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Same-Day Analysis

BP Chief Reassures Azerbaijan on U.K. Firm's Commitment amid Talk of Asset Sales

Published: 07 July 2010
Embattled BP CEO Tony Hayward yesterday met with Ilham Aliyev in Baku, aiming to reassure the Azerbaijani president that BP has no plans to divest its assets in Azerbaijan despite the company's growing bill for the oil spill response effort in the U.S. Gulf of Mexico.

IHS Global Insight Perspective

 

Significance

Back on the job as CEO of BP—rather than the public face of the disastrous Gulf of Mexico oil spill—Tony Hayward travelled to Baku yesterday to reassure Azerbaijani president Ilham Aliyev that BP has no intention of selling its assets in the Caspian state.

Implications

Azerbaijan has become a core growth area for BP over the course of the past decade, with multi-billion-dollar investments in oil and gas production and transportation infrastructure, so even in BP's current dire straits, Hayward was quick to reiterate that BP remains committed to Azerbaijan.

Outlook

Far from selling any assets in Azerbaijan, BP is preparing to expand its portfolio in the country, as Hayward oversaw the signing of a deal on the key principles for a planned production-sharing agreement (PSA) for two offshore gas fields, a clear sign that BP is preparing to stay in the country for the long haul.

Reassurance Needed?

As the wolves have come out for BP, Ton Hayward, the embattled CEO of the company, has now been forced to take on another uninviting role. For much of the past 78 days, Hayward has been disparaged in the press as the public face of BP, which has taken the brunt of blame for the disastrous oil spill in the Gulf of Mexico (GOM) following the explosion and sinking of the Deepwater Horizon rig. Several ill-advised comments put Hayward under even more political pressure, but in the past two weeks Hayward has shifted gears, returning to London (United Kingdom) to take over the reins again as BP's chief executive while handing responsibility to Bob Dudley, the former CEO of TNK-BP, for the company's critical oil spill response efforts.

Hayward may be back on more familiar ground, but he is finding that his job now includes new responsibilities, the main one of which is convincing investors and sceptical foreign governments about BP's ability to remain a going concern. As BP's costs for the oil spill response continue to mount, speculation continues to percolate on whether the beleaguered U.K. firm could become a takeover target. BP has attempted to shore up its finances and boost its liquidity by lining up stand-by credit in a show of strength, and yesterday the company insisted that it has no plans to issue new shares in an effort to raise more money. Still, as the firm continues to haemorrhage money with the GOM oil spill response, investors remain wary.

Azerbaijan in Focus

In an effort to calm nervous investors and reassure questioning foreign governments, Hayward has embarked on what amounts to a "listening tour" of BP's important country partners. Last week, Hayward travelled to Moscow to sound out concerns from Russian policymakers about BP's commitment to Russia, where the U.K. firm is a 50% stakeholder in TNK-BP, the country's third-largest oil producer, and yesterday Hayward went to Baku, the capital of Azerbaijan. In a meeting with Azerbaijani president Ilham Aliyev, Hayward "reiterated BP's commitment to Azerbaijan and to continuing successful cooperation with the government and [Azerbaijani state energy firm] SOCAR," according to a BP statement.

Aliyev was no doubt concerned about BP's intentions regarding the company's assets in Azerbaijan, particularly amid rumours that the U.K. firm—the largest foreign investor in the Caspian state—could potentially sell some of its assets as part of a plan to raise cash to fund the oil spill response (see Azerbaijan: 28 June 2010: Gazprom Interested in BP's Stake in Azerbaijan's Shah Deniz Field). SOCAR president Rovnaq Abdullayev said that BP "remained faithful" to the company's projects in Azerbaijan (see sidebar) and "would do everything for their further development." Aside from being the largest shareholder in both of Azerbaijan's main oil and gas production projects, BP has also been a major force behind the construction of infrastructure to allow Azerbaijan to export this output, shepherding through the Baku-Tbilisi-Ceyhan (BTC) oil pipeline project as well as the South Caucasus gas pipeline (SCP) project.

Key BP Producing Assets in Azerbaijan

AIOC: BP holds a 34.14% stake in Azerbaijan International Operating Company (AIOC), the consortium that is developing the Azeri-Chirag-Guneshli (ACG) group of fields. BP is the operator and holds the largest stake in the consortium, which is far and away the largest oil producer in Azerbaijan. Oil production from ACG accounts for approximately 80% of Azerbaijan's oil production, which is just over 1 million b/d/.

Shah Deniz: BP has a 25.5% stake in the Shah Deniz consortium. BP is the commercial operator and joint-largest stakeholder (alongside Statoil) in the consortium, which is developing the 1.2-tcm Shah Deniz field in the Azeri sector of the Caspian Sea. The Shah Deniz field is the largest gas field in Azerbaijan. Initial production began in early 2007, transforming Azerbaijan from net gas importer to net exporter, and with the second phase of development of the field expected to add another 20 bcm of gas production, Azerbaijan is poised to become a regional gas export powerhouse on the basis of Shah Deniz.

Perhaps the clearest sign of BP's commitment to Azerbaijan, however, was in Hayward participating in the signing of a deal on the key principles underpinning a new project. BP and SOCAR signed a memorandum of understanding (MoU) in July 2009 to explore and develop the Shafag and Asiman structures in the Azeri sector of the Caspian Sea (see Azerbaijan: 14 July 2009: BP Signs New Exploration MoU with SOCAR for Block Offshore Azerbaijan). Yesterday, Hayward oversaw the signing of a deal between SOCAR's Abdullayev and BP Azerbaijan president Rashid Javanshir taking that MoU to the next stage, paving the way for the start of negotiations on a potential production-sharing agreement (PSA) for the two offshore gas fields, located about 125 km south-east of Baku.

Outlook and Implications

Azerbaijan is a core business centre for BP, with forecast growth in oil and gas production from the company's assets in Azerbaijan expected to play an important role in BP's strategy going forward. Whereas before Azerbaijan was slated to be a major driving force in BP's growth plans, now the company is counting on the country to help it weather the current storm and, eventually, power its recovery. Some reports suggest that the State Oil Fund of Azerbaijan (SOFAZ) could even become an investor in BP as the company looks to new investors to shore up its weak flanks.

On the other side of the coin, BP is of paramount importance to Azerbaijan, as the company has played a key role in the "oil strategy" for developing the country's economy in the post-Soviet years. BP has been the driving force behind Azerbaijan's main oil and gas production and transportation projects, the key that drives the engine to the country's petroleum-fired economic boom. BP's investment in Azerbaijan's social and human capital has also contributed greatly to the country's development in the more than 15 years since the 1994 signing of the "Contract of the Century" for the Azeri-Chirag-Guneshli (ACG) project. BP came to invest in Azerbaijan in the country's time of need; the question now is whether Azerbaijan will do likewise for BP.
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