BP at the center of Baku’s criticism

 

Orkhan Sattarov. Exclusively to Vestnik Kavkaza

 

Unprecedented harsh criticism by the President of Azerbaijan Ilham Aliyev, in which he attacked the British oil company "BP" in a speech at a meeting of the Cabinet of Ministers, provoked a great response both within the country and abroad. The president blamed BP for  blunders committed by the consortium in recent years, as a result of which oil production in the "Azeri" and "Chirag" fields dramatically fell. Aliyev explained all the alleged "sins" and motives of British Petroleum.

 

The central point of the criticism is that BP is not fulfilling its own forecasts. "It is not that we have reached a peak, and after that, of course, as they say, there are processes of decline. The point is that the forecasts made have not been fulfilled," Aliyev said. After that, the President hinted that the real reason for the decline of oil production was the reluctance of the consortium to make additional investments at a time when equity section in the "Azeri "and "Chirag" fields have changed in favour of Azerbaijan: "In those early stages, when there were a lot of investments, the share of foreign investors was higher - about 75 to 25 percent in favour of foreigners, so to speak. After they returned their investments, the equity sector began to change - at the level of 50 to 50 percent. In mid-2008, given the profitability of the "Azeri" and "Chirag" oil fields and the terms of the contract, the equity section changed in favour of Azerbaijan, and now, from mid-2008 to the present day, it is 75 to 25 percent. That is, 75 percent of crude oil falls to Azerbaijan. Once again I want to say that after the change occurred on the basis of the contract, the extraction of oil from the "Azeri" and "Chirag" oil fields for some reason began to diminish."

 

Finally, the President of Azerbaijan, giving specific figures, actually accused the British company of a shortfall of 8.1 billion dollars. "In 2009, the forecast of production from the "Azeri" and "Chirag" fields amounted to 46.8 million tons. And in fact, oil was produced at the level of 40.3 million tons. In 2010, the forecast was 42.1 million tons, and the production was actually 40.6 million tons. In 2006, the forecast was 40.2 million, while the actual production was 36 million. In 2012, a forecast of 35.6 million tons was made. Given the current production, it can be assumed that by the end, BP will not be able to get more than 33 million tons of oil from "Azeri" and "Chirag". Summing up all these numbers, taking the price of oil at $100, although in these years, it was even higher, and counting, we see that Azerbaijan did not get 8.1 billion dollars of revenue. This is the reality. This little statistical figure is our reality. Therefore, production in the oil industry reducing year after year, month after month, quarter after quarter is the logical result of this situation."

 

The President stressed that this unexpected decline was possible only due to gross errors on the part of BP, the head of the consortium, which operates in the "Azeri" and "Chirag" fields. The British, according to the president, though admitting their mistakes, did absolutely nothing to correct them. Moreover, they are deliberately delaying  and are not solving the existing problems: "We have partnered with BP for many years. At all times we supported their activity in the most difficult days for them. We expected adequate treatment. These erroneous forecasts are unacceptable to us. False promises to the State Oil Company are unacceptable. In the business world, the business of such a level of relationship has no place, it is impossible. We've always been fair to all partners - both in politics and in economics. We always keep our promises. We expect adequate treatment. I believe that very significant changes should be made concerning this issue. Why am I just now publicly disclosing information related to this issue? Because in the last month BP has officially given me the promise that these negative effects will be eliminated in a short time. All the errors were found. It was recognized that the situation is not very encouraging. There were promises that in the short term very significant changes would be made, the work program will be amended, specific measures would be committed to maintain production at a stable level, and most importantly, the people who have committed these blunders would be replaced. But from that time to the present day - almost a month later - I do not see the implementation of these commitments. On the contrary, I think there is a process of delaying. So I think that this is totally unacceptable."

 

BP responded to the criticism by the Azerbaijani President, assuring that "it is devoted to Azerbaijan". As Fineko / abc.az of BP Azerbaijan reports, the company is working with the State Oil Company of Azerbaijan (SOCAR) on all matters of oil production from ACG. The company refrained from raising expectations about the program of stabilization of oil production from the block and about real stabilization. Earlier, on October 9, President of SOCAR Rovnag Abdullayev said that the company started to prepare the program. He also announced that in 2012 and 2013, oil production in the country would amount to 47.5 million tons.

 

Almost at the same time, it became known that the British company would appoint a new Vice President of BP-Azerbaijan. Gary Chrisman left this post. He has received a new assignment in Houston, where he also will be the vice-president of the Global Wells Institute. The company has not named the successor of Chrisman yet, Turan reports. Perhaps Chrisman was one of the people who committed a gross error, and therefore President Aliyev insisted on his replacement.

 

So what is the reason for the barrage of criticism from the president towards the British? Matthew Hulbert, author of the magazine "Forbes", notes in his article that the Azerbaijani leadership has long positioned itself as a leader of the Trans-Caspian project. On the one hand, the rich deposits of natural gas in the "Umid" and "Absheron" fields offset losses in oil production, on the other hand, a final investment decision on "Shah Deniz-2" is approaching. If Turkmen gas and Kazakh oil will go through the Caspian Sea and Azerbaijan, Baku will objectively rise at the heart of the Eurasian energy transit policy and will be the arbiter in many disputes. BP is interested in participating in this process; in addition, it is not indifferent to how the gas will be transported to Europe, and what the formula of pricing will be in this case. The monologue from Baku was provoked, perhaps, by the fact that the leadership of the State Oil Company at a recent briefing voiced a desire to see Exxon Mobil and Conoco in the Caspian Sea as the closest partners. Of course, such a move by the head of state is unlikely to mean a "red light" for the current operator, but it activates the global players in the oil field, Hulbert believes.

 

 

A German analyst who specializes in energy issues in the Caspian region, Mathias Dornfeldt, during the discussion in Berlin dedicated to the energy policy of Azerbaijan suggested that the current strict performance by the Azerbaijani President to the British oil company is directly related to Baku’s desire to arrange redistribution of property in the oil market, following the example of Russia. However, Azerbaijan is vitally interested in the latest Western technology in the field of oil and gas, and therefore the threat of "exiling" BP from the country cannot be implemented. In addition, the Minister of Energy and Industry Natig Aliyev has issued reassuring statements that no contracts with foreign oil companies from Azerbaijan will be cancelled. According to 1news.az, the Minister of Industry and Energy Natig Aliyev told reporters on Monday on the sidelines of the 6th Conference "Caspian oil and gas trading and transportation": "Statements of the head of state that these measures must be taken against BP in connection with the fall in oil production of the "Azeri - Chirag – Guneshli” field do not contain any threat to foreign oil companies. There is no threat that the contracts will be terminated. In this case we are talking about the measures to be taken to stabilize oil production at "Azeri - Chirag - Guneshli" " Natig Aliyev said. 

 

Against the background of peaceful applications by the Azerbaijani Minister, the response of the speaker of the Milli Majlis, Ogtay Asadov, noting that BP fulfils its promise "because there has been a last warning", seems much less sustained. The question arises, what will happen after the last warning? It is logical that we could then go to the termination of the existing contract - however, there is no such threat, if we still go by the words of the Minister of Energy and Industry Natig Aliyev. Azerbaijani MP Vahid Ahmadov urged the president to sue BP because of a business failure: "It is necessary to improve the situation with regard to the breach of obligations; Azerbaijan should receive 8.1 billion dollars. BP also must seriously think about it. True, these are economic issues, but they also have political sides. We should keep in mind all of this and try to get the money. I do not believe that the contract with BP would be terminated and that the company will be replaced by another. But it is necessary to resolve this issue, even if it is done at the level of the international court,” the MP said.

 

In any case, the decline in oil production in the country has already affected its macroeconomic indicators, which is quite disturbing for the government. GDP growth in recent years has slowed significantly. This year it is expected to reach 2.2% instead of the planned 5.7%. The reason is the decline in oil production by 4.5% instead of the originally expected growth of 1.5%. This deterioration in economic performance, especially in view of the presidential election of the next year, is hardly acceptable to the Azerbaijani government. At the same time, it is obvious that the charges of Ilham Aliyev to the British company are the real reason – there was no refutation on the part of BP. Probably, Baku is now trying to make the British increase investment in oil exploration to increase its effectiveness and, as a result, the revenues of Azerbaijan.

 

 

On the other hand, Azerbaijan can hardly be seriously willing to break existing agreements with BP. First, the country needs Western technology. Second, such a move would mean the actual loss of such an important ally as the UK for the Azerbaijani government. It is rather a question of preferences for future projects, which will be allowed for BP. It is possible that many aspects will depend on the approach of the company to solving the problems encountered in the ACG. After all, not surprisingly, President Aliyev, when on an official visit to France, invited the leading French energy companies to actively cooperate with Azerbaijan. The country is looking for alternative partners amongst foreign companies. Will the activity of BP be adjusted in Azerbaijan, and what will be the future strategy of the rulers in Baku in this matter? This will become clear in the coming year.

 

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