IN THE PIPELINE

Azerbaijan 2014 | ENERGY | INTERVIEW

TBY talks to Rovnag Abdullayev, President of the State Oil Company of Azerbaijan Republic (SOCAR), on operating TAP and TANAP, Shah Deniz II, and the Umid field.

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, 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).

What is the importance of the Shah Deniz II final investment decision (FID)?

The signing of the FID is no less than a turning point for the industry. We value the project as a major driver of the energy strategy developed in the mid-1990s. The signing of the FID in December 2013 dramatically increases our export potential as it covers not only the full development of the Shah Deniz gas field, but also the construction of the Southern Gas Corridor, infrastructure that will deliver Azerbaijani gas to European markets. The Southern Gas Corridor is a chain of several projects including the expansion of the South Caucasus Pipeline, the construction of the Trans-Anatolian Pipeline (TANAP), and the Trans-Adriatic Pipeline (TAP). We plan to deliver the first extracted gas from Shah Deniz, utilizing TANAP, to Turkey in mid-2018 and to Europe through TAP in 2019.

Given the international nature of the projects, what challenges do you anticipate in building and operating the TAP and TANAP?

These two large-scale projects, with a total length of over 2,600 kilometers, will head from Turkey crossing Greece, Albania, the Adriatic Sea, and come ashore in Italy. Taking into account the sheer scale of investment, the number of companies involved, and the diversity of countries, projects such as TANAP and TAP usually present major challenges on their own. Being aware of the potential risks and challenges, we constantly work with our partners to identify risks and implement effective risk management strategies, which is an ongoing process. TAP and TANAP are very well positioned due to their strategic importance for Europe's energy security policy. Therefore, the projects are supported not only by the participating member countries, but also by the EU as a whole. From an international perspective based on that information, TAP and TANAP fall into the low-risk projects category. However, we are exposed to the risk of rising steel prices due to the lack of long-term hedging instruments. Another type of common potential risk is the disruption to materials supply at the construction stage of projects, preventing timely execution. We have understood and evaluated the possible impact of these risks for our projects; therefore, we have taken the appropriate pro-active measures to mitigate them. These measures are not limited to the hiring of a highly skilled and experienced management team, and the involvement of third-parties in order to achieve minimum deviation—if any—in both the cost and the schedule of the projects respectively.

The Umid field was SOCAR's single largest gas condensate find. How has production at the field performed since 2010?

The SOCAR-UMID LLC, a joint venture between SOCAR (80% working interest) and Nobel Oil Exploration and Production Ltd. (20% working interest) was established in May 2008 for the exploration of the Umid structure. The exploration program was approved on July 24, 2009. Drilling at the first exploration well started in September 2009 and was concluded in November 2010 with a gas discovery at a 6,006-meter depth. On the same day, SOCAR made a public announcement on the estimated reserves at Umid, putting the figure at a minimum of 200 bcm of gas and 30 million tons of condensate. In May 2011, SOCAR and Nobel Oil approved a decision on the drilling of a second exploration well at Umid, which commenced in July 2011 and finished in April 2012 at a depth of 6,400 meters. The well was successfully flow tested with 1.2 mcm of gas and 150 tons of condensate at the wellhead. Pilot production from this well started in September 2012, and by January 2014 accumulated net production from the well was 251 mcm of gas and 40,000 tons of condensate. On September 26, 2012, SOCAR and Nobel Oil approved a decision on the drilling of a third exploration well at the Umid field, which started in November 2012 and ended in December 2013 at the depth 6,309 meters. The well was successfully tested in January of 2014 with a flow of 1.5 mcm of gas and 200 tons of condensate at the wellhead.

“ The OGPC is SOCAR's largest downstream project in Azerbaijan. "

What were the noteworthy downstream developments for SOCAR in 2013, and what are your plans for 2014?

Currently, the oil and gas processing and petrochemical complex (OGPC) is SOCAR's largest downstream project in Azerbaijan, and boasts national significance. Its development stage started in 2013 and will continue throughout 2014. The complex will consist of an oil refinery with a capacity of around 9 million tons and a gas refinery with a capacity of 12 bcm, as well as a petrochemical plant. Completion of the complex is scheduled for 2020. Meanwhile, in Turkey, we initiated downstream investments to become the major shareholders of the Petkim Petrochemical Complex in 2008 and, since then, have successfully developed our business in that market. We continue to invest in the expansion of certain product lines and complex facilities. In 2013, we also started construction of the STAR Refinery with the capacity to process 10 million tons of crude oil per annum, which will pave the way for future regional projects. The STAR Refinery will be built using environmentally friendly technologies to produce petroleum products such as diesel oil, jet fuel, and LPG, for example. It will also produce 1.6 million tons of naphtha, which will reduce the dependency of the petrochemical sector on imported oil products.

What role will initiatives like the Oil and Gas Research and Design Institute, as well as the Science Fund, play in the company's future development?

As a successful global company, R&D is of the essence, including in particular the development of nanotechnologies. SOCAR, along with its Oil and Gas Research and Design Institute, boasts a nanotechnologies department within the company structure. The fact that most of the Oil and Gas Research and Design Institute's world-class research projects have been certified, and that the institute has over 1,200 inventions in its portfolio, shows that we have already registered strong achievements in R&D. In addition to this, SOCAR's nanotechnology department holds four related patents. Elaborate technologies are being continuously tested on our wells. Our Science Fund is also dedicated to stimulating scientists external to the company to conduct research in our fields of interest. We believe that someday our in-house research has the capacity to contribute not only to the company's future development, but also to the development of the oil and gas industry worldwide.

To what extent has SOCAR become an international actor in the energy sector?

Currently, SOCAR is the owner of companies operating in Georgia, Turkey, Romania, Ukraine, Switzerland, and other countries. The largest component of our international portfolio, worth approximately $20 billion, including TANAP, is located in Turkey, where we hold a major share in the Petkim Petrochemical Complex, projects such as the STAR Refinery, and other mainly downstream assets. SOCAR is currently the biggest foreign direct investor in Turkey. We are also the largest taxpayer in Georgia, where we have invested over $400 million since 2006. Currently, our Georgian assets include a gas distribution network, filling stations, and the Kulevi Oil Terminal and Port. Moreover, there is a network of over 300 SOCAR-branded filling stations in operation in Georgia, Ukraine, Romania, and Switzerland. In 2013, SOCAR placed its first Eurobond issue on the London Stock Exchange, which was positively perceived by investors. The company also delivers oil of Brent quality that is traded on the London Stock Exchange. Besides, SOCAR has representative offices in Georgia, Turkey, Romania, Austria, Switzerland, Kazakhstan, the US, the UK, Iran, Germany, and Ukraine, as well as subsidiaries in Singapore, Vietnam, Nigeria, and elsewhere. Our continued steps toward expanding our foreign activities include the recent acquisition of a 66% stake in Greek natural gas transmission network operator DESFA, which will allow SOCAR to participate in various investment projects in Balkan countries.