Shah Deniz's potential provides hope for other Caspian Sea operators

Tough politics, tougher bottom environment

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The location of the Shah Deniz Field off Azerbaijan.
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The environment in the Caspian Sea is one of the more unfriendly in the oil industry. The area is plagued with increasingly high costs due to land-locked isolation and risky political conditions.

Over the past two years, operators such as Arco, Conoco, and Pennzoil have expressed disappointment in the area and pulled out, leaving behind rather hefty investments. The impetus for the retreats have been the lack of commercial reserves in their respective exploration areas, but underlying each of these were hints of problems dealing with Socar, the Azeri state oil company.

While speculation persists that the area contains reserves rivaling that of the Middle East, proving that claim has been increasingly difficult. The onshore area has proven several times over to be reserve-rich, but the offshore reserves have been more difficult to find.

The main thrust of the offshore play has hinged on the Azeri-Chirag Field in the Azerbaijan sector of the Caspian. The field has estimated recoverable reserves of 4.6 billion bbl and has been onstream since 1997. Reserves of this magnitude have been enough to keep interest in the area high, but doubts of the area's potential remain. These doubts were one of the reasons that a watch was kept on the exploration efforts of the BPAmoco-led consortium, Azerbaijan International Operating Company (AIOC).

The group targeted the Shah Deniz (translated to mean King's Sea) prospect in the southern Azeri sector of the Caspian, some 70 km southeast of Baku. In relation to other known fields, Shah Deniz is located 35 km southeast of the Bahar Field and 70 km southwest of Azeri-Chirag.

BP Amoco and partners Statoil, Socar, Elf, LukAgip, Oil Industries Engineering and Construction, and Turkish Petroleum Overseas signed the production sharing agreement (PSA) for Shah Deniz with the government of Azerbaijan on October 17, 1996. The initial PSA was for a three-year period and carried a commitment to drill two exploration wells, plus a mandatory third well if the partners apply for a further year's extension - which they recently did. The contract covers an area of 860 sq km in water depths ranging from 50 meters in the northwest to 600 meters in the southeast.

The prospect was thought to hold massive reserves, in the area of 2.4 billion boe, and could possibly help in proving up the region's potential. But beyond proving prospectivity, what made the Shah Deniz so interesting to others were two unique characteristics:

  • The prospect lay in a relatively unexplored area with extremely difficult geology.
  • It was going to be drilled with the first rig constructed in the region.

Geology

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The Istiglal semisubmersible is being used to drill the wells on Shah Deniz.
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Azeri geologists first identified Shah Deniz in 1954. The area is considered to have high pressure and is relatively unstable. Socar had previously drilled two wells in the structure - SD-6 and SD-4. The wells were drilled to 5,500 meters without hitting the reservoir and were stopped due to financial and technical reasons. Analysis of the wells did produce key informa tion on the challenges the group would face in drilling the prospect.

The group contracted Caspian Geophysical to shoot 22,000 km of 3D seismic over the PSA in 1997, using the M/V Baki vessel. Following the seismic shoot, the group acquired detailed bathymetry over the prospect. The studies identified a number of hazards in the area, including young unconsolidated sediments and 12 separate mud volcanoes, the largest of which, located to the north of the reservoir, produces a major debris flow over 5 km wide.

These geologic problems were expected to pose problems for drilling operations. The rig would have to drill through clays, which have yet to become shale, and sands, not converted to sandstone. In addition, because the sediments have sunk rapidly and remain unstable, mud, gas, and water could gush out as pressure is released. Studies also proved that the area planned for the drilling was prone to seabed slides.

Istiglal rig reconditioned

AIOC chose a location on the northeast flank of the structure for the first well - SDX-1. The well was begun in 1998 using the Dada Gorgud semisubmersible in 135 meters water depth. Due to technical limitations with the derrick capacity and well control equipment the Dada Gorgud could not drill the lower sections of the well and was contracted to drill and case the well to 2,500 meters.

However, due to the area's rig shortage and the difficulty of moving a rig into the region, AIOC had to contract for an older rig to complete the well. The Shelf 5 semisubmersible was upgraded at the Kaspmornefteflot (KMNG) yard in Astrak han. The project entailed completely stripping down the rig and rebuilding it to current standards. KMNG removed of 4,000 tons of equipment, reinforced the deck to handle higher loads, added accommodations for 120 persons, new power generators, drilling equipment, and a new mooring system.

The yard completed the work in less than 18 months and renamed the rig the Istiglal. The final upgrade increased the water depth of the rig from 280 meters to 700 meters, increased drilling depth to over 6,000 meters, extended the variable deck load to 3,200 tons, and installed a 15,000 psi BOP.

The rig was set to complete the SDX-1 well to 6,200 meters. The Istiglal represented the first major upgrade carried out in a Caspian Sea yard. And, with that success, it could hold the key to adding more rig capacity to the rig-deficient Caspian Sea.

SDX-1 prospect

The Istiglal re-entered SDX-1 in 1998, but soon afterward experienced mechanical difficulties. The Dada Gorgud was brought back to reach the target depth of 6,316 meters in 1999. The well encountered gas condensate in three separate horizons with a total net payzone of 220 meters.

Operator BP Amoco tested the lowest horizon. Gas flowed at the maximum capacity of on-board equipment - 50 MMcf/d of gas, with 2,965 b/d of condensate at a choke setting of 38/64-in. and a wellhead flow pressure of 7,126 pounds per sq. in. The SDX-1 represented the deepest well ever drilled by a semisubmersible in the South Caspian Sea.

This well sent waves of encouragement throughout the Caspian region. According to BP Amoco, the well suggested a significant resource in the structure, justifying the early establishment of a joint working group to explore the possibilities for material gas exports.

SDX-2 prospect

To further test the potential of the structure, the group moved the Istiglal 6 km to the south of SDX-1 and spudded the second well, SDX-2. The water depth was 348 meters. The second well was drilled to a depth of 5,892 meters and penetrated three main horizons. Final testing results on the well have yet to be released, but early reports from BP Amoco called the well a significant gas condensate discovery.

"There is confidence that the results of the two wells already drilled, combined with those of a third well to be drilled later this year, should enable us to prove first stage resources of 150 bcm of gas and 150 million bbl of liquids," said Andy Hopwood, BP Amoco's Azerbaijan Exploration Business Unit Leader.

Representatives of AIOC partner Socar reportedly stated that the well could yield 2.5 MMcm/d of gas, almost one million more than SDX-1. Total reserves for the field are now estimated at 700 bcm of gas, up from Socar's previous estimates of 400 bcm of gas and 200 million tons of condensate.

Phased development

Following SDX-2, BP Amoco, on behalf of AIOC partners, outlined a $1.0-1.3 billion plan for the first-stage development of Shah Deniz and the export of the gas based on the gas memorandum signed between the Azeri's and Turkey.

The plan calls for the first stage to produce 5 bcm a year, subsequently rising to possibly 16 bcm a year. This first stage will involve platforms in the shallow water area in the north and east of the field and the construction of a subsea pipeline to carry the gas to an onshore gas compression station. Hopwood said that the partners will be working with the governments of Azerbaijan and Turkey to develop the framework of the project with the objective of delivering first gas to market in the winter of 2002-2003.

The project will be separate from the Trans-Caspian gas pipeline running through Turkmenistan and is more inline with the AIOC spearheaded Baku-Ceyhan line. The partners in Shah Deniz have said they want to package and synchronize its export pipeline with the Baku-Ceyhan. The group is claiming that they can supply gas cheaper via this line, rather than the Trans-Caspian pipeline.

This places Turkey in a tough position. The country has long touted the Baku-Ceyhan line. If it does not buy Shah Deniz gas, AIOC may pull its support and it could lose the line following years of hard work. At the same time, if it buys the Shah Deniz gas it could put serious doubts on the Trans-Caspian line. However, negotiations on the fate of both pipelines are still underway and Shah Deniz partners have about a year to arrange a gas sales contract with Turkey, before the project is sanctioned.

The Shah Deniz plan will entail renovating 490 km of existing pipeline in Azerbaijan and laying 280 km of new pipeline in Georgia to the Turkey border. Engineering, procurement, and construction are expected to begin in the second half of this year. Total cost for this segment is estimated to be between $600-700 million.

Exploration work is still underway. A third well, SDX-3 is set to be drilled later this year to further delineate the field. Once the well is complete, the engineering, procurement, and construction will begin. Also, the group has planned three more appraisal wells following SDX-3.

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