BMI View: Reports that Statoil is in talks with Azerbaijan over the development of significant untapped offshore gas discoveries underscores our bullish outlook for Azeri natural gas production. Strong European interest in diversifying its sources of imported gas will support continued investment in exploration and production activity across the country's offshore gas resources.
Norwegian national oil company (NOC) Statoil is to reportedly partner with Azerbaijan's state - owned State Oil Company of Azerbaijan Republic ( SOCAR) regarding the development of the Umid, Babek, Zafar and Mashal Caspian Sea gas prospects. Umid, discovered in 2010, has estimated reserves of 200bn cubic meters (bcm) and 40mn tonnes of condensate. SOCA R officials are even more bullish with regard to potential reserves at the Babek (or Babak), with the company suggesting the largely untested prospect may contain some 200 bcm to 400bcm and sizable condensate volumes . In November 2012, it was reported that SOCAR was planning to begin exploratory drilling across Babek in 201 6 .
The Umid discovery was the first independen t find made by SOCAR in decades and followed the failure of a drilling campaign to materialise after ConocoPhillips and Target Petroleum were awarded the rights to the block . Previous SOCAR estimates suggest that gas production from th e Umid and Babek finds could support output of 14 - 15bcm per annum. If achieved, these volumes would be just below the 16bcm output that the Shah Deniz field is set to reach after development of its Phase II , deliver ing additional gas to Europe from 2017.
Consequently, the development of new fields would pose upside risk not only to the Azeri economy, but also to European efforts to diversify gas import sources and develop the Southern Corridor as a sizable contributor to the European energy market. For Statoil ( w hich already has a presence in Azerbaijan's flagship oil and gas projects, the ACG field and the Shah Deniz project ), leading the project to develop Umid would be the company's first opportunity to take on the role of operator rather than partner. With its experience in Azerbaijan's upstream, the NOC would be well place d to take on such a challenge.
Meanwhile, BP , which is the operator at many of Azerbaijan's key existing upstream project s , may well end up with a role in the project if it makes the case for leading any future development. However, r ecent problem s in output from the ACG oil fields, which erupted in a dramatic public row between the UK major and Azeri President Ilham Aliyev, and cost overruns at the Shah Deniz full field development project, may leave BP too taxed to take on the role of ope r ator at another major project in Azerbaijan.
Talks regarding developing new offshore gas discoveries are evidence that Azerbaijan intends to make good on plans outlined by SOCAR head Rovnag Abdullayev in December 2012. Abdullayev announced plans to develop recent discoveries at Absheron (150-300bcm resource estimate), Umid, Babak, and also to extract deep gas from the ACG fields. These comments and the resource estimates for the country's recent gas discoveries reinforce our bullish outlook for Azerbaijan's gas sector. Given cost overruns, delays and the technical challenges to other upstream projects in the Caspian Sea, we highlight downside risks; however, given our expectation of continued strong interest in Azeri gas from Europe, we see significant upside risk to the country's gas sector.
|New Fields Generate Upside To Strong Growth Outlook|
|Natural Gas Production, Consumption & Net Exports (bcm)|