SCALABILITY AS DRAWN

Azerbaijan 2012 | ENERGY | INTERVIEW

TBY talks to Rovnag Abdullayev, President of the State Oil Company of Azerbaijan Republic (SOCAR), on Azerbaijan as a key international oil player, the pipeline race, and the Southern Gas Corridor.

Rovnag Abdullayev
BIOGRAPHY
Rovnag Abdullayev began his career at Neft Dashlari (Oil Rocks) in 1989. In 1990 he worked as an engineer in the Construction Department of the 28th of May Oil and Gas Production Department in SOCAR before becoming Head of the Production Technology Department of the Khazardenizneftgazinshaat (Caspian Sea Oil and Gas Construction) Trust in 1991. He was promoted to Head of the Trust in 1997. In 2003 he was appointed Director of Baku Oil Refinery and was elected to Azerbaijan’s third parliament in 2005 and to the fourth parliament in 2011. In late 2005 Mr. Abdullayev was appointed President of the State Oil Company of Azerbaijan Republic (SOCAR). In 2008 he was appointed President of the Azerbaijan Football Federations’ Association (AFFA).

How does the success of SOCAR represent the development of Azerbaijan as a key international player in the oil sector?

The role of national oil companies (NOCs) has been growing lately around the world, and they have been gaining a larger role in the world regardless of their geographic location. SOCAR is also playing an important strategic role both in Azerbaijan and internationally. We plan on developing our presence in surrounding countries such as Georgia and Turkey. Four years ago we made our first international investment in Georgia, and today we represent 50% of that market, with our own distribution network for oil and oil-based products. SOCAR also oversees the gas distribution network in Georgia as well, because up to 90% of gas imports to that country come from Azerbaijan. We are the biggest taxpayers in the country.

In addition, we have made strategic investments in Turkey, where in 2011 we inaugurated a new refinery, called “Star," which is located in Izmir province and will have a production capacity of 10 million tons a year. We are going to invest about $6 billion in that refinery, because we want to expand our activities in the petrochemical sector in Turkey, which has huge potential. Besides that, we have started investing in the distribution of oil products in Ukraine and Romania. Furthermore, we bought Exxon's petrol stations and the businesses tied to them in Switzerland, and we started constructing a new oil terminal in the UAE through SOCAR Trading.

The project consists of three phases: the first is the construction of a terminal with a capacity of 115,000 tons. In the second phase, the capacity will be increased to 230,000 tons by 2013. Finally, we will further expand the facility's capacity to over 600,000 tons by 2014 in the final phase.

What are the advantages of the construction of the Trans-Anatolian Pipeline (TANAP)?

The oil and gas businesses are very different. Gas is a lot more challenging, and we first have to figure out transit and distribution issues for the gas to start flowing. We signed various agreements in Izmir, Turkey, in October 2011 and we were granted the right to deliver and transport gas throughout Turkey. Right now we're talking about a capacity of 16 billion cubic meters (bcm), and we had to either do this through Turkey's gas distribution company, BOTAŞ, and its expansive national grid, or build a new, dedicated pipeline. Both are considered as key elements of the Southern Gas Corridor. We came up with the TANAP project, although we agreed with the authorities in Turkey to check the feasibility of both projects and to make a final solution by mid-2012. Azerbaijan and SOCAR place a priority on Europe and Turkey in terms of Azerbaijani gas, and this project offers alternatives to the future supply of Azerbaijani gas to both markets. However, as a gas supplier, our aim isn't just to deliver the gas, but to do it at the best price. This is a commercial enterprise after all. European consumers should know that we have to make multi-billion dollar investments to be able to deliver our gas to Europe. The preliminary assessment of costs for Shah Deniz Phase II is about $25 billion to $26 billion. Therefore, the gas we sell has to recover those costs and deliver a reasonable profit as well.

What favorable options does SOCAR see for Azerbaijan to supply to the EU through the Southern Gas Corridor?

In January 2011, the President of the European Commission (EC), Jose Manuel Durao Barroso, and President Ilham Aliyev signed a joint declaration on the Southern Gas Corridor. Barroso, knowing of the importance of Azerbaijan in such a project, labeled us the “enabler" country, because the first supplier of gas from the Caspian Sea to Europe will be Azerbaijan. SOCAR has been positively contributing to this project by carrying out negotiations with potential buyers and the owners of pipeline infrastructure in Europe. During 2011 we managed to narrow the initial pool of 14 companies that could be the potential buyers of Azerbaijani gas from Shah Deniz II. We have identified the potential pipeline projects for the Southern Corridor: Nabucco, the Interconnector Turkey-Greece-Italy (ITGI), the Trans-Adriatic Pipeline (TAP), and the Southeastern European Pipeline, which is geographically going to follow the Nabucco route via Bulgaria, Romania, and Hungary.

Since all these projects needed Azerbaijani gas to go ahead, we had to prioritize one of them, because it is impossible to carry out all four at the same time. When one is started the other ones will be postponed. In February this year we selected a single pipeline to Italy and decided to undertake exclusive negotiations with TAP. No decision has yet been made on the selection of a single pipeline toward South Eastern/Central Europe and we expect to finalize our choice by mid-2012. A final route selection for an initial 10 bcm per annum from the Shah Deniz field to Europe will be made no later than the planned final investment decision for the Shah Deniz project in mid-2013. Meanwhile, we continue our commercial engagement with potential buyers, to compile the necessary information about the selected projects, and to further develop our cooperation with the EC to implement the Southern Corridor Strategy. We are now considering what the design of the pipelines should be in all the potential routes, keeping in mind not only current volumes of gas, but also all those volumes that would come from other fields in Azerbaijan after 2020 or 2025. We don't just plan for the next five years but the next 15 to 20 years. Our forecast for 2025 is that the production of natural gas from Azerbaijan would be around 50-55 bcm. Therefore, obviously, it's not economically feasible to build pipelines for every one of our fields. Instead, we need to build a pipeline that can service all these fields and one that can be upgraded as the necessity arises. This leads to an interesting and innovative concept: scalability. Throughout 2011 and continuing today we have been working on the concept that any pipeline project should be scalable; you start with one capacity, then end up with a second capacity, but in such a way that it prevents any losses, offers maximum efficiencies, and doesn't bring interruptions to operations. Therefore, 2012 is the year for decisions, and in terms of starting the full-scale implementation of the Shah Deniz Phase II project, there will also be financial decisions, after which there is no point of return.