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BP's Pipeline Strategy

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In Azerbaijan, observers had hailed it as the “contract of the century.” In September of 1994, the Azerbaijani government signed a Production Sharing Agreement (PSA) with a consortium of eleven oil companies, collectively known as the Azerbaijan International Oil Company (AIOC). The PSA spelled out the plans to develop a Caspian Sea oil field called Azeri-Chirag-Guneshli (ACG), 37 miles off the shore of Baku, Azerbaijan’s capital. The members of the AIOC would invest over $15 billion dollars in this project, making it one of the largest non-military capital investments in the world. For Azerbaijan, the development of ACG promised to transform the economy and reestablish the country as a center of the oil industry. For the oil companies, ACG represented one of the largest known undeveloped oil fields in the world, with more than five billion barrels of proved reserves.

Five years later, in 1999, David Woodward, the newly appointed president of BP Azerbaijan, sat in his office at Villa Petrolia in downtown Baku, Azerbaijan, weighing a complex dilemma. Since the agreement, BP, which had had the largest stake in the AIOC, had merged with Amoco, the company with the second largest stake, giving BP Amoco ownership of over a third of the AIOC. After the merger, BP had become the operator of the AIOC, in place of a multi-company consortium. As the operator, BP was in the center of a controversy that threatened to delay the project.

As a landlocked country, Azerbaijan needed to transport its oil through pipelines to a port where the oil could be loaded onto tankers and shipped to global markets. Azerbaijan’s existing pipeline connection was a holdover from the Soviet era and inadequate to handle the vast volume of oil that would soon be pumping from the Caspian. However, there was little agreement on where to build a new pipeline. Four routes for the Main Export Pipeline (MEP) had been proposed, with vastly different political and economic profiles. A wide array of actors was trying to influence the final decision.

A new export option had to be developed or else the project would have to be delayed or significantly scaled back. In only a few weeks, Woodward had a meeting with the BP board in London, and he would have to present an analysis of the pipeline routes as well as put together a strategy for negotiating with the interested nations and the other members of the AIOC.

Published Date: 06/12/2006

Suggested Citation: Spencer Hutchins, Farid Dadashev, Jaan Elias, and Tom Grasso, "BP's Pipeline Strategy," Yale SOM Case 06-020, December 6, 2006

Keywords: Azerbaijan, oil