The leadership of British Petroleum (BP) in the international consortium developing the largest oil field in the Caspian Sea faces strong criticism from Azerbaijan’s government for a fall in crude oil output which has created a US$ 8 billion hole in state revenues. Azerbaijan’s economy is strongly dependent on energy exports and falls in production have a significant impact on the country’s growth as well as the mood of voters ahead of the 2013 presidential elections.
President Ilham Aliyev has blamed the international consortium AIOC for “grave errors,” resulting in a sharp reduction of oil output in the off-shore fields “Azeri” and “Chirag” over recent years. The head of state admitted that every field has its own life and that after peaking, the oil production goes down. However, “this is not the question ... the matter is that the given forecasts are not being implemented.”
At the latest governmental discussion of the country’s macroeconomic indicators for January-September 2012, President Aliyev reiterated the signature in 1994 of the so-called Contract of Century for exploration of the offshore oil fields “Azeri-Chirag-Guneshli” (ACG). BP holds 35.83 percent of the shares, while Azerbaijan’s State Oil Company holds 11.6 percent, Chevron 11.27 percent, Inpex 10.96 percent, Statoil 8.56 percent, Exxon 8 percent, TPAO 6.75 percent, Itocu 4.3 percent, and Hess 2.72 percent. Hess has sold its share to India’s ONGC.
President Aliyev noted that 75 percent of the oil profit was originally received by foreign companies due to their large investments in the fields’ development, while the remaining 25 percent was a profit for Azerbaijan. The sides became equal partners only when foreign companies returned their investment. Since mid-2008, taking into consideration the economic feasibility of two fields Azeri and Chirag, the sharing scheme started to change and now 75 percent of the oil profits belong to Azerbaijan. While appreciating the huge foreign investments, Aliyev said that the ACG development was not “a charitable event ... this is a business project ... The consortium has invested US $28.7 billion into the development of these fields, but it has derived an income of US$ 73 billion.”
The ACG has experienced declining output over the last three years. According to Aliyev, it produced 40.3 million tons of oil in 2009 against BP's forecast of 46.8 million tons. In 2010, the forecast was cut to 42.1 million tons while production came in at 40.6 million tons. Last year the fields’ production level dropped to 36 million tons, which was still down from the expected 40.2 million tons.
At the current output level, Aliyev predicted that BP would have produced only 33 million tons by the end of the year, against the forecasted 35.6 million tons. Aliyev argued that at an oil market price at US$ 100 per barrel, while higher in reality, the failure to meet output forecasts – termed a “grave error” on the part of BP – has cost Azerbaijan US$ 8.1 billion in revenues over the last three years. “ ... Wrong forecasts given to us are not accepted. False promises to SOCAR are not accepted ... serious changes are needed,” Aliyev stressed. He also noted that the company recognized its mistakes one month ago and promised to take measures, including the replacement of personnel responsible for errors and ensuring that oil output is kept at a stable level. According to the president, BP has done nothing to repair the damage: “Investors who are not able to implement their commitments ... should learn a lesson and take serious steps; measures should and will be taken.”
Industry and Energy Minister Natiq Aliyev termed the drop in production at ACG over recent years “abnormal. At an energy conference in Baku he stated that “We see large numbers that are significantly different from those planned, which means either that the project was conceived improperly or that activities carried out to stabilize oil production are insufficient.” Yet, the minister also reassured foreign investors that there is “no threat of termination of contracts with foreign oil companies in Azerbaijan.” Clarifying the president’s words about taking serious measures, the minister said that “measures must be taken to stabilize oil production on the ACG field.”
In addition, Natiq Aliyev stated that SOCAR, which also has a share in the project, should strengthen its control over the annual production program. “New oil wells are needed because old wells have a limited life period ... New methods of exploration are needed,” the minister said.
A few days after the president’s statement, BP appointed new experts to help run its oil production operations in Azerbaijan after the departure of two vice-presidents earlier this week. Jim Cowie will take up the position of Vice President for Wells Azerbaijan starting from November 15, and will lead the team of wells experts in Baku. Craig Wiggs has been appointed Vice President of Operations Midstream in the country. BP also reported that 10 new specialist engineers will join the wells team in Baku, drawn from its operations in several other parts of the world, including North America, the North Sea, Angola and Egypt.
On October 17, SOCAR’s president Rovnag Adbullayev met the BP group’s chief executive Bob Dudley in London to discuss the future of the ACG oilfield. The statement said the parties agreed to continue working closely together to manage oil production from the ACG fields in the Caspian Sea for the benefit of the State of Azerbaijan and its partners.
“It was an open and constructive meeting and the task ahead is clear. BP is fully committed to Azerbaijan and the effective management of the ACG field complex, one of the world's great oilfields,” Dudley was quoted as saying. BP will resume output at the Deepwater Guneshli platform this month after closing it on Sept. 25 for planned maintenance.