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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

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This World Class Gas Field Is About To Start Producing

Nat Gas

99 percent ready and poised to start this September. This is music to the ears of Azerbaijan, as well as to European technocrats intent on bringing Russia’s foothold in Europe to a minimum. Shah Deniz 2 will endow Azerbaijan with a new role, that of a European gas actor, which can not only introduce a new supply route, but perhaps contribute to the redrafting of Europe’s existing energy-sector rules, a function of its success. The 1.2 TCm (42.5 TCf) gas field has been in operation since 2006 and its first-phase reached peak production in 2016 (10 BCm or 360 BCf), it is the second phase which was closely followed for the last ten years because it will be Shah Deniz 2 which will herald the age of Azerbaijan as a major gas exporter. Whether this label will last for long is a different issue altogether, 2018 ought to be the year of jubilation.

Covering an area of 860km2 some 70 kilometers off the Azerbaijani Coast, the Shah Deniz prospect was known to geologists since 1954. However, due to the prioritization of other structures it was officially discovered only in 1999 when BP, the operator, spudded its first three exploration and appraisal wells at total depth of 5-6km. Subsequently in 2007 BP discovered a new reservoir, larger and higher-pressure, beneath the northern flank of Shah Deniz at a depth of 7.3 km, which evolved into Shah Deniz 2. Shah Deniz 2 peak production of 16 BCm per year, to be reached by 2023 (plateauing for 7-8 years at that level), is more than half of Azerbaijan produces currently (29 BCm/year). More than that, its role in boosting Azerbaijani gas exports is further underscored by the fact that a third (roughly 10 BCm) of produced gas in Azerbaijan is reinjected for the purposes of enhanced oil recovery.

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Shah Deniz (means “King of the Sea”) shareholders have three market outlets to choose from: domestic market, EU countries and Turkey. Turkey holds a special place in Azerbaijani energy policy, largely based on the all-around cultural and political ties that bind the two countries. Turkey has been the only stable export outlet for Azerbaijani gas, under a 2003 contract providing for up to 6.6 BCm/year of supplies, aside from Georgia which has been receiving 1-1.5 BCm/year. In 2011, Baku and Ankara consolidated their energy strategic partnerships, with the Turkish company BOTAS signing up to secure 6 BCM/year of Shah Deniz II supplies. It is to be noted that Shah Deniz 2 gas will hit the European markets only after the Turkish side of the deal is duly fulfilled, i.e. not before 2020.

After Turkish appetite for Shah Deniz gas had been satiated, the remaining 10 BCm/year will be supplied to Europe via the Transanatolian Gas Pipeline (TANAP) which will subsequently stream into the Transadriatic Pipeline (TAP). Transitting Greece and Albania on its way to Italy, TANAP/TAP will add a healthy new element to South Europe’s gas supply possibilities. It also paves the way for the emergence of the EU-propelled idea of the Southern Gas Corridor, Brussels sees TAP, ironically enough exempted from the Third Energy Package, as the initial enabler of this initiative. EU officials have also been placing their hopes in a Turkmenistani gas route, however, absent an all-encompassing Caspian demarcation agreement this has zero chances of happening. Therefore, Shah Deniz 2 is the best pick of Brussels now.

Beyond Shah Deniz, Azerbaijan’s prospects might not be that rosy. Absheron, located roughly in mid-distance between Shah Deniz and the country’s legacy field, Azeri-Chirag-Gunashli (sometimes denoted as ACG), was widely believed to be the next best thing. Soon after the deepwater field’s discovery, the operator company Total claimed Absheron might be producing 5.15 BCm/year (182 BCf) straightaway, last year, however, it admitted the field’s first-phase development will allow only for 1.3 BCm/year and the 5 BCm/year benchmark will be only be attained after the second phase is brought on in 2023. The full volume of phase-one production will be marketed on the domestic market, shielding it from sporadically occurring gas shortages.

The national energy company of Azerbaijan further safeguarded itself from any potential gas shortage in the future (as new volumes from Shah Deniz-2 are exported, falling output from legacy fields has to be counterbalanced with something) by signing a gas imports agreement with Gazprom in November 2017, stipulating that SOCAR is entitled to buy 1.6 BCm of gas per year. This marks a shift in Russo-Azerbaijani gas flows, given that for more than a decade Russia supplied no gas whatsoever to Azerbaijan, moreover it imported in 2010-2015 it to its southern regions. The first symptoms of such a change emerged in 2015 when Gazprom signed a mid-term sales contract with the Azerbaijani methanol producer, AzMeCo. The peculiarity of this 2 BCm/year contract was that SOCAR’s fixed preferential rate of $130/MCm was much more preferable than Gazprom’s formula-based one, however, due to supply shortages AzMeCo was forced to go along.

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Beyond Shah Deniz-2 and Absheron, Azerbaijan has a couple of prospects that could potentially make it. The Umid and Babek fields are closer to shore and so far played no significant role in the country’s gas sector as Babek is largely unappraised and Umid is producing from two wells a mere 0.75 MCm/year (there were rumours of substantial field pressure declines). SOCAR intends to increase production to a peak level of 5 BCm/year in the 2020s, however, it most probably will not be able to deliver on its promise – among others because ten wells were drilled at the Umid block in Soviet years, finding no commercial deposits of gas. No doubt, today’s possibilities surpass those of 30-35 years ago, still, it would be a rare feat if a field could shoot up like that. Babek is the continuation of the Umid field further off shore, it remains to be seen if the 5 BCm/year peak production estimate can be achievable.

Perhaps the most interesting Azerbaijani prospect is the Alov-Araz-Sharg field, which, as it happens, is disputed between Baku and Teheran. Its estimated 395 BCm of gas hidden in depths of 600-800 meters will not see the light anytime soon because the two sides are anything but close to a maritime frontier demarcation agreement. Moreover, both sides tried to claim the territory in the past, sometimes resorting to bellicose moves – Iran even sent a military warship and airplanes in 2001 to frighten off BP’s survey vessels. Thus, Azerbaijan’s short-term prospects are very upbeat with the $28 billion Shah Deniz 2 finally hitting the market, however, if one is to look into the murky shade of the long-term future, the contours of it are very opaque.

By Viktor Katona for Oilprice.com

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