PROJECT OF THE DECADE

A forum for the presentation and discussion of a project to create a new oil-and-gas refining and petrochemical complex (OGPC) opened in Baku on 10-12 April at the initiative of SOCAR (Azerbaijani State Oil Company). The forum was organized by Iteca Caspian and INBC Consulting.

The object of the forum was to present information about the project to a broad circle of companies, including potential licensors and engineering-and-design, supply, construction and other contracting companies. As part of the OGPC project it is planned to construct oil-refining and gas-refining plants with a capacity of 10m tonnes and 10bn cu m annually respectively. The project also includes petrochemical production aimed at creating about 2m tonnes of basic polymers annually. Off-plot facilities, including an independent power-supply unit, are also due to be built for the new complex. The technical-ecological feasibility report of the project was drawn up with the participation of such major companies as Technip, Foster Wheeler AG and UOP.

Everything is new - the old is best forgotten

The OGPC will undoubtedly be one of the major projects of the second decade of the 21st century in Azerbaijan (the whole complex is due to be commissioned by the end of 2020) both in scale of work and in volume of investments, which are estimated at $15bn. So one can understand the interest the aforementioned forum aroused among foreign companies. At the same time, this mega-project, despite its cost, is commercially attractive: it is expected to pay for itself within 7-8 years.

Moreover, as President Ilham Aliyev pointed out in his message of greetings to the participants in the forum, Azerbaijan is recognized in the world as a reliable supplier of energy carriers, and the contracts signed with influential oil companies and agreements on cooperation and investments in oil and gas projects have brought dividends and justified investors' expectations. "One of our main tasks today is the construction and commissioning of a new oil and gas refining complex and the production of petrochemical output which will meet modern standards and produce petrochemical output," President Ilham Aliyev's letter states.

According to SOCAR President Rovnaq Abdullayev, in recent years oil extraction in Azerbaijan has increased sixfold - to 50m tonnes annually and daily extraction has grown to 140,000 tonnes. "The increase in gas extraction volumes is continuing through the implementation of Stage-1 of the Shah Deniz project. In recent years gas extraction in the republic has increased 5.2 times. Work is now being completed on preparing for the start of the implementation of Stage-2, which includes a minimum planned extraction volume of 16bn cu m annually. In total, Azerbaijan's confirmed hydrocarbon reserves amount to 4.5bn tonnes of standard fuel with anticipated reserves of 10bn tonnes of standard fuel," he said. Abdullayev stressed that the development of new oil and gas structures is now continuing, including Abseron with reserves of 340bn cu m of gas and 45m tonnes of condensate.

Bearing in mind that existing oil refineries will simply not be able to keep up with the increasing demand, and the capacities of the gas processing plant built in 1959 are not even sufficient now, and besides this all these enterprises are out of fashion and do not match up to the requirements of world standards, the construction of the new petrochemical complex is simply of paramount importance.

True enough, this year SOCAR will start work on updating its existing oil refineries and, as Davud Mammadov, vice-president of the refining company said, it will be completed by 2015. But this will only help to maintain the country's oil refining industry to a small degree until the new complex is ready. Without it, spokesmen of the state-run oil company say, in the future Azerbaijan may be dependent on the import of petrochemical products. And this is quite absurd if you bear in mind that SOCAR is already now one of the leading investors in petrochemical complexes abroad, especially in Turkey, and so on.

Pluses without minuses

The construction of the new complex in Azerbaijan will commence in 2013, and work is currently underway to prepare for the project. "Design work is at the final stage. Tenders will be put out this year so that the foundations can be laid in the first quarter of 2013 and construction can begin," Abdullayev said.

The area covered by the oil-and-gas refining and petrochemical complex extends to 1,500 ha. It will be located 60 km from Baku, next to the Sangachal terminal. The complex is due to be commissioned in 2018-2020. That said, the first to be handed over will be a gas-processing complex with a capacity of 10bn cu m annually. Gas will be converted from the state oil company's own fields, associated gas from the Azeri-Chirag-Gunashli bloc of fields and, if necessary, gas from the Shah Deniz field, which falls to the share of SOCAR.

At the second stage the petrochemical complex will be commissioned, followed by the oil refinery with a capacity of 10m tonnes. At the refinery it is proposed to begin production of A-92, A-95 and A-98 car petrol, as well as jet-engine and diesel fuel. Incidentally, particular attention will be focused on the latter in order to boost imports to Azerbaijan of more fuel-saving vehicles operating on diesel. As regards jet-engine fuel, which is believed to be the costliest in the world, its production within the country in large volumes will increase the commercial effectiveness of local airlines and bring significant revenue into the country.

And so, the main facility (in percentage terms) at the complex will be the oil refinery. Petroleum products will, in the main, be used to satisfy increasing domestic demand, and also be used for export. Diesel, aviation fuel and petrol are to be exported. The main sales markets will be the countries of the Mediterranean, Turkey and Georgia. Some 90% of petrochemical output will also be exported. And in this area Turkey is a very attractive market from the point of view of high rates of development and large demand for petrochemical products. Other sales markets will be the countries of the CIS and the Mediterranean.

The most important thing is that all the output complies with high world standards and that production is carried out in line with the strict principles of ecological safety. Moreover, alongside the complex in the village of Sahil, it is planned to build a special community for workers with free apartments which will undoubtedly encourage young people to work at these enterprises. Among the social benefits of the project will be the opening of additional jobs, improving the vocational training of experts in this sphere, training new staff, and so on.

"The successful implementation of this project will have a positive impact on the country's economy and help to develop a number of production facilities and also produce a large number of highly qualified specialists," Tofiq Qahramanov, SOCAR's vice-president for strategic development, said.

We should also point out that once the new complex is up and running all the existing oil refineries and other enterprises will be dismantled, creating additional opportunities for town planning and developing Baku and Sumqayit.

The monetary question

As far as the financial aspect is concerned, i.e. who is to pay for this mega-project, Abdullayev said that the main shareholder of the OGPC will be SOCAR. "The question of the participation of other shareholders is being discussed. There have been offers from companies, but we must assess this," Abdullayev said. Meanwhile, Sahmar Movsumov, executive director of the Azerbaijani State Oil Fund, said that the fund is prepared to render financial support to the construction project of a new oil-and-gas refining and petrochemical complex in the republic.

Fuad Ahmadov, deputy head of SOCAR's department for the OGPC project, said that all sources of funding will be considered for the construction of the new complex. He also noted that funds from SOCAR's authorised fund, SOFAR, export credit agencies, commercial banks, and others are all potential sources of funding for the project. "All sources will be considered and then a decision will be made," Ahmadov said. According to him, $12.4bn of the proposed cost of the project ($15bn) will come from direct investments, and $2.6bn from interest yield obtained during construction. The internal rate of return will be 13% which, Ahmadov believes, is a good figure. The main part of the funding, he says, will be for 2016-2017, when construction work will be at its most intense.

Meanwhile, in the opinion of experts, the adoption of a law on special temporary legal status could have a positive impact on the implementation of the project. "Insofar as during the implementation of the project foreign investments, contractors and sub-contractors will be involved, the creation of a special legal status is necessary in order to prevent delays in the construction of the new complex. SOCAR has already approached the government about creating a legal base to regulate a special work regime," Ceyhun Bayramov, a managing partner in the OMNI legal company, said.

One way or the other, as has already been said, the OGPC will be one of the most attractive projects for investors, as shown by their interest in the presentation forum. So there should be no financial problems regarding its implementation. All that needs to be done is to select the most suitable partners and give the "green light" to the project.