BP Faces Rise in Azeri Oil Spending Without Extended License

The BP Plc-led group developing Azerbaijan’s biggest oilfield will probably have to increase investments to stem an output decline even without winning a license extension, according to its state partner.

“Whether the field will require additional investments or not, the probable answer is yes, it will,” Vitaliy Baylarbayov, deputy deputy vice president for marketing and investment at State Oil Co. of Azerbaijan, said in Baku.

Production at the Azeri-Chirag-Guneshli, or ACG, project fell 12 percent in the first half of the year, prompting Azeri President Ilham Aliyev to accuse BP of “grave mistakes.”

The Caspian field remains one of BP’s most valuable projects after the London-based company agreed to sell more than $50 billion of assets to pay the costs of the worst oil spill in U.S. history in 2010. BP has replaced executives in Azerbaijan and said it has a plan for “long-term stabilization of ACG production,” which made up 78 percent of Azeri output last year.

BP and its partners, which include Statoil ASA (STL), Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM), have sought an extension to their production-sharing agreement beyond 2024 to allow them to recoup investments. The state oil company, known as Socar, is keen to develop the field on its own after the contract expires.

“There is no conversation about extending the PSA,” according to Baylarbayov, who said “the remaining period is long enough to realize any kind of program agreed upon by the sides.” Socar has the capacity to develop ACG after 2024 and produce “whatever remains recoverable,” he said.

BP Plans

BP is staking its future on its expertise in offshore drilling, focusing investment on projects in the Gulf of Mexico, the North Sea, off Angola and off Azerbaijan over the next five years. Last month, Chief Executive Officer Bob Dudley agreed to sell BP’s half of Russia’s third-biggest oil company.

Socar President Rovnaq Abdullayev said last month the company was working with BP on plans to increase production at the Caspian Sea deposit to 35 million metric tons in 2014 from 33 million tons forecast for next year. Output will then remain stable at 33 million to 34 million through 2020, according to the Azeri company.

Output at the ACG field slumped because of technical and “natural” reasons, and there are no plans to replace BP as the operator of the field, Baylarbayov said. “With proper treatment, I am sure we can get closer to the previously planned output levels.”

BP Replacements

Plans for the field address “reservoir pressure and decline management; well management and system optimization; as well as sand control,” BP said in an e-mailed statement on Nov. 16.

BP replaced the head of regional operations and two deputies after President Aliyev demanded that those “responsible” for the decline be dismissed. BP’s office in Baku didn’t immediately comment on the potential increase in investment.

The U.K. company, which holds 36 percent stake in ACG, said in August that the venture plans to spend $708 million on operations and $2.52 billion on capital expenditure at the project in 2012, compared with investments last year of $699 million and $1.9 billion, respectively, according to reports on its website.

By the end of November, the partners will determine how much investment is needed to stem the decline and estimate future output after a “technical sub-committee” completes an assessment, Socar’s Abdullayev said last month.

‘Not Fatal’

Socar is moving forward with plans to build the Trans- Anatolian, or Tanap, natural gas pipeline across Turkey to the border of the European Union to carry gas from the Shah Deniz field, where BP is also operator. Milli Maclis, Azerbaijan’s parliament, voted today to approve agreements signed with Turkey in October 2011 and June 2012 on construction of the pipeline.

Talks with partners in the OMV AG-led Nabucco West project, which is vying with the planned Trans-Adriatic Pipeline to carry Shah Deniz gas on to EU customers, are progressing more slowly than expected, Baylarbayov said.

“There are still differences in positions but they are not fatal,” Baylarbayov said, adding that the differences are related to commercials issues and obligations of the sides. “I think they can be overcome. Yet the differences may not allow us to sign an agreement with Nabucco West as quickly as we previously wanted to.”

Pipeline Competition

The Shah Deniz partners, which include Total SA and Statoil, are expected to choose between the two by May. They reached a preliminary agreement earlier this year with the investors in the Trans-Adriatic Pipeline, or TAP, on providing funding for the link and the right to buy a stake of as much as 50 percent of the project. TAP is being developed by Statoil, EON Ruhrgas AG and EGL AG.

Socar will “almost certainly” take equity in whichever pipeline project is chosen, while Socar will keep 51 percent of Tanap, Baylarbayov said. BP, Statoil and Total have yet to agree to buy a stake in the link from Socar, he said.

“The most important thing is to realize that no matter whether they join or not, it will not in any manner delay the implementation of Tanap,” Baylarbayov said.

Azerbaijan started to finance Tanap, which may cost from $7 billion to $10 billion, before intergovernmental and shareholder agreements were signed, he said.

“Turkey and Azerbaijan will do everything to ensure that this pipeline becomes a reality because Azerbaijan’s gas reserves cannot be developed without a dedicated pipeline,” he said.

To contact the reporters on this story: Zulfugar Agayev in Baku at zagayev@bloomberg.net; Hellmuth Tromm in Berlin at htromm@bloomberg.net

To contact the editor responsible for this story: Hellmuth Tromm at htromm@bloomberg.net

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