31ST OIL & GAS PSA CONTRACT BETWEEN AZERBAIJAN AND FOREIGN CONTRACTORS PUT INTO FORCE
It has been published and enforced the Law signed by Azerbaijani President Ilham Aliyev on issue of permissions for realization of the PSA contract for exploration, rehabilitation, development and sharing production from block of fields Bahar and Gum-Daniz. The contact was signed on 22 December 2009 between the State Oil Company of Azerbaijan (SOCAR), its subsidiary SOCAR Oil Company and company Bahar Energy Limited (UAE).
The Law permits realization of this 31st PSA for issue and realization of governmental guarantees and commitments on it, allows to issue licenses, customs permissions, visas and other authorities to the contract participants to fasten contract implementation.
The PSA contract does not envisage subscription bonuses but contains the bonuses from an investor.
At the start of work, which a contractor should begin over 30 months, the $2 million bonus will be paid. When extraction in regard to rehabilitation part of the contract block will exceed 1.5-fold the level of 2008, a bonus in the amount of $2 million is paid. At the start of industrial production in regard to exploration part a bonus to the sum of $1 million per each 100 million barrels of oil equivalent is paid.
The contractor will also pay by $2,000 per 1 cubic km of the contract area as acre payments.
Indemnification of investments at Libor+2% rate is actually non-interest bearing loan, taking into account the bonuses, payments per acre and riskiness of its exploration part.
The contract consists of two (rehabilitation and exploration parts).
The rehabilitation part covers fields Bahar-1 and Gum-Daniz total area about 310 sq km and exploration – perspective structure Bahar-2 area 600 sq km. In regard to rehabilitation, distribution of additional production will be carried out in compliance with principle 40 % of the State Oil Company of Azerbaijan (SOCAR) and 60% - Bahar Energy limited (United Arab Emirates), which is a foreign contractor. In regard to exploration, at the first stage SOCAR will have 40%, its subsidiary SOCAR Oil Company - 12% and Bahar Energy – 48 %. From now onwards, according to schedule of R factor, total share of Azerbaijan will grow to 92% and that of the foreign contractor – will drop to 8%.
Under the contract, project stakes of Bahar Energy Ltd and SOCAR will be 80% and 20% respectively.
At the same time the contractor finances all obligations of SOCAR regards the contract. In regard to rehabilitation, its expenses are indemnified from revenue of SOCAR, if production doubles the level of 2008.
The contract period is 25 years with a possibility of its extension for another 5 years. The investment program is originally estimated at $1 bn. Remaining gas reserves in the contract block are 25 bn cu m. Bahar Energy Ltd will invest all volume of investments.
The contract consists of two parts. The first part includes rehabilitation and development and the second - exploration. Exploration concerns Bahar field. The field has structure Bahar-2 where exploration is planned.
One exploration well will be drilled on this structure over three years and another one can be drilled if necessary during the fourth year. The contract also stipulates 1.5-fold increase of production over three years compared to the 2008 index when oil production at the block reached 54,000-55,000 tons and 195 million cu m of gas.
At primary stage it is planned to drill 50 wells and repair 100 existing ones at the contract block.
According to SOCAR experts’ forecasts, pace of production on Bahar field will reduce by 15% for the next 5 years and production of condensate by 10% per year. In this connection SOCAR considers that it is possible to achieve stabilization of production and increase in remaining reserves of hydrocarbons by attracting foreign investments to implement rehabilitation and development program in the block of fields Bahar and Gum-Daniz over short term.
Gum-Daniz oilfield is located 21 km south-east from Baku. The field was put into operation in 1955. 28.897 million tons of oil and 26.995 bn cu m of gas have been extracted from the field until now.
Gas field Bahar was commissioned in 1969. For entire period of operation the field was produced 16.833 million tons of oil and 128.688 bn cu m of gas.Fineko/abc,