PARTNERSHIP FOR OIL

The commotion caused by the sharp remarks of President Ilham Aliyev against the BP oil company, which has been operating large oil and gas projects in Azerbaijan for many years now, is gradually waning. To recap: the head of state said that the decrease in the oil production from the Azari-Ciraq-Gunasli [Azeri-Chirag-Guneshli] oil fields is the consequence of violations in the activity of BP that resulted in the rapidly declining production of oil from the fields in the past years. Aliyev noted that this is not related to the oil production from the fields in question reaching their zenith and now entering a natural process of decline. "It is about failure to fulfil the forecasts that have been set", - the head of state added. He also pointed out that because of the failure to fulfil the forecasts for production Azerbaijan did not receive revenue to the tune of 8.1bn dollars in 2009-2012.

As expected, there was no loud exit by the British oil giant: ВР solemnly promised to rectify the situation and reached agreement with the state oil company (SOCAR) and the Azerbaijani authorities. The company has already made its first steps in this direction and considering the seriousness of the warnings that were made this time everything possible and impossible will be done to meet the forecasts for oil production. 

18 years of respect

Meanwhile, from the outset some circles sought to link the issue of ВР & Co. with political processes involving Azerbaijan. Speaker Oqtay Asadov even had to speak out about this at a Milli Maclis session: "The Azerbaijani president talked about the production from the Azari and Ciraq oil fields. This is elementary that forecasts have to be fulfilled. However, for three years running neither forecasts, nor commitments were fulfilled. However, turning this into a show and a political matter is not respectable. BP will fulfil its commitments for oil production in Azerbaijan as it received its last warning".

The indignation of the Speaker is understandable: some absurdly nonsensical suggestions and forecasts were aired regarding the situation with BP. It reached the point where even Armenian President Serzh Sargsyan sought to impossibly link the possible exit of BP from Azerbaijan with a change of forces in the Nagornyy Karabakh issue, certainly in favour of Armenia. "It is true that the possession of oil can influence the process in favour of Baku, but are we really that sure that this mortgage will continue to prevail over others? According to the latest news, Azerbaijanis oppose the presence of British Petroleum. They believe that they can do without the presence of the English: balance may change", - Sargsyan said. 

This extremely convoluted and unclear "pearl" only expressed the great wish of our "friendly" neighbours to see the collapse of Azerbaijan's oil strategy. Most likely, the head of the neighbouring state meant that after the British company from Azerbaijan exits the production of oil here will be stopped, and all energy resources will be exhausted and all foreign companies will leave… 

However, leaving aside the next "brilliant" Sargsyan remark, let us note that in any case, BP is not going anywhere, oil production in Azerbaijan will not fall, and foreign companies can work in peace, if they are living up to the arrangements and consistent in their actions.

It should also be noted that Azerbaijan has the legal right to replace the operator of the ACG. However, as the president of SOCAR, Rovnaq Abdullayev said, it is too early to do this: "Since the signing of the "Contract of the Century" 18 have passed, and Azerbaijan respects the contract and creates good conditions for its members," - he said.

Minister of Industry and Energy Natiq Aliyev told journalists that "the Azerbaijani President's statements in respect of BP do not carry any threat to foreign oil companies. There is no threat that companies will have their contracts terminated. In this case we are talking about the measures to be taken to stabilize the oil production on the "Azeri-Ciraq-Gunasli", - Aliyev said.

According to him, the sharp decline in oil production at the ACG for the past two years "should be seriously argued, though this should not be scary": "At the time Azerbaijan took its oil production to 51m tons a year. When the reserves of ACG were estimated at 511m tons, it was expected that stable oil production for many years may be 35 million a year. When the reserves were revised upwards, it was even planned that the annual production from the ACG may reach 65m tons per year, " he said.

Aliyev said that the ACG development is based on an annual program that is worked out every year, which reflects all the necessary arrangements, but "all of these activities have to be justified." "When one level of production is planned, but in the end we see the numbers that are very different from those planned, it means that either the program was made incorrectly, or activities that were carried out to stabilize the oil production proved sufficient," Aliyev said.

The minister also stressed that a wider range of scientists should be involved to work out ways out of the situation. 

If you cannot stand the heat 

Scientists will likely be involved in resolving the situation we can only hope that this time the opinion of Azerbaijani specialists will also be taken into account. However, we already know that there have been changes in the top management of BP-Azerbaijan:

Starting 15 November  the new company vice president for wells, Jim Cowie, will begin work and from 1 January 2013 -the new vice president for terminal and pipeline operations, Craig Viggz, will commence his duties. Jim Cowie's experience encompasses work with projects that are characterized by high pressure and temperature, and with wells drilled from the platform. In BP-Azerbaijan, he will lead a team of 300 experts. In addition, a group of engineers at BP wells in Azerbaijan will be joined by 10 new professionals who have worked in the company's projects in Alaska, North America, the North Sea, Angola and Egypt. In turn, Viggz will be responsible for security operations at Sangacal terminal, as well as for all export pipelines from Azerbaijan to Turkey and Georgia. In Azerbaijan, he will lead a group of more than two thousand employees.

However, the company claims that all the personnel changes were planned, so it was probably just a happy coincidence. Either way, it is clear that BP has undertaken to correct serious flaws. By the way, in the words of the head of SOCAR Rovnag Abdullayev, it sounded like "some technical issues and a complete avoidance of the risks by BP". According to him, in 2008 a major accident occurred at the BP platform in the Gulf of Mexico, after which the Azari-Ciraq-Gunasli leaked natural gas. As a result of studying the causes of gas leaks a few months the platform Central Azari was suspended. For this reason in that year BP was unable to fulfill the forecast for oil production.

"In addition, after the accident in the Gulf of Mexico, rather than control the risk BP opted for the tactics of completely avoiding them. Although there are risks in the mining industry - this is natural. Do not stay in the kitchen if you can't stand the heat. If you are afraid of risk, there will be no production, " he said. Therefore, the new program to increase production will reflect the issue of risk management.

Commenting on a question about deliberate production cuts, Abdullayev said that this is unfounded. "The probability of the deliberate reduction of production by BP is not there. We control the process. The main reasons, as I said, were related to technical issues and BP's risk avoidance." The head of SOCAR also categorically denied that the alleged decline in production was due to a decrease of the deposit reserves: "The field is large and has vast reserves. What was said about the fact that the alleged deposit was exhausted and other assertions are absolutely unfounded. Currently, 50% of the wells on the existing platforms at ACG have not been used yet."

Let us note that for settlement of disputes a meeting was held between Abdullayev and a delegation of BP management in London with CEO Robert Dudley and executive group exploration unit of British corporations. Following the meeting a number of interesting statements from BP were made public. In particular, Dudley stressed that "BP is fully committed to Azerbaijan and the effective management of one of the largest oil fields in the world - the ACG complex."

In the course of the meetings held in London, a group of senior officials arrived in Baku representing the departments of production, design, strategy, and integration of BP. As a result of the negotiations held in Azerbaijan, executive vice president of BP production Bob Friar said that the British company intends to attract their best resources around the world to increase oil production at ACG. According to him, the meetings in Baku were aimed at determining the course to address the issues of production at the field "Azeri-Ciraq-Gunasli". He also said that cooperation has been successful for 18 years. "Now we have one crucial question, and we, SOCAR and our partners, we will persevere in resolving this matter," - said Friar.

The executive vice president  of BP for engineering, Bernard Looney, said that each of these meetings was to identify significant challenges. "I thank the leadership of SOCAR for the cooperation and commitment to work with us for the good of the people of Azerbaijan and our partners in matters of production at ACG. Of course, it also wants to ensure that our business is successful, and together we will continue to conduct business activities in Azerbaijan at the international level ", Bernard Looney said.

Stabilising production

What will these meetings and decisions yield in the long run? According to Rovnaq Abdullayev, ACG partners are preparing a program for the extraction from the field in 2013, 2014 and 2014-2024 years. So, in 2013 the field is projected to stabilize oil output at 33 million tons, in 2014 - up to 35 million tons, in the years 2014-2024 the volume of production will be stabilized at the level of 33 million tons (700 thousand barrels a day).

In addition, as the BP company statement said a block of the new platform West Ciraq for the Ciraq oil project (increasing oil production at ACG block) will be sent in early 2013. "The completion of such a large and basic work brought closer by one step to attaining our plans for receiving the first oil from Ciraq oil project the fourth quarter of 2013", said the regional president of BP in Azerbaijan, Georgia and Turkey, Rasid Cavansir. He stressed that a successful and safe loading of the jacket on the barge gives us confidence that the remaining work within Ciraq oil project, including the platform West Ciraq, will be successfully completed in 2013. " For the first time in the history of the development of the ACG all installation work was carried out in Azerbaijan extensively, with local reserves," Cavansir said. "It confirms our commitment to the obligations to establish and maintain in Azerbaijan the production line of the project".

We are sure that Ciraq oil project will raise oil production from the area between the existing production platforms, "Ciraq" and "Gunasli" to the maximum".

Before the Ciraq oil project, he says, six world-class platforms were built at the ACG. They are still in effective and safe operation, bringing profit to the Azerbaijani people and the project partners. Under the project (until the end of the contract on ACG in 2024) more than 300 million barrels of oil are expected to be produced.

Thus, the hopes for the stabilization of oil production in Azerbaijan are becoming more real, and in the future, the trend of decline of mining and hydrocarbon exports (in January-September 2012 some 26.8 million tons were exported, which is 10.3% lower than in same period last year) will be changed drastically.