Karabakh find steadies Azeri nerves
Socar and Equinor’s 440mn bl discovery in the Caspian could mitigate declines at Azerbaijan’s major fields
Socar’s offshore discovery last month offers Azerbaijan’s oil sector a much-needed shot in the arm as it tries cope with plummeting oil prices and declining production. The find—made with the state-owned oil company’s 50/50 partner Norway’s Equinor—is in the Karabakh field 120km east of Baku in the Azeri sector of the Caspian Sea. Reserves are estimated at more than 440mn bl.
Karabakh is close to the Socar-operated shallow water Gunashli field and the giant BP-operated Azeri-Chirag-Gunashli (ACG) development, and Socar reckons it is large enough to justify commercial development. Nine wells are planned for production, of which six will be for crude extraction and three for water injection. Production is expected to start in 2021-22.
The discovery will come as a relief to Socar as the ACG field, which accounts for 80pc of the country’s liquids output, is now in decline with more than half of its estimated reserves of 6bn bl already produced. The company is under pressure to secure organic growth prospects to offset that drop. Company chiefs are bullish, with Socar president Rovnag Abdullayev saying development of Karabakh would “significantly contribute to Azerbaijan’s oil income”.
That said, there is no immediate pressure to build up production given Azerbaijan’s recent commitment to cut output. The country pledged to reduce production by 164,000bl/d for the next two months, to 554,000bl/d, at the 12 April meeting of Opec and non-Opec producers. Production will rise to 587,000bl/d in the second half of the year. ACG alone produced an average of 535,000bl/d last year.
440mn bl – Karabakh reserves
Despite Socar’s public confidence about the prospects for its new discovery—claimed to be the first new find since Azerbaijan gained independence from the Soviet Union—the recent collapse in oil demand could still challenge the commercial underpinning of capital-intensive upstream projects in the Caspian.
Like other producers, Baku will be watching anxiously to see whether the latest Opec deal succeeds in restoring strength to oil prices, given the sizeable cost borne by Socar and its partners in maintaining Caspian output.
Average prices for Azeri crude were $63/bl in the first two months of this year, above the $50/bl level the country needs to cover its budget. But the post-coronavirus price drop renders the financing climate highly challenging. This is particularly acute at projects such as Karabakh, where the reservoir is 3,400m in depth—deeper than the ACG field—but the reserves are substantially smaller.
Socar’s confidence rests on its tried and tested ability to squeeze barrels out in the most difficult circumstances as part of a strategy of ‘managed decline’. The company claims a recovery-efficiency ratio of 5pc on mature fields in the ACG contract area. In shallow water areas such as the Gunashli field, the production efficiency ratio is higher still, at 8-9pc.
Other new production will emerge from the Azeri-Central-East (ACE) platform within the ACG field, which is expected to produce 100,000bl/d and 350mn ft3/d of gas when it comes onstream in 2023.
That the likes of Equinor and BP are still committing budgets to E&P in Azerbaijan is a significant boost for the authorities. A European player quickly replaced US major Chevron, which sold its 9.6pc stake in the ACG field to Hungary’s Mol in November 2019. And while Equinor sold its 15.5pc share in the Shah Deniz gas development in the Caspian five years ago, it is still committed to new oil developments in Azerbaijan. After drilling in the Karabakh field, the Norwegian company plans to drill the Aypara exploration well in the Ashrafi-Dan Ulduzu-Aypara licence in Azerbaijan.