AZERBAIJAN’S OIL SUPPLIES: CURRENT STATE AND FUTURE PROSPECTS
Adaliat Muradov, D.Sc. (Econ.), professor, department head, Azerbaijan Ministry of Economic Development (Baku, Azerbaijan)
The petroleum industry occupies a principal place in the country’s economy. Suffice it to say that in 1941, the republic produced 172 million barrels of oil, almost 75% of the Soviet Union’s entire petroleum production. Today, the oil sector constitutes approximately 30% of Azerbaijan’s GDP.
In the 1990s, this sector, like Azerbaijan’s economy as a whole, underwent a drastic slump. The strategic value of the petroleum industry and its pivotal role in the structural reform of the national economy gave rise to the drawing up and implementation of a special state oil strategy, which indeed came about. The need for such a strategy was also dictated by the fact that, contrary to expectations, oil began playing an even greater role on the world arena.
Competition in this sphere is becoming increasingly tougher. The Caspian region has occupied a special place in this competition during the past decade in terms of assimilating the vast supplies of hydrocarbon resources and delivering them to the world market. According to the U.S. Department of Energy, the region’s oil supplies are estimated at 200 billion barrels. And if we keep in mind that the resources of the Middle East countries amount to 700 million barrels, the Caspian is the second largest oil-possessing region in the world.1
For Azerbaijan, the Caspian Sea is of exclusive interest, since the main prospects for developing the country’s petroleum industry rely on its offshore fields. The republic’s proven oil supplies amount to approximately 12.5 billion barrels, with another 27 billion barrels in possible supplies, whereby the Azeri sector of the sea of 78,800 sq. km (20.8% of the entire water area) has undergone the most research. One hundred and forty-five prospective structures have been identified here, including 40 at a depth of up to 60 meters, 33 at a depth of 60 to 200 meters, and 72 at a depth of more than 200 meters.2 According to the forecasts, oil production in the Caspian will reach 4% of the world index in the near future.
Active assimilation of the oil and gas resources of the Azeri sector of the Caspian shelf began after the “contract of the century” was signed on 20 September, 1994. This was an agreement on the exploration, development, and production distribution at the Azeri-Chirag-Gunashli (ACG) fields. The parties to the agreement, who founded the Azerbaijan International Operating Company (AIOC), included the State Oil Company of the Azerbaijan Republic (SOCAR), America’s Amoco, Unocal, and Pennzoil, the UK’s British Petroleum, McDermott, and Ramco, the Norwegian Statoil Company, Russia’s LUKoil (although it sold its share to a Japanese company), Turkey’s TPAO, and Delta from Saudi Arabia. Later the Japanese Itochu Company and America’s Exxon joined the contract. This contract, which was signed for a period of 30 years, was meant to draw more than $11 billion in investments into the country.
On 12 November, 1997, the first oil with a production rate of more than 1,000 tonnes a day was extracted from the Chirag-1 well. At present, it is pumped from this platform by underwater pipeline to the state-of-the-art Sangachal Terminal. The Chirag-1 platform was the first in the republic (under the early oil program) to be built according to western standards, and two underwater pipelines lead from it (an oil pipeline of 176 km in length and a gas pipeline to Neftianie Kamni of 48 km).
Development of Chirag put an end to the oil production slump in Azerbaijan, and after 1998 its production began to rise again. For example, in 1997, 9 million tonnes of oil were extracted, in 1998, 11.3 million tonnes, in 1999, 13.8 million tonnes, in 2000, 14 million tonnes, in 2001, 14.8 million tonnes, and in 2002, 15.3 million tonnes.3 Before 1999, sales profit was used to cover the expenses involved in extracting oil from the Chirag-1 platform, but as early as December of the same year (after the fifth anniversary of the “contract of the century” was celebrated), the first tanker of profitable Azeri oil arrived on the world markets.
At the initial stage of development, only some of the gas produced at Chirag-1 was transported to dry land, but the rest was burned (in flares) as waste. SOCAR was faced with the task of preventing these losses. The company succeeded in ensuring gas utilization at the Gunashli and Neftianie Kamni fields. As a result of the measures taken, 2.6 million cubic meters of the 3.2 million cubic meters of the petroleum gas produced every day are pumped to the shore, and the rest is burned at the site due to its low pressure.
When analyzing the events that have occurred since the contract was signed, it can be said that the crisis period for the petroleum sector is now part of the past, its upswing has boosted the development of other branches of the country’s economy, and foreign investors are showing a greater interest in it. Immediately after signing the “contract of the century,” which is one of its kind in scope, another 21 contracts on the joint exploration, development, and distribution of oil were signed in rapid succession, and are now being implemented. Pursuant to these agreements, more than $60 billion in foreign investments will be pumped into the republic’s economy.
In 1997-1999, new gas condensate fields were discovered, including Shakh Deniz, which is unique in terms of its supplies. The gas deposits at this field are estimated at $1 trillion cubic meters and the condensate supplies at 150 million tonnes. Western specialists are of the unanimous opinion that Shakh Deniz is the largest gas field discovered since 1978.
After Phase-1 of Full Field Development (ACG Phase 1) and the subsequent phases go into effect, new facilities and approximately 3,000 jobs will be created, which will have a positive effect on the republic’s socioeconomic development. Nine billion dollars will be spent on developing these fields, and a profit of $16 billion is anticipated from the implementation of these projects. The “contract of the century” and other agreements, including regarding the Shakh Deniz field, will make it possible for Azerbaijan to become not only an oil, but also a gas exporter. The estimates show that in the near future oil production in the republic could reach about 60 million tonnes a year. On the whole, the country’s oil strategy is aimed primarily at integration into the world market by attracting foreign investments, assimilating new up-to-date technologies, and so on.
It should be emphasized that the planning and implementation of investment projects on the exploration and development of the fields required urgent resolution of the problem of transporting hydrocarbon resources, since the absence of safe and stable routes for delivering crude oil to the world markets could create problems in attracting foreign investments. So the second vector of the republic’s oil strategy is to build new pipelines for exporting oil, which will help to eliminate monopolistic dependence in this sphere.
We will remind you that at the beginning of the 1990s, when the new independent states appeared in the post-Soviet space, neither Azerbaijan, nor the other countries of the Caspian region had independent access to the world markets. This was not only due to the economic relations mechanism created by the Soviet management system, but also to the absence of a sufficiently widespread pipeline network.
Azerbaijan first had any real prospects of gaining access to the world oil market after an agreement was signed in September 1994 with foreign oil companies on the joint development of the Azeri, Chirag, and deepwater part of the Gunashli fields, pursuant to which the project on early oil production was put into effect. What is more, repairs were made to the Tikhoretsk-Grozny-Baku pipeline at breakneck speed and the direction for pumping oil along it was changed. On 27 October, 1997, the Baku-Novorossiisk (northern route) oil pipeline was put into operation, which runs from the Sangachal Terminal to the Russian port of Novorossiisk on the Black Sea. It is 1,411 km in length, 224 km of which pass through Azerbaijan.
Specialists consider the main advantage of this route to be the possibility of raising the throughput capacity of the oil pipeline to 14 million tonnes a year, that is, increasing deliveries along an already functional route. On the negative side is the fact that different grades of oil are mixed together in the Russian oil pipeline system, which lowers the quality and thus the price of Azeri oil. What is more, the situation that has arisen in the Northern Caucasus poses a threat to the safe and stable operation of this route. So Azerbaijan and the AIOC adopted a joint decision to build the Baku-Tbilisi-Supsa oil pipeline (850 km long, 480 km of which pass through Azerbaijan) and an export terminal on the Black Sea, which were put into operation in April 1999.
The shortcomings of this route included the higher (compared with the northern route) expenses, the low guarantee of pipeline safety due to the unstable sociopolitical situation in Georgia, the underdeveloped infrastructure, and Tbilisi’s lack of experience in exporting crude oil. The possibility of implementing the project by the designated deadline was also questionable. But subsequent events unequivocally confirmed the expediency and economic efficiency of the decision to build this pipeline. It (the western route) has become an alternative for delivering Azeri oil to the world market, is an up-to-date transportation system that meets the requirements of world standards, and has made it possible to ensure the reliability and flexibility of oil export from Azerbaijan and lay the foundations for the Caspian-Black Sea transportation corridor for exporting energy resources and providing transit through Azerbaijan and Georgia.
At present, the SOCAR is pumping oil along two routes, 2.5 million tonnes of oil via the Baku-Novorossiisk pipeline (with a throughput capacity of up to 5 million tonnes) and 6.5 million tonnes via the Baku-Supsa route. But in the very near future, these export routes will be unable to meet the republic’s delivery requirements to the world markets. According to Phase-1 (production to start in first quarter of 2005) of the Azeri-Chirag-Gunashli contract alone, the decision to implement which was made on 30 August, 2000, annual production will exceed 15 million tonnes, and together with the oil from the Chirag-1 platform, this amount reaches 22 million tonnes. After the Phase-2 (production to start in the second half of 2006) and Phase-3 (2008) projects are launched, this index under the Azeri-Chirag-Gunashli contract alone should come close to 50 million tonnes a year. If we take into account all the other contracts, the construction of a new export pipeline with a throughput capacity of 50 million tonnes is an absolute necessity.
It should be noted that work on the conception of the Main Export Pipeline (MEP) began as early as 1996. Eleven possible alternatives for exporting oil from Azerbaijan were considered. According to the first results of the studies carried out, three commercially viable routes were defined: to the Black Sea via Georgia, to the Black Sea via Russia, and to the Mediterranean via Georgia and Turkey.
Based on the forecasts for production in the contract area of Azeri-Chirag-Gunashli, it was revealed that the throughput capacity of the oil pipeline should amount to 1 million barrels a day (50 million tonnes a year). But in order to determine the economic efficiency, corresponding estimates were made for a throughput capacity of 0.5 and of 1.2 million barrels a day, 25 and 60 million tonnes a year, respectively. In terms of several parameters, in particular, the low sulfur content, the proximity to export terminals, the possibility of servicing large capacity tankers, the presence of corresponding capacities and technological refining possibilities, and so on, the oil refineries in the Mediterranean region won preference in the eyes of Azeri oil consumers.4
The initial assessment of the aforesaid routes was made keeping several factors in mind: political (stability in the region and oil pipeline safety), environmental (crossing rivers and other reservoirs, passage through the Bosporus, and the route’s relief), technical (construction risks and possibilities, including completion by the designated deadlines), and commercial (capital and operational expenses, tariffs, and maximizing the net export value of Azeri oil). The analysis showed that the Baku-Supsa and the Baku-Novorossiisk routes, although they entail less expense, nevertheless involve further transportation from the Black Sea, which requires resolving the question of tankers passing through the Bosporus or looking for ways to build the pipeline bypassing it.
The main problem with the strait is the potential threat of ships colliding and causing oil spills, which would mean closing the waterway and drastically restricting tanker movement. At present, about 50 million tonnes of oil and petroleum products pass through the strait every year (approximately 5,400 tankers). The full tonnage of a vessel usually amounts to between 50 and 100,000 tonnes, but recently tankers with a capacity of up to 150,000 tonnes are used.5 After the accidents that occurred in the 1980s and beginning of the 1990s, Turkey, with the approval of the International Maritime Organization, toughened up the safety regulations for vessels passing through the Bosporus.
Moreover, the production prospects in the countries of the Caspian region required careful analysis and prediction of the future needs and possibilities of the consumer countries. In this respect, when evaluating the potential volumes for the MEP, three main sources of crude oil were considered: production under the “contract of the century” (Azeri-Chirag-Gunashli); production according to the results of exploration work stipulated by agreements signed between Azerbaijan and foreign companies; and oil produced in other Caspian countries and delivered to the world markets by transit through Azerbaijan. An analysis of the production dynamics in Kazakhstan and Turkmenistan was of particular interest here, as well as the possibilities of transporting part of the oil via the MEP. It was determined that if all went well, 400,000-500,000 barrels of oil from these republics could be shipped through Azerbaijan a day (20-25 million tonnes a year).
The results of an analysis of the delivery volumes of Caspian oil to the shores of the Black Sea and the requirements of its neighboring countries are also rather interesting. The forecasts show that by 2010, the daily consumption of crude oil will reach 200,000 barrels in Ukraine, 310,000 barrels in Rumania, 150,000 barrels in Bulgaria, and 250,000 barrels in Turkey, thus totaling 910,000 barrels (on the order of 48.5 million tonnes a year). If we take into account the oil exported by Azerbaijan, Russia, Kazakhstan, and Turkmenistan through the Black Sea ports, which will reach 3.4-3.8 million barrels a day by 2010 (170-190 million tonnes of oil a year), it becomes obvious that approximately 2.5 million barrels a day (125 million tonnes a year) must be exported via the Black Sea through the Bosporus, or by other routes that skirt the strait.
Thus the analysis of various oil pipeline routes carried out by the SOCAR and foreign oil companies showed that from the viewpoint of safety, reliability, stability, environmental requirements, and economic efficiency, the Baku-Tbilisi-Ceyhan route appears to be optimal.
As a result, the SOCAR and the companies belonging to AIOC drew up a joint commercial-technical agreements on construction of the Baku-Tbilisi-Ceyhan Main Export Pipeline, which were signed on 17 October, 2000 in Azerbaijan, on 18 October in Georgia, and on 19 October in Turkey.6
The oil pipeline will be 1,757 km long, 441 km of which will pass through Azerbaijan, 246 km through Georgia, and 1,070 km through Turkey, the throughput capacity will be 50 million tonnes a year, the cost $2.94 billion, and construction should be finished and the pipeline supplied with oil by the beginning of 2005.
The Baku-Ceyhan route will provide direct access to the Mediterranean markets, as well as make it possible to deliver oil on large-capacity tankers to other regions of the world. What is more, it will be the main oil pipeline for the countries of the Great Silk Road. Today, this route is recognized as a strategic project not only for Azerbaijan, but also for the entire Caspian region and as a vital factor in ensuring the energy independence of all of its states.
Development of the oil sector will promote an increase in foreign investments in the Azeri economy. For example, under the projects planned until 2004 alone, during the first phase of large-scale development of the Azeri, Chirag, Gunashli and Shakh Deniz fields, as well as the Baku-Tbilisi-Ceyhan oil pipeline, and the Baku-Tbilisi-Erzurum gas pipeline, they amount to approximately $9 billion.
As for the latter route, it is intended for exporting gas to Turkey from the Shakh Deniz field, the proven resources of which are evaluated, as shown above, at more than 1 trillion cubic meters, and daily production should be close to 25.5 million cubic meters. The length of the route is 650 km, and the estimated cost is $950 million.
Thus, Azerbaijan’s petroleum sector has reached a new stage in its development and its role in the country’s economy has perceptibly grown. Even at the most modest estimates of world prices for hydrocarbons, the republic’s anticipated revenue in the next few years will be enormous. Nevertheless, while reducing its dependence on oil prices, the government intends to diversify the economy in the near future and ensure a steady rise in the population’s standard of living, which will ensure our country a dignified place among the civilized states of the world.
1 See: N. Aliev, M. Mirzoev, E. Shakhbazov, OET Baku-Tbilisi-Ceyhan: ot videniia k realnosti, Baku, 2001, pp. 3-7.
2 See: Ibid., pp. 15-17.
3 See: N. Aliev, “OET Baku-Tbilisi-Ceyhan—sostavnaia chast neftianoi strategii presidenta Azerbaidzhana Geidara Alieva,” Bakinskii rabochii, 27 November, 1999.
4 See: N. Aliev, M. Mirzoev, E. Shakhbazov, op. cit., pp. 20-29.
5 See: G. Aliev, “Kontseptsiia neftianoi strategii v deistvii,” Bakinskii rabochii, 20 February, 2001.
6 See: N. Aliev, op. cit.