AZERBAIJAN - Part 2 - Rising Production.

Baku, "the world's oil capital" at the start of the past century, hopes that its oil production will exceed 1m b/d by 2010 and reach 2m b/d within the next decade, compared to the current level of 600,000 b/d which has risen by 290,000 b/d since 1997. Marketed Azeri production of natural gas would rise to more than 16 BCM/year by 2010 and probably 50 BCM/year by 2020.

Azerbaijan could make $3 bn in oil income in 2006 and may see this double in 2007. David Woodward, President of BP-Azerbaijan, on June 7 said a major part of this would be brought in by exports of crude oil from the offshore Azeri-Chirag-Gunashli (ACG) complex of fields. BP-Azerbaijan is the operator of the ACG complex, which holds about 5.4 bn barrels in oil reserves. Woodward said the ACG venture, of Azerbaijan International Operating Consortium (AIOC), would receive some $20 bn in capital investment at the development stage. The BP official, attending an international Caspian Oil and Gas conference in Baku, said if world crude oil prices remained above $60/b in the coming years, the country would see its oil earnings double every year, outstripping GDP by a factor of three by 2009. According to the President and CEO of The State Oil Company of the Azerbaijan Republic (Socar), Rovnag Abdullayev, Azerbaijan will produce more than 476m barrels of oil a year, over 1.3m b/d, by the end of this decade.

Not all of Azerbaijan's foreign E&P investment projects have been successful, with several ventures having had disappointing drilling results and several production sharing agreements (PSAs) shutting down in recent years. Besides the ACG venture of AIOC, several of Azerbaijan's offshore prospects have been relatively disappointing in contrast to the high expectations for the Caspian Sea region during the 1990s.

Most recently, the failure of ExxonMobil and LUKoil to discover commercially viable hydrocarbon reserves at the Zafar-Mashal and Yalama blocks, respectively, will lower future output estimates from Azerbaijan's offshore area. The first well at Zafar-Mashal was the deepest in the Caspian Sea, reaching a total depth of over 22,000 feet (6,600 meters) and was the most expensive at around $100m. The Yalama Block was the last drilling programme underway in offshore Azerbaijan. Finally, without an agreement on the maritime borders in the Caspian Sea, entire fields have been left untapped due to the lack of clarity on ownership.

Azerbaijan's main challenge since the early 1990s has been to secure export routes that would help guarantee its independence. A major crude oil pipeline from Baku to the Turkish terminal of Ceyhan has come on stream. A parallel pipeline for Azeri gas exports to Georgia, Turkey, Greece and other European markets is to be on stream in late 2006 (see Part 3 in next week's Review).

This country has the biggest number of international consortia in the Caspian region to develop its main oil and gas areas in the south. The first and largest consortium, AIOC, is producing up to 390,000 b/d, up from 50,000 b/d in mid-1998, and is aiming to raise its output to a plateau of 1m b/d by 2010. The other main consortia are each aiming for a large oil production system, with the Shah Deniz group to become the biggest gas producer in Azerbaijan. (See the profiles of AIOC and the Shah Deniz group in Gas Market Trends).