Azerbaijan International

Winter 1999 (7.4)
Pages 93-97

BP/Amoco Section
At the Turn of the 21st Century
AIOC President, David Woodward
by Betty Blair

David Woodward, President of AIOCNow that BP Amoco has taken over the operatorship of AIOC (Azerbaijan International Operating Company), what is your title and role?

I'm still President of AIOC, but earlier this year the partners agreed that BP Amoco would become operator of AIOC. At that time BP Amoco made me Associate President, the most senior representative in the country. Actually, BP Amoco has two business units here: Azerbaijan Development and Production, which I head, and Azerbaijan Exploration, led by Andy Hopwood.

Photo: David Woodward, President of AIOC.

This was potentially confusing for the outside world and, since AIOC was the primary operating company here and partners wanted to still be represented through AIOC, we retained the name of that company. I also retained the title President of AIOC. Sometimes people find it a little difficult. When they say, "What's your title?" I have to go through this long explanation.

So are you Hopwood's boss or is he your boss?
Andy and I both report to the same boss in London. Andy doesn't report to me. I don't report to him. We both are directly responsible for our respective businesses. But when it comes to BP Amoco's overall reputation in the country, dealings with the President and other senior officials, I'm the one who has ultimate responsibility.

Andy was responsible for the merger between BP and Amoco here in Azerbaijan. That took place early in 1999 outside of AIOC. I didn't have any direct involvement but was aware of what was going on. BP and Amoco staff moved into a single office and a number of expatriates had to leave.

Following the merger of BP Amoco, it was recognized that BP Amoco had, by far, the largest shareholding in AIOC (34 percent). The partners saw the value of having a single company responsible for the operation rather than having it managed by the consortium and agreed that BP Amoco should take on this role commencing in June 1999.

So you are making it more efficient?

Heydar Aliyev signing Baku-Jeyhan pipeline in Istanbul OSCE Summit, 1999.We were able to combine AIOC activities with BP Amoco's other activities here. Andy and his team moved into our office at Villa Petrolea. We then started sharing various services. For example, we now have one GPA (Government and Public Affairs) department, one HR (Human Resources) department and one IT (Information Technology) department shared between the two business units.

Did a lot of people lose their jobs?

Approximately half of the office-based expatriates left as a result. In every case, if we had to release people, we went through a careful process of determining who was best qualified for the job. The other members of the management team and I put in a lot of effort to make sure this was being done in an absolutely fair way. We wanted to do it as quickly as possible, too, so that people could settle into new jobs and new organizations.

Photo: Intergovernmental agreement for the Baku-Jeyhan pipeline signed by the presidents of Azerbaijan (Aliyev, left), Turkey (Demirel, right) and Kazakhstan (Nazarbayev, not pictured). U.S. President Bill Clinton, center, looks on. Istanbul OSCE Summit, November 1999. Photo: Rafig Baghirov.

But it happened at a difficult time when oil prices were very low, and when several oil companies were leaving Azerbaijan.

That's right. For the expatriates who left, in many cases there weren't positions for them back at their parent companies. For the national staff who were released, there were limited opportunities for them to move into good jobs elsewhere. It's a painful process for an organization to go through.

Ultimately, we have a responsibility to shareholders and to Azerbaijan to conduct our activities as efficiently and effectively as possible. We spent quite a bit of time talking to SOCAR and the government about BP Amoco becoming the operator of AIOC, what the implications would be, that there would be job reductions for the nationals. There would also be significant cost savings, primarily through a reduction in the number of expatriates and synergies in other parts of the operations, such as offshore supply vessels and helicopters. The authorities recognized that this was in the best interest of Azerbaijan in addition to our partners.

About yourself, you've been here a year, right?

Just a year. It was about mid-December that I arrived last year.

Let's go back to a year and half ago - talk a little bit about getting the top position here at AIOC.

Before I knew that I was coming to this assignment, I was aware of Azerbaijan. Since I'm in the oil business, I know where the oil is produced around the world and a little bit about the history of those areas.

I knew Terry Adams - over the years our paths have crossed in various places. Most recently I had succeeded him as General Manager of the onshore operating company in Abu Dhabi. I knew that Terry was moving into a challenging job in Azerbaijan as head of the AIOC consortium. Every now and then I would hear that Terry was in Washington talking to the U.S. government about activities in this part of the world. When production started for the Northern route [via Russia], I read articles about that, then later about the Western route. Without knowing that I would ever end up here, I was aware of what was going on.

But in terms of the people and culture, I knew next to nothing. Eighteen months ago I was working in Moscow. It was interesting that many of the Russians I worked with had actually spent time in Azerbaijan during the Soviet period. Of course, Azerbaijan was a major oil center in the Soviet era so it wasn't totally surprising that they'd spent time here.

I was not given a lot of notice about the job. An opportunity arose for John Leggate to go back to London as a result of the BP Amoco merger. In late October last year I was asked to come here. I came on a reconnaissance visit in November and arrived on the job by mid-December.

I must say that I detected an optimism in the air here that I hadn't seen in Russia - optimism from the people and the place. I think it's because the people have gained their independence and are able to express their national identity. Also, international businesses have started to come in and there are investments in oil. Although the benefits are not flowing as fast as many would like, I think people believe that ultimately things will get better. Also there has been very firm leadership under President Aliyev, creating stability and peace for several years. People have a basis for their optimism.

In contrast, I found Russia very depressing. I was there for just a year working in a Russian oil company, Sidanko, in which BP had acquired a 10 percent interest. Three of us from BP were seconded into Sidanko to introduce Western management techniques.

Russia's economy was just starting to turn around after seven years of decline. The stock market was booming. The middle class was starting to get sufficient money to buy Western consumer goods. More and more Russians were able to take holidays abroad. There was a feeling that things were going to get steadily better.

Unfortunately, by August of that year the economy had collapsed and the ruble was devalued, dropping to less than a third of its value in a few short months. Many of the Western companies that had come in and started to invest shut down their operations.

Those people who had just started to see things getting better had their savings wiped out. They had a glimpse of a better life only to have it snatched away from them. It seems many of them are convinced that Russia will always be different, that other economies will grow but Russia is destined to be exploited by some form of ruling class.

Coming to Azerbaijan, it was interesting to witness the contrast between these two countries since both of them were part of the Soviet Union. Azerbaijanis can take pride in their independence, national identity and the possibility of things improving. In Russia people see the loss of an empire and the failure of a system that they had tried to impose on others.

What are the some of the good things that you find here in Azerbaijan?

I find the people very open, very friendly. They are a well-educated and cultivated people. The country is remarkably rich in terms of its history and culture, considering its small size and population.

How do you find Georgia since AIOC has been dealing in that country as well?

I suppose it's somewhat similar in terms of a people who have had a yoke removed and gained their independence and national identity. But they don't have major oil and gas resources. I was struck when I went to Georgia recently by how poor many of the people are. In Tbilisi it's almost totally dark at night. There are a few streetlights, but if you look at the buildings, there's barely a light on in any of them. That's because they have a shortage of gas or are unable to pay for gas supplied by Russia, to generate electricity.

It's cold, though. Isn't the winter cold in Georgia?

Yes, it is. One can imagine the difficulties that people face when there's a shortage of fuel and power. Although Georgia has had a boost from becoming independent, they're still looking for ways to develop their economy.

President Shevardnadze has started to attract some Western investment, such as our activities with the Western Export Route and negotiations for the Main Export Pipeline. There are also several American companies there managing power distribution and exploring for oil and gas.

In time, Georgia will start to turn its economy around, but it's likely to take somewhat longer than in Azerbaijan before they see improvements in the standard of living and the lifestyle that I'm sure many people were expecting after the collapse of the Soviet Union.

People possibly had unrealistic expectations throughout the former Soviet Union as to how quickly their lifestyles were going to improve. It would have been naïve to think that a Communist system could transition to a democratic market economy overnight. How, in just a few years, can something be undone that people have become accustomed to over 70 years?

It's fascinating to see how a region like this will emerge from its past into what we hope will be a good future for everyone. I think most westerners here feel privileged to be part of that evolution. We focus on increasing oil production and managing the cost, but we also look for more out of our work than just increasing profits. If what we're doing is contributing to the development of the country, to the development of the democracy, freedom and a better life for the people in that country, then clearly we can feel much better about it than if we weren't making that contribution.

Let's talk about Chechnya.

No matter what the outcome is, what's happening now in Chechnya is terrible. It was only a few years ago that the people in Chechnya were involved in a war. Now they're exposed to another, very bloody war.

My personal view is that Russia is unlikely to go beyond Chechnya into Georgia or Azerbaijan. I think they recognize that the international response to that would be such that it would not be in their interests to do so.

You think that the international community would react?

This is a hypothetical question, but personally I think there would be a strong international reaction to any encroachment by Russia beyond its borders. This would be partly because of the strategy that President Aliyev and Azerbaijan have followed. There are many international companies - U.S., European and Japanese - that have made major investments here. Judging from the effort the U.S. government is putting into trying to make the Baku-Jeyhan (Ceyhan in Turkish) pipeline happen, to contribute towards the political stability of this region and ensure the flow of oil from the Caspian to Western markets, they recognize the importance of an independent Azerbaijan, Georgia and Turkmenistan.

Russia is clearly unhappy with the Baku-Jeyhan pipeline agreement, and if they can do things that make the people and leaders in the countries involved feel they have to placate Russia and involve it in their affairs, then I think they will.

On the other hand, I don't think it makes sense to try to exclude Russia from Caspian developments, from developments in Azerbaijan and Georgia. It makes a lot more sense to continue the policy that Azerbaijan has had of engaging Russian companies - in the form of LUKoil - in the developments here.

What about Iran?

As to BP Amoco's position: we are a British company and registered in the London Stock Exchange with about 40 percent of our assets in the United States. Sir John Browne has said that we intend to behave as though we were a British-American company when it comes to dealings with Iran and Libya. BP Amoco doesn't intend to do anything that contradicts the U.S. policy that prohibits American companies from doing business with such countries as Libya, Iran and Iraq.

With time, I think Iran will re-emerge into the international community. It's a major country with major resources and can't be ignored in the long term. Azerbaijan is clearly interested in being on good terms with all of its neighbors, which makes sense. Isolating a country isn't in anyone's best interest. There may be certain policies that countries pursue that one disagrees with, but it's always better to try to build a relationship, create a dialogue and attempt to influence in that way. I believe that applies to Iran as much as it does to Russia and other major countries in this region.

What about the Baku-Jeyhan agreement that was just signed at the OSCE Summit in November in Istanbul?

The Baku-Tbilisi-Jeyhan Main Export Pipeline (MEP) was an inter-governmental agreement, made between the heads of states of Turkey, Georgia and Azerbaijan. It defines the legal and commercial terms that would apply to any organization that would build such a pipeline. It describes what security arrangements those countries would provide and how to acquire land. It also defines the taxes and fees for pumping oil through the pipeline.

In other words, it enables some organization - it could be a group of oil companies - to assess whether there is sufficient interest amongst companies developing oil resources in the area to transport oil via that route. Having determined what volumes might be available for transport, one can then assess if sufficient financing can be attracted to pay for this pipeline. The cost of the pipeline is up to $2.7 billion. It would take something like 6 billion barrels of oil committed to the line to make it a commercial proposition.

The pipeline would have a capacity of 1 million barrels a day - that's the maximum rate that could be transported through it. You'd have to have a million barrels a day flowing through it for nearly 20 years paying a tariff of about $2.70 for each barrel to cover the capital and operating costs, fees and taxes.

Companies finding oil offshore Azerbaijan or transporting oil across the Caspian from Kazakhstan would probably be prepared to pay $2.70 in order to export their oil out of the Caspian. In addition, they must cover the cost of finding the oil, developing it and operating the production facilities. They have to pay taxes in the host countries plus the pipeline transportation costs. Then they have to put the oil in the tankers, take it to a market and pay the shipping, refining and distribution costs. And at the end of the day, they have to make some profit so they can pay their shareholders and have money to reinvest for further exploration. I am always struck by the oil industries' ability to do this and deliver a gallon of gas to your car for less than the price of a gallon of Coke or bottled mineral water.

If we can get a tariff in the range of $2.50 to $2.70 a barrel for the Baku-Tbilisi-Jeyhan pipeline, we believe there's a reasonable chance of attracting those volumes of oil that I've been talking about that will be needed to make the project commercial.

We're now at a point where the governments will be aiming to get a group of oil companies together into a sponsor group. That sponsor group would spend about six months doing basic engineering, which is the first stage of actually designing the line. It would find out how much oil those companies are actually able to commit to the pipeline. Then we'll see whether we can approach this 6 billion barrel figure. Towards the end of this year, we'll have a much better assessment of whether oil companies are really ready to commit this amount of oil to the system.

Within AIOC we have a certain amount of proven oil that we expect to develop. A significant amount of oil has also been discovered onshore in Kazakhstan, but this would actually be quite costly and difficult to develop. You also have to transport it across the Caspian. You would need a terminal here and then you would need to load it into that system. Six to nine months will give the companies time to figure out if they can make the whole chain commercial and whether they would be prepared to commit to such a pipeline and take an interest in it, investing in it themselves or attracting other capital.

Apart from us, there are various trans-Caspian reserves that are proven, where companies can now consider what it will cost to develop and get to Baku. Then we'll know what it would cost us to get it from Baku to Jeyhan.

OKIOC (Offshore Kazakhstan International Operating Consortium) is a group of Western companies that are drilling offshore Kazakhstan. If there were to be a discovery there, then that consortium could be interested in a pipeline from Baku to Jeyhan. The question really is, would they be in a position to commit to the line in 2000? There is a real challenge in meeting the time frame laid out in the governmental agreement, which is for the line to be operational by 2004.

In order to have it operational by then, you have to arrange for the financing and have most of the engineering done by the first quarter of 2001. During the first six to nine months of this year, we'll see how much interest there is amongst companies to use that line and hence be in a position to arrange for financing. The financing would be arranged in the later part of this year and early 2001, to enable construction to take place for it to be available by 2004.

The signing of IGAs (Inter-Governmental Agreements) in November represented a lot of hard work, certainly by the AIOC personnel who were working with the others in the Azerbaijan Working Group to negotiate agreements with Turkey. But it's only one milestone on the way towards the construction of that pipeline. It's possible that it won't happen by 2004. It may take longer to get to a point where companies are ready to commit to such a pipeline. But I do believe there's a very good chance that a million-barrel-a-day pipeline from Baku to Tbilisi to Jeyhan will be constructed eventually.

So you say the Baku-Jeyhan pipeline is possible?

Yes, indeed. But achieving it by 2004 is going to be a challenge.

It's always our concern that we should be able to maintain the pace of development of the Azeri, Chirag and deep-water Gunashli fields we're responsible for developing. We've completed the Early Oil project with the development of Chirag, but we're now producing at the capacity of that platform. To increase production, we have to move on to the next stage of field development. That requires a new export solution to transport the oil to international markets. We're currently scheduling for that next stage, what we call Phase One of the Full Field Development, to come on stream in 2004. We want to make sure that Baku-Tbilisi-Jeyhan will be available by that time, or if it isn't, that there is an alternative.

Let's talk about some of the difficulties you've faced while doing business in Azerbaijan.

Facing difficulties and overcoming them is a feature of doing business anywhere in the world, and while Azerbaijan is no exception, I would not wish to dwell too long on these difficulties when there is so much to feel positive about here. Many of the systems and ways of doing business here are part of the legacy of the Soviet past. While the PSA (Production Sharing Agreement) allows us to operate according to international standards, we still have to do business with SOCAR, the government and other agencies. To a significant extent, there's still the traditional way, the Soviet way of doing business.

There's not always a full appreciation of the need for an adequate return on investments and the care that we take in evaluating projects before we make an investment. During the Soviet era, central planners determined everything that happened throughout the country and economy. Although they attempted to assess the cost and the benefits, it just was not possible to do this effectively, which eventually led to the collapse of the Soviet Union.

So, obviously, it was a severe problem.

There are some people in positions of authority who, having developed their careers within the Soviet system, find the Western way of doing business difficult to understand. They're much more inclined to move ahead with a project once you've defined the concept, done some assessment and concluded it is economic. They say: "Get on with it." Whereas in the West, we ask, "Can we improve the profitability of this investment before we embark upon it? Do we have sufficient assurance that things won't go wrong? Have we assessed the risks? Have we found ways of mitigating the risk before embarking?"

We sometimes sense that there's a feeling among the authorities here that we're wasting a lot of time up front in these projects and that we're spending money unnecessarily on studies. In the West, companies like ours screen projects very carefully, evaluating them, refining them, making sure that we've identified the risks and found ways of managing any problems before we embark upon construction.

Which, of course, is to Azerbaijan's interest in the long run.

It's very much in Azerbaijan's interest, and not only our shareholders.

I must add that we usually do achieve a mutual understanding of the best way forward, but it takes considerable time and effort. But this is clearly a part of the process we have to go through as countries like Azerbaijan transition from a centrally planned system to a market economy.

On the other hand, we're impressed by how quickly some people here have come to understand how Western business functions.

Let's talk about your own career. Looking back, what experiences in childhood influenced what you do and what you have become today?

My father was a schoolmaster - the head teacher. Very often I went to a school where my father was the leader in various parts of the world. Originally he worked in the UK but then he started working for the Royal Air Force (RAF) as a headmaster of schools for the children of personnel. So at the age of 13, I went to Bahrain. The British still had a base there. I think that was the first time I ever visited an oil refinery. There wasn't much else in Bahrain in terms of industrial activity and so any school outings were inevitably to the oil refinery. I've still got a photo of myself sitting by one of Bahrain's oil production well heads from those days.

I was always interested in science and engineering. Oil interested me, but I never thought it would be a career. I continued to move around the world. My parents moved to Singapore and I went to school there. Then I went to university in the UK while my parents were in Cyprus.

I studied physics, but once I started doing research I felt that I didn't want to spend my career in a research lab. I really didn't know what I wanted to do, but I did know that I wanted to travel because I had done that as a child and that appealed to me. I decided to join a big company that had lots of opportunities.

I started looking into companies that might hire somebody with a science background and provide them with international assignments. Oil companies ranked high on the list. At that time in the UK, there were very few petroleum engineering courses. There wasn't a North Sea oil business so very few universities offered a petroleum engineering degree. Oil companies like BP and Shell were recruiting reservoir engineers and petroleum engineers from a wide range of engineering and science backgrounds.

I joined BP in 1970. I spent one year in London, then went up to the North Sea where they had just started gas production and were exploring up North. I worked on one of the first appraisal wells of the Forties field. Then I went to the Middle East and worked in Abu Dhabi.

It wasn't a particularly well-thought-out process that made me end up in the exploration and production business, but I was very fortunate. I just loved the work. One moment I would be at my desk, at a computer building mathematical models of reservoirs. The next moment, I would be out on a rig in the middle of the Arabian Gulf or in the middle of the North Sea testing a well-dirty, tired and wrestling with the equipment. You never get bored and it provided opportunities to go to places like Abu Dhabi, the North Sea, Aberdeen and Norway.

In terms of being a manager, I look back again at my father. Here was a school with hundreds of children plus teachers and support staff, and my father was the one running it. Perhaps in the back of my mind I felt that that was the sort of thing I should do, that ultimately I should be responsible for a large organization.

The jobs I've had and been interested in are exactly like that, where I'm responsible for a very large organization, trying to deliver extraordinary results through a group of people with a range of skills and disciplines. That's what gives me the greatest satisfaction. With my background, I'm very comfortable moving around the world and working with different nationalities and cultures.

As to personal interests, apart from work and my family, I suppose I've always enjoyed sports, whether it's swimming, rugby, football or cricket. I still go jogging every other evening just to keep myself fit and play the occasional game of tennis - doubles with my family when we are together.

Is your family here?

My family is UK-based. Since my children are in their teens, it's difficult to move them around. I have two children - a daughter, 15, and a son, 18. My wife stays with them. They come out here for holidays and I get back to the UK once every few weeks. It's not an ideal family existence, but it provides them with the continuity of schooling and friends.

They still have a lot of international experiences. They enjoy coming out here. When I was in Russia and Alaska prior to that they would also come out during the school vacations. Five years ago we were in the Middle East; they actually lived there with us and went to primary school. So they've also had some experience of different parts of the world and different cultures.

In this issue of the magazine, we're dealing with youth in the next century. May I ask what kind of advice you would give to youth facing the 21st century?

I'd tell them: Try your best at whatever you do and it will give you lots of satisfaction. It doesn't really matter how smart you are. Apply yourself, whether it's playing sports, doing your studies or doing your job. If you apply yourself, you can succeed at just about anything you attempt, and you'll derive a great deal of satisfaction from it.

I've been very fortunate with my career. This is my 30th year in BP and I could never have imagined at the start of it that it would be a career like this. This is one of the best jobs that exist in BP Amoco. I can't think of another Business Unit Leader job in the upstream business that can compare as far as the combination of technical, operational and commercial challenges. It has this layer of political complexity, too, since Azerbaijan has such geopolitical significance. We have the U.S. government, European governments, Turkey and others involved in the development of resources here and we have to interact with them, which brings an added dimension and interest to the role.

But there's this other one of making a contribution to the development of a nation. If you're in the States or Europe, you might feel like you're achieving something in your job, but it doesn't actually go far beyond that job. Whereas here, you can see how you can really impact the development of a country.

I don't think there's any other industry that can have as profound an effect on the development of a young nation as oil. What other industries could transform places like the Middle East? Take Abu Dhabi or Dubai. Thirty years ago or so they were small fishing villages and settlements.

Today they've been transformed into modern cities and states with impressive infrastructures and economies. Our work will ultimately have a substantial impact on Azerbaijan. I can't imagine what other business could do that.

I feel very fortunate to have chosen my career in a business where, although some may say that oil companies damage the environment, actually we're doing good for people. We're producing a product that everybody wants. We're increasingly concerned about the environment and other social issues. Most of all, we're able to contribute to the development of countries and making peoples' lives better, and that makes it immensely satisfying.

Azerbaijan International (7.4) Winter 1999.
© Azerbaijan International 1999. All rights reserved.

BP Amoco: Current Developments
- Tamam Bayatly
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