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Shah Deniz gas production in Azerbaijan restarts with launch of second well 28 février 2007

Posted by Acturca in Caucasus / Caucase, Central Asia / Asie Centrale, Energy / Energie, EU / UE, Russia / Russie, South East Europe / Europe du Sud-Est, Turkey / Turquie, USA / Etats-Unis.
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Global Insight, February 21, 2007

Andrew Neff

A BP-led consortium yesterday resumed gas production from Azerbaijan’s offshore Shah Deniz field, bringing output back onstream after a troubled launch of the project in December and a failed restart in January.

Shah Deniz Start-Up, Take Three

Significance The BP-led consortium has restarted gas production at Shah Deniz by launching a second well even as the first well, which has been beset by technical problems, remains offline.

Implications Gas supplies from the Shah Deniz field are expected to play a major role in helping Georgia, Turkey, and south-eastern Europe not to mention Azerbaijan itself reduce reliance on Russian gas imports.

Outlook The BP-led consortium is hoping that it is third time (albeit with a second well) lucky, as any further disruptions to gas output from the project would begin to trigger questions about the reliability of Azeri gas supplies as consumers in Turkey, Greece, and south-eastern Europe look for alternatives to Russia.

For the third consecutive month, a BP-led consortium has launched gas production from the Shah Deniz gas field offshore Azerbaijan. After commissioning the first well at the 1-Tcm Caspian gas field in mid-December, however, the consortium quickly shut down the well for unspecified technical reasons (see « Related Articles » below). A second attempt to resume production at the well in early January faltered, forcing the consortium to once again take the well offline and shut down production from the field. The consortium which includes Norway’s Statoil, Azerbaijan’s SOCAR, Russia’s LUKoil, Iran’s NICO, France’s Total, and Turkey’s TPAO (see table) then said that it hoped to resume production and start exports from the field by the end of the first quarter.

Shah Deniz Stakeholders             Company Share
  BP                                                           25.5%
   Statoil                                                     25.5%
SOCAR                                                    10%
LUKoil                                                     10%
NICO                                                       10%
Total                                                        10%
TPAO                                                        9%

Yesterday, the consortium made good on that promise, announcing that it had resumed pumping initial volumes from the field. Although the technical problems at the first well have not yet been resolved, the Shah Deniz partners brought a second well onstream, allowing gas production to resume, bolstering the field’s overall production capacity at this stage, and not to be overlooked improving confidence in the eventual success of the project and the reliability of gas exports from Azerbaijan. BP has forecast output from the field this year at 2.8 Bcm of gas from a total of four production wells, with output expected to reach an eventual plateau of 8.6 Bcm per year in the first phase of production.

For Azerbaijan, the restart at Shah Deniz, even with the first well still not back online, is good news indeed, particularly as the country opted not to import more expensive Russian gas this year, counting on the start of Shah Deniz gas output to help meet domestic demand requirements. After Russia said it would double its export price to Azerbaijan and provide only one-third of the gas volumes that Azerbaijan had sought, Azeri authorities decided to bite the bullet, refusing the Russian gas supplies and instead altering the country’s energy policies. Retail gas prices for consumers were increased, triggering protests, while a campaign to convert gas-fired power plants to diesel and mazut has accelerated. SOCAR, the state oil and gas company, has also sought to secure additional gas supplies in the form of associated gas output from the BP-led Azerbaijan International Operating Company (AIOC) to make up for the loss of Russian gas imports.

Outlook and Implications

Nevertheless, the resumption of gas production at Shah Deniz will ease the tension in Azerbaijan’s gas supply/demand balance, even if the majority of supplies from the field are intended for export. Georgia, which has also been squeezed by Gazprom’s move to more than double the price for gas, was forced by the December Shah Deniz outage to sign a stopgap supply deal with Gazprom. Still, Georgian authorities are hoping to import the bulk of their gas supply needs this year from Azerbaijan, by receiving supplies as part of a 2001 agreement on the construction of the South Caucasus Pipeline (SCP) (part of the Baku-Tbilisi-Erzurum pipeline, the major conduit for Azeri gas exports) and/or via a deal with Turkey to buy part of that country’s allotment of Shah Deniz gas supplies this year.

Further downstream, both Turkey which receives some 65% of its gas from Russia and Greece are watching the Shah Deniz developments with interest. While Turkey does not need Azeri gas supplies this year (Turkey is already oversupplied with gas from previous deals based on overblown gas demand projections; hence that country’s willingness to cede part of its quota of Shah Deniz gas to Georgia), it is interested in diversifying its suppliers to reduce its dependence on Russia. Turkey is also keen to realise its ambitions of being an « energy bridge » for Caspian and Middle Eastern gas supplies to Europe, but considering the oft-unreliable supplies of Iranian gas to Turkey, the Turkish government is no doubt gauging the reliability of Azeri gas exports with the problematic start-up of Shah Deniz.

Similarly, Greece and other south-eastern European countries are eyeing the Shah Deniz launch with interest, even if they don’t have any supply deals signed with Azerbaijan yet. If European countries are looking to reduce reliance on Russian gas, with one of the key criticisms of Gazprom recently focused on the « unreliability » of Russian gas deliveries, then Shah Deniz gas exports must be stable and reliable in order to truly improve the energy security of European countries that are increasingly counting on Azeri gas. The problematic start-up of Shah Deniz will do little to build confidence in European circles about shifting reliance to depend more on Azeri gas supplies. Nevertheless, the ramp up in Shah Deniz gas production and the start of exports via the SCP will bolster the energy security of Azerbaijan and Georgia in the short term, and assuming no further disruptions the Caspian gas field has the potential to play a major role in underpinning European energy security in the long term.

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