CONTRACT OF THE CENTURY IS 10

PSA PROJECTS ACTIVE

Practical realization of oil and gas strategy of Azerbaijan began 10 years ago - September 20, 1994 - with signing of the contract on prospecting, development and production share in the Azeri-Chirag-Guneshli (ACG) fields under the leadership of the ex-president, national leader of Azerbaijan Heydar Aliyev.

During this time, as they say, much water has flowed under the bridge, while the biggest world holdings merged and took over. Azerbaijan managed to build an essentially new industrial system meeting world standards in a record breaking short time and became a leader among the CIS countries for the volume of investments per capita, started exporting its oil to world markets, today two pipelines Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum - South Caucasian Eurasian transport corridor "named after Heydar Aliyev" to connect the Caspian with EU market - are being built.

In December 2003 Azerbaijan suffered a great loss - the leader of our nation Heydar Aliyev passed away. We bend our heads before the memory of this great personality.

Today's oil and gas policy is continuation of the one commenced 10 years ago plus the parallel and dynamic development of non-oil sector. And the newest history of Azerbaijan oil industry is a mirror reflection of all the processes taking place in world oil and gas industry of late XX - early XXI centuries.

Among participants of the agreement formed then by the Azerbaijan international operational company (AIOC) were American Amoco, Unocal, Pennzoil, Exxon, McDermott, British British Petroleum, and Ramco, Norwegian Statoil, Russian LUKoil, Turkish TPAO and Delta Oil from Saudi Arabia. Further the list of the companies - members of the consortium underwent changes - Petroleum and Amoco amalgamated. American Mobil, which merged with Exxon, the project participant entered the consortium. Besides "new" names appeared in AIOC: Devon Energy (former Pennzoil), and British Ramco left the project in 2000 selling the share (2.0825%) to the Saudi-American alliance Delta Hess for $150 mln. And in 2002 Russian LUKOIL sold its share in the project for $1.375 bn to the Japanese INPEX. Presently participating shares of the project are BP (operator 34.1367% of individual share), Unocal (10.2814%), SOCAR (10%), INPEX (10%), Statoil (8.5633%), ExxonMobil (8.006%), TPAO (6.75%), Devon Energy (5.6262%), Itochu (3.9205%), Delta Hess (2.7213%).

For the past 10 years (from the moment of signature) AIOC consortium was headed by 4 presidents: Terri Adams, David Prichard, John Legat and David Woodword, who is heading the operational company up to date.

In November 1997 under the intergovernmental agreement between Azerbaijan and Russia, First Oil was transported from the contract area via the Baku-Novorossisk pipeline to the Black Sea port of Novorossisk (Russia) for further export to world markets. The only export pipeline then received informal name of "northern" route.

Within the first stage of the project called "First oil production project" the Chirag-1 platform was constructed. Today 17 wells have already been drilled from the platform and 18 are being drilled. Besides, the Sangachal terminal was constructed under world standards and put into operation. The Italian company Saipem built two underwater pipelines: a 24" oil line - till the Sangachal terminal, and 12" gas line - till the gas compression station at "Neft Dashlari". In April 1999 the project of first oil was successfully completed by employment of the terminal in the Georgian Black Sea port Supsa and Baku-Supsa oil line. From this moment AIOC became possessor of the second export oil line, which received the name of "western route". Almost the whole oil produced in ACG is exported via it today.

Manufacture

SOCAR oil production is stable enough, it hesitates to this or that side by 1-2%. In 2003 1 5.38 mln tons of oil and 5.17 bn c.m. of gas was produced in the republic.

About 58% of Azerbaijan oil production and more than 80% gas production from this sum fall on SOCAR's share.

Changes were made in SOCAR structure by the presidential decree in January 2003. As a result Industrial association for onshore oil and gas production and Industrial association for offshore oil and gas production united in the single Azneft IA.

Currently more than 40% of the whole Azerbaijan gas production is from the Bahar field developed by SOCAR. The country's gas production is expected to increase much since 2006, when the Shah Deniz gas condensate field is employed. Under the forecasts, by 2010 gas production will increase three folds and exceed 15 bn c.m. at the expense of ACG and Shah Deniz contract areas.

Most part of oil produced by SOCAR (6.4 mln tons from almost 9 mln tons in 2003) is directed to Azerbaijan OR. The rest volume - 2.6 mln tons was transported via the Baku-Novorossisk export oil line in 2003.

Capacities of two Azerbaijan OR processing only SOCAR oil are operated only at 30%. Oil from the ACG is completely exported via the Baku-Supsa oil line, and presently AIOC consortium has no need to redirect it to Russia: transportation tariff in Russia is $15.6 per ton, and about $3 per ton via the Baku-Supsa oil line.

In 2003 besides 9.1 mln tons of crude oil, Azerbaijan exported also oil products. These are mainly diesel fuel (68% in 2003), motor gasoline (15%), air kerosene (8%) and black oil (7.6%). In 2003 oil export volume was considerably cut, and is not planned to increase in 2004.

In December 2003 Gazexport and SOCAR signed the contract on delivery of Russian gas to Azerbaijan since January 1, 2004. Under the contract, Gazexport provides 50% of the republic's demand for import gas. Second half of the necessary volumes is at Itera which has own contract with Azerbaijan. In 2004 total deliveries will increase to 5.5 bn c.m., theoretically by 2.75 bn c.m. from each of the two Russian companies. Gazprom transfers realization of contract obligations to KazRosGaz, the joint venture of Gazprom and Kazakhstan company KazMunayGaz, which will deliver gas from the Karachaganak field to Azerbaijan.

Then Gazprom signed one more agreement with Azerbaijan on expansion of deliveries from 2.75 bn c.m. to 4.5 bn c.m..

International projects - ACG today

In 2003 investments in Azerbaijan oil and gas sector increased twice up to $2 bn vs. 2002 covering almost 83% of all the capital investments in the national economy. Within one year the assets of the State Oil Fund created in December 1999 for control of oil incomes have grown by 17.7%. Today the development project of three ACG fields has already spent about $3 bn.

Total expenses on development of Azeri, Chirag and Guneshli fields will be $6 bn, and half of this sum is already invested.

ACG Project major milestones in 2004 include:

Install drilling rig on CA dech - 1Q (completed successfully)

Install CA jacket in the sea - 1Q (finishing)

Finish underwater pipelines laying - 2Q (two already finished)

Install offshore the CA topsides - 3Q

Sanction and commence Phase 3 - 3Q

Install offshore C&WP jacket - 4Q

STEP ready to receive First Oil - 4Q

CA First Oil at wellhead - end 4Q

Azeri facilities construction is about 90% complete, West Azeri (WA) facilities construction progress is 48%, and East Azeri (EA) - 18% actual. 65% progress has been achieved at the Compression and Water Injection Platform (C&WP). Currently project operator is getting ready to install platform at 48 wells in central part of the Azeri fields.

Oil produced just from the Azeri-Chirag-Guneshli will suffice for the constructed Baku-Tbilisi-Ceyhan (BTC) main export pipeline. This was effective as a separate commercial enterprise with design throughput of 50 mln tons of oil per year. However, it does not mean that BTC will pump 1 mln barrels of oil per day (50 mln tons of oil per year) through the whole term of the project Initially, within Phase-1 of ACG full-scale development 400,000 barrels per day is planned to produce. Within Phase-2 production volume will total 800,000 barrels in mid 2007 and only within Phase-3 to start at late 2009 this figure will reach 1,000,000 barrels per day.

That is, the necessary volume of oil for full loading of BTC will not be received before late 2009. That's why, when the speech goes about that oil from the "contract of the century" will cover the whole BTC project, first of all namely the period of peak pipe loading is meant. And at this period oil will have to be produced at the volume not exceeding BTC capacities, as exactly in this period additional oil may appear from other fields. The period of duration of this peak is not known yet. It will depend on how many companies will be involved in the project and how much oil will be pumped through the pipe. Possibly, the pipe schedule will have to be cut and stretched, or on the contrary, kept at the most right limit, but further BTC loading will start to come to naught. Hypothetically it may be assumed that pipe loading peak will keep on from three till five years.

BTC pipeline is 1762 km long, of them 443 km is in Azerbaijan, 249 km in Georgia, and 1070 km in Turkey. BTC pipeline throughput is 50 mln tons of oil per year. Construction works started in April 2003 and will complete at the 4Q 2004. Azerbaijan oil from the Ceyhan (Turkey) port is planned to commence at the 2Q 2005. Currently 55% of construction works under the project has been completed. BTC project cost totals $3.6 bn.

Participating interests of the project are BP (30.1%); SOCAR (25.00%); Unocal (8.90%); Statoil (8.71%); TPAO (6.53%); ENI (5.00%); Itochu (3.40%); ConocoPhillips (2.50%); INPEX (2.50%), Total (5.00%) and Amerada Hess (2.36%).

Baku-Tbilisi-Ceyhan (BTC) project

Major stages of BTC project in 2004:

Receive first loan within BTC foreign financing - 1Q. BTC ready for linefill in Azerbaijan and Georgia - 4Q. BOTAS on-track for linefill 1Q05; 90% complete - 4Q

One of the most important events of this year will be joining of Kazakhstan to the BTC system by creation of the Aktau-Baku transport corridor. A new terminal is supposed to build for storage and transshipment of petroleum in Kurik (76 km southeast Aktau), and also connecting pipelines to create Aktau-Baku system. Capacity of the transshipment system will be 20 mln tons of oil per year with 7.5 mln tons transported at the first stage. Volume of investments will be determined after signing the intergovernmental agreement. The new system will be built by arrival of the First Oil from the "Kashagan" field, i.e. in 2007.

A separate company will be created to control the Aktau-Baku system, basic investors of which will be four companies - ENI, TotalFinaElf, ConocoPhilips and Inpex. These companies participate in development of the Kazakhstan field "Kashagan" and have individual 15% shares in the BTC Co (the pipeline construction and employment operator). Agreement must be concluded between the governments of Kazakhstan and Azerbaijan in 2004, and also between BTC Co. and Kazakhstan exporters of the "Aktau-Baku Co.".

Shah-Deniz project

The Shah Deniz prospecting, development and production share partners are BP Azerbaijan (operator - 25.5%), Statoil (25.5%), SOCAR (10%), LUKAgip (10%), OIEC (10%), TotalFinaElf (10%) and TPAO (9%). The very companies are participants of construction of the Baku-Tbilisi-Ceyhan gas line.

A contract on delivery of 700 km welded large diameter steel pipes for the South Caucasian pipeline (SCP) was submitted to the Sumitomo corporation within the project framework. The pipes for SCP have been arriving in Azerbaijan since January 2004. This will allow commence of laying the pipeline in the fourth quarter of 2004. Engineering-technical works and placing orders on delivery of materials and equipment keep under the schedule.

Stage-1 of the project provides installation of the platform, laying of two underwater pipelines and fabrication of gas and condensate treating plants in the coastal terminal, and construction of the South-Caucasian pipeline from Azerbaijan via Georgia to the Turkish border (Azerbaijan-Georgian part of the Baku-Tbilisi-Erzurum gas transportation highway). Cost of the Stage-1 is estimated at $2.3 bn, South Caucasian pipeline - $0.9 bn. In 2003 drilling of the first and almost second from the planned three advance wells was completed. In July a sea platform construction commenced in Singapore, its blocks are to arrive in Baku by October 2004.

Stage-1 provides total 178 bn c.m. of gas and 34 mln tons of condensate production at the top annual level 8.4 bn c.m. of gas and 2 mln tons of condensate.

Within framework of the project 6.6 bn c.m. of gas per year will be delivered to Turkey since 2006 under the contract for 15 years. Besides Georgia will buy 1.5 bn c.m. per year and Azerbaijan 0.8 bn c.m. per year.

The second stage of the field development may start in 2010 to bring production to the peak level of 16 bn c.m. per year. Gas export beyond Turkey, in opinion of the consortium is possible only at this stage.

Not only Europe, but also Iran and Russia are regarded perspective markets. But for now this question is considered only at the conceptual stage.

Stage-1 extracted field stocks are estimated at 625 bn c.m. of gas and 101 mln tons of condensate. General stocks of the field are estimated as 1 trn c.m. and 400 mln tons of condensate.

However in the light of last data Shah Deniz stocks may be much more. During drilling the first advance well a new gas-bearing layer was discovered. Its stocks are to be assessed after the second advance well is finished.

Major milestones at Stage 1 in 2004

Increase efficiency of the project performance to deliver first gas in 4 Q 2006 1 quarter; Deliver TPG500 platform shares to the Caspian 3 quarter; Send TPG platform sections and drilling equipment to Azerbaijan via the sea 3 quarter; Finish advance drilling program 3 quarter; Commence connecting TPG platform sections in floating dry dock 4 quarter; Commence SPC pipeline construction 4 quarter.

Besides two major contracts on ACG and Shah Deniz where active works are already ongoing, 6 more PSA (production share agreement) offshore contracts and 5 PSA onshore contracts act in Azerbaijan.

Araz-Alov-Sharg

According to the contract signed between BP and SOCAR, drilling of the first advance well in the AAS should have been commenced long ago. But after the July 2001 incident, when patrol boats of the Iranian naval forces forced Azerbaijan research ships to leave this area under the threat of force, BP as the project operator suspended all the works and did not return to the AAS.

And though BP did not notify SOCAR of that it regards the "Iranian" incident as a fors-major situation, it declared that the works in Araz-Alov-Sharg will be suspended until Azerbaijan and Iran agree to which side the disputable fields belong.

SOCAR experts consider Araz-Alov-Sharg South Caspian fields rather perspective. After SOCAR realized surface researches of sea-floor sediments at the AAS experts came to the conclusion that the fields bear hydrocarbon stocks.

During researches the so-called "alive" oil was discovered. It means that hydrocarbons lay not so deep. And detailed interpretation showed that deposit basin is very big. Moreover, in this part of the sea there is active oil migration, which increases chances to find commercially attractive raw material volumes.

Zafar-Mashal

The contract was signed between the American ExxonMobil and SOCAR in April 27, 1999. 50% of the project share belongs to the State Oil Company and 30% - to ExxonMobil. In 2000 20% was transferred to the American Conoco (nowadays ConocoPhillips). The sum of project investments is estimated at approximately $2 bn, and forecasted volume of oil stocks - 140 mln tons, of which 100 mln falls on Zafar, and 40 mln on Mashal.

After a series of failures at drilling in northern part Zafar structure, the Lider semisubmersible drilling rig was displaced to the southeast at almost 4 km from its former point. Sea depth on the new is even more - 720 meters.

Southeast part of Zafar structure is drilled at the distance of 4 km from the former point in northern part. Design depth of the well - 7000 meters.

Zafar-Mashal structures were discovered as a result of seismic researches in 1961, and first geophysical works in them were carried out in 1985 and 1987. Prospecting drilling was not conducted in the structure. Productive layers are at depth of 3500-3800 meters.

The whole prospecting period of this project is actually divided into two parts - 3 years are its major part, when the foreign contractor is obliged to run a three-dimensional seismic prospecting of the 643 sq. km. area and drill 2 test wells in the contractual yard. Then the contractor has the right to prolong the prospecting period three times in one year. Each year it has to drill one well.

Inam

Inam participating interests are SOCAR - 50%, BP - 25%, Shell-25%. Under the contract, in case commercial oil stocks are revealed, the Inam field will be operated for 25 years. The field's predicted oil stocks are estimated at 1.4-2 bn barrels.

The project will include $1.7 - 2 bn investments. February 2001 drilling of INX-1 at "Inam" was suspended at the depth of 4442 meters (vs. project depth 5025 m) for the high rock pressure. Dede-Gorgud drilling equipment stands pressure till 700 atm., but in INX-1 it appeared much higher. In this regard a decision was adopted to drill the well to the end with the help of Istiglal SSDR, for its equipment was intended for much higher pressure. Currently geological-engineering researches are carried out aimed at renewal of drilling the first well in 2004.

Nakhchivan

Socar and ExxonMobil have equal shares in this project. Investments in the "Nakhchivan" development are estimated at $2 bn. Forecasted stocks are 110 mln tons of oil and 85 bn c.m. of gas. Nakhchivan oil and gas bloc is located 85 km south from Baku. Its contractual yard is 280 sq. km., sea depth reaches 800 meters in some places.

The American company ExxonMobil refused to use Istiglal SSDR further, for it did not find commercially favorable oil stocks in the first prospecting well in the Nakhchivan bloc. At the same time, during drilling the first well, a lot of information was received about the oil and gas structure on the whole. Even two core samples were selected, which is usually done during drilling the second well. The geological researches say the structure bears pretty rich hydrocarbon stocks. The company has great expectations from the second well.

Savalan-Lerik-Deniz-Janub-Dalga

Partners of the contract on the Savalan structure are SOCAR (50%) and American ExxonMobil (30%). 20% of individual shares are still free. The Savalan bloc includes four structures Savalan - Dalga - Lerik-Deniz - Janub. Total area of the bloc in southern part of the Caspian is 850 sq. km.

Iran, which offers to divide the Caspian into five equal parts asserts that a part of the Savalan bloc is in its sector of the sea. Baku insists on that borders of the national sectors must correspond to the coastal lines of each Caspian state. ExxonMobil has more than once stated that for now the company is not planning to commence work in the Savalan. "As the project has free 20%, and Azeri parliament has not ratified the contract yet, our company's position is only to wait. We can not say how much time it will take". A rep of the American company noted that ExxonMobil, as a private company, is not going to participate in settlement of disputable issues between Azerbaijan and Iran. "Governments of the two countries must deal with this by themselves", - he stressed.

According to SOCAR reps, at division of the Caspian by any method, the Savalan offshore bloc will be in Azerbaijan sector of the sea. Therefore American company ExxonMobil must not doubt of this project's stability. First of all huge means are required for realization of the project: it is necessary to run seismic prospecting with maximal definition, geological-geophysical researches, create the structure's model, and only after that it will be possible to calculate the area's stocks. If the produced hydrocarbon volumes are economically attractive, the project will require not less than $2 bn for test drilling.

Yalama

The agreement on prospecting, development and production share in the D-222 perspective bloc in Azerbaijan sector of the Caspian was signed on July 3, 1997 in Moscow during official visit of the head of Azerbaijan to the Russian Federation. After ratification by Milli Mejlis on December 10, 1997 the agreement came into force. Prospective volume of investments in the project is $2.5 bn.

The structure's stocks are assessed at 130 mln tons of oil. Under the contract, LUKOIL must drill not less than 2 test wells in the contract area with approximate design depth - 3000 m. D-222 is a part of the biggest perspective structure Yalama in northeast Caspian located with almost equal parts in Azerbaijan and Russian sectors of the Caspian sea at distance of 30 km from the shore. Sea depth in the area of Yalama perspective structure is from 80 to 700 meters. The probability of discovering commercial hydrocarbon stocks is estimated as high.

April 2003 LUKOIL increased its share in Yalama by 20%. SOCAR president Natig Aliyev and LUKOIL President Vagit Alekperov signed a pack of agreements on additional conditions of prospecting and development of the D-222 (Yalama) perspective sea structure located in Azerbaijan sector of the Caspian. The sides agreed upon concession conditions and signed the agreement on increase of LUKOIL's share from 60% to 80% at the expense of SOCAR's share, which currently has only 20%. LUKOIL also expanded the contract area from 1287 sq. km. to 3037 sq. km. Drilling the first prospect well with floating semisubmersible drilling rig in the D-222 contract area is planned to start in the second half of 2004.

Hovsani-Zykh

In this project Russian LUKOIL and SOCAR have equal shares 50-50. Investments of the Russian side must total presumably $250 mln.

Residual stocks of Hovsani-Zykh, on the data of the State Oil Company total 17-20 mln tons of oil.

After coordination of all questions with Azerbaijan Ecology and Natural Resources Ministry, it will be clear when the contract on development of the Hovsani-Zykh onshore structure comes into force. Validity of the contract needed achievement of compromise between LUKoil and SOCAR on the "exclusive sites" Hovsani-Zykh.

Definition of "exclusive areas" of the field means dedication of useful and free areas of the perspective bloc, where there are neither dwelling points nor objects of strategic importance. One of the obstacles is the necessity of additional investments in realization of ecological measures.

Kursengi - Garabaghli

The contract on the bloc was signed on December 15, 1998 and ratified by Milli Mejlis in April 16, 1999. Conditions of the agreement provide rehabilitation, prospecting and development of the contract bloc. Total contract area is 450 sq. km.

The fields are located in the Salyan district, Azerbaijan, 150 km from Baku. Under the SOCAR data, the field operation period employed about 9 mln tons of oil since 1962. Shareholders of the operational company are: SOCAR (50%), two Chinese companies - China National Oil and Gas Exploration and Development Corp. (CNODC) and CNPC (Hong Kong) Ltd. (CNPCHK) possessing 25% each.

Chinese Great Wall plans to drill 18 wells in the contract area. Currently the company produces the so-called oil of K&K grade (density 26 degrees under API, sulfur contents 0.27%) in the area.

Mishovdag-Kelameddin

PSA on Mishovdag - Kelameddin was signed in September 12, 2002. Shares of the sides in this contract were distributed as follows: American Moncrief - 49.7%, PetOil (Turkey) - 35.3% and SOCAR - 15%. But already at the beginning of 2003 the situation changed and now it is like this: Canadian Nations Energy possesses 85%, SOCAR - 15%. There are 790 wells (200 oil) in the Mishovdag field, 190 in the Kelameddiin field. Validity of the contract is designed for 25 years, with the opportunity of prolongation for five years. This year 3 wells will be drilled at the rehabilitation site (Mishovdag-Kelameddiin), and 1 in the prospecting site (Padar-Kharami). The drilling will be carried out by the Turkish company TPIC.

The agreement on the Padar structure was signed between SOCAR and American company Moncrief Oil on April 27, 1999 in Washington. And in the Padar PSA SOCAR possessed 20% of shares, Moncrief Oil - 64%, ISR Oil - 16%. But, as in the previous contract of 2003 the list has changed.

Now participating interests of the project are: Nations Energy - 80%, SOCAR - 20%. Predicted volume of investments in the project is not less than $500 mln.

Southwest Gobustan

Southwest Gobustan structure consists of 3 fields with the total area of 604 sq. km. The sum of capital investments of prospecting works in the contract area is estimated at $51 mln.

Capital expenditures in the project total $470 mln. Produced stocks of the structure equal to 115 mln barrels of oil and 530 bn c.f. of gas (totally about 206 mln barrels of oil equivalent).

Currently shareholders of the project are: SOCAR - 20%, the rest 80% are divided between Chinese CNPC, CNODC and Rosco.