SO FAR SO GOOD

Traditionally, the oil industry of Azerbaijan celebrates the Day of Oilman and the anniversary of the signing of the Contract of the Century in September. This year, September did not have any surprises but, as it turned out, autumn can surprise not only with weather.

On September 23, the OPEC+ Ministerial Monitoring Committee meeting in Algeria decided to remain committed to agreements reached in June 2018 (to increase production by 1 million barrels per day) but no decision was made regarding the further increase of production volumes. At the same time, quotas between countries also remained unallocated.

Expecting $100 per barrel

The committee’s decision caused a sharp increase in oil prices on the following day with the Brent crude oil rising to $80.60 per barrel. Currently, the price is $81 on optimistic forecasts of demand and expectations that Iran will cut oil supplies to the world market due to American sanctions.

This situation could not but cause assumptions about the return of prices to the level of November 2014. Trafigura and Mercuria were the first oil traders to talk about the restoration of oil prices at $100 per barrel.

According to the co-founder of Mercuria Energy Group Ltd., Daniel Jaeggi, the price may exceed $100 per barrel in the 4^th quarter of 2018. "The market does not have many choices to replace 2 million barrels per day of Iranian oil, which may be lost as a result of the second round of the US sanctions," the expert said.

Trafigura, on the other hand, expects $90 per barrel by Christmas, and $100 per barrel at the beginning of 2019. This was stated by the CEO of the company, Ben Luckock.

Bank of America Merrill Lynch reviewed its forecast for Brent in 2019 raising the price tag to $80 per barrel from the previously expected $75. In previous estimates, analysts of the bank expected that Iran would reduce its oil exports by 500 thousand barrels per day, which actually turned out to be 1 million barrels due to the more aggressive position of the US. Experts also raised the Brent estimate from $90 to $95 per barrel at the end of the 2Q2019.

OPEC+ Monitoring Committee will hold the next meeting on November 11 in Abu Dhabi, while the ministerial meeting of OPEC and OPEC+ countries will take place in Vienna on December 6 and on December 7, respectively. Experts expect no surprise decision as a result of these meetings. Apparently, in December, the parties will announce the completion of negotiations on freezing the oil production, reached back in December 2016, and the continuation of cooperation between OPEC and OPEC+ countries in new format.

According to the world media, the draft document on the new format of cooperation is ready. Russia and Saudi Arabia expect to become leaders of the new agreement and expect that in December, the OPEC+ countries and new potential participants will agree on the format, which will be followed by its introduction in 2019.

Saudi Arabian energy minister, Khalid al-Falih, also announced the likelihood of reduction of oil production starting from the next year. “We expect excess supply in 2019. So, we may have to re-initiate oil reduction. I hope in 2019 we will reach an agreement on the reduction of oil production to manage the market somehow, so as not to create shortage and surplus of supplies. We can see a very comfortable level of demand, and the declaration on cooperation between the OPEC+ countries has done what we expected, but we need to think about what to do in the coming years, "Al-Falih said.

By the way, one of the active participants in the OPEC and OPEC+, Azerbaijan, also supports the continued cooperation to improve the regulation of the situation in the oil market. Azerbaijani Energy Minister Parviz Shahbazov noted that the agreement on freezing oil prices allowed to reduce volatility in the oil market but OPEC+ should not stop the efforts in this direction.

“Although the price reached $80 per barrel, the situation in the oil market has not fully stabilised. The growth of economies in the EU, the US and China increases the oil demand, which also impacts the prices," Mr. Shahbazov said.

Surprising "Gobustan"

Azerbaijan’s contribution to global oil production is small and, obviously, cannot have any significant impact on the oil market but the efforts made by Baku within OPEC have not gone unnoticed. As a result, it was decided to hold one of the meetings of the OPEC Ministerial Monitoring Committee in Baku next year.

By the way, the natural decline in oil production in Azerbaijan may slow down in the future, as foreign companies are increasingly interested in new projects. Thus, a decision made by one of the world's leading oil producers, BP, to start the development of one of the country's onshore fields was a real surprise, as the British company had focused on the exploration and development of offshore fields in the Azerbaijani sector of the Caspian Sea.

In September 2018, BP made an official announcement on the acquisition of a 61% stake in the production sharing agreement (PSA) for the development of the South-West Gobustan onshore block (SWG). The seller was the Canadian company Commonwealth Gobustan Limited, which is a 100% subsidiary of the British Arawak Energy and is a member of the Vitol Group.

As part of the deal, which has already been approved by SOCAR, BP will act as the drilling operator for only one exploration well to evaluate the potential of the block. The company expects to begin drilling operations at the beginning of 2H2019.

The South-West Gobustan block has a total area of ​​600 sq. km and includes 13 fields and undeveloped structures located 50 km from Baku. The contract for the rehabilitation and development of this field was signed in Baku on June 2, 1998. Prior to the current transaction, the equity participation of the parties in the PSA was distributed as follows: SOCAR (20%) and Commonwealth Gobustan Limited (80%).

Unfortunately, there is no data on current production volumes from the block. Information from open sources indicates that the proved oil reserves on the Gobustan block are estimated at 15.8 million barrels, gas - 214.6 million cubic feet. Total reserves (proven plus perspective) are 66.6 million barrels of oil and 412.9 million cubic feet of gas.

Vitol's website indicates that hydrocarbon reserves of Gobustan are mainly reserved in the sandstones of the Pliocene, Oligocene and Miocene. Additional potential for the discovery of hydrocarbon resources exists in deeper Cretaceous and Jurassic sediments. This partly explains the choice of BP. After all, the company would hardly have taken the risk without confidence in the success of its enterprise.

BP's step-in cannot only intensify current activities in the South-West Gobustan project but can also significantly expand the volume of operations in case of successful results of exploration drilling. “If successful, we will agree on a development plan and announce our further actions,” NewsBase Intelligence quotes the press service of BP in London.

It is difficult to assess the significance of this project for Azerbaijan, as its contribution to the total oil production is hardly noticeable. However, the discovery of new oil reserves in the Gobustan block can play a positive role in the overall stabilisation of the oil production process.

Offshore redevelopment

In general, onshore operations in Azerbaijan are considered more promising for oil exploration, since the latest offshore discoveries are mainly related to the reserves of natural gas. That is why SOCAR together with foreign companies is seeking oil deposits in the onshore Mesozoic deposits.

Nevertheless, the main plans of the government to stabilise oil production are associated with the additional development of the Azeri-Chirag-Guneshli fields (ACG) block. As mentioned above, oil production volumes in Azerbaijan decline every year (see table below), and the main task of production companies (SOCAR and the Azerbaijan International Operating Company) is to keep the decline rate at stable levels.

In September 2017, SOCAR and its foreign partners in ACG signed a new contract for the development of this block until 2050. The total investment volume under the new contract is estimated at $43 billion during 2017–2049. The objective is to extend the period of current production due to additional volumes of oil.

Since the date of signing, the project has materialised to what is now known as the Central-Eastern Azeri project, which is the next stage in the development of the Azeri-Chirag-Guneshli field with an expected daily peak production rate at 100,000 barrels of oil and 350,000 cubic feet of gas. This will be ensured by a new offshore drilling platform Central-Eastern Azeri (CEA) reaching the sea depth of 137 m.

The construction of the support block and the upper modules of the platform, as well as part of the underwater infrastructure will be implemented in Azerbaijan. By the end of the 1Q2019, BP expects to finalise the tender for the selection of contractors for the construction of facilities, and in the 4Q2019 to launch a program on drilling six wells before installing the platform in the sea. According to company estimates, this will speed up the process of oil production. The advanced drilling program will last 12 months.

After connecting the main wells to the CEA platform in the 2Q2023, drilling will start directly from the platform. Altogether, the CEA project provides for the drilling of a maximum of 26 operational, 5 water injection, 7 gas injection and two wells for sludge re-injection. BP expects to get the first oil from the CEA project in early 2023, and to reach peak production in 2024.

According to government estimates, by 2050 more than 500 million tons of oil will be extracted from the ACG block, and Azerbaijan’s revenues will be about $200 billion.

Considering the forecasts on reserves and assessing the potential of the oil industry in Azerbaijan, we can safely say that the era of oil in Azerbaijan will not end soon. However, this is not a reason to relax because the oil market is not guaranteed against a crisis. High oil prices should be used not only to replenish the state treasury, but also as an opportunity for complete diversification of the national economy. Indeed, as experience shows, a seemingly normal situation can end very unexpectedly and significantly painfully for any oil-dependent country.