Caspian Region in Focus

From the Kashagan project in Kazakhstan to the Galkynysh (formerly South Yolotan) in Turkmenistan, this month, we revisit’s the Caspian and gauge how the region, whose growth was previously stifled by political in-fighting and physical extremes has fared.

In the immediate term, the Kashagan oil field – considered the largest discovery in the world for 30 years – presents a very positive picture, and could be producing oil to the tune of 370,000bpd by the end of 2013, and up to 1.5mbpd when running at full capacity.

Discovered in 2000 and located in the northern part of the Caspian Sea, it is estimated the Kashagan field has recoverable reserves of about 13 billion bbl of crude oil.

But this is not easy oil. Extreme temperature variations (ice during winter and a fluctuation from -35°C to 40°C, shallow water and high hydrogen sulphide concentration equates to one of the world’s most challenging oil projects. It is also estimated to be the most expensive at around $116b.

Unsurprisingly, given the sheer scale and complexity of the project, and vast financial implications, a number of oil majors are connected to the project.

Following an initial exploration programme by the Kazakhstan government in 1992, the Kazakhstancaspiishelf was formed in 1993, it consisted of Eni, BG Group, BP/Statoil, Mobil, Shell and Total.

These players have altered slightly in the intervening years, with BP/Statoil selling its stake to the remaining partners in 2001, and in 2004 the Kazakshtan government bought half of BG’s stake in the contract, with the remainder being shared out among the five Western partners in the consortium. The agreement was comprised of Eni (16.81%), Royal Dutch Shell (16.81%), Total (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), Conoco Phillips (8.4%), and Inpex (7.56%).

In November 2012, India’s ONGC Videsh agreed to buy ConocoPhilips’ stake, which remains subject to the approval of Kazakhstan’s and India’s government.

A decision on this sale is expected on July 2, said Kazakhstan’s Oil & Gas Minister Sauat Mynbayev in May. ConocoPhillips expects to sell its stake for around $5b. However, as Oil & Gas Middle East went to press there were reports that China was emerging as the front runner in the bid, as its considerable financial potential to participate meant it is better placed.

Another decision is pending on oil production at Kashagan, with the latest information indicating oil production might be postponed from June to early September, according to Kazakh Minister of Economy and Budget Planning, Yerbolat Dossayev.

Kashagan covers an area of 5,500km² and consists of five separate fields, including Kashagan SW, Kairan, Aktote and Kalamkas.

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The main development for field operation is a structure called Island D, connected with 12 oil wells and consists of two trains of production, separating oil and gas. Oil is transported to onshore by a 92km long pipeline.

Production at the Galkynysh gas field is also expected to commence imminently, with the latest information indication June 30. Discovered in Turkmenistan in November 2006, it is considered the fourth or fifth largest gas field in the world with estimated reserves of between 4 and 14tcm of natural gas. China’s CNPC, South Korea’s LG International and Hyundai Engineering and the UAE’s Petrofac Emirates are developing the field.

Turkmenistan has drafted plans to run a pipeline across the Caspian to Azerbaijan, and to the EU to ease the region’s reliance on Russian gas. Unsurprisingly, Russia – one of the five Caspian states – has opposed the route, stating it would damage the ecology of the Sea – a notional objection since it is widely accepted that Russia would miss out on sizeable injection of cash as the route currently runs across Russia.

Known as the Trans Caspian Gas Pipeline, it would also include a connection between the Tengiz field in Kazakhstan and Turkmenbasy. On 12 September 2011, the EU Foreign Affairs Council agreed to give a negotiating mandate to the European Commission for negotiations with Azerbaijan and Turkmenistan on the Trans-Caspian Gas Pipeline.

On 3 September 2012 after the European Commissioner for Energy, Gunther Oettinger, Turkish Energy Minister Taner Yildiz, and Azerbaijani and Turkmenistani officials in Ashgabat, Yildiz stated that Turkey will buy gas from Turkmenistan through the Trans Caspian Gas Pipeline.

The projected capacity of the pipeline is 30bcm of natural gas per year at an estimated $5b. In Baku, it would link to the South Caucasus Pipeline, and through this with the planned Trans-Anatolian gas pipeline.

In a statement during the fourth International Gas Congress, which opened in Ashgabat on May 21, President Gurbanguly Berfimuhamedov, said ‘Our country has abundant gas reserves. While serving the interests not only of the Turkmen people, but all mankind, these resources are of great importance for developing the economy of the country and increasing its role in the global system of world economic relations.”

There can be no doubt that a region with projects on the scale of Kashagan, Galkynsh presents firms with a plethora of opportunities.

As Peter Predescu of Confind said, the Caspian is a key area for the firm going forward: “As a manufacturer of oilfield equipment the Caspian is of great interest to us. In particular if you consider the upstream investments we have seen over the past few years, it is clear there is positive sentiment and business in the area for firms like ours is on the up.”

He added, however, that such investment not only encourages new projects but makes it very attractive for similar firms and one of the ongoing challenges is to get a piece of the business.

“As I said, the market has to be considered a pivotal one, and there will be opportunities within for many years to come. Due to the multiple field of activities it is certain that the number of players will increase going forward.”

There should, however, be a sizeable volume of work to secure a piece of in coming years with other projects such as BP’s development of the Azeri fields, the Shah Deniz gas field and the Chirag Oil Project. Crude oil production at the BP-operated Azeri-Chirag-Guneshi field complex offshore Azerbaijan has stabilised at 660kbpd.

“There will be further trends in drilling and production,” said Predescu. “And overhauling of the wells will likely increase in the next two to three years. Therefore, for us it will offer a great challenge to assist and provide our experience in manufacturing the equipment for drilling our wells, for overhauling and for production.”

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The success of Caspian upstream projects are not exclusive to the region either. At a recent industry conference in Baku, Azerbaijan, EU Energy Commissioner, Guenther Oettinger detailed the essential role Azerbaijan will play in gas supplies to Europe, in a message to the attendees.

In particular, he noted the progress that was made in realising the Southern Gas Corridor – the series of planned links that aims to diversify the source and route of energy supply into Europe.

Speaking at the same session, the US Deputy Assistant Secretary of State for Energy Diplomacy Amos Hochstein affirmed its support for the implementation of the Southern Gas Corridor.

According to the UK Prime Minister Trade Envoy to Azerbaijan, Kazakhstan and Turkmenistan, Charles Hendry, the decision, he added is of strategic importance to the diversification of the UK’s energy supply. BP alone has invested $25b in Azerbaijan alone. A decision on the new pipeline route is expected to be made by June 28 of this year.

Located in Azerbaijan, the Shah Deniz gas field is the country’s largest. Situated in the South Caspian Sea, 70km southeast of Baku, it is located at a depth of 600m.

Reserves of the Shah Deniz field are estimated at between 1.5 to 3bboe from 50 to 100bcm of gas. Speaking on June 21, after meeting the European Commission President, Jose Manuel Barroso, Ilham Aliyev said that Azerbaijan hopes to supply the EU with greater volumes of gas than that available from the Shah Deniz 2 project, with more than 2tcm of proven gas reserves.

The consortium developing the field is considering both the Trans Adriatic Pipeline and Nabucco West for gas export. A final decision is planned for June and a final investment by October 2013.

For many years considered an impossible idea, the Southern Gas Corridor could initially bring 10bcm to Europe by 2019, and in the medium term, the corridor could cover more than 10% of Europe’s annual needs.

The Trans Adriatic Pipeline (TAP) is a natural gas pipeline project. The pipeline will start in Greece, cross Albania and the Adriatic Sea and come ashore in southern Italy, allowing gas to flow directly from the Caspian region to European markets.

TAP offers the shortest and most direct link from the Caspian region to the most attractive European markets with the most attractive gas tariffs. On June 21, the Greek Government and TAP agreed the Host Government Agreement in Athens.

Kjetil Tungland, TAP’s MD, stated: “We have now all necessary political agreements in place for the Shah Deniz decision. I remain absolutely confident that our proposal is the strongest from the technical, commercial and political points of view, with the overwhelming support of the host governments.”

Rikard Scoufias, TAP’s country director for Greece, said, “This achievement has resulted not only in an important component for securing Greece’s and TAP’s bid for the Southern Gas Corridor, but also constitutes an international benchmark for expediency in terms of establishing a positive investment climate.

With the support provided by the Greek Government, as well as the Greek Parliament, I feel that we are well on our way to deliver a project that will have notable positive impact on Greece, the region as well as European energy objectives.”

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Nabucco-West will begin at the Turkish-Bulgarian border, traversing Bulgaria, Romania, and Hungary and end at the Central European gas hub, Baumgarten, in Austria. The capacity of the 48” diameter, 1329km is scalable between 10-23bcm.

The Nabucco West pipeline will enhance interconnectivity and diversification within the European gas market, connecting the gas transmission grids of the Balkan region, South Eastern European countries and Western and Central European countries with a liquid market at Baumgarten.

In a recent statement, Reinhard Mitschek, CEO of Nabucco Gas Pipelines said, “The political support, along with the strong interest in the Nabucco Open Season for capacity booking, shows that there is considerable demand for Caspian gas transported via Nabucco. The support of Turkey, as an important transit partner for Caspian gas to Europe is a key advantage.”

Strengthening the pipeline’s position on June 19, Nabucco welcomed the declaration of support from the Presidents’ of Austria, Bulgaria, Hungary and Romania.

One glance at the multi-national element of the contractors, developers and producers involved in the region demonstrate the competition firms are up against. Not only the traditional oil & gas players from the West and Middle East, but Asia.

A trend that is not, according to Predescu, that uncommon. “The competition with companies from South Korea and China is not just specifically related to this market, but is a global trend. We as a manufacturer in the oilfield business for more than 20 years consider such competition normal and can really only benefit the customer,” he said.

And whilst it’s difficult to predict too closely what the next 12-18 months will bring, Predescu expects challenges relating to the drilling and overhaul of onshore wells to play a key role.

With the imminent decisions over the gas pipeline route, coupled with tangible production dates at major oil fields Kashagan and Galkynysh, there is no doubt that progress in the Caspian is ongoing. The next objective for Middle East oil and gas players is to ensure they are well-positioned to capitalise on future investment.

The Caspian Sea is a 700-mile body of water in central Asia bordered by Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. Among the five nations, only Iran is a member of the Organisation of Petroleum Exporting Countries. Azerbaijan, Kazakhstan and Turkmenistan became independent when the Soviet Union dissolved in 1991 following the fall of communism.

Historically the Caspian region has produced oil and natural gas, but the region is considered to have large resources of oil and gas capable of much greater production. Today the oil in the Caspian basin is estimated to be worth over $12 trillion. Following the collapse of Russia and opening up of the region, intense investment and development has followed by international oil companies.

Turkmenistan has oil reserves of 600mbbl and gas reserves of 8tm³. Azerbaijan has oil reserves of 7bbbls and gas reserves of 1.2tm³. Kazakhstan has oil reserves of 40bbbl and gas reserves of 1.8tm³.

The total recoverable hydrocarbon reserves of the Caspian basin, excluding the Iranian and Russian sectors, represent 6% of global gas reserves and 4% of global oil reserves.
Turkmenistan’s gas reserves are the fourth largest in the world after Russia, Iran and Qatar.
The region has been affiliated with exploration for many years. The world’s first offshore wells and machine-drilled wells were made in Bibi-Heybat Bay, near Baku in Azerbaijan.

In 1873, exploration and development of oil began in some of the largest fields known to exist on the Absheron peninsula near the villages of Balakhanli, Sanbunchi, Ramana and Bibi-Heybat.
Total recoverable reserves were more than 500m tonnes. And by 1900, Baku had more than 3,000 oil wells, 2,000 of which were producing at industrial levels. By the end of the 19th century, Baku was known as the ‘black gold capital’.

The Southern Gas Corridor is an initiative of the European Commission for the gas supply from Caspian and Middle Eastern regions to Europe.

Together, the various pipelines in the Southern Corridor project could provide the necessary transportation capacity to deliver 60 to 120bcm/a of Caspian and Central Asian gas that the European Commission aims to bring directly to Europe.