NEGOTIATIONS ON MEP – ON THE WAY TO FINISH
Rauf Guseynov
Diversification of the pipeline routes remains for Azerbaijan the most foreground tasks. For the time since last oil and gas exhibition held in Baku the republic could radically change the situation. Mainly it became possible due to discovering large natural gas reserves on the Shah-Deniz filed, as well as, thanks to present progress and actual completion of the first round of negotiations on the MEP project on the Baku to Ceyhan route.
MEP - «steeplechase»
The negotiations around the "main" pipeline of the country have never been easy. In fact nobody expected that discussions about a $2.4bn project might be easy. However, sometimes one could get an impression that the parties would not reach consensus…
By the mid-1999 the Azerbaijani-Turkish negotiations on the Baku-Ceyhan pipeline project have gradually moved to a new stage. For the first time the foreign investors joined the negotiations at this stage of the consultations and they preliminary put forward a number of proposals to the both parties.
In the run of one of rounds held in Ankara, it has become known that the Turkish government had got down to preliminary dialog with the world leading financial institution on conditions of funding the Baku-Ceyhan project. In particular the following organizations have been involved in the negotiating process: Overseas Private Investment Corporation, the US and Japanese Eximbank, International Monetary Fund, International Financial Corporation. According to information from the Turkish sources, having approved the project as a whole the mentioned organizations insisted on that already now Turkey presented its own financial guarantees in form of liquid assets to them.
Thus, the investors demand that in the nearest future Ankara starts accumulating funds on one of foreign accounts for the purpose of putting the Baku-Ceyhan project into practice. By that the investors would have financial guarantees against possible overspend as a result of the project’s cost going higher than agreed sum. The Turkish party has initially agreed on "liquid" guarantees, and stated on its interests in as soon as possible implementation of the project. However, a lot was to be done to reach that point.
At the same time, by the mid-1999 the parties were still unable to resolve the problem on defining final project cost, and therefore, the problem of the guarantee agreement which would be submitted to Ankara was still in the air.
Earlier the Turkish party has approved the signing and further ratification of the guarantee agreement in the parliament. According to the agreement Ankara should reimburse possible overspend against fixed project cost at own expense. However final approval of the document was delayed due to the fact that fixed cost of the Baku-Ceyhan pipeline was not defined.
Nevertheless, it did not take too long for the Turkish experts to start studying the Guarantee Agreement in which the reimbursement mechanism was to be explained. Having made a favorable decision for themselves the Turkish party has met last requirements of AIOC, large oil companies and the White House administration, which insisted on providing such the guarantees.
The first serious "movement" has been "registered" on November 18 in Istanbul during OSCE summit held there and resulted in signing a package of 4 Intergovernmental agreement.
The documents signed by the presidents of Azerbaijan, Georgia and Turkey consisted of: Intergovernmental Agreements, the Guarantee Agreement of investors with the transit countries and contract for construction of the Baku-Ceyhan pipeline.
It is worthwhile to state briefly what does each document represent:
The Intergovernmental Agreement is a legal foundation for the Baku-Ceyhan project and covers such aspects as utilization of lands and facilities connected with the pipeline route, its approval by the parliament, as well as, environmental issues;
The investors’ agreements with transit countries extend regulations laid in the previous document and define the commercial relations of the three countries and companies which will be engaged in the pipeline construction;
The construction contract states the terms, conditions and requirements connected with the construction of a section of the pipeline within the Turkish territory;
The guarantee agreement stipulates provision of guarantees on reimbursement by Turkey of the cost of building the section of the pipeline on its territory if that figure exceeds $1,4bn.
It is notable that those agreements have been ratified by the official representatives of all three governments, as well as, by AIOC’s representatives.
Thus, judging by what SOCAR President Natig Aliyev has said, the parties had completely resolved the issues with the guarantees of not-exceeding total cost of the project – within the Turkish land it would be provided by the Turkish government, but in Azerbaijan and Georgia – by AIOC.
However, in reply the consortium stated that nobody of its official representative had taken part in discussion of the issues on guarantees provision for not-exceeding the MEP project cost within Georgia and Azerbaijan.
AIOC’s staff members of high rank on behalf of Wref Digings have only participated in negotiations relevant to the Baku-Ceyhan project and have taken part in preparation of the package of intergovernmental agreements on MEP as a part of the Azeri working group.
Thereby, the experts emphasize the fact that in the event of starting the negotiations on such the guarantees, not AIOC as a single structure but its shareholders would participate at them. Therefore, it is fully possible that one or a few stockholders of the consortium agree with Azerbaijan on reimbursement of the corresponding MEP risks, but another group of companies would consider such the step as commercially inexpedient.
Baku still counts on the leader – AIOC (Operated by BP Amoco) that owns 34.14% of the consortium’s interest.
However, the company is not in a hurry to guarantee the investments in construction of the Main Export Pipeline and it confined itself to statements on "geopolitical expediency of the project". Hence the issue of defining a party, which would be a guarantor of not exceeding the cost of the Baku-Ceyhan project within Azerbaijan and Georgia is still unsolved.
After the return from Istanbul N.Aliyev has also noted that in the nearest future the establishment of the pipeline company – MEPCO – would be finished. The company will be engaged in detailed engineering and general preparation of the project, signing corresponding contracts and inviting tenders on construction of the pipeline. "I think that during the year we will be able to set its financial structure up and get down to pipeline construction. We expect that it will be underway in a year or maximum year and a half and will take two and a half years in total", N.Aliyev noted.
Judging by what he said the construction of MEP would be competed by 2004.
Final capacity of the pipeline will be 50m tones of oil a year. Thereby, at the first stage the capacity of the pipeline will be less (about 25m tones of oil a year), but according to the President of the State Oil Company, the pipelines to be laid are to be 42 inches in diameter.
The debottlenecking of MEP will take place gradually and at the cost of increase in pump stations’ capacity.
A transit rate for the Baku-Ceyhan route would amount to $2.58/barrel and according to N.Aliyev, it makes a provision for oil transportation through the whole route – from the Sangachal Terminal to Ceyhan where oil tankers will be filled.
As it has already been informed BOTAS, a Turkish company, had been selected as the main contractor to the project. Total estimated cost of the project is equal to $2.4bn, out of which $1.4bn are supposed to be used for laying the pipeline in Turkey, $0.4bn – in Georgia and $0.6bn – in Azerbaijan.
However, at the end-1999 unexpected resistance to the start of putting the project into effect came from the Georgian side that raised four main issues, which need to be solved for successful completion of the negotiating process:
Lack of correspondence between a number of terms and conditions laid in the Baku-Ceyhan MEP agreement and present constitution of Georgia,
Landownership – what are the rights of the pipeline owner on the land, etc.
Mutual guarantees and obligations between the state and companies,
Determination of fiscal policy, i.e. coordination of the financial aspects of the project.
After negotiations with Georgia, which lasted more than three months, Azerbaijan could remove practically all disputable problems and achieve a consensus on the most painful problem – sharing the transit tariff rate.
Really, on the face of it a voluntary refusal of the transit tariff seems to be extremely radical method to achieve compromise with intractable Georgia. But the first impression is sometimes illusory.
Firstly, it should be noted that the statement of President H.Aliyev in Tbilisi on passing the Azeri share in the transit tariff over Georgia was not a sort of something composed on the spur of the moment, but was one of carefully prepared options by the experts. Anyway it is obvious that the option was initially meant for "extraordinary" situations and should have been used in extreme position. However, by that time the bilateral Azerbaijani-Georgian negotiations kicked off last December reached a deadlock due to just one issue because Tbilisi insisted on having a tariff higher that $0.20/barrel.
Bypassing some further history it is worthwhile to say that Georgia could not keep the desired limit.
The potential investors have shown nervousness by the early-March and one by one they pointed out to Azerbaijan, the project initiator, on non-observance of initially set terms of the project. Those reproofs could not be considered as the best advertisement for the Baku-Ceyhan project, especially at its present stage of implementation. New failures in negotiations could have finally persuaded serious investors in lack of prospect for the Ceyhan pipe. However, somehow or other the decision "has got into necessary shape" and H.Aliyev himself called it a risky but necessary step aimed at forcing the MEP construction project.
So, according to approved "spreadsheet" the rate of the fixed transit tariff for Georgia for the first 5 years of the Baku-Ceyhan pipeline operation would total $0.12/barrel. For the following 11 years the transit tariff for Georgia would equal to $0.14/barrel, and for last 24 years - $0.17/barrel with a possibility of having this value increased.
Similar table for Turkey looks as follows: for the first 5 years - $0.20/barrel, for the following 11 years - $0.30/barrel and for last 24 years - $0.37/barrel. Judging by what Valeh Aleskerov, the head of SOCAR Foreign Investments Department, has said, residual sum to the tune of $2.58/barrel of total MEP transit tariff would be meant for reimbursement of the transport cost, pipeline maintenance, compensation of interests due to funds attracted, etc.
SOCAR itself does not think that the republic would have any loses due to the decision taken. In any case Azerbaijan will have large dividends from the MEP project and it should also be realized that we are not the transit country, but oil producer, that is why we will have income as a result of oil fields development, but not as a transit party, Natig Aliyev, SOCAR President, thinks.
According to him, the main aim of the country is a prompt implementation of the project. "The quicker we can put it into practice, the sooner we get our income, but any delay results in damage to the republic", N.Aliyev underlined.
At the same time, in his opinion, it is not a right way to consider that Azerbaijan has made any concessions to Georgia. "In a number of clauses of the Transit Agreement the Georgian party had to compromise, in particular, when the issue was about guarantees provision. At that time our main demand was to get Georgia to reimburse loses of oil exporters as a result of intentional damage of the pipeline within its territory", the head of the State Oil Company clarified.
It should also be mentioned that Azerbaijan in any case would get real income from oil pumped through MEP, however, as a turnover tax and only after reimbursement of all capital expenditures within the framework of the project.
According to Ilham Aliyev, the first vice-president of SOCAR on foreign economic relations, for that purposes 8-15 years on an average would be required depending on world oil prices movement.
And finally one more important fact that unconditionally affected Azerbaijan’s decision was Baku’s unwillingness to leave the most important investment project unsolved against background of growing power in Russia the main policy of which after V.Putin’s victory on the presidential elections, is still not defined precisely. Moreover, the Foreign Minister of the Russian Federation V.Ivanov on March 27, 2000 right away after announcement of initial results of the elections has "vaguely" stated on changes in the foreign political course of Russia. Nobody can guarantee that they will not touch upon, in particular, Azerbaijan. It is of great importance if taking into account the active Russian policy conducted in Caucasus.
In the final analysis, at the end-April in Washington DC the official delegation of Azerbaijan, Turkey and Georgia ratified the Transit Agreement within the frameworks of the Baku-Ceyhan pipeline construction project. US Secretary of State Madeline Albright was in the chair when ratifying the document.
Based on the results of the negotiations the parties could resolve the last of above provided reasons that concerns capital responsibility of Georgia for possible intentional damage to the pipeline on its territory. The representatives of the Georgian delegation have confirmed their readiness to be responsible to the oil exporters and owners for the material and financial aspects of the pipeline within the limits of the Georgian territory. The representatives of the Georgian delegation have confirmed that, however, they achieved some mitigation in the wording of the Transit Agreement: phase "Georgia must be responsible to the oil exporters and owners for the material and financial aspects of the pipeline security within its territory before" was replaced approximately by the following wording: "Georgia will make every effort to provide security of the pipeline".
Earlier official Tbilisi has stated that as a result of a difficult internal financial situation, Georgia has not been able to provide guarantees for reimbursement of possible loses to the oil exporters and owners in the event of an intentional damage to the 200-km section of the pipeline within its territory. Georgia was trying to share the responsibility with the foreign investors.
However, according to the exporters nobody from international financial institutions has in written form provided such the guarantees. "Everybody understands very well that in any case Georgia will not be able to be fully responsible for possible intentional damage to the pipeline and future investors will take into account present situation in this country", one of experts stated. It is therefore possible that in the near future when entering into contract with the founders of the project the investors would stipulate the measures on insurance of their interests in laying and commissioning the Georgian section of the pipeline.
Thereby, the experts involved in the negotiating process note that the text of the Transit Agreement has not yet been signed by investors and representatives of the Georgian government. The project investors will be defined sooner after holding relevant negotiations.
Thus, it is possible to state that at the present moment one more stage of the negotiating process on the Baku-Ceyhan project is completed. Azerbaijan, Georgia and Turkey have agreed and ratified the whole package of the intergovernmental agreements including – the main document on MEP signed by the presidents of these countries, contract on construction on "a turn-key basis", document on guarantees of Turkey on not exceeding the fixed cost of the MEP construction within its territory and the Transit Agreement between Georgia and investors.
On May 17 the President Heydar Aliyev of Azerbaijan has delivered a package of Intergovernmental agreements on the MEP construction project on the Baku to Ceyhan route to the Milli Mejlis of the republic for further ratification.
According to Asya Manafova, the chairman of a parliamentary commission on natural recourses, power engineering and ecology, the ratification of the package of agreements should be held on May 26, 2000, but prior to that her experts would be engaged in detailed consideration of the documents within the commission. Thereby, despite availability of different conditions in the package, it will be studied within the frameworks of this commission only.
As it used to be before, during the ratification the parliament would give the draft copy of the agreements their first reading, A.Manafova noted. It is worthwhile to stress that if Azerbaijan is going to complete the ratification of the documents on MEP by the end-May, the official representatives of Turkey and Georgia had already stated that consideration of the Intergovernmental agreement by their parliaments would take place in June.
The package of the document consists of 4 agreements:
intergovernmental agreement;
the turnkey construction contract;
guarantees of the Turkish government on not exceeding the cost of MEP construction within its territory (not higher than $1.4bn);
the Transit agreement between Georgia and investors.
According to the Azerbaijan strategy on implementation of the pipeline construction project on the Baku to Ceyhan route, the official Baku is intended to hold 3 levels of project presentations to attract potential participants of MEPCO. At the first stage the project will be presented to the representatives of 11 companies – AIOC shareholders, at the second – to 32 foreign companies participating in the oil contracts in Azerbaijan, and finally at the third stage it will be presented to the companies which have not yet set their business in Azerbaijan.
After ratification of all mentioned documents in the parliaments of Georgia and Turkey, that is going to happen as early as June, the contractors will start full project engineering which according to some assessment will take 1.5 to 2 years. The basic feasibility study will be performed during the first stage of the project, as well as, the environmental impact assessment will be completed. The second stage will be devoted to development of detailed feasibility study in the run of which an estimated cost of the project should be stated by independent experts. It will be the stage at which, according to AIOC experts, probably overspend on the project will be defined, and then the guarantees of the parties on reimbursement of the difference at their own cost will be in force. Then the participants of the project will submit the draft project for approval to the western financial-investment institutions and hold negotiations on borrowing terms and conditions.
In opinion of the SOCAR leadership, this process can be completed by the end of this year in order that the laying of the pipeline starts in 2001.
The construction of the route will last two and a half years and Azerbaijan expects completion of the MEP construction by the early/mid-2004.
As it is known, a readiness of the investors to provide funds under the MEP is an apprehension which can be expected in future, and according to experts, this process can be facilitated and fastened by legally binding treaties between MEPCO and oil companies, in accordance with which the oil companies will have to declare volumes of oil they will be able to have for pumping through the pipeline. So far such the agreement can be signed with AIOC only which has stable oil production. The first results from the rest of the Caspian consortia can be expected in 1-1.5 years at best.
It should be mentioned that an "enticement" in the form of above said existing tariff to the tune of $2.58/barrels has already been prepared for potential investors. According to SOCAR, at that rate they will pump the oil towards Ceyhan. All other future users of the pipe will pump the oil on the basis of other, undoubtedly, higher tariffs.