Azerbaijan - Part 1 - The Prospects & Geology.

Azerbaijan is producing about 310,000 b/d of oil, up from 180,000 b/d in 1997. Its production of natural gas this year is expected to total about 200 billion cubic feet (BCF), as in 2001 and 2000, but its import of gas will increase in 2002. The country's oil production capacity is projected to exceed 1m b/d by 2010 and to peak at about 2m b/d within the following decade, with marketed production of gas to rise to 30 BCM/year by 2010 and 50 BCM/year by 2020.

The state oil company Socar and its minority partners produce 190,000 b/d, down from 285,000 b/d in 1987. Azerbaijan International Operating Co. (AIOC), a BP-led consortium, is producing 120,000 b/d and aims to raise this to 700,000 b/d in this decade (see the producing ventures in Part 2).

Judging by the number of foreign companies involved in E&P ventures and their strong lobbying in the West, including the biggest among the US majors, Azerbaijan should be able to have adequate oil and gas export pipelines from 2005/06. So far, Baku has signed 21 oil and gas production sharing agreements (PSAs) with 33 companies from 15 countries (see Gas Market Trends of this week).

To a great extent, Azerbaijan's economic and geo-political prospects will depend on a viable solution to the issue of sharing the Caspian Sea with its neighbours. This is a tricky issue (see Downstream Trends).

Azerbaijan is suffering from a shortage of energy. It will keep importing both gas and electricity from neighbouring countries until its energy base becomes self-sufficient in the coming years (see Downstream Trends No. 5).

The President of Azerbaijan, Gaidar Aliyev, personally signs the PSAs and is a very keen negotiator. His aides are eager to see the country become a major oil exporter (see Part 3 in OMT No. 6, and profiles of Azerbaijan's decision makers & executives of the main JVs in Downstream Trends No. 6).

The Political Background: Azerbaijan had an oil boom in late 19th century. That it will have another boom in the early 21st century remains to be seen. It has become one of the focal points of the so-called "Great Game", involving the US and Russia, with the Caspian Sea being a zone of high strategic importance.

Investments to explore for and develop the oil and gas resources of this zone, including Russia's, could exceed $350 bn by 2010. The capital would include up to $14 bn for oil and gas pipelines and related infrastructure facilities, if all projects under negotiation materialise.

Azerbaijan is a country where the geo-political and economic ambitions of Russia, the US, Europe, Turkey, Iran and other countries are inter-meshed. Despite Moscow's current support for the American war on global terrorism, geo-political and economic interests in the Caspian reflect a balance between two power blocs competing for influence in this area: the US and Turkey on the one hand and Russia and Iran on the other. Europe leans towards the US-Turkey bloc, but it is not averse to partnerships with Russia and Iran. Each of these countries is vying for influence in Azerbaijan in its own way (see the background in Vol. 55, OMT No. 1).

In June 2002 President Aliyev said that, on Aug. 24, would vote on changes to Azerbaijan's constitution to bring the country in line with European standards. In reality, the changes have been designed to smooth the way for his son, Ilham Aliyev, to become president after him. This is provided for in one proposed amendment that will make the prime minister the second most powerful politician in Azerbaijan and the person who would take charge should the president be unable to govern.

At the moment the speaker of parliament, who is elected by deputies, assumes power if the president steps down or dies. The prime minister, in contrast, is appointed by Aliyev.

Aliyev has no doubt that the voting on Aug. 24 will go the way he has planned. Previous elections have been marred by widespread fraud. The Azeris have already concluded that Aliyev, who does not tolerate dissent, will make sure the vote will be "almost unanimous" and he will later make Ilham prime minister.

The president, aged 79, has also announced that he would run for a third five-year term in 2003. However, many people say privately that he will not be able to last another term. Aliyev, a former Politburo member of the Soviet Communist Party, has undergone extensive surgery including a multiple heart-bypass operation. At public functions he has at times appeared frail.

Aliyev has dominated Azeri political life since the late 1960s. It is certain that his departure, in Baku referred to as "Day X", will spark a bitter power struggle. His 40-year-old son Ilham, a shy and polite person, already is the number two figure in the ruling Yeni Azerbaijan (New Azer-baijan) Party as well as being vice president of Socar in charge of international affairs and foreign investments.

Moscow, depending on Soviet era tactics, has prevented Baku from going too far in favour of the US. Russia will interfere in Azeri politics to take advantage of any power struggle after Aliyev's departure. Among other things, Russia backs Armenia in the conflict over Nagorno-Karabakh and has used the disputed legal status of the Caspian as a lever to make sure Russian energy companies are involved in key Azeri ventures. The giant LUKoil, which has rights to develop most of the Caspian Sea's Russian sector, is involved in several oil development projects in Azerbaijan.

The US aggressively pursues its business interests in Azerbaijan. American companies, with Washington backing, use their financial and technological muscles to become the biggest players in the Azeri sector. Apart from the UK/US major BP, US companies involved in oil development projects in the country include ExxonMobil and ChevronTexaco.

Europe and Japan have an interest in Azerbaijan's stability. Companies from Britain, France, Germany, Italy, Japan and Saudi Arabia are involved in the country petroleum development projects. BP leads the two main consortia, AIOC and the gas-rich Shah Deniz. TotalFinaElf of France and Agip of Italy are among major investors in Azerbaijan.