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. Last Updated: 07/27/2016

Baku Oil Project Gains Critical Momentum

BAKU, Azerbaijan -- When a refurbished Soviet-era oil rig is launched in the Caspian Sea this month, it will bear the name of a born-again Soviet-era politician: Azerbaijan's President Heidar Aliyev.

Ties to the government are what count in this former Soviet republic, and nobody knows that better than those vying for the billions of dollars at stake in the Caspian oil fields.

"One big advantage of working here is that you have immediate access to the top. When we need to get things done, we get them done. They want this to work," said one Western oil executive.

He was referring to the clear headway finally being made by the Azerbaijan International Operating Co., or AIOC, a multinational consortium pursuing an $8 billion project to tap the Caspian's oil riches.

The members of the AIOC consortium are among the world's biggest oil companies: America's Amoco, Exxon, Unocal, McDermott and Pennzoil; British Petroleum; Norway's Statoil; Ramco Energy; Saudi Arabia's Delta Nimir; the Turkish Petroleum Co.; Japanese trading house Itochu Corp.; and Russia's LUKoil.

Now, with oil set to flow from the offshore fields by next August, the consortium is approaching its last in a series of logistical hurdles -- how to pipe the oil out of Baku and onto the world market.

AIOC president Terry Adams said in an interview that the group has already completed all its offshore seismic analysis, seabed surveying and environmental work in preparation for exploiting the "early oil" -- up to 100,000 barrels per day, or about 15 percent of the maximum projected output -- in the Azeri, Chirag and deepwater Gunashli fields by next August. "Up to this point in time you would be very pleasantly surprised at how well things have gone," said Adams, a 30-year veteran of overseas oil projects. Studies of possible export routes and work under the contract is "very much on track," he said.

Helping to smooth the way is the AIOC's connections with key figures in the Azeri government. The vice president of consortium member SOCAR, the Azeri state oil company, is none other than Aliyev's son Imkham.

"There are about a hundred people that matter in Baku, so they made it happen," one Western oil manager said of the consortium's progress, adding that Imkham Aliyev was a "powerful" asset.

The consortium plans to drill three evaluation wells at its offshore Caspian oil concession in early September after it launches for sea trials one of its Soviet-age oil rigs, recently refurbished to Western standards and christened with the name of the Azeri president, Adams said.

The drilling will mark a new stage for the consortium, which started with just four employees in a small office in Baku's old town in January 1995. Now almost 100 expatriates and more than 300 Azeris work out of a resplendent restored headquarters, Villa Petrolea II, named after Alfred Nobel's 19th-century Baku office that was used as a movie house in Soviet times.

With the building completely restored to its original splendor and a fleet of foreign cars in the yard, the company is today the focus of Baku's business life.

"We have housing, we've built a fleet of 10 vessels which have been fully refurbished, we have full helicopter support, our logistical systems are working extremely well between here and Georgia," Adams said.

Although the way appears clear to begin drilling, a larger obstacle remains -- how to ferry the oil out of Baku to foreign markets. Now AIOC is proceeding with work on two pipelines to ferry early oil to world markets: a northern route through Russia to the Black Sea port of Novorossiisk, and a western route through Georgia to the Black Sea ports of Batumi or Poti.

Both pipelines need substantial upgrades and expansion to become operational, Adams said. The northern route, damaged by fighting in Russia's breakaway region of Chechnya, has an annual capacity of 17 million tons, and the western route through Georgia a 7 million ton capacity.

The managing contractor for the $50 million upgrade of the northern route is Fluor Daniel Inc., a U.S. engineering company, while Europe's Kvaerner ASA John Brown Engineers and Constructors is overseeing the $275 million western route.

Construction companies from Turkey, Russia, the United States, Europe and Japan all have expressed interest in building and upgrading the western route, Adams said.

But, beyond the technical work, political obstacles loom for the consortium, which must submit a proposal to the Azeri government by next June for an export route to ship its main output of 700,000 barrels per day by 2010.

Nearby Turkey has recently called for tighter measures to prevent Azeri oil from passing through its congested Bosporus straits. Instead, it proposed to build a pipeline from Baku to its Mediterranean oil terminal of Ceyhan.

"In terms of the Bosporus, this is a real political issue for Turkey, and it's a practical challenge that needs resolution," Adams said.

Adams said the consortium was safe with its early oil export from Novorossiisk, because the 5 million tons per year increase in crude traffic across the Bosporus "does not impact in any serious way the balance of crude being exported into the Black Sea."

However, if the fighting in Chechnya continues, it could upset AIOC's plans to send some of the crude to Novorossiisk as part of the pipeline runs through Grozny, which has lately seen some of the worst fighting between Russian troops and Chechen rebels for control of the city.

Mary Page, a researcher at Geneva-based PetroConsultants, said the only indication that AIOC is concerned about increased fighting in Chechnya was the consortium's determination to proceed quickly with its western route pipeline construction.

"What they have said is that they are considering accelerating the plans for the second, Georgian, pipeline as a contingency against not being able to work on the section of the pipeline that goes through Chechnya," she said.

"The AIOC has been able to learn from some of Chevron's fate," she said, referring to difficulties the U.S. Chevron Overseas Petroleum faced in transporting the output from its $20 billion Kazakh oil project in Tenghiz, on the far shore of the Caspian Sea from Baku.

Chevron was forced to cut back its production schedule after Russia made it clear the venture would not be able to transport more crude through Russia's existing pipeline network to the Black Sea port of Novorossiisk.

The constraints have led Chevron to look for alternative transport routes, including an expensive Caspian Pipeline Consortium project that would finance a $1.2 billion to $1.5 billion planned link to ship the main output from Tenghiz to Novorossiisk.

"It has cleverly given itself an option," she said, referring to AIOC's plans to construct a western route to link Baku with the Georgian coast. However, she said the existing northern route was likely to remain "the first option."

"It will be much cheaper to refurbish that line and therefore they could have it ready much quicker," Page said, adding the most likely route for the main Azeri oil output would "go down through Turkey."

Adams said the pipeline to the Turkish port of Ceyhan "could be a very competitive option" but would need to "satisfy a variety of potential customers."

"We will be extremely flexible," he said. He also said the consortium "did not have any direct conversations with Chevron or any other members of the Caspian Pipeline Consortium" about the possible use of a future pipeline that would link Kazakhstan's massive Tenghiz oil field with the Black Sea.

Adams also said that oil exchanges with neighboring Iran, part of a smaller $4.1 billion Shakh-Deniz project in the Caspian, had been considered but ruled out as an export option.

The United States -- counter to the wishes of most European countries -- is opposed to Iran's participation in Caspian energy deals because of Tehran's alleged sponsorship of international terrorism, and has recently adopted legislation that would impose sanctions on foreign companies doing business there.

Iran's partly state-owned Oil Industries Engineering and Construction Co., in June acquired a 10 percent stake in the Shakh-Deniz project, which also includes British Petroleum, Statoil, Turkish Petroleum, LUKoil and France's Elf-Aquitaine.

Khosbakht Yusifzade, vice president of Azerbaijan's SOCAR, said Baku is keen on improving links with Iran which, apart from supplying the country with cheap produce, is home to some 22 million ethnic Azeris.

"The Americans were categorically against the deal. Other [Western] countries said they didn't mind. But America is far away, and Iran is close. It's our neighbor and we can't afford to spoil our relationship," he said.

Azeri officials fight off the image of Azerbaijan as a small Caspian state sitting on oil riches, and say they plan to use the money from oil development to improve the country's retarded economy.

"No one should compare Azerbaijan with Saudi Arabia and Kuwait. For a small country like Azerbaijan, even 30 million tons a year would be enough. But you don't feed the people with oil," Yusifzade said.

Still, tales of corruption and embezzlement in the country's oil sector abound, with President Aliyev himself recently adding oil to the fire after he accused SOCAR's head, Natig Aliyev (no immediate relation), of embezzlement and failure to organize the company's activities.

At a Cabinet meeting last month, the president interrupted Natig Aliyev and accused him of an illegal barter deal worth $10 million and the disappearance of an undisclosed amount of products from SOCAR's refineries. While local observers say the criticism could yet land SOCAR's president in a string of trouble, in true Soviet apparatchik style he has so far retained his position.

"Within the context of recent events in Washington and the nature of our consortium at this point in time, it is not a preferred option," he said.