But now Azeri-Chirag-Guneshli, the enormous field offshore in the Caspian Sea whose development since 1994 has spurred Baku’s most recent oil boom, is moving into terminal decline. And Azerbaijan is trying to reinvent itself as a leading producer and transit hub for natural gas.
Elshad Nassirov, vice-president for marketing and investments at Socar, the state oil company, says: “We are going to compensate for the decline in the production of crude oil with an increase in the production of gas and condensate from other fields.”
At the centre of this ambitious plan is the $45bn Southern Corridor project, signed with great fanfare at the end of 2013, which would deliver Caspian gas directly to Europe, starting in 2020.
Little more than a year later, however, the project’s economics are under scrutiny amid a tumble in oil prices that is also dragging down natural gas prices in Europe.
Two of the partners in the project, Total and Statoil, have sold their stakes since the final investment decision was signed, amid grumblings about its expected profitability.
Mr Nassirov concedes that the project will be less attractive in a lower oil price environment — it would break even at an oil price of about $60 a barrel, he says, compared with recent prices of below $50.
But he says there is no talk of scrapping the flagship investment: “Of course, we will be affected [by the fall in oil prices], but not to the extent that we will cancel or postpone our big projects such as the Southern Gas Corridor.”
In its efforts to keep the project on track, Socar is delaying and cancelling other projects, he says, scaling back plans for an enormous petrochemical plant and reducing spending on construction in Baku.
BP, which is leading the development of the Shah Deniz II gasfield as part of the project, has already committed $10bn in contracts, says Gordon Birrell, the oil company’s regional head, making a reversal highly unlikely.
The fall in oil prices has complicated things, however.
Of the overall $45bn cost of developing the field and building 3,500km of pipelines from Azerbaijan to Italy, some $10bn-$12bn is scheduled to be funded by Socar and the Azerbaijani government, according to Shahmar Movsumov, chief executive of Sofaz, the state oil fund.
With oil prices falling, Baku is rethinking how it will fund its share of the project, Mr Nassirov says. “We are changing our views, first of all because there is a new need for money with the falling prices for crude oil,” he says. “We will be using our own funds, money from the oil fund, and we will be trying to attract money from project finance.”
Another problem has been thrown up by the new Greek government, which has suggested it might seek to renegotiate the terms of its involvement as a transit country for the project, creating a ripple of concern in Azerbaijan.
Nonetheless, analysts expect Azerbaijan to resolve these issues.
“The government views the Southern Gas Corridor as a major strategic investment for the country,” says Livia Paggi, a Central Asia and Caucasus analyst at risk consultancy GPW, adding that Sofaz may seek to issue a eurobond to help fund its commitments to finance the project.
With plans to deliver 10bn cubic metres to Europe a year, the size of the Shah Deniz II project is relatively modest. Gazprom managers, who sell about 150bcm to the continent annually, have joked that it is “just about enough for a barbecue”.
But Azerbaijan’s ambitions in gas stretch well beyond Shah Deniz. Baku hopes that the construction of a pipeline to Europe will stimulate a cluster of smaller fields, such as Absheron, Umid-Babek, and ACG deep, which together could double the flow of gas to Europe.
In the longer term, the pipeline could also become a conduit for Iranian or Turkmen gas, making Azerbaijan a key part of Europe’s strategy to diversify its energy supplies away from Russia.
But these grand plans are increasingly under threat amid falling oil prices and lower appetite for big investments among the world’s oil majors.
In December, Russia threw another spanner in the works, announcing it would abandon the 63bcm a year South Stream pipeline project across the Black Sea and redirect it via Turkey instead, where, if realised, it would be in direct competition with Azerbaijani gas.
While the supplies from Shah Deniz are already contracted, Russian gas could displace other Azerbaijani projects, given limited pipeline capacity, says Gulmira Rzayeva, research associate at the Oxford Institute for Energy Studies.
More about:
