In five years: what is there to expect from Azerbaijani oil?

The peak of oil production was registered in Azerbaijan in 2010 at 50.8 million tons, of which 40.6 million was extracted from the bloc of offshore fields Azeri-Chirag-Guneshli (ACG).

The price of production decline. Accroding to the estimates of the Centre for Oil Studies Caspian Barrel,  during the past five years the pace of oil production decline in Azerbaijan was in average 17.5% a year and in 2014 it totaled 41.9 million tons. The oil production in the country declined by in average 1.78 million tons or 13 million barrels a year.

Between 2010 and 2014 oil extraction decline on the contract area Azeri-Chirag-Guneshli (operated by BP) has strongly influenced oil production in Azerbaijan. During the past five years the pace of production decline on ACG constituted 22.4%. As one can see, the production decline on ACG was ahead of the pace of decline in the country.

Oil production on ACG

     Oil revenues of the state have reached their peak in 2011. The oil revenues mean revenues of the State Oil Fund of Azerbaijan (SOFAZ). At present 95% of these revenues comes from the proceeds from sales of oil extracted from the ACG contract.

    Why did the peak of oil revenues fell to 2011,  because that year production decreased by 12.8%? That time the production decline was compensated by rise in oil prices at the world markets. According to the BP Statistical Review of World Energy, if in 2010 average Brent oil price was $79.50 per barrel, after a year it totaled $111.26. This means that rise constituted 39.9%.

As a result, in 2011 proceeds to the Oil Fund reached $19.8 billion and next year they started going down by in average $1 billion.

Table of incomes of Oil Fund of Azerbaijan

  One can see from this table that during last year revenues of the Oil Fund were equal to the incomes of 2010. This year the Oil Fund’s budget will have a great deficit and its incomes will significantly decrease. According to the budget approved by SOFAZ, its incomes are forecast at 10.246 billion AZN ($13.1 billion at the old exchange rate of 0.78 AZN per 1 USD), if average export oil price would have been $90.00 per barrel. If average oil price is $60.00 per barrel and oil production declines in the country by more than 1 million tons, then revenues of the Oil Fund could expected to be about $8.5 billion, which means almost double reduction of the revenues.

What is next? At present 81% production of oil and condensate in Azerbaijan falls to BP-Azerbaijan and extraction on the main asset of the company – ACG- goes down, then one should not expect stabilization.

Azerbaijani geologists believe that since the first days the ACG contract area has been intensively exploited. As a result of that only the upper strata of the productive beds have been developed. From 2005 to 2014 263.8 million tons of oil was extracted on this bloc. Between 1997 and 2014 354 million tons of oil or 2,620,000,000 barrels of oil was been extracted on the ACG. Such an intensive oil production (especially between 2007 and 2010) has led to a sharp reduction of oil reservoir recovery. According to BP’s plans, in 2010 it was planned to increase production up to 1.2 million barrels a day (60 million a year, which is 50% more, than real production, but the plans have not been approved by the State Oil Company of Azerbaijan (SOCAR).

BP claims that in order to increase oil production, it is necessary to build another platform on the Azeri field. This will require billions of dollars. SOCAR has been watching the effect of the newly-built platform in early 2014 and $6 billion has been spent for that.

However, it is clear now that with the current pace of works till 2020 the production on the ACG contract area will go down to in average 4 million barrels a year (700,000-750,000 tons).

In five years the oil production in the country will total about 36 million tons. Therefore, at present the government needs to take urgent measures to restore the sectors of economy, which could bring profit to the   budget and feed the population. One can no longer hope for rise in oil prices, because the country has already lost $1 billion from reduction of oil production with stable oil prices. On the other hands, if in 2020 oil price reaches $100-110, then the real price will be $80.00 in the current prices.