AZERBAIJAN - Gunashli.

Almost half of SOCAR's oil production in recent months came from the offshore shallow-water part of Gunashli, known in the Soviet era as the "28th of April Field" and located 60 miles off Azerbaijan's Absheron Peninsula. Shallow-water Gunashli first came on stream in 1981, but was developed only to a maximum water depth of 400 feet due to technological constraints. By early 2002 2005, oil production levels there had begun to fall as equipment was in disrepair and the structure was losing reservoir pressure.

In August 2002 Socar began efforts to rehabilitate its Gunashli system by adding new production platforms. In the autumns of 2004, Socar announced the recommissioning of several new wells with improved production capacities. Gunashli's deeper formations, containing more oil, are being developed by AIOC, the main consortium led by BP (see Gas Market Trends of this week).

However, Socar's onshore and offshore fields have been in disrepair and have been artificially stimulated for years using water injection. Inefficiencies due to ageing equipment and largely depleted reservoirs have caused the cost of production of Socar's onshore crude oil to reach $18/barrel. Socar still lacks modern equipment and spare parts, despite the fact that in Soviet days Azerbaijan used to be the centre for the production of rigs and various other field equipment.

There are almost 35 fields in offshore Azerbaijan. Of these, 33 had been found by Soviet geologists since the 1940s. More than 30 fields lie in the southern region, mostly in waters of less than 200 metres.

Work on a joint venture to develop the shallow part of Gunashli, to involve Total, has been delayed because the French major has not accepted Socar's PSA terms. This project, called shallow-water Gunashli (SWG), had previously been negotiated with Ramco of the UK and Conoco of the US. Socar, which has devised a $1.7-1.9 bn programme for SWG, insists that the PSA will only cover crude oil to be produced on top of the company's average output from this field of about 100,000 b/d, with this going to the domestic market. Socar has said SWG contained almost 1 bn barrels of oil. Total was worried that SWG's oil was migrating to the deeper part of Gunashli being developed by AIOC. Socar admits the PSA terms on offer for SWG are not acceptable to other foreign firms.

The SWG programme covers construction of a new production platform in the northern part of the field, where 12 existing rigs already operate, and installation of a pumping station to prevent the shallow oil reserves from moving into AIOC's sector (see Background in Vol. 63, OMT No. 2).

The oldest set of Socar's offshore fields is in a complex called Neft Dashlary (ND), also known as Oily Rocks. About 170m tons of crude oil have been pumped from ND since production began in 1948. Output peaked at about 170,000 b/d in the 1960s. It has since dropped to 14,300 b/d. The complex's importance has fallen considerably.

Built in the middle of the Caspian Sea, Oily Rocks is called "the eighth wonder of the world". A "city" on stilts, with 150 km of interlinking causeways built on pilings covering 40 sq km, of which only a third is usable, it is 50 km from the nearest land.

Oily Rocks boasts its own police force, dormitories, hospital, gas-turbine power station and bakery. From the air, the causeways seem to stretch to infinity, but large chunks are falling off into the water, and others are becoming submerged.

Socar executives hope a medium-sized western oil company will become interested in rehabilitating Oily Rocks. While such company can extract oil to the last drop, Socar would be saved the trouble of deciding what to do with this inefficient complex.

The complex was offered to western companies along with four other offshore fields in its first rehabilitation tender in June 1998. At the time, Socar was hoping to attract $1.5-2 bn in total investments for the five projects. But so far there have been no takers. The Oily Rocks complex alone employs about 5,000 people.

All the big oil companies working in Azerbaijan looked it over at one time or another. No one came close to making an offer. Privately Socar executives admit that the complex - some of the pilings holding up the roads should have fallen in the water 12 to 17 years ago - may not last long enough to extract all the oil.

Most of the southern offshore fields are small and lie at depths of 3-4 km below the water. The bigger ones there lie at depths of 5 km. Exploration since independence in the complex geology of the southern Caspian has suggested that major oil and gas deposits lie at depths of 6-8 km.

More than 930 wells have been drilled in the southern Caspian, including 180 at a depth of 5 km.

Of the many onshore oilfields, ten account for the bulk of onshore production. But total onshore output is averaging less than 30,000 b/d. There are about 9,000 wells onshore and almost half of them are idle. Many of the producing wells need rehabilitation.

Some of the onshore fields are more than 120 years old. Socar is still producing oil from Balakhany and Sabunchy, which were discovered in 1871 less than 10 km north of Baku. They used to be the country's giants and have since yielded more than 330m tons of oil. Now they are producing at the combined rate of 750,000 t/y.

Developing the onshore Kemalettin field is a JV between Socar and Petoil of Turkey. The venture is called PetZer. Its oil production fluctuates between 1,500-2,500 b/d. The field's recoverable reserves have been estimated at about 50m barrels.

It was agreed between Petoil and Socar that once the field's cumulative production reached 20,000 tons, the crude oil would be transported to Turkey for refining. This has involved a complicated route using trucks to Baku, a tanker sailing from the Caspian port to the Volga-Don canal, and then to the Black Sea.

An alternative overland route the JV considered was to be through Iran to the refinery of Batman, in south-eastern Turkey. Another alternative was to truck the crude to Baku's refinery and sell the oil products to Iran, Georgia and the Ukraine.

The largest onshore field is Muradhanly, having an area of 3,100 sq km close to the Iranian border. But it is only producing 3,500 tons/month. The field has reserves estimated by Socar at between 6m and 18m tons. The field was partly developed by the Soviets in the 1960s.

Ramco Energy of Scotland in June 2001 pulled out of a JV which was to rehabilitate and modernise the developed section of the field. Ramco was also to develop the other sections and undertake exploration of deeper horizons. But it only drilled one well which proved disappointing.

Muradhanly now is being negotiated between Socar and China's state-owned company CNPC. Socar estimates the field needs about $1 bn of investment.

The onshore fields of Kyursangy and Karabaghli, in the Lower Kura Basin on the Absheron Peninsula and 100 km west of Baku, are being re-developed by the Salyan Oil consortium consisting of Socar (50%), CNPC (30%) and the US-Saudi partnership of Amerada Hess and Delta (DeltaHess). DeltaHess, the operator, is producing about 6,100 b/d from the fields. A further development of the fields would require about $900m. Socar estimates the fields' oil reserves at 100m tons (730m barrels).

CNPC bought the 30% equity in early 2002 from the London-based European Bank for Reconstruction and Development (EBRD). The EBRD had inherited this from Frontera Resources of the US in August 2001, after the latter was unable to repay a $60m EBRD loan.

The Salyan group hopes to recover about 25m tonnes of crude oil. The fields were discovered in the early 1960s by the Soviets. Some 600 wells have been drilled in the two fields.

Near these fields, Socar in early April 1999 discovered a gas-rich field called Vandavan. Three wells drilled into the structure tested between 500,000 and 1 MCM/day. After additional wells were drilled through to end-1999, Socar geologists said the field's recoverable reserves were about 25 BCM. They said there would be additional gas reservoirs in that area.

On Feb. 1, 2002 Socar began a five-well delineation programme to confirm oil and gas reserves at the onshore Zira field, which was discovered in 1955 by the Soviets. The field began producing oil in 1956 but the output fell in the subsequent years and the Soviets abandoned the structure. Socar on Feb. 1, 2002 spudded the first well.

Zira has two main reservoirs, the Kala and Podkirmaku. Socar has said that each of these formations can produce 400-600 b/d of 32[degrees] API oil, and that the field's remaining recoverable reserves were 7.5m barrels of oil, about 35 BCF of gas and 100,000 barrels of condensate.

The onshore South-West Gobustan oilfields are being developed by a JV of Socar (holding 20%) and the British-Canadian Commonwealth Oil Refining (80%). The PSA for this was signed on June 2, 1998 and under the project Commonwealth Oil was to spend between $700-800m. The fields' reserves were estimated at 750m barrels of oil and 900 BCF of gas.

On June 2, 1998, Socar signed with Agip a $2.5 bn PSA for the Kurdashi offshore block with estimated reserves of 100m tons. Agip holds 25% and is the operator. Socar holds 50%, Japan's Mitsui holds 15%, and Turkish Petroleum (TPAO) has 5%. Repsol holds the remaining 5%.

Among several other onshore fields to be rehabilitated in partnership with foreign companies are Bibi Eybat and Buzovny-Mashtaga, which have been on offer since 1997.

US explorer Moncrief in July 2000 began work on the onshore Padar-Harami block in the Kura Valley, where oil reserves have been estimated at 1 bn barrels. Holding 80% under a PSA signed in 1999, with Socar having 20%, Moncrief's local unit Kura Valley Development Co. has since evaluated the available data. Its programme called for three exploration wells to indicate whether additional seismic work was required. At the exploration stage, investment was set at $50m. If all goes well investment may reach $2 bn.

An Azeri-Turkish consortium is investing $618m in renovating a century-old onshore oilfield in Azerbaijan, under an agreement signed on Sept. 29, 2004. The "AZEN consortium" - made up of Azeri oil refiner Azpetrol and the Turkish construction conglomerate Enka - is investing the cash in the Binagadi field, near Baku.

Estimates then put recoverable reserves at the field at 12.8m tons. Under the agreement, the consortium was to invest the money over a 25-year period, according to a press release from the companies. The field was first discovered more than one hundred years ago. Production reached its peak during the Second World War. But since then output from its ageing wells has declined steadily.

The AZEN consortium took a 70% stake in the field, with the rest held by Socar. Socar's then CEO Natiq Aliyev (now the energy minister) said the deal - and the involvement of Azpetrol - was a landmark, noting: "For the first time an Azeri company is participating as an investor in such a project".

Socar is developing its petroleum equipment and oil service industries with the help of western companies. It has a JV with McDermott of the US, MacShelf, which builds deep-water platforms.

In May 2000 Socar signed a ten-year co-operation agreement with PetroAlliance of the US for exploration and development services both onshore and offshore. Socar wants additional co-operation agreements and JVs with foreign companies to cover the widest range of upstream equipment and services possible. Other projects include construction of underwater pipelines and reconstruction and retrofitting of ships for use in drilling and laying of marine pipelines.