Our Analytics 15 september — 12:52

Ilham Aliyev again strengthens Azerbaijan's geopolitical significance (Our afterword)

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BY ELNUR MAMMADOV, ECONOMICS SECTION

So, the long-awaited event has happened: in Baku, a new agreement was signed between Azerbaijan and partner companies, including the State Oil Company (SOCAR), to develop the block of Azeri-Chirag-Gunashli oil and gas fields until 2050. The old 'Contract of the Century,' signed on September 20, 1994, has been extended for another 25 years. Over the past period, revenues from the implementation of this contract have brought Azerbaijan more than $125 billion, thanks to which the country in a short time came to be among the leaders in the region in all indicators.

It should be noted right away that the sides have been preparing this agreement for quite a long time. The first reports about the beginning of negotiations on the extension of ACG development appeared in 2015. At the end of the last year, SOCAR and the Azerbaijan International Operating Company (AIOC), headed by BP, signed a letter of intent to further develop the ACG and extend the contract until 2050. What was the cause of such a rush (the terms of the old contract expire at the end of 2024) and the delay in signing a new contract?

The fact is that when signing the 'Contract of the Century' in 1994, foreign companies believed that the volume of extracted oil on the ACG block was no more than 511 million tonnes. True, local specialists from the very beginning persistently argued that the reserves were much larger, but it took a long time to persuade foreign partners. Many years passed before their own calculations using the most modern technologies and instruments proved the fidelity of the forecasts of Azerbaijani oilmen. Indeed, by the end of the first half of this year, ACG has already produced 430 million tonnes of oil. And the recoverable residual reserves here still exceed 550 million tonnes. This is the real mega-house of high-quality oil.

This, perhaps, explains the high interest of the leading oil companies of the world to this block. Oil production here intensively grew from year to year. Moreover, since the beginning of the millennium, oil prices have also started to grow in the world market. Azerbaijan literally bathed in the surging flow of petrodollars.

Baku, built on oil money

Revenues paid off so quickly that in the middle of 2008 the country reached a maximum profit level of 80%. And in 2010, within the project, the maximum production level was also recorded: 40.6 million tonnes of oil. But after that the extraction went on decline: in 2012 from the contract area only 34.9 million tonnes were extraxted, which was followed by the corresponding reaction of the Azerbaijani President Ilham Aliyev. In October of the same year, at a government meeting, the head of state sharply criticised the activities of the operator of an international consortium, British company BP.

The reaction of the British company did not hesitate to show itself: in a short time almost all the management of BP-Azerbaijan was replaced. But the new team did not manage to stabilise production. The rate of decline in oil production at the block was almost one million tonnes per year. And this year, according to preliminary forecasts, only slightly more than 28 million tonnes of oil will be produced at the ACG. Neither threats, nor personnel reshuffles helped. Hence, there is a more significant reason.

Yes, the extraction peak is over, the contract term is coming to an end. And to stabilise the extraction large investments are needed. But in this situation, partner companies are unlikely to want to risk large amounts. Of course, if in a couple of years it is necessary to prepare the area for liquidation, no one will want to invest billions here. Now, if the contract was extended... This was the cherished dream of foreign partners, which were quite satisfied with the other terms of the contract.

And the contract was extended until 2050. The Azerbaijani side received a guarantee for stable oil production, and the partners agree to invest another $40 billion in the project for 32 years. But now the partners are quietly reacting to this: the remaining more than 500 million tonnes of oil that have not been extracted will make it possible to recoup these expenses more than once. What can one say, if from the extension of the ACG block development Azerbaijan will get 3.6 billion dollars only in the form of bonuses!

Yes, it is difficult to imagine today what position Azerbaijan might have found itself in, if the 'Contract of the Century' was not signed in 1994.

The 'Contract of the Century' helped to easily overcome the famine and devastation that prevailed in the country until the mid-1990s. And since all this was happening before our eyes, it is not difficult to predict that the prolonged 'Contract of the Century' will allow Azerbaijan to ensure for a long time its own stable inflow of petrodollars and further strengthen its geopolitical significance.

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