Company of Azerbaijan Republic:
An interview with Natig Aliyev, President
by Pirouz Khanlou
has the recent drop in the price of oil affected Azerbaijan?
Left: Natig Aliyev, president of SOCAR, who has been
involved with signing 16 international oil contracts since 1994.
The price of oil and oil products began dropping drastically
at the beginning of 1998. Of course, this has affected all oil-producing
companies and countries, including Azerbaijan. We are receiving
less profit from the sale of crude oil and oil products than
we anticipated. We have initiated a few changes. For example,
we sold 80,000 tons of crude through the Baku-Novorossiysk pipeline.
We were selling diesel to Turkey via Iran, but when changes occurred
in the market, we began selling it directly to Europe via Batumi.
We were using all possibilities to lessen the market effects
because SOCAR plays a critical role in generating income for
When it comes to investment, of course, the drop in oil prices
has affected the entire world. That's why many famous, large
oil companies are cutting back drastically. That's why Amoco
and BP, as well as Exxon and Mobil have merged. We expect others
to merge as well. Consolidation enables them to reduce staff.
Amoco and BP, we're told, have reduced their staff by 20,000
employees. At the same time, of course, they are becoming more
conservative with their investments, hesitating to get involved
with projects they consider to be a risk. We feel the impact
of this in Azerbaijan also. Companies are reducing their budgets
for 1999 since predictions expect the low price to remain until
the year 2002. But these are just predictions. No one can be
absolutely sure this will happen. Everyone is waiting.
The announcement regarding the pipeline route was originally
scheduled for October 1998. Already the announcement has been
postponed several times. Why is this? Is AIOC leaving the political
factors out of the equation and trying to solve the issue only
from a commercial point of view?
Many discussions are going on regarding the main pipeline.
According to AIOC's calculations, this project will cost $3.7
billion. That's an enormous amount of money for them. And that's
why they are pushing to build the Baku-Supsa pipeline first,
and then develop Jeyhan.
What will the actual cost of the pipeline be, and how is it
that AIOC made an estimate of $2.5 billion and then came back
and quoted nearly $4 billion?
AIOC first estimated the cost of the pipeline would be $2.9
billion but later they increased this figure to $3.7 billion.
BP made this cost estimate, but we're skeptical about this figure.
The actual costs are lower. For example, the Turkish government
together with World Bank estimated that the Baku-Jeyhan pipeline
would cost $2.4 billion and they stand behind their quote. As
you see, these are quite different quotes, so we are analyzing
them all. Those different figures depend on how they go about
estimating the costs. But let me mention one more point.
are trying to lower their expenses, it seems they have a tendency
to suggest a higher price than this figure to emphasize how expensive
the Baku-Jeyhan route would be, trying to persuade everyone that
the less expensive Baku-Supsa pipeline is more suitable. Today,
negotiations are going on with the Turkish government. As you
know, we have met with the people responsible for these decisions
several times, both in Istanbul and Baku. Soon we will conduct
another meeting to discuss the commercial viability of the pipeline.
We still need to calculate the exact cost of transit fees and
By SOCAR's estimate, this route should not exceed $3 billion.
The final estimate that Turkey has made is $2.4 billion, and
Turkey stands by its estimate. Turkey says that if we agree on
this figure, they would be ready to build this route for that
amount. That's why we are optimistic that this route will get
In the end, who will succeed-AIOC or Azerbaijan's government-in
determining the main pipeline route?
It's not a win or lose situation. This is a joint project.
AIOC and SOCAR are cooperating with each other. There is no conflict
or confrontation between us. We are not having a war or anything
like that. We are just trying to find the best solution. The
final decision, however, will be made by the Azerbaijan Republic
and its President. And as you know, the Ankara Declaration (September
1998) was signed by five presidents from the region. Aliyev (Azerbaijan),
Shevardnadze (Georgia), Demirel (Turkey), Nazarbayev (Kazakhstan)
and Karimov (Uzbekistan) affirmed their political interests to
support an East-West corridor through Baku-Jeyhan. This pipeline
route will restore and maintain stability in this part of the
world and play a critical role from an economic point of view.
That's why today we are trying to analyze these things in an
objective way and to inform our President both about the negative
and positive aspects. In the final analysis, the decision will
be made by our President.
As far as attracting financial investment is concerned, after
the route is confirmed, if AIOC and its shareholders want to
take a part in building the pipeline-fine. If any company of
AIOC does not want to participate, then it's their own business
and we will invite other companies to participate. Many other
companies are working in Azerbaijan in addition to those that
comprise the AIOC Consortium. They are taking part in various
contracts and, of course, their oil needs to be transported through
a pipeline as well. Some of them are also interested in taking
part in a major project. There are also other companies producing
pipes, pumps, etc. that could get involved. After making a final
decision for the route, a separate company will be created to
build the pipeline.
Specifically, how do you anticipate that these new mergers
will affect the projects in Azerbaijan?
I don't think that the mergers will affect Azerbaijan negatively.
In fact, the opposite is more likely to occur. These mergers
can be useful for Azerbaijan, rather than harmful. We work with
all these companies. If they decide to cut their budget and use
their money more carefully, this will benefit Azerbaijan. As
you know, the money that they spend here has to be paid back.
If they invest less, it will be more beneficial for Azerbaijan.
That's why we look at these developments very positively. In
the short term, it's not so important how many foreigners work
here or even how many Azeris get jobs. The most important thing
for these foreign companies is that the project produces economical
How does the new merger affect the dynamics of AIOC now that
the British, not the Americans, have the majority of shares in
That's a very hard question to answer. So far, we haven't really
felt any changes because AIOC is a group composed of 12 companies.
I don't think this change will affect AIOC's structure and the
work that they are doing. The fact that Amoco and BP merged-what's
the difference? They both were former members of AIOC. Now they
will be functioning as one company, but the widespread policy
that is affecting progress is that AIOC is pursuing a policy
of caution. They are cutting back on expenses, not just their
own projects, but also AIOC.
Some people in the neighborhood seem to be quite pleased that
in some blocks, not as much oil has been found as was anticipated.
a very interesting problem. Of course some view this negatively.
But I would like to suggest another point of view-once again
the opposite opinion. Let me explain why. First of all, the oil
companies that are insisting that no field was found in the Karabakh
structure are not correct. Oil was discovered there. When two
exploratory wells were tested, oil, gas and gas condensate fields
were found. This is a big event for the whole region because
we always insisted that every prospective structure is not yet
an oil field. It needs to be discovered-and that takes work.
Karabakh could have been empty, but it wasn't.
news for us. There are plenty of gas and gas reserves in those
structures. Perhaps Pennzoil estimated its own reserves and reached
the conclusion that it wouldn't be profitable to exploit it from
a commercial point of view. Well, that's their own business.
Still, for SOCAR it is a very positive situation. If foreign
companies come here, discover a field and then estimate that
it isn't profitable for them, that doesn't mean that the situation
is the same for SOCAR. On the contrary, we think that it will
be worth putting that field into operation.
Some people complain that so many contracts are being signed
and given to foreigners who come and work here, they fear that
nothing will be left for Azerbaijan's future. But this is also
a positive thing. Because, let's say if SOCAR itself had to discover
these fields and invested $120 million for this work, it wouldn't
be the same. But foreign companies give their consent to carry
out all this work at their own financial risk. Azerbaijan hasn't
lost anything. The money that foreigners invest is at their own
We know that those fields are not as promising as Azeri, Chirag
and Gunashli. They are small in comparison. Karabakh is thought
to have approximately 7 million tons of oil and Dan Ulduzu, 10
million tons. Of course, we don't know for sure yet. Perhaps,
if they were to be operated together, then their profitability
would increase. In general, turning those perspective structures
into fields in the Azerbaijan sector of the Caspian signifies
to us that there are, indeed, plenty of oil and gas reserves
in the Azerbaijan sector of the Caspian.
Now that Russia along with all the other countries (except
Iran) have found oil in their sectors of the Caspian, what progress
is being made to resolve the issue related to the status of the
Caspian, and what specifically is happening between Azerbaijan
As you know, many changes have occurred in terms of the Caspian
Status problem. In 1993, all countries except Azerbaijan insisted
that the Caspian should be treated as a common sea and all of
its reserves should belong equally to everyone. Today, all countries
including Turkmenistan and Kazakhstan hold the position that
national sectors should exist and that each country must work
within the frame of its national sector. The bottom of the sea
should be divided by a middle line according to standards accepted
throughout the world. Still Iran doesn't quite agree with this.
They say that the national sector should exist, but the Caspian
needs to be divided equally, or twenty percent of the project
should be given to each of the five countries. But no such thing
exists anywhere in the world. There is no precedent for doing
However, for Iran to admit that there should be something called
a "national sector" is also a positive sign for us.
We don't know how this problem will finally be resolved. Some
countries think that all problems should be solved at once. That
is, protection of environment, fishery problems, sailing and
shipping rights, etc. But recently, negotiations held between
Russia, Kazakhstan and Azerbaijan as well as between Russia and
Turkmenistan give us reason to think that we are getting closer
to resolving the problem.
Are you less optimistic about the future given these recent
developments in the oil industry?
First of all, I should say that we think we are on the right
track. As you know, more than $1.6 billion capital has been invested
by foreign companies during these past few years. Of course,
this policy is having an impact. If such a policy were not in
place, then I would say Azerbaijan's condition would have been
considerably worse. Azerbaijan is developing today because of
its policy of openness to foreign investments. As to when the
average person will feel the benefits from Azerbaijan's oil,
only time will tell. The drop in the oil price delays all projects,
prolonging the time it takes to repay the capital investment.
So it's very hard to say that exactly in 2002 Azerbaijan will
have so much money that it won't need any more foreign investment.
Maybe it will be like this, but we don't know for sure.
But I would
like to emphasize one thing. We really need to develop all aspects
of the economy, not just oil. We can't just sit and wait until
Azeri, Chirag and Gunashli produce oil. This is not a wise idea.
We need to carry out reforms. We need to develop other resources
that can benefit the economy. We need to work on privatization
programs. Other parts of the economy also need to function so
that all of our people will live better. We can't just sit passively
and rely upon oil. Not everyone will benefit from oil. That's
why we're trying to develop our own construction, engineering
and chemical industries, entities that will eventually support
themselves. If such programs and reforms can be initiated, then
we'll be on the right track. Otherwise, if we sit here waiting
until money comes from oil, our country will not develop as it
(6.4) Winter 1998.
© Azerbaijan International 1998. All rights reserved.
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AI 6.4 (Winter 1998)
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