The office of the Custom Committee of Azerbaijan

He also said that the corresponding articles providing for production sharing might be reconsidered upon completion of the capital construction works within the projects: "Privileges exempting the operating companies from custom dues may be eliminated in the future."

Concerning this proposal from a representative of the State Customs Committee, sources in AIOC developing the Azeri-Chirag-Guneshli field noted that the contract was signed on September 20, 1994, and approved by the Parliament on November 15 of the same year. The contract was validated by presidential decree on December 12, 1994. The term of the production sharing agreement expires in 2024 but may be prolonged for another 5 years with the consent of the State Oil Company of Azerbaijan. AIOC representatives explained, "This contract should be considered as law with priority over any other laws in Azerbaijan which were adopted afterwards."

However, the "contract of the century" may indeed be changed. This is a very complicate issue, because all 11 participants must give their consent to any proposed changes. Sources in SOCAR in turn state that they "understand the intentions of the State Customs Committee, which could increase custom charges and transfers to the state budget by annulling certain privileges in the production sharing agreement." However, SOCAR explains that this is just how it looks at first glance, because if the State Customs Committee's proposals were accepted, the overall value of the contract would increase automatically and Azerbaijan would lose some of its oil profit. Besides, when Azerbaijan signed the contract, these privileges were offered to foreign participants in the project to "attract investment" by sweetening the deal. SOCAR representatives' state, "We must consider the following important issue: Azerbaijan has managed to attract huge foreign investment over the past 10 years, but the investors have not yet been fully compensated for their risks."

The leadership of Kazakhstan expressed its desire to introduce certain corrections to the production sharing agreements, because foreign petroleum companies became accustomed to "the lack of experience of the newly established states" in the early 1990s and managed to dictate their conditions. As a result, their rate of return was higher than in any developed country. However, the government failed to correct the existing contracts due to strong resistance from both the foreign companies and international institutes. Despite this, the Government of Kazakhstan managed to strengthen its positions in other directions. The law prohibits the employment of foreign labor forces in the territory of Kazakhstan without clear reason; the state company Kazmunaygaz will keep at least 50% of all production sharing agreement and reserve the right to operate, while contractor and subcontractor works will be assigned to foreign companies only if no local companies can handle the project. Some foreign companies could not stand this governmental pressure and decided to sell their shares to other companies, abandon the market, and pull out. The Government of Kazakhstan, which already had monetary reserves of over $15 billion, managed to prove that it had priorities as the field owner and purchased nearly all shares in these projects.

Unlike the Government of Kazakhstan, the leadership of Azerbaijan is trying the opposing strategy of pleasing its outside partners. Despite its significant experience in oil and gas production, the State Oil Company does not directly run any joint projects with foreign companies under management contracts. Even in onshore projects, which do not demand serious investment or experience, SOCAR is satisfied with a mere 20% share. After 11 years of experience with Western technology and management, there is not a single citizen of Azerbaijan as vice president or managing director in the "Contract of the Century". The State Oil Company of Azerbaijan is systematically divesting itself of its producing associations and transforming into a socialistic bureaucratic machine that put profit first, which is unable to operate the market mechanisms and must always wait for certain signals from the government. Maybe this is why there is not a single private local production company in Azerbaijan's oil and gas market.