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Azerbaijan - Caspian Sea

The completion of the Baku-Tbilisi-Ceyhan pipeline transformed Azerbaijan's oil industry, unlocking the country's oil sector potential by providing an outlet to world markets for crude oil. Azerbaijan is one of the world's oldest oil-producing countries, and it has played a significant role in the development of today's oil industry. The world's first paraffin factory was opened in Azerbaijan in 1823, and the worlds first oil field was drilled in the country in 1846. Azerbaijan was the site of the first offshore oil fieldthe Neft Dashlaryin the shallow water of the Caspian Sea, which was completed in 1951. The oil field still produces oil today. The country's largest hydrocarbon basins are located offshore in the Caspian Sea, particularly the Azeri-Chirag-Gunashli (ACG) fields, which produced 634,000 b/d in 2015, accounting for almost 75% of Azerbaijan's total oil output in 2015.

Most of Azerbaijan's natural gas is produced offshore in either the Shah Deniz field or the ACG complex. The Shah Deniz natural gas and condensate field is being developed in two phases, the first of which started production in late 2006. The second phase is scheduled to begin production in 2018 and is expected to produce 565 Bcf of natural gas per year.

Azerbaijan's main producing field, the Azeri-Chirag-Gunashli (ACG) complex, produced 634,000 b/d of liquids in 2015, accounting for about three-quarters of total liquids production in Azerbaijan. The field developers originally expected peak petroleum production from ACG to reach 1 million b/d, but ACG production peaked in 2010 at 823,100 b/d before falling to 664,400 b/d in 2012.

The Iranian stance that the Caspian should be divided equally (each state receiving 20 percent) would mean that the Iranian maritime border would extend to Baku, something unacceptable to the GOAJ. Azerbaijan's long-standing policy that an agreement on demarcation with Iran and Turkmenistan was not necessarily that important as Azerbaijan would continue to develop its Caspian energy resources without a broader, five-way agreement. Most local political analysts believed that Iran continues to be the main obstacle to any agreement on the legal status of the Caspian.

The 5-party Caspian Sea Working Group met dozens of times since 1991, with no movement on the part of either Iran or Turkmenistan toward the delimitation position jointly held by the other three Caspian states (which signed agreements with each other in 2003), and both continued to hold their traditional positions. Useful discussions had taken place on a variety of other Caspian Sea issues, including notional joint agreements on environmental protection, fishing and other "surface access" rights, security cooperation, and military use/naval issues.

Traditionally, Caspian oil and natural gas went directly to Russia through Soviet infrastructure, such as the Central Asia-Center (CAC) gas pipeline system, where some could go to Western markets. Kazakhstan and Azerbaijan have had the most success in developing Caspian oil and natural gas export capacity through the construction of several major pipelines, which have become the main transit routes for Caspian hydrocarbons.

The biggest export route to bring oil directly from Caspian fields to European markets is the Baku-Tbilisi-Ceyhan (BTC) pipeline, which was commissioned in 2006. The Baku-Tbilisi-Ceyhan (BTC) Oil Pipeline Project consists of construction and operation of a dedicated pipeline, approximately 1,760 km in length, with an approximate capacity of one million barrels of crude oil per day. The Project is sponsored by BTC Company, a special purpose entity compromised of twelve oil companies, of which BP Corporation owns the largest share and is the operator in Azerbaijan and Georgia. Total cost of the Project is US$3.9 billion. The BTC pipeline runs from the Caspian Sea to the Black Sea and carries an average of 1 million barrels of oil per day. A parallel pipeline built around the same time transports up to 280 billion cubic feet of natural gas per year.

With growing oil and natural gas production in Kazakhstan and Azerbaijan, the two countries worked to develop new export routes, such as the Kazakhstan-Caspian Transportation System (KCTS). This network will take oil from Kazakhstan's largest fields, Kashagan and Tengiz, and move it to the Caspian coast where it will go by ship to Azerbaijan and then on to the BTC pipeline. KTCS is expected to supply 300,000 barrels per day through BTC to global markets, gradually increasing to 800,000 barrels per day. Foreign investment will fund part of the project, estimated to cost $4 billion.




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