Socar expands up, down and sideways

By bne IntelliNews April 29, 2010

Clare Nuttall in Baku -

Azerbaijan's state oil and gas company Socar is considering various financing options for an investment programme spanning exploration and production, environmental work, shipbuilding and other areas of the vast conglomerate's activities. Following mergers with Azerigaz and Azerhimia, Socar is also drawing up investment plans for Azerbaijan's gas distribution and petrochemicals sectors.

Socar, already Azerbaijan's largest enterprise employing some 60,000 people, has grown further in the last eight months after President Ilham Aliyev ordered it to merge with gas distribution and transit company Azerigaz in July. In April, the government announced that Azerbaijan's petrochemicals holding company Azerhimia is also being merged with Socar.

Socar management is now drawing up comprehensive investment plans for Azerigaz and Azerhimia. Officials are working with several foreign companies - German utilities RWE and E.On Rhurgas, and Austria's OMV - to calculate the size of investment needed for the modernization of the gas distribution network and the introduction of modern management practices within Azerigas.

Concerning the more recent merger with Azerhimia, investment planning has just started. "We are now working out what needs to be done with this petrochemicals company, which is primarily located in and around Sumgait and in the past was one of the biggest in the former Soviet Union to bring it to the international standards," Socar deputy vice president, Vitaliy Baylarbayov, tells bne.

By bringing together exploration and production, gas distribution and petrochemicals, Azerbaijan is creating a national champion spanning all parts of the oil and gas industry. Socar's strong financial position will make it possible to channel investment into the long-neglected chemicals sector. However, critics of the plan fear that the bigger-is-better approach will do nothing to address inefficiencies within Socar.

Upstream, downstream

Investments into Azerigas and Azerhimia are in addition to the planned investments within Socar's core business areas.

Upstream, Socar will continue investing into the development of the Umid field this year. The company is also investing heavily into the redevelopment and rehabilitation of existing fields, with the aim of raising oil production by 10-15% a year. Downstream, Socar plans to start construction of a new oil refinery, gas processing and petrochemicals complex in the Garadagh area to the south of Baku. This will see the relocation of refining operations to outside the city, and is due to be completed by 2018. An environmental programme encompassing all of Socar's activities is also in progress.

A joint venture with Singaporean company Keppel Fels for the construction of a shipbuilding yard was announced in March. Socar has a specialised fleet of over 200 support vessels, most of which date back to the Soviet era and need to be replaced. The company also needs modern tankers to ship oil across the Caspian Sea. "We are funding these activities with our own resources and through external financing. We might use project finance or export-import financing. We are also considering issuing our own bonds," says Baylarbayov.

Azerbaijan is already close to its target of producing 60m tonnes of oil a year, due to the work carried out by Socar and foreign oil and gas companies operating in the country. "Production at the Azeri-Chirag-Guneshli [ACG] field and the $6bn Chirag Oil Project, which will enable us to recover additional reserves at the field, will help us to reach this target. The COP will allow us to produce around 50m tonnes of oil at ACG until at least 2020," says Baylarbayov. "Previously, we expected peak production to end in 2011 or 2012, but we now plan to keep production at ACG level at a minimum of 50m tonnes of crude, which in addition to Socar's own production at other fields and joint ventures, will allow us to maintain production 60m tonnes a year at least until 2020."

Baylarbayov says there is also further potential at ACG, Shah Deniz and other fields, which could make it possible to maintain this level of production after 2020, but this has not yet been confirmed by definite investment decisions.

The target for gas production is 50-55bn cubic metres a year (cm/y) by 2020. Output is expected to grow slightly from 27bn cm in 2009 to 29-30bn cm in 2010, but will sharply increase when production starts at Shah Deniz Stage 2.

There is also the potential for further new discoveries, especially offshore. Exploration works have restarted at several previously explored structures, with new agreements signed with Total, Gaz de France, and RWE. Exploration of both structures was started in the past, but during a period of low oil and gas prices and with limited geological success; the decision was made as the time that the discoveries were non-commercial. "We at Socar were glad when this opinion was proved wrong by the fact that other big oil and gas companies are interested in re-exploration of these fields," says Baylarbayov. "We are now preparing for another round of exploration. The potential for new discoveries is very significant and we expect to see new discoveries in the next five years."

European governments have continued to court Azerbaijan with the aim of securing access to its oil and gas reserves. The opening of the BP-led Baku-Tbilisi-Ceyhan oil pipeline in 2006, which became the first Caspian pipeline to pump oil directly to Europe without crossing Russian soil, gave a considerable boost to the Azeri economy. Several routes for the export of Azeri gas are still being considered, with the rivalry between the EU-backed Nabucco and Russian South Stream projects just two of several. "From our perspective it is important to have as many transportation options as possible. We are prepared to support any of the gas pipelines being planned - including Nabucco, South Stream, ITGI, the Trans-Adriatic Pipeline Project and others," says Baylarbayov. "We see that Nabucco is probably the most advanced. There is already an institutional framework and work on project support agreements has started. This project could definitely absorb all the gas to be produced in Azerbaijan in the short term and longer term. Now the important thing is to see the decision of the shareholders of Nabucco to start the construction and to reach mutually beneficial commercial conditions for the transportation."

Alternative means

However, in addition to pipeline projects, Socar is also investigating alternative forms of transportation including the transport of liquefied natural gas (LNG) or compressed natural gas (CNG) from the Black Sea shore to Romania, Bulgaria and other European countries. This would involve building an LNG or CNG terminal on the Black Sea shore and redelivery facilities on the opposite shore. "Our goal is the free and unimpeded transit of our gas, and direct access to the final buyers in international markets. For us, those markets are primarily the European Union markets, and countries on the way to the EU," says Baylarbayov.

"What we are aiming to secure is an unimpeded right of transit, that is clear, transparent, well defined and supported by an institutional framework of stable and predictable tariffs, that allow us to easily see what we will get if we send our gas through this or that pipeline or route," he says. "We also want acknowledgement of the fact we are putting a lot of money into the development of Azerbaijan's gas resources - at least $20bn is needed for the further development of Shah Deniz Stage 2 alone."

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