Status of Azerbaijani offshore oil and gas contracts as of December 2013

Baku, Azerbaijan, Dec. 23

By Emil Ismayilov - Trend:

Azeri-Chirag-Guneshli (ACG)

The Azeri-Chirag-Gunashli PSA was signed in September 1994. The agreement provides for the development of the contract area within 30 years. Production at the Chirag field commenced in 1997, at Central Azeri in early 2005, West Azeri in early 2006, East Azeri in late 2006, and at deepwater Gunashli in spring 2008.

In early September 2012, the U.S. oil company Hess agreed to sell its share to ONGC Videsh.

In March 2013, the Hess Corporation announced that it had completed the sale of its stake in the Azeri-Chirag-Guneshli project and the Baku-Tbilisi-Ceyhan (BTC) oil pipeline to the Indian ONGC Videsh.

Under the deal, Hess sold to ONGC Videsh its 2.72 percent stake in the ACG project and 2.36 percent in the BTC pipeline for $1 billion. After tax the net profit from the deal totaled $884 million.

The contract for development of the Azeri-Chirag-Guneshli large offshore field was signed in 1994. Shares are distributed as follows: BP (operator at Azeri-Chirag-Guneshli) - 35.78 percent, Chevron - 11.27 percent, Inpex - 10.96 percent, AzACG - 11.65 percent, Statoil - 8.56 percent, Exxon - 8 percent, TPAO - 6.75 percent, Itochu - 4.3 percent and ONGC - 2.72 percent.

Project Status

As of October 30, some 318 million tons of oil have been extracted since the start of development of Azeri-Chirag-Guneshli.

In this period some 88.7 billion cubic meters of gas were produced at the block. The volume of Azerbaijan's profit oil from ACG in this period stood at 165 million tons.

Also in 2013, as a result of active works, the partners in development of the field managed to overcome the decline in oil production and stabilize this indicator.

The project on increasing the production at the Chirag field, called Chirag Oil Project (COP), by means of constructing a new platform - West Chirag, is important within ACG.

The jacket and topsides of the new platform were sent to sea for their installation this year. Plans are for the new platform to be commissioned in the near future. Currently, pre-commissioning and testing are being completed as part of the project.

The Chirag oil project includes construction of the 170 meters deep West Chirag platform that will be installed between the already active Chirag and Guneshli platforms.

Investments totaling $6 billion are projected for the Chirag oil project.

In total, over 300 million barrels of oil are expected to be produced during the project before the ACG contract terminates in 2024.

The estimated daily volume of Azeri Light crude oil from the new platform, to be built during increasing oil production at the ACG, will hit 183,000 barrels. The expected daily volume of associated gas from the new platform will exceed 6.5 million cubic meters. The estimated daily volume of gas pumped at the platform will hit 2.3 million cubic meters.

Shah Deniz

Under the documents signed in Baku on December 17, the contract on development of the Shah Deniz was extended from 2036 to 2048, and equity interest of SOCAR and BP (operator of the project) in the project increased to 16.7 and 28.8 percent respectively.

SOCAR acquired 6.7 percent of Norwegian Statoil's share in the project for development of Azerbaijani Shah Deniz gas and condensate field and the South Caucasus gas pipeline. In turn, the British BP acquired Statoil's 3.3 percent share in the Shah Deniz project and the South Caucasus gas pipeline.

The sales of Statoil's assets in Azerbaijan totals $1.45 billion. The deal will come into force on Jan. 1, 2014.

The contract on development of the off-shore Shah Deniz field was signed on June 4, 1996. The Shah Deniz participating interests (new share distribution after the purchase and sale transaction) are: BP (operator) - 28.8 percent, Statoil - 15.5 percent, NICO - 10 percent, Total - 10 percent, Lukoil - 10 percent, TPAO - nine percent, SOCAR - 16.7 percent.

The proven reserves of the Shah Deniz field are estimated at 1.2 trillion cubic meters of gas and 240 million tons of condensate.

Project status

As of Oct. 30, some 46 billion cubic meters of gas and more than 12 million tons of condensate have been extracted since the beginning of the fields' development.

Around 29 billion cubic meters of gas have been exported since the beginning of the Shah Deniz gas condensate field development in Azerbaijan.

Some 25 billion cubic meters of the total gas volume exported from the field went to Turkey and 3.4 billion cubic meters to Georgia. The gas is also supplied to the pumping stations of the Baku-Tbilisi-Ceyhan pipeline.

Earlier, peak production at the field in the first stage of development was projected at nine billion cubic meters of gas and 50,000 barrels of condensate.

However, according to the new plans, the annual production volume of gas as part of Shah Deniz's first phase of development is planned to increase to 10.4 billion cubic meters. An additional 1.4 billion cubic meters as part of the new contract will be sold to SOCAR. The cost of selling additional volumes has not been disclosed due to commercial confidentiality. Gas is being produced at the field from five wells.

The most important event of 2013 was the adoption of the final investment decision on the second phase of the field development on Dec. 17.

The advance drilling of more than 20 wells is underway as part of the second phase of the field development.

Two major contracts were signed with Tekfen-Azfen and AMEC-Tekfen-Azfen (ATA) consortiums for conducting construction works as part of the second stage of development of the Shah Deniz gas and condensate field, according to a message from BP Azerbaijan. The value of the first contract is $998 million, and the value of the second contract is $974 million

The work under first contract is to commence in January 2014 with completion expected in 2018. In particular, the scope of work for this contract includes construction of the main gas and condensate processing facilities at the Sangachal terminal, gas, condensate and MEG pipeline installation from the offshore pipeline beach landing site to the terminal facilities and brownfield works in the existing Sangachal Terminal.

The second contract is for the fabrication, load out and offshore hook-up and commissioning of the topsides units of the two Stage 2 platforms - Production and Risers platform (SDB-PR) and Quarters and Utilities platform (SDB-QU) within five years.

The total cost of implementing the second phase of the Shah Deniz field is estimated at more than $ 25 billion.

An additional16 billion cubic meters of gas a year will be extracted within the second stage of field development. Around 6 billion will be delivered to Turkey and 10 billion to Europe. It is predicted that gas production will be brought up to 24 billion cubic meters a year within the second stage of field development.

Long term, the partners developing the field are also considering implementing a third stage of development based on the results of an exploration well drilled at the field in 2007 (the deepest well drilled in the Caspian Sea so far). The discovery of a new productive layer shows promise of a grand future for the field after the second stage of its development. But taking into account the high pressure, new technologies and exploration operations to develop these reserves will be needed.

Absheron

Absheron project participants include SOCAR (State Oil Company of Azerbaijan) - 40 percent, the French company Total - 40 percent and Gaz De France Suez - 20 percent.

The contract on the Absheron field was signed Feb. 27, 2009 between SOCAR and Total. Later Total sold 20 percent of its equity participation in the contract to the company Gaz De France Suez. This is the most major oil and gas contract concluded in Azerbaijan recently.

Project status

Discovery of the deposit was announced in September 2011. A decision about sidetrack drilling of the first exploration well was made to specify the data. The work was completed in 2012.

The results of the first exploration well indicate the existence of commercially attractive gas and condensate reserves. According to geologists of the State Oil Company of Azerbaijan (SOCAR), the reserves 'Absheron' structure could amount to 300 billion cubic meters of gas and 45 million tons of condensate.

Currently, the work in the field is not being carried out due to a lack of free rigs. All rigs are being used to carry out work at the "Azeri-Chirag-Guneshli" block and "Shah Deniz" field.

The construction of a new floating rig has begun in Azerbaijan. It will be used primarily for the needs of SOCAR. However, an additional three new rigs are needed for developing the field and conducting exploration drilling at prospective structures in the country.

The drilling of the first appraisal well at the "Absheron" field in the Azerbaijani sector of the Caspian Sea is expected in 2017. The first gas from the field is expected by the end of 2020.

Bahar and Gum Deniz

On Dec.22, 2009, SOCAR signed a PSA contract with Bahar Energy Limited for the exploration, rehabilitation and development of the Bahar and Gum Deniz offshore fields in the Azerbaijan sector of the Caspian Sea. Under the contract, SOCAR's equity is 20 percent and Bahar Energy Limited-80 percent.

Bahar Energy Limited was registered in the Jebel Ali Free Trade Zone in the UAE. SOCAR signed a memorandum of understanding with the firm on April 16, 2009.

Project Status

The contract consists of two parts. The first envisages the rehabilitation and stabilization of production at the block of fields and the second - the exploration of the Bahar-2 prospective structure.

Roughly 58 wells are to be drilled at the Gum Deniz and Bahar oil and gas fields over the next few years.

Around 101 wells are planned for re-completion at the fields (48 at "Gum-Deniz" field, and 53 at "Bahar"). Six new oil platforms are planned to be constructed and installed.

Eight old platforms are to be renovated and modernized. Plans are to hold a two-dimensional (2-D) seismic survey at "Gum Deniz" oil field and "Bahar" gas field, and a three-dimensional (3-D) seismic survey in the exploration area of "Bahar-2" prospective structure.

The total production is estimated at 122 billion cubic meters and 84 million barrels of condensate within the first phase of the plan for rehabilitation of Bahar field (the implementation period has already been specified).

Oil production within the "Phase 1" (implementation period is not specified) of the plan for the rehabilitation of the "Gum Deniz" field is estimated at 207 million barrels of oil and 16.6 billion cubic meters of gas.

A 25 year contract has been concluded with the possibility of extension for another five years. Initially, SOCAR's share of profitable hydrocarbons will amount to 40 percent. In the future the share will increase to 90 percent. The investment in this project will hit $1 billion, according to preliminary estimates.

SOCAR will receive 170,000 tons of oil and 630 million cubic meters of gas free of charge within three years.

Gum Deniz field has operated since 1955 and is located 21 kilometers southeast of Baku.
Bahar field has operated since 1969 and is located 40 kilometers southeast of Baku.

Shafag-Asiman

A 30 year contract on Shafag-Asiman was signed in October 2010. The exploration period will be four years, with possibility of extension for three more years. Two wells are to be drilled within the first phase. Two more wells will be drilled if necessary within the second one.
In the operational period the sides will implement joint operatorship within the project. Shared participation in the contract is expected on the scheme 50 to 50 percent.

The forecasted reserves of the "Shafag-Asiman" block have hit 500 billion cubic meters of gas and 65 million tons of condensate.

The block is located 125 kilometers to the south-east of Baku. Exploration work has not been conducted on the block yet. It is located at a depth of 650-800 meters with the depth of the reservoir at 7,000 meters.

Project status

BP-Azerbaijan continues the processing of three-dimensional geophysical studies conducted at the "Shafag-Asiman" prospective structure. After the completion of the data processing, one more year will be needed to carry out work on planning the first exploration well.

An additional drilling rig is important for conducting drillings at the prospective structure.

Deep-seated gas in Azeri-Chirag-Guneshli

Under the "Contract of the Century" signed by Azerbaijan in 1994, BP and its partners in the Azeri-Chirag-Guneshli project have the right to develop oil layers to Fasile (Break) suite. Based on the Production Sharing Agreement, development of the lower horizons is the subject of a separate agreement.

Judging by other Azerbaijani offshore fields, one can argue that productive stratum placed after Fasile, namely the sandy suites Nadkirmakinsk and Podkirmakinsk and Gala, also contain hydrocarbons.

According to the forecasts, the gas reserves are estimated at 300 billion cubic meters.

At present, work is underway to prepare a contract on development of deep-seated gas in Azeri-Chirag-Guneshli. The oil reserves at ACG are being developed based on the PSA. However, it is expected that the contract on deep-seated gas in Azeri-Chirag-Guneshli will be concluded in a new form. This will be a new Risk Service Agreement (a contract with a minimum guarantee of compensation).

Araz-Alov-Sharg

Araz-Alov-Sharg participating interests are: BP (operator) - 15%, Norwegian Statoil - 15%, U.S. ExxonMobil - 15%, Turkish TPAO - 10%, Canadian Alberta Energy - 5% and SOCAR - 40%. Required investments are about $4bln.

Project Status

The project will remain frozen until the Caspian Sea status is agreed upon between Azerbaijan and Iran.

Zafar-Mashal

SOCAR and Norway's Statoil signed a Memorandum of Understanding on the two prospective sites Zafar and Mashal in the spring of 2013. It envisages negotiations, coordination of basic commercial principles and conditions of a contract for the development and conclusion of the contract within a year after its signing.

Statoil has acquired new experience in Brazil and Tanzania in recent years, and now the company is ready to share this experience with SOCAR, as well as benefit from SOCAR's experience.

The first contract for development of the promising offshore Zafar-Mashal field was signed between the U.S. ExxonMobil and SOCAR on Apr. 27, 1999. SOCAR owned 50% and ExxonMobil 30%. In 2000, the remaining 20% was transferred to the U.S. ConocoPhillips.

Required investments in the project were estimated at $2bln with projected volume of oil reserves at 140mln tons, of which 100mln coming from Zafar and 40mln from Mashal.

According to SOCAR geologists' estimations, the reserves on this structure are estimated at 300 billion cubic meters of gas and 37 million tons of condensate.

Nakhchivan

The first contract on the development of the perspective offshore structure of Nakhchivan was signed on Aug.1, 1997. The parties to the contract were ExxonMobil - 50%, SOCAR - 50%.

Project Status

In March 2010, SOCAR and German RWE signed a memorandum of understanding on the offshore perspective structure "Nakhchivan". Under the terms of the memorandum, companies should have undertaken all necessary work to prepare a PSA by March 10, 2011.
However, the contract was not signed until 2013.

The field's reserve is projected at 300 billion cubic meters of gas and 40 million tons of gas condensate.

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