UPDATE 3-Azeri president attacks BP over low oil output


* Aliyev accuses BP of "false promises" on oil output

* Could signal third battle line for oil major

* Western firms losing ground to Russians, Kazakhs

(Adds analysts) By Afet Mehdiyeva and Dmitry Zhdannikov

BAKU/LONDON, Oct 11 (Reuters) - Azerbaijan accused BPon Wednesday of making "false promises" on oil output and saidthe state had missed out on $8 billion of potential revenuesfrom what is one of the company's biggest projects in the world.

President Ilham Aliyev said he would take "serious measures"- threatening a third battle front for BP as it seeks asettlement over its Macondo oil spill in the United States andis struggling over the fate of its $25 billion Russian venture.

"Azerbaijan has not received $8.1 billion in revenues,"Aliyev told his government, accusing BP of "grave mistakes" inplanning oil output at the Azeri-Chirag-Guneshli (ACG) fields inthe past few years.

"It is absolutely unacceptable ... Investors who cannotstick to their obligations and contract terms must learnlessons. Serious measures must and will be taken," Aliyev said,according to a text posted on his website.

BP's spokeswoman in Azerbaijan, Tamam Bayatly, said thecompany remained devoted to its Azeri operations and would workwith state oil company SOCAR to resolve issues.

The comments will also concern BP's partners on the project:Exxon Mobil , Chevron and Statoil whichhave for years watched neighbouring Russia and Kazakhstan takelarger shares in oil projects away from Western companiesaccused of contract violations.

"This looks like a worryingly familiar development forenergy companies in the former Soviet Union," said an executivewith a risk consultancy firm active in the region.

"All too often it is the first step in some form ofobligatory renegotiation of contract terms," he added.


The consortium, which has invested $28.7 billion inAzerbaijan since the 1990s and received revenues of $73 billion,is holding talks with the country on whether it can extend thecontract and work on the fields after 2024.

ACG was supposed to produce more than 1 million barrels perday (bpd) after a third phase was completed in 2008. Theprospect of so much non-OPEC crude ensured considerable Westerndiplomatic support for the project and industry kudos for BP.

ACG is so critical to Azerbaijan that the day the ProductionSharing Agreement (PSA) was signed - Sept. 20 - has beendesignated "Oil Workers Day", marked by annual celebrations.

However, ACG has not lived up to expectations. After hitting823,000 bpd in 2010, output has fallen, averaging 684,000 bpd inthe first half of this year.

"Last month BP officially promised to me to fix thesenegative developments as soon as possible ... and moreimportantly, replace people, who made those grave mistakes. Amonth has passed and I don't see those promises beingfulfilled," Aliyev said.

Oil executives and diplomats told Reuters last month BPwould have to invest billions of dollars more than previouslyplanned if it is to slow the output decline. Doing so might notbe commercially viable if the PSA is not extended beyond 2024.

BP is the biggest foreign investor in Azerbaijan, where italso operates the giant Shah Deniz gas project which suppliesTurkey.

A western oil company source familiar with the project saidthat even though ACG did not deliver the maximum output that hadbeen expected, it was always going to ramp up sharply to a peakand then decline sharply, because the reservoirs are not huge.

RBC Capital Markets' analyst Peter Hutton said he did notexpect a major threat to BP's position in Azerbaijan.

"However, the vehemence of the attack in such a core areashould raise eyebrows, especially given the pressures elsewhereincluding the recent indications that BP had been left off thelist to rebid in Abu Dhabi, another 'heritage' location for BP,"he said.

(Additional reporting by Margarita Antidze, Lada Evgrashina andAndy Callus; Editing by Robin Pomeroy)


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