Let the good times roll
Azerbaijan has seen oil booms come, and it has seen them go. The nineties version might involve larger sums and English-speaking foreigners, but it amounts to much the same thing. Only a few years ago, the Caspian basin was being hailed as a new Persian Gulf. Now, if the doom-sayers are believed, it was all a big hoax, propagated by over-zealous policy makers in the US State Department
The answer, of course, lies somewhere in between. However, aside from the prolific Azeri-Chirag-Guneshli (ACG) fields, operated by the Azerbaijan International Oil Company (AIOC), offshore Azeri oil projects are not yet coming up with the goods. Elsewhere in the region, expectations are largely being met, leaving Azerbaijan, says one analyst, ?as a bit-part player?.
Recently, the news has been relentlessly bad. The disbanding of Caspian International Petroleum Company (Cipco), following the discovery of commercially insignificant volumes of hydrocarbons at the Karabakh prospect in the Caspian, was a highlight of discouraging events. Cipco, formed in early 1996, had invested about $120m. AIOC scaling back
Around the same time, AIOC announced that it would scale back its investment programme over 1999 by 20%. Even this so-called ?contract of the century?, it seems, has felt the impact of the oil price collapse. Plans for 1999, had included an exploration well to be drilled in the deep-water section of the Guneshli field, and an appraisal hole on the Azeri field. A total of 16 wells are forecast to be on stream by end-1999 ? eight fewer than earlier planned.
And in another field in which BP Amoco is involved, the Shah Deniz offshore concession, consortium members have been eager to play down the talk of the field as a bell-wether for the region. In March, drilling on the SDX-1 was suspended after the engine on the rig failed.
Various sources suggested that the necessary depth had not been reached. The target, around the 6,300 metres mark ? the deepest well so-far drilled in the Caspian Sea ? was expected to be reached by the end of last month. But the well might not show the hoped-for amounts of oil. ?It?s got lots of gas,? said one analyst. ?It could be major gas discovery ? probably at about half the size of Karachaganak. But discovering gas when you?re looking for oil is a major shock to the system.?
After discovering non-commercial amounts of oil following exploration drilling in the Dan Ulduzu and Ashrafi prospects, the North Apsheron Operating Company (NAOC), formed in 1997, announced its disbandment. The consortium had invested over $70m in three exploration wells.
But the gloominess of some oilmen in Azerbaijan seems not to have affected others. Exxon and Mobil were both preparing to sign production-sharing contracts with Socar when President Aliyev was in Washington, at the beginning of this month.
Required investments were thought to exceed $2bn each. Exxon?s contract, in which the company will act as operator and hold 50% equity, covers the Zafar and Mashal deep-water structures, with estimated reserves of 120m tonnes.
Mobil?s 30%, and operator, stake is said to cover the Lerik-Deniz, Janub, Savalan and Dalga fields, holding estimated reserves of 150m tonnes.
The two US majors might have been reassured by the discovery made by LukArco, the joint venture between Arco (46%) and Russia?s Lukoil (54%). Initial analysis of a 2-D seismic survey made of block D-222 suggested a ?major oil deposit, possibly the largest ever discovered in the Caspian itself?, according to a LukArco statement.
The excitement was likely to affect negotiations between LukArco and Socar concerning further exploration plans for the block. LukArco holds a 60% interest and is operator of the Yalama concession, which includes D-222. The news created ripples, and may, at least, have shored up some investor confidence.
BP Amoco is holding firm. The company holds major stakes in AIOC, NAOC and Shah Deniz, and sees Azerbaijan as an area central to its international operations. If the company successfully swallows Arco, its presence in the country will be reinforced by stakes in most of the main development consortia.
While attention has naturally focused on the massive contracts signed in Azerbaijan in the last few years, the smaller companies have deserved at least as much attention. Ramco, a founding partner of the AGC contract, completed the signing of a production-sharing agreement in a ceremony at 10 Downing Street, the home of the UK?s Prime Minister.
The contract was for rehabilitation work on the onshore Muradkhanli acreage, which includes the Muradkhanli, Jafarli and Zardab fields Ramco?s place in Azeri oil-lore is secure.
Steve Remp, the company?s chief executive, went on a mission to the then-republic of the USSR in 1989 ? the first Western oilman into Azerbaijan since the 1920s.
Now, the company is well positioned to exploit its experience in the country. ?Everything is moving ahead on Muradkhanli,?? says Lisa Newman, from the company?s headquarters in Aberdeen. ?We?re planning to start drilling a new well next month. It could mean first oil from the acreage by August, this year.? Total investment in the development programme is about $12m.
Ramco?s share of the development is 50%, with state oil company Socar?s oil affiliate holding the other half. Reserves at Muradkhanli are approximately 5bn barrels of oil in place. Modernising fields
Ramco?s operations in the country also include the company?s rights to shallow-water Guneshli (a part that was left out of the original ACG negotiations) ? a producing field in need of rehabilitation. Conoco, Ramco?s partner in the field, is negotiating on behalf of the two companies with the government.
Ramco?s optimism about its prospects in Azerbaijan comes from the knowledge that the current low oil prices have helped, and not hindered, the company?s ambitions in the country. ?It hasn?t affected our appetite,?? says Newman, of last year?s collapse in prices. ?Quite simply because we are one of the few cash-rich exploration and production companies at the moment with no debt.
Also, countries like Azerbaijan, we?re not facing any competition. Take Muradkhanli, onshore wasn?t of any interest to any of the majors. We?ve got the cash to exploit these little niches.? On the back of Muradkhanli alone, which aims for production of about 75,000 barrel a day (b/d) by 2005, Ramco is likely to become the leading foreign player in the onshore sector.
Crude from the field will likely be exported from the western or northern routes. However, the serious investments required to push Muradkhanli well past the 100,000 b/d mark may demand heavier wallets than even the relatively cash-rich Ramco carries.
And despite their status as ugly sisters beside the mega-projects signed in Azerbaijan in the last five years, the onshore deals are worth looking at. That was the judgement of a recent report by the analysts Wood Mackenzie, entitled PSCs onshore Azerbaijan ? Small But Perfectly Formed?
Aside from Ramco?s Muradkhanli rehabilitation programme (which Wood Mackenzie deemed ?an attractive prize with a risk comparable to an exploration venture?), independent Frontera, in Kursanga-Garabagly, and Commonwealth/Arco, in SW Gobustan, were also analysed. But for the low oil price, claimed Wood Mackenzie, the majors might also have been enticed into the onshore province.
While volumes in the onshore are not as great as those believed to lie offshore, operating costs, and the flexibility allowed in onshore development, make prospects attractive. For the time being, however, participation in the Azerbaijan onshore province seems destined to be a minority sport.