Shah Deniz Gas Consortium in Azerbaijan Approves Final Investment Decision

On December 17, 2013, in Baku, the Shah Deniz natural gas producers’ consortium approved the Final Investment Decision (FID) to start Phase Two of production. The investment commitment is valued at $25 billion for field development, separately from the estimated $20 billion for the construction of pipelines to Europe.

The Shah Deniz FID enables the opening of the Southern Gas Corridor to Europe, connecting a non-Russian supply source through a non-Russian pipeline route to European Union territory. The first gas flow is planned to reach the EU market by 2019.

Azerbaijan’s head of state, Ilham Aliyev, and top officials from transit and consumer countries witnessed the signing ceremony. Azerbaijan’s State Oil Company (SOCAR) president, Rovnag Abdullayev, and BP (formerly British Petroleum) regional president for Azerbaijan, Georgia and Turkey, Gordon Birrell, signed the final investment decision in the presence of BP CEO Bob Dudley. BP is the technical operator of Shah Deniz Phases One and Two, leading the multinational consortium.

Coincident with the FID, the Shah Deniz producers’ consortium has adjusted its structure, effective from January 1. Norway’s Statoil has reduced its stake from 25.5 percent to 15.5 percent. It sold two thirds of the freed shares to SOCAR and one third to BP, which had held 10 percent and 25.5 percent, respectively, until now. Statoil earns $1.45 billion in cash from this sale. According to Statoil president and CEO, Helge Lund, the sale reflects a “rigid prioritization of [Statoil’s] future investment” (Statoil press release, December 17, 2013).

The adjusted shareholding is now comprised of BP (project operator) with 28.8 percent of the shares, SOCAR 16.7 percent, Statoil 15.5 percent, and the other shareholders retaining their stakes unchanged: Total of France, Russian Lukoil, and the National Iranian Oil Company at 10 percent each, and Turkish Petroleum with 9 percent. The same adjustment applies to the South Caucasus Pipeline (SCP, across Azerbaijan and Georgia; also known as Baku-Tbilisi-Erzurum), the pipeline dedicated to the export of Shah Deniz gas. The composition of the SCP’s shareholding is identical with that of the gas producers’ consortium.

Along with this reshuffle, SOCAR becomes the commercial operator of the Shah Deniz project, replacing Statoil in that role. From now onward, SOCAR will handle the marketing of gas through the newly established Azerbaijan Gas Supply Company, on the consortium’s behalf (Fineko/abc.az, December 23, 28, 2013).

As part of the FID, the lifetime of the Shah Deniz Production Sharing Agreement is prolonged by 12 years, until 2048 (the initial PSA, signed in 1996, was to run until 2036).

Shah Deniz Phase Two will produce 16 billion cubic meters (bcm) of gas per year, reaching the production plateau at that level by 2022. That volume will add to the 10.4 bcm per year from Phase One of production (augmented from the existing 9 bcm), aggregating to 26.4 bcm annually (Trend, December 17, 18, 2013; naturalgaseurope.com, accessed January 13, 2014).

Of that amount, 6 bcm per year is set aside to supply Turkey from 2018 onward, while another 10 bcm is already contracted to European energy companies from 2019 onward.

The field is located some 70 kilometers offshore, in water depth ranging from 50 to 550 meters. It holds 1.2 trillion cubic meters in proven reserves. According to Dudley and BP’s vice-president for Shah Deniz, Alasdair Cook, BP intends to conduct seismic surveys and exploration at three new sites (Shah Deniz Deep) within the PSA area, anticipating additional reserves there. On that basis, a Phase Three is tentatively being considered (Trend, BP press releases, December 17, 18, 2013).

Shah Deniz also contains substantial reserves of condensate, the high commercial value of which will help finance the investment into the dry gas project. Condensate production is planned to increase from 55,000 barrels per day during Phase One to 120,000 barrels per day in Phase Two. The condensate is to be exported to international markets through the Baku-Tbilisi-Ceyhan pipeline.

BP had discovered the Shah Deniz gas and condensate deposits during the 1990s. The first PSA was signed in 1996; Phase One of commercial production started in 2006; and the dedicated SCP export pipeline, from Azerbaijan via Georgia to Turkey’s border, saw the completion of its first stage in 2007. With Phase One, the project was one of regional significance. With Phase Two it advances to European significance.

In messages from Brussels and Washington, respectively, European Commission President Manuel Barroso and US Secretary of State John Kerry congratulated Azerbaijan and President Aliyev personally. Barroso characterized the investment decision as a corollary to the EU-Azerbaijan Memorandum on Strategic Energy Partnership and the Joint Declaration on the Southern Gas Corridor, documents signed by Aliyev and Barroso in 2006 and 2011. Kerry’s message noted that the investment decision is the first step in connecting the Caspian basin with Europe, opening of the Southern Gas Corridor, and reinforcing Azerbaijan’s independence as part of that process (European Commission press release, December 17, 2013; Fineko/abc.az, January 7, 2014).