Baku-Ceyhan pipeline project noses ahead

The frontrunning project in the race to establish a primary oil export route out of the Caspian region took a significant, if conditional, step forward yesterday with the signing of a frame agreement to cover financing and preliminary design of a 1,700-km trunkline from Azerbaijan to Turkey.


Darius Snieckus
OGJ Online

LONDON�The frontrunning project in the race to establish a primary oil export route out of the Caspian region took a significant, if conditional, step forward yesterday with the signing of a frame agreement by a consortium of 8 companies to cover financing and preliminary design of a 1,700-km trunkline from Azerbaijan to Turkey.

On the drawing board, the proposed 42-in. pipeline, dubbed the Main Export Pipeline (MEP), would follow a route from the Azerbaijani capital, Baku, via Tiblisi in Georgia, and on to Ceyhan on the Mediterranean coast of Turkey. It would have capacity for some 1 million b/d of oil.

The signatories�Statoil AS, BP, State Oil Co. of Azerbaijan Republic (SOCAR), Japan's Itochu Corp., Turkey's TPAO, and Delta/Hess (Amerada Hess Corp. and Delta Oil Central Asia Ltd.), Unocal Corp., and Ramco Energy PLC of the US�each become party to agreements inked earlier to cover transit across Azerbaijan, as well treaties regulating the pipeline's route through Georgian and Turkey, according to a statement from Statoil.

Statoil's Regional Vice-Pres. for the Caspian Rolf Magne Larsen described the deal as a "very important milestone for the group and for Azerbaijan's economic development." Similar deals are to be sealed with Georgia and Turkey in the coming days, he said.

Larsen said the "most important aspect" of the frame agreement was that it cleared the way for development of the BP-led Azerbaijan International Operating Co.'s Azeri-Chirag-Guneshli (ACG) fields, where Statoil is a partner, to "continue at full tempo."

Full production from the ACG fields, discovered and brought into early production in 1997, is expected to ramp up in late 2004 from an initial rate of some 400,000 b/d. "Without the assurance of a transport solution," said Larsen, "these plans could not have been sustained."

A staged development at the three-field complex, which is thought to contain some 4.6 billion bbl of oil, aims to ultimately raise production to between 800,000 and 1 million b/d.

Political debate
Intergovernmental debate centering on finding a route for a primary trunkline out of this politically fraught region has been tortuous. Three-way deals detailing the legal and regulatory framework for the construction and operation of the MEP were finally signed this summer by Azerbaijan, Georgia, and Turkey.

At stake is the transportation of a large slice of existing reserves�and oil and gas yet to be discovered�in Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan (OGJ, July 24, 2000, p. 38). Remaining reserves alone from these Caspian nations have been calculated by UK analyst group Wood Mackenzie to be in the region of 76 billion boe.

Moving the MEP off the drawing board and toward start-up in 2005 is now being newly threatened by cost estimates ballooning upward to between $3-$4 billion�and a scarcity of financial backers, lending support to the MEP's detractors.

"Finding willing financiers for the project is problematic, given the modest oil reserves discovered to date in Azerbaijan and the lack of committed volumes from Kazakhstan," stressed analysts Wood Mackenzie in a recent report on the pipeline project.

Statoil acknowledged that with costs as prohibitive as are currently being forecast, a "final decision" on building the MEP is still some 18 months off.

According to WoodMac, the bottom line is that the MEP needs to transport 5-8 billion bbl, depending on the tariff, to reach profitability. Under the "most optimistic scenario," this means some 4.2 billion bbl could come from the ACG fields, although AIOC, having already sunk huge sums into the Baku-Supsa pipeline project, the so-called "western route," will likely want a return on its investment through use of that line and, therefore, will commit only 2.8 billion bbl. Moreover, Russia's Lukoil, a 10% shareholder in ACG, plans to export its share of production to Novorossiisk, cutting committed ACG crude to 2.5 billion bbl.

Rival pipeline study
Meanwhile, TotalFinaElf SA was last week reportedly named to undertake a feasibility study for a rival pipeline to transport oil from Kazakhstan via Turkmenistan to Iran, according to Paris-based newsletter Petrostrategies (OGJ Online, Oct. 13, 2000). Citing "reliable sources," the energy weekly reported that the Kazakhstan government had awarded the French energy combine an "official operator's mandate" to look into a "southern route" pipeline that would run from the recently discovered giant Kashagan oilfield, off Kazakhstan, to the Iranian town of Neka.

The proposed export line, the Kazakh-Turkmen-Iran Oil Pipeline, would cost some $1.6 billion to construct and carry 500,000 b/d to refineries in northern Iran. Capacity could be raised to 1 million b/d at a cost of a further $500 million, Petrostrategies reported. Among the various export routes that pipeline could take is one dubbed the "median line" starting in the Tengiz region and running 510 km to the Turkmen border and then on some 740 km to Neka.

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