The second stage of one of the world’s largest offshore oil and gas projects, BP’s Shah Deniz, is expected to commence production in 2018. It is likely to further Azerbaijan’s success in the petroleum industry, but will it be hindered by a turbulent environment?
In Azerbaijan, amid the deepwater 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 industry that is facing plummeting prices and increasing opposition from conservationists.
The field lies 70km south-east of Azerbaijan’s capital, Baku, and holds at least a trillion cubic metres of gas. It was discovered in 1999, and is operated by BP on behalf of its partners in the Shah Deniz Production Agreement (PSA).
Its 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 largest gas-condensate fields.
Azerbaijan has a long and prolific history in the oil industry, and the country and the operator are hoping that Shah Deniz will justify the investment made in it when it starts production.
The first stage began operations in 2006, and the second (SD2) is almost complete, it is expected to enter its production phase in 2018.
Stage one can produce around ten billion cubic meters of gas a year, which is about 50,000 barrels a day of condensate. The second stage 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 include two new, bridge-linked offshore platforms, 26 production wells, upgraded offshore construction vessels, and an expansion of the Sangachal terminal to allow new gas processing and compression facilities.
Stay on target
According to BP, the project is now over 70% complete in terms of engineering, procurement and construction, and is well on the way to hitting its target of starting production in 2018. SD2 will also start exporting to Turkey by the end of that year.
Socar head of investment Vagif Aliev said in June 2016: “More than 72% of the overall scope of the work is done, which is ahead of schedule by about 2.5%. $12 billion has been spent to date, from a total SD2 cost estimate of $24 billion, including an inflation rate for the period 2014–2020.”
In May 2016, the Shah Deniz consortium was awarded $1.5 billion 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 subsea production systems and structures can be installed in deeper water at all points of the project. Khankendi is 155m long, 32m wide, and has a 13m 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 two 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 two 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 deploying 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 550m.
BP regional president for Azerbaijan Gordon Birrell said: “The Shah Deniz consortium is proud to be involved in the construction of the Khankendi, which it believes marks a new era in the shipbuilding history, not only of Azerbaijan, but also of the entire Caspian region.”
History of success
Overall, the petroleum industry in Azerbaijan produces nearly 900,000 barrels of oil a day and 29 billion cubic metres of gas a 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 front runner in the global oil and gas industry, and the first oil well in Bibi-Heybat was drilled. By the beginning of the following century, Azerbaijan was supplying more than half of the world’s oil.
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 oil and gas.
The EIA stated that Azerbaijan was an important oil and natural gas supplier in its Country Analysis Brief report. It said it expected 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-two 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 have been involved in construction and development across all main contracts in the country, and over 80% of them were Azerbaijani.
Much of the gas from SD2 will be exported, 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 a year will be exported to Turkey and ten billion cubic meters to Europe in a route known as the ‘Southern Gas Corridor’.
Approximately $28 billion 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 grow.
However, Azerbaijan was one of the countries hit hardest by the oil price crash. Its currency devalued by almost a third overnight in December 2015.
The revenue of SD2 is expected to be $5 billion a year, which is dwarfed by the fact the project and pipeline together will cost an estimated $45 billion overall. Interest on that $45 billion 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 has said that it expected a decline in oil production in the country by 40,000 barrels a day in 2017 due to a lack of new projects.
This may no longer be the case in 2018 when SD2 starts production, by which point oil prices may again be on the up. 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.