The Contract of the Century - a national strategy for success

18 September 2019

As we celebrate the 25th anniversary of ACG, here is the quick flashback to the glorious journey full of remarkable achievements and milestones

Since Azerbaijan gained independence in 1991, it has opened its oil industry to foreign participation as a way to fund development and, through agreements with nearby countries, promote regional stability and growth. A national strategy developed by the government was crowned with the signing of a ground-breaking Production Sharing Agreement (PSA) in September 1994 – a historic day for Azerbaijan. The PSA was signed between the State Oil Company of Azerbaijan Republic (SOCAR) and a consortium of 11 foreign oil companies from six nations for the development of an area that covered three major oil fields in the Azerbaijan sector of the Caspian Sea – Azeri, Chirag and Deepwater portion of the Gunashli field (ACG).

The ACG PSA, initially signed for 30 years and in 2017 extended until mid-century, was enacted into law by the Milli Majlis (Azerbaijan Parliament) on 2 December 1994, and became effective on 12th December 1994. This PSA represents the first major investment by Western multinational companies in any country of the former Soviet Union and has become known as the Contract of the Century.

Following ratification of the PSA the Azerbaijan International Operating Company (AIOC) was formed to implement the agreement on behalf of the foreign shareholders working in partnership with SOCAR and the government of Azerbaijan. Originally AIOC comprised 11 major foreign oil companies (BP, Amoco, Unocal, LUKoil, Statoil, Exxon, TPAO, Pennzoil, McDermott; Ramco; Delta Nimir) representing six countries: UK, USA, Russia, Norway, Turkey and Saudi Arabia.

Effective June 1999, BP assumed operatorship for AIOC.

ACG current participating interests are: BP (30.37 per cent), SOCAR (25.0 per cent), Chevron (9.57 per cent), INPEX (9.31 per cent), Equinor (7.27 per cent), ExxonMobil (6.79 per cent), TPAO (5.73 per cent), ITOCHU (3.65 per cent), ONGC Videsh Limited (OVL) (2.31 per cent).

The ACG contract is governed by a Steering Committee, which approves the work programme and specific project budgets for AIOC. The Steering Committee is made up of representatives from SOCAR, the Government of Azerbaijan, and the participating foreign oil companies.

ACG is Azerbaijan’s first offshore PSA and it signifies the institutionalisation of Azerbaijan’s new oil strategy, and the creation of a framework that provides legal stability for investors. According to the PSA, for each stage of the field development, the participating oil companies cover all development costs and recover them in the form of ‘cost recovery oil’. The rest of the oil produced is ‘profit oil’ which is then split between the companies and the State of Azerbaijan.

Contract area

The ACG oil field lies offshore Azerbaijan in the Caspian Sea, approximately 100km east of Baku. The ACG megastructure comprises a series of reservoir horizons, including Balakhany VIII and X, and upper and lower Fasila, located between 2,000 and 3,500m beneath the Caspian Sea. Total investment by the end of the first half of 2019 was more than $36 billion. To date, total production from ACG has been over 3.6 billion barrels.

The field has been developed in several phases: Chirag has been producing since 1997 as part of the Early Oil Project (EOP). This was followed by Azeri Project Phase 1 - Central Azeri where production started in early 2005. Successive Phase 2 included West Azeri, which started production in December 2005, and East Azeri, which started production in late 2006. The next ACG development phase - Phase 3 Deepwater Gunashli started up in April 2008. These phases were followed by the Chirag Oil Project, which included the West Chirag platform and first oil from the platform was achieved on 28 January 2014. The latest ACG development project is Azeri-Central-East (ACE) which was sanctioned in April 2019 and includes construction of one production platform. The ACE project is currently at the execute stage with first oil expected in 2023.

The field is currently producing around 550,000 barrels per day, which is exported to world markets mainly via Baku-Tbilisi-Ceyhan (BTC) and Western Route Export Pipeline (Baku-Supsa) routes.

International recognition

The 25-year successful co-operation between the ACG partners and the Government has demonstrated that the foreign oil companies can work with the Government of Azerbaijan and SOCAR to jointly implement a world-class project involving offshore production platforms, subsea pipelines, onshore storage and export to international markets.

This has increased investor confidence and gained international recognition for Azerbaijan as the place to do a successful business.

With ACG, Azerbaijan has developed a growing role as a highly strategic supplier of energy.

The extension of the contract

Driven by the extraordinary success of ACG’s development, the Azerbaijan Government of Azerbaijan and the ACG partnership extended the ACG contract until mid-century by signing the amended and restated agreement on 14 September 2017. The new contract was signed in Baku in the presence of H.E. President Ilham Aliyev.  

The new contract enables the government and the investors to maximize the economic benefits from ACG for Azerbaijan and the companies over the next 30 years with the potential for more than $40bn capital to be invested in this world-class field. It ensures that over the next three decades ACG’s participating companies will continue to work together with the Government of Azerbaijan to unlock the long-term development potential of ACG through new investments, new technologies and new joint efforts to maximise recovery from the field. 

People who delivered ACG

In ACG, the first – the most important – is the highly skilled people involved in its development.

While ACG has been a truly international effort involving many thousands of committed people across the world, the bulk of the work was done in the country by Azerbaijani experts and workforce.

The project provided jobs for thousands of people from the neighbouring communities  and enabled hundreds of local Azerbaijani companies to develop their capability and become suppliers to the oil and gas industry projects.

New professional skills have been learned, the local business infrastructure has significantly improved.

This capability growth has enabled the projects to undertake world class offshore platform fabrication activities fully in Azerbaijan.

In addition, Azerbaijani nationals currently comprise 90 per cent of the professional staff of BP Azerbaijan – the operator of ACG.  As part of the development of the national staff involved in ACG,  many national employees of BP Azerbaijan have acquired high professional competence taking leadership roles in BP’s UK, Iraq, Russia and other offices.

Baku-Tbilisi-Ceyhan (BTC) oil export pipeline

Internationally, the success of ACG is the strategic importance of energy from Azerbaijan.

ACG opened up a whole new route from the land-locked Caspian Sea to world markets. 

The Baku-Tbilisi-Ceyhan oil export pipeline is an important and integrated component of implementation of the ACG project.

Currently the majority of ACG volumes are carried to world markets via this pipeline. BTC is a world-class pipeline, which spans three countries and 1,768km from Azerbaijan through Georgia to the Mediterranean where a new marine terminal has been constructed at Ceyhan, Turkey. BTC is a safe and reliable route to international markets and makes the region a major international energy player.

The BTC pipeline has created substantial revenues for the transit countries and helped strengthen economic and political links between Azerbaijan, Georgia, Turkey and the West. BTC throughput capacity has been increased from its design capacity of one million barrels per day to its current capacity of 1.2 million barrels per day. To date the pipeline has carried around 3.3 billion barrels (around 440 million tonnes) of crude oil from the Caspian to the Mediterranean safely and reliably.