Source: BP
Source: BP

Baku Extends ACG PSA, Boosts Stake: Update 2

(Adds comment from Wood Mackenzie)

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 in October.

Subject to parliamentary approval and the bonus payment of $3.6bn to the state oil fund, paid in proportion to each company's stake, it will last until 2049, but the shareholdings have altered as state Socar has more than doubled its stake.

Socar and its co-venturers have also agreed to progress engineering development work to evaluate an additional production platform in the ACG contract area. During the next 32 years, there is the potential for more than $40bn capital to be invested in the ACG oil field, the partners said.

Production now is about 580,000 b/d of crude and 33mn m³/d associated gas but two-thirds of the gas is re-injected for oil production.

Azerbaijan's president Ilham Aliev said the new terms were better for Azerbaijan, though the agreement signed in 1994 also met Baku’s interests fully. Socar's president, Rovnag Abdullaev, said: "The terms of the new contract reflect the growing financial and technological potential of Azerbaijan and Socar. They also demonstrate the confidence of our foreign partners in the Azerbaijani economy, taking our effective partnership to a new level.”

BP CEO Bob Dudley said: "Today’s contract is perhaps an even more important milestone in the history of Azerbaijan as it ensures that over the next 32 years we will continue to work together to unlock the long-term development potential of ACG."

Statoil's international upstream vice-president Lars Christian Bacher said: "This year we celebrate 25 years of Statoil presence in Azerbaijan and we cannot find a better way to celebrate this milestone than by extending our participation in the ACG field for a further 25 years. The ACG field represents a world-class development and will be a key asset in our international portfolio for many years to come."

The vice president of state-run Azerbaijan’s oil company Socar, Khoshbakht Yusifzadeh told NGW that from first oil (November 1997) to date some 430mn metric tons of oil and 134bn m³ of associated gas have been produced from the field and another 150bn m³ of gas and 570mn mt oil are expected to be extracted by 2050. Also there is a gas layer in ACG with 200bn m³ recoverable dry gas that can be developed in future, but that will be subject to a separate PSA.

“During last two decades, the consortium only extracted oil and gas from layers 3.5 km deep, but the dry gas layer is deeper – 4km. Now, the second PSA on ACG was signed today, but the gas layer project would belong to a third PSA in coming years.”

Negotiations on supplying the ACG gas to the Southern Gas Corridor have been already started. The first phase of SGC is aimed to transit 16bn m³/yr of Shah Deniz stage 2 gas to Turkey and EU by 2021, but its capacity is projected to reach 24bn m³/yr in mid-2025 and finally to 31bn m³/yr in early 2030s.

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

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 government receives 80% of profit from extracted oil now, but this will decrease to 75% based on the second PSA. However, regarding the increase in Socar’s share in the project, its profit from the produced oil also goes up.

The consortium also delivers gas to Azerbaijani government free of charge based on the first PSA and this will continue. Azerbaijan has received 30bn m³ sales gas from ACG as of now.

Win-win deal: Wood Mackenzie

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.

 

Ilham Shaban, William Powell

 


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