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Azerbaijan 2012 | ENERGY | REVIEW: ENERGY

New discoveries and infrastructure are set to ramp up the country's output of oil and gas products as profits swell and Europe looks on.

Azerbaijan has come a long way since the Russian Empire first exploited the country's rich hydrocarbon reserves on an industrial scale, and even further since the signing of the “Contract of the Century" in 1994. Both domestic and foreign investment is amplifying output and increasing discussion on further export routes, while profits are being pumped into the national power generation and distribution markets.

Technical work hampered production at the country's prime Azeri-Chirag-Guneshli (ACG) oil field in 2011, resulting in a drop in output by as much as 13%. The State Oil Fund of Azerbaijan (SOFAZ), however, reported a boost in profits thanks to a high average price of oil over 2011.

While the Shah Deniz gas field enters Phase II of its development, new gas discoveries, including the Umid field, announced in late 2010 by the State Oil Company of Azerbaijan Republic (SOCAR), and the huge Absheron gas field, announced in September 2011 by Total, are raising hopes that a deal can be struck on a pipeline to bring the resource to European markets. Another prospect is the Shafag-Asiman offshore field, which is being explored under a Memorandum of Understanding (MoU) between SOCAR and BP, with initial reserves estimated at 500 billion cubic meters (bcm) of gas.

The domestic energy market also underwent expansion in 2011, with hundreds of transformers and new substations installed and commissioned and 3,700 kilometers of power transmission lines built. Gasification works also continued at top speed, with 5,000 kilometers of gas pipeline supplying 148 residential settlements laid in 2011, as well as 1,537 pipelines repaired. The renewable energy train also rolled on as new wind, solar, and biogas facilities were announced in 2011.

THE CONTRACT TODAY

Overall oil production decreased in 2011, mainly due to technical work at the ACG field, which lowered output to 35.4 million tons from 40.6 million tons in 2010. Despite the drop, SOFAZ reported incomes of $19.88 billion, up from the previous year thanks to an average oil price of $111 per barrel in 2011, as opposed to $78.20 in 2010. Indeed, revenues from ACG accounted for 95.7% of SOFAZ's overall profits in 2011. ACG produced 717,600 barrels per day (bbl/d) in 2011, or around 261.9 million barrels—35.4 million tons—overall. BP is the main signatory to the “Contract of the Century," and is the operator with a share of 35.78%. SOCAR owns 11.65%, Chevron 11.27%, INPEX 10.96%, Statoil 8.56%, ExxonMobil 8%, TPAO 6.75%, ITOCHU 4.3%, and Hess 2.72%. Overall operating expenditure at the Chirag, Central Azeri, West Azeri, East Azeri, and Deepwater Guneshli platforms came in at $699 million in 2011, and capital expenditure hit $1.9 billion. Oil from the ACG field is being pumped to the Sangachal Terminal to the south of Baku, and it then finds foreign markets through three pipelines: Baku-Novorossiysk, which carries oil into Russia with a capacity for 5 million tons per year, Baku-Supsa, which connects Azerbaijan to Georgia and has a capacity of 145,000 bbl/d, and the Baku-Tbilisi-Ceyhan (BTC), which transports oil from Baku to Tbilisi in Georgia, and then through Anatolia to Ceyhan on Turkey's Mediterranean coast. The second longest pipeline in the world after the Druzhba pipeline between Russia and Central Europe, the BTC has a capacity of 1 million bbl/d.

SHAH DENIZ

The Shah Deniz gas field is Azerbaijan's largest natural gas reservoir and has come firmly into the spotlight in recent years, as Europe looks to secure a supply of gas that bypasses Russia and Iran. Reserves in the field are estimated at between 50 and 100 bcm. In addition, the field contains 400 million cubic meters of gas condensate, which is mixed with oil from ACG and exported via the BTC pipeline. In terms of production, Phase I of the development of the site supplies 8.6 bcm of gas per year, and approximately 50,000 barrels of condensate. Also operated by BP with a majority share of 25.5%, other shareholders include Statoil (25.5%), SOCAR (10%), Total (10%), LukAgip (10%), NIOC, (10%), and TPAO (9%). Phase II of the development of the site has also been approved, and the project is set to include an additional offshore gas platform as well as new sub-sea wells and an expansion of the Sangachal Terminal. Preliminary costs of Phase II are “about $25 billion to $26 billion," Rovnag Abdullayev, President of SOCAR, told TBY. Focused on the remaining resource potential in the current reservoir, the works could add “16 bcm of gas per year and up to 100,000 barrels of condensate per day," Rashid Javanshir, BP's Regional President for Azerbaijan, Georgia, and Turkey, commented in an interview with TBY.

NEW DISCOVERIES

All part of efforts to open up the European market to Azerbaijani gas, other recently discovered gas fields are building hope that the country could be a long-term supplier of gas to Europe. The Umid gas field, discovered in late 2010, is estimated to contain 200 bcm and belongs to SOCAR. This figure could also rise dramatically if predictions that the Babek field lying under Umid could bring total reserves to 600 bcm. Shafag-Asiman is also new on the block, discovered in 2009. It also has an estimated 500 bcm and is to be jointly operated by BP and SOCAR. It too is fuelling discussion about plans to begin work on the Southern Gas Corridor, with BP's Javanshir expecting “to begin the delivery of Shah Deniz gas [to Europe] in 2017." Although the details remain to be hammered out, work is mooted to begin on the Trans-Anatolian Pipeline (TANAP) as a part of SOCAR's deal to deliver gas to Turkey's domestic market. The gas will reach Greece and Italy via the Trans-Adriatic Pipeline, but a decision has yet to be made regarding gas transportation to Central Europe. The Southeastern European Pipeline (SEEP) and Nabucco West pipelines have risen to the forefront as the potential pipeline routes through Bulgaria, Romania, and Hungary. The latest development, however, is Total's discovery of the Absheron gas field, located 25 kilometers northeast of Shah Deniz. The discovery has estimated reserves of 350 bcm, as well as 45 million tons of gas condensate. Total is to be the operator of the site and will have a 40% share, while SOCAR will have 40% of the shares, and GDF Suez the remaining 20%. With enormous capital outlays that may position Azerbaijan to sell gas to Europe, SOCAR remains positive in terms of output, with its President Rovnag Abdullayev telling TBY, “Our forecast for 2025 is that the production of natural gas from Azerbaijan will be around 50-55 bcm."

ELECTRICITY & ALTERNATIVES

Although the country's five regional grids have been transferred to the private sector, Azerenergy retains a monopoly over power generation. In January 2012, Azerenergy produced approximately 2.2 billion kWh of electricity, compared to 1.9 billion kWh in the same period for 2011. This is a continuation of an upward trend that saw the state company generate 20 billion kWh in 2011, compared to 18.4 billion kWh in 2010. Its 13 thermal power plants generated the lion's share in January 2012, with 2 billion kWh, while around 200 million kWh were generated by its six hydropower plants. Although the country is also technically self-sufficient, it has been forced to import up to 10% of its electricity from neighboring Russia, Iran, and Georgia due to transmission inefficiencies from its Soviet-era grid. Investment continued in 2011 to boost the quality of the grid with 310 transformers and 25 substations connected and commissioned, and 3,700 kilometers of power transmission lines installed. Along with an announcement that 70% of the country's electricity is produced in the regions outside Baku, the capital is also getting some attention with the development of the Shimal-2 power plant, set to be completed by 2013. The second unit at the site, it will have a generating capacity of 400 MW, and will be built along with a new 220-kilowatt transmission line, ensuring energy security on the Absheron Peninsula.

New to discussions on the country's energy mix are renewable energies. Although in its infant stages, companies such as Alten Group are trying to get ahead in a sector that has yet to enjoy the subsidies seen in Europe. “The sector needs subsidies to evolve, because right now it is too risky to develop certain projects," Elmar Geybatov, General Director of Alten Group, told TBY. The group is currently developing a hybrid wind and solar pilot project with an output of 8 MW, in order to attract investor interest in its 100-MW development at the same site. Also as part of state efforts, an experimental hybrid site with a power capacity of 5 MW through wind, solar, and biogas stations was commissioned in 2011.