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Azerbaijan: Gas Discovery Disappoints Caspian Oil Seekers

  • Michael Lelyveld

Boston, MA; 21 June 1999 (RFE/RL) - Despite a series of positive reports this month about a project in the Caspian Sea, there is little reason for U.S. planners to be pleased about the latest discovery of gas off the coast of Azerbaijan, analysts say.

The first well drilled at Azerbaijan's offshore field known as Shakh Deniz has found vast amounts of gas. On June 10, President Heydar Aliyev hailed the results at a meeting of his security council, saying the field now appears to hold 700 billion cubic meters of gas and 400 billion cubic meters of gas condensate. The amounts are nearly twice as much as first estimated, he said.

But the news is seen as disappointing to those who were hoping to strike oil. A new oil discovery would have helped to justify the cost of building a main export pipeline from Baku to the Turkish port of Ceyhan.

Industry officials have been waiting since late last year to hear the results from Shakh Deniz, a project started in 1996 under a contract valued at $2.5 billion. There have been at least two major concerns. The first is that some early estimates of the Caspian's total oil reserves may have been overblown.

Worries mounted last year after some wells discovered gas instead of oil. Two consortiums in the Caspian have closed after finding insufficient quantities of oil. Analysts say that if Shakh Deniz also turns out to be primarily gas, it may be a sign that nearby fields do not contain oil.

The second concern has been for the commercial viability of the Baku-Ceyhan plan. Shakh Deniz was seen as a potential source of oil that could help fill the line to its capacity of one million barrels a day, adding its volume to that of the Azerbaijan International Operating Company. So far, AIOC remains Azerbaijan's only offshore consortium that is producing oil.

"It hasn't helped the case for building a Baku-Ceyhan line," said an official of BP Amoco, which owns major shares in both AIOC and Shakh Deniz. The company is still hoping that oil will be found, although there has been no sign from the first well. Two more wells will be drilled in the Shakh Deniz field, but the results will not be known until the first quarter of next year, the official said.

Although the results from the first well were portrayed as crucial six months ago, recent news reports from the region have glossed over the importance of finding oil at Shakh Deniz. Instead, the reports have spoken of finding unspecified "hydrocarbons."

In fact, analysts say that the discovery of gas may not be a positive development for Azerbaijan. The country has promoted itself as the center of an oil boom, while neighboring Turkmenistan already has enormous unused and ready quantities of gas.

If anything, large quantities of Azerbaijani gas may pose problems. It is not clear what the country will do with huge volumes of gas. Azerbaijan's underground gas storage facilities for its own domestic consumption must be rebuilt at a cost of $270 million, Azernews reported this month.

The country is talking about becoming a gas exporter to Turkey, joining at least a half-dozen other producers that are already competing for the Turkish market. The greatest risk is to Turkmenistan, which recently signed an agreement to supply gas to Turkey with a trans-Caspian pipeline that would run through Azerbaijan.

But because Azerbaijan is closer to Turkey, the republic is likely to seek greater access to the pipeline for its own gas as a condition of transit, analysts say. The result is that Turkmenistan's share of the pipeline export capacity could be squeezed over time as Azerbaijani gas supplies grow.

Plentiful gas from Shakh Deniz could also depress prices for other producers, if the resources are developed. The competition could be especially hard on those that must export over longer distances, like Turkmenistan. Promoters of the trans-Caspian gas line say that it could be open as soon as 2002, but Azerbaijan and Turkmenistan are still feuding over their Caspian border, which the pipeline must cross. U.S. diplomats have been working to resolve the issue.

In the past week, officials of the joint-stock company Azerigas have also claimed that the Soviet-era pipeline from Iran through Azerbaijan to Georgia is still in good condition and could be used for exports to Turkey, Azer-Press said. Azerigas indicated that the pipeline could even carry gas from Turkmenistan. U.S. analysts' maps show the line from Iran into Azerbaijan as inactive. But the idea suggests that Azerbaijan is now turning its attention to gas exports because of the results from Shakh Deniz.

The problem for U.S. strategy is that it has largely relied on notions of specialization. Azerbaijan has been seen as an oil producer, while Turkmenistan is viewed as a source for gas. The U.S. designs for a Baku-Ceyhan oil line and a trans-Caspian gas line from Turkmenistan may now both be at risk if Azerbaijan turns out to be a producer of more gas and less oil than originally planned.

The question is whether pipeline plans will be flexible and commercial enough to absorb the changes in the outlook for the Caspian. So far, finding pipeline solutions has proved even harder than finding oil.