Azerbaijan Keen to Seal Oil Deal With West

But negotiations have been tied up in politics and questions remain over Russia's role

AZERBAIJAN is ready to sign a large-scale oil development contract with a consortium of Western oil companies which should see it become one of the world's principal oil exporters by the end of the decade, Azeri officials say.

The long-awaited contract, worth about $9 billion in Western investment, will rejuvenate Azerbaijan's ailing oil industry and provide new access to Western markets.

Representatives from Western oil companies are cautious, however. Negotiations have reached this stage twice before and then collapsed, and Russia's involvement in the deal is a further point of contension.

The deal could boost the ex-Soviet republic's crude oil output to 600,000 barrels a day, industry experts say, placing it on a par with Gulf states such as Qatar and Oman.

The consortium, which includes United States oil companies Amoco, Pennzoil, and Unocal, along with British Petroleum, signed a protocol in mid-July to show their faith in a final production agreement.

``We have finished the real negotiations,'' says Natik Aliev, president of SOCAR, the Azerbaijan state oil company. ``We have a couple of technical problems left to deal with, but within the month we will invite our foreign partners to Baku to sign the agreement.''

Three years of negotiations have been plagued by political complications tied to Azerbaijan's six-year war with Armenia over the disputed territory of Nagorno-Karabakh. The conflict has resulted in the ouster of two Azeri presidents and the occupation of about 20 percent of Azeri territory by Armenian forces. Further, the Azeri government accuses Russia of exploiting the war to restrict Azerbaijan's independence.

The Western consortium confirms that it is close to signing a deal, but executives say political questions surround Russia's involvement. ``The security risk is our primary worry,'' one oil company spokesman says. ``The Russians have controlled this area for 200 years. If the Azeri government tries to resist Russia, there will be another civil war here.''

Heydar Aliyev, a former KGB general, became president last June after a Russian-sponsored coup ousted his pro-Turkish predecessor, Abulfaz Elchibey. Shortly after, Mr. Aliyev took Azerbaijan into the Commonwealth of Independent States and gave Lukoil, a Russian company, a 10 percent stake in the oil deal.

SOCAR's Mr. Aliev says he is confident he can handle the Russian dimension. ``We view Lukoil as just another one of the foreign oil companies,'' he says. ``The contract doesn't depend on Lukoil or the Russian government. It depends only on SOCAR and Azerbaijan.''

Some executives from the Western consortium argue that Lukoil's involvement should discourage any Russian urge to sabotage Azerbaijan's oil development. ``Some of the oil companies feel it's better to have the Russians on board than sniping from the wings,'' a senior European diplomat in Baku confirms.

Other executives are not so sure. They complain that they know very little about Lukoil - a private company - or its connections with the Russian government. ``I think the Azeri government is too naive,'' says a Western oil executive. ``They think Russia will be satisfied if Lukoil gets its share, but the Russians want to extract much wider political advantages.''

Indeed, Russian diplomats in Baku say that Moscow will aggressively defend its perceived interests in Azerbaijan. ``Russia is a great neighbor of this country,'' says Walter Shonia, Moscow's ambassador to Azerbaijan. ``Russia is interested in cooperation with the West over Azerbaijan. But if there is some attempt to unseat us, there will be unpleasant consequences.''

The uncertainty about Russia's position has also affected technical issues, such as the route for an oil export pipeline. Much discussed last year, the subject has been largely dropped until a formal production contract is signed.

Aliev says a new pipeline will not be needed for several years, as the replacement of old equipment will depress output for five years. In the meantime, several methods could take Azeri oil to market. Some could be delivered to Black Sea ports, either by tanker through the Volga-Don canal, or through existing - but decrepit - pipelines passing through Georgia or Russia.

Turkey opposes a dramatic rise in tanker traffic through the narrow Bosphorus Straits, so Iran has proposed an oil-swap arrangement, whereby Tehran would import Azeri oil for internal use, agreeing to export equivalent quantities of its own oil from established ports on the Gulf.

Whatever the final delivery arrangements, the Azeri government is anxious to settle a production deal as soon as possible. Baku is hoping that once Western commercial interests are vested in Azerbaijan, governments in Europe and the US will extend more concrete support to ending the Karabakh war.

In the meantime, everyone is waiting. ``This whole operation is clearly very high-risk,'' confides a Western oil representative here. ``The negotiations are so delicate. Remember, we've reached this point twice before. Both times something happened to blow the plan out of the water. But there's just too much oil under the Caspian to abandon it now.''

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