Energy resources have provided a firm basis for economic development of Azerbaijan. Tremendous reserves that Azerbaijan’s fields contain in the Caspian Sea made it possible to meet the growing energy resource needs for a long period. The energy strategy of Azerbaijan has been considered from point of both the domestic needs of the country and the entire region as well as factors of energy demand increase in the world. Thus, it helped to ensure a long-term flow of currency earnings, paving a way toward sustainable development, and create safety cushions in case of decline of oil prices. The State Oil Company of the Republic of Azerbaijan (SOCAR) has always been a major driving force for implementation of oil-gas projects and starting from May has become an operator in AGSC and SCPC projects.
Southern Gas Corridor
Two important events occurred in the energy sector of Azerbaijan after the foundation laying ceremony of the Southern Gas Corridor (SGC) was held on September 20 of the past year. Upon the initiative of Azerbaijan, Baku hosted the first session of the Advisory Council of the Southern Gas Corridor on February 12 which brought together both present members, cooperating with Azerbaijan, and future members of the Southern Gas Corridor. Azerbaijan’s leading role was emphasized in the final statement made for the press.
The Turkish city of Kars hosted the foundation laying ceremony of the TANAP gas pipeline in March of this year, drawing attention of the global community. The TANAP project is an integral part of the Southern gas corridor which consists of 4 parts.
“TANAP is an important part of the Southern Gas Corridor. Azerbaijan is involved in the TANAP project implementation as a major shareholder. The operations are about to start and I believe that Azeri gas extracted within the framework of Shah Deniz II project is to reach Turkey in 2018”, President of Azerbaijan Ilham Aliyev stated in his address to the session of the Cabinet of ministers dedicated to the social-economic development of 1Q of 2015 and the forthcoming tasks.
TAP has been selected by Shah Deniz shareholders as a route for delivery of Azerbaijani gas to Europe. Gas to be extracted within the framework of Stage II of development of Shah Deniz field located in the Azeri sector of the Caspian Sea is considered as major source for the project. The initial capacity of the pipeline will total 10 bcm of gas per year with a potential for increasing the volume up to 20 bcm.
The Southern Gas Corridor provides a completely new energy map and Azerbaijan role is growing gradually. The European Commission has already put forward a number of proposals concerning the energy union, mentioning Azerbaijan as an important partner in the documents. “Azerbaijani gas is currently the only new source for the European space”, the head of state of Azerbaijan emphasized.
The Southern Gas Corridor is important for both Azerbaijan and SOCAR. Azerbaijan which has no access to the open sea has to ensure the most convenient, reliable and profitable transportation for its products. The pipeline transportation is the most favorable option for Azerbaijan. The TANAP pipeline, which shall connect Azerbaijan with the European Union markets, makes it possible not only to sell gas but also fulfill contract obligations on gas supply to the market which is regulated by competition laws and therefore not dependent on bilateral agreements signed between consumers and customers. Unlike many other examples when prices for fuel, transit tariffs and contracts on volumes are changed and dependent on agreements signed between producers, transit parties and customers, in case of Azerbaijan it involves long-term agreements on sale of gas and its transportation for 25 years. These agreements are reliable and beneficial for all parties and not subjected to any conjunctural changes by any certain party. In this way, Azerbaijan obtained an opportunity to sanction the start up of production and development of other fields in the Azeri sector of the Caspian Sea as well as to extend the carrying capacity of the SGC system up to a required level in order to supply markets with additional gas volumes which will be above the volumes of Shah Deniz II.
Project operator
The signing of documents to transfer the operatorship over the Azerbaijan Gas Supply Company (AGSC) and commercial operatorship over South Caucasus Pipeline Company (SCPC) to SOCAR in the head office of the State Oil Company early in May was the next important step on the way toward implementation of the project.
The transaction was completed as a result of the sale of the Norwegian Company Statoil’s 15.5% participating interest in Shah Deniz production-sharing agreement, 15.5% share in South Caucasus Pipeline Co. (SCPC) and 12.4% share in Azerbaijan Gas Supply Co. (AGSC) to Malaysian Petronas as well as in view of the final investment agreement on Shah Deniz II signed on December 17, 2013.
Transfer of operatorship in AGSC and commercial operatorship in SCPC to SOCAR has been a historical event and the following demonstration of trust of the international consortium members.
Foreign oil companies are highly appreciating SOCAR’s role in regional and global projects, and accepting it as one of the international companies.
Azerbaijan has also created a new scheme of financing for the Southern Gas Corridor projects. Azerbaijan’s President Ilham Aliyev signed a corresponding decree on February 25 establishing a new company (Southern Gas Corridor CJSC) for effective management of the following projects: the second phase of Shah Deniz gas and condensate field’s development, expansion of the South Caucasus Pipeline, Trans-Anatolian Gas Pipeline (TANAP) and Trans Adriatic Pipeline (TAP).
According to the decree, the State Oil Company of Azerbaijan Republic (SOCAR) has been assigned to create a closed joint stock company (51 percent state-owned and 49 percent owned by SOCAR) with an authorized capital of $100 million; to ensure effective management of projects; and ensure involvement in projects via the CJSC.
Resource base
Shah Deniz is one of the largest offshore gas fields in the world. With recoverable reserves that total no less than 1.2 trillion cubic meters of gas and 240 mln tonnes of condensate, the field is the basis of the Southern Gas Corridor. Nowadays, Shah Deniz I gas is being exported to Georgia and Turkey. After the launch of the Shah Deniz II project, production at the field, alone, will total over 25 bcm of gas in 2020. The investment decision of Stage II of the project was made in December 2013.
Taking into account the success gained at Umid (200 bcm of gas and 40 mln tonnes of condensate) and Absheron (350 bcm of gas and 45 mln tonnes of condensate) as well as gas reserves in the deep horizons of Azeri-Chirag-Guneshli and other fields, Azerbaijan will need an additional gas export route by 2020. The work on search for new gas export routes is already underway. There still remain many unexplored fields in Azerbaijan. Exploration will be continued on such fields as Shafag-Asiman (together with BP), Nakhchivan (together with RWE), Zafar, Mashal, Babek, etc. In particular, to ensure sooner fulfillment of this work, in 2013 SOCAR signed a memorandum of understanding with the Norwegian Company Statoil on promising structures as Zafar and Mashal. Within a year after its signing, the memorandum implies reaching agreement on major commercial principles and terms of the contract.
SOCAR, which has signed 18 PSA-type agreements with 25 companies from 15 countries, is successfully representing Azerbaijan in the global arena. SOCAR has been awarded ratings by all three rating agencies (Standard Poor’s, Fitch Ratings, Moody’s) recognized by international investors.
Along with broad-scale activities carried out within the country, SOCAR is expanding its presence abroad especially among neighbor countries. Georgia was the first country SOCAR invested into and is currently the single largest tax paying company in Georgia. Investments made by Azerbaijan in Turkey have exceeded those made by the Turkish party in Azerbaijan.
Besides, other large-scale plans are to be realized in Turkey. Notable among them are the TANAP to be built by 2018, ongoing construction of the Star Oil Refinery, expansion of the petrochemical plant Petkim as well as construction of a port in western Turkey. Other countries on the anvil of SOCAR’s expansion are Switzerland, Ukraine, Romania, the United Arab Emirates, Singapore and Vietnam.
At the global energy market SOCAR is rapidly growing international oil-gas company which develops successfully despite the change of conditions on the global market.
