When patience yielded rewards
The two big new oil projects on either side of the Caspian Sea –the Baku-Tubilisi-Ceyhan (BTC) pipeline taking Azerbaijan oil to Turkey and the near doubling of output from Kazakhstan’s Tengiz oilfield- are similar in one respect. They will both cost around $3bn.
But the very different way in which the two projects are to be financed shows how different the relationship between state and international oil companies is in Azerbaijan and Kazakhstan, and how, in the former country, involving international finacial institutions such as the European Bank for Reconstruction and Development can bring greater transparency.
Traditionally, the oil majors finance big projects off their balance sheets. But the 10 oil company shareholders in the BTC pipeline have decided otherwise. Some $1.7bn (out of the total $2.9bn) is to be raised in external debt, with most of that coming from commercial banks, with the balance from the London-based EBRD and the International Finance Corporation in Washington.
There are several reasons for this. One is that pipelines are relatively easy to raise money for this. One is that pipelines are relatively easy to raise money for; they are backed by the volume of oil committed by the companies, and are not subject to oil price risks.
In the BTC case, the most immediate reason is that consortium borrowing will help Socar, the Azeri state oil company, borrow money to fund its 25 per cent stake in the pipeline. This is the second largest stake behind BP (30 per cent) and reflects the considerable amount of “profit oil” that Socar will receive from the offshore Azeri-Chirag-Gunashli (ACG) fields feeding the pipeline.
The main motive for involving the EBRD and IFC is to help cover the political risk inevitable in a 1,000 mile pipeline which will cross Azerbaijan and Georgia, and which has attracted a fair amount of critism from environmental and even human rights groups.
The commercial banks rest easier with the involvement of these international financial institutions, which are better placed to intervene, if need be, with governments. Since the BTC loan is needed for essentially non-financial reasons, its raising has been allowed to lag behind actual BTC construction, which is already underway.
Negotiating the commercial bank loan is comlicated by the fact that it will be backed by export credit agencies form the US, UK, France, Germany and Japan. The loan is expected to be finalised by mid-summer. Despite this, buying of pipe and other goods and services for BTC has proceeded, while the richer BTC shareholders are carrying Socar’s share.
In contrast to Azerbaijan, which has secured increasingly good terms by negotiating most of its production sharing agreements (PSAs) fairly recently, many of Kazakhstan’s PSAs date back to the early 1990s. At that time foreign companies could argue political risks were high and therefore drove a fairly hard bargain with the Kazakh government.
The latter, at all events, has recently been trying to compensate, particularly in negotiations relating to the Tengiz expansion by the Tengiz Chevroil consortium, composed of ChevronTexaco with 50 per cent, ExxonMobil 25 per cent, KazMunaiGas 20 per cent and LukArco 95 per cent).
A row developed last autumn when the western partners proposed financing the expansion out of reinvested profits which, according to their PSA depreciation schedule, would not be taxed. The Kazakh government which depends on oil taxes for a third of national revenue, said this was out of the question, arguing it had already budgeted for the tax revenue and telling the western companies they should fund Tengiz expansion with commercial loans.
In January, after a two-month standoff that halted the Tengiz expansion, a compromise was reached. The western companies did not appear to give way on the principle of depreciation, but agreed to compensate the Kazakh treasury by paying in an extra $600m over the 2003-2005 period.
But they also agreed to carry KazMunaiGas’ share of Tengiz expansion by raising commercial loans. In addittion, ChevronTexaco agreed to pay the Kazakhs the $210m it owed for its 1998 purchase of Tengiz assets.
The deal seemed to satisfy both the government’s cash flow needs and the companies’ insistence on the sacrosanct nature of their PSA. But the row itself also underscored growing concern about the diminishing value of PSAs to governments, not only around the Caspian but in many developing countries.
Yet the hard bargain which some companies drove with the Kazakh government was allegedly accompanied by certain private sweeteners. In corruption charges brought against james Giffen, an erstwhile US oil adviser to the Kazakh government, US procecutors allege that Mr Giffen funnelled US oil money into bank accounts of senior Kazakh officials, including the president.
(By David Buchan from Financial Times, 29/04/03)