Energy & Mining

Gas is the New Black

Energy

Azerbaijan is investing heavily in the value-added manufacturing of oil and gas with a new refinery complex in an effort to protect itself from fluctuating oil prices.

People have been producing oil in Azerbaijan for centuries, since one of the world’s first oil wells was drilled in 1846. The sector has played a long and important part the country’s history and economy; however, efforts to diversify the economy are beginning to pay off as the oil sectors contribution to the GDP graduals falls. The sectors contribution for 2015 is expected to fall to 34.9% compared to 40.4% in 2014. The oil sector’s share is expected to fall by 2.2% while the value-added of the non-oil sector will rise by 8.1%. This being said, it by no means signifies that the oil and gas sector in Azerbaijan is drying up, in fact it is quite the contrary, whereby the country’s natural gas sector is looking to pick up the mantle and carry the sector forward.

REFINING

According to the Oil & Gas Journal, Azerbaijan has 7 billion barrels of oil, which ranks it 20th globally in proven oil reserves. In regard to it proven gas reserves, the “Land of Fire” ranks high globally with 2.3 trillion cubic meters (tcm). The main player in the Azerbaijan oil and gas sector is the State Oil Company of Azerbaijan Republic (SOCAR), which is involved in all segments of the oil sector and produces 20% of Azerbaijan’s total output of oil. SOCAR is also responsible for exploration as well as the operation of the country’s two oil refineries, the Baku Refinery and the New Baku Refinery. The country has a crude oil refinery capacity of 399,000 bpd with the Baku Refinery the larger of the two with a capacity of 239,000 bpd and the New Baku Refinery a capacity of 160,000 bpd. However, the Organization for Security and Cooperation in Europe (OSCE) stated that both refineries require modernization in order to bring them up to European standards, which the government said would cost between $600 million and $700 million to complete. In November 2014, SOCAR announced it was going to do just that and began modernization work on its refineries. SOCAR plans to replace the two aging refineries with a gas processing and a petrochemical plant worth $8.45 billion. This plant was originally planned to be completed in 2017; however, due to a tightening of funds the project has been delayed slightly. The second plant under construction is a new oil refinery, which is now expected to be completed by 2030 instead of the original date of 2026. The oil refinery will cost an estimated $8 billion and increase the annual oil capacity of oil refining from 6 million tons to 8 million tons. The plants will also be able to process 12 billion cubic meters (bcm) per year as well as 800,000 tons of polyethylene and 300,000 tons of polypropylene. Funding for the project is set to come from a number of avenues, with SOCAR providing $1.27 billion of it own money, 70% coming from investment firms and private companies, and the remainder would come from Azerbaijan’s $34 billion State Oil Fund of the Republic of Azerbaijan (SOFAZ). The new complex would allow the country to add value to its natural resources and profit more from manufactured products instead of solely exporting oil and gas. The refineries will also manufacture European standard, high-octane gasoline Euro-5 for the domestic market and possibly for export by 2030.

OIL

In 2010, Azerbaijan passed the milestone of producing 1 million bpd of oil; however, since then oil production has been gradually declining and is expected to come in at 852,000 bpd in 2014. The country’s main reserve Azeri—Chirag—Guneshli (ACG) field, which covers 432sqkm and is 120km east of Baku in the Caspian Sea. Current estimates put oil reserves at between 5 billion and 6 billion barrels. The field accounts for 80% of the country’s production and according to BP stabilized around 660,000 bpd in 2013 from a peak of 800,000 bpd in 2009. BP stated that production at the ACG field is expected to continue to decline over the coming years and in 2023 will be around 500,000 bpd; however, it predicts a surge in 2017 back up to 700,000 bpd before returning to its decline. When the ACG field came online, operators expected production to hit the 1 million mark; however, this is unlikely now. Another relatively large field is Shah Deniz. Even though it is more known for its gas reserves, it still produces 50,000 bpd, which is operated largely by BP.

GAS

By far the largest gas field in Azerbaijan is the Shah Deniz project, which holds approximately 1 tcm of gas 6,000m below sea level. The project has been split into two phases, Shah Deniz and Shah Deniz 2. During the first stage, production began in 2006 with a capacity to produce 9 bcm per annum and 55,000 bpd. During Phase I, an estimated $6 billion was poured into the project, and by 2013 the field had produced a total of 47.3 bcm of gas and 99.5 million barrels of oil. Phase II of the project will introduce two new offshore platforms and the drilling of 26 gas wells as well as two semi-submersible rigs. In addition to this, 500km of sub-sea pipelines would be laid to connect with 10 sub-sea manifolds as well as the production wells. Production will also increase drastically to an annual capacity of 18 bcm after the introduction of two new gas processing trains, each with a capacity of 9 bcm per annum. Supply from the field will serve domestic use as well as being exported to Georgia, Turkey, and on to Europe. The gas will get to Europe through the Trans Adriatic Pipeline (TAP), which will connect with the South Caucasus Pipeline (SCP) via the Trans Anatolian Pipeline (TANAP). The supply of gas is expected to begin in 2018 to Georgia, Turkey, and beyond. Up to 10 bcm per year will be allocated for Europe, while Turkey will take 6 bcm per year. However, shareholders will hope there are no delays in bringing on line the project as two major backers have sold there interests. Total was first when it put its 10% share in the project up for sale for $1.5 billion as it looked to lower major investments and fight the rising costs and falling returns the company is experiencing. The next in line was Statoil, which again was experiencing falling returns and stated it was looking for more “value rather than volume” in its investments for the time being. The company put its 15.5% in Shah Deniz up for sale for $2.25 billion, which was taken up by Malaysia’s Petroliam Nasional. Statoil also sold its share in the SCP, its holding company, and a 12.4% share in the Azerbaijan Gas Supply Company. The total value of all the assets it offloaded came to around $4.3 billion and has reduced Statoil’s expenditure commitments significantly. This is just one of a number of assets Statoil has sold since 2010, with the company shedding $22 billion worth of assets since then. The cost of Shah Deniz requires fully committed shareholders, with estimates expecting Phase II to require $28 billion.

The current slump in oil prices are obviously affecting investment in new oil and gas projects all over the world. Oil companies are beginning to count the pennies as the margins close. Gas prices, however, have remained stable as global demand grows, meaning the Shah Deniz project looks set to continue. This fall in oil prices has emphasized the government’s ambitions to diversify its economy, with President HE Ilham Aliyev restating his commitment to boost non-oil sectors and balance the economy while also protecting it from future fluctuations.

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