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BP and partners sign new 25-year Azerbaijan oil production sharing contract

Highlights


SOCAR stake raised at partners' expense

Deal accesses 2 billion more barrels

London — BP and its partners in Azerbaijan's giant ACG oil production complex agreed Thursday to extend the production sharing contract by 25 years to 2049 and to increase the stake of state-owned SOCAR, reducing the size of their own shares.

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The Azeri-Chirag-Deepwater Gunashli (ACG) complex in the Caspian Sea produces most of Azerbaijan's sought-after crude oil.

At the time of the signing of the original production sharing contract in 1994, it was seen as a major advance by the international oil industry into the former Soviet state, dubbed the "contract of the century."

Output has been declining for a number of years, however, falling particularly steeply in the first half of this year -- by 11% compared with a year earlier -- to 585,000 b/d, despite the startup of a new platform in 2014 at a cost of $6 billion.



Under Thursday's deal, the international companies will pay a $3.6 billion bonus to the state oil fund over a number of years. The international partners comprise BP, currently with a 35.8% stake; Chevron with 11.3%; Japan's INPEX with 11%; Norway's state-controlled Statoil with 8.6%; ExxonMobil with 8%; Turkey's TPAO with 6.8%; Japan's ITOCHU with 4.3%; and India's ONGC Videsh with 2.7%.

The extension of the production sharing contract, which was to expire in 2024, was seen as necessary to ensure continued investment.

The altered shareholder structure also gives SOCAR a greater share of production and greater spending obligations as its stake in the consortium rises from 11.6% to 25%.

Total operating costs last year for ACG were $503 million, and capital expenditure was $1.45 billion.

BP said the deal would enable the partners to access an additional 2 billion barrels of economically recoverable oil from the end of the current version of the production sharing contract.

The partners will carry out preliminary engineering work to evaluate the possible addition of another platform, it added.

The deal cuts BP's stake by 5.43% to 30.37%, with corresponding reductions for the other partners.

SOCAR Chief Executive Rovnag Abdullayev said it reflected the "growing financial and technological potential of Azerbaijan and SOCAR."

Although the foreign partners will get a lower share of production, their share has risen somewhat since oil prices collapsed in 2014 because the production sharing contract entitles them to more barrels when oil prices are lower, to cover their costs.

BP's annual reports show it received just 13.5% of total liquids production from ACG and the Shah Deniz gas and condensate field in 2013, or 96,000 b/d, but its share rose to 16.2%, or 111,000 b/d, in 2015, even though total liquids production in that period fell by 3.5%.

BP's current 35.8% stake, which has made it by far the dominant commercial presence in Azerbaijan, partly reflects its 1998 purchase of legendary US company Amoco, which held an almost equal stake to BP at the original production sharing contract signing, with Amoco on 17.01% and BP on 17.12%.


WIDER INTERESTS


Production decline at the field was long expected, but has been a source of tension, prompting a public outburst by President Ilham Aliyev reprimanding BP in 2012.

While Thursday's agreement diminishes its role, BP is also focused on other interests in Azerbaijan, not least the giant Shah Deniz 2 gas development, which is intended to supply the Southern Corridor, delivering gas to Europe from 2020.

"Today's contract is perhaps an even more important milestone in the history of Azerbaijan as it ensures that over the next 32 years we will continue to work together to unlock the long-term development potential of ACG through new investments, new technologies and new joint efforts to maximise recovery," BP Chief Executive Bob Dudley said.

One result of decline at ACG has been the under-utilization of the Baku-Tbilisi-Ceyhan pipeline across the Caucasus mountains to Turkey's Mediterranean coast.

The pipeline operated at a little over half its 1.2 million b/d capacity in the first half of this year.

The pipeline may eventually be used to transport more of Kazakhstan's burgeoning production, and is seen as an emergency backup to the CPC route that brings most of Kazakhstan's production to international markets across Russian territory.

But so far, Kazakh volumes via the route remain minimal.

Statoil, which sees its stake cut from 8.56% to 7.27% and has already exited Shah Deniz, said the extension "represents a major milestone for Statoil and all the participating companies, which will continue generating value from the asset for many decades to come."

--Nick Coleman, nick.coleman@spglobal.com
--Edited by Annie Siebert, ann.siebert@spglobal.com