A CONTRACT FOR CENTURIES

20 September marks the 18th anniversary of the signing of the "Contract of the Century" - a document of great importance and scope, which laid the foundation for the development of independent Azerbaijan. Along with the revenues from the project on the development of the Azari - Ciraq - Gunasli (ACG) block of fields, Azerbaijan gained a lot of advantages. Moreover, the dividends from the "Contract of the Century" can also be spoken about in the future tense.

Second wind

18 years is a considerable period. Hence, we can summarize the results. Let's make a reservation right at the start: they are more than impressive. Let's start with the fact that the total amount of investment from BP and its partners in the projects Azari - Ciraq - Gunasli, Sah Daniz (Phase 1), Baku - Tbilisi - Ceyhan and the South Caucasus pipeline is around $ 35 billion.

Since the beginning of oil production in the project for the development of the ACG fields, 280 million tons of oil have been produced, and 140 million tons of this amount are Azerbaijan's profit oil. And this is not the end, though some "experts" claim that the oil reserves of ACG are not limitless. But there are a number of objections to this.

For example, BP and its partners are now continuing to work on the Ciraq oil project (COP) aimed at increasing production from the block. The COP is nothing other than another phase in the development of ACG, which provides for oil extraction in the western part of the Ciraq deposit and the construction and installation of a new drilling and dwelling platform West Ciraq, which is designed to drill 48 wells. It will be built between the existing platforms Ciraq-1 and Deepwater Gunasli at a depth of 170 metres.

The new platform is designed to extract a total of 360 million barrels of oil (50 million tons) from ACG, and daily production will be 160,000-185,000 barrels.

West Ciraq will be the largest platform at ACG. It is planned that the first oil from the platform will be produced in the fourth quarter of 2013. The overall investment in the COP is estimated at $ 6 billion (including $ 2 billion in operating expenses).

According to the COP manager Ilqar Mammadov, it is not planned to build new pipelines to transport oil from the West Ciraq platform. The platform will be connected to the existing pipeline infrastructure that will make it possible to deliver the raw material to the Sanqacal terminal.

According to a BP-Azerbaijan report, 62 per cent of construction work has already been carried out as part of Ciraq oil. Currently, the work involves 5,500 people, of whom more than 90 per cent are citizens of Azerbaijan.

Interesting fact: it is oil from Ciraq that was the first oil produced by foreign companies in the Caspian in 1997.

But that's not all. One of the main reasons for the "longevity" of ACG is the presence of large gas reserves at the field. According to the State Oil Company of Azerbaijan (SOCAR), the total reserves of ACG are estimated at 1 billion tons of oil and 350 billion cubic metres of gas. It is the gas that will be the subject of the next major contract on ACG.

According to the Contract of the Century, BP and its partners in the ACG project have the right to develop oil horizons only to the Pereryv suite, the thickness of which is no more than 100 metres. The Nadkirmakinskaya and Podkirmakinskaya suites lie deeper and have a larger capacity than the Pereryv suite (140-160 metres each).

The BP management asked the government of Azerbaijan to start negotiations on a new agreement on the development of lower horizons of ACG in 2007. SOCAR is dealing with the issue of signing a new contract.

Earlier, Azerbaijani Minister of Industry and Energy Natiq Aliyev said that "Azerbaijan should draw up its own strategy for the deep-seated layers of ACG". "It is necessary to solve a set of issues - capital and operating costs, the technical aspect, financial support, the terms of cooperation with the same BP or any other company, etc. That is to say the State Oil Company will examine several options for the agreement," the minister said.

The first vice-president of SOCAR, Xosbaxt Yusifzada, said that "BP has offered to be the operator of the project, which is why we are negotiating with them".

According to him, BP is likely to become the operator of the project, "but the composition of shareholders will not be similar to the ACG contract".

"If all goes according to plan, gas production from the deep-lying strata of ACG will begin in 2017," Yusifzada said.

According to the head of the SOCAR Foreign Investment Department, Vaqif Aliyev, the gas contract will be an RSA (Risk Service Agreement, the minimum guarantee of reimbursement - Ed.).

Previously, it was announced that the document can be signed in 2012. Therefore, today everyone is waiting for a new contract for the development of deep-seated ACG reservoirs.

By the way, the reservoirs under the Ciraq and Gunasli blocks will be developed in the first phase and Azari in the second phase.

Gas

But Azari - Ciraq- Gunasli is not the only success of the oil strategy of Azerbaijan. The Contract of the Century gave impetus to the realization of such large-scale projects as Baku - Tbilisi - Ceyhan, Baku - Tbilisi - Erzurum, Sah Daniz and finally, the Trans-Anatolian Pipeline (TANAP), which is designed to transport Azerbaijani gas from the Georgian-Turkish border to Turkey's border with Europe.

According to SOCAR President Rovnaq Abdullayev, TANAP, the construction of which is planned to start in 2013, is "one of the largest projects of Azerbaijan and the largest project of Turkey".

The length of TANAP is 2,000 km and capacity - 16 billion cubic metres of gas per year with possible further expansion.

An important point: Currently, the stakes in the project are as follows: SOCAR - 80 per cent, Turkish Botas and TPAO - 20 per cent. But recently it became known that three members of the Sah Daniz consortium were ready to take part in the construction of the pipeline - Britain's BP, France's Total and Norway's Statoil. SOCAR plans to cede 29 per cent of its share in the project, thus keeping 51 per cent. And this suggests that the project operator will be an Azerbaijani company.

Could we have imagined in 1994, when the "Contract of the Century" was signed, that after 18 years, SOCAR would assume the role of the operator in such a large project and that the Sah Daniz field, the development of which was also made possible by the foundation laid 18 years ago, would become a world-class deposit and Azerbaijan would arrest the attention of the world community as a major supplier of gas, and not just because of Sah Daniz, but also such fields as Umid, Babak, Abseron, Naxcivan and Zafar-Masal?

Today SOCAR, for the first time in its history, is independently developing the Umid field, where the reserves total 200 billion cubic metres of gas and 40 million tons of condensate.

The drilling of exploratory wells at Umid established that the reserves at the nearby promising Babak field total 400 billion cubic metres of gas and 80 million tons of condensate.

At the same time, the total reserves of the Abseron and Naxcivan deposits are estimated at 600 billion cubic metres of gas. As part of the development of these fields, SOCAR works with well-known international companies.

But it is thanks to Sah Daniz that Azerbaijan has turned from an importer into a gas exporter. It is difficult to imagine, but in the period from 2004 to 2010, natural gas production in Azerbaijan increased by 5.2 times - from 5 to 26 billion cubic metres a year.

Today preparations are under way for the development of the second stage of Sah Daniz. Its cost is estimated at $ 28 billion (!). As part of Shah Daniz-2, at least 16 billion cubic metres of gas will be produced annually. Of this amount, 6 billion cubic metres will be sold to Turkey, and Azerbaijan is ready to export 10 billion cubic metres to Europe.

We will have to wait a lot - the beginning of gas production from Sah Daniz-2 is scheduled for 2017.

According to SOCAR's predictions, by 2015, gas production in Azerbaijan will reach 20 billion cubic metres (without injection into reservoirs). In 2025, this figure will reach 40 billion cubic metres. "This shows that Azerbaijan will be playing an increasing role in the energy security of Europe," Abdullayev said.

In general, according to SOCAR, the proven gas reserves of Azerbaijan are 4.2 billion tons and projected - 10 billion tons of equivalent fuel. According to the head of SOCAR, "there are about 40 promising onshore and offshore structures ready for drilling".

Preserve and increase

As we can see, thanks to the Contract of the Century, Azerbaijan regained its former glory as an oil-rich power and turned into a country that produces and exports natural gas, securing a comfortable future for itself.

But, most importantly, the Contract of the Century became the basis not only of the country's oil strategy and the overall development of the Azerbaijani economy. Today, with revenues generated from the implementation of oil and gas contracts, truly large-scale projects are being implemented in the country.

For example, Azerbaijan has created a State Oil Fund (SOFAR) tasked not only with maintaining but also multiplying the revenues received from oil and gas. The fund is a kind of "safety cushion" for the economy, as the rational use of its revenues is a factor of sustainable economic growth.

It is difficult to imagine, but from 2001 to 30 June 2012, SOFAR received $ 75.8 billion. The Fund's expenses during this period amounted to $ 41.3 billion.

The ratio of transfers from the State Oil Fund and state budget revenues in 2003-2011

increased from 8.2 to 57.3 per cent. According to SOFAR, at the end of the first half of 2012, this indicator reached 60.3 per cent. In the reporting period, SOFAR assets increased from $ 0.5 billion to $ 32.8 billion.

Impressive figures! But it is clear that the country's income from oil and gas projects will only increase.

Today, the Fund's assets are being used for the implementation of major infrastructure projects (for example, the construction of the Baku - Tbilisi - Kars international railway), the construction of strategic facilities and the financing of socially-oriented programmes. Of the funds received by SOFAR since 2001, 3,249.4 billion manats have been funnelled into financing social

and infrastructure projects.

It's no secret that a large part of state budget revenues is precisely money from SOFAR. For example, 60.3 per cent of the revenues of the state budget of Azerbaijan for 2012 should be transfers from SOFAR. More than 73.2 per cent of state treasury revenues this year will be formed, as planned, at the expense of the oil sector. Overall, in the period from 2001 to 1 July 2012, the Fund's transfers to the state budget exceeded 29.7 billion manats.

Speaking about Azerbaijan as an investor, it is worth noting that at present, various options are being considered for funding the TANAP project, including possible use of SOFAR funds.

But this is not the main thing. The main thing is that SOFAR funds received from oil and gas, as well as bonuses, per-acre payments, dividends, transit payments for oil and gas, proceeds from the sale of assets and from the management of the Fund's assets are used for the benefit of citizens.

Speaking of the global aspect, the strategic currency reserves of Azerbaijan today exceed $ 41 billion, and these reserves cover nearly 3-year importation of goods and services. This is one of the factors of the economic stability of the state in which all its citizens are interested.

In addition, the republic is witnessing a rise in GDP, which increased even during the global financial crisis, while the interest of foreign investors in Azerbaijan - a country which is now able to carry out large-scale overseas projects itself and is the author of a number of projects of transnational significance - is growing.

In addition to oil and gas, the non-oil sector is actively developing, which is a priority for the government of Azerbaijan, new enterprises are opening, jobs are being created and incomes are rising. Today, Azerbaijan is an island of stability in a troubled world. And this is the most important result of the new oil strategy founded by the legendary Contract of the Century.