Implications of Absheron

Total’s announcement in September of a major discovery of natural gas in the Azerbaijani offshore block of Absheron has highlighted the importance of the Caspian Sea region in the global hydrocarbons markets. However, a number of obstacles remain in the path of development projects, including operational difficulties, legal implications and geopolitical relations.

The Absheron X-2 block could produce billions of cubic metres of natural gas with Total hoping to find 350 billion m³ of gas and 45 million tonnes of associated gas condensates. One exploration well will be drilled during a three-year exploration period; the field had previously been explored by a Chevron-led consortium but the deal was subsequently terminated as Chevron found the deposits to be non-commercial. This most recent discovery takes Azerbaijan’s total proven gas reserves to 2.55 trillion m³, indicating that Azerbaijan has the potential to become a major global gas exporter.

Azerbaijan

For a country that received over 60% of its annual GDP from hydrocarbons in 2010, the Absheron discovery represents a significant boost to its revenue. Despite efforts to diversify its economy, Azerbaijan remains reliant on its reserves of natural resources to support state spending and investment in infrastructure. The state is heavily involved in exploration and production of oil and gas reserves through state-owned oil company SOCAR, which holds a 40% stake in the Absheron project.

In June, SOCAR announced that the country would have 25 - 30 billion m³ of gas available for export by 2020 - 2025. Currently, the bulk of the country’s gas sales go to Turkey and Russia, although Azerbaijan could substantially increase its sales with the construction of the EU-backed Nabucco pipeline, which would link the Caspian gas fields with southern European markets. Nabucco aims to transport 31 billion m³ per year from Central Asia via Turkey and south-eastern Europe into Austria and western Europe. Analysts had previously suggested that the only immediately available gas would be 10 billion m³ from the Shah Deniz field; the Absheron discovery could now stem concerns regarding supplies for the project. EU representatives visited the region earlier in September to discuss a trans-Caspian pipeline which would support the Nabucco project. It would allow Europe to lessen its dependence on Russian supplies, particularly important as Russia is increasingly looking to increase its control of Belarusian and Ukrainian transit routes, and on North African production, which has been interrupted by the Arab Spring.

Operational difficulties

The development and expansion of reserves in the region is not without difficulties. Due to the shortage of floating rigs in the Caspian, the production of gas from the Absheron field is not due to begin until 2021-2022; even if a fixed platform were to be installed, production would not start for another five to six years. New rigs are currently under construction in the region, and SOCAR announced in August that the construction of two new floating rigs had started, which will be needed both for the Umid gas field discovery and for new exploration operations in the Absheron field. Reserves of 200 billion m³, the largest discovery since Shah Deniz, were discovered in the Umid field in November 2010, for which an offshore platform had to be constructed for the want of vacant drilling rigs.

Until the collapse of the Soviet Union, the Caspian was regulated by treaties signed between the USSR and Iran, none of which established a maritime boundary or a division of rights to exploit resources. Since the creation of three new independent states around the Sea, Azerbaijan, Kazakhstan and Turkmenistan, there has been little progress in establishing a multilateral legal framework governing the use or development of the sea’s oil and gas reserves, or of sovereignty rights. Although numerous bilateral agreements have been signed, a comprehensive agreement regarding sovereign rights over the Sea remains elusive and countries are at odds as to how the Caspian should be divided. Such differences continue to impede developments in the Sea, including the trans-Caspian pipeline project, which has been hindered by its uncertain legal status. Geopolitical relations in the region can often be strained, and will not be aided in the future as many of the littoral states look to increase their military capabilities in the Caspian basin. Russia has indicated that its Caspian Sea Flotilla is to receive five new vessels by the end of 2011, and 16 in total by 2020. Iran is planning to add 75 new vessels to its Caspian fleet, and Turkmenistan is to establish its first naval college on the Sea.

Author: Louise Taggart is an Intelligence Analyst at AKE Group Ltd, a global security and risk management firm. For more information on AKE’s services please email intel@akegroup.com phone: +44 (0)20 7816 5454 or view the website www.akegroup.com

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