WHATEVER THE PRICE

Apart from impacting on the world economy - in some cases positively, in others negatively - the significant fall in oil prices is in the first instance hitting the oil industry. Many companies are reviewing their plans to develop new fields. According to analysts at Wood Mackenzie Ltd, the major energy companies have already deferred over 200bn dollars of investments in 46 projects.

The most affected are shale oil projects in the US, the development of oil-bearing sands in Canada and projects on the Russian shelf. In addition, the low prices are impacting on the development of fields in South America, particularly Venezuela and Brazil, which demand large-scale investments, leading to an increase in the cost price.

It is not all plain sailing, either, in the Caspian region, which is rich in energy resources. For example, Kazakhstan and Turkmenistan have for many years been unable to commence development of the major Kashagan and Galkynysh fields respectively.  Kashagan was due to provide oil back in 2005, but because of several changes in timescales production is not expected until 2016.

In this respect, Azerbaijan is in a more advantageous position. Despite low prices - up to 50 dollars a barrel - interest in oil and gas fields in Azerbaijan by foreign companies remains at a high level, although such a low price factor is by no means the best background for investment. However, the development of the Azari-Ciraq-Gunasli [Azeri-Chirag-Guneshli] block of fields, the construction of the Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines and the first stage of the development of the Sah Daniz [Shah Deniz] field has been proceeding with oil prices sometimes at the level of 20-30 dollars a barrel. It should be pointed out that the timetable for the development of Azerbaijani fields is not directly dependent on oil prices on the world markets.

Azerbaijan is currently carrying out measures to contain oil production volumes at a level of 40-45m tonnes annually, with an increase in natural gas production from the current 29bn to 50bn cu m annually. Of course, Azerbaijani's oil workers today require state-of-the-art technology for oil and natural gas extraction. New fields are now being discovered in the depths of the Caspian, and wells are being sunk to over 6,000m.

Drilling at such depths requires state-of-the-art equipment, which is not easy to supply to the Caspian region. One has to remember that the Caspian is an enclosed body of water and supplying state-of-the-art equipment for the construction of well rigs and platforms in Azerbai-jan continues to be a difficult matter.

The Azerbaijani government follows a policy of gross capacity of its existing construction sites and well rigs in the oil and gas sector. In this connection, it is important that work at the fields be carried out strictly in a certain order. Currently, priority is being given to the development of fields for the production of natural gas, and in particular the Stage-2 project for the development of the Sah Daniz field.

In this context, the oil and gas companies have been forced to form a queue behind the well rigs.  The French company Total, which is due to begin development at the Abseron field with reserves of 350bn cu m and 45m tonnes of condensate, is no exception. After acquiring a well rig Total plans to begin drilling the first well in 2017, and the first gas from the Abseron field is due to be obtained at the end of 2021- beginning of 2022. It will be recalled that, as well as Total (with 40 per cent of the share) SOCAR (40 per cent) and the French company Gaz de France Suez (20 per cent) are also shareholders in the Abseron project.

Of course, Azerbaijan's oil workers are also very active in the search for hydrocarbon resources. And SOCAR's persistence was rewarded with the discovery of the Umid field in 2010. Experts' estimates of reserves based on the results of the drilling of the first exploratory well are over 200bn cu m of gas and 40m tonnes of condensate. Incidentally, SOCAR is considering developing the Umid field in a block with the prospective company Babek, with estimated supplies of 400bn cu m of gas and 80m tonnes of condensate. At the same time, the possibility of attracting a foreign partner into the development of a joint bloc is being considered.

One should also bear in mind potential structures such as Naxcivan, Safaq-Asiman, Zafar-Masal, Araz, Alov and Sarq, the development of which will be possible at subsequent stages.

Gas resources such as these raise the question of prompt supplies to sales markets. But here Azerbaijan does not have a problem. Its gas has long been awaited in Europe in the context of its own strategy for the diversification of energy supply sources and routes. The Southern Gas Corridor is one of the EU's priorities. 

Business groups from the Czech Republic and Serbia visited Azerbaijan in September and in the course of negotiations they spoke about the possibility of supplies of Azerbaijani gas. Serbia, which as each day passes has less hopes for the construction of Russia's "Turkish Stream", was particularly interested in this. In this context, Serbia's Deputy Prime Minister and Minister of Foreign and Domestic Trade and Telecommunications, Rasim Ljajic, spoke about considering the possibility of signing up to the Southern Gas Corridor and a desire to acquire Azerbaijani gas.

But the furore over "Turkish Stream" seems to have died down somewhat. Originally intended to have a capacity of 63bn cu m to supply south and south-east Europe, the pipeline project has already narrowed down to 16-17bn cu m, aimed specifically at the Turkish market. BOTAS and Gazprom have been unable to reach an agreement on the construction of the pipeline and the question has stalled over providing Turkey with discounts for Russian gas. But despite this Russia still plans to build an alternative route to Europe to the Ukrainian gas transportation system. To achieve this it is proposed to lay a new "North Stream-2" system on the bed of the Baltic Sea to Germany. The capacity of this route will be 55bn cu m of gas annually. When this project is implemented Germany will become one of the biggest gas hubs in Europe, through which Russian gas will be distributed. But, once again, how soon this route will be implemented and what its eventual capacity will be are open questions. That is why Russia has no longer been so categorical in its plans to reject the Ukrainian gas transportation system when the current transit contract is closed. At least, Gazprom has promised to hold talks with Ukraine on the subject of concluding a new agreement, naturally with normal commercial conditions. In this context, the significance of Azerbaijani gas for the countries of South-East Europe in the context of the Southern Gas Corridor increases even more.  

That said, the infrastructure of the Southern Gas Corridor, including the Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipeline could be used by other countries, Turkmenistan in particular.  Moreover, the implementation of another project as part of the Southern Gas Corridor - the Azerbaijan-Georgia-Romania Interconnector (AGRI) - is possible in this context. The AGRI presupposes supplies of Azerbaijani liquefied gas (LNG) via Georgia and the Black Sea to Romania. Originally, the AGRI project was regarded as an additional component of the Southern Gas Corridor. Supplies of natural gas through its liquefaction will help to create a new system of gas supplies by tankers which will in the future broaden the geography of the countries involved. The AGRI project is due to be implemented in two stages. The first stage will see the transportation of up to 2bn cu m, and the second from 5 to 8bn.

All these projects over the next decade will turn Azerbaijan into a significant supplier of gas to Europe. And here it is not just a completely new source of gas that has great significance but also the possibility of new countries joining Azerbaijan's new infrastructure. And here we are talking not just about Turkmenistan and Kazakh-stan, but also potentially Iran and Iraq.