BP's Target in Azerbaijan Way Short

The U.K. major BP Plc ( BP - Analyst Report ) seems to have another battle ahead with the development of the oilfield block Azeri-Chirag-Gunashli (ACG) in the Azerbaijani sector of the Caspian Sea.

The woes at BP seem unending with the British major still trying to settle criminal and civil liabilities with the U.S. Department of Justice over the Gulf of Mexico (GoM) oil spill and also exit from the controversial Russian joint venture, TNK-BNP. Presently, the company has been sharply criticized by Azerbaijani President Ilham Aliyev for lagging behind in production output from several Caspian Sea oil fields.

The Azeri and Chirag fields have experienced declining output since the last three years. In 2009, it produced 40.3 million tons of oil against BP’s forecast of 46.8 million tons. In 2010, the forecast was cut to 42.1 million tons while production came in at 40.6 million tons. And last year the fields’ production level dropped to 36 million tons, still down from the expected 40.2 million tons.

Current year production is estimated at 35.6 million tons but given the production trends, the BP led consortium is not expected to pump more than 33 million tons by the end of the year. Lower-than-expected output has cost the Azerbaijan state an estimated US$8.1billion in revenues.

In response to this broad criticism, BP informed that it is working with the State Oil Company of Azerbaijan (SOCAR) to address the production issues from the ACG block. BP has sizeable resources in Azerbaijan that include stakes in the ACG offshore oil fields and the vast Shah Deniz offshore gas field. It also partly owns and operates the strategic Baku-Tbilisi-Ceyhan pipeline, the primary export means for Azerbaijani oil.

The BP-led consortium has already expended $28.7 billion in the Azeri and Chirag oil fields till now since the 1990s and made revenue of $73 billion.

ACG oilfields are divided between the operator BP with 35.8% share and Chevron Corp. ( CVX - Analyst Report ) , Inpex, SOCAR, Statoil ASA ( STO - Analyst Report ) , ExxonMobil Corporation ( XOM - Analyst Report ) , TPAO, Itocu and Hess Corporation ( HES - Analyst Report ) . On the other hand, the offshore Shah Deniz field is operated by the British oil giant with a 25.5% share, with the other partners being Statoil, NICO, Total SA ( TOT - Analyst Report ) , LukAgip, TPAO and SOCAR.

BP is one of the world's largest energy companies, providing customers fuel for transportation, energy for heat and light, retail services and petrochemical products. Although near-term production hiccups remain in Azerbaijan, BP continues to focus on operations for the long term and is in discussion with the country on extending the contract and working on the fields after 2024.

BP has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We also maintain a Neutral rating on BP ADRs for the long term and expect it to perform in line with the broader market indices.