Open for business in the Caspian:higher oil prices spur E&P investment

March 1, 2006
After the break-up of the former Soviet Union, the countries in the Caspian Sea region struggled with difficult economic and political transitions.

Pam Boschee, International Editor

After the break-up of the former Soviet Union, the countries in the Caspian Sea region struggled with difficult economic and political transitions. Rebuilding of these economies continues, and contributing to the recovery is the ongoing development of the region’s oil and natural gas resources.

Although the area is rich in energy wealth, the Caspian Sea is landlocked, and five countries hold the keys-Russia, Azerbaijan, Kazakhstan, Turkmenistan, and Iran.

The first rig Parker Drilling sent to Kazakhstan, Rig 257, is now being used by Agip KCO in the Vostochny Kashagan field on the Caspian Sea shelf.
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Geopolitical jockeying continues among the Caspian-bordering countries, especially in light of Middle East instability and the subsequent revisions of many Western countries’ energy policies.

Clearing the hurdles

In 1991, these countries may have been declared independent after the dissolution of the USSR, but they remained harnessed by the restrictions previously imposed on them behind closed borders.

For example, geological knowledge of the region was limited because no modern 3D seismic data was collected during the Soviet era, and minimal 2D seismic was available.

Geography of the region, with Caspian nations lacking access to an open sea, made transport of their oil and gas to the world markets difficult.

Added to these challenges was the underlying fact that the Caspian countries did not have access to all the modern worldwide resources of the industry, such as offshore drilling and construction fleets, or world-scale fabrication facilities.

As recently as six years ago, there was only one crane barge in the region, and it was 30-year-old technology, long outdated in the industry.

As well-financed western companies were allowed to enter the newly opened markets of the former Soviet republics in the mid-1990s, investment capital and better technology were introduced.

The escalation of world oil prices has served to attract and maintain interest in the Caspian region by making available capital with which to tackle the significant challenges it presents.

Offshore Kazakhstan leads in reserves

Even at their eventual peak, the Caspian region’s production levels will be significantly less than the OPEC countries’ output. In 2015, Caspian production is expected to reach 4 MMb/d, a 150% increase from 2003 production levels of 1.6 MMb/d, compared with 45 MMb/d for the OPEC countries, according to the US Energy Information Administration (EIA).

EIA has estimated that the region’s proven crude oil reserves range from 17 to 44 Bbbl.

The growth in oil production since independence of these countries has been about 70% since 1992. Kazakhstan and Azerbaijan have been the primary contributors to this growth and are expected to remain so for the next decade.

Kazakhstan holds the largest share of the Caspian Sea region’s recoverable crude oil reserves. Its production accounts for about two-thirds of the 1.8 MMb/d currently being produced in the region.

The Kashagan field is the largest oil field outside the Middle East and the fifth-largest in the world in terms of reserves. Located off the northern shore of the Caspian Sea, its estimated recoverable reserves are 7 to 9 Bboe, with an additional potential of 9 to 13 Bbbl using secondary recovery techniques, such as gas injection.

Ongoing political challenges have delayed the target date for first production from 2005 to 2008. Estimates for early production levels are 75,000 b/d with peak reaching 1.2 MMb/d by 2016.

On behalf of seven companies under the North Caspian PSA (production sharing agreement), Agip KCO, a company wholly owned by Eni through Agip Caspian Sea BV, is the single operator of the appraisal and development operations, estimated at $29 billion, in the Kazakhstan sector of the North Caspian Sea.

Members of the Kashagan consortium include: Agip Caspian Sea BV (operator, 18.52%), KazMunayGas (8.33%), ExxonMobil Kazakhstan Inc. (18.52%), Shell Kazakhstan Development BV (18.52%), Total E&P Kazakhstan (18.52%), ConocoPhillips (9.26%), and INPEX North Caspian Sea Ltd. (8.33%).

Kashagan is the largest of the offshore fields in the North Caspian PSA area. Other Agip KCO fields-Kashagan SW, Aktote, Kairan, and Kalamkas-have separate appraisal programs from Kashagan. These offshore fields are large by international standards, but still considerably smaller than Kashagan.

Agip KCO invested $1.8 billion in the Kashagan field in 2003. During the early-oil phase, oil will be produced at three sites, each consisting of three artificial islands for production rigs and another island to host onshore and floating facilities for initial oil treatment and gas separation.

Sulfur removal facilities will be based onshore. Part of the gas will be injected back underground, and the remaining volume is to be piped to an onshore gas treatment plant.

Azerbaijan benefits from critical pipeline

Facing many of the same issues as Kazakhstan, Azerbaijan is moving toward realizing economic benefit from its Caspian Sea resources.

Azerbaijan’s oil production averaged 312,000 b/d of crude oil in 2004. Estimates of its proven crude oil reserves range between 7 to 13 Bbbl, according to EIA.

The State Oil Company of the Azerbaijan Republic (SOCAR) estimates proven reserves at 17.5 Bbbl, which may include reserves that are either not viable or not fully proven because the numbers were derived under antiquated Soviet methodology.

The country’s largest hydrocarbon structures are located offshore in the Caspian Sea and account for most of the country’s current petroleum production. The majority of Azerbaijan’s oil output (59%) comes from SOCAR.

The largest offshore PSAs are the Azeri-Chirag-Gunashi (ACG) and Shah Deniz fields, both operated by BP. ACG holds estimated reserves of 5.4 Bbbl of oil with a projected investment of $13 billion, and Shah Deniz holds 2.5 Bbbl of oil and 14 tcf of natural gas with a projected investment of more than $3 billion.

A significant milestone for continued development and investment interest in Azerbaijan was achieved in May 2005, with the opening of the 1 MMb/d-capacity Baku-T’bilisi-Ceyhan (BTC) pipeline. At a cost of nearly $4 billion, this critical infrastructure provides a means of export to the west of the Caspian region.

The BTC will export Azeri (and possibly up to 600,000 b/d of Kazakhstani) oil along a route from Baku, Azerbaijan via Georgia to the Turkish Mediterranean port of Ceyhan, bypassing the sensitive and heavily used Bosphorous Straits.

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Last month, linefill of the BTC advanced up to the second pump station in Turkey, a point 970 km along the total length of the 1,768-km pipeline. Some 5.4 MMbbl of oil are now in the line. The next phase of stage-by-stage linefill was set to have begun in early March, running from pump station PT2 to pump station PT3.

BP holds a leading 30% stake in the consortium running the pipeline. Other consortium members include SOCAR, Amerada Hess, ConocoPhillips, Eni, Inpex, Itochu, Statoil, Total, TPAO, and Unocal.

BP estimates that exports via BTC should reach 200,000-300,000 b/d by the end of 2006.

In March 2005, Kazakhstan and Azerbaijan agreed to build the Aktau-Baku pipeline, connecting the Kashagan offshore oil fields near Aktau in Kazakhstan to the BTC in Baku via the Caspian in 2008.

Regional E&P activity grows

Within the last four months, reported E&P activity from the Caspian region has been frequent.

BP started production in another section of the ACG field. Oil from one of three wells at the West Azeri platform reached the Sangachal oil terminal, about 40 km south of the Azeri capital, Baku, on January 4.

Total output from West Azeri is estimated to be around 70,000 b/d day in 2006.

West and East Azeri comprise phase II of the ACG project. This phase will represent more than 420,000 b/d when East Azeri comes onstream next year.

Central Azeri, which is phase I of the ACG project, came onstream in February 2005, producing around 93,000 b/d. An average output of 230,000 b/d is expected in 2006.

The third phase covers the deepwater Gunashli field, which is due to begin production in 2008. This will bring the total ACG development to seven platforms.

Total output from ACG is estimated to reach more than 1 MMb/d by 2009.

It is estimated that 5.4 Bbbl of oil and 100 bcm of natural gas will be recovered within the duration of the production sharing agreement.

PSL Energy Services Ltd. has been contracted to carry out a range of pre-commissioning work on a jackup mobile production unit for SBM Offshore. All equipment and personnel will be mobilized from PSL’s newly opened Caspian regional headquarters in Baku, Azerbaijan.

Iran’s North Drilling Co. and China Oilfield Services Ltd. signed an oil exploration agreement for management, repair, and maintenance of the Alborz semi-floating platform, currently being constructed by Iranian Offshore Industries Co. (Sadra).

A three-year contract with an estimated cost of $33 million will enable Iran to move its exploration activities to the deep waters of the southern sector of the Caspian. Iran had previously been limited to exploring fields up to depths of 90 m.

Eurasia Energy Ltd. has signed TRACS International Consultancy Ltd. as its petroleum engineering consultants to assist in the preparation of a rehabilitation, development, and exploration plan for the company’s 600-sq-km oil and gas block in the Republic of Azerbaijan.

The block is located in the shallow coastal waters of the Azerbaijan sector of the Caspian Sea approximately 70 km south of Baku.

Lukoil opened a major multilayer oil and gas condensate field in the Severny licensed area in the northern part of the Caspian Sea.

The field was discovered with the first exploration well in the Yuzhno-Rakushechnaya structure, 220 km from Astrakhan.

The reserves of the new field under the probable and possible categories are estimated to be 600 MMbbl of oil and 1.2 tcf of gas.

The new field is the most significant oil field opened in Russia over the last 10 years, according to the company.

Valkyries Petroleum Corp. has decided to drill its first exploration well on the Lagansky block based upon newly acquired 2D seismic that confirms several drillable prospects located in the Russian sector of the Caspian Sea.

The company is currently converting a set of shallow draft barges for the drilling operations.

Valkyries expects to spud its first well at the end of 2Q 2006, targeting the large Morskoye prospect, located in approximately 2 m of water offshore.

The Lagansky block encompasses over 2,000 sq km and is located immediately adjacent to and directly on trend with Lukoil’s recently announced major new oil discovery.

After a series of lengthy negotiations, ExxonMobil has reached an agreement with the State Oil Company of Azerbaijan (SOCAR) on compensation for the refusal to drill a second exploration well on the Naxcivan and Zafar-Marshal offshore fields.

The companies have already signed all relevant documents, which detail that ExxonMobil will pay $32 million for the Zafar-Marshal field and $18 million for the Naxcivan field.

ExxonMobil stopped exploration drilling on these fields in 2004. Data from the first exploration well informed company experts that continuing the search for commercial oil and gas deposits on the fields would not be economically feasible.