Azerbaijan: racing to develop natural gas potential

Back in 1994, when the so-called “Contract of the Century” was signed, forming an international partnership to develop the giant Azeri-Chirag-Guneshli (ACG) oil field, lots of experts believed that Azerbaijan would not have to worry about money for a long time. But just 23 years later, Azerbaijan’s government finds itself wrestling with revenue dilemmas. Today, Azerbaijan still holds roughly 7 billion barrels of proven oil reserves and produces 841,000 barrels on a daily basis. Yet that volume represents a significant drop from peak output of 1.1 million barrels a day in 2010, Eurasianet writes in an article "Azerbaijan: Racing to Develop Natural Gas Potential".

Lower yields, rising concerns about the depletion of reserves and falling world oil prices have sent Azerbaijan searching for alternative sources of revenue. Baku’s chief hope is to develop its natural gas potential. According to conservative estimates, Azerbaijan sits atop 1.3 trillion cubic meters of gas and condensate, most of it in the offshore Shah Deniz field, which is believed to be among the largest in the world. Production there began in 2006, and is expected to increase significantly during the second development phase, currently underway. Azerbaijan’s ambition is to supply natural gas through Turkey, Greece, and Albania to Italy and the rest of Europe – via the planned Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipelines that will form the Southern Gas Corridor. Deliveries are scheduled to begin in 2018, with around 4 billion cubic meters (bcm) per year slated for the Georgian and Turkish markets. The plan is to then expand this volume to 12 bcm a year in 2019, and finally to a full capacity of 16 billion cubic meters a year in 2020, 10 bcm of it headed for Europe. But even the boost from Shah Deniz exports is not projected to be enough to place Baku on sound financial ground. The ultimate success of Azerbaijan’s effort to emerge as a global natural gas power rests with new offshore exploration.

One recent discovery, announced in 2010, is the Umid gas field in the south Caspian Sea, estimated to contain 200 billion cubic meters of gas and 40 million tons of condensate; the country’s state energy company, SOCAR, has been producing gas there since 2012, and has recently finished drilling the third well.

Also of great promise is the adjacent Babak field, yet to be developed, with potential gas reserves of 400 billion cubic meters, plus 80 million tons of condensate. Further off the coast, the Shafag-Asiman field holds an additional 300 billion cubic meters of gas, which Azerbaijan plans to extract in an equal-share partnership with BP. (This field may contain oil too, according to a seismic survey.) And another offshore deposit, Nakhichevan, is being jointly explored with the German company RWE.

The difference-maker for Azerbaijan’s ambitions as a gas exporter is the Absheron field, discovered in 2011. This field’s development, currently in its first phase, could greatly boost potential supplies (its reserves are estimated at 350 billion cubic meters of gas and 45 million tons of condensate) capable of filling Europe-bound pipelines of the Southern Corridor. This could bolster Europe-bound flows from the Shah Deniz field, and ease concerns that the European Union might have over future supplies. All in all, according to SOCAR’s strategy document, these steps could expand Azerbaijan’s gas export volumes to a massive 40 bcm per year.

The problem is that this will not happen until 2025 at the earliest, and in the meantime, Azerbaijan has several challenges to overcome. More importantly, it will be at least five years before Azerbaijan begins to see its anticipated windfall from natural gas. The Absheron field will not start producing until late 2021 or early 2022, and the first gas deliveries from Shah Deniz will not reach Europe until 2020 or later.

For Baku, it may be a race against time. At present, Azerbaijan faces a gas shortage. It needs 12 billion cubic meters to satisfy its own domestic demand, and in 2016, it was forced to import around one-tenth of it from abroad. In fact, in the first five months of that year, SOCAR’s gas production had actually decreased by 5.4 percent compared to the same period in 2015. The fall triggered new discussions with Gazprom over potential gas imports from Russia, on the order of 3 bcm to 5 bcm per year, with Baku asking Moscow for a discount.

Azerbaijan’s high construction expenses are somewhat offset by the falling world price of steel, which is needed for pipelines; Baku has saved $2 billion on TANAP alone. But its budget is still strained, forcing it to prioritize some energy development projects over others. This will likely leave it focused on the Shah Deniz field and the Southern Gas Corridor initiative, while other projects that have no foreign partners –including the Umid and Babak gas fields – risk falling behind. Absheron will probably stay on track, thanks to the involvement of France’s Total.

2830 views


More Azerbaijan News

Moscow marks 99th anniversary of Azerbaijani Democratic Republic

Moscow marks 99th anniversary of Azerbaijani Democratic Republic

Moscow is hosting a traditional solemn event dedicated to the Azerbaijani Republic Day, which is celebrated every year on May 28, as Azerbaijan declared its independence establishing the Azerbaijan Democratic Republic on May 28, 1918. The …

Jeyhun Bayramov: Work with gifted children is one of Ministry of Education#039s priorities

Jeyhun Bayramov: "Work with gifted children is one of Ministry of Education's priorities"

Azerbaijani Deputy Minister of Education told Vestnik Kavkaza on the state support of the winners of the Olympiad

US State Department energy official to visit Baku

US State Department energy official to visit Baku

Deputy Assistant Secretary for Energy Diplomacy, US Department of State Robin Dunnigan will visit Azerbaijan, the US Embassy in Azerbaijan said. Dunnigan will lead a US delegation during the annual international …

Ilham Aliyev and Mehriban Aliyeva attend official reception on occasion of Azerbaijani Republic Day

Ilham Aliyev and Mehriban Aliyeva attend official reception on occasion of Azerbaijani Republic Day

Azerbaijani President Ilham Aliyev and first lady Mehriban Aliyeva have attended an official reception on the occasion of the Azerbaijani Republic Day at the Buta Palace. The national anthem …

Mammadyarov: Baku committed to Nagorno-Karabakh conflict#039s political settlement

Mammadyarov: Baku committed to Nagorno-Karabakh conflict's political settlement

Baku is committed to the political settlement of the Nagorno-Karabakh conflict on the basis of the principles of sovereignty, territorial integrity and inviolability of international borders, Azerbaijani Foreign Minister Elmar …

Ilham Aliyev lays wreath at Azerbaijan Democratic Republic memorial

Ilham Aliyev lays wreath at Azerbaijan Democratic Republic memorial

Azerbaijani President Ilham Aliyev laid a wreath at the memorial devoted to the Azerbaijan Democratic Republic in Baku today. The guard of honor was arranged around the memorial. Then the President laid a …

 Book about main directions of Azerbaijan#039s foreign policy 1991-2016 presented in Baku

Book about main directions of Azerbaijan's foreign policy 1991-2016 presented in Baku

The official presentation of the book titled 'Main Directions in Azerbaijan's Foreign Policy 1991-2016' was held in Baku today. It reflects the views of Azerbaijan's leading experts on the country's foreign policy …

Leningrad region and Republic of Azerbaijan preparing agreement

Leningrad region and Republic of Azerbaijan preparing agreement

They are going to significantly expand ties in the trade-economic, scientific-technical and cultural spheres

BP marks 25th anniversary of collaboration with Azerbaijan in London with Anglo-Azerbaijani Society (PHOTO)

BP marks 25th anniversary of collaboration with Azerbaijan in London with Anglo-Azerbaijani Society (PHOTO)

BP's headquarters in London hosted an event dedicated to BP's 25-year activity in Azerbaijan, organized jointly with the Anglo-Azerbaijani Society. The event was attended by the Vice-President of Communications and External …

Erdogan: Turkey highly appreciates Azerbaijan’s achievements in all areas

Erdogan: Turkey highly appreciates Azerbaijan’s achievements in all areas

Turkish President Recep Tayyip Erdogan has sent a congratulatory letter to Azerbaijani President Ilham Aliyev. “I would like to extend my sincere congratulations to Your Excellency …

more Azerbaijan News