Author: Namig MAILOV
"Recently we celebrated a historical landmark, the 25th anniversary of the Contract of the Century. As one of the active participants in the negotiation process on this agreement, which moments you remember the most?"
“The Contract of the Century played a special strategic role in the history of independent Azerbaijan. The successes of these 25 years strike with the grandeur of energy projects being implemented in our country and abroad. The triumphal path of the Contract of the Century, which allowed Azerbaijan to get out of the state of deep crisis to unprecedented socio-economic growth, significantly changed the energy map of the region, laying the foundation for a new system of mutually beneficial cooperation.
In the history of modern Azerbaijan, the name of the national leader of Azerbaijan, Heydar Aliyev, is forever connected with this contract. He has set the task and determined the parameters for its implementation; he has encouraged the participants of the process with his enthusiasm and ideas and led us along a difficult path through all the obstacles of the negotiations and signing, and during the implementation of the most significant project of the twentieth century ever implemented in the post-Soviet space.
We worked day and night after Heydar Aliyev met in the spring of 1994 with the entire group of employees of the State Oil Company of Azerbaijan (SOCAR) involved in the project. He listened to us, advised us, explained, and set specific tasks. It was not at all easy for us to solve these problems under the then conditions for relatively young and unexperienced negotiators as we were at that time. We understood the assigned tasks very clearly.
Heydar Aliyev explained his thoughts easily and intelligibly. He also told us how important the contract was for our country, its people, for all of us. I think that no one could give us a better explanation.
I still remember that meeting. The way Heydar Aliyev talked, the way he looked like. During the whole negotiation process, he has never ceased to take care of the team and the negotiation process and supported everything that we did to achieve the ultimate goal. He would call us showing his interest in the progress; he would ask questions and give instructions. It was a lively process and Mr. Aliyev was specifically interested in working on a contract, the value of which for the country, in my opinion, only he understood then.
Can you imagine his willpower, confidence in own actions and vision that he used to convince the international oil corporations to invest huge amounts of money in a country which, in the conditions of ongoing clashes, devastation and the lack of relevant experience and legislative base, did not even exist just three years before the event?
At the same time, Azerbaijan was not only isolated geographically, being a country without access to open seas, but also politically. For a long time, Azerbaijan had been part of the USSR unable to conduct an independent policy. If so it did, the central Soviet government would punish it."
"Can we say with confidence that the contract met our expectations in full?"
"Back in 1995, analysts recognised the contract as one of the most stringent conditions reached with foreign investors, and, accordingly, the most beneficial for the host. Twenty-five years of work with the Azeri-Chirag-Guneshli field have proved that what we predicted then exceeded the wildest expectations by many times and brought Azerbaijan many times more than we expected.
The three-round negotiations, which took place on May-September 1994 with the participation of a very small Azerbaijani negotiating group, united into one team led by the then Vice President of SOCAR Mr. Ilham Aliyev, successfully ended on September 20, 1994 with the signing of a contract that was later called the Contract of the Century.
President Ilham Aliyev managed to fully protect the national interests of Azerbaijan, taking on the main burden of negotiations in a tense geopolitical environment for signing the Contract of the Century.
The first contract was concluded for 30 years with a possibility of further extension. New oil and gas reserves (more than twice larger than what we expected back in 1994) discovered during the development of the field, as well as the successful cooperation of SOCAR with BP as the project's operator and with all project partners, and the accumulated experience made it possible to predict the terms and the prospects for the contract confidently.
All this set of multifaceted factors made it possible to say that the Azeri-Chirag-Guneshli (ACG) fields are not just a pearl in the crown of our other deposits, but an exclusive diamond that can be further faceted with the help of further contract negotiations and the development of new conditions.
On September 14, 2017, we concluded a new contract, even more beneficial for Azerbaijan, to develop ACG up until 2050."
"The role of the Contract of the Century can hardly be overestimated in terms of the development of the region as a whole. What are the main dividends received over the past 25 years?"
"I believe that President Ilham Aliyev gave the best assessment of the contract in his recent speech at the ceremony dedicated to the 25th anniversary of the Contract of the Century and the Day of Oil Workers on September 20: the Contract of the Century is an integral part of Heydar Aliyev’s oil strategy, its beginning. And indeed, the contract has a special role in the history of our independence."
Over the past 25 years, oil production in Azerbaijan has increased more than four times, and gas production - five times. This is an excellent result, which contributed to the revival in all sectors of Azerbaijan's economy thanks to a multiplier effect. As a result of effective management of oil revenues, we could achieve a real breakthrough in all sectors of the economy, let alone the upgrade of our military potential, education, science and healthcare, social services, and the development of modern urban infrastructure. Azerbaijan's GDP has grown by 216 times, and the poverty level has decreased by more than ten times. Transformation of oil revenues into human capital has led to a steady increase in the quality of life and, above all, the welfare of our population.
The Contract of the Century marked the beginning of a new era in the oil and gas industry, which is today the leading force in the Azerbaijani economy. To develop deep-sea deposits in the Azerbaijani sector of the Caspian Sea, the country used the state-of-the-art technologies and innovative production methods. About $265 billion was invested in Azerbaijan, of which $101 billion was invested in the oil and gas industry. The volume of investments invested in the development of ACG exceeded $36 billion. Our cooperation with investors and contracting companies is based on a legislatively solid and unchanged basis for all these 25 years.
As President Ilham Aliyev said in his address at the signing ceremony of the new contract for ACG fields on September 14, 2017: “Azerbaijan has created a very successful, interest-based format of cooperation with leading foreign oil and energy companies. This has brought us great benefits. As a result of this project, foreign partners also received large profits. This is one of those rare cases where both sides win.”
"In addition to the oil and gas industry of Azerbaijan, the contract initiated a series of large projects of regional significance..."
"That's right. The most important component of the contract that we concluded back in 1994 was the provisions on the construction of the main export pipeline Baku-Tbilisi-Ceyhan (BTC). Much before we started work on the BTC, which was successfully completed in 2006, in 1995, we began negotiations on the Baku-Novorossiysk pipeline. In parallel, we held talks on the Baku-Supsa pipeline commissioned in 1999 and followed by the South Caucasus Gas Pipeline operational since 2006. So, the pipeline strategy has gradually acquired its current shape.
Obviously, this is a continuation of the vision that was laid back in the nineties and realized in the 21st century by President Ilham Aliyev. He had a vision that Azerbaijan, as an isolated country without access to seas and infrastructure that would ensure access to international markets, must make a breakthrough, create a network of pipelines much larger than the Baku-Supsa and the Baku-Novorossiysk pipelines. That same vision became a cornerstone of the independence we enjoy together today.
It is already universally recognised that the ACG, Shah Deniz, BTC, and the Southern Gas Corridor (SGC) projects form a basis for the security and independence of Azerbaijan and the regional states. They serve as a bridge, which connects us with other countries feeding them with natural resources and bringing us well-deserved profits.
We continue to work on the SGC. It is almost complete in Turkey. The construction of the pipeline's sections in Azerbaijan and Georgia is complete. The system was commissioned in July 2018, and we expect first gas supplies to Europe in 2020. But again, this is only the beginning. SGC will also develop in stages. There will be more gas pumped through the system and more producers and consumers will have access to it. But this will be possible in the future."
"The Contract of the Century brought Azerbaijan “live” money, the so-called petrodollars. How efficiently were they spent?"
"When Azerbaijan began receiving the first revenues in 1997, the government began to think about what to do when there would be even more revenues, and set about developing an appropriate strategy. As a result of this strategy, the State Oil Fund of of Azerbaijan (SOFAZ) was founded in 1999. This year the fund celebrated its 20th anniversary. Time has shown the success of this endeavour.
SOFAZ is unique. Part of the fund’s money was spent on supporting those who lost the most over these years. I mean the refugees, internally displaced people, people who lived in terrible conditions. Some of the funds are used to support our industry, including oil and non-oil industries. Of course, the fund makes money on its own as well.
In fact, the fund was created and is managed exclusively correctly and efficiently. It is an institution that plays an instrumental role in the economic life of Azerbaijan. The distribution of its resources was carried out as transparently as possible, in accordance with the principles that were formulated and strictly implemented by President Ilham Aliyev for the benefit of future generations of Azerbaijanis."
"A new stage in the oil era has initiated the development of gas production in Azerbaijan. After all, it was the success of the Contract of the Century that ensured the start of the Shah Deniz project."
"Sure. One of our key achievements in 25 years was the recognition of Azerbaijan as an important new source of natural gas. As a result of the successful development of the Shah Deniz field, Azerbaijan has become not only an exporter of natural gas but also a leading force in global infrastructure gas projects. Last year, we successfully completed three of the four segments of the 40-billion megaproject SGC, carried out on the initiative of Azerbaijan. Now we are fully prepared to supply gas produced under the Shahdeniz-2 project to Europe. The construction of the TAP pipeline, the last segment of the corridor, is also nearing completion. Over the next 25 years, SGC, which is already a reality, will even more closely connect us with European countries and partners in these countries, significantly expanding our international cooperation, while at the same time providing rich opportunities for a new infrastructure for all interested parties.
As for the infrastructure, I would like to underline that for a relatively small country as Azerbaijan, which nevertheless plays an important role on the world energy map, we have significant hydrocarbon reserves. We still have a significant number of prospective structures (more than 50) and continue negotiations on many of them. Both these structures (some of them are contracted or under development) and ACG enter the next stage of development after the first phase of the project. Like the Shah Deniz project, for example. We believe that the third, and possibly even the fourth, phase of the project will follow in the future.
Azerbaijan's investment potential is huge: the proven reserves discovered by our experts reach 2.6 trillion cubic meters of natural gas and 1.5 billion tons of oil. We should note the enormous role of our esteemed First Vice President of SOCAR, Academician Khoshbakht Yusifzadeh, who discovered most of these deposits.
Gas production in Azerbaijan has increased five-fold over the 25 years and by 30.3% over the past eleven years. This positive trend continues: by the end of 2019, we predict a 20% increase in total gas production. In subsequent years, gas production in Azerbaijan will continue to grow. Along with Shah Deniz, exploration and production works at Absheron, Karabakh and Umid fields show that gas condensate reserves have good prospects. We also have great expectations from such structures and deposits as Babek, Shafag, Asiman, Ashrafi, Dan Ulduzu, Aypara and others."
"You mean that the mining industry is on the rise, which encourages the development of related industries, such as the petrochemical industry."
"The success of the gas industry opens up new horizons for us both in the gas processing and in the chemical industry, prompting the creation of local enterprises that can produce products that were previously imported from abroad. Last year, we made significant progress in this direction by putting into operation high-density polypropylene and polyethylene production plants at SOCAR Polymer and SOCAR Carbamide plants.
SOCAR Polymer will produce 300 thousand tons of products annually. We expect to export 70% of the produce to foreign markets. At the same time, the use of these products as raw materials for the production of various kinds of consumer goods will give an incentive to the development of small and medium enterprises and will play an important role in expanding the non-oil sector.
The main objective of the carbamide (urea) plant is to meet Azerbaijan's demand for nitrogen fertilisers. 650-660 thousand tons of fertilizers will be produced here annually, 2/3 of which is planned for export. The commissioning of new plants greatly diversifies our production operations. This will reduce dependence on traditional types of products; it will guarantee us against the volatility in the international oil markets. Diversification of the investment and operational portfolio is one of the primary challenges of our time, and we can confidently say that SOCAR has been successful in this direction as well.
The raw materials used at both SOCAR Polymer and SOCAR Carbamide plants are supplied by the Heydar Aliyev oil refinery and Azərikimya Production Association.
The objective of reconstruction process currently ongoing at the Heydar Aliyev Refinery and Azərikimya is to bring these large enterprises in line with the growing pace of the country's economy, to upgrade their main facilities, to build new ones increasing the quantity and quality indicators, and the product range, as well as to ensure production complying with the highest European standards.
After a major reconstruction, both the refinery and chemical complex will serve our people for many more years producing better and more environmentally friendly products, significantly increasing our export opportunities."
"SOCAR has transformed and grown during these 25 years. Has the company managed to hit the main objectives?"
"SOCAR is a worthy successor to the traditions of the oil and gas industry of Azerbaijan, which has an ancient and glorious history. The company has changed beyond recognition. It has been modernised becoming one of the largest national oil and gas companies in the world.
Our company is the leading force in Azerbaijan's economy and fulfils the orders coming from the government regarding exploration, drilling, production, transportation, processing and exporting hydrocarbons in a timely manner.
Using new technologies, SOCAR independently builds, installs and operates deep-sea foundations, carries out drilling and production at sea depths, on complex geological structures under high pressure, creates industrial enterprises operating in line with international standards, and participates as an operator in projects of global scale.
It is especially significant for the Azerbaijani oil industry that the construction of new production modules and supporting blocks of huge offshore platforms are carried out in Azerbaijan and with the participation of local specialists at SOCAR's construction sites.
One of the key tasks set by President Ilham Aliyev is to make SOCAR an internationally recognised, modern and competitive, vertically integrated multinational company. I can say that we have already achieved significant success in this area. SOCAR has confidently entered the world markets and continues to strengthen its position there.
The successes achieved during the construction of the TANAP pipeline showed that SOCAR can carry out large and very complex projects outside Azerbaijan in a timely manner and with high efficiency. We successfully operate in Georgia, Turkey, Ukraine, Romania, Switzerland and other countries.
Our operations already cover almost all continents. Last year, we implemented various commercial operations in more than 100 points of 40 countries, which indicates the presence of SOCAR wide and developed global trading infrastructure network. At the same time, about 80% of our trading operations are carried out at the expense of third-party products. By continuously diversifying our business portfolio, we are committed to increasing our share of participation in international markets. We are currently considering the possibility of building a new petrochemical complex in Turkey in conjunction with BP.
SOCAR is the largest foreign investor in Turkey. Within a short period, we were able to create a single infrastructure and value chain, which is gradually becoming strategically important for the two fraternal countries. It includes such large assets as the Petkim petrochemical complex, wind power station, the SOCAR container terminal, which is the largest port in the Aegean Sea, a fiber-optic line and the STAR refinery commissioned last year. The products we produce at the STAR plant boost the development of our business in Turkey.
In a word, SOCAR grows and develops every year, exploring new segments in international markets, increasing the value of the national wealth of Azerbaijan. At SOCAR, we always remember our social responsibility and actively participate in the socio-economic development of the regions of Azerbaijan, projects of the Heydar Aliyev Foundation, other projects in countries where we are actively represented."
"One of the most crucial tasks challenging the global oil companies is to minimize environmental damage during the implementation of production activities. Can SOCAR comply with high environmental standards?"
"SOCAR is at the forefront of environmental protection, which has gained widespread momentum in Azerbaijan and is aimed at eliminating the problems that we inherited from oil and gas production of the Soviet times. We carry out large-scale measures to clean oil-polluted fishing areas, in particular the Absheron Peninsula, to clean sea water, to create green spaces, and to prevent the emission of greenhouse gases. SOCAR's environmental projects have been praised by the UN and the World Bank. Our Waste Management Centre is the first such company in the CIS and the Caspian region specialising in waste management of the oil and gas industry.
I am happy to note that our foreign partners are actively cooperating with SOCAR in the implementation of environmental activities. For example, many companies involved in the SGC project are committed to reducing methane emissions in the value chain of the natural gas production and distribution (Methane Guiding Principles Initiative). SOCAR is one of the first national oil companies to join this initiative, and the first company in the Caspian region to stop flaring associated gas.
The Southern Gas Corridor is using modern technologies to ensure the production and supply of natural gas with the lowest possible methane emissions. In this sense, the construction of SGC will also have an important demonstration effect in setting new industry standards for methane emissions.
All these global achievements reflect the success of the energy strategy developed by the national leader Heydar Aliyev and successfully continued by President Ilham Aliyev."