The Caspian region is one of the largest remaining potential resources of undeveloped oil and gas in the world. Recent levels of interest by the major international oil and gas producers, the international contractor community and by governments and academic institutions are a testament to the region's potential.
At the present time, the offshore portions of the basins of the Caspianregion are largely unexplored. Limited geological information and exploration activities have led to a wide range of resource estimates.
Most estimates place total potential in the Azerbaijani and Kazakh sectors of the Caspian region (excluding the eastern Turkmen gas reserves), both discovered and undiscovered, in the range of 100 to 200 billion barrels of oil equivalent. This could make the Caspian roughly equivalentto the North Sea (100 GBOE EUR discovered), not another Middle East (900 GBOE EUR discovered)*, but clearly significant to worldwide energy supplies.
To date, about 60 billion barrels have been discovered between the north Caspian and south Caspian basins, shown on Diagram 1. Most of this resource has not yet been developed. Even with modest success, oil and gas development activities in the region would be significant, far outpacing the activity levels seen during the Soviet era, which was limited to shallow water areas.
Since the Caspian is a land-locked sea, it does not have access to all of the worldwide resources of the oil and gas industry, such as marine drilling and construction fleets, or world scale fabrication facilities.
As a result, the Caspian region must be more self-sufficient than most developing hydrocarbon basins. In West Africa, for example, large floating production systems could be built in the shipyards of Western Europe, the Far East, or the Gulf of Mexico and towed to location.
This is not possible in the Caspian region, as access is limited by either the Volga-Don Canal System or by overland routes. Instead, it will be necessary to develop the basic infrastructureto build and install production facilities.
The northern and southern regions of the Caspian are different environmentally as well as geologically. In the north, water depth over prospective structures is as shallow as two meters, with average water depth of about eight meters.
The most northern portion of the Caspian Sea is typically ice covered for 4 - 5 months of the year. Also, environmental pressures on the sturgeon population and other wildlife could limit the scope and types of offshore development activities allowed. In the south, water depth ranges as great as 800 meters over prospective structures. Ice is not a factor, but storm-driven wave heights will be a concern, as will seismic activity and mud volcanoes.
As a result,development in the two areas will look very different,necessitating industrial infrastructure specialized to one area or the other. The north could be characterized by numerous smaller ice-resistant structures constructed and supported by a specialized shallow water fleet. In the south, development could tend toward very large deep-water structures with a significant number of subsea wells.
There are roughly 260 undrilled structures in the Caspian area. Looking at only the largest ones, about 40, a success rate of 40 to 60 percent would result in 15 to 20 major developments, and could yield crude oil production levels of 3 - 6 million barrels per day in the next twenty years.
Looking at this outlook another way, it assumes a success rate of 45 to 70 percent for PSAs and joint ventures already in place (12 PSAs in Azerbaijan, 1 current PSA and 9 JVs in Kazakhstan).
Two major projects, AIOC's Megastructure development in Azerbaijan, and Tengizchevroil's development of the Tengiz field in Kazakhstan, are already underway. Each of these developments could produce between 750 thousand and one million barrels per day.
Each potential project will likely be a phased development that could take several years to complete. In all current PSAs, exploration and development periods are limited by the PSAs.
The result could be intense competition among developers for scarce infrastructure resources resulting in upward pressure on costs. This competition is already evident in the South Caspian where deep-water drilling rigs are in demand to drill exploration wells.
Given worldwide industry experience, typical costs to explore, develop and deplete the region's hydrocarbon resources could be in the range of four to six dollars per barrel produced.
Applying this unit cost to the range of reserves expected to be developed (120 - 220 billion barrels) would result in a total expenditure required of 500 - 1,300 billion dollars, as measured in today's currency.
Recent low oil prices will continue to put pressure on costs as a way of improving profitability. Over time, development costs may come down somewhat. (Diagram 2)
Note that these figures do not include billions of dollars in pipeline infrastructure development that would also be required, as these are typically not included in the field development costs. The result would be unprecedented levels of activity and spending in the region.
Obviously, it will take a long time to spend this amount of money. In the next twenty years, at industry average costs to develop oil and gas reserves, the industry could expect to spend 300 to 500 billion dollars to implement the development plans that I have just described.
This would be an average of 15 to 25 billion dollars per year. Peak spending could be as high as 30 billion dollars per year. As a point of reference, the upstream industry worldwide has averaged capital expenditures of about 60 billion dollars per year ('98$) over the last ten years (source: Oil & Gas Journal Energy Database). For direct comparison, in the North Sea, 16 billion dollars were spent in 1996, the latest year for which actual expenditure data is available.
Industrial infrastructure required for oil and gas developments of this magnitude will likely be in the range of at least 5 - 20 billion dollars, or about 1 - 2 percent of the development expenditures.
These expenditures would include upgrades and additions to the existing marine drilling and construction fleet, upgrading and expanding the shore-based fabrication and support facilities, and installing new facilities for such things as materials handling and living quarters.
As a point of comparison, AIOC expects to spend about one billion dollars out of a total $12 billion on industrial infrastructure, including refurbishing and upgrading the jacket fabrication yard in Baku, refurbishing several major vessels in the marine fleet in Azerbaijan, and establishing a drilling and operations support base.
As an early project in Azerbaijan, AIOC may be carrying a disproportionate investment in infrastructure. But maybe not. As PSAs are added and projects are approved, the demand for infrastructure is only going to increase.
Clearly, the oil and gas industry faces a major challenge to develop the area in a way that maximizes the value of the reserves and their contribution to world energy supply. Will the industry be able to raise and then effectively manage a capital spending and infrastructure development program of this magnitude?
The pace of investment required under a successful exploration scenario could well be the limiting factor for development of this region. Some examples of levels of oil and gas development activity that would need to be supported by industrial infrastructure are shown on Diagram 3.
Production Sharing Agreement awards to date in Azerbaijan alone have created a backlog of about 30 - 40 exploration and appraisal wells, including 20 commitment wells that must be drilled in the next three to four years. At present, rig capacity in Azerbaijan can drill four to six wells per year.
With completion of two more drilling rigs currently being upgraded (Shelf 3 and the new jack-up for Mobil and Elf), capacity in Azerbaijan should grow to about 10 wells per year. When PSA awards get underway in Kazakhstan, exploration drilling rig capacity there could be another 10 wells per year.
Since many of these wells will be targeting very deep formations, a typical drilling rig may only be able to drill two to three wells per year. The total requirement for exploration drilling rigs in the basin could be six to ten rigs drilling 12 to 20 exploration wells per year.
To achieve the production build-up rate shown previously could require the addition of 50 to 80 new production wells each year by 2010. Most of these wells will likely be drilled from dedicated platform rigs, but a support infrastructure to move thousands of tons of materials and hundreds of people into the region and onward to drilling locations in the Caspian Sea will be required.
In recent years, the state oil companies and their co-venturers have drilled only a few new wells in the region. As a result, the drilling support infrastructure is underdeveloped.
Support for drilling and production activities could require installation of 8 to 12 new offshore platforms each year by 2010. At present, there is one facility in the Caspian region that builds jackets.
With upgrading, it may be capable of building four to five jackets at a time. Many of the deepwater opportunities in the South Caspian could benefit from more recent advances in floating production systems technology.
AIOC is considering barge mounted production facilities for the Megastructure development that would be among the largest such vessels in the world. To date, there have been no structures of this type built in the Caspian.
This could be a major constraint on the pace of development that could only be dealt with by substantial new investments in fabrication facilities.
Finally, the requirement for skilled crafts people in the region should grow at the same rate as other development indicators. Within ten years, the requirement for skilled tradesmen could reach 8 to 12 thousand in the fabrication of production platforms and topside facilities.
At present, there are less than a thousand skilled workers active in the fabrication yards in Baku. Training programs and facilities to turn out qualified welders capable of working to unfamiliar Western standards will be required, as will management systems to ensure that the developers' requirements for quality, schedule compliance and safety can be met.
The Caspian Sea region is certainly "infrastructure challenged" for the potential oil and gas development activity levels in the next several years, assuming that exploration is successful.
During the Soviet era, economic policy and lower costs directed much of the oil and gas development funding to Siberia, resulting in the Caspian region being relatively under-explored and under-funded.
Within the Soviet Union, Baku was established as the center of the Caspian oil and gas industry, with offshore structure fabrication, manufacture of oil field equipment and support for the marine drilling and construction fleets.
Until the signing of the megastructure PSA in 1994, the existing infrastructure had seen little or no investment for a number of years. (Diagram 4)
Baku is the home of most of the Caspian offshore drilling fleet. At present, the fleet consists of 11 offshore drilling rigs. Only two of these, the Dada Gorgud and the Shelf 5, are currently functional.
As part of their Early Oil Project, AIOC upgraded the Dada Gorgud to Western standards to allow it to drill delineation wells on the Megastructure. The rig was then further upgraded for drilling deeper, higher-pressure wells, but is currently limited to 10,000 psi stack pressure and 250 meter water depth.
BP has just completed upgrading the Independence (Shelf 5), capable of drilling wells to 15,000 psi pressure and operating in 475 meter water depth. It is currently drilling the first well on the Shah Daniz prospect in about 200 meter water depth.
Baku has several facilities that could be upgraded to do much of the expected fabrication work in the South Caspian. The Shelfproyectstroi (SPS) yard, located just south of Baku, is one of the largest marine fabrication facilities in the world, covering about 270 acres.
Maximum annual throughput at SPS was about 60,000 tons of steel construction, putting it on a par with Gulf of Mexico yards.
However, SPS only built relatively small structures for the shallow water areas of the South Caspian. Major upgrades required at SPS would be rolling mills for the larger sections needed in modern deep-water structures, automated welding capability and load-out facilities for handling much heavier structures.
During AIOC's Early Oil Project, a joint venture between SPS and McDermott rebuilt the topside facilities for the Chirag 1 platform. In addition to SPS, Baku has several other smaller shipyards that could be upgraded to produce topside modules, subsea templates and other necessary steel fabrication.
The Caspian marine construction and support fleet has very limited capability relative to the projected activity levels. Kaspmornefteflot (KMNF), a subsidiary of SOCAR, operates all of the offshore construction and support fleet in Azerbaijan.
While there are a large number of vessels (over 350) of different sizes and types, most are no longer in working condition. SOCAR's intention is to lease vessels to contractors who will upgrade and operate the fleet. This has been done with a few key vessels for AIOC's Early Oil Project.
While there are a number of crane barge vessels in the KMNF fleet, there is only one, the derrick barge Azerbaijan, that is capable of any significant lifts for setting topside facilities onto platforms.
The vessel has a rated lifting capacity of only 1,500 tons. AIOC used this crane to set the topsides on the Chirag 1 platform in 1997.
While the vessel performed well, its limited lifting capacity was a severe limitation on topside design, resulting in 13 modules. This limitation on future larger platforms would make offshore installation and hook-up costs prohibitive.
Also, the Azerbaijan would become a constraint among multiple developers, as it would be tied up on any one installation for several months at a time.
Russia has a group of shipyards at Astrakhan that should be well positioned to build support vessels and offshore structures for the Caspian. Astrakhan has built numerous tanker ships, barges and supply boats, as well as the Shelf series semi-submersibles and the Khazar series of jack-up drilling rigs.
While the shipyards have not built any offshore structures, they should have the necessary fabrication areas, heavy cranes and skilled work force to build a wide range of facilities.
Astrakhan is also well positioned geographically at the outlet of the Volga-Don Canal System, making it a good location to reassemble vessels or modular structures arriving into the Caspian from the West.
Recently, the Mallard Bay posted barge drilling rig, now operating for the Offshore Kazakhstan International Operating Company (OKIOC) in Kazakhstan, was assembled and upgraded there.
Ship building and general fabrication facilities also exist at Neka in Iran. Recently, a jack-up rig has been upgraded there for work in Turkmenistan. Other minor facilities are possibly available at Atyrau and Aktau in Kazakhstan and at Krasnovodsk in Turkmenistan.
These would likely be limited to light fabrication and used as supply bases. Oil and gas development companies are initially concerned with industrial infrastructure required for building and supporting production facilities.
However, development of social infrastructure in the region is equally important in determining the pace of oil and gas exploration and development, and will be critical to the success of both the developers and the host country.
Social infrastructure is facilities and amenities that are generally provided for public use. These include public road and railway systems, airports, power generation and distribution facilities, general housing, schools, recreation facilities, and so on.
While national and expat staff employees of oil and gas developers may make use of these types of infrastructure, these facilities would not generally be built or owned by oil and gas companies. Instead, the host country governments should provide the majority of this infrastructure from general tax revenues.
The social infrastructure of the Caspian basin is largely pre-existing from the Soviet Union. Like the industrial infrastructure, it has suffered in recent years from a lack of investment in capital upgrades and maintenance.
The countries in the Caspian region in recent years have been faced with declining economic output, employment, tax revenues and a net reduction in population. Without sufficient capital, and with other priorities for rebuilding their economies, little money has been put into infrastructure.
* Discovered Resource Estimate (rounded)
`By K.T. (Terry) Koonce
President, Exxon Ventures (CIS), Inc.
© 2000 Mena Report (www.menareport.com)