Together with national oil company Socar and other international companies, we have worked both industrially and socially to build a robust basis for our investments in this country.
Exploration and commercial development
Encouraged by the prospect of oil and gas revenues, governments in the countries around the Caspian began in the early 1990s to negotiate licences and production sharing agreements (PSAs) with international oil companies to attract foreign capital and modern technology.
We concluded an alliance with BP in 1990 which was intended to develop new business for the partners through exploration and commercial development in specified parts of the world.
Through this Statoil/BP alliance, we resolved in 1992 to move into Azerbaijan and rank today as the country’s second largest foreign investor. In addition to three PSAs, we are a partner in the two most important pipelines exporting oil and natural gas from Azerbaijan.
Azeri-Chirag-Gunashli (ACG) These three oil fi elds contain more than 5.4 billion barrels of oil, which makes them 1.5 times the size of Norway’s Statfjord field. The first production phase began in 2005 and the second in 2006, while phase three is due to come on stream in 2008.
There are 10 partners with BP as operator, and our share is 8.65%. Total daily output is expected to exceed one million barrels by 2009. Our share of daily production in 2006 was 35,000 barrels.
Shah Deniz
Shah Deniz is a gas and condensate field. We are one of seven partners, with a 25.5% interest. BP is operator. Production began in December 2006 and will total nine billion cubic metres annually when plateau is reached in 2009. Alov-Araz-Sharg exploration licence StatoilHydro has 15% of a licence covering exploration and development of the Alov, Araz and Sharg prospects.
Technical evaluations of this promising acreage were made in 2002, but drilling of a first exploration well is currently on hold pending talks between Iran and Azerbaijan about sector boundaries in the area.
Baku-Tbilisi-Ceyhan (BTC) pipeline
We and nine other oil companies are partners in the BTC oil pipeline which connects Baku via Tbilisi, capital of Georgia, with Ceyhan on Turkey’s Mediterranean coast. Our share is 8.71%. With a daily transport capacity of about one million barrels, this 1,768-kilometre system climbs to a staggering 2,850 metres above sea level in the Caucasus.
Azerbaijan’s oil no longer needs to be shipped through the narrow and vulnerable Bosporus, and thereby reaches world markets more quickly and safely.
South Caucasus Pipeline (SCP)
Gas and condensate from Shah Deniz are piped to Turkey through the SCP, which runs parallel to BTC for 970 kilometres via Tbilisi to the Turkish town of Erzurum. We have a 25.5% holding in the SCP, which became operational in 2006. We are commercial operator for business development and administration of the SCP Company (SCPC), which is responsible for piping the gas to market.
Operations in Azerbaijan already make a valuable contribution to our international production, and will become increasingly important as the fields reach plateau. Roughly 8-10% of our total revenues (based on current production) will then derive from the value chain which starts in Azerbaijan.
An oil nation’s renaissance
The petroleum industry has a rich heritage in Azerbaijan, with development accelerating from the end of the 19th century. At one time, the country accounted for half the world’s crude oil production. The unstable 1920s and 1930s brought decline, and many industrialists left Azerbaijan when the Soviet Union seized control in 1920. Oil production declined rapidly thereafter.
The Second World War sparked a second but brief oil boom. Many of Azerbaijan’s export markets disappeared after the country declared its independence from the Soviet Union in 1991, and it was hit by an economic crisis.
In these conditions, the country’s substantial hydrocarbon resources represented a very important potential for its development.
Azerbaijan’s break with the former Soviet Union marked the start of its third oil boom. Western companies became involved, with strong support and financial backing from their governments. The aim was threefold:
- develop reserves and production to help bring new oil and gas volumes to market
- contribute to Azerbaijan’s economic development in order to strengthen the country’s political independence, and to contribute to democratic development as well as to greater prosperity for its people
- establish a new energy corridor from the Caspian to supplement the Russian supply lines to Europe.
Community investment programmes
Most of the major development projects are organised in consortia with participants from many oil companies. One example is a community investment programme (CIP) financed by the partners in BTC and SCP which aims to create sustainable social and economic development in local communities along the pipeline route in Azerbaijan, Georgia and Turkey.
In cooperation with local and international nongovernmental organisations (NGOs), this CIP has implemented programmes to create jobs, secure wider access to an improved social infrastructure such as schools and hospitals, and strengthen farming. The partners spent USD 24 million on such work during the project phase.
New programmes for the operational phase
As the large-scale ACG, BTC, Shah Deniz and SCP projects moved from construction to operation, the Regional Development Initiative (RDI) and the Future Communities Programme (FCP) entered the picture.
The FCP will take over where the different CIPs left off and continue to focus on community empowerment and mobilisation, while the RDI will introduce more innovative mechanisms for socio-economic development.
RDI: a programme with a long-term commitment
The RDI programme for socio-economic development will address basic development challenges, such as:
- enterprise development
- effective governance
- access to energy.
It aims to maximise the development impact of our core business and ensure that the proceeds from these activities are fairly distributed in the region. A long-term perspective is being taken to find good solutions to these issues, reflecting an interest by the partners in developing a stable operating environment.
To maximise the benefit of its measures, the RDI partners have established close collaboration with development agencies as well as the governments and societies involved. Major collaborators include:
- International Finance Corporation (IFC)
- European Bank for Reconstruction and Development (EBRD)
- Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ)
- UN Development Programme (UNDP)
Education and capacity building
In addition to the RDI’s three main activities, a continuous focus will be maintained on:
- education
- capacity building
- vocational training
In terms of staffing, the RDI will have assurance and technical personnel in Baku as well as coordinators in Georgia and Turkey.
The very nature of the RDI implies integrating many professional disciplines, and the joint venture partners will contribute expertise in such areas as government relations, legal, tax, finance, corporate responsibility and health and safety.
Pilot projects
The RDI launched its first pilot projects in 2004, covering waste management as well as banking and financing in the Georgian towns of Borjomi and Bakuriani.
The programme is currently supporting a host of activities, including the facilitation of supply chain finance in Azerbaijan to boost local content in supplies, and an initiative to reduce the regulatory burden on business so that operating costs for small and medium-sized enterprises can be cut.
We have been an active participant in shaping the RDI. Together with our partners, we devoted USD 12 million to projects in the programme during 2006. This is set to rise to USD 15 million from 2008.
Big assets for Statoil and Azerbaijan
Production sharing agreements (PSAs) Development and production of oil and gas resources make the biggest contributions to the economy of Azerbaijan. With today’s production and prospects, PSAs ensure the country substantial revenues. At the same time, they safeguard the financial interests of the companies.
More than three-quarters of value creation from the petroleum business falls to Azerbaijan. The projects in which we participate are important for us, for our partners and for Azerbaijan as the host nation. The PSAs are structured in such a way that the partners share the oil produced in accordance with defined allocation mechanisms.
These agreements are public and can be found, for instance, on the internet. The allocation of oil ensures that a relatively large proportion of the production will go to meeting investment costs in phases where most of this spending still has to be repaid.
Another element covers operating costs, while a third represents profit for the companies (profit oil). This allocation of revenues resembles the one found on the NCS, and its starting point is a division of the value creation after investment costs have been met.
The host country gets 80%, while the foreign partners receive the remaining 20%. Assuming an oil price of USD 40 per barrel throughout the producing life of the Shah Deniz and ACG projects, for example, calculations show that the Azerbaijan government’s share of net revenues would total USD 170 billion.
This is a very large income flow for a country which had a gross domestic product in 2005 of USD 12.6 billion. Azerbaijan had the world’s highest growth rate in 2006, with its GDP expanding by no less than 34.5%.
The major oil and gas projects in Azerbaijan in which we participate came on stream in 2006. Central Azeri, one of seven platforms installed on the Azeri-Chirag-Gunashli field in the Caspian, kicked off the first production phase.
