8 March 2021

Monday, 11:32



Azerbaijan and Turkmenistan finally agreed on the joint development of the Kapaz / Serdar field



Following the victory in Garabagh, Azerbaijan has successfully solved yet another long-standing regional problem. This time the contradictions were not about the land claims, but about a Caspian oil field. Most importantly, it was not about the occupation of the field at all. Therefore, despite years of negotiations, the differences did not lead to any confrontation and the dispute was eventually resolved in the most peaceful and friendly atmosphere. By the way, the field, which Azerbaijan and its Caspian neighbor, Turkmenistan, could not agree upon until recently, has been symbolically called Dostlug (Friendship).


Historical document

During the online meeting on January 23, the presidents of Azerbaijan and Turkmenistan, Ilham Aliyev and Gurbanguly Berdimuhamedov signed an intergovernmental Memorandum of Understanding on joint exploration and development of hydrocarbon resources of the Dostlug field in the Caspian Sea.

"It is a result of many years of work carried out by our countries. The objective is to strengthen cooperation and mutual understanding in the energy sector, unlocking the huge mutual potential of the two largest energy powers, creating the most favourable conditions in the Caspian Sea region for the development of sustainable energy, broad and mutually beneficial international partnership,"  Mr. Berdimuhamedov said at the signing ceremony.

“I would call this document historical. It is the first time Azerbaijan and Turkmenistan start joint work on the development of an offshore field in the Caspian Sea. This field will bring our countries and peoples closer together and will benefit both the Turkmen and Azerbaijani peoples,” Mr.  Aliyev said.

In fact, the Dostlug field is the offshore field well-known in Azerbaijan as Kapaz and Serdar in Turkmenistan. Azerbaijan initially proposed the joint development of energy resources in this area. It is good to see that the leaders of both countries have finally agreed on this issue following many years of discussions.

Those who are well familiar with the history of Azerbaijani-Turkmen relations will definitely understand what the leaders of the two countries meant when they mentioned the importance of the moment and the significance of the signed document. After all, the Kapaz / Serdar field has become a real pain between Baku and Ashgabat in the post-Soviet period. Due to the disagreements going as back as to the late 1990s, both parties have expressed mutual threats to initiate court proceedings on the issue and even reached the point of suspending diplomatic relations. Subsequent warming of relations and the resumption of dialogue gave little hope that the parties would soon or later come to a consensus. Finally, the day has come.

The memorandum was not only an important step in improving relations between the two Caspian countries, but it could also become the key to the construction of the Trans-Caspian Gas Pipeline (TCP). Considering that the Dostlug field is rich with oil and gas reserves, prospects, especially for Turkmenistan, as well as for the Southern Gas Corridor and European gas consumers, are obvious.


Historical background

The Kapaz / Serdar field was discovered back in 1959. Drilling operations started in 1986. The reserves of the field are estimated at 50 to 100 million tons of oil and 30 billion cubic meters of gas, but further exploration works may reveal even larger deposits of hydrocarbons.

Exploration has been carried out mainly until 1991, when Turkmenistan and Azerbaijan were part of the Soviet Union. After the collapse of the Union, the independent republics could not agree among themselves and with Iran on the delimitation of the borders of the Caspian Sea. That’s when the negotiations reached a dead end.

In the late 1990s, as well as in 2001, Turkmenistan tried to transfer the field to investors and announced a tender for its development, but Azerbaijan protested. As a result, Azerbaijani-Turkmen relations worsened and the field was frozen.

According to the agreement signed by the two countries in 2008, no exploration and drilling works should have been carried out and had not been carried out until the issue of determining the status of the Caspian at the Kapaz / Serdar field was resolved. The first factor that contributed to getting off the problem from ground was the signing in August 2018 of the Convention on the Legal Status of the Caspian Sea by the leaders of the five coastal states. It was this document that allowed Azerbaijan and Turkmenistan to start a substantive dialogue on joint projects in the Caspian.

According to the Turkmen leader, during his official visit in March 2020, the heads of the two states discussed and analysed in detail the possibilities of bilateral cooperation in energy in the Caspian Sea. “As a result, we have reached agreements on the joint operation at one of the largest deposits of hydrocarbon resources in the Caspian. At the same time, the key principles of our cooperation will be solidarity, mutual respect and support. Therefore, the name of field, Dostlug, has a deep symbolic meaning,” Mr. Berdimuhamedov noted.

The President of Azerbaijan believes that the implementation of the project for the joint development of the Dostlug field will create new opportunities for the export of energy resources.

“Today's achievement opens a new page in the development of the Caspian hydrocarbon resources. This project will contribute to strengthening the energy security of our countries, as well as that of our neighbours. This project opens up great export opportunities, thereby contributing to the growth of the welfare of our peoples,” Mr. Aliyev said.


Production and transit

Indeed, given the available network of export pipelines in Azerbaijan, and most importantly, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, liquid hydrocarbons produced at the Dostlug field can also be exported along these routes. Thus, Turkmenistan will get direct access to international sales markets. It will also increase the load on the BTC and bring additional revenues to the pipeline shareholders and transit countries.

By the way, the Turkmen oil produced by Petronas has been supplied to the world markets using BTC for a long time and very successfully. Thus, the choice of this route for new volumes looks quite logical.

In addition, most of the fields in Azerbaijan have been in operation for more than a decade, and there is a natural decline in production, including the Azeri-Chirag-Guneshli block, which provides more than half of all oil production in the country. Dostlug will help to achieve the goal of stabilizing this indicator.

On the other hand, available gas resources at the Dostlug field suggest the possibility of their supply via the Southern Gas Corridor. This will further strengthen the role of the SGC and open up direct access for Turkmen gas to new gas markets in Turkey and the EU.

With the development of the Dostlug field, the planned infrastructure can be connected to the ACG infrastructure for the delivery of hydrocarbons to Azerbaijan. This will greatly simplify the issue of gas supplies from Turkmenistan through the Caspian Sea to Azerbaijan for its subsequent export to the markets of Turkey and Europe. Given the plans for the development of the SGC, Turkmenistan, which has the fourth largest natural gas reserves in the world, is the most obvious candidate for transporting gas through the TANAP and TAP pipelines to Europe.

“The agreement reached today between Azerbaijan and Turkmenistan not only enables the two countries to work together on the development of the Dostlug field, but also opens up new perspectives for cooperation in the production of natural gas, or at least in the transit of gas from Turkmenistan through the Caspian Sea to Azerbaijan and other countries. It would be very important for Turkmenistan to provide access to reliable markets,” former US Ambassador to Azerbaijan Matthew Bryza said.

Robert Cutler, director of the Energy Security Program of the Canadian Association of NATO, a leading specialist in geopolitics and Caspian energy, shares a similar opinion. “In fact, it is the Aktau Treaty signed in August 2018 (on the legal status of the Caspian Sea, R+) that contributed to the present memorandum. It removes the last obstacle on the way to the Trans-Caspian gas pipeline. There should be no doubt that both sides discussed the TCP cooperation in detail in the context of bilateral discussions that resulted in this memorandum. It is not surprising that we will be able to see the further progress in the implementation of the TCP in the near future,” Mr. Cutler said.

Svapnil Babele, a senior analyst at the independent Norwegian research and consulting company Rystad Energy, said the joint development of the Dostlug field by Azerbaijan and Turkmenistan opens up even more opportunities for exploration in the Caspian Sea.

“In fact, both Azerbaijan and Turkmenistan see a decline in the production of liquid hydrocarbons. Thus, this project will help them maintain production in the short term. The agreement could also set a stage for new negotiations on the long-proposed Trans-Caspian Pipeline, and could open up new gas markets for Turkmenistan, which mainly exports gas to China. Azerbaijan has already started gas supplies to South-Eastern Europe through the network of gas pipelines, which are part of the Southern Gas Corridor," Babele said.

There is a lot of work to do to bring the started process to the signing of actual contract for the development of the Dostlug field. First of all, the parties need to resolve technical and commercial issues. The contract is likely to be signed between the state-owned companies of the two countries on an equal footing (50-50) with the subsequent creation of a joint operating company that will deal with the development of hydrocarbons and all issues related to the creation of infrastructure for the production and transportation of oil and gas to the shore.


Next stop is Iran

The signing of memorandum between Azerbaijan and Turkmenistan indicates that all issues in the Caspian can be resolved through dialogue and cooperation. The project will serve as a good example for the settlement of similar issues between Azerbaijan and Iran. The subject of the dispute between Baku and Tehran is the block of promising structures Alov-Araz-Sharg. The contract for the exploration and development of these fields was signed on June 21, 1998 between SOCAR and a number of foreign companies. British BP was the operator of the project. However, after an armed incident involving the Iranian naval forces to prevent an Azerbaijani vessel from conducting geophysical surveys of this territory in 2001, works under the contract was frozen until an agreement was reached on the status of the Caspian Sea between Azerbaijan and Iran.

Positive shifts occurred in March 2018, during the visit of Iranian President Hassan Rouhani to Baku, when the energy ministers of both countries signed a memorandum of understanding on the joint development of relevant blocks in the Caspian Sea. Among the discussed blocks was, in particular, Araz-Alov-Sharg. Iranian Deputy Oil Minister Amir H. Zamaniya also spoke about the intention of the two countries to create a joint oil company to operate in the Caspian Sea. However, the US sanctions imposed on Iran in the fall of the same year actually prevented the implementation of these works, postponing them until better times.

Nevertheless, the parties continue to demonstrate a desire for cooperation. During the meeting of the Iranian President Hassan Rouhani with First Deputy Prime Minister of Azerbaijan Shahin Mustafayev in December 2019, the parties discussed the cooperation in the joint development of oil and gas fields of the Caspian. Mr. Rouhani said that Tehran was monitoring the implementation of joint projects for exploration and production of oil in the Caspian Sea, and expressed his hope that these issues would be discussed at a meeting of joint commissions of the two countries.

By the way, Iran plans to develop similar cooperation with Turkmenistan. Perhaps with the lifting of US sanctions, this process will intensify.

The agreement on the status of the Caspian Sea states that the signatory states are ready to resolve issues of disputed fields in a bilateral format. Azerbaijan and Turkmenistan did just that. There is confidence that joint work at the Dostlug field will be successful and effective. If Iran follows the example of Azerbaijan and Turkmenistan, it will only serve the good of the entire region and will make a great contribution to transforming the Caspian into a zone of lasting peace, good-neighborliness, mutual understanding and effective partnership.