Azerbaijan – Oil & Gas 2019

Azerbaijan Plans to Invest US$20 Billion in Oil and Gas Industry

Published: 25 January 2019

Several new projects are in the pipeline

The oil and gas industry remains by far the largest investment sector in Azerbaijan. Declining oil prices led to a slump in capital spending in the sector after 2015. But projects for the production and processing of oil and gas and the implementation of new production-sharing agreements for the development of oil and gas fields continue to be planned. They promise a wide range of sales opportunities for foreign suppliers of equipment and industry-related services.

Billions are flowing into development of the Azeri-Chirag-Guneshli oil fields

Research and consultancy group Wood MacKenzie estimates that at least US$20 billion will be invested in the Azerbaijani oil and gas industry between 2018 and 2025. Among the projects, the further development of the large offshore deep oil fields Azeri-Chirag-Guneshli (ACG) by international consortium AIOC (Azerbaijan International Operating Company) stands out. The planned construction of two oil platforms for the Azeri Central East project is considered to be one of the most promising individual projects.

In autumn 2017, the Government of Azerbaijan and the consortium extended the 1994 Production Sharing Agreement (PSA) for the development of the oil fields until 2050. The parties expect oil production of around 500 million tons and investments of more than US$40 billion over the next 32 years. By the end of 2017, US$ 43 billion had been invested in the development of the ACG deposits and a further US$1.2 billion in the first three quarters of 2018. Oil production was approximately 440 million tons between 1994 and 2017. For 2019, the AIOC consortium expects oil production of 30.9 million tons and gas production of 29.7 billion cubic meters.

Contracting parties of the economically most important Azerbaijani PSA are state-owned oil company SOCAR (Azerbaijan, share of the consortium: 25.0%) and foreign companies BP (UK, 30.37%), Chevron and ExxonMobil (both US, 9.57% and 6.79%), Inpex and Itochu (both Japan, 9.31% and 3.65%), Equinor (Norway, 7.27%), TP (Turkey, 5.73%) and ONGC Videsh (India, 2.31%). Chevron and ExxonMobil are planning to sell their shares. Consortium and project leader is British oil company BP. Proven oil and gas reserves of the ACG block amount to 1.2 million tons of crude oil and 350 billion cubic meters of natural gas.

 

Azerbaijan: Gross fixed capital investment in the oil and gas sector (in US$ billion)

2014 2015 2016 2017
Foreign investment 5.4 5.3 4.3 3.7
Domestic investment 2.2 1.6 1.1 1.2
Total investment 7.6 6.9 5.4 4.9

Source: Statistical Committee of the Republic of Azerbaijan

 

Shah Deniz-2 project targets gas exports to Europe

Exploration of the Shah Deniz-2 gas deposit, including the construction and expansion of pipelines for gas exports to Europe, is the second major project in Azerbaijan’s hydrocarbon sector. At the end of December 2013, SOCAR and BP, operator of the Shah Deniz gas field, agreed on the second development phase. From 2020 on, 6 billion cubic meters of gas will be supplied to Turkey and 10 billion cubic meters to other European customers annually.

Total investment in the southern gas corridor is estimated at about US$ 40 billion. Azerbaijani company Southern Gas Corridor CJSC (stakeholders: Government of Azerbaijan and SOCAR) had implemented projects worth US$ 9.8 billion by the end of 2018 from its total planned investments of US$11.5 billion for the overall project. In 2019 the company wants to invest another US$1.4 billion.

New exploration and development projects boost investment

New or renewed production-sharing arrangements for the exploration and exploitation of hydrocarbon deposits are helping to revive investment in the oil and gas sector. Prove of the interest of foreign oil and gas companies in the development of new hydrocarbon deposits is the construction of the southern gas corridor, the new export route to Europe. It includes contracts for the exploration and development of oil and gas fields Absheron (foreign partner: Total, France), Muradkhanly-Jafarly-Zardab (Zenith Energy, Canada), Govsany-Zykh (Global Energy, Russia), Block D230/North-Abscheron (BP, UK) and Dan-Ulduzu-Ashrafi-Aipara and Karabakh (Equinor, Norway). Additionally, Russian oil company Rosneft – in cooperation with SOCAR – wants to explore further the Goshadash oil and gas block.

Gas production at the Abscheron deposit is expected to start in Q3 of 2020, initially with 1.5 billion cubic meters of gas and 700,000 tons of gas condensate annually. From 2022/23 onwards, an increase in annual gas production to at least 4 billion cubic meters of gas is expected. French company Total estimates the reserves of the Abscheron gas deposit at up to 350 billion cubic meters of gas and 108 million tons of gas condensate.

Production at the Karabakh oil and gas deposit is scheduled to start in 2021. The recoverable reserves of the deposit are estimated at not less than 16 million tons of oil and 28 billion cubic meters of gas. Equinor plans to begin seismic surveys in the Dan-Ulduzu-Ashrafi-Aipara block in mid-2019. BP plans to start such activities in Block D230 in the first half of 2019 and announced that it will drill the first wells in the Shafag-Asiman contract area in 2019, as well. Reserves of this deposit amount to 500 billion cubic meters of gas and 65 million tons of condensate. Zenith Energy has been intensifying its oil drilling in the Muradkhanly-Jafarly-Zardab block since late 2018 and early 2019.

 

Azerbaijan: Oil and gas production

2015 2016 2017 2018 2019 2020 2021
Crude oil and gas condensate (in m. ton) 41.6 41.1 38.7 35.5 38.5 38.9 39.1
Natural gas (in bn. cbm.) 29.2 29.3 28.6 27.7 36.9 39.9 43.4
.Marketable gas 19.2 18.7 18.2 17.4 24.7 29.8 36.2

Notes: 2018: January to November; 2019-2022: government forecasts

Sources: Statistical Committee of the Republic of Azerbaijan, Government of Azerbaijan

 

Expectations are high for the Umid-Babek project

Azerbaijan has high hopes for the implementation of the Umid-Babek project. The two deposits together have reserves of 600 billion cubic meters of gas and 120 million tons of gas condensate. The Umid deposit has already been producing gas for several years. In spring 2018, SOCAR and British company Nobel Upstream signed a Risk Service Agreement and other agreements for the assessment, exploration and development of the onshore deposits. The production company established by the two parties is interested in attracting other foreign partners.

The main player in the oil and gas industry in Azerbaijan is state oil company SOCAR (www.socar.az). It produces around 7 to 8 million tons of oil and 6 to 7 billion cubic meters of gas annually (excluding joint ventures for offshore exploration). With that, SOCAR accounts for around one fifth of both oil and gas production of Azerbaijan. In 2017, the company was responsible for nearly two thirds of all investments in the oil and gas sector.