In The World is Not Enough, James Bond races to the Azeri oil fields to protect a crude oil pipeline heiress whom he believes to be marked for death by terrorists. In the real world, Caspian Sea pipeline proposals themselves could use some 007-style help. International oil and gas companies operating in Azerbaijan and other former Soviet Union republics face a nagging lack of infrastructure, political conflicts, early exploration disappointments and expensive drilling contracts. Duff & Phelps Credit Rating Co. reports Azerbaijan produced half the world's oil at the commencement of the 20th century, yet the former Soviet republic today has recovered less than 4% of its total oil reserves, estimated at around 38 billion barrels. "As far as development of that region is concerned, it's quite an unpredictable timeline. I wouldn't expect it to be imminent," says Aidan Cheslin, a DCR analyst in London. "There has got to be greater pipeline capacity before companies can actually start production." Leaders of Azerbaijan, Kazakhstan, Georgia and Turkey late last year signed declarations supporting a crude oil pipeline from Baku to Ceyhan, Turkey, while a similar accord was signed for a trans-Caspian gas pipeline from Turkmenistan. But despite the politicians' fanfare, industry observers agree these pipelines are years away from financing, much less a ribbon-cutting ceremony. "I think the oil companies are a little more sanguine about what can and can't happen in the Caspian," than in the past, says Amy Myers Jaffe, senior energy analyst at the James A. Baker III Institute for Public Policy at Rice University in Houston. In December 1999, Socar (the State Oil Company of the Azerbaijan Republic) announced it had 17 deals with foreign oil companies, worth more than $50 billion in potential investment, to develop Azeri oil and gas reserves. Cheslin expects "an eventual push into the production phase," but this hinges upon completion of a new pipeline or pipelines before the landlocked Caspian oil has a viable path to world markets. Attractive oil prices are necessary to bring projects to production, too. DCR anticipates that production volumes of several tens of million barrels of oil per day could be sustained for a decade, or longer at a lower production volume, Cheslin says. DCR issued a written report on the Azeri oil industry last spring, and Cheslin talked with Oil and Gas Investor after the signing of the pipeline accords. He emphasizes that the oil price collapse of 1998 and early 1999 created an inertia in the region. Future oil price drops would further stall development there. In late December 1999, Azerbaijan and the 10-member Azerbaijan International Operating Co. (AIOC) sold the first oil for profit from the consortium's one producing offshore field to TotalFina, which won a tender to buy the first "profit oil" from Socar. Oil for profit began flowing in fourth-quarter 1999 once the consortium paid off its operating costs incurred to date. Future revenues will be split, with half the money considered profit and half going to cover expenses. Azerbaijan will receive 30% of profits for now, and its portion will increase during the life of the $10-billion-plus contract. That contract was heralded as the "contract of the century" upon its 1994 signing. Azeri presidential advisor Ali Asadov calls the first profit oil "an enormous positive" for his nation, which hopes to earn up to $100 million from the consortium's oil sales in 2000. Edinburgh, Scotland-based Wood MacKenzie reports foreign operating companies must carry Socar's share of costs during the exploration phase of offshore projects. The Socar share is in addition to the foreign companies' own equity share of well costs. "Between them, Exxon and Mobil are likely to spend more than US$190 million in direct drilling costs to meet their contract obligations-and this will only be the first step towards determining the commercial potential of their assets," Wood MacKenzie reports. The cost of the Socar carry to the contractors is directly proportional to the level of Socar equity and ranges as high as 50% in some of the latest major contracts, compared with 10% in the earliest contracts. If wells are commercially successful, exploration costs will be recoverable against field production but the exploration costs must be viewed as part of the companies' near-term financial exposure. Exxon Mobil has shares in five exploration production sharing contracts. Socar has a 50% holding in four of those, while Exxon Mobil holds equity shares ranging from 30% to 50%. "As a single entity, it will be most exposed to the exploration risks evident in the province and [these contracts] are thereby demonstrating a high level of confidence in the potential of the offshore basin," Wood Mackenzie reported, concerning the merger of Exxon and Mobil. The risks partially are offset by established production and revenue provided by Exxon Mobil's 8% equity in the Azeri, Chirag, Guneshli (ACG) offshore fields complex, which is operated by BP Amoco, leader of the AIOC. Exxon Mobil Corp. chairman and chief executive Lee Raymond says it's hard to be critical of the progress that the AIOC has made in getting production to a level where "we are limited by our ability to transport the crude out, as opposed to [being limited by] the producing facility itself." "We're also pleased that we made the decision a couple of years ago to construct two alternatives, one out through Supsa and Georgia, as well as one up through Chechnya, which as you might expect would be difficult under the current [war]. "We strongly support developing the next phase, and finding a pipeline alternative which is economic, and we hope we will be able to do that with the operator, BP Amoco, leading the way, in the near future." BP Amoco has lower exposure to exploration costs than Exxon Mobil because BP Amoco had early entry to contracts with lower Socar equity and also because BP Amoco's equity holdings are between 15% to 25.5%. This excludes BP's 34% equity in the established ACG fields. "Both the super majors are heavily committed to Azerbaijan and in particular to oil exploration success in the deeper offshore basin," the report says, adding the super majors' financial strength allows them to carry such exposure. Wood Mackenzie says foreign operators are evaluating existing assets and that BP Amoco appears to be one to two years ahead of Exxon Mobil. During 1999, a consortium led by BP Amoco announced a wildcat well discovered significant gas and condensate at the Shah Deniz field. Houston-based Conoco closed its Baku office upon failing to reach a commercial-terms agreement with British oil explorer Ramco Energy Plc and Socar over development of Guneshli, an oil field currently producing 65% of Azerbaijan's own oil. "We wish the Azerbaijan government and Socar success in arresting the production decline of Guneshli and restoring it to profitability," Archie W. Dunham, Conoco's chairman and chief executive office, said, in the news release. London-based Ramco has rights of first refusal to the shallow-water developed portion of the Guneshli Field, operated by Socar. "So, all rights to that field have actually reverted back to Ramco," says Lisa J. Newman, Ramco director of corporate affairs. "...It's still in need of rehabilitation so we are still continuing negotiations with Socar to find a mutually acceptable partner to move forward. There has been a lot of interest from other parties." Ramco is far from discouraged; it has been doing business with Azerbaijan since 1989. "We are very close to the state oil company and very close to the government. We introduced BP, Statoil and Pennzoil [whose Azeri E&P interests now belong to Devon Energy] and carved out a unique position," Newman says. "We're not finding a problem with working out there at all. But then again, perhaps it helps to be the first in and to have that long association with the country." "Infrastructure is further along than most people think," Newman adds. "AIOC constructed a new pipeline, the western pipeline route, through Azerbaijan and Georgia to the Black Sea port of Supsa. All AIOC production has been flowing through that route. We are not having to struggle to find cash to keep our Caspian projects moving. "We are fully carried in AIOC, and our Muradkhanli field is onshore Azerbaijan. The costs involved are nothing like the costs offshore, there is a lot of rig availability, and infrastructure is in place for export of production from the field." Meanwhile, the International Monetary Fund is advising Azerbaijan that it needs to establish a better climate for foreign investment. The IMF issued a statement-after the manat, the Azeri currency, tumbled 6% against the dollar-that forecast 3.8% growth for Azerbaijan in 1999, down from 10% in 1998. "Directors considered that, provided economic reforms were pursued vigorously, Azerbaijan's medium-term prospects were strong. They stressed that, in the long run, Azerbaijan's oil wealth could not provide a substitute for determined reform," the Washington-based IMF reported. Rob Sobhani, president of Washington, D.C.-based Caspian Energy Consulting and a U.S. Senate candidate, says potential investors generally have two notions about the Caspian Region: it's a great game involving a race for power and influence, or it's a great gamble involving problems of civil unrest and ethnic tensions. "But I would argue there is a third way to look at this:...maybe it's the great gain-the great gain for the people in the region, for the companies working there, for U.S. foreign policy and European countries, the whole world, and ultimately the energy markets," he says. "What I think is going to make or break the Caspian is U.S. policy." Sobhani expects to see little progress made on Caspian Sea energy issues until after the U.S. presidential election in November. An advisor to energy companies with a stake in Azerbaijan, Sobhani hands out a bright yellow bumper sticker proclaiming, "Happiness is multiple pipelines." Marvin Zonis, president and chief executive officer of Marvin Zonis & Associates and a University of Chicago professor, says he warns his consulting clients that Russia probably will become more aggressive in its policy toward the Caspian region. "We will see increased intervention by Russia in the politics of these countries, specifically Kazakhstan, Azerbaijan and Georgia, in an effort by Russia to prevent and diminish the stability of those countries and to enhance the alternative attractiveness of Russia as an export route," Zonis predicts. Cambridge Energy Research Associates chairman Daniel Yergin says pipeline routes have yet to be finalized, and the Russians are pushing ahead to bring gas out of the Black Sea to Turkey. The existing pipeline accords would reduce the former Soviet republics' dependence on Russia. The White House supports the Turkish route because it wants Caspian Sea oil to bypass Iran on its way to world markets. Various pipeline routes are proposed. Currently, an existing pipeline runs from Baku to Novorossisk, a Russian port on the Black Sea, and another pipeline runs from Baku to Supsa, a Black Sea terminal in Georgia. Sustained investment will be needed to build new, bigger export pipelines, says Cheslin. The DRC report lists three possible solutions: a new pipeline from Baku through Iran to the Persian Gulf; an upgrade of the existing pipeline from Baku to Supsa; or construction of a new pipeline from Baku to Ceyhan on Turkey's Mediterranean coast. "The most likely probability is that the Ceyhan pipeline will be constructed and, as capacity is approached, political sensitivities may have softened sufficiently so as not to prevent the building of a second route through Iran," Cheslin says. Peter Bass, deputy assistant U.S. secretary of state, said, at a London conference last year, that despite the pipeline accords "there is still much to be done if the parties intend to stay on course for completing the project by 2004." Much of the oil to go through Baku-Ceyhan is supposed to come from the AIOC, which is slated to produce 800,000 barrels per day by 2010. But in 1999, AIOC's production was only 115,000 barrels per day. The Baku-Ceyhan pipeline can be financed commercially, says Bass, but he believes there will have to be "an open season to attract Caspian oil volume commitments from companies that are not members of AIOC, since it appears that oil volumes produced by AIOC may not by themselves provide sufficient throughput." John Wolf, a former U.S. ambassador, now serves as special adviser to President Clinton and Secretary of State Madeline Albright on Caspian Sea energy diplomacy. He emphasizes the need for cooperation among the former Soviet republics. "We believe any meaningful cooperation clearly will need to include Russia. We hope it will play a major and positive role. The countries in the region must be the lead actors. They must make the difficult political and economic decisions," Wolf says. Wolf's comments came during a U.S.-Azerbaijan Chamber of Commerce conference at which Richard Matzke, president of Chevron Overseas Petroleum Inc., and Daniel Mihalik, senior regional vice president for Texaco Inc.'s Texas Pipeline International, also spoke about the need for cooperation. Matzke says, "None of these countries will function completely independent of the others. It will require cooperation and recognition of the Caspian as a single major oil and gas development entity." Mihalik agrees that cooperation among the region's countries is essential, adding that oil prices also are a force behind the pace of development in the Caspian. "Because the producing countries around the Caspian Sea have little influence on price, they must work for regional stability." Although 007 can save the day for Caspian-region petroleum producers on the silver screen, progress in real life is going to take the coordinated effort of many countries and companies, despite their political differences and sometimes conflicting goals. M