Anniversary of a Triumph

In 2013, Azerbaijan produced a total of over 26 billion cubic meters (bcm) of gas, similar to the 26.9 bcm and 25.7 bcm it produced in 2012 and 2011, respectively. Azerbaijan holds an estimated 991.1 bcm of proven natural gas reserves. It is thought that the proven oil reserves of the region reflect 3.5% to 4% of the world’s total, while gas represents 7% to 11%, respectively. In comparison to those of other CIS nations, Azerbaijani gas extraction figures are impressive.

In 2012, Russia produced 4,557 bcm, Kazakhstan 2,397 bcm, while Azerbaijan came close behind with 1,879 bcm. In the same year, Azerbaijan extracted 43.5 million tons of crude oil, approximately matching the figures of 43.38 million tons, and 45.62 million tons in 2012 and 2011, respectively. Of these 43.5 million tons, 1.7 million came from land assets and the vast majority came from offshore facilities. However, Azerbaijan’s oil extraction volumes have been higher in previous years, and this is due to the diminishing returns on ageing fields.

GREASING THE WHEEL

Oil has been produced in Azerbaijan for hundreds of years, but the process came into its own during the Soviet era. World War II marked yet more records in production, but perhaps some of the most innovative and interesting developments took place in the post-war period. In the late 1940s, a comprehensive geological study of the oil source known as the “Neft Dashlari” (Oily Rocks) was carried out, and the field was developed rapidly after this. Azerbaijan will celebrate the 65th anniversary of this revolutionary man-made town, which lies over 100 kilometers from the country’s coast in the middle of the Caspian Sea. It was the world’s first offshore oil platform, and continues to support a population of thousands of workers and citizens. Production is ongoing, with a new well commissioned by the Oily Rocks OGPD as recently as April 2014.

The pioneering spirit that brought about such an ambitious project continues today, as Azerbaijan consistently seeks out and exploits international demand for energy resources. “SOCAR’s oil production is slowly decreasing from year to year because it has very old oil fields,” explained Natiq Aliyev, Minister of Industry & Energy, in conversation with TBY. “SOCAR’s production goes to refineries and only its crude oil is refined at our refineries.” The national oil company was established in 1992 by presidential decree, and has since expanded its interests systematically. Toward the end of 2013, SOCAR launched the construction of a $17-billion oil-gas processing and petrochemical complex 60 kilometers from Baku in the Garadagh district. Planned for commissioning in 2020, it is designed to produce a capacity of 1.7 million tons of finished goods. It will also comprise an oil refinery with a capacity of 10 million tons, and a gas processing plant capable of 10-bcm output annually.

HOME & AWAY

Looking abroad, SOCAR and the Azerbaijani government are looking to increase the country’s downstream interests with the neighbors. Approximately $475 million has been allotted by SOCAR to fund an oil refinery in Turkey in partnership with several major companies out of a total estimated project cost of $5.5 billion. An EPC contract was signed in May 2013 for the STAR Refinery, which will manufacture diesel fuel, and the project is expected to be complete by 2017. Elsewhere, SOCAR has been expanding its network of gas stations in CIS countries such as Ukraine, Romania, and Georgia, all of which have seen new filling stations opened as recently as April 2014. In the latter, SOCAR was declared the largest investor and taxpayer in the entire nation in February 2014, its roughly $78.4 million contribution to the state budget recognized at a ceremony in Tbilisi. In 2013, SOCAR Georgia Petroleum introduced 11 new filling stations in the country, and 295,715 tons of oil products were imported to the market from Azerbaijan.

The inauguration of the BTC pipeline in 2006 was an historic breakthrough for Azerbaijan’s energy industry, facilitating exports of its hydrocarbon resources to world markets via the marine transport terminal of Turkey’s Mediterranean port of Ceyhan. The 1,768-kilometer pipeline started pumping in June of 2006, and has since transported a total of over 1.9 billion barrels of crude oil from Azerbaijan. The operating company is controlled by BP, and managed to export approximately 247.2 million barrels in 2013. In 2014, the quantity of Azerbaijani oil flowing through the BTC conduit has remained consistent, with 2.2 million tons in February and 2.4 million tons in April. On February 15, SOCAR began pumping its own oil through the BTC.

CASPIAN GIANT

However, Azerbaijan is looking beyond this significant success for the nation’s energy ambitions. The government deftly appreciates its other role as a potential transit country for energy reserves. Discussion of a possible Trans-Caspian gas pipeline between Turkmenistan and the EU has led to Azerbaijan confirming its willingness to channel these assets, and though the idea has been under consideration for over 15 years, the process has been stimulated by intensified negotiations since 2011.

In April 2014, Baku hosted the First International Caspian Energy Forum, during which the continued growth of European demand was reiterated. It was stated that an additional $50 billion would be required to secure gas supply from Phase II of the Shah Deniz project to Europe. Phase I of Shah Deniz and the South Caucasus pipeline were ready, like the BTC, in 2006, and allowed Azerbaijan to fundamentally transform its reputation as a global gas exporter. It is located 70 kilometers offshore in the Caspian, and is one of the largest gas condensate fields on earth. It produces over 9 bcm in gas, as well as over 50,000 barrels per day of condensate. Phase II will expand production significantly. The development of the Southern Gas Corridor will allow Azerbaijan to shore up European energy security, both with supplies from Shah Deniz and by linking up with the Trans-Caspian line. Customers in Bulgaria, Greece, and Italy, among others, will benefit from access to these reserves.

CURRENT DEVELOPMENTS

According to Azstat, the national statistics bureau, Azerbaijan produced approximately 20.6 billion kW/h of electricity in 2013, up 0.6% on 2012. The lion’s share of this power came from thermal plants, with around 19.2 billion kW/h created using this method. The national installed capacity is some 7,000 MW. Renewables are gradually gaining importance as the country recognizes the potential of its uneven terrain and abundant water supplies, which could be developed into a sustainable hydroelectric power system. In a focused effort to avoid the dreaded “Dutch disease,” Azerbaijan has established a dedicated state renewables company in SAARES, the State Agency of Alternative and Renewable Energy. Over $90 million has been invested by the entity to develop the hydroelectric segment. Hydroelectric power plants saw a drop in production to almost 1.4 billion kW/h in 2013 due to technical difficulties at the power plants. However, 1Q2014 saw an increase in efficiency of 8.1% on the same period of 2013.

The two decades since pen hit paper for the Contract of the Century have allowed Azerbaijan to transform its established hydrocarbon industry into a 21st century, industrialized sector with global reach. As the focus remains on the elaborate implementation of the Shah Deniz II and Southern Energy Corridor projects, Azerbaijan will stay comfortable with stable production figures and a perennially business-oriented administration.