King of the Sea

Shah Deniz: King of the Sea

By Ramiz Mammadov

Shah Deniz translates from Azeri as “King of the Sea” and it really is the king of Caspian region, being the 9th largest gas field in the world with reserves of around 1.2 trillion cubic meters. The “King” is situated in the South of the Caspian Sea, off the Azerbaijan shore, approximately 70 km south-east of Baku, the capital of the Azerbaijan Republic. It is being operated since the end of 2006 through a production sharing agreement (PSA) ratified in 1996 by a consortium of companies consisting of lead operator BP (25.25%), Statoil (25.5%), Socar (the State Oil Company of Azerbaijan), Lukoil of Russia, Total of France, NICO of Iran (10% each) and TPAO of Turkey (9%).

The Shah Deniz field produced about 6.5 bcm in 2009. This is expected to be raised to 7.6 bcm in 2010, according to BP. Total production in Azerbaijan was almost 16 bcm in 2009. Azerbaijan expects its gas production to be raised to 26-30 bcm by 2012. Out of that volume, 9 to 10 bcm of gas is to be produced under Phase I of the Shah Deniz project, 12 to 14 bcm of gas is to be extracted by the State Oil Company of Azerbaijan (Socar), another 5 to 6 bcm of associated oil gas may be produced by the Azeri-Chirag-Gunesli oil project.

By 2020, Azerbaijan wants to raise its gas production to 55 bcm. Such a big jump can only be achievable with the start of Phase II of Shah Deniz, which will include construction of a new offshore gas platform and a gas plant at the current oil and gas terminal, at an estimated cost of at least $10 billion.

Azerbaijan had originally been due to bring Shah Deniz' second phase on stream in 2014, potentially providing the market with an extra 16 to 17 bcm per year – half the planned capacity of the European Union-backed Nabucco link. Realistically, Azerbaijan can ensure direct gas deliveries for Nabucco only after the launch of Phase II of the Shah Deniz project.

Meanwhile, official representatives of SOCAR declared in mid 2010 that the main reason for postponing the date for the start of production at Shah Deniz II to 2016 and even 2017 from the previous date of 2014 was the absence of a transport and price agreement over gas supplies to Turkey. This came after almost two years of negotiations with Turkey on transit and supply terms that have so far delivered no results. This is one of the main reasons Azerbaijan has meanwhile made gas deals with Russia, thereby undermining the prospects of Nabucco to get gas from Azerbaijan. Azerbaijan wants to raise the current price of $120 per 1,000 m3 which it charges to Turkey from Shah Deniz I to $200. Turkey has also yet to decide on the volumes of gas it will need for its own future consumption. Azerbaijan and neighboring Georgia could probably use about 4 bcm from Shah Deniz II, which leaves 12 -13 bcm to be exported to Turkey and Europe.

But the Russian Federation is also targeting Phase II as one of the suppliers for its South Stream pipeline. Russia seeks to increase its imports of Azerbaijani gas to the maximum possible extent so as to reduce the volumes available to Nabucco. Gazprom signed an agreement at the beginning of September 2010, firstly to increase their consumption volumes to 1 bcm for 2010 and 2011, secondly to purchase more than 2 bcm of gas from Azerbaijan after 2012. This agreement does not mention exact volumes that Russia will receive from 2012, but it gives a very dangerous signal to Europe. If the Interconnector Turkey-Greece-Italy (ITGI) and Trans-Adriatic Pipeline (TAP) projects, which run toward southern Italy, succeed in obtaining gas from Shah Deniz (and TAP has already made clear it is targeting Shah Deniz), Nabucco could lose the 8 bcm of volumes it is counting on from Azerbaijan. All of this happened only because Nabucco shareholders didn’t give a clear invitation to Socar to participate in the pipeline project either by offering to buy a share or at least through a pricing agreement. Even though political statements from Baku officially voice support for Nabucco, Azerbaijan assesses the prospects of this project pragmatically and it is not too optimistic about it.

To make matters worse for Nabucco, Azerbaijan together with Romania and Georgia has launched an LNG project on the shores of the Black Sea, also known as the Azerbaijan-Georgia-Romania Interconnector (AGRI). AGRI envisages transporting Azerbaijani gas by pipeline to Georgia’s Black Sea coast, where it will be liquefied, shipped by tankers to Romania’s coast, re-gasified and delivered into Romania’s pipeline system and onward to EU territory. Initial estimation of volumes to be transported is around 1.5 bcm with potential plans to increase up to 4 bcm. This project is still in the planning stage, though. It is not certain yet that it will fly.

Ironically, all the shareholders of the various projects discussed above regard their projects as part of the planned “Southern Gas Corridor” for Caspian gas to Europe. At the same time none of the projects has been finalized yet. This means that Azerbaijan is in a position to call off the start of Phase II of Shah Deniz, citing the financial and technical instability of Nabucco and the other projects. It also means that whoever will help Azerbaijan solve its dispute with Turkey and arrange a proper deal for the European market will surely acquire volumes of Phase II. As of now, Russian is the only partner which is steadily buying Azeri gas, both guaranteeing acceptable prices and increases in volumes. The lack of cooperation between European consortiums and their unwillingness to see Azerbaijan as an equal partner will in the end carry a heavy price tag.