The rising fortunes of the Caspian

Last edited: 1 November 2011

Visitors to Baku can’t have helped notice the volume of construction taking place in Azerbaijan’s capital, made possible by the renaissance in the country’s oil industry. BP's role there is set to expand, with plans to develop the full Shah Deniz gas field

It’s hard to look beyond the immediate surroundings at Gobustan, the UNESCO world heritage site in Azerbaijan’s scorched semi-desert, an hour’s drive southwest of the capital, Baku. There, on a barren hill-top, more than 20,000 years of human history is etched onto giant boulders, with thousands of carvings that depict how communities lived in the region through the ages. Wild animals, livestock, male and female figures, and even longboats feature on rock faces, today’s remnants of caves once lapped by waters of the Caspian Sea. 

Now sitting 108 metres (354 feet) above sea level, Gobustan’s petroglyphs are about five kilometres (three miles) from the shoreline. While the fascinating, sometimes hard-to-decipher carvings demand visitors’ attention, if you tear your eyes away from this art gallery of a landscape and turn a full 180 degrees, the sweeping view down to the blue Caspian waters is equally captivating. 

In the distance, like small toys dropped in a bath, it’s just possible to make out parts of man-made infrastructure that tell a story about this nation in modern times. For, just as Gobustan reveals a rich history through its archaeological findings and burial sites, the Caspian waters point to Azerbaijan’s present and future, with images of the oil and gas industry - rigs, platforms and vessels - lining the horizon.

Extracting hydrocarbons is not a new activity here; the country’s first industrial oil well was drilled in 1848 and by 1901, Azerbaijan produced half the world’s oil. More than a century later, driving along the highway that traces the coastline, there are constant reminders of the oil industry, past and present: narrow pipelines, disused nodding donkeys, and an enormous steel carcass of a platform jacket, waiting to be disassembled for parts. 

Contract of the century

The six-lane roadway itself is a result of the revival of Azerbaijan’s oil production; in 1994, the late president Heydar Aliyev signed what became known as the ‘contract of the century’, a production sharing agreement (PSA) with 11 foreign oil companies, including BP, to develop offshore hydrocarbon resources. Less than 20 years later, oil revenues are bringing investment to the nation’s infrastructure, and nowhere is the pace of change more evident than in Baku. 

Alongside the renovated sandstone mansions of the first oil boom and the utilitarian blocks of the Soviet era, new skyscrapers, hotels, shopping malls and entertainment venues are springing up, thanks to the 21st century oil boom. 

Dominating the city’s skyline now are three Flame Towers, each 182 metres (600 feet) of curving steel, inspired by Azerbaijan’s history of fire-worshipping. In ancient times, the Zoroastrians – for whom fire was an important symbol – built temples around burning gas vents in the ground. The towers are the country’s tallest buildings, symbolising the significance of oil and gas.
If the first chapter of this latest hydrocarbon boom has been largely down to oil, with the giant BP-operated Azeri-Chirag-Gunashli (ACG) field yielding on average 757,500 barrels a day in the first nine months of 2011, the next chapter will see a new order, thanks to the development of one of the world’s largest ever natural gas discoveries. 

Shah Deniz – meaning ‘king of the sea’ – lies offshore, 70 kilometres (40 miles) south east of Baku, and is thought to hold 1 trillion cubic metres of gas. With the first phase brought online in 2006, up to 8 billion cubic metres of gas a year (bcma) and 35,000 barrels of condensate per day (in the first nine months of 2011) supply markets in Azerbaijan, Georgia and Turkey, transported through the South Caucasus pipeline (SCP). With a 25.5% interest in the field, and as operator, BP is now leading a consortium of seven partners who are working towards bringing the full field into production, in a $20 billion project of unprecedented scale and complexity in the company’s worldwide portfolio. 

“I don’t call Shah Deniz a project, I describe it as a programme, because it has at least four major projects within the whole,” says Rashid Javanshir, BP’s regional president for Azerbaijan, Georgia and Turkey. “They include subsea development, topsides offshore, an extension of Sangachal terminal to process the gas and potential expansion of SCP for export to Turkey. There is also gas transit through Turkey to consider, as well as sales agreements for buyers there, and beyond."
"I don’t call Shah Deniz a project, I describe it as a programme, because it has at least four major projects within the whole."
- Rashid Javanshir
Gas volumes held in the Shah Deniz reservoirs are so vast that they will not only meet the needs of Azerbaijan and its regional neighbours, but provide significant supplies to Europe. Of the incremental 16bcma of gas that the full field will produce, 10bcma will be transported to markets west of Turkey. 

“We are part of an historic development to build the so-called ‘southern energy corridor’, to bring gas from the Caspian to western Europe,” Javanshir continues. “This is an exciting opportunity for Shah Deniz and BP; it involves negotiations with multiple countries which have an interest in a new pipeline, as well as the different companies that have submitted route proposals.” 

As the European Union looks to diversify its energy supplies, the creation of a new southern corridor aims to provide increased energy security for the continent, bringing affordable gas supplies initially from Shah Deniz, and paving the way for future gas delivery from the wider Caspian region and, potentially, the Middle East. With a five-year extension to the original PSA signed last year, Shah Deniz will produce natural gas until at least 2036. 

Securing the long-term support of international stakeholders for the project is, therefore, crucial, as BP’s vice president for Shah Deniz development, Al Cook, explains: “The gas will flow through many countries, so it’s vital that we work together to address the strategic needs of all the nations involved, as well as the commercial needs of BP and its partners. We hold workshops on a quarterly basis to bring the consortium of companies together with governments and the European Commission; we’re looking to create a project that will bring benefit for all.”

Before the gas crosses any borders, Azerbaijan itself will be top of the list of benefactors. “Broadly speaking, Shah Deniz means energy independence for us,” says Bahram Huseynov, deputy vice president for geology at SOCAR, the state oil company of Azerbaijan, a member of the Shah Deniz consortium and a key BP partner. “It will allow the country to be self-sufficient for gas and reap the benefit of selling to other markets.”

Gas sales to Europe

The first step towards making this a reality came in June 2010, when the governments of Azerbaijan and Turkey signed a Memorandum of Understanding to establish a framework for gas sales and transit terms for transportation through Turkey into Europe. Another major step was taken on 25 October last year, when the Shah Deniz consortium signed legally-binding sales and transit agreements with their Turkish counterparts. These agreements will allow the partners to proceed with the selection of a pipeline into Europe, to confirm gas sales agreements with potential customers and to move towards a final investment decision. 

A common theme in conversations about Shah Deniz is the sheer scale of the development; for BP, the full field resources represent the largest single volume of gas ever sold by the company. Once commercial and bi-lateral agreements between buyer and transit countries are finalized, a final investment decision and project sanction is likely to come in 2013. Only then will construction of the offshore facilities and infrastructure get underway; that chapter will continue for 10 years, as 26 subsea wells will be brought online in different phases, generating up to 10,000 local jobs.

Huseynov continues: “If we add everything together, including construction of two platforms, subsea infrastructure and pipeline laying, the pace and scale of activity will be challenging, as it all needs to run in parallel to meet the target start-up date in 2017.” 

BP has experience of managing projects on such a scale. “This plays to BP’s strengths, as we’re able to draw on expertise from our regional and divisional structure, to bring together an immensely complex value chain,” says Cook. “To make this successful, every part of a 4,000 kilometre [2,485 mile] chain has to work and we’ve formed an organisation to address those needs.” 

Learning from experience

Lessons from the ACG development also provide valuable knowledge, as Bruce Luberski, BP Azerbaijan’s vice president for developments, explains: “What we learned developing ACG was about offshore jackets and floatover topsides, the advantages of a production line and standardisation. Our biggest lesson was to build everything onshore, transport the complete facility to its offshore location, then set it in place – that’s the floatover concept that we’ll use again and again.” As the Caspian Sea is landlocked, with access only by two canals that are narrow for industrial purposes and freeze in winter, there’s no question of shipping large facilities into the country. Instead, Azerbaijan’s four existing strategic marine installation vessels will be upgraded to meet the Shah Deniz specifications.

“We’ve used all the vessels before, so we’re playing to a known delivery system,” Luberski adds. “The Shah Deniz platforms will be numbers eight and nine in our repertoire, so this development will take the benefit of everything else we’ve done in the Caspian.” With engineering studies ongoing, 2011 was a busy year for the project team. Milestones included the drilling of a third development well, geo-technical surveys in preparation for ground-clearing and construction of new access roads at Sangachal terminal for site extension, and a survey of the SCP route through Azerbaijan and Georgia for its expansion, as well. In the complex programme to bring the full field online, there are four separate, yet inter-dependent, projects and the key is to ensure each remains on track. 
“Marine-subsea, offshore topsides, terminal extension and pipeline expansion are all huge projects in their own right,” says Cathal Kelly, project general manager for SD2, who is responsible for the integration, monitoring and alignment of wells, subsurface and projects in the development. “We need to make sure they all progress at the same rate and that one does not get ahead of another.”

There are 600 people currently at work on the Shah Deniz development in five UK offices, in addition to those dedicated to BP’s other Caspian developments, such as the Chirag Oil Project. In Azerbaijan, BP now employs around 2,300 national staff across the whole business, equating to 87% of the workforce. The company’s goal is to achieve a nationalisation rate of 90%, to make certain that the future of the oil and gas industry in Azerbaijan lies in local hands. It is continued exploration of the Caspian that will drive growth for both country and company; with a new PSA ratified by the republic’s Parliament last May, BP and SOCAR will jointly explore and develop the Shafag-Asiman block, in a deepwater section of up to 900 metres (2,950 feet) below the water surface. 

“We’re excited to begin exploration here again,” says Javanshir. “It means BP will have all upstream divisions present and I’m a strong believer that we’ll do more and more together with SOCAR. Partnerships are essential in Azerbaijan and I’m pleased to see our employees moving between the companies. I see this as positive, as a sign of trust and I hope it continues.” 

As local talent emerges and new investment gets the green light, Azerbaijan is preparing to come forward as a major supplier for European energy. Last year’s victory in the Eurovision song contest may mean that Baku – and its brand new, specially-constructed stadium – has one night in the spotlight this May, but Azerbaijan’s imminent role as a long-term provider of natural gas to the rest of Europe will put this nation firmly on the map for years to come.

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