Foreign companies working in Azerbaijan are seeking to cut costs and increase hydrocarbon production at the same time. However, they are keen to stress that the results will be felt in Baku, Azerbaijan’s capital, as well as their own balance sheets, as earnings from contracts increases.


Azerbaijan International Operating Company (AIOC), operator of the Azeri-Chirag-Gunashli (ACG) offshore project, is seeking to reduce costs by 0.3% to $2.896bn in 2006, David Woodward, BP‘s Azerbaijan president, told a press conference.

Capital costs will be $2.552bn, and operating costs $344m in 2006, compared with a forecast of $2.711bn and $193m, respectively in 2005. Capital costs were $400m over budget and operating costs $40m over in 2005 due to an additional workload, faster schedule and growth in equipment and input costs.

Expenditure on the development of the Shah Deniz field in 2006 will amount to $865m, 33.4% less than forecast expenditure in 2005, Woodward said. The drop in expenditure, he explained, is due to the completion of work on the construction of a production platform and an export pipeline.


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By GlobalData

Oil production from the platform in western Azeri began in
January. Work to install the platform at sea is nearly complete and start-up work is 90% complete. The pace of work has enabled the company to significantly accelerate production of the first oil.

Woodward revealed that five predrilled wells would be hooked into the platform first and average annual production from the platform in 2006 would be 75,000 barrels of oil a day.

During maximum production from the 48-well platform, the company will produce 340,000 barrels a day. Production was initially set to begin in the second quarter of 2006.

“Production from ACG is planned at four billion cubic metres in 2006.”

AIOC plans to increase average daily oil production by 70% in 2006 to 439,000 barrels. Oil production from Chirag is forecast at 138,000 barrels a day in 2006, production from central Azeri is planned at 226,000 barrels, up 80%, and production from western Azeri will be 75,000 barrels.

Woodward said production of condensate at Shah Deniz would reach 19,000 barrels a day. Oil and condensate production under the Azeri-Chirag-Gunashli and Shah Deniz projects in 2006 will total 458,000 barrels a day.


All this improvement in production is expected to translate into greater takings for Azerbaijan. The ACG oilfield project will net Azerbaijan revenues of $1.45bn–$2.8bn in 2006.

Taking $40 as the average price per barrel, Azerbaijan will net $1.45bn, if the price is $50 this figure would increase to $2.1bn, and at $60 a barrel revenue would reach $2.8bn, according to Woodward. This is an increase from the $1bn Azerbaijan received in revenue from the project in 2005.

Phase 1 of the project, costing $3.4bn, involves the development of the central part of the Azeri field, with 48 wells drilled from the central Azeri platform. The full development of the field will require the installation of another two such platforms in the eastern and western parts of the field. These will be built as part of phase 2.

Production during phase 1 will amount to 1.425 billion barrels of oil. Crude production in western Azeri is slated for the second half of 2006 and the first half of 2007 for eastern Azeri. More than 20 million tonnes a year, or 420,000 barrels a day, will be produced from the two platforms. Overall, phase 2 will yield 210 million tonnes, or 1.6 billion barrels of oil, and cost $5.2bn.

“The BTC pipeline will stretch 1,767km and will have a capacity of 50 million tonnes of oil per year.”

The ACG project participants are BP (34.1367%), Unocal (10.2814%), ExxonMobil (8.0006%), Devon Energy (5.6262%), Amerada Hess (2.7%), State Oil Company of the Azerbaijani Republic (Socar) (10%), Inpex Corp (10%), Itochu Oil (3.9205%), Statoil (8.5633%) and TPAO (6.75%).

The ACG project was signed in 1994 and the Chirag field started to produce oil in November 1997.


On top of these savings, spending on the Baku-Tbilisi-Ceyhan (BTC) pipeline project will total $641m in 2006, half the figure spent in 2005. Woodward said that the money would be spent on filling the pipeline and completing testing of the Turkish section.

The first tanker from the Ceyhan Port is to be sent in the spring of 2006. However, a thorough testing programme is taking longer than expected.

Construction contractors in Azerbaijan, Georgia and Turkey have complained to BPC Co about delays in construction. Although the option of applying fines for work not completed on time is being discussed, Woodward explained that he did not want to see the use of fines and that the most important thing was to have the pipeline ready for operation within the deadline.

The BTC pipeline will stretch 1,767km (443km through Azerbaijan, 248km through Georgia and 1,076km through Turkey) and will have a capacity of 50 million tonnes of oil per year. Construction began in April 2003.

Participants in the BTC project include BP (30.1%), Socar (25%), Unocal (8.9%), Statoil (8.71%), TPAO (6.53%), Eni (5%), Itochu (3.4%), ConocoPhillips (2.5%), Inpex (2.5%), Total (5%) and Amerada Hess (2.36%).


In early 2006, BP plans to begin pumping gas into formation at Azeri from the gas compressor and water injection platform to increase well flows. However, Socar asked the company to ship associated gas to shore to be used for Azerbaijan’s needs and the matter is being discussed.

Production from ACG is planned at four billion cubic metres in 2006. Woodward also revealed that the company will begin producing gas at Shah Deniz in the third quarter of 2006 and Azerbaijan can buy one billion cubic metres of gas during the first year. If Turkey is unable to buy gas in 2006, that share could be purchased by Azerbaijan.

“The first tanker from the Ceyhan Port is to be sent in the spring of 2006.”

As construction of the production platform and export pipeline is completed, the cost to develop Shah Deniz will fall to $865m in 2006, down 33.4% from forecast costs for 2005.

Woodward said that the construction of the TPG-500 platform onshore has been completed and equipment is being tested. The platform will be shipped offshore in the second quarter of 2006 and the first gas will be produced in the third quarter.

Construction of the South Caucasus gas pipeline to export gas to Turkey is also in the final stages. All work is on schedule to supply the first gas to Turkey in the autumn of 2006.

Construction of the Turkish section of the pipeline from the border with Georgia to Erzurum is on schedule. If Turkey is unable to begin receiving gas on schedule, it will pay fines for each day of downtime.

Under the contract to develop ACG fields, Azerbaijan receives associated gas free. AIOC supplied 1.65 billion cubic metres of gas to Azerbaijan in the first 11 months.

Shah Deniz holds an estimated 625 billion cubic metres of gas and 101 million tonnes of condensate. Phase 1 development includes the production of 178 billion cubic metres of gas and 34 million tonnes of condensate.

During peak production under phase 1 the field will produce 8.4 billion cubic metres of gas and two million tonnes of condensate a year. Gas will be produced from 15 wells at the TPG-500 platform at sea depths of 105m. Production will increase to 16 billion cubic metres a year in the later stages of the project.


Looking ahead to new projects in the area, Woodward told reporters that a first exploration well could be drilled at the Inam structure in Azerbaijan in the second half of 2006.

“Shah Deniz holds an estimated 625 billion cubic metres of gas and 101 million tonnes of condensate.”

The Istiglal rig could, according to plans, start to drill the well in the second half of 2006, but the precise timing would depend on when a fourth appraisal well is drilled at the Shah Deniz field. The drilling budget has already been worked out, but project shareholders have yet to discuss and approve it, Woodward added.

The contract for Inam was signed and ratified in 1998. Socar has a 50% stake in the project, BP owns 25% and Shell owns 25%. Full-scale development will cost $3.5bn–$4bn.

Azerbaijani geologists identified Inam in 1953. Socar believes that the field holds 100 million tonnes of oil and 100 billion cubic metres of gas. The first exploration well was drilled at the field to 4,550m in 2000–01.

It was supposed to be drilled to 5,025m but was suspended due to abnormally high pressure. The Istiglal will be able to drill wells to 7,620m at sea depth of 700m.