What is IFC’s role?
IFC’s role is to: (i)assist in mitigating political risk perceived by international investors in a cross-border project and help ensure stability of the Project’s arrangement and operation; (ii) provide long-term financing (both directly and by mobilizing commercial bank funding through its B loans) that is especially needed by the smaller borrowing companies; (iii) provide a framework and oversight for the development and operation of the project in an environmentally and socially sustainable manner; (iv) enhance development impacts by IFC’s linkage and community development programs (currently being developed to complement the Sponsors’ SME and community development programs); (v) assist in the transparent and effective management of the Oil Fund in Azerbaijan in coordination with the World Bank and input from the IMF; and increase the transparency in the projects.
Are the projects commercially viable?
IFC is lending on a commercial basis and therefore has been quite intent on ensuring the projects’ viability.
Phase 1 Project
Return on investment for oil developments are largely dependent on oil price projections. As a lender, IFC assesses the project assuming WB oil price projections and conservative oil reserve volumes, i.e. P90. Under these assumptions, sponsor returns on their Phase 1 project equity investment are in the 20 – 25% range. Under more aggressive, i.e. P50, oil volume assumptions, this return is in the 25 - 30% range. Considering the timing of cash flows, the split between foreign sponsors (PSA financing parties) and the Government of Azerbaijan (including SOCAR) is approximately 40:60. It is important to note that early, high-risk capital investment is made primarily by the foreign sponsors, while the state receives royalties, profit taxes, bonus payment and in addition to its return on SOCAR’s investment.
BTC Project
For the BTC project, the sponsors’ real rate of return is fixed at 12.5% for 20 years. Assuming the debt financing cost is lower than 12.5%, the return on equity investment will be higher than 12.5%. Based on the assumptions considered by the lenders, the average BTC tariff over the life of the loan, i.e. through end-2015, is low enough to make the project viable and high enough to provide a reasonable rate of return to investors. As equity investors, the BTC sponsors may make more aggressive assumptions about the project including BTC transportation of: (i) volumes from ACG Phase 3, which is not yet sanctioned, but would come on stream in 2008, (ii) additional SOCAR volumes from the shallow water Gunashli field, and (iii) Shah Deniz condensate volumes. The average BTC tariff level under the Commercial Case is a very competitive transportation option in the region. The BTC tariff could be even lower if non-ACG Caspian (e.g., North Caspian) oil vo
lumes are shipped on BTC.
What benefits will accrue to the region from the projects?
In the widest geopolitical context, the projects will provide global markets with a new, strategically secure source of crude oil by creating an east-west energy corridor, independent of the Middle East. The BTC pipeline will provide the first direct transportation link between the hydrocarbon-rich, land locked Caspian Sea and the Mediterranean. It has already strengthened relations between Azerbaijan, Georgia and Turkey through increased cooperation on a variety of issues and through co-dependence required to realize project benefits.
The project also reflects the development of new economic and political links between the three host countries and Western Europe. The BTC pipeline will enhance Turkey’s strategic significance by establishing it as the western outlet of the future east-west energy corridor and as a hub for energy distribution through the Mediterranean, to European and other international markets.
With prudent management, hydrocarbon revenues have the potential to improve economic conditions in Azerbaijan, assisting it in the transition from a centralized command economy to a market driven one. This may contribute to political stability and ongoing processes of economic restructuring and reform in the region.
What will be the primary developmental benefits from the projects?
Principal benefits of the projects will accrue to the Government of Azerbaijan through the increased revenues that will result from development of the country’s hydrocarbon reserves and its increased capacity to deliver oil and gas to international markets. Other anticipated benefits include:
- Revenues to Georgia and Turkey from transit fees.
- The establishment of high quality operations to international standards (e.g. environmental, social and corporate governance standards), and the potential to transfer these standards to other local businesses.
- Provision of gas into domestic energy networks in Azerbaijan, and with the development of Shah Deniz, Georgia and Turkey.
- Increased oil export from the Caspian, through Turkey, without adding to traffic in the Turkish Straits. Economic and social benefits, particularly employment during the projects’ construction, and opportunities for supplying goods and services by local business.
- Follow-on foreign direct investment as a result of realizing successful commercial projects.
- Benefits to the local communities through community, social and environmental investment programs.
- A route to international markets that will make the region a major international energy player.
- Help in promoting and securing economic and political links between the three countries and with the West.
What is being done to strengthen SMEs in the region?
Azerbaijan:
The overall objective of the SME program is to improve the capacity and capability of the Azeri oil and gas service and supply sector providing targeted technical assistance, improving access to finance and creating local business development service (BDS) providers.
The program to provide technical assistance (TA) to suppliers involves IFC, GTZ and BP (and the consortia) and the Enterprise Center. Financial and in kind contributions for a total of $850,000 will provide targeted TA for up to 30 Azeri suppliers to be selected based on agreed criteria and in growth orientated sub-sectors focusing on operational aspects of the pipeline.
The development of BDS providers will be done in partnership with the Azerbaijani Bank Training Center (ABTC). A dedicated
Train the Trainers initiative based in Baku will train up to 200 people over a three-year period.
SME Map to detail all SME related support activities in Azerbaijan in access to capital, business environment and access to enterprise support services including appropriate initiatives that can address the gaps. The budget for this activity has been put into place.
Georgia:
Early ideas based on two visits to Georgia center around support activities in the Borjomi region, along the direct route of the pipeline. Proposals currently under discussion include the promotion of eco-tourism in the Borjomi national park area, developing community-based forest management and reforestation initiatives, as well as an SME training program delivered through a local business services provider. Other longer term projects include water treatment/management and renewable energy initiatives.
Turkey:
Mission in summer 2003 to formulate ideas. Current suggestions revolve around a supply chain project at Ceyhan oil terminal looking at more local participation via local sourcing/spin out opportunities and development of local business associations.
