Summary of alliancing initiative and goals


Azerbaijan has attracted international interest by developing its potentially rich oil reserves in the Caspian Sea. It is clear that Azerbaijan's oil production will be the catalyst for the economic development of this country. Reserve numbers of the Caspian Sea petroleum production potential are being stated ranging from 100 to 200 billion barrels. Currently foreign specialists are comfortable to assume that just the Azerbaijani offshore sector contains more reserves than within the North Sea.

In September, 1994 a consortium of 11 major companies (AMOCO, BP, Exxon, Pennzoil, Unocal, Statoil, LUKoil, Ramco, Itochu, Turkish Petroleum AO, Delta-Nimir) known as Azerbaijan International Operating Company (AIOC) signed an $8 billion Production Sharing Agreement (PSA) to develop three offshore oilfields. The Contract for 30 years was dubbed the "deal of the century". Since that time 10 offshore and 3 onshore PSAs worth a total of more than $30 billion have been signed to date. The successful completion of the AIOC's Early Oil Program catalyzed the process of investing in the Azerbaijan.

Early Oil Program is completed, and it marks the beginning of a tremendous opportunity, and not just for Azerbaijan, but for the international community as well. An opportunity to not only participate in the exploration of Azerbaijan's hydrocarbon resources, but an opportunity for international contractors and manufacturers to position themselves to participate within a major developing market serving the Caspian Region, the former Soviet Union and the world market. Currently, where else in the world can an international contractor or manufacturer negotiate a fair deal, assume operations of existing facilities, tap a large pool of technical and skilled workers with proven world class performance potential and position themselves so strategically from a market standpoint.

Oil is not the only asset of Azerbaijan. The intense interest in hydrocarbon producing potential of Azerbaijan is currently reinforcing yet another significant opportunity for commercial participation there. The reality of Azerbaijan is that it is a developed country with an extensive manufacturing and offshore petroleum services infrastructure. During the days of the former USSR, Azerbaijan provided the state monopolies with 70% of all the petroleum sector equipment required. It was the center of excellence within the USSR for numerous petroleum sector technological areas, such as electric logging, seismic techniques, offshore technology, drilling equipment and etc. There are tens of thousands of engineers and skilled workers available to be employed within the petroleum sector manufacturing and services industries, upon their refurbishment and revitalization.

Therefore, it is natural and logical for Azerbaijan to strive towards re-establishing itself as a major exporter of petroleum sector goods to the international market and provider of offshore services to the Caspian Region. The country is uniquely positioned to achieve both objectives due to the great perspective reserve potential within Azerbaijan, the willingness of Azerbaijan Government and State Oil Company of Azerbaijan Republic (SOCAR) to negotiate and abide by a fair deal, the exceptional productivity and work quality demonstrated by Azerbaijan's large technical and skilled work forces and the current competitive labor cost. When all of the fore mentioned factors are brought together, then it is easy to conclude that great potential exists to create and facilitate commercially viable alliances between selected world class international firms and selected capable Azerbaijani organizations.

If structured properly and provided with an investment environment conducive to profitable operations, these ventures should successfully compete both within the Caspian Region and beyond within the international market. This is exemplified by the current operationally successful alliances active within Azerbaijan, such as Caspian Geophysical, Azfen (SOCAR/ Tecfen), MacShelf (SOCAR/ McDermott), MacDock (SOCAR/ McDermott ), Gabeg/ Azpromstroy, Azlab (SOCAR/ Schlumberger), Azeri-FUGRO and Caspian Drilling Company (SOCAR/Santa-Fe). a number of other alliances are being pursued and are in various stages of development, such as SOCAR/ Stolt Comex, SOCAR/ Brown & Root, SOCAR/ FEL/ LUKOIL, etc.

There are presently two initiatives being sponsored by SOCAR and the consortia to facilitate the formation and success of Azerbaijani/Western firm alliances. These are Shared Infrastructure Services (SIS) and Azerbaijan Industrial Development Initiative (AIDI).

Azerbaijan Industrial Development Initiative is being conducted for the Azerbaijan Cabinet of Ministers and supervised by the Coordinating Council. The initiative initially targets the Petroleum Sector Industrial Complex for re-vitalization via the formation and facilitation of ten (10) to fifteen (15) Azerbaijani/ International firm alliances. This first group of alliances is seen as establishing the model through which the Government can broaden its application to additional sectors of the manufacturing and service industries within Azerbaijan.

A number of Azerbaijani firms have been evaluated as potential candidates for alliancing with appropriate, selected International partners via a preliminary screening process to assess their respective current capabilities. Presently, the IMF, EBRD, OPIC, Japan EX-IM and US EX-IM have stated strong interest in providing project financing to the initiatives.

A key input into this process is a regional demand model based upon the approximated development programs for the existing consortia operating in Azerbaijan, Kazakhstan and Turkmenistan. This demand module lists the various main types of equipment and services required to the exploration, field development and operation activities of the known Production Sharing Agreement holders. Thus far, one hundred and forty (140) potential opportunities for manufacturing alliances have been identified.

The critical elements and issues to be brought together and facilitated to foster the commercial success of these alliances are:

Both the Shared Infrastructure Services and Azerbaijan Industry Development Initiatives have entered the initial round of partner selection and pairing.

We offer to all parties interested in taking an opportunity to participate in fulfillment of these significant programs an alliance structure for joint cooperation, which will operate under the terms of Revenue Sharing Agreement (RSA).

The Revenue Sharing Agreement (RSA) is modeled after the Production Sharing Agreement form with all its benefits and principles that allow an alliance to operate like a foreign subcontractor, avoiding the adverse tax consequences of the joint venture framework and thereby enhancing foreign investment and profitability of the resultant RSA Alliances. This is a flexible, robust alliance structure that is familiar to the Azerbaijan authorities and international contracting community. It can be structured to yield the Win-Win alliance structure, which is critical in establishing long term, stable alliances. Similar to a Production Sharing Agreement between an Oil company and Government, the RSA would aim to create the unique fixed term legal and fiscal framework for the existence of an alliance and its corporation with Azeri industry. It would be sanctioned by the Azerbaijan Government and incorporated as a national law as an alternate structure to the Joint Venture structure.

Some of the RSA's key features are:

  1. All loan and finance costs on each phase are to be repaid to the International partner before any profit distributions commence (Phased Cost Recovery is negotiable);
  2. After repayment of loans and finance costs, the profit of each phase could be distributed as negotiated and this arrangement will be reflected in the RSA.
  3. Regarding new capital, the RSA will be flexible arrangement whereby if Azerbaijani and International partners mutually agree, new participants can join the RSA and any new participation equity can be partly used to repay existing loan. This would mean that distributions can be made at an earlier date.
  4. RSA framework would provide contractor/investors with protection against changes in the laws affecting the resultant alliance.