The 'Contract of the Century'

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The production sharing agreement (PSA) signed by the Azerbaijan government and a consortium of eleven foreign oil companies fields on 20 September 1994 is commonly referred to as the the "Contract of the Century".[1] The contract called for a total US $7.4 billion investment (at 1994 rates) over 30 years in three offshore oil fields in the Caspian Sea: Guneshli, 82 kilometers (km) offshore, Chirag (94 km) and Azeri (113 km), with combined reserves estimated at 4 billion barrels of oil[2] and gas deposits of around 55 billion cubic meters (bcm). Later, in 2009, BP estimated the three fields' combined reserves at 5.7 billion barrels.

Division of stakes and profits

The contract stipulated that Azerbaijan's government would receive approximately 80 percent of the total profits from a combination of royalties and the share owned by the State Oil Company of Azerbaijan (SOCAR), with the remaining 20 percent divided among the other Consortium members.[2] Soon after the ratified contract went into effect on 12 December 1994, member companies of the oil consortium established the Azerbaijan International Operating Company (AIOC) to provide long-term planning and to conduct the day-to-day operation of the three oil fields contained in the contract area.[3]

Export pipelines

Most of the oil extracted in the framework of the project is exported to the world market via the Baku-Tbilisi-Ceyhan oil pipeline, running 1770 kilometers from Baku to the Turkish port of Ceyhan, which began operations on 28 May 2006.[4] The rest flows through two other pipelines: [Baku-Supsa Pipeline|Baku-Supsa]] and Baku-Novorossiysk.[5]

Impact on Azerbaijani economy

The revenues generated by oil activity in the contract area form the backbone of the Azerbaijani economy, according to Norwegian oil company Statoil.[6] From the start of production in 1997 to June 2012, fields in the contract area had produced 272 million tons of oil with Azerbaijan receiving 130 million tons of profit oil in that period, or 63% of total production.[7]

A switch from a state-run to a capitalist economy, combined with the effects of the conflict in Nagorno-Karabakh, led between 1989 and 1994 to a collapse in trade and a GDP decline of almost 60%, agricultural production by about 43% and industrial output by about 60%. According to the United States Association for Energy Economics in 2011, the contract signing brought about political stability and contributed to Azerbaijan's significant economic growth over the past decade. Between 2003 and 2009, strong oil and gas production gains, high international oil prices and sharply higher public spending propelled GDP growth to an average of 27% a year, leading the country’s currency reserves to reach US $18 billion by the end of 2008 - twice its foreign debt. The oil sector - with the ACG fields playing a decisive role - accounted for 42 percent of value added (of GDP), 90.7 percent of total gross exports and 83.9 percent of total foreign investment in 2009.[5]

References

  1. ""CONTRACT OF CENTURY" RETURNS FORMER OIL GLORY TO AZERBAIJAN" Public Finance Monitoring Center, 6 October 2009.
  2. 2.0 2.1 "Azerbaijan's "Contract of the Century"" Azerbaijan International, Winter 1994.
  3. "AIOC Celebrates 5 Year Anniversary", Azerbaijan International, Autumn 1999.
  4. "Contract of the Century" Azerbaijans.com, 2011.
  5. 5.0 5.1 "Analysis of Azerbaijan Oil and Gas Sector" United States Association for Energy Economics, 2011.
  6. "Contract of the century turns 15" Statoil website, September 2009.
  7. "Already 63% of income from Contract of Century accounts for Azerbaijan" ABC.az, 2011.