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Thu 17 Jun 2010 04:00 AM

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Giant awakening

Demand for E&P work in the Caspian region is booming, and Middle Eastern firms are strategically located to cash in on the action.

Giant awakening
In winter, parts of the Caspian Sea freezes up.
Giant awakening
Total divisional president Darricarrere and SOCAR president Abdullayev.
Giant awakening
Foreign oil and gas firms are trying to get their share of business.
Giant awakening
An oil field in near Baku, Azerbaijan.
Giant awakening
Fazel Falzelbhouy is chief executive officer of TOPAZ Energy & Marine.
Giant awakening
A platform being towed to an offshore production field in the Caspian Sea..
Giant awakening
A platform supply vessel of the type used to supply BP’s developments off the Azeri coast.
Giant awakening
Jack-up rigs lie in waiting near the coast of Azerbaijan ready to be tranported to the oil fields near Baku.

Demand for E&P work in the Caspian region is booming, and Middle Eastern firms are strategically located to cash in on the action.

The Caspian Sea is a 700-mile body of water in central Asia bordered by Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. Among the five nations, only Iran is a member of the Organisation of Petroleum Exporting Countries (OPEC). Azerbaijan, Kazakhstan and Turkmenistan became independent when the Soviet Union dissolved in 1991 following the fall of communism. Historically, the Caspian region has produced oil and natural gas, but the region is considered to have large resources of oil and gas capable of much greater production.

The region has been affiliated with exploration for many years. The world's first offshore wells and machine-drilled wells were made in Bibi-Heybat Bay, near Baku in Azerbaijan. In 1873, exploration and development of oil began in some of the largest fields known to exist on the Absheron peninsula near the villages of Balakhanli, Sanbunchi, Ramana and Bibi-Heybat. Total recoverable reserves were more than 500 million tons. And by 1900, Baku had more than 3,000 oil wells, 2,000 of which were producing at industrial levels. By the end of the 19th century, Baku was known as the ‘black gold capital'.

This centre of the oil industry came under the control of the Soviet Union in the 1920's following the Bolsheviks capture of Azerbaijan and confiscation of all private property - including oil wells and factories. By 1941 Azerbaijan was producing a record 23.5 million tonnes of oil and the Baku region supplied nearly 72 per cent of all oil extracted in the Soviet Union.

Today the oil in the Caspian basin is estimated to be worth over US$12 trillion. Following the collapse of the Soviet Union and the opening up of the region, intense investment and development has followed by international oil companies. Former US Vice President and Halliburton chief executive officer Dick Cheney commented that he could not "think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian."

Bernard Gelb, specialist in industry economics writing in a CRS report for Congress in 2006 said it is likely there are large reserves of crude oil and natural gas production in the area.

"There is a likelihood of much greater additional reserves of crude oil and natural gas being found in the Caspian Sea region. This is supported by the fact that a number of oil companies have large stakes here. Much of the known reserves have not been developed yet, and development usually leads to discovery that prospects are larger than originally estimated. Moreover, many areas remain unexplored. It is estimated that an additional 184 billion barrels of crude oil reserves are possible, which would raise the total to almost five times its present level."

If proved, the report added, such a level of reserves would almost equal the amount held by Saudi Arabia and would come to about 15 per cent of world reserves.

However, the report also stated that there were "obstacles to increases in the Caspian Sea region production of oil and gas that may slow development."
These obstacles derive primarily from status issues and the establishment of contentious water boundaries. Disputes between Azerbaijan, Turkmenistan and Iran could affect future plans to open up the region to the west.

In the immediate term this includes the proposed Trans-Caspian oil and gas pipelines, which would allow western markets easier access to Kazakh oil, and potentially Uzbek and Turkmen gas as well. While the US has granted its support for such schemes, Russia has opposed them, ostensibly on environmental grounds. It is worth noting that the pipelines would bypass Russia completely, denying it valuable transit fees and eliminating its current monopoly on westbound-hydrocarbon exports from the region.

The status of the Caspian Sea is the key problem. There are three major issues here: access to mineral resources, access for fishing and access to international waters. If a body of water is labelled as a sea, there would be some precedents and international treaties obliging the granting of permits to foreign vessels. If the body of water is labelled as a lake, then no such obligations exist.

According to a treaty signed between Iran and the Soviet Union, the Caspian Sea was recognised as a lake, which would be divided into two sectors and the resources shared. The line between the two sectors would act as an international border and the Soviet Union's sector sub-divided among the four littoral republics.

However, following the dissolution of the Soviet Union, not all independent states assumed continuation of the old treaty. Currently, Russia, Kazakhstan and Azerbaijan have reached agreement on delineating ownership of the Sea's resources or the rights of development. There is no agreement between Kazakhstan and Turkmenistan, while Azerbaijan and Iran are at loggerheads due to joint claims over oil fields.

In summary, Turkmenistan has oil reserves of 600 million barrels and gas reserves of 8 trillion cubic meters. Azerbaijan has oil reserves of 7 billion barrels and gas reserves of 1.2 trillion cubic meters. Kazakhstan has oil reserves of 40 billion barrels and gas reserves of 1.8 trillion m³. The total recoverable hydrocarbon reserves of the Caspian basin, excluding the Iranian and Russian sectors, represent 6% of global gas reserves and 4% of global oil reserves. Turkmenistan's gas reserves are the fourth largest in the world after Russia, Iran and Qatar.

Despite the controversy, the region is a magnet for oil and gas firms. In 2008, Swedish firm Lundin Petroleum announced it had made a major oil discovery in the northern Caspian Sea at the Aptian and Neocomian sandstone reservoirs. The Morskaya-1 exploration well, situated in the Lagansky block, discovered a large accumulation of oil after drilling to a depth of 2,082 metres in water less than two metres deep.

"This is a world class oil discovery which has confirmed excellent prospectivity of the Lagansky block. It is clearly positive that the discovery is predominantly oil but based upon the data acquired it appears the size of the discovery will be below pre-drill estimated," said Ashley Heppenstall, Lundin's  president and CEO.

The Australian-headquartered firm Caspian Oil + Gas has six projects currently underway. These are at Mailisu III, with five exploration wells completed. Completion work on Mailisu III Number 2 well is expected in May. Charvak, where deeper prospects have been identified by a seismic survey completed in mid-2009, is another. Ak-Bura, Sulukta and Katran complete the remaining projects.
In April, the company announced that following the resumption of operatorship of the company's Kyrgyz assets, it had identified a total of 25 prospects and leads with prospective resources totalling 242 million barrels (mmbbl).

The opportunities range up to 55mmbbl mean prospective resource (unrisked) and an average of around 10mmbbl across the portfolio.

Consequently the company is now looking to farm out an interest in over 7,000 square kilometres of prospective ground in the Fergana Basin.

"A number of good opportunities have come out of our recent work. For example the West Mailisu 3 lead, which is 100 per cent Caspian owned, has the potential for up to 25bcf as well as 10mmbbls of oil," says Caspian chief executive officer Graeme Parsons.

"To evaluate its potential we have contracted Kyrgzgeophysika, a local geophysical company, to record additional seismic over the lead commencing in May 2010 with the view to drilling the prospect later in the year if the extra seismic confirms structural closure," Parsons added.

Dubai-based Topaz Energy and Marine continued to strengthen its presence in the Caspian region, with the delivery of the ‘Caspian Protector', a vessel that will be deployed in Azerbaijan in support of a 10-year $225 million BP contract won in 2008. The vessel will line up alongside existing ships; Caspian Server, which began operations in 2009 and the anchor handling tug supply vessel the Caspian Power, due for delivery later this year.

In addition, Topaz Energy and Marine announced in 2009 that its subsidiary, BUE Kazakhstan, had secured a $100 million contract to build, own and operate six specialised barges for Agip KCO in Kazakhstan. The deal will see BUE Kazakhstan operate the barges over a 10-year period to support Agip's development programme in the Kashagan field in the northern Caspian Sea.

Such lengthy contracts are beneficial in seeing out the recession, says Topaz CEO Fazel Falzelbhouy "In the Caspian market, oil majors and National oil companies typically award medium to long-term projects that grant Topaz strong earnings visibility and consistent cash flows. This made Topaz able to straddle the recessionary cycle and mitigated the effect of the downturn."

In Azerbaijan, the firm's anchor handling tug supply vessels and platform supply vessels actively support BP's development of the east, west and central Azeri fields in addition to the major Shah Deniz gas field. Upcoming projects in Azerbaijan include the Chirag Oil Project (COP) and Total's development of the Absheron field. Topaz also operates seven vessels offshore Turkmenistan in the Carigali field serving Petronas and Technip.

There are a number of oil majors, national oil companies and independents working in the Caspian through production sharing agreements, but the major operators are BP, Agip, Shell and Petronas.
The Kashagan oilfield is one of the largest hydrocarbon discoveries in the last four decades with estimated recoverable reserves of more than 10 billion barrels. The field is expected to double Kazakhstan's output to approximately 3 billion barrels per day. The whole project is expected to cost $136bn, with production due to start late 2012. The field is operated by an international consortium under the North Sea Caspian Sea Production Sharing Agreement. It is comprised of seven companies consisting of Eni, Shell, Total, ExxonMobil and KazMunayGas - all with a 16.8 percent stake - and ConocoPhillips (8.4 percent) and Inpex (7.5 percent).

Access to such an output is not without its challenges. "The project is facing immense technical difficulties such as high pressure, high hydrocarbon sulphide content, exceptionally shallow waters and extreme weather," says Fazelbhoy. These challenges also extend to politics, he added. "As with any region, Governmental policies affect business and it's important to understand the priorities of the political leadership. The organisation must be sufficiently agile to be able adjust itself to changing political climates and tax regimes. Because of our extensive experience operating from the Caspian we have built capabilities and relationships that allow us to effectively operate in the market."

Economic and political pressures aside, there is one further pressing issue in the region. "In the Caspian, the issue of workforce nationalisation is very important and is a definite Government priority," says Fazelbhoy. "Recruiting National seafarers is a challenge but it's an area where we have made great progress especially in Azerbaijan where Topaz now has over 90 percent workforce nationalisation."

"Ongoing training and knowledge transfer have allowed numerous Nationals to take up senior positions both on board the vessels and in the shore-based organisation. 100% of our marine crews in Azerbaijan are now local and are only supported by expatriate technical advisors to ensure compliance with our client's requirements. Topaz also contributes to the local economy by procuring the vast majority of its materials and services locally,' he added.

Dubai's Dragon Oil recently announced further details regarding two contracts awarded for the construction of two new platforms in its Cheleken Contract in off-shore Turkmenistan.The first was awarded for the construction of the Dzhygalybeg A platform, which will see up to eight wells drilled from the platform in the Zhdanov Field, due for completion in Q1 2012.The second was for a Dzheitune C platform, which, again will see up to eight wells drilled in the Lam field and due for completion in Q42011.

Dragon Oil expects to spend around $250 million this year and $600-700 million in total on infrastructure projects in the planning period 2010-2012.

Other key projects in the region include the controversial and drawn-out $5bn Trans-Caspian Oil and gas pipelines (opposed by Russia and Iran) and the Nabucco pipeline (a proposed pipeline from Erzurum in Turkey to Baumgarten an der March in Austria), which would diversify natural gas suppliers and delivery routes for Europe.

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