UK oil giant BP has started drilling two new exploration wells to search for gas deep beneath the Caspian Sea.
The announcement comes as Azerbaijan imports gas from Iran and Russia to meet both growing domestic demand and existing export contracts. Baku has also pledged to double exports to Europe within five years.
One of the wells will reach a depth of 7,000 meters, BP said this month, to tap a gas reservoir believed to lie below the existing Shah Deniz gas field, which currently provides the bulk of Azerbaijan’s gas exports. This well, which is expected take around a year to complete, should confirm whether gas in the deep reservoir can be extracted commercially.
BP said the second well, which will reach a depth of about 4,500 meters, is targeting a possible reservoir below Azerbaijan’s main oil field, the Azeri-Chirag-Guneshli (ACG) field. This drilling project will follow an existing well for part of its depth and so is expected to be completed in just three months.
Offshore drilling in deep water is enormously expensive, with each well costing many tens of millions of dollars.
The first well is being drilled under the existing production agreement between Baku and the consortium operating the field, which includes BP, Azerbaijan’s state oil company SOCAR, Turkey’s state oil company TPAO, Iranian state oil company NICO and Russia’s Lukoil. This means both that any gas produced from the deep reservoir belongs to the consortium, and that the consortium can recover the cost of the well from the revenue generated by the sale of gas from the field.
The situation with the ACG well is more complex.
Like most oil fields, ACG also produces large quantities of gas; some is pumped back into the field to boost oil production and the rest delivered onshore by pipeline.
Under the production agreement, oil produced from the field belongs to the ACG consortium – which includes BP, SOCAR, TPAO, Exxon Mobil and six other international companies, who together export the oil to global markets. However, the gas which is delivered onshore belongs to SOCAR, and is used to meet Azerbaijan’s domestic gas demand.
BP confirmed to Eurasianet that the new exploration well into the deep gas reservoir is being funded by the ACG consortium itself ahead of an agreement over who owns the gas, and with no guarantee that it will be able to recover costs. This unusual move suggests both that the consortium is confident that it will locate significant gas reserves, and that it will be able to secure a deal over ownership which suits both Baku and its commercial partners in the consortium.
If commercial volumes of gas are discovered by one or both of the exploration wells, as things stand there will be no difficulty finding markets for the gas.
Russia’s invasion of Ukraine, the subsequent imposition of sanctions by the EU, and Moscow’s retaliatory decision to restrict gas flows have upended the European gas market.
With Azerbaijani gas already flowing to Greece and Bulgaria, in recent months countries across southeastern Europe have been signaling their interest in importing gas from Azerbaijan.
In July Brussels and Baku inked a landmark agreement under which Baku would increase gas deliveries to Europe from 10 billion cubic meters (bcm) to 12 bcm in 2022 – and double deliveries to 20 bcm by 2027. In the event, exports to Europe last year totaled only 11.4 bcm, and are expected to reach only 11.6 bcm this year.
It’s unclear if the shortfall is due to limited production, or limited capacity in the three pipelines which make up the Southern Gas Corridor that carries Azerbaijani gas to Europe.
Azerbaijan has faced difficulties meeting both growing domestic demand and export commitments.
In late 2021 Azerbaijan signed a three-way swap deal which saw Turkmenistan ship gas to northeastern Iran and Iran ship a corresponding volume from northwestern Iran to Azerbaijan.
It’s unclear if the trade is continuing, but Baku has agreed to buy gas from Russia in order to meet an expected shortfall, raising the uncomfortable prospect that Azerbaijan may have been importing Russian gas in order to export more Azerbaijani gas to Europe. From the EU’s perspective, this would undermine the point of the Azerbaijan-EU deal, which was to reduce European dependence on Russian gas.
What isn’t in doubt, though, is that existing reserves at Azerbaijan’s Shah Deniz gas field will be unable to meet Baku’s commitments to Brussels by 2027. New volumes will have to be found.
Efforts to secure agreements to bring gas from Turkmenistan across the Caspian appear to have stalled.
Now the question is, with several years of development work required on the new deeper fields, can Baku deliver the promised gas on time?