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BP Amoco: Financing of the Caspian Oilfields Development Project
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BP Amoco: Financing of the Caspian
Oilfields Development Project
Project Finance Coursework
Prepared By : Buvan Rajendra
Student ID : 7670600
Prepared For : Dr. Fiona Saunders

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Introduction
The 1991 fall of the Soviet Union and the subsequent formation of the Independent Soviet
Republics brought with it a raft of new opportunities, not least of which was the chance to
finally explore and develop the wealth of oil and gas reserves in the Caspian Basin. While
this was initially hindered by the social and political unrest - coup attempts; in-fighting;
terrorism activities; border disputes - typical of any newly liberated region especially one
with as diverse a population as the Soviet Region, the election of Heydar Aliyev as president
of Azerbaijan, followed swiftly by a cease fire declaration in 1994 finally cleared the path. To
this end the newly elected president signed the unprecedented Production Sharing Agreement
(PSA) dubbed the “Deal of the Century” at the time [1].
The following sections of this paper shall provide a succinct background of the Azerbaijani
sector of the Caspian Oilfields Development Project (CODP) followed by a comprehensive
overview of the project adopted at each stage. The financing strategies adopted by BP and
Amoco during the first stage of the project will also be discussed before an assessment of the
best way forward for BP Amoco’s financing of the project as a unified organisation rather
than two separate entities in light of its recent merger.
Project Scope and Budget
The signing of the PSA commissioned the CODP to be undertaken by the AIOC, a
multinational, 11-member joint venture as documented in Table 1 of the Appendix granting
them sole and exclusive rights for petroleum operations in the Azeri, Chirag and deep-water
Gunshali oil fields for a period of 30 years. Following a successful series of obligatory
seismic and environmental impact studies the AIOC outlined a dual-staged four-phased
development plan, beginning with the single-phase Early Oil Project (EOP) and concluding
with the three-phased Full Field Development Plan (FFDP) with total estimated cost almost
$10 billion. The progress of each stage would be subjected to approval from AIOC and Socar
based on an assessment of the previous stage [2]. This phased nature of the project promotes
constant improvement on the subsequent phases based on information attained from the
preceding phase. This also helps in reducing the cost of debt.
Commencement of the first stage – EOP - begun in 1994 focussing on the Chirag oil field and
the construction of three transportation pipelines, two of which were export pipelines to
Novorossiysk, Russia and Supsa, Georgia. Forecasted to cost $1 billion, development of this
phase was eventually completed in 1999 with the exception of the Georgia pipeline. Besides
the incomplete pipeline, another dark spot which marred an otherwise successful project
which was now producing and exporting to Russia the forecasted 100,000 barrel of oil per
day (bpd) was a cost overrun of $0.9 billion which almost doubled initial cost estimates due
to greater expenditures on the pipelines [2]. It was also during this period that the two
majority stakeholders of the AIOC – BP; Amoco – announced their merger making them de
facto leaders of the AIOC.
Following the conclusion of the EOP, attention then turned towards the second FFDP stage.
This would include the development of the Azeri and Gunshali platforms. Beginning in 2000,
the first phase was estimated cost around $2.6 to $3.1 billion with a targeted production rate
of 300,000 bpd by 2003. Next would be the development of the Gunshali platforms at an
estimated cost of $3 billion followed by further development of the Azeri platforms at an
estimated cost of $2 billion. Successful completion of these phases forecasted a final
production rate of about 800,000 bpd by the end of 2005 which would be sustained to 2011
before tapering down in proportion with the depleting resources.

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Project Structure
In assessing the development of the Caspian oilfields, it is paramount to first have an
understanding of its model as depicted by Figure 1 and Figure 2 of the Appendix for the EOP
and FFDP respectively. The undertaking of this project was awarded to the unincorporated
AIOC joint venture which formed the Special Purpose Vehicle (SPV) of this project
responsible for management of the project. The formation of this consortium provided the
security of limited liability to each member as well as the efficacy of a centralized
management. This was facilitated by the PSA concession agreement signed with the
Azerbaijani Government stipulating the terms and obligations of each participating party. The
agreement stipulated that the government through Socar grants exclusive petroleum operation
rights including all the necessary legal documentation to the AIOC. Besides this, they are also
responsible for providing the AIOC with all necessary and relevant information pertaining to
the location as and when requested [3]. The AIOC consequently is obligated to conduct a
series of seismic, environmental impact studies, test wells as well as submit project proposals
and updates regarding discoveries [3].
The SPV is held together by a Shareholders Agreement, also the PSA in this case which was
signed by all the 11-members as summarised in Table 1. This agreement documents the
responsibilities as well as entitlement of each member. Following these agreements the
financing decisions were to be made. In the case of the EOP, differing strategies were
employed by two factions of the AIOC. Corporate Financing by six of the members most
notably BP and a Project Finance loan by Amoco, Exxon and the others as illustrated in
Figure 1 [2]. It can be observed that BP and Amoco had decided on different forms of
financing which served as a conundrum for later decisions following their merger. It was
eventually decided that Project Finance would be used as depicted in Figure 2. The terms
and conditions of the Project Finance loan is underlined in the Loan Agreement with the
lenders – International Financial Corporation (IFC); European Bank for Reconstruction and
Development (EBRD) – who were responsible for raising the money required for the project.
Smooth running of the project was then ensured by the Operations, Supply and Construction
Agreements and a sustained and secure future is achieved through the Off-take Agreements
which is an agreement with the future purchasers of the product which was to be Russia,
Turkey and Georgia. The project operator which governs the operations and maintenance of
the project was initially the AIOC as a whole for the EOP however following the BP Amoco
merger they become the largest shareholders of the project and were made operators of the
FFDP most likely due to the vast combined resources available at their disposal [4].
Project Financing
The gargantuan scale and budget of this project has been established in the previous section,
it is therefore constructive to study the methods of financing employed thus far as part of the
EOP. The AIOC was a structured unincorporated joint venture hence making each subsidiary
responsible for providing funds proportional to its stake in the company which similarly
applies to the proportion of profits it enjoys. This system enabled members to make
individual as well as collective financing decisions which were exemplified by the dual
strategy of Corporate and Project Finance that was executed.
BP and Penzoil among others had decided on the use of Corporate Finance as displayed in
Figure 1. These companies decided on funding their share of the project on their balance
sheet however the lack of credible documentation as to the details of this leads to the
assumption that this would have been achieved through Mezzanine Financing by selling
company bonds as well as Equity Financing. This would have allowed for a wider

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apportionment of the risk as it would have reached a wider range of investors and its ability
to be issued in smaller quantities while also costing less due to lower interest rates. The
drawback of Corporate Financing however is the liability held by the company which
becomes especially insecure when dealing with such a heterogeneous partnership in a
relatively unstable environment as failure of want of the partners or external risk could
jeopardize the success of the whole project. In this case however the immense support and
vested interest of the government – Socar’s 10% stake – would have served to alleviate these
fears.
The other six companies which include big players Exxon and Amoco on the other hand
opted to raise the funds collectively through a Project Finance agreement with the reputable
IFC and EBRD by forming the Mutual Interest Group (MIG) SPV. These loans were given to
them in the form of direct lending and syndicated bank loans as well as equity contributions
[4]. Project Finance brings with it the upside of non-recourse funding, a guaranteed income
stream for the project as well as a favourable allocation of risk. Besides this funding also
enables a variety of participants particularly beneficial in the case of LUKoil and Itochu Corp
who would have otherwise struggled to obtain financing due to their poor credit ratings.
Finally Project Finance also added to the credibility of the project with the involvement of the
IFC and EBRD which would have greatly increased investor confidence. Nonetheless the
process of achieving this is a costly and complex affair which was demonstrated by the initial
inability to raise the required amount of $200 million in syndicated loans [2]. This form of
Financing may also serve to dilute future profits as it is repaid from revenues generated from
the project and if equity contributions were part of the loan as was the case for this project.
Recommendations
The 1998 BP Amoco merger had far reaching ramifications on the CODP at a critical
transitional period between the first and second stage of its development. Chief among this
was the financing decision that would be employed by this new consolidated institution
which had previously functioned with two opposing strategies. BP Amoco was now faced
with the choice of economical isolation – Corporate Financing – or embracing openness –
Project Financing. There was however also a third option of maintaining the status quo which
would essentially mean that its funding would be split equally between Corporate and Project
Finance. This would be a pivotal decision in the success of the project primarily as the
merger had made them the de facto leaders of the AIOC conglomerate. In order to take this
step forward, it is essential that an extensive assessment of the project. This decision however
cannot be made in isolation as it would have to consider the other interest of the company as
well.
The turn of the century was proving to be a very turbulent and volatile period compounding
the predicament of a recently independent country already experiencing precarious times with
the threat of sudden leadership incapacitation and the risk of a largely untested legal system.
This was exacerbated by an economic pandemic caused by the rapid expansion of the global
capital market brought about by the tide of democracy and market-oriented policies [5]. This
made the process of getting credit lines increasingly difficult demonstrated by the initial
incomplete Project Financing. Against the backdrop of a volatile economy the performance
of the oil industry provided and even bleaker picture crashing 60% in the past year alone as
shown in Figure 3[6]. This brought the price to well below the $14 per barrel price that was
initially estimated by BP Amoco [2]. Add this to the transportation issues of inadequate
pipeline to Russia and Georgia as well as heated disagreements with the Turkish over the
location of the Main Export Pipeline and the FFDP certainly seemed like a dead duck. It was

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not all doom and gloom however the success of the first stage as well as the government’s
assertive leadership, immense support and dedication to oil politics and economy might just
be enough to make this next stage a success.
The risk presented above serves to highlight that the form of financing that chosen not only
has to be cost effective and profitable but also provide the security and protection needed to
operate in such an uncertain environment. As discussed in the previous section Corporate
Financing while being cheaper and more profitable does not represent the safest option.
Besides this, the tumultuous economy and BP Amoco’s new position as the operator changes
the decision making landscape. A decision to back out of the Project Finance deal might send
negative signals to the other members who will then have lesser bargaining power and
therefore costlier debt raising questions on its commitment to the project not to mention risk
total failure should the likes of LUKoil and Turkish Petroleum completely fail to secure a
loan. In addition to that, a decision to back out would not go down well with the lenders
which will affect any future financings as well as its other interest elsewhere in the world.
In conclusion, it is recommended that Project Financing is undertaken as it will be for the
best of the AIOC. Increasing the number of participants especially with established names
such as BP Amoco would serve to limit the exposure of each participant as well as increase
the likelihood of negotiating a good deal. This deal will also guarantee the involvement of the
influential IFC and EBRD giving the consortium greater clout when negotiating with
opportunistic and hostile parties while also protecting the company against any unsettling
eventualities in the region. It should be recognized however that this recommendation is
based purely on a theoretical foundation and therefore while providing convincing arguments,
lacks the accuracy and solidarity of a comprehensive financial analysis with the relevant tools
such as an Present Value, Gearing and Risk Mitigating analysis.
References
1. President of Azerbaijan. (2012). Azerbaijan: Contract of the Century. [online] Available:
http://en.president.az/azerbaijan/contract. Last accessed: 14 November 2013.
2. Esty, B.C. (2004). BP Amoco (B): Financing Development of the Caspian Oil Fields.
Modern Project Finance: A Casebook, p151-p165. John Wiley & Sons Inc. USA.
3. President of Azerbaijan. (2012). Azerbaijan: Contract of the Century. Available:
http://en.president.az/azerbaijan/contract. Last accessed: 14 November 2013.
4. Anon. (1994). 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 Azerbaijan
Sector of the Caspian Sea. [pdf]. Available:
http://subsites.bp.com/caspian/ACG/Eng/agmt1/agmt1.pdf. Last Accessed: 14 November
2013
5. International Financial Corporation. (2004). IFC Project Database. [online] Available:
http://ifcext.ifc.org/IFCExt/spiwebsite1.nsf/78e3b305216fcdba85257a8b0075079d/e0bf9
9bac8cdd8e5852576c10080cbda?opendocument. Last accessed 14 November 2013.
6. Fieldstein, M. (2003). Economic and Financial Crises in Emerging Market Economies:
An Overview of Prevention and Management. National Bureau of Economic Research.
[online]. Available: http://www.nber.org/chapters/c9773.pdf
7. U.S Energy Information Administration. (2013). Independent Statistics and
Analysis. Available:
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D. [online].
Last accessed 14 November 2013.

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Appendix
Figure 1: Early Oil Project Structure [2]
SPV
Concession
Agreement
Shareholders
Agreement
Operations
Contract
Loan
Agreement
Suply
Contract
Off-take
Contract
Construction
Contract
IFC; EBRD
11-Members
AIOC
Suppliers
Russia;
Georgia;
Turkey
Contractor
s
Corporate
Financing
BP; Penzoil;
Amerda Hess;
Statoil; Socar;
RAMCO
Azerbaijani
Government
AIOC
MIG
PSA

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Figure 2: Full Field Development Project [5]
Figure 3: Crude Oil Price History [7]
SPV
Concession
Agreement
Shareholders
Agreement
Loan
Agreement
Operations
Contract
Suply
Contract
Off-take
Contract
Construction
Contract
IFC; EBRD
11-Members
BP AmocoSupplier
s
Russia;
Georgia;
Turkey
Contractor
s
Azerbaijani
Government
AIOC
PSA

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Table 1: AIOC Membership [2]
Azerbaijan International Operating Committee (AIOC) Members
Company Country AIOC Share
(%)
S&P Debt
Rating
Ownership
BP UK 17.1 AA Public
Amoco USA 17.0 AAA Public
Statoil Norway 8.6 Unrated Government
Turkish
Petroleum
Turkey 6.8 BB- Government
Amerda Hess USA 1.7 A Public
Uncoal USA 10 AAA Public
Exxon USA 8 n/a Public
Penzoil USA 4.8 unrated Public
Ramco Plc UK 2.1 unrated Public
LUKoil Russia 10 unrated Government
Itochu Corp Japan 3.9 unrated Government
Socar Azerbaijan 10 unrated Government