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The Oil Market Turnaround Is Damaging For Azerbaijan

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  • The Oil Market Turnaround Is Damaging For Azerbaijan

    THE OIL MARKET TURNAROUND IS DAMAGING FOR AZERBAIJAN
    By Bedros Terzian, with permission of Petrostrategies

    Civilitas Foundation
    http://www.civilitasfoundation.org/anal ysis/090130oil.html
    Feb 2, 2009

    Some hydrocarbon exporting countries are suffering more than others
    from the decline in oil prices for economic, and sometimes political
    reasons, too.

    Azerbaijan belongs to the latter category. The fall in prices
    is occurring just as the country's production is on the verge of
    peaking. If prices continue to flag, they could deprive Baku of
    what should have been its golden oil age. Unlike other producer
    countries, Azerbaijan extracts the lion's share of its oil from a
    single group of fields: the ones being developed and exploited by
    the AIOC consortium, i.e. Azeri, Chirag and Deep Guneshli (ACG). The
    AIOC's production plateau risks lasting for only a short period of
    time. As a result, it is the entire Azeri production that will decline,
    as its profile cannot be enhanced by contributions from other fields,
    unlike countries that have a large number of fields. The exploration
    work carried out by over a dozen foreign oil groups, which have spent
    more than $1 billion in two decades (ExxonMobil being the latest
    to date), have led to no new oilfield discoveries in Azerbaijan,
    putting aside that of Shah Deniz, since it contains gas. Peak oil
    production is thus expected in 2010 and the decline could commence as
    of 2013 for the ACG. The scheduled arrival of condensates from phase
    2 of the Shah Deniz development could help postpone the downturn in
    Azeri liquid hydrocarbon production until 2014-15 at the latest. Two
    possible sources could emerge thereafter to slow down this decline in
    production growth: an EOR program on ACG and/or the service start-up
    of the Inam field, which is currently being explored.

    For the time being, Azerbaijan is channeling a large chunk of its
    oil revenues into amortizing the investments made by foreign firms to
    develop ACG and Shah Deniz. According to the IMF's statistics in 2007,
    Azerbaijan put $5.2 billion into reimbursing the oil expenditure (opex
    and amortizing capex) of foreign companies, and this left it with $5.3
    billion in net export revenues. The country started reimbursing past
    investments in 2006 (see table). But new development investments are
    currently being made: $2.5 billion were planned for 2008, after the
    $3.2 billion spent in 2007, for ACG and Shah Deniz. Thus, it will
    take several more years of reimbursements to amortize these. Added
    to the latter are operating expenses, which in 2008 were estimated
    at around $750 million/annum for ACG and Shah Deniz and which are
    100% reimbursed over the year. The lion's share of the investments
    coincided with the rise in costs in the global oil industry as of
    2003-4, while prices are falling just as Baku is preparing to reap
    the fruits of its production hike. In short, low-priced=2 0oil will
    be used to reimburse oil developed at high costs.

    The fall in global oil demand is another source of disappointment
    for Baku.

    Not that it is hard to sell its crude oil: no, Azeri oil is of a high
    quality (apart from a number of recent problems related to temporary
    sourness, it seems) and is generally sold at a comfortable premium
    compared with Brent. The problem has more to do with the fall in
    global demand, which has given rise to a production capacity surplus
    of 5-8 million b/d around the world and which risks continuing up
    to 2016, according to Cambridge Energy Research Associates (CERA -
    PETROSTRATEGIES, January 12, 2009).

    Thus, while in 2006 and 2007, the world could not do without Azeri
    oil (nor could it do without any producer country of an equivalent or
    bigger size than that of Azerbaijan), this crude oil is today no longer
    essential for ensuring the balance of the international oil market.

    The political consequences of these evolutions are of no benefit at
    all to Azerbaijan. Baku was pinning high hopes on its strengths as
    an oil producer to boost its negotiating power with Armenia in the
    Nagorno Karabagh conflict. But now this trump card is being undermined,
    as worrying signals are being sent from Georgia and Turkey, two key
    countries for Azeri oil exports. The deterioration of the situation
    in Georgia following the short Russia-Georgia war in August have been
    the cause of20much concern: Baku made a public statement in which it
    regretted "putting all its eggs in the same basket", which proved to
    be "fragile" (PETROSTRATEGIES, October 6, 2008), by having all its new
    hydrocarbon pipelines transit Georgia. But now that this has been done,
    the Azeri government is left with no other choice; it is doing all it
    can to help Georgia. At the beginning of December 2008, Baku guaranteed
    that it would cover 85% of this country's gas demand by committing to
    supply it with 900 million cu.m/annum at a cut price. Baku has acquired
    the Kulevi oil terminal in Georgia, has opened service stations in
    the country, and has granted a $300-million loan at a 1% interest over
    25 years for the construction of a Baku-Akhalkalaki-Kars railroad to
    Turkey, etc. At the same time, Baku is coming to the aid of the Azeri
    minority, which has a very strong presence in the North-east border
    region (transited by the BTC oil pipeline) of Georgia, providing it
    with social, medical and schooling assistance.

    Azerbaijan is starting to experience problems with Turkey too, its most
    powerful ally in the region. Over the last few months, three energy
    sector disputes have come to light between the two countries. The first
    of these involves the price at which Turkey has been purchasing the gas
    (of Shah Deniz) from Azerbaijan since 2007. A price of $120/1,000 was
    agreed for the first year. This was r espected, despite the price hike
    on the international market. But this agreement expired in July 2008;
    Azerbaijan rejected the new price of $150 that Turkey was offering,
    saying Ankara should pay double this. The second stumbling block
    concerns Turkey's purchase of part of the gas to come from phase 2
    of Shah Deniz and which will be exported to Europe. Ankara is asking
    for 8 bcm/annum, while Baku is offering only 4 bcm/annum. The third
    dispute is over the transit fees that Turkey is charging for the
    Azeri oil that is piped through the Baku-Tbilissi-Ceyhan (BTC) oil
    pipeline. At the outset, in order to encourage the construction of
    this expensive structure ($4 billion), the Turks had agreed to charge
    a fee of only $0.35/b. But as a result of the crude oil price hike,
    they considered that a rise was justified, which Baku contests,
    arguing that long-term agreements were reached with Ankara.

    Turkey is in a very strong negotiating position. Not only does the
    country serve as a transit corridor for two Azeri pipelines (the BTC
    oil pipeline and the Shah Deniz gasline), but at any time it wishes,
    it can open up the Armenian border, which it closed in 1993 to support
    Baku in the Nagorno Karabagh conflict. Azerbaijan is now anxiously
    observing how relations evolve between Armenia and Turkey. True, the
    historical visit by Turkish President Abdullah Gul to the Armenian
    capital in September 2008 led to nothing in=2 0concrete terms and
    Ankara is maintaining its blockade on the border, but an increasing
    number of people in Turkey are talking about re-opening it.

    Furthermore, public opinion in Turkey, which had previously been
    homogenous, is now riddled with contradicting opinions, even on the
    ultra-sensitive issue of the Armenian genocide. Thus, in mid-December,
    300 Turkish intellectuals launched a petition entitled: "We ask them
    for forgiveness" for "the Great catastrophe that the Ottoman Armenians
    suffered in 1915". More than 27,000 people signed the petition and
    it is the source of hot debate in Turkey. Such an initiative was
    inconceivable only a few months ago in this country, where even
    the mention of genocide is punishable with a prison sentence. At
    the beginning of January 2009, a Turkish state prosecutor opened an
    inquiry in order to establish whether the intellectuals' initiative
    violated the famous Article 301 of the penal code, which punishes
    "insults against the Turkish national identity". The Prime Minister has
    spoken out against the petition, while the President of the Republic
    says it proves that freedom of speech does exist in Turkey. Baku is
    following these developments with much concern.
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