STABLE PLATFORM

The sanctions war between Russia and the West is finding new victims. The fall of the rouble's exchange rate and oil prices - which, incidentally, some experts say is a result of collusion between the USA and Saudi Arabia aiming to reduce Russia's revenues and hit its economy - has begun to affect primarily oil and gas companies on both sides of the economic "front". Thus, a report by Russia's largest oil company, Rosneft, says that its net profit in the third quarter of 2014 fell by more than 140-fold (!!!) to R1bn. On the opposite side, the victim is Britain's BP which owns nearly a 20-per-cent stake in Rosneft. BP's net profit in the third quarter of this year fell to 3bn dollars from 3.7bn dollars in July-September 2013. Furthermore, it was Rosneft who "contributed" to the decline in BP's revenue - revenue generated by the British company's stock in the Russian giant fell from 808m dollars to 110m dollars.

Along with Russia, Azerbaijan is also a place in the post-soviet area where BP has major business concentrated. However, in this country the company is doing incomparably better. "Azerbaijan makes a positive impact on BP's overall figures, as oil and gas production levels surpass our projections," Gordon Birrell, BP's regional president for Azerbaijan, Georgia and Turkey, told reporters when answering a question from R +.

Thus, in January-September 2014, average daily oil extraction at the Azeri-Chirag-Guneshli [Azari-Ciraq-Gunasli] block remained almost at last year's level and was 655,700 barrels. A total of 24.2m t of oil were extracted at the block over the three quarters, and 2bn cu.m. of gas were transferred to Azerbaijan's State Oil Company.

A total of 2.535bn dollars were invested in the development of this block over the three quarters of the year 2014. "This block requires constant investment to maintain production levels. However, for the time being we do not have plans agreed with the Azerbaijani government and other shareholders in the project for new major investment," Birrell said. At this stage, planned maintenance work is under way at one of the platforms of the block - Central Azeri.

The work started on 31 October and will last until 27 November. The platform, which currently produces 160,000 barrels of oil a day, will run at full capacity in the first days of December. The goal behind the maintenance work is to replace equipment whose service life has come to an end and to check all systems. One platform standing idle will not affect general oil production plans. "For this year, we projected average daily production of up to 620,000 barrels from the ACG block, but we can say already now that we will surpass our forecast," Birrell said.

A total of more than 350m t of oil have been extracted from the block since the beginning of the development in November 1997. Of this amount, more than 185m t are Azerbaijan's profit oil.

However, while the ACG's peak has already passed, another BP project in Azerbaijan is just only rising to its feet. That's the development of the Shah Deniz [Sah Daniz] field, within the framework of which active preparations for the second stage have already started. This project is meant to deliver to Europe a new alternative source of gas. "On 17 December 2013, a final investment decision was made regarding Stage 2 of the development of the Shah Deniz field, which also includes the creation of the Southern Gas Corridor system, and a ground-breaking ceremony was held on 20 September 2014 for this main gas transportation pipeline that includes the expansion of the South Caucasus Pipeline (SCP - from Baku to the Georgian-Turkish border), the construction of the trans-Anatolian gas pipeline (from eastern Turkey to western Turkey) and the trans-Adriatic gas pipeline (from Turkey via Greece and Albania to Italy)," Birrell said.

Overall investment in this work is estimated at 45bn dollars, of which 28bn dollars will go directly into work to develop the field and expand the SCP.

 "Contracts worth 9.6bn dollars have been signed as part of work related to Stage 2, which BP is in charge of (the development of the Shah Deniz field and also expansion of the SCP).

Moreover, not all contracts envisaged have been issued yet. This year alone, 4.5bn dollars have been spent, and most of it has been issued to Azerbaijani contractors," Birrell said.

The advance boring of five wells has been completed and all work is proceeding according to an approved timetable so that gas production can start in 2018. The peak of production under Stage 2 will make it possible to obtain an additional 16bn cu.m. of gas, of which 10bn will be sold in Europe and 6bn in Turkey.

As part of Stage 1 of the development of Shah Deniz, 7.25bn cu.m. of gas and 1.72m t of condensate were extracted in the three quarters of 2014.

Throughout the development of the field, 55bn cu.m. of gas and 14m t of condensate have been extracted, said SOCAR's First Vice-President Xosbaxt Yusifzada. He said that of that amount, 4bn cu.m. of gas were exported to Georgia and 30bn cu.m. to Turkey, while the rest was purchased by Azerbaijan.

Birrell said that about 11.4bn dollars were invested in the development of Shah Deniz. "As part of Stage 1, we have already reached peak production levels. For the current year, we projected a production level of about 9bn cu.m., but the actual amount will be markedly higher. Production levels will remain at this peak in the next four to five years," Birrell said.

Another defining moment for this period is assessment of the impact of falling oil prices on BP's plans to develop Azerbaijani fields. "We have no intention of changing our plans because of the decrease in oil prices. All planned works are proceeding in line with our working programme," said the head of the BP mission.

Basically, the current decrease in oil prices to 85 dollars per barrel should not affect Azerbaijan projects because of low production costs. As is known, programmes for the development of the ACG block were prepared back in the mid-1990s, when oil prices hardly exceeded 20 dollars. That is to say, at the time this project paid off. Naturally, over the time that has elapsed the cost of additional work on new platforms and wells has significantly increased as well, but in this given case the period of large-scale investment towards the development of the ACG is now over.

Azerbaijani President Ilham Aliyev is also unruffled by the decrease in oil prices. "Overall, economic and financial potential that has been created in Azerbaijan is so big that I do not believe that the decline in oil prices has greatly affected us. However, in any case, we should be prepared for this and shape our plans in accordance with this, as the global economy has not yet exited the crisis," said the head of state at the most recent meeting of Azerbaijan's Cabinet of Ministers that was held to discuss socio-economic development in the first nine months of the year.

Therefore, the average oil price entered in the country's draft state budget for 2015 has been slightly reduced - from 100 dollars per barrel this year to 90 dollar next year. The average selling price of Azeri Light oil in world markets was 108.2 dollars in January-September 2014.

BP's President Robert Dudley believes that a decrease in oil prices in certain periods contributes to the growth of the global economy.

"Cheap oil is not such a bad thing. Low prices, as drivers of global growth, help economies that depend on fuel imports to speed up and open up their potential, and eventually this all plays for the common good. There are two sides to everything," Dudley said at the Oil & Money conference in London titled "Huge volatility, many challenges".

In the long term, oil prices will, undoubtedly, be on the rise.

In the next 20 years, demand will grow 40 per cent - that, if you add to the current demand consumption by one more USA and one more China, he explained. In the future - as it is common practice in the oil and gas sector to look 20-0 ahead - the world will need more resources, the BP president said. New major projects and new partnerships will be needed to meet future demand.

Therefore, there is no particular reason for concern. Especially as the Azerbaijani government has been for several years now successfully implementing the strategy of diversifying the country's economy and increasing the share of the non-oil sector.