BISNIS Bulletin, December 2002/January 2003
by
Michael A. Lally and Bakhtiyar Mamedov
In 2003, energy investment in Azerbaijan will move into high gear with construction of the Baku-Tbilisi-Ceyhan pipeline, the third phase of development of the Azeri-Chirag-Guneshli (ACG) oil field, and the development of the Shah Deniz gas field and pipeline. Industry experts suggest that Caspian reserves as a whole may approach those of the North Sea, with virtually every major international oil company investing in Azerbaijan. While drilling results over the past few years have disappointed analysts and operators alike, British Petroleum (BP) and its consortium partners have embarked on major spending that will put Azerbaijan on the world energy map. To develop this potential, the Azeri government has put in place more than 20 production sharing agreements (PSAs) with international oil consortia. These PSAs have provided a solid foundation for foreign investment in oil and gas-related sectors of the economy, and they mean big business for U.S. suppliers. Over $10 billion in energy-related business opportunities are expected during the next 6-36 months in Azerbaijan and the Caucasus. More than 90 U.S. companies—a 20 percent increase since 2000—are now resident in Baku, recognizing that the oil business is developing rapidly.
Given the extensive energy investment in Azerbaijan, U.S. firms can “follow the oil money” to potential sales. U.S. suppliers should divide the market into the offshore exploration, production, and service businesses, as well as onshore infrastructure and pipelines. BP is the operator in the Azerbaijan International Operating Company (oil) and the Shah Deniz consortium (gas), and the major player on the Azeri energy scene. In September 2002, McDermott was awarded additional contracts for ACG Phase Two, to include fabrication of the West Azeri and East Azeri topside decks to support drilling facilities, living quarters, power generation facilities, and other process equipment and facilities. Total expenditure for ACG Phase Three, to be tendered in 2003, is estimated at $3.6 billion. Shah Deniz, also expected to be sanctioned in 2003, will result in investment of more than $2 billion on offshore platforms, drilling services, well casing, maintenance, and other works. Companies such as Caspian Wireline Services and Caspian Oil Services have shown that small and medium-sized U.S. firms can operate successfully in this challenging business environment. BP, on behalf of its consortium partners, maintains an excellent website for its Baku-based Enterprise Center, www.ecbaku.com, which includes tips on working with BP, registering a U.S. firm as a pre-qualified supplier, and future tenders on which U.S. firms can bid.
The Baku-Tbilisi-Ceyhan (BTC) oil pipeline, officially approved in September 2002, is scheduled to load first oil in 2005 with a capacity of 1 million barrels a day. In August 2002, CCC, a Greece-based construction and project management firm, won a tender for laying pipe and construction of the Azeri and Georgian portions of the pipeline. Subcontracting for some of this work is currently under way. Shah Deniz pipeline construction will begin once the offshore gas project has been officially approved, and this may also present opportunities for U.S. sub-suppliers. An Azeri firm, Azertrans, has existing tanker offload and rail facilities in Baku. In early 2003, Azertrans will open a second tanker offload and railcar facility near Sangachal, about 45 kilometers south of Baku. Large-scale construction, particularly pre-fabricated housing and warehousing for the oil and gas industry, is being or will be bid. While all of these major projects have procurements already secured or under way, the year 2003 will bring further opportunities for U.S. suppliers.
Azerbaijan has more to offer outside the oil and gas sector. The best non-energy prospects for U.S. firms are in agribusiness, food processing and packaging, IT/telecommunications, construction, and medical equipment. Agriculture is Azerbaijan’s second-largest sector after energy, with opportunities in value-added processing and packaging. A construction boom is taking place in Baku, Azerbaijan’s capital of 3 million. Residential, and to a lesser extent, commercial construction significantly increased in 2002, and this activity is likely to continue in 2003. Telecoms/IT equipment suppliers will see a growing market in Azerbaijan in 2003. However, continued delays in the planned privatization of Aztelecom assets will limit large-scale sales in the immediate future. Baku’s small but growing middle class is increasing demand for quality health-care services, resulting in opportunities for U.S. equipment suppliers to state-sponsored and private polyclinics.
Doing business in Azerbaijan requires patience, fortitude, and a long-term view. There are many challenges to operating a business in this emerging market, although some problems are simplified by working under a PSA and its attendant privileges. Preparation, flexibility, and networking are some of the keys to getting things done in Azerbaijan. It is also important to develop a strong cadre of local talent to expand your expertise in the market. The following steps are recommended for market entry:
Michael A. Lally is commercial attaché for the U.S. Commercial Service at the U.S. embassy in Baku. Bakhtiyar Mamedov is the BISNIS representative in Baku.
========================
The
CIS Oil and Gas Summit:
Russia,
Caspian and Central Asia
March
31–April 2, 2003
Organized by: The Energy Exchange Ltd.
For more information, visit www.theenergyexchange.co.uk
-------------------------
Baku, Azerbaijan
Sponsored by: International Finance Corporation, Swiss State Secretariat for Economic Affairs, Swiss Organization for Facilitating Investment), Azerbaijan Ministry of Economic Development
For more information, visit www.invest-in-azerbaijan.com
-----------------------
June
3–6, 2003
Baku, Azerbaijan
Organized by: CaspianEvents Ltd.
For more information, visit www.caspianoilgas.co.uk
This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)