CASPIAN PROGRESS TOPS C.I.S. DEALS

Upstream joint ventures continue to sprout in the C.I.S., notably a major exploration and development push in the Caspian Sea.

Among the latest deals:

A Unocal Corp. unit signed a notice of acceptance to take about a 16% interest in foreign participation in unitized development of three large oil fields in the Caspian Sea off Azerbaijan. Similar acceptances were expected at presstime last week from other major companies involved in the development project.
Seven western oil companies signed an exclusive agreement June 9 with Kazakhstan to negotiate for an exploration program in the northern part of the Caspian Sea.
A Russian-U.S.joint venture set up $84 million of project financing for an Chernogorskoye oil development campaign in western Siberia.

AZERBAIJAN DEVELOPMENT

With its acceptance, Unocal agreed to terms of a unitized development declaration issued June 5 by State Oil Co. of the Azerbaijan Republic (Socar).

Socar issued the declaration to consolidate development of Guneshli, Chirag, and Azeri oil fields into a single contract area with a single development plan.

Last month, the Azeri government asked three petroleum companies and/or groups involved to consolidate their respective proposed development projects for the three fields. Socar Pres. Sabit Bagirov told a news conference in early May the three fields could contain a combined 4.4 billion bbl of oil reserves, as well as significant volumes of natural gas.

Unocal said there is a geological possibility, the three big fields, all less than 100 miles off Azerbaijan, could be part of one megastructure. Bagirov projected petroleum industry investment related to the project at $10 billion.

A combine of British Petroleum Co. plc and Norway's Den norske stats oljeselskap AS last year signed an agreement with the Azeri government to conduct a feasibility study of Chirag, estimated to hold 1 billion bbl of oil reserves (OGJ, Oct. 19, 1992, p. 25).

BP/Statoil also owns a 9.9% stake in Azeri field, where Amoco Corp. is operator. Amoco on behalf of a group of companies last year signed a preliminary agreement with Azerbaijan to develop Azeri field, which is thought to hold 1.8 billion bbl of reserves. Unocal took a 25% interest in the foreign company participation in that project.

Pennzoil Co. has proposed further exploration and development in the Guneshli area, which accounts for most of Azerbaijan's current Caspian Sea oil production of 180,000 b/d (OGJ, Feb. 15, p. 36)

Socar's unitization declaration calls for a single production sharing type of unitized development contract. Full time contract negotiations are expected to begin in mid-June.

The contract, which requires ratification by Azerbaijan's parliament, will include complete commercial terms that have not been agreed upon. Also to be required is a definitive plan and commitment to an export pipeline.

Amoco, BP/Statoil, Pennzoil, Unocal, and Turkish pipeline company Botas last year agreed with Socar to conduct a feasibility study for a pipeline to transport crude from the three fields to an existing Mediterranean export terminal at Ceyhan, Turkey. Pipeline and related infrastructure costs have been pegged at $3 billion.

Socar also has an agreement with Turkish entities to use existing facilities and construction of additional pipelines. Three routes from the Baku area to Turkey via Georgia, Armenia, or Iran are under detailed study and cost analysis.

With ratification, partner approvals, and a pipeline deal wrapped up, full scale development could begin. Conceptual design work is under way.

UNOCAL AGREEMENT

Several factors will determine Unocal's net interest in the project.

Under terms of the Socar declaration, Socar reserves the right to a 30% participation in project investment. Unocal's interest also is subject to a participation right of about 1.7% by its coventurers. That would put Unocal's net participating interest in the project investment at about 9.5%.

Unocal said its preliminary studies support Socar's estimates of potential reserves in the three fields but noted additional seismic work, delineation drilling, and some production experience are needed to confirm the estimates.

John Imle, Unocal executive vice-president, said, "A coordinated, phased development program should accelerate oil production, reduce capital and operating costs, and limit pre-production cash exposure for the participants.

"Now that the three fields will be consolidated, Socar and the foreign companies are in a position to concentrate on rapid resolution of outstanding contractual issues and begin actual project work. We believe significant quantities of oil production for export could commence within 3 or 4 years after the contract and pipeline issues are finalized.

"The Caspian Sea is destined to become a major oil producing region with significant strategic implications for the U.S. and other oil consuming nations."

KAZAKH GROUP

A group formed to explore the Kazakh portion of the Caspian Sea consists of Agip SpA, British Gas plc (BG), BP/Statoil, Mobil Oil Corp., Shell Exploration B.V., Total, and KazakhstanCaspishelf (KCS), a new Kazakh state offshore oil company.

Group membership should lead to exclusive negotiating rights on certain blocks if study results prove successful, BG said. KCS will serve as group operator. The group was formed from an original short list of more than 20 international oil and gas companies.

BG said it hopes an agreement in detail on preliminary exploration work will be signed with the Kazakh government by September.

The Kazakh government said a 3 year work program will include geological, geophysical, and environmental studies of the offshore region, thought to be one of the most prospective unexplored regions in the world. The seismic survey is expected to cover 100,000 sq km of the Northeast Caspian Sea off Kazakhstan.

Exploration in the Kazakh offshore region has been limited largely to a few seismic surveys by the former Soviet government.

Total cost of the work program is expected to reach $200 million during the 3 years, shared equally by all group members.

The initial commitment is a nonrecoverable $5 million from each participant, to go to the Kazakh government to fund KCS.

"As these major oil companies begin to invest substantial amounts of money to carry out the exploration program, this agreement will serve as an excellent catalyst for development of the region around the Caspian," said Kazakhstan's Minister of Energy and Fuel Resources Kadyr Baikenov.

The deal was announced at a formal signing ceremony in Alm Ata, 2 months after Chevron Corp. agreed to develop adjacent onshore reserves of giant Tengiz field.

CHERNOGORSKOYE FINANCING

The Chernogorskoye financial package, expected to meet the western Siberian project's borrowing requirements, includes a:

$30 million loan with an option to borrow another $10 million from the European Bank for Reconstruction & Development.
$44 million credit from the U.S. Export Import Bank.

Officials involved in negotiating the deal said it is the first time a complex package of limited recourse financing has been raised for a Russian oil project. The ExIm bank's project finance credit is its first in Russia.

Andrew Seton, director of Morgan Grenfell & Co. Ltd., London, who along with Proteus International, New York, served as advisers to joint venture partners during negotiations, said news of the third party lending package should encourage international oil and gas companies watching oil and gas developments in Russia.

"At last, debt funding has been raised to meet the borrowing needs of a project and share risks with entrepreneurial suppliers of equity capital," he said.

TERMS DESCRIBED

Chernogorskoye's financial package features terms common to international oil production financing but still novel in Russia, including a long term oil transportation agreement and a licensed off shore account to capture production revenues to service debt. Certain other permits and authorizations often withheld in Russia were made available in recognition of the needs of western financing sources.

Japanese trading house Itochu played a key role in assembling the financial package by taking an equity interest in the venture and agreeing to negotiate oil offtake arrangements.

Morgan Grenfell and Proteus helped develop a plan involving other parties to the project, such as suppliers of oil field equipment and services, that enables Chernogorskoye to meet completion guarantee requirements of financing banks.

Chernogorskoye is producing an undisclosed volume of oil. The joint venture will be able to reinvest income from oil revenue to cover the balance of the project's expected capital requirements. The loans will have a duration of 8 years.

Chernogorskoye partners are Chernogorneft AO, an oil production association based in Nizhnevartovsk, western Siberia, and Anderman/Smith Overseas Inc., Denver.

Morgan Grenfell has helped raise $3.5 billion in funding for projects in the Russian Federation and the former Soviet Union.

The company is advising clients involved in other major oil and gas deals in the region.