Azerbaijan – part two:

Published October 18th, 2000 - 02:00 GMT

Azerbaijan has attracted international interest in its potentially rich oil and natural gas reserves in the Caspian Sea basin.  

Note: information contained in this report is the best available as of May 2000 and can change.  

 

Caspian Sea Issues: 

Uncertainty over the Caspian Sea's legal status -- specifically the territorial rights of nations bordering its shores (Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan) -- complicates development plans for the area. 

 

Azerbaijan has advocated the establishment of maritime boundaries based on an equidistant division of the sea. 

 

In a dispute with Turkmenistan over a field called Kyapaz by Azerbaijan and Serdar by Turkmenistan, SOCAR vice-president Ilkham Aliyev has noted that some methods for dividing the Caspian proposed by the United States would put the Kyapaz field into Turkmenistan's sector, and stated that ownership of the field could not be determined solely "with a ruler," since the field was developed by Azerbaijan.  

 

Azerbaijan also has stated that the 1970 division of the Caspian by the Soviet Ministry of Oil and Gas, which assigned the Kyapaz field to Azerbaijan, remains in force.  

 

In addition, Azerbaijan's Foreign Ministry has objected to the Iranian decision to award Royal Dutch/Shell and Lasmo a license to conduct seismic surveys in a region that Azerbaijan considers to fall in Azeri territory, and has announced that it will call a tender for the D-43, D-44, and D-74 fields which are located in the same region, as well as prohibiting Iranian participation in oil exploration projects in Azerbaijan's sector of the Caspian Sea. To date, no final resolution of Caspian Sea legal issues has been achieved. 

 

Export Routes:  

The AIOC exports its initial production - the "early oil" - via a northern route through Russia and a western route through Georgia, with a combined initial design capacity of about 200,000 bbl/d.  

 

The northern route became operational at the end of 1997, and the western route in April 1999. However, shipments through the northern route were interrupted by pumping problems and conflict in Chechnya, with 70,000 bbl/d now flowing around Chechnya by rail from Dagestan to Stavropol. Azerbaijan shipped about 85,000 bbl/d via the western route in 1999.  

 

Several proposals have been made to expand each of these routes. AIOC expects production to peak at about 800,000 bbl/d within the next 15 years. Exporting the additional oil could require the building of a main export pipeline (MEP) with a capacity of 1 MMBD.  

 

Several options for routes were presented for consideration to the Azerbaijan government in 1997, including pipelines from Baku to Ceyhan (Turkey), Baku to Supsa (Georgia), and Baku to Novorosiisk (Russia). 

 

The AIOC has been reluctant to increase exports along the northern route because: 1) it is longer and more expensive than the western route; 2) the northern route mixes AIOC crude with other crude oils while in transit to Novorosiisk, reducing its values; and 3) the conflict in Chechnya. 

 

In November 1999, Azerbaijan, Georgia, and Turkey signed agreements affirming the Baku-Ceyhan route for the MEP. 

 

A regional pipeline and transit system centered on Azerbaijan is beginning to emerge, but export pipelines have been effectively open only to AIOC and SOCAR. All other Azeri companies either sold their oil domestically or exported via rail by Caspian TransCo, the sole remaining option. 

 

SOCAR has designated Caspian TransCo as the purchaser of oil from Azerbaijan's joint ventures, as it is the only transportation company with available capacity. Shirvanoil had lost a ruling to challenge Caspian TransCo's designation.  

 

The EU has loaned Azerbaijan $25 million under the TRACECA program to rehabilitate and upgrade the seaport near Baku to allow up to 500,000 bbl/d of oil shipments from the eastern Caspian. 

 

As Caspian production increases, trans-Caspian pipelines could carry increasing volumes of oil and gas from Kazakhstan and Turkmenistan. 

 

The cross-Caspian pipelines could connect with other export pipelines from Azerbaijan, such as the proposed MEP and the early oil routes. 

 

Oil is currently being shipped across the Caspian from Kazakhstan and Turkmenistan to Azerbaijan for further trans-shipment westward. Chevron has contracted with Caspian TransCo to offload Tengiz oil from Kazakhstan onto trains at the Ali-Bayramly railway station and oil loading facility near Baku, to ship the oil via pipeline and rail to the Georgian Black Sea port of Batumi. 

 

Shipping volumes have risen from 2,000 bbl/d in 1996 to an estimated 54,000 bbl/d in 1999. Caspian TransCo has been working with the Azeri government to overhaul and expand the oil terminal facilities at Dyubendi, 30 miles northeast of Baku, to allow for further increases.  

 

In addition, Caspian TransCo was given the exclusive right to use pipelines belonging to SOCAR, including the oil-loading facility at Ali-Bayramly. 

 

In addition, Iran has proposed a pipeline that would transport oil from Baku via a proposed 190-mile pipeline to Tabriz in northwest Iran, where it would also connect with the existing Iranian pipeline network and refineries. 

 

France's Elf Aquitaine and TotalFina have proposed building a 200,000 - 400,000 bbl/d pipeline for this plan. Azerbaijan has indicated that progress on disputes with Iran concerning the division of the Caspian would need to occur before such as project moved forward, as well as Iranian progress towards improved relations with the West. 

 

NATURAL GAS:  

Azerbaijan has imported natural gas from Russia, Turkmenistan, and Iran in the past to meet domestic demand. Azerigaz has announced that it does not intend to import any more gas, and plans to instead develop new gasfields in the Caspian Sea to meet domestic demand. 

 

Increased domestic usage of natural gas could also free up additional oil for export to world markets, which is desirable because Azerbaijan currently can get its oil to world markets, but has no natural gas export pipelines.  

 

In addition, there is no infrastructure to deliver gas from offshore fields - the source of most of its production - to consumers in Azerbaijan, and consequently gas is being flared instead of piped to markets.  

 

For Azerbaijan to achieve self-sufficiency in gas, however, there will need to be a complete overhaul of the country's gas supply system, and reforms to ensure rational usage of these supplies. 

 

Azerbaijan's gas market was slow to develop because the price of natural gas to consumers was regulated at artificially low prices, there was non-payment of bills by customers (including the use of illegal connections to the gas network), and many areas of the country did not have access to the gas distribution system.  

 

In October 1999, the U.S. Trade and Development Agency signed a $425 million agreement with SOCAR to help fund a comprehensive study on Azerbaijan's natural gas sector that will assess its consumption needs and its production and export potential. 

 

In addition, Azerigaz has signed agreements with both Statoil and Royal Dutch/Shell to help Azerbaijan to develop and export its gas. 

 

If the necessary infrastructure were developed and gas flaring were eliminated, gas production could increase by as much as 1 trillion cubic feet (Tcf) per year by the end of the next decade, and Azerbaijan could become a net exporter of natural gas to its neighbors. 

 

Azerbaijan has also enacted a law of gas supplies requiring that each oil and gas production project include a plan to develop its natural gas potential. 

 

Azerbaijan has moved to develop its infrastructure for tapping its natural gas potential, such as modernization of the gas processing plant at Karadag near Baku, and possible construction of a new processing plant. 

 

The European Bank for Reconstruction and Development (EBRD) is studying a proposal for the Kalmas gas storage project to further develop Azerbaijan's gas potential. The World Bank is offering credits to renovate underground storage facilities at Garadagskoye and Galmazskoye. 

 

Other projects include a World Bank-financed plant for the installation of industrial gas meters, and restoration and expansion of gas service to regions such as the Absheron peninsula. 

 

Production and Exports:  

Over 90 percent of Azerbaijan's natural gas production comes from offshore fields. Bakhar is Azerbaijan's most important gas field, accounting for 45 percent total production in 1998. 

 

Production has declined because of a lack of new drilling. Almost all production is from SOCAR, with small amounts of associated gas from AIOC.  

 

Additional production could come from the recently discovered offshore Nakhchivan field, with an estimated 900 billion cubic feet (Bcf) in reserves, with additional supplies coming from the elimination of flaring of associated gas.  

 

However, even with these additional supplies, SOCAR estimates that gas production at all existing fields except for Gunashli and Shah Deniz will be 35 billion cubic feet in 2010. As a result, Azerbaijan's export potential over the next decade will depend largely on the Gunashli and Shah Deniz fields.  

 

The Gunashli field could be brought online in three years once pending legal issues are resolved. The Shaz-Deniz field was found to contain large reserves of gas condensate, with some estimates totaling 35 Tcf. 

 

Production at the Shaz-Deniz gas field had been initially targeted by 2004, and Azerbaijan could become a net exporter sometime during the next decade if proposed infrastructure development goes forward. 

 

Azerbaijan plans to export over 70 Bcf of natural gas per year to Georgia once production at the Shah Deniz field comes online. Turkey would be the first export market, with Bulgaria, Greece, and Romania also possible markets. 

 

Exports to Georgia could begin with the reconstruction of a 40-mile-long stretch of pipeline in Azerbaijan and Georgia. By extending the pipeline, Azerbaijan could also export to the fast-growing Turkish natural gas market. 

 

Tentative plans call for extending the line to Erzerum, Turkey, to be able to export 300-350 Bcf to Turkey. A feasibility study on utilizing existing pipelines for exports is being developed under the EU's INOGATE program. 

 

Completion of the proposed 1-Tcf Trans-Caspian natural gas pipeline would make possible large-scale natural gas exports to Turkey from Turkmenistan and the Caspian region. 

 

Delegations from Turkmenistan, Azerbaijan, Georgia and Turkey are developing agreements that the operators of the project, PSG of the United States and Royal Dutch/Shell, must conclude with each of the four countries in order for investment to begin.  

 

Azerbaijan, which would like to exploit the large gas find at Shah-Deniz, had asked for 50 percent of the available capacity on the pipeline, but has tentatively agreed to a 1/6 share. 

 

If the pipeline is built, Azerbaijan will be able to collect transit revenue for Turkmen exports while it is developing its own natural gas potential. Later, the pipeline could provide a route for Azeri natural gas exports.  

 

Iran has also shown interest in importing 106 Bcf per year initially, with imports increasing to 283 Bcf per year over the next five years. The gas could be exported from Azerbaijan using an existing pipeline built during Soviet times from Baku to Astara, Iran that has been unused for two decades.  

 

Iran has estimated that the pipeline could be rehabilitated within six months of an agreement. Iran has offered to pay for the renovation, but the proposal faces opposition from the United States. 

 

ELECTRICITY:  

President Aliyev issued a decree in 1996 to transform the state power company, Azerenergy, into a state-owned, closed joint stock company, and issued a five-year program for privatization. 

 

The plans called for Azerenergy to convert into an open joint stock company after its outstanding debts are paid to the state budget. The first stages of privatization will cover transmission networks, with power stations remaining state-owned initially. 

 

Azerenergy planned to transfer 16 distribution networks to private ownership in 2000, but bids were received for only four networks (Gusar, Shamkir, Mingachevir, and Sheki). 

 

Azerbaijan's power infrastructure, built in the Soviet period, is generally in poor condition. Since independence, there has been almost no public investment or maintenance of public infrastructure, and Baku periodically experiences shortages of gas, water, and electricity.  

 

Difficult economic conditions, high taxes, and non-payment by customers in Azerbaijan have left the power sector without sufficient working capital and investment funds. Although tariffs have been raised several times, rates are still low and collection is not adequate.  

 

A lack of funds has resulted in fewer repairs and less maintenance to aging power generation facilities. Azerbaijan must upgrade and replace much of its power generation system over the next few years.  

 

Over half of the country's turbo-generators and boilers have been in use for more than 40 years. In addition, the energy efficiency and environmental adequacy of the power sector need to be improved, with energy losses via the distribution network around 20 percent. 

 

Azerbaijan's power sector has a generating capacity of about 5 gigawatts (GW), consisting of eight thermal plants supplying over 80 percent of generating capacity, and five hydroelectric plants. 

 

Two-thirds of the country's thermal capacity is powered by Mazut (residual fuel oil), with natural gas as the secondary fuel. Large-scale upgrades needed by the power sector could cost $2.5 billion. 

 

Azerbaijan imports power from Dagestan (Russian Federation), Turkey (for the Nakhchivan region), Iran, and Georgia (for western Azerbaijan), and participates in energy exchanges as well. 

 

To improve electricity flows between these countries, Azerbaijan has participated in a project within the framework of the EU's TACIS program to create a unified energy system for Azerbaijan, Georgia, and Turkey. 

 

Georgia, Azerbaijan, and Turkey signed a letter of intent at the end of May 1999 to construct a transmission line connecting power grids in these three countries which will allow exports of power to Turkey. 

 

Azerbaijan has also agreed to an annual exchange of electricity with the Iranian province of Gilan.Gilan will provide winter seasonal power to Azerbaijan, with summer power moving in the other direction. 

 

Projects: 

Several rehabilitation projects are currently underway that will add 670.5 megawatts (MW) of capacity. The reconstruction of the 360-MW Mingechaur hydroelectric station on the Kura River is expected to cost $41 million and to be completed by 2001.  

 

In June 1997, the EBRD made a $21-million loan to finance the replacement of three generators at the plant, and to implement environmental controls. The project is co-financed by a $12.5-million loan from the Islamic Development Bank, and is supported by grant financing from the EU's TACIS program.  

 

In December 1994, the EBRD also made a $53-million loan for the rehabilitation Yenikend Hydropower Station located on the Kura River, with project completion expected in 2000. Completion of the power station will allow Azerbaijan to increase its fuel oil exports and to reduce gas consumption. 

 

ENERGY INDUSTRY:  

Organization: State Oil Company of Azerbaijan Republic (SOCAR); Azerigaz - State Gas Company; Azenergo - State Electric Company  

Major Oil Ports: Baku  

Oil Export Pipelines: Baku-Novorosiisk (Russia - "early oil" northern route), Baku-Supsa (Georgia - "early oil" western route)  

Major Oil Refineries (Capacities 1/1/2000): Baku (238,978 bbl/d), Novo-Baku (202,830 bbl/d)  

Major Power Plants: Azerbaijan Station near Mingechaur (2100 megawatts or MW), Ali-Bayramli (1100 MW)  

Source: United states Energy Information Administration. 

 

© 2000 Mena Report (www.menareport.com)

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