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Caspian players plot oil revival

Gas has made most of the recent running, but major producers like Azerbaijan are focusing on boosting crude oil production too

Giant natural gas developments such as Azerbaijan's Shah Deniz have captured the headlines, but the Caspian region's crude oil producers are also ramping up activity as they seek to stem declines in maturing basins.

Those plans hit an expected hitch late last year, as two majors, ExxonMobil and Chevron, signalled their intention to pull out of the BP-led Azeri-Chirag-Guneshli (ACG) oilfield development off Azerbaijan, amid indications that costs had increased.

The ACG field produced 584,000bl/d on average last year and the prospect of the loss of the two US players on Azerbaijan's main production basin has prompted speculation that expansion ambitions for the field — where output is expected to be flat this year-could be affected.

Media reports in early April suggested that BP and its partner, state-owned Socar, would have to postpone a final investment decision on the next stage of development at ACG. But BP tells Petroleum Economist that the firm is committed to ACG and that the consortium is moving towards sanctioning the Azeri Central East (ACE) project, which is expected to add 100,000bl/d.

And there are "absolutely no obstacles" facing the FID, says Socar, although there might be potential interest from various sides to buy shares in ACG, considering the huge reserves and high profitability of the field. Socar maintains that ACG is a major production field, and it aims to maintain stable production levels in years to come.

Officials have also played down speculation that Japan's Inpex — already a 9.3pc stakeholder in ACG — could be in the running to take over the ExxonMobil and Chevron shares (worth a combined 16pc), which would render it the second-largest partner in ACG after BP. BP itself is reported to be interested in buying up some or all of the US companies' stakes, but sources suggest to Petroleum Economist that this is premature.

ACG and beyond

Socar needs ACG progress, as Azerbaijan's overall crude production has slipped in recent years. Its current output of 776,000bl/d is about 20,000bl/d below September 2018 volumes, and well down on the all-time high of over 1mn bl/d recorded in 2010. Production would be even lower, were it not for rising volumes of condensate from the Shah Deniz gasfield, which are estimated to average a hefty 55,000bl/d.

Azerbaijan's Karabakh field, a 50/50 joint venture between Norway's Equinor and Socar, will see increased drilling this year, with the prospect of further condensates and a significant oil outcome by 2020, Socar says.

It also expects more condensate, as well as natural gas, to come from the Umid-Babek and Shafag-Asiman fields. The semi-submersible Heydar Aliyev drilling rig is finalising drilling at the Absheron field, then will start drilling at Shafag-Asiman, where condensate volumes could mirror those at Shah Deniz.

Kazakhstan's Caspian portion has seen impressive oil output growth

Another significant drilling operation is set to take place within the scope of the shallow-water Absheron peninsula project this year, says Socar, with the necessary drilling capacity secured.

BP plans to shoot seismic on Block D230 this year, north of the Absheron peninsula, and may extend the survey to the south to the Ashrafi-1 well location in Ashrafi-Dan Ulduzu-Aypara, or Adua, exploration area. The firm is confident of the field holding significant oil reserves, even in a completely unexplored area. A discovery there would further bolster BP's position and help offset production declines at other fields.

The net effect of these activities could swell production in the coming years. By 2022, Azerbaijan's crude and condensate output could rise to 880,000bl/d, according to a forecast from Fitch Ratings' director of natural resources Dmitry Marinchenko.

"At least for the Azerbaijan sector, things are looking quite good. Russia's Lukoil is interested in getting on with exploratory projects, such as Umid-Babek west of Shah Deniz," says Philippe Weber, associate energy director at consultancy IHS Markit.

Weber points out that the largest of Azerbaijan's three oil export pipelines, heading to Turkey, has substantial spare capacity. "They are looking to fill that, and liquids are always a good fit. With gas, the problem is you need the market and the capacity to export it. What will really pay off for Azerbaijan is the liquids," he says.

Kazakhstan on the up

In contrast to Azerbaijan, Kazakhstan has seen more impressive oil output growth in recent years, thanks largely to the boost in production at the Kashagan field. This first phase of this project has reached 380,000bl/d, and upgrades to gas injection facilities, additional drilling and other methods could boost output by about 100,000bl/d above the initial target. The partners in the North Caspian Operating Company consortium have adopted plans to increase raw gas injection at the field.

Another Kazakhstan field, Tengiz, produced almost 650,000bl/d in the first half of 2018 and is set to reach its peak capacity of 900,000 bl/d by 2022.

Such activities contradict perceptions of Caspian crude developments as being shaped by "managed decline". Instead, analysts see more oil production emerging from the Caspian in coming years. "For a basin that reported its first discovery in the mid-19th century, the fact that the biggest Caspian discoveries were only made 130 years later [in the 1980s and 90s] is suggestive that the potential of the basin is still substantial," says Weber.


Difficult neighbourhood

Last August, all five Caspian littoral states — Azerbaijan, Russia, Turkmenistan, Iran and Kazakhstan — together signed the Convention on the Legal Status of the Caspian Sea.

This agreement lays out rules and obligations for dealing with boundary issues and recognises each country's right to 15 miles (24km) of sovereign waters, plus a further 10 miles for fishing. The demarcation agreement promised to give a boost to joint production and export efforts in the Caspian.

Bilateral cooperation deals have emerged. Azerbaijan's Socar signed a memorandum of understanding in January 2019 with Kazakhstan's KazMunaiGas to increase cooperation, the former taking delivery of a floating drilling rig for use in drilling operations in the Azerbaijani sector of the sea. Nevertheless, Caspian states still face sizeable differences that will block their oil and gas ambitions.

For Iran, hit hard by the US withdrawal from the Joint Comprehensive Plan of Action and the re-imposition of US sanctions last year, the demarcation deal appeared to offer a modicum of protection through enhanced cooperation with its Caspian neighbours.

"On the one hand, there was the decision of the US to withdraw from the nuclear agreement. But at the same time the Caspian demarcation deal provides strict commitments for security cooperation and that will be a stabilising factor for regional security," says Stanislav Pritchin, executive partner of the Expert Center for Eurasian Development.

Despite this, Iran's chances of attracting IOCs to its portion of the Caspian appear slim. Although Iranian oil ministry officials have held talks with IOCs that were engaged in deepwater drilling with Azerbaijan's Socar in the Caspian, the Caspian demarcation agreement is unlikely to afford the Iranians insulation from the long arm of US sanctions.

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