CASPIAN GIANT

Offshore oil platforms are remarkable feats of engineering. Requiring billions of dollars in investment, these colossal structures take years to construct and, upon completion, facilitate the extraction of oil and gas from the most inaccessible sites.

April marked a significant milestone in Azerbaijan's oil and gas industry as bp commenced oil production from a new platform at the Azeri-Chirag-Guneshli (ACG) field block.

As the British oil behemoth observes, the new platform holds importance both internally and externally, serving as "part of an effort to secure essential energy supplies to the region and Europe, as well as adding value to bp."

First Oil

Offshore hydrocarbon production is invariably costly, time-consuming, and risky. Only exceptionally large companies with substantial financial resources and pertinent project implementation experience can undertake such ventures. Absent offshore platforms, average oil prices would likely be markedly higher—offshore sources contribute approximately one-third of global oil production and one-fourth of gas production.

On April 16, bp announced the initiation of oil production from its new Central East Azeri (CEA) platform within the ACG field block. "CEA represents one of bp's most technologically sophisticated and digitalized platforms to date, and is integral to our efforts to satisfy global energy demands," the British firm stated officially.

On April 19, 2019, the ACG Field Block Development Project's stakeholders ratified a final investment decision for the $6 billion CEA project, with around $3.2 billion allocated for construction expenses and the remainder for development costs, including the drilling of new wells.

The inaugural oil from the CEA was procured from the initial production well, whose drilling commenced in December 2023. bp now plans to drill and activate two additional production wells from this platform during 2024. The daily oil output from the platform is anticipated to rise, reaching 24,000 barrels by the end of 2024.

The CEA project signifies the subsequent phase in the ACG block's evolution, upon which considerable expectations are placed. In recent years, a discernible production decline has occurred here due to natural factors. The dwindling reserves in the ACG deposits currently being exploited led to a reduction of 2 million tonnes in fuel production in 2023 compared to the previous year. With no immediate prospects for an increase, bp and SOCAR's efforts are concentrated on preserving the existing output levels.

"CEA will augment oil production in Azerbaijan and enhance the utilization of the maturing field. This will afford both bp and Azerbaijan the chance to achieve an improved yield from existing fields and assets," the UK project operator remarks.

Hence, the inauguration of the new platform is garnering considerable attention from both the corporation and the Azerbaijani government.

The CEA project entails the drilling of 48 wells by Turan Drilling Company. At its zenith, the platform is projected to yield 100,000 barrels of oil per day (bopd) and 350,000 cubic feet of associated gas. An estimated 300 million barrels of oil are expected to be extracted over the platform's operational lifespan.

In April, bp also commemorated the 16th anniversary of the operational Deepwater Gunashli platform, which has produced approximately 638 million barrels of oil and 18.2 billion cubic meters of associated gas since April 22, 2008. As of the close of 2023, the average daily oil output from this platform stood at 67.3 thousand barrels.

Collectively, around 133 million barrels, or an average of 363,000 b/d, were extracted from ACG in 2023.

Fossil Fuels For Years To Come

These endeavours are of paramount importance to Azerbaijan, as they will enable the country to sustain production levels at ACG and nationally for several more years (albeit with an inevitable decline, albeit not acutely perceptible), while concurrently advancing "green" energy initiatives. Furthermore, the demand for oil persists and will continue for the foreseeable future, notwithstanding the global shift by leading corporations and nations towards eschewing fossil fuels. The objective is ambitious, and if attainable, will require many years to realize. President Ilham Aliyev of Azerbaijan underscored this during his address at the international forum "COP29 and Green Vision for Garabagh" at ADA University.

The president is convinced that the global reliance on fossil fuels will persist for a considerable duration, thus negating the need to entirely abandon oil and gas projects in favour of "clean" energy. A more judicious approach would be to pursue their parallel advancement. "In terms of integrating green energy and fossil fuels, I believe the world will continue to depend on fossil fuels for many years ahead. It would be naive to presume that this reliance will cease abruptly. The global economy and industry are simply not prepared for such a transition. Therefore, the optimal strategy would be to foster synergies and follow an evolutionary trajectory rather than pursuing an unachievable target. In our case, we have already commenced substantial investments in green energy projects alongside our investors," the president declared.

The president recalled that Azerbaijan initiated oil collaboration with international firms 30 years ago, becoming the inaugural nation to welcome foreign oil companies to the Caspian Sea for the joint exploitation of the ACG block.

"I believe our future will be more prosperous if we do not give up on fossil fuels. We shall not do so; however, we will simultaneously prioritize the green agenda," Aliyev emphasized, clarifying that the execution of oil and gas projects does not preclude the pursuit of green initiatives and the expansion of renewable energy sources.

The Lull Following the Tempest

The prevailing favourable oil prices contribute to an expedited recoupment of the expenditures incurred in launching the CEA platform. For the Azerbaijani government, this is also crucial for ensuring stability in the currency market, bolstered by the influx of foreign currency and a substantial balance of payments surplus. Moreover, consistent exports from ACG will permit the project's stakeholders to modestly increase their tax contributions to the national treasury, thereby aiding in the preservation of a fiscal surplus.

Despite the elevated oil prices, the hydrocarbon market's status is far from stable. This April vividly illustrated how the escalating conflict can influence price surges. Following the Israeli assault on the Iranian consulate in Damascus and amid anticipations of Tehran's reprisal, prices soared to $92 per barrel—the highest since October 2023. This spike is attributable to heightened risks of an expanding Middle East conflict, apprehensions of new hostilities, and naturally, concerns over potential supply disruptions from a region accountable for up to one-third of the planet's oil production.

OPEC+ also played its part: On April 2, eight countries of the alliance unexpectedly declared that they would reduce oil production from May until the end of the year. Saudi Arabia (500 thousand bpd), Iraq (211 thousand bpd), and the UAE (144 thousand bpd) will lead the cutback. Including Russia, which prolonged its 500,000 bpd reduction until year's end, the aggregate OPEC+ curtailment will total 1.65 million bpd. This equates to approximately 1.7% of global oil consumption. The escalation in prices was spurred by concerns over the supply cut and the anticipated rise in global fuel demand. Concurrently, OPEC+ members in early April maintained the previously sanctioned quotas and called for stricter adherence to the established standards by some countries.

Prices have now dipped to $89.5 per barrel for Brent crude and $83.85 for the WTI grade. Analysts largely concur that the price drop is attributable to the diminished risk of a direct confrontation between Iran and Israel.

Yet, prices remain high and are expected to stay within the $85-95 per barrel range for the foreseeable future.

"There are certainly ongoing geopolitical concerns in the oil markets, as evidenced by WTI crude prices remaining above $80," stated Tyler Ritchie, co-editor at Sevens Report Research. He opined that if not for the Middle Eastern tensions, prices would be "at best" in the $70-75 per barrel bracket, given the recent decline in petrol demand and OPEC+'s static production policy.

Nonetheless, some analysts anticipate a price hike as the summer season nears and fuel demand traditionally peaks. "The probability of oil prices surpassing $100 a barrel is exceedingly high," remarked Jeff Curry, head of energy markets strategy at Carlyle Group.

Fitch Ratings projects the average oil price at $75 in 2024. Analysts suggest that should market supply remain constrained, the average price could escalate to $120.

"Traders are now able to concentrate on market fundamentals, with the geopolitical risk premium somewhat alleviated," observed Charu Chanana, an analyst at Saxo Capital Markets in Singapore. "The dwindling inventories indicate that oil demand is resilient."

Simultaneously, the US Senate ratified new sanctions targeting Iran's hydrocarbon sector. The sanctions package specifically includes measures against ports, vessels, and refineries engaged in the transport or processing of Iranian oil in contravention of US stipulations. It further broadens secondary sanctions.

The legislation encompasses all dealings between Chinese financial entities and Iranian banks implicated in the procurement of crude oil and petroleum products. This will complicate the acquisition of Iranian commodities by independent Chinese refineries.

Moreover, the US administration opted to reinstate sanctions against Venezuela, particularly those concerning hydrocarbon exports. Essentially, the White House opted not to renew the sanction-relief agreement initiated last October as a concession for the presidential election. Entities and nations that resumed operations with Venezuela amid the sanction relaxation now have 45 days to wind down their activities.

Given that Iran and Venezuela have somewhat acclimatized to life under sanctions, such constraints are unlikely to severely impact them. However, the oil market narrative differs. These impositions will not go unnoticed and could influence demand growth and, consequently, prices. Amid the ongoing intensification of Middle Eastern tensions, a significant downturn in prices or a reversion to the more manageable $60-65 per barrel range for producers and consumers is not anticipated in the near term. The pivotal question now hinges on OPEC+'s forthcoming decision in June regarding its subsequent course of action...