NEW CENTURY CONTRACT

It was on 20 September 1994. Azerbaijan has just signed an agreement on development of the Azeri-Chirag-Guneshli [Azari-Ciraq-Gunasli] oil fields with 12 companies from eight states of the world. Apart from the world-known British Petro-leum/Statoil, Unocal, TRAO and other companies, the signing ceremony at Gulistan Palace was also attended by government representatives from the USA, the UK, Turkey and Norway. In view of its international scale, the agreement was instantly dubbed "Contract of the Century". The contract became the basis for the oil strategy of national leader Heydar Aliyev and enabled Azerbaijan to achieve such heights in the economic and political spheres that one would not even have been dreamt of some 20 years before. 

17 December 2013. Azerbaijan together with its partners has signed a final investment agreement on the second phase of development of the Shah Deniz gas field. The signing ceremony was attended by the presidents of Azerbaijan and Montenegro, the heads of government of Croatia, Albania, Georgia, Bulgaria, the foreign ministers of the UK and Italy, representatives of Turkey's energy ministry and high ranking EU officials. This agreement has come to be called "Contract of the 21st Century" in the world. The agreement was signed at Baku's Heydar Aliyev Centre which is included on the list of the world's architectural masterpieces. If the "contract if the century" had not been signed nearly 20 years ago, we could hardly be able to see the new century contract being signed and at such a modern centre. 

The Shah Deniz 2 investment agreement is opening the way for Azerbaijani gas to Europe and translating Azerbaijan's energy policy from the regional to a global plane. 

"Today is a historic day in the history of modern Azerbaijan. The implementation of the Shah Deniz 2 energy project will start today. It will ensure the long-term development of this country. Shah Deniz 2 is one of the world's biggest energy projects. This is a project for energy security and energy diversification. Wide cooperation of the member states and companies will be ensured within this historic project," Azerbaijani President Ilham Aliyev said at the investment agreement signing ceremony. 

He said that the project will change the energy map of the region and Europe as Azerbaijan's gas resources will be supplied to markets awaiting them. TANAP and TAP rank among the world's biggest energy projects. Investments totalling 45bn dollars will be attracted to the Shah Deniz 2 project (taking into account the construction of these two gas pipelines - author). More than 30,000 new jobs will be created in the countries located along the pipeline route. Naturally enough, the project will call for additional efforts but it will ensure this country's long-term sustainable economic development," said the head of the Azerbaijani state. 

Now the main focus will be on carrying out the TANAP and the TAP projects for the timely supply of Azeri gas to European markets. It will be necessary to create infrastructure 3,500 km in length. For this end, close cooperation will be needed among the countries involved in the initial stage of the Shah Deniz project: Azerbaijan, Georgia, Turkey, Greece, Albania, Italy and Bulgaria. 

Without becoming complacent, Azerbaijan is seeking new sale markets for its gas. For the first phase, those are Montenegro and Croatia. This explains the presence of Montenegrin President Filip Vujanovic and Croatian Prime Minister Zoran Milanovic at the investment agreement signing ceremony. A Memorandum was also signed at the ceremony on cooperation among Azerbaijan, Albania, Croatia and Montenegro and on the Southern Gas Corridor and the South-Eastern European Corridor. 

Longer-term plans envisage that Azerbaijani gas will enter Central European markets. "I hope that we will do active work together with our partners in Romania, Hungary and Austria during the years to come to extend the pipeline in that direction too," the Azerbaijani president said. 

According to UK Foreign Secretary William Hague, Azeri gas supplies to Europe via the Southern Gas Corridor will make it possible to reduce the region's dependence on the only supplier or one transit system and will have an effect on all the countries in the region. 

William Hague sees a potential to expand the Southern Gas Corridor in the years to come involving big gas suppliers from the Middle East. That in turn may contribute a lot to Europe's energy independence, "strengthen competition in the European gas market and affect the gas price". Moreover, the European Union's gas market is so much tied together that countries other than those receiving gas directly from Azerbaijan will also see its fruits, William Hague said at the investment agreement signing ceremony in Baku. 

By the way, of interest in this context are statements made by BP chief Robert Dudley during his meeting with a group of Azeri journalists. In particular, asked by an R+ correspondent about the possibility of piping Iranian gas through the Southern Gas Corridor system in the light of improving relations between the West and Iran, R.Dudley said that the system has sufficient capacity to pipe gas from third countries. "We are monitoring the situation although we haven't thought seriously of that. The pipeline in Turkey will have a high throughput and it will be possible to pipe third countries' gas there. But we are not looking that far into the future yet," R. Dudley is quoted as saying. 

As for prospects for Azeri gas supplies to Europe, the BP head has no doubts about them all the more so as the company has become a shareholder in the TANAP project getting 12 per cent from SOCAR's share. Apropos, BP and SOCAR have also bought out part of the Norwegian Statoil's holding in the contract to develop the Shah Deniz field. According to data from Statoil, the two companies will pay 1.45bn dollars for a 10 per cent interest in Shah Deniz. At the same time, BP and SOCAR are acquiring 3.3 per cent and 6.7 per cent respectively, bringing up their respective shares to 28.8 per cent and 16.7 per cent. Statoil will keep 15.5 per cent. It is planned to close the deal in 2014. 

Stage two of the Shah Deniz field development envisages the installation of two platforms, drilling 26 underwater wells connected to the platforms, laying a new gas pipeline across Azerbaijan and connecting it to the South-Caucasus Gas Pipeline in Georgia's territory, building two big pumping stations in Georgia and building two processing lines (each having a capacity of 8bn cu.m. of gas per year) at the Sangacal terminal. All these works will provide 10,000 new jobs in Azerbaijan alone. Investments in these efforts will total 28bn dollars. 

All that will make it possible to produce up to 16bn cu.m. of gas annually. It is planned to launch gas production in 2018 under the Shah Deniz 2 project. All in all, peak output from two Shah Deniz development stages will exceed 25bn cu.m. annually. The production of condensate from the field will increase from 55,000 to 120,000 barrels per day.   

Of 16bn cu.m. of gas planned to be produced within Shah Deniz 2, 10bn cu.m. will be sold in Europe (the markets of Greece and Bulgaria will have 1bn cu.m. each and 8bn cu.m. will go to Italy). Turkey will buy 6bn.cu.m. Nine companies are buying Azerbaijan's gas: Gas Natural Fenosa, DEPA, E-ON, GDF-Suez, HERA Trading, AXPO, Enel, Shell and Bulgargaz. 

At the same time BP as Shah Deniz operator is already thinking of phase three of the field development. According to BP head Robert Dudley, a deep exploration well drilled in the gas field in 2007 showed good reserves in the deeper strata. A full-scale exploration is necessary. A new technology that is under development is needed there because, apart from lying deeper, the gas has higher pressure in those strata. "Basing on my intuition and experience," Robert Dudley said, "I can say that there are great reserves of gas that will last until the next century". 

Apropos, Shah Deniz stockholders can safely plan their work under the project as the gas field development period has been extended till 2048 as was announced at the investment agreement signing ceremony.  

The gas reserves in the reservoirs earmarked for development during Stages 1 and 2 total 900bn cu.m. or 1,400bn cu.m., taking into account those in the deeper strata planned for Stage 3. 

Shah Deniz shareholders have also decided to increase gas output from the field as early as next year. Within Stage 1, by the end of 2014, it is planned to increase gas production to 10.4bn cu.m. annually whereas earlier it was planned to achieve 9bn at the most. According to BP Vice-President Al Cook, the annual surplus of 1.4bn cu.m. of gas will be sold to Azerbaijan. 

Historically, 20 years is just a moment. For sure, no-one could suppose in 1994 that Azerbaijan would become one of the main gas suppliers providing diversification of energy resources for Europe. Yet today's realities show that the country will remain the region's major player for more than one century. Azerbaijan's gas resources are estimated even now at 3,000bn cu.m. but there are a few more projects that can increase this country's gas potential. Both the partnership relations and the work being done today promise unique opportunities to supply Azerbaijan's gas resources to new markets.

FIRSTHAND INFORMATION

"Shah Deniz 2 is a project for energy security. The energy security of each country is inseparable from its national security. It was not so in the 1990s when the Shah Deniz project was signed. But today it is already a reality."

Ilham Aliyev, president of Azerbaijan

"By joining in this project, Montenegro will ensure its long-term energy security. Because we are dealing here with a very reliable supplier."

Filip Vujanovic, president of Montenegro

"One of the world's biggest projects has started turning into a reality. We continue drawing the map of Europe's energy routes."

William Hague, UK foreign minister 

"Azerbaijani companies and resources will create a new panorama for countries of Southern Europe. At the same time Albania will be a constituent part of the network of an important energy project. We guarantee that all commitments related to Albania and South-Eastern Europe will be met."

Edi Rama, prime minister of Albania

"Azerbaijan is turning into an important country providing for the energy needs of our region and countries of the European Union. At the same time the geographic position of Georgia enables it to act as a transport hub in the South Caucasus and offers the shortest transit route linking Europe together with Turkey to the Caspian Sea region." 

Irakliy Garibashvili, prime minister of Georgia

"This project is of special importance for us… It means not only energy security but also cooperation. It means consolidation of countries, new jobs and new investments."

Zoran Milanovic, prime minister of Croatia

"Supplies of Caspian riches to world markets will raise even higher the level of wellbeing both in this and other regions. Using all its strategic and geographic resources, Turkey will contribute to this project's success."

Taner Yildiz, minister of energy and natural resources of Turkey 

"Quite recently, some people described this project as impossible. Yet this is not the first time projects deemed impossible in this region have been successfully accomplished as a result of partnership and cooperation. First it was the Baku-Tbilisi-Ceyhan oil pipeline and now it is the Southern Gas Corridor." 

Gunther Oettinger, commissioner for energy of the European Union

NOTE

The contract for the development of the Shah Deniz gas field was signed in Baku on 4 June 1996 and ratified by Milli Maclis [parliament] on 17 October 1996. The project's shareholders are: BP - 28.8 per cent, SOCAR - 16.7 per cent, Statoil - 15.5 per cent, LUKoil - 10 per cent, NICO - 10 per cent, Total - 10 per cent and TPAO - 9 per cent. The TANAP gas pipeline is meant to transport Azerbaijani gas from the Shah Deniz field within the framework of Stage 2 from the Georgian-Turkish border to the western border of Turkey. 

The TANAP project cost is estimated at 10-11bn dollars. The project participants are SOCAR (68 per cent), BP (12 per cent) and BOTAS (20 per cent). 

The TAP gas pipeline is meant to transport natural gas from the Shah Deniz gas field within Stage 2 via Greece and Albania to Italy. The pipeline capacity is 20bn cu.m. annually depending on demand. The shares are distributed among the holders as follows:  SOCAR (20 per cent), BP (20 per cent), Statoil (20 per cent), Flyxis (16 per cent), Total (10 per cent), E.ON (9 per cent) and EGL-Axpo (5 per cent).