AZERI DEALS STILL ON DESPITE TURMOIL

Civil unrest in Azerbaijan hasn't halted foreign petroleum companies' ambitious investment plans there.

At presstime last week, most firms were maintaining a presence in the embattled former Soviet republic despite the apparently imminent success of a coup against the elected government. As rebel troops entered Azerbaijan's capital Baku June 22, most companies kept operations running as they await what they see as an inevitable agreement to develop Azerbaijan Caspian Sea oil fields.

Some foreign companies with offices in Baku said the capital city was quiet and the danger to their employees insufficient to justify evacuations. Others moved their foreign workers out of the country, temporarily interrupting operations until the situation calmed. The U.S. embassy in Baku warned U.S. citizens to leave the country.

Meantime, Azerbaijan is falling short of its goal to stem its long term oil production decline this year. Azeri crude output fell another 8% the first 4 months of 1993 vs. the same 1992 period.

Growing domestic political turmoil and recent military setbacks in clashes with neighboring Armenia caused by a territorial dispute have clouded prospects that Azerbaijan can quickly achieve big offshore Caspian Sea oil output gains with large scale assistance from major western oil firms.

TURMOIL UPDATE

Rebel leader Surat Husseinov on June 22 seized the city of Gyanja, demanding President Abulfaz Elchebey resign. Elchebey then fled to his home village, handing power to parliamentary Chairman Gaidar Aliyev.

Husseinov said he plans to take absolute power in Azerbaijan after winning support from government troops and parliament, according to international press reports.

Husseinov reportedly demanded to be made president or prime minister of the country. Aliyev was said to be discussing his demands.

Husseinov launched the rebellion June 4 and as of last week had seized half the country. Earlier, government troops told Elchebey they would not oppose Husseinov if the rebels entered Baku. Most government troops are fighting Armenian forces for control of Nagorny Karabakh, an Armenian enclave in Azerbaijan. And last week the parliament declared support for Husseinov.

NEGOTIATIONS CONTINUE

British Petroleum Co. plc said June 23 that whatever the outcome of the political power struggle, oil companies would continue dealing with the State Oil Co. of Azerbaijan Republic (Socar).

Meetings continued in London last week between Socar and western participants. Although Socar announced earlier this month that Guneshli, Chirag, and Azeri oil fields would be developed together under a unitization agreement, there remain other major steps to be taken (OGJ, June 14, p. 18, and June 21, p. 34).

The agreement affects separate development proposals by groups led by BP, Amoco Production Co., and Pennzoil Co.

"We are still negotiating crucial areas of the deal with Socar," BP said. "In particular, production sharing contracts have to be agreed. Despite the political turmoil, negotiations will proceed with Socar. An agreement is inevitable, as the Azeris need investments."

Financial Times, London, reported that eight foreign petroleum companies involved Azerbaijan Caspian development agreed June 22 to advance a combined $70 million in "good faith money," or one third of a $210 million signature bonus on the development project.

OPERATIONS LITTLE AFFECTED

Unrest in Azerbaijan is having little effect on staffing there by foreign companies seeking oil and gas deals.

Whatever their decisions-to leave or stay-foreign companies said it is premature to speculate about how the turmoil will affect Azerbaijan's plans to reverse its declining oil and gas output.

BP said June 23 that operations in Azerbaijan continued normally during the turmoil. Its Baku office stayed open during the unrest, manned by two expatriates and 20 local staff. Visits by engineers and commercial staff, however, have been halted.

BP's retail outlet in Baku was unaffected. Operated through a local agent, the station sells motor oil and spare parts for BP and auto components supplier Unipart.

Prior to the unitization agreement announcement, teams of engineers and commercial staff working in Baku helped roll three development plans into one, completing the work just before the unrest started.

STILL DOING BUSINESS

Pennzoil Co. and Unocal Corp. were among companies that decided the situation was not serious enough to pull people out as of presstime last week.

Pennzoil and Unocal also have been talking with Socar about its unitization plan.

Unocal said the company decided against telling employees to leave because eyewitnesses returning from Baku reported the streets were quiet.

"Our people are still there doing business. We have not seen anything that would prompt us to change our plans about moving forward with the next steps on the unitized field development," Unocal said.

Unocal has 10 people in Azerbaijan, including dependents.

While declining to comment about staff levels, Pennzoil said it had not pulled any employees out of the country because of concern about safety.

The company said it plans to continue negotiations. A meeting was planned last week in London of companies hoping to take part in the project, and Unocal and Pennzoil said they would attend.

TAKING PRECAUTIONS

Among companies that decided to take precautions, McDermott International Inc., New Orleans, evacuated 20 of 21 employees from Baku.

McDermott is part of a group of companies led by Amoco Caspian Sea Petroleum Co. that is negotiating for a role in the unitized development.

The company also is studying the possibility of converting some Azeri shipbuilding capacity to build offshore production facilities to support development of the country's Caspian oil and gas reserves. Efforts in both areas have been suspended.

Amoco in response to reports of escalating fighting evacuated most non-Azeri employees and curtailed travel into and out of Azerbaijan but continued to maintain its office in Baku and working on terms of Socar's unitization proposal. Although most of Amoco's employees left the country, talks on joint development would not be hampered, Amoco said.

"We're confident Socar's agreement concerning unitization will be honored, and that our work is going to be continuing there," Amoco said. "Azerbaijan needs foreign investment to help develop its resources and we're moving forward with that in mind."

Foreign oil companies said Azerbaijan's needs and goals aren't likely to change much because of the political turmoil, and foreign companies already working there are best positioned to resume activities in the event of a substantive change in government.

"Ultimately, whatever contract we have is going to require parliamentary approval," Amoco said.

AZERI PRODUCTION SLIDE

Reports from Baku say Azerbaijan's crude/condensate flow during January-April averaged about 208,000 b/d vs. 225,000 b/d the first 4 months of 1992.

Target for 1993 is an average of 211,000 b/d, rising to 500,000 b/d in 1996-97. All of the output loss was attributed to Caspian fields. This indicates offshore oil production has fallen to less than 170,000 b/d vs. a peak of 258,000 b/d reached in 1970.

Caspian crude/condensate flow dropped to about 175,000 b/d in 1983-84. But it recovered to 200,000 b/d by 1986 as production from giant Guneshli (formerly 28th of April) field, east of the Apsheron Peninsula, increased.

Azerbaijan's gas production also continues to slide. Flow fell from 304 bcf in 1992 to 278 bcf in 1992. This year's goal is 256 bcf. About 90% of Azerbaijan's gas comes from offshore fields.

The only bright spot in the Azeri petroleum industry is that onshore oil output of 40,000-45,000 b/d stabilized during January-April. Flow from onshore fields climbed to as much as 445,000 b/d in 1940, before offshore production started, and had fallen by 6-7%/year for many years.

Azerbaijan hopes to maintain or even slightly increase onshore oil production during the remainder of the decade with Turkish assistance.

With overall crude/condensate production down from 222,000 b/d in 1992 and 235,000 b/d in 1991, Azerbaijan has been forced to depend increasingly on oil from Russia and Kazakhstan to keep its refinery utilization at a reasonable level. But with its own production falling sharply, Russia failed to deliver about 5 million bbl of crude to Baku's refineries through May of this year.

Together with declining oil, gas, and petrochemical production, the low rate of refinery utilization has contributed to a recent plunge in Azeri gross national product.

The nation has a huge foreign debt, a large budget deficit, and soaring inflation.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.