On November 24, 2010, the Azerbaijani state oil company SOCAR announced the discovery of the largest gas field in Azerbaijan after the Caspian giant Shah Deniz deposit. This offshore field is named Umid, meaning “Hope”. President Ilham Aliyev met with the management of the company on that day and expressed his hope that the gas field would ultimately prove to contain more gas than the initial estimates had suggested. If current calculations hold, Azerbaijan will be considering new gas exports far beyond those currently supplied to regional and European markets.

BACKGROUND: The Umid structure is deep – approximately 6,500 meters below the seabed. The platform from which the wells are drilled stands in some 60 meters of water; it is located around 70 kilometers south of Baku and 40 kilometers from the shore. So far, data from the well shows that the “Umid” deposit contains 200-250 billion cubic meters (bcm) of gas at the lowest estimation, which could rise as more wells (up to 9 are planned) are drilled in the deposit. Apart from gas itself, it is estimated that Umid will also produce 30-40 million tons of gas condensate. The production of such associated liquids has been of significant benefit in the development of the Shah Deniz field.

Of particular importance is the fact that SOCAR’s geologists discovered the field with their own financial and technological means, independent of any foreign direct investment or any help from specialists from foreign energy companies. During the Soviet era from 1977 to 1992, exploration work was undertaken in the area and 9 wells were drilled. However none of those wells reached what is now known as the Umid structure. In order to drill this deep and withstand such high pressures, Azerbaijan needed new technologies which it obtained in the 1990s.

In addition, SOCAR has already started large-scale exploration works at the platform, which is another first for the national company. Such works suggest good prospects for the Babek structure, which is even deeper than Umid and can be drilled from the same platform. Babek could contain twice as much gas as does Umid.

Such encouraging news from Umid and possibly also from Babek is not the only success of SOCAR. The other advantages are that the exploration drilling at the block of a stationary platform reduces the cost of the work two-fold as compared to drilling from floating rigs. According to first vice-president of SOCAR Khoshbext Yusifzade, the overall cost of the work will amount to about US$ 60-80 million against a possible US$ 200 million. Moreover, drilling from a floating rig and construction in the stationary platform would take seven years, whereas drilling directly from the platform will take only approximately two years. In comparison with some estimates by foreign experts, SOCAR will save a huge amount of funds and time in bringing reserves of the Umid and Babek fields on stream.

SOCAR’s exploration of the Umid and Babek fields, along with other possible fields such as Absheron, Nakhchivan, Shafag, Asiman, and Zafar-Mashal – and when combined with the PSAs in which foreign companies participate – has increased Azerbaijan’s gas potential by 1.4 trillion cubic meters over the last 10 years. According to some calculations, Azerbaijan’s proven and estimated gas reserves may eventually reach up to 5 trillion cubic meters. If achieved, this would place the country among the top ten gas reserve holders in the world. At the meeting with the SOCAR’s management, President Aliyev stated that the country will work to position itself as a gas producing country in the 21st century as it did in 20th century with oil.

IMPLICATIONS: In 2016, the second stage of Shah Deniz will start producing, and if the new developments are successful Socar estimates that Azerbaijan could produce some 50-70 bcm of gas per annum by the end of this decade. There would thus be significant additional export potential; and gas could flow to markets in the north, west and south. However – apart from the first stage of Shah Deniz – Azerbaijan and SOCAR still have to decide how best to market their gas. Export markets for Shah Deniz’s second stage of gas are not yet determined and a tender process for the contract between the operating consortium and potential buyers is underway. There is no shortage of gas, but it remains an open question how much of it will reach European markets. SOCAR has committed to increase its gas exports to Russia, Turkey, Iran and even Syria. If the 62 kilometer Aleppo-Kilis pipeline is built by late 2011, then 1.5 bcm of Azerbaijani gas will be delivered via Turkey to Syria and Jordan from 2012.

However, in accordance with Azerbaijan’s strategy for diversifying energy markets and export routes, the country is seeking to enter new markets not only within the region, but also distant huge and growing markets such as those in Asia. Given the increasing importance of unconventional gas, especially LNG boom in the U.S. and Europe, Azerbaijan is considering a diversification of its energy exports through LNG and has already launched a project named AGRI which will deliver Azerbaijani liquefied gas to European countries via the Black sea.

It is well known that investment in the production of LNG is financially justified if consumers are located at a distance of more than several thousand kilometers (eg. Qatar or Malaysia or Australia to Japan or China). Of key importance to Azerbaijan in developing any approach involving LNG exports is the development of capacities, both upstream (in this case LNG liquefaction capacities), and downstream (regasification terminals). Major investments in such infrastructure will be necessary in the coming decades to transport additional volumes of natural gas over increasing distances by tankers, requiring several billions of dollars of investment. The Azerbaijani government understands the future gas export trends which are resulting in rapid development of the LNG market. Above and beyond the AGRI project Azerbaijan has suggested to deliver 5 bcm of LNG annually to Ukraine; and that Ukraine could join the AGRI project with the construction of the regasification plant in Odessa. The Presidents of the two countries announced the drafting of the strategic energy agreement to deepen cooperation in the energy sector on October 28. By this agreement, Azerbaijan will export oil as well as gas to the Ukraine, and might use Ukrainian territory as a transit country to deliver gas to Central European countries such as Czech Republic. On October 27, the Czech ambassador to Azerbaijan Radek Matula stated that his country – whose gas needs amount to 8.5 bcm a year – is interested in importing Azerbaijani natural gas. 

In expanding its LNG exports and infrastructure, Azerbaijan could in the long run benefit tremendously from the Qatari experience of LNG exploration and production. Qatar shifted the world energy market to a new era with the inauguration of the world’s largest single LNG project Qatargas-2, involving next generation technology with a cost of US$ 13 billion. If it does manage to tap LNG technology, Azerbaijan would have access to the huge, lucrative and growing Asian market, including the rapidly growing and strategically important Chinese and Indian markets via the Mediterranean, Red Sea and Indian Ocean in the long term.

CONCLUSIONS: Azerbaijan’s consideration of its LNG options and its new eastern perspective will likely strengthen its position in the pricing negotiations with Turkey – which is the main transit state for Azerbaijani gas going to Europe – and with other states such as Russia. Located in a complex region, and facing rough times politically, Azerbaijan would clearly be wise to adopt an energy policy that leaves alternatives to choose from. Churchill had neither gas, nor LNG, nor even the former Soviet Union, in mind when he said “Safety and certainty in oil lie in diversity and diversity alone”. While he was thinking about the British Navy of the day, these words are good guidance for Azerbaijan as it makes decisions about gas which will impact its economy and people for many years to come.

AUTHOR’S BIO: Gulmira Rzayeva is Research Fellow in the Economic Analysis and Global Affairs Department at the Center for Strategic Studies under the Azerbaijani President.