ACG: TO BE CONTINUED...

The oil and gas sector will play a leading role in the economy of Azerbaijan for years to come, despite the earlier pessimistic forecasts of experts. The latest discoveries of geologists and the interest of the leading oil and gas producers give us reason to believe the analytical company Wood Mackenzie claiming that about $20 billion will be invested in the extraction sector of Azerbaijan and the development of Azeri-Chirag-Gunashli fields (ACG) in the Azerbaijani sector of the Caspian Sea in 2018-2025. Fitch Ratings forecats the growth of oil production in Azerbaijan by 2022 to 880 thousand barrels per day (in 2018 - 792.6 thousand bpd).

Profit oil

By and large, ACG and Shah Deniz projects are the two leading oil and gas development projects in Azerbaijan. In his address at the fourth international forum of SOCAR called Downstream Caspian Sea and Central Asia: Trading, Logistics, Oil Refining, Petrochemistry, Azerbaijan’s Energy Minister Parviz Shahbazov said that as of April 1, 2019, the total volume of oil produced from the ACG fields reached 481.1 million tons and 156.2 billion cubic meters of associated gas. At the same time, profit oil of Azerbaijan accounted for 58% of all oil extracted from the block.

"According to forecasts included in the energy balance of the Ministry of Energy for 2019-2021, oil production in Azerbaijan during this period will be stable. We expect growth in the production and export of natural gas. At the same time, ACG and Shah Deniz fields will play an instrumental role in the development of Azerbaijan's oil and gas industry," Shahbazov said.

However, by the end of 2019, this indicator is expected to decline in Azerbaijan due to the plans of AIOC (Azerbaijan International Operating Company) to stop for two weeks the operation of two production platforms, Central Azeri and West Chirag. According to the updated estimates of the Ministry of Energy, in 2019 oil production is expected  to be 38 thousand tons against 38.8 thousand tons in 2018. However, this will make it possible for the government to fulfil its obligations to reduce oil production under the OPEC+ deal to 776,000 bpd. Although the deal has been in effect since January 2019, Azerbaijan failed to reduce oil production to the required level in the first quarter. According to the Ministry of Energy, the average daily oil production in January-March reached 799 thousand bpd.

By the way, the successful implementation of the Contract of the Century in 2001-2019 brought to the State Oil Fund of Azerbaijan (SOFAR) $138.2 billion from the sale of profit oil from the ACG block. Only in the past year due to high oil prices, SOFAR earned a total of $9.7 billion from the sales of profit oil from ACG and condensate from the Shah Deniz field.

It is expected that by the end of 2019, the fund will earn additional $7.8 billion from the sales of ACG profit oil. Currently, oil producers are happy with prices, including Azerbaijan. The country's budget is based on the price of oil at $60 per barrel, whereas at present it exceeds $72, i.e. already 20% higher than expected by the government. This means additional income from oil exports, as well as a positive balance of payments, at least in the first half of 2019.

A six-billion-dollar gift

On September 20, the contract for the development of the ACG fields will celebrate its 25th anniversary. Thus, the main birthday present was the adoption of the final investment decision (FID) for the Central-Eastern Azeri (CEA) project. SOCAR and its foreign partners on the ACG project signed the respective document on April 19.

SOCAR President Rovnag Abdullayev said that $36 billion has been invested in the development of the ACG block so far. The remaining fields of the ACG block are estimated to be at least 500 million tons of oil. "For decades, SOCAR has reinvested the oil revenues of Azerbaijan into the development of highly skilled labour and modern industrial facilities in Azerbaijan. Today we have excellent plants, production and installation complexes, sea vessels and highly qualified local personnel, which all together enabled us to construct and install the Central-Eastern Azeri platform. Looking to the future, we expect more than 3 billion barrels of additional oil production from ACG. This strategic decision supports the growing role of Azerbaijan as an energy supplier for regional and global markets," Abdullayev said.

CEA project will cost $6 billion, of which about $3.4 billion will be spent on the construction of the platform and the infrastructure, and the rest on drilling operations. As part of the project, it is planned to build a production platform and offshore installations at a depth of 137 m to ensure daily production of 100,000 barrels of oil and 350,000 cubic feet of gas. The first oil from the new platform is scheduled for 2023, and one year later, in 2024, to reach the peak production volume. In total, for the entire period of operation of the platform, is planned to produce 300 million barrels of oil.

According to SOCAR, the construction works will begin this year and will continue until mid-2022. At the peak of construction, the project will attract eight thousand people. It is important that the construction of the support block and the upper modules of the platform, including part of the underwater infrastructure, is scheduled to be implemented in Azerbaijan. In particular, the support block and platform topsides will be built at the Heydar Aliyev Baku Deep Water Jackets Plant. The oil and gas extracted from the block will be delivered to the Sangachal terminal.

By the way, CEA project is one of the stages of additional development of the ACG block, which is going to be operational until 2050 and is estimated at $43 billion, suggesting production of about 500 million tons of oil. However, over the past few years, oil production at the ACG block has been decreasing annually for natural reasons. It is clear that in these conditions, the main task of AIOC is to stabilise oil production, which is what the implementation of the Central Asian project is aimed at. After all, this will largely compensate for the fall and, at least for 10-15 years, ensure a stable volume of production, hence a stable inflow of currency from exports.

"ACG production would reach its peak as early as in 2010, but since that the block still has to produce 3 billion barrels of oil, the project is halfway through its development. The main task of the operator, BP, is to manage this long decline in production to maximise recovery and the remaining value. The CEA project is central to these plans, adding 100,000 barrels per day of production at the peak in the mid-2020s," Robert Morris, a senior analyst at Wood Mackenzie said.

According to Morris, BP manages approximately 80% of oil production in the country. In 2023, Azerbaijan will become the fifth largest source of oil production in the global portfolio of the British company, when the first oil is produced from CEA. "Complicated logistics means that many projects in the Caspian are more expensive and take longer than other locations. Nevertheless, the launch by BP of the second phase of the Shah Deniz project, which began in accordance with the schedule and budget last year, makes it possible to look optimistically at CEA," R. Morris said.

Meanwhile...

…on the day of the signing of FID, the project’s shareholders clarified the sale of shares by American Chevron and ExxonMobil in the Contract of the Century, which was announced at the end of last year. Chevron's share in the project is 9.57%, ExxonMobil's - 6.79%. Most likely, these shares will be distributed among the rest of the project participants. President of SOCAR said that his company and its foreign partners on the project decided to participate in the tender for the purchase of these shares.

The mechanism of the future transaction was to some extent disclosed by the head of SOCAR's Investment Management Unit, Vagif Aliyev. "The tender for the purchase of shares of Chevron and ExxonMobil in the ACG project has already been announced. SOCAR and its project partners will acquire the shares in one package and then distribute among themselves," Aliyev said, without mentioning the volume of shares. "This question depends on the price and conditions that will be offered," Aliyev said.

CEO of BP Robert Dudley announced in early April the readiness of his company to consider the purchase of shares of Exxon and Chevron. "We like our participation in the ACG. I think that if there is an opportunity to increase our share, it will be a natural choice for us, but everything will depend on the price," Dudley said.

Currently, the share of BP in ACG (operator) is 30.37%, SOCAR - 25%, ONGC - 2.31%, Japanese Inpex Corp. and Itochu Oil - 9.31% and 3.65%, respectively, Norwegian Equinor - 7.27%, and Turkish TPAO - 5.73%.

It is unlikely that extra shareholders enter the project, but this option is possible. At the same time, it is most likely that BP remains the main shareholder of the ACG project following the results of the new deal.