History of the Baku Oil Industry. Part 84

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.

In 1997, a contract was concluded between LUKOIL and an Iraqi company on the development of the very promising West Qurna deposit with reserves amounting to 40 billion barrels of oil. In addition to the contract with Iraq, LUKOIL was involved in 10 international projects of oil production. An agreement on the Yalama structure (block "D-222")  with a total area of 1 square km became the sixth contract signed between SOCAR and international companies and LUKOIL's fourth contract in the Azerbaijani sector of the Caspian Sea. According to the contract, LUKOIL had a share of 60%, while SOCAR had 40%. 1 The contract was signed on July 4th 1997 in the Kremlin. The signing was attended by the president of Azerbaijan, Heydar Aliyev, who at the time was in Moscow on an official visit and by Russian president Boris Yeltsin.

The Yalama field, located 30 km from the coast on the border between Azerbaijani and the Russian sectors of the Caspian Sea (the parties' territories ratio was about 1:1) was the object of sharing, which was rather symbolic of the cooperation between SOCAR and LUKOIL. 3 This field was discovered by Soviet geologists back in 1963-1970, but  since that time all exploratory works conducted there consisted only of three-dimensional seismic analyses and reconnaissance drilling of one or two wells.

The contract provided that in case of negative results of seismic explorations of the deposit, Azerbaijan was to receive a bonus of not more than 3 million dollars. 5 If the estimates were to correspond to reality, the figure was to increase to $5 million. After the initial industrial development of the field, Azerbaijan was to receive another $10 million. 6 It must be stressed that the share of SOCAR in the project was unprecedentedly high compared to previous contracts on the development of deposits in the Azerbaijani sector of the Caspian Sea. After the industrial development, under the contract LUKOIL was ready to pay $2,500,000 to the Republic of Azerbaijan for every 100 million barrels of oil.

The negative experience with the Karabakh deposit made the company more cautious. Acre payments reached $2000. According to the contract, LUKOIL planned to spend $200,000 on personnel training. Capital investment should amount to $2-2.5 million, 70 million of which would go towards the exploration works. Instead of the 25% profit tax planned earlier, this contract stipulated 32%.

The agreement entered into force on December 10th 1997, after its ratification by the Azerbaijani parliament on November 4th. The Yalama field was a part of the megastructure that united the Russian and Azerbaijani sectors of the Caspian, so a part of it belonged to Russia (Dagestan), and LUKOIL held exclusive rights to explore on behalf of this megastructure.

It was possible that 20% of the contract would be given to another oil company, for instance Rosneft, Yukos or Sidanco. 3 Yukos and the international partners of LUKOIL – ARCO and Agip – were considered to be the main contenders.

All this showed that the foreign oil corporations had not lost their interest in Azerbaijani Caspian oil after the failure of the Karabakh contract, and the intention of the other Russian companies to work on these fields was also a positive development.  By 1997 Russian companies had completed the organizational work and had caught up with the international oil corporations both in finance and technology. LUKOIL's activity in the Caspian encouraged them to invest in the development of the sea deposits. Finally, ARCO joined LUKOIL, creating a joint project LUKARCO (ARCO at that moment possessed a 7.99% share of LUKOIL stocks). As a result the LUKARCO share of the contract reached 60% against SOCAR’s 40%, and  investment was set to reach two billion dollars.

The term of the contract was set at 25 years with a possibility of 5-year prolongation with SOCAR's agreement. The oil reserves were estimated at 100 million tons and the first extraction was planned for 2004-2005.

On September 3rd 1998 the Azerbaijani-American company Caspian Geophysical completed 3D seismological exploration in Yalama. The investors took their time to thoroughly examine the exploration's results – in the summer of 1999 LUKARCO was still studying the seismological analysis. The contract allowed for withdrawal after the seismological analysis, because the geological structures had been poorly researched before.

By August 1999 ARCO decided against further realization of the project in Yalama, as it was considered ineffective. The company closed its office in Baku in July 1999. However, some oil experts believed that there was not enough grounds to reject the project.  But then LUKOIL either had to find a new partner or to work by itself. LUKOIL's leadership was ready to continue the project alone.