Azerbaijan International

Winter 1994 (2.4)
Page 25

The Contract
Anticipating the Future

by Natig Aliyev, President of SOCAR

The SOCAR Contract signed September 20, 1994, with the Western Oil Consortium combines three major fields offshore the Absheron Peninsula-Azeri, Chirag, and Guneshli. At the beginning of negotiations in 1991, the three fields were treated as three separate contracts. The tender for the Azeri field was won by Amoco although Unocal, McDermott, BP & Statoil Alliance also participated in the bid. At that time, Pennzoil and Ramco were negotiating for Guneshli field; and BP & Statoil Alliance had their hopes set on Chirag.

In June 1993, a decision was made to unite the three fields under a single consolidated consortium comprised of BP & Statoil Alliance, Amoco, Pennzoil, Unocal, Ramco and McDermott. This decision maximized resources, allowing the specialists to focus on concluding the negotiations legally. At the same time, it minimized financial risk on the part of the investors as each was responsible for less initial investment. Ultimately, the decision served to speed up the negotiations which otherwise might have dragged on infinitely. On February 4, 1994, President Heydar Aliyev ordered a Presidential Decree defining SOCAR's responsibility to carry out the negotiations, preparation and execution of the Contract with Western Consortium members.

Negotiating Stages

Subsequently, there were four major joint negotiating sessions with the foreign oil companies (FOCs). The first took place in Baku in March at which time, the basic approaches of both sides were presented particularly in regard to the financial model of the contract and the major technical issues.

The next two meetings were held in Istanbul in May and June which facilitated fewer interruptions than had been in Baku and better access to telecommunications between the FOCs and their home offices. In the course of the Istanbul rounds, a priority work program was agreed upon. A plan was discussed regarding the scope of operations to develop the fields' optimum levels of oil production and the mechanism for finances, principles and terms of cost recovery and profit sharing. A considerable portion of the legal aspects of the contract was worked out at that time. Significantly, a plan was drawn up for the early recovery of some of the investments by proposing early oil production and export prior to the completion of the construction of the main export pipeline. At this time, the deep water portions of Chirag were reintroduced into the Contract. The final round of negotiations took place in Houston in July 22-September 10.


Naturally, many complications occurred throughout the course of the negotiations as the major parties (FOCs as well as SOCAR) were all trying to protect their own interests. One of the main concerns focused upon the lack of stability in the region. The FOCs expressed concern that there was political and economic instability not only in Azerbaijan, but in the adjacent regions as well. There was particular concern in regard to: (a) the countries through which the main export pipeline might have to pass, and (b) the countries through which material and equipment might have to be transported in order to construct the project; for example, materials which might have to be shipped down waterways such as the Volga.

Obviously, one of the major issues relates to the best pipeline route to the world market since Azerbaijan is landlocked (the Caspian does not connect to any larger body of water). The Contract stipulates two major stages for implementation: (a) the production and export of early oil from Guneshli, and (b) the full capacity development of the entire region. The Contract provides that oil will begin to be exported within 11 months of signing for the early oil and within 54 months through the main export pipeline.

After the Contract is endorsed by the Boards of the Oil Companies and by the Azerbaijan Parliament, the first six months will be used to carry out necessary studies. Subsequently, recommendations will be presented to the Steering Committee of the Consortium in regard to the route for the main export pipeline.

Russia Tries to Intrude

While negotiations for the Western Oil Consortium were in progress and particularly after its signing, the Russian Ministry of Foreign Affairs tried to raise doubts concerning Azerbaijan's rights to these fields with reference to the earlier treaties which had been made between the former USSR and Iran. During the Soviet period, the legal status of the Caspian had been governed by those treaties and since the dissolution of the Soviet Union, the treaties have not been updated. It should be noted that these treaties actually refer to the state boundaries in regard to fishing rights although it is obvious that the Russians are implying the rights to the natural resources of the subsurface strata of the Caspian. The fact that extraction of oil and gas from the subsurface strata of the Caspian Sea both during the former Soviet period and afterwards did not arouse any claim against the USSR by Iran proves that Azerbaijan entering into the Contract with the consortium of FOCs had never breached the legal status of the Caspian Sea, which is based on international law and judicial precedent for similar matters. Obviously, this issue was thoroughly examined from all sides legally and the absolute legality established before the companies signed the Contract.

If one thoroughly studies the map of the Caspian region, it is clear that the Azeri, Chirag, and Guneshli fields are located at a considerable distance from Russia's borders. Therefore, it would only be reasonable for Russia to set aside ambitions and solve the issues of demarcation of the areas of the subsurface strata of the Caspian Sea as they relate to the zones of economic interests in accordance with international law and world practice.

New Possibilities

In regard to other oil resources in Azerbaijan, preparatory work is already underway to attract foreign companies for exploratory operations and development of some of the other discovered fields. Such well-known companies as Exxon, Shell, Chevron, Mobil, Elf and Agip are interested in developing some of these areas. Agreements for some of these are likely to be signed in the near future.

The implementation of this Contract will obviously attract more foreign companies to Azerbaijan including companies not even directly related to oil. At present, many companies have already accelerated their activity in manufacturing equipment, materials, chemical agents and the like for oil industry. This, in turn, will help set in place a new infrastructure which will help stabilize the economic and political situation. Consequently, the risk of capital investment will be significantly lessened in the future.

From Azerbaijan International (2.4) Winter 1994.
© Azerbaijan International 1994. All rights reserved.

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