CAPITAL: Baku

MONETARY UNIT: Manat

REFINING CAPACITY: 441,808 b/cd

OIL PRODUCTION: 255,000 b/d

OIL RESERVES: 1.178 billion bbl

GAS RESERVES: 4.4 tcf

The oldest known oil-producing region in the world experienced an oil boom at the beginning of the 20th Century and later served as a major refining center in the former Soviet Union.

OIL production peaked at about 500,000 b/d during World War II, then fell after the 1950s as the Soviet Union redirected resources elsewhere. Production declined after Azerbaijan became independent in 1991, averaging an estimated 193,000 b/d in 1997.

Most of Azerbaijan`s oil production comes from the Caspian Sea. Guneshli field, located 60 miles offshore, in 1999 accounted for more than half of the country`s oil production.

Upstream developments

Development of new fields through joint ventures and production-sharing agreements in the Caspian Sea was expected to boost Azerbaijan`s oil production well beyond its earlier peaks. The country`s oil exports could exceed 1 million b/d by 2010 and 2 million b/d by 2020.

In what was described as "the deal of the century," an international consortium-Azerbaijan International Operating Company (AIOC)-signed an $8 billion, 30-year contract in September 1994 to develop Caspian oil fields Azeri, Chirag, and the deepwater portions of Guneshli with total combined reserves estimated at 3-5 billion bbl. Oil revenues were projected to be $80 billion during the 30-year life of AIOC, and Azerbaijan will realize 80% of these revenues.

In 1999, BP Amoco PLC confirmed a major gas-condensate discovery in the Caspian Sea off Azerbaijan with a wildcat drilled on the Shah Deniz license area.

Speculation about a major find on Shah Deniz began in May 1999, when State Oil Co. of the Azerbaijan Republic announced that the well had cut natural gas and condensate pay zones in the Shah Deniz structure.

BP Amoco announced on July 12, 1999, that results from the SDX-1 well suggested a significant resource in the structure-enough to justify the early establishment of a joint working group to explore prospects for "material gas exports."

A BP Amoco official estimated reserves at 15 tcf of gas. Azeri sources quoted figures as high as 25 tcf, although these estimates were thought to be based on politicians` hopes rather than engineers` expectations.

The working group was expected to push for exports of Shah Deniz gas to Turkey by pipeline. Unusual for such a find, no consideration had been made of condensate reserves, the official said. "Gas is the driver for this project, not liquids," he said.

Processing activity

Azeri crude is refined domestically at two refineries in Baku, the Baku refinery with a capacity of 238,978 b/d, and the Novo-Baku refinery with a capacity of 202,830 b/d.

Both plants ran at well below capacity in the late 1990s, with overall refinery utilization rates at about 40% in 1997. The government estimated that upgrades at the two refineries would cost $600-700 million.

Transportation

AIOC exported its initial "early oil" production via a northern pipeline through Russia and a western route through Georgia, with a combined initial design capacity of about 200,000 b/d. Several proposals had been made to expand each of these routes.

Exports through the northern route began at the end of 1997 but ceased in 1999 because of Russia`s military conflict with Chechnya, through which the pipeline passed. Exports on the western route began at the end of 1998 and carried about 110,000 b/d of Azeri oil through most of 1999.

AIOC expected production to peak at 800,000 b/d within 15 years, requiring greatly expanded export capacity through a new or expanded main export pipeline (MEP) with capacity of 1 million b/d. Several options for routes were presented for consideration to the Azerbaijan government in 1997, including a new pipeline from Baku to Ceyhan, Turkey, and expansions of the western pipeline from Baku to Supsa, Georgia, and of the northern pipleine from Baku to Novorossiisk, Russia. No final decision had been made by yearend 1999.

One potential complication in Azerbaijan`s plans for developing its Caspian Sea resources was uncertainty over the legal status of the Caspian Sea, specifically the territorial rights of other nations bordering its shore: Russia, Kazakhstan, Turkmenistan, and Iran.

Azerbaijan advocated the establishment of maritime boundaries into national sectors based on the equidistant division of the sea.

Azerbaijan entered into a dispute with Turkmenistan over a field called Kyapaz by Azerbaijan and Serdar by Turkmenistan, which included it as part of its Block 30 licensing. In addition, Azerbaijan`s foreign ministry objected to an Iranian decision to award Royal Dutch/Shell Group and Lasmo PLC a license to conduct seismic surveys in a region that Azerbaijan considered its territory.

A regional pipeline and transit system centered on Azerbaijan was beginning to emerge in 1999. Oil moves via tanker across the Caspian Sea from Kazakhstan and Turkmenistan to the port of Baku for transshipment by rail and pipeline westward to the Black Sea.

Shipping volumes rose from 2,000 b/d in 1996 to 20,000 b/d in 1997 and an estimated 60,000 b/d in 1998. Shipping company Caspian Transco worked with the Azeri government to overhaul and expand the oil terminal facilities at Dyubendi, 30 miles northeast of Baku, to allow for further increases.

The European Union announced in October 1998 that it would loan Azerbaijan $25 million to rehabilitate and upgrade the seaport near Baku to allow as much as 500,000 b/d of oil shipments from the eastern Caspian.

As Caspian production increases, trans-Caspian pipelines could carry increasing volumes of oil and gas from Kazakhstan and Turkmenistan. The cross-Caspian pipelines could connect with other export pipelines from Azerbaijan, such as the proposed MEP and the early oil routes. In addition, Iran proposed a pipeline that would transport oil from Baku via a proposed 190-mile pipeline to Tabriz in northwest Iran, where it would also connect with the existing Iranian pipeline network and refineries.