OKIOC discovery: Reason for jubilation, or caution?

Jul 18, 2000 02:00 AM

by Jennifer DeLay

Reports of a huge oil discovery by OKIOC continued to generate excitement recently, but the jubilation was countered -- ever so slightly -- by the Azerbaijani government's confirmation that no oil had been found in the first test well drilled at the Kyurdashi block.
Most sources indicate that OKIOC has discovered a truly spectacular oil deposit in the northern Caspian Sea. According to Kazakhstani government officials, the group's Vostochny Kashagan field appears to hold about 50 bn barrels of crude. This would make it larger than any other oil field in Kazakhstan -- and, indeed, larger than all of the known oil deposits in the North Sea combined.
OKIOC is not expected to release an official report on its assessment of the first test well until next month, but two members of the consortium have confirmed that they were hoping to see Vostochny Kashagan hit the 50 bn barrel mark. A high-ranking energy expert was quoted as saying that the field could conceivably hold as much as 200 bn barrels.

In Azerbaijan, meanwhile, levels of enthusiasm ran somewhat lower. Prime Minister Artur Rasizade confirmed on July 13 that AKD Petroleum Operating's first exploratory shaft, had turned up almost nothing. Despite this disappointing development, the Agip-led group is hardly ready to quit. AKD has said it will not jump to any conclusions about the Kyurdashi block's reserves until it sinks at least one more test well. Yet the prospect of seeing another oil project falter is surely a sobering one for Baku.
The Azerbaijani government lost both revenues and investor confidence last year after two consortia -- the Caspian International Petroleum Company (CIPCO), set up to develop the Karabakh prospect, and the North Abzheron Operating Company (NAOC), set up to develop the Ashrafi and Dan Ulduzu fields -- folded. It would lose more if AKD were to close up shop.
Even more worrisome are the whispers that AKD's failure is an indication that the Azerbaijani sector of the Caspian Sea is not as rich in oil as previously thought. Certainly the AIOC holds a prize asset in the Azeri-Chirag-Guneshli concession. But that group's fields were discovered before the fall of the Soviet Union. Since other consortia began drilling three years ago, no other major oil fields have been found off the Azerbaijani coast.

The biggest windfall, at the Shah-Deniz deposit, came as a surprise. The field's operators had expected to find crude oil. Instead, they turned up natural gas -- between 700 bn and 1 trillion cm of it. Other fields -- notably Abzheron, formerly known as Zeinalabdin Tagiyev -- may hold even more gas. As such, Baku is making a bold bid to capture a share of the growing Turkish gas market. Last week, the Azerbaijani government signed a package of agreements with Georgia on the transport of gas through the southern Caucasus to Turkey.

The contrast between Vostochny Kashagan and Kyurdashi is, though stark, perhaps not all that surprising. Industry experts have a history of issuing contradictory pronouncements on Caspian oil reserves, blowing first hot, then cold, then hot again. After the AIOC signed its contract with the Azerbaijani government in September of 1994, other industry players began lining up for a crack at Azerbaijan's oil reserves. As the line became longer and longer, the US State Department issued a report stating that the Caspian Sea basin might hold up to 200 bn barrels of oil. (There's that 200 bn barrel figure again.) Russian experts and others ridiculed the report, saying that the region was more likely to have 15-25 bn barrels.
The US government chose to remain optimistic and pushed ahead with plans for an ambitious oil transport scheme -- namely, the construction of a Baku-Ceyhan main export pipeline (MEP). Washington has consistently backed this project, as have other players in the region such as Turkey. (This attitude was much in evidence last week as John Wolf, the US administration's point man on Caspian energy issues, travelled to Tbilisi and Turkish President Ahmet Necdet Sezer visited Baku for discussions on Baku-Ceyhan.) This position has not changed, even when failures in the Caspian -- e.g., the ill-starred efforts of CIPCO and NAOC -- led many to doubt the optimistic forecasts on the region's oil reserves.

Scepticism about the Caspian began to erode earlier this year, after the Russian company LUKoil announced that it had discovered 2.19 bn barrels of oil equivalent at the Severny field in the northern part of the sea. Shortly after LUKoil's revelation, word began to spread of OKIOC's major find. Subsequently, another set of pipeline builders -- the Caspian Pipeline Consortium (CPC) -- called for a speedy completion of work on a new conduit that will be able to ferry oil from western Kazakhstan to the Black Sea port of Novorossiisk.
Yet it is too soon to say that there is absolutely no room for scepticism over the oil industry's prospects in the Caspian -- and not just because the disappointment at Kyurdashi coincided with jubilation over Vostochny Kashagan. It ought not to be forgotten that LUKoil's Severny field, which is not all that far away from Vostochny Kashagan, appears to contain only 40% oil. That is, 60% of the Russian deposit's estimated 2.19 bn BOE in reserves is probably gas. Not that there's anything wrong with gas. The Shah-Deniz group, for one, is seeking to turn lemons into lemonade by using its unexpected gas strike as a platform to make inroads into the Turkish energy market. Gas is a widely used fuel, and it is less harmful to the environment than petroleum.
However, it cannot be said that the discovery of a massive gas field generates the same sort of excitement as a massive oil field. Oil seems to have more power to attract media attention and high-dollar investments. As such, it might prove prudent to wait and see just how much oil -- and how much gas -- the Caspian basin appears to contain before making sweeping pronouncements about the region's prospects.

Source: NewsBase
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