AZERBAIJAN - Socar & The PSAs.

So far, the Baku government has signed 23 major PSAs with more than 35 foreign companies from 16 countries. The firms are to invest over $60 bn in exploration, field development, production and export pipelines.

The Energy Ministry, created on April 18, 2001 on the recommendation of the EU and IMF, oversees the PSAs. The ministry develops investment programmes for the petroleum sector and is responsible for granting or withdrawing licences for oil and gas field development. It monitors fulfilment of licence conditions. Previously these functions were assumed by the state-owned NOC Socar (see its profile in Part 2 of next week).

Azerbaijan International Operating Co. (AIOC), formed in September 1994, has been the showcase venture for Baku. AIOC is developing the country's three largest offshore fields: Azeri, Chirag and the deep-water part of Guneshli, about 160 km east of Baku. The group is led by BP. Its 30-year PSA is to develop between 4.3-5.4 bn barrels of crude oil at a cost of $10 bn. The JV is now producing 155,000 b/d, from 50,000 b/d in mid-1998. This should exceed 1m b/d by 2010 (see Part 2 in next week's Review).

BP, the biggest investor in Azerbaijan, leads in five PSA ventures - which are committed to spend a total of up to $29 bn to find and develop up to 11.4 bn barrels of oil and over 2 TCM of gas: AIOC's, Shah Deniz, North Absheron, Inam, and the Alov-Araz-Sharg block which Iran also claims.

AIOC shares are held by 11 companies as follows: BP (34.14%), Unocal (10.05%), Inpex of Japan (which in 2003 bought LUKoil 10% for $1.354 bn), Socar (10%), Statoil (8.56%), ExxonMobil (8%), TPAO (6.75%), Pennzoil (4.82%), Itochu (3.92%), DeltaHess Khazar (2.08%) and DeltaHess ACG (1.68%). A partnership of Amerada Hess of the US and the Saudi firm Delta acquired the 2.08% stake from Ramco Energy in mid-2000.

Shah Deniz is the second largest field in Azerbaijan. The partnership for this was set in June 1996. The ownership structure is as follows: BP (25.5%), Statoil (25.5%), Socar (10%), NaftIran (10%), LukAgip (10%), Total (10%) and TPAO (9%). With reserves originally put at 1.5 bn barrels of oil and condensates and 4 TCM of gas, development and infrastructural costs were estimated at $4 bn. US companies stayed out of this project because of participation by an Iranian firm, NIOC affiliate OIEC, which was brought into the venture in 1996 by Baku as a compensation for NIOC's exclusion from AIOC. In May 2002 OIEC sold its stake to NaftIran (Nico).

BP began 3-D seismic studies in May 1997. It began drilling the first exploration well in October 1998 and found a major gas reserve. SDX-1 drilled to a depth of 6,316 metres, in mid-1999 tested 35 MCF/day of gas and 2,965 b/d of condensate from its lowest horizon. It had a net pay zone of 220 metres, which led BP to estimate reserves in place at between 430-750 BCM (15-26 TCF).

The second well, SDX-2 drilled to 5,892 metres, in 2000 encountered the Pereryv suite and tested 88 MCM/d of gas and condensate from a Balakhani formation. This led BP to raise its gas reserve estimate to 1 TCM. A third well in late 2000 failed to find gas.

BP and its partners then decided the finds were large enough for a $1.3 bn development project, with gas to be exported to Turkey by pipeline. But Turkey in 2002 said it will not be able to buy the gas before 2006, which compelled the consortium to delay completion of the Shah Deniz project. Gas and condensate will be produced for the local market in 2005. The group will be the first in the Caspian to use a floating production system. Its 30-year PSA gives it the right to all gas found

The North Absheron Oil Co. (Naoc): The offshore North Apsheron Ridge contains the deep-water fields of Ashrafi and Dan Ulduzu, 70 km east of Baku. A 25-year PSA signed in December 1996 by Socar and the Naoc consortium allowed the group to begin work in March 1997. The partners are: BP (30%), Unocal (25.5%), Socar (20%), and Delta/Nimir (4.5%), with Itochu and JNOC of Japan having decided to sell their 20% equity.

The two fields are estimated to have reserves of 900m barrels of oil and 1-1.7 TCF of gas, and development costs are estimated at $2 bn. The foreign partners will provide the finance for Socar's stake. The first exploration well, Ashrafi-1, in early February 1998 tested two zones. The first zone yielded 22 MCF/d of gas and 350 b/d of condensate. The second flowed at 3,400 b/d of oil with 1.3 MCF/d of associated gas. A second well was drilled in 1998/99 to test the Dan Ulduzu structure. Small oil production began in 2003 and is to reach 140,000 b/d in 2008.