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 oil-

extracting 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 vice-

presidents. 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

PlatformStart of

production

Unit of

measurement

From the start of

production till end of

2011

2010 2011

ChiragNovember

1997

mmbbl

mmte

573,6

77,5

34,0

4,6

27,2

3,7

Central

Azeri

February

2005

mmbbl

mmte

502,5

67,9

74,9

10,1

70,1

9,5

West Azeri December mmbbl 435,2 90,6 72,4

2005 mmte 58,8 12,2 9,8

East AzeriNovember

2006

mmbbl

mmte

237,6

32,1

51,4

6,9

45,8

6,2

Deepwater

GunashliApril 2008

mmbbl

mmte

156,1

21,1

49,5

6,7

46,4

6,3

Totalmmbbl

mmte

1,905

257,4

300,4

40,6

261,9

35,4

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

Start of

production

Unit of

measurement

From the start of

production till end of

2011

2010 2011

SD gasNovember

2006

bscm

bscf

mmboe

29,9

1,056,0

182,1

6,9

243,4

42,0

6,7

235,4

40,6

SD

condensate

November

2006

mmbbl

mmte63,7

8,1

14,7

1,9

14,0

1,8

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

2007 2008 2009 2010 2011

487 362 348 312 380

1462 1632 1889 20672272

0.750128270908161

0.818455366098295

0.844434510505141

0.868852459016394

0.856711915535448

Professional staff of BP in AzerbaijanExpatriate National Percentage of National citizens

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

27%

5%

30%

39%

Training expenditure of BP in Azerbaijan

Health, safety and environment/emergency re-sponseCore/foundation/leadership

Operations/technical

Professionals

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

61%11%

13%

14%

Reported breaches in Azerbaijan

Operating safely, responsibly and reliablyOur peopleOur business partnersOur 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.