According to Petrostrategies, “The government of Azerbaijan and the international consortium AIOC, which exploits the three large off-shore oilfields of Azeri, Chirag and Guneshli Deepwater (ACG), must face up to an unexpected challenge: the decline of ACG production began at least three years earlier than expected, in 2011 instead of 2014-15. Contrary to the official theory put forward in Baku, this precipitated drop is not due to the government’s wish to extend the lives of ACG’s reserves. Reliable reports put this decline down to geological, economic and contractual reasons. This information comes from sources close to companies that are members of the consortium and western diplomats posted in Baku. Their message is summed up in four points; 1) the geology of the fields has proved to be more complex than expected; 2) the production facilities that were created at the beginning are no longer adequate; 3) very big investments must be made to maintain and prolong production; 4) to ensure that the consortium commits to these investments, a guarantee must be provided for the extension of the current production-sharing contract, which expires in 2024, together with “sweeteners”. In oil jargon, this word refers to tax breaks or other incentives that companies ask for.
“Given the nature of the political regime in place, i.e. very close to a complete dictatorship, not many feel at ease to speak openly in Azerbaijan. Yet the official statistics show that the production from ACG peaked at 823,000 barrels per day in 2010, that it fell to 718,000 in 2011 and to 684,000 barrels per day in the first half of 2012. After phase 3 of its development, ACG should have produced 1 million barrels per day. In order to meet this projected growth (and in the hope of receiving greater volumes of crude oil from Kazakhstan, too), the capacity of the BTC oil pipeline to Ceyhan, on the Mediterranean, was raised to 1.2 million barrels per day in March 2009. The new Chirag project (known as COP), which is slated for completion at the end of 2013, will make it possible to add 100,000 barrels per day. But to what extent will the output have fallen by then?
“Baku says it wants to prolong the life span of its reserves and that the robustness of oil prices ensures it enough oil revenues to avoid having to boost production. Azerbaijan’s crude oil export revenues are currently around $25 billion/annum, but according to the figures of the State Oil Fund, net hydrocarbon revenues will hit $16.5 billion in 2012. It can be estimated that around $14 billion/annum will come from crude oil exports, $1.6 billion from gas exports (8 to 9 bcm/annum) with the rest coming from refined products. Added to this are revenues generated from State Oil Fund assets, which stood at $32.5 billion at the end of the 1st quarter of 2012 (sources say they generate 5 to 6% per annum of revenues).
“At the same time, Azerbaijan has revised its gas production forecasts downwards for the 2025 time horizon. Instead of the 50-55 billion cubic meters (bcd) that had been announced, it believes it will be able to produce 40 bcm/annum, said Rovnag Abdullayev, the President of state-owned company Socar. He stated that exports could range from 20 to 30 bcm/annum, while underlining that this would depend on domestic gas consumption. If the population of Azerbaijan hits 20 million people, as Baku hopes, then gas exports could fall to only 10-19 bcm/annum, warns Abdullayev, i.e. less than the contracted export volumes. On the other hand, the cost of developing the Shah Deniz field (phase 2) has been reassessed, rising from $20 billion to $28 billion, according to Socar’s President. And, he added, this figure could climb even further.”
