New era in oil industry

Signing of Phase-1 of the full-field development of Azeri-Chirag-deepwater Gunashli fields took place in a ceremony at the President’s office on Thursday attended by President Aliyev. The agreement was signed by the SOCAR president Natig Aliyev and the AIOC president David Woodward.

Attending the ceremony were top officials and representatives from BP, Unocal, LUKoil, Statoil, Itochu, Exxon, TPAO, Pennzoil, and Delta Hess.

Describing the work done to this end as 'an initial stage', President Aliyev said a new phase in implementation of the Contract of the Century had been embarked upon.

Explaining the delay in the launch of Phase-1 by the belated sanction for the construction of the Baku-Tbilisi-Ceyhan MEP, the President said that MEP-related agreements had already been signed and commercial operations undertaken. Detailed engineering of the pipeline route is currently underway with construction work expected to start next year, the head of state said.

Afterwards, the AIOC and SOCAR presidents David Woodward and Natiq Aliyev signed the agreement.

In his remarks, the AIOC president David Woodward stated:

"It was almost seven years ago that a group of foreign companies, SOCAR and the government together sowed the seeds for Azerbaijan’s new oil era with the signing of the ‘Contract of the Century’. Today it is a great honor for me to stand before you on behalf of the AIOC partners and announce a significant milestone in turning the seeds that were the Early Oil project into a rich harvest, which will propel Azerbaijan into the modern world.

The construction stage of the Azeri-Chirag-Gunashli Phase-1 of the Full Field Development is a massive world-class undertaking in terms of investment, the jobs that will be created, the local facilities that will be used, the oil revenues that will be generated and the positive impact we hope the project will have on the nation’s economy and the lives of all its people. There are a number of key factors that have brought us to the successful sanction of this phase of the project. These will continue to influence the progress of ACG’s future phases, which together will see Azerbaijan producing in excess of a million barrels of oil a day - and potentially revenues totaling $9 billion a year - from ACG alone by the end of the decade.

Sustained economic and social stability and the ability of foreign oil companies to work in partnership with SOCAR and the Government to international oil industry standards, will continue to drive investment. For Azerbaijan the prize is immense. Phases two and three of ACG development will require an additional $7 billion investment, and the Baku-Tbilisi-Ceyhan pipeline, which is expected to be completed early in 2005 to coincide with the delivery of oil from Phase-1, will require a further $2.9 billion investment from those who participate in the project.

The AIOC partners will continue to contribute their modern management practices, technology, high ethical, safety and environmental standards, and their ability to secure finance and manage the multi-billion dollar investments now being made in Azerbaijan.

It is fitting that Azerbaijan, a nation which more than 150 years ago created the industry on which the world continues to rely for much of its energy needs, is again poised to play a pivotal role on the global energy stage. The substantial revenues, which the ACG project will in time generate affords Azerbaijan a unique opportunity to strengthen its economy and reassert the independence which it achieved 10 years ago. It is with great pride that AIOC - through the commitment it has made - associates itself with Azerbaijan’s future prosperity and the social and economic well-being of al its people."

In his closing remarks, President Aliyev thanked the companies participating in the consortium and Azeri oil workers for the work done. He then recalled of the problems encountered along the way. Describing the agreement being signed as vital to the entire Contract of the Century, the President reiterated Mr. Woodward's remark that the landmark event signifies the start of a new era in Azerbaijan's oil strategy.

The President went on to praise Azeri specialists for the contribution to Phase-1 and the importance of continued use of national resources.

"You must efficiently use our Deep Sea Fabrications Plant built in the 1970s. This means that the giant enterprise will work again and provide jobs to its staff. You should make the best use of everything we have in Azerbaijan", he said.

What is Phase-1?

The Phase 1 project is a $3.4 bn development plan. It is the first major step after the Early Oil Project in the implementation of the ACG Production Sharing Agreement (PSA) and the first step towards achievement of the ACG Full Field Development. Some $2.74 bn of the $3.4 bn will be spent on the construction of facilities and pre-drilling to deliver the first oil production from Phase 1 in Q1 2005. The balance of the sum will be spent on development drilling the subsequent production period.

Phase 1 targets development of the central area of the Azeri field in the ACG contract area. It builds on the learning from the Early Oil Project and will be followed by a further two Phases of development: Phase 2 which will focus on the development of the remaining parts of Azeri (West and east) and Phase 3 which will develop Deepwater Gunashli. The Phase 1 project comprises a 48-slot production, drilling and quarters (DQ1) platform, 30" oil pipeline from DQ1 to the Sangachal erminal, conversion of an existing 24" subsea oil pipeline to gas service, expansion of the existing onshore terminal in Sangachal, a gas compression and water injection platform (C&WP) which will be bridge-linked to DQ1.

Phase 1 reserves expected to be produced during the PSA period are 193 million tons (1425 mln barrels). The development is expected to achieve average rates of 18.7 million tons per annum (375,000 barrels per day) of oil when at maximum production. To achieve this production a total of 48 production, water injection and gas injection wells will be drilled followed by 46 sidetracks through the life of the field.

Prior to sanctioning construction AIOC conducted an extensive competitive tendering process spanning some eight months and involving fourteen companies in support of the Phase 1 project. A three-month interim period has already started with five international contractor companies in order to finalize contracts for construction activities. These include McDermott Caspian Contractors International for the fabrication of platform topsides and for offshore pipelay; Bouygues Offshore for the fabrication of jackets, piles and the drilling template; Emtunga International for Living Quarters; Saipem for transport and installation activities; and Eiffel for the platform drilling module. The contract award for onshore terminal expansion remains under evaluation.

The level of utilization of Azerbaijan's facilities and involvement of local workers will be significant throughout the construction works. The jackets will be constructed and modules assembled at the SPS yard. SOCAR/KMNF pipelay, crane, transport barges and marine fleet will be used. The main contractors have been encouraged to maximize use of local subcontractors. The project will create more than 3000 direct local construction jobs at peak and will give a significant boost to Azerbaijan's economy.

The PSA for the ACG fields was signed in Baku on September 20, 1994. It was ratified by the Milli Mejlis and became effective on December 12 the same year, having already become known in Azerbaijan and elsewhere as "the Contract of the Century".

The AIOC was established by international oil companies from six countries which together with SOCAR are shareholders in this major field development. The Steering Committee includes representatives from the State Oil Company of Azerbaijan (SOCAR - 10%) and a representative from each of the nine foreign oil companies who are participants in the project - BP (operator - 34,1%), Unocal (10,3%), Lukoil (10%), Statoil (8,6%), ExxonMobil (8%), TPAO (6,8%), Devon (5,6%), Itochu (3,9%), Delta Hess (2,7%).

Recoverable field reserves are estimated at around 620 million tons (4.6 billion barrels) of oil - a super-giant field on any global basis. From the start, the activity level in AIOC has been exceptionally high. The Early Oil Project which was the first stage of the contract implementation was sanctioned in February, 1996 and delivered First Oil from the Chirag field on the November 7, 1997. Since that time a total of 15.6 million tons (115.7 million barrels) of oil, including 1.512 million tons of Azerbaijan's profit oil, has been produced from Chirag and exported to world markets. The daily average production rate from Chirag has now reached 16,000 tons (118,400 barrels) per day.

The PSA stipulates that the contract period will be 30 years. With such a long-term presence in Azerbaijan, AIOC and its shareholders will do more than just produce oil and gas. Since day one of its existence AIOC has been closely working with Azerbaijan's people, local and international organizations and institutions, as well as government bodies and SOCAR to carry out a major social investment program which focuses on education, science, humanitarian efforts and culture.

Sangachal capacity to reach 1mln barrels

Expansion of the Sangachal terminal is expected to start later this year as part of the Phase-1 of the Full Field Development of Azeri, Chirag and deepwater Gunashli fields and the anticipated implementation of Shah-Daniz gas project. The capacities of the oil and gas treatment facilities will be brought into conformity with the project requirements, according to the AIOC President David Woodward. The terminal's daily storage capacity will rise to one million barrels. The work is planned to commence in 2002 and complete in late 2004.

Mr. Woodward said that the next stage of the Sangachal expansion will take place on the eve of Phase-2 and Phase-3.

Phase-1 EIA

The environmental and socio-economic impacts assessment of Phase-1 of the Full Field development of Azeri, Chirag and deepwater Gunashli fields will be approved in January 2002, according to the AIOC President David Woodward.

He said the Ministry of Natural Resources and Ecology has endorsed the AIOC-prepared review of the project's environmental and social impact.

In addition, safety policy issues are also coming to the forefront, Mr. Woodward said. An emphasis will be placed on controlling over safety requirements on construction yards.

BTC construction to start in 2002

The Baku-Tbilisi-Ceyhan (BTC) Main Export Pipeline will be used to deliver the oil to be produced as part of Phase-1 of the Full Field Development of Azeri, Chirag and deep-water Gunashli fields to western markets. Its construction is expected to start in the first half of 2002 and complete in early 2005 - by the time of oil production commences within Phase-1.

The AIOC president David Woodward said talks are underway with international financial institutions to attract the necessary funding of $2.9 billion.

Detailed engineering of the pipeline route, for which $150 million has been allocated, is currently underway, while another $56 million was allotted for basic engineering, Mr. Woodward said. According to him, international financial organizations are also interested in the pipeline construction.

The 1,746km pipeline's intended yearly throughout capacity is 50 million tons. The transit fee has been set at $2.58 per barrel ($18 per ton).

Sanctions for construction operations under Phases Two and Three of the Full Field Development of Azeri-Chirag-deepwater Gunashli fields will be issued in 2002 and 2003 respectively. The AIOC President said Friday that Phase-2 is expected to cover the western and eastern portions of Azeri field, while Phase-3 will target the deepwater portion of Gunashli.

According to Mr. Woodward, oil production under Phase-2 is expected to commence in 2006, while under Phase-3 in 2008. Some $7 million will be invested in both phases. Under the Contract of the Century, the highest oil production rate, 50 million tons of crude a year, is to be achieved in 2009, 2010 and 2011.