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US majors’ planned Caspian exit puts Baku in a bind

Azerbaijan may find it much tougher to find investment after the departure of Chevron and ExxonMobil

The start of commercial gas deliveries to Turkey from the Shah Deniz 2 field last July imbued Azerbaijan's hydrocarbons sector with a sense of positivity. But 2018 ended on a downbeat note when reports emerged that Chevron and ExxonMobil intended to withdraw from the largest Caspian oilfield development, Azeri-Chirag-Deepwater Gunashli (ACG).

The planned exit of these US majors comes at a tricky time for the Azeri government. Baku needs to maintain the flow of investment into exploration and production at a time when political risk in the Caspian region is mounting. This is due, in part, to the intensified sanctions squeeze being imposed on neighbour Iran by the administration of US president Donald Trump.

Chevron is seeking to sell its 9.57pc stake in ACG as well as its 8.9pc stake in the Baku-Tbilisi-Ceyhan (BTC) pipeline, while ExxonMobil is reportedly seeking to sell its 6.8pc stake in ACG. This leaves state energy firm Socar heavily dependent on BP, its largest partner among the international oil companies, to drive future foreign investment in the giant ACG fields. ACG accounts for some 80pc of the country's liquids output.

Commercial priorities

The decisions to leave are likely to be based more on commercial expediency rather than political risk. Chevron confirmed, in a statement to Petroleum Economist, it had decided to initiate the process of marketing of its Chevron affiliate interests in the Azeri ACG project and BTC, with a view to a potential sale. It said the decision was part of a realignment of its global asset portfolio to fit with its long-term priorities.

By mid-January, ExxonMobil had yet to comment on reports of its departure. A Reuters article published in early December, and citing industry sources, said that the firm hopes to raise up to $2bn by selling its stake. ExxonMobil seldom comments on such plans.

BP is operator of the concession with a 30.4pc stake, and has a clutch of other agreements with Socar, making the area a core part of its operations. But for the US firms the Azeri fields are a more marginal proposition, having passed their production peak and needing more capital to keep output from sagging faster.

ACG has estimated reserves of 6bn barrels, of which 3.5bn has been produced since the project started in 1997. Average production was running at 588,000 bl/d in the first three quarters of 2018.

"Peak production was planned to reach 1mn bl/d in 2010, but that was never achieved,"
says Philippe Weber, an energy sector analyst at consultant IHS Markit. "They've had to dramatically increase gas injection in order to maintain oil production, raising development costs, which may have motivated both companies to take the business decision to withdraw and monetise their stakes after the renewal of the PSA."

The production-sharing agreement (PSA) for AGC was extended to 2049 in September 2017.

Investment challenge

Although the two US majors have much smaller stakes than BP, their departure would be a significant blow for Baku. ExxonMobil and Chevron were prominent in helping the former Soviet republic develop an independent oil and gas industry in the early 1990s. The 1994 deal on ACG was hyped as the "deal of the century" at the time, and touted as a means of helping Europe diversify its supply options away from Russia.

Without those firms, it may be harder to attract new investment to offshore oil developments in Azerbaijan.

"The country has big plans for long-term projects that will require new investment, but this decision from the two US companies makes it harder to attract that investment," says Stanislav Pritchin, a consultant at the Expert Centre for Eurasian Development. "There aren't many with the expertise and capital to work in the deepwater part of the Caspian, and Socar's own expertise is also limited."

Not all is lost. BP remains committed to ACG, spending more than $1bn in operating and capital expenditure on ACG activities in the first three quarters of 2018. A BP spokesperson told Petroleum Economist there was no change to the company's position on a concession that it looks forward to operating until the late 2040s.

"Azerbaijan is important to us, and it's not just ACG and the BTC pipeline but also on the gas side, with the Shah Deniz Phase 2 starting up and the Southern Gas Corridor pipeline now complete," the spokesperson said.

The UK-based major's continued commitment will surely be welcomed in Baku. But attracting other Western players to a declining oil resource will take considerable effort.

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