Azerbaijan hit by oil slump
Copyright © 1999 Nando Media
Copyright © 1999 Reuters News Service
By LAWRENCE SHEETS
BAKU (February 18, 1999 7:55 p.m. EST
nandotimes.com) - Oil man Paul Justice is
packing up his handmade Azeri rugs and his
collection of shiny 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-publicized
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 meager 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 fueled 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 major oil
companies.
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
program.
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-publicized 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 skeptical
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.
nandotimes.com
If the Caspian region doesn't produce as much as had been expected and if the field off West Africa takes too long to come in, will the shortage of crude develop then? If it costs $12 to produce Caspian oil, there is little rationale to compete with Arabian oil that costs far less.
Long term forecasts say that eventually the price of oil will be forced to rise because of the growth of the world population and economic progress now that socialism has been discredited. New sources of crude oil are getting more difficult to develop or are in politically unstable areas which may make future oil supplies problematical. I believe Saudi Arabia is looking forward and preparing the world oil market for the time when they may be able control the price of oil again as they did in the 1970s. But how long will that take? Certainly not months, but how many years? In these times with plentiful oil cheaply produced, when OPEC tries to cut production, non-OPEC producers increase their production and OPEC members lose market share. Saudi Arabia has found that when it cuts production and oil prices rise, ethically challenged OPEC members are provided even more incentive to cheat. I wonder whether Saudi policy is now to keep oil prices down for as many years as is necessary to get everybody else's cheap oil out of the ground, leaving Saudi Arabia once again sitting on the world's largest and cheapest reservoir of oil.
Here are my reasons why I believe Saudi Arabia is forcing the price of oil down now so that eventually world oil prices can be greatly increased.
1. Drive marginal oil producers out of business.
2. Cut capital spending by major oil companies, have them lay off personnel which may be difficult for them to hire back if oil remains low long enough. The job market is supposed to be tight in the USA and this might be the best time to do this before the next recession.
3. Damage rival Iran as well as punish it for defying OPEC's agreement to cut production. Iran decided to cut from an artificially high level of production which it had never achieved but was authorized by OPEC to reach in the October 1997 agreement. Iran didn't have time to ramp up to that level by the time OPEC decided to cut from its agreed upon 10% increase level. Iran has the second highest OPEC quota, 3.3 million barrels, compared to Saudi Arabia's quota of 8 million barrels. I think Saudi Arabia foresaw the coming glut of oil after the collapse of the Asian economies and got OPEC to increase all members' production quotas so that it could greatly increase its own production.
4. Punish Venezuela for deliberately cheating on its agreed upon level of production that it promised to maintain but quietly and constantly broke over the years, despite Saudi Arabia's complaints. Saudi Arabia and Venezuela compete for the huge US oil market. Venezuela has recently whined that it will contact Mexico, Norway, Russia, and other oil exporters on its own to try to get some agreement, but Saudi Arabia is the 800 pound gorilla.
5. Make use of the UN imposed quota on Iraq which sets a dollar limit rather than a volume limit of Iraq's oil exports. As long as the price of oil can be driven lower, Iraq will be allowed to produce and export more oil than before. It still does not export as much as it did before it invaded Kuwait in 1990 and Saudi Arabia grabbed Iraq's markets and production quota at that time. Saudi Arabia has also called for the UN oil restrictions to be removed which would also help it to drive down the price of oil.
6. Encourage wasteful energy consumption practices and policies throughout the world which will be difficult and costly to undo, once it is decided to drive oil prices up. Tremendous progress continues to be made in energy conservation and development, but which is slowed by long term extremely cheap energy.
Charles |
