15-05-02 A new report by Edinburgh-based Wood Mackenzie says that hydrocarbon liquids production in the Caspian region could reach 3.8 mm bpd by 2015 under a risk-free scenario, but when risk is taken into consideration production could amount to only 2.8 mm bpd by that time.
The study was presented by Wood Mackenzie's senior analyst Hillary McCutcheon at the CIS Oil and Gas Summit in London last month. The study says that the region's hydrocarbon liquids production will continue to be dominated by Kazakhstan and Azerbaijan during the next 15 years based on current reserves. But it says that future discoveries could add to the production potential and extend a production plateau of 3.5-4 mm bpd beyond 2020.

The region currently consumes some 530,000 bpd of crude. Furthermore, the Caspian has the potential to produce 16-17 bn cfpd of natural gas by 2010, of which Turkmenistan could account for some 49 % of the total and Kazakhstan 38 %. Regional domestic consumption of natural gas is currently 7.3 bn cfpd.
The favourable estimates for the region's liquids and gas production should be discounted against the risk involved in hydrocarbon development, which the study says includes complex geopolitics, distance to international markets, relatively high levels of risk and availability of financing.
Such uncertainties make the risk-free scenario production figures for liquids and gas unlikely to be achieved in their respective timeframes. When taking the factors for risk into consideration, the Caspian scenario has a peak production of 2.8 mm bpd in 2014 compared with nearly 4 mm bpd in the "unrisked" case.
"The significant difference between the unrisked and risk profiles represents the loss due to exploration failure or delays as a result of technical or market-related issues," the study says.

As of January 1, 2002 the five Caspian states have remaining liquid reserves estimated at 39.4 bn barrels. Of this, Kazakhstan's offshore Kashagan oilfield, with reserves estimated at 10 bn barrels, accounts for 25 % of the regional total. By 2010, it is expected that 57 % of the Caspian's liquids production will come from just four fields: Tengiz, Karachaganak and Kashagan in Kazakhstan and the Azeri-Chirac-Guneshli oilfields in Azerbaijan.
Total Azerbaijani crude reserves are put at 6.6 bn barrels, but drilling activity in Azerbaijan has been disappointing, the study notes, in light of the fact that there has been no new discovery in the country since the Shah-Deniz gas field in 1999. Meanwhile, Iran is not expected to begin exploratory work in the Caspian until 2004.

The study estimates natural gas reserves in the region at 207 tcf and credits Kazakhstan and Turkmenistan with 45 % and 44 % of total reserves respectively. The offshore Kashagan field is estimated to contain associated gas reserves of 25 tcf, but on the whole, Kazakhstan's large natural gas reserves are sour and costly to develop.
Azerbaijan's Shah-Deniz gas field contains sweeter gas and accounts for 10 % of the region's gas reserves. The country has a geographical advantage in that it can get its gas to market easier and this has enabled Azerbaijan to secure a gas sales contract with Turkey.
Kazakhstan will have a more difficult time exporting its gas, the study says. It will have to secure stable, long-term contracts for the gas produced at its Tengiz, Karachaganak and Kashagan fields, the key projects driving gas production in Kazakhstan. According to the study, one factor to consider is the prospect of gas reinjection at Tengiz and Kashagan, which could reduce the volume of gas available for sale from Kazakhstan.

Caspian oil projects are constrained primarily by export pipeline capacity, the study notes, but it also points out that the new Caspian Pipeline Consortium (CPC) system "will enable Kazakhstan oil production to take a major step forward."
Meanwhile, Azerbaijan anticipates the construction of the Baku-Tbilisi-Ceyhan (BTC) crude pipeline. Work on that 1,700 km system is due to begin this summer. "Although these two pipelines will add up to 2.3 mm bpd to current export capacity," the study says, "smaller projects may still experience difficulty in accessing export routes and be delayed accordingly. Any significant delay to Tengiz or the ACG project could be especially problematic, as plateau could then coincide with peak production from Kashagan, resulting in increased competition for export capacity."

According to the study, potential future gas production in the Caspian could be significant, but a large proportion of the gas reserves remain stranded without local, regional or international markets. "Turkmenistan and Kazakhstan gas remains subject to Russia's dominance and as a result is largely unable to reach markets willing to pay international gas prices," the study says, adding that key regional challenges include securing additional gas markets, obtaining the finances for export pipelines and managing the technical and political risks.
Under any scenario, investment in the region will be driven byfinancing the four key projects in the Caspian: Tengiz, Karachaganak, Kashagan and ACG, the study says. But increased investment is also expected in Shah-Deniz as additional gas contracts are negotiated.

The study draws the following conclusions:
-- The majority of reserves, production potential and investment potential in the Caspian region are controlled by a few key projects and relatively few companies. Over 60 % of the reserves and production potential of the region is provided by Kazakhstan.
-- Just three Caspian projects (ACG, Kashagan and Tengiz) account for almost half of investment (46 % unrisked, 47 % risked) to 2020.
-- Gas production will account for a significant proportion of overall hydrocarbon production. Similarly, gas will play an increasingly important part in the success of the key projects if it can be sold at a reasonable price.
-- Total "unrisked" investment for the Caspian between 1990-2020 is estimated at almost $ 314 bn. Total risked investment is almost $ 268 bn for the same period.
-- The overall profile is so dependent on four key projects that any delays or deviations from the plan could have a huge effect on both the production and investment profiles.
-- The single most important factor which will dictate the future oil production in the Caspian is export capacity.
-- The risks associated with a number of the key projects in the Caspian are significantly lower than they were 12-18 months ago. Examples include: Kashagan, which is now a discovery; the CPC pipeline, which is now operational, reducing the transportation and marketing risk for Tengiz and others; progress on the BTC pipeline, which should have a similarly positive effect on the ACG development; conclusion of the gas contract and transit terms for Shah-Deniz gas.

The overall potential of the Caspian region is not in doubt. However, the rate of investment will be primarily determined by the perceived risk in the region.
If the host governments can genuinely and perceptibly reduce those risks (e.g. improve the fiscal and political stability) then lenders should be more willing to finance upstream projects in those countries. Without improved fiscal and legal stability, financing the required $ 268-314 bn in the Caspian could prove problematic, especially for the small investor, as some companies are already discovering to their cost.