Center For Energy Researches

Gorbachov’s policy of Perostroyka and Glasnost give an opportunity to the foreign oil company, which were interested in Azerbaijan oil, to invest oil fields in Azerbaijan. Newly discovered oil fields, like rich “Chiraq” and “Azeri” oil fields received the foreign oil companies’ attention. In January of 1991, Azerbaijani government declared a tender for the joint exploration of these oil rich fields. British Petroleum (together with Statoil), Amoco, and Unocal participated at this tender. At the result American oil company Amoco became winner of the tender.

      Under the leadership of the Amoco a consortium was formed for the exploration of the “Azeri” oil field’s deposits. Unocal, BP/Statoil, McDermott, Ramco were also participating in this consortium.[1] Amoco has kept its leading position and saved 45% of total interest of all western companies. Generally, there is assumed the further shares' allocation - 85% will be in Azerbaijan, 15% will belong to new established company.

      But at that time government changed in Azerbaijan. In June 1992, Abulfez Elchibey, the leader of the Popular Front was elected as a president of the Azerbaijan Republic. Elchibey’s government also tried to continue its oil policy by getting foreign oil companies’ interests in working together in Azerbaijan oil industries. State Company "Azneft" continued negotiation with the western companies regarding surveys and development the bowels of Azerbaijan sector of the Caspian Sea. Negotiations were prosperity and in 1992 the first info about joint oil produced in Azerbaijan appeared in American press. It is true that the speech was not about offshore developments, but about onshore fields which had already been discovered and launched. In September 7, 1992 one more contract was concluded with the alliance of two European companies BP/Statoil. Alliance received exclusive rights for realizing of survey at "Dostlug" field and "Shah Daniz" area's development. The shares in new established joint venture are distributed by 50/50. Moreover, BP/Statoil had agreed to pay $30 mln. for exclusive rights to development of stated fields.

    The second preliminary agreement was signed between the alliance BP/Statoil and SOCAR for the joint exploration of “Chirag” field and also later “Shah Deniz” field in March 1993. In this agreement BP had 19% of interest in “Azeri” project.  The third agreement came at the beginning of October 1992 with the Pennzoil. By this agreement company get the participation rights in the development of “Gunashli” field, which was conducted oil production from 1980s. Project proposed by American Unocal on unitization of surveys' operations at all three fields was positively accepted by SOCAR. Proposal got its development in October 1992 and there were signed five memorandums in November with all participants of contracts regarding mutual understanding about unique base of provision, unique system of subsea pipelines and terminals. Azerbaijan was intended to unite all of these three projects in one unique management, and informed the signing company about it. None of the company gives disagreement about unique consortium.[2]

     After further negotiation the Turkish Oil Company joined consortium and get share by the help of BP. But Azerbaijan authority made a mistake in its oil policy, which was resulted with changes of political situation in the republic. It refused to give percentage to the company, like Total, Lukoil, and Iran Oil Company, with whom it has problem over Caspian Sea status. Moreover, in May 1993, six agreements about unique program of exploration of all three fields and matter about unitization of it were signed. At the same year negotiation about oil contract and possibility of having them signed were planned in London. Azerbaijan President was also participated in these meetings.[3]

     In June 5, the Board of Directors of SOCAR approved the declaration about unitization of all works conducted at "Azeri-Chirag-Gunashli" fields. Only TPAO from all foreign companies did not declare about its public agreement with SOCAR's plans but finally they got unique declaration. According to new terms 70% of share belonged to SOCAR and the rest 30% distributed among participants of Consortium.[4]

     Several political mistakes resulted that two Azerbaijan's neighbor super powers Russia and Iran did not agree with the regime of National Front of Azerbaijan.[5]

     In April 1993, Armenia began the occupation of regions belonging to Azerbaijan adjoining to Nagorno  Karabakh and Armenia. Azerbaijan found itself in the worst economy and political crisis.[6]

     The war condition in Nagorno Karabakh, the internal conflict, and mainly problematic relation with neighbor countries, mainly with Russia and Iran, led withdrawal of the Elichibey authority from leading position. The Russian authority did not tolerate Elchibey anti-Russian policy and also losing its influence on Azerbaijan. All of these events resulted the revolt in June of 1993 inside the republic. After evacuation of Elchibey’s national and democratic government from its post Haydar Aliyev came power. He halted all of the negotiation with foreign oil company. Consequently, the State Oil Company (SOCAR) was kept away from the renewed negotiations. This time, the negotiations were pursued by expert compatriots living outside the country. In the fall of the 1993 Haydar Aliyev granted a few concessions to Russia by giving 10% ownership right to the Russian oil company Lukoil in the forthcoming contract. And lately the negotiation with foreign oil companies began in the beginning of 1994.[7]

     At the result of the negotiation Azerbaijan and Consortium of the foreign oil companies signed a production sharing contract, which was called “Deal of Century”, in Baku’s Gulustan Palace for developing Azerbaijan’s Caspian oil reserves, on 20 September 1994.

     The agreement calls for a total $7.4 billion investment (at today's rates) over 30 years in three offshore oil fields. First, the fields include Guneshli (82 km offshore in the section which is deeper than 200 meters), Chirag (94 km) and Azeri (113 km). The reserves are estimated at 4 billion barrels (511 million tons). The crude which these field produce is considered to be among the lightest in the world. The lighter the oil, the less expensive to refine. Azeri crude weighs 36.7 degrees average API gravity, which is even lighter than Saudi Arabia's, which weighs 34. Second, production, is scheduled to begin at 40,000 barrels per day after 18 months (perhaps as early as 1997) and will rise to 80,000 barrels per day during the first years, peaking at 700,000 barrels per day in ten to fifteen years. Current Azerbaijani oil production stands at 160,000 barrels per day.[8]

     Azerbaijan's government will receive approximately 80% of the total profits from a combination of royalties and SOCAR's share. (Calculations indicate that 55 billion cubic meters of gas will also be extracted which will wholly belong to Azerbaijan). The remaining 20% of profits will be divided among the other Consortium members. The final division of stakes (and therefore division of expenses) among the eleven final multinational signatories is as follows:

SOCAR (Azerbaijan) 20%

British Petroleum (UK) 17.127%

Amoco (USA) 17.01%

Lukoil (Russia) 10%

Pennzoil (USA) 9.82%

Unocal (USA) 9.52%

Statoil (Norway) 8.563%

McDermott International (USA) 2.45%

Ramco (Scotland) 2.08%

Turkish State Oil Company (Turkey) 1.75%

Delta-Nimir (Saudi Arabia) 1.68% (See chart on page 29 for actual percentage of total profit)

Delta-Nimir (DNKL) is a privately-held Saudi oil company which joined the Consortium this year after buying 15% of Unocal's 11.2% original stake.[9]

A sliding scale mechanism factoring output and oil prices will determine the exact division of  profits. According to one Azeri official, preliminary estimates of Azerbaijan's overall profit are projected to be $81 billion over 30 years. In addition, the Azeri government will receive a $300 million bonus from the Consortium for signing the agreement. Of this total, $80 million has already been paid. Another $70 million will be paid after the agreement is ratified by Azerbaijan's parliament, $75 million will be due when production reaches 40,000 barrels per day (expected in 18 months), and $75 million will be paid when export of oil through a pipeline commences.[10]                    

     But recently the situation changed in the shares of Deal of Century, like Lukoil sold its shares to Japan Oil Company. Current condition of the shareholders of deal is like that:  BP 34.14%, Yunokal 10.28%, ARDN? 10.00%, ?NPEKS 10.00%, Statoyl 8.56%, EksonMobil 8.00%, TPAO 6.75%, DEVON Enerji 5.63%, ?toçi      3.92%, Amerada Hess 2.72%.[11]

[1] Nasib Nasibli, “The independent Azerbaijan oil policy”, article from the forthcoming “Oil and Geopolitics in the Caucasus and Central Asia”, Lecture at the University of California at Berkeley, April 15, 1998

[2] "We should put the interests of our country above the interests of companies”- Heydar Aliev or the history of the contract of the

[3] Ibid

[4] Ibid

[5] Ibid

[6] Ibid

[7] Nasib Nasibli, “The independent Azerbaijan oil policy”, article from the forthcoming “Oil and Geopolitics in the Caucasus and Central Asia”, Lecture at the University of California at Berkeley, April 15, 1998

[8] Nasser Sagheb and Masoud Javadi, “Azerbaijan’s “Contract of the Century” finally signed with Western Oil Consortium”, Azerbaijan International, Summer, 1994

[9] Nasser Sagheb and Masoud Javadi, “Azerbaijan’s “Contract of the Century” finally signed with Western Oil Consortium”, Azerbaijan International, Summer, 1994

[10] Ibid

[11] www.socar.az