This column continues the series on the Baku-Ceyhan pipeline agreements and their fall-out. Previous articles discussed the cost guarantee agreement, the Main Export Pipeline (MEP) agreement itself, and the agreement between investors and transit states. This week, I wish to interject remarks on the role of the Azerbaijan International Operating Company (AIOC). Future articles will continue discussion of the Istanbul accords, including the Trans-Caspian Gas Pipeline (TCGP) for natural gas from Turkmenistan to Turkey and the problem of identifying sufficient oil to fill the MEP, as well as the construction contract and Iran’s recent moves to cut the cost of its swaps to the producer countries.
Aside from political protests by Russia and Iran, the only real opposition to the Baku-Ceyhan MEP has come from AIOC. It is hard to avoid the impression that until recently, the AIOC has searched more for obstacles to the MEP than for ways to overcome them.
For example, consortium officials originally said that the Azeri-Guneshli-Chirag (AGC) project would be able to produce 800,000 barrels per day but that the MEP required one million to be economically viable. Then after preliminary engineering plans were drawn up consonant with the one-million-barrel figure, the AIOC raised its viability requirement, for reasons that remain unclear, to 1.2 million. Moreover, the AIOC has never made clear in its pronouncements whether its own figures concerning AGC’s 4 billion barrel reserves (capable of producing 800,000 barrels per day) refer to proven reserves or to proven plus probable reserves. Long-term development planning is usually based on the proven-plus-probable figure; moreover, the level of reserves tend to grow over time.
Earlier this fall, the AIOC suggested that full production from AGC could be delayed until 2008. This was and is a ploy to increase the capacity of the Baku-Supsa early oil line while biding time to see whether routes through Iran become unclogged. It is now suggested that the doubling of the Baku-Supsa line become a tripling by 2002, but there is already excess production that needs to be shunted through Dagestan by rail.
If the partisans of the Baku-Ceyhan MEP may be criticized for advocating construction of a pipeline before the oil is identified to fill it, then the AIOC is equally deserving of criticism for controlling the release of data and at least giving the appearance of seeking to control the pace of field development in order to influence pipeline selection. This is not the regular way of doing business in the industry. Truth be told, the AIOC really has no reason to be concerned about throughput, given Turkish financial guarantees.
The problem is that there is no executive body that acts exclusively on behalf of the AIOC’s organizational interests within the framework of Caspian energy development. That is, the AIOC’s capacity to respond to changes in its environment is limited by the assessment of those changes by its component members, each on the basis of its own interests. This is why a great deal of organizational learning has been evidenced within the AIOC by its members, as they define issues of common interest and act jointly with reference to them, but not by AIOC itself. Emergent issues in the business environment that touch the AIOC on a strategic level only indirectly affect its individual members, which have other assets and interests throughout the Caspian region as well and so are divided and weak in formulating a response to change.
In such an organizational predicament, it is natural that the strongest and most prominent component companies in the consortium take the lead in defining the incentive structure of the consortium as a whole when faced with changing circumstances of a strategic nature. In the case of the AIOC, that company is of course BP-Amoco. Therefore it is likely that one new element driving the AIOC’s new flexibility, which led to the Istanbul accords, was the discovery of the Shah-Deniz gas and condensate field. BP-Amoco, which holds a third of the AIOC and operates the consortium for all members, is heading the effort to develop Shah-Deniz with a different consortium of seven companies. Petroleum geologists say that the gas discoveries can mitigate the volume problem in two very significant ways. First, condensate from Shah-Deniz could be added to the Baku-Ceyhan stream; this would also improve the quality of the crude. Second, it is possible that an oil rim underlies the gas column at Shah-Deniz; this would make the impact of the new discovery huge. The condensate-gas ratio at Shah-Deniz needs further confirmation. One hopes that the results will be made public so that general debate on the merits of Baku-Ceyhan may be better informed.
The various individual energy companies have shown extreme flexibility and great learning capacity in their striking of strategic alliances and innovation of unprecedented working conventions. But the AIOC as a consortium has not attempted to form any such alliances with other consortia. Only recently has it even contacted other producers to ask what quantities they might hypothetically contribute to Baku-Ceyhan. For all the talk of requiring the MEP to be commercially justifiable, therefore, one must conclude that the AIOC has done little to make the business environment in which it operates, as a consortium among consortia, more commercial. A forum is needed where a fair and impartial arbiter, trusted by all consortia and concerned exclusively with analysis, can receive information confidentially from the consortia and promote transparency without compromising industrial secrets. This is a neat balancing-act but it is not impossible. A "free market" requires circulation of information.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 62 (13 December 1999): 3–5.