February 1999

by Seymour Khalilov

Of all the oil-rich countries of the NIS, Azerbaijan has most actively sought foreign partners for joint exploration and development of its vast oil fields. The huge projects which have resulted present a fertile source of business opportunities for oil field manufacturers, and oil field equipment and services suppliers, typically working as subcontractors to the consortia of major oil companies who are parties to the primary contracts. Between 1994 and late 1998, Azerbaijan had signed no less than 16 such contracts, all but one ratified by the Parliament. The majority of the projects to date involve exploration and development of offshore oil fields, but several contracts have recently been signed for onshore projects. Anticipated investment under the current contracts is nearly US$34 billion, and this amount will increase as new contracts are signed.

Production Sharing Agreements
These huge oil contracts are all production sharing agreements (PSAs). The PSAs are based on one common concept: they provide for the exploration and development of selected oil fields, allow for the sharing of the proceeds by the participants, and each PSA must be approved separately by the Azerbaijan Parliament. Parties to the PSA are consortia of international oil companies headquartered in many different countries, notably the United States, the United Kingdom, Turkey, Saudi Arabia, Norway, Japan, and Russia, and are always in partnership with SOCAR, the Azerbaijan State Oil Company.

The first international PSA in Azerbaijan was signed with a 12-company consortium called the Azerbaijan International Operating Company (AIOC), and was termed the "Contract of the Century." This contract forms the foundation for the Government of Azerbaijan's policy of attracting foreign investment to the country and serves as a model for subsequent oil/gas PSAs. The AIOC (which includes Amoco, Exxon, Lukoil, and Pennzoil) undertook a 30-year commitment to explore and produce three significant offshore oil fields. Once the PSA was ratified, the AIOC participants/shareholders signed a joint operations agreement and set up an operating company. With investment of over US$1 billion to date, the AIOC project has just yielded the first of the nearly 600 million tons of crude oil expected over its contract life. Sale of the crude should generate about US$80 billion, with peak production of 35-40 million tons yearly by 2010. The main export pipeline should be built by 2004 or 2005, and cost recovery is expected by the year 2007 or 2008.

As production from the AIOC and subsequent projects comes on-line, the PSA participants will be heavily involved in the design and construction of new and rehabilitated export pipelines, which will generate more business opportunities for U.S. equipment and services suppliers.

As of yet, only AIOC has begun full field development. Other projects are only in the exploration stage. Nevertheless, all consortia, through their operating companies, are encouraging suppliers to make themselves known as potential subcontractors now. This notification demonstrates that the company is serious about this market and has a long-term orientation towards it. The notification also sets the stage for realization of the procurement opportunities as they arise. The bulk of these opportunities are likely to mature in four to five years.

Requirements for Subcontracting
Knowing the requirements and guidelines for contracting and prequalifying with the consortia operating companies is vital. In particular, studying AIOC's requirements is important as AIOC is the leading project in Azerbaijan, with more opportunities than any other structures presently.

There are two areas of procurement: (1) AIOC in Baku and (2) major contractors that are involved in AIOC's procurement through engineering, procurement, and construction contracts. An interested company should notify these sources of the company's interest in becoming a supplier to a consortium. Companies should contact not only AIOC but these contractors, too. AIOC currently has a major engineering contract with Brown and Root for AIOC's first phase of the full field development of the Azeri, Chirag, deepwater portion of Gunashli.

The consortium usually deals only with manufacturers and major suppliers. Interested companies should be committed to AIOC and Azerbaijan by having world-class standards. This commitment can be demonstrated through working in Azerbaijan, having a representative office, or working with local companies in joint ventures or alliances in the associated industries. Training local personnel and becoming involved in the cultural life of the country can be a good way to demonstrate commitment as well.

AIOC follows track records of companies. Thus, companies that have worked in the NIS and successfully completed projects may have an advantage in the decision-making stages. A proven track record of supplying services and/or equipment materials to major oil companies around the world (i.e., extensive export experience) is a requirement. The consortium and its contractors prequalify suppliers and contractors against known requirements. AIOC in Baku will register expressions of interest to work with the consortium.

Companies with a commitment to the area and with appropriate oil field-related services and supplies to offer should obtain a registration form from the Manager of Procurement and Transportation. All the requests and inquiries should be in writing. Companies are recommended to contact the consortium and its major contractors only if they meet the requirements and their intention serves as company policy. Although the criteria mostly apply to AIOC, they will probably be used by other operating companies since AIOC is serving as the model, having been the first PSA project in Azerbaijan.

For more information on Azerbaijan, visit BISNIS OnLine at www.mac.doc.gov/bisnis/country/caucasus.htm#Azerbaijan. For more information on the oil industry in the NIS, visit BISNIS OnLine at www.mac.doc.gov/bisnis/isa/isa.htm#C1isa.

Seymour Khalilov represents BISNIS at the U.S. Embassy in Baku.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)