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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The country's oil industry suffers from outdated technology and poor planning, which have resulted in under-production, waste and severe environmental degradation.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 recent years.

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 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. 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 total output. Total production has fallen to 180,000 b/d. It could fall to lower levels if it continues to lack 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. On average for all its fields, one ton of crude oil costs Socar about $18/b 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 more than 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 Amoco. Work on a joint venture to develop the shallow part of Guneshli, to involve Ramco of the UK and Conoco of the US, has been delayed because the latter have not accepted Socar's terms.

The oldest set of 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. Its peak of about 170,000 b/d in the 1960s has 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 causeway built on pilings covering 40 sq km, of which only a third is usable, it is 50 km from the nearest land. It boasts its own police force, dormitories, hospital, gas-turbine power station and bakery. From the air, the cause-ways 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. Alchin Shirinzade, head of Oily Rocks, says the fields still hold 27-35m tons of oil which would take about 20 years to extract if the western company invests properly. "I believe that if we work with each interested party specifically, we can come up with a plan that is mutually beneficial and at the same time makes a profit".

The complex was offered to western companies along with four other offshore fiels 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 work-ing in Azerbaijan looked it over at one time or another. No one came close to make 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 (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 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 and up to 450m barrels could be recoverable, which is being developed by Ramco Energy of Scotland in a JV with Socar. Ramco's PSA for this, approved in 1998 by President Aliyev, gives it about 50% in the field.

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. Ramco will develop the other sections and undertake exploration of deeper horizons. The project was to pay back in five years. The company first proposed to develop Muradhanly in 1995. Negotiations broke down over tax issues and were only resumed 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). Ramco resumed drilling at the field in mid-June 2000, after an earlier well was abandoned three months before due to mechanical difficulties which prevented testing of the primary target. Ramco's plan is to convert the new well into a long-term producer to be hooked into the existing field infrastructure. Assuming the well proves successful, Ramco will shoot 3D seismic to the northernmost point of the acreage in August. Should this sidetrack operation work out, the well should produce around 700 b/d.

Ramco is planning around 12 wells per year on the field, which should see production peak at about 100,000 b/d. It will truck the crude to the Kurdamir rail loading terminal, about 30 km north. From there the oil can go west to the Black Sea terminal of Batumi in Georgia, or east to the loading terminals for the northern pipeline export route to Novorossiysk. For the longer term, Ramco and Sorar are looking at the possibility of a tie-in to the planned main oil export pipeline from Baku to Turkey's Mediterranean terminal of Ceyhan (see OMT).

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 is the operator. Socar holds 50% and an alliance of Saudi Arabia's Delta and the US-owned Amerada Hess holds 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 Azeri 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 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).

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/d. 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 June 2, 1998, Socar 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 each holds a 40% share. They are working jointly with Socar in exploiting the fields' estimated 20m tons of oil.

On the same day, 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 this month 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. will evaluate the available data within a year and will then decide on a contract area, which must cover 600 sq km. Three exploration wells will be drilled to indicate whether additional seismic is required. At the exploration stage, investment will be $50m. If all goes well investment may reach $2 bn.

Now Socar is only discussing small onshore fields which it wants to be rehabilitated and re-developed by foreign companies as partners. One such project under discussion with LUKoil is the small fields of Govsany and Zykh, and an agreement on this was due to be signed on July 28, 2000. With Poland's POGC, Socal has been negotiating the fields of Bozovny, Kala, Mashtaga and Turkan.
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Publication:APS Review Gas Market Trends
Geographic Code:4EUUS
Date:Jul 10, 2000
Previous Article:AZERBAIJAN - LUKoil Operations & The Yalama JV.
Next Article:AZERBAIJAN - Socar Improving Services.

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