AZERBAIJAN - Azerbaijan International Operating Co.

AIOC, in which BP is the operator and consortium leader, is currently producing around 155,000 b/d offshore, up from 50,000 b/d in mid-1998. This should reach 420,000 b/d or more in 2005.

AIOC this year is spending $2.45 bn on Phases 1 and 2 of the full-scale development of the Azeri-Chiraq-Guneshli (ACG) complex on fields. Of this, the capital expenditure amounts to $2.36 bn. The remaining $9m covers operational expenses. In 2003 the consortium spent $2.19 bn on the same development programme.

AIOC had spent about $1 bn on an initial phase of its programme, involving the Chirag field and its first platform with a capacity of 130,000 b/d and related facilities. The initial wells on this platform began to flow crude oil on Nov. 7, 1997. The fourth production well went on stream on May 25, 1998. Later AIOC spent another $1 bn on further development work and an export pipeline wich cost $590m. The pipeline runs 917 km from Baku's terminal and storage farm of Sangachal (40 km south of Baku) to the Georgian Black Sea port of Supsa and has a capacity of 100,000 b/d. It has been on stream since April 1999.

Phase 1 of the full development for the main production stream from Chirag, Azeri and the deep formations of Guneshli fields will be ready in the first quarter of 2005 to raise production to 420,000 b/d. This involves a permanent drilling platform to handle 48 wells and a separate gas compressing platform being built at the Azeri field. The new platform will be linked to the onshore Sangachal terminal by a new 30-inch marine oil pipeline.

Contracts worth $483m were awarded in December 2001 to McDermott Caspian Contractors and Bouygues Offshore for Phase 1. Saipem has installed a 12-slot main drilling template on the seabed at the location where the main drilling and living quarters platform will be functioning. BP's drilling of a first development well at the same location was completed in May 2002 by the semi-submersible rig Dede Gorgud. Another eight wells are being drilled through the template, of which one will be a water injector.

Under a $320m contract, McDermott is fabricating platform topsides and installing marine pipelines for the Azeri field. Bouygues got a $163m contract to produce and load two platform jackets for the main first phase production, drilling and living quarters and for a new gas compression platform. Associated piles for both structures, with a total of 45,000 tons, are also being built by Bouygues. The structures are being built at the Baku fabrication yard of Socar unit Shelfprojectstroy (SPS). BOS Shelf, a 50-50 JV of SPC and Bouygues, operates the yard which has been refurbished. Once built, the new facilities will be installed by Bouygues on the Azeri field, 120 km south-east of Baku. Entrepose is building new storage tanks at Sangachal which will expand the terminal's capacity by 1m barrels.

Other components of the programme for Phase 1 awarded in late 2002 and early 2003 include a 28-inch marine gas pipeline, one for the topsides of a gas and water injection platform, and one for the terminal main tankage and dewpoint gas plant. In 2001 BP awarded eight main contracts for offshore construction and expansion of the Sangachal terminal.

The increase in crude oil production to more than 420,000 b/d in the first quarter of 2005 will coincide with the coming on stream of the Baku-Ceyhan (BTC) export pipeline. Phase 2, sanctioned in late 2002, should raise oil production to more than 800,000 b/d by 2007.

Another $3 bn will be spent on Phase 3. This should raise AIOC's crude oil production to more than 1m b/d by 2009/2010.

New drilling also aims to double gas production at the shallow Guneshli field to 400-500 MCM/year by 2006/07. Total investment by AIOC could eventually reach $10 bn.

In June 2004 Aker Kvaerner's unit Maritime Hydraulics AS (MH) in Kristiansand, Norway, signed a MoU with AIOC to deliver by the third quarter of 2005 complete drilling installations for Phase 3. MH will also provide training and long term operational support in Baku.

MH's supply will consist of a complete package including pipe-handling equipment and drilling machinery, as well as an advanced computerised control system. The drilling facility will be fully automated with the most advanced control system available in the market today. It will meet the most demanding requirements for safety, efficiency and working environment, according to a company statement.

MH will be responsible for project supervision and expertise for testing and start-up of the drilling facilities. Project implementation and engineering will start in October 2004 and will be carried out in Kristiansand. (MH had previously signed major contracts with BP for such projects as the ACG Central Azeri, ACG West Azeri and ACG East Azeri systems, as well as the Valhall project in the North Sea and the Thunder Horse in the Gulf of Mexico).

AIOC's aim is to recover a total of 5.4 bn barrels of oil reserves at the ACG complex through the 30-year life of its PSA with the Azeri government.

Work on the final 1m b/d pipeline to Ceyhan, Turkey's oil terminal on the Mediterranean, is progressing on schedule and should be completed in early 2005 (see Part 3 in next week's Review).

AIOC sells its cost-recovery crude and most of equity crude through the terminal of Supsa, in Georgia. AIOC's remaining share and Socar's crudes are exported through an old pipeline running north to Russia's Black Sea port of Novorossyisk. The crude from Chirag, Azeri Blend, is a medium gravity sweet grade - 34.6o API, with 0.15% sulphur and pour point of minus 3oC.

AIOC signed what was termed "the contract of the century" with the Baku government in September 1994 to develop the three fields under a $10 bn programme. The 30-year PSA was to prove and develop up to 5.4 bn barrels of oil reserves.

BP, by far the biggest investor in Azerbaijan, leads in five PSA ventures which are committed to spend a total of up to $29 bn to find and develop up to 11.4 bn barrels of oil, 31 TCF of natural gas and 1.7 bn barrels of condensate: AIOC's, Shah Deniz, North Absheron, Inam and Alov (see Gas Market Trends No. 1).

At first, BP's work in Azerbaijan concentrated on subsea inspection of an existing jacket on Chirag and a feasibility study on early production from the field. This was followed by an upgrade of an existing rig. A 3D seismic work and site survey were done together with an environmental study and preparations for a logistics and supply base. By October 1995, the old Chirag-1 platform was dismantled into nine modular units and transported to the Shelfprojectstroy for refurbishment 20 days ahead of schedule. The upgraded platform was put in place by the autumn of 1996. Drilling of three appraisal wells began in September 1996. In October of that year Saipem was contracted to build a 182 km crude oil pipeline from Chirag-1 to the Sangachal terminal and a 47 km gas line to link the three fields. Work was completed in 1997. Start up of production was delayed, however, mainly because of problems with the section of the northern export pipeline passing through Chechnya. Production increased to the current 155,000 b/d level after the coming on stream of the new export pipeline to Supsa.

Socar President Natig Aliyev has said AIOC's annual profits from the three fields would grow from $100m in 1999 to $2 bn in 2005 and $5 bn in 2007. AIOC has benefited the Azeri economy considerably and has sub-contracted work to over 90 local companies.

AIOC shares are held as follows: BP (34.14%), Unocal (10.5%), Inpex (10% bought in 2003 from LUKoil), Socar (10%), Statoil (8.56%), ExxonMobil (8%), TPAO (6.75%), Pennzoil (4.82%), Itochu (3.92%), DeltaHess ACG (2.08%), and DeltaHess Khazar (1.68%). DeltaHess, a partnership between Amerada Hess and the Saudi oil firm Delta, bought the 2.08% equity from Ramco Energy of the UK in 2000.

LUKoil's sale of its 10% equity to Inpex of Japan in 2003 has since become the subject of a tax dispute between the Russian company and the Azeri government. In March 2004, President Ilham Aliyev also weighed into this by saying international experts should rule whether LUKoil has to pay additional taxes resulting from the equity sale. The Azeri Tax Ministry claims LUKoil still owes as much as $200m in taxes resulting from the sale. LUKoil sold its stake for about $1.35 bn.

President Aliyev was quoted as saying: "There is a provision on the first production-sharing agreement (PSA) signed in 1994 about assignment of the share from one owner to a new owner. The way that it is put in the contract is the peculiar way. You can treat it as you like, therefore international expertise is needed to clarify it".