Samira Bayramli, a recently promoted financial analyst at the Azerbaijani office of global oil and gas group BP, had a lot on her plate. It was November 2014 and Bayramli`s office window in Baku harbor offered a picturesque view of the Caspian Sea. Earlier this week, Bayramli`s top line asked them to review a proposed structure for a new production sharing agreement (PSA), for which BP wanted to conclude negotiations with the State Oil Company of the Republic of Azerbaijan (SOCAR) by the end of the year. This contractual agreement would establish the cost-benefit sharing system between BP and Azerbaijan for the exploration, exploitation and production of shallow-water offshore hydrocarbon deposits around the Absheron Peninsula (Figure 1). The contractual structure was complex and Bayramli wanted to understand the risks and opportunities of the project and how they should be distributed between BP and the host country. BP and SOCAR today signed a new Production Sharing Agreement (PSA) for the joint exploration and exploitation of Block D230 in the northern Absheron Basin in the Azerbaijani sector of the Caspian Sea. At the signing ceremony, Abdullayev said: “We have a long tradition of fruitful collaboration with BP. I believe that the synergies between modern advanced technology and the unique historical experience embodied in both companies create a solid foundation for our sustainable success. On the basis of fair and equitable conditions, today`s agreement becomes an important milestone in the search for maximum efficiency in the joint exploitation of Azerbaijan`s hydrocarbon resources.  In 2001, gas condensate beds were found at a depth of 6500 meters (21,300 ft);  However, these reserves were found to be commercially unprofitable and Chevron exited the project in December 2005.  This case is used in an optional subject for the second year in corporate finance, “Corporate Financial Policies”.
It invites students to analyze the estimated cash flows for a production sharing agreement (PSA) between BP and the Azerbaijani government, which is expected to be signed by the end of 2014. The main relationship is a joint venture (JV) between BP and the State Oil Company of the Republic of Azerbaijan (SOCAR). The joint venture shall have the right to cover the operating and capital costs generated by the revenues from the sale of the early production of the project and to share with Azerbaijan the profits of the so-called Profit Petroleum (PP) production after repayments. . . .