The Baku energy race
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Despite the opening toward the European market and the growing network of infrastructures connecting neighboring countries, Azerbaijan still has wide margins of growth in the fossil fuel sector, a development also affected by the oil price crisis

Following the start of gas production in the Shah Deniz gas field in the mid-2000s, Azerbaijan has rapidly become one of the most attractive partners for the emerging European energy security policy. Almost simultaneously, the inauguration of the Baku-Tbilisi-Ceyhan oil pipeline has finally opened the doors of the global markets to the Caucasian country’s oil resources – geographically enclosed between the Caspian Sea, Russia and Iran.
The most recent data regarding Azerbaijan’s oil and gas industry reveal oil reserves amounting to 7 billion barrels (bbls), and natural gas reserves of around one trillion cubic meters (Tcm), the figures fluctuate slightly according to different sources) These resources rank Azerbaijan in twentieth place with regard to proven crude oil reserves (0.4% of global reserves), and in twenty-third place for natural gas reserves (0.6% ).
Following the production peak reached in 2010, when Azerbaijan’s production reached 1 million barrels per day (bls/d), the performance of the oil industry suffered a major slowdown, only interrupted in 2013 by a slight recovery of the national output (877,000 bls/d). Based on the latest available data, production in 2015 would have declined further, reaching the lowest level of the last decade at 835,000 bls/d.

 

A fluctuating production

Azerbaijan’s national energy company, SOCAR, produces approximately 20% of the total output, amounting to 163,870 bls/d in 2015, a slight decline compared with previous years (167,083 bls/d in 2014). Production is concentrated in the fields of Mishovdagh (27,000 bls/d), Neftchala (14,000 bls/d), Khilli (14,000 bls/d), Pirsahhat (10,000 bls/d), Gum Deniz (condensed, 10,000 bls/d) and in a series of other small prospects.
Approximately 80% of the country’s oil output, however, comes from the offshore complex of Azeri, Chirag and Guneshli (ACG), operated by BP, whose production-sharing agreement was signed in 1994 as part of the famous Contract of the Century. Even this has suffered a major decline since 2010, the year in which production stood at 823,100 bls/d, reaching 634,000 bls/d in 2015. In order to deal with the slowdown in the exploitation of the ACG oil fields, BP, on the one hand, plans to increase the re-injection of associated gas, which should at least stabilize production; on the other hand, is the bet on the development of a new section of the Chirag oil field, authorized by the government in 2010, which entered into production with the installation of the new West Chirag platform. In 2014, the new prospect reached a production of 66,000 bls/d, compared with a maximum production capacity planned for the platform of 183,000 bls. BP also currently operates in the Shah Deniz gas field which, despite mainly being a natural gas basin, produces around 55,000 bbls/d, complementing the crude oil produced by the English majors in the country.

 

The journey of Azerbaijani oil

With domestic consumption at around 80,000 bbls/d, much of Azerbaijan’s oil (approximately 760,000 bbls/d) is exported on international markets. The aforementioned Baku-Tbilisi-Ceyhan pipeline, which runs from the Sangachal terminal on the Caspian Sea for 1,770 kilometers, arriving at the Turkish port of Ceyhan, on the Mediterranean, is the main export channel for Azerbaijani crude oil. The pipeline has a total capacity of 1 million bbls/d and, in 2015, was also used to transport volumes of Kazakh and Turkmen crude oil. The other 2 export routes are the Baku-Novorossiysk (or Northern Route Export Pipeline, NREP) oil pipeline, which is capable of transporting a maximum of 100,000 bbls/d to Russia (through which, in 2015, 25,500 bbls/d of crude oil were exported), and the Baku-Supsa pipeline, capable of transporting 145,000 bbls/d under the Black Sea (through which 56,000 bbls/d of crude oil were exported in 2015).

 

The advance of gas resources

In the natural gas industry, despite the ambitious claims of Baku to be revised downwards, the situation appears, however, to be less critical. Based on data provided by SOCAR, in the last decade, natural gas production has more than tripled, increasing from 9 billion cubic meters (Bcm) in 2006 to 29 Bcm in 2015, a year which, however, recorded a very slight decline compared with the peak reached in 2014 (29.6 Bcm). A significant portion of this gas, however, is re-injected to maintain the pressure in the crude oil fields, in fact reducing the commercially usable production in 2015 to 18.9 Bcm. Contrary to oil, most of the gas produced is consumed domestically; approximately 11.5 Bcm is consumed at the domestic level, leaving over 6 Bcm available for export to Georgia and Turkey via the South Caucasus pipeline (also known as Baku-Tbilisi-Erzurum, BTE), which links the Caspian coasts to the heart of Turkey and has a total capacity of 8.8 Bcm.
Most of the natural gas production is concentrated in the offshore gas fields of Azeri-Chirag-Guneshli (associated gas) and Shah Deniz, with the latter having reached an output of 9.9 Bcm, of which 2/3 are destined for export. Smaller deposits developed by SOCAR include Gum Deniz-Bahar (2 Bcm produced per year) and Bulla Deniz (0.3 Bcm). As regards the development of further resources needed to ensure exports to European markets via the TANAP and TAP gas pipelines, Azerbaijan launched the development of the second phase of the Shah Deniz gas field (with announced investments of over $120 billion), and also the activities for exploiting the offshore gas fields of Absheron, Umid and Babek, as well as the development of non-associated gas located in the ACG complex. Currently, only data regarding the estimated proven reserves of these deposits are available: as regards Absheron, the gap is particularly wide, ranging from 80 to 350 Bcm, Umid 200 Bcm, Babek 400 Bcm and ACG 280 Bcm. Although these resources have the potential to be developed, their exploitation is currently heavily reduced due to the fall in crude oil prices (along with gas prices), the substantial flattening of the European gas demand, and due to a series of operational difficulties of the Azerbaijani oil industry.


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