Another sign of the times type article about the Caspian region. Low oil prices are hurting business on all fronts....
find.co.uk
Friday February 19, 6:35 PM
Oil slump, Caspian woes jolt Azerbaijan
By Lawrence Sheets
BAKU, Feb 19 - Oil man Paul Justice is packing up his handmade Azeri rugs and collection of ceremonial daggers. He is leaving Baku and the Caspian oil business behind.
The native Texan is heading home not to dig black gold, but worms. "I figure a bait farm should be a good idea," said a dejected Justice over a farewell lunch at a local Chinese restaurant.
The portly 62-year-old, after 17 years with U.S. oil company Pennzoil and a six-year stint in Baku, was unceremoniously let go by his company in December.
"My boss came in and told me to close down my department in two weeks and to be gone in four," said the rueful public relations man, a well known personality in Baku oil circles.
He is one of hundreds of foreigners, from oilmen to bar owners, on the way out of the de facto capital of the Caspian oil business.
Rock-bottom world oil prices, combined with the risky and relatively expensive nature of Caspian projects, as well as speculation that the much-publicised wealth beneath the Caspian Sea may have been exaggerated, are the main culprits.
The exodus has brought a more sober reality to a city which has ridden a crest of oil euphoria for several years.
It poses a financial threat to Azerbaijan, dependent on oil revenue for what meagre cash its government raises, and the foreign policy of President Haydar Aliyev. Aliyev wants to use the oil card to get Western support in the long struggle against Armenia over the mountainous Karabakh region.
PRICE FALL HURTS BUSINESS
Baku had been the oil world's sexiest new address in recent years, driven by a craze over Caspian resources that in some cases was fuelled by Western governments. U.S. State Department estimates of the region holding 200 billion barrels of crude are now widely acknowledged to have been exaggerated.
The recent price crunch, in which crude prices have plummeted to historic lows of around $10 a barrel, have led some to question the wisdom of new Caspian projects, where start-up and infrastructure costs are high.
Augmenting that are recent disappointing drilling results.
A Pennzoil-led consortium, the Caspian International Operating Company (CIPCO), closed down in January after poor test results, nullifying as much as $3 billion in investment for the former Soviet republic had it gone ahead.
Another group, the BP Amoco -led North Absheron Operating Company (NAOC), is drilling its final test well after two unsuccessful initial attempts. Oil sources say it is all but certain it will shut down later this year.
Justice had been assigned to the CIPCO project for the last two years, but his dismissal was part of a general belt-tightening under way here by oil majors.
The only consortium actually producing, the $11 billion BP Amoco-led Azerbaijan International Operating Company (AIOC), has slashed spending and delayed the main part of its planned investment programme.
Former AIOC chief Terry Adams, now with British Monument Oil and Gas, said recently there was a consensus that Caspian projects were not profitable at prices below $12.
The new business atmosphere stands in stark contrast to that of the early 1990s, when oil companies banged down the door of the Azeri government to sign exploration deals.
So eager were firms to get a piece of the action that in one famous case one even concluded a deal to develop a disused on-shore field whose infrastructure included a leper colony.
Exploration contracts however, especially in risky offshore areas, do not neccessarily translate into oil production, something that was not often noted by the Azeri government as it trumpeted the deals to its mostly poor population.
A much-publicised planned major pipeline, which might cost as much as $4 billion, to ship Caspian output to Western markets has been shelved indefinitely, sources close to the project here say. Azerbaijan, the U.S. and Turkey want the route to go from Baku to Turkey's Mediterranean port at Ceyhan.
"We are just trying to keep the idea alive, let alone any thought of building it," said one official close to the talks.
But companies have not totally lost interest in the Caspian.
"Exploration can be carried out fairly cheaply. We're likely to see that continuing, but in many cases actual drilling, if oil is found, may be put on hold until a big jump in prices," said one Western oil representative in Baku.
"Eventually, Azerbaijan will get major revenues from the oil sector," said Tevfik Yaprak, World Bank Representative in Baku. "But the key word is eventually."
KNOCK-ON EFFECT ON ECONOMY
On the heels of the oil men came entrepreneurs of all types, like Englishman Kenneth Winston Barrett, who opened two British-style pubs, O'Malley's Irish Bar and Winston's.
"Business is way, way down. The foreigners are leaving, and I don't see anything changing for at least the next year or so," said Barrett, who is closing his businesses and leaving Baku after seven years.
"I'm headed to Havana. I hear it might be the next hot spot. The oil men say it isn't worth it here right now," he said.
Barrett says according to his figures as many as 2,500 foreign nationals have left Baku over the last few months. Air routes into the city are being cut as fewer foreigners are flying.
The price collapse and failure of the CIPCO consortium came at the worst possible time for many businesses which were just getting started over the last year, anticipating a boom.
Investment groups and western accounting firms have also cut staff.
Apartment rents have fallen amid the exodus. The head of one foreign firm building luxury flats over Baku Bay called the situation "very, very tough." Many new buildings stand empty.
The price fall cost the Azeri government $155 million in lost revenues in 1998. With oil its main source of income, it asked for and received $79 million in emergency funds from the International Monetary Fund to help make ends meet.
"They are still putting a brave face on things, but the reality is that the situation is pretty bleak," said one Western diplomat in Baku.
The government still forecasts GDP growth at 10 percent for 1999, but some economists are sceptical of that figure. But some see the more sober days as a positive thing.
"The pendulum swung too far in one direction. There was too much euphoria about our country. Now things are more realistic. That is the way it should be," said Saud Fataliyev, American Express managing director in Baku.
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