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©Blackwell Publishing Ltd, 2008
GLOBAL ENERGY REVIEW
Central Asia/Trans-Caucasus: Outlook for Exports
A Report by Dr Paul McDonald
Consulting Editor, Oil and Energy Trends
A survey of the oil and gas reserves, production and exports of:
o Azerbaijan
o Kazakhstan and
o Turkmenistan
Together with a summary of the reserves of the remainder of the region
Plus forecasts for exports in 2015
28 April, 2008
©Blackwell Publishing Ltd, 2008
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Contents
Introduction 4
Oil 5 The International Context 5 Caspian Reserves 8 Kazakhstan 10
Kashagan 10 Other Fields 12 Oil Exports 13 Rival routes 14 Production Outlook 16 Production Forecast 16
Azerbaijan 16 Developing ACG 17 Oil Exports 19 Production Outlook 22 Production Forecast 22
Other Countries 22 Net Exports 22 Export Outlook 23
Natural Gas 24 The International Context 24 New Pipelines 25
Caspian Gas 26 No Nabucco? 27
Sourcing the Gas 27 Export Outlook 30 Production Outlook 31 Export Forecast 33
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List of Tables
Table 1 World’s Ten-largest Oil Producers, 2007 5
Table 2 World’s Ten-largest Gas Producers, 2007 6
Table 3 World Proven Oil Reserves, 2008 7
Table 4 World Proven Gas Reserves, 2008 8
Table 5 Russia/Central Asia/Trans-Caucasus: Proven Oil Reserves, 2008 9
Table 6 Russia/Central Asia/Trans-Caucasus: Oil Production, 2007 9
Table 7 Kazakhstan: Oil Profile, 2007 10
Table 8 Kashagan: Field Profile 11
Table 9 Kazakhstan: Principal Oilfields 12
Table 10 Kazakhstan: Oil Export Routes 15
Table 11 Azerbaijan: Reserves & Production 19
Table 12 Azerbaijan: Oil Profile, 2007 20
Table 13 Azerbaijan: Oil Export Routes 20
Table 14 Azerbaijan: Proposed Pipeline Projects 21
Table 15 Russia/Central Asia/Trans-Caucasus: Net Oil Trade, 2007 23
Table 16 EU Dependence on Russia, 2007 24
Table 17 Proposed Gas Pipeline Links 26
Table 18 Russia/Central Asia/Trans-Caucasus: Net Gas Trade, 2007 28
Table 19 Russia/Central Asia/Trans-Caucasus: Proven Gas Reserves, 2008 28
Table 20 Russia/Central Asia/Trans-Caucasus: Gas Production, 2007 29
Table 21 Azerbaijan: Proposed New Gas Export Pipelines 30
©Blackwell Publishing Ltd, 2008
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Introduction
The Central Asia/Trans-Caucasus region consists of the following countries:
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
all of which were republics of the Soviet Union until they gained their independence in 1991.
Of the eight countries listed above, four–Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan–
are significant producers of oil or gas, or both. The first three of these are regarded as important
potential energy suppliers to Western Europe which–along with the US–has supported the
development of new oil and gas industries there in an attempt to develop an important new
source of energy imports that is independent of both Russia and the Middle East.
In this they have been only partly successful. Russia is beginning to reassert political and
economic control over much of Central Asia and the Trans-Caucasus and is likely to control a
large proportion of the region’s future exports of oil and gas: either by direct purchases of oil and
gas or by providing the principal export route for the region’s main producers. In a further blow
to European hopes of receiving a substantial share of the region’s oil and gas exports, China is
now emerging as an important competitor for oil and gas from countries lying east of the
Caspian.
Forecasts are provided for production, consumption and exports for Central Asia and the Trans-
Caucasus for 2015.
©Blackwell Publishing Ltd, 2008
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Oil
The International Context
Since the early 1990s, the EU and the US have encouraged the development of the oil and gas
industries of Central Asia and the Trans-Caucasus as an alternative to Russia and the Middle
East. Western oil companies have successfully developed new fields and–rather less
successfully–new export routes to Europe. High hopes have nevertheless been expressed
concerning future levels of production from the region and a growing volume of exports has
been predicted.
Western hopes have centred principally on Azerbaijan, Kazakhstan and Turkmenistan; but
production gains have only been modest during the past one-and-a-half decades. In 2007, none
of the Caspian countries appeared in the list of the world’s ten-largest oil producers (see Table 1)
and only one–Turkmenistan–made it into the list of top-ten gas producers (see Table 2).
Table 1
World’s Ten-largest Oil Producers, 2007
(mn bpd)
Saudi Arabia 10.4
Russia 9.9
United States 7.4
Iran 4.0
China 3.8
Mexico 3.5
Canada 3.4
United Arab Emirates 3.0
Venezuela 2.6
Norway 2.5
Others 31.8
Total 82.3
Includes NGL; Excludes Biofuels & Processing Gains
Source: Pearl Oil estimate
The situation is similar in respect of proven reserves. Only Kazakhstan makes it into the top-ten
list, being the tenth-largest in terms of its proven oil reserves (see Table 3).
©Blackwell Publishing Ltd, 2008
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Table 2
World’s Ten-largest Gas Producers, 2007
(bn cfd)
Russia 59.0
United States 51.7
Canada 18.3
Iran 10.5
Norway 8.9
Algeria 8.2
United Kingdom 7.7
Indonesia 7.2
Saudi Arabia 7.2
Turkmenistan 6.5
Others 99.8
Total 285.0
Source: GER estimate
In the case of both reserves and production, Russia and the Middle East remain the dominant
countries, suggesting that there is little chance of dislodging them from their position amongst
the leading suppliers of oil and gas to the EU in particular and, to a lesser extent, the US.
©Blackwell Publishing Ltd, 2008
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Table 3
World Proven Oil Reserves, 2008
Country Reserves Share of Total
(bn bbl) (%)
Saudi Arabia* 266.8 23.1
Iran 138.4 12.0
Iraq 115.0 9.9
Kuwait* 104.0 9.0
UAE 97.8 8.5
Venezuela 87.0 7.5
Russia 60.0 5.2
Libya 41.5 3.6
Nigeria 36.2 3.1
Kazakhstan 30.0 2.6
Others 180.2 15.6
Total† 1,156.9 100.0
Totals rounded
* Including half Neutral Zone † Excluding Canadian oil sands
Source: Oil & Gas Journal
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Table 4
World Proven Gas Reserves, 2008
Country Reserves Share of Total
(tcf) (%)
Russia 1,680 27.2
Iran 948 15.3
Qatar 905 14.6
Saudi Arabia* 253 4.1
UAE 214 3.5
US 211 3.4
Nigeria 184 3.0
Venezuela 166 2.7
Algeria 159 2.6
Iraq 112 1.8
Others 1,354 21.9
Total 6,186 100.0
Totals rounded
* Including half Neutral Zone
Source: Oil & Gas Journal
Caspian Reserves
The proven oil reserves of Central Asia and the Trans-Caucasus are modest by world standards
(see Table 5) and are mainly concentrated in Kazakhstan, which has 30.0 bn bbl, or 78.3%, of the
region’s total of 38.3 bn bbl. Reserves:production ratios are also moderate, except, again, in the
case of Kazakhstan, where the ratio is 59:1. Azerbaijan comes second, with 27:1.
©Blackwell Publishing Ltd, 2008
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Table 5
Russia/Central Asia/Trans-Caucasus: Proven Oil Reserves, 2008
Country Reserves Years remaining
(bn bbl)
Russia 60.0 16.6
Kazakhstan 30.0 58.7
Azerbaijan 7.0 27.4
Turkmenistan 0.6 8.2
Uzbekistan 0.6 16.4
Others 0.1 2.0
Total 98.2 21.8
(Saudi Arabia 259.8 68.4)
Totals rounded
Source: (Reserves) Oil & Gas Journal; (Other) Pearl Oil estimate
The region’s oil production amounted to 2.6 mn bpd in 2007: just 26.3% of the total produced by
Russia (see Table 6). Kazakhstan was the largest regional producer, with 1.4 mn bpd, followed
by Azerbaijan, with 0.8 mn bpd. Between them, these two countries accounted for 84.6% of the
region’s output.
Table 6
Russia/Central Asia/Trans-Caucasus: Oil Production, 2007
Country Volume
(mn bpd)
Russia 9.9
Kazakhstan 1.4
Azerbaijan 0.8
Turkmenistan 0.2
Uzbekistan 0.1
Others 0.1
Total 12.5
(Saudi Arabia 10.4)
Source: Pearl Oil
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Kazakhstan
Kazakhstan produces 1.4 mn bpd of oil, of which some 1.2 mn bpd is exported (see Table 7).
There are plans to increase output to more than 3.0 mn bpd, but these depend critically on the
development of the Kashagan field and the whole project is mired in a dispute between the
government and the oil companies that are proposing to develop the field.
Kashagan was originally due to come into production in 2005. Since then, the start-up date has
been postponed a number of times. At the beginning of 2007 the plan was for the
commissioning of the field to take place in 2008. In February 2007, Kazakh officials began to
refer to a starting date sometime in 2009. The following month, Kashagan’s operator, ENI, said
that first oil would not appear until the third quarter of 2010. Since then, dates as late as 2011
and 2012 have been privately mentioned by companies involved in the project.
Table 7
Kazakhstan: Oil Profile, 2007
Proven Reserves 30 bn bbl
Reserves remaining 59 years
(mn bpd)
Production 1.4
Consumption 0.2
Exports 1.2
Source: (Reserves) Oil & Gas Journal
(Other) Pearl Oil estimate
Kashagan
Kashagan is a major oilfield in world terms, with proven reserves estimated between 13 bn and
15 bn barrels, giving it roughly half Kazakhstan’s total reserves of oil. It is being developed by
an international consortium of seven companies, led by ENI, which is the field’s operator.
The field’s development, however, has encountered a number of problems: some geological and
some political. The result has been a series of increases in the estimated cost of developing the
field. Costs of developing the initial phase of the field were estimated in 2004 at just over
$10 bn. By early 2007 that figure had risen to $19 bn. It is probably now nearer $20 bn.
The above costs represent sums required to begin producing oil at around 300,000 bpd. Output
is then supposed to increase in stages to 1.5 mn bpd somewhere around 2019 (see Table 8). The
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cost of the additional development stages is put at $11 bn, but some unofficial company
estimates exceed $30 bn, putting the total cost of the field as high as $50 bn. Government
sources claim the true figure is more than twice this amount.
Kashagan lies offshore in the Caspian Sea at a depth of around 15,000 feet. This makes it one of
the world’s deeper reservoirs. It is also structurally complicated and lies in waters that are liable
to freeze in winter. There are further problems with high reservoir pressures, which require
stringent safety precautions to be taken in drilling and operating oilwells, and with the high
sulphur content of the field. All this makes the field costly to develop and every delay to the
field means that costs rise further.
Table 8
Kashagan: Field Profile
Discovered 2000
Proven Reserves 13-15 bn bbl
Development Profile
Date* Volume
(kbd)
2010 75
2011 300
2012 450
2019 1,500†
* Dates approximate † Peak production
Source: ENI; oil press
The delays have not only been for technical reasons. There have been a number of disputes
between the government and members of the development of the consortium. Many of the
disputes have been about revenue-sharing from the field. Part of the government’s strategy has
been to threaten to increase tax rates on foreign oil investments. Much of the government’s case,
however, hinges on the size of its holding in the field-consortium.
State-owned KazMunaiGaz has an 8.33% share. The government has indicated that it wants a
40% share. It has further muddied the waters by suggesting that KazMunaiGaz should take over
the operatorship of Kashagan despite the state company’s lack of experience in developing large
©Blackwell Publishing Ltd, 2008
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and difficult offshore fields. There have even been suggestions that the government should
receive some revenues from the field before it comes into production.
Negotiations have been further complicated by the raising of a number of environmental issues
by the government, which claims that the current development plans contravene environmental
legislation, and suggesting that this could form grounds for the removal of ENI as operator of the
field. It is claimed in particular that marine life–including the Caspian’s sturgeons–could be
poisoned by releases of hydrogen sulphide and other toxic wastes from the field.
Other Fields
Kazakhstan has some other important developments under way. These include the Tengiz,
Karachaganak and Kumkol fields. The largest of these is the Tengiz field in western
Kazakhstan. Reserves here are an estimated 9 bn bbl (see Table 9) and production is close to
300,000 bpd. The development of the Tengiz field has been adversely affected by the presence
of large quantities of hydrogen sulphide. This has been processed into solid sulphur pellets, but
the production of sulphur has often exceeded the market for the product. Large mounds of the
material have accumulated and Chevron–the field’s operator–has frequently been in trouble with
the Kazakh authorities over the accumulation of its ‘sulphur mountain’.
Table 9
Kazakhstan: Principal Oilfields
Field Proven Reserves
(bn bbl)
Kashagan 15.0
Tengiz 9.0
Karachaganak 2.4
Aktobe 1.0
Uzen 1.0
Kumkol 0.6
Others 1.0
Total 30.0
Source: (Reserves) Oil & Gas Journal
(Other) Pearl Oil estimate
Karachaganak is a British Gas-operated gas condensate field in the north-west of the country. As
well as producing some 200,000 bpd of gas liquids it is also an important producer of natural
©Blackwell Publishing Ltd, 2008
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gas, which is exported to Russia. There are plans to raise the output of liquids to 350,000 bpd
and to double gas production to 1.6 bn cfd.
Kumkol is one of a number of fields in central Kazakhstan that the Chinese have interested
themselves in. In 2005, China’s state-owned China National Petroleum Corporation (CNPC)
bought the Canadian independent oil company PetroKazakhstan for $4.2 bn in order to gain
access to the 150,000 bpd that was produced by Kumkol and nearby fields. The following year,
it built a 200,000 bpd pipeline to carry the crude oil to the western Chinese refining centre of
Dushanzi.
Oil Exports
Kazakhstan has no direct link to the world’s oceans and is therefore forced to rely on third
countries to export its oil. Because of its land-locked situation it has sought to avoid dependence
on any single export corridor. Its main export routes go through Russia, but it is now developing
routes via China.
The routes through Russia date partly from the days when Kazakhstan was part of the USSR.
The main oil route via Russia is the comparatively recent Caspian Pipeline Consortium (CPC)
pipeline that was built to take crude oil from Tengiz to the Russian Black Sea port of
Novorossiisk. It is owned by a consortium representing the interests of Kazakhstan, Russia and
the Tengiz field’s shareholders.
The line was opened in 2001, with a capacity of 560,000 bpd. It can now handle about
700,000 bpd, but the Tengiz partners and Kazakhstan want to increase capacity to 1.3 mn bpd.
Russia, however, opposes this for economic and political reasons.
Russia’s opposition to the expansion of CPC is based partly on the cost of doing so when another
line exists allowing the export of Kazakh crude and condensate via Russia, using the pipeline
from Atyrau to Samara (see Table 10). The Russians have nevertheless indicated that they might
drop their objection if the CPC partners were to help finance a 700,000 bpd pipeline from Burgas
in Bulgaria to the Greek port of Alexandroupolis. Moscow is promoting this line as a by-pass to
the congested Bosphorus, which is approaching saturation in terms of the number of oil tankers it
can safely handle. The oil would be shipped from Novorossiisk across the Black Sea to Burgas
and thence to the Adriatic. The Russians have proposed an initial capacity for the route of
700,000 bpd.
©Blackwell Publishing Ltd, 2008
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Rival routes
Russia is not the only country bidding to transport Kazakh oil to the rest of the world. Ukraine,
Azerbaijan and Iran all have schemes of their own to handle its exports for part of their journey.
Ukraine’s proposal is for a pipeline link from the Black Sea to the Baltic. It is designed to make
use of a pipeline opened in 2002 between the Ukranian Black Sea port of Odessa and the town of
Brody, some 420 miles inland. The 180,000 bpd line was designed to allow the export of oil
from Kazakhstan and Azerbaijan to Central Europe, but failed to attract any business. It
remained idle until 2004, when Ukraine agreed to allow Russia to transport some of its oil
southwards through Odessa to the Mediterranean.
Last October, Ukraine and Poland agreed to extend the line from Brody to Plock in Poland and
from there to the Baltic port of Gdansk. An initial capacity of 240,000 bpd has been proposed.
KazMunaiGaz is reported to have expressed interest in the scheme.
Another proposal being studied by the Kazakh state company is for a tanker shuttle to operate
across the Caspian to transport up to 500,000 bpd of oil to the Azeri port of Baku, from where
the oil could be transported by pipeline either to Ceyhan in the Mediterranean or Supsa, on the
Black Sea coast of Georgia.
The tanker shuttle proposal is being studied by KazMunaiGaz in conjunction with Azerbaijan’s
national oil company, Socar. A separate proposal is being studied by Total–one of the partners
in the Kashagan field–for a pipeline of a similar size to the Caspian, from where oil would also
be shipped to Baku by tanker (see Table 10). The idea would be to make use of the existing
Baku-Tbilisi-Ceyhan (BTC) pipeline to take the Kashagan crude to the Mediterranean. BTC is
currently used for the export of oil from Azerbaijan but there are plans to increase capacity in the
future. It now handles about 700,000 bpd, but capacity is to be raised to 1.0-1.2 mn bpd in 2008
and there are further proposals for an increase to 1.6 mn bpd beyond that.
©Blackwell Publishing Ltd, 2008
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Table 10
Kazakhstan: Oil Export Routes
Route Destinations Length Capacity* On-stream
(miles) (kbd)
Existing Routes
Pipelines
Tengiz-Novorossiisk
(CPC)
Russia/Black Sea/
Mediterranean
945 700 2001
Atyrau-Samara Russia/Central Europe 450 340 Soviet era
Atyrau-Aktau Azerbaijan/Georgia/Iran/
Mediterranean
450 100 Soviet era
Atasu-Dushanzi China 900 200 2006
Railways
Kumkol-Alataw-Shankou 1 China 600 25 Soviet era
Total 1,365
Proposed Pipelines
Tengiz-Novorossiisk
(CPC)
See above Expansion 640 TBD
Kashagan-Aktau-Baku Azerbaijan/
Mediterranean
500 500 TBD
Atyrau-Dushanzi China 1,875 400 2 TBD
Kumkol-Dushanzi China Expansion 200 2010
Total 1,340
* Capacities approximate TBD: to be decided 1 Largely replaced by pipeline to Dushanzi 2 Extension of Kumkol-Dushanzi pipeline to western Kazakhstan (hence figure not included in
total)
Source: Pearl Oil
Iran too is studying the idea of shipping crude oil from Kazakhstan across the Caspian. In the
Iranian case, the proposal is to run tankers to the port of Neka on the southern shore of the
Caspian and from there to build a pipeline across Iran to the Persian Gulf at Jask.
The Neka-Jask route would allow better access to markets in Asia than the BTC pipeline, and
Iran’s proposal is thought to be favoured by Kashagan’s operator, ENI, but it suffers from the
uncertainty brought about by the EU’s opposition to Iran’s nuclear programme.
©Blackwell Publishing Ltd, 2008
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Production Outlook
Kazakhstan has ambitious plans for its oil industry. For some years there has been talk of raising
output from the current level of 1.4 mn bpd to more than 3 mn bpd. In 2002, the Ministry of
Energy set targets of 2 mn bpd for 2010 and 3 mn bpd for 2015. In the light of the delays at
Kashagan this now looks wholly unrealistic.
Kashagan looks unlikely to produce large volumes of oil before late 2010, and may not even
exceed 100,000 bpd until some time in 2011. Peak production of 1.5 mn bpd is not expected
before 2019, which is probably the earliest date at which Kazakhstan could be producing
3 mn bpd. The government now forecasts 2015’s output at 2.5 mn bpd rather than the earlier
target of 3.0 mn bpd.
There may be further new production–mainly of condensate–from gasfields such as
Karachaganak. Output from Tengiz is also slated to rise by 150,000 bpd by about 2009. There
may even be oil from new fields such as Kurmanagazy and Tub-Karagan, all of which should
help Kazakhstan to realise its goal of 3 mn bpd by about 2020. Beyond that, though, there may
not be much scope for further additions to output. Kazakhstan’s production, however, will not
reach any of its targets unless it is able to agree with its neighbours’ ways of finding its oil.
Production Forecast
(mn bpd)
2007 1.4
2015 2.5
Azerbaijan
For many years, Azerbaijan was an important supplier of oil to Western Europe. It has some of
the world’s oldest oilfields which are, in consequence, way past their peak levels of output. Its
prospects for future production do not depend on these mature fields but on those recently
discovered in the Caspian Sea. Whilst these relatively new discoveries appear promising in
terms of both reserves and production, they are few in number and unlikely to provide the oil
bonanza that was once predicted.
Modern commercial oil production in Azerbaijan began in about 1806, when oil was produced
from shallow pits. The earliest pits were dug around 3000 BC and wells as deep as 100 ft were
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reported by the late 16th century AD. The first of the current oilfields dates from 1871, when
output was recorded at 660 bpd (see Box).
An early problem for the oil producers was to transport their oil to the world’s major oceans.
The earliest exports went by river, road and railway to the main cities of Russia. In 1877, a
railway from Azerbaijan to Batumi on the Black Sea allowed the first exports directly by sea,
though these were limited by the fact that the oil could only be shipped in individual barrels.
The large scale international trade in oil was finally permitted when a London merchant, Marcus
Samuel, successfully shipped the first cargo of oil by ocean-going oil tanker in 1892: from
Batumi to Singapore and Bangkok. By 1895, Azerbaijan was the world’s largest producer of oil,
having overtaken the US; but war and revolution caused its output to decline sharply after 1913.
There was a recovery in the 1940s prompted by the need to supply oil to the Red Army, but
output again declined subsequently as the USSR developed newer, larger fields in Siberia and
elsewhere. By 1997, production hit a post-Soviet low of 182,000 bpd.
Developing ACG
In that year, BP brought a new offshore oilfield on-stream, called Chirag. This was the first of a
number of developments to be made by the British oil major in conjunction with its partners for
the newly-independent Azerbaijan. BP became the operator and principal shareholder in a
consortium known as the Azerbaijan International Operating Company (AIOC), of which the
other members were the Azeri state oil company, Socar, plus Chevron, Devon Energy,
ExxonMobil, Hess, Inpex, Itochu, Statoil and TPAO.
Chirag was the first of a series of fields, known collectively as Azeri-Chirag-Gunashli (ACG),
which are now being developed in stages. Chirag was followed by the Central, West and East
Azeri fields in 2005 and 2006, which helped to raise Azerbaijan’s oil production from
182,000 bpd in 1997 to 810,000 bpd in 2007 (see Box). This year, Guneshli is due to be
commissioned, which should push Azerbaijan’s production above 1 mn bpd (see Box).
Early output forecasts showed the ACG fields reaching a peak in 2009 or 2010 then declining
quite quickly. A prediction made in 2005 showed a fall in output to 800,000 bpd by about 2015.
The latest forecasts from AIOC suggest that the peak will be prolonged for two or three years, at
1.2 or 1.3 mn bpd. In the best case, these levels could be sustained from about 2010 to 2015.
©Blackwell Publishing Ltd, 2008
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Azerbaijan: Oil Production History and Prospects
Year Output Remarks
(bpd)
1871 660 First oilfield drilled
1873 3,000 Second oilfield drilled
1895 115,000 Output exceeds that of US
1901 165,000 Output equals half world total
1913 206,000 Peak output in Tsarist times
1921 81,000 Output collapse following Revolution
1943 260,000 Post-revolutionary recovery
1991 240,000 Last year under USSR
1997 182,000 First year of Chirag production
2005 452,000 Central Azeri field on-stream
2006 654,000 West Azeri field on-stream
2007 810,000 East Azeri field on-stream
2008 900,000 Gunashli field on-stream
2009 1,000,000
2010 1,200,000
2013 1,300,000 Forecast plateau
2015 1,200,000
2020 800,000 Production in long term decline
Source of figures:
(Before 1991) Pearl Oil based on Russian/Soviet sources
(1991-2006) BP Statistical Reviews of World Energy
(2007-onwards) Country data/Azeri forecasts
©Blackwell Publishing Ltd, 2008
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Table 11
Azerbaijan: Reserves & Production
Reserves (2008)
Proven Reserves* 7.0 bn bbl
Reserves Remaining† 27.4 years
Production (2007)
(kbd)
AIOC 630
Socar 155
Others 25
Total 810
* As at 1.1.08 † Based on 2007’s production
Totals rounded
Source: (Reserves) Oil & Gas Journal
(Other) Pearl Oil estimate
The level of proven reserves has been stated in the last nine months between 5.4 bn and
7.0 bn bbl, with oil-in-place estimated at 16.0 bn bbl. Most of the oil is in the Azeri field-
complex.
Oil Exports
Nearly all of Azerbaijan’s oil is exported, and what is exported is primarily sold in the form of
crude oil. Output of 810,000 bpd and domestic consumption of 150,000 bpd gives the country
net exports of some 660,000 bpd (see Table 12).
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Table 12
Azerbaijan: Oil Profile, 2007
(kbd)
Production 810
Consumption 150
Net Exports 660
Refinery Capacity
Baku 240
New Baku 160
Total 400
Totals rounded
Source: (Refineries) Oil & Gas Journal; (Other) Pearl Oil estimate
Given its geographical position, Azerbaijan is obliged to export its crude via other countries. In
Tsarist times, this involved railways or pipelines through either Georgia or Russia (see Table 13).
From an early stage following independence from the Soviet Union, Azerbaijan wanted to find a
third route. In this, it was strongly supported by the US, which wanted to try and detach as many
of the countries of the Trans-Caucasus and Central Asia from Russia following the break-up of
the Soviet Union.
Washington strongly promoted the idea of a new pipeline from Baku to Ceyhan on the
Mediterranean coast of Turkey. It was also thought a good idea to route the line through
Georgia, which would help to tie that newly-independent country into the western orbit by
allowing it to receive oil from Azeri fields that were being developed by western oil companies.
Table 13
Azerbaijan: Oil Export Routes
Route Type Capacity
(kbd)
Baku-Novorossiisk Pipeline 20
Baku-Supsa Pipeline 155
Baku-Tbilisi-Ceyhan Pipeline 1,000
Baku-Batumi Railway 25*
* Figure represents most recent shipment levels
Source: Country data
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The idea was to develop the pipeline in conjunction with the ACG fields. Such a line would
allow the AIOC partners to export their oil directly to the world’s oceans without having to go
through the congested Bosphorus Straits at Istanbul, where the narrowness of the waterway
causes congestion, lengthening voyage times, and also restricts the size of vessels that can be
used, thereby increasing shipping costs further. Ceyhan is able to handle very large crude
carriers (VLCCs).
Thus was born the 1,100-mile Baku-Tbilisi-Ceyhan (BTC) pipeline, which opened in 2006 with
a capacity of 1 mn bpd. There are plans to increase the size of the line: by 200,000 bpd in 2008
or 2009; and by a further 200,000 bpd or 400,000 bpd in about 2013, giving it a capacity of up to
1.6 mn bpd (see Table 14).
Table 14
Azerbaijan: Proposed Pipeline Projects
Route Proposed
Expansion
Completion
(kbd)
Baku-Odessa 100 TBD
Brody-Plock-Gdansk
Baku-Supsa * 2008/9
Baku-Kashagan 500† 2011
Baku-Tbilisi-Ceyhan 200 2008/9
Baku-Tbilisi-Ceyhan 200-400 2013
* Refurbishment of Soviet-era pipeline † Link to BTC pipeline. Caspian Sea section initially by tanker pending agreement over seabed
Figures refer to capacities to be added at each stage
TBD = to be decided
Source: BP; Total; Country data
Some of this additional capacity is designed to be used by other ex-Soviet republics, notably
Kazakhstan. Total wants to export some of the Kashagan field’s output via BTC once the new
Kazakh field is brought on-stream, probably around 2010. Total–which is one of Kashagan’s
main shareholders–plans a trans-Caspian link by tanker capable of handling 500,000 bpd (see
Table 14); but delays to the development of Kashagan may mean that there is not sufficient oil to
make such a link worthwhile until sometime after 2012.
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Azerbaijan meanwhile plans to export at least 100,000 bpd via the Ukrainian Black Sea port of
Odessa, where Ukraine proposes to build a pipeline link to the main Western European pipeline
system at Plock in Poland, and subsequently to the Baltic at Gdansk. The Azeris also want to
export more crude oil to neighbouring Georgia, which wants to reduce its reliance on Russia for
oil exports.
Production Outlook
The ACG field-complex will continue to provide the key to Azerbaijan’s production between
now and 2015. Whilst the fields may not peak as sharply as once predicted (see above) there is
unlikely to be a prolonged plateau. Output is therefore likely to be in decline by 2015, having
peaked around 2013 (see Box).
Production Forecast
(mn bpd)
2007 0.8
2015 1.2
Other Countries
Oil production in the remaining six countries of Central Asia and the Trans-Caucasus amounts to
only 0.4 mn bpd (see Table 6). Moreover, with the exception of Turkmenistan, all the remaining
countries are net importers of oil (see Table 15). No increase is expected in the total production
of these six countries and net imports are likely to increase.
Net Exports
The Central Asia/Trans-Caucasus region had net exports of 1.7 mn bpd in 2007. There were
three net exporters–Kazakhstan, Azerbaijan and Turkmenistan–of which the first two accounted
for all but 0.1 mn bpd of the region’s net exports (see Table 15).
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Table 15
Russia/Central Asia/Trans-Caucasus: Net Oil Trade, 2007
Country Volume
(mn bpd)
Russia 7.0
Kazakhstan 1.2
Azerbaijan 0.7
Turkmenistan 0.1
Uzbekistan (0.1)
Others (0.2)
Total 8.6
(Saudi Arabia 8.2)
Source: Pearl Oil
Export Outlook
Net exports are likely to rise from Kazakhstan and Azerbaijan thanks to increases in production
there. Output is expected to be little changed in the remaining countries whilst consumption
rises, leading to a growth in net imports. The outlook for net exports is summarized below:
(mn bpd)
2007
Kazakhstan 1.2
Azerbaijan 0.7
Others (0.2)
Total 1.7
2015
Kazakhstan 2.1
Azerbaijan 1.0
Others (0.2)
Total 2.7
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Natural Gas
The International Context
Worried about its increasing reliance on Russia for oil and gas (see Table 16), the EU has sought
to procure as much gas as possible from Central Asia and the Trans-Caucasus. To this end, it has
promoted a number of pipeline schemes to bring gas directly from the Caspian to Europe by
routes that avoid Russia (see Table 17). The principal of these routes is one known as Nabucco.
Table 16
EU Dependence on Russia, 2007
Oil
Volume Russian Share
(mn bpd) (%)
Production 2.3
Consumption 15.1
Net Imports 12.8
(Russia 5.7 44.5)
Natural Gas
Volume Russian Share
(bn cfd) (%)
Production 18.0
Consumption 47.0
Net Imports 29.0
(Russia 12.5 43.1)
Source: Pearl Oil estimate
However, whilst the European Union (EU) tries to find new sources of gas imports outside
Russia, Moscow is pre-empting any such moves to lessen the EU’s dependence on Russia by
announcing new plans to bring gas to Central and Western Europe. A major new gas export line
has been brought nearer by an agreement to route the South Stream gas pipeline via Serbia,
whilst another export project has just been agreed under which Russia will provide a conduit to
Europe for gas from Kazakhstan and Turkmenistan.
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New Pipelines
The South Stream pipeline is designed to deliver up to 3 bn cfd of natural gas from Russia to
Central and Western Europe. It will extend some 2,000 miles from Russia, across the Black Sea,
through Bulgaria and Serbia, then westwards to various parts of the EU. The line is being
promoted by state gas company Gazprom and Italy’s ENI. Its cost has been put in excess of
$13 bn.
Two routes had originally been under consideration: one via Romania, Hungary and Slovakia to
Northern Europe and one passing through Bulgaria and Serbia en route to places further west and
south. The Serbian route appears to have been chosen partly in order to strengthen Russian ties
with a key ally in Eastern Europe. For its part, Serbia has been anxious to obtain a direct supply
link with Russia for its gas rather than rely on the present pipeline that passes through Ukraine.
On previous occasions during disputes between Russia and Ukraine over prices, Serbia has
experienced interruptions to its supplies. Serbia has to import nearly all of the 250 mn cfd it
consumes.
Another incentive for Moscow to proceed with the Serbian route was an agreement that Russia
could take a stake in Serbia’s national oil company, Naftna Industrija Srbije (NIS). This is likely
to involve a 25% shareholding in NIS and the stake is expected to go to Gazprom. NIS owns
Serbia’s two oil refineries: the 98,000 bpd Pancevo unit and the 117,000 bpd Novi Sad refinery.
Gazprom is also likely to build gas storage facilities in Serbia.
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Table 17
Proposed Gas Pipeline Links
Route Pipeline Capacity Source of Gas On-stream
(bn cfd)
Russia-Serbia-Europe South Stream 3.0 Russia 2013
Russia-Germany Nord Stream 2.7 Russia 2010
Turkey-Austria Nabucco 3.0 Iran; Caspian 2012
Turkey-Greece-Italy TAP 1.0 Iran 2010
Turkey-Greece-Italy ITGI 1.0 Caspian 2012
Greece-Austria West Balkan 1.0 Caspian TBD
Egypt-Levant-Europe AGP 1.0 Middle East TBD
Nigeria-Algeria-Spain TSGP 2.0-3.0 Nigeria; Algeria 2015
Total 14.7-15.7
Volumes and dates subject to change TBD: to be decided
TAP: Trans-Adriatic Pipeline
ITGI: Interconnector Turkey Greece Italy
AGP: Arab Gas Pipeline
TSGP: Trans-Sahara Gas Pipeline
Caspian Gas
Some nine days after agreeing the Serbian deal, on 20th December, the Russians signed an
agreement with Kazakhstan and Turkmenistan to build a 2 bn cfd pipeline between the two
Caspian countries and Russia. The line would transit a further gas producer: Uzbekistan. The
new pipeline is supposed to be in operation by late-2010 and could be increased in capacity after
that date.
This suggests a fairly tight timetable for the project, but Moscow’s aim appears fairly clear. It
wants to tie-up as much Caspian gas as possible in deals with its national gas company Gazprom
before other, rival schemes have time to act.
Three major pipeline deals designed to bring Caspian gas directly into Europe are under
discussion at present (see Table 17). All are being promoted as a way of reducing the EU’s
reliance on Russia. The EU Commission has been giving particular encouragement to a line
backed by Austria’s OMV and others to pipe gas from Azerbaijan and Turkmenistan to Central
Europe using the Nabucco pipeline.
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Nabucco is the largest of the three lines proposed between the Caspian and Europe and if it were
to go ahead, the other two–the Interconnector Turkey Greece Italy and the West Balkan line–
would almost certainly not be built. The problem for the EU is that Nabucco may now not be
able to go ahead either. Russia’s recent agreement to take up to 2 bn cfd of gas from Kazakhstan
and Turkmenistan leaves little available for other export pipelines such as Nabucco. Moreover
any Caspian and Central Asian gas not tied-up by Moscow would probably be exported to China
rather than going westwards to Europe.
The Kazakh and Turkmen gas signed-up by Russia is almost certainly intended for the South
Stream pipeline. The line may also carry gas from Uzbekistan to Europe. Russia has for some
time been trying to encourage its Caspian and Central Asian neighbours to route more of their
gas exports via its territory. After years of paying low prices for their gas, Gazprom agreed in
2007 to a doubling of the price paid to Uzbekistan to about $2.85 per mn BTU. This year, the
Russian company will pay an extra 30% for Turkmen gas for the first six months and then an
extra 15% on top for deliveries in the second half of 2008, bringing the total to $4.25
per mn BTU.
No Nabucco?
Russia’s latest plans may still leave some spare Caspian and Central Asian gas available for the
Nabucco pipeline, but Moscow appears to have allowed for this by leaving open the idea that the
2 bn cfd pipeline to Kazakhstan and Turkmenistan might be increased in capacity. It is also
possible that Russia will consider building spur-lines off South Stream to enable it to serve more
countries in Europe. The EU may be beginning to realise this as well. The Energy Commission
is promoting new trade links with gas exporters in North Africa and is even considering pipeline
imports from as far away as the Middle East and Nigeria.
Sourcing the Gas
Only three countries in the Central Asia and the Trans-Caucasus are net exporters of gas at
present: Turkmenistan, Uzbekistan and Kazakhstan (see Table 18). The region’s entire net trade
amounts to 6.1 bn cfd, compared with a figure for Russia of 15.0 bn cfd in 2007.
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Table 18
Russia/Central Asia/Trans-Caucasus: Net Gas Trade, 2007
Country Volume
(bn cfd)
Russia 15.0
Turkmenistan 4.5
Uzbekistan 1.2
Kazakhstan 0.8
Azerbaijan (0.2)
Others (0.2)
Total 21.1
Totals rounded
Source: Pearl Oil estimate
Russia similarly dwarfs the region in terms of reserves (see Table 19) and production (see Table
20). Russia’s proven reserves of 1,680 trillion cf are more than five-times those of Central
Asia/Trans-Caucasus. Its production is nearly four-times that of the region.
Table 19
Russia/Central Asia/Trans-Caucasus: Proven Gas Reserves, 2008
Country Reserves Years remaining
(trillion cf)
Russia 1,680 78.0
Turkmenistan 100 42.1
Uzbekistan 65 33.0
Kazakhstan 100 97.8
Azerbaijan 30 102.7
Others 1 27.4
Total 1,976 72.6
Totals rounded
Source: Pearl Oil estimate
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Table 20
Russia/Central Asia/Trans-Caucasus: Gas Production, 2007
Country Volume
(bn cfd)
Russia 59.0
Turkmenistan 6.5
Uzbekistan 5.4
Kazakhstan 2.8
Azerbaijan 0.8
Others 0.1
Total 74.6
Totals rounded
Source: Pearl Oil estimate
The three-largest net exporters–Turkmenistan, Uzbekistan and Kazakhstan–can only export gas
via Russia, and the Russians intend to retain their stranglehold over these countries’ exports for
as long as possible. In pursuance of their aim, they have begun to show themselves as more
accommodating to requests for higher export prices than heretofore. There seems little
likelihood of European sales using pipeline systems other than those that traverse Russia.
Only Azerbaijan has a link to Europe that does not involve Russia. The South Caucasus Pipeline
(SCP) is a 1 bn cfd line, which runs from Baku via Tbilisi and connects with the Turkish
transmission system at Erzurum. SCP is designed to supply gas from the newly commissioned
Shah Deniz field in the Azeri part of the Caspian. The EU Commission hopes that additional gas
can be supplied to Nabucco via an expanded SCP.
Azerbaijan also supplies gas by pipeline to Georgia and Iran, whilst importing from Russia. The
trade with Iran is essentially a swap deal. Azerbaijan supplies gas to northern Iran whilst Iran
delivers a roughly similar volume to Nakhichevan in southern Azerbaijan, which lies just across
the border from Iran.
The problem for the supporters of Nabucco is that there are several other proposed pipeline links
to Western Europe which all depend on gas from Azerbaijan (see Table 21). Azerbaijan
meanwhile faces additional demands of its own.
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Table 21
Azerbaijan: Proposed New Gas Export Pipelines
Route Pipeline New Capacity Completion
(bn cfd)
Azerbaijan-Georgia Soviet-era pipeline * 2008/9
Azerbaijan-Turkey South Caucasus Pipeline, Phase II 1.0 After 2013
Azerbaijan-Austria Nabucco 3.0 2012
Azerbaijan-Italy Interconnector Turkey Greece Italy 1.0 2012
Azerbaijan-Austria West Balkan 1.0 TBD
* Refurbishment of existing lines
TBD = to be decided
Volumes and dates subject to change
Source: Country data
In the first place, Azerbaijan’s domestic consumption is growing rapidly. Demand has doubled
since 1998 and the rate of increase shows signs of accelerating. Azerbaijan also has plans to
increase deliveries to Georgia, which wants to loosen its dependence on Russia for gas. Turkey
also wants more Azeri gas: in its case to re-export to Greece via a pipeline between the two
countries opened in 2007.
Azerbaijan also faces a reduction in deliveries from Russia, which objects to the way that the
Azeris are able to use Russian imports to free more of their own gas for export to countries also
supplied by Russia. There is unlikely to be any spare Azeri gas for Nabucco for the foreseeable
future.
Export Outlook
Azerbaijan is the only country likely to be able to supply gas to the EU in 2015 without transiting
Russia. Most of its gas exports, however, are likely to go to Georgia, Iran and Turkey. Small
volumes may be available for onward transmission via Turkey to Greece but the volumes
involved are unlikely to exceed 0.1 bn cfd.
Turkmenistan, Uzbekistan and Kazakhstan are almost certain to be exporting via Russia. The
only other serious contender for gas from these countries is China, which has proposed pipeline
links to all three countries. The Chinese have indicated that they would like to import up to
4 bn cfd. Kazakhstan has offered around 1 bn cfd. There may not be much more than this from
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anywhere else in Central Asia. It is not clear when these deliveries might begin; but whatever
happens, there looks like being no extra gas for Nabucco.
Production Outlook
All four main producers propose to increase production. Some uncertainty, however, surrounds
the plans of Turkmenistan. Despite its seemingly large reserves, it has struggled to raise
production in recent years. It continues, however, to announce ambitious plans for new
production and export schemes. In 2007, it agreed in principle to supply China with up to
3 bn cfd via the proposed Trans-Asia Gas Pipeline: an ambitious scheme designed to take gas
from Turkmenistan, Kazakhstan and Uzbekistan to Peking, Shanghai and Canton from about
2012.
Some of the gas might be sourced from the South Iolotan field. The Turkmen authorities have
suggested peak volumes of 5 bn cfd, but have been vague about dates. There are also suspicions
that the field’s reserves are being exaggerated. There is considerable scepticism about the
government’s claim of gas reserves nationally of 870 trillion cf. Most external sources suggest a
figure around 100 trillion cf (see Table 19). Turkmenistan’s production plans, moreover, are
behind schedule. Output in 2007 was supposed to be 7.7 bn cfd rather than the 6.5 bn cfd
estimated in Table 20. The development of South Iolotan might enable it to reach 12 bn cfd in
2015, but this should be regarded as the likely best case.
Like Turkmenistan, Kazakhstan has ambitious targets for increased gas production. Like
Turkmenistan also, it is having trouble fulfilling these ambitious plans. Targets have been cut as
current production has turned out lower than expected. The target for 2010 has been cut by
almost a quarter to 3.9 bn cfd, and 2015’s planned total has been reduced by nearly 12%, to
6.8 bn cfd: and even this looks unlikely. Kazakhstan is struggling to attract the huge investment
needed for a planned 143% rise in output between 2007 and 2015; and the government has not
helped its case by trying to increase taxes on foreign companies whilst reducing their equity
stakes in major fields. If all goes well, it might just about double output by 2015 to 5.6 bn cfd.
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Uzbekistan may not raise its output at all between now and 2015 unless there are major new
finds. Its best hope appears to lie with four fields being explored by Lukoil. The Khauzak,
Kandym, Kungrad and Shady fields are said to contain 11 trillion cf. Khauzak is due on-stream
in 2008, followed by Kandym in 2011, when their combined output is set to reach 0.8 bn cfd.
The two remaining fields are not likely to add much to this total. Meanwhile, output from
Uzbekistan’s mature fields is declining. The best the country can hope for appears to be a small
increase by 2015, to 5.6 bn cfd.
Output for the region is forecast as follows:
(bn cfd)
2007
Turkmenistan 6.5
Uzbekistan 5.4
Kazakhstan 2.8
Azerbaijan 0.8
Others 0.1
Total 15.6
2015
Turkmenistan 11.5
Uzbekistan 5.6
Kazakhstan 5.6
Azerbaijan 1.6
Others 0.1
Total 24.4
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Export Forecast
Part of the increases in production shown above will be absorbed domestically. The rest will go
mainly to Russia or–to a lesser extent–China, leaving little or none for the EU other than that
exported via Russia. Net exports are forecast as follows:
(bn cfd)
2007
Turkmenistan 4.5
Uzbekistan 1.2
Kazakhstan 0.8
Azerbaijan (0.2)
Others (0.2)
Total 6.1
2015
Turkmenistan 8.0
Uzbekistan 0.6
Kazakhstan 2.6
Azerbaijan 0.2
Others (0.4)
Total 11.0
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