16 July 2018

Monday, 02:59



Azerbaijan extended the Production Sharing Agreement with transnational oil companies until 2050



The Heydar Aliyev Center of is a majestic creation by the world-famous British architect Zaha Hadid. This snow-white building remarkable for its round and smooth lines has become a symbol of the new Baku along with the Flame Towers and personifies the successful development of modern Azerbaijan. "This is a perfect symbol of the successful advancement of Azerbaijan after gaining its independence," said British Minister of State, Alan Duncan, on September 14, 2017 at the signing ceremony of the renewed Contract of the Century in Baku.

It is symbolic that the signing ceremony of the renewed contract for the development of the Azeri-Chirag-Guneshli deep water fields, designed to be the continuation of the current Contract of the Century, took place at the Heydar Aliyev Center.

Signed on September 20, 1994 at the dawn of the restoration of Azerbaijan's independence, the Contract became not only the locomotive of the country's development, but also influenced to a certain extent the preservation of sovereignty and statehood in the early years, as it was possible to attract companies from the USA, Great Britain, Turkey, Russia and other countries, ensuring the interest of many states in such a difficult time in a complex region.

As a result, the Contract of the Century was the first sign that ensured investors' confidence in the country as the driving force of economic development. This allowed Azerbaijan in the following years to conclude more than 30 contracts for the development of oil and gas fields, including the Shah Deniz gas field, which turns Azerbaijan into one of the most important players on the energy map of the world.

The contract for ACG development was designed for 30 years, and would expire in 2024. For several years, foreign companies involved in the development of ACG have supported the extension of the contract period to ensure inflow of new investments to prevent the decline in oil production due to depletion of the fields. However, SOCAR played an instrumental role in advocating the re-design of the contract taking into account new realities. The position of the Azerbaijani company is quite clear: in 1994, Azerbaijan needed such a contract with large oil companies to ensure the flow of investments and show the world that conditions for foreign business were created in the country. Considering that only three years have passed since the restoration of independence, and Azerbaijan was suffering from the active phase of the war with Armenia, which occupied 20% of the territories of Azerbaijan, the contract was completed in a few months before September 1994 and the terms of the contract were not the best. The economic crisis, rampant unemployment, inflation, lack of financial resources have further aggravated the situation.

But the situation has changed radically, primarily thanks to the same Contract of the Century. Over 23 years, Azerbaijan has received $125 billion in revenue. Using these funds over the last decade, Baku has been updated not only with buildings, but also with new road infrastructure, schools, modern medical centers. And not only Baku, new roads run accross the whole territory of Azerbaijan, children are being trained in upgraded schools in remote mountain villages, and patients in the regions of the country do not need to go to the capital to receive qualified medical care. The revenues from the Contract of the Century underlie the existing conditions, at low oil prices, allow developing the non-oil sector of the economy.

Foreign exchange reserves of the country exceed $40 billion, whereas in 1994 there were practically none. SOCAR has become a fairly large international company, actively developing business in Georgia, Turkey, Ukraine, Switzerland, Malta, Southeast Asia, Africa and other countries and regions. But when the Contract of the Century was signed and during the first years of its implementation, SOCAR did not have the means to even pay its 10 percent share of the costs. The foreign partners did this taking part of the oil.

"Today Azerbaijan belongs to those countries that live at their own expense. We have quite large foreign exchange reserves. The economy is developing dynamically, very important steps have been taken to diversify the economy, reduce dependence on the oil and gas factor, and there are no political, economic or any other obstacles or problems for the future development of our country. Azerbaijan has great potential. In recent years, we have been building up on this potential, and the Contract of the Century plays an instrumental role in the development of this potential. It is difficult to imagine what would be the conseuquences if the Contract of the Century was not signed back in 1994. Today, we treat countries that pursue an independent policy. And our opportunities for carrying out an independent policy, first of all, are based on our economic opportunities. The Contract of the Century has created these opportunities for us, "  said at the signing ceremony of the renewed contract President of Azerbaijan Ilham Aliyev.

Successful transformation of oil revenues into human capital can be considered an even more important result of the implementation of the Contract of the Century. It is no secret that oil can bring both benefits and problems, it is enough to compare, for example, Norway and Nigeria.

Azerbaijan has chosen and is successfully implementing the Norwegian model. It is clear that until now most of the income was spent on developing the economy, updating the infrastructure, building new schools, hospitals and other facilities. In particular, over 3 thousand schools, over 600 hospitals, over 50 Olympic centers in the regions were built, about 11 thousand kilometers of roads were laid, energy and water supply infrastructure was updated.

New houses were built for 250,000 internally displaced people in 100 new settlements that used to live in tent camps. All these measures have made it possible to develop the non-oil sector to a significant extent-tourism, agriculture, industry, etc.

"The foresight of the late President Heydar Aliyev deserves approval, as he invited British world-class companies to share their rich experience, to help develop the oil and gas infrastructure in Azerbaijan. Over the past 23 years, billions of dollars have been invested, more than 3 billion barrels of oil have been delivered to world markets. Thus, the ACG fiels made a great contribution to the economic development of Azerbaijan. Making a walk through the capital of Baku today, I personally became convinced of this contribution, which aroused deep feelings in me.

I am glad that the extension of the contract will bring our countries economic benefits. By establishing such ties, we will ensure long-term prosperity and stability for the future," said British Minister Alan Duncan.

Further development of ACG deposits will provide additional injections into the non-oil sector, and will help to accumulate significant funds for future generations. After all, in 23 years of field operation, less than half of all the reserves of the field were produced - 436 million tons, of which 245 million tons is Azerbaijan's share of profitable oil. More than $33 billion have been invested in the development of the fields. These funds went to construction of 6 production and 2 technological platforms, drilling of almost 200 wells, construction of the Sangachal Terminal, one of the largest in the world, etc.

Within the framework of the renewed contract until 2050, it is planned to produce 500 million tons of oil. According to BP CEO Robert Dudley, another $40 billion will be invested in the fields over the next 32 years. It is expected that the funds will be spent on drilling new wells, repairing and updating existing platforms and possibly building another production facility. All these measures are aimed at preventing the decline in oil production, because due to the depletion of productive layers, production fell from a peak of 830 thousand barrels per day in 2010 to 580 thousand barrels in the first half of 2017.

And in recent years, the main task of BP, acting as the operator of the project, was precisely the prevention of falling production and stabilization at an acceptable level. However, the terms of the termination of the contract made it senseless to invest new investments. As can be seen from the terms of the updated document, this requires even more than what has been invested so far.

Under the current circumstances, foreign companies can safely continue investing funds, being firmly convinced of the invariability of the terms of the contract until the middle of the 21st century.

SOCAR President Rovnag Abdullayev said that within the new contract the share of Azerbaijan's profitable oil would remain at a stable level of 75% of the total production. As a result, according to preliminary calculations, the country can receive up to $200 billion. At the same time, foreign companies will pay bonuses of $3.6 billion to Azerbaijan as certain conditions are fulfilled, the first installment of $450 million will be received after the ratification of the agreement in the Parliament. Another important change is the increase of SOCAR’s share from 11.65 to 25% due to a decrease in the share of other contractors. The current position of the company allows us to absorb the financial burden of the contract, which promises big profits in the future.

The infrastructure created in previous years will contribute to the production of almost all the construction and renovation of platforms in Azerbaijan. For example, two large platforms were entirely constructed in Azerbaijan under the Shah Deniz Stage II development. The first ACG platforms were delivered to Baku in large blocks and only assembly was carried out there. The accumulated experience will be involved in the implementation of the new contract.

Thus, the renewed contract for the development of ACG fields looks quite promising for Azerbaijan in terms of the added revenues and provides stable profits to foreign companies that believed in Azerbaijan back in the 1990s.