Petrostrategies: Decline Recorded in Azerbaijan’s Oil Production
Saturday, 6 October, 2012 – 16:20
Civilnet.am
Reports in English
The World Energy Weekly, published by the Paris-based Petrostrategies
consulting firm which carries out strategic and economic research and
analysis on the energy industry, reports this about Azerbaijan’s energy
sector, in its October 1, 2012 issue. As with nearly every aspect of the
energy sector, economic and production news always carry political
implications. This is even more true in the case of Azerbaijan, given
that government’s reliance on its oil and gas revenues to buttress its
positions regarding Armenians.
According to Petrostrategies, `The government of Azerbaijan and the
international consortium AIOC, which exploits the three large off-shore
oilfields of Azeri, Chirag and Guneshli Deepwater (ACG), must face up to
an unexpected challenge: the decline of ACG production began at least
three years earlier than expected, in 2011 instead of 2014-15. Contrary
to the official theory put forward in Baku, this precipitated drop is
not due to the government’s wish to extend the lives of ACG’s reserves.
Reliable reports put this decline down to geological, economic and
contractual reasons. This information comes from sources close to
companies that are members of the consortium and western diplomats
posted in Baku. Their message is summed up in four points; 1) the
geology of the fields has proved to be more complex than expected; 2)
the production facilities that were created at the beginning are no
longer adequate; 3) very big investments must be made to maintain and
prolong production; 4) to ensure that the consortium commits to these
investments, a guarantee must be provided for the extension of the
current production-sharing contract, which expires in 2024, together
with `sweeteners’. In oil jargon, this word refers to tax breaks or
other incentives that companies ask for.
`Given the nature of the political regime in place, i.e. very close to a
complete dictatorship, not many feel at ease to speak openly in
Azerbaijan. Yet the official statistics show that the production from
ACG peaked at 823,000 barrels per day in 2010, that it fell to 718,000
in 2011 and to 684,000 barrels per day in the first half of 2012. After
phase 3 of its development, ACG should have produced 1 million barrels
per day. In order to meet this projected growth (and in the hope of
receiving greater volumes of crude oil from Kazakhstan, too), the
capacity of the BTC oil pipeline to Ceyhan, on the Mediterranean, was
raised to 1.2 million barrels per day in March 2009. The new Chirag
project (known as COP), which is slated for completion at the end of
2013, will make it possible to add 100,000 barrels per day. But to what
extent will the output have fallen by then?
`Baku says it wants to prolong the life span of its reserves and that
the robustness of oil prices ensures it enough oil revenues to avoid
having to boost production. Azerbaijan’s crude oil export revenues are
currently around $25 billion/annum, but according to the figures of the
State Oil Fund, net hydrocarbon revenues will hit $16.5 billion in 2012.
It can be estimated that around $14 billion/annum will come from crude
oil exports, $1.6 billion from gas exports (8 to 9 bcm/annum) with the
rest coming from refined products. Added to this are revenues generated
from State Oil Fund assets, which stood at $32.5 billion at the end of
the 1st quarter of 2012 (sources say they generate 5 to 6% per annum of
revenues).
`At the same time, Azerbaijan has revised its gas production forecasts
downwards for the 2025 time horizon. Instead of the 50-55 billion cubic
meters (bcd) that had been announced, it believes it will be able to
produce 40 bcm/annum, said Rovnag Abdullayev, the President of
state-owned company Socar. He stated that exports could range from 20 to
30 bcm/annum, while underlining that this would depend on domestic gas
consumption. If the population of Azerbaijan hits 20 million people, as
Baku hopes, then gas exports could fall to only 10-19 bcm/annum, warns
Abdullayev, i.e. less than the contracted export volumes. On the other
hand, the cost of developing the Shah Deniz field (phase 2) has been
reassessed, rising from $20 billion to $28 billion, according to Socar’s
President. And, he added, this figure could climb even further.’