During 2005, monthly oil production in Azerbaijan rose 150,000 bbl/d during 2005, driven almost exclusively by growth from the Azeri-Chirag-Guneshli (ACG) field. This is above the production levels the country produced at its peak during World War II. SOCAR, the state oil company of Azerbaijan expects the countrys total liquids production to average roughly 600,000 bbl/d for all of 2006. Domestic petroleum consumption in Azerbaijan has fallen since independence, resulting in a growing margin for net petroleum exports (see Figure 1). Azerbaijans net exports amounted to roughly 310,000 bbl/d in 2005, most of which was routed to Russia, Italy, Turkey, and Germany. Estimates of Azerbaijans proven crude oil reserves range between 7 and 13 billion barrels according to industry journals and government sources. The State Oil Company of the Azerbaijan Republic (SOCAR) estimates proven reserves at 17.5 billion barrels which, under an antiquated Soviet reserve classification system, may include reserves that are either not viable or not fully proven. The countrys largest hydrocarbon structures are located offshore in the Caspian Sea and account for most of the countrys current petroleum production. The majority of Azerbaijans oil output (59 percent in 2005) comes from SOCAR, but AIOC oil represents a growing share of the countrys total production.
SOCAR was established in September 1992 with the merger of Azerbaijans two state oil companies, Azerineft and Azneftkimiya. SOCAR and its many subsidiaries are responsible for the production of oil and natural gas in Azerbaijan, for operation of the countrys two refineries, for running the countrys pipeline system (except BTC), and for managing the countrys oil and natural gas imports and exports. Although government ministries handle exploration and production agreements with foreign companies, SOCAR is party to all of the international consortia developing new oil and gas projects in Azerbaijan. The company does not have effective control over output levels and the state is reorganizing the company to create greater operating and fiscal efficiency. Since 2003, SOCAR has owned the oil it produces; previously, SOCAR relinquished ownership once the oil had been sent to processing facilities. The restructuring also involved transferring some of the non oil-producing businesses to the Ministry for Economic Development. Further restructuring of SOCAR is likely in upcoming months as the company implements recommendations of an international consulting consortium that was funded by an EBRD grant. The company (not including subsidiaries) employs 60,000 people and is headed by Abdullayev Rovnag, who was formerly head of Socars Azerneftyanag refinery. The former head of SOCAR, Natik Aliyev (no relation to President Ilham Aliyev), was appointed Minister of Energy in December 2005. Almost half of SOCARs oil production in recent months came from the offshore field shallow-water Guneshli, known in the Soviet era as the 28th of April Field, and located 60 miles off Azerbaijans AbsheronPeninsula. Shallow water Guneshli first came online in 1981, but was developed only to a maximum water depth of 400 feet due to technological constraints. Recently, production levels have been falling as equipment is in disrepair and the structure is losing reservoir pressure. Residual reserves at the field are estimated at 1.3 billion barrels of oil according to Interfax, a news service. As a result, in August 2002 SOCAR began efforts to independently rehabilitate shallow-water Guneshli by adding new production platforms. By the fall of 2004, SOCAR announced the recommissioning of several new wells with improved production capacities, but by 2005 Guneshlis stock of wells had only increased by six, and the company plans to complete only three new wells during the first half of 2006 due to material shortages. SOCAR also operates 40 other older fields (both on- and off-shore), many of which are considered to be in similar disrepair and have been artificially stimulated for years using water injection. Press reports indicate that inefficiencies from aging equipment and largely depleted reservoirs have caused the cost of production of SOCARs onshore crude oil to reach $15-$17 per barrel.
Although production from SOCARs Soviet-era fields are in decline, foreign direct investment since independence has revitalized the countrys oil sector through the development of large-scale new projects and the refurbishment of existing facilities. To date, Azerbaijan has signed over 20 major field agreements with approximately 30 companies from 15 countries. Azerbaijans increase in oil production since 1997 has mainly come from the international consortium known as the Azerbaijan International Operating Company (AIOC), which represents over 70 percent of Azerbaijans total oil exports. AIOC (partners: BP, Chevron, SOCAR, Inpex, Statoil, ExxonMobil, TPAO, Devon Energy, Itochu, Delta/Hess) operates the offshore Azeri, Chirag, and deep water Guneshli (ACG) mega-structure, which is estimated to contain proven crude oil reserves of 5.4 billion barrels according to the fields operator and largest stakeholder, British Petroleum. In 2005 SOCAR raised its assessment of the fields recoverable reserves from 5.4 billion barrels to 6.9 billion barrels. The start of oil production from the Central and West Azeri fields in the ACG complex increased AIOC production from 140,000 bbl/d in January 2005 to roughly 420,000 bbl/d in May 2006. Adding to the existing 140,000 bbl/d of early oil production from the Chirag field, output from the Central Azeri field began in February 2005. Production at Central Azeri averaged roughly 240,000 bbl/d at the end of 2005 from eight pre-drilled wells. Operator BP began re-injection of natural gas at the Central Azeri field in May 2006, which enabled the field to stop routine natural gas flaring and to support well pressure and oil production. The West Azeri field began production in late December 2005 at a plateau rate of 300,000 bbl/d and will add to production growth during 2006. Production of oil from East Azeri is planned to come on stream early in 2007 as part of the second phase of ACG. In total, oil production from AIOC and SOCAR fields is slated to reach approximately 800,000 bbl/d by 2007 and around 1 million bbl/d by 2010, following the completion of Phase 3.
BP sources said talks on a possible fourth phase, which includes an additional platform to be installed in an undeveloped area between the Chirag and Guneshli fields, is active again after losing momentum during 2005. Outside of the ACG field, not all of Azerbaijans foreign investment projects have been successful, with several projects announcing disappointing drilling results and several production sharing agreements (PSAs) shutting down in recent years. Besides the ACG project, many of Azerbaijans offshore prospects have been relatively disappointing in contrast to the high expectations for the Caspian Sea region during the 1990s. Most recently, the failure of ExxonMobil and Lukoil to discover commercially viable hydrocarbon reserves at the Zafar-Mashal and Yalama blocks, respectively, will lower future production estimates from Azerbaijans offshore area. The first well at Zafar-Mashal was the deepest in the Caspian Sea, reaching a total depth of over 22,000 feet (6,600 meters) and was the most expensive at around $100 million. Exxon Mobil announced in January 2006 that it will pay the Azerbaijani government $32 million claim to exit exploration at the Zafar-Mashal field. The Yalama Block was the last drilling program underway in offshore Azerbaijan. Finally, without an agreement on the maritime borders in the Caspian Sea, entire fields have been left untapped due to the lack of clarity on ownership.