REGION FOCUS: Unlocking the Caspian

Today the oil in the Caspian basin is estimated to be worth over US$12 trillion, and the total recoverable hydrocarbon reserves of the Caspian basin, excluding the Iranian and Russian sectors, represent 4% of global oil reserves and 6% of global gas reserves.

Even with a recent boom in production, there are still extraordinary opportunities in the region, and Middle Eastern firms are mixing it with global powerhouses.

Oil companies have flocked to the Caspian in the last two decades, where oil reserves rival Saudi Arabia’s and gas reserves rival Iran’s, without the headaches of sanctions and with the benefit of low tax rates and accommodating governments willing to offer long-term contracts.

Workforce Nationalisation

There are, however, local challenges to be met.

The policy of workforce nationalisation continues in the region, and presents challenges to companies seeking expert staff as projects continue to expand. Senior executives have described recruiting locally as a challenge, but one the larger players are meeting with comprehensive training programs.

Jimmy Larsen, Momentum Managing Director and CEO, told Oil & Gas Middle East “it’s part of to government initiatives to impart and teach the local teams the skills they need to do this for themselves. We’re happy to work within that framework”.

Topaz Energy and Marine CEO Fazel Falzelbhouy says his firm’s “ongoing training and knowledge transfer have allowed numerous nationals to take up senior positions both on board the vessels and in the shore-based organisation”.

The issue is not going away, so firms are investing heavily in training to bring local staff up to standard.

Water nuisance

The status of the Caspian Sea is a key problem, with various countries arguing it is either a lake or a sea – which has implications regarding international treaties – to suit.

There are also ongoing associated territorial disputes. Azerbaijan is an example; its continued territorial disputes with Armenia, Iran and Turkmenistan provide an ongoing ingredient of political risk.

Conflicting claims over the maritime and seabed boundaries of the Caspian Sea between Azerbaijan and Iran also provide continued uncertainty, with Iran insisting on an even one-fifth allocation and challenging Azerbaijan’s hydrocarbon exploration in disputed waters.

Bilateral talks continue with Turkmenistan on dividing the seabed and contested oilfields in the middle of the Caspian, while discussions with Georgia continue on the alignment of their boundary at certain
crossing areas.

Train to Georgia

Despite these issues, Azerbaijan’s global stature as a supplier of natural gas and oil can only increase.

The country now has keystone status in the region, resulting from the size and location of its reserves, which can reach the lucrative European market via Turkey and Georgia without traversing Russia or Iran.

BP is the most important producer in Azerbaijan, having got its foot in the door early after the fall of the Soviet Union. The Macondo disaster has spurred BP to focus on the Caspian as a future source of sustainable stable revenue.

In October last year, BP signed a major deal for the development of the Shafaq-Asiman gas field, in deep water 125 km south-east of Baku.

According to Socar, the state-owned oil and natural gas corporation of Azerbaijan, the gas field has estimated reserves of 17 trillion cubic meters.

When developed, the Shafaq-Asiman is set to rival current output at the mammoth Shah Deniz gas field. Shah Deniz is the product of a consortium of seven international oil companies and the Azerbaijani government.

BP and Statoil are the major 25.5% stakeholders, with BP acting as operator. At its maximum rate of production the field is expected to yield 8,600 bcmpa and approximately 50,000 barrels of oil equivalent a day of condensate.

Shah Deniz continues to expand under BP’s Full Field Development program, instigated after BP found the potential for a further 16 bcmpa of gas and 100,000 barrels of oil equivalent a day of condensate at the field not currently under production.

Engineering studies for thirty new wells are taking place over 2011. On completion, total output from Shah Deniz is slated to triple.

Oil and gas from the fields goes to the BP-operated 500 sq km Sangachal Terminal for processing, storage and export. The terminal has a current processing capacity of 1.2 million barrels per day and 1.25 billion cubic feet of gas per day.

To cope with a massive anticipated upswing in supply resulting from the Full Field Development, the terminal is to undergo a major expansion to enable the it to process an additional 16 billion cubic feet of gas per day.

To support this massive expansion, BP has laid more than 500 km of new pipeline and expanded the 700km South Caucasus pipeline to Georgia and Turkey to cope with more than 20 billion bcmpa.

In addition, the Umid gas field is being developed, and is likely to be the second highest-producing gas field in Azerbaijan when complete.

Azerbaijan is also benefitting from the re-routing of oil and gas transit from Iran. Dubai-based Dragon Oil had to make this transition in 2010, away from its existing arrangement with Neka in Iran to exports via Baku.
The company exported 10.8 million barrels of crude in 2010, suggesting a seamless switch, and won $200 million in new contracts.

Turkmenistan

Dragon Oil also had a record year off the back of major investment in Turkmenistan, recording end-of-year operating profit of $487.7 million on revenue of $780.4 million. Most of the firm’s oil is reportedly sold to the State Oil Company of Azerbaijan for re-export.

The Dubai-based $2 billion explorer has been in Turkmenistan for more than ten years. At the end of 2010, the firm reported recoverable reserves of 639 million barrels of oil and condensate, 1.6 trillion cubic feet of gas reserves (corresponding to 260 million barrels of oil equivalent) and 1.4 trillion cubic feet of gas resources.

Current offshore drilling is continuing to yield further reserves, which are quickly being exploited. Average daily oil production in January-March 2011 was 57,800 barrels of oil per day (bopd) in the first quarter, compared with 47,600 bopd a year ago.

CEO Dr Abdul Jaleel Al Khalifa said on announcing Dragon’s 2010 results: “we remain focused on three strategic areas: the accelerated development of the Cheleken Contract Area, gas monetisation opportunities and value-enhancing acquisition”.

Dragon Oil paid its first dividend in 2011, marking its transition to a mature regional player, according to Andrew Latto, Senior Research Analyst at Proactive Investors.

Investment in Turkmenistan is slated to continue, as the firm plans to complete 11 wells by the end of 2011 and then between 2011 and 2013 aim for 40 development wells which include five appraisal wells, at a cost of $600-$700 million.

The latest big story in the country is in gas: the South Yolotan field is now “easily the world’s second-largest gas field in terms of gas-in-place,” Peter Holding, GCA general manager for Russia and the Caspian announced at a recent Caspian conference.

The previous GCA estimate, conducted in 2008, said the field held between four trillion and 14 trillion cubic meters of gas and made Turkmenistan into the world’s fourth-largest owner of natural gas deposits. The field now ranks behind only Iran’s South Pars.

Holding declined to provide GCA’s audited reserve figure, to be released in June, but Turkmen government officials reportedly estimated reserves at South Yolotan to be equal to 21 trillion cubic meters.

Under ambitious plans proposed by Turkmen President Kurbanguly Berdymukhamedov, Turkmenistan will more than treble gas output to 230 billion cubic metres (bcm) annually by 2030, all but 50 bcm of which is to be exported.

Kazakhstan

Vast, landlocked and mountainous, Kazakhstan has the second largest oil reserves as well as the second largest oil production among the former Soviet republics after Russia. Latest estimates place total recoverable oil reserves at 30 billion barrels, around 3% of world total.

The lack of access to a seaport makes Kazakhstan dependent principally on pipelines to transport its hydrocarbons to world markets.

It is also a transit state for pipe line exports from Turkmenistan and Uzbekistan. Neighbors China and Russia are key economic partners, providing sources of export demand and government project financing.

Tengiz is currently Kazakhstan’s largest producing oil field, with recoverable onshore crude oil reserves estimated to be between six and nine billion barrels by project consortium leading IOC Chevron.

Tengiz has been in development since 1993 by the Tengizchevroil (TCO) joint venture, a 40-year, $20 billion agreement between Chevron (50%), ExxonMobil (25%), KMG (20%), and LukArco (5%) signed with the Kazakh government.

Production is predicted by the US government’s Energy Information Administration to increase to 800,000 bpd by 2016. Tengiz output is currently exported through the Caspian Pipeline Consortium oil pipeline, which runs from Tengiz to Novorossiysk, Russia on the Black Sea.

LUKoil remains locked in a shareholder dispute over the giant Karachaganak gas project in northwest Kazakhstan. Karachaganak, one of the world’s largest gas condensate fields, is estimated that the Karachaganak field contains 1.236 billion tonnes of liquids and 1.371 cubic kilometers of gas in place.

Karachaganak Petroleum Operating Group, a consortium of BG Group, ENI as owners, Chevron Corp, LUKoil partners due to operate the project until 2038, has said hydrocarbon output at Karachaganak fell to 133.7 million barrels of oil equivalent in 2010 from 139.4 million barrels in 2009.

In addition to it;s vast oil & gas wealth, Kazakhstan also contains Central Asia’s largest recoverable coal reserves, and is the second largest coal producer in the former Soviet Union after Russia.

Company profile: Logis

Since 1991 the Logis group – comprising four main businesses with ten 10 subsidiaries in Europe, Russia, Ukraine, the Baltic countries and Caspian region – has been specialising in the transportation of various equipment, heavy and oversised cargo, general-purpose cargoes, crude oil, and oil products.

The bulk of the Logis group’s operations are in the former Soviet states of Russia, Kazakhstan, Turkmenistan, Uzbekistan, and Ukraine.

Kirill Vishensky, CEO of the Logis group, spoke to Oil & Gas Middle East about the logistical challenges the region poses, and how his business overcomes them.

The Caspian sea is connected to the world’s oceans by a single deep waterway, the Volga-Don channel, which is only open from April to December each year, due to low temperatures and thick ice.

This poses a problem for companies that need to move cargo too large or heavy for conventional road and rail transport during wintertime.

Five years ago, Logis developed the Logis Multimodal Service LLC (LMMS) for, as Vishensky puts it, “fighting against Russian winter” by using alternative routes and multiple transport methods.

“This is very important, particularly for some categories of delicate and expensive equipment, and is less expensive than any other comparable service” says Vishensky.

Logis also runs the Gulf Caspian Line (GCL), a regular sea charter service from the Middle East to Atyrau and other Caspian sea ports. The new service is proving popular, as a company can load cargo to a Logis vessel at, for example, Jebel Ali port, and have it arrive in Atyrau in 35 days without intermediary shipments.

One of Logis’s major projects last year concerned the Atyrau port located in heart of Kashagan, between the huge Karachaganak and Tenguiz oilfields, Kazakhstan.

The port has been completely rennovated, expanding handling capacity and bringing the facility up to ISO standard. The port can now accept 500 ton sea/river vessels. New rail track will be added to connect the port to the CIS’ 250,000 km railway network, in addition to improved storage.

Two years ago Vishensky decided to establish a Logis office in Dubai Maritime City Free Zone.

“Quite a lot of Russian, Kazakh and other ex-Soviet Union counties companies are coming to Dubai, accelerating cooperation and trade turnover with UAE and Gulf countries” said Vishensky.

Company profile: Momentum

The Dubai-headquartered group has continued it success in the Caspian region on the back of providing innovative drilling and engineering solutions to increasingly cost-conscious contractors.

Momentum has over 25 years’ experience in the Middle East, and set foot in the Caspian region in the early 1990s, owning and operating three onshore drilling rigs in Azerbaijan. The rigs ranged from 750HP to 2,000HP with which Momentum drilled more than 300 wells.

The company established a regional hub in Baku in 1999 and a further office in Ashqabad, Turkmenistan in 2008. Jimmy Larsen, Managing Director and CEO, told December’s edition of Oil & Gas Middle East: “we certainly see the Caspian as a huge opportunity. It’s a dynamic market for us. ”

In 2010 Momentum netted a contract for the lease and management of a new jackup for Dragon Oil in Turkmenistan, due for completion in November 2011. Larsen says: “Momentum is the main drilling contractor responsible for the daily operation, management logistics and maintenance of the rig and base station”.

The project builds on a strong portfolio of rig management projects, including several in Azerbaijan.

Momentum are working with partners Yantai Raffles Offshore China and TSC Offshore China. “Yantia will carry out the rig construction and TSC will provide the drilling and related equipment,” explains Larson.

The Friede & Goldman-designed Super M2 jackup can operate in water 300ft and a drilling depth of up to 30,000ft in all weather conditions, in accordance with ABS assessment criteria.

It is being assembled in China in modules for assembly in the Caspian where it will undergo testing before deployment to the Cheleken Contact Area in offshore Turkmenistan. “The whole project is going really well” says Larsen.

Recently Momentum delivered and installed an offshore platform weighing more than 1,000 tonnes in 60 metres of Turkmenistan waters for Petronas, Turkmenistan.

The platform was installed in three sections; the first section weighing in at 400 tons was lifted and placed on the seabed using Momentum’s managed crane barge, the General Shikhlinsky.

Momentum has also developed a reputation for its refurbishing program, having completed refits for the ORIZONT, the FORTUNA, and the EEIV (nee BAHRAM) in the UAE, on time and to budget.

The firm is undertaking sub-sea hyperbaric welding of strengthening plates for repeat client Petronas, using processes developed and designed in-house by Momentum engineers.

Momentum also installed a 35 km, 30” sub-sea pipeline for Dragon Oil in the Turkmenistan waters using Momentum-managed pipe-laying barge.

Larsen said that the firm is also looking towards “exciting developments in Malaysia and Iraq”. These have been converted these into wins in 2011, the highlight being a contract to supply US giant Baker Hughes with a 750 HP drilling rig in Iraq.