EXTRA TIME

Azerbaijan's oil potential, growing year by year, is rapidly approaching a peak. Already, within the second quarter of this year, the government's share in the development of the promising Azari-Ciraq-Gunasli deposit may reach 80%. This will be Azerbaijan's share of the profit and, given the high price of oil on the world market, it is very likely to increase again by the end of this year. Let us note that, from 1 April, the government's share in ACG increased from 50% to 75%, whereas in 2007 it was 25%. The ratio changes as shareholders' returns on their investments in the project increase.

The extraction of oil is also expected to reach its peak - 1 million barrels a day - this year, most likely by the end of 2008. Then a period of reduced extraction will follow. However, the Azerbaijani International Oil Corporation (AIOC) (operator - BP-Azerbaijan) is trying its best to postpone that "then" as long as possible. According to AIOC President Bill Schrader, while peak production at ACG had been planned to last 1-2 years, the company's shareholders are now considering several ways of extending this period. "Phase 4 of the ACG development project, in which oil will be extracted from the Ciraq-Balaxani deposit, will be implemented for just this purpose. There are also several other attractive options for extending the period of peak extraction at ACG," said Mr. Schrader.

Very little time remains

So the AIOC announced the start of oil extraction at the Gunasli group of deep-drilling platforms (GDG). The launch of operations at GDG will complete Phase 3 of the development of the Azari-Ciraq-Gunasli deposit in the Azerbaijani sector of the Caspian Sea.

During the period of stable extraction, the daily output of the GDG platforms will be about 320,000 barrels, and this will make it possible to achieve a total output at ACG, including Ciraq, East, West and Central Azari deposits, of 1 million barrels a day.

In the Azerbaijani Government's assessment, oil extraction at ACG will begin to fall in 2011 and decrease, compared to 2010, by 541,000 tons (54.204 million tons in 2011 compared to 54.745 million tons in 2010).

However, as early as last year Bill Schrader declared that plans for the further development of oil and gas projects include preparations for the extraction of oil from the Balaxani formation (oil is currently being extracted from the Pereriv formation), which might require the construction of new platforms. This would constitute Phase 4 of ACG.

Recently, the same Mr. Schrader told journalists that the launch of the project will be sanctioned before the end of 2009 and all participants in the AIOC consortium consented to its development. Mr. Schrader said that the project's official name was Ciraq-Balaxani and its estimated deposits are 350 million barrels of oil.

The capital expenditure required for this project is not included in the total sum allocated for the development of ACG deposits for the entire period of the contract, which runs until 2019 ($20 billion have been allocated).

As for the peak of natural gas extraction at the Sah Daniz deposit, this will be reached, within the framework of Phase-1 of the project, in the first half of 2009; thereafter it will level off. Mr. Schrader said that during the period of stable extraction within Phase-1, the output will be 8.6 billion cubic metres of natural gas a year and about 45,000 barrels of condensate a day. Let us remind our readers that in 2008 gas extraction at the deposit is predicted to reach 7.7 billion cubic metres and 1.9 million tons of condensate. For comparison, 1.8 billion cubic metres of gas and 0.5 million tons of condensate were extracted in the first quarter of this year.

So the government has gained more time in which to secure the country's economy against the contingency of the sudden disappearance of the oil factor. However, "replacement" or compensation for the absence of oil will only be possible by the realization of major regional projects, including transport corridors and transit pipelines, whose service life is much longer that the period of peak production.

Upsizing is imminent

The bringing of existing transit routes to full operational readiness and increasing their capacity are acquiring urgency. As we know, there are currently three oil transportation routes and just one natural gas route passing through Azerbaijan. The oil routes are the three oil pipelines: Baku-Tbilisi-Ceyhan, Baku-Supsa and Baku-Novorossiysk. The latter is used exclusively by the local SOCAR [State Oil Company of the Azerbaijani Republic] for pumping its oil northwards.

Baku-Supsa is still not functional today, although repair work, which began in 2006 and cost BP-Azerbaijan $53 million, is already complete. However, according to Rasid Cavansir, BP-Azerbaijan's vice president for land operations, the full routine of repeated start-up tests is currently under way. "We will put the pipeline into operation only when we are fully satisfied with its technical characteristics," he said.

It has to be said that, given the existence of the two additional routes in addition to the possibility of dispatching oil by railroad, discussions and debates are under way on a plan to increase the capacity of the Baku-Tbilisi-Ceyhan main oil pipeline. There are plans to increase its capacity from the current 1 million barrels a year to 1.2 million barrels a year by the end of this year, by pumping a special polymer substance into the pipeline. Capital expenditure on this project will amount to $70 million.

"This is a simple and inexpensive way of increasing the capacity of the pipeline. There are plans to reach a capacity of 1.2 million barrels a year by the end of this year, when daily oil extraction at ACG will be 1 million barrels. Given the periodical technical stoppages in the oil pipeline and any interruptions which occur unexpectedly, due to weather conditions or other factors, we need to have a capability of pumping more than 1 million barrels, to leave time for emptying the reservoirs at Sanqacal," Mr. Cavansir noted.

Whether or not this plan will be implemented by the deadline remains to be seen, given SOCAR's discontent with some aspects of the project. SOCAR Vice President Elsad Nasirov said that his company has differences with BP on this issue, in particular on the issue of ownership of the pipeline once expenses are recovered (this is scheduled to occur in 2020), and "there is a need to find a common denominator without encroaching on the interests of either party."  Mr. Nasirov said that the possibility of increasing the capacity of Baku-Tbilisi-Ceyhan to 1.2, 1.6 or 2 million barrels is to be negotiated.

It should be reported that neither SOCAR nor BP are fully open about all the differences. Furthermore, Mr. Cavansir even claims that this will all be settled only within the framework of existing agreements. However, the problem probably lies in an adjustment of the agreements to take account of the new capacities: this would also extend the period of recovery of investment in the construction of the Baku-Tbilisi-Ceyhan pipeline and, accordingly, postpone the date of transfer of ownership of the facility to Azerbaijan. Be that as it may, both sides agree that the capacity of the oil pipeline needs to be increased, so some consensus will be reached.

Opening in Qulevi

It has already been noted that, besides the pipeline routes, Azerbaijani is considering the possibility of oil transportation by railway, which is exactly why an upgrade project was carried out by SOCAR at the Qulevi terminal in Georgia. To complete the terminal, SOCAR took out a syndicated loan of $305 million. The loan was issued by a syndicate of 15 European banks, headed by ABN Amro, Societe General and BNP Paribas. Given the high price of oil and increasing output, SOCAR plans to pay back the loan in 2009.

At the initial stage, the terminal will be able to process annually up to 10 million tons of oil and oil products which will arrive in Qulevi by railroad from Azerbaijan and other countries of the Caspian region for further forwarding to Europe. Following completion of the project, the terminal's cargo throughput capacity is to be about 15-20 million tons a year and the tank capacity is to be increased to 380,000 cubic meters.

The terminal has four railway approach lines with a total capacity of 168 railroad tanks, one approach channel and three quays. The terminal's infrastructure also includes a quality control laboratory for oil and oil products, special gas-loading racks, a mobile flotilla which has nine support service vessels and the new, 13.8-kilometre, Kolkheti-Qulevi section of railway. According to estimates the terminal will easily be able to handle tanker ships with dead-weights of 100-150,000 tons.

So, Azerbaijan is consolidating its position in the oil transportation market by developing a modern pipeline infrastructure and increasing both its railway and sea cargo transportation capacities. This will enable the country to skilfully avoid the negative consequences of the depletion of its oil and gas resources in the future. However, the development of other sectors of the economy should not be forgotten, otherwise "oil dependence" will simply be replaced by "transport dependence."