Caspian’s Future to Outshine its Past

The history of the oil industry in the Caspian Sea is one of the oldest tales known in the Exploration & Production business. Few are those who are not aware of the role that the Caspian holds as the original oil producing centre of the world, with 3,000 producing wells by the year 1900. But the upstream industry is all about looking forward, and in this landlocked offshore sector it’s worth looking ahead to what’s coming up on the horizon rather than spending too much time looking back over what’s been achieved so far, impressive though it is.

For many, the Caspian is still considered to be a simple shallow-water benign environment. But developments are now being considered or in the early stages of implementation that are taking activities in this inland sea into previously untapped deeper waters – and with what happened to BP (itself already a long-established major player in the Caspian) in the Gulf of Mexico last year, that means an even more heightened focus on environmental responsibility post-Macondo in what is recognised as one of the world’s most sensitive ecological systems.

On top of this, the northern portion of the sea remains ice-bound for large parts of the year, with this too providing unique challenges for projects underway or being considered for Russia and Kazakhstan’s offshore sectors.

In terms, however, of straightforward facts, it is Azerbaijan that holds the lead role as the largest offshore producer in the Caspian Sea of both oil and gas. It is expected to continue spearheading Capital Expenditure in the region for many years to come, with Kazakhstan, Russia and Turkmenistan expected to contribute between US $1.6 billion and $2 billion in expenditure each over the period 2011 to 2015, according to recent figures from analysts Infield Systems.

A flagship project for the Caspian region will be the Shah Deniz ‘Full Field Development’ offshore Azerbaijan. The giant project represents Stage 2 of the field’s development, as well as the expansion of the South Caucasus Pipeline, and was able to move ahead after a 5-year extension to the Production Sharing Agreement (PSA) to 2036 was signed at the end of last year by Azerbaijan’s state oil company SOCAR and the Shah Deniz partners BP, Statoil and Total.

Led by BP (with a 25.5% working interest), the second phase will eventually triple overall production from the field, and deliver an additional 16 Bcm a year of gas and up to 100,000 barrels of condensate.

The project will involve major spending by BP and its partners, with two new offshore platforms to be fabricated in Azerbaijan, up to 30 subsea wells drilled, and more than 500 kilometres of subsea pipelines to be laid. In addition there will also need to be a major expansion of the Sangachal Terminal as well as of the 700 kilometre South Caucasus Pipeline to Georgia and Turkey to more than 20 Bcm per year.

Appraisal activity is still underway for the Shah Deniz FFD, with wells such as the SDX-06 appraisal recently successfully drilled by the Istiglal rig. The probe is located in the northern part of the field and was drilled to a planned total depth of 6,272 metres. The Istiglal is due to then move on and carry out further appraisal drilling elsewhere on the field.

The proposed development concept itself would see two new bridge-linked production platforms, fed by up to 30 subsea wells to be drilled by two semisubmersible rigs. These wells will sit in water depths of up to 550 metres – the deepest yet drilled in the Caspian.

With first gas planned for 2017, engineering studies are still underway and are expected to be completed by around mid-2011 in order for the project to proceed on schedule and enter the next stage of development.

Mr Al Cook, Vice President of the Shah Deniz Development at BP, recently described the 30 trillion cubic feet field as “one of the world’s great gas fields” and said the Full Field Development was now ready to move forward towards a Final Investment Decision.

“This is a truly giant project. It is currently the largest in BP’s worldwide portfolio and indeed one of the largest in the world. First production in 2017 will allow us to ramp up gas supplies from around 8 Bcma today to a total of 24 Bcma,” he said.

But Shah Deniz is not the only future focus of BP and SOCAR, with a PSA signed in October last year between the two companies for joint exploration and development of the Shafag-Asiman structure also in the Azerbaijan offshore sector, marking the beginning of bilateral co-operation between the two companies in exploration and development of a new offshore block.

Under the 30-year PSA BP will act as the operator with a 50% interest, while SOCAR will hold the other half. With the block lying around 125 kilometres to the south east of Baku, it covers an area of some 1,100 square kilometres and is truly frontier unexplored territory. Located in a part of the Caspian featuring water depths ranging up to 800 metres, reservoir depths are put at around 7,000 metres.

And what cannot be forgotten is the massive amount of work that still remains to be done (and money to be spent) on the Azeri-Chirag-Gunashli (ACG) development.

This huge and pioneering project last year saw US $426 million laid out in operating expenditure and $1.65 billion in capital expenditure. BP is again the operator with a 37.4% stake, with its partners being Chevron (11.3%), SOCAR (10%), INPEX (11%), Statoil (8.6%), ExxonMobil (8%), TPAO (6.7%), ITOCHU (4.3%) and Hess (2.7%).

Producing an average of 823,100 b/d from the Chirag, Central Azeri, West Azeri, East Azeri and Deep Water Gunashli platforms, this is a world-class development. Current activity includes rig maintenance on the Chirag platform, which is due to be completed in the fourth quarter of this year, and the delivery of two new oil producer wells (B04z and B18y) and one gas injector well (B01y) during the course of 2011. Another oil producer well (C15z) will be completed on West Azeri, with another on East Azeri (D20) and a further one on Deep Water Gunashli (E16) before the end of the year.

With the ongoing $6 billion Chirag Oil Project to see a new fixed platform installed in the Chirag-Deep Water Gunashli area in 170 metres of water, the Production, Drilling and Quarters facility will be partially integrated with the existing DWG facility via subsea pipelines for the export of produced water for disposal and the receipt of inject water for reservoir water flood.
Around $4 billion of the total will be spent on the construction of the facilities as the pre-drill programme, with the remainder to be spent on platform development well drilling during the production period. First oil is planned to flow by late 2013.

An equally giant project sits further north in the Caspian Sea, where Italy’s Eni and its partners are in the process of developing the multi-billion dollar Kashagan field in the North Caspian PSA, some 80 kilometres south east of Atyrau. The PSA contains other fields such as Kashagan South West, Kalamkas, Aktote and Kairan, and will remain the major focus for exploration and development activity offshore Kazakhstan over the next few years.

Via the Agip Kazakhstan North Caspian Operating Company N.V., Eni is responsible for the execution of the first phase of development and for the onshore part of the second phase of development for the technically-challenging field, which has estimated recoverable reserves of at least 11 billion barrels.

With the development plan outlining a phased approach with the aim of producing between 7-9 billion barrels of gross recoverable reserves, expandable to 13 billion barrels through partial gas reinjection, this is another world-class project for the Caspian.

Latest indications are that the first development phase is progressing on schedule with the use of advanced techniques to cope with high reservoir pressures, the presence of high concentrations of hydrogen sulphide, as well as harsh environmental conditions.

More than 80% of the work has been completed on this phase, and first oil is being forecast for December 2012. The overall scheme entails the construction of production hubs located on platforms and artificial islands, which will collect production from satellite islands from which production wells will be drilled.

In the first development phase oil and non-reinjected gas will be treated in the hubs and delivered, through two separate lines, to onshore treatment plants (located at Bolashak, near Atyrau). The oil will be further stabilized and purified. Natural gas will be treated for the removal of hydrogen sulphide and will be mostly used as fuel for the production plants; the remaining amount will be marketed.

Eni says that once the further phases of development have been implemented, Kashagan’s full field production plateau could reach 1.5 million b/d, a 25% increase over the original target.

This will be added to by contributions from the other discoveries in the PSA area, with successful appraisal wells already drilled on the Aktote, Kairan and Kalamkas structures. Partners in Kashagan are Eni, ExxonMobil, Royal Dutch Shell, Total and ConocoPhillips.

Also off Kazakhstan, a recent exploration probe on the N-Block license area by a ConocoPhillips-lead consortium has also given encouraging early signs, although it has not yet been officially confirmed. The first well in the block detected hydrocarbons at several intervals before it was completed earlier this year, according to Kaiyrgeldy Kabyldin, Chairman of Kazakh state oil company KazMunaiGas.

Although still at a very early stage, Mr Kabyldin said the field could hold more than 4.6 billion barrels of oil in place. The well was targeting the biggest prospect to be drilled offshore Kazakhstan since Kashagan was discovered in 2000.

The N-Block is located 30 kilometers south-southwest of Aktau and is 51% owned by KazMunaiGas, with Abu Dhabi-based Mubadala Oil & Gas and ConocoPhillips holding 24.5% each A second well will be drilled later this year to confirm the findings of the initial probe on the Rakushechnoe More structure. Around $100 million was spent drilling the first well, which was capped to avoid the potential risk of a blowout, which happened a decade earlier when a well was drilled on the same structure.

Kazakhstan continues to attract keen interest internationally, with India’s Oil & Natural Gas Corp. in the process of buying a 25% stake in the Satpayev exploration block after the Indian government gave the go-ahead for a total investment plan of $400 million. This would include a signature bonus of $13 million and $80 million as a fee for taking the stake, with the rest to be spent on the exploration program.

The Satpayev block is located off the country’s south-western coast, with KazMunaiGas to hold the remaining 75% interest in the block.

The other player in the northern Caspian is of course Russia, which has already discovered eight large fields and identified a further 16 prospective structures. With recoverable reserves put at more than 1 billion tons of oil equivalent, Russia’s Lukoil got the ball rolling officially with first oil produced from the Yury Korchagin field in 2009, after discovering it in 2000.

The ice-resistance production facility will produce recoverable reserves of nearly 30 million tons of oil and 63 Bcm of gas, with the operator having so far sunk around $1.2 billion in the project so far.

Progress in Russia’s sector has not been quite as fast as some observers hoped, with the planned development of the Vladimir Filanovsky field to take place in 2014/15. The field holds an estimated 220 million tons of oil and 40 billion cubic metres of gas. Its development will be followed around two years later by the two gas-condensate discoveries Sarmatskoye and Khvalynskoye. These will all, of course, add to the growing logistical infrastructure established in Astrakhan.

That infrastructure will definitely be required. Lukoil has previously estimated the potential need for up to 28 new platforms and more than 1,000km of pipeline to develop these and other oil fields in this area over the next decade, activity that would require several billion dollars of investment.

Another license where progress has not been as quick as hoped is the Lagansky block in the Russian sector, which Sweden’s Lundin Petroleum operates with a 70% interest. The company is hoping to resume appraisal of its Morskaya oil discovery there once discussions with potential partners are completed. The field, discovered in 2008, recently saw 103 square kilometers of 3D seismic acquired to help delineate fresh drilling targets.

Lundin describes Morskaya as a major oil discovery but due to its offshore location is deemed to be strategic by the Russian Government under the Foreign Strategic Investment Law. As a result a 50% ownership by a state-owned company is required prior to appraisal and development.

As always, working in the Caspian Sea requires patience and a long-term outlook. The region’s history has already proven that. Patience is a virtue, it is said. And the huge potential rewards that lie in the Caspian mean that, for most, it is a virtue that will make the long wait very worthwhile.

Mark Thomas: ROGTEC Magazine Correspondent