Thursday, December 9, 2010

Azerbaijan adds gas to gas

Azerbaijan adds gas to gas.....
By Robert M Cutler

MONTREAL - Rarely a month goes by nowadays without game-changing news from Azerbaijan on the Caspian Sea energy front. In the past two weeks, three events have occurred, two of which are in natural gas and either of which would be bona fide game-changers by themselves. The third is in oil and also has the potential to be of comparable significance .....

International energy company BP, which has a strong presence in the country, is directly involved in two of these three. In the first instance, BP-Azerbaijan president Rashid Jevanshir announced last week his company's intention to build a gas pipeline with a capacity of 16 billion cubic meters per year (bcm/y) in addition to the existing 8 bcm/y pipeline. "This is necessary, for gas export under full-scale production at Shah Deniz," he said, as quoted by

Reuters. The first gas from Shah Deniz Two is currently expected in early 2017.

Rovnag Abdullaev, president of Azerbaijan's main energy company, the state-owned SOCAR, has said that of the 16 bcm/y from Shah Deniz Two, Turkey would receive 6 bcm/y while Europe would receive 10 bcm/y. This would seem to indicate plans of dedicated volumes, making good on earlier statements by industrial and political figures in Azerbaijan (at a time when the industry publicly expected only about 8 bcm/y from Azerbaijan) that the country was prepared to dedicated as much as 16 bcm/y to the proposed Nabucco pipeline intended to transport gas from the region to Europe.

Nabucco negotiators expect the first gas in 2015, before Shah Deniz Two comes on line, which means that they expect it to come from Iraq, where they have been negotiating intensively for some time, even if contracts for subsequent delivery are first signed with Azerbaijan next year.

The first phase development of the Shah Deniz deposit, already under way for some time, is expected to produce 7.8 bcm of gas this year, peaking later at 8.6-9.0 bcm/y. This means that total production of the Shah Deniz deposit may reach 25 bcm/y as the second phase of development ramps up. This new pipeline with capacity of 16 bcm/y can then be doubled as more gas comes online to meet Nabucco's projected final capacity of 31 bcm/y when completed.

The Nabucco pipeline was originally planned to take gas from the Caspian Sea basin to Austria's Baumgarten hub for distribution throughout the European Union, via Azerbaijan, Georgia, Turkey, Bulgaria, Romania, and Hungary. Recently, however, Azerbaijan has been bargaining hard for the right not only merely to supply gas to Central Europe but also to sell its own gas to countries in Southeast Europe en route, which could interconnect their national systems to the Nabucco pipeline with relatively little effort. It has been in talks with nearly two dozen consortia and companies seeking to purchase Shah Deniz Two gas, and anticipates concluding negotiations by the middle of 2011.

That the aforementioned statements are not mere words is indicated by reports from Azerbaijan that the technical preparations for the second stage of the field development are well under way, notably including the expansion of the gas section of the Sangachal oil terminal.

This implies actual capital investment by BP-Azerbaijan in the physical plant, which would be extremely rare if the company was not as certain as possible that it is warranted. Field development is already planned to include constructing two new platforms, drilling 30 new wells, and laying 500 kilometers of new offshore pipe. Total investment is estimated at US$20 billion.

The manager of BP-Azerbaijan's Caspian-region gas marketing has specified that they "[have] determined the direction of exports, [which is] to Europe via Turkey, and are choosing the most suitable route". Representatives of the Nabucco pipeline consortium (referring to ongoing negotiations between the Shah Deniz consortium and potential European gas buyers who would like to use Nabucco for transit) have stated their expectation that gas supply contracts will be signed in the first half of 2011.

The head of the EU Delegation in Azerbaijan has told assistants to President Ilham Aliev that, taking into account not just Shah Deniz Two, but also the Apsheron and other offshore deposits, Europe is looking forward to 18 bcm/y of Azerbaijan's natural gas while the country continues to export in other directions as it wishes.

Publicly noting that "Europe's demand for gas will increase dramatically in 2016-2020", he told representatives of the press in Baku, still more significantly, that the EU's adoption of its "Third Energy Package" in 2009 signifies support for implementing a Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan, in which case "Azerbaijan will turn into not only supplier but also a transit country which will bring much benefit to it". (The two countries are continually discussing the TCGP project in various forums nowadays, most recently in the wake of the five-way Baku heads-of-state Caspian Sea summit, again in their bilateral Intergovernmental Commission on Economic and Humanitarian Cooperation.)

The EU's representation in Baku undoubtedly had in mind the report to the European Commission released the following week on the shortcomings in implementation of the Trans-European Networks for Energy program, which was declared to have "neither the resources nor the flexibility to make a full contribution to the delivery of the ambitious energy and climate goals."

As a result, the European Commission plans in mid-2011 to propose a new financial instrument that will support defined priority projects during the 2014-2020 budgetary period. It explicitly identifies the Southern Gas Corridor as such a priority project.

The European Parliament's resolution of November 25 concerning the EU's proposed "Energy Strategy for Europe 2011-2020" adds the qualification "specifically the Nabucco project" while also "welcom[ing] the work on a Caspian Development Corporation".

Mentioning the need to integrate energy issues into "the dialogue on the EU Strategy for the Black Sea region," the parliament elsewhere in its resolution stresses the need to "extend financial support, including by the European Investment Bank and other financial intermediaries, to the implementation phase of projects".

This language is about as clear as one can get about the intention to put real money on the table for definite projects, and it is especially auspicious in view of how the timing of the EU budgetary and planning cycle complements the current development pace of pipelines and gas deposits under the Caspian Sea and in the South Caucasus.

BP is involved not only in the Shah Deniz gas project but also in the oil production from the Azeri-Chirag-Guneshli (ACG) field. This is the so-called "Contract of the Century" from the 1990s that contributes the lion's share to the Baku-Tbilisi-Ceyhan (BTC) oil pipeline to Turkey's East Mediterranean coast via Georgia.

Plans are in the works to increase the BTC's volume. In this connection it bears noting that, as part of this second major recent development, the circumstances are finally ripe for Azerbaijan to increase production from ACG of both oil and associated petroleum gas (APG). Already ACG has produced 2.5 bcm of associated gas in 2010 alone, and plans are under way to expand APG extraction in deepwater Guneshli.

In 2010, the BTC oil pipeline is transporting about 750,000 barrels per day (bpd) of ACG oil, which is on track to produce almost 850,000 bpd this year. The additional 100,000 bpd goes into the still functioning Baku-Novorossissk oil pipeline, ending in the Russian Black Sea port, from where it is shipped through the Turkish Straits to world markets. According to Azerbaijani government sources, the BTC's pumping volume is expected to grow over the next four years to fill the present 1.2 million bpd complete capacity. The country's energy and industry minister, Natik Aliev, indicates that Azerbaijan expects to be able eventually to provide this quantity itself.

The BTC has also carried oil from Kazakhstan and Turkmenistan that is shipped across the Caspian Sea on barges. Earlier this year, Kazakhstan stopped supplying oil to the BTC without a public explanation. However, subsequent remarks by the country's oil and gas minister, Sauat Mynbaev, suggested the disagreement was over how to apportion Kazakhstan's oil (which reaches Georgia's Black Sea coast by overland transportation) between the Batumi port, in which his country's state energy company KazMunaiGaz has a majority interest, and the terminal not far away at Kulevi, owned by the State Oil Company of the Azerbaijani Republic (SOCAR). Signing of a new maritime oil transport agreement was planned for the Baku summit last month.

In the meantime, in place of oil from Kazakhstan, Azerbaijan has been shipping oil from Turkmenistan through the BTC: yet another indicator of the improved relationship between these two countries, and their readiness to cooperate despite the longstanding territorial disagreement over where to delimit their contiguous Caspian Sea national sectors for subsoil rights to natural resources. The BTC pipeline's throughput would later be upgradeable to 1.6 million bpd to receive oil from the second phase of development of Kazakhstan's offshore Kashagan deposit later in the decade, first by barge or tanker across the Caspian Sea and then, as Kashagan ramps further up into its third phase, via an undersea oil pipeline.

The third major development in the last two weeks in the Azerbaijan energy realm is the announcement of the discovery of gas at the Umid offshore deposit, with reserves officially said to be second only to those at Shah Deniz (which is estimated to hold 1.2 trillion cubic meters), but possibly greater.

The first public estimate of Umid's reserves is 200 bcm, but this is likely to increase as more exploration is conducted (SOCAR carried out the work by itself without foreign assistance), particularly as Azerbaijani public estimates tend to the conservative side, in the first instance to preserve strategic state secrets and also the better to enhance its bargaining position later.

After many years of waiting and careful preparation, natural gas production and pipeline projects in the South Caucasus are finally beginning to come to a head. However, as the Umid discovery suggests, there are likely still many interesting developments ahead in coming years, not least in the prospective interconnection of the two shores of the Caspian Sea, creating an energy thoroughfare from Central Asia to Central Europe.

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