Oil and gas (2011)

а) Oil and gas production

Assessing the results of 2011 in Azerbaijan's energy sector, it is necessary to mention some important, in our view, events:

-Azerbaijan and the EU signed the Declaration on the Southern Energy Corridor in Baku in January. According to the Declaration, both parties agreed to encourage the process of distributing available gas reserves within the Shah Deniz 2 project and other fields in Azerbaijan. The total goal is to create and rapidly put the Southern Gas Corridor on to an operational level, as well as to determine Azerbaijan as being the main gas supplier for this project.

- in July the State Oil Company of the Azerbaijan Republic ( SOCAR ) has obtained a portion of British BP shares in the development of the Azeri-Chirag-Guneshli (ACG) offshore fields in the Azerbaijani sector of the Caspian Sea and increased its share from 10 up to 11.6 percent.

- in September company Total announced the discovery of large reserves of natural gas and condensate on the Absheron field in the Azerbaijani sector of Caspian Sea. The field's potential reserves are estimated at 350 billion cubic metres of gas and 45 million tons of condensate.

- in October Turkey and Azerbaijan signed a package of gas agreements including the cost of Azerbaijani gas for Turkey from the Shah Deniz-2 and gas supplies to Turkey from this field after 2017 and an agreement on Azerbaijani gas transit via Turkey.

- in December Turkey and Azerbaijan signed a Memorandum of Understanding to establish a consortium which will construct a gas pipeline to transport gas from Azerbaijani Shah Deniz field to Europe through Turkey.

According to the Azerbaijani State Statistics Committee, in 2011 Azerbaijan produced 45.37 million tons of crude oil and condensate, which is 10.5 percent less than production in 2010. In 2010 the country produced 50.83 million tons of oil.

The bulk of oil production in 2011 accounted for the block of "Azeri-Chirag-Guneshli" oil and gas fields and "Shah Deniz" gas-condensate field, which are developed jointly with foreign partners.

Some 36.9 million tons from the total oil produced in Azerbaijan in 2011 accounted for oil and condensate from Azeri-Chirag-Guneshli and Shah Deniz fields. SOCAR produced 8.4 million tons of oil in 2011.

Gas production in 2011 in Azerbaijan was about 26 billion cubic meters, which is 2.2 percent less than in 2010. In 2010 the country produced 26.23 billion cubic meters of gas.

Summing up the results of production, it should be noted that previously, in early 2011, Azerbaijan forecasted to produce about 50 million tons of oil in 2011. There are several main reasons for the decline in production. The first reason is the revision of the drilling program on the "Azeri-Chirag-Guneshli" field and a more careful approach to the drilling operations on offshore platforms in connection with an incident in late 2008, when the operation of the platform was suspended because of unexpected and uncontrolled gas release. According to SOCAR President Rovnag Abdullayev, so far the cause of the observed cases is uncertain. For this reason, it was necessary to revise the program of drilling on this block of fields that affects production volumes. However, now new drilling technologies are used, and oil volumes will be gradually increased again. The second reason was long-term stop of operation of all platforms by turn on the "Azeri-Chirag-Guneshli" field to conduct routine engineering and maintenance work, which also influenced decline in production.

b) Refinery

In 2011, Azerbaijan produced approximately 5.145 million tons of oil products, which is 0.9 percent more than in 2010.

The greatest volume of production accounted for diesel fuel - about 2.5 million tons.

Oil products are refined at two Baku oil refineries with capacity of 20 million tons of oil per year.

The table reflecting production of oil products in Azerbaijan in thousand tons:

Source: State Statistics Committee of Azerbaijan

In April 2011, after major repair the State Oil Company of Azerbaijan (SOCAR) commissioned a catalytic cracking unit at the Heydar Aliyev Oil Refinery, which is the largest and most important production area of the plant. After repair, both qualitative and quantitative indicators of products have significantly increased.

c) Sale

According to the State Statistics Committee, about 4.4 million tons of oil products were delivered to the Azerbaijani domestic market in 2011 or 12.6 percent more compared to 2010.

About 1.18 million tons of the total volume of oil products fell to petrol. Most petrol was sold on the domestic market.

Petrol was sold by 11.8 percent more during this period than in 2010. The wholesale cost of one ton of A-92 petrol (including delivery and VAT) is 670 manat, A-95 petrol - 736 manat in the Azerbaijani domestic market.

More than 1.06 million tons of diesel fuel were sold in the domestic market in 2011, or 16.1 percent more than in 2010. The wholesale cost of one ton of diesel fuel (including delivery and VAT) is 485 manat in the Azerbaijani domestic market.

About 239,700 tons of fuel oil were sold on the domestic market in 2011, or 8.5 percent less than in 2010.

About 532,200 tons of aviation kerosene were sold or 9.3 percent more than in 2010. The wholesale cost of one ton of aviation kerosene (including delivery and VAT) is 307 manat in the Azerbaijani domestic market.

About 251,500 tons of oil bitumen were sold in the domestic market in 2011, or 10.2 percent more than in 2010. The wholesale cost of one ton of BN 60/90 bitumen (including delivery and VAT) is 160 manat in the Azerbaijani domestic market.

About 135,200 tons of liquefied gas (LPG) were sold on the domestic market in 2011, or 61.1 percent more than in 2010.

Over 1 million tons of other types of oil products were sold in the domestic market, or 13.9 percent more than in 2010.

SOCAR continued making foreign investments in the facilities selling oil products in 2011. In particular, the company opened 11 filling stations in Romania. The opening of these filling stations is the company's first investment in the European Union. The number of filling stations in Georgia was brought up to 88. Several filling stations were opened in Ukraine.

2. Chemical complex

The steady revival was observed in the Azerbaijani chemical industry in 2011. There were a number of important events. "Azerkimya" production association commissioned the plant "Surface-active substances" after repair in April. The plant "Organic synthesis" was also repaired. In July, the engineering and research operations were launched in July. The technical parameters were determined to construct the carbamide plant in Sumgait with a capacity of up to 600,000 tons per year. SOCAR's Azerkimya production association started repairing in August and completed the overhaul of the "Ethylene-Polyethylene" plant in late October. "Azerkimya" began dismantling the surface-active substance plant in September. The decision was taken because this company did great harm to the environment.

"Azerkimya" production association continued exporting the main types of products to Turkey, polyethylene, propylene, isopropyl alcohol, polyethylene glycol, propylene glycol, and others during the year. It should be noted that over 50 percent of Azerkimya's goods are exported to the Turkish market. Several employees of the production association were sent to Turkey for the chemical complex Petkim Holding to exchange experience.

The construction operations in gas facilities on the basis of Kulevi oil terminal were underway within the project of transporting the chemical products produced by "Azerkimya", namely, liquid polyethylene and polypropylene through the terminal.

SOCAR increased its market share in the petrochemical holding Petkim, by signing the agreement to transfer Turcas Petrol's 25 percent share in SOCAR's joint venture "SOCAR-Turcas". According to the agreement, SOCAR acquired Turcas Petrol's 25 percent stake for $ 44 million. SOCAR's share in the joint venture was 74 percent before this deal was struck.

Azerbaijani President Ilham Aliyev signed a decree to establish the Sumgait chemical industrial park in late 2011. The enterprises producing the competitive products (services), as well as the petrochemical refineries and facilities of other priority industries will be established.

According to the Azerbaijani State Statistics Committee, SOCAR's Azerkimya production association (production of chemical products) produced 15,300 tons of sulfuric acid in 2011, or 64.5 percent more than in 2010.

There was an increase virtually in all major types of chemical products produced by the production association in 2011.

Production of basic chemical products:

About 8.681.9 tons of solid polyethylene pipes, tubes, hoses were produced in 2011 or 85.7 percent more than in the same period of 2010. About 425 tons of porous polyurethane plates and strips were produced or 2.1 times more than in 2010.

The enterprises included in the production association "Azerkimya", produced about 275,600 tons of various chemical products in 2011.

3. Electricity

Azerbaijan produced more than 20 billion kilowatt-hours of electricity in 2011 or 8.4 percent more than in 2010.

The opportunities of exporting the electricity were opened for Azerbaijan in 2011, as the country fully ensured its energy security, having a power system capacity of 6,200 megawatts using 3,300 megawatts.

The events of 2011:

- the construction of five small hydropower plants is underway;

- the reconstruction of the eight energy units of the Azerbaijani thermal power plant in Mingachevir has been completed. Earlier, the electric power station capacity was 2,400 megawatts. After the reconstruction operations, the capacity of each energy unit was increased by 30 megawatts;

- the construction of "Janub" electric power station and the second energy unit at "Shimal" station is underway;

- the WB project for the rehabilitation of transmission lines in Azerbaijan was implemented. The project implementation began in March 2006. The aim of the project was the modernization of electric power dispatching system (SCADA system). This would help to ensure reliability, stability and efficiency of the energy sector, as well as investing in the restoration of high voltage transmission lines and a number of high voltage substations;

- the reconstruction of transmission lines to the border with Georgia continued within the "Energy bridge" designed to connect the Azerbaijani, Georgian and Turkish energy systems.