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. Last Updated: 07/27/2016

Russia, Azerbaijan Sign Pipeline Deal

Russia and Azerbaijan signed a deal Thursday to transport oil from Caspian oil fields to the Russian Black Sea port of Novorossiisk, ending year-long negotiations.


The agreement was signed by Russian Prime Minister Viktor Chernomyrdin and Azerbaijan President Heidar Aliyev at a ceremony at the White House in Moscow attended by top government officials and representatives of the 12-member international oil consortium that will use the pipeline.


Under the agreement, the consortium, which will extract crude oil from the Azerbaijani sector of the Caspian, will transport its early output, about 70,000 barrels per day, to Novorossiisk from the second half of this year.


"The arguments are finally over," Chernomyrdin told journalists after signing the deal. "We restored the scheme that had worked for so many years," he said, referring to cooperation between former Soviet republics and the Russian Federation. "This scheme is working today, and it is in mutual interest of both Russia and Azerbaijan."


Russia is trying to restore its economic leverage in the former Soviet republics, often employing energy companies as a means to this end.


LUKoil, Russia's pre-eminent oil company and de facto national champion in the Caspian, is the only Russian member of the consortium. Its president, Vagit Alekperov, said he was pleased with the agreement.


"LUKoil always said that the Russian route is the best, and the signing of the agreement today proves that our opinion was right," he said. "It's the most economically efficient route."


The consortium is led by an alliance of British Petroleum Co. and Norway's Statoil. Other members number U.S.-based Exxon, Amoco, Pennzoil, Unocal, and McDermott International, together with Britain's Ramco Energy, Saudi Arabia's Delta Nimir, Turkish Petroleum, and the Azerbaijani oil company Socar.


The consortium has a chosen export route via another existing pipeline through Georgia to its port of Batumi on the Black Sea. This pipeline is said to be in bad shape.


The consortium's three fields in the Caspian -- the Azeri, Chirag and Guneshli -- could generate 700,000 barrels a day by 2010, it says.


Valery Chernyaev, head of the Transneft Russian pipeline monopoly that owns and operates the Russian portion of the pipeline, said the war in Chechnya has had no effect on the operation of the Russian pipeline, which goes underground through Grozny.


"The pipeline has been working without interruption," he said. "We will use all possible security measures to make sure it continues to work."


The existing pipeline may need modernization, and LUKoil or the consortium may participate, Alekperov said.


"We have Transneft as our major pipeline operator, but if they need our assistance, we always said we can help," he said. Modernization could cost as much as $100 million.


The fate of another major pipeline project around the Caspian, that of the Caspian Pipeline Consortium from the Tenghiz oil field in Kazakhstan to Novorossiisk, may also be decided soon, Transneft's Chernyaev said.


"The board of directors of the CPC will meet someday soon," he said. "We will have some news then."


Chernyaev said Transneft is "holding negotiations over the CPC" with the other participants, which are Kazakhstan and the Oman Oil Company. "We are still talking about the existing project," he said. "It is possible to realize the project with two or three parties. If the project does come through in the current form, then Russia will build this pipeline."


Alekperov confirmed LUKoil's plans to take part in the CPC and not to try to launch another competitive consortium, as the company had suggested it was about to do in December.


"We received an invitation from the Kazakh government to participate in developing Tenghiz, and we confirmed our desire to take part in the CPC," Alekperov said. "We are interested in the realization of this project as soon as possible."


Officials said questions remain about the legal status of drilling rights in the Caspian. "We are still looking for compromise," said Azeri Foreign Minister Gasan Gasanov. "The agreement signed today is just a part of a major document under preparation."


"This is a very important agreement," said Alexander Blokhin, a senior analyst from United Financial Group. "Through this agreement Russia will maintain its control over the oil reserves in the Caspian."