Winter 1998 (6.4)
Page 75

SOCAR Section

State Oil Company of Azerbaijan Republic:
Current Developments

Facing the Future
An interview with Natig Aliyev, President
by Pirouz Khanlou

How has the recent drop in the price of oil affected Azerbaijan?

Left: Natig Aliyev, president of SOCAR, who has been involved with signing 16 international oil contracts since 1994.

The price of oil and oil products began dropping drastically at the beginning of 1998. Of course, this has affected all oil-producing companies and countries, including Azerbaijan. We are receiving less profit from the sale of crude oil and oil products than we anticipated. We have initiated a few changes. For example, we sold 80,000 tons of crude through the Baku-Novorossiysk pipeline. We were selling diesel to Turkey via Iran, but when changes occurred in the market, we began selling it directly to Europe via Batumi. We were using all possibilities to lessen the market effects because SOCAR plays a critical role in generating income for Azerbaijan's economy.

When it comes to investment, of course, the drop in oil prices has affected the entire world. That's why many famous, large oil companies are cutting back drastically. That's why Amoco and BP, as well as Exxon and Mobil have merged. We expect others to merge as well. Consolidation enables them to reduce staff. Amoco and BP, we're told, have reduced their staff by 20,000 employees. At the same time, of course, they are becoming more conservative with their investments, hesitating to get involved with projects they consider to be a risk. We feel the impact of this in Azerbaijan also. Companies are reducing their budgets for 1999 since predictions expect the low price to remain until the year 2002. But these are just predictions. No one can be absolutely sure this will happen. Everyone is waiting.

The announcement regarding the pipeline route was originally scheduled for October 1998. Already the announcement has been postponed several times. Why is this? Is AIOC leaving the political factors out of the equation and trying to solve the issue only from a commercial point of view?

Many discussions are going on regarding the main pipeline. According to AIOC's calculations, this project will cost $3.7 billion. That's an enormous amount of money for them. And that's why they are pushing to build the Baku-Supsa pipeline first, and then develop Jeyhan.

What will the actual cost of the pipeline be, and how is it that AIOC made an estimate of $2.5 billion and then came back and quoted nearly $4 billion?

AIOC first estimated the cost of the pipeline would be $2.9 billion but later they increased this figure to $3.7 billion. BP made this cost estimate, but we're skeptical about this figure. The actual costs are lower. For example, the Turkish government together with World Bank estimated that the Baku-Jeyhan pipeline would cost $2.4 billion and they stand behind their quote. As you see, these are quite different quotes, so we are analyzing them all. Those different figures depend on how they go about estimating the costs. But let me mention one more point.

As companies are trying to lower their expenses, it seems they have a tendency to suggest a higher price than this figure to emphasize how expensive the Baku-Jeyhan route would be, trying to persuade everyone that the less expensive Baku-Supsa pipeline is more suitable. Today, negotiations are going on with the Turkish government. As you know, we have met with the people responsible for these decisions several times, both in Istanbul and Baku. Soon we will conduct another meeting to discuss the commercial viability of the pipeline. We still need to calculate the exact cost of transit fees and tariffs.

By SOCAR's estimate, this route should not exceed $3 billion. The final estimate that Turkey has made is $2.4 billion, and Turkey stands by its estimate. Turkey says that if we agree on this figure, they would be ready to build this route for that amount. That's why we are optimistic that this route will get built.

In the end, who will succeed-AIOC or Azerbaijan's government-in determining the main pipeline route?

It's not a win or lose situation. This is a joint project. AIOC and SOCAR are cooperating with each other. There is no conflict or confrontation between us. We are not having a war or anything like that. We are just trying to find the best solution. The final decision, however, will be made by the Azerbaijan Republic and its President. And as you know, the Ankara Declaration (September 1998) was signed by five presidents from the region. Aliyev (Azerbaijan), Shevardnadze (Georgia), Demirel (Turkey), Nazarbayev (Kazakhstan) and Karimov (Uzbekistan) affirmed their political interests to support an East-West corridor through Baku-Jeyhan. This pipeline route will restore and maintain stability in this part of the world and play a critical role from an economic point of view. That's why today we are trying to analyze these things in an objective way and to inform our President both about the negative and positive aspects. In the final analysis, the decision will be made by our President.

As far as attracting financial investment is concerned, after the route is confirmed, if AIOC and its shareholders want to take a part in building the pipeline-fine. If any company of AIOC does not want to participate, then it's their own business and we will invite other companies to participate. Many other companies are working in Azerbaijan in addition to those that comprise the AIOC Consortium. They are taking part in various contracts and, of course, their oil needs to be transported through a pipeline as well. Some of them are also interested in taking part in a major project. There are also other companies producing pipes, pumps, etc. that could get involved. After making a final decision for the route, a separate company will be created to build the pipeline.

Specifically, how do you anticipate that these new mergers will affect the projects in Azerbaijan?

I don't think that the mergers will affect Azerbaijan negatively. In fact, the opposite is more likely to occur. These mergers can be useful for Azerbaijan, rather than harmful. We work with all these companies. If they decide to cut their budget and use their money more carefully, this will benefit Azerbaijan. As you know, the money that they spend here has to be paid back. If they invest less, it will be more beneficial for Azerbaijan. That's why we look at these developments very positively. In the short term, it's not so important how many foreigners work here or even how many Azeris get jobs. The most important thing for these foreign companies is that the project produces economical results.

How does the new merger affect the dynamics of AIOC now that the British, not the Americans, have the majority of shares in the Consortium?

That's a very hard question to answer. So far, we haven't really felt any changes because AIOC is a group composed of 12 companies. I don't think this change will affect AIOC's structure and the work that they are doing. The fact that Amoco and BP merged-what's the difference? They both were former members of AIOC. Now they will be functioning as one company, but the widespread policy that is affecting progress is that AIOC is pursuing a policy of caution. They are cutting back on expenses, not just their own projects, but also AIOC.

Some people in the neighborhood seem to be quite pleased that in some blocks, not as much oil has been found as was anticipated.

That's a very interesting problem. Of course some view this negatively. But I would like to suggest another point of view-once again the opposite opinion. Let me explain why. First of all, the oil companies that are insisting that no field was found in the Karabakh structure are not correct. Oil was discovered there. When two exploratory wells were tested, oil, gas and gas condensate fields were found. This is a big event for the whole region because we always insisted that every prospective structure is not yet an oil field. It needs to be discovered-and that takes work. Karabakh could have been empty, but it wasn't.

That's great news for us. There are plenty of gas and gas reserves in those structures. Perhaps Pennzoil estimated its own reserves and reached the conclusion that it wouldn't be profitable to exploit it from a commercial point of view. Well, that's their own business. Still, for SOCAR it is a very positive situation. If foreign companies come here, discover a field and then estimate that it isn't profitable for them, that doesn't mean that the situation is the same for SOCAR. On the contrary, we think that it will be worth putting that field into operation.

Some people complain that so many contracts are being signed and given to foreigners who come and work here, they fear that nothing will be left for Azerbaijan's future. But this is also a positive thing. Because, let's say if SOCAR itself had to discover these fields and invested $120 million for this work, it wouldn't be the same. But foreign companies give their consent to carry out all this work at their own financial risk. Azerbaijan hasn't lost anything. The money that foreigners invest is at their own risk.

We know that those fields are not as promising as Azeri, Chirag and Gunashli. They are small in comparison. Karabakh is thought to have approximately 7 million tons of oil and Dan Ulduzu, 10 million tons. Of course, we don't know for sure yet. Perhaps, if they were to be operated together, then their profitability would increase. In general, turning those perspective structures into fields in the Azerbaijan sector of the Caspian signifies to us that there are, indeed, plenty of oil and gas reserves in the Azerbaijan sector of the Caspian.

Now that Russia along with all the other countries (except Iran) have found oil in their sectors of the Caspian, what progress is being made to resolve the issue related to the status of the Caspian, and what specifically is happening between Azerbaijan and Turkmenistan?

As you know, many changes have occurred in terms of the Caspian Status problem. In 1993, all countries except Azerbaijan insisted that the Caspian should be treated as a common sea and all of its reserves should belong equally to everyone. Today, all countries including Turkmenistan and Kazakhstan hold the position that national sectors should exist and that each country must work within the frame of its national sector. The bottom of the sea should be divided by a middle line according to standards accepted throughout the world. Still Iran doesn't quite agree with this. They say that the national sector should exist, but the Caspian needs to be divided equally, or twenty percent of the project should be given to each of the five countries. But no such thing exists anywhere in the world. There is no precedent for doing this.

However, for Iran to admit that there should be something called a "national sector" is also a positive sign for us. We don't know how this problem will finally be resolved. Some countries think that all problems should be solved at once. That is, protection of environment, fishery problems, sailing and shipping rights, etc. But recently, negotiations held between Russia, Kazakhstan and Azerbaijan as well as between Russia and Turkmenistan give us reason to think that we are getting closer to resolving the problem.

Are you less optimistic about the future given these recent developments in the oil industry?

First of all, I should say that we think we are on the right track. As you know, more than $1.6 billion capital has been invested by foreign companies during these past few years. Of course, this policy is having an impact. If such a policy were not in place, then I would say Azerbaijan's condition would have been considerably worse. Azerbaijan is developing today because of its policy of openness to foreign investments. As to when the average person will feel the benefits from Azerbaijan's oil, only time will tell. The drop in the oil price delays all projects, prolonging the time it takes to repay the capital investment. So it's very hard to say that exactly in 2002 Azerbaijan will have so much money that it won't need any more foreign investment. Maybe it will be like this, but we don't know for sure.

But I would like to emphasize one thing. We really need to develop all aspects of the economy, not just oil. We can't just sit and wait until Azeri, Chirag and Gunashli produce oil. This is not a wise idea. We need to carry out reforms. We need to develop other resources that can benefit the economy. We need to work on privatization programs. Other parts of the economy also need to function so that all of our people will live better. We can't just sit passively and rely upon oil. Not everyone will benefit from oil. That's why we're trying to develop our own construction, engineering and chemical industries, entities that will eventually support themselves. If such programs and reforms can be initiated, then we'll be on the right track. Otherwise, if we sit here waiting until money comes from oil, our country will not develop as it should.



From Azerbaijan International (6.4) Winter 1998.
© Azerbaijan International 1998. All rights reserved.

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