LABELLED "SHAH-DENIZ"

Georgia, Turkey, Ukraine, Romania, Switzerland… Quite recently this list was extended to take in Greece. It is precisely in these countries that the State Oil Company of the Azerbaijan Republic (SOCAR) has acquired assets over the last couple of years. 

SOCAR's latest acquisition was the purchase of a 31-per-cent stake in the Greek National Natural Gas Transmission Operator S.A., DESFA, attached to the Hellenic Republic Assets Development Fund (HRADF) and a further 35-per-cent stake in Greece's largest oil company Hellenic Petroleum SA.

Although a rumour that the deal had broken down was circulating in some Greek and Russian media literally a couple of days before the agreement on the purchase and sale of the DESFA shares, since Russia's "Gazprom" had come up with an offer, all that turned out to be just a red herring. 

Some 15 years ago it would have been difficult to imagine SOCAR as the owner of a petro-chemical complex in Turkey, of gas supply pipelines in Georgia and Greece, chains of filling stations and supply bases in Ukraine, Switzerland and Romania. This is a far from complete list of all SOCAR's assets. 

Today a company, which at the end of the 1990s could not even dig up enough capital to simply finance the drilling of oil prospecting wells, is itself able to initiate and put together the financing for such large-scale projects as the Trans-Anatolian Gas Pipeline (TANAP), which stretches from the east of Turkey to the west and makes it possible for Azerbaijan to export gas to Europe. 

This is how, by following the example of the development of one company, you can trace the small amount of advantages obtained by Azerbaijan from implementing an oil-based strategy, or to be more exact, only the first step limited to the development of the "Azeri-Chirag-Guneshli" [Azari-Ciraq-Gunasli] oil field. The next step will be the development of the country's gas resources as well as supplying them to consumer markets. This is all being achieved when the time is right.

In many countries, in particular in Europe energy security has become synonymous with national security and sovereignty. Azerbaijan's president, Ilham Aliyev, mentioned this when signing the investment agreement on the second stage in developing the  "Shah-Deniz" [Sah-Daniz] gas field in Baku in mid-December 2013. The president said that the "Shah-Deniz-2" project is an energy security project, that the energy security of each country was inseparable from its national security. He added that in 1990s, when the "Shah-Deniz" project was signed, things were different, but today this is already the reality. 

This is the reason why Europe is striving to vary its gas supply sources as much as possible, in an attempt to decrease its dependence on its major supplier, Russia. 

The exhaustion of its own energy resources in the north of the continent, the instability in the Middle East and North Africa, which have been Europe's traditional suppliers of gas, the failure to get to grips with Iran's nuclear problem and also the fact that Kazakhstan's, Uzbekistan's and Turkmenistan's infrastructure is closely connected to the Russian pipeline networks, makes Azerbaijan almost the only alternative source of gas.

Azerbaijan has moreover already provided for its own energy security, ensuring as much as 95 per cent of the country's gas needs have been met. Official Baku has also set about ensuring that there is energy security on a regional scale.

Georgia is almost meeting all of its needs with Azerbaijan's gas. Moreover, as mentioned above, SOCAR is the operator of the gas pipeline networks in the neighbouring country. Although gas supplies to Turkey are not yet form a very considerable part (something like 6bn cu m) of the country's growing needs, but acting as an alternative and allows this fraternal country to be able take a more definite stand in negotiations with other suppliers. Nor should one forget the gas supplies to Russia either, which is itself the main player in supplying gas to Europe and the CIS [Commonwealth of Independent States] countries. In supplying up to 1.5bn cu m of gas to the southern regions of Russia, Azerbaijan is ensuring more flexible and undoubtedly cheaper supplies to the consumers of its northern neighbour, than  "Gazprom" can do, since the latter has to pipe the gas several thousand kilometres from the gas fields in Siberia. 

But official Baku is not restricting itself just to the regions, which do not provide the necessary level of market diversification or volumes of consumption. In this respect, 2013, which was labelled the "Shah-Deniz" year was particularly noteworthy.

A long awaited event happened in the summer of 2013; the route along which Azerbaijan's gas is to be transported Europe was finalised. But, in spite of the expectations, it was not the Nabucco project in its shortened version, which was actively put forward and promoted over the last few years, but the Trans-Adriatic Pipeline (TAP) that was chosen. The choice was fundamentally made purely out of commercial considerations.

As mentioned by Regionplus, TAP is approximately 900 km long, while the Nabucco West pipeline would have been 400 km longer, which means that construction costs would have been higher. Besides this, TAP crosses the territory of three states - Greece, Albania and Italy, while Nabucco West runs through four states - Bulgaria, Romania, Hungary and Austria. These two considerations would undoubtedly be reflected in the gas transit tariffs and mean that TAP is a more advantageous project. One determining factor in constructing the gas pipeline network was the consumer markets. TAP has got obvious advantages here. 

The Italian town of San-Foca in "the heel of the boot of Italy" is the gas pipelines final endpoint. Over the last few years Italy has been experiencing problems providing for the volumes of gas it requires. Of its annual consumption of 80bn cu m the country imports approximately 70bn cu m. Its main suppliers are Russia, Algeria, Libya, Norway and Qatar. But the instability in Algeria and Libya has led to disrupted gas supplies, so the country is actively looking for new sources in order to avoid increasing its dependence on Russia, from which it gets almost one quarter of its gas imports. Azerbaijan's gas may act as a lifeline in diversifying the sources of its imports. 

Greece, which will be crossed by TAP has long been interested in supplies of Azerbaijan's gas. It has even had it delivered in the form of a secondary export from the Turkish Petroleum Pipeline Corporation Botas. Although Greece's requirements are nowhere near as great as Italy's, there are a number of advantages to providing gas to it. These two European countries have the highest gas prices. The main reason for this is first and foremost their remoteness from the main gas fields in the continent's north. Russian gas has to be pumped several thousand kilometres across several countries before it reaches the main consumer market, which naturally results in high transit costs. The wholesale price of gas in these countries is 15-20 per cent higher than the average for Europe. Whereas on average the price of 1,000 cu m of gas is something like 400 dollars, in Greece and Italy it is as much as 470-500 dollars.

Both officials and almost all experts think that TAP is a much better option than the Nabucco West project. Some people were quite categorical about it, noting that neither the Nabucco nor the Nabucco West projects ever had any kind of chance of being implemented.

In this case, however, the prospects for growth in gas extraction in Azerbaijan and for the discovery of new gas fields should be taken into consideration. For, according to today's estimates the country's gas reserves are estimated to be 3 trillion cu m, which would allow more than 50bn cu m of gas to be extracted annually. TAP, which has an annual pumping capacity of 10bn cu m will not be able to "cope with" prospective volumes of gas, even if its diameter is doubled. This means that in some 10 years or so, we might even see the Nabucco West project implemented or some other project, which would be able to deal with the envisaged supply of Azerbaijan's gas to Central Europe.

Moreover, work is already being undertaken in this direction. At the investment agreement signing ceremony Azerbaijan's president Ilham Aliyev said that he was hoping that in the next few years they would be working on lengthening the pipeline to this end with their partners in Romania, Hungary and Austria.  

Almost immediately TAP had been chosen as the main pipeline for gas supplies to Europe, the main shareholders in the "Shah-Deniz" project acquired a share in the gas pipeline project.

SOCAR and BP acquired a 20-per-cent share each in the project and Total a 10-per-cent share. Besides this, the major operator of gas pipelines in Europe, the Belgian company Fluxys, also decided to acquire a 16-per-cent package in TAP. 

Thus, the distribution of the TAP project looks like this: HRADF - 20 per cent; BP - 20 per cent; Statoil - 20 per cent; Fluxys - 16 per cent; Total - 10 per cent; E.ON - 9 per cent and EGL-Axpo - 5 per cent. 

Back in September the "Shah-Deniz" shareholders had already signed the long-term contracts relating to gas sales within the framework of the second stage of working the gas field with the involvement of nine European companies. 

The purchasers of Azerbaijan's gas from Stage-2 of the "Shah-Deniz" project were Gas Natural Fenosa, DEPA, E.ON, GDF-Suez, HERA Trading, AXPO, Enel, Shell and Bulgargaz, selected from 15 companies submitting applications for almost twice as much gas as was on offer. The contracts are valid for 25 years and the overall volume of supplies is 10bn cu m per year. The total approximate income from the sale of gas within the framework of these contracts is predicted to be around 200bn dollars.

"We think that the partnership, which is based on these agreements will provide a unique opportunity for other markets in Europe to forge ties with Azerbaijan, which has large reserves of gas. I have in mind the deep-lying gas strata, which it is planned to develop at "Shah-Deniz" and "Azeri-Chirag-Guneshli", the potential of the "Absheron" and "Umid" gas fields, the extremely promising structures of "Shafag-Asiman" and "Babek". All this gives us grounds for hoping that we can cross the frontiers of Bulgaria, Greece and Italy," SOCAR head Rovnaq Abdullayev noted at the agreement signing ceremony.

State-of-the-art drilling installations, which SOCAR has already set about building  are needed to develop all these areas. In the summer of 2013 an agreement was signed between the companies CDC (92 per cent of which belongs to SOCAR) and Singapore's Keppel Fels on constructing the first semi-immersed drilling rig of its type, costing 1bn dollars. Another three installations of this type are to be constructed.

According to the forecasts, 16bn cu m of gas will be extracted within the frame work of the Stage-2 project, of which 6bn will be distributed in Azerbaijan, Georgia and Turkey; the remaining 10bn is to be exported to Europe. Bulgaria and Greece are to receive 1bn cu m of gas each and the remaining 8bn cu m will be supplied to Italy. 

BP President Al Cook has said part of the gas supplied to Italy may be forwarded to other countries in Central Europe. First and foremost deliveries will be focussed  on countries like Albania, Montenegro and Croatia which are the closest to TAP. 

Virgin territory is opening up to SOCAR. Albania and Montenegro are not gas consumers in general. The company has already begun negotiations with the governments of both countries to get the gas pipeline infrastructure going.

Finally, the main event of the past year was the signing of the long-awaited investment agreement on the second stage in developing the "Shah-Deniz" gas field, which is called "The XXIst Century Contract". The presidents of Azerbaijan and Montenegro, the heads of government of Croatia, Albania, Georgia, Bulgaria, the British and Italian foreign ministers, Turkey's energy minister and high-ranking EU representatives were present at the signing ceremony.

The total investments in this project, taking into account the TANAP and TAP pipeline construction costs, will be 45bn dollars, which will allow a 3,500-kilometre-long pipeline network to be built to supply Azerbaijan's gas. More than 30,000 new jobs will be created in the countries located along the pipeline.

As a result of the Stage-2 construction work and operations 10,000 jobs will be created in Azerbaijan alone. The investments in this project are estimated to be 28bn dollars, which will allow a maximum of 16bn cu m of gas to be extracted annually. It is planned to start gas extraction within the framework of the "Shah-Deniz 2" project in 2018. Altogether, the aim is to obtain a peak extraction figure of more than 25bn cu m annually from the two stages of the "Shah Deniz" development. Condensates extraction from the gas field is to grow from 55,000 barrels per day to 120,000 barrels per day. 

A number of other important decisions have been taken within the framework of the investment agreement signed. In particular the British BP company has become a shareholder in the TANAP project, obtaining a 12 per cent of the share of SOCAR, which is left with 68 per cent and 20 per cent of Botas share.

Incidentally, BP and SOCAR have also bought up the share of the Norwegian Statoil company in the contract on the "Shah-Deniz" development. According to Statoil data, these two companies have paid 1.45bn dollars for a 10-per-cent share in the "Shah-Deniz" project. BP has also acquired an extra 3.3 per cent share, increasing its total share to 28.8 per cent, while SOCAR, which had a 6.7-per-cent share, has increased that to 16.7 per cent. Statoil still has a 15.5-per-cent share. It is planned to close the deal this year. 

Moreover, BP as the operator of the "Shah-Deniz" development is already thinking about a third stage in developing the deposit. "The deep prospecting borehole, drilled at the deposit in 2007, revealed that there are good reserves in the deep-lying strata. Full-scale prospecting needs to be done. A new technology is needed, which is still being developed, for, as well as being at greater depths, the gas there is under greater pressure. My intuition and experience suggests to me that there are large reserves there that will last until the next century," said BP chief executive Robert Dudley.  The reserves of gas in the reservoirs which are planned to be developed within the framework of Stages 1 and 2 are 0.9 trillion cu m, and taking into account the deeper strata already envisaged in Stage 3, 1.4 trillion cu m. So that the "Shah-Deniz" shareholders can get a more accurate picture of the work to be planned, Azerbaijan has extended the gas field development period until 2048.

Yet another important decision on the "Shah-Deniz" development is the plan to increase gas extraction from the field next year. Within the framework of Stage-1 annual gas extraction will have been increased to 10.4bn cu m by the end of the year, while it was previously planned to bring it up to 9bn cu m. BP's vice-president Al Cook said with regard to the project that the extra 1.4bn cu m will be sold to Azerbaijan. 

 The Russian government's decision to denounce the 1996 agreement on the transit of Azerbaijan's oil by the Baku-Novorossiysk pipeline has not gone unnoticed either.

The Russian side linked the rejection of the contract with the losses that the shareholder company "Transneft" has been incurring in operating the pipeline. 

For Azerbaijan this step has not been crucial. The country pumps most of the oil it extracts along the Baku-Tbilisi-Ceyhan and Baku-Supsa pipelines. Although SOCAR and "Transneft" did hold negotiations on concluding a new agreement, they could not agree upon an overall figure, and the Russian pipeline company is already mothballing the pipeline as far as Makhachkala [Russia's Dagestan region]. The pipeline may get a new lease of life in another direction. The Russian oil giant "Rosneft" has shown interest in pumping oil to Baku and possibly across the BTC. During Russian President Vladimir Putin's visit to Baku, the parties concluded a memorandum on this issue and now the variants are being looked at. In principle 2014 should be a quieter year since all the necessary decisions of on Azerbaijan's gas exports to Europe have already been taken. Now we are faced with the painstaking work of drawing up the necessary contracts, of honouring them so that in five years time an announcement can be made about a new means of ensuring Europe's energy security.