The Caspian Oilfields Development Project - Essay Example

? The Caspian Oilfields Development Project Project Assessment Task  The Caspian Sea region has the potential to export oil and natural gas to Europe, South Asia, and East Asian. With rising gas and oil prices and growing worldwide demand for oil and natural gas, Caspian region countries including Russia, Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, and Iran are developing several measures for improving exports of oil and natural gas. Some countries cooperate and jointly develop oil export capacity, while others focus on attracting enough investment to create their own routes. The oil and gas industry in the Azerbaijani is controlled by the major company State Oil Company of the Azerbaijan Republic (SOCAR). SOCAR also acts as the major rights holder in the oil and gas industry. It also acts as a government mean to control the oil and gas sector in the state of Azerbaijani. Oil exploration in the Caspian sea began in the year 1992 when the Kazakhstan government announced an oil exploration project in the Caspian sea. The Caspian Oilfields Development Project has an oil exploration scope of operation in the whole of the Azerbaijan state. The area under the project is broken down into oil fields all of which are controlled by the government through the SOCAR. The oil fields include Chirag Oil Project (COP), Azeri-Chirag-Guneshli (ACG) field, West Azeri, East Azeri, Deep water Gunashli, Baku-Tbilisi-Ceyhan (BTC), Shah Deniz, and South Caucacus Pipeline and Itochu Oil Exploration (Azerbaijan). Most of the oil fields are based in the sea region. This crude oil pipeline stretches 1,768km in length from Baku in Azerbaijan to Ceyhan, Turkey on the coast of the Mediterranean Sea by way of Tbilisi, Georgia and can handle 1.2 million barrels of oil per day. The project has a direct and immediate control of the Caspian Sea where there have been oil discoveries. The scope of operation of all the contractors is based on SOCAR grants to the Contractors the sole and exclusive right to conduct Petroleum Operations within and with respect to the Contract Area in accordance with the terms of their Contracts (including those terms set forth in Article XV of the Azerbaijan constitution) and during the term thereof. Budgeting on the Caspian oilfields development project depends fully on the current financial results and the oil developments in the area. If new wells are discovered then additional capital is required to drill the oil and gas (CEE Bankwatch, 2012, pg 43). . With first three stages as rolled out in the country’s strategic programme completed and 7 operational platforms functional, total production from Azeri-Chirag Guneshli is more than 1 million barrels (160,000 m3) a day. As per BP's report, Chirag had 19 wells in operation with an overall production of 105,300 bbl/d (16,740 m3/d). Central Azeri had 18 wells with production of 185,800 bbl/d. West Azeri (WA) had 18 wells in operation (14 of which are oil producers and 4 - water injectors with production of 275,200 barrels per day (43,750 m3/d). East Azeri (EA) had 13 wells in operation with overall production 139,400 barrels per day (22,160 m3/d) for the first three quarters of 2009. Deep Water Gunashli had 17 wells (9 oil producers and 8 water injectors) in operation with production of 116,400 barrels per day (18,510 m3/d) of oil. Since 1995 the Government of Azerbaijan together with IMF and World Bank have implemented structural adjustment and sector oriented programmes. The oil sector has been recognized as promising in that the sources of Azerbaijani medium term development projected that at end of the millennium GDP will double based on income from the oil sector. The government budget greatly relies on oil revenues for financial soundness. On average, it makes around 50% of income in the budget. The Bp company currently holds a stake of 34.13% as a mean of the stakes in all the oil fields where it is hugely significant. The structure of the early oil and full field development projects began with the presidential decree of 1994 which gave the State Oil Company of the Azerbaijan Republic (SOCAR) authority to sign the contracts with oil extraction companies to drill, process and sell energy either nationally and internationally (Badalova, 2009, pg. 43). The government is indirectly involved in the gas and oil industry through the State Oil Company of the Azerbaijan Republic (SOCAR). The State Oil Company of the Azerbaijan Republic (SOCAR) is directly involved in dealing with the contractors and also in the market. The State Oil Company of the Azerbaijan Republic (SOCAR) has the strongest authority in the oilfields which gives it a better view of the market and enabled it to advise the government accordingly on the business trends in the Oil sector and also briefs the government on how to tax the Oil companies (Financing Development, 2008, pg. 22). The contracts are signs giving out the rights, warranties and privileges to the contracted companies to the aspects of drilling, exploration, selling and distribution of gas and oil products. Currently, the government has changed its stand on the issue pertaining the holding of stakes in the oilfields and have allowed the private contractors have a huge share of the oil and gas sector in the economy whereby the Bp contractor has taken over the State Oil Company of the Azerbaijan Republic as currently holds the largest stake though its activities are closely monitored by State Oil Company of the Azerbaijan Republic (SOCAR) (Tarel Gusep, 2008, pg. 43). The structure can be presented as: (c) Explain how the project has been financed to date, including which financial instruments have been used and why those instruments were chosen.  Financing of the project has majorly been through the private contractors who sign agreements with the government through the Azerbaijan International Operating Company (AIOC) to regulate their oil explorations, drilling, processing and sale. According to the World Bank, the total investments for Caspian Oil and Gas Exploitation are about USD 140-200 billion, and the private sector is the main source of those available funds. The International Financial Institutions have worked heavily since 1994 to ensure non-public investments and political risk reduction in the energy sector, with particular interest in South Caucasus (Scott, 2007, pg.54). It includes reducing the risk through institutional, policy and legal improvements, as well as through “the involvement of government agencies, which can give a unique degree of protection to private investors – a so-called “halo effect,” that according to IFIs should have “particular value...in the Caspian region, where capital market availability is fragile and relations with other governments are highly important. The biggest reason for the heavy investment through the private sector is majorly because of the economic status of the country whereby most of the people in the country are living under the poverty line. The government has also been coined with heavy corruption which would interfere with the public dealing with the oil industry (Marco, 2004, pg. 56). Money would be lost if the government was to be directly involved with the drilling of the oil. d) Make recommendations to the board as to whether BP Amoco’s 34.1% (US$2.8billion) stake in the Full Field Development Project should be funded using corporate finance or project finance, giving the full reasoning behind your decision (40marks) In Corporate Finance (balance sheet finance) lending decisions are based on the balance sheets where cash flow and company assets are looked upon to service the debt facility. In Project Finance the lender places weight on the stand-alone project itself. This creates a great opportunity to project owners seeking to advance their project on the merits of the project itself against the projects sustainable revenues and management of risk that underpin the projects inherent viability. Most companies across the globe use the project finance to finance their huge investments. Contrary to the many companies across the globe, I would advise the board of Bp Amoco to fund the project using the corporate finance. Firstly, it is because the sum required for the expansion of the Full Field Development project is a huge amount to be funded through the project funds (Esty, 2000 pg. 43). The sum would lead to the plummeting down of the project funds which would otherwise be used for other smaller projects. Using the project funds would also lead to reduction in the company’s operating cash which would lead to cash crisis in future. Secondly, in Corporate Finance the lender has a potentially improved source of cash flows from which to acquire payments. Since Project Finance company are first and leading debt economics (Esty, 2005), we implant the option of Project Finance versus Corporate Finance in a reproduction of debt financing comparable to that in Hart (1995). Since the pool of property and cash flows is better, but less provable, in Corporate Finance, creditors’ human rights play a more important role in Corporate Finance. Specifically, the lender’s believable threat to follow up security matters more with Corporate Finance, where cash flow is less demonstrable and borrower optimism is therefore more probable. The threat of insolvency serves to deter this opportunism. Furthermore, Project Company invests in solitary, discrete property. Therefore, tradeoffs between inefficient continuance versus unproductive liquidation that arise from the attendance of future increase opportunities and typify bankruptcy in Corporate Finance ( Gartner and Scharfstein, 1991) are not present in Project Finance. Secondly, using debt will improve the capital base of the company. The company will be able to apply hi tech technology in drilling the oil and gas and is therefore likely to gain from the more capital. References Financing Development of the Caspian Oil Fields in Project Finance Casebook, pp21-36. Scott Hoffman, The Law & Business of International Project Finance (3rd ed. 2007, Cambridge Univ. Press). Esty, Benjamin C., and Michael Kane. "BP Amoco (B): Financing Development of the Caspian Oil Fields." Harvard Business School Case 201-067, January 2001. (Revised May 2010.) (20 September 1994 )Agreement on the joint development and production sharing for the azeri and chirag fields and the deep water portion of the gunashli field in the azerbaijan sector of the caspian sea. 1996-2013 BP p.l.c. available at www.bp.com A.Badalova (2009-08-18). "Azerbaijani oil field third in IHS CERA ranking of world's 20 largest oil fields". Trend News Agency. "Recoverable reserves at Azerbaijan’s Azeri-Chirag-Gunashli fields estimated at nearly 1 billion tons". Today.az. 2009-09-02. Vladimir Socor (2007-05-09). "Caspian gas plentiful now for Nabucco pipeline project". Eurasia Daily Monitor 4 (92) (The Jamestown Foundation) "BP reports over 1 bn barrel of oil production in Azeri-Chirag-Guneshli field" 14 (8). Alexander's Gas and Oil Connections. 2009-04-15. Marco Sorge, The nature of credit risk in project finance, BIS Quarterly Review, December 2004, p. 91. Tarel Gusep. Translated by Theresa Murphy (2006-01-13). "West Azeri platform of the Azeri-Chirag-Guneshli offshore oilfield commences oil extraction". Caucaz europenews. Retrieved 2009-11-24. CEE Bankwatch Network? (April, 2002) Who are the Real Beneficiaries of Oil Infrastructure Development in Georgia and Azerbaijan Digital sources: www.businessmonitor.com/EuropeOil&Gas en.org/wiki/Azeri–Chirag–Guneshli? Read More