Summer 2002 (10.2)
How Far We've Come
the Progress of Azerbaijan's Oil Industry
by Valeh Alasgarov
Valeh Alasgarov, General Manager of
the Foreign Investment Division of the State Oil Company of Azerbaijan
Republic (SOCAR), has been involved with Azerbaijan's oil contracts
with international companies since SOCAR was established in 1993.
This article is an expanded version of the speech that he gave
at the USACC's Fifth Annual Conference in Washington, D.C. on
March 8, 2002. Here Alasgarov responds to what he sees is a tendency
for foreigners to weigh Azerbaijan, Russia and Kazakhstan against
each other in terms of their economic growth and progress toward
democracy. This is like comparing apples and oranges, he says.
Considering all of the crises that Azerbaijan has had to deal
with in these past 10 years - war with Armenia, nearly a million
refugees and early widespread political unrest, Alasgarov is
convinced that the country has made incredible strides forward.
We didn't start from zero. We started
from a collapsed system. We had no country, no ruling power,
no government. We had to put those pieces together, rebuild the
country and try to regain the people's trust. When we talk today
of what we have attained, we have to remember how it all started.
Above: Roughly 1 out of every 8 Azerbaijanis
was made a refugee from the war with Armenians over the territory
of Karabakh. Still they have not been able to return to their
homes nine years later. The responsibility of trying to provide
even meager support for nearly 1 million homeless people has
placed a serious strain on Azerbaijan and its development. Photo:
Oleg Litvin, 1993.
A decade has passed since Azerbaijan gained its independence
and we began to move towards democracy and a market economy.
It's important that we not forget the many obstacles that have
obstructed our path. Perhaps the most significant is the fact
that 1/8th of Azerbaijan's population are refugees and IDPs (internally
displaced persons). Nearly 1 million people in Azerbaijan were
forced to flee their homes because of the war in Nagorno-Karabakh
with Armenia. This massive displacement of civilians creates
a tremendous burden on our society because these people have
to be helped and cared for. So many of our refugees still don't
Imagine if 12 percent of the population of the United States
were refugees. In a population of 285 million people, that would
mean 22.8 million people would be displaced from their homes
and communities - about twice the population of New York City.
Consider the appalling economic, political and social consequences
of such a disaster. For any country, this would be a catastrophe.
In any evaluation of Azerbaijan's development this past decade,
it's a mistake not to factor in these historical and social conditions
that we have been dealing with. To speak about issues like macro-economic
indices, democracy and human rights doesn't make sense to the
refugees right now. How can you talk about human rights when
the most basic of their rights as human beings - the right to
live on their own land-has been violated?
Their concerns are more basic. They are absorbed with issues
like: Where can I get something to eat today? Where can I find
shelter? How do I care for my children or my grandparents who
Certainly Russia has had to deal with its share of refugees as
well. Russian newspapers indicate that there are 1.6 million
Russian nationals who came from Tajikistan and other newly independent
countries of the former Soviet Union. However, unlike Azerbaijani
refugees who had to flee for their lives, these people simply
decided that it would be more feasible for them to live in Russia
after the collapse of the Soviet Union.
But still such a large number of refugees (roughly 1 percent
of the population) is considered to be a major economic burden
for Russia because these people need homes, jobs and social support.
Now, if this situation creates such a huge problem for a country
with an estimated population of 144 million, imagine what it
does to us, a country of only 8 million when 12 percent of our
people have to cope with such life-shattering circumstances.
For such a small country like ours to deal with this problem
is an enormous undertaking in itself. Despite all these difficulties,
it's obvious that Azerbaijan is developing and moving forward.
Even families that have not been displaced are affected by it.
When my daughter sees refugee children, she is psychologically
affected by it. It causes her to lose faith in justice, in honesty
and the basic decency of people. She asks, "Dad, doesn't
the whole world see what's going on?"
It doesn't matter who is right or who is wrong when it comes
to politics. The fact is that these people have lost their homes,
their past lives, their whole sense of belonging. It's also a
tragedy that this little person of 10 years old loses faith and
belief in what she considers to be fair in life.
Once she was watching TV where they were discussing human rights
and democracy. Suddenly she stood up in anger and rebuked the
TV: "I'd like to know what you would say about human rights
if you came and saw how our refugees live in the camps."
Imagine such a young child being so deeply affected. Everybody
is affected one way or another by the tragedy of our refugees.
Educating the Public
Another difficulty in building a democracy and a market economy
has been in preparing the Azerbaijani public for sweeping economic
and political changes. It's one thing to pass laws and legislation,
but these new rules must be understood and put into practice
by the entire population.
Let's not forget that an economy is not based only on formulas,
programs and laws, but on the people's sense of community as
well. In other words, not just the President of a country or
his ministers. If the general public is not ready for certain
economic or political changes, then it becomes very difficult
to implement them.
We've had wonderful help from experts from the United States
and Europe who have come over to assist us in building a democracy.
But in advising us, they should also keep in mind the history
of their own countries. It's not reasonable to expect us to achieve
in a mere 10 years what it took them 200 to 300 years to do.
A few years ago at a conference in Washington, D.C., I challenged
the Americans there to consider how long it had taken for some
of their democratic institutions to be fully realized. For example,
even though the Constitution had been adopted in 1787, women
were not granted the right to vote for more than a century. It
took more than 133 years for something as basic as women's suffrage
to be enacted.
And what about blacks? When did they get the right to ride in
the front of the buses with whites, or to eat in the same restaurants?
Not until the 1960s. For 215 years, the United States has had
a democratic Constitution that outlines basic human rights. Those
declarations haven't changed, but in reality these basic human
rights have not always been fulfilled. Why? Because the people
were not ready to accept the laws.
We Azerbaijanis have had to totally rethink our political system.
Today's young people don't have the Soviet mentality that we
grew up with, but naturally they still carry the remnants of
the past because their parents and grandparents grew up under
that system. It will take a long time, even several generations
for that Soviet mindset to be replaced with new ideas.
I often think about why Moses wandered in the desert with his
people for 40 years? If you look at a map of the area, you see
that it should have only taken them about 20 or 30 days to walk
from Egypt to Israel - not 40 years.
Moses knew what he was doing. He knew it would have been impossible
to build up a new society with people who had grown up knowing
only slavery. He wanted his people the Israelites to emerge with
a new mentality when they reached the Promised Land. You can't
build a new society with people who have the mentality of slaves.
In the desert they had to work hard for their own survival in
order to organize a new nation. First they had to get used to
freedom. Then they had to understand that their survival depended
on their own initiative. Just like them, we Azerbaijanis are
building a new society - a new state. And we need time.
Some readers may recall the situation in Azerbaijan between 1990
and 1993. Three years of negotiations with international oil
companies had failed to produce a single page of agreement. The
main problem at that time was a lack of mutual understanding.
The two sides simply did not understand each other.
For one thing, Azerbaijanis didn't understand the value of money.
During the Soviet era, our factories and official departments
received money according to decisions made by the top decision
makers in Moscow. Azerbaijanis could only follow orders; they
were not given the responsibility to care if a business was effective
or ineffective, profitable or unprofitable. Some of the money
from the Central government was dispersed to the oil industry,
some to agriculture, some to engineering. So when we gained our
freedom, we weren't used to making financial decisions. So the
Azerbaijani side lacked a basic understanding about money.
On the other hand, the international companies didn't understand
the mentality of our country at first. They thought that everyone
here would understand complex economic terms like "internal
rate of return" and "net present value". But we
Azerbaijanis were used to thinking with a different set of categories.
Basic financial terminology had different meanings for each side
- it didn't matter if we were speaking to each other in Russian
Another major obstacle was the political and economic instability
that existed in Azerbaijan at the time. At the end of the Soviet
period, in 1990 and 1991, it was impossible to even think about
our future because we didn't know what was going to happen to
our country. How could we make plans to implement a 20- to 30-year
oil project when we didn't know what would happen tomorrow? There
was no faith in the future.
After Azerbaijan became independent, the situation worsened as
various leaders jockeyed for power. At that time, the people
who were fighting for power were using terms like democracy,
market economy and human rights. Those were pleasant words spoken
by individuals who weren't necessarily intent on building a new
country. In reality, they were interested in controlling the
stream of goods, money and oil.
I remember in June 1993, there was hardly a single foreigner
left in Azerbaijan because a civil war had broken out. Some people
now refer to those days as a "military coup", but that
wasn't the reality. People who weren't here at the time can say
those things. But we were here. We lived through it. It was civil
war. There was curfew and tanks in the street. The country was
on the verge of collapse.
One colonel was in control of the western part of Azerbaijan;
another, the east; another, the north, and in Baku there was
no one. Each political party had its own armed force. The foreigners
had all left Baku because they didn't believe that anything could
be done. The country was literally falling apart.
Azerbaijanis wondered who was ruling the country and where it
was heading? Would Azerbaijan survive, or would it be divided
into several regions and fall under the protectorate of other
In the midst of this chaos and impending collapse, the people
who were in power decided to go to Nakhchivan where Heydar Aliyev
was living at the time and invite him to come to Baku. The leaders
who call themselves "opposition" today were actually
among the ones who invited him at the time. It took a lot of
persuasion, but when Aliyev realized that the country was on
the verge of collapse, he agreed to come.
People tend to forget that Aliyev took big risks in doing so:
no one could guarantee his safety. There could easily have been
an attempt made on his life. Likewise, when Aliyev went to Ganja
to meet with Surat Huseynov, who was trying to take control of
the entire country, no one could vouch for Aliyev's security.
About a week later, Azerbaijan's President, Elchibey, ran away
from the situation [June 1993]. He just got on a plane and disappeared,
without telling anyone. He left for his mountain village in Nakhchivan
without informing anyone. What was the country to do? What was
Heydar Aliyev supposed to do? Sit and wait until he came back?
The country was disintegrating.
Things got worse. One of the colonels, now referred to by some
as a "political prisoner", declared himself as president
of a Talish-Mughan republic. He pulled his troops away from the
Front in Nagorno-Karabakh, leaving our territory exposed, and
he headed down to Lankaran, the center of the Talish-Mughan region.
After two assassination attempts - in October 1994 and in March
1995 - what did Aliyev do? He went out into the streets at midnight
and addressed the people. Hundreds of thousands of people turned
out to support him - the young, the old, women and children.
It was the people who protected the President, not the armed
soldiers. No one could guarantee that there weren't people in
that crowd who would try to kill him. But he went out anyway
to rally the nation that had come to protect him.
We didn't start from zero. We started from a collapsed system.
We had no country, no ruling power, no government. We had to
put all those pieces together, rebuild the country and try to
regain the people's trust. When we talk today of what we have
attained, we have to remember where it all started. These are
the events that took place only seven or eight years ago.
New Oil Contracts
Nevertheless, by late 1993, we were already putting together
a negotiation team - including Natig Aliyev, Ilham Aliyev, Khoshbakht
Yusifzade and myself - to begin serious talks about contracts
with international oil companies.
But before we signed agreements like the "Contract of the
Century" (September 1994, for the development of Azeri,
Chirag and Gunashli), we had to establish a system that would
encourage and protect foreign investment. We had to give serious
consideration how to carry this out on a legal level.
After studying the oil contracts and legislation of 61 different
countries, we realized that there were two ways to proceed. We
could follow the model set forth by Norway, England, the United
States and Canada - that is, to prepare a comprehensive set of
regulations. But according to my calculations, we would have
needed to create at least 1,380 regulations related to issues
such as taxation, customs and insurance. This process would have
taken several years. Unfortunately, we didn't have such luxury
of time. We had to forge ahead and try to attract foreign investment
as quickly as possible.
That's why we adopted a law, which in my opinion was very good,
despite the fact that we still receive criticism today about
it. Each oil contract has to be ratified by the Milli Majlis
(Parliament), and only then can it be deemed binding as a legal
document according to the laws of the Azerbaijan Republic. In
this way, we sped up the process in a way that allows investors
to trust this country.
It would have been impossible to attract large companies and
major investors here any other way because those companies already
had experience in other post-Soviet countries - for example,
in Russia. And they saw that every day the government there was
adopting new laws, a new taxation system and new regulations
related to import and export taxes. We had to reassure the international
companies that we weren't going to change their contracts. They
would be valid for 25 to 30 years, and nobody would be able to
change them, even if new laws were adopted in Azerbaijan. Any
changes relative to their contracts would have to be carried
out with the consent of both sides.
In these past seven years, since the signing of that first major
contract, we haven't had any complaints that Azerbaijan isn't
following the rules. These companies come to Azerbaijan because
they believe that they can trust their billions of dollars to
work for them.
This trust between the two parties, in my opinion, is critical.
If an investor doesn't have faith in a country - no matter how
much oil it has - he will never invest his money there. This
is not the money and investment of a single person: this is the
money of an entire company and its shareholders. In my opinion,
we've succeeded in gaining the trust of these companies.
Each contract that we signed protects not only investors and
oil companies, but also the other companies that work for them,
including subcontractors, service companies and suppliers. This
is why the service industry has dared to come to Azerbaijan.
For example, when Transocean Sedco Forex built a drilling rig
in Azerbaijan, 25 percent of the costs were covered by the oil
companies, but the other 75 percent was undertaken by the service
company. This shows that service companies are not afraid to
invest their money in the development of Azerbaijani infrastructure.
In a short period of time, we've signed 21 PSAs [Profit Sharing
Agreements] - a significant achievement for Azerbaijan. If we
compare Azerbaijan to neighboring countries that have many more
confirmed oil deposits, they haven't been nearly as active. It's
because their legislation doesn't recognize the basic needs of
their investors and they end up changing the rules too often.
But in Azerbaijan, we continue to work in the same mode and attract
new investors to the oil and gas sector.
Hits and Misses
I would also like to say a few words about the wells that have
turned out to be empty. Of course, it's very disappointing to
hear that such wells were not deemed profitable enough to develop,
but this is only natural. According to international statistics,
if two or three wells out of 10 turn out to have significant
oil and gas deposits, it's considered to be very successful.
Let's take Saudi Arabia, for example, which signed its first
oil contract back in 1922. Their second major contract wasn't
signed until ten years later, in 1932. But consider, when was
the first major deposit discovered? In 1949. And when did they
first start exporting oil? In 1951. At present, Saudi's Ghawar
oil deposit is considered to be the largest oil reserve in the
world, with more than 11 billion tons of oil. But they had to
deal with many empty wells before they discovered it.
Or consider the discoveries found in the North Sea. In the 1950s,
who would have thought that there would be so much oil there?
Many books and articles at the time insisted that there could
be no oil or gas in the North Sea. Even though small gas deposits
had appeared on the shores of England in the 1920s, analysts
insisted there could be nothing more than that. In 1959, the
massive Groningen gas field was discovered in the Netherlands,
but still the experts said that there could be nothing more.
Of course, the companies that are drilling the wells have to
pay for them, so it's only natural for them to be deeply concerned.
But there's no use to speculate about whether there will be this
much oil or that much oil in a given well. There will only be
as much oil as God has put there.
Progress on Pipelines
Exploration and exploitation of the oil or gas deposits is really
the easiest part of our job here. The main difficulty is figuring
out how to transport this oil out to the world market. In this
area, Azerbaijan has again made what I consider to be wise decisions.
Back in 1997, in the First Stage of Early Oil with ACG, we started
building the Northern pipeline from Baku to Novorossiysk (Russia).
Despite harsh criticism, we also decided to build a second pipeline.
And today I can say that most of the companies who are currently
using the Western pipeline route between Baku-Supsa (Georgia)
were against the idea at that time. There were complaining: "Why
do we need a second pipeline if we already have Baku-Novorossiysk?
If something happens in Russia tomorrow, we'll sue them."
But the Azerbaijani side and primarily President Aliyev insisted
on constructing the second pipeline. Experience now shows that
we made the right decision. The Baku-Supsa pipeline is not having
any problems in getting the Azerbaijani oil to the world market.
The same can't be said about the first pipeline that we built
But the Baku-Supsa pipeline is still not an adequate solution.
Perhaps it's enough for our needs today, but we must plan for
the future. Actually, we started thinking about this shortly
after signing the first oil contract in 1994. Today, when some
people criticize us and say that the pipeline route of Baku-Tbilisi-Ceyhan
[pronounced Jeyhan] is merely a political decision, I can say
that it's not true. Believe me, I've been in this business since
the very beginning. It took us three years - 1995, 1996, 1997
- to consider the various options: going through the Black Sea,
the Persian Gulf and numerous other alternatives. We calculated
everything and reached the decision about Baku-Ceyhan, without
being pushed by anybody.
I always say that Azerbaijan is not such a rich country that
we can construct a pipeline wherever we want. We have to know
the value of every single dollar and every single manat. And
that's how the decision about Baku-Ceyhan was reached. It's clearly
the best option from an economic point of view.
Fewer and fewer people are speaking about using the Bosphorus
[which connects the Black Sea to the Mediterranean Sea] these
days, but some still continue to insist: "Why are you building
a pipeline to the southern coast of Turkey on the Mediterranean?
Use the Bosphorus. You can transport 100-200 million tons a year
through the Bosphorus." But it's not true. It's impossible
to transport that much oil through those narrow straits.
Not so long ago while delivering a speech in Istanbul, I said:
"This nation [Turkey] will wake up someday. God forbid that
some tanker explodes in the Bosphorus. All the disasters that
have happened there so far, fortunately, have not been catastrophic.
But if a major disaster does take place, not a single tanker
will be allowed to pass through the Bosphorus for years."
According to my calculations, the Bosphorus can handle about
75-80 million tons a year. The figure is already close to 60
million tons. In a few years, it will reach 70-80. And then what
When we consider other possible routes through Bulgaria, Greece,
Romania and Croatia, it's necessary to take into account the
fact that we wouldn't receive the reasonable rates that we can
get with Baku-Ceyhan. Let's take the Azeri-Chirag-Gunashli oil
deposit, for instance, which has an estimated 600 million tons
of oil. If we were to spend an extra $2.50 to $4 on each barrel,
the additional cost would be $15-24 billion. Who would agree
to such a decision? That's why we're convinced of the feasibility
of the Baku-Ceyhan route.
The Detailed Engineering Phase of the Baku-Ceyhan project is
now coming to an end. This June, we plan to sign contracts regarding
the main equipment purchase. By the end of 2004, Baku-Ceyhan
should be completed and already beginning to operate.
As for the gas pipeline, after the discovery of the Shah Deniz
gas condensate deposit, we had to start thinking about how to
export gas as well. As a result of negotiations with Turkey and
Georgia, we have signed several contracts: a Gas Sale and Purchase
Agreement with Turkey, another with Azerbaijan, and now we are
going to sign one with Georgia.
The gas pipeline construction is supposed to be finished by the
end of 2004. And beginning in 2005, we are going to start transporting
Shah Deniz gas to the Azerbaijani and Georgian markets, and onward
to the Turkish market. Someday we anticipate that this pipeline
will not only transport Azerbaijani gas, but that of other Caspian
countries as well.
Non-oil sectors are also a very important topic for Azerbaijan.
What good is it if we export oil but then have to spend our money
on importing apples from Argentina? It's hard to believe, but
today Azerbaijani marketplaces sell apples from Argentina, milk
from Germany and chicken from somewhere else. That's why it's
crucial for Azerbaijan to develop its non-oil sectors.
Azerbaijani is beginning to sell its products to the world market
as well. Ten years ago, had anybody in America heard of place
called Masalli? No. But today, a company working in Masalli is
exhibiting its produce in the United States. And I believe that
in the nearest future, the non-oil sectors in Azerbaijan will
develop tremendously as well.
In my opinion, the Oil Fund that we have just established will
help develop these other sectors. But they in return must bring
a profit to themselves as well as back to the Oil Fund.
Some people think that we were forced to establish the Oil Fund.
No, we did it on our own accord. Azerbaijan managed to establish
the Oil Fund in a very short time, with a transparent accounting
of its revenues and expenditures. Each year, all of the Oil Fund's
revenues and expenditures are checked by an independent auditing
company and then published. If there is anything more that we
can do for transparency, we are ready to do that.
During the Soviet era, we used to spend everything we earned
and, consequently, we went bankrupt. Now that we're independent,
it's critically important that we make wise decisions so that
our children and grandchildren can benefit from what we are doing
Valeh Alasgarov was interviewed
by Azerbaijan International's Editor, Betty Blair, to expand
his initial speech given in Washington, D.C.
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