Foreign Direct Investment in
Transition Economies
The Case of British Petroleum in
Azerbaijan
2nd International Conference on Energy, Regional
Integration and Socio-Economic Development
Baku, Azerbaijan
October 1-3, 2014
Elchin Guliyev
Table of Contents
Introduction
1. Foreign Direct Investment
1.1 What is FDI
1.2 Types of FDI
2. FDI of BP in Azerbaijan
3.1 The overview of Azerbaijan
3.2 The Effects of BP`s FDI in Azerbaijan
3.2.1
Employment
3.2.2
Community and Social investment
3.2.3
Ethical performance and human rights
3.2.4
Environment
3.3 Summarizing
Introduction
One of the most important factors to develop an economy is foreign direct investment,
which is long-term capital investment to create new production facilities or improving existing
ones.
There is a rapid increased of foreign direct investment in the last decades. From the second
half of the 80`s it increased in 4 times, than production of world gross domestic product, and in 2,5
times quicker, than world trade. According to the Organization for Economic Cooperation and
Development (OECD), the annual volume of foreign investments has increased from 48 billion
dollars in 1981 to 235 billion dollars in 1997, and their saved-up balance cost has reached 2,6
trillion dollars(OECD, 1998).
Foreign direct investment has enormous impact on state of the economy, prospects of its
development and growth rates. FDI has become the main instrument of creating of the goods and
services on the foreign markets and a core of system of the international production, in a growing
measure influence scales, the directions and structure of world trade.
World experience proves that direct foreign investments have a number of advantages
before other forms of investments: first, they give an additional source of capital investments in
production of the goods and the services, in some cases carried out in the form of transfer of
progressive technologies, a know-how, the latest methods of management; secondly, it does not lie
down burden on the state budget, on its external debt (O. Kowalewski, M. Weresa, 2008).
FDI gives the chance to receive higher quality of investments, i.e. higher profitability of
capital investments in comparison with the national investment market of the investor (because of
transfer technologically more effective assets, smaller risk in comparison with purely national
investments).
Foreign Direct Investment
What is FDI?
FDI is an important and big part of international capital movement. There are many
definitions of FDI, which describe the different sides of its nature. Imad Moosa (2002. p. 261)
defines FDI as the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution and other activities of a firm in
another country ) the host country. The International Monetary Fund`s (IMF) Balance of Payments
Manual defines FDI as “an investment that is made to acquire a lasting interest in an enterprise
operating in an economy other than that of the investor, the investor`s purpose being to have an
effective voice in the management of the enterprise”. The United Nation`s (UN) 1999 World
Investment Report (UNCTAD, 1999) defines FDI as “an investment involving a long-term
relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign
direct investor or parent enterprise) in an enterprise resident in an economy other than that of the
foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate). One of the key words
of the last definition is the “long-term”, which used here to distinguish FDI from portfolio
investment, which has short-term nature.
But, there is another common feature of all FDI definitions, which completely distinguish
FDI from portfolio investment, which is “control”. Investors who are involved in portfolio
investment do not seek for control or lasting interest, he/she is interested in immediate profit. On the
contrary, investor, involved in FDI, is interested in control over firm, lasting interest and stable
profit.
Sometimes, another qualification is used to define FDI, in cases, when capital transferring
from a source country to a host country takes place. So, activities are considered to be FDI, when is
control through substantial equity shareholding and there is a shift or part of the company`s assets,
production or sales to the host country. But, sometimes, project may be funded completely by
borrowing in the host country.
So, the main distinguish feature of FDI from other international investments is control.
Razin et al. (1999) argue that the element of control gives direct investors an information advantage
over foreign portfolio investors and over domestic savers. The term “control” means some degree of
decision-making by investor in management policy and strategy. But it is possible to control, even if
person or company does not have any equity in other company. This type of control is possible to
exercise via contractual arrangements as subcontracting, management contracts, franchising,
licensing and product-sharing. Lall and Streeten (1977) argue that a majority shareholding is not a
necessary condition for exercising control, as it may be achievable with a low equity share even
without an explicit management contract.
Hence, problems may arise in measuring FDI. In order to keep secrecy, many countries do
not publish much information of their companies. Imad Moosa (2002) argues that because of these
problems, inconsistency between measures of FDI flows and stocks are the rule rather than the
exception. Furthermore, Cantwell and Bellack (1998) argue that the current practice of reporting
FDI stocks on a historical cost basis is unsatisfactory, because it does not take into account the age
distribution of stocks, which makes international comparisons of FDI stocks almost impossible. But,
nevertheless, there is a big scientific interest in FDI, which resulted in several theories explaining its
causes and effects. Moosa (2002) gives three reasons for such an interest in FDI. The first reason is
the rapid growth in FDI and the change in its pattern, particularly since the 1980s. This growth is
the result of increasing global competition tendency to free up financial and goods markets. FDI
flows were not affected much even when world trade slows down. Jeon (1992) and Moore (1993)
argue that when the growth of trade is retarded by trade barriers, FDI may increase as firms attempt
to overcome the barriers. Lipsey (1999) argues that FDI has been the least volatile source of
international investment for the host countries, with the notable exception of USA.
The second reason for interest in FDI by Moosa is the concern it raises about the causes and
consequences of foreign ownership. The opinions on this issue are very different from considering
FDI as symbol of new colonialism or imperialism to the opinion that the host country cannot
survive without FDI.
The third reason is that FDI offers the possibility and creates conditions for transferring
resources to developing countries. That means FDI is becoming an important source of funding
projects, when other means of financing are inaccessible. Lipsey (1999) argues that FDI also is very
important because it is transferring technology and managerial skills to the host country.
White C. and Fan M. (2006) argue that FDI is an ambiguous concept and give three
principal reasons. First, FDI includes three related but completely different activities – funding,
ownership and operation, and confusion arises because it is unclear which of activities the main
activity is. Funding or financial flow usually transferred to the host country by companies, by
intermediaries (financial institutions usually), sometimes even borrowed in the host country.
Ownership is a matter of who directly owns the productive assets created by the investment, often a
large multinational corporation which can own directly through subsidiaries or even through joint
enterprises (White C., Fan M., 2006, p 43.). Operation involves the appropriate organization and
integration of the relevant resources in the process of creating something of value to a market
(White C., Fan M., 2006, p 43.).
White C. and Fan M. (2006) argue that the second source of ambiguity is that each of the
terms in the expression, foreign direct investment, lacks a precise meaning. It is unclear to which
function foreignness is related – financing, ownership or control, or all three. In theory, subsidiary
of a multinational corporation can borrow money from banks in the host country. But such a
financial flow usually excluded when estimating foreign direct investment, because funding must
occur from abroad. Also how to determine the nationality of a multinational company, simply by
location of its headquarter? Then ownership and control do not necessarily occur together.
Corporation can own a business, but charge to control it to hired management, and can control a
business without hiring. Finally, what does the term ‘investment’ consist of? Is it simply financial
flow or movement of ‘real’ resources? If it is also movement of ‘real’ resources then the investment
includes managerial experience and technical knowledge.
And finally, White C. and Fan. M. (2006) asserts that the third source of ambiguity is that
the analysis of foreign direct investment requires a multidisciplinary approach, involving:

The financial theory relating to capital markets;

The management theory relating to strategy;

The theory of firm;

Political theory;

Neoclassical economics relating to production and trade;

Game theory, applied to strategic problems.
Types of FDI
FDI can be classified from the perspective of the investor (the source country) and from the
perspective of the host country. From the perspective of the investor, Caves (1971) distinguishes
between horizontal FDI, vertical FDI and conglomerate FDI. The purpose of horizontal FDI is to
produce the same or similar products in the host country. So, one of the main elements of horizontal
FDI is product differentiation. Also, the purpose of horizontal FDI is to use monopolistic or
oligopolistic advantages which it cannot do at home market because of home country laws.
There are two kinds of vertical FDI:
1) Backward vertical FDI, when the purpose is to exploit raw materials in the host country;
2) Froward vertical FDI, when the purpose is to be close to consumers through distribution
outlets.
Another type of FDI, conglomerate FDI, includes the horizontal and vertical FDIs. In 1999
horizontal, vertical and conglomerate mergers and acquisitions accounted for 71.2%, 18% and 27%
respectively of the total value of mergers and acquisitions worldwide (Imad Moosa, 2006,p.5).
From the perspective of the host country, FDI can be classified into:
1) Import-substituting FDI;
2) Export-increasing FDI;
3) Government-initiated FDI.
Import-substituting FDI implies production of goods, which were imported to the host
country before by investor. Import-substituting FDI may happen because of the host country`s
market size, transportation costs and trade barriers.
Export-increasing FDI implies desire of looking for new sources of input, such as raw
materials and intermediate goods. This kind of FDI is occur when the host country is increasing
export of raw materials and intermediate goods to investing countries and other countries.
Government-initiated FDI, as appears from the name, is initiated by government usually to
eliminate deficit in a balance of payments. Government can initiate such FDI through offering
incentives to foreign investors.
Kojima (1985) adopted similar trade-related classification and according to his
classification, FDI is ether trade-orientated FDI (which generates an excess demand for imports and
excess supply of exports at the original terms of trade) or antitrade-orientated FDI, which has an
adverse effect on trade.
FDI also can be classified into expansionary and defensive types. Chen and Ku (2000)
suggest that expansionary FDI seeks to exploit firm-specific advantages in the host country. On the
other hand, they suggest that defensive FDI seeks cheap labor in the host country with the objective
of reducing the cost of production. Chen and Yang (1999) suggested that a multinomial logit model
can be used to identify the determinants of the two types of FDI in the case of Taiwan. Their
empirical results indicated that expansionary FDI is influenced mainly by firm-specific advantages
such as scale, R&D, intensity, profitability and motives for technology acquisition. But, on the other
hand, Chen and Yang (1999) in their empirical research showed that FDI is influenced by cost
reduction motives and the nexus of production networks. Both types of FDI are affected by the
features of industry of the host country.
There is another classification by Chryssochoidis, Millar and Clegg (1997) which implies
five different types of FDI. The first type of FDI is occurs when a company want to get access to
specific factors, such as raw materials, technical knowledge, patent or brand names. If these factors
are not available in the home country, then a company invests to the host country to get access to
these factors.
The second type of FDI is developed by Raymond Vernon in his product lifecycle
hypothesis. According to his hypothesis a company will invest to the host country in order to get
access to cheap production factors, such as low-cost labor or raw material. The third type of FDI
implies mutual investment of international competitors, through cross-shareholdings or through
establishment of joint venture, in order to get access to each other`s products.
The fourth type of FDI implies that a foreign company tries to get access to consumers in the
host country through FDI since export of certain services may be impossible from home country to
the host country.
The fifth type of FDI occurs when foreign company has good location conditions in their
home country, but it is impossible to export goods to the host country because of tariffs or other
barriers of trade. Hence, foreign companies in order to overcome these barriers establish local
subsidiaries to get access to local markets.
FDI of BP in Azerbaijan
The Overview of Azerbaijan
Within the last 19 years Azerbaijan develops as the independent country, and takes
important place in the region and on the international scene. The main projects in the region,
especially energy projects, were initiated by Azerbaijan. All these projects made a huge contribution
to energy safety of the region and Europe. Strategically located at an intersection of Europe and
Asia, Azerbaijan is washed from the East by the Caspian Sea rich with hydrocarbon resources, on
the North borders on Russia, in the West – with Georgia and Armenia, in the southwest – with
Turkey and on the South – with Iran. The country has open access on extensive and quickly
emerging markets of the countries of Central Asia, Caucasus and Middle East. Excellent
infrastructure of Baku (including the largest regional sea and air terminal) is the best choice for
every businessman entering the market of the Caspian region.
Azerbaijan – the logistic center of the Caspian region. The country possesses the biggest
seaport on the Caspian coast. The Azerbaijani State Caspian Sea the shipping company is leading
company in the region with large commercial fleet, actively involved in transportation of passengers
and cargoes to Europe, the Middle East, Iran, Russia and Central Asia. Azerbaijan has well
developed network of the railways, and also the regular railway ferry communication with the main
ports of the Caspian Sea in Russia, Iran, Kazakhstan and Turkmenistan. The Baku International
Airport of a name of Heydar Aliyev meets the requirements of the international standards. Thanks
to the very favorable geographical arrangement, Baku the airport became number one in the region
for transit flights between the East and the West, the North and South.
Azerbaijan - the central transit point of a route of the Great Silk Way, stretching from
Central Asia to Europe. 13 countries of the region are members the international organization
TRACECA founded in 1998. TRACECA corridor - the international program on development of a
transport corridor for transportation of goods on a route Europe -Asia. Besides, an initiative of the
largest regional trading partners – Russia and Iran - to encourage bilateral trade, and also to expand
commercial relations with Central Asia and Northern Europe, has involved Azerbaijan to the
shortest geographical route connecting this two trades and economic partner. Every year on this
route essential growth trade turnover is observed.
Azerbaijan borders on the expanded European Union. The government has accepted the
extensive program of coordination of the legislation and standards according to the European
legislation and standards. Being «the new neighbor» of European Union, Azerbaijan is actively
involved in such the European initiatives, as Council of Europe, OSCE, North Atlantic cooperation,
EU cooperation programs and etc.
Nowadays Azerbaijan is the country with most quickly developing economy in the world.
Rapid economic growth of Azerbaijan has proceeded and in 2011-2012 years that has served
increase in the income per capita, to opening of new workplaces and decrease poverty level.
Table 3. FDI net (BoP; US dollars) in Azerbaijan
Source: World Bank.
In the 2011th year real growth of gross domestic product in Azerbaijan has made 8,4 %.
High rates economic growth of Azerbaijan within the previous several years are connected with
increased volume of export of oil.
Over the last 10 years the economy of Azerbaijan has grown by more than 1000 %. It is one
of most striking examples of rehabilitation among economies in transition.
Azerbaijan abounds with mineral and climatic resources. Oil and gas fields of the Caspian
Sea are one of the world’s largest. Azerbaijan possesses also considerable reconnoitered fields of
precious metals (including gold and silver), ferrous and non-ferrous metals, raw materials of various
construction materials etc.
One of the main resources of the country is its natural variety. Despite of rather small sizes,
the territory of Azerbaijan, thanks to a difficult relief and to geographical arrangement, includes
some various climatic zones: from the damp subtropical climate to the semi-Arctic. It creates unique
possibilities for development agriculture and tourism.
Azerbaijan – the country with old industrial and trading traditions. Industrial revolution has
occurred here at the end of 19 century, in connection with expansion and development of oilextracting and oil refining branches. Further industrial development has led to growth of scientific
research base. Along with many universities and colleges, in Azerbaijan there is a large research
center - National Academy of Sciences of Azerbaijan (NANA) numbering about 7000 scientists.
Azerbaijan has concluded 39 bilateral agreements about mutual protection of investments
and 39 international agreements on avoidance of the double taxation. The legislation of Azerbaijan
develops according to a strategic objective of the government which is carrying out by «benevolent
policy» for foreign businessmen. Foreign investments are protected by the certain guarantees
provided by the government and the legislation, in that number:
1) The guarantee against legislation deterioration;
2) The guarantee against nationalization and requisition;
3) The guarantee of compensation of damage;
4) The guarantee of repatriation of profit;
5) The simplified system of registration («system of a uniform window» for registration of legal
entities);
6) The Considerable achievements in the course of accession to WTO.
Azerbaijan, according to the analytical report of the World Bank and International finance
corporation “Doing Business”, is recognized as the world leader of the 2009th year on
implementation of reforms. Azerbaijan has made unprecedented jump on 64 places, and has moved
from the 97th to the 33rd place. Reforms have been carried out in 7 of 10 the indicators
accompanying rating of the countries of the world on creating an enabling environment for
business.
Table 4. FDI net inflows (% of GDP) in Azerbaijan
Source: World Bank.
Table 5. FDI net outflows (% of GDP) in Azerbaijan
Source: World Bank.
Financial sector: Banking
The global financial crisis which has captured the financial markets of the world in 2008,
has affected communications and the relations of foreign investors with financial institutions of
developing countries. It has affected also on abilities of the Azerbaijani banks to involve resources
of the foreign financial markets. As terms and conditions of a foreign loan became more strict in the
2008th year, risks connected with refinancing and liquidity also have increased. Banks aspired to
diversify debts to the foreign financial markets by means of currency, sales, terms of payments and
investments, thus, having managed to protect itself from growing risks. In the 2008th year the
portfolio of banking system has not tested serious negative changes. As a whole the effect of global
financial crisis has induced financial institutions of Azerbaijan to revise plans for further
development. Despite the adverse crisis environment, the banking system of Azerbaijan has shown
ability to resist to the arising to risks.
BP in Azerbaijan
British Petroleum (BP) is one of the most prominent and successful oil companies in the
world. It operates almost in all oil-countries across the globe. After the fall of the “Iron Curtain”
there were big opportunities for foreign MNCs in the CEE countries and the former Soviet Union
countries. Azerbaijan, with its oil-rich reserves, of course, became target for many big oil
companies, and BP was not an exception. But, the government of Azerbaijan also made an
important step. It created good investment conditions for MNCs, including particularly oil
companies. Government of Azerbaijan gave to MNCs government guarantees for safety of their
investment. So, these steps attracted many MNCs to make business in Azerbaijan.
BP opened its first office in Baku, Azerbaijan, in 1992. Then, two years later BP signed
“Contract of the century” with government of Azerbaijan and other oil companies. So, since 1994
BP is participating almost in all big oil and gas projects in Azerbaijan. It participates in such
important and huge projects as Azeri-Chirag-Deepwater Gunashli, Shah Deniz. These oil projects
are important not only for Azerbaijan and this region, but also for energy security of Europe. BP in
cooperation with Azerbaijan government extracts oil in Caspian Sea and transfers it by “BTJ” to
Turkish port Jeyhan, where it is sold to European countries and US.
BP has also gas projects in Azerbaijan. It extracts and transfers gas to Turkey and then to
Europe.
BP has several legal entities in Azerbaijan, but the main legal entity is BP Exploration. BP
operates in Azerbaijan in consent of several Product Sharing Agreements (PSA) and Host
Government Agreements (HGA) signed with the government of Azerbaijan.
The management of BP in Azerbaijan consists of one regional president and eleven vicepresidents. In 2009 the regional president of BP was appointed Rashid Javanshir, Azerbaijani. It
was for the first time when the regional president of BP became Azerbaijani, which proves that BP
pays very big attention to diversity management and tries to appoint not only foreigners on top
positions. It is one of the main FDI strategies of BP.
Since 1995 BP have been invested in Azerbaijan in form of FDI 34 billion US dollars, which
shows long term investment interest of BP in Azerbaijan. One of the main oil projects of BP in
Azerbaijan is Azeri-Chirag-Guneshli oil project. BP started operation here in 1997. It situates in
Caspian Sea in Azerbaijan sector, 100 km East of Baku. Azeri-Chirag-Guneshli is operated with
SOCAR.
Table 6. Azeri-Chirag-Deepwater Gunashli oil production
Start of
Unit of
production
measurement
November
mmbbl
1997
Central
Platform
From the start of
2010
2011
573,6
34,0
27,2
mmte
77,5
4,6
3,7
February
mmbbl
502,5
74,9
70,1
Azeri
2005
mmte
67,9
10,1
9,5
West Azeri
December
mmbbl
435,2
90,6
72,4
Chirag
production till end of
2011
East Azeri
Deepwater
Gunashli
2005
mmte
58,8
12,2
9,8
November
mmbbl
237,6
51,4
45,8
2006
mmte
32,1
6,9
6,2
mmbbl
156,1
49,5
46,4
mmte
21,1
6,7
6,3
mmbbl
1,905
300,4
261,9
mmte
257,4
40,6
35,4
April 2008
Total
Source: BP Sustainability Report 2011 (mmbbl – million barrels; mmte –million tonnes)
In the nearest future, it is expected to extract five billion barrels of oil. Of course, this
amount of oil barrels will require more sophisticated oil reservoirs and more improved management
techniques
One of the main gas projects of BP in Azerbaijan is Shah Deniz gas project. This gas field
was discovered in 1997. BP started extracting gas in this field in 2006. In 2011, Shah Deniz
produced 6,67 billion standard cubic meters of gas. Shah Deniz project has great future.
Table 7. Shah Deniz gas and condensate production
SD gas
Start of
Unit of
production
measurement
November
2006
SD
November
condensate
2006
From the start of
production till end of
2010
2011
2011
bscm
29,9
6,9
6,7
bscf
1,056,0
243,4
235,4
mmboe
182,1
42,0
40,6
63,7
14,7
14,0
8,1
1,9
1,8
mmbbl
mmte
Source: BP Sustainability Report 2011 (bscm – billion standard cubic meters; bscf – billion
standard cubic feet; mmboe – million barrels of oil equivalent; mmbbl – million barrels; mmte –
million tonnes).
In the second stage of this project it is planned to transfer gas to Turkey and then to Europe,
what will be a big contribution to Europe energy security.
The Effects of BP`s FDI on Azerbaijan
As any investment, FDI of BP has its certain effects on Azerbaijan. Sometimes these effects
may be negative, but mostly they are positive. BP`s FDI affects mostly on following spheres in
Azerbaijan:





Employment
Community and society
Ethical performance
Human rights
Environment
Employment
Development of variety of oil and gas projects by BP in offshore and in onshore fields in
Azerbaijan creates favorable conditions for stimulating direct and indirect employment. There are
2 701 permanent employees in BP, according to 2011 sustainable report. 86% of employees are
citizens of Azerbaijan Republic. Subcontractors and suppliers of BP also employ many people, for
example, in procurement and service. There are many people, which were employed temporary,
which is also very important for community. For example, it may be during construction of some
facilities. All the projects, especially construction of pipelines, require a wide range of goods and
services. BP estimated expenditures for these goods and services for all projects and got 300 million
US dollars per year. According Keynes theory, these expenditures have “multiplier” effect, which is
also very important contribution by BP in Azerbaijan employment policy.
BP has special recruitment strategy and training programs, which allows hiring people,
which really deserve these job places. Recruitment strategy includes all the aspects, which
prospective employees will need in their work. Also, all the stuff of BP periodically is trained in
order to improve their professional skills.
Figure 1. Professional staff of BP in Azerbaijan
Professional staff of BP in Azerbaijan
Expatriate
National
Percentage of National citizens
86%
84%
87%
75%
82%
1462
1632
1889
2067
487
362
348
312
380
2007
2008
2009
2010
2011
2272
Source: BP Sustainability Report 2011
BP hires a wide range of professional as engineers, administrative personnel, human resource,
marketing and other managers. Also BP recruits graduates from Azerbaijan universities, which is
great opportunity for these graduates.
Figure 2. Training expenditures of BP in Azerbaijan
Training expenditure of BP in Azerbaijan
26%
Health, safety and
environment/emergency response
Core/foundation/leadership
39%
Operations/technical
5%
Professionals
30%
Source: BP Sustainability Report 2011
BP established the Enterprise Centre in Baku, which helps to local firms to identify
opportunities to work with BP, which is also, is a big contribution to Azerbaijan business
environment. The aim is to build local supply capability, promote international standards, and
increase opportunities for local businesses.
Community and Social Investment
Big projects are always accompanied by investment to community and social environment.
MNCs do this in order to create stable social environment capacity and, of course, to create a good
reputation.
BP, as one of the biggest MNCs in the world, also invests a lot in social environment, where
the aim is to support development of community and country`s economy. BP prepared program of
community investment, which includes non-governmental organizations, and other organizations.
One of the steps of this program is the design of water and sanitation project in the Sangachal area,
which situated near Baku. This project will be held with local authorities, non-governmental and
other organizations. BP also develops projects, the aim of which is supporting education and local
business environment development in Azerbaijan.
BP attaches important significance in cooperation with stakeholders. Particularly in
Azerbaijan the main stakeholders are government, civil society and employees. BP has very
successful partnership relations with the government of Azerbaijan. The top management of BP met
the president of Azerbaijan many times. BP also has very productive relationship with SOCAR. BP
also has mutually successful relations with Ministry of Environment and Natural Resources, the
Ministry of Transport, the Ministry of Culture and the Ministry of Economic Development.
BP established in Azerbaijan Social Review Commission, which is an independent advisory
group, which was created in order to improve BP`s social performance in Azerbaijan. Also, the
representatives of BP periodically meet with the representatives of non-governmental organizations
and others members of society. The top management of BP periodically meets with the employees
or with representatives of employees, discusses essential problems, and this is straight feedback in
company from employees to the top management.
BP has also very good relationships with other stakeholders, such as community, media,
students, contractors, local enterprises and general public.
Ethical Performance and Human Rights
As an economy in transition, corruption is still remaining one of the main problems in
Azerbaijan. Azerbaijan government undertakes certain steps to erase corruption. Corruption is one
of the main barriers for FDI, so this became main issue for Azerbaijan government to solve.
As one of the biggest foreign investors in Azerbaijan, BP plays its positive role in this case.
There were many concerns about transparency of contracts between Azerbaijan government and
BP, but all contracts between Azerbaijan government and BP, PSAs and HGAs, are available online
on the public website. Elements of contracts can be a model for other contracts for foreign investors
in the future.
As oil-operator with high reputation, BP has world-class business policies on health, safety
and the environment, ethical conduct, employees, relationships, and finance and control. These
policies completely prohibit corruption and bribery. These policies also extends on BP`s
contractors, suppliers and partners.
BP also has several external independent and internal groups, auditing BP. There was
established 24-hour telephone hotline, where everyone can inform about breaches and can stay
anonymous. All reported breaches will be carefully investigated.
Figure 3. Reported breaches in Azerbaijan
Reported breaches in Azerbaijan
14%
Operating safely, responsibly and
reliably
Our people
13%
Our business partners
11%
62%
Our assets and financial integrity
Source: BP Sustainability Report 2011
BP highly appreciates human rights. It pays an important attention on protection of human
rights. All employees of BP have the equal rights, and there is no any discrimination by race,
religion, political views and other factors. All employees of BP are recruited and promoted only on
the basis of their knowledge and experience. They all have chance to improve their living standards.
While construction of pipeline or facility BP always takes care about landowners. BP tries not to
relocate any households, but if it happens, then all landowners affected by the projects are
compensated fairly.
The process of acquisition and compensation takes place as transparent and consultative
process. All activities in this case are reported in “Resettlement Action Plans”, which is released
publicly.
All these procedures took place while construction of BTJ.
So, it can be concluded, that ethical performance and human rights are very important issues
for BP.
Environment
One of the main features of environment in Azerbaijan is its biodiversity. But, there are
many ecological problems in Azerbaijan. They are land degradation, soil erosion, but major
problems are in Caspian Sea. Because of perennial extracting of oil in Caspian Sea near Baku, the
ecological situation here is very bad. This situation is resulted in decreasing of amount of fish in
Caspian Sea, especially near Baku, which was strong impact on fish industry.
BP always adhere world standards in ecological issue. So, BP made certain step in order not
to affect natural environment. First of all, while construction of pipelines, BP tries to avoid
territories with high biodiversity, national park and other sensitive areas. Of course, it increased
costs of projects, but also increased reputation of BP.
But, despite of all these steps, some projects have certain impact on environment. In this
case BP tries to mitigate the consequences of this impact, restore affected areas.
Another danger for environment is oil spills. Oil spills have significant ecological impact.
They are able to destroy the ecosystem in Caspian Sea. That is why, BP pays a big attention on
technical safety on offshore oil and gas fields. BP also uses the most advanced technology in order
to avoid such situations. Also, BP has a perfect oil spill response mechanism, so, it can immediately
mobilize all resources and equipment to clean-up and restore the potential damage.
BP has also measuring and monitoring mechanisms. Qualified professionals periodically
measure and monitor natural environment in order to recognize any potential danger. So, BP invest
huge amount of investment in protection of environment which have positive effect on relationship
between BP and the host country, Azerbaijan.
Summarizing
Twenty years history of BP in Azerbaijan can be a good example of positive effects of FDI
on the economy of the host country.
These relations are productive for both sides, BP and
Azerbaijan. For BP, it is, of course, oil-rich fields with high quality of oil and, as a result, high
revenues. For Azerbaijan it is a long-term stable investment, which creates thousands of job places.
Azerbaijan government created very good conditions for foreign investors, especially for BP. There
are many highly qualified professionals in oil industry in Azerbaijan, which, also, makes it easier
for BP, so, it does not have to bring specialists from other countries.
There are also obvious positive effects of functioning BP for Azerbaijan. First of all, BP
hires many people in different fields. It is also transfer of advanced technology, knowledge,
managerial skills and international experience in Azerbaijan. BP also takes care about environment
and invests in community.
Taking everything into consideration, the relations between BP and Azerbaijan have positive
effects on both sides, which proves overall positive effect of FDI of BP on the economy of
Azerbaijan.