Opinion: Extension of “Contract of the Century” was mostly political

In an interview with EADaily, economist Natig Jafarli and expert in energy Ilham Shaban speak about oil recovery in Azerbaijan, gasoline price hikes, and extension of the “Contract of the Century” with European oil companies.

The Central Bank of Russia has accused Azerbaijan and some other countries of destabilizing oil prices. What do you think of that statement by the Russian Central Bank? Are its claims substantiated?

N.D. Even if there were no OPEC and Azerbaijan did not undertake commitments to reduce oil recovery by 30,000 barrels, Baku would reduce recovery for natural reasons. Recovery is falling anyway. During the first seven months of 2017, oil recovery fell by 9%, which is approximately 70,000 barrels. Therefore, Azerbaijan would reduce recovery even if there were no agreements at all.

I.Sh. In early September, the Energy Ministry of Azerbaijan published reports on oil sales for January-August 2017. It turned out that oil recovery in Azerbaijan has not reached 800,000 barrels per day this year. When Azerbaijan signed agreements within OPEC+ format, Baku agreed to reduce recovery by 30,000 barrels per day as compared to the indicator for October 2016. Then Azerbaijan was producing 835,000 barrels per day. Therefore, Russian Central Bank’s accusations are not fair. I cannot say what political reasons are behind these statements.

What is Azerbaijan’s stance on oil price issue? Will the country further reduce recovery or abandon the idea to retain its share in the market?

N.D. As to further steps, Azerbaijan signed extension of the “Contract of the Century” for 2025 and seeks to increase oil recovery in future or at least stabilize the current level. At the next stages, starting from 2019, when these projects will be launched, Azerbaijan will weigh an increase in oil recovery. The situation on the energy market at present is not good and anyone who will lose its share on it will face great problems trying to restore it. The problem is that oil importer countries have turned into oil exporter ones. Such countries as Canada, U.S. and Austria are increasing oil recovery now. That is why I do not think that restrictions on oil recovery and anything else will influence oil prices in future.

Basically, Azerbaijan is for a rise in oil prices, as its dependence on prices of energy resources is higher than dependence of Russia, OPEC members and other countries.

I.Sh. Azerbaijan is not losing its markets, since our oil is among top five high-quality oils in the world. Azerbaijan’s oil is by 1.5-2-fold more expensive than Brent since it is extra light and is more demanded. Azerbaijan has no problems with sales of crude oil, and 65% of that oil is exported to Europe, another 8% to Middle East and the remaining to Asian markets. Since 2011, oil recovery has been reduced annually.

A new “Contract of the Century” has been signed. SOCAR will increase its share in the new contract with BP on Azeri, Chirag and Gunashli oil fields at the expense of the shares of other companies, including BP. The contract involves no Russian companies. How would you explain that? What political and economic developments should be anticipated after that contract?

N.D. As you know, the previous contract would expire in 2024. There were 7 years before it would expire. Besides economic reasons, the extension of the contract was politically motivated. Presidential elections are around the corner and I think these contracts are connected with that event too.

As to the economic component, it is naturally smaller than the one of the contract signed in 1994. Actually, Azerbaijan was eager to extend that contract and asked BP to recover oil deeper in the Caspian Sea, since recovery is falling. Therefore, at the current stage, Azerbaijan seeks to maintain at least the current recovery.

The goal of the contract was to fix the current volumes. In peak years, Azerbaijan recovered over 1 million barrels of oil, but one cannot even dream about such scales now. The only goal today is to keep at least the current recovery.

I.Sh. When Azeri-Chirag-Gunashli contract was signed, talks were held with State oil company and the project participants, and there were no Russian companies among them. There are 8 foreign companies. In the first contract, Russia was represented by Lukoil with a 10% stake, but the company withdrew from the contract in 2001 by selling its stake for more than 1 billion dollars. Consequently, Azerbaijan should not be blamed that there are no Russian companies in the contract.

Azerbaijan has recently increased the price of Super petrol again. What caused the rise in price? How will that affect the social and economic sector?

N.D. Frankly speaking, sale of this gasoline standard is some 1%. Owners of luxury cards only buy it. That is why, the recently increased price will have no serious impact on the economic situation in the country, unlike the increased price of AI-92 grade gasoline, which has influenced the economic situation dramatically. This caused price hikes throughout the country and affected the macroeconomic situation at large. Besides, gasoline price has intensified inflation.

I.Sh. In mid-July, AI-92 grade gasoline price increased for 30%. Afterwards, the prices of AI-98 and AI-95 have increased. Since the government regulates the petrol prices and prices are not market-based here, they simply soar. In other countries, gasoline price increases for 5%-6% annually, and it is normal.

Interviewed by Anar Huseinov