20 SEPTEMBER - A DAY LONGER THAN A CENTURY

On 20 September 1994, the State Oil Company of Azerbaijan (SOCAR) and 11 well-known oil companies of the world signed in Baku an agreement "On the joint development and production sharing of oil production at the Azari, Ciraq and Gunasli fields", which went down in history as "the Contract of the Century".

It was the first international oil agreement signed by Azerbaijan, and from the first day it took a worthy place in the annals of independent Azerbaijan for its historical importance and strategic value aimed for the future.

As the first post-Soviet state to sign a large oil contract with the famous giant companies of the West, Azerbaijan laid the foundations of international cooperation in the Caspian. From this perspective, the implementation of the "Contract of the Century" is of strategic importance not only for our republic, but for a number of other countries, as well as for the South Caucasus and Central Asian regions.

The "Contract of the Century" had a positive effect on the political, economic and social life of the country and particularly, on its oil and gas industry. SOCAR President Rovnaq Abdullayev spoke to Region Plus about the achievements of past years.

- In September, Azerbaijan marked the 15th anniversary of the "Contract of the Century". I remember that in the 1990s, the contract was met with a very mixed reaction. Now that 15 years have passed, have all the i's been dotted and all the t's been crossed?

- Along with being an important guarantor of the national independence of the republic, this agreement, authored by our national leader Heydar Aliyev, ensured the use of free trade mechanisms and integration into the global economy. In addition, it created a positive basis for the implementation of other global projects in the region and transferred Azerbaijan's relations with the Western world into a strategic vector.

Suffice it to note that during the past period, 26 oil agreements with oil companies from other countries were signed in Baku, as well as in the famous halls of major world capitals - Washington, Moscow and London. Today, successful collaboration continues with 24 oil companies from 14 countries on 14 contractual production sharing agreements.

- Speaking in the language of figures, what did the "Contract of the Century" give Azerbaijan during this time?

- According to all the above agreements, it is planned to invest about $60 billion in oil and gas production in Azerbaijan. Over the past 15 years, investment in oil and gas production totalled $29.866 billion. In addition, bonuses, per acre payments and other fees amounted to $1.283 billion. Investments in the development of the Azari-Ciraq-Gunasli block of fields alone totalled $21.395 billion, and bonuses, per acre fees and equity payments - $413 million. Along with the "Contract of the Century", significant investment came from another significant project - Sah Daniz, in which $5.409 billion were invested, while bonuses, per acre fees and equity payments totalled $87.8 million.

As you know, in Azerbaijan there are two main export oil and gas pipelines, operated jointly with foreign companies. During the past period, the volume of capital investment in BTC totalled $4.996 billion, and in the South Caucasus pipeline, realized via the Baku-Tbilisi-Erzurum route - $1.356 billion.

According to approximate estimates by scientists, Azerbaijan will receive more than $200 billion in revenues from the implementation of the "Contract of the Century". These funds will be directed both at increasing the economic power of the state, and through the State Oil Fund, at ensuring the welfare of present and future generations.

- And how do you see the history of Azerbaijan's oil and gas in the future?

- It should be noted that the amount of proven hydrocarbon reserves in the Azerbaijani sector of the Caspian Sea is estimated at 4 billion tonnes of standard fuel. Scientists' projections are even more optimistic. In their view, the hydrocarbon resources of Azerbaijan in arbitrary units reach 8-10 billion tonnes of standard fuel. However, it is likely that ongoing geological surveys will raise this figure even higher. This is the situation after exploration work within the framework of the "Contract of the Century" - the total volume of reserves has increased from 511 million tonnes of oil and 160 billion cubic metres of gas to 925 million tonnes of oil and 280 billion cubic metres of gas. At the same time, a large amount of reserves proves nothing in itself. The most important thing is that the oil and gas industry in Azerbaijan already has the necessary capacity to use these resources. Continuous processes of improvement in the industry, which began in 1994, clearly demonstrate this.

I should note that the state programme on the development of Azerbaijan's fuel and energy complex (2005-2015) identifies the intensification of the exploitation of deposits that are being developed and acceleration of the use of modern geophysical and oilfield equipment as major tasks.

1994-2009 will be remembered as years of intensive development in the oil sector and improvements in the material-technical base. Due to the full commissioning of the Azari and Gunasli fields, drilling of new wells from platforms installed here, as well as measures to increase the oil-bearing capacity of wells in the Ciraq field which was put in operation 12 years ago, the volume of oil under the "Contract of the Century" is growing annually.

170 million tonnes of oil have been extracted from the block of fields. In general, over the past 15 years, the republic produced over 308 million tonnes of oil, of which more than 140 million tonnes were produced by SOCAR. This year, it is planned to produce more than 50 million tonnes of oil, 8.5 million tonnes of which will be produced by SOCAR. The discovery of new fields and structures, the commissioning of new production wells at fields, as well as intensification of the exploitation of deposits allow scientists to predict an increase in production in the next few years and raise it to 66-67 million tonnes in 2010-15. And it inspires hope in the positive future of Azerbaijani oil.

- It turns out that the level of geophysical and geological studies has also risen to a new plane...

- Of course. Over the past 15 years as a result of exploration and drilling operations carried out by oil companies in the sea, important results have been obtained. First and foremost, it should be noted that in 1998, two oil and gas condensate deposits with reserves estimated as average were discovered - Asrafi and Qarabag, and in 1999 the giant gas condensate field Sah Daniz was discovered (reserves are estimated at 1.200 trillion cubic metres of gas and more than 240 million tonnes of condensate).

At the same time, exploration and 3D seismic work in the contract area of the Azari-Ciraq-Gunasli block of fields showed that the volume of oil and gas resources here is much greater than previously envisaged. Exploration drilling in the Azerbaijani sector of the Caspian Sea has been particularly effective. An analysis of the area covered by exploration work and the growth of oil and gas resources in the fields show that as a result of drilling operations conducted at 39 wells, a growth of 2.047 million tonnes of fuel was secured in hydrocarbon reserves.

At the new structures, SOCAR began independent development work using its own resources. In these areas, including Umid, Babak, Abseron, Naxcivan, Zafar-Masal, Qarabag, Asrafi and Dan Ulduzu, it is planned to drill 19 wells by 2015. In general, in 2008-2015, it is planned to drill 110,000 metres of exploratory wells, in which 2.76 billion manats will be invested. 

- The "Contract of the Century" also turned Azerbaijan from the a gas importer into an exporter...

  - Yes, as a result of the work that was carried out after the "Contract of the Century" was given a start in life, 38 billion cubic metres of gas were produced from the Azari-Ciraq-Gunasli block of fields. It should be noted that, according to the "Contract of the Century", the associated gas produced in these structures is handed over to SOCAR after being used in technological processes. The 16,651.8 million cubic metres of gas handed over to Azerbaijan since 1997 on these conditions played a crucial role in meeting the critical needs of the country.

- In total, over the past 15 years, Azerbaijan has produced 135.9 billion cubic metres of gas...

- We can say with full responsibility that the work aimed at developing the gas industry proved to be highly effective for its actual technical and economic indicators.

As a result of Stage 1 in the development of the Sah Daniz project, as well as activities within the framework of SOCAR's gas programme, the republic has turned from a gas importer into an exporter. This proves once again that Azerbaijan is the only energy independent country in the region. Now the whole world has a great interest in Azerbaijani gas, and our country is positioned as an important and reliable partner for major projects supported by influential circles in the West. Today Azerbaijan is supplying gas to Georgia, Turkey and Iran. Azerbaijani gas has already reached Greece. This year Russia's Gazprom and SOCAR signed an agreement on the sale of Azerbaijani gas.

At present, SOCAR's average daily gas production has increased from 12.2 million cubic metres in 2006 to 20.1 million cubic metres. It is especially important that, along with fully meeting the country's demand for natural gas, the company exports gas to Georgia. Thus, in January-July this year we delivered 265.3 million cubic metres of gas to the neighbouring republic.

Azerbaijani President Ilham Aliyev has set SOCAR the task of expanding the active volume of underground storage facilities and increasing it to 3 billion cubic metres in order to ensure smooth supplies to the country. According to this instruction, work began in 2007 to expand the Qaradag underground gas storage facility the volume of which, according to the feasibility study, will be increased to 2.3 billion cubic metres.

- What role did the "Contract of the Century" play in the formation of SOCAR's international image as a partner in the implementation of new oil and gas projects?

- During the past period, we have found various forms of cooperation with foreign oil, gas and service companies. Along with PSA contracts, 36 joint ventures and four alliances, established by SOCAR and its structural divisions, are successfully functioning in all areas of the oil and gas industry today. A clearer idea of the range and extent of cooperation can be obtained by tracing the composition of the joint ventures created with SOCAR's participation last year alone: Sarmatia, SOCAR-Umid, SOCAR-UGE, SOCAR-Petroleum, SOCAR Gas Supply Ltd. and SOCAR Trading.

The first of these joint ventures - Sarmatia - will concentrate on the preparation of a feasibility study for a new corridor for the transportation of hydrocarbons extracted in the Caspian Sea to Europe by extending the Odessa-Brody oil pipeline to Plotsk. SOCAR-Umid and SOCAR-UGE operate in the field of drilling oil and gas wells, cementing, repairing and other services using modern equipment and technology. SOCAR-Petroleum and SOCAR Gas Supply Ltd. are engaged in the sale of oil products, buying ports, terminals and fuel stations to this end, improvement, maintenance work, etc.

- From your words it is clear that SOCAR is not the company it was 15 years ago. The company which needed large investments is now on a par with global giants and invests abroad. How do you assess the progress of the projects outside the republic, and were they influenced by the world economic crisis?

  - President Ilham Aliyev has instructed us to turn SOCAR into a modern and strong company. This primarily means that its structure should be brought into line with international standards and its management efficiency should be improved. As an integral part of this process, we embarked on activities to improve the accounting system, and in a short period of time, we were able to achieve tangible success. We know that Azerbaijan is the first country in the world to join the Extractive Industries Transparency Initiative, and our activity in the implementation of this initiative has received the highest awards. The major economic benefit of adopting international financial reporting standards is precisely the transparency of information based on these standards, which plays an important role in attracting investments in the company and in work with foreign credit rating agencies, including Fitch Rating and Moody's Rating, with which a contract has been signed. The draft presentation, designed on the basis of this document, is ready and first discussions have been held on its basis. Recently, the presentation of Fitch Rating was held, which brings SOCAR one step closer to the issuance of securities.

All these measures increase the reliability and financial rating of SOCAR both domestically and abroad. Using more favourable conditions, the company has signed a loan agreement and an agreement on guarantees of 750 million manats with the Central Bank, Ministry of Finance and the World Bank in order to finance oil and gas operations. In addition, for the timely implementation of the plan of activities to enhance gas production in the country, credit resources of $474 million have been borrowed from the International Bank of Azerbaijan. Despite the economic crisis raging in the world, the company fulfils its obligations in a timely manner on the loans previously borrowed from a syndicate of international banks.

I should also note that in order to provide institutional support for the implementation of long-term economic projects and for SOCAR's more rapid access to the world energy market, the company has opened representative offices in Kazakhstan, Turkey, Georgia, Romania, Switzerland, Austria, Ukraine, Iran, Germany, Britain and other countries. Also with a view to implementing direct deliveries of hydrocarbons to world consumers at competitive conditions and optimizing revenues from this activity in Switzerland, the SOCAR Trading Company has been founded in Switzerland. This year, a subsidiary of this company was opened in Singapore.

According to the instruction of the country's leadership, since 2007 SOCAR has committed itself to implementing foreign investment projects and has managed to achieve significant results in a short period of time. For example, we have carried out significant work on the reconstruction and modernization of the Kulevi Black Sea terminal which the company acquired in Georgia. In May this year the hundredth oil tanker was sent to the world market from the terminal. Recently, the terminal received the three-millionth tonne of cargo. Owing to ongoing activities, in the current year the volume of exported oil products will reach 8-10 million tonnes here. The fact that the terminal in Kulevi has been awarded a certificate by Moody International shows that management has been successful here.

The work of SOCAR's subsidiary in Georgia, LLC SOCAR Energy Georgia, can be considered satisfactory. In 2007, it paid 88 million, and in 2008, more than 172 million lari in tax to the state budget of that country, taking the lead among the energy companies operating Georgia. Currently SOCAR operates up to 30 fuel stations in the neighbouring republic. By the end of this year, it is planned to open nine more such stations. To improve the skills of the staff, an educational-training centre has been opened in Georgia. In the 2008-09 academic year, 450 people trained there. 250 of them are our compatriots living in Georgia. In addition, SOCAR Energy Georgia pays a monthly stipend to 60 Georgian Azerbaijanis studying in Georgian universities.

In the future, SOCAR will play an important role in gas supplies to Georgia. SOCAR's subsidiary Georgia Gaz is already successfully operating on the gas market of that country. In 2008, the Ministry of Economic Development of Georgia this company the winner of a tender on the privatization of the distributing company for the gasification of the country. Under the conditions of the tender, SOCAR Georgia Gas will supply gas to 30 cities and regions (over 150,000 customers) in three years and invest at least $40 million. In addition, on the initiative of Azerbaijan, in April 2009, the gas distributing company Marneuli Gas, covering Marneuli District which is densely populated by Azerbaijanis, was bought and handed over to SOCAR Georgia. Note that on an instruction from the government of Georgia, SOCAR Georgia Gas was authorized to supply gas to areas densely populated by Azerbaijanis - Gardabani and Dmanisi by 100 per cent and Bolnisi by 42.55 per cent, and now we are working in this direction.

The company is also engaged in an extensive investment programme in neighbouring Turkey. The management of the country's largest petrochemical complex Petkim has been handed over to the SOCAR-Turcas-Incaz alliance. The products of this holding are sold mainly on the Turkish market, of which Petkim covered 27 per cent in 2006. Using additional investments, it is planned to raise this figure to 40 per cent. To do this, first of all, it is necessary to resolve the problem of continued and reliable raw material supplies to the company. To this end, SOCAR and its partners are planning to start building a new oil refinery, which will increase the productivity of Petkim on the one hand, and on the other, will accelerate the access of petroleum products produced by SOCAR to the Turkish market.

In short, all this shows that in the 15 years since the signing of the "Contract of the Century", the implementation of the oil strategy has risen to a qualitatively new level. According to the logic of the strategy, foreign exchange reserves from global oil and gas projects have created broad opportunities for the development of this sphere and the non-oil sector in the future.