Azerbaijan: The New Source of Energy of the 21st Century

PRESENTATION

GRAHAM ALLISON: It is a great opportunity for the Kennedy School, the Caspian Working Group, and the ongoing SDI Series on the Caucasus and the Caspian, to have such a special guest. Our honored guest is Ilham Aliev, who is the first Vice President of the State Oil Company of the Azerbaijan Republic, known in the oil business as SOCAR.

He is in charge of foreign economic relations for SOCAR and is one of the company''s principal representatives in all its international negotiations. Mr. Aliev graduated from Moscow''s University of Foreign Relations with a degree in international affairs and a Masters in History; from 1985-1990, he was an assistant professor, like some of our people here today, in a university, after which he returned to Azerbaijan and became a private entrepreneur from 1990-1993, then he joined SOCAR.

In the industry, Mr. Aliev is recognized as one of the people who has had the furthest-reaching vision about the opportunities in the energy domain, and especially, the opportunities for the country, which he represents, for Azerbaijan.

It is a great honor and pleasure for us here at Harvard to welcome him here today.

ILHAM ALIEV: Thank you, thank you very much for this introduction, ladies and gentlemen. First of all, I would like to say, that, for me, it is a great honor to speak at this University. I have heard a lot about it over the years, since I was once a student myself. At that time, I began my studies in the country called the Soviet Union, and people graduating from this University, from Harvard, usually assumed influential positions in the United States. We were then on opposite sides of the globe. We were divided by politics, by systems, by confrontation, and it was very difficult for me to imagine, at that time, that someday I would be here, speaking to you.

I will discuss recent oil developments in Azerbaijan. Oil is the commodity Azerbaijan is rich in, and since the time many centuries ago when oil was discovered in Azerbaijan, it has brought not only happiness to people, but also caused many problems.

Azerbaijan was the first country in the world where oil was discovered and produced. Azerbaijan was also the first country in the world where off-shore oil production started. This was back in 1949. After regaining independence, Azerbaijan is again a pioneer in developing its huge oil reserves in the Caspian Sea.

Three years have passed since the State Oil Company of Azerbaijan, SOCAR, signed its first production sharing agreement with the consortium of the biggest oil companies in the world. This was in September of 1994. This agreement, which is known now as the contract of the century, opened the doors for Azerbaijan to join the international community, made foreign investment possible, and ensured the very stable and constant development of the country''s economy and infrastructure.

Since 1994, we have begun wide-scale cooperation with the major oil companies of the world. We have signed nine agreements with foreign partners. The estimated amount of reserves, only in these nine oil fields, is the equivalent of twelve billion barrels. This is a very large amount of oil for the Republic of Azerbaijan with a population of only 7.5 million. The total amount of investments in the nearest future will total around $30 billion US dollars. And one billion US dollars has already been invested in Azerbaijan''s infrastructure.

During these past three years, however, no oil has yet been produced. But Azerbaijan''s sector of the Caspian Sea is very rich in oil fields and deposits. I should say that all the oil fields in the Caspian Sea, or most of them, even in the sectors of other countries, have been explored and developed by Azerbaijan oil men who have considerable experience and good working traditions. We have an enormous amount of oil reserves, and many people say that Azerbaijan will be the "Kuwait of the next century." There are 137 deposits in Azerbaijan''s sector of the Caspian Sea. So our opportunities are very large.

We have succeeded in creating very comfortable conditions for our investors because it is clearly understood that investors will come and invest only if there is stability in the region and their investments are protected. So we have developed a unique system which combines governmental guarantees with legislative protection. Each signed contract becomes the law of the Azerbaijan Republic after it has been ratified by Parliament. And no one, neither we nor our investors, has the right to make even the slightest unilateral change in the contract. This gives our investors confidence and they are sure that each dollar that they have put into Azerbaijan is protected by the government.

Of course, there are other advantages for foreign oil companies in working in Azerbaijan, because we have very well-developed oil infrastructure, communications, and very professional, talented oil specialists who have also participated in all these huge oil developments over the past several years.

Our partners, our investors, and some of the representatives of some of the oil companies are here. But I want to mention all the companies we will work with within the frame of the oil consortia, so that you will have, perhaps, a better impression about what''s going on now in Azerbaijan. Our partners are Amoco, Unocal, Pennzoil, Exxon, Mobil, Chevron, British Petroleum, Statoil, Lukoil, Turkish Petroleum, Itochu, Delta, Ramco, OIEC, Petrofina, Deminex, Total, Elf Aquitaine and Agip. You can see that many countries are represented in the consortia in Azerbaijan. That was also part of our policy, part of our strategy, to invite companies, the biggest companies in their own countries, that represent different parts of the world.

Of course, as people dealing with oil usually say, there is no use producing if you don''t know how to sell it. In other words, if you don''t have the transportation facilities. Azerbaijan faced such a situation. We did not have access to world markets. Therefore, a crucial thing for us was to create a pipeline system which would deliver our oil safely to world markets.

We made the first steps in that direction two years ago. A decision was made to have, not one, but two and even three pipelines to different parts of the world. We have signed two inter-governmental agreements already with the governments of Russia and Georgia for the transportation of Azerbaijan oil through the territory of their countries. The pipeline through Russia through Novorossiisk''s port is already in operation. And the first Azerbaijan oil is now flowing in this northern direction. The pipeline which will bring us to the Georgian Coast of the Black Sea is under construction now and will be in operation in September/October of next year (1998). So we have already provided the first steps for the transportation of our oil.

But by increasing production-and we are planning to increase production step-by-step, up to at least 60 million tons of oil per years-we will need to construct another major pipeline. We are working in that direction now and a special committee has been established in Azerbaijan to assist the negotiations with all the possible transit countries; and after that, to give recommendations about the possible routes. If we manage to resolve this, and I am sure we will, then Azerbaijan will be able not only to export its own oil to world markets, but also to export the oil of third parties, especially those on the other side of the Caspian Sea.

The idea of having a system of several pipelines was important not only because we needed to increase the capacity, but because we clearly understood that in our region, security issues are crucial. And we did not want to depend on one single route. We wanted to have an alternative, so in case some problems emerged in one direction we would be able to redirect the crude in another. I think this was a very wise decision and now is appreciated by all of our neighbors.

I can talk a lot about oil developments in Azerbaijan, but I do not want to take much of your time. To describe it in all its detail will take considerable time. But I do want to tell you one thing. It has not been easy over these last several years. Since 1994, when we started our cooperation with major foreign oil companies, especially from the United States, we have faced many difficulties. We have experienced pressure, threats, coup attempts, and the main reason for this has been oil development in Azerbaijan. Those who are not our friends clearly understood that if Azerbaijan succeeded in three or four years in establishing a good economic basis for joint ventures with foreign oil companies who have money and modern technology, and in creating the means for increasing our oil production, we would become economically very strong in the near future. As you know, it is very difficult to impose someone''s will on an economically strong country, or even a person. And we, as a country that is newly independent-we have only had our independence for the last six years-still feel this pressure and still feel that some of the ideas prevalent in our former environment are still present in our region.

For me, it is always a pleasure to be in the United States. I have many friends and partners here. American companies are our biggest partners. They participate in six of the nine projects we are now engaged in, together with foreign companies, and play the leading role in these six projects.

We recently had a very significant celebration in Baku. The first oil from our off-shore platform was produced. This was the result of three years'' intensive work by our company and our foreign investors, and we now have a platform with the highest standards in the world, with all modern facilities. Since November 12, oil from this platform has been flowing to our shore terminal.

Now, I can also give you an overview of what Azerbaijan is like today. Maybe you do not know what it was like several years ago, therefore it will be difficult for you to judge some things which we regard as achievements - which are very common here. But for us, these are real achievements.

First, we managed to guarantee stability in our country, which, in its turn, has a positive impact on the stability in the region. Our economy is developing in a very positive way. We have begun large-scale privatization, which is proceeding very rapidly and has been acclaimed by the relevant international organizations. And we are conducting a policy of economic reforms. For the first time this year, we enjoyed a growth in production of about five percent. For us, these are great results, and they show that now Azerbaijan has managed to overcome all the difficulties of the past and is preparing to take off.

The last thing I want to mention is that oil, although it is a traditional part of our economy, is not only a means of earning money and becoming richer. Oil for us now means the strength of our independence. We were deprived of independence once, in the 1920s, and we do not want this to happen again. Oil for us is the glue which will provide our security, our future, and the future of our children. Thank you very much.

COMMENTS

GRAHAM ALLISON: Thank you very much. We are grateful for such a succinct statement of both the opportunity and the vision.

The first comment is from Ash Carter, my colleague, a Professor here at the Kennedy School. Then there will be brief comments from a number of representatives from the oil companies, and a few comments and discussion from the floor.

Ash Carter was Assistant Secretary of Defense in the Clinton Administration, served with John Deutch, who is also here in the background, and myself and a number of others. He was formerly a director of the Belfer Center for Science and International Affairs and he is now back as a professor.

ASH CARTER: Thank you. My comments are about security for Azerbaijan, and I want to suggest to you that economics and security are intertwined in this region, not only for us here in the United States but for Azerbaijan as well. We ought to not just look at pipelines and oil but the security structure in this region as well, and try to look at this a little bit from Azerbaijan''s point of view as well. What is the future of it''s security?

In 1994, the United States opened a security dialogue with the government of Azerbaijan, with the Pentagon leading that strategic dialogue. In those days the focus was very simple: the focus was on providing visible support from the United States for the very existence of Azerbaijan as an independent state. Well, that was then and now is now. That was the post-Cold War era, this is the post-post Cold War era, and we ought to be looking ahead, at security in this region. Let me suggest three ingredients of the security structure for this part of the world.

First, U.S. support for multiple security ties for Azerbaijan with the rest of the world. There is an analogy to pipelines here. It is not in Azerbaijan''s interest, in fact it is not in our interest or the interest of anyone else in the region, for Azerbaijan to be overly dependent upon any other power or overly dependent upon its neighbors. And that is why the U.S.- Azerbaijan military to military relationship is important, that is why Azerbaijan''s military relationships with other powers in Europe, and even with NATO''s Partnership for Peace, are so important for Azerbaijan, and should be fostered.

Second, United States support for military reform in Azerbaijan. Azerbaijan, like all the other states of the former Soviet Union (we have got to stop using that phrase), inherited what it inherited when the music stopped and the Soviet Union ended. Now it is trying to take that inheritance and turn it into a security structure that is appropriate for a new state. And Azerbaijan was determined to do that, very early on, in an independent manner, with no Russian troops on its soil. Now, we are limited by Section 907 of the Freedom Support Act in what we can do to help them in that connection. I regret those limitations. But I will remind you that the United States, when it set up its security relationship with Azerbaijan, did determine that it would not do anything with Armenia that it could not do with Azerbaijan, so as to be even-handed with the two. Now that leaves us doing less than either state legitimately warrants in the way of its relationship with us, but we are even-handed.

Finally, U.S. support for regional security cooperation. We just had a stunning example, in Central Asia a few months ago, of regional security cooperation when Kazakstan and Uzbekistan and Kyrgyzstan jointly conducted a military exercise with U.S. paratroopers and yes, even Russian forces. Fabulous example. Regional linkages overcome old animosities, they create common capabilities that states can use to solve common problems, and they provide greater bargaining power for small states with larger neighbors. Now, obviously the current stalemate in regional conflicts is an obstacle to regional military cooperation throughout the Caucasus, but there are some opportunities here and this is the right vision for the future.

So those are three directions that I think security thinking should go, and I want you all to do a thought experiment and imagine there were no oil in Azerbaijan. If there were not oil in Azerbaijan, it would still be an important place, it would be a geopolitically important place to the United States, we would still have an interest there, and we should still have a security strategy there.

I am going to close with two proposals, repeat two proposal I made before. One I made before to President Aliev of Azerbaijan when he was here in February, which is a meeting of key regional powers, catalyzed by the United States-all the regional parties-catalyzed by the United States, at a high level, preferably at the head of state level, for a combined business and geopolitical discussion. All of the parties, with all of the stakes on the table. I think that would be very fruitful, because there are no really fundamental reasons why everyone cannot win from such a discussion.

The second proposal is this-I have also proposed this to parties in Baku-that we here, those interested in this part of the world at Harvard, and also some of our colleagues at Stanford, have a dialogue with Azerbaijani strategists about the security dimension, about the geopolitical dimension. So I just invite you, as we have this discussion, not to focus only on oil but to remember that there are geopolitics here as well, and we have interests and a relationship with Azerbaijan which goes beyond oil.

GRAHAM ALLISON: We could have a fascinating seminar today on the security problems and geopolitical dimensions of these issues, and Ash''s comment helps remind us that there are many additional dimensions to the subject that we are discussing today. But the topic of this seminar today being oil, we are now going to focus principally on oil as the core of our discussion, and then on the dimensions that extend from there.

We are honored to have here today with us a number of oil companies represented by the people who are doing the work in collaboration with SOCAR and Azerbaijan. We are going to take them in alphabetical order from the company that they represent, since that is the way they appear on my list here. Let me urge each of you to be brief and I''ll introduce you each as you come.

We have representatives from Amoco, Delta Oil, Exxon, Mobil, Mondoil, Pennzoil and Unocal. So we have a number of people to make comments. I think that, particularly for those of us who are not so well-acquainted with the energy business, seeing this issue from many angles, and particularly the angle of the companies that are engaged in this business, will be instructive. So we appreciate you being here.

The first of the comments will come from Charles Pitman. Charles is the Chairman and President of Amoco-Eurasian Petroleum Company, which is responsible for Amoco''s efforts in Russia, Azerbaijan and Kazakstan. He has been with Amoco for more than 20 years, and before that worked for a dozen years at the State Department. So he is a good example for students here of people who live both public and private lives and we are very glad to have Charles with us.

CHARLES PITMAN: Thank you very much, Graham, I am truly privileged to be here and I thank the organizers of this afternoon for inviting me. I will talk about oil because I am in the oil business, and if I echo some of the things that Ilham Aliev has said it is because of the fact that we are both in the same business.

Azerbaijan, indeed, in our experience is a paradigm for foreign investment in the countries of the former Soviet Union. We have had some very negative experiences in Russia and I must tell you that the experience we have had in Azerbaijan is in very happy contrast to that experience. There are clear procedures for investors who go in to work there.

The country, as Ilham mentioned, has followed a very wisely balanced policy of including companies from many different countries, which strategically is very important for them. They have been committed to developing their resources for the good of their people and the development of their economy. They have been committed to helping us identify and establish the very critical early first routes out for oil production, first through Russia and next year, as Ilham mentioned, through Georgia. They are committed to helping us identify and to build a truly big pipeline, capable of carrying about a million barrels or more of oil per day-the main export pipeline, the route for which is due to be selected about a year from now.

Among the challenges ahead, this is probably the biggest one we face, that is, transportation. If you had been in Baku last week, on November 12th, for the first oil ceremony, and watched a whole parade of diplomats and government officials come to the podium: Energy Secretary Peña, the Prime Minister of Turkey, President Shevardnadze of Georgia, Deputy Prime Minster Nemtsov of Russia, all making their case for a particular pipeline route and strategic reasons for each, you would have been very keenly aware of the high stakes that are involved in the game we''re playing there. It was quite a scene to behold.

We have basically three choices. The first is the route through Russia, which is now being opened for the first oil. The second is a route through Georgia, which will be open, of course, next year. And the third is a route from Baku to Ceyhen and the Mediterranean coast of Turkey. This last route, as far as Amoco is concerned, is the ideal route, if it can be made commercially viable, and we are consulting with all the parties concerned to try and find ways to bring that about.

There are some particular aspects of what is going on in the Caspian, and particularly Azerbaijan, that have importance from a U.S. perspective, and I spoke about those before a Senate sub-committee in late October, and made basically four points.

The first was the need to repeal Section 907 of the Freedom Support Act, which, for those of you who do not know about that act, is a particularly unbalanced bit of legislation that effectively hinders humanitarian assistance to Azerbaijan and also hampers the efforts of agencies like Ex-Im Bank and OPIC, which foreign investors in any country we operate in like to rely on. Section 907 generally forecloses any kind of use of those agencies and indeed is an unbalanced bit of legislation.

I also urged the US Government to work toward resolving regional conflicts, particularly the one over Nagorno-Karabakh, and we are pleased to see that some progress may be finally being made by the OSCE Minsk group on that.

We asked also for government support of a commercially viable and secure pipeline, and I have explained what our position as a company is on that.

Finally, we asked for the government''s help in resolving the legal status of the Caspian, which is truly an open question. The Russians and the Iranians see the Sea as a condominium which effectively would give any particular country a say over the ability of another country, a littoral state, to invite foreign investors, which we do not see as a good way at all to encourage the development of resources.

I would encourage you, just in conclusion, to keep yourself informed of developments and events in this part of the world because, indeed, you are going to be hearing a lot more about them in the years ahead, both from the economic interest point of view from our country and the strategic interest point of view as well. Thank you very much.

GRAHAM ALLISON: Thank you very much. Delta Oil Company Limited is a Saudi Arabian oil company that was founded by its Chairman and Chief Executive Officer Badr Al-Aiban. Badr not only established this company but has been operating it. Delta Oil is a member of the AIOC, and therefore centrally involved in the exploration and development of oil fields in Azerbaijan.

BADR AL-AIBAN: Ladies and gentlemen, I know most of my counterparts in the oil industry will speak about oil, but I must make a statement before I begin my speech: that the stability and the continued economic prosperity in Azerbaijan would not have taken place without the wise leadership of President Geidar Aliev.

It has been almost five years to the day that I first set foot in Azerbaijan and Delta Oil Company began its relationship with the newly formed state oil company of the Azerbaijan Republic, better known as SOCAR. Looking back over the pictures and memories of Azerbaijan just five years ago, then looking at it today, it would be an understatement to say that the transformation of the country has been amazing.

From a distance, a semi-neglected backwater of the former Soviet Union, Azerbaijan today boosts an economy that, according to the Financial Times recently-and I think the original source is the IMF-is rapidly expanding at the rate of 17 percent, even while its currency has actually depreciated by 13 percent against the U.S. dollar-over the past twelve months. Such an enviable record of economic performance could not have been achieved without President Aliev''s wise policies of fiscal discipline and rule of law at the national level and the cultivation of friendly relations with all countries that have respected Azerbaijan''s sovereignty at the international level.

As we approach the beginning of the 21st century, it is worthwhile for me, as a Saudi Arabian citizen, to compare the rapid development of Saudi Arabia in this century with the development of Azerbaijan in the short span of time that Geidar Aliev has been President. Within the next five years, Azerbaijan is projected to export 500,000 barrels per day of oil. Within the next ten years, we expect it to export at least one million barrels of oil per day. This will, of course, put Azerbaijan in the league of major oil and OPEC oil exporting countries. Assuming the current government''s wise and rational policy of fiscal discipline is maintained, the people of Azerbaijan will enjoy a prosperous future that even the people of the Scandinavian countries today would envy.

We in Delta Oil Company of Saudi Arabia look forward to building on our partnership of commerce and cultural affinity with Azerbaijan, and we plan and hope that we will be there in our second home, in Baku, when Azerbaijan becomes a major league oil exporter early in the 21st century.

Thank you very much for this opportunity, and I wish the Azerbaijani people every success.

GRAHAM ALLISON: Thank you for those comments. For those of us here at Harvard who study development, among the remarkable stories of the past fifty years, in which one has seen many countries rise from a very low per capita income to become some of the wealthiest counties in the world, the Saudi story is a very interesting analogue to bear in mind when one is considering Azerbaijan.

Our next speaker is from Exxon, Tim Cejka. Tim Cejka is the Vice President for Exploration of Exxon Ventures, CIS. He has had many responsibilities for production and exploration in the U.S., particularly in the U.S. Gulf Coast area, and that has served him well as he now tries to explore new possibilities, especially in the Caspian. So we are very happy to have Tim here.

TIM CEJKA: Good afternoon, I am pleased and honored to be here as well, but even going alphabetically it gets a little harder when you are the fourth or the fifth speaker, so while others were talking I was crossing out paragraphs so I would not repeat the same messages, and if I have not crossed them all out, I apologize up front.

Let me start by a little history. In his famous memoirs, Marco Polo wrote, in visiting Azerbaijan in 1272, while he was traveling the silk road to China, that "There is a fountain of oil which discharges a great quantity as to furnish loading many camels. The oil is good for burning. In the neighboring countries no other fuel was in the lamps, and people come from distant parts to procure it."

Well here we are, seven centuries later. People from distant parts are flocking back to Azerbaijan, all for the same reason, for the oil, and Exxon is among them. How large is the prize in the Caspian region? I honestly do not know, but each company has its own estimates. I have heard estimates as high as 200 billion barrels of oil. Who knows? But it does not matter. The fact is, whatever that prize is, it has drawn the attention of all major world energy companies. And so I think that lends support to the fact that whatever the number is, it is probably huge.

Exxon began, and I began my discussions, in Azerbaijan back in 1993. We are involved in the mega-structure as part of the Azerbaijan operating company at AIOC. Even in itself, this is an accomplishment. In AIOC, there are 11 different companies representing 8 countries, so it is a meeting of the UN every time we conduct a steering committee meeting. Already mentioned but worth mentioning again, the first production was celebrated last week, on November 12th, in Baku. The ceremonies were presided over by the President. I was privileged to be there as well. I find this to be a very great moment for Azerbaijan, the region, the entire energy industry. Not only did the partnership of SOCAR, the international oil companies and Azerbaijan succeed in producing early oil, they also succeeded in developing these transportation routes to deliver oil to the world markets. But just as significant, on that day Azerbaijan celebrated the second anniversary of its Constitution, which may be even more important than that first oil.

It has already been talked about, but one of the key challenges in developing oil is going to be the transportation. A colleague from Amoco mentioned the three routes, but there are probably as many routes as there are imaginations, through as many countries that border or are close to Azerbaijan. For Exxon and for the rest of the industry, we have two jobs to do in Azerbaijan. First is to find and size the resource, the remaining reserves, and then hopefully to develop multiple routes to multiple marketplaces. A slogan that has become popular with the industry and with SOCAR now, is: "Happiness is multiple pipelines." And we support that concept.

In June of this year we signed a production sharing agreement with SOCAR, on a 50/50 basis, where SOCAR will be our partner and we theirs in developing a large, undrilled exploration area called Nakhchyvan. We will start work this January and hope to drill the first exploration well in deep water in about the year 2000. Exploration activities and development activities in these various exploration blocs, carried out by Exxon and all my associates here, are going to create long-term mutual economic benefit for the companies and the country, and create huge employment opportunities in Azerbaijan.

As for the future, I think the energy industry and Exxon in particular will continue to pursue involvement in other oil and gas projects with SOCAR. The opportunities-part of my job is to sort out opportunities around the world-the opportunities in Azerbaijan compare very favorably to other regions in the world, and we believe the deep water portion of the Caspian Sea is going to be an important new frontier in Azerbaijan''s long history in the oil business. The open door policy of Azerbaijan, the legal system, the support and leadership of President Aliev, makes Azerbaijan uniquely attractive for foreign investment.

As we hope to contribute in the oil patch, there is another side of this story, and I will not spend all my time talking oil. The other side is just as important: social and economic contributions that need to be made.

Let me give one example. Soon after his election, in 1993, President Aliev restored Azeri as the country''s official language. He also has encouraged Azerbaijanis to learn English as the universal language of commerce. To help the twin goals of restoring Azeri as the national language while supporting the study of English, Exxon sponsored the publication of the first Cyrillic and Roman alphabet versions of the Azeri-English Dictionary, with the cooperation of the Azerbaijan Institution of Foreign Languages. President Aliev has called the dictionary a very important, much needed work. Because we see this as a great area for the development of the people of Azerbaijan, we have continued to fund in this direction and have recently funded the publication of an Azeri ABC primer for children, and now are involved in funding a five-volume Azeri language encyclopedia. So there is a softer side than just oil, and I am glad we can be involved in both. Thank you.

GRAHAM ALLISON: Our next speaker from the oil companies comes from Mobil, which has been much in the news lately, with the visit of President Nazarbaev of the adjacent Caspian state of Kazakstan. C.D. Sabathier is President of Mobil New Exploration and Producing Ventures, CIS and Caspian Regions. His responsibilities include all of Mobil''s new venture activities in the Caspian region and Central Asia, which currently are focused in Azerbaijan and Kazakstan. So we are very pleased to have him next on the list.

C.D. SABATHIER: It is a pleasure to be here today at this distinguished University and to have the opportunity to discuss the importance of Azerbaijan and the Caspian region''s energy potential in the next century. The importance of Azerbaijan''s role in meeting the world''s energy demands of the next century are really three-fold. First, for the wealth of its resources, obviously. It is a country of eight million people, very small country, about the size of the state of Maine, yet it has known oil reserves, no speculation, of 8-10 billion barrels, gas reserves of over ten trillion cubic feet, and future potential many multiples time that. As has been mentioned here, no one really knows how much.

Second, Azerbaijan, Baku specifically, is a historical and natural regional transportation hub. You have heard that mentioned already. Baku offers diversified market access to producing nations of the region, offers strategic options for the transportation of oil and gas to markets, particularly western markets; in essence, it reinforces independence throughout the entire region. Additionally, the Baku-Ceyhen pipeline, we think, will provide a strategically diversified base of energy supply.

Finally I would like to emphasize this point: Azerbaijan has become, I think-and I travel, as you can tell by all those countries that have to fit on my call card-a leading example for other republics in Central Asia and is well on its path towards stability and economic growth. The progress made since its independence six short years ago-and it is incredible what has gone on in these years-is unbelievable, but especially, I think, since President Aliev has taken office and assumed control of the government, in 1993, just four years ago. Baku is clearly on the road to economic development and recovery. The process is not an easy one, and those of us who work in the region can understand how difficult this process is. But Azerbaijan is clearly moving down the right path. The dedication of the government, organizations like SOCAR, and the individuals we deal with there, is, I think, a source of inspiration for someone from the West.

I think Azerbaijan and the Caspian region represent a vital interest for the United States as well. These nations are developing democratic institutions and I think we need to provide assistance where we can. They are also an additional source of energy for us to help diversify our resources, and they offer us an opportunity to reduce dependence on Middle East oil. Azerbaijan''s prosperous secular government also serves as a model for other governments in the new independent republics.

So, how can the U.S., especially the U.S. Government, assist in this rapidly moving and exciting process? First, I believe, is in the area of repealing Section 907 of the Freedom Support Act. Section 907 denies Azerbaijan access to the resources and assistance the Act provides elsewhere in the region.

Secondly, the U.S. Government must increase its efforts to resolve the Nagorno-Karabakh conflict. While I think all of us would agree that the recent efforts are encouraging, intensified efforts are required to end the suffering of the one million refugees in Azerbaijan, and to achieve a just and lasting solution.

The issue of the demarcation of the Caspian region must also be resolved. This will be a significant step to clear the way for each company to fulfill its potential in the region and spread the development of transportation infrastructure to move these new strategic supplies of oil and gas to Western markets.

Let me skip down and close and just say simply that we think Azerbaijan is a very reliable partner for industrial development, not only in our business but, I think, in all businesses. And Mobil is pleased, as I am sure all of our colleagues in other companies are, to be able to participate in what is not only the economic development but also in a very historic juncture in the history of this country. Thank you.

GRAHAM ALLISON: Our next speaker is Bijan Mossavar-Rahmani. Bijan is the Chairman of Mondoil Corporation, which is a privately-held international oil and exploration company. He was earlier President of Apache International, and before that, in an earlier incarnation, he was actually part of the Kennedy School where he was the Assistant Director of our international energy studies, in the Environment and Energy Policy Center.

BIJAN MOSSAVAR-RAHMANI: Graham, thank you, and Ashton, for inviting me back to Harvard. I am here to report that there is life after Harvard and it takes one to fascinating places like Baku, which has been a tremendous learning experience in terms of my own career and business interests.

I have come here from Washington, where we participated, with Ilham Aliev and some of the oil company representatives, in a conference organized by another alumnus of the Kennedy School, Dan Yergin, on pipeline routes from the Caspian to the external world markets. There were probably 500 or so participants in that conference, it was a huge gathering, and that is a substantial number of companies and individuals interested in the business opportunities of Azerbaijan.

When I was at Harvard, in the 1980s, I doubt if there were 500 people in the entire United States who knew of Azerbaijan''s oil potential, and probably no more than a handful of people who ever expected to be participating in the investments that are now taking place in that country. I said a handful of people-I was one of the first of those individuals in the industry to have an interest in Azerbaijan. I first went to Azerbaijan in early 1991, when it was still part of the Soviet Union, and the difficulties have been alluded to by some of the previous speakers. Well, I will give you a couple of examples of how great these difficulties were.

On my first trip to Azerbaijan, we had to go through Moscow, there were no flights into Baku, and one had to get visas and permission from the Soviet Government to go in. And I remember a meeting with the Deputy Minister of Oil of the Soviet Union, in which we expressed an interest in going to Baku, and he said, "Well, what in the world for?" And I said, well, we were interested in looking at the oil opportunities in Azerbaijan. He said, "No, no, you don''t want to do that, you want to look at opportunities here in the northern part, in the Russian region proper," and I said, "No, I really do want to go to Baku and meet people and see what the opportunities are." And he said, "No, no, the people down there, they''re Muslim barbarians." And I said, "Well, I''m a Muslim barbarian, too." So he said, "OK, we''ll let you go."

There were other difficulties. I remember in subsequent trips, it was virtually impossible to get a visa to go to Baku. Those visas, again, would have been given by the Soviet Foreign Ministry. So we improvised. We would telex ourselves in the office an invitation to go down to Baku, we would copy this telex, take it to the Soviet Embassy and get visas to go down.

There were times in our early years in Baku when water supplies were scarce. We had to ship water in from Texas. Drinking water. Never mind bathing water.

So difficulties were tremendous in terms of the Azeri side. The technology was dated. But the mind-set was dated too in some of the earlier negotiations with our counterparts in Azerbaijan. Again, this goes back to 1991-1992. It was extremely difficult to work with people who had never been accustomed to dealing with the modern business context, with the international oil industry. But those obstacles, those difficulties, again, as has been mentioned by the other speakers, have been addressed. The progress that has been made, the strides, the success of the discussions between the companies and the government in Azerbaijan are spectacular. I have operated and worked and negotiated in more than fifteen countries around the world, and the progress in the past four or five years is unprecedented, certainly in my business experience and probably in the history of the industry.

The interests of the companies in Azerbaijan has been both a combination of a pull and a push. The pull, obviously, the resources in the Caspian sea region and on-shore, in Azerbaijan. But there has also been a push towards Azerbaijan in the sense that because of U.S. policies and sanctions against Iran, Iraq and Libya, three countries that together have proven reserves in excess of 250 billion barrels, companies have sought out opportunities where they are politically accessible, and Azerbaijan has been one of those, and the government of Azerbaijan has capitalized on all that interest and brought the companies in and has signed, again, as we''ve heard, a substantial number of contracts, with a lot more contracts still to be concluded.

I would like to go quickly to another facet of the opportunities in Azerbaijan, and that is the geopolitical dimension of it. Getting oil out of Azerbaijan and out of the other essentially landlocked countries of the Central Asian republics is a major problem. Multiple pipeline routes have been examined, are under discussion, but no single substantial pipeline route and investment has yet been committed to, or even agreed upon.

One of the most favorable, probably the most favorable from a commercial point of view, options for getting oil out of the Caspian Sea region is south, through Iran. Iran is uniquely positioned between the Caspian Sea area and the Persian Gulf in terms of an exit route, and the exit route through Iran need not be in the form of an actual pipeline to be constructed. It can be done through a vehicle which I call a "virtual pipeline".

Iran is uniquely positioned, in part because consumption in Iran, the population centers, industrial as well as residential and commercial consumption, is in the northern part of the country, much closer to the oil fields of the Caspian Sea than is Iran''s own production, which is to the South, in the Persian Gulf, and on-shore, very close to the Persian Gulf region. Iran has something in the order of 500,000 barrels per day of refining capacity in the North, in Tehran, in the city of Tabriz in the northwest. The oil for these pipelines is piped up from the southern part of the country. Iran could very easily bring oil in by barge and tanker from the Caspian region, refine this oil in its own refineries in the north. That would provide a market of up to 500,000 barrels a day. Again, that could be developed with a minimal investment on the order of $50 million, with a spur pipeline that would take two months to build. This is compared to the other major pipeline projects, which are on the order of two or three billion dollars, to be built over a two or three year period of time over a sometimes hostile politically, but also in a geographical or terrain sense, area. Not only can Iran take 500,000 barrels a day of oil for its two refineries; it could reverse the pipeline that is marked on that map and flow another 500,000 barrels a day down into the Persian Gulf to its own export terminals. So there is a tremendous opportunity for this option as one of the multiple pipeline routes that have been talked about as a way of freeing up export opportunities not only for Azerbaijan but for the other republics in the region. The biggest obstacle to this one option is the United States and U.S. sanctions policy against Iran, which, while not altogether clearly excluding a pipeline option or virtual pipeline option, or swap option of the kind that I have described, does discourage companies, and this is another geopolitical facet of the future of Azerbaijan as it ties in with regional politics.

Thank you.

GRAHAM ALLISON: We have two more representatives from the companies and then we''re going to have other comments and questions. From Pennzoil, Richard Edmonson is Senior Vice President for International and Negotiations. He has led Pennzoil''s efforts to explore and produce oil and gas developments worldwide. He has been the head of the Pennzoil negotiating team in the Azeri deals, so we are very pleased to have him with us.

RICHARD EDMONSON: Well, Tim, if you thought it was bad working for a company that began with "E", you should work for one that begins with "P". And Ken, I have no idea what Unocal is going to be able to say after all this.

But I do want to thank the Kennedy School for letting me come and say a couple of words on basically why Pennzoil is in the Caspian.We began in the Caspian in 1992, when we first went to Azerbaijan, in the late winter-early spring. We were the first company to sign a contract with the state oil company to actually build and complete a project in the country. That was a gas utilization project, which was able to gather 150 million cubic feet a day of natural gas that was being lost in their off-shore fields, compress that gas and bring it to shore, where it was very badly needed in their domestic market. The project was completed in 1995, we operated it for approximately a year, and then turned the project over to the state oil company, where it still is being operated very efficiently by the state oil company and its people.

We also are in the mega-structure, the Azeri-Chirag-Gunashli unit, and have a third project called Karabakh, which is an exploration project north of the ACG mega-structure. We are in the process of finishing our first well there, and we will be drilling two more wells in 1998.

But why is Pennzoil there? Well, you have heard some numbers, and I cannot argue with them. This area has the potential for 200 billion barrels of reserves. That is the North Sea and Gulf of Mexico combined type of numbers, that is Saudi Arabia reserve type of numbers. And whenever you have that kind of potential, you are going to have every major oil company in the world there-and they are there, plus national oil companies, from Turkey to China.

But the other reason that they are there is because of the policies of the government of Azerbaijan and President Aliev. They have made Azerbaijan a place to invest, they have made it a stable place to invest. That has been the key. And they were the first to do that in the Caspian region. While President Nazarbaev of Kazakstan, who has been here this week, in the United States, has been a little slow, and so has Turkmenistan, Azerbaijan took the lead in bringing Western investment to this country.

Now, how much Western investment has there been? Well, you have heard people describe the fact that we were in Baku last week for what has come to be called the early oil celebration. Well, Terry Adams, the President of the AIOC, announced during that celebration that we were spending our one-billionth dollar on that project that week-and that is just one of the projects. So that is the size of the kind of investment that is coming into the Caspian and into Azerbaijan in particular.

My first trip to Baku was in March 1992, and things were tough there. They were very hard for the people. For the people who were trying to govern that country, the collapse of the Soviet Union had been very difficult. It is a very remarkable change. When I was there last week, I went and ate Chinese food, and then I went to a Mexican restaurant, and then I went to a Cajun food restaurant. That is the kind of change that we are now talking about in Baku. And you are beginning to see it in the people. When you walk through Baku-and it is a beautiful city. If you have never been there, you should go. It reminds me of San Francisco. It is a great, great place. But you can see it in the people''s faces. They are smiling. The clothes have changed-there was an Italian suit store that had opened since the last time I was there. This is a place that is beginning to boom-beginning to join the world, and really is a fabulous place to be able to do business.

Why is it important to the United States and to the West? Well, just a couple of numbers, since the rest of my speech has been thrown away by others. In Europe, from 1997 to 2010, production from Europe is going to decline from 8.4 million barrels of oil a day to 6.5 million barrels per day. In addition, Western Europe''s demand during that same time period is going to grow by 2 million barrels a day. Where is that oil deficit going to come from? Well, it can come from OPEC-but if you are a net importer, what do you want? You want diversity of supply, and the Caspian can help you do that. As these barrels begin to come on stream, along with the main export pipeline, with the two projects that are already underway, and the oil that is already flowing (and the western route for the oil will be flowing by the end of the year), Europe will have that diversity of supply.

As stability grows in the Caspian, because of the investment and because of the political stability that is brought about by that investment, it will be good for the United States and it will be good for the rest of the West. Thank you.

GRAHAM ALLISON: So, as a person whose name begins in A, I am always in favor of alphabetical orders, but for the Unocal people I apologize. Ken Bradley has been very patient, but since he is an Australian, he is used to Americans being our normal and somewhat impolite selves. He has been with Unocal for over 27 years and is the President and Resident Manager of the Unocal subsidiary in Azerbaijan. Thank you very much, Ken.

KEN BRADLEY: Thank you. One of the problems of working for Unocal is I''m always the last speaker. I am a little disappointed that I was not listed in the Azerbaijan delegation, as that would have given me a little better chance with this speech.

I say that because I have been Resident Manager in Baku since January 1993. If we go back to that time and see what my opinion of the whole thing was at that time, I would have said: There is an active conflict between Azerbaijan and Armenia in Nagorno-Karabakh; Azerbaijan is mostly unknown in the Western world-at that time-there is a curfew in Baku; hotel standards are low; we get our food from the local market; communications with the outside world are accomplished via a portable satellite dish on the balcony outside my bedroom; and I use this dish to fax the maps that I make of each day, showing the expanding conflict and front-line, to my headquarters in Los Angeles.

And at that time, suddenly, Azerbaijan, with a population of seven million, has almost a million displaced people to look after. And to add more difficulty to this, the Caspian water level continues to rise and damage coastal facilities.

So that at that time I remarked, What are we doing in this area? There is no pipeline to the West. The existing off-shore infrastructure is incapable of accomplishing the development of the fields that are being discovered by the Azerbaijani people, and without massive refurbishment, nothing very much can be accomplished. We are importing materials and equipment in a difficult way into this isolated Caspian area.

The local economy at that time was still collapsing, the political situation was uncertain, and I would have found it difficult to believe that by now, by the end of 1997, we would have a stable government, a cease-fire would have been accomplished, with a somewhat uncertain peace, the first production sharing contract would have been signed, and eight more of them would have been signed. And these would have become law and protected our investments. AIOC would have spent a billion dollars, as you have already heard, and production would have commenced, and (I knew everyone else would have said this because it is an extremely important milestone) a pipeline would be operational to take that production to the Black Sea, with a second pipeline under construction, and at last, access would be established for the oil through hard currency markets.

The sixth point-that I would have found difficult to believe-is that I am still in Baku by the end of 1997. But living in Baku is a privilege, I think, which allows a basic understanding of the magnitude of the problems faced by a struggling, newly independent country transiting to a free market economy. AIOC has led the way, at this point, and is building on its successful partnership with SOCAR to further lead the way in promoting alliances with selected local enterprises, with business, and with western service companies, in an effort to build these into competitive companies (a very important aspect of life in Azerbaijan at the moment) to get behind the first development of oil.

By this formation of alliances, we can expect the introduction of new technology and modern management, and the utilization of the skilled labor that exists there. There are a lot of enterprises that have currently failed. There are a lot of people there with a lot of skills, and we need to use them.

As the production of oil and gas increases, some critical local shortages can be also addressed. This winter, as usual, Baku and selected larger population centers will receive essential natural gas for heating and cooking. Supplies of electricity are limited, and the water supply system to Baku desperately requires refurbishment. You can always tell which part of the city is receiving water at any one hour by the flooded streets, such i