Azerbaijan Growls, But Has No Teeth

Azerbaijan President AliyevOn October 10, Azerbaijan President Ilham Aliyev publicly criticized London-based British Petroleum (NYSE:BP) over its production levels at the Azeri-Chirag-Guneshli and Shah Deniz oil fields. Since the 1990s, BP has invested $28.7 billion and led a group consisting of itself, Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and Statoil (NYSE:STO) in operating the fields, thought to contain about 9.5 billion barrels of oil. Promising 1 million barrels a day from the field, production for the first half of 2012 averaged 684,000 bpd.

“It’s totally unacceptable,” said Aliyev in a television broadcast. “Oil production began to decline sharply on the Azeri and Chirag fields due to serious mistakes committed by the consortium over the past few years.” Aliyev stressed that his country has been very supportive of BP and its efforts, but that erroneous forecasts have lead to an $8.1 billion shortfall in the country’s budget.

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Socar, Azerbaijan’s state-run oil agency, which also has a stake in the ACG field, “has been instructed to officially raise the issue and take the necessary measures. Serious measures are needed and will be taken,” according to Aliyev in the address. Although specific about the production numbers, he was not specific about what measures may be taken. BP pulls more than 3 percent of its global output from the country, but the ACG field — that BP holds a 35.8 percent stake in — accounts for 78 percent of Azerbaijan’s output.

On October 15, Azeri energy minister Natik Aliyev — no relation to President Ilham Aliyev — spoke to reporters and clarified the President’s aggressive position.

“The signal to BP over the necessity to improve works at ACG does not mean that we are against the company or any other foreign companies,” he said, according to Reuters“There is no and cannot be any threat to BP or any other foreign company.” This tameness may come as a result of that domineering 78 percent output that BP is largely responsible for.

BP has responded to questions relating to the situation with an email that reads: “We are fully committed to Azerbaijan. We are working with Socar to address ACG production issues as quickly as possible.” While BP could throw its weight around if it wanted, bringing the field up to 1 million bpd is no doubt on the company’s radar. The company is still facing billions in litigation related to the Deepwater-Horizon disaster, and has seen its shares bleed some value this year to date.

Minister Aliyev has said that the state-run oil agency should strengthen its control on the field. Contracts are up for discussion come 2024.

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