Oil Industry in Azerbaijan - Term Paper Example

1. Introduction and Industry Background The global demand for oil is rising at a much greater rate than existing energy resources are able to sustain. Today 85 million barrels of oil are produced each day. It is expected that the demand for oil would reach 115 million barrels a day by 2030 (Klare 2007). The Caspian Sea region is a crucial area for the supply of oil and natural gas. The region is comprised of Azerbaijan, Turkmenistan, Uzbekistan and Kirgizstan. It is situated between the Russian Federation and Iran. This region currently produces the fourth largest supply of oil in the world. It also contains the world's largest deposits of natural gas (Energy Information Administration 2008). The breakup of the former Soviet Union has attracted much of the world's interests in the huge oil and gas reserves of the Caspian Sea region. The newly independent countries have signed many contracts worth billions of dollars to develop the region's oil and gas fields. The Caspian Sea has the potential to become one of the major oil and gas production areas in the world similar in its capacity to the North Sea and the Gulf of Mexico (Energy Information Administration 2008). 2.1 The History of Azerbaijan Oil Industry During World War II, Azerbaijan's oil production peaked at about 500,000 barrels per day (bbl/d). Oil extracted from Azerbaijan constituted 71.4% of overall oil output of former Soviet Union. Following the war, the former Soviet Union directed resources elsewhere causing Azerbaijan's oil production to drop dramatically. In 1991, Azerbaijan gained its independence from the former Soviet Union and oil production was at a minimum low of 180,000 bbl/d (Energy Information Administration 2008). The ability of Azerbaijan to develop its oil and natural gas resources was dependent on the availability of sources of capital and technology. Since then, Azerbaijan officials have been trying to attract foreign investments into their oil and gas industry. Azerbaijan's has 1.2 billion barrels of proven oil reserves in addition to enormous possible reserves in the Caspian Sea. These oil reserves in addition to successful governmental policies have attracted foreign international investment to Azerbaijan. Since 1996, over $3.4 billion has been invested in the oil sector with expectations to reach $2 billion in 2006. Ever since, Azerbaijan's oil industry experienced a boom reaching almost 800,000 bbl/d in 2007. Much growth is still anticipated during the 21st century. It is expected that by 2010, Azerbaijan's oil production would exceed 1.5 million bbl/d (www.stat.gov.az, 2006). New fields in the Caspian Sea were developed through joint ventures (JVs) and production sharing agreements (PSAs). JVs were later converted to PSAs in 2000, due to their restrictions on the ability to export their oil (Energy Information Administration 2008). The Caspian Sea has 30 billion tons of oil, 18-20 trillion cubic meters of gas, which comprises 15 percent of the world carbon-hydrogen resources. The oil deposit that belongs to Azerbaijan 3-5 billion tons of oil, 5 trillion cubic meters of gas the oil production in Azerbaijan is expected to increase rapidly (SOCAR, 2008).. Azerbaijan carries most of its oil products from the Caspian Sea to the European market through the following four major pipelines: Baku-Tbilisi-Ceyhan (BTC), Baku-Novorossiysk, Baku-Supsa, and Caspian Pipeline Consortium (CPC) as shown in figure 1 (Energy Information Administration, 2008). Figure 1: Four Major Pipelines of Azerbaijan The Caspian Sea is also rich with natural gas. The largest natural gas field in Azerbaijan is Shah Deniz. Azerbaijan is planning to supply natural gas to Turkey and European countries through the development of South Caucasus Pipeline (SCP) (SOCAR, 2008). The former Soviet Union lacked of environmental protection has caused heavy environmental damages to Azerbaijan and the Caspian Sea. Mismanagement of the oil industry has generated much pollution and alteration of the natural environment of Caspian Sea region. Furthermore, oil and gas extraction activities have increased environmental concerns. Countries of the Caspian Sea are forced to take serious measures to decrease pollution and prevent natural disasters in the region (SOCAR, 2008). 2.2 Major Players of Azerbaijani Oil Industry 2.2.1 Azerbaijan International Operating Company (AIOC): In 1994, eleven major oil companies representing eight countries of the world which comprise the Western Oil Consortium signed an agreement to operate under the umbrella of the Azerbaijan International Operating Company (AIOC). This agreement was called "Contract of the Century." AIOC is Azerbaijan's first PSA which accounts for most of Azerbaijan's increase in oil production. AIOC is operated by British Petroleum (BP). In 1994, AIOC signed an $8-billion, 30-year contract to develop three fields Azeri, Chirag, and deepwater of Gunashli (ACG). The ACG field is 120km off the coast of Azerbaijan and contains 5.4 billion barrels of recoverable oil (SOCAR, 2008). By the end of 1999, AIOC had spent about $2 billion in ACG to yield a production average of 100,000 bbl/d in 2000. Most of this production comes from the shallow-water field of Gunashli which is 100 kilometer off the Azeri coast. Further development of ACG is delayed until a decision is made on export options and the ability to export via the Baku-Ceyhan pipeline (Energy Information Administration 2008). 2.2.2 State Oil Company of Azerbaijan Republic (SOCAR): State Oil Company of Azerbaijan Republic (SOCAR) was established under the order of the president of Azerbaijan to improve the management structure of the oil industry. It is one of the largest oil companies in the world using the oil reserves of Azerbaijan. SOCAR's goal is to satisfy Azerbaijan's internal demand for the oil and export everything above this demand. In order to provide this Oscar operates 57 oil deposits 18 of them are in the Azerbaijan sector of the Caspian, the rest are on land. SOCAR is capable of conducting exploration, utilization and renovation of land and sea oil fields (SOCAR, 2008).. After the establishment of the AIOC and the introduction of international oil companies in Azerbaijan, the Republic of Azerbaijan was open to foreign investments. 27 PSA contracts have been signed between the SOCAR and foreign oil companies (SOCAR, 2008). 2.2.3 British Petroleum (BP) Azerbaijan: BP operates AIOC as one of the eleven constituting members. BP invests in three major projects in Azerbaijan which are supported by the governments of Azerbaijan, Turkey, and Georgia. First, it participates in the ACG oil field which is a four-phase project. ACG is expected to produce one million barrels per day by 2009. Second, BP has also participated in the project of Baku-Tbilisi-Ceyhan (BTC) pipeline. Its significance exists as it represents the first direct link of transportation between the Caspian Sea and the Mediterranean while avoiding the Turkish straits. The 1760-km pipeline would carry oil produced in AGC to Ceyhan in South Turkey where it would be loaded on tankers to be transported worldwide. The pipeline is shown in figure 2 (British Petroleum 2003). Figure 2: Baku-Tbilisi-Ceyhan (BTC) Pipeline. BP is also involved in the production of natural gas from the major gas field of Shah Deniz which is 100-km off the shores of Baku. This field would mainly supply the Turkish market (British Petroleum 2007). The ownership of ACG among the participating oil companies are currently divided as follows: BP is the operator with the largest share of 34.1%, Chevron, SOCAR, INPEX all with 10% each. In 1007, ACG spent $2,822 million in capital expenditure and in 2008 expected $1,926 million in capital expenditure. In 2007, ACG produced over 244 million barrels from the Chirag, Central Azeri, West Azeri and East Azeri platforms (British Petroleum 2008). 2.2.4 ExxonMobil Azerbaijan ExxonMobil is the world's premier petroleum and petrochemical company. In 1995, Exxon Mobil joined Azerbaijan's oil and gas projects. In Azerbaijan, ExxonMobil shared in the Azeri-Chirag-Gunashli and Araz-Alov-Sharg projects. In 2001, Exxon Mobil suspended the Araz-Alov-Sharg project in response to the arguments between Azerbaijan and Iran. In 2006, Exxon Mobil cancelled its Azerbaijan Operating Company due to its failures in explorations and the problems with Iran towards the status of the Caspian Sea. Exxon had to pay considerable indemnities to SOCAR due to its early cancellations (Baku News 2007). Exxon Mobil did not join the Baku-Tbilisi-Ceyhan (BTC) pipeline project and lost a major opportunity to transport its oil at good tariffs. In 2005, Exxon Mobil was forced to sign a five-year contract with Azpetrol Holding to export its oil through the Baku-Batumi railway (Baku News 2007). Despite its failures of oil exploration, Exxon Mobil provided humanitarian aid to Azerbaijani and conducted considerable humanitarian projects in education. ExxonMobil continuously tries to improve the quality of life in host countries by operating efficiently and by being a good neighbor. The company takes protective measures to cut down on marine oil spills and reduce the carbon dioxide emissions to improve the quality of the air. It also protects its employee by employing best performances in the industry and they were able to cut down 75 percent of its worldwide injuries (Exxon Mobile 2008). 2.2.5 Statoil Azerbaijan: Statoil is a Norwegian-based company who has been a partner with 25% in the major natural gas field of Shah Daniz in addition to partnership in other fields of Alov-Araz-Sharg and Azeri-Chirag-Gunashli fields since 1992. Natural gas from these fields would be transported to Turkey through the South Caucasus Pipeline (SCP). It is also involved in the project of the new oil Baku-Tbilisi-Ceyhan (BTC) pipeline. Statoil operates in Azerbaijan in accordance with SOCAR towards the development and export of its gas reserves (Statoil 2006). 2.2.6. Shell Azerbaijan: In 2000, Shell returned to Azerbaijan after almost 90 years to acquire twenty five percent in the Inam offshore project in the Caspian Sea. Inam is operated by BP which owns twenty five percent and SOCAR which owns the remaining fifty percent. However, couple year Shell did not hold its stakes in the high potential Azerbaijan oil and gas sector. Shell sold its shares in the undeveloped Inam project to South Korea decreasing its involvement in Azerbaijan. Upon the approval of the Azerbaijani government, SOCAR and BP, the project will remain under the leadership of BP (Reuters 2007). 2.2.7. INPEX Thirty percent of INPEX is owned by the Japanese government. INPEX explores for natural gas and oil in a number of worldwide locations including the oil-rich areas of the Caspian Sea. INPEX has partnered with BP and Chevron to explore for and produce crude oil from fields in Azerbaijan. The company focuses on cleaner burning liquified natural gas (LNG). (INPEX Corporation. 2008). Both fields of INPEX are progressing well and as planned in phases of the original plan for AGC. Crude oil production has increased at the ACG Oil Fields in Azerbaijan, which consequently lead to increased sales in both the domestic natural gas business (INPEX Corporation. 2008). References British Petroleum. (2008). 2007 results and 2008 plans media briefing by the BP Azerbaijan Leadership Team. British Petroleum. (2007). The Azerbaijan Social Review Commission First Report June 2007. Baku News (2007). Exxon Mobile leaves Azerbaijan. Azerbaijan. British Petroleum, (2003). Economic, social and environmental overview of the ACG, BTC and Shah Deniz/SCP projects in the national and regional context of Azerbaijan, Georgia and Turkey. Energy Information Administration. (2008). Azerbaijan Country Analysis, obtained on October 4, 2008 from http://www.eia.doe.gov/cabs/Azerbaijan/Background.html. Exxon Mobile (2008). ExxonMobil: A good corporate neighbor Obtained on October 3, 2008 from www.exxonmobil.com/Corporate/Newsroom/Publications/deepwater/energy/mn_energy.html INPEX Corporation. (2008). Offshore North Caspian Sea Block (Kashagan Oil Field and Others) obtained on October 2, 2008 from http://www.inpex.co.jp/english/business/nis.html. INPEX Corporation. (2008). Annual Report obtained on October 3, 2008 from Others) obtained on October 2, 2008 from http://www.inpex.co.jp/english/business/nis.html. Klare, M. (2007). Oil Addiction rehab or bust. University College Maastricht, Germany, obtained on October 5, 2008 from http://crossroads.journalismcentre.com/2007/michael-klare-in-maastricht-oil-addiction-rehab-or-bust. Reuters (2007). RPT-UPDATE 2-Korea KNOC buys Azeri oil project stake from Shell. Obtained on October 3, 2008 from http://uk.reuters.com/article/oilRpt/idUKL286048520070828 Socar, (2008). State Oil Company of Azerbaijan Republic (SOCAR), obtained on October 3, 2008 from http://socar.az/about-en.html. Statoil, (2006). Annual Report and Accounts obtained on October 5, from www.statoil.com. Read More