Spring 1996 (4.1)
SOCAR Current Trends
by Valeh Alasgarov
Valeh Alasgarov, SOCAR's Director of Foreign Investment Division
If your foreign company is hoping to sign an oil contract with Azerbaijan, chances are you'll need to know and work with SOCAR's Valeh Alasgarov. Currently, a member of SOCAR's Board of Directors, Alasgarov heads SOCAR's Division of Foreign Investment, which is responsible for the legislative and financial aspects of all negotiations with foreign oil companies.
Like many Azerbaijanis, Alasgarov has been involved in the oil and gas industry for his entire professional career. In 1970 he graduated from Azerbaijan's Oil Academy with a specialty in Petroleum Engineering. He has also studied economy and law at the Academy of the National Economy.
Alasgarov brings to his position 15 years of experience working in the oil industry in the northern regions of the former Soviet Union. In 1985 he returned to Azerbaijan where he was named First Deputy Manager of Azneft, a position which he held from 1987 to 1991 when Azerbaijan gained its new status as an independent nation, and Azneft was restructured and renamed SOCAR (State Oil Company of Azerbaijan Republic). Alasgarov was named SOCAR's First Vice President at that time. His responsibilities today involve him in all of SOCAR's major negotiations with foreign companies.
Here he shares some of his thoughts about SOCAR's activities as they relate to foreign involvement in Azerbaijan.
Working with Western Companies
The attitude of Western oil companies towards Azerbaijan is much different today than when we first started working together a few years ago. There is much more stability in our country now which makes it a lot easier for foreign companies. We've gained considerable experience these past 3-4 years working with companies of the Western Consortium. Obviously, as companies become more familiar with us, they'll find negotiations progressing much smoother.
Chechnya and the Oil Pipeline
The Chechnya situation has been a great tragedy for both Chechens and Russians. Russia has promised to guarantee the security of the proposed alternative route north through its territory for Azerbaijan's "early oil." This contract was signed in Baku between SOCAR, AIOC, and the private Russian company, Transneft Oil, on February 16th. This followed the accord signed in Moscow by Azerbaijan's President, Heydar Aliyev, with Russia's Prime Minister, Vladimir Chernomirdin, on January 18th.
Both sides have undertaken certain guarantees regarding the transport of oil. Russia has ensured that any transit through its territory will be continuous and uninterrupted. Should any incidents occur that bring loss or damage to Azerbaijan, Russia is required to undertake expenses to rectify the situation. The opposite holds true in regard to Azerbaijan's responsibilities towards Russia. We feel confident that the pipeline through Russia can function continuously. Azerbaijan will pay a tariff for oil transit which has been established at $2.20 per barrel ($15.67 per metric ton). Since the pipeline also passes through Chechnya, part of this tariff will go to Chechnya; if not now, then eventually.
Relations with Iran
I'm not personally involved in policy that relates to Iran, therefore I won't speak about the political aspects of this question. However, let me say that good relationships between neighbors living side by side are essential and that includes economic relations. So, in my opinion, there is no question that we should cooperate with Iran.
In fact, economic development often strengthens political relations. For example, the ideological relationships between the USA and the former Soviet Union were often at odds with each other; nevertheless, economic links did exist which helped to ease political tensions.
Today, there are no great problems between Azerbaijan and Iran. Why shouldn't we be able to talk? Why shouldn't we find common interests? We have been neighbors for centuries. We are currently involved in various projects and stand ready to expand our cooperation with them. For example, SOCAR has invited Iran to take part in the Shah Deniz offshore project. In accordance with current US policy, US companies cannot get involved with projects in which Iran is a partner. In the case of the Shah Deniz project, there are no US companies involved.
SOCAR has other projects together with the Iranian Oil Company. Presently, we sell them diesel oil, carry out geological research in the Iranian sector of the Caspian, and are drilling a second well together in that region.
Oil Benefits to Azerbaijanis
Some Azerbaijanis think we are "selling out" Azerbaijan's natural resources when we invite foreign companies to get involved with us. Such perception is based on ignorance. It's important not to equate "Azerbaijan's share" with "SOCAR's share" in any of these contracts. The two are very different entities.
In SOCAR's contract with the Western Consortium (September 1994), Azerbaijan's share is 75% of all profit. The remaining 25% PSA (profit sharing agreement) is shared between 11 foreign companies of which SOCAR has a 10% investment share.
In regard to the Karabakh offshore project (November 1995 and ratified by Parliament on February 14,1996), Azerbaijan's share is 70%, and SOCAR's interest of the remaining 30% PSA is 7.5%.
In all cases, Azerbaijan's share does not change. No matter how small SOCAR's share might become, Azerbaijan's percentage is never in jeopardy. The reason why SOCAR's share is so small is that undertaking to finance such fields involves certain risks. Besides, how can the Republic invest so much money when there are so many fields that need to be financed.
Nations all over the world have always involved other countries in major projects like this to draw upon their expertise and resources. This is a common practice. One of the largest fields in the US is operated by British Petroleum. More than 17 foreign companies are involved in the British sector of the North Sea. Such explorations and developments always involve a considerable number of investments and, consequently, risks. Numerous companies join together to share the risk. How, otherwise, could the Azerbaijani government have found $8 billion for the exploration of Azeri, Chirag, and deep water Gunashli fields of the Western Consortium contract?
Importance of Diversifying
Some people are concerned about what will happen when the oil runs out, and wonder if we are planning to explore alternative sources of energy such as (1) wind, (2) waves or (3) solar forms of energy.
Oil has been extracted by industrial methods here in Azerbaijan for more than 125 years. Despite how large the Western Consortium block is, we believe it comprises only 1% of all the perspective fields known today. There are other fields still unidentified. The duration of each contract that we sign is for 30-35 years so even if we were able to conclude our last contract in 35 years, we could still expect to have oil resources for 30-35 additional years.
It's true we shouldn't rely on profit from oil alone. We must develop other fields of industry and business that will become profitable, too, such as machine-building, agriculture, etc. Consider Japan. Just because it imports 99% of all its raw materials, doesn't mean that Japan is not developing. We, too, must expand into numerous fields of industry so we won't always need to depend on oil. In addition, we must not neglect our intellectual resources nor fail to organize encompassing social programs, especially in the fields of education and medicine.
Foreign Investments Division
The SOCAR Division which I head-the Foreign Investments Division-is involved in bringing foreign investments to Azerbaijan. We're responsible for all foreign projects in terms of their legislative, financial regulation and supervision of expenses. We realize how important it is to control the expenses of foreign companies during the realization of these contracts. Obviously, the greater the initial expenses, the less profit there will be.
Though the division was only created in mid-1995, we employ about 50 experts and are rapidly expanding. I'm assisted by two deputies, Davood Yakubov and Vitaly Baylarbayov.
We have the responsibility of overseeing day-by-day operations of the Western Consortium (AIOC) where we are involved with Contract Realization Supervision, Law, Project Coordination, Economic Mathematical Models, Investment Decisions Analysis and Adoption, Relations with International Financial Structures, Computer Programs, Accounting and Auditing.
SOCAR has relations with various international financial organizations including the World Bank which has allocated what is called, "Technical Assistance Credit" to SOCAR to finance various projects selected for tenders.
Before any contract can be signed with a foreign company, the President of Azerbaijan must give his consent. Afterwards, the main terms and conditions of the contract are prepared and submitted to the President's Office. When these have been agreed upon by all parties, then we hold a special Signing Ceremony and Representatives (usually the company Presidents) and the Energy Ministers of their respective countries take part. Afterwards, the contract is brought before Parliament for ratification which usually takes place a few months later.
Valeh Alasgarov directs SOCAR's Division of Foreign Investment where he is involved with every major foreign oil negotiation.
From Azerbaijan International (4.1) Spring 1996.
© Azerbaijan International 1996. All rights reserved.