Twenty-Fifth Anniversary of "Contract of the Century"

The beginning of the implementation of this contract in the difficult period for Azerbaijan after the collapse of the USSR allowed to carry out large-scale transformations in the country's economy and turn Azerbaijan into one of the world suppliers of hydrocarbons, becoming an important milestone in the new history of Azerbaijan"s oil and gas industry, the development of SOCAR, the operator of the project, BP, and all other project partners.
The Azeri-Chirag-Gunashli contract, called the "Contract of the XX Century" in the country, was extended in September 2017 to the middle of the XXI century, that is, it connected two eras and confirms the presence of large oil resources on this block - over 1 billion tons. The development of ACG allowed Azerbaijan to raise annual production from 9.56 million tons in 1994 to a stable 38-39 million tons in recent years. The peak production in Azerbaijan - 50.4 million tons was achieved in 2010 thanks to ACG, but the reserves of this block can be guaranteed to produce oil up to 2050.
Recall that the first oil from ACG was obtained in November 1997 from the Chirag field. According to BP, over the past period, a total of more than 488 million tons (more than 3.6 billion barrels) of oil have been extracted from the block, that is, about half of the estimated reserves.
Of this volume, about 3.3 billion barrels of oil was exported to world markets via the Baku-Tbilisi-Ceyhan pipeline, commissioned in 2006 and for the first time ensured the delivery of Azerbaijani oil to the Mediterranean, where the demand for oil is high. Since 2006, 4,300 ACG oil tankers have been dispatched from the terminal in Ceyhan.
In order to accumulate oil revenues in Azerbaijan, at the end of 1999 a state oil fund was created, according to which from 2001 to August 1, 2019 the country received $ 143 billion 366 million from the sale of profitable oil from ACG, including $ 4 billion 951 million for the first half of 2019.
From 1994 to the end of the second quarter of 2019, BP and ACG partners invested $ 36 billion in the project, and $ 84 million in Azerbaijani sustainable development projects.
The country received over 44 billion cubic meters of associated gas from ACG.
Recall that on September 14, 2017, the ACG contract was extended until the end of 2049. Within its framework, on April 19, 2019, another block development project was approved - Central East Azeri (ACE, cost $ 6 billion), the first oil from which is expected in 2023.
It is important that in the framework of the ACG project over the past 25 years, one platform was repaired (Chirag 1) and seven new platforms were built, one of the largest oil and gas processing terminals in the world was created, and a complex network of subsea pipelines was laid at the bottom of the Caspian Sea.
According to BP, at the end of the second quarter of 2019, 124 wells were in operation at ACG.
There is constant monitoring of the environmental situation (there were about 140 environmental impact assessments and 266 marine, coastal and land coastal monitoring studies).
In many ways, the ACG project has become a model for other oil and gas projects in Azerbaijan, as well as a litmus test for attracting foreign investment to the country.
Since 1995, to this day, Azerbaijan has signed over 30 production sharing agreements (PSA) with foreign oil companies to develop oil and gas fields offshore and onshore, with an estimated capital investment of over $ 80 billion.
According to forecasts by Wood Mackenzie, in 2018-2025, investments in the oil and gas industry of Azerbaijan will amount to $ 20 billion, most of which will go to Azeri-Chirag-Gunashli.
The development of the oil and gas sector of Azerbaijan affects the progress in all related sectors - construction, transport and others.

Experts on the pros and cons

ASTNA commented on the pros and cons of the "Contract of the Century" with experts.

The head of the independent Center for Oil Studies, Ilham Shaban, believes that by signing the international oil contract 25 years ago, Azerbaijan demonstrated to foreign investors that it is possible to cooperate with the newly formed state and not be afraid that the investments will be lost.

"The Azerbaijani government is interested in attracting investments and complies with all the clauses of the contract. Its signing 25 years ago helped the government bring macroeconomic indicators to the country in stability. Indeed, by the end of 1994, inflation in the country reached a record high - 1763.5%. In 1991-1994, the rate of decline in GDP averaged 16.5% annually, the discount rate of the National Bank of Azerbaijan in 1994 reached 250%, from 1991 the average wage in the country, taking into account inflation, decreased 5.7 times by 1995. In addition, volumes of oil and gas production also decreased," reminded Shaban.

Since 1995, with the start of the activities of the international consortium and the receipt of the first tranches of bonuses from the ACG project, as well as construction work under the project, the government has been smoothing the situation, and since 1996, the Azerbaijani economy has been steadily growing.

From 1995 to 2019, SOCAR earned more than $ 6 billion, having a stake in the "Contract of the Century", and the Azerbaijani government received more than $ 15 billion in taxes from ACG.

From 1995 to 2019, the subsidiaries of the State Oil Company of Azerbaijan, as part of the implementation of the ACG contract, performed contract work worth $ 6.3 billion.

"I believe that this was achieved thanks to the effective management model introduced by BP. Management is impeccable - to achieve maximum results with minimal human resources, that is, labor productivity at AIOC (ACG operating company) shows the highest rate in Azerbaijan and throughout the post-Soviet space," noted I. Shaban.

In his view, the government should adopt a model of how AIOC works.

"Since 1995, the Azerbaijani side has been directly observing the work of AIOC, as it approves the annual work programs, their implementation and financing. However, so far our government has not adopted a model of activity or at least important elements of the work of this high-performance enterprise and has not tried to apply it at least in one state-owned enterprise. If this happened, then for a long time highly developed and profitable enterprises would have functioned at various levels," I. Shaban emphasized.

The economist Elshad Mammadov also reminded ASTNA that the signing of the "Contract of the Century" allowed us to restore the necessary production chains in the economy of Azerbaijan, which had halved by the mid-90s of the 20th century.

"For the construction of a virtually new economy, the country needed investments and such were foreign investments in the oil sector, which stimulated GDP growth, allowed to create new jobs and reduce social tension, replenish the state budget, and stabilize the balance of payments," E. Mammadov said.

According to him, Azerbaijan"s foreign trade balance has become surplus largely due to the implementation of the ACG oil contract.

"This situation makes it possible to formulate financial and currency policies in the format that is necessary for the economic growth of Azerbaijan," the economist said.

At the same time, in his opinion, the enhanced development of the oil sector is fraught with "imbalance" of the national economy. As a result, the budget component is largely dependent on oil.

"About 90% of Azerbaijan"s exports are still hydrocarbons, which makes it difficult to exchange foreign trade with the rest of the world. In addition, commodity exporters "rule" the economy of Azerbaijan, and, along with tightening monetary policy, we have certain difficulties in diversifying the economy, and in the development of the real sector and high technology. In the national economy, systemic weaknesses are still observed, as the crisis years 2015-16 showed. But there is hope that the non-oil sector will develop, which recent transformations in the tax sphere, as well as global trends, are aimed at," E. Mammadov noted.