A farewell to Azerbaijan? Why are the U.S. oil giants leaving the country?

Early this year U.S. oil major ExxonMobil announced in a surprise move to extend its activities in Azerbaijan by acquiring 2.5 percent stake in the Baku-Tbilisi-Ceyhan (BTC) pipeline from CIECO BTC (UK) Ltd, an affiliate of Japan"s Itochu.

Two months later, in April, Neil W. Duffin, president of ExxonMobil, sent a warm letter to Azerbaijan's Ilham Aliyev offering congratulations on his victory in the snap presidential election.

"At ExxonMobil, we are proud that we have been able to join with your nation in its development, and we look forward to continuing our work to support a bright future for the Republic," Duffin noted.

ExxonMobil has had a long business presence in Azerbaijan since 1995, by sharing 8 percent interest in the International Operating Consortium (AIOC).

Now, the company, along with its major rival Chevron, are reportedly having second thoughts. Both are looking to exit Azerbaijan, including the country"s biggest oil field and some pipeline infrastructure.

"Exxon Mobil and Chevron are seeking to sell their stakes in Azerbaijan's largest oilfield, marking the retreat of the U.S. majors from the former Soviet state after 25 years as they re-focus on domestic production," Reuters reported on Dec 4,.

The surprise move would mark the withdrawal of U.S. companies from the Azeri oil industry a full 25 years after western majors, including five U.S. firms, signed what is known as "the Contract of the Century".

Approached by Turan's Washington correspondent on Wednesday, both Exxon and Chevron officials declined to comment on their companies' plans for Azerbaijan.

Some energy analyst in Washington draw attention to the fact that in recent years, Exxon has shifted its global focus to offshore exploration in the countries like Guyana. On Dec 3, the company announced its 10th discovery offshore Guyana and increased the Stabroek resource estimate from 4 to more than 5 billion oil-equivalent barrels.

In the meantime, industry analysts with focus on Caspian energy issues are not entirely convinced that Exxon"s decision to leave Azerbaijan "is only commercial - although that remains one of the main reasons", as a former Energy Department official put it in an interview with ASTNA.

One of the challenges that the oil companies are facing in Azerbaijan is the lack of - or removal of - expertise required to develop the country's heavy oil infrastructure, which "certainly gets older, and needs fresh investments."

"It looks like the Aliyev government needs to take a close review to the level of capital expenditures required to continue developing the country's oil," the source said, adding that the topic has been recently raised "on several occasions" between the country's leadership and the western diplomats, as well as energy companies.

"We need to bare in mind that the oil industry is extremely capital intensive and this is the key to understanding what has gone wrong in Azerbaijan. When oil prices rise, oil companies may reap millions of not billions of dollars in profits as well as capital investments, and if oil prices decline, it can quickly turn into billions of losses," said the source.

Another important challenge for the Western companies operating in the Caspian region has to do with Iran for obvious reasons.

Even if oil giants had been able to convince the U.S. Treasury to wave Azerbaijan's energy projects from Iran sanctions, they would still have to at least drastically reduce the scope of their activities, the source added.

Alex Raufoglu

Washington D.C.