October 11, 2012 7:50 pm

Azerbaijan attacks BP for missing targets

BP has come under a blistering attack from Azerbaijan’s president who has accused it of failing to meet production targets over the past three years in a move that could cloud the company’s future in a state that is a key part of its business.

Addressing the Azeri cabinet, Ilham Aliyev accused the BP-led consortium operating a huge field in the Caspian Sea called Azeri-Chirag-Guneshli, or ACG, of “grave mistakes”, which had led to an “unexpected” decline in production.

He said the company had failed to honour promises made almost a month ago to keep output stable.

The president said that since 2009, the consortium running ACG failed to meet its production targets and that as a result, Azerbaijan had missed out on $8.1bn in oil revenues. He called the missed targets “unacceptable” and threatened “strict measures”.

The intervention of Mr Aliyev, the authoritarian ruler of Azerbaijan for nine years, is troubling to BP which has enjoyed good relations with the Azeri authorities. “The vehemence of the attack in such a core area of BP’s operations should raise eyebrows,” said Peter Hutton of RBC Capital Markets. ACG accounts for four per cent of BP’s global oil output.

In a statement, BP said it was “fully committed” to Azerbaijan and was working with Socar, the Azeri state oil company, to address production issues at ACG “as quickly as possible”.

The attack comes at a sensitive time for BP. The company is trying to settle civil and criminal liabilities with the US justice department arising from the 2010 Deepwater Horizon spill. It is also engaged in negotiations to sell its 50 per cent stake in its Russian joint venture, TNK-BP. Its share price is still a third below it was before the Macondo incident.

BP was the first major oil company to break into Azerbaijan, which has vast offshore oil and gas reserves that were ignored during Soviet times but were a huge draw for the international oil industry. BP’s 1994 deal to develop ACG, concluded with Ilham Aliyev’s father, the former president Heydar Aliev, was known at the time as the Contract of the Century. ACG produced its second billionth barrel of oil earlier this year.

BP later built a 1,768km pipeline from the Azeri capital Baku to the Turkish port of Ceyhan on the Mediterranean coast which brought ACG’s oil to export markets. It also operates a huge natural gasfield in Caspian called Shah Deniz, the second phase of which will export gas to Europe.

Mr Aliyev said BP had forecast production from ACG at 46.8 million tonnes in 2009 and it had produced only 40.3mt. In 2010, it had forecast 42.1mt, but it only pumped 40.6mt: and last year output was forecast at 40.2mt but it had only produced 36mt. He said the field was supposed to pump 35.6mt this year but would probably only produce 33mt.

He said he had raised the issue of missed targets with BP last month and the company had admitted its mistakes. It had, he said, promised to amend ACG’s work programme, take measures to keep production stable and “replace the people who had committed these gross errors”.

But the promises had “not been kept”, he said. “We were always fair to all our partners – in politics and in the economic sphere,” he said, in a speech carried on his website. “We always kept our word. We expect the same thing.”

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