Lower Output Forecast As BP Row Levels Off

BMI View: In the wake of ongoing operational challenges at the ACG fields which support the majority of Azerbaijan's oil production, we have further downgraded our forecasts for oil production to 890,000b/d for 2012. While we now expect lower output from the ACG over the duration of our forecast period, our long-term outlook for Azeri oil production remains largely unchanged. We continue to expect production to peak in 2019 at a revised figure of 1.15mn b/d and gradually decline from that date onward. Moreover, with the BP-Baku row now diffused, we remain bullish in our outlook for the country's gas sector, as Shah Deniz II and accompanying midstream infrastructure remain on track for first gas in 2017.

In the wake of the row between Azerbaijan and UK major BP over faltering volumes from the key Azeri-Chirag-Guneshli (ACG) fields, we have further downgraded our forecast for oil production. While we lowered our forecast for 2012 to 907,000 barrels per day (b/d) in our most recent review of Azeri oil production, recent developments and data have resulted in a further downgrade of oil production to 890,000b/d for 2012. Our data indicates that ACG accounts for nearly 80% of the country's total production, and after peaking at 823,000b/d in 2010, output has struggled in recent years.

Our revision extends beyond 2012, as we are no longer expecting a mild recovery in output from the fields in 2013, but rather relatively flat volumes. This suggests the problems that began in the field in 2011 will continue to weigh down Azerbaijan's overall production until at least 2015, and that original production targets may have now been too ambitious. First oil from the Chirag Oil Project (COP), part of the ACG complex, should help to offset problems at other fields in the BP-led development as production ramps up from late 2014 onwards.

The long-term outlook for Azeri oil production remains relatively unchanged; we expect overall production to peak in 2019 at 1.15mn b/d and gradually fall over the duration of our forecast period to 2021. Despite tough comments initially from President Ilham Aliyev, who was pointedly critical of BP for 'grave errors' that led to falling volumes and unmet production targets, cooler heads seem to have prevailed, with the UK international oil company (IOC) maintaining its operatorship of the field - one of the largest in its portfolio.

Output Falters As Peak Production Approaches
Azerbaijan Oil Production & % chg y-o-y ('000b/d)

Oil Falls, Gas Rises

Moreover, while we have lowered the contribution we expect ACG to make to total production - in part based on revised output targets from BP and its partners on the field, Chevron and Statoil - we may revisit these figures as plans advance for new investment at the site to satisfy Baku's concerns. However, with the production sharing agreement (PSA) at the site set to expire in 2024, current contractual terms may not make substantial new investments economical. Although US independent Hess sold its small stake in ACG for US$1bn to India's ONGC in September 2012, the technically challenging conditions of the field would have complicated any efforts by Azerbaijan to bring in a new operator; moreover, it would have created uncertainty in the country's upstream sector at a critical time.

The intensity of the initial criticism levelled at the UK major reflects the importance of oil revenues to the country's economy, while the softening of the government's stance highlights the important role BP plays in its oil and gas sector - particularly with BP leading the Shah Deniz (SD) project. The second phase of this project will support a near doubling of the country's natural gas production from our 2012 estimate of 17.7bn cubic meters (bcm) to 35bcm in 2021. With a decision expected in 2013 on a pipeline to deliver the gas directly to European markets and first gas from SDII in 2017, we remain bullish in our forecasts for the country's gas sector.

Strong Gas Growth To Power Azerbaijan Into Future
Natural Gas Net Exports, Production & Consumption 2007-2021 (bcm)
This article is tagged to:
Sector: Oil & Gas
Geography: Azerbaijan

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