BP Azerbaijan Business Update - December 2005

14 December 2005

Year End Press Meeting with David Woodward, BP Azerbaijan Associate President

Azeri-Chirag-Gunashli (ACG)

ACG Participating Interests are: BP (operator – 34,1%), Unocal (10,2%), SOCAR (10%), INPEX (10%), Statoil (8,6%), ExxonMobil (8%), TPAO (6.8%), Devon (5,6%), ITOCHU (3,9%), Amerada Hess (2,7%).

We are forecasting operating expenditure of $193 million this year against the plan of $154 million. The expected increase is due to higher transportation costs, higher well-work activity on Chirag and increased facilities maintenance spend. We expect our ACG operating expenditure to be $344 million in 2006.

Our forecast of capital expenditure in 2005 is $2711 million for ACG activities (Operations and Project) against the $2311 million plan. The increase is due to the decision to drill two additional wells as part of the East Azeri (EA) pre-drilling programme which has now been completed, and the accelerated start of the Deep Water Gunashli (Phase 3) pre-drilling programme, the diving support vessel upgrade and associated pipelay and subsea costs, West Azeri and Phase 3 projects acceleration, additional contractor work scope, and additional costs due to oilfield price inflation and currency exchange rate movements. 

In 2006 we are planning to spend $2552 million in capital expenditure on ACG activities. 
ACG Operations

During the first eleven months of the year we have produced about 250,000 barrels per day average in total from the Chirag and Central Azeri platforms. Our plan for 2005 was to produce 227,000 barrels per day but as a result of good well performance and platform operating efficiency we now expect to achieve an average of over 260,000 barrels per day for the year. This is a 15% increase over the original 2005 forecast. 

Production
Chirag - during the first eleven months of 2005, the platform produced about 48 million barrels (about 6.5 million tonnes) of oil, which reflects the good production performance.

Chirag has operated with very few interruptions since the commencement of development drilling and first oil production in 1997. It currently employs about 250 people of whom over 85% are Azerbaijan nationals. 

Since the beginning of this year the production activities on Chirag have continued in accordance with the plan for 2005 with an operating efficiency exceeding 96%. This year Chirag’s average production rate is expected to be in excess of 140,000 barrels per day with a peak rate of about 160,000 barrels per day. 

Since the start of production in November 1997 Chirag has produced 326 million barrels (over 44 million tonnes) of oil. 
Central Azeri (CA) - the CA platform has performed well since start up in February of this year. Today the production rate from eight pre-drilled wells is approximately 240,000 barrels per day. The platform’s operating efficiency year to date is 90% which is an excellent delivery in the first year of operation.

By the end of November, total production from Central Azeri had been about 39 million barrels (about 5.3 million tonnes). Production will continue to ramp-up through 2006 as the remaining pre-drilled production wells are brought online followed by platform drilling.

Sangachal Terminal - Oil from the Central Azeri platform is brought ashore via a new 30” subsea pipeline to the expanded Sangachal Terminal. Of the more visible signs of this major expansion are the three new crude oil storage tanks with a combined storage volume of over 2.7 million barrels.

The Sangachal Terminal processes the oil and has maintained an operating efficiency approaching 100%. This has enabled our two platforms to continue production with limited interruption. All this has been achieved by the Sangachal operations team of which over 85% are highly-qualified Azerbaijan nationals. 

Processed oil is currently being transported from Sangachal to market via existing export routes including rail. Part of the oil continues to be used to fill the BTC oil export pipeline. 
Associated gas from Central Azeri continues to be delivered to the Azerbaijan state from the Sangachal Terminal via a new gas export pipeline connecting the Terminal gas processing facilities and Azerigas’s national grid system. 

By the end of this year we expect to deliver in excess of 750 million standard cubic meters of gas from Sangachal to Azerbaijan in 2005.

In the future, gas produced from Central Azeri, beyond that which is re-injected for reservoir pressure maintenance or used for fuel, will continue to be exported via the 28” subsea pipeline into the Sangachal Terminal and via the new gas export pipeline into the Azerigas system for domestic use. 

The associated gas produced from the Chirag platform has continued to be sent to the SOCAR compression station at the Oil Rocks via the existing 16” subsea gas pipeline. The remainder of the Chirag associated gas will be sent to the Central Azeri compression and water injection platform (C&WP) once it is operational in the first quarter of 2006, for re-injection into the Azeri reservoir. The C&WP operations will enable us to stop routinely flaring gas on the Chirag platform.

We expect to deliver in excess of 1000 million standard cubic meters of gas from Chirag to Azerbaijan in 2005.

To date we have delivered 1.7 billion standard cubic meters of associated gas to Azerbaijan in total from the Chirag and Central Azeri platforms in 2005. 
Drilling
Chirag currently has 20 wells, of which 14 are oil producers and six are active water injectors. Well-20 was handed over to operations in mid-October and has produced at a rate of up to 25,000 barrels per day. We will continue rig activity on the platform with sidetracks and well surveillance prior to spudding well-21 in mid-2006. 

The Dada Gorgud has successfully completed the East Azeri pre-drilling programme this month. Overall we have drilled and suspended eight pre-drill wells on East Azeri which will be tied back to the platform once it is installed offshore in 2007.

The drilling rig will shortly move to the Deepwater Gunashli (DWG) area to commence the Deepwater Gunashli pre-drilling programme. 

The major ACG Operations milestones for 2006 are: 
  • First Oil from WA – 1Q
  • C&WP first gas injection – 1Q
  • DWG pre-drilling programme commenced – 1Q
  • CA platform drilling commenced – 1Q
ACG Project

Since the beginning of this year the focus on safety performance at all ACG Project construction sites has continued and the project has continued excellent progress on schedule.

The ACG Project currently employs about 12,000 people of whom 77% are Azerbaijan nationals. 

The Compressor and Water Injection Platform (C&WP) Topsides installation activities have continued safely since the successful sail away from the Amec-Tekfen-Azfen (ATA) yard in early July.

Offshore installation and hook up activities are about 90% complete. We plan to complete commissioning and commence gas injection early next year. 

Once fully operational, the C&WP platform will provide water and gas injection services to the Central, West and East Azeri platforms. When connected to these platforms it will also be able to manage associated gas export and provide electrical power. 

West Azeri (WA) Topsides sailed away successfully on September 21 and were safely installed offshore onto the jacket. The overall offshore installation activities are currently 99% complete with offshore hook up and commissioning already 90% complete. 

We plan to achieve First Oil from WA next month following completion of topsides offshore hook up and commissioning activities. This will eventually increase the Azeri-Chirag-Gunashli offshore facilities oil production capacity by 340,000 barrels per day. 

The East Azeri (EA) Topsides construction is progressing ahead of schedule at the Baku Deepwater Jackets Factory (BDJF) yard with 90% of the overall work already complete versus the 81% plan. 

All of the modules and the drilling derrick have already been installed onto the integrated deck with the topsides fabrication already 82% complete. 


The East Azeri Jacket fabrication at the BDJF yard is substantially complete and the jacket was loaded onto the STB-1 transportation barge in November releasing space for Phase 3 jacket fabrication. 

Following the Derrick Barge Azerbaijan (DBA) main block upgrade (currently 30% complete) campaign, the East Azeri jacket will sail away to be installed offshore in the second quarter of 2006.

Deepwater Gunashli (Phase 3) has made very good progress during this year with 30% overall progress achieved to date against 30% planned. 

The Deepwater Gunashli Drilling, Utilities and Quarters Platform (DUQ) topsides and jacket in-country fabrication progress is 21% complete.

The Drilling Modules fabrication in Holland is also progressing to the target schedule and is 86% complete with delivery to Baku expected in the third quarter of 2006.

We started fabrication of the Phase 3 Production, Compression, Water Injection and Utilities Platform (PCWU) jacket and topsides in-country fabrication at the ATA yard in the third quarter of 2005.

Design and procurement of the subsea water injection facilities was completed in the fourth quarter of 2005. These facilities will inject over 400,000 barrels of water per day into the Deepwater Gunashli reservoir through six subsea wells drilled from two subsea drilling centres approximately 5km away from the Deepwater Gunashli platform. Development of these subsea facilities marks the first significant subsea development in the Caspian Sea, and paves the way for future Caspian subsea development options.

Subsea pipe-lay - we completed the West Azeri subsea pipeline construction in July, and then continued with East Azeri pipe-lay. 
We have to date laid 18 subsea pipelines totalling over 850km in length since the start of ACG phase 1 using the Israfil Huseynov barge, and by the end of the pipe-lay programme we will have installed 21 pipelines totalling 950km in length. For this purpose we will have used over half a million tonnes of pipe.

The SOCAR-owned dynamically positioned diving vessel Tofik Ismailov commenced operation this year after extensive upgrade. Since June it has been engaged in diving work to complete the subsea pipeline tie-ins for C&WP and West Azeri. This diving vessel is the most sophisticated of its kind in the Caspian, and will continue to support diving operations on the ACG and Shah Deniz projects through 2006.

The Sangachal Terminal Expansion Programme (STEP) construction activities aimed at building one of the world’s largest terminals, have progressed on schedule. The main contractor of the STEP works, Tekfen/Azfen has achieved 26 million man-hours without any day away from work injury cases from the beginning of the construction works in November 2001. This is an exceptional achievement and is a result of extremely hard work and dedication to safety of all the people involved. 

The Sangachal Terminal is the place where all of our major projects converge to form one integrated facility. It currently employs over 3600 persons of whom more than 76% are local Azerbaijan citizens. About half of these people are local residents from adjacent villages and towns of the Garadagh district. 

STEP for Azeri Phase 1 was handed over to operations in February 2005 and oil has been flowing through it since the system’s start up on March 3. All the three new oil tanks with a storage capacity of nearly 880,000 barrels each are in operation.


The ACG Phase 2 facilities overall construction is 99% complete with the Phase 2 commissioning process already 50% complete, which is several months ahead of schedule. We are now planning to complete Phase 2 facilities construction and commissioning work at the beginning of the second quarter of 2006.

The ACG Phase 3 is the next important phase of construction at STEP and this has commenced with civil works and underground piping already underway.

The major ACG Project milestones for 2006 are: 
  • WA first revenue oil - 1Q
  • Derrick barge Azerbaijan main block upgrade completed - 1Q
  • STEP Phase 2 started up - 2Q
  • EA jacket installed - 2Q
  • Installation of Phases 2 and 3 subsea pipelines completed – 2Q
  • DUQ jacket template installed - 2Q
  • PCWU platform detailed engineering completed – 2Q
  • DUQ drilling modules delivered to Baku – 3Q
  • DUQ living quarters delivered to Baku – 3Q
  • Phase 3 subsea Xmas trees delivered to Baku - 4Q
  • DUQ jacket ready for sailaway - 4Q
  • EA topsides offshore hook up and commissioning completed – 4Q
  • Trains 5 and 6 commissioning commenced - 4Q
The Baku-Tbilisi-Ceyhan project (BTC) The BTC Co. shareholders are: BP (30.1%); AzBTC (25.00%); Unocal (8.90%); Statoil (8.71%); TPAO (6.53%); ENI (5.00%); Total (5.00%), Itochu (3.40%); INPEX (2.50%), ConocoPhillips (2.50%) and Amerada Hess (2.36%).

BTC construction progressed smoothly during this year with the start up of line-fill from the Sangachal Terminal in May. On August 10, oil reached the Azerbaijan-Georgian border and entered the Georgian section. On November 17 oil crossed the Georgian-Turkish border and has now reached Pump Station No1 in Turkey (PT1) with 4 million barrels of oil already in the pipeline. 

By the end of this year, BTC will have spent $1287 million (including costs of line-fill and financing) against the planned $1214 million in 2005, because of the higher project costs associated with contractors and project management, and additional costs due to oilfield price inflation. The 2006 BTC capital expenditure budget is $641 million.

Linefill and completion of the BTC pipeline is continuing with the focus on the rigorous testing and commissioning activities to ensure the integrity and safety of each section of the pipeline prior to introducing oil. This is taking longer than expected, but our aim is to complete this safely and ensure that the pipeline will operate efficiently for the next 40 years or more.

We continue to make steady progress in the linefill programme and are now planning the official inauguration of the Turkish section of the pipeline and the Ceyhan Terminal to take place in spring next year once oil has reached the terminal and the first tanker has been loaded. 

The Turkish section is 1,070 kilometres long. It includes 4 pump stations, two metering stations and the Ceyhan marine export terminal which itself consists of seven crude oil storage tanks, and a 2 kilometer long jetty to load two tankers of up to 300,000 dwt simultaneously. 
Commissioning of the Ceyhan Terminal facilities is already underway, using a cargo of crude oil delivered from the Supsa terminal. Following commissioning the terminal will be fully ready to receive oil through BTC on arrival at Ceyhan.

At the Sangachal Terminal, we are successfully operating the BTC head pump station Phase 1 pumps while the commissioning of the BTC Phase 2 pumps is 99.50% complete.

A total of 10 million barrels of crude oil is required to fill the 1768 km long line running from the Sangachal Terminal near Baku via Georgia to the Ceyhan Terminal on the Mediterranean coast of Turkey. The oil comes from the ACG field in the Azerbaijan sector of the Caspian Sea. 

BTC is a major project, which will make a positive difference by bringing significant benefits to the region. By avoiding the Bosphorus it will help relieve the inevitable growth in oil related traffic and associated environmental risks, while creating substantial revenues for the transit countries, and will help strengthen economic and political links between Azerbaijan, Georgia, Turkey and the West.

Export – Current production from Central Azeri and Chirag platform is running, ahead of expectations, at some 400,000 bpd and we remain on target for 1 million bpd in late 2008. 

Because oil continues to be produced from the Azeri field for linefill and exported through existing routes including rail, at a growing rate, our growth plans are on track and will not be affected by the timing of the BTC start up. 

We continue to ramp up production from the Azeri-Chirag-Gunashli (ACG) field and are successfully exporting production via the Western and Northern Route Export pipelines and by rail in addition to filling BTC. 
1. The Western Route Export Pipeline (WREP) to Supsa: this has continued to operate normally and by the end of November we had successfully transported over 338 million barrels (about 46 million tonnes) of oil via the Western Route Export Pipeline for AIOC partners and the State of Azerbaijan (263 tanker loads – about 33 million tonnes for AIOC and 47 tanker loads - 6.3 million tonnes of Azerbaijan’s profit oil) from Supsa. 

2. The Northern Route Export Pipeline (NREP): since the beginning of transportation activities in 1997 to the end of November, 2005 over 143 million barrels (19.5 million tonnes) of oil (including SOCAR non-ACG oil) had been transported via the Northern Route Export system, which allowed the shipment of 217 tanker loads from Novorossiysk (including 137 tank ships, over 13 million tonnes of SOCAR oil).

3. The Azerbaijan and Georgian railway systems: this started on June 1, 2005 when we put first oil into the 16" Azpetrol line connecting the Sangachal terminal with the nearby Azpetrol Terminal, for onward transportation to the Black Sea port of Batumi using the Azpetrol rail system, and will continue until BTC becomes fully operational in spring next year. We are currently transporting an average of 130,000 bpd via the railway systems of Azerbaijan and Georgia. Since the beginning of railway transportation we have carried over 15.6 million barrels (2.2 million tonnes) of oil by rail which had allowed us to load 17 tankers from Batumi by the end of November. 
The Shah Deniz Project The parties to the Shah Deniz Production Sharing Agreement are: BP (operator – 25.5%), Statoil (25.5%), the State Oil Company of Azerbaijan Republic (Socar - 10%), LUKAgip(10%), NICO (10%), Total (10%), and TPAO (9%).

The Shah Deniz gas and condensate development project has progressed according to schedule to meet the target of delivering first gas to the market before winter 2006. Stage 1 construction is currently 88% complete overall. 

Our forecast indicates that by the end of the year the Project will have spent $1299 million against the $1290 million capital expenditure plan for 2005 due to increased project, yard upgrade costs and currency exchange rate movements. The Shah Deniz 2006 capital expenditure budget is $865 million.

The Stage 1 project is progressing according to schedule to meet the target of delivering first gas to the market on 30 September 2006. 

Drilling

In late August the project spudded the fourth pre-drill development well. The well was drilled from the existing drilling template in 101 meters water depth to a location that is near the field’s crest, with a drilling step-out of 1.44 km. The well has already reached the total depth of 6189 m and currently we are in the process of logging which we will complete shortly. We will then run a production liner and the well will be suspended before the end of the year. The well will be completed after the First Gas in September 2006.

This well completes the Shah Deniz Stage 1 Pre-drill Programme, which includes a total of four production wells.

The current SDA-04 well was sanctioned by the Shah Deniz partners in 2004 to provide an aggregate of some 3 billion cubic meters of additional natural gas to Azerbaijan over the first three years after commencement of deliveries from Shah Deniz in 2006. 
Use of pre-drilling in advance of installation of the TPG500 production platform allows an accelerated project schedule to the first gas date and will provide for a faster ramp-up of gas and condensate production immediately after the platform is commissioned, benefiting both Azerbaijan and the Shah Deniz partners.

Appraisal activities in support of additional stages of the Shah Deniz development continue. After SDA-04 the Shah Deniz project is planning to drill another appraisal well – SDX-04, which we expect to spud in the south-western part of the field in early 2006. 

Construction activities

Work at the Zykh facility operated on behalf of the Shah Deniz Project by Technip Maritime Offshore Limited (TMOL), has been ongoing since the third quarter of 2003 when refurbishment of the Zykh 3 and 4 facilities commenced to re-establish a world-class offshore fabrication yard prior to the arrival of the TPG500 hull. 

The completed hull of the Shah Deniz TPG500 platform was successfully transferred in April of this year from the Floating Dry Dock (FDD) in the South Bay of Baku to Zykh, and construction activities have since focused on final installation of the platform legs and completion of the topsides facilities at the Zykh fabrication yard. 

The main construction milestones at the Zykh yard in the second half of this year have included:
Upper leg section installation - July
Vent tower installation – August
Helideck installation – August
Hull strip zero installation – September
Process manifold installation – October
Spud can fabrication completed - December

The living quarters and topsides pipe racks outfit and platform commissioning are now substantially complete. Operational pre-commissioning work will continue in the first quarter of 2006 to minimize the scope of work required offshore. 
Some 2750 people are currently involved in the construction activities at the Zykh yard and of these 2100 (about 77 % of the total workforce) are Azerbaijan citizens. 

The overall construction of the platform is on schedule for sail away during the second quarter of 2006 in line with our target to achieve First Gas for the winter of 2006.

Shah Deniz section of STEP

The construction works for the Shah Deniz section of STEP started in November 2003 and are planned to be completed in September 2006. The works on the large gas plant for Shah Deniz at STEP is progressing ahead of schedule and the construction is already more than 84% complete with the majority of STEP workforce currently involved in the Shah Deniz section. We are planning to achieve mechanical completion of the Shah Deniz section at the terminal in the second quarter of 2006. Following this, the work programme will shift to commissioning and start up of the terminal's Shah Deniz gas facilities.

As part of the STEP Shah Deniz section, a large compression station is also incorporated in the construction activity. The construction of this main compressor and metering station which is being built as part of the South Caucasus Pipeline (SCP) project and which will be used for Shah Deniz gas export to Azerbaijan, Turkey, and Georgia, is also ahead of schedule. We are planning to complete it in the second quarter of 2006 which will allow us to commence the SCP commissioning from the Sangachal Terminal during the second quarter of 2006.

All works are progressing in accordance with the engineering and procurement plan. The overall progress is 84% complete, which is 3% ahead of schedule. 
Subsea Pipelay activities

In September we commenced laying the Shah Deniz Stage 1 subsea pipelines.

The Shah Deniz subsea pipelay programme consists of three 90 km pipelines – a 26” gas pipeline and a 12” pipeline for condensate, and a 4” piggy-backed mono ethylene glycol pipeline. 

The pipelay programme utilises the Israfil Huseynov barge which previously was successfully re-fitted and upgraded for Azeri-Chirag-Gunashli (ACG) subsea pipelay operations. The project plans to expend almost 700,000 man-hours on the Shah Deniz offshore pipeline installation activities and has employed a local Azerbaijanian workforce of up to 400 personnel.

To date about 85% of the Shah Deniz offshore pipelines have already been laid and the programme remains on schedule to be completed by the end of January 2006.

The programme utilizes local infrastructure, including support bases, the lay barge and several support vessels.

After completion of the Shah Deniz pipe-lay, the lay barge will return to complete the ACG pipeline programme by second quarter of 2006. By that time over 1000km of subsea pipelines will have been installed by the Israfil Huseynov in total for the ACG and Shah Deniz projects. 
br /> SCP (South Caucasus Pipeline) progress

The SCP Co. funding shareholders are: BP (technical operator – 25.5%), Statoil (commercial operator - 25.5%), the State Oil Company of Azerbaijan Republic (SOCAR - 10%), LUKAgip (10%), NICO (10%), Total (10%), and TPAO (9%). 
The overall SCP project is about 95% complete, and by the 25th of November the overall pipeline construction was 90% complete in Azerbaijan and 81% complete in Georgia. We have already hydrotested more than half of the 442.4 km Azerbaijan section of the pipeline. Good progress has also been achieved in Georgia, where the focus has been on completing the high ground work prior to the arrival of winter conditions. 

In addition, the Turkish offtake facility is 98% complete and the Georgian offtake is 95% complete. The Azerbaijan offtake is within the Sangachal terminal scope.

The project currently employs (with BTC) 1600 personnel in Azerbaijan of which 1300 are Azerbaijan nationals. The SCP pipeline is scheduled to be substantially mechanically completed by the end of this year, with final off-take connections to BOTAS, GIOC, and Azerigas to be completed in 2006. System commissioning will start in the second quarter of 2006 and be completed to deliver first gas by the winter of 2006.

The major 2006 Shah Deniz Stage 1 milestones include: 
  • SDA-04 pre-drill well completed - 1Q
  • SDX-04 spudded - 1Q
  • Stage 1 subsea pipelay completed - 1Q
  • TPG500 onshore commissioning at Zykh completed - 1Q
  • TPG500 ready for sail away – 2Q
  • Mechanical completion of the SD section at the terminal achieved – 2Q
  • SCP commissioning from the Sangachal Terminal commenced – 2Q
  • Off-take connections to BOTAS, GIOC, and Azerigas completed - 3Q
  • SCP ready to receive First Gas – 3Q
  • Offshore commissioning of TPG500 completed – 3Q
  • First Gas - 3Q
  • SDX-04 completed - 4Q
Exploration projects In the Inam PSA (BP 25% and operator, SOCAR 50% and Shell 25%) the early stages of the well planning for INX-2 have been finalised and the project is ready to move into the final planning stage in early 2006.

INX-2 is scheduled to be drilled by the Istiglal rig commencing during the second half of 2006; however, the actual timing will depend on when the Shah Deniz SDX-4 well is completed.

In Turkey and Georgia, BP recently finalised a farm-out of interest to Unocal (now owned by Chevron) for a 25-percent working interest in Turkish License 3534 and a 10-percent working interest in Georgia blocks APC-IIA, IIB and III. In Turkey, BP operates Deepwater Exploration Licence 3534 and is currently drilling the Hopa HPX-1 well, the first exploration well in this undrilled deepwater basin. Following completion of the farm-in, the partners are BP (25%), Turkiye Petrolleri A.O (TPAO – 50%), Unocal Turkey (Chevron) (25%). For this first well, BP as Operator has contracted the Global Santa Fe (GSF) Explorer, a dynamically positioned drill ship capable of drilling in over 2,000m of water. HPX-1 spudded on 18 July in 1500m of water. While there is still significant uncertainty as to the outcome of drilling, HPX-1 will be an important first well in this deepwater basin.

In Georgia, Anadarko Georgia Ltd (“Anadarko”) is operator, and following the farm-out the Production Sharing Contract (“PSC”) is now jointly held by Anadarko (48.0%), BP (28.5%), Turkey Petroleum Overseas Company (13.5%) and Unocal (10%). Drilling plans for this license will depend on the results of exploration in the Turkish Black Sea.


For further information please contact:
Tamam Bayatly, BP Baku Press office, telephone:      994 (0) 12 599 4557