REFERENCE POINT

There are dates in the history of each country that are similar to benchmarks, giving rise to a new stage in its development. That date in the history of the oil industry of Azerbaijan is September 20th. Back in 1994, a contract for the exploration and development of the Azeri, Chirag and Deep-Water Guneshli fields was signed under the leadership of President of Azerbaijan Heydar Aliyev with 11 oil companies (Amoco, BP, McDermott , UNOCAL, LUKoil, SOCAR, Statoil, TPAO, Pennzoil, Ramco, and Delta) representing seven countries of the world. This was the first contract signed by independent Azerbaijan with the world's leading oil companies. Due to its historical, political and international significance, the document made up of 400 pages in four languages was called the Contract of the Century. Since 2001, Azerbaijan’s oil industry celebrate its professional holiday on September 20. This year, the Contract of the Century turned 25 years old.

25 years later

A quarter of a century is quite a lot of time. On a countrywide scale, this could be an era. Over these years, six oil production platforms that meet modern standards have been built and commissioned at the Azeri, Chirag and Guneshli fields, followed by the construction of necessary infrastructure for delivering oil and associated gas from the offshore platforms to oil terminals in Sangachal and Ceyhan. We have also witnessed the construction of the Baku-Tbilisi-Ceyhan and Baku-Supsa export pipelines, construction of the Baku-Novorossiysk oil pipeline and the upgrade of the Istiglal and Dede Gorgud drilling rigs, as well as the construction of Heydar Aliyev and Leader rigs.

As to the role of the Contract of the Century for the oil industry, Azerbaijan has managed to raise the bar of annual oil production significantly from 9.56 million tons in 1994 to a record 50.4 million tons in 2010. In recent years, the country's annual oil production is maintained at about 39 million tons, which is a difficult task solved by applying modern technologies at drilling wells and increasing oil recovery. According to the Ministry of Energy of Azerbaijan, the annual oil production in Azerbaijan in 2019-2021 will remain at the same level: 39 million tons.

During eight months of 2019, Azerbaijan produced more than 25.1 million tons of oil, of which 20.9 million tons were exported. In the same reporting period, 18 million tons of oil were produced at ACG, of which about 77% (13.7 million tons) was Azerbaijan's profit oil. In other words, even after 25 years, the ACG block provides about 72% of all oil production in the republic with only 50% of the recoverable reserves developed. According to the Ministry of Energy, during the entire development period (from November 1997, when the first oil was launched from the Chirag platform, and until September 1, 2019), Azerbaijan produced 492 million tons of oil and 161 billion cubic meters of associated gas from the ACG block. At the same time, the profitable oil of Azerbaijan reached 287 million tons, or 58% of the total production from the ACG block.

There are currently 8 foreign companies participating in the Contract of the Century: British BP, American Chevron and ExxonMobil, Indian ONGC Videsh Limited, Japanese Inpex and Itochu, Azerbaijani SOCAR, Norwegian Equinor (formerly Statoil) and Turkish TPAO.

Investment and income

“This contract deserves appraisal and a worthy place in the world practice because it secures the interests of both the state and the investors. Investments made in the implementation of the Contract of the Century have paid off in full. Foreign investors earned billions of dollars, and Azerbaijan’s income exceeded $100 billion,” Azerbaijani President Ilham Aliyev said at the ceremony marking the 25th anniversary of the Contract of the Century.

According to BP-Azerbaijan, over the past five years (2014-2018) total investments in the ACG block, the Shah Deniz field, the Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus Pipeline (SCP) reached $35,4 billion, including capital investments of $28.7 billion and operational expenses of $6.7 billion.

“So far, about $265 billion has been invested in the Azerbaijani economy, including $101 billion in the oil and gas sector. Only $36 billion has been invested in the development of ACG,” Rovnag Abdullayev, President of SOCAR, said.

As for revenues, the State Oil Fund of Azerbaijan (SOFAZ) received $143.4 billion in 2001-Aug 1, 2019 from the sale of profitable oil from the ACG block, including almost $5 billion in January-July 2019.

“The production sharing agreement on the development of ACG fields has created a unique mechanism of joint work in Azerbaijan, providing legal stability and reliable protection for investments of the ACG partners. This would be impossible without mutual trust and unwavering faith of all parties, in particular the Azerbaijani government, in the success of the venture. It was the spirit of this trust and cooperation that allowed us to achieve the success of ACG together, hand in hand,” Gary Jones, Regional President of BP in Azerbaijan, Georgia and Turkey said.

Indeed, the successful implementation of the ACG project has significantly increased the level of investor confidence in the country. Since 1995 Azerbaijan has signed over 30 production sharing agreements (PSAs) with foreign companies for the development of onshore and offshore oil and gas fields. Also, new enterprises for the construction of modern drilling rigs and ships were created, including the large oil industry enterprises such as the Heydar Aliyev Baku Deep Water Base Plant. The existing capacities of petrochemical and oil refining facilities have been improved, new petrochemical plants have been created.

CEA: New stage of development

Currently, Azerbaijan mainly produces oil from more than 120 wells drilled from the the Chirag, Central Azeri, West Azeri, East Azeri, Deep Water Gunashli, and West Chirag platforms at the ACG field. In the first half of 2019, the costs of developing the ACG block reached $929 million, including operating expenses and capital investments ($272 million and $657 million, respectively). However, in the next two years, the volume of capital costs for the project will increase significantly, and this is due to the implementation of the Central East Azeri (CEA) project as part of the ACG development. This is going to be quite a difficult project to implement but should play an instrumental role in extending the 'oil history' of Azerbaijan.

The main objective of the $6 billion CEA project is to achieve daily production at the peak period of up to 100 thousand barrels of oil and 350 thousand cubic feet of natural gas by drilling additional wells and installing offshore facilities. The start of production of the first oil from the Central East Azeri platform is planned in 2023.

The Azerbaijan International Operating Company (AIOC) has already decided on the main contractors for construction works. AIOC has so far concluded five contracts for a total of $1 billion 7 million for the design and construction of the support block, upper modules, drilling block and residential blocks of the new Central East Azeri platform.

Additional development of the ACG block will be carried out until 2050 under the agreement signed between SOCAR and the project shareholders on September 14, 2017. Under the new contract, the share of BP (the project's operator) in the project is 30.37%, SOCAR - 25%, Chevron and ExxonMobil - 9.57% and 6.79%, ONGC - 2.31%, Inpex Corp. and Itochu Oil - 9.31 and 3.65%, respectively, Equinor (formerly Statoil) - 7.27%, TPAO - 5.73%. Investments under the new agreement are estimated at $43 billion. During this time, it is planned to produce more than 500 million tons of oil from the ACG block.

Meanwhile, although the works on the new contract have just started, Azerbaijan has already received the first dividends from its implementation. So, under the terms of the agreement, SOFAZ will receive $3.6 billion in bonuses, that is $450 million each year in 2018-2025, of which the fund received the first two instalments in January 2018 and 2019.

ACG gas potential

In addition to oil, ACG also has great gas potential. According to SOCAR, the natural gas reserves in the deep-water portion of the block is estimated at 350 billion cubic meters. Negotiations on the implementation of this project have been going on for many years between SOCAR with BP and other project shareholders, but it is possible that this will be a completely new contract with a new membership.

According to the Azerbaijani Ministry of Energy, the annual volume of gas production from deep-water layers of the ACG block may reach 3-5 billion cubic meters.

The implementation of the project may be significant for Azerbaijan given the country's ambitious plans to increase gas production and export.

The life has shown that the Contract of the Century not only created a special image for Azerbaijan as a reliable partner in large projects, raised the level of the state internationally and regionally, but also opened up enormous opportunities for the development of the national economy. The oil and gas sector of Azerbaijan is now one of the leading sectors of the economy, although in recent years it has gradually begun to give way to other sectors, and the country's economy is becoming more and more diversified.

Now the Contract of the Century enters a new stage of development. We still have huge works to do, including making of investments, introduction of new technologies and new joint efforts to implement the long-term potential of the ACG field. Certainly, everything will come to life as our oil industry has proven this more than once.