History of the Baku Oil Industry. Part 80

After the discovery of oil fields, Baku became a special place, where various economic and political interests of international coalitions, industrial clans and leaders were concentrated and clashed. VK begins publishing chapters from the book by Ismail Agakishiyev "History of the Baku Oil Industry and the Second Oil Boom (second half of the 19th century - beginning of the 20thcentury)" The book presents a historical analysis of the emergence and current state of the Azerbaijani oil industry.

The discovered oil reserves were not commercially sufficient for the development of the Karabakh field, with the prices for oil that existed at the time. As the experience of working in the North Sea and the Caspian Sea shows, the lack of developed infrastructure increases the cost of oil production. But one cannot say that work on the Karabakh field did not bring anything to SOCAR and LUKOIL. The Russian company acquired invaluable experience in exploration and drilling in the deep layers of the Caspian Sea, which was useful in the development of other offshore deposits. SOCAR didn't lost anything in connection with the dissolution of the CIOC. Under the contract, in case of a decision on the economic ineffectiveness of an area's development, all the funds of foreign contractors spent on exploratory works were not to be reimbursed.

The CIOC gained unique experience, which it used in the future in the North-Apsheron consortium, since it conducted works in a similar contract area. The CIOC has become a member of the club of users of oil installations regulating the use of the currently-used drilling rigs "Dede Gorgud" and "Shelf-5." The CIOC's share in the modernization of rigs was $22 million. 1 During the modernization of the SSDR "Dede Gorgud", the CIOC spent $1.2 million. In August 1996 the modernization was completed and at the commission of the AIOC, the Santa-Fe company paid 38 million dollars for the installation. After modernization, this modern complex could work not only in the Azerbaijani sector, but all across the Caspian Sea. According the vice-president of LUKOIL, Ravil Maganov, estimated reserves of the Karabakh structure amounted to 23 billion cubic meters of gas. Azerbaijan has always been interested in economic ties with Russia. In 1997, the countries had a solid regulatory framework of bilateral agreements in the economic sphere. An agreement "On economic and trade cooperation until 2000" and an agreement "On the transportation of oil across the territory of Russia" were part of it. The involvement of LUKOIL in the "Contract of the Century" and the contract on the development of the Karabakh field were only the first steps towards the development of the Caspian region: the company had already started negotiations on joining the contract on "Shah Deniz."

Disagreement over the "Kyapaz" contract: 1997-1998.

LUKOIL signed the third contract in the Azerbaijani sector of the Caspian Sea on June 4th 1996 with British Petroleum (UK), Statoil (Norway), OIEK (Iran), Elf Aquitaine (France) and TPAO (Turkey) on the development of Shah Deniz. Along with the "Contract of the Century" it has become one of the most successful and profitable deals for all the parties involved in the project in connection with the discovery of large reserves of natural gas at the deposit. In June 1997, an agreement was signed in Moscow between LUKOIL, Rosneft and SOCAR on the development of the Kyapaz field. The companies had the following shares: LUKOIL - 30%, Rosneft - 20%, SOCAR - 50%. LUKOIL participated in five out of seven energy contracts in Azerbaijan (in two of them it was already the operator and could become operator in the third contract on the development of the Kyapaz field). The agreement was signed by the presidents of LUKOIL, Rosneft and SOCAR during Aliyev's official visit to Moscow in July 1997. The participation of the state company Rosneft in the contract indicated the growing influence of Russia in the Azerbaijani sector and the desire of Azerbaijan to build relationships with its close neighbours on the basis of equal economic relations.

Earlier, on June 4th 1997, an "Agreement on the foundation of commercial principles and provisions to the agreement on the exploration, development and production sharing on the Azerbaijani block including the Kyapaz field in the Caspian Sea" was signed in Moscow at the White House in the presence of the first vice-president of the government and the Minister of Fuel and Energy of Russia, Boris Nemtsov, and heads of Russian oil companies.

Issues of joint exploration and development of the Kyapaz filed had been discussed several times in the past between Nemtsov and the management of LUKOIL and Rosneft. In June 1997, after the address of Nemtsov to the leadership of the Azerbaijani Republic, bilateral negotiations on these issues started. During these negotiations, as noted in a statement by SOCAR, the corresponding documents and a contract were agreed on. The day after the contract was signed, the Turkmen Foreign Ministry issued a strong statement addressed to Azerbaijan and Russia. It demanded the cancellation of the contract.

The position of the Turkmen president, Saparmurat Niyazov, led to the freezing of the contract. Instead of offering cooperation, Niyazov began to claim his rights to the Azeri and Kyapaz fields. The latter field received the name of "Serdar" in his honor. The President of Turkmenistan argued that Azerbaijan had incorrectly established the boundaries of its sector in the Caspian Sea. Essentially, the boundaries in the Caspian were defined on January 19th 1991 by the Ministry of the Gas and Oil Industry of the USSR. According to Ministry of Foreign Affairs of Turkmenistan, the interested parties had to refrain from work in the Caspian Sea until its new legal status was developed. Interestingly enough, already back in 1995 LUKOIL raised the issue of the contract on the exploration and development of the Kyapaz field. Back then, representatives of the Russian company said that Russia, Azerbaijan and Turkmenistan had to be involved in the development of the Kyapaz field. The Azerbaijani side was not against it.