Azerbaijan’s new oil strategy has raised the country’s geopolitical status in the Southern Caucasus and Caspian Region. The new Azerbaijan is now established as one of the oil centres of the world and an artery in the flow lanes through Asia, the Caucasus and Europe.
It is evident that oil can only be profitable when it is accompanied by an operational mechanism and foreign investment is now a significant component of that mechanism.
Investors from abroad have invested in Azerbaijan’s oil industry in order to solve their problems of energy security as well as to profit from the region’s geostrategic advantages.
This process only took off after the arrival of Steve Remp, president of the “Ramco Energy” (Scotland) company, in Azerbaijan in 1989, as a result of long and complicated negotiations. The discussions with western companies continued till June 1993. Then, in May-June 1993 there was a change of government here. An experienced politician was elected president - Heydar Aliyev (1993-2003). At the end of June 1993, while carrying out the duties of chairman of the Supreme Council and also president of the state, he made the decision to halt the negotiations with foreign oil companies. He believed that important aspects of the contract under discussion did not serve Azerbaijan’s best interests.1
Heydar Aliyev issued the decree “On accelerating the development of offshore oil and gas fields in the Republic of Azerbaijan”2. Thereafter, in March 1994, the negotiations process was resumed, at first in Baku and then in Istanbul and Houston. The project agreement was discussed by the supreme bodies of the republic and on 14 September the decree “On the results of negotiations with the consortium of foreign oil companies on the joint development oil fields in the Azerbaijani sector of the Caspian sea” was signed3. The project agreement was approved by the decree and agreements were signed with “Amoco Caspian Sea Petroleum Ltd”, “BP Exploration Caspian Sea Ltd”, “Den Norske Stats Oljeselskap AS” (Statoil), “Oil Company Lukoil JSC, “McDermott Azerbaijan”, “Pennzoil Caspian Corporation”, “Ramco Khazar Energy Ltd”, “Turkish Petroleum Overseas Company Ltd” and “Unocal Khazar Ltd”4. To understand the essence of the negotiating process conducted in the oil sector we must track the changes occurring in the foreign policy of the new government of Azerbaijan.
A warming in official relationships between Baku and Tehran at that time opened the possibility of participation by Iranian oil companies in the consortium. The USA was decidedly against such a development. The regime of multilateral sanctions applied by the USA against Iran after the Islamic Revolution of 1979 - in particular, the ILSA (Iran-Libya Sanctions Act) law - were a fundamental barrier to Iranian involvement. The USA companies even stated that they would leave the consortium in the event that Iranian oil companies joined it.
The Azerbaijani side, as an expression of allegiance to the conditions laid down by the USA, informed official Tehran through diplomatic sources that there was no prospect of Iranian oil companies participating in the consortium.
Finally, the interests of the various states involved were satisfied and negotiations were completed on the joint operation of the oil project by Azerbaijan and the Western oil companies.
Landmark contract signed
On 20 September 1994 the first international agreement “On the joint development of the ‘Azeri’, ‘Chirag’ and deep-water ‘Guneshli’ oil fields in the Azerbaijani sector of the Caspian Sea and production sharing” was signed in Baku, at the Gulustan Palace. This agreement is called “the Contract of the Century”, due to its importance.
- Volume of investment – $7.4 billion;
- Operational costs – $5.9 billion;
- Area covered by the contract – 432.4 km2;
- Stipulated amount of oil production – 510 million tons (currently 630 million tons of oil are predicted);
- Additional gas recovered – 70 billion cu.m.6
80 per cent of investment in this contract was to be made by the foreign companies and 20 percent was to come from the Azerbaijani side.
The companies had the following shares in the Production Sharing Agreement7:
Name of companies Countries Rates of share
1. SOCAR Azerbaijan 10.0000%
2. British Petroleum Great Britain 17.1267%
3. Amoco USA 17.0100%
4. Unocal USA 10.0489%
5. Lukoil Russia 10.0000%
6. Statoil Norway 8.5633%
7. Exxon USA 8.0006%
8. TPOC Turkey 6.7500%
9. Pennzoil USA 4.8175%
10. Itochu Japan 3.9205%
11. Ramco Great Britain 2.0825%
12. Delta Saudi Arabia 1.6800%
As can be seen from the schedule, 4 US companies, 2 British companies, 1 Norwegian, 1 Japanese, 1 Russian, 1 Turkish and 1 Saudi Arabian company partnered SOCAR in the first international contract providing for the joint operation of Azerbaijani oil. We should note that SOCAR initially had a 20 per cent share in the contract. However, in spring 1995, SOCAR yielded 5 percent of its share to Exxon and 5 percent to TPOC. These companies undertook to give Azerbaijan a bonus amounting to $173.2 million and to finance 10 per cent of SOCAR’s share.
Other changes also occurred to the production shares of members of the consortium. Thus, the Japan company “Itochu” obtained McDermott’s (USA) 2.45 percent share and took its place. At the same time, Itochu obtained 1.4705 percent from Pennzoil’s (USA) 5 percent share, to raise its own share to a total of 3.9205 percent. Exxon (USA) and Unocal (USA) purchased 3.0006 percent and 0.5289 percent respectively of Pennzoil’s share.
The signing of “the Contract of the Century” drew a wide response from around the world. President Clinton of the USA, Prime Minister Major of Great Britain, President Demirel of the Republic of Turkey, and heads of state and government of other countries sent their greetings to the President of the Republic of Azerbaijan on the signing of an international oil contract with such great prospects.
As for the significance of ‘the Contract of the Century’, Heydar Aliyev best expressed its value: “In signing this contract we once more demonstrated to the world that Azerbaijan is a fully independent state and that its people control their own wealth. In signing this contract we created relations with the developed countries of the world, with their biggest oil companies, and the basis for integrating Azerbaijan into the global economy and establishing a free market economy. In signing this contract, we demonstrated once more to the world that the independent Republic of Azerbaijan is a legal and democratic state”8.
The contract as launchpad
Following ‘the Contract of the Century’, 31 international contracts connected with other fields in the Azerbaijani sector of the Caspian Sea were signed with the world’s major oil companies. The number of pipelines delivering Azerbaijani oil to world markets increased to three. The legend of the Baku-Tbilisi-Ceyhan oil pipeline became reality. 52 million tons of oil have been produced in Azerbaijan during 2010 and the greater part is transported to world markets via this pipeline.
The signing of ‘the Contract of the Century’ also afforded Azerbaijan the opportunity to become a producer and exporter of gas. Until 2007, Azerbaijan was purchasing approximately 4.5 billion cubic metres of gas per year but since then it has started to export gas through 4 different pipelines to Russia, Georgia, Iran and Turkey. In 2009, Azerbaijan produced 23 billion cubic metres of gas: 3 times more than is required domestically.
Azerbaijan’s oil diplomacy continues successfully today. Its priority is the diversification of energy exports. This policy increases the country’s importance in ensuring Europe’s energy security year on year. This in turn promotes its growing influence in the world and makes the following clear:
1. Azerbaijan. ‘October – 94, March – 95. Attempt. Chronicle of attempts of coup d’état’, p.11. Baku: Azerneshr, 1995
2. H. Aliyev. ‘Our independence is forever’ (Vol 2), May 1994 – December 1994, p.6. Baku: Azerneshr, 1997
3. Ibid. p.44
4. N. Aliyev, E. Shahbazov. ‘Heydar Aliyev and the Development of Azerbaijani Oil’, p.75. Baku: Azerneshr, 1997
5. Newspaper ‘Azerbaijan’, 20 November 1994
6. Azerbaijan. ‘October – 94, March – 95. Attempt. Chronicle of attempts of coup d’état’, p.66. Baku: Azerneshr, 1995
7. T. Goltz. ‘Azerbaijan Diary’. New York, “Light”, p. 46. 1998
8. N. Aliyev, E. Shahbazov. ‘Heydar Aliyev and the Development of Azerbaijani Oil’, Baku: Azerneshr, 1997
About the author
Elman Nasirov is a director of the Centre of Geostrategic Researches of the Academy of State Management under the President of the Republic of Azerbaijan. Dr. Ph., an associate professor.