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Energy

Azerbaijan is the birthplace of oil and gas. For more than 100 years, Azerbaijan's economy has been dominated by petroleum extraction and processing. In the Soviet system, Azerbaijan's delegated role had evolved from supplying crude oil to supplying oil-extraction equipment, as Siberian oil fields came to dominate the Soviet market and as Caspian oil fields were allowed to deteriorate. Although exploited oil deposits were greatly depleted in the Soviet period, the economy still depends heavily on industries linked to oil.

The year 2012 was a key year, since this was when Azerbaijan's oil production and related revenues peaked. According to the State Statistics Committee, in January-February 2013, Azerbaijan produced about 7.2 million tons of oil and gas condensate, which is 3.6 percent less than in the same period of 2012. In 2012, production of oil and gas condensate in Azerbaijan was 42.98 million tons, which is 5.3 percent less than in 2011. The Organization of the Petroleum Exporting Countries (OPEC) reported in June 2013 that Azerbaijan's oil supply was anticipated to amount to 0.85 million bpd in the second quarter, 0.84 million bpd in the third quarter and 0.86 million bpd in the fourth quarter of 2013. Azerbaijan's proven oil reserves amounted to 7 billion barrels as of early 2012.

With oil production in decline in most countries outside OPEC, Azerbaijan is seen as one of the few non-OPEC countries capable of increasing its output significantly over the next few years. However, conflicting claims over the maritime and seabed boundaries of the Caspian Sea have yet to be agreed among the 5 littoral states (Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan). An agreement on the division of the Caspian's rich oil and natural gas resources would open up new areas of exploration.

Azerbaijan's proven crude oil reserves were estimated at 7 billion barrels in January 2009 by the Oil and Gas Journal. The country's largest hydrocarbon basins are located offshore in the Caspian Sea, particularly the Azeri Chirag Guneshli (ACG) fields, which accounted for over 80 percent of Azerbaijan's total oil output in 2008.

The State Oil Company of Azerbaijan Republic (SOCAR) is Azerbaijan's state-owned oil and natural gas company and is responsible for producing oil and natural gas in Azerbaijan, operating the country's two refineries, running the country's pipeline system, and managing the country's oil and natural gas imports and exports. Although the Ministry of Industry and Energy handles exports as well as exploration and production agreements with foreign companies, SOCAR is party to all of the international consortia developing oil and gas projects in Azerbaijan.

The Azerbaijan International Operating Company (AIOC) is a consortium of 10 petroleum companies that have signed extraction contracts with Azerbaijan. AIOC includes: British Petroleum (BP), Chevron, Devon Energy, StatoilHydro, Turkiye Petrolleri, Amerada Hess, ExxonMobil, Inpex, Itochu, and SOCAR. AIOC has made significant direct investments in the development of the ACG fields, as well as the construction of the South Caucasus Pipeline (SCP) and the Baku-Tbilisi-Ceyhan (BTC) pipelines. BP is the largest foreign investor and has been involved in Azerbaijan since 1992.

Oil production in Azerbaijan increased from 180,000 barrels per day (bbl/d) in 1997 to 875,000 bbl/d in 2008. Production climbed in late 2005 and in 2006 following the startup of the Azeri fields, amounting to about 207,000 bbl/d additional production in 2006 compared with 2005. In 2008 another 228,000 bbl/d leap in production followed the startup of the Guneshli field, expected to produce 320,000 bbl/d at peak. While production has been increasing, domestic consumption has been generally decreasing, from 203,000 bbl/d in 1992 to 128,000 bbl/d in 2008. This has led to a significant increase in oil exports.

Azerbaijan has 3 major export pipelines:

The majority of oil exports pass through the BTC pipeline system, which runs 1,110 miles from the ACG fields in the Caspian Sea, via Georgia, to the Mediterranean port of Ceyhan, Turkey. From there the oil is shipped by tanker mainly to European markets, with Italy reportedly being the largest importer of Azeri crude in 2008 at about 40 percent of crude exported. The pipeline began exporting in July 2006; it is operated by BP, the largest shareholder, and owned by AIOC members. The capacity of the pipeline is 1 million bbl/d. It was reported that Azeri pipeline crude oil exports in 2008 were 653,300 bbl/d. The BTC pipeline is also used to export Kazakhstan oil, which travels by tanker across the Caspian to the pipeline head at Sangachal Terminal, near Baku. It was reported that Kazakh crude oil exports from the Tengiz field began in October 2008 at 350 bbl/d and had increased to 4,800 bbl/d by February 2009.

The 830-mile long, 100,00-bbl/d-capacity Baku-Novorossiysk pipeline runs from the Sangachal Terminal to Novorossiysk, Russia on the Black Sea. SOCAR operates the Azeri section and Transneft operates the Russian section. 2008 exports were estimated at 29,000 bbl/d by Argus FSU. In April 2009, SOCAR announced plans to nearly double exports to 50,000 bbl/d of oil in 2009 as the BTC is close to capacity because of production growth in the ACG oil fields as well as increasing throughput from Kazakhstan.

The Baku-Supsa pipeline has an estimated capacity of 145,000 bbl/d and runs 520 miles from Baku to Supsa, Georgia on the Black Sea. It is operated by BP and owned by AIOC members. The pipeline was shut down for repairs from October 2006 to August 2008, but due to safety concerns during the Russia-Georgia conflict it was not restarted until November 2008. Argus FSU reported that only 13,000 bbl/d were exported to Supsa in 2008. Azeri sources report that 55,000 bbl/d were exported through this pipeline during the period January-August 2009. The pipeline is used by ExxonMobil Company to export its share of oil from the ACG fields because ExxonMobil, although it is a participant in AIOC, is not a participant in the BTC pipeline.

On June 27, 2013 a European consortium aiming to build a natural gas pipeline from Azerbaijan to Western Europe rejected a costlier, longer version called Nabucco in favor of the more modest Trans Adriatic Pipeline (TAP) project. The Austrian-led consortium seeking to supply natural gas to power-hungry Western Europe says it has chosen the proposed Trans-Adriatic Pipeline, which will run about 800 kilometers through Turkey, Greece and Albania, crossing the Adriatic Sea and ending in southern Italy. The consortium rejected Nabucco West, a more expensive project that would have built a 1,300-kilometer pipeline running through Turkey, Bulgaria, Romania and Hungary to Austria.

The project is seen as the main competitor for the European market against the Russian-financed South Stream pipeline. South Stream will run from Kazakhstan and Russia through Bulgaria, Serbia and Hungary, and then connect with European pipelines in Austria. Industrialized European nations wanted to lower their dependence on Russian natural gas, which at the moment makes up about 30 percent of European gas imports. The scrapped Nabucco West pipeline would have passed through many of the same Eastern European countries as South Stream, swapping Serbia for Romania.

This is the first gas pipeline from the former Soviet Union that is not controlled by Russia. This is a precedent and a model for Europe to get gas by pipelines from the Caspian Sea region or from other regions without the Russian control. The pipeline is expected to become operational in 2019, pumping 10-billion cubic meters of gas per year to Europe.