Petroleum Iran Oil and Gas

Caspian fields as Dream or reality

SPECIAL TOPIC: The Caspian Sea — Fields of Dreams?

For much of the past decade, the Caspian Sea region has been a major source of both hope and frustration with respect to oil and gas.  The region is believed to have over 250 billion barrels of oil resources and another 570 trillion cubic feet of natural gas resources.a

Billions of dollars have been spent over the past decade trying to develop these resources. In April 1993, Chevron concluded a historic $20-billion, 50-50 deal with Kazakhstan to develop the Tengiz oil field with its estimated recoverable oil reserves of six to nine billion barrels.b In what was then described as “the deal of the century,” in September 1994, the Azerbaijan International Oil Consortium (AIOC) signed an $8-billion, 30-year contract to develop three Caspian Sea fields–Azeri, Chirag, and the deepwater portions of Gunashli (ACG).c Partners in this consortium include BP (34.1%, operator),  SOCAR, the Azerbaijan state oil company (10.0%), Statoil (8.6%), Exxon Mobil (8.0%), and Amerada Hess (1%).d Until recently,  there has been little to show for these investments.  For instance, while TengizChevroil has increased daily oil production at Tengiz to 280,000 barrels per day, compared with 30,000 barrels per day when the joint venture was formed in 1993, oil production for the region as whole in 2000 was only nominally higher than in 1990.e,f

Disappointing exploration results have contributed to the Caspian’s failure to live up to expectations.  As recently as June 2001, TotalFinaElf expressed a willingness to pay $12 million to get out of its exploration commitment on the Lenkoran-Talysh-Deniz prospect in the southern Caspian after drilling a dry hole.  There is also the report that Exxon Mobil’s first well on the Oguz concession was a dry hole.g

Believers in the region’s potential, however, like to point out that the history of successful exploration includes the drilling of many dry holes.  For example, the well that discovered the enormous Prudhoe Bay field in Alaska had been preceded by a decade of exploration in which a number of dry holes were drilled.h

Not all of the recent exploration has been fruitless.  The initial logs of the exploration well at the Kashagan prospect in Kazakhstan’s sector in the Caspian Sea suggest that this may be one of the most important discoveries of the last 30 years.i The prospect is being explored by the Offshore Kazakhstan International Operation Company (OKIOC) whose partners are ENI, TotalFinaElf, Royal Dutch/Shell, BG, Exxon Mobil, Phillips Petroleum, and Inpex Masela.  In a promising sign, the prospect’s first appraisal well, Kashagan East 2, flowed 7,400 barrels per of oil in a constrained test.j While some have compared the prospect to Prudhoe Bay (16 billion barrels), others have speculated that the field could even have 60 billion barrels of oil.k

In any event, while not always easily found, the oil and gas is there.  For instance, the ACG oil fields have reserves of over six billion barrels of oil and nearly six trillion cubic feet of gas.l There is also the giant Shah Daniz gas condensate project.  BP, the operator of the consortium that discovered the field has reported that it contains 15 trillion cubic feet of natural gas reserves.mOthers have speculated that the field could contain as much as 35 trillion cubic feet of gas.n

While the disappointing exploration results to date have played a role in the region’s failure to live up to expectations, there are also questions about how much pipeline capacity the region’s needs to export its output to world markets.  The lack of adequate pipeline infrastructure has in turn slowed the pace of development of existing successful prospects.  For example, the AIOC has announced that the planned Phase-1 program to develop the ACG, will be effectively delayed until a decision has been made on the export options.

Indeed, the principal factor causing concerns about the success of the region has been the lack of pipeline infrastructure to move the oil and gas west onto world markets.  Recognizing the lack of adequate infrastructure, the countries of Georgia and Azerbaijan signed a 30-year agreement in 1996 to pump a portion of the “early oil” from the Azerbaijan International Operating Company (AIOC)’s ACG from Baku to the Georgian port of Supsa on the Black Sea.(Figure 31) Following the agreement, the AIOC made substantial upgrades to the existing pipeline along this route and built the $565-million Supsa terminal on the Black Sea.  The 515-mile pipeline became operational in April 1999.  However, the pipeline’s capacity is a fraction of the region’s export potential.o

More recently, the Caspian Pipeline Consortium (CPC) opened the valves on its 980-mile pipeline which connects the Tengiz oilfield in western Kazakstan to Russia’s Black Sea port of Novorossiysk.  Ten international companies financed the $2.6-billion initial capital costs of the pipeline.  The FRS companies Chevron, Exxon Mobil, and Kerr-McGee are among the partners in the venture.  The pipeline was filled and the first tanker was loaded in late October 2001.p The pipeline’s current capacity is approximately 565,000 barrels per day and is expected to increase to 1.35 million barrels a day by 2015.  While only about 240,000 barrels a day have been committed to the pipeline as of late October 2001, there are indications that the completion of the pipeline is prompting an expansion of the productive capacity of the Tengiz oil field.q

One of the disadvantages of the CPC export route is that the port of Novorossiysk can be closed up to 2 months per year due to bad weather.r In addition, there are the potential risks associated with having to navigate the Bosporus, the narrow waterway that connects the Black Sea with the Sea of Marmaru and ultimately the Mediterranean.  This waterway is one of the world’s busiest (50,000 vessels annually, including 5,500 oil tankers), and one of most difficult-to-navigate in the world.  Six accidents occur on the Bosporus every 1 million transit miles, which is twice the accident rate of the Suez Canal.s Moreover, unlike the Suez Canal, which largely cuts through desert, theBosporus flows through Istanbul, a city of 12 million, dramatically increasing the damage from a collision.

Concerned about possible Russian control over the flow of oil, the U.S. government has long supported the proposed Baku-Ceyhan route.t Unlike the CPC route, this route would avoid Russian territory and instead pass through Azerbaijan, Georgia, and Turkey to the Mediterranean Sea.  The estimated cost of $2.8 to $2.9 billion of the route has been a major issue.u On a per-barrel basis, this works out to about $3.00 per barrel which is about twice the unit transportation costs of the CPC route.  Another key question is the volume of oil potentially available for export through the pipeline.  As of late 2000, it was unclear whether the ACG fields had sufficient potential reserves to produce the roughly 1 million barrels per day that some analysts have cited as needed to make the pipeline economical.v

In February 2001, Chevron, which has long opposed Baku-Ceyhan (along with Exxon Mobil), decided to join the group of its sponsors, becoming the first oil company outside of the AIOC (which is developing the Azeri-Chirag-Gunashli deposits that will provide much of the oil for export) to join the sponsorship group.w BP, the leader of the AIOC consortium which had also opposed the project, announced in June 2001 that the Baku-Tbilisi-Ceyhan project is economic based on the volumes which will be available from the fields now being developed in Azerbaijan.x The project has moved into the “detailed engineering phase” with a completion target of 2004.  However, some have questioned the viability of the route following the improvement in relations between the U.S.and Russia following the September 11th terrorist attacks on the World Trade Center and the Pentagon.

With the discovery of the Shah Deniz field, mainly natural gas, in mid-1999, the issue of natural gas exports has become a pressing issue.  This field is located in the western portion of the Caspian.  It is envisioned that the production from Shah Deniz will be transported by pipeline fromBaku via Tbilisi in Georgia to Erzerum in Turkey.  The 600-mile pipeline will have a capacity of 700 million cubic feet per day and is expected to cost $1 billion.z Shareholders in the project include BP (25.5 percent), Statoil (25.5 percent), LukAGIP (10 percent), SOCAR, the Azerbaijan state oil company (10 percent), Offshore Iran Energy Company (10 percent), and TPAO, the Turkish state oil company (9 percent)

On May 21, 1999, Turkey’s state owned pipeline company signed an agreement to build a $2-$2.4 billion, 1,050-mile gas pipeline from Turkmenistan, underneath the Caspian Sea, across Azerbaijan and Georgia, and on to Turkey and then Europe.ab However, the economic viability of the project is now considered doubtful by some, given the discovery of the far more accessible natural gas supplies from Shah Deniz, the construction of the “Blue Stream” pipeline that will transport natural gas from Russia to Turkey, and the continuing legal issues concerning the ownership of the Caspian.