Azerbaijan's Oil And Gas: A Nationalized Industry?

Azerbaijan's oil and gas industry is a major source of income for the country, with oil and gas accounting for more than 90% of its exports. The State Oil Company of the Republic of Azerbaijan (SOCAR) is a fully state-owned national oil and gas company and a significant contributor to the Azerbaijani government's revenue. SOCAR produces oil and gas from onshore and offshore fields in the Azerbaijani segment of the Caspian Sea and operates the country's only oil refinery. The company has a complex web of contracts and middlemen that have allegedly led to the enrichment of the country's ruling elites.

Following the Bolshevik Revolution, the Azerbaijani oil industry was nationalized, and the Azneft business was created. In the 1990s, Azerbaijan adopted a strategy to accelerate oil exploration and deplete existing oil wells, providing immediate economic gains. The country has signed several production-sharing agreements (PSAs) with major international oil companies (IOCs), including the Contract of the Century for the development of the Azeri-Chirag-Deepwater Gunashli (ACG) oil field, which is Azerbaijan's primary source of oil for export.

The State Oil Company of the Republic of Azerbaijan (SOCAR)

SOCAR's activities include the exploration, preparation, and exploitation of onshore and offshore oil and gas fields, as well as the transportation, processing, refining, and sale of oil, gas, condensate, and other related products. The company has a commitment to eco-friendly technology research and development, and innovation, enabling it to meet the growing energy demands worldwide.

SOCAR is involved in various exploration projects, including the Shafag-Asiman and Absheron natural gas fields, in collaboration with BP and TotalEnergies, respectively. In 2010, SOCAR and BP signed a production-sharing agreement regarding Shafag-Asiman, and in 2014, they agreed on joint exploration and development over the Shallow Water Absheron Peninsula. SOCAR has also explored the Umid and Bulla Deniz gas fields.

In addition to its exploration and production activities, SOCAR owns and operates fuel filling stations under its brand name in multiple countries, including Azerbaijan, Turkey, Georgia, Ukraine, Romania, Switzerland, and Austria. The company has stakes in several export pipelines, such as the Baku-Tbilisi-Ceyhan pipeline and the South Caucasus Pipeline. It is also a major shareholder in the Trans-Anatolian gas pipeline and the Trans Adriatic Pipeline, which are crucial for transmitting gas to Europe and diversifying energy supplies.

SOCAR has been associated with controversies and corruption allegations, including bribery, illegal payments, and a lack of transparency in its operations. Despite these issues, the company plays a significant role in Azerbaijan's economy and has expanded its presence internationally through its subsidiaries and partnerships.

Oil and gas reserves and production

Azerbaijan is one of the birthplaces of the oil industry, with evidence of petroleum use in the region as early as the 3rd and 4th centuries. The country has a rich history of oil production and trade, with historical accounts of the Baku oil industry dating back to the 16th century.

Oil and Gas Reserves:

According to the BP Statistical Review of World Energy 2021, Azerbaijan holds approximately 7 billion barrels of proven oil reserves as of 2016, ranking 20th in the world. These reserves account for about 0.4% of the global total. The country also has an estimated 2.5 trillion cubic meters of proven natural gas reserves, with the Shah Deniz gas field being one of the world's largest.

Oil and Gas Production:

The petroleum industry in Azerbaijan is a major contributor to the country's economy, with the State Oil Company of the Republic of Azerbaijan (SOCAR) serving as a significant source of income for the government. In 2022, the country produced about 33 million tonnes of oil and 35 billion cubic meters of gas.

The Azeri-Chirag-Deepwater Gunashli (ACG) field, located about 100 km east of Baku, is the largest oil field in the Azerbaijan sector of the Caspian Basin. It was discovered in the early 1970s and comprises a series of individual reservoir horizons located 2,000 to 3,500 meters beneath the Caspian seabed. The ACG field is responsible for about 65% of the country's current oil production.

Azerbaijan has a long history of oil production, with the first offshore oil extraction taking place in the 19th century. The country has continuously worked to improve its drilling practices and infrastructure, attracting significant foreign investment from major international oil companies.

In recent years, Azerbaijan has also become a significant natural gas producer, with the BP-operated Shah Deniz field being the country's largest gas development. The Southern Gas Corridor, comprised of the South Caucasus Pipeline, the Trans-Anatolian Pipeline, and the Trans-Adriatic Pipeline, further establishes Azerbaijan's role as a key energy supplier to Europe.

Export and Consumption:

Azerbaijan exports about 78% of its oil production, with the Baku-Tbilisi-Ceyhan (BTC) pipeline serving as the main export route. In September 2017, over 1.9 million tons of Azerbaijani oil were exported through the port of Ceyhan. The country also exports hydrocarbons and petroleum products to various countries, including Italy, India, Spain, Israel, and Turkey.

In terms of consumption, Azerbaijan ranks 81st in the world for oil consumption, with a daily consumption of 96,000 barrels per day as of 2016. This accounts for about 0.1% of the world's total consumption.

Energy security and diversification

Azerbaijan's energy security and diversification are heavily influenced by its rich oil and natural gas reserves, which have been a significant driver of economic growth. The country's energy mix is highly concentrated in fossil fuels, with oil and gas accounting for over 98% of its total energy supply. While supply security is generally not a concern, this heavy reliance on fossil fuels has a few drawbacks:

• It elevates Azerbaijan's GHG emissions, which could be reduced by diversifying its energy sources.
• It exposes the country to fuel price fluctuation risks, which can impact the economy due to its dependence on extractive industries.
• It necessitates the modernisation of ageing natural gas networks, with a focus on improving distribution system losses and gas supply quality.

To address these challenges, Azerbaijan has taken several steps:

• The country has invested heavily in modernising its energy infrastructure, including electricity generation plants, gas and electricity networks, and oil refineries.
• Azerbaijan has diversified its export routes and oil product import sources to mitigate the risk of supply or demand shocks.
• The government has recognised the value of diversifying the economy and increasing energy efficiency. It supports the development of renewable energy sources, such as solar, wind, hydro, biomass, and geothermal energy.
• Azerbaijan has adopted several laws and strategies to promote renewable energy development and improve energy efficiency, including the Law on the Use of Renewable Energy Resources in Electricity Production and the Law on Efficient Use of Energy Resources and Energy Efficiency.
• The country is committed to sectoral reform in the energy sector, with plans to gradually transition to a liberal market model, enhance competition, improve system efficiency, and ensure supply reliability and transparency.
• Azerbaijan has set a target of having renewable energy provide 30% of electricity generating capacity by 2030, almost doubling its 2018 share.
• The country has established the Ministry of Emergency Situations to manage emergency response mechanisms in all sectors of the economy, including the energy sector.
• Azerbaijan has invested in research and development related to renewable energy and energy efficiency, although further efforts are needed to streamline and improve the coherence of these initiatives.

In summary, while Azerbaijan's energy security is closely tied to its oil and gas reserves, the country is taking steps to diversify its energy sources, improve energy efficiency, and reduce its environmental impact. These efforts are expected to contribute to both economic and environmental sustainability in the long term.

The Azeri-Chirag-Deepwater Gunashli (ACG) oil field

The ACG field is developed by the Azerbaijan International Operating Company (AIOC), a consortium of international oil companies, and operated by BP on behalf of the consortium. The AIOC was originally composed of eleven major international companies, including BP, Amoco, Lukoil, Pennzoil, and Statoil, among others. Since then, there have been changes in the consortium, with Exxon, Itochu, and Inpex joining, and McDermott, Ramco, and Lukoil selling their shares.

The ACG field has an estimated 5 to 6 billion barrels of recoverable oil reserves, with peak oil production reaching 885,000 barrels per day in 2010. However, by the first quarter of 2024, production had declined to about 336,000 barrels per day. The development of the ACG field has occurred in multiple phases, with the Chirag field being the first stage, followed by the Azeri field, and the Deepwater Gunashli section being the third phase.

The Chirag field, located 120km east of Baku, includes a 24-slot production, drilling, and quarters (PDQ) platform with water injection equipment. It has a 24-inch oil pipeline to the receiving terminal at Sangachal and a 48km long 16-inch gas pipeline to the Oil Rocks. The Chirag platform has both producing and water injection wells to increase oil recovery.

The Azeri field development includes the Central Azeri, West Azeri, and East Azeri platforms. The Central Azeri platform has a 48-slot PDQ platform, a 30-inch oil pipeline, and a 28-inch gas pipeline connected to the Sangachal terminal. The West Azeri platform also has a 48-slot PDQ platform and a 30-inch oil pipeline to the Sangachal terminal. The East Azeri platform is located 100km off the Baku coast and has a similar setup to the Central Azeri platform.

The Deepwater Gunashli (DWG) complex is the third phase of the ACG field development and is located on the east side of the Gunashli field at a depth of 175 metres. The complex consists of two bridge-linked platforms: a 48-slot drilling, utilities, and quarters (DUQ) platform, and a process, gas compression, water injection, and utilities (PCWU) platform. The DWG complex has a production capacity of approximately 320,000 barrels per day, contributing to the total ACG production rate of over a million barrels per day.

The ACG field has attracted significant foreign investment and is considered a major source of oil for Azerbaijan's exports, with oil and gas being a major income source for the country.

The Southern Gas Corridor

The main supply source for the Southern Gas Corridor is the Shah Deniz gas field in the Caspian Sea. The corridor passes through Georgia, Turkey, Greece, Albania, and Italy, covering a distance of approximately 3,500 kilometres. It is one of the most complex gas value chains ever developed, involving over a dozen major energy companies.

• Shah Deniz 2 Development: Drilling wells and producing gas offshore in the Azerbaijani sector of the Caspian Sea.
• Expansion of the natural gas processing plant at Sangachal Terminal on the Caspian Sea.
• Expansion of the Italian gas transmission network.
• South Caucasus Pipeline Extension (SCPX): Running through Azerbaijan and Georgia.
• Trans-Anatolian Pipeline (TANAP): Crossing Turkey.
• Trans Adriatic Pipeline (TAP): Passing through Greece, Albania, and Italy.
• Gas Interconnector Greece-Bulgaria (ICGB): Connecting Greece and Bulgaria.

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