AZERBAIJAN - Socar's Gas Production.

Marketed production of natural gas in Azerbaijan this year is expected to be between 5.2-5.7 BCM, and this is consumed locally. In addition, Azerbaijan is importing this year 4.5 BCM from Gazprom, Itera and TransNafta (see DT No. 1).

Marketed gas production has declined steadily in recent years, from 8 BCM per annum in 1991, 7.4 BCM in 1992, 6.2 BCM in 1995, 5.2 BCM in 1998, 5.2 BCM in 2001, and 4.8 BCM in 2002. Socar produces the bulk, about 5 BCM/year mostly from offshore fields, and the rest is produced by AIOC.

The country's demand for natural gas exceeds 15 BCM/year and the government can only import part of the shortfall from neighbouring gas producing countries (see Part 3 in next week's Review).

Local demand for gas is expected to exceed 20 BCM per annum in a few years. With a BP-led consortium developing the giant Shah Deniz gas field for export to Turkey and other European markets, gas production in Azerbaijan is expected to exceed 30 BCM/year by 2010-15 and 50 BCM/year by 2020-25.

In most the PSAs signed since September 1994, non-associated gas found by the foreign operators belongs to Socar. One exception is the Shah Deniz PSA, which has given the partners the right to all gas found in that block.

BP, the operator, has found about 31 TCF of recoverable gas and 1.7 bn barrels of condensate in Shah Deniz. The costs of this field's development and related pipelines for export and the domestic market will total about $3.2 bn, up from an earlier estimate of $2.6 bn, with first gas for the local market and exports now scheduled for the first quarter of 2006 (see below).

In the offshore Karabakh field, Pennzoil has found gas instead of oil in the two wells it has drilled. But the gas reserves discovered were not large enough to justify the massive investment usually required, because the area is far from existing infrastructure. The negative result of the second well was reported in early July 1998. Subsequently Pennzoil and its partners abandoned the Karabakh venture (see Gas Market Trends No. 1).

Socar is to develop non-associated gas reserves found in early 1997 in a deep formation beneath an oil reservoir on the north-western flank of the Azeri field, which is operated by the BP-led AIOC. This was discovered with AIOC's delineation well at a depth of 3,450 metres. Socar has the right to all non-associated gas in AIOC's Guneshli, Chirag and Azeri field areas.

In January 1998, Socar and Conoco (now ConocoPhillips) signed a MoU for joint exploration of Azeri gas resources, both onshore and offshore, and for other gas projects. These include a $150m project to expand Azerigaz's 4.5 BCM/year gas processing plant of Garadagskovo, south-west of Baku, and the production of compressed gas (CNG).

In early 1998, Socar and Exxon (now ExxonMobil) agreed to begin a joint study of the country's gas resources, of the local energy market and of the potential for gas exports. An agreement for a similar study was signed by Socar and Shell in March 1998. In July 1997, Exxon and Socar had signed a PSA for the offshore Nakhchivan block and later the US major got Blocks D-3, D-9 and D-38 in the Baku archipelago adjacent to Shah Deniz.

Azerigaz, a unit of Socar, is a monopoly in charge of the country's gas processing, transport, distribution and storage. With 99 subsidiaries, it has an extensive pipeline system. The group is being overhauled and modernised with the help of Sofregaz, a unit of Gaz de France, under a contract mostly financed by the World Bank and a loan from the Japanese government. The number of Azerigaz subsidiaries will be cut to 15 or less.

Azerigaz is among state companies that would be privatised and for this the World Bank would provide $150m to help boost the group's profitability.

Azerigaz has been hit financially due to low gas selling prices and large payment arrears. It is trying to restore and use some 4,000 km of idle gas pipelines. These were laid decades ago by the Soviets to carry Russian, Iranian and Turkmen gas to Armenia and Georgia.

A joint venture was established with a Turkish company, Global Trade, to revive the idle lines. The aim is to restore the lines to withstand a pressure of 55 atmospheres. The JV would use most of the lines eventually, and would rent a part to receive $1.5 to $2.5 per MCM for gas pumped through.