Oil Fuels Azeris' Hopes for Future

One of 15 former Soviet republics, this oil-rich nation is welcoming Western investment in a bid to rapidly secure its independence and build a new prosperity

MARCO POLO, stopping here while making his way along the Silk Road to China, was startled by "fires that cannot be put out."

The Italian merchant was by no means the first visitor to this land along the Caspian Sea to remark on the flames, fed by deposits of oil and gas so rich that the oil gathered in pools on the brown earth. From ancient times, Azerbaijan was known as the Land of Fires.

From the mid-19th century, after Azerbaijan had been incorporated into the Russian Empire, the oil deposits were exploited. Foreign oil barons such as the Rockefellers, the Rothschilds, and Alfred Nobel, the inventor of dynamite, bought the fields and built pipelines to move the oil to processing plants. By the end of the century, the Baku oil fields produced half the world's oil.

"The air is heavy and the sky somber," describes one late-19th century account of Baku. "The stench is such that it seems to choke one."

The oil fields and plants were taken over by the Communist state after the Bolsheviks took power here in the early 1920s. When the Red Army drove off the Nazi invaders in World War II, Azeri oil fueled their tanks.

But after the war, the Soviet state found new, huge deposits of oil on Russian soil in Tatarstan and Siberia. Baku faded into a backwater, its old fields producing less and less and new development largely halted. Production fell from 445,000 barrels per day in 1940 to 244,000 bpd at the end of 1990, about 2 percent of total Soviet output.

Now Azerbaijan has regained its independence, along with the other 14 republics of what once was the Soviet Union. The Azeris are looking to oil to secure that independence.

Sabit Bagirov is a soft-spoken oil expert whose most recent job was editing the newspaper of the nationalist Azerbaijan Popular Front. When the Front took power in Azerbaijan last June from the Communists, Mr. Bagirov was one of the key figures brought into the new government. He not only directs Azerineft, the state oil company, but also is a senior adviser on overall economic stategy to Azerbaijan President and Popular Front leader Abulfaz Elchibey.

"The future of our republic, the future of our economy, depends to a large degree on how fast we can solve the problems of the oil industry," Bagirov told the Monitor. "The main way we see is in attracting foreign investment, with advanced technology."

While the old fields are largely exhausted Bagirov says Azerbaijan has huge untapped oil deposits under the Caspian Sea. Four major deposits have been identified with reserves of more than 500 million tons of oil, and even those represent exploration of only 7 percent of the Azeri part of the Caspian shelf.

"All of the bottom of the Caspian Sea is an oil structure," says Bagirov, voicing a contention backed up by the existence of massive oil and gas fields, mostly undeveloped, in Kazakhstan and Turkmenistan on the opposite shore of the sea.

The Azeris have moved quickly to sign preliminary agreements with Western firms to develop three of the four fields; a contract on the fourth is close. The speed and openness to foreign investors are in contrast to Russia where little foreign investment has been approved, despite much talk.

"The Russians are trying to develop the oil industry themselves," says an informed Turkish source here. "That's why they're going to lag far behind. The Azeris are the cleverest ones. They say, `Come and drill.' "

In September, Azerineft signed a deal with a consortium led by Amoco Corporation, a multinational oil giant, to develop the huge "Azeri" field, with its estimated reserves of 250 million tons of oil and 70 billion cubic meters (2.5 trillion cubic feet) of gas. Amoco and its partners - Unocal Corporation, McDermott International, British Petroleum, and Norway's Statoil - intend to quickly reach production levels of 14 million tons a year (280,000 barrels per day), more than the current total Azeri output.

Western companies have secured agreements on several other fields as well.

Azerbaijan is also involved in a multi-billion dollar project to build a new pipeline to carry Caspian Sea oil out to the world. The Caspian Pipeline Consortium includes Caspian producers Kazakhstan and Russia, with the backing of the Oman state oil company and private companies that include construction giant Bechtel as well as Chevron, which is developing a large field in Kazakhstan. A new pipeline will run either through Russia, Azerbaijan, and Georgia to the Black Sea, or through Iran and Turkey to t he Mediterranean Sea. Bagirov says Azerbaijan now prefers the second route.

The open door to foreign investors is not without critics in Azerbaijan. "Some points in the agreements remind me very much of contracts signed in the 1920s by Middle Eastern countries that had no concept of oil and oil development," says Etibar Mahmedov, head of the opposition Azerbaijan Independence Party. "But Azerbaijan has 100 years of experience in oil development. We are only behind in commercial affairs and technology."

The contracts must come before the parliament for final approval and Bagirov acknowledges the controversy over foreign involvement has had some impact.

The government is continuing negotiations to finalize the deals, looking to get a slightly larger share of the profits. But the oil boss argues that the speed of development is of the essence.

"We obviously hope to work with public opinion and explain that if we want to solve our problems in a short time, it has to cost something."

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