BP clinches long-awaited contract extension at ACG
Thursday, Sep 21, 2017
After years of drawn out talks, Azerbaijan and a BP-led consortium have agreed to extend the production-sharing contract (PSC) for the ex-Soviet republic’s largest oil asset up to 2050.

The Azeri-Chirag Deepwater-Gunashli (ACG) fields form the bedrock of Azerbaijan’s oil-driven economy, accounting for 80% of national crude production. Last week’s landmark agreement is expected to unlock over US$40 billion in investments over the next 32 years, helping to slow down the rate of output decline at the ageing deposits.

Under the revised PSC, the project’s foreign investors will pay a one-off US$3.6 billion signing bonus to the Azeri government. Azeri state oil company SOCAR will raise its stake in the project from 11.65% to 25%, while BP’s share will drop from 35.8% to 30.37%. The British major will remain operator of the fields, however.

Meanwhile, Chevron’s holding will shrink from 11.3% to 9.57%, while Japan’s Inpex will lower its stake from 11% to 9.31%, Norway’s Statoil will cut its share from 8.6% to 7.27%, ExxonMobil from 8% to 6.79%, Turkish Petroleum from 6.8% to 5.73%, Japan’s Itochu from 4.3% to 3.65% and India’s ONGC Videsh Ltd (OVL) from 2.7% to 2.31%.

BP and its partners signed the original PSC for the ACG fields in 1994, dubbed “the contract of the century” for its transformative impact on Azerbaijan’s economy. This agreement had been due to expire in 2024.

“Finalising the contract extension is fitting recognition of the value that ACG represents – not only for BP and its partners but also the Azeri economy,” Wood Mackenzie analyst Laura Bennie said in a statement. “The combination of the extension, bonus payment and increased SOCAR stake looks like a balanced outcome.”

Situated around 120 km off the coast of Baku, the ACG fields have already yielded over 3 billion barrels of oil since commercial operations began in 1997. Wood Mackenzie estimates that a further 3 billion barrels will be extracted between now and 2050.

Output at the deposits has been flagging ever since it peaked at over 820,000 bpd in 2010, averaging just 585,000 bpd of crude in the first half of 2017. BP is expected to launch a seventh platform at the site – Azeri Central East – in the 2020s, helping to slow down the rate of production decline. The project is pending a final investment decision (FID).

“The long-term trend will be decline, but there will be sustained high investment to make the decline as slow as possible,” Ashley Sherman, a senior analyst at Wood MacKenzie, told NewsBase Intelligence (NBI). He added that future output would depend largely on drilling levels and reservoir performance.

According to Sherman, the Azeri Central East platform will likely have a similar capacity to West Chirag, which was brought online in 2014 and averaged an output of 120,000 bpd last year. Wood Mackenzie estimates that ACG will still be producing around 500,000 bpd at the end of 2024.
BP head Bob Dudley was quoted as saying by Reuters last week that the new deal at the fields was profitable at current oil prices, despite the signing bonus and reduction in its share.

“ACG has taken great strides in cost optimisation,” Sherman told NBI. “Operational costs are half what they were in 2014, and the goal of the consortium is to make as many of those savings stick.”

The Edinburgh-based research house does not expect any older platforms at ACG to be decommissioned until towards the end of the new contract period.

“There will be an investment focus on extending the life of all platforms for as long as possible,” Sherman said.

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