The Contract of the New Century: New opportunities to strengthen independence, political and economic stability
- 14 September 2017
On September 14, Baku hosted a signing ceremony of the Amended and Restated 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 Azerbaijani sector of the Caspian Sea
The statements made at the ceremony allow making predictions about Azerbaijan’s policy for the coming years and directions of its oil strategy, necessitating a re-assessment of the path from the Contract of the Century to the present day.
The Contract of the Century allowed Azerbaijan to balance its foreign policy. In the early years of independence, there was a serious gap in the region, and Azerbaijan became a "testing ground" for foreign powers that sought to secure their interests in the South Caucasus. The opportunities of pursuing a multilateral foreign policy was limited, the global struggle turning tough in nature, the tension between the US and Iran, the US and Russia, and Europe and Russia were having an immediate impact on Azerbaijan. This struggle was not just aimed at having the energy-rich region under control, but the geopolitical position of the South Caucasus further enhanced its attractiveness. Geo-strategic players in the Eurasia region were creating conflicts to destabilize the region, further exacerbating the tensions. The creation of a legal framework that would ensure access for the Caspian's hydrocarbon resources to get to the world market in such a historic environment would neutralize the pressure on the country and balance the foreign policy course, which means the historic value of the Contract of the Century. The principles of exploitation of resources and sharing of production prevented Azerbaijan from coming under influence of any extraordinary power and ensured the country’s involvement in multilateral cooperation formats. These advantages allowed Azerbaijan to build its foreign policy entirely on the development of bilateral relations. In these terms, the Contract of the Century has a key role for not only economic benefits, but also a strengthened independence.
For 150 years, Azerbaijan has been known as an oil-rich country. However, during the periods of the Tsarist Russia and the Soviet Union, our country did not receive a fair share from the allocation of resources. Only thanks to the contracts signed in the years of independence and the oil strategy which was defined and implemented by Heydar Aliyev and is being successfully continued today, Azerbaijan has been able to generate tremendous revenues from oil. Thanks to the rational use of these revenues, the country’s infrastructure (schools, hospitals, roads construction of settlements for refugees and internally displaced persons) was reconstructed, and a significant portion of oil revenues was collected in State Oil Fund for future generations. The Contract of the Century also ensured the integration of Azerbaijan into the global oil market. Azerbaijan is one of the subjects in balancing the world market; it is actively involved in the “OPEC+” format on production reduction and contributes to creation of a balance between supply and demand in the oil market by fulfilling its commitments. This increases the specific weight of the country in the global economy and on the energy market.
The increase in the SOCAR share from 11 up to 25 per cent in the production sharing, the commitment to pay the country $3.6 billion in bonus shows that Azerbaijan is maintaining its economic interests when signing oil contracts. This is clear not only in the extended oil agreement signed today, but also in other contracts on exploitation of gas fields in the Caspian Sea. It is better to let economists deal with the economic aspects of the issue. However, it’s enough to mention the fact that the current market value of 500 million tons of oil reserves to be involved in the production in Azeri-Chirag-Gunashli field is about $170 billion at current prices, Azerbaijan owning 25 percent share will earn fairly significant revenues in the next decades. This is only the revenue from the Contract of a New Century. If we add here the revenues to be earned from the development of Shah Deniz and Shah Deniz 2 fields, a fairly serious figure will emerge.
A particular attention should be paid to a factor that the Contract of the Century is not only an economic agreement, but it has serious political weight. The value of the Contract of the Century is also measured by ‘the strength of stability.’
The struggle for energy sources in the world is increasingly exacerbated, and most of the great wars going on over the past decades are caused by control over oil-rich regions and oil transportation routes. Suffice to mention the processes taking place in Afghanistan, Iraq and Syria, the Saudi-Iranian confrontation and the embargo policy’s turning into one of the major tools of exerting pressure. For this reason, the notion “there are bloodshed and instability where there is oil” is becoming stronger in the international public opinion year after year. Thanks to the successful oil strategy, Azerbaijan managed to stay aside these processes. After the implementation of the Contract of the Century, the country gained economic and political stability which continues to this day.
Although the Nagorno-Karabakh conflict gained significance as the result of the struggle for interests in the South Caucasus and control over energy resources, the Contract of the Century and Azerbaijan’s grown economic strength prevented the conflict from being used a pressure tool against our country. The growth in economic revenues led to accelerated work on military construction, the creation of an army equipped with modern weapons, which weakened the ability of external forces to use the Nagorno-Karabakh conflict to destabilize Azerbaijan. The April battles of last year showed that the wise use of oil revenues brings Azerbaijan closer to the conflict being resolved in its interests.
The extension of the Production Sharing Agreement on the exploitation of the Azeri-Chirag-Gunashli block of fields until 2050 shows that over the next decades there will be more opportunities for
a) Balancing the foreign policy course
b) Expansion of foreign policy ties not in a multilateral but in a bilateral format
c) Strengthening the country's independence
d) Increasing the significance of the country as an oil country in the world energy markets
e) Strengthening economic and political stability
f) Increased military, political advantage in the settlement of the Nagorno-Karabakh conflict.
This, in turn, depends on the continuation of the successful oil strategy pursued by Azerbaijan during the period of independence. The reaction of the US, Europe and Russia speaks of two points: first, despite the fact that relations between major foreign players in the region have worsened, they, in contrast to the end of the last century, are today interested in maintaining stability in Azerbaijan. Although the sources of this approach are different, the interests ultimately coincide. All parties that have tense relations want to see stability in Azerbaijan and see the county as a platform for dialogue of global powers. Suffice to recall the two meetings of the high-ranking military officers of Russia and the US in Baku last year.
Vugar Huseynov, Head of APA Analytical Center