Production from Chirag-Guneshli-Azeri field just a start

Nov 12, 1997 01:00 AM

Production has started from the giant Chirag-Guneshli-Azeri field, first of the massive offshore projects being developed by the world's major international energy companies in the Caspian Sea. The first pumping of oil from the Chirag-1 platform, on Nov. 8, was essentially symbolic. It will take several months for oil production to build up. Likewise it will take months more for the oil to fill the waiting pipeline that will take it up across the Russian border and, if all goes well, across the republic of Chechnya to the Russian Black Sea port of Novorossiisk.
But for the time being, the foreign oilmen who have hammered the Azerbaijan International Operating Company (AIOC) into Azerbaijan's leading oil company are well pleased. Less than 3 years after the government in Baku formally signed the legislation granting them rights to produce oil from fields which the Soviets had unsuccessfully sought to develop, the crude will actually be flowing.
So far, the AIOC consortium members, led by British Petroleum and the Amoco, have paid out well over $ 1 billion to get the project up and running. Eventually, they estimate production and distribution costs will exceed $ 8 billion. Such sums are beyond the resources of the strained treasuries of Azerbaijan and its fellow Caspian states, Turkmenistan and Kazakhstan. That is why the Azeri government has now signed 8 major agreements with internal groups to develop the resources lying off Azerbaijan's coast.
No one knows quite how much oil is out there. Confirmed estimates remain relatively low, around 10 billion barrels for Kazakhstan, 3.6 billion barrels for Azerbaijan, and 1.5 billion barrels for Turkmenistan, a total which amounts to just 1.5 % of the world's total proven oil reserves of some 1,037 billion barrels.
But what is driving the industry is the oilmen's belief that the geology is so good that there may be as much as 200 billion barrels in and around the Caspian. Moreover, even the oil that has already been proved is enough to move markets.
The North Sea, which so often sets the trend for oil prices, only contains around 3 % of proven world reserves. And in the words of AIOC President Terry Adams, the oil industry expects to find the equivalent of "one, or even two North Seas" in the southern Caspian alone.
But it's not just the geology which makes the region exciting: it's the fact that it is accessible. Two-thirds of the world's oil -- more than 680 billion barrels, is locked up in the Middle East where production is dominated by giant state monopolies such as Saudi Arabia's Aramco, the Kuwait Petroleum Company, and the national companies of Iraq and Iran.
In the Caspian, the oil majors can sign deals for full-scale exploration and production, taking the risk of a dry hole from which no oil flows, but reaping the reward of direct access to income if and when the crude starts to flow.
The region is also exciting for the gas industry. Turkmenistan used to be the world's fourth largest gas producer and, with internationalcompanies finding fresh resources routinely, could well recover that status in the near future.
But it all depends on finding a way -- or several ways -- to bring the oil and gas to hard cash markets in the outside world. The first oil from Azerbaijan will go north, through Russia to the Black Sea.
In about 4 months' time it will be loaded onto a tanker at Novorossiisk and then ferried to a commercial market, probably transiting the Bosporus Straits through Turkey en route to a Mediterranean or West European destination.
But the Baku-Novorossiisk pipeline can only ship 100,000 bpd. A second export line will become available in the second half of 1998, another 100,000 bpd line to the Georgian Black Sea port of Soupsa.
But this will not be sufficient to carry the kind of volumes which AIOC intends to produce from the Chirag-Guneshli-Azeri fields in the first decade of the 21st century -- let alone the volumes to be produced by the other consortia developing crude oil prospects in Azerbaijan and Kazakhstan.
AIOC alone should be producing around 700,000 bpd around 2006 and overall production from international producers in the Caspian will almost certainly ensure that total production will be more than double that figure.
But just how fast the oil and gas reserves are developed will depend on resolving a host of issues. Turkmenistan and Azerbaijan are disputing ownership of some of the fields in the middle of their region of the Caspian, whilst Russia has been arguing some central areas of the sea should be developed on behalf of all five littoral states, so that Russia and Iran would benefit as well as Azerbaijan, Turkmenistan and Kazakhstan.
No one is quite sure which new pipelines will be built to take the bulk of the oil out. But few oilmen challenge the catchphrase first voiced by AIOC Vice-President Greg Rich -- and now emblazoned on car bumper stickers from Baku to Houston, that "happiness is multiple pipelines."
The Iranians, mindful of their historic connections with the region, are just completing a small gas line that will take Turkmen gas down the Caspian coast to the Iranian capital of Teheran.
Turkey and some western companies are pushing for a pipeline complex that would bring oil under the Caspian from Kazakhstan to Azerbaijan, and then through the Caucasus and eastern Turkey to the nearest deepwater and open water port to the Caspian: the Turkish Mediterranean oil terminal at Ceyhan.
But such prospects and problems are all for the future to resolve. The people of Azerbaijan are still suffering from 7 years of political instability, an unresolved conflict with Armenia and economic collapse following the break up of the Soviet Union. Now they are finally getting real physical proof that external investment will, ultimately, yield real rewards.

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