Azeris concerned about declining US involvement in offshore fields

Ali Babayev Contributing Editor - Baku Changes of share by oil companies in the total investments for Azerbaijan development of offshore fields. 1 is the situation which was after signing of the contract for development of the unitized Azeri-Chiraq-Guneshli Fields. 2 is the situation after signing of a contract for the development of the Karaakh Field. 3 is the situation after McDermott sold its share to Itochu. 4 is the situation after Pennzoil sold its shares to Itochu. 5 is the most likely

Ali Babayev
Contributing Editor - Baku
  • Changes of share by oil companies in the total investments for Azerbaijan development of offshore fields. 1 is the situation which was after signing of the contract for development of the unitized Azeri-Chiraq-Guneshli Fields. 2 is the situation after signing of a contract for the development of the Karaakh Field. 3 is the situation after McDermott sold its share to Itochu. 4 is the situation after Pennzoil sold its shares to Itochu. 5 is the most likely situation after Shaikh Deniz Field has been contracted.
  • Change of share some countries in total investments for development of Azerbaijan's offshore fields shows that the US share is declining more than that of other countries.
Two importent events have recently taken place in the Azerbaijan offshore sector. In March, the American company McDermott International announced that it had sold all of its shares (2.45%) in the Azerbaijan International Development Corporation joint venture for the development of the unitized offshore Caspian Sea Azeri, Chiraq, and Guneshli (deepwater) Fields, to the Japanese oil company Itochu. The agreement will be formally completed over the next two months.

Then, in April, the American company Pennzoil announced that it had sold the same Japanese oil company 5% of its holdings in the AIDC project. (Pennzoil held 9.8175% interest prior to the Itochu sale). It is expected that this transfer of interest will be completed this month.

These two events have generated a number of questions about the participation of American oil companies in Azerbaijani oil developments. It is wondered if American oil companies have determined that there will be too many problems for their interest in Azeri projects to be successful, thus have decided to leave the country, or whether it is a coincidence that these two sales came so close together and were to the same Japanese buyer.

Socar's viewAccording to information provided by the state oil company of the Azerbaijan Republic, Socar, these two sales of shares had only commercial implications and did not reflect a change of attitude about Azerbaijan's potential. McDermott was one of the companies that established the AIDC and first formulated the unitization, and it was one of the operating companies at the same time. This apparantly was causing some problems for McDermott. Representatives of the company in Azerbaijan have said that McDermott will be continuing its business in Azerbaijan for project works, procurement operations, work for production, and installation of marine constructions, pipelines, and vessels.

Pennzoil, on the other hand, will receive $132 million from the sale of its shares to Itochu, with an immediate transfer of $90 million, $22 million after the first oil is produced, and $20 million when the rate of oil production reaches 200,000 b/d. Terms of the agreement specify that Itochu will pay all of Pennzoil's expenditures in the contract until that time when oil production no longer compensates previous expenditures.

The president and CEO of Pennzoil, James Pate, has said that this is a very good arrangement for Pennzoil, because the company will be able to keep profits from the project, and it will not have any related expenditures in the future. A representative of Pennzoil in Azerbaiman has noted, however, that the sale has not meant a decrease of participation by Pennzoil in Azerbaijan's oil industry. Rather, the company retains a 4.8175% share in the development of the Azeri, Chiraq, and Guneshli Fields, and also has a 30% share in the development of another Caspian field, Karabakh.

Nevertheless, these two events have continued the process of decreasing the share of American oil companies in Azeri offshore developments. Richard Kozlarich, US ambasador to Azerbaijan, has described the domestic situation in Azerbaijan as not very good for business at this time, since the privatization process has not begun, there are no tax privileges for foreign companies awaiting doing business in the country, and the political situation is not very condusive to business improvement. As a consequence, Azerbaijan projects involve considerable risk, and investment in the country isn't always profitable at this time.

On the other hand, oil companies from other countries are continuing to express their interest in obtaining more participation in Azerbaijan's offshore developments. In addition to Itochu, another Japanese company, Mitsui, would like to invest between $700,000 and $1 million in the Azerbaijan oil industry. Elf Aquitaine is entering the sector with 10% interest in the development of Shaikh Deniz, and is, at this time, negotiating for development of another field, the Lenkoran Deniz Field.

Although the Russian company Lukoil has already acquired 10% interest in the Shaikh Deniz Field, the company's president, Vahid Alekperov said during his recent visit to Baku that Lukoil will try to increase its share to 20-25% in the future.

Azerbaijan's sector of the Caspian Sea contains great reserves of oil and gas in some 25 oilfields. There is much hope in the country that American oil companies will take a more active role in developing these fields.

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