NEW STRATEGY FOR OLD OIL

As investment priorities shift, international companies are increasingly streamlining their portfolios, while for national oil and gas companies control over the resource base acquires additional strategic value.

For Azerbaijan this trend is especially significant given the role of the Azeri–Chirag–Gunashli (ACG) block of fields in the country’s economy. Today the project is entering a new phase, where alongside maintaining production, ever greater importance is being attached to enhanced oil recovery, development of new horizons and unlocking gas potential. It is precisely in this context that SOCAR’s increased stake in ACG should be viewed after the acquisition of Japan’s Itochu package.

Planning for future

The decision by the State Oil Company of Azerbaijan to purchase the Japanese company's stake was a significant development in the current stage of ACG's growth. Following the completion of the deal, SOCAR's participation increased from 31.65% to 35.3%, placing it significantly ahead of the project operator, BP, which holds 30.37%. The remaining participants are MOL (9.57%), INPEX (9.31%), ExxonMobil (6.79%), TPAO (5.73%) and ONGC Videsh (2.92%).

On initial observation, this appears to be a straightforward replacement of one shareholder for another. However, the more intriguing question is why SOCAR chose to increase its involvement at this particular juncture, given that ACG is already at a mature stage of development. Despite having passed its production peak, the block continues to generate substantial cash flow: in the first half of 2026, around 59 million barrels of oil were produced here, or an average of 323,000 barrels per day. Concurrently, BP and its partners allocated approximately $1 billion to the project, with $268 million designated for operating expenses and $733 million for capital expenditures.

The maturity of ACG means rising capital intensity and technological complexity of development, as well as opportunities to extract additional value through enhanced oil recovery, new drilling technologies, digitalisation of reservoir management and exploitation of the gas potential. Therefore, when assessing the purchase of Itochu's stake, it is essential to consider this in the context of current production volumes. SOCAR is increasing its involvement in a project that retains significant resource potential for the duration of the agreement, which is set to run until 2049.

In essence, the current deal represents a further development in the progression of the "Contract of the Century". The initial agreement on the development of ACG was signed in 1994 and was most recently extended in 2017, with the deadline for its conclusion set at the end of 2049. Concurrently, SOCAR's involvement was augmented and the foundations for a novel investment cycle were established. One of its key projects was Azeri Central East, which was designed to produce up to 300 million barrels of oil over its entire operating life and cost around $6 billion. The first oil from the new platform was received in 2024.

It is evident that today's ACG bears significant differences when compared to the projects undertaken in the 1990s and even the 2010s. The focus is now on optimising the use of the infrastructure established over three decades, extending the productive life of the fields and facilitating the introduction of additional resources. The technologies and economics of the project are in a state of flux, with the emergence of new sources of value and a transformation in the structure of its participants. SOCAR's purchase of Itochu's stake is a logical step in this process, strengthening Azerbaijan's involvement in the country's primary oil asset at a new stage of its development.

Different strategies—a common interest

The decision of Japan's Itochu to withdraw from ACG does not, naturally, suggest a decline in the project's investment attractiveness. Instead, it is indicative of a shift in the corporation's strategic priorities and a reallocation of capital. In today's global energy industry, large international companies are increasingly reviewing their portfolios, freeing up funds from mature assets and channelling them into new projects, infrastructure, low-carbon and digital technologies.

Itochu's strategy aligns with this rationale. According to Japan's Nikkei, the corporation plans to invest billions of yen in building around 10 data centres in Japan by 2030, each with a capacity of roughly 50 MW.

Simultaneously, the sale of its ACG stake does not indicate that the company is withdrawing from Azerbaijan. Itochu, which participated in the development of the block for decades and became one of the first major Japanese investors in the country's energy sector, stated after the deal that Azerbaijan remains an important market for its investment and trading activities and that cooperation with SOCAR will continue. Given the development of digital infrastructure in Azerbaijan, the Japanese corporation’s new competencies could potentially broaden the areas of bilateral engagement.

Thus, for Itochu the sale of a stake in a mature oil asset can be seen as an element of investment portfolio management.

For SOCAR the logic is different: the same asset represents a long-term source of revenue and is of strategic importance for national participation in the development of the resource base. It is precisely in this difference of approaches that the interests of seller and buyer coincided.

Following the completion of the deal, SOCAR, with a 35.3% stake, became the largest shareholder in ACG. The Azerbaijani company's increased involvement will not impact the project's operational model. BP will continue to serve as the operator, and the management of the block will remain consortium-based. The economic significance of this investment is twofold. Firstly, it gives SOCAR the opportunity to participate in a larger share of the project's future value. Secondly, it increases its obligations to finance further work.

The latter circumstance is of particular importance at the mature stage of ACG's development. In the first half of 2026, the project's capital expenditure increased by 32% to $733 million, while operating expenditure totalled $268 million. This cost structure reflects the ongoing transformation. In order to maintain current production levels, as well as extend the productive life of the fields and improve development efficiency, it is clear that additional funds are required.

Conversely, a decline in production at a specific section does not necessarily imply a reduction in the economic potential of the entire block. In the first half of 2026, ACG's average daily production amounted to 323,000 barrels, compared with 327,000 a year earlier—a decline of only 1.2%. However, these processes are not uniform, and there are in fact several different processes at play. Production is in decline at Chirag and Deepwater Gunashli, while Central East Azeri is showing growth.

In a field where experience is a key asset, it is only natural that the redistribution of roles and responsibilities should follow a natural progression. Some sections gradually reach their maximum productivity levels, while others receive additional resources as a result of new investment and technological advances. At this stage, ACG's value is therefore increasingly determined by production volume, as well as the effective use of the remaining resource base and existing infrastructure.

Reserves of a mature field

The key question at the current stage is how ACG can maintain its economic return amid the natural decline in oil production. The answer is increasingly linked not to extensive increases in output, but to more efficient development, the use of new technologies and the involvement of additional resources in production.

The Central Azeri Gas Expansion project, launched in January 2026, is a good example of this. It provides for expanding gas reinjection capacity at the Central Azeri platform to maintain reservoir pressure and increase oil recovery from existing wells. As part of the project, four gas injection compressors were modernised, with the work carried out without halting production. In a field where there is already a lot of activity, such solutions are of particular importance. Extracting each additional barrel becomes increasingly technologically challenging, and increasing the oil recovery factor makes it possible to prolong the productive life of already developed sections.

The most significant prospects are linked to the start of commercial production of non-associated natural gas in 2026. Historically, ACG was perceived as an oil project; now, however, gas is capable of forming an independent source of value. The first well was drilled using the existing infrastructure of West Chirag. According to estimates, ACG's recoverable non-associated gas resources may amount to around 4 trillion cubic feet, with the potential to increase to 6 trillion.

A key benefit is that developing these resources does not necessitate the creation of production and transport infrastructure from the outset. Gas and condensate from the first well are delivered to the Sangachal terminal through the existing ACG system. This approach reduces capital expenditure compared with developing a new field. Consequently, the oil infrastructure established over decades gains an additional function, while ACG itself is undergoing a gradual transformation into a more diversified oil and gas asset.

Another potential reserve that could be explored is the oil rim located between the gas and water-bearing formations. In May 2026, drilling operations commenced on the first well from the Deepwater Gunashli platform. The objective of this initiative was to ascertain the well's characteristics and evaluate its potential for production. It is premature to speak of a commercial effect so far: this requires test results and further reserve evaluation. However, the fact that such work is being carried out demonstrates that ACG's resource opportunities are not limited to the already known and developed oil horizons.

Greater responsibility

For Azerbaijan, the economic meaning of the deal lies mainly in increasing national participation in one of the country’s main energy assets. At the same time, SOCAR’s increased stake should not be directly linked to an increase in revenues to SOFAZ. The mechanism for distributing income is considerably more complex and takes into account profit oil, cost recovery, taxes, shares and the financial obligations of participants.

Nevertheless, ACG’s significance for state oil revenues remains substantial. In 2025 SOFAZ’s receipts from the development of the block amounted to around ₼8.3 billion, and in the first half of 2026 alone to roughly ₼4.4 billion. By increasing its share, SOCAR acquires a greater direct economic interest in the project’s future results—both in oil production and in new sources of value.

However, there are also potential drawbacks. Increases in percentage points indicate not only potential revenues but also the corresponding obligations to finance capital expenditure. This is particularly relevant for ACG, since maintaining the productivity of a mature field requires ever more sophisticated technological solutions and significant investment. The financial effectiveness of the purchase of a 3.65% stake will therefore depend on future oil and gas production and on the cost of the deal itself, which has not been publicly disclosed.

ACG is not merely a financial asset, but rather a pivotal component of the national resource base, which is already equipped with substantial infrastructure and is scheduled to operate until 2049. Should the composition of participants change further, it would be entirely understandable if SOCAR wished to increase its stake, although each such decision would inevitably require an assessment of the balance between future income and additional investment obligations.

ACG is entering a new stage of development. While the initial focus was on increasing oil production and establishing export infrastructure, there has been a shift towards optimising the monetisation of existing production. Enhanced oil recovery, the development of gas, and the exploration of additional horizons have the potential to extend the project's economic life and partially compensate for the natural decline in production at its mature sections.

The SOCAR-Itochu deal represents a significant change in ownership and strategic direction. The project is indicative of two prevailing trends. Firstly, it demonstrates the reallocation of capital by international companies. Secondly, it reflects Azerbaijan's desire to strengthen its participation in a strategic asset whose resource potential is far from exhausted.

In this sense, the Contract of the Century is subject to change, in line with developments in the oil and gas industry. The current period of high sales volumes is being succeeded by a new era of greater efficiency. And to a large extent the economic return of the project over the next two decades will depend on how successfully the remaining resources, technologies and infrastructure of ACG can be turned into new sources of value.