Shah Deniz: the ace up Azerbaijan’s sleeve

The second stage of one of the world's largest offshore gas projects, Shah Deniz, is expected to start producing oil and gas in 2018. It’s considered amongst BP’s most significant commercial successes and is likely to further Azerbaijan’s success in the petroleum industry, but will a turbulent oil environment hinder the new project’s success?


Shah Deniz

In Azerbaijan, amid the deep water shelf of the Caspian Sea, lies one of the largest offshore gas projects in the world. Shah Deniz is the largest discovery BP has made since Prudhoe Bay in 1977, and so is likely to be a significant asset in an oil environment that is facing plummeting prices and increasing opposition from conservationists. 

The field lies 70km south east from Azerbaijan’s capital Baku and holds at least 1 trillion cubic meters of gas.  It was discovered in 1999 and is operated by BP on behalf of its partners in the Shah Deniz Production Agreement (PSA). 

The developers say   the project will be a completely new challenge, being the biggest subsea production system ever built in the Caspian Sea, and one of the world’s biggest gas-condensate fields. 

Azerbaijan has a long and prolific history in the oil industry, and both the country and the operator are hoping that when it comes into production, Shah Deniz will be worth the investment.  

Step by step: Stages 1 & 2

Stage 1 began operations in 2006, and the second stage is almost complete and expected to enter its production phase in 2018. 

Stage 1 has the capacity to produce around 10 billion cubic meters of gas per year, which is about 50,000 barrels a day of condensate. Stage 2 is expected to add a further 16 billion cubic meters to this number, nearly tripling the number of barrels produced. 

Plans for the new stage of the field include two new bridge linked offshore platforms, 26 production wells, upgraded offshore construction vessels and an expansion of the Sangachal terminal to allow for new gas processing and compression facilities. 

"Stage 2 is expected to triple the number of barrels of oil produced."

According to BP, the project is now over 70% complete in terms of engineering, procurement and construction and it is well on the way to hit its target of starting production in 2018. SD2 will also start exporting to Turkey by the end of the same year.

Socar head of investment Vagif Aliev said in June: "72.4% of the overall scope of the work is done, which is ahead of schedule by about 2.5%. $12bn have been spent to date from total SD2 cost estimate of $24bn including an inflation rate for the period 2014-2020.”

Subsea production

Last May, the Shah Deniz consortium was awarded $1.5bn for the transport and installation of the deeper water subsea production systems of SD2. This is to manage and operate the new subsea construction vessel  Khankendi, so that deeper water subsea production systems and structures can be installed at all points of the project.

The Khankendi is 155 meters long, 32 meters wide and has a 13 meter main deck. It is expected to perform subsea activities between 2017 and 2027. 

“We are pleased to continue cooperation with our strategic offshore installation contractor and its major local consortium partners to progress the execute phase of the giant Shah Deniz Stage 2 project,” said BP's vice president for the SD2 marine and subsea programme Frank Wilson. “The new flagship vessel Khankendi, which is currently under construction by Baku Shipyard, will provide essential support for the installation of the Stage 2 subsea structures - the biggest subsea production system ever built in the Caspian.”

He added that the major contract was a testament to BP’s commitment to deploy this technology, and that it was the first time that subsea production will happen in the Caspian Sea at this level, with structures  reaching a depth of up to 550 metres.

BP regional president for Azerbaijan Gordon Birrell said: “The Shah Deniz consortium is proud to be involved in the construction of the Khankendi, which, we believe, marks a new era in the shipbuilding history of not only Azerbaijan but also the entire Caspian region.”

Azerbaijan: already a major player

Overall, the petroleum industry in Azerbaijan produces nearly 900,000 barrels of oil per day and 29 billion cubic meters of gas per year. The country has been linked with oil for centuries, since medieval travellers to the region noted the abundant supply. 

By the 19th century, Azerbaijan was the frontrunner in the global oil and gas industry and the first oil well in Bibi-Heybat was drilled. Fast forward to the beginning of the 20th century and Azerbaijan was producing over half the total supply of oil in the world. 

Traditionally, oil has been the main asset and natural gas a secondary one. The US Energy Information Administration (EIA) has confirmed the country’s importance in ensuring energy security, and being an important part of European markets for both oil and gas.   

"The petroleum industry in Azerbaijan produces nearly 900,000 barrels of oil per day."

The EIA stated that Azerbaijan is an important oil and natural gas supplier in its Country Analysis Brief report. It said it expects the country to grow in importance as a natural gas supplier, with significant field development occurring in the future as well as much expansion of export infrastructure.

“Stage 2 development of the Shah Deniz natural gas and condensate field will more than double Azerbaijan’s natural gas exports by the end of the decade,” the report said.

The development is also monumental for Azerbaijan as a country in general. BP states that so far in 2016, more than 22,000 people were involved in construction and development across all main contracts in the country, and over 80% of them were Azerbaijani people.

Exports and crashing prices of oil

A lot of the gas from SD2 will be exported to other countries, so it is an economical giant for its industry and it is expected to more than double Azerbaijan’s natural gas exports. Six billion cubic meters of gas per year will be exported to Turkey and 10 billion cubic meters to Europe in a route known as the Southern Gas Corridor. 

Approximately $28bn of capital investment is required to produce this gas and build the infrastructure required to transport it to the Georgia-Turkey border, as it will travel over 3,500km to get there. 

Other than Shah Deniz, Azerbaijan is also home to a number of other important gas fields, including Absheron, Umid, Babek and Nakhchivan. The country is confident that this will ensure its development in the gas industry for hundreds of years.

Overall gas production in Azerbaijan totalled 18.2 billion cubic meters in 2015, which was 3.4% more than in 2014, according to the BP Statistical Review of World Energy 2016. With SD2 set to be completed, this figure will surely only grow.

However, Azerbaijan was one of the countries hit hardest by the oil price crash. Its currency devalued by almost a third overnight last December. 

The revenue of SD2 is expected to be $5bn a year, which is dwarfed by the fact the project and pipeline together will cost an estimated $45bn overall.  Interest on that $45bn worth of debt is likely to take a large chunk out of profits, so BP should hope that it has buyers for what is produced at the field. 

Also, the Organization of the Petroleum Exporting Countries (OPEC) is sceptical of Azerbaijan’s position as world leader in petroleum and said this month that it expects a decline in oil production in the country by 40,000 barrels per day in 2017 due to a lack of new projects. 

This may no longer be the case in 2018 when SD2 starts production, and by that point oil prices may be on the up again. It all depends on the global demand and whether SD2 is completed on time, which the operators are certain it will, and whether that oil and gas are in fact profitable.