Energy & Mining

Power House

Energy

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Power House

With 15% of the world's oil reserves, Azerbaijan has made rapid progress in the oil and gas sector and shows no signs of slowing down.

The land of Azerbaijan is so potent with oil that the hydrocarbons hit the senses upon arrival. It is no surprise that Azerbaijan owes its riches to its plentiful natural resources, and its rate of growth shows no sign of slowing. As one of the world’s oldest oil producers, Azerbaijan has a rich history with “black gold”. Evidence shows oil was being used for energy in the 3rd and 4th centuries AD, with the first recorded production boom in 1871. While oil production slowed dramatically during the Soviet years, the industry took leaps forward in 1994, when President Heydar Aliyev signed the “Contract of the Century” with BP and the other international partners in the Azerbaijan International Operating Company (AIOC) consortium. The 30-year deal transformed the industry in Azerbaijan and set the country on its way to substantial economic development.

Furthermore, its plentiful resources coupled with its geostrategic position catapulted the Southern Caucasus country onto the international stage. Both the EU and Russia vie for the energy security that Azerbaijan’s resources can provide, placing it in a substantially powerful position. In addition, its position as a transit country for gas from the other side of the Caspian only increases its status.

THE CONTRACT

The agreement between the Azerbaijani government and international oil companies—most notably BP—in 1994 has quite rightly been dubbed the Contract of the Century. While Azerbaijan was a world leader in oil production in the 1900s, the recently independent country needed technical help and financial muscle to rediscover and export its oil and gas resources in the Caspian Sea. President Heydar Aliyev signed the contract on September 20, 1994, which included a number of caveats to assist Azerbaijan’s development. Since then, 20 production-sharing agreements (PSAs) have been signed.

The State Oil Company of Azerbaijan Republic (SOCAR) is one of the largest oil companies in the world. SOCAR has 57 oil fields, 18 of which are offshore in the Caspian, with the rest onshore. It is estimated that the Caspian basin has 30 billion tons of oil and 18-20 trillion cubic meters of gas, which comprises 15% of the world’s carbon-hydrogen resources. The company currently holds 40% of the deal’s share, but organization President Rovnag Abdullayev has said the company would buy part of the share of the US Devon Energy company, which would leave SOCAR with the biggest share ahead of BP.

The Azeri-Chirag-Guneshli (ACG) field has produced a staggering amount of oil for the country and has set the Azerbaijani oil industry on fire. Together with SOCAR, the AIOC includes BP, Statoil, Total, Chevron, Amerada Hess, TPAO, Inpex, Itochu, ExxonMobil, and Devon Energy. The ACG Oil Project is designed to further develop the Chirag and deepwater Guneshli fields. The final investment decision on the $6 billion project was made in March 2010. Production is scheduled to begin in 2013.

The AIOC produces and develops offshore crude oil reserves in the Caspian Sea from the ACG Field. The original total production was 125,000 bbl/d in 1997 and this has risen to an average total daily crude oil production of 822,000 barrels (28,000 net) in 2010.

The Chirag oilfield is scheduled to come on stream in late 2013, which will provide a boost to oil production from 2014. Growth will also be supported by increasing investment in the hydrocarbons sector, which will be necessary as preparations for the second phase of the Shah Deniz project, which is expected to come on stream in 2016-17.

SHAH DENIZ

Shah Deniz is one of the world’s largest gas fields, with estimated reserves of well over 30 trillion cubic feet, or 1 trillion cubic meters, of gas condensate in place. The field, which includes Shah Deniz I and II, is located approximately 70 kilometers southeast of Baku on the deep-water shelf of the Caspian Sea. The BP operated field lies in water depths ranging from 50 to 550 meters.

The first phase of the project started up in 2006, after discovery in 1999, with the maximum rate of production expected to be 8.6 billion cubic meters of gas per annum (bcma) and approximately 50,000 barrels a day of condensate. The project has taken just seven years to get up and running and has proved a secure and reliable supplier of gas to Azerbaijan, Georgia, and Turkey. However, it is the second phase of the project—full field development—that is most exciting. The next step seeks to uncover the possibility to produce an additional 16 bcma, 100,000 barrels of condensate, and supply the Nabucco pipeline, thus easing Europe’s energy security concerns.

THE LEFTOVERS

The newest kid on the block is the Shafag-Asiman field, which is estimated to hold 500 billion cubic meters of condensate gas. A memorandum of understanding (MoU) was signed in October 2010 between SOCAR and BP. The unexplored block lies in deep water of about 650-800 meters, with reservoir depth of about 7,000 meters, some 125 kilometers southeast of Baku and covers an area of 1,100 square meters. Under the PSA, set to last 30 years, BP Exploration (Azerbaijan) Limited will be the operator with a 50% interest, while SOCAR will hold the remaining 50% equity.

Located 55 kilometers south of Baku, the Sangachal Terminal is a vital link in Azerbaijan’s oil and gas industry. The BP operated terminal receives, processes, stores, and exports crude oil and gas produced from Azerbaijan’s offshore oilfields in the Caspian Sea. It is one of the world’s largest oil and gas terminals, and consists of two main parts: the Early Oil Project (EOP); and Sangachal Terminal Expansion Program (STEP). The EOP terminal has been constructed to process, store, and export oil from the Chirag offshore field in the Caspian. The EOP terminal houses four crude oil storage tanks at 25,500 cubic meters each, and can process, store, and export in excess of 6 million tons of crude oil per year. STEP is the part of the terminal that has been expanded to receive, store, and process oil from the Azeri and Deepwater Guneshli sections of the ACG field and gas from the Shah Deniz field. It houses a number of facilities including three crude oil storage tanks with 880,000 barrels of capacity each.

The impact of the AIOC’s relationship with Azerbaijan is clearly visible. Not only have the partners led the development and operation of the country’s biggest fields, they have played a major role in the training of the local population, building modern industry facilities, sponsoring numerous social projects, and giving technical assistance to public institutions, as per the initial contract. The investments have generated improvements to the country’s medical facilities, schools, and roads as well as providing training for medical staff and farmers, supplying medical aid to local residents, and offering micro loans to entrepreneurs. Furthermore, the partners have implemented major development initiatives aimed at building skills and capabilities in local communities, improving their access to social infrastructure, and providing technical assistance to public institutions.

OTHER MAJORS

You would be forgiven if you thought Azerbaijan’s oil story was all about BP. The multinational company has large stakes in the industry, but other international companies are taking hold of the newly discovered reserves. French company Total (40%) is currently the operator drilling in the Absheron sea block with SOCAR, (40%), and GDF Suez (20%). Total is the operator during the exploration phase and will lead joint-venture operations during the development phase. The drilling of an exploration well began in early 2011.

Total has been operating in Azerbaijan since 1996, with production reaching 13,000 bbl/d in 2010 against 12,000 bbl/d in 2009, and 18,000 bbl/d in 2008. The group’s production is currently centered on the Shah Deniz field. Total holds 10% of South Caucasus Pipeline Company, the company that owns the South Caucasus Pipeline (SCP), which transports gas from Shah Deniz to the Turkish and Georgian markets. Total also holds 5% of the Baku-Tbilisi-Ceyhan pipeline (BTC), owned by BTC Co., which connects Baku to the Mediterranean Sea.

Statoil has a 25.5% ownership share in the Shah Deniz gas field, which is located in the Caspian Sea southeast of Baku and is Azerbaijan’s largest gas resource. Gas from the site is currently transported through the 690-kilometer South Caucasus Pipeline (SCP), which extends to the border between Georgia and Turkey. While peak production from the Shah Deniz Phase 1 is projected at 8.6-9 bcma, gas production will be increased by another 16 bcma during Phase 2. Additionally, Chevron increased its non-operating working interest in AIOC from 10.3 % to 11.3 % in the third quarter of 2010.

PIPELINES

Not only does Azerbaijan sit on a wealth of oil and gas, but it lies in a significant geostrategic position for exporting the natural resources of other countries. The SCP is a 1,768 kilometer long crude oil pipeline from the Azeri-Chirag-Guneshli oil field in the Caspian Sea to the Mediterranean Sea. Shareholders in the pipeline include BP (30.1%), AzBTC (25%), Chevron (8.9%), Statoil (8.71%), TPAO (6.53%), ENI (5%), Total (5%), Itochu (3.4%), INPEX (2.5%), ConocoPhillips (2.5%), and Hess (2.36%). It is anticipated that the Nabucco pipeline will branch from the BTC to export condensate gas from Shah Deniz II through Georgia, Turkey, Bulgaria, Romania, and Hungary to Vienna to satisfy the EU’s current energy needs. The president of BP in Azerbaijan, Rashid Javanshir, has already announced that the company plans to build a new gas pipeline to expand the capacity of the South Caucasus Gas Pipeline (SCGP), which supplies gas from Azerbaijan to Georgia and Turkey. The current capacity of the SCGP is 8 bcma, and BP intends to increase this to 24 bcma. According to BP, the expansion of the pipeline will be necessary so that there is sufficient capacity for gas from the second phase of the Shah Deniz project, which is due to come on stream in 2016-17. In order to cope with the increase in gas production from Shah Deniz Phase 2, BP plans to construct a 400-kilometer pipeline that will run to the Azerbaijani-Georgian border, where it will connect with two large compressors that are to be constructed in Georgia. The new pipeline will be connected to the existing SCGP. BP estimates that the new pipeline will cost around $3 billion to construct. BP is the largest foreign investor in Azerbaijan. The expansion of the SCGP will increase the gas volumes available to Turkey and Georgia. The pipeline may also form part of the proposed Nabucco pipeline, which has an estimated capacity of 31 bcma.

Once this pipeline is in place, it encourages the construction of a trans-Caspian pipeline to open up easy access to Turkmen, Uzbek, and Kazakh gas. Furthermore, this pipeline would also work in the other direction, opening Azerbaijan’s options to export through Afghanistan into Pakistan and then to India as part of the Trans-Afghanistan Pipeline (TAP or TAPI) proposed by the Asian Development Bank (ADB). While the development of the natural gas pipeline is primarily intended for transporting gas from Turkmenistan, a trans-Caspian pipeline would open further transit and export possibilities for Azerbaijan.

ALTERNATIVE ENERGY

While Azerbaijan has vast reserves of oil and gas to hand, the country is also blessed with other natural resources. The government is extremely keen to move away from a solely petro-economy and is making significant efforts to diversify. Its geostrategic position lends itself well to being a transit hub for energy—be it oil and gas, nuclear, or renewables. Baku’s name is widely believed to be derived from the old Persian names of the city Bād-kube, meaning “Wind-pounded city”, in which bād means “wind” and kube is rooted in the verb kubidan, “to pound”. It may come as no surprise then, that wind power is an option. The country enjoys 260-280 days of sunshine per year, meaning solar power is also a viable investment opportunity. In addition, the region benefits from geothermal waters, especially in Guba, where the water temperature sometimes reaches 90 oC, suitable for geothermal plants.

Azerbaijan’s relationship with nuclear power is as yet undecided. A plant was planned in Baku and Sumgait, due for completion in 2012; however, this project has been put on hold.

ELECTRICITY

Azerbaijan’s electricity network is yet another legacy from the Soviet Union, and one that needs to be upgraded. The authorities have begun to use its hydrocarbon revenue to upgrade the electricity generating and distribution network, as well as the gas distribution network, and there will be substantial opportunities for investors in these sectors in the coming years. Azerbaijan has an installed capacity of around 5,924 MW, consisting of eight thermo-electric plants fuelled mainly with fuel oil (accounting for roughly 80% of generating capacity in 2007), six hydroelectric plants, and five so-called modular plants, all of which are owned by the state. Azerenergy, the state-owned electricity monopoly, announced the opening of a 105-MW thermal-power station in Guba, in the northeast of the country, in September 2009. The station consists of 12 plants with an individual capacity of 8.7 MW and is expected to generate 700 million kW of power each year. Construction of the Shahdag power station was also completed in 2009. The plant has a capacity of 104 MW. The power station will supply the Guba and Gusar districts, also providing electricity to the Shahdag tourist complex, which is currently under construction. Energy losses via the inefficient distribution network amount to around 20%, and the country is forced to import electricity. This is an ongoing process, however, and Azerbaijan’s State Oil Fund (SOFAZ) along with international donors are working to transform the country’s system. To demonstrate commitment to both economic diversification and investment in the electricity system, the government is planning to reduce three fold the consumption of traditional fuels for generation of 1 kW of electricity. The strategy aims to make energy consumption more efficient by increasing transmission capacity and installing 110 kV electric networks. Electricity consumption is estimated at 22,018 GW in 2010, an increase of 3.3% compared with the previous year. Growth in electricity consumption is expected to accelerate over the forecast period, driven mainly by industrial growth in and around the oil sector. On average, consumption is expected to grow by 4.2% annually between 2011 and 2020. While Azerenergy has a monopoly on power generation, the national electricity network is divided into five regional grids: Baku, Nakhchivan, North (Sumgait), South (Ali Bayramly), and West (Ganja). Each of the regional grids has been opened to foreign investors by means of open joint-stock companies, and each has been transferred to the private sector using joint-stock companies.

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