Baku Doubles ACG Life

This article is featured in NGW Magazine Volume 2, Issue 18

By Ilham Shaban, Dalga Khatinoglu, William Powell

Baku has asserted itself in the Caspian, coming across as less the passive investor in the ACG field. But BP says that taken in the round, the new structure is good for all the parties and the new deal unblocks funding decisions.

Azerbaijan has revised and extended the 1994 production-sharing agreement (PSA) with the BP-led consortium operating the Azeri-Chirag-Guneshli block, the partners said September 14. It could replace the present one within a few months. The original agreement – which the partners described as' the contract of the century' – was signed in September 1994 and approved the next month.

Subject to parliamentary approval, it will last until 2049, but the shareholdings have altered as state Socar has more than doubled its stake.

An official told NGW that according to the new PSA, the shareholders would pay $3.6bn bonus to Azerbaijani government. The first tranche of $450mn will be paid just after parliament has ratified the deal and the rest will be paid in seven yearly instalments.

BP said that the money covered the development of reserves that would not have been produced in the remaining years of the first PSA and so was a separate bonus payment.

Azerbaijan will take 75% of the profits from the sale of oil and all the profits on the associated gas which it receives freely. And state-run Socar will also no longer be a passive shareholder. “It has only provided the investment, based on its share, but now, Socar has established and introduced its subsidiary AzACG company which will be involved in the project as subcontractor,” he said.

Coming to the revenues, during production period (1997-2017), the average price of oil produced at ACG was $70.06/barrel. Revenue projections no longer expect this, with $60/barrel seen as the optimistic price and the mid-range is just $40/b; $20/b is at the pessimistic end. Baku’s revenue after excluding Socar’s revenues as shareholder was $125.5bn in the foregoing period. The average yearly production was 162mn barrels. Over the next 32 years, this will be much lower, at some 112.5mn b/yr.

Though the capital expenditure on the second PSA is higher than the first one ($40bn vs $33bn) and there is a further $20bn of operating expense, revenue is expected to reach $270bn by 2049, of which $185bn is to be net profit for the government and shareholders.

The recovery rate of ACG is very high, standing at 47.5%, compared to Kazakhstan’s Kashagan’s 18-24% or Socar’s own operated fields with 20-25%, he said, adding that the next generation technologies can increase the ratio and the projected production volume and profit value can increase. "At $7/b transit fees, the net profit would stand at above $185bn, of which $139bn goes to Azerbaijan's government directly, another $11bn in taxes, and the rest ($34.5bn) is the consortium’s.

Under the extended PSA, Socar's stake more than doubles, from 11.65% to 25%. Operator BP now has 30.37% down from 35.8%; US Chevron has 9.57%, down from 11.3%; Japanese Inpex has 9.31%, down from 11%; Norwegian Statoil has 7.27%, down from 8.6%; US ExxonMobil has 6.79%, down from 8%; Turkish TPAO has 5.73%, down from 6.8%; Japanese Itochu has 3.65%, down from 4.3%; and Indian ONGC Videsh has 2.31%, down from 2.7%.

The ACG consortium started negotiations on extending the PSA in 2012, when the reservoir’s output declined from 40.6mn mt in 2010 to 32.9mn mt in 2012, much to Baku’s anger. The second PSA includes new investment package and development plan.

Early signing oils the machinery

UK major BP sees the premature termination of the production-sharing agreement for Azeri-Chirag-Gunashli fields and its replacement with a new deal as enabling future work to unlock more oil, the company told NGW.  Investment decisions taken now might not yield results before the existing production sharing agreement expires, it said, and work needs to continue smoothly without additional pressures mounting as the expiry date nears. 

Signed in the autumn of 1994, it was to last 30 years; the reformed PSA, signed September 14, could therefore replace it while the old one still has another seven years to run. Also it materially affects the shareholdings as Socar has more than doubled its share, the other partners being scaled back in proportion to their shareholdings. So their future profits could be less than otherwise, all things being equal.

BP said though that revenues would be balanced by the higher margins that the foreign investors would receive once the deal was approved by parliament. "Taken in the round with other changes, such as the adjustment of profit sharing, the net outcome is broadly neutral," it said.

The partners also have to stump up another signature bonus, of $3.6bn. But the company said that was not the same as paying twice over as this money would enable the recovery of some 2bn barrels, repeating the words of CEO Bob Dudley: big fields keep on getting bigger.

And as to the other side of the equation, the lower stake bringing lower commitments, welcome at a time of low oil prices, BP said that all companies had tighter economic hurdles when taking decisions, but that even so, ACG was still very competitive. "BP retains its very large incumbent position in Baku, and wants to make the most of it," it said.

Socar's growing role a 'natural process'

With the terms and conditions agreed in the 1994 deal still ordinarily valid for another seven years or more, the shareholders might have been keen to keep things as they were, if it really was the 'deal of the century.' The doubling of Socar's stake could appear as expropriation, especially in a country as opaque as Azerbaijan.

However the readjustment in shareholdings also shifts more of the risk on to Socar, and this is a natural process, says Ashley Sherman, senior analyst on the Caspian upstream team.

He told NGW that the talks to extend the ACG contract have been ongoing for several years. "Given the scale of this megaproject, resolution was always targeted well in advance of the expiry date (2024). We see this as a win-win. For Azerbaijan, this brings clarity on future investment and the immediate benefits of the sizeable bonus payment and a higher equity stake.

"For the international investors – this reduces risk to their expenditure, both before and after 2024. Stabilising ACG production needs sustained investment now and a new platform in the 2020s. Without timely extension of the contract, this was not assured.

"Today's announcement is a good benchmark for other contract extensions in the region and beyond. Major new investment projects take years to move from plan to reality. Reaching a mutually beneficial agreement in advance can unlock value and volume for governments and investors for decades to come," he said.