ACCELERATION IN MULTIBILLION-DOLLAR AZERI OIL PROJECTS.

Publication: Monitor Volume: 7 Issue: 116

Officials of international oil companies and of the U.S. government have announced a significant acceleration in the development of Azerbaijani oil projects. According to the U.S. ambassador in Baku, Ross Wilson, Azerbaijan stands “on the threshold of a new oil boom” in terms of capital investment and project development, with “cardinal decisions on multibillion-dollar projects” to be made within the next two to three months.

Several major projects are about to enter simultaneously the full-scale development phase: the Azeri-Chirag-Guneshli offshore oilfields, the Baku-Tbilisi-Ceyhan pipeline dedicated primarily to those oilfields, the Shah-Deniz gas and condensate offshore deposit, and the Sangachal (Azerbaijan)-Georgia-Erzurum (Turkey) gas pipeline. The much-delayed construction of the Baku-Tbilisi-Ceyhan pipeline will proceed on a schedule correlated to that of three oilfields’ development.

British Petroleum Amoco is the lead company in the international consortia for all of these projects. According to BP’s associate president in overall charge of Azerbaijani projects, David Woodward, the spending of up to US$12 billion will be authorized by the consortia in the coming months for the full-scale development of those projects. That aggregate sum includes up to US$2.9 billion for the Baku-Tbilisi-Ceyhan pipeline construction, US$2.7 billion for Shah-Deniz and some US$6 billion for the Azeri-Chirag-Guneshli field development.

The Sponsor Group of interested oil companies has completed the basic engineering study for the Baku-Tbilisi-Ceyhan pipeline and is launching the detailed engineering work along the chosen route this month. This work is expected to cost US$150 million over a twelve-month period. The contractors are the American company Bechtel on Azerbaijani and Georgian territory and the Turkish state pipeline company Botas on Turkey’s territory.

The pipeline will measure 1,750 kilometers in length and is projected for a throughput capacity of 50 million tons of oil annually. The revised cost estimate is US$2.8-2.9 billion, up from the previously projected US$2.4 billion. Average tariff rates are projected at US$3 to US$3.5 per barrel, which should in turn ensure a 12.5 percent real rate of return to investors. The pipeline consortium plans to adjust to any variations in the throughput volume by altering the tariff, not the rate of return.

The pipeline’s Sponsor Group includes: BP Amoco as leader with a 25 percent stake; Unocal of the United States, Norway’s Statoil, Turkish Petroleum and Japan’s Itochu with stakes ranging from 3 to 8 percent; and Azerbaijan’s State Oil Company with a 50-percent stake, of which it plans to sell two blocs of 10 percent each. These companies are also involved in the Azeri-Chirag-Guneshli consortium, and they welcome the participation of outside companies. The American company Chevron is the frontrunner among bidders for those 10-percent stakes. With that, the makeup and structure of the pipeline consortium is taking shape.

Both the Azeri-Chirag-Guneshli consortium and the pipeline’s Sponsor Group are discussing a role for Kazakhstan as a crude oil supplier to the Baku-Ceyhan pipeline. The just-completed, basic engineering study has revised earlier projections that had deemed inputs of Kazakhstani oil crucial to the Baku-Ceyhan pipeline’s commercial profitability. According to the revised estimates, the pipeline should be commercially viable with Azerbaijani oil inputs, though the expected inputs from Kazakhstan can maximize its profitability. President Nursultan Nazarbaev officially agreed in February of this year that Kazakhstan would export some of its oil via Baku-Ceyhan. An annual amount of 15 million tons is being mentioned. Meanwhile, the government in Astana seeks to enhance its bargaining position by expressing doubt that Baku-Ceyhan could be profitable without Kazakhstani oil. The U.S. government supports a plan to ship Kazakhstani oil by tankers from the port of Aktau across the Caspian Sea to Baku for further transport to Ceyhan. In that case, the overall transportation project would be redesignated Aktau-Baku-Tbilisi-Ceyhan. Originally proposed last year by Turkey’s President Ahmed Necdet Sezer, the extension has now reached the planning stage. Last week, the U.S. Trade and Development Agency granted US$350,000 to Kazakhstan’s Oil and Gas Transport Company for a feasibility study. International oil companies active in Kazakhstan–including BP Amoco, ExxonMobil, Texaco and Shell–have formed a Kazakhstan Group to assess the opportunities for the constituent companies to participate in the Aktau-Baku tanker transport project and the Baku-Tbilisi-Ceyhan pipeline.

To maximize the profitability of both that oil pipeline and the gas pipeline from Shah-Deniz TO Erzurum, BP has decided to pair them. They are to be laid in parallel, just ten meters apart, using the same tracts of purchased land, using the same construction equipment, sharing the support infrastructure and operating under joint management (Survey based on recent reporting by The Financial Times, Turkish Daily News, Dow Jones, the Oil Daily, Anatolia, Turan, Caspian Business Report, TopAzerbaijan news services; see the Monitor, March 15, 29, May 21; Fortnight in Review, March 16, 30).

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