PRICE OF ERRORS

Azerbaijan has always been proud of the fact that during the period of the republic's independence, it earned well-deserved respect from almost all foreign investors as an honest and stable partner that builds its cooperation on principles of transparency and fairness and legal documents. This is a fact recognized by both partners and prestigious rating agencies.

However, any friendship in the world of business is good as long as the interests of the parties are respected. This axiom does not require proof.

In this light, although the quite strong statements of President Ilham Aliyev about BP, one of the most important investors in the country's economy and a longtime partner in the largest oil and gas projects in Azerbaijan, came like a bolt from the blue, they are an appropriate response to inappropriate actions.

The Azerbaijan International Operating Company (AIOC) operated by the British oil giant made gross errors that led to a sharp decline in oil production in the Azeri and Chirag fields in recent years. The price of these errors is no more no less 8.1 billion dollars.

Foul play?

The accusations against BP were made in the president's speech at a meeting of the Cabinet of Ministers on the results of socioeconomic development in the first nine months of 2012. As before, the dynamics of the country's economic performance were positive, and the overall economic growth was 1.1 per cent, while the non-oil sector grew by 10.3 per cent. Some 16 billion dollars were invested, and 70 per cent of them are internal, while the strategic currency reserves increased by almost $ 5 billion and now total $ 45 billion. The population's money income grew by 12 per cent and inflation - only by 1.5 per cent.

However, the situation looks unsightly in manufacturing, which has been in recession for several years now. And in the first nine months, the total industrial production in Azerbaijan based mainly on the oil and gas sector fell by 3.5 per cent. The answer to the question "why" is simple: oil production is steadily falling in the country. In this connection, the question arises: why is it falling? We kept silent about it for a long time. Many experts, not to mention ordinary people, took this as normal - the peak of production is now over and oil is running out... But it turned out that the situation is much more serious.

According to President Ilham Aliyev's statement, the cause of the decline in the level of oil production in Azerbaijan is gross errors by the AIOC, in particular BP. "It's not that we reached a peak, and after that, of course, as they say, there is a decline. The point is that the forecasts made are not being fulfilled," the head of state said. And it all began when, according to the production sharing agreement (PSA) on the Azeri and Chirag fields, Azerbaijan was to get 75 per cent of the profits from the sale of oil. In the initial stages, the share of foreign investors was 75 to 25 per cent in favour of foreigners. After they recouped their investments, the division of shares began to change - at the level of 50 to 50 per cent. In mid-2008, taking into account the profitability of the Azeri and Chirag oil fields and the terms of the contract, the division of shares changed in favour of Azerbaijan. Currently, from mid-2008 to the present day, it is 75 to 25 per cent. That is to say 75 per cent of crude profit oil is Azerbaijan's share. That's when the decline in oil production at ACG began: in 2009, instead of the predicted 46.8 million tonnes, it was 40.3 million tonnes, in 2010 - 42.1 and 40.6 million tonnes respectively, and in 2011 - 40.2 and 36 million tonnes. "This year the forecast is 35.6 million tonnes, but given the current production, it can be assumed that by the end of the year, BP will not be able to produce more than 33 million tonnes of oil from the Azeri and Chirag fields," the president said.

To clarify what a difference of two million means to the economy of Azerbaijan, the president cited a specific example: taking the oil price at the average level of $ 100 and summarizing the tonnes that were not produced, it turns out that Azerbaijan lost $ 8.1 billion in revenues. That's the reality behind a small statistical number.

Again, as we mentioned above, the AIOC and even BP separately can be called the largest investor in the oil and gas industry of Azerbaijan - from the very beginning to the present day, the consortium invested $ 28.7 billion in the development of Azeri and Chirag. However, investments are not a charity or a grant - they pay for themselves. The AIOC recouped its investment in Azerbaijan by more than 100 per cent, making a profit of $ 73 billion. Of course, our country did not stay at a disadvantage: According to Aliyev, most of our foreign exchange reserves, which now stand at $ 45 billion, are assets of the Oil Fund. They, in turn, are used to implement infrastructure projects, build schools and roads and carry out renovation work.

Over the entire period that BP has been working in Azerbaijan, the company has been supported at the highest level. It would be logical to expect an adequate attitude to us from the company. However, President Ilham Aliyev said, the unexpected decline was possible only due to gross errors by BP.

"These erroneous forecasts given to us are unacceptable. The false promises given to the State Oil Company are unacceptable. In the world of business, business of such a level, there is no room for such attitudes - they are impossible. We've always been fair to all partners - both in politics and in the economy. We have always kept our word. We expect an adequate attitude. I believe that in connection with this issue, very significant changes should be made. Why am I publicly disclosing information about this issue right now? Because, last month BP officially promised me that these negative issues would be eliminated in a short time. All errors have been admitted. It was recognized that the situation was not very encouraging.

These promises that were given to me were that very significant changes would be made in the short-term, the working programme would be amended, specific measures would be taken to maintain production at a stable level, and most importantly, people who made these blunders would be replaced. But almost a month has passed and I do not see that these promises have been kept. On the contrary, I think there are delays here. So I think this is totally unacceptable. The State Oil Company has long been instructed to raise the issue officially and take action. Investors who are not able to perform their duties and the terms of the contract should draw conclusions, and strict measures should and will be taken," the Azerbaijani president said.

Warning

There is no doubt about the fact that there have been very serious mistakes since they are stated at such a high level and in such a rough form. Azerbaijan has long grown out of the period when it had to cling to investors, even large ones, at all costs - the country's economy is now quite self-sufficient and our own SOCAR already acts as a major investor in other countries. Therefore, playing with Azerbaijan on the principle of "you give it to me and I keep it" is a big mistake.

It is impossible not to take into account the fact that the country has successfully managed to keep the economy stable despite the lingering global financial crisis when the ratings of many leading countries, companies, banks and others dropped. In Azerbaijan, the opposite is happening: last quarter, one of the most respected economic structures of the world - the Davos Economic Forum - released new rankings of countries' competitiveness, in which Azerbaijan took 46th place, which is nine points higher than last year. Moreover, we are leaders in this ranking in the CIS. In macroeconomic stability, Azerbaijan takes 18th place in the world. According to the head of the Central Bank of Azerbaijan, Elman Rustamov, the country is already just two steps away from the top ranking - Zone A.

Azerbaijan has repeatedly proved that it does not depend on the opinion of foreign investors, companies and international organizations. And the most recent evidence of this is the TANAP project. "For many years, maybe for 10 years, discussions have been going on about various projects. We see that these discussions are going on just for the joy of it and there is no end in sight. They gather, talk, hold conferences and events, sign documents, but in the end, there is nothing. And we are not used to working this way. We are used to working specifically. Therefore, on seeing that these discussions are endless, we took concrete decisions in a short time, put forward our own proposals and all issues were resolved in a short time. Currently, there in a great interest in the TANAP project, and it will be implemented on the basis of an initiative put forward exclusively by Azerbaijan," Ilham Aliyev said.

Many ordinary people are interested in the question: Do such harsh statements by the president mean that cooperation with BP will be abandoned? Absolutely not, at least not at this stage. Azerbaijan is faithful to the principles of the market economy, and if the contract with a long-time partner is terminated, it will certainly meet all international legal norms.

The company is now given a second and perhaps the last chance to correct the existing mistakes and stabilize oil production. And BP is aware of this: the day after the Cabinet meeting, the company's press office in the country made a statement in which it said that "BP is totally loyal to Azerbaijan and is working with SOCAR to address issues of production at the Azeri-Chirag-Guneshli field at the earliest possible time".

So a happy end in this story is still possible.