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11.07.2012
Caspian boom: Inside the $50bn Shah Deniz project
The Shah Deniz offshore natural gas field was discovered in 1999. The discovery was one of the world’s largest and in 2006 production began on the field through a consortium led by BP and Statoil, each holding 25.5% of control. This project is now entering the second stage of its development, which is set to dramatically increase the amount of natural gas being produced in the Caspian, a move which will have an impact on the European gas market.
The second stage of the Shah Deniz development is said to be worth $25 billion, and BP, the operator of the field, believes it will have a major impact on the region as a whole. “Shah Deniz full field development (FFD) and Stage 2 is a giant project estimated at $25 billion. It has a strategic importance as it is designed to transform Azerbaijan into a major gas supplier to international markets,” a BP spokesman explains to Oil and Gas Middle East. “Shah Deniz FFD is an important source of gas that will open up the Southern Gas Corridor and enhance the ties between Azerbaijan and the international markets. The project is set to establish Azerbaijan as a major provider of gas to Europe and will pave the way for future supplies,” he adds. Stage 2 of the development will add 16 billion cubic metres a year of capacity to the approximately 9 bcma already in place in Shah Deniz phase one, providing a huge boost to the region’s natural gas production levels. BP is quick to underline the importance of the new phase of development. “This is one the largest oil and gas projects in the world. Shah Deniz gas is the biggest gas discovery BP has made in decades. The project we are planning with our partners will join one of the world’s biggest gas resources to one of the world’s biggest gas markets,” the firm states. The Caspian has forever faced transportation issues. While the area is rich in natural resources, it can be very tricky to get these resources to market due to its location. Because of this, a lot of weight has been put on a decision as to which pipeline project the Shah Deniz development will use in order to get the natural gas to the European market. “It is most important to make the right decision. Selecting the right pipeline will help ensure the success of investing some $25 billion to develop this enormous gas resource in Azerbaijan. We are making good progress. Gas sales and transit agreements were signed in October 2011 with BOTAS, the Turkish pipeline company, and the Turkish Government, – all within an Inter-Governmental Agreement (IGA) signed by the Republic of Azerbaijan and the Republic of Turkey,” says BP’s spokesman. Since that date, agreements have been signed to allow the Trans Anatolia Pipeline to commence engineering studies for potential gas transportation across Turkey. Three options are being considered to carry gas into Europe: the Trans Adriatic Pipeline (TAP) with a route to Italy; Nabucco taking gas to Austria and the South East Europe Pipeline (SEEP) taking gas through Hungary, Bulgaria and Romania. The final decision on the pipeline will be made by the Shah Deniz consortium in mid-2013. BP says it is looking to complete any investment decision by the same time as well. In finalising the pipeline issue, the consortium will have overcome its last major obstacle providing further financial difficulties do not hit Europe hard. “The politics have been what have kept projects from moving forward so far, you have had the economic downturn and if you see a worsening of the Eurozone crisis then you may see gas demand in Europe not recovering fully and then there is a danger these projects could be delayed further,” reveals IHS energy analyst Andrew Neff. Aside from a drastic deterioration in the EU, the project is good to go, according to Neff. “In terms of producing the gas at Shah Deniz it’s a done deal, the financial side is going to be there because there’s a clear commercial rationale for that.” The main benefits of this project will be felt most by the EU, Turkey and Eastern European countries as the project will provide a new source of natural gas imports. Europe relies heavily on Russian gas imports and this will be eased by the extra gas available from the Caspian once stage two and the pipelines are completed.
However, the difference this extra capacity will make may not be big enough, according to analysts. “In the end it’s talking about a drop in the bucket of overall European gas demands and European gas imports,” says Neff. “If you have an extra 20-30 billion cubic metres of gas in total coming from the Caspian and in the future from the Middle East, perhaps from Northern Iraq,[you need to] compare that to the fact that Gazprom itself currently supplies 150bn cubic metres. You’re talking one fifth of what Gazprom already supplies and it is in the process if building new pipelines to increase its overall exports,” he adds. Neff also reveals that the Balkans might go from 90% reliance on Russian gas to 75%, which is a small step and indicative that the dependence on Russian gas in Europe is unlikely to come to an end any time soon. “You don’t want to be 100% reliant on one supplier but on the other hand you’re not going to replace Russian gas at this point,” Neff states. The Caspian region is providing a good amount of business for firms in the gas sector. HMS Group, a firm which provides equipment to the oil and gas industry, says that natural gas in particular is an area where it expects growth. “For the time being we have only supplied the auxiliary equipment – meters or measuring tools, pumps, vessels, etc,” explains Yuriy Skrynnik, strategic director at HMS Group. “Natural gas is a quite promising direction and HMS Group plans to develop it,” he adds. The services sector will look to prosper with contracts on mega projects such as Shah Deniz. The stage two development is at the Front End Engineering Design (FEED) stage currently. “Engineering studies will be refined, further wells will be drilled, commercial agreements will be finalised and key construction contracts will commence. The consortium will also finalise its selection of export routes across Turkey and into Europe,” explains BP. Away from this project there are other opportunities in different countries in the region. “We have a strong presence on the markets of the Caspian region: Azerbaijan, Iran, Kazakhstan, Turkmenistan and Uzhbekistan. In the latter two we have established our representative offices to carry out EPC projects, predominantly related to the water supply and utilities sector” says Skrynnik. “Sales go through our extensive net of dealers. We also take part in tenders together, taking advantage of their local experience and connections.” The opportunities are spread over all energy projects. “Countries of the Caspian region such as Kazakhstan, Turkmenistan and Uzbekistan have lots of ambitious expansion and modernisation (upgrade or restoration) programmes – reconstructing infrastructure of oil and gas fields, water supply and treatment facilities, hydro and thermal power plants,” reveals Skrynnik. Due to the high number of opportunities in the region, competition is high. Skrynnik states that the competition is getting more intense as the region (with energy reserves inferior in size only to Middle East and western Siberia) is considered as a hot spot and drawing attention of major western players as well as Chinese companies are fortifying their positions. An increase in Chinese companies in the region has been noticed by analysts as well. “I would say over time is the increased involvement and investment from Chinese companies in particular in Kazakhstan and now in Turkmenistan,” reveals Neff. Middle Eastern involvement in the region is not huge. Aside from Iran, which borders with and has territory in the Caspian Sea, there are few major governments with interests there. Dragon Oil, which is majority owned by Emirates National Oil Company has its major operations in Turkmenistan and large EPC contractors such as Abu Dhabi based National Petroleum Construction Company (NPCC) have expressed an interest in expanding to find opportunities in the Caspian Sea area.
Late last year Iran made a huge gas discovery in the Caspian Sea. Iranian oil minister Rostam Qasemi made the announcement that the country had discovered a field with a reserve of approximately 50 trillion cubic feet of gas. “The gas reserves of the field are estimated to be several times more than previous estimates”, the official website of Iran’s Oil Ministry, SHANA, quoted Qasemi as saying. He also stated that previous to this discovery, Iran’s natural gas reserves in the Caspian were estimated at around 11 trillion cubic feet, a figure which is now apparently greatly increased. The field is reportedly wholly within Iran’s territory and is not shared with any of its neighbouring countries. Iran made two other major gas discoveries in 2011. A field called Madar with reserves of 495 billion cubic metres was discovered in August, while in June the Khayyam gas field was found with reserves of 277 billion cubic metres. Once the Caspian is connected to Europe effectively by the pipelines which are on the table, the region will become an even more important player in the natural gas market. Although this may not have a huge impact on the EU and its reliance on Russian gas, it will provide a market big enough for the huge potential of fields such as the Shah Deniz. The EU has a strong interest in the region, while the Chinese companies are now seen to be moving in from the East. This shows that the Caspian is in demand, and it is an area where global players will compete for the opportunities on offer. Azerbaijan snapshot
The majority of oil production growth in Azerbaijan is provided by the Azeri-Chirag-Guneshli (ACG) field. The Azerbaijan International Operating Company (AIOC) accounts for over 70% of the country’s total oil exports. The majority of the Azerbaijan’s natural gas is produced from offshore fields and most of the country’s natural gas production increases in the future are expected to come from the development of the Shah Deniz offshore natural gas and condensate field, considered one of the world’s largest natural gas field discoveries over the last twenty years. Caspian Oil & Gas Exhibition 2012
The event serves as a meeting place for regional and international oil and gas leaders, the Ministry of Industry and Energy of Azerbaijan, and SOCAR. The exhibition is a forum for international exhibitors to meet and do business with key local oil and gas operators and suppliers. The conference is held alongside the exhibition, and is a hub for ministers and regulatory agents from around the world to discuss and debate important issues, which help to shape the energy dynamics of Azerbaijan’s oil and gas sector. The exhibition will be opened by the President of Azerbaijan, HE Ilham Aliyev and is a platform for local and international companies to display the latest technologies, developments in the regional energy sector. Arabian Oil & Gas Staff, June 11th, 2012 |
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The Caspian region attracts a huge amount of investment from around the globe due to its vast energy resources. One project underway is set to have a massive impact on the natural gas sector in the area, and other opportunities are also being developed.