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Azerbaijan: LUKoil's Plan To Sell Azerbaijani Assets Raises Questions

Azerbaijani officials are reportedly surprised by reports that Russia's LUKoil may sell its holdings after eight years of investment in the country. Baku is said to be most concerned that the company could leave the consortium for Azerbaijan's largest Caspian oil field as the project for the Baku-Tbilisi-Ceyhan pipeline prepares to get under way.

Boston, 29 October 2002 (RFE/RL) -- Oil analysts and officials have voiced reactions ranging from surprise to shock at reports that Russia's LUKoil plans to sell some of its most important holdings in Azerbaijan.

Baku has been uneasy since the Agence France-Presse news agency reported last week that Russia's biggest oil company is planning to dispose of its major interests in Azerbaijan. The sale is said to include a 10 percent share in the Azeri-Chirag-Guneshli oil fields, the country's first Caspian project.

The report, quoting an unnamed company official, said LUKoil would also withdraw from Azerbaijan's Shah Deniz gas project, perhaps the largest gas resource in the Caspian so far. The official said LUKoil wanted to focus on other priorities, including operations in the northern Caspian.

The company has been quiet about the report, which came two days after LUKoil President Vagit Alekperov told reporters in Baku that it was not losing interest in Azerbaijan. Instead, it would concentrate on projects where it is the operator rather than just a minority shareholder, Alekperov said, according to the Associated Press. LUKoil is the operator of two other projects in Azerbaijan.

Japan's Itochu Corporation quickly denied AFP's report that it had agreed to buy LUKoil's interest in Azeri-Chirag-Guneshli for over $1 billion. An official told Platt's Global Energy news service, "We too have read the report...but it is not true, we are not even in negotiations with LUKoil for their stake."

But the reports have clearly shaken Azerbaijani officials, who had not received assurances from LUKoil as of 25 October. Natiq Aliev, president of the state oil company SOCAR, told AFP, "I do not know if any of that is true, but if it is, then LUKoil should not count on doing anything in Azerbaijan in the future."

LUKoil's only response so far has been vague. In a statement last week, the company said that it "reviews its strategic options on an ongoing basis, and frequently is approached by potential strategic partners." It added: "From time to time, LUKoil engages in discussions with other oil and gas companies regarding strategic options. None of these potential options has reached the stage that justifies further comment at this time."

Azerbaijan has several reasons to be upset. The first has to do with the history of Russia's involvement in Azerbaijan.

In 1994, SOCAR agreed to assign a 10 percent stake of the Azeri-Chirag-Guneshli project to LUKoil in order to placate Russia. Moscow initially challenged the legality of the deal, which was a first for foreign companies in the Caspian with a former Soviet republic. But the objections were eventually muted after LUKoil won a share in the consortium known as AIOC.

Now, eight years later, the suggestion that LUKoil would drop out of the project comes as a shock, particularly after most AIOC members have agreed to sponsor the Baku-Tbilisi-Ceyhan pipeline to export oil from the fields. LUKoil has decided not to help build the pipeline, but it has said it would use the line once it is built.

Azerbaijan has also spent nearly two years in improving relations with Russia, culminating last month in a Caspian border agreement and support for Moscow's formula on dividing the sea bottom. The idea that LUKoil would now sell its key interests in Azerbaijan has analysts looking for reasons.

Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said, "I'm totally surprised." Ebel said, "If I were in Moscow, I would want LUKoil involved in Azerbaijan over the years."

Last week, the London-based industry newsletter "Petroleum Argus" said that LUKoil's change in Azerbaijan is part of a major shift in strategy at the company.

LUKoil is said to be worried that its first-place position is slipping to Russia's second-ranked oil company Yukos. While LUKoil's output has grown 3 percent this year, Yukos's production has jumped 20 percent, "Petroleum Argus" said.

The company's new strategy is to focus on its arctic oil fields and new developments in the northern Caspian, the port of Murmansk, Eastern Europe, and the Baltic countries. All are likely to be costly. The proposed export project at Murmansk alone could cost $2.5 billion, Russian Energy Minister Igor Yusufov said at a conference in the United States earlier this month.

LUKoil reportedly plans to sell its stake in Shah Deniz because it is held jointly with Agip, a subsidiary of Italy's ENI oil company. The international investment bank J.P. Morgan has already been chosen as the consultant for the sale, "Petroleum Argus" said.

If it does sell its interest in the AIOC project, LUKoil would lose a share of the 25 million tons a year (500,000 barrels per day) of oil it is expected to yield in 2005. But it would also save the cost of helping to develop the Azeri-Chirag-Guneshli fields.

Whatever the outcome, the questions about LUKoil are likely to cause a recalculation of oil interests in Azerbaijan and doubts about the future of Russia's role after the past eight years.