Focus: Energy

Fuels of Change

Fuels of Change

May. 2, 2013

According to Ministry of Industry and Energy figures, Azerbaijan produced 45 million tons of oil and 27 billion cubic meters (bcm) of gas in 2012. Gas production in particular has shown tremendous growth over recent years, as the figure has tripled since 2006. This means that in addition to meeting its domestic needs, Azerbaijan is able to export the majority of its natural gas production. The country consumes about 12 bcm of gas annually, and exported approximately 15 bcm in 2012.

Meanwhile, electricity generated from sources such as thermal stations, hydroelectric facilities, and even renewable energy is also exported to the region. In total, 329 million kWh of energy was exported to countries such as Georgia and Turkey, at a value of $24 million in 2012.

Encouraging activity in the energy sector has led to the attraction of massive investment in oil and gas and electricity generation projects since 1994. In the period following the Contract of the Century, Azerbaijan received investments totaling $50 billion. In early 2013, the Ministry reported in an interview with the press that the volume of investment in the energy sector will likely double in the coming two decades.

Much of the profits gathered from state operations in the energy sector have been channeled to the State Oil Fund of Azerbaijan (SOFAZ). The fund is worth an estimated $32.7 billion according to the latest Sovereign Wealth Fund statistics. The fund serves the purpose of reserving monies for future generations, investing in major local projects, and sterilizing excessive liquidity in the domestic economy.

Meanwhile, the State Oil Company of Azerbaijan Republic (SOCAR) has looked to support funding for projects abroad. One of the most important projects is a petrochemical and refinery complex in Turkey, in which SOCAR has committed to invest $800 million initially. On the topic of SOCAR's work in Turkey, President Ilham Aliyev explained, “Azerbaijan's major energy projects enhance the importance of Turkey as a transit country and a contributor to European energy security." Although regional energy security in the form of a Southern Gas Corridor has long been considered a priority for Azerbaijan's interests, the Caspian nation is looking beyond its surroundings to larger markets in Europe. With the support of Turkish state energy company BOTAŞ, SOCAR is to become the main operator of the Trans-Anatolian Pipeline (TANAP), which will extend from Georgia to Turkey's borders with Bulgaria and Greece. The determination of both countries to extend Caspian gas resources into Europe and beyond led to the $7 billion-$10 billion project. Designed to carry Shah Deniz II gas, the pipeline will have the capacity to carry 31 bcm annually by 2026, when the field is fully operational. Construction of TANAP is expected to begin in late 2013 or early 2014.

By 2012, Azerbaijan's contribution to the gas market of a variety of European countries had already increased to 40%. When Shah Deniz II gas is finally pumped to Europe through TANAP in 2018 or 2019, Azerbaijan's role in the natural gas market will be crucial. “This project is expected to become a major contributor to our long-term development and will secure Azerbaijan's economic and other interests for decades to come," President Aliyev explained.

OIL & GAS

Although Shah Deniz has taken center stage as of late, two-thirds of Azerbaijan's territory is energy rich. The Azeri-Chirag-Guneshli (ACG) oil field and the Umid natural gas field are two other major sources of oil and gas wealth for the country.

Located offshore, the ACG oil field produced an average of 664,400 barrels of oil per day (bbl/d) in 2012, which amounted to over 243 million barrels or about 32.9 million tons that year. The field comprises 65 wells and covers an area of over 432.5 square kilometers. Discovered in 1985, the ACG field's shareholders began producing oil in 1997. The main operator of the field is BP, with a 35.7% stake. AzACG owns the next largest share (11.6%), followed by Chevron (11.3%), Inpex (10.9%), Statoil (8.5%), Exxon (8%), TPAO (6.75%), Itochu (4.3%), and Hess with the remaining 2.7%.

Full of surprises, the Umid gas field was discovered to be the second largest gas field in Azerbaijan in 2010. Although work had begun at the site as early as 1953, no commercially viable wells were found until SOCAR financed further exploration in 2009. SOCAR's work took the drilling 6,500 meters underground, where 200 bcm of gas and 40 million tons of condensate were uncovered. After announcing its find, SOCAR began exploiting the field in September 2012. Oil production had reached 200 tons per day by the beginning of 2013. Located 75 kilometers from Baku, SOCAR expects reserves at the Umid gas field to meet domestic demand for the next 100 years and earn up to $50 billion in revenues.

With reserves amounting to figures above and beyond any other discovery in the country, Azerbaijan's Shah Deniz I field produced about 7.73 bcm of gas and 2 million tons of condensate, or 21.1 million cubic meters of gas and about 44,100 barrels of condensate per day in 2012. Led by BP, operating expenditures for Shah Deniz amounted to $269 million and capital expenditure reached nearly $1.1 billion in the same year. BP expects to spend over $222 million in operating expenditure and over $2.6 billion in capital expenditure on Shah Deniz activities in 2013.

New for 2013, SOCAR has begun drilling a recent well at an offshore field in the Azerbaijani sector of the Caspian Sea. Drilling began in March 2013, and is being conducted by a contracting company called Sahil. Currently, the well's depth has reached 5,800 meters, and the site is expected to produce 40 tons of condensate and 350,000 cubic meters of gas per day.

According to Natiq Aliyev, Minister of Industry and Energy, “Oil production volumes have increased by more than five times and gas volumes have increased by more than four times since 1994. Azerbaijan is now energy self-sufficient in terms of oil and gas." With gas reserves of over 2 trillion cubic meters, Azerbaijan is currently a net exporter of hydrocarbon resources, and the country is seeking ways to diversify its energy transportation routes. Two pipelines that are key in transporting resources from the country's capital on to points further afield are the Baku-Tbilisi-Ceyhan (BTC) and Baku-Tbilisi-Erzurum (BTE) pipelines, which carry oil and gas, respectively. In 2013, pipeline operators are considering expanding their capacity to meet the expected surge in supply with huge reserves coming on stream in the medium term. Currently, BP and Statoil are discussing plans to increase the capacity of the BTE gas pipeline to 50 bcm per year.

THE RENEWABLES TRAIL

Having completed a state program for the increased use of renewable energy in the country, Azerbaijan is also seeking ways to diversify its energy supply. The President and his administration have acknowledged that Azerbaijan has prime wind and sun resources, and electricity-generating companies have already taken advantage of water power by establishing seven hydropower plants in the country. These plants comprise about 13% of the total electricity supply of the country. According to the Ministry of Industry and Energy, a pilot project in the renewable sector was implemented in 2012. As part of the project, a new photovoltaic plant was build in Sumgait. “We have a new strategy and program for developing renewables. We want to achieve no less than a 12% share in renewable energy by 2020," Minister Natiq Aliyev told TBY. To this end, the government aims to attract approximately $7 billion in investment for the renewables segment, to be dispersed over the coming seven-year period. When complete, renewable energy will account for 2,000 MW of energy on the nationwide grid.

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