Special Brief on the Azeri-Chirag- Guneshli (ACG) Contract: US Companies Get 16 Percent Share in Azerbaijan Oil Deal

Transcription

1 Special Brief on the Azeri-Chirag- Guneshli (ACG) Contract: US Companies Get 16 Percent Share in Azerbaijan Oil Deal 18 September 2017 Washington, DC i n f c a s p i a n p o l i c y. o r g + 1 ( ) w w w. c a s p i a n p o l i c y. o r g

2 US Companies Get 16 Percent Share in Azerbaijan Oil Deal On September 14, 2017, Azerbaijan and its international partners signed a new deal to extend ACG until As part of the contract, US companies Chevron and Exxon get over 16 percent share in total (9,57 and 6,79 respectively). The original PSA, which was signed in 1994, was called the Contract of the Century, and this time the country signed a landmark agreement with BP and its partners in the Azeri, Chirag fields and the Deep Water Portion of the Gunashli Field (ACG), embodying celebration of a Contract of the 21st Century. Despite the decline in oil prices and investments across the world, it is remarkable to see continued international interest in Azerbaijan s energy projects. During the next 32 years, more than $40bn capital will be invested in the ACG oil field. The continued trust of the international oil majors in Azerbaijan is due to the reliability, credibility and commerciality of the previous and current projects. The country signed the first oil contract when it was just received its independence and despite all challenges of being a young state, it managed to prove itself as a reliable partner in delivering the responsibilities of the major international undertaking. The contract was signed in Baku in the presence of President Ilham Aliyev and a group of visiting senior government and state officials. Following completion of the contract, the new ACG participating interests will be as follows: BP, 30.37%; AzACG (SOCAR), 25.00%; Chevron, 9.57%; INPEX, 9.31%; Statoil, 7.27%; ExxonMobil, 6.79%; TP, 5.73%; ITOCHU, 3.65%; and ONGC Videsh Limited (OVL), 2.31%. The consortium s decision to extend its ACG PSA at this stage, 7 years prior to the planned 2024 expiration date, and despite plunging oil prices, reflects the consortium s belief that there are still significant amounts of oil to be extracted and further capital investments to be unlocked. Even at current oil prices of US$55 a barrel, the extracted oil reserves are expected to create a profit opportunity of US$180 bn, a 75% share of which will be apportioned to Azerbaijan, in accordance with the terms of the new agreement. Azerbaijan will be receiving 3,6 billion dollars as a bonus and also 75 percent of the profit oil. Foreign investors shall pay a one-off bonus of US$3.6 billion to the State Oil Fund of the Republic of Azerbaijan (SOFAZ), as soon as the agreement is ratified by the National Assembly. Its national oil company SOCAR also will receive 25 percent of the shares up from 11 percent. Overall the country is making the new deal in better conditions than the previous one. Addressing at the ceremony on the signing of the agreement President Ilham Aliyev said: "Today is a remarkable and historical day. It is an important day for Azerbaijan and the world energy sector. The new era begins in the development of giant Azeri, Chirag, Gunashli oil fields. Azerbaijan has a great potential and we have strengthened this potential over the last couple of years and the Contract of the Century has a special role in Caspian Policy Center 2

3 the development of this potential. This also proves the confidence of our foreign partners in the Azerbaijani economy, taking the effective partnership to a new level." The United States has actively supported the development of the oil and gas resources in Azerbaijan and elsewhere in the Caspian Basin since the early 1990 s, seeing their development and their secure delivery to European and other markets as key to boosting economic prosperity and global energy security. Commenting on the new contract US Ambassador Robert Cekuta said: US is pleased to continue cooperation with Azerbaijan within the extension of agreement on ACG development. The US has actively supported a production of oil and gas resources in Azerbaijan and other places of the Caspian basin. The main goal is a delivery of oil and gas to Europe and other markets. And this contributed to economic development and global energy security. Azerbaijan's importance is recognized by the US today. This reality was clearly reflected in the US president Donald Trump's letter on Azerbaijan's Independence Day on May 28, as well as the 24 th Oil and Gas Exhibition and conference, US Secretary of State Rex Tillerson's letters to the Southern Gas Corridor and its Advisory Council held in February. US-assisted Azerbaijan to transport its oil to world markets in the late 1990s provided political support to BTC, the US companies participated in here with their finances and technologies. The US has been and will be a long-term partner of Azerbaijan in oil and gas sector, non-oil sector and implementation of New Silk Road project." The biggest shareholder in the contract is BP, which has over 30 percent share in the new contract. Bob Dudley, group chief executive of BP said: Over the past 23 years the Contract of the Century has truly transformed Azerbaijan, energy supplies to Europe and all of us who have worked so hard to make it a success. Today s contract is perhaps an even more important milestone in the history of Azerbaijan as it ensures that over the next 32 years we will continue to work together to unlock the long-term development potential of ACG through new investments, new technologies and new joint efforts to maximize recovery. In light of that, I think it is fair to call this the Contract of the New Century. Theresa May, Prime Minister of the United Kingdom praised UK-Azerbaijan strategic partnership and stated: "The contract renewal reinforces, for decades to come, the deep and special co-operation between the United Kingdom and Azerbaijan in the energy field." On the other hand, SOCAR increased its shares in the contract to 25 percent. Rovnag Abdullayev, SOCAR president said: Since the signing of the first PSA in 1994, ACG has benefited from $33bn of investment, producing around 440 million tonnes of oil, and delivering directly more than $125bn of net profit to our country. Another company that has almost quarter-century presence in Azerbaijan, Statoil and it decided to continue to be part of the new contract. Lars Christian Bacher, Statoil's Executive Vice President said: "This year we celebrate 25 years of Statoil presence in Azerbaijan and we cannot find a better way to celebrate this milestone than by extending our participation in the ACG field for a further 25 years." Representing Norway Terje Soviknes, Minister of Petroleum and Energy said: "As the new Production Sharing Agreement for the Azeri-Chirag-Gunashli Field is signed, a new chapter of fruitful international energy cooperation opens." Caspian Policy Center 3

4 One another key party to the contract with almost 6 percent share is Turkey which also serves as a transit country for Azerbaijan energy resources to reach global markets. "The extension of the agreement on the Joint Development and Production Sharing for the Azeri- Chirag-Gunashli fields until 2050 which is called a "contract of the century" will be beneficial to our countries," said in congratulation letter of Turkish President Recep Tayyip Erdogan. It is also important to mention that the new contract will also benefit Georgia which served as the main transit country for Azerbaijan energy exports. Its prime minister Giorgi Kvirikashvili, said: "I believe that the extension of the Joint Development and Production Sharing Agreement is of historic importance and demonstrates that Azerbaijan continues to establish itself as a global energy player." The contract for the largest oil complex offshore Azerbaijan could lead to billions of dollars in investments and billions more in oil barrels. American oil companies have remained among the original participants in the AIOC consortium, and in the late 1990s, the United States provided strong political and financial support for the Baku-Tbilisi-Ceyhan (BTC) pipeline, which carries oil from ACG and other Caspian fields to world markets. American oilfield equipment and services companies also have played a key role in the implementation of these projects. After BTC, our cooperation led to the construction of the South Caucasus Pipeline, which now delivers Caspian gas to Georgia and Turkey. Now with the new contract US companies Chevron and ExxonMobil will acquire an overall 16.4% share in the renewed ACG contract. More recently, the United States has worked closely with Azerbaijan, Georgia, Turkey, and other countries in developing the Southern Gas Corridor, which will enhance European energy security still further by creating a new source and route for gas supply to European consumers. Given that world oil demand is expected to boost, according to both OPEC and IEA projections, it should be intriguing to witness how the post-2024 oil sector landscape in Azerbaijan is about to unfold in the aftermath of this crucial contract extension. Key Facts: Updated shareholder structure: BP, 30.37%; AzACG (SOCAR), 25.00%; Chevron, 9.57%; INPEX, 9.31%; Statoil, 7.27%; ExxonMobil, 6.79%; TP, 5.73%; ITOCHU, 3.65%; and ONGC Videsh Limited (OVL), 2.31%. US companies Chevron and ExxonMobil will acquire an overall 16.4% share in the renewed ACG contract. The Azerbaijani side has secured better terms in the restated PSA, as SOCAR is set to increase its equity share from 11.65% to 25%, following international partners decision to reduce their own stakes. Interest held by BP, which will maintain its position as field operator, will drop to 30.37% from 35.8%. Caspian Policy Center 4

5 Foreign investors shall pay a one-off bonus of US$3.6 bn to the State Oil Fund of the Republic of Azerbaijan (SOFAZ), as soon as the agreement is ratified by the National Assembly (Milli Majilis.) As estimated by SOCAR and international partners, there is a potential for some US$40 bn in capital to be invested in ACG over the next 32 years, in addition to the US$33 bn already spent. Even at current oil prices of US$55 a barrel, the extracted oil reserves are expected to create a profit opportunity of US$180 billion, a 75% share of which will be apportioned to Azerbaijan, in accordance with the terms of the new agreement. In the context of the Contract of the New Century, as referred to by BP CEO Bob Dudley, SOCAR and co-venturers have also agreed to progress engineering development work to evaluate an additional production platform in the ACG contract area, the Azeri Central East, projected to be commissioned by ACG operations currently consist of 8 offshore platforms, namely 6 production platforms and 2 process facilities (gas compression and water injection). Hydrocarbons are then exported by the platforms to the Sangachal Terminal, located 55km south of Baku. The recovered oil has been exported westward mainly via the Baku-Tbilisi-Ceyhan (BTC) and Western Route Export pipelines. The ACG complex, discovered between 1979 and 1989, represents about 75% of Azerbaijan s output. The crude produced by these fields is considered to be among the lightest in the world, making it less expensive to refine. In 2010, ACG reached a peak output of 0.82MMbbl/d and has since fallen to 0.63MMbbl/d in 2016 and 0.58MMbbl/d in the first quarter of 2017, although the latter number is justified by a planned maintenance shutdown and is not related to Azerbaijan s compliance with the OPEC output-cut pact. BP s decision to extend its ACG PSA at this stage, 7 years prior to the planned 2024 expiration date, and despite plunging oil prices, reflects the consortium s belief that there are still significant amounts of oil to be extracted and further capital investments to be unlocked. The existing ACG PSA was signed on 20 September Since that time around $33bn of investment has been made into the development of the ACG field. Whereas with the new contract the investment amount will be around 40 billion dollars. First oil was produced from the Chirag field on 7 November To date, the field has delivered around 3.2 billion barrels (around 440 million tonnes) of oil production, which has been exported to world markets, primarily via the Baku-Tbilisi-Ceyhan and Western Route Export pipelines. ACG has also delivered over 30 billion cubic meters of associated gas in total to the Government of Azerbaijan. In the first half of 2017, total production from ACG averaged 585,000 barrels per day. Caspian Policy Center 5

6 Shareholder structure of the Azeri-Chirag-Guneshli contract Contract of the Century 1994 SOCAR 11.6 % BP (operator) 35.78% Chevron 11.3% Statoil 8.6% INPEX 11% ExxonMobile 8% TPAO 6.8% ITOCHU 4.3% ONGC 2.7% New ACG contract 2017 SOCAR 25% BP (operator) % Chevron 9.57% Statoil 7.27% INPEX 9.31% ExxonMobile 6.79% TPAO 5.73% ITOCHU 3.65% ONGC 2.31% Caspian Policy Center (CPC) is an independent, nonprofit research think tank based in Washington D.C. Economic, political, energy and security issues of the Caspian region constitute the central research focus of the Center. The Caspian region, at the crossroads of the East and the West, is increasingly becoming a crucial area of global interest with its rich natural resources, geopolitical rivalry and economic development. Established in 2016, the Center aims at becoming a primary research and debate platform in the Caspian region with relevant publications, events, projects and media productions to nurture a comprehensive understanding of the intertwined affairs of the Caspian region. With an inclusive, scholarly and innovative approach, the Caspian Policy Center presents a platform where diverse voices from academia, business and policy world from both the region and the nation s capital interact to produce distinct ideas and insights to the outstanding issues of the region. Caspian Policy Center 6