THE AZERBAIJAN OIL AND GAS INDUSTRY IN THE 1949-1999 PERIOD

By Natig Aliyev

The SOCAR President Natig Aliyev, Doctor of Geology and Mineralogy, Academician of East Oil Academy

On November 12,1999 Azerbaijan marked a milestone in the history of oil - the 50th anniversary of oil production in the fields off the Caspian coast. But if we have in view of the his-tory of only offshore oil production, of course, the history dates back to the beginning of this century.

At this time for the first time at the Bay of Baku a small territory was taken away from the sea by pouring loose materials on a site. The area of the sea was called the Bay of ll'ich after V.I.Lenin (ll'ich is his patronymic) afterwards. First oil was produced in the area and then an offshore oilfield was based on the plot. As time has gone on, different methods of tapping off-shore oil bearing areas appeared - the artificial islands conquered from the sea, offshore sta-tionary isolated platforms carved out, semi-sunk ships, barges. Then the era came to con-struct tubular trestieworks by which oil people have toed into Caspian waters and thus strengthened their foothold. There were enough grounds for this.

It is known that the present shoreline of the Caspian Sea cannot set limits on the extension of onshore oil fields and highly promising struc-tures seaward. The investigations showed that many of them extend farther seaward beyond the edge of the Caspian to form lengthy anticli-nal zones like the Baku archipelago, on under-water slopes of Dagestan, the Chelecken peninsula in Turkmenistan, the Beke-Bushkudan embankment in western Kazakhstan. All this acted as a spur to oilmen's ambitions, making them to expand geological prospecting surveys in the Caspian Sea and to break into offshore fields in Azerbaijan.

From this view of point, oil production from the fields off the Caspian coast has an older history. However, as a matter of fact, first ton of oil was produced 50 years away, namely, at the Neftyanye Kamni (Oil Rocks) on November 7, 1949. It is of great importance to us, as Azerbaijan became a first-mover in developing offshore fields, namely, in the Caspian Sea off-shore Azerbaijan.

DEVELOPMENT OF THE NEFTYANYE KAMNI FIELD FROM TRESTLEWORK DOES NOT HAVE LOOKALIKES WORLD-WIDE AS YET

An unique peculiarity of developing the Neftyanye Kamni field consists in what quite innovative techniques were used in the field, which have never and nowhere been employed earlier. It is enough to say that the trestlework method of developing the Neftyanye Kamni field is so far considered to be for the first time applied in offshore upstream oil industry world-wide and does not have any lookalikes so far. Offshore conditions have had to lead to the need to develop innovative and technical solu-tions to deal with many challenges.

One of the solutions is the drilling non-monobore wells - the drilling of several direc-tional wells laterally situated and going out of a monobore well. It has found widespread appli-cation in the Caspian Sea now as dramatically reduces well intervention costs. As the years went on, on the Caspian the powerful complex-es for building offshore facilities have been developed. Among them is the Baku plant mak-ing offshore platforms. It was transformed into the Shelfprojectstroy corporation afterwards. The enterprise is the flagship of the offshore deepwater platforms and floating jack-up rigs construction industry.

The need for their maintenance and repair resulted in establishing a fleet consisting of vessels rigged out with special equipment pro-viding services to upstream operations. The fleet has pipes laying vessels, specially equipped boats, passenger ships. By now it is a whole offshore engineering industry. It is no more chance that after Neftyanye Kamni a new phase was begun in discovering and tapping oil and gas fields through jack-up rigs and semi-submersible drilling rigs. With their help, as early as Soviet era there were discovered the Azeri, Chirag, Guneshli, Kyapaz fields in the Caspian Sea offshore Azerbaijan, the Livanovo-Eastern Gorge in Turkmen sector of the Caspian Sea, the Rocky Sea near Kazakh coast.

Now, as it is known, the TRIDENT-20 semi-submersible drilling rig is under construction in Baku. Test wells can be drilled from it to a ver-tical depth of 7,500 meters below sea level. All this gives a ground for thinking that in the near future Baku will become one of the powerful hubs of building floating rigs.

THE AZERBAIJAN OIL INDUSTRY

Indeed, the Oil Industry existed in Azerbaijan until 1969. It was the mainstay of the former USSR's energy supply. It was entirely controlled by Moscow that pulled the strings of it. The Ministry was as if under dou-ble rule. On the one hand, it was subordinate to Azerbaijan's Cabinet of Ministers, on the other hand, it did the USSR Oil Industry Ministry's bidding. Of course, it made no sense of retain-ing the authority body in the republic when in

Azerbaijan offshore oil production had been generated, which was developed at a great rate and the republic's oil production on land started to decline. Therefore, Moscow was set on set-ting up two production associations, the func-tions of which would be different from each other, instead of the Azerbaijan Oil Industry Ministry. These production associations were Azneft, which was engaged in oil production on land, and Caspmorneft, the all-union produc-tion association, which was then renamed Caspmorneftegasprom. It was involved in exploring, prospecting and developing oil fields throughout the Caspian Sea. In short, as tasks and a system of management changed, extra production entities, among which turned to be Azerbaijan's Oil Industry Ministry, were wound up. However, it should be noted that Azneft, the production association, and Caspmorneftegasprom, the all-union produc-tion association, continued to reserve the sta-tus of the ministry. The authority and empowers of the associations' general directors were rather high and they were always the people to be reckoned with.

ECONOMIC EFFECTIVENESS OF OLD FIELDS REHABILITATION PROJECTS

I must say that offshore oil production was always profitable. I can reinforce what I said with some figures. If in 1980 the production cost of a ton of oil was 55 rubles on average throughout Azerbaijan, the oil produced from the Guneshli field cost from 3 to 7 rubles. And it was so despite what capital investments in offshore fields were more than the ones con-tributed to onshore fields. Of course, the cost effectiveness of offshore oil production was high owing to the high rates of output at oil pro-duction wells. On the other hand, the cost-ben-efit of offshore oil production was provided by permanent addition of new fields to the yet up and running deposits. The cost-benefit of off-shore oil production has always been con-firmed by the world experience.

As it is known, we afforded 19 contracts with foreign companies. Many of the projects, except for Azeri, Chirag, Guneshli, have rele-vance to tapping new offshore perspective structures, where, according to forecasts, sig-nificant hydrocarbon reserves are available. Discovery of oil deposits on these structures is the cause of the future. We are developing about 17 fields on our own, many of which have been yielding oil for more than a decade. Of course, over time the fields fell to a break even point when their exploitation to stop bringing in a profit. In addition, expenses spent on techni-cal maintenance of infrastructure under condi-tions of aggressive marine medium resulting in quick corrosion and a decline in oil production make for reducing a cost-benefit level of crude oil produced here. Oilmen are currently in their search for ways for retaining such oil fields.

In other words, a more exact economic count of the proposed total oil production, repair of equipment is performed. Capital investments, which might have covered the quotation, are determined. And, in addition to this, they have to yield a profit. We are at work on such calculations of many fields to maximize return on investment. Among them are Neft Dashlary (Neftyanye Kamni), Bakhar, Sangachalu-Duvanny, Pirallahi and other fields.

We prepared a package of geological and geophysical data characterizing the present state of the fields. In Houston and London we conducted a presentation of this package of data, which foreign companies were interested in. The data is being studied by foreign experts. A task is that the fields, which fell to a break even point, were raised to a qualitatively new level of their development with help of foreign investments. I think that the projects of foreign companies will be submitted to us in the near future. And if they are of benefit to SOCAR and foreign companies, appropriate agreements will be signed.

SOCAR AFTER 10 YEARS

A few years earlier at SOCAR, its Foreign Investments Department staffed with trained specialists was formed. It is engaged in various calculations and working out the underlying principles of mutual relationships between investors and SOCAR and has appropriate talks with them. I think that the department will be involved in entering into contracts, putting them into practice and keeping a control over the deals. Its duties also will include the calcu-lations of revenues coming to SOCAR's cof-fers. It is one of the most important divisions of SOCAR. In future, I think, the department will be expanded. After affording every contract, we establish an affiliated company of SOCAR, which are SOCAR's representatives to consor-tia. They take a share in projects and them-selves finance for them. SOCAR's administra-tive structure is improved over time and its management quality enhances.

Now SOCAR consists of eight offshore and onshore oil production associations - that of trunk pipelines, two oil downstream associa-tions ( one refines crude oil into light oil prod-ucts and it is called Azernweftyanajag, other group is Azerneftyag that processes crude to produce luboils). There are also the following production groups - Shelfprojectstroy, Geology and Geophysics. The production associations were set up to cover all lines and spheres of today's oil business and practice.

In addition, we founded an independent department for foreign relations, which is engaged in exporting crude oil and refined products. In the next ten years it is likely to appear a new tendency in SOCAR's activities requiring more flexible changes in the existing management system. In the run of doing our business we will make changes to SOCAR's activities.

FROM 2005 AZERBAIJAN'S ANNUAL OPERATING EARNINGS FROM THE CONTRACT OF THE CENTURE WILL SURGE UP TO US$1 BILLION

We said all of our suggestions had aimed to replenish our country's foreign exchange reserves by selling oil produced from oil fields. As from the year-2000, Azerbaijan will earn about US$100 million in operating revenues from oil produced from the Azeri, Chirag, Guneshli fields. The profit will further have atendency to increasing. We launch to fulfill the Phase-1 large-scale development program of the Azeri, Chirag, Guneshli fields, and from the year-2005 they will bear US$1 billion per year. It is huge money for our republic. So, as early as today a question arises of how to use the funds. For this, it is essential to study the expe-rience of other countries, in which oil industry was developed very quickly, and to provide a continuous cash flow. The main thing is that to correctly spend the funds. The Azerbaijani gov-ernment, which will own the money, works on the problem. SOCAR is not entitled to use the foreign exchange revenues to its discretion. In connection with the issue of great importance, a special program of reinvestments will be developed. Time will tell what sectors of the country's economy will be covered by the pro-gram, what the program will aim at. It is clear that the program will cover the sectors of indus-try, of which enterprises can not only absorb the investments but maximize and quicken return on investment and yield a profit. There are such sectors in the republic. I have in view of machinery construction, oil industry and chemicals production and agriculture.

The World Bank recommends to form a special fund or account to which foreign exchange revenues gained from oil sales and development of fields will be transferred. I think it is a sound idea because if these revenues come to the state's budget, they can be veiled and dispersed or scattered and none will be unable to answer how much foreign exchange arrived and what they were spent on. One is likely to have to set up a commission on the use of foreign exchange, which is a prerogative of the state. SOCAR is not entitled to intervene or give any advices.

FOREIGN COMPANIES ARE OBLIGED TO COMPLETE THEIR EXPLORATION PERIODS ON SCHEDULE

I do not think that any delays will take place during the fulfillment of the projects for devel-oping the Nakhichevan area operated by

Exxon and the Tagiyev field operated by Chevron. A groundwork is being done for the indicated structures now, i.e., the engineering and geological features of the seabed are under study. Further the experts will have to carry out a 3D seismic survey. After date pro-cessing, the locations for the first appraisal wells will be selected. To drill the wells, the Istiglal amd Dede Gorgud semi-submersible drilling rigs will be used. In any case, foreign companies are obliged to complete exploration on schedule. Otherwise, they will lose their right to a contract.

THE SCOPE OF MEP PROJECT IS INCOMPARABLE WITH EARLY OIL EXPORT

At the moment, a working negotiating group of Azerbaijan is in talks with Turkey. As far as I know, the process of dovetailing governmental documents comes to an end. A positive ele-ment is that at last foreign companies, including BP Amoco, have already got a more favorable attitude to the Baku-Ceyhan МЕР. And if many shareholders of BP Amoco were previously inclined to consider the Baku-Ceyhan project to be expensive, today there are positive upheavals in views of these companies.

All of them think the Baku-Ceyhan pipeline is a project of strategic value not only to Azerbaijan but all the Caspian region and that the МЕР can assist in providing energetic inde-pendency of the region. I think we still will fol-low through a matter of the Baku-Ceyhan pro-ject. As to signing a package of agreements, it will be sealed at a time when all issues are resolved and submitted to Azerbaijan President Heydar Aliyev. They cover the terms of finding for the project and other its features.

The documents in form are similar to the papers we signed on early oil with Georgia and Russia. However, the volume of the documents on МЕР is more because here the scope is much more than that of the early oil export pro-ject.

If early oil projects were sponsored by the AIOC consortium , in this case it is quite a dif-ferent matter, i.e., it is expected to form a new pipeline consortium and the financial aspect of the project falls under its jurisdiction.

- It is the first difference.

- Each of the pipeline company's father founders must contribute its stake to the project on its own. It is the second difference.

- Third difference is the largest one. It is what the contract for building "turnkey" МЕР has the fix sum of its construction. -

- The fourth difference is that the Turkish government gives guarantees for the construc-tion having to be completed within the budget. If the real cost exceeds the fix sum, all cost overruns will have to be covered by Turkey.

- The scope, nature, and terms of delivering the project for МЕР are significantly different from the early oil export contracts.

CASPIAN EASTERN COAST MUST SHOW ITS BUSINESS ACTIVITY

I would like to note that all of companies operating on the eastern coast of the Caspian Sea are interested in the Baku-Ceyhan МЕР construction. The companies repeatedly announced their willingness to participate in bringing МЕР project into effect. However, negotiations with them cannot be held until all the issues of drawing up appropriate papers and tasks are posed by Azerbaijan President Heydar Aliyev for us to fulfill.

Of course, after the Pipeline Consortium has been formed and its conception has been determined, the companies - Chevron, Exxon/Mobil and others - will be able to be incorporated into it. Such suggestions are available but so far they are not under consid-eration. After a while, the matter might be con-sidered by us.