AZERBAIJAN - Socar & Production Background

The oldest oil producing region in the world, Azerbaijan had an oil boom at the beginning of the 20th century and later served as a major refining centre for the Soviet Union. Oil production peaked at about 500,000 b/d during World War II, then fell significantly after the 1950s as the Soviet Union redirected resources elsewhere. All production used to come from onshore fields. Offshore exploration only started in the 1950s.

The country's oil industry suffers from outdated technology and poor planning, which have resulted in under-production, waste and severe environmental degradation both onshore and offshore. Due to shortages of funds, particularly for drill pipe, exploration and development drilling declined in recent years.

In September 1992, the state's two companies, Azerineft and Azneftkimiya, were merged to form the Azerbaijan State Oil Co (Socar). Socar produces oil and gas, runs the two oil refineries through a subsidiary, operates the country's extensive pipeline systems, is in charge of oil exports and imports, and handles E&P deals with foreign companies. Local distribution of oil products and gas is controlled by the State Fuel and Energy Committee.

Socar has 78 fields in production. Of these, 17 offshore fields account for over 80% of total output. Production has declined to 180,000 b/d. It could fall to lower levels as the country 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 oilfield equipment.

There are almost 35 fields in offshore Azerbaijan. Of these, 33 had been found by Soviet geologists since the 1950s, when offshore exploration in the Caspian Sea began. More than 30 fields lie in the southern region, mostly in waters of less than 200 metres. One field, Guneshli located 60 miles off the Azeri coast, accounts for more than half of Socar oil production. This field is a giant, estimated to contain 1.4 bn barrels of oil. In the early 1990s, it was producing about 125,000 b/d. It is being developed by AIOC, the main consortium led by BP (see Gas Market Trends).

Most of the southern offshore fields are small and lie at depths of 3-4 km below the water. But 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 28,000 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 330 million tons of oil. Now they are producing at the combined rate of 750,000 t/y (1,500 b/d).

The less old field onshore, Kemalettin, has become a joint venture with 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 to be transported to Turkey for refining.

This would involve 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 a large reserve, with 740m barrels said to be in place, which is to be developed by Ramco Energy of Scotland in a JV with Socar. Ramco's PSA for this was approved recently by President Aliyev.

The field was developed by the Soviets in the 1960s. Under the PSA, Ramco will rehabilitate and modernise a section of the field which has already been developed in the initial phase. Later on, Ramco will develop the other sections and under-take exploration of deeper horizons.

Ramco's President Steve Remp was quoted by 'Petroleum Argus' on June 29, 1998 as saying its project will pay back in five years. The company first proposed to develop Muradhanly in 1995. Negotiations broke down over tax issues and were only resumed earlier in 1998. Former British foreign minister Malcolm Rifkind played a key role in finalising the PSA at Baku in June 1998. He is a director of Ramco (see who's who in Downstream Trends).

The onshore fields of Kyursangya and Karabaghli, in the Lower Kura Basin on the Apsheron peninsula and 100 km west of Baku, are to be re-developed. The PSA for this was signed on June 2, 1998, as an annual oil and gas conference opened in Baku, with a consortium led by Frontera Resources of the US. Frontera, an oil services company working in Azerbaijan, holds 30% and will be the operator. Socar holds 50% and an alliance of Saudia Arabia's Delta and the US-owned Amerada Hess hold the remaining 20%. The 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. Kyursangya has proven and probable oil reserves of 119.7m barrels and 800 BCF of gas. Karabaghli contains 22m barrels of oil and about 338 BCF of gas.

A director and shareholder in Frontera is former US treasury secretary Lloyd Bentsen of Texas who is among the Washington lobbyists for Baku. At the signing ceremony, Frontera's President Steve Nicandros said: "The agreement holds great potential for near-term revenues for the Azerbaijani government, near-term employment and the discovery of new reserves".

Bids for the two fields had been made by Unocal, of the US, and Central Fuel Co. (CFC) of Russia which is chaired by former Russian energy minister Yuri Shafranik. CFC has negotiated a PSA for offshore Block A, close to the Oily Rocks field (see below).

On June 2, 1998, Socar also signed a PSA with Union Texas Petroleum and the British-Canadian Commonwealth Oil Refining to develop the onshore South-west Gobustan oilfields and invest between $700-800m. The two companies will each hold a 40% share. They will work jointly with Socar in exploiting the fields' estimated 20m tons of oil. Azeri President Aliyev, speaking at the signing ceremony, assigned special importance to onshore agreements, pointing out the untapped resources the sites contain. He said: "On the soil of Azerbaijan, we have rich onshore fields. The main part of oil and gas of Azerbaijan has not been produced onshore. Therefore it is very important to develop onshore fields jointly with foreign companies".

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

Of 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. Other fields on offer in 1998 for rehabilitation are Kala and Zira, near Baku.

On June 5, Baku announced the first tender to rehabilitate offshore oilfields belonging to Socar. Mike Woods of the UK-based MAI Consultants Ltd, which is assisting in carrying out the tender, said that Socar was preparing to receive offers for PSAs to expand production on five offshore structures. He added: "We would encourage foreign oil companies to come and look at these oilfields and develop a relationship with Socar".

MAI Consultants estimates that the fields - Neft Dashlary, Bulla Deniz, NGDU Narimanov, Bakhar and Palchyg Tapesi - still contain some 458m barrels of oil and 3.4 TCF of gas. Neft Dashlary, also known as "Oily Rocks", is Azerbaijan's oldest drilling site still in operation, having first been developed in 1947.

"Data packages" on the structures compiled by MAI were to be sold through Socar. The Azeri firm was to meet with prospective companies and governments during July and August 1998.

In Baku alone, during the June 2-3 conference, 25 companies expressed interest in investing in these five fields. Total investment in them is estimated at $2 bn, though Woods says he does not expect any one party to buy the offer as a whole.

The smaller fields should be sold for around $100m. The larger ones should go for $600-700m, Woods says, adding: "Socar's aim is to close some of the deals by the end of the year". But there is no official closing date.

The government is keen to seal the deals in order to start producing immediate revenues for its cash-strapped economy. Azerbaijan will not see a major influx of funds from the 13 major PSAs it has signed with multinational oil consortia until 2002 at the earliest.