BP Criticised for Not Keeping Promises in Azerbaijan

on Oct 12, 2012

BP (NYSE:BP, LON:BP) has come under attack from Azerbaijan’s president who accused the UK oil company of failing to meet production targets over the past three years, the Financial Times reported on 11 October 2012. The accusations come at a difficult time for BP, with the company still trying to settle liabilities with the United States over the Deepwater Horizon oil spill in the Gulf of Mexico in 2010.

**BP Accused of Failing to Meet Production Targets**
Addressing the Azeri cabinet, President Ilham Aliyev accused the BP-led consortium which operates a huge field in the Caspian Sea called Azeri-Chirag-Guneshli (ACG), of “grave mistakes” leading to an “unexpected” decline in production. He noted that BP had failed to honour promises made almost a month ago to keep output stable.

Mr Aliyev said that since 2009, the consortium, which also includes Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Statoil (NYSE:STO), failed to meet its production targets and as a result, Azerbaijan had missed out on $8.1 billion (£6.2 billion) in oil revenues. More specifically, Mr Aliyev noted that BP had forecast that production from ACG would be 46.8 million tonnes in 2009, but produced only 40.3mt; in 2010, the forecast was 42.1mt whereas output reached only 40.6mt. Last year, BP said it would produce 40.2mt, but pumped 36mt, whereas the field was supposed to produce 35.6mt in 2012 but will probably pump only 33mt.

!m[Low Output Prompts Azeri President Aliyev To Threaten Action Against The British Explorer](/uploads/story/565/thumbs/pic1_inline.png)“It’s totally unacceptable,” Mr Aliyev said in a statement posted on his website, as quoted by Reuters. “Investors who cannot stick to their obligations and contract terms must learn lessons. Serious measures are needed and will be taken.”

**BP “Fully Committed”**
In a response to Mr Aliyev’s attack, BP said that it was “fully committed to Azerbaijan,” as reported by Bloomberg. BP also noted that it was working with the state oil company Socar to “address ACG production issues as quickly as possible.” The ACG field accounts for four percent of BP’s global output and last year produced as much as 78 percent of Azerbaijan’s total output.

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BP, which is the biggest foreign investor in Azerbaijan and also operates the giant Shah Deniz gas project, struck the ACG deal in 1994 with Heydar Aliyev, former president of Azerbaijan and father of Ilham Aliyev. The FT reports that the intervention of the current Azeri president is troubling to BP, which has enjoyed good relations with the Azeri authorities. “The vehemence of the attack in such a core area of BP’s operations should raise eyebrows,” notes Peter Hutton of RBC Capital Markets, as quoted by the FT.
In addition, the ACG has the potential to become a third battle for BP, which is still trying to settle criminal and civil liabilities with the US justice department over the Gulf of Mexico oil spill. In addition, the British oil giant is currently seeking an exit from its Russian joint venture, TNK-BP.
**Familiar Scenario**
Reuters reports that Mr Aliyev’s attacks also concern BP’s partners Exxon Mobil, Chevron and Statoil, which have for years watched Russia and Kazakhstan take shares in oil projects away from Western companies accused of contract violations.
“This looks like a worryingly familiar development for energy companies in the former Soviet Union,” commented an executive at a risk consultancy company active in the region, as quoted by Reuters. “All too often it is the first step in some form of obligatory renegotiation of contract terms.” The BP-led consortium is currently in talks with Azerbaijan about extending the ACG contract to 2024.

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