and Azerbaijan.
Another important sample is the transport of Turkmen gas to Turkey via Azerbaijan and Georgia. An agreement on the route was sealed between Turkey and Turkmenistan in October 1998. Ukraine also expressed its intention to export oil through its territory via the Odessa-Brody route to Poland.
Investigations of various routes for export-ing main oil are designed to speed up selecting optimum way. Under the Oct. 1998 Declaration above mentioned, in 2004 the transport of "big" Caspian oil to world markets will be effected.
Thus, a conclusion can be drawn that the Caspian region is being transformed into one of the largest oil hubs of the world. It will result in the accelerated upturn of Azerbaijan's econo-my and give it a top place amidst the industrial-ized states of the world.