AZERBAIJAN
NICK COLEMAN
Senior Reporter
AZERBAIJAN
20 YEARS ON...
With production from its main oil
fields 20% below peak and gas
mega-projects facing market
uncertainty – plus the threat of
conflict escalation – the celebrations
for Azerbaijan’s 20th anniversary of
the Contract of the Century were
somewhat overshadowed.
Shifting geopolitics, production declines
and escalating military tension detracted
somewhat from this year’s 20th
anniversary in Azerbaijan of the so-called
“Contract of the Century,” the
momentous deal which heralded the
rebirth of the country’s oil industry and
an opening for international companies.
The September 1994 production sharing
agreement for the Azeri and Chirag fields
plus a deepwater portion of the Guneshli
field was Azerbaijan’s first offshore PSA.
With the subsequent Baku-TbilisiCeyhan (BTC) pipeline it marked a big
advance into the former Soviet Union by
Courtesy: bp.com
THEN: President Heydar Aliyev and BP’s John Browne shake hands in 1994.
36
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DECEMBER 2014
Western companies and won
heavyweight political backing from
Washington.
But the celebrations in September led by
President Ilham Aliyev, whose father
Heydar Aliyev oversaw the original
contract, could not disguise the fact that
the Caspian oil boom has shown signs of
faltering. Falling Azeri production
mirrors declining political interest from
countries outside the region, partly
reflecting more recent production surges
from places like Iraq and the US.
BP, the leading Western player in the
country, has been working to sustain
Azeri-Chirag-Guneshli output following
a row with Aliyev in 2012, who was
furious over the production decline and
the consequent hit to state coffers,
accusing the company of having made
“grave mistakes.”
The British major has managed to
stabilize ACG production with the
start of production from the 183,000
b/d West Chirag platform, the
centerpiece of the $6 billion Chirag Oil
Project, taking cumulative investment
AZERBAIJAN
in ACG to $29 billion. Output in the
first six months of this year was up
0.1% from the 2013 full-year level, at
656,000 b/d.
However this level, 17 years after
production began, is already 20% below
that in ACG’s peak year, 2010. Azeri oil
production as a whole was 14% lower
last year than in 2010, at 877,000 b/d.
Consultancy Wood Mackenzie expects
ACG production – which has totaled
more than 2.5 billion barrels of oil so
far, out of a total 5 billion allowed
under the current PSA – to stay above
600,000 b/d for the next few years, but
to decline further before the end of the
PSA in 2024.
“The peak of those [ACG] fields is over,”
BP’s CEO Bob Dudley admitted in July,
although he noted that “there could be
other sources … to put in the [BTC]
pipeline that are not our projects.”
Liquids to gas
In the view of many industry observers,
Azeri oil production is entering a
sunset period and the country will need
to face up to production being more
based on gas, plus an important role
transporting resources from countries
on the eastern side of the Caspian – oil
from Kazkahstan and gas from
Turkmenistan, if the proposed TransCaspian Gas Pipeline ever becomes a
reality.
As part of the 20th anniversary
celebrations this year, a ceremony was
held at the Sangachal terminal near
Baku to mark the groundbreaking for
the Southern Gas Corridor, a network
of pipelines that will stretch from
Azerbaijan across Turkey to Europe.
Courtesy: yeniazerbaycan.com
NOW: Leaders at the Southern Gas Corridor groundbreaking ceremony (left to right: Azerbaijan, Georgia, Turkey,
Greece, Bulgaria, Albania, Italy, Montenegro, the UK, the US, BP and Socar)
President Aliyev was joined by the
president of Bulgaria, the prime
ministers of Turkey, Georgia, Greece
and Montenegro, and senior
government officials from Italy,
Albania, Croatia, the US and the UK
who all put their signatures on the first
piece of pipe for the Southern Gas
Corridor.
Speaking at the event, BP’s Dudley
said: “Today we are not only looking
back to celebrate the last two decades,
but looking ahead to the next chapter
in Azerbaijan’s energy story as we start
the building of the Southern Corridor
to carry gas from the Caspian’s giant
Shah Deniz field to Georgia, Turkey,
Greece, Bulgaria, Albania and
ultimately, Italy.”
The ceremony came after BP and
partners in late 2013 took a final
investment decision on the $28 billion
Shah Deniz phase 2 project, which
includes expansion of the South
Caucasus Pipeline. With gas production
of 16 billion cubic meters/year, phase 2
will also increase Shah Deniz
condensate production to 120,000 b/d
from 55,000 b/d.
BP also hopes to unlock the ShafagAsiman structure with its “20K”
program, a high-pressure, high
DECEMBER 2014
insight
37
AZERBAIJAN
AZERBAIJAN: A HISTORY
OF HYDROCARBONS
temperature drilling technology project
aimed at handling pressures of up to
20,000 pounds per square inch and
temperatures up to 350 degrees
Fahrenheit. Shafag-Asiman is thought
to contain 500 billion cubic meters of
gas and 65 million mt of condensate.
Azerbaijan’s signing of the Azeri-ChiragGuneshli PSA in 1994 was a powerful symbol
of the return of international oil companies to
the former Soviet Union. It was not the first
PSA of the post-Soviet era – Kazakhstan’s
Tengiz PSA was signed the year before – but it
had particular resonance because of Baku’s
history as the so-called Black Gold Capital, the
birthplace of the modern oil industry outside
the US.
Azerbaijan has long been outgrown as an oil
producer by Russia and more recently
Kazakhstan. But it holds a special status both
as a gateway to the Caspian, and symbolically
as the place where finance and expertise
came together in the late 19th century to form
an industry that for a time rivaled the US in
levels of production and comprised a
multinational cast of characters, including
Russians, Britons, Azeris, Armenians and
above all the Swedish businessman and
engineer Ludvig Nobel, whose Branobel
company operated in both Azerbaijan and
Turkmenistan. A young Georgian called Ioseb
Jugashvili – later to be known as Josef Stalin
– also cut his revolutionary teeth agitating
among Baku’s oil workers in the early part of
the century.
That heady mix was largely snuffed out with
the 1917 Russian Revolution. By the time of
Branobel’s nationalization in 1920, Azeri
production had fallen far behind the giant
leaps made in the US. Azeri oil wealth
continued to capture imaginations however,
not least that of German Nazi leader Adolf
Hitler, who in World War II diverted his forces
THEN: Baku’s oil towers.
38
insight
DECEMBER 2014
Also on the horizon is the giant
Total-operated Absheron field, thought
to contain 5-10 Tcf (142-284 billion
cubic meters) of gas and due on stream
around the end of the decade.
NOW: Baku’s Flame Towers.
away from Moscow and towards the Baku oil
fields in what some historians consider a fatal
tactical error.
With a shift in post-war attention to Siberia
and its oil fields, Soviet geologists still
managed to make major discoveries in the
Caspian region. Today, most Caspian
production comes from fields discovered in
the Soviet era, including ACG in Azerbaijan and
Kazakhstan’s Tengiz and Karachaganak.
Today’s oil industry perhaps owes a debt of
gratitude to Nobel however, partly for
pioneering industrial production in Baku, but
also for the refining, transportation and trading
methods he employed. The Contract of the
Century signed by President Heydar Aliyev in
1994 was in some sense a re-embrace of
those international values, and sparked an
economic boom from the late 1990s until the
latter part of the 2000s that transformed the
country.
But the story has been soured by questions
about the glamorous lifestyles of
Azerbaijan’s first family and the methods it
has used to stay in power, including
suppression of democracy and human
rights. Kazakhstan’s rise as an oil producer
has been just as controversial. In both
countries stagnating production and recent
falls in oil prices have added to pressures on
their political leaders.
Such projects are questioned by
critics who point to diminished
expectations of European gas demand
and a possible increase in LNG
volumes in the Mediterranean in
years to come.
Proponents of Caspian gas however
point to the steady development of the
Southern Corridor, which promises to
reduce Europe’s reliance on Russian gas
– notably Russian gas that transits
Ukraine – and also highlight Turkey’s
growing gas demand.
“We know Turkey will be a gas
importing country. We are working to
find the best development for
Absheron, and we are relatively
confident we’ll find access to market,”
Total’s president for exploration and
production, Arnaud Breuillac, told
Platts in September.
‘Status quo can’t last’
From a geostrategic viewpoint, the
Caspian oil boom was never just about
Azerbaijan. The BTC pipeline
provided a counterweight to Russia’s
energy dominance in the European
sphere and has underpinned Turkey’s
rise as a Mediterranean oil hub, both
AZERBAIJAN
key strategic aims of the US and
Europe.
CASPIAN SEA OIL AND GAS FIELDS
In terms of the security situation, BTC
has to some extent justified hopes that
it would help dampen down conflict in
the historically unstable region by
giving Azerbaijan a stake in the security
of the whole of the southern Caucasus
and thus restraining ongoing tensions
over the Armenia-backed NagornoKarabakh area.
But 20 years since the end of a six-year
war over Nagorno-Karabakh in which
tens of thousands of people died, that
unresolved conflict is also in danger of
reigniting. Deadly clashes involving
small arms and artillery fire have
intensified this year around NagornoKarabakh, which the BTC route skirts
around, and have widened to include the
less fortified Azeri-Armenian border
close to Georgia. In the latest escalation
in November, Azerbaijan shot down an
Armenian helicopter, killing the three
crew members.
KAZAKHSTAN
Astrakhan
field
RUSSIA
Kashagan
field
Korchagin
field
UZBEKISTAN
AZERBAIJAN
ACG fields
Shah Deniz
field
TURKMENISTAN
Cheleken
contract area
Sardar Jangal
field
IRAN
Agreed-upon maritime boundaries
Theoretical Caspian equidistant line
Oil field
Natural gas field
Oil refinery
Natural gas processing plant
Source: EIA
SOUTHERN CORRIDOR PIPELINES
BELARUS
POLAND
GERMANY
CZECH REP.
UKRAINE
SLOVAKIA
Lanzhot
Baumgarten Lanzhot
MOLD.
HUNGARY
AUSTRIA
3 Trans-Anatolian Pipeline (TANAP)
4 South Caucasus Pipeline (SCP)
5 Ionian Adriatic Pipeline
1 Trans Adriatic Pipeline (TAP)
6 Interconnector Greece Bulgaria (IGB)
2 Nabucco West
7 Baku-Tbilisi-Ceyhan (BTC)
Atyrau
Odessa
Tarvisio
SLO.
Petrovsk
Russian artery (simplified)
Existing pipelines
Proposed pipelines
Brody
Waidhaus
President Aliyev has sworn to recapture
lost Azeri territory. As for Armenia, its
worries about Azerbaijan’s growing
military strength, one of the fruits of its
oil wealth, have led to talk in
government circles of making preemptive strikes against Azeri
infrastructure, says Lawrence Sheets,
analyst at International Crisis Group.
Tengiz
field
2
CRO.
ROMANIA
Constanza
BOS.
SERB.
5
ITALY
BUL.
Stara Zagora
Brindisi
Komotini
Otranto
GEORGIA
Bourgas
Samsun
3
Istanbul
Tbilisi
Caspian
Sea
7
ARMENIA 4
AZERB.
Ankara
GREECE
Aktau KAZAKHSTAN
Dzhugba
6
AL. MAC.
1
RUSSIA
Black Sea
Erzurum
Baku
Turkmenbashi
Sangachal
TURKMENISTAN
7
Korpedzhe
TURKEY
Ceyhan
Kort-Kui
Mediterranean Sea
“I don’t see the status quo as something
which can last forever. The statements
out of Baku were always belligerent, but
it has become more than threatening,”
Sheets said, adding that a diplomatic
effort is urgently needed involving the
return to Azerbaijan of territory around
Nagorno-Karabakh.
CYPRUS
SYRIA
IRAQ
Tehran
IRAN
Source: Platts
Kashagan embarrassment
Meanwhile, with throughput of 744,000
b/d in the first six months, BTC is
operating at less than two-thirds of its
1.2 million b/d capacity. This partly DECEMBER 2014
insight
39
AZERBAIJAN
reflects the technical and governance
problems that have engulfed
Kazakhstan’s giant Caspian field,
Kashagan, which was supposed to be
creating transport bottlenecks in the
region by now. It had long been
intended that BTC would carry growing
production from landlocked Kazakhstan
as Azeri output declined.
“
Critics point to diminished expectations of
European gas demand and a possible increase in
LNG volumes in the Mediterranean in years to
come.
”
But instead it has been an
embarrassment, described by Total’s chief
financial officer, Patrick de la
Chevardiere, as a “failure of the
industry.” Kashagan was originally due
on stream in the middle of the last
decade, but that goal proved hopelessly
optimistic and after problems last year
with leaking sulfurous crude it is not
now expected on stream before the
second half of 2016.
Beyond these present and proposed
projects, Azeri production is largely
confined to the declining mature assets
of state company Socar, together with
the Gum Deniz offshore field, which is
operated by US-Azeri joint venture
Bahar Energy and has produced less than
2,000 b/d of oil this year.
The Azeri onshore is generally seen as an
unattractive prospect due to its heavy
exploitation, dating back to the 19th
century, and resulting environmental
damage. However, US company
40
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DECEMBER 2014
ConocoPhillips is pursuing exploration
in one unexploited area, the Kura Valley.
And Norway’s Statoil, a key player in
European gas, is upbeat on Azerbaijan,
despite having sold its 25.5% stake in
Shah Deniz in the last 12 months. It
retains an 8.6% stake in the ACG fields
along with a stake in the BTC pipeline.
Statoil senior vice president for Europe
and Asia Katie Jackson notes that ACG
remains a “truly huge field” with its 2.5
billion barrels still to be produced under
the current agreement.
In addition she is optimistic that new oil
and gas resources will be discovered in
what is a relatively restricted offshore
zone, still restricted by territorial disputes,
and generally prone to high drilling costs.
Azerbaijan will have to compete against
other destinations in a cost-conscious
environment as global oil prices drop,
but the country has earned respect for
its stable fiscal regime, Jackson says. “We
continue to see the region as very
interesting in terms of having a rich
petroleum system and also well
positioned in terms of infrastructure …
for exporting both oil and gas, and also
positive – Azerbaijan in particular –
having been very stable from a fiscal
perspective for a long period of time,”
she said in a recent interview.
Others are less convinced. “It’s just the
opportunity set – it’s low value onshore
and then very high cost and technically
challenging offshore,” Nick Gellatly, the
head of Caspian upstream research for
Wood Mackenzie, said. “To have
opportunities for mid-cap players,
international players – there probably
aren’t any that stick out at the moment
in the upstream.”