Caspian Overview: SD2 Cuts Capex, Baku Optimistic

UK operator BP said this week that in the first half of 2016, the partners in the Shah Deniz spent about $225mn in operating expenditure (opex) and about $1.87bn in capital expenditure (capex), which was associated with the Shah Deniz Stage 2 project (SD2).

In comparison with 1H 2015, the figures indicate that opex and capex were down by $25mn and $390mn respectively. 

The major offshore project, Shah Deniz, produced some 5.4bn m³ of gas from its first phase (SD1) in 1H 2016, about 0.2bn m³ more than 1H 2015.

Azerbaijan and its partners have been developing the second stage of field (SD2), aimed to export 16bn m³/yr of gas to Turkey and EU by 2021. The volume would increase to 24bn m³/yr by 2025 and 31bn m³/yr in early 2030s.

"SD2 is now over 77% complete in terms of engineering, procurement and construction, and remains on target for first gas from SD2 2 in 2018 (to Turkey)," BP says.

Coming to the another BP-operated offshore project, for first time since 2010, Azerbaijan's oil output from Azeri-Chirag-Guneshli (ACG) block increased, thanking to more gas re-injections.

According to the BP, the ACG production for the two quarters was on average 655,000 b/d, about 14,000 b/d more than 1H15.

During this period, AGC delivered only 1.31bn m³ of associated gas to Azerbaijan, or 0.79bn m³ less than the same period in last year, owing to more re-injections to maintain crude oil output.

Baku is committed and optimistic

Despite the drop in Shah Deniz's capex, Southern Gas Corridor Co CEO Afgan Isaev told NGW that Baku has fully committed to invest in SGC, including SD2, and was continuing to meet its financial obligations on time.

Southern Gas Corridor Co was founded on February 25, 2014, following a decree by the president of Azerbaijan, Ilham Aliev, on the effective management of energy projects including SD2 and SGC, which consists of the South Caucasus pipeline extension (SCPX) and the Trans-Anatolian and Trans-Adriatic pipelines (Tanap and TAP respectively).

He said that Southern Gas Corridor Co had invested $5.212bn, while in total, Azerbaijan’s share in financing SGC and SD2 is estimated at $11.454bn. “Therefore, Azerbaijan has already realized 45.5% of its financing obligations.”

The current cost of the SGC from the SD2 reservoir to landfall in southern Italy, is estimated at around $40bn, comprising $9.3bn for Tanap, $6bn for TAP and $23.8bn for developing SD2 as well as the SCPX.

Isaev explained the sources of funds which Azerbaijan has allocated to SGC as below:

• Issue of bonds by SGC to the sovereign wealth fund Sofaz, for a total amount of $2.5bn;
• Equity injections from the finance ministry and state oil concern Socar for a total amount of $1.7bn;
• And an inaugural eurobond in the amount of 1bn in March 2016.

“SGC Co is willing to raise debt financing to fund its committed capital investments to the projects until 2019. The net funding need amounts to $6.2bn,” he said.

Isaev added Azerbaijan is negotiating with World Bank to attract credits for SGC. “Our projects are attractive and financial entities are interested in Azerbaijan’s energy projects. It is hard to say any concrete figure which would be allocated by international finance sources, because both they and Azerbaijan should reach a common point in credit terms. However, we believe that the terms of credits must be soft and the payments period should be at least 10 years, because these projects are not only in favour of Azerbaijan, but a big region would benefit economically from these projects.”

He said that Azerbaijan is expected to allocate $2.809bn in 2016, of which 55.7%, or $1.566bn would be spent on Tanap. About 30.2%, or $847mn, would be allocated to SD2, while for TAP will take about $278mn and SCPX will take $118mn.

He added that the capex of these projects for Azerbaijan rose by $1.474bn year-on-year, while the figure for 2014 was only $227mn. The big rise is mainly owing to the acceleration of work on the SCPX and Tanap.

Azerbaijan’s state oil company, Socar, has 49% and the economy ministry 51% of Southern Gas Corridor Co.

The shareholders of Shah Deniz are: BP (operator; 28.8%), Turkish TPAO (19%), Malaysia's Petronas (15.5%), Socar (10%), Russian Lukoil (10%), Iranian Nico (10%) and Socar subsidiary SGC Upstream (6.7%).

Shareholders of Tanap are: Socar (58%), Botas (30%) and BP (12%), while TAP’s shareholders are: BP (20%), Socar (20%), Italy's Snam (20%), Belgian Fluxys (19%), Spanish Enagas (16%) and Swiss Axpo (formerly EGL - 5%).

Ilham Shaban