KAZAKHSTAN, AZERBAIJAN, TURKMENISTAN, RUSSIA AND IRAN - 2000-2025

Caspian Energy analytical group

The first 5 years of XXI century are completed in 2005. This period was denoted with stable prices growth in the world oil markets that made a print to whole world economy. The leading worldwide importers are defined with sources of supplies for themselves to the nearest decade, and both largest and independent exporters more or less clarified with the largest projects are capable to intensify trade relations in future.

Elements of these changes are clearly find themselves at separate sectors of market and oil and gas production regions. For example, there is making good crude oil transportation from the Caspian Sea and Mediterranean. Concerning gas, its export is planned from the Caspian to the western direction.

Long crude oil pipelines are planned from Russia and Kazakhstan to Japan and China. Export pipelines from Canada to the US are expanding to accommodate growing production from Alberta's oil sands.

Generally for five years oil consumption in the world increased by 7,5%. Leader of growth became Asian-Pacific Rim. European and CIS oil markets on growth are back from Asian-Pacific Rim and North America.

Industrial developed nations for five years provided with 29% of oil consumption growth. Leader of growth among developed nations are USA, whereas Japan, Germany and Italy reduced oil consumption. The growth of oil consumption in Europe provided by Spain, Austria, Poland and Holland. Only China for five years increased the oil consumption by 94 mln. a year and provided 31% of worldwide oil consumption growth.

Oil production in the world from 2000 to 2004 increased by 7.1%. In 2001-2002, oil consumption pushed up not significantly and OPEC reduced the oil production for saving of price situation in the market.

Since 2003, countries-producers took off the confining to oil production and export for providing of fast growth demand. Oil production growth in Russia, Saudi Arabia and some countries was partly compensated with reduction of production in the North Sea, USA, Venezuela, Iraq and Indonesia caused firstly by political, war-political and technological reasons.

Forecasts. 2001-2025.

Stabilization of political situation in some OPEC states allowed the increasing of production approximately to 73 mln. tona a year. It compensates the production reduction in the USA and other states where it caused by technological reasons.

So, oil trade of developed countries sharply increases the demand that cause thew growth of export keeping under control by OPEC.

Concerning natural gas then special attention should be paid to speed growth of LNG trade and its perspectives.

Product flow patterns are changing, too-but for different reasons-in the Atlantic Basin and East of Suez markets.

The US Energy Information Admin-istration's most recent International Energy Outlook highlights the growing share of future OPEC and Persian Gulf exports destined for developing coun-tries.

Through 2025, the amount of oil flowing from OPEC exporters to industrial importers will grow. But oil movement to developing countries will grow even more (Table 1). In its reference, or most likely, case, the agency expects OPEC exports to de-veloping countries to increase by more than 18 million b/d during 2001-25. Three fourths of the increase will go to Asian developing countries.

China, alone, is likely to import about 6.6 mln. b/d from OPEC by 2025, virtually all of which is expected to come from Persian Gulf producers, the report says. While North America's oil imports from the Persian Gulf will double during 2001-25, more than half the region's imports at the end of the forecast period will be from Atlantic Basin sources. EIA expects major increases in North American imports of crude oil from Venezuela, Brazil, Colombia, and Mex-ico and further increases from Nigeria, Angola, and other West African produc-ers. Most of North America's increase in product imports will be from Caribbean Basin refiners.

Western Europe's oil imports will grow during the study period as North Sea production declines. The region also will receive growing volumes from the Caspian region.

Reference: the amount of oil production at continental Norwegian shelf for the first 7 months of 2005 reduced by 11,2% in comparison with the same period of last year and the gas production increased by 5,1%. Such data provides by Norwegian board of directors. Norwegia is the third oil and gas exporter in the world after Saudi Arabia and Russia and its daily production on the continental shelf 3,2 mln. bbl in fuel equivalent.

Caspian region with its great resources potential took stable place with its hydrocarbon in the world trade market. And its began after there were solved all matters connected with pipelines' construction, international oil companies and government of the Caspian nations began oil flowing into European markets. Presently, some of projects are under the stage of development.

However, this is still largely an optimistic scenario, driven by assump-tions that history has not borne out. The succession of drilling failures in the Caspian does not bode well for future discoveries, and the ongoing dispute over the legal sta-tus of the sea-nearly 14 years since the breakup of the Soviet Union-does not augur well for a quick resolution that would open up new fields to exploita-tion.

Kazakhstan: still to bloom

No state represents the potential of the Caspian region better than Ka-zakhstan. The country's vast proved oil reserves were largely untapped in the Soviet era, and the discovery of the massive Kashagan field in 1999 - the largest oilfield discovery in the world for 3 0 years - in shallow water of the North Caspian has only added to its allure.. Yet Kazakhstan's offshore is largely unexplored, and the much-vaunted "Caspian Development Programme" has been derailed by a restrictive produc-tion-sharing agreement (PSA) regime and a new tax policy in 2004 that foreign energy companies say has ham-pered investment.

Still, Kazakhstan's potentially volumi-nous offshore oil reserves have made it the most attractive investment destina-tion in the Caspian region for lOCs. Its main Caspian project already in production is at Tengiz oil field on the eastern shore, developed by Tengizchevroil (TCO), a Chevron-led consortium, with estimated recoverable reserves of 7-9 billion bbl.

The $3 billion second generation and sour gas injection (SGP/SGI) ex-pansion finally went forward in January 2003 after a dispute over financing of the project, and output at the field rose to 270,000 b/d by the end of 2004. Production is slated to reach 750,000 b/d by the end of the decade and could top out at 1 million b/d by 2012 under the right economic conditions.

Although not technically a "Cas-pian project," the development of its Karachaganak gas-condensate field on the Russian-Kazakh border is nonethe-less a key energy project for Kazakhstan. Led by BG Group, the Karachaganak Petroleum Operating BV (KPO) consor-tium has focused on extracting liquid hydrocarbons in the initial stages of the field's development.

A pipeline connection to the CPC's Tengiz-Novorossiysk pipeline, complet-ed in 2003, has given the consortium an export outlet for its condensate out-put, although a problem with contami-nation forced KPO to push back exports via the CPC until mid-2004.

KPO is producing 100,000 b/d in condensate with plans to increase that total to 140,000 b/d, although Phase III development of the field will focus on gas extraction. Karachaganak condensate exports eventually could be redirected to China once the Kazakhstan-China pipeline is completed.

The aforementioned Kashagan proj-ect is Kazakhstan's first major offshore oil field development, and its massive size-with an estimated 38 billion bbl in proved reserves, including at least 7 billion to 9 billion bbl recoverable-has stimulated significant IOC interest in the offshore development program.

Due to its massive production po-tential and obvious importance-both to Kazakhstan and global oil sup ply-the project has been delayed by a series of setbacks as the government and the consortium developing the field, the Agip Kazakhstan North Caspian Operating Co. (Agip KCO), have argued over plans for developing Kashagan.

An original timetable for the start of oil production in 2005 proved untenable, prompting the government to demand compensation from Agip KCO, led by Italy's Eni, before consenting to a delay in the start of production. The new timetable for production envisions first oil in 2007-08 at 75,000 b/d, rising quickly to 450,000 b/ dby 2010, then to 900,000 b/d by 2013, and finally hit-ting a plateau output of 1.2 million b/d by 2016.

Recently, five of the exist-ing members of Agip KCO struck an agreement-af-ter protracted negotiations-with the government to divide up BG Group's 16.67% stake in the project among them, with Kazmunaigaz getting an 8.33% stake to give the state a direct role in Kashagan.

Several more oil projects in the Kazakh sector of the North Caspian are in the very early stages, with talks still continuing over fields such as Isatai, Zhemchu-zhina, and Zhambyl. In addition, Russia and Kazakhstan have agreed to jointly develop the 7.33 billion bbl Kurman-gazy field, which lies in the Kazakh sector of the sea but straddles the Russia-Kazakh border. However, a deal on a PSA for the field has been delayed over Rosneft's concerns over the Kazakh fiscal regime, even as Kazmunaigaz is ready to bring in France's Total as opera-tor of the project.

The Kurmangazy dispute epitomizes the Kazakhstan dilemma for foreign oil companies: a massive oil field that holds much untapped potential but an over-bearing government eager to dictate the terms and pace of development.

Kazakhstan is hoping to treble its current production of 1.2 million b/d by 2015, but government interfer-ence is beginning to hinder foreign investment. In turn, the government is increasingly turning to state-to-state oilfield development deals rather than open tenders for its offshore blocks.

Azerbaijan: boom, stable growth.

A series of high-profile drilling disappointments in the Azeri sector of the Caspian Sea left several lOCs high and dry, though the Azeri government continued to promote the country's off-shore potential all the while.

For Azerbaijan, one of the oldest hydrocarbon-produc-ing regions in the world, the 21 st century oil boom starts-and may end-with the exploitation of the ACG structure. The BP-led AIOC signed the 30-year, $8 billion "contract of the century" in 1994, and initial oil pro-duction began in 1997, but 2005 marks a turning point for the project.

With the BTC pipeline slated to come on stream later this year (initial exports from Ceyhan are expected in the fourth quarter following the pipeline's official commissioning in May 2005), AIOC has begun to ramp up production at the structure, which stood at 130,000 b/d at the end of 2004.

The start of production at Central Azeri field in February 2005 has already ratcheted up output to around 165,000 b/d through March, and production for 2005 is expected to rise to around 220,000 b/d.

With West Azeri field scheduled to come on stream in 2006, AIOC is ex-pecting output to increase to 424,000 b/d of oil, then to 754,000 b/d in 2007 with the first oil from East Azeri field. The final phase of the ACG project, development of deepwater Guneshli field in 2008, is expected to

push AIOC's oil production past the 1 million b/d level in 2008 with 1.046 million b/d once the field is brought on stream.

However, AIOC's development plans for the 5.4-billion-bbl ACG structure envision a sharp dropoff in production after hitting peak output. The ACG fields will see production taper off to 800,000 b/d early in the next decade before a steep decline starts, with output leveling off at between 250,000 and 300,000 b/d by 2020 (Table 4).

Now that Azerbaijan's oil boom has finally arrived, however, the govern-ment needs other projects to sustain that boom, but the prospects thus far are not good. High hopes for offshore projects at the Lenkoran-Talysh, Oguz, Apsheron, and Ateshgah blocks were dashed by drilling failures, and each of those projects has closed.

Similarly, ExxonMobil's inability to find commercial hydrocarbon reserves at either the Zafar-Mashal structure or the Nakhichevan block means that these two projects are effectively dead as well.

Just as Azerbaijan's long-awaited return to world oil prominence is kick-ing off, the country is staring directly into the abyss in the absence of another major discovery.

Azerbaijan still has hope, however, that several fields could dispel the no-tion that the country is all hype, no substance. For example, Lukoil is drill-ing the Yalama block in the northern part of the Azeri section of the Caspian Sea. In addition, the country stands to benefit greatly from a multilateral ac-cord on the legal status of the Caspian Sea-if only the littoral states could agree to one. Several prospects in disputed waters near the Azeri-Iranian and Azeri-Turk-men maritime borders could see signif-icant investment if the legal uncertainty about their ownership is removed. In particular, the Araz-Alov-Sharg struc-ture, with an estimated 6.6 billion bbl in reserves, could be a major boon for Azerbaijan's oil industry.

A joint development deal between Azerbaijan and Iran, along the lines of the Russian-Kazakh agreement in the North Caspian, could open up the structure for development, but in the absence of such an agreement, Azerbaijan will increasingly rely on the ACG project to drive its oil production.

Turkmenistan: frozen in time

Over the course of the past 14 years, independent Turkmenistan has dis-tinguished itself among the ex-Soviet Caspian nations as a virtual black hole of foreign investment. Not only are the estimated oil re-serves in its sector of the Caspian Sea thought to be substantially smaller than those of Azerbaijan or Kazakhstan, but Turkmenistan has also done a far better job of repelling foreign investment than it has of attracting it. The central Asian republic inherited a bloated bureaucracy from the Soviet era, but under President Saparmurad Niyazov (also known as "Turkmen-bashi," or "Father of the Turkmen"), the investment climate has perhaps even worsened.

Niyazov, who was appointed presi-dent-for-life in 1999 by the rubber-stamp Turkmen legislature, has exhib-ited a knack for erratic policymaking and micromanagement of the economy, fostering a wildly unpredictable investment climate, complete with arcane regulations and constantly changing administrative requirements.

The absence of political or economic reforms gives Turkmenistan the aura of a mini-Soviet planned economy, pre-collapse. The majority of international energy companies who dared venture into the murky world of Turkmenistan in the 1990s have departed, leaving only a handful behind.

Still, those few companies that have found themselves on Niyazov's good side have managed to carve out a small niche in the country's Caspian shelf. Dragon Oil, a company based in the United Arab Emirates, has the rights to the Cheleken contract area on the shoreline, and the company's extensive well workover and continuous drill-ing program have boosted production above 20,000 b/d.

Petronas, the Malaysian state oil company drilling at Makhtumkuli-3A field (also known as East Livanov), announced encouraging results earlier this year with plans to begin production by late 2005. Furthermore, the UK's Bur-ren Energy is continuing to produce oil from the onshore Burun field under the Nebit Dag PSA with Turkmenistan.

Despite the shoddy investment climate and the "reputational risk" to lOCs from Turkmenistan's awful human rights record, investment dollars in the country's oil sector are actually on the rise, led by Russian companies but also including well-known players such as Denmark's Maersk Oil and lesser-known

Western companies such as Canada's Buried Hill Energy.

A consortium of Russian companies, including Zarubezhneft, Rosneft, and Itera, are still negotiating details for the Zarit PSA, while Gazprom and Lukoil are also seeking to develop oil fields in the Turkmen sector of the Caspian.

Maersk signed a PSA for offshore blocks in October 2002, while Buried Hill enlisted the services of former Canadian prime minister Jean Chretien to secure rights to Serdar field. However, Azerbaijan, which also claims the field but calls it Kyapaz, has raised objections to the licensing of the field, threatening retaliation against Canada.

Given the dictatorial nature of the Niyazov regime-as well as the uncer-tainty in the investment climate-Turkmenistan will struggle to attract larger levels of foreign investment, making it nearly impossible to achieve Turkmen-bashi's ambitious production growth targets.

Although Turkmenistan has sub-stantial gas reserves, the country has comparatively small oil resources, and the goal of 2 million b/d in oil output by 2020 looks unobtainable, especially given current production of just over 200,000 b/d.

High oil prices made profitable for foreign investors the development of some former contract areas in Azerbaijan sector of the Caspian from which foreign companies had refused in one's time. The speech about development of "Ashrafi" and "Garabagh" fields on which there were concluded in one's time PSA and also about new perspective "Babek" structure. According to SOCAR's chief Natig Aliyev "development of these fields are planned by State program of FEC development of state to 2005-2015. However, we have not begun the operations at stated blocks yet, and foreign companies can be attracted for their development", - SOCAR's chief said. The discovering of "Ashrafi" and "Garabagh" fields by foreign companies occurred in 1998-99, i.e. to the period of sharp oil prices reduction in the world markets (in 1998 - up to $9-10 per bbl). However because of not big reserves (approx. 40-50 mln. tons in fuel equivalent each) foreign companies had refused from their development. However Natig Aliyev said that oil price significantly increased and the growth continues. "If previously from economy point of view the development of stated fields was unprofitable then now taking into account the oil price growth invested will prove itself", - chief SOCAR said.

To be continued: Russia and Iran pls. read in next issue.