AZERBAIJAN: "SECOND OIL BOOM PREDICTED".

Mid-East oil companies consolidate their positions as new opportunities

Azerbaijan's role in world energy supplies and transport has taken a dramatic leap forward as a result of recent developments in the Caspian Sea and the southern Caucasus. But while this promises a return to prosperity in the coming decade, it has also fuelled fears of intensified great power rivalry in the region and raised fears that the country's huge economic and social inequalities may be exacerbated.

Just before the opening of the prestigious "Caspian Oil and Gas 2001" show and annual exhibition in Baku early last month, the US Ambassador to Azerbaijan, Ross Wilson, told reporters: "We stand on the brink of what I think is the second oil boom for Azerbaijan. Multi-billion dollar contracts," he added, "are due to be signed over the next six to 18 months."

Even before his statement, the buzz surrounding the show was evident to all in the industry: more than 330 companies from 25 countries, including Saudi Arabia, Turkey, Iran and other Middle Eastern states, had signed up to participate. More than a third were first-time entrants, reports Suzanne Morris, Project Director of the event, which was organised by Spearhead Exhibitions of the UK in partnership with the Azerbaijan Chamber of Commerce and Industry. "They are eager to make their interest and presence felt in order to ensure that they do business in this rapidly developing region," she added.

Although Azerbaijan ranks among the world's first oil producers, having begun modern drilling operations in the 19th Century, it is only since the break-up of the Soviet Union and the creation of the Republic 10 years ago that exploration has begun in earnest. The "Contract of the Century," which was signed in 1994, marked the first time that major international oil corporations were allowed to work in the Azeri sector of the Caspian. Today, the Azerbaijan International Operating Company (AIOC), which is led by BP Amoco and which includes Delta Hess, a Saudi/US venture, TPAO of Turkey, Exxon of the US, Itochu of Japan, LukOil of Russia and Statoil of Norway, is producing some 500,000 tonnes of oil and 70 million cubic metres of gas a month, primarily for export to customers in Europe, the eastern Mediterranean and other parts of the Middle East.

Since then, 19 other contracts have been signed with other international energy conglomerates such as Chevron and Conoco of the US; the UK-Netherlands conglomerate, Shell; TotalFinaElf of France and Agip of Italy, as well as with the State Oil Company of the Azerbaijan Republic (Socar). Companies from Turkey and the Arab Gulf states, as well as from Scotland, the UK, Norway, Europe, the US and Japan have also benefited from related contracts for the supply of oil field equipment and services, pipelines, transport, housing and technical surveys.

Developments this year, however, promise even greater opportunities for potential investors and suppliers, as well as for oil producers and consumers. Plans to build a 1,745-kilometre oil pipeline from Baku through Georgia to the port of Ceyhan on Turkey's Mediterranean coast received a major boost in late May when BP Amoco and a group of sponsors announced a decision to go ahead with detailed engineering studies costing some $150 million. Construction of the line, which is expected to cost $2.8 billion to $2.9 billion, is set to begin in the second half of next year, with completion by the end of 2,004.

Support from the new Bush Administration in the US for the line is now also being extended to a second link to transport gas from Azerbaijan's huge offshore deposits in the Shah Deniz field and from other potentially major gas finds in the Azeri sector of the Caspian to Turkey. In May, BP's associate president in Azerbaijan, David Woodward, announced plans to invest $2.7 million in the gas field and pipeline, bringing BP Amoco's total projected investment in the country up to more than $9 billion. The second link would be built parallel to the oil line and would provide supplies to Turkey of up to 6.6 billion cubic metres of gas a year by the middle of this decade.

By early 2005, thanks to additional investments by BP Amoco of $6 billion to $6.5 billion in three offshore fields-Azeri, Chirag and Guneshli, as well as the new oil line, AIOC alone should be producing 350,000 barrels of oil a day. Combined with exports from Shah Deniz, Azerbaijan could be earning more than $1 billion a year, according to Woodward. This could rise, to more than $5 billion a year by the end of the next decade. Other substantial revenues may be added if additional exploration and production planned by companies such as Shell, Chevron, Conoco, Exxon Mobil, Statoil, Agip and Itochu go ahead.

Despite the optimism, however, significant problems remain, on both the energy front and domestically and regionally. Some oil analysts remain sceptical that the Baku-Ceyhan oil line will be commercially viable without additional supplies from other Caspian producers, particularly Kazakhstan, where one of the world's largest oil fields, Kashagan, was recently discovered. "The pipeline needs 100,000 to 300,000 barrels per day more at an early stage to be viable," Gavin Graham, a Shell regional vice-president is reported as saying last month.

"Shell", he added, "would contribute supplies to the line if its explorations in the offshore Imam field prove to be commercial."

The Bush administration appears to share some of these doubts, despite its enthusiasm for the Baku-Ceyhan links. Last month the US government announced that it would grant Azerbaijan $600,000 to study ways to modernise two refineries in Baku and to upgrade port and terminal facilities to handle lower grade crude from the eastern Caspian, a move which would facilitate Kazakh shipments through the line as well as helping to free up more Azeri oil for transport to Turkey. And, while Kazakhstan's President, Nursultan Nazarbayev, has said that his country is considering using the Baku-Ceyhan line, government officials in Astana in May disclosed they had agreed, along with TotalFinaElf, to conduct a yearlong study on building another oil pipeline south, through Turkmenistan to Iran.

Within Azerbaijan itself, President Heydar Aliyev has already expressed concern that however great the prospects for his country's oil and gas sectors, the promise of substantial new revenues over the coming years, rather than helping to stabilise the country, could give rise to exaggerated expectations. Such expectations could exacerbate social and economic tensions, especially in a country with some one million refugees and displaced persons. Criticism is also being raised domestically that the presence of international oil companies has not benefited the non-oil sectors of the economy such as manufacturing and agriculture and that it has led to huge disparities in the wages paid to foreign and local workers. While the establishment of a new Oil Fund is aimed at alleviating some of these problems, pressure is mounting to use its resources for local development now, rather than for accruing savings to be used for future generations.

Even more importantly, the prospect of Azerbaijan's new found role in world energy supplies is raising the prospect of renewed regional and international tension. While both Bush and Russia's President Vladimir Putin, were due to discuss cooperation in the South Caucasus at their first summit meeting in Slovenia in mid-June, many observers remain sceptical that such cooperation can be achieved without a solution to Azerbaijan's continuing conflict with neighbouring Armenia and an end to the occupation of Azeri land. Successive rounds of talks between Aliyev and Armenian President Robert Kocharian to reach a peaceful settlement of the conflict, carried out with the help of mediation by the US, Russia and France in the past two years, have so far failed to come up with an agreement that is ready to be approved by the populations of both countries and that of the disputed enclave of Nagorny-Karabakh.