OGPSS - Looking at Azerbaijan future fuel production

The President of SOCAR, the State Oil Company of Azerbaijan, is touring the United States at the moment. His goal is, in part, to gain support for the Baku Higher Petroleum School, a place to generate the indigenous engineers that his firm needs for future resource development. (About 75% of the labor force is currently Azeri, but at lower levels of management). The school is expected to open its doors next September. While this is, perhaps a little late to the game, it underscores the global need to find those individuals who can be technically trained and who are then willing to spend weeks of their lives, at a time, in increasingly remote parts of the world, often in inclement conditions, just so that the rest of us can have an easy commute to work in the mornings. (Folks were even talking about the opportunities in the wilds of North Dakota at our Rotary meeting this week).

The effort by SOCAR also underscores the point that there remains a future for the petroleum industry in Azerbaijan, despite the long history of oil recovery that the nation has already seen, with the depletion of many of the old reservoirs. There are new fields in which oil and natural gas are being developed, though as Darwinian pointed out, the rapid build-up in production to which I referred last time, has, more recently, begun tailing off. He referred to the Joint Organizations Data Initiative – Oil (JODI) which shows the decline from 1.05 mbd in July 2010 to 920 kbd this September. That peak was down from the peak of almost 1.1 mbd in early 2008. This year the decline has reached around 11% pa and while SOCAR explains that this is the result of introducing additional safety measures following the Deepwater Horizon event, and for scheduled maintenance, the number seems a little large for such a cause.


Further if one looks at the drilling record for the country, SOCAR reports that while drilling was down last month (and likely will also be this month) overall they anticipate exceeding the 2010 figures, with roughly 90% of the work going for development and about 10% for exploration. The development drilling is down from the 2010 figure, which was itself lower than that in 2009, which was below that of 2008. But some of this may have been market driven, one can certainly see that in the natural gas numbers that I discuss below.

I had missed, when I wrote the post last week, that Jerome had previously written on the topic in 2008, my apologies to him and you for that omission. His post gave more detail of the fields off the peninsula than I had provided, so I am reproducing a figure from the post here:

Oil and gas fields off Azerbaijan (Jerome at TOD)

The recent decline in overall oil production impacts flow through the pipeline from Baku to Ceyhan (the BTC pipeline) which had a targeted flow of over 1 mbd, and much of this comes from the Azeri-Chirag-Gunashi fields (there is some crude also from Turkmenistan, and condensate from Shah Deniz). IHS list it as currently the third largest oil field (behind Saudi Arabia’s Ghawar and Kuwait’s Burgan). Recent production from the complex can be obtained from the BP site:

During the first three quarters of 2011, ACG produced on average 757,500 barrels per day (b/d) (206.8 million barrels or 27.9 million tonnes in total) from the Chirag, Central Azeri, West Azeri, East Azeri and Deepwater Gunashli platforms.

At the end of the third quarter of 2011, a total of 57 oil wells were producing, while 27 wells were used for injection in the ACG field, as follows:

Chirag had 12 wells (8 oil producers and 4 water injectors), producing on average of 73,300 b/d.

Central Azeri (CA) had 19 wells (13 oil producers, 5 gas injectors and one water injector), producing on average 209,200 b/d.

West Azeri (WA) had 19 wells (13 oil producers and 6 water injectors), producing on average 213,800 b/d.

East Azeri (EA) had 14 wells (11 oil producers and 3 water injectors), producing on average 134,300 b/d.

Deep Water Gunashli (DWG) had 21 wells (12 oil producers and 9 water injectors), producing on average 126,900 b/d of oil.

Development of Chirag (EPC Engineer )

A new platform is in construction for Chirag, aimed at adding 185 kbd to current production in 2013, which with increased drilling at the other platforms (averaging about 20 wells a year) may, in the short term, bring the production back toward the 1 mbd target production. The total estimated recoverable reserve is estimated at 5.4 billion barrels of oil, of which around 1.8 billion is estimated to have been produced to date. The partnership is currently extended until 2024.

The natural gas picture is a little more complicated. Although the ACG complex produces more gas than Shah Deniz roughly 75% of it is re-injected to maintain reservoir pressure. Discounting the production from Shah Deniz, SOCAR is still producing natural gas for export to Europe, for which it is still being paid on average $191 per 1,000 cu m (kcm) ($5.40 per 1,000 cu.ft or million Btu approx) this year (though down to $151 in October). These prices are significantly higher than the $61 per kcm it received last year, and are also ahead of the $186 price in 2009, though just under the 2008 average.

They are undercutting the price of Russian gas, which they report as being some $446 per kcm this year, though it is anticipated to fall to $415 next year. (In perspective Ukraine is currently paying $400 per kcm, ($11.33 per kcf) for Russian gas, but hoping to get that price lowered).

SOCAR is anticipating that this market may dry up in three years when the gas fields off Cyprus are brought into production. This will be gas from the Aphrodite gas field, which holds some 3.3 Tcm of natural gas – about three times the reserves for Shah Deniz. That area of the Mediterranean is, however, quite politically sensitive.

Together with other fields (Leviathan and Tamar), this area of the Mediterranean is estimated to have 10 trillion cu m of gas. In connection with the worsening political and military situation fields Leviathan, Tamar and Block 12 have been patrolled by Israeli drones. Russia sends its only aircraft carrier to this area, while fleets of other countries claiming to develop these fields are drawing as well.

These new fields lie in the Levant Basin Province, and, given this location and the neighborhood, who will end up producing what is going to be an interesting development to watch. Given the size of the deposits, their development could also change the economics of natural gas distribution for some time.

Location of the Levant Basin Natural Gas Province (Fast Company )

SOCAR is hoping that, as this transpires, it may get additional supplies from Turkmenistan through a trans-Caspian pipeline that could be completed by 2015. Concurrently Shah Deniz II, slated to produce some 100 kbd of oil and 16 bcm of natural gas, is being prepared for production to start in 2017.

In short, in the short term production of oil from Azerbaijan will continue at roughly current levels, but the volumes of gas that will be available on the global market may exceed demand within the near future unless, as now, they significantly discount the price.

OGPSS - an initial look at Baku and Azerbaijan

“The Prize”, itself a prize-winning history of oil written by Daniel Yergin covers the growth of the oil industry around the world, and begins with the start of the industry in the United States. But right behind those early chapters comes the story of Russian oil. This is not surprising since between 1898 and 1901 Russia and America roughly split global production of around 500,000 bd between them, with Russia out-producing the United States on occasion (as it does again now). That Russian oil is Russian no longer, since the early oilfields were found on and off the Aspheron Peninsula in what is now Azerbaijan. (It was annexed by Russia initially in 1813 by Alexander 1). The first well was drilled in 1847, after decades of recovering the oil from hand-dug pits, and there has been ongoing activity there ever since. By 1904 the Baku region was producing 73 million barrels a year, although production began to decline after that. And with the loss of much of its male population with the revolution, it took a long time to recover. Yet it had rebounded to be strong enough that this oil from the Baku reservoirs was considered a critical factor in governing many battles of the Eastern Front in Second World War.

Azerbaijan sits in a region of states that run along the southern Russian border, and which hold the promise of holding some of the last large deposits of fossil fuel that have yet to be fully developed.

Location of Baku, and Azerbaijan (Google Earth)

The first fields to be developed were the onshore Balakhany, Sabunchi and Ramany in 1871 with the coastal field of Bibi-Eybat being developed in 1873. Such was the nature of prospecting at the time, and the multiplicity of oil-bearing layers in the ground that oil still remains to be found and recovered. It has been estimated that the fields initially held around 8 billion barrels of oil (John Grace) but that while a billion of this was within range of early technology, the rest waited for the more advanced western technologies to arrive, and sometimes it didn’t.

As a result, within the last year, new wells have been sunk in these old fields. One at Balakhany is aimed to be 3,200 ft deep, with a target production of 28 barrels a day, Most of the production was produced following the Russian Civil War and in the lead into World War 2. In 1913 production was at 206 kbd, but fell to 81 kbd by 1921, and then slowly built until the region was producing 622 kbd by the start of WW2.

Balakhany today (Alexander Zaitchik )

The older fields no longer have the reserves to justify the investment of the large capital equipment associated with modern technology, but their history describes the wealth that they produced before the first World War, first for the Nobel family, and then for the Rothschilds. Baku oil also underwrote the career of Mr “Five Percent” Calouste Gulbenkian. Daniel Yergin notes that it was the need to replace expensive British coal that led Russia to use oil first in ship bunkers on the Black Sea, and then to fuel the railway engines across Russia. However production continued to fall from the original wells at Baku, Royal Dutch/Shell had bought out the Rothschilds, yet in the period just before WW1 Russia’s export market share had dropped below 10% as the shallow fields ran out. Of course this was also the time that Stalin was learning his trade as an organizer/agitator in the Baku fields., though it was not until 1920 that the Bolsheviks took Baku and nationalized the oil industry.

Azerbaijan remains, however, with the fields off the peninsula, the source of a growing percentage of global production. Because of that it is where the Baku-Tiblisi-Ceyhan pipeline begins. The BTC pipeline carries up to 1.2 mbd of oil to the Turkish port of Ceyhan on the Mediterranean where it can be loaded into tankers.

Path of the BTC pipeline (Central Asia-Caucasus Institute)

To meet this, and other demands the re-growth of the oil industry in Azerbaijan has, within the last decade, raised production from 283 kbd to more than 1 million bd.


The most productive of these fields lies 62 miles east of Baku, in the Caspian, where the complex of fields known as the Azeri-Chirag-Gunashli (ACG) field lies. The complex is believed to hold 9 billion barrels of oil, though these are only a few of the fields found in the region. Yet there is a world of difference between how these fields are being developed with modern equipment and investment and the fate of the older fields.

The oilfields of Azerbaijan (Offshore Technology )

It is here also that the Shah Deniz field, with 22 Tcm of natural gas and 750 mb of oil can be found.

The region has thus not only had, but continues to have significant fossil fuel reserves. Production this year averaged 989 kbd to date, with $19 billion in exports of 715 kbd. This is up from last year, but down from the 2009 figures.

As the volume of oil available has increased, so the market for Azeri oil has also grown. Azerbaijan began exporting oil to India this year, and already sends some to China. It plans on sending oil to Czech and Ukrainian refineries and to Slovakia, to the tune of around 15 million barrels a year. The diversion of more to countries of the Former Soviet Union is something that has caught OPEC attention, and they note, in their November MOMR that the booming Russian economy is increasing internal demand, with a consequent cost to exports, to the tune of around 100 kbd growth in demand in the FSU to 4.2 mbd.

FSU oil demand change (y-o-y) in kbd for selected countries (OPEC November MOMR )

In terms of natural gas production the IEA projects that this will grow from a current 17 billion cubic meters (bcm) a year to 50 bcm by 2035, much of this to come from the second phase of the development of Shah Deniz.

In this regard it should be remembered that there are three main oil pipelines that carry oil out of Azerbaijan and while the BTC carries the majority, the Baku-Novorossiysk pipeline (B-N) carries 7% of the exports to the Black Sea Russian port of Novorossiysk , and the Baku-Supsa pipeline carries 14% of the total feeding oil to the Georgian port of Supsa, with a capacity of 145 kbd. The flows from Azerbaijan to Russia, via the B-N pipeline have been fluctuating all year, but on average have fallen over 12% from last year.

Average monthly flow in the pipe from Azerbaijan to Russia (News.AZ )

It may be that, in the same way that Russia used to play with demand for gas from Turkmenistan, they are now playing the same game of cutting back demand in order to force lower prices. However as with the Chinese pipeline to Turkmenistan, the BTC pipeline from Baku provides other customers so that prices may now be maintained – and with them support for the local governments. (The Azerbaijan government now has a strategic reserve of $41 billion).

P56. Pick Points

I see that Jerome is a little upset with the NYT story about coal and renewable energy costs. In the story the question is raised as to how much extra the average consumer is willing to pay to switch from coal to renewable fuels. There are several aspects to the story – the first is that the Administration can raise the relative cost of burning coal by imposing some additional cost for generating carbon dioxide (whether by tax directly or through cap and trade). The second is that, by regulation, it can make it so expensive to build a new coal powered station that the alternatives become more attractive. Or, by driving improved efficiency and conservation (especially in a time of recession) it can lower the need for additional power. However if costs are raised, then the utilities will pass these additional costs on to the consumer, and as I have noted before, running as the candidate who doubled electricity costs is not a sure election ticket. The article does, however, question the veracity of some of the estimates for coal-fired power

One big question is how much it currently costs companies to produce coal-fired energy, and the answers are often colored by ideology or self-interest. Companies that sell coal or rely on coal-fired electricity often pick a low number; environmentalists cite the indirect costs to society, like strip mining or spills of coal ash. And since the electricity industry became more competitive, the utilities, even municipal ones, have become more secretive about their costs.

Yet if the backup power to wind is natural gas (and most new power stations are planned to be fueled that way) and costs pick up around the end of they year, then the combined cost of new power generated that way will still argue for coal.


The debate between natural gas and coal continues in Mississippi where utilities with underutilized gas production are arguing against a new coal fired power station. At the same time there is a claim from Canada of a process that can burn any coal to generate electricity with a negative carbon dioxide balance. The Canadian Government is investing in ways to improve carbon capture

In the world of oil and gas pipelines there continues to be the sound of change, if not yet the certainty. The Nabucco pipeline (the one that will bring natural gas to Southern Europe without going through Russia) is getting some favorable publicity with the anticipation of an intergovernmental agreement in June to get the program running. However some of the gas is anticipated to come from Azerbaijan and the Shah Deniz field, and that production is being delayed. Stage 2 of the program is being delayed from 2013 to the 2014-15 time frame, though given the potential current glut in natural gas as more LNG tankers become available, this may be smart timing. It could also use another pipeline, the Turkey-Greece-Italy one, rather than Nabucco, since Azerbaijan is on the west side of the Caspian and thus does not have to go through Russia.

Nearer home there is a question as to whether the natural gas pipeline through the Mackenzie Valley might be built before the Alaskan natural gas version. ConocoPhilips thinks they are ahead. There is not, however, universal support for new pipelines north of the border. China, meanwhile has signed a deal, which gives it the natural gas production off-shore Burma, as well as a pipeline to deliver it.

It is a little hard to grow the feedstock for conventional corn ethanol in Alaska, but a more traditional fermentation near Governor Palin’s home has created “Permafrost” (which is a vodka). The Mt Redoubt volcano continues to rumble nearby, and snow was used to help Anchorage airport remove ash and get the place back running after the volcano had gone through a total of 18 eruptions (The snow helps hold the ash together, so that it can be moved by plow). There are some oil storage facilities in the area that might be threatened.

Kansas is coming out of a record year for oil and gas production with production valued at $6.58 billion. This was up 10% over 2007, with most of the gain coming from oil. Unfortunately thefts of power (electricity and natural gas) are also up. The story is unlikely to be repeated this year, as the national rig count drops below numbers last seen in 2003. The question becomes when this decline will be seen in a production drop, given the short lives of most wells these days. The article suggests before the end of the year. In Colorado, where much production drilling has occurred, the rules are being tightened to include the Colorado Division of Wildlife in those deciding on new oil and gas location assessments. At the same time two new gas-powered plants are moving forward in the region.

Looking at alternate energy New Jersey is moving ahead with solar generation that will develop 42 MW of solar power by 2012. Meanwhile India appears to be opening up as a market for the technology. This goes beyond just building PV cells in country, a new plant will increase one companies production from 12 – 42 MW, The new Solar Cities Initiative will ultimately affect 60 cities, but will soon start with 2, including Nagpur.

Wind Energy, however, to return to Jerome’s topic, is becoming more recognized as the renewable to beat. The report by the Royal Society for the Protection of Birds (RSPB) this week stated

The RSPB believes wind energy has an important role to play in tackling climate change. Consequently we only oppose those windfarms that pose a significant threat to wildlife.

The title “Positive Planning for Onshore Wind,” also suggests the bent of the report – available as a pdf of 57 pages.

P48. Pick Points

Half-a-dozen or so stories of interest:

There has been considerable debate about fossil fuel producers being given tax breaks to encourage production. Treasury Secretary Geithner has suggested that those days should be over, since the companies contribute to global warming. It is perhaps an indication of things to come.

"We don't believe it makes sense to significantly subsidize the production and use of sources of energy (like oil and gas) that are dramatically going to add to our climate change (problem). We don't think that's good economic policy and we think changing those incentives is good for the country," Geithner told the Senate Finance Committee at a hearing on the White House's proposed budget for the 2010 spending year.

I suspect the days of being able to separate the debates on peak oil and climate change may be coming to an end. And yet, at the same time he spoke of the need to reduce the national dependence on foreign oil. The proposed budget would also charge $4 per acre for leases in the Gulf that are nonproducing. But the core proposal is to raise money from the cap-and-trade system that could be used to help pay for the middle class tax cut. The apparent rate for carbon dioxide production that is being bruited about is $20 a ton.

German Chancellor Merkel has said that the Nabucco gas pipeline should not be subsidized by public money. She sees the problem as being one of getting enough gas to supply the pipe, rather than raising the cash, since she anticipates enough private investment.. Germany has long been suspicious of the pipeline. Former Chancellor Schroeder, who is on the Board of the Nordstream pipeline to bring Russian gas to Germany, (as well as the TNK-BP Board) was today in Yugra, visiting the Kamennoe field, where TNK-BP get 70% of their production (40 million tons in 2008 or roughly 800,000 bd). The ex-Chancellor noted that it was one of the most modern fields he had seen, despite the economic conditions they hope to hold production at current levels this year. Italy meanwhile is calling for a high-level meeting with Turkey and Azerbaijan to discuss getting gas from the Shah Deniz field. This is some of the gas that might end up in the Nabucco pipeline.

On a slightly worrisome note, there was an interview with Kate Watters of Crude Accountability about Turkmenistan’s oil production. Worrisome since it has been through ecological concerns that Eastern European governments have sought control of Western investments. And there are areas where concerns are now being raised

Unfortunately, we have seen serious problems with IFI-financed projects in the Caspian region to date. The Karachaganak Field in Kazakhstan is one example where a recent audit by the IFC's own compliance mechanism found it to be out of compliance with numerous air monitoring requirements. Numerous complaints have been filed against the EBRD and IFC for their investments in the Baku-Tbilisi-Ceyhan pipeline, and we have grave concerns about the environmental impacts of EBRD financing at the Bautino Port in Aktau, Kazakhstan, which services the Kashagan field. Among other concerns at Kashagan are threats to the habitat of the Caspian seal.

Completion operations are underway on a well to test multiple prospective intervals in theHaynesville shale. The first fracture stimulated a fourteen-foot interval with 78,000 pounds of proppant. This zone is currently testing at approximately 400 thousand cubic feet per day (kcfd). The Company plans to test this first stage for three to four additional weeks before testing additional intervals. (Note these are vertical wells in the Haynesville gas shale).

One of the big targets for the stimulus package is to improve the national electricity grid, and its ability to distribute power. There are some growing concerns that the investment alone might not be enough. One problem is a recent court ruling said that states could over-rule the Federal Energy Regulatory Commission regarding putting these lines in place. Another is that there are not yet enough standards established for the new grid components, although with encouragement these could be developed relatively quickly. Standards are needed, since there are a number of competing products, for example in the smart electricity meters that are used to optimize domestic electricity use, and legislation may end up favoring one over others.

The TVA is spending over $1 million a day in cleaning up the coal ash spill in Tennessee, with the ultimate bill being expected to be in the $500 - $800 million range.

The Department of Energy is already starting to post some of the steps they are taking to spending their portion of the stimulus package. The initial breakdown into ten overarching programs is first defined and then the subdivisions are broken down into the sub-divisions, each with their own web page. These ultimately lead to the Funding Opportunity Announcements, two of which came out today, as an example:

The first FOA offers $35 million for component research, development, and analysis. The funding will support 20 to 30 projects to develop advanced technologies that will address important aspects of creating, managing, and using engineered geothermal reservoirs. The second FOA offers $49 million to support 5-10 domestic EGS demonstration projects. DOE seeks projects in a variety of geologic formations that will quantitatively demonstrate and validate reservoir creation techniques that sustain sufficient fluid flow and heat extraction rates for 5-7 years and produce at least 5 megawatts of electricity.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.

P21. Pick Points

Half-a-dozen or so stories of interest.

When the normal supplies of fuel are cut-off, as electricity has become intermittent in Pakistan, and gas supplies are also restricted, then those that need the heat will find and use what is available. So now the nation is beginning to be worried about deforestation. As the Crown Prince of Belgium noted at the World Future Energy Summit, this has happened in Europe in the past.

Over in Bengal the situation is no better, with coal, of which India has plenty in the ground, running short to the power stations even as more come back on line, after being down for maintenance. Part of the problem appears to be delays in getting environmental permits for the increase in coal production.

While the immediate dispute between Russia and Ukraine appears over, Pravda wants you to know that Ukraine is near default on its loans. And others doubt that stability will last. Nevertheless gas has now arrived in Germany and so this years crisis is over.

But for those who think that this disturbance might help move the Nabucco pipeline forward, which includes a fair number of Eastern European countries there is good news and less good. With the discovery of gas in a lower field below the existing reservoir in the Shah Deniz field in Azerbaijan the prospects for a second stage is being contemplated and Iran (with 10% of the first phase) has some interest in investing in this production. It would also feed into the Nabucco pipeline, if Russia has not tied up the additional production, by purchase. And while Russia is supposedly buying all available Turkmen gas, one might note that General Petraeus did just happen to drop by there last week. Still Kazakhstan has caught on to the game, and has now raised the price for transiting the gas from Turkmenistan to Russia by 21%.

More information is available on the interesting conditions that will be met when the Shtokman field off Russia is developed. In the last 48 years a total of 220 icebergs have been registered, and the ice thickens to about 2 meters in winter. Production is thus being anticipated as being from a ship. Its impact on the Norwegian economy is expected to be small.

Hmm and h/t to WUWT it turns out that the switch to a portion of biodiesel in the tanks of the school buses in Minnesota brought some grief last week, at least to some, as the fuel gelled in the tanks in the bitter cold. However the reports may have the wrong cause, since some of the problem seems to have come from the petroleum part of the fuel, although many of the buses that did not have problems seem to have been left running all night. The explanation of gel points in biofuels can be seen on Youtube.

As usual more stories can be found at the Energy Bulletin and in Drumbeat at The Oil Drum.