BP Plc has no shortage of challenges: adapting to lower oil prices, dealing with the legal fallout from 2010’s Gulf of Mexico spill and managing the largest foreign investment in Russia.
Chief Executive Officer Bob Dudley can add another to the list: extending an agreement with Azerbaijan to manage the country’s largest oil project, fields accounting for about 4 percent of the London-based company’s global production.
Two decades later, Aliyev’s son Ilham leads a more confident nation, where the economy is underpinned by oil and natural gas revenue. With the concession to operate ACG ending in 2024, Azerbaijan is considering all options including allowing the State Oil Co. of Azerbaijan, or Socar, to take over operating the field, according to a person familiar with the matter, who asked not to be named due to confidentiality.
Putting forward the idea is a natural opening position for negotiation, said Edward Chow, senior fellow at the Center for Strategic and International Studies. The Azeri company has experience with the fields and time to improve capabilities should that decision be made, he said.
More Difficult
Azerbaijan’s relationship with BP has become more difficult in recent years as the fields produced less than expected, an issue which Baku may use to pressure the U.K. producer in talks on the renewal of the ACG operating agreement.
Nizamaddin Quliyev, head of Socar’s press service, declined to comment as did Tamam Bayatly, a BP spokeswoman in Baku.
The idea of Azerbaijan dropping BP also shows the increasing assertiveness of national oil companies, who seek less reliance on the technical and financial help of the largest U.S. and western oil producers.
Abu Dhabi, which holds most of the oil reserves in the United Arab Emirates, is seeking payment of about $7 billion from international companies bidding for stakes in onshore oil fields after a 75-year concession expired.
Iraq, meanwhile, has awarded service contracts for its largest fields that pay international oil companies a set rate per barrel of production, rather than a share of output. That’s a model Azerbaijan is moving to for some projects.
Boom Town
Azerbaijan’s capital, Baku, was one of the world’s first oil boom towns. Nearby wells supplied as much as 50 percent of the world’s oil at the start of the 20th century. Baku’s city hall, modeled on Paris’s Hotel de Ville, and its lavish opera house are both products of that era.
Wedged between Russia and Iran, Azerbaijan saw its significance fade during the Soviet era as onshore deposits declined. It wasn’t until the collapse of the Soviet Union that international majors with more advanced offshore technologies gained a shot at the Caspian’s larger prizes.
The BP-led ACG deposits provided 76 percent of Azeri output in 2013. Others in the development group include Chevron Corp., Exxon Mobil Corp., Statoil ASA, Turkiye Petrolleri AO, Itochu Corp., ONGC Videsh Ltd. and Socar.
Flame Towers
The field has transformed Azerbaijan’s economy and Baku is again an oil boom town, where the skyline is dominated by three office blocks known as "Flame Towers” and Zaha Hadid’s Heydar Aliyev Cultural Center won 2014 Design of the Year from the London Design Museum.
The nation’s gross domestic product has grown more than seven-fold since 1990 to $73.56 billion in 2013, according to the World Bank. The country has built a $37 billion reserve fund, providing a cushion even after the recent plunge in oil pries. All this means a much stronger bargaining position.
Handing the deposit to Socar could give Azerbaijan’s state oil company a big share of the field’s revenue. The risk is that in the interim, the BP-led group will curb investment in preparation for their exit and that could lead to a deeper drop in output, according to the person familiar with the matter.
BP Azerbaijan President Gordon Birrell said a year ago the contract, which ends in 2024, needs to be extended to allow for more investment in the field to keep output stable.
Unexpected Decline
In any case, earlier than expected output declines from the fields will complicate the task for BP, according to Julian Lee, a Bloomberg First Word oil strategist. ACG output declined to 32.5 million tons in 2013 from 32.9 in 2012.
BP and Baku appear to have made peace since then, Lee said. The sides have a long working partnership and a December announcement of plans for joint exploration in shallow waters can be taken as an indication that relations are reasonably good, he said.
BP will probably stress continuity in investments in talks, CSIS’s Chow said. The company and some partners may also be able to use their position leading the development of a Caspian natural gas field as leverage in talks, he said.
"Some of its key members would naturally mention their other commitments in the country, such as BP in the Shah Deniz gas/condensate field,” he said.
Shah Deniz
BP is leading a group developing the second phase of Shah Deniz, a $28 billion investment intended to bring 16 billion cubic meters of gas a year to Turkey and Europe.
Baku may demand more favorable terms on extending ACG, perhaps changing the production sharing agreement to a service contract, Lee said.
Socar President Rovnag Abdullayev told reporters last year that production sharing agreements would only be signed for "high risk” structures while lower risk developments would be targeted for service agreements.
The future of "ACG will be decline management, or later life, oil field management and Socar may well feel that’s something they can do well on their own,” Lee said. "I’m not sure BP is strong enough position to demand a renewal on their terms.”
(Bloomberg)
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