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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Oil Rich Azerbaijan Looking for Investors

The prosperity of former republics of the USSR, which collapsed in December 1991, has primarily been driven by the development of energy resources in the post-Soviet era, notably around the Caspian. Out of the debris of the Soviet Union have arisen four petro-states ringing the Caspian – the Russian Federation, Turkmenistan, Kazakhstan and Azerbaijan.

The possibilities there have focused the attention of investors for the last twenty years. More than a decade ago Vice President Dick Cheney, then Halliburton CEO, remarked, "I can't think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian."

While all four nations have their allure, none has gone further to attract Western investment than Azerbaijan. In September 1994 Azeri President Heydar Aliyev signed a $7.4 billion "deal of the century with 11 Western oil companies to develop a number of sites in both onshore and offshore Azerbaijan, including Chirag and the offshore Guneshli oil fields.

And the present? Future?

On 2 February State Oil Company of the Azerbaijani Republic (SOCAR) first vice president Hoshbakht Yusifzade said during an interview with the local press that hydrocarbon reserves in Azerbaijan are now estimated to be 10 billion tons oil equivalent (toe), remarking, "So far, recoverable oil and gas condensate reserves in Azerbaijan have been estimated at 2 billion tons, and gas at 2.55 billion cubic meters (bcm.) Now, oil and condensate reserves are forecast at 2 billion tons and gas at 3.45 trillion cubic meters (tcm), and the country's overall reserves are estimated at 10 billion toe."

Yusifzade added that Azerbaijan intended to increase natural gas production 11 percent in 2012 as more offshore Caspian projects come online, saying, "Gas production will total 28.28 bcm in Azerbaijan in 2012, 8 bcm of which will be produced from the Shah Deniz field, 13.1 bcm of which will be associated gas from the Azeri-Chirag-Gunashli (ACG) block of fields, and another 7.18 bcm of which will come from fields developed by SOCAR."

Two decades ago, as Azerbaijan began to dream of developing its oil reserves and attracting Western investment, its biggest concern was how to transport the oil to Western markets without using the old Soviet-era pipeline network, giving Moscow undue influence over Azerbaijan?

The solution was the construction by an international consortium of the $3.6 billion, 1 million barrel per day (bpd), 1,092-mile Baku-Tbilisi-Ceyhan pipeline, first proposed in 2002, which began pumping operations in May 2005, taking nearly a year to fill. The BTC transits high-quality crude from Azerbaijan's offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan.  British Petroleum heads the BTC consortium and, besides operating the pipeline, has a 30.1 percent share of the project, exceeding that of SOCAR, which owns 25 percent. Other Western investors include Chevron (8.9 percent), Norway's StatoilHydro (8.71 percent), Turkey's Turkiye Petrolleri Anonim Ortakligi (6.53 percent), Italy's Eni/Agip group and France's Total (5 percent apiece), Japan's Itochu (3.4 percent), the Japanese Inpex Corp. (2.5 percent) and the American Hess Corp. (2.36 percent). Accordingly, Western concerns receive 75 percent of BTC's revenues.

Try matching those rates of ownership or income revenue in Moscow, Ashgabat or Astana.

But Azerbaijan lives in a tough neighborhood, which the events of August 2008 threw into high relief.

About 11 p.m. on 5 August 2008 an explosion occurred on the BTC pipeline segment in eastern Turkey’s Yurtbasi village. After Ankara was notified, valves 29 and 31 were closed as officials waited for the oil contained in the 4-mile segment of No. 30 terminal to burn out. Following the explosion BTC operator British Petroleum declared force majeure.

The separatist Partiya Karkeren Kurdistan (Kurdistan Workers' Party, or PKK) claimed responsibility. The stoppage caused alarm in Baku, which Azerbaijan's economy, now one of the world's fastest-growing, which projected revenues from BTC as high as $230 billion over the next two decades, as BTC supplies more than 1.1 percent of global daily energy needs.

Two days later, Georgia bombarded South Ossetia and the Russian Federation responded in kind, igniting a brief but violent nine-day war.

Accordingly, Azeri oil exports were caught in the hostilities. As BTC was closed, seeking an alternative route, BP switched to the recently reopened 550-mile 140,000 bpd Western Route Export Pipeline (WREP), better known as the Baku-Supsa line, which opened in 1999 and was running at about 90,000 bpd. On August 12 BP announced that it was suspending shipments through Baku-Supsa, as well as the South Caucasus Pipeline (SCP), which transported natural gas from Baku to Turkey via Tbilisi.

Completing the lock-in of Azeri westward oil exports, the fighting caused authorities to suspend seaborne shipments from Batumi (200,000 bpd) and Poti (100,000 bpd), both supplied by rail. Poti was closed on August 8 following reported Russian air strikes. Adding to the grim picture, the fighting also closed exports from Kulevi, Georgia’s third Black Sea oil terminus, which opened last year and is capable of shipping 200,000 bpd. In a fiscal bonanza for Moscow, BP resumed sending Azeri crude northwards through Transneft’s Baku-Novorossiysk pipeline, which Azerbaijan had quit using following the BTC becoming operational in May 2006.

In an unexpected gesture that surprised many foreign analysts, Azerbaijan also delivered its first oil cargo of 100,000 tons to the National Iranian Oil Terminals Company's Caspian Neka port facilities for an oil swap.

BTC was reopened on 25 August.

For Baku, the three-week export interruption was costly. The U.S. Department of Energy estimated that Azerbaijan lost over $1 billion in export revenues, while subsequent BTC repairs added to the burned oil and firefighting expenses added another $20 million to Baku's tab.

And now 3 ½ years later?

The Caucasus is still not the world’s most quiescent place, but one should note the comments made during a 26 January interview by the British ambassador to Azerbaijan, Peter Bateman, with Azeri-Press Agentliyi (APA), who said, "The UK is the largest foreign investor in Azerbaijan and BP's partnership with Azerbaijan has been a huge success story for both parties. Azerbaijan is a home or a regular destination for a large British business community. Azerbaijan is strategically important not just for the UK but for Europe as well since the country holds a key to diversifying Europe's energy supply."

If Her Majesty’s ambassador is so optimistic, what greater reassurance do investors need?

By. John C.K. Daly of Oilprice.com




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