Oil prospects darken for Azerbaijan

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Financial Times

 

Oil prospects darken for Azerbaijan

 

July 8, 2001 6:28pm

 

 

Azerbaijan's position as the centre of the Caspian oil and gas industry this week suffered a further blow, after ExxonMobil reported a dry exploration well, and speculation rose of other failed offshore drilling.

 

An ExxonMobil official announced this past week that the first exploration well in the Oguz offshore concession, once believed to contain some 95m tonnes of crude, would be abandoned because "no commercial accumulation of hydrocarbons were encountered".

 

"At the moment there are no plans for future drilling," the official added. ExxonMobil, under its contract with Azerbaijan's state oil company Socar, is committed to drilling two wells in the structure or pay compensation.

 

The US multinational's announcement is the third piece of bad news this year for the ex-Soviet state of Azerbaijan, which only a few years ago was being touted as the next Kuwait.

 

It comes as industry analysts have raised expectations that Chevron is soon to announce similar bad results at offshore drilling sites.

 

A consortium run by Italy's Agip failed to find sufficient amounts of hydrocarbons January in its first well in its Kurdashi concession in the south Caspian. TotalFinaElf, the French group, recently annouced failure in the Lenkoran Talysh-Deniz structure near by.

 

Chevron is widely expected to reveal less-than-positive results in its Absheron offshore field this week. The site was earlier believed to hold up to 1,000bn cubic metres of gas, making it one of the largest natural gas fields in the world. Industry analysts said that the US company found only a "very thin gas layer".

 

Azerbaijan in fact has yet to strike oil since exploration in its offshore sector began three years ago.

 

Azeri officials are quick to point out that the worldwide petroleum industry registers only a one in 10 success rate and claim that the country may still become one of the main oil and gas producers this century.

 

Azerbaijan at the same time already boasts two world-class offshore projects in the Azeri-Chirag-Guneshli oilfields and the Shah Deniz gas structure, both operated by BP, whilemore than a dozen fields are still to be explored.

 

Many observers, however, are not convinced. "The jury is still out on whether Azerbaijan will be a major oil and gas provider," says Gavin Graham, a Shell official, whose company has interests in all five Caspian countries.

 

Others see the balance of gravity already shifting north, thanks to a gargantuan oil discovery in Kazakhstan's Kashagan offshore structure and two smaller finds in Russia's Caspian sector.

 

Thane Gustafson of the Cambridge Energy Research Associates sees the northward shift as creating a possible change in the choice of oil export routes, as Russia becomes more of a player.

[MJ]

The interesting thing is that this picture was clear more than 10-20 years ago. Soviets knew that there was not much oil and gas in the Azerbaijani territory.

 

My understanding is that the extensive advertising of Azerbaijan was a calculated bluff by several parties. The idea was to build pipelines under the illusion of vast resources of Azerbaijani oil and gas, and subsequently, after the failure to produce the promised resources, use the existing pipelines as a justification for transporting the Turkmen gas and Kazakh oil through these pipelines.

 

Basically, Azerbaijan built its entire foreign policy playing the "oil card." Assuming that it fails to produce the "promised" oil reserves, its foreign policy may suffer a major fiasco.

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FACTBOX-Main Caspian oil production and pipeline projects

 

MOSCOW, July 10 (Reuters) - Competition to export the oil and gas wealth of the Caspian Sea will hot up in August when the first oil from Kazakhstan's giant Tengiz field finally flows out of a consortium-built pipeline at Russia's Novorossiisk port.

 

The Caspian Pipeline Consortium (CPC) line is the first major new pipe built to export oil from a region with estimated hydrocarbon reserves of up to 250 billion barrels. But many other schemes will follow.

 

Below is a list of the main fields, followed by production and pipeline projects in the Caspian region:

 

 

FIELDS

 

-- TENGIZ is one of the world's largest oilfields with total reserves of about 25 billion barrels. It is developed by the Tengizchevroil joint venture, led by U.S. oil major Chevron (NYSE:CHV - news) with 50 percent. Kazakhstan holds 20 percent of the venture, ExxonMobil (NYSE:XOM - news) 25 percent and LUKArco five percent.

 

-- KASHAGAN is a more recent Kazakh oil find which, according to some estimates, could contain as much as 50 billion barrels of oil, making it possibly the largest field to be discovered in the past three decades.

 

It is being developed by an international consortium OKIOC, with Italy's ENI (Montreal:ENI.M - news) as the project operator.

 

-- AZERI-CHIRAG-GUNESHLI is operated by BP (quote from Yahoo! UK & Ireland: BP.L) and belongs to the Azerbaijan International Operating Company. The complex's output will be ramped up to at least 450,000 barrels per day (bpd) by 2005 and one million bpd by 2010 from a current 100,000-130,000 bpd.

 

-- There are two blocks on Russian Caspian territory -- the Severny, owned by LUKOIL , and a block offshore from the Volga Delta, owned equally by LUKOIL, Gazprom and YUKOS . The Russian Ministry of Natural Resources estimates reserves in the Russian sector at 4.4 billion barrels.

 

-- Turkmenistan also has big oil and gas deposits, but so far has been unable to attract much international investment. It disputes Azerbaijan's ownership of the Azeri and Chirag fields and threatens legal action if Baku continues working them.

 

 

PIPELINES

 

-- The CASPIAN PIPELINE CONSORTIUM is a 1,500-km (930 mile) link from Tengiz to Novorossiisk. Initial capacity will be 560,000 barrels per day, rising to 1.35 million barrels a day.

 

Shareholders are Chevron, the Russian, Kazakh and Oman governments, LUKOIL, Rosneft-Shell Caspian Ventures (quote from Yahoo! UK & Ireland: SHEL.L) Mobil (NYSE:XOM - news), Agip , BG (quote from Yahoo! UK & Ireland: BG.L) Kazakhstan Pipeline Ventures and Oryx .

 

-- ATYRAU-SAMARA: an existing 690 km (430 mile) pipeline along which Kazakh oil is currently being pumped. It goes from the Tengiz field to Samara in Russia and thence to the Druzhba pipeline system. Its capacity is around 200,000 bpd.

 

-- BAKU-CEYHAN: a proposed line of around 1,700 km (some 1,000 miles) from Azerbaijan to Turkey via Georgia, expected to cost $2.8-$2.9 billion. BP leads the sponsor group which plans to build the one million bpd capacity pipeline by 2005. The project is also heavily backed by the United States.

 

-- BAKU-SUPSA: Some 100,000-130,000 bpd of oil from Azerbaijan's Chirag field is already being exported along a line from Baku to the Georgian port of Supsa.

 

-- SHAKH DENIZ: Another BP-led consortium plans to build a link to feed gas from Azerbaijan's 15 trillion cubic feet Shakh Deniz gasfield into Turkey.

 

-- KASHAGAN TO IRAN: TotalFinaElf is supporting a study of a pipeline from Kashagan across the Caspian to the Iranian border. A further pipeline could then be built to pipe Kazakh crude across Iran to Tehran's Gulf Export Terminals.