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The country's oil industry suffers from outdated technology and poor planning, which have resulted in under-production, waste and severe environmental degradation.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 Azerbaijan Republic (Socar). Socar is a huge, overstaffed company with more than 75,000 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 in production. Of these, 17 offshore fields account for over 80% of its total output. Total production by Socar and by Socar-controlled JVs now average about 190,000 b/d.

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. Socar's production system is grossly inefficient. It is said that crude oil costs Socar about $18/barrel to produce onshore.

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.

The shallower formations of one field, Guneshli located 60 miles off the Azeri coast, account for half of Socar's oil production. Guneshli is a giant. In the early 1990s, it was producing about 125,000 b/d. Its deeper formations, containing more oil, are being developed by AIOC, the main consortium led by BP.

Work on a joint venture to develop the shallow part of Guneshli, to involve TotalFinaElf, has been delayed because the French major has not accepted Socar's PSA terms. This project, called shallow-water Guneshli (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 current average output of about 100,000 b/d, with this going to the domestic market. Socar has said SWG contained almost 1 bn barrels of oil. TFE was worried that SWG's oil was migrating to the deeper part of Guneshli which is being developed by AIOC. Socar admits the PSA terms on offer for SWG are not acceptable to 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.

The oldest set of Socar's offshore fields is in a complex called Neft Dashlary (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 10 to 15 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 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 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 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 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 Hell 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 500,000 to 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 32o 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 is required. At the exploration stage, investment was set at $50m. If all goes well investment may reach $2 bn.