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 1940s, when the world's first offshore well was drilled in the Azeri part of the Caspian. The world's first onshore oil discovery was made in Azerbaijan in the 19th century.

The Azeri petroleum industry has suffered from outdated technology and poor planning, which have resulted in under-production, waste and severe environmental degradation. Due to shortages of funds, particularly for drill pipe, exploration and development drilling declined in the past three decades.

In September 1992, the state's two companies, Azerineft and Azneftkimiya, were merged to form the State Oil Co of the Azerbaijan Republic (Socar). Socar is a huge, overstaffed company with more than 70,000 employees and with a long list of subsidiaries. It produces oil and gas, runs the country's two oil refineries through a subsidiary, operates the pipeline systems, and is in charge of oil exports and imports. The energy ministry now handles the E&P deals with foreign companies. The State Fuel and Energy Committee controls local distribution of oil products and gas.

Socar has 78 fields and satellites in production. Of these, 17 offshore fields account for over 80% of its total oil output - with about half of the oil output coming from the shallow-water part of the Gunashli field. Total production by Socar and by Socar-controlled JVs averages about 210,000 b/d, up from 190,000 b/d in mid-2004. Socar's part of Gunashli is also a major producer of natural gas (see Gas Market Trends).

Estimates of Azerbaijan's proven crude oil reserves range between 7-13 bn barrels, according to industry journals and government sources. Socar estimates reserves at 17.5 bn barrels which, under an antiquated Soviet reserve classification system, may be either not viable or not fully proven.

While government ministries handle exploration and production agreements with foreign companies, Socar is party to all of the international consortia developing new oil and gas ventures in Azerbaijan.

In January 2003, then President Heidar Aliyev (who died in late 2003) issued a decree calling for re-organization of Socar. Under its new charter, Socar now owns the oil it produces; previously, Socar relinquished ownership once the oil had been sent to processing facilities. The restructuring also involved transferring some of the non oil-producing businesses to the Ministry for Economic Development.

In June 2004, reports indicated that Socar might change into a joint-stock company within the three to four years. The European Bank for Reconstruction and Development (EBRD) and the US Trade and Development Agency were mentioned as leading institutions to underwrite the transformation.