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    Oil & Gaz Analitical Service


Azerbaijan is the oldest oil pro­ducing region. Over its history Azerbaijan's oil and gas indus­try saw multiple ups and downs, attributed to a number of fac­tors, both geological beyond human control and economic caused by human actions. The latest development phase began with the signing of a new production sharing agreement with a consortium of foreign investors back in 1994. The last several years saw a positive dynamics in oil production, expected growth of gas pro­duction, completion of the Baku-Tbilisi-Ceyhan pipeline and considerable revenues to the State Oil Fund used to fill the state budget and support social programs.

First mention of oil and gas on Azer­baijan's territory dates back to early history. The first written evidence could be found in the fifth century manu­script of a Byzantine scholar Priscus of Panium who mentioned sources of flam­mable oil in Azerbaijan. In the Middle Ages and later oil was recovered from the sur­face of several lakes on the Aspheron Peninsula, primarily the Masadyrsky Lake, from surface accumulations and hand-dug pits. In the early sixteenth century there were about 500 such pits around Baku.

The Beginning_

Oil was used for heating, illumination, and for therapeutic purposes. We know that Indi­ans once built a large temple for worshippers in the Surakhan area where associated gas was escaping to the surface. Oil from the Aspheron Peninsula used to be shipped to Iran, Iraq, India, and other countries.

The beginning of Azerbaijan's oil and gas industry as we understand it today dates back to 1871 when the Balakhany-Sabunchi-Romany and Bibi-Eibat fields were discovered. Since that time oil was produced by artificial lift.

With further development of well drilling technologies new fields were discovered on the Aspheron Peninsula laying the founda­tion for the oil and gas industry and stimu­lating the development of appropriate infrastructure and oil refining facilities.

Field development dictated the need for an appropriate legal base, and having acquired jurisdiction over the territory of modem Azerbaijan under the Gulistan (1813) and Turkmanchai (1828) the Russian Government in the early 1870s abolished the state monopoly over oil production.

In 1872, two legal acts were approved -the Law On Oil Fields and Excise Tax on Petroleum Products and the Law On Auc­tion Sale of Leased Oil Fields to Private Per­sons. The first auction was held in the late 1872 for 17 areas in the Balakhan and Bibi-Eibat fields. The winners were mostly foreign entrepreneurs and only one Azeri company. By the late XlXth century, Azeri businessmen owned 49 out 167 companies, the major of them being the Baku Oil joint-stock company established in 1874. At that time the construction of new kerosene and lubricant producing facilities began, and in 1878 the first oil pipeline was built. These developments brought about an economic boom in Baku attracting foreign capital. The Nobel brothers and the Rothschilds greatly contributed to the Baku oil boom. They controlled up to 45% of oil exports from Baku. In the early XXth century Royal Dutch Shell bought the Rothschild proper­ties, and gradually accumulated 60% of oil business on the Aspheron Peninsula.

From 1880 to 1901 oil production rose from 343 thousand tons to 11 million tons exceeding the level of oil production in the US and accounting for over 50% of world oil production. At that time, the Balkhany and Bibi-Eibat were major sources of crude oil.

Over a period of 1897-1907, the first 830km Baku-Batumi pipeline was built (200mm in diameter, throughput capacity - 1 million tons/year). Incidentally, the pipeline route leading to the Black and Mediterranean Seas was suggested by D. Mendeleev.

The well known events in the first quar­ter of the XXth century followed by indus­try nationalization impacted Azerbaijan. In 1 920, oil production fell to 2.9 million tons notwithstanding the discovery of three new fields - the Pirallakhi, Surakhany, and Shubany fields.

Before nationalization of the Azerbai­jan's oil industry had over 100 joint stock companies primarily with Russian and Bri­tish ownership operating in the country together with 270 oil production compa­nies, about 50 drilling contractors, 25 refining companies, and multiple business­es providing technical services.

The Soviet Period

In the Soviet time, considerable cash and material resources were invested in Azer­baijan with the aim of reviving its oil pro­duction. More intense geological explo­ration at that time resulted in many discov­eries in the Aspheron Peninsula, including the Kala, Loktaban, Binagady, Karabag, Shongar, and some others. Production increased from year to year and reached record high in 1941 - 23.6 million tons or 75% of total Soviet production. That achievement has not been surpassed even today - (See "Production Milestones"). Dur­ing the war oil production declined to 11 million tons due to relocation of Azerbai­jan's oil production facilities to new oil regions - Turkmenia, Tataria, and Bashkiria.

After the war, oil production revived with the beginning of the Caspian devel­opment in addition to the Aspheron Peninsula. In 1 947, the Gyurgany off­shore field was discovered in the Caspian coastal water. Another major oil field Neft Dashlary (Oil Rocks) was discovered far­ther offshore and put on stream in 1 950. That was a period of intense geological exploration and multiple discoveries - the Gumadasy, Darwin, Sanchagaly-Duvanny offshore field, Bula, Peschany offshore field, Bakhar, and other fields. The devel­opment of offshore drilling methods and technologies was in progress, and off­shore infrastructure was built.

In 1957, a total of about 16 million tons of crude oil and 3.4bcm of gas was produced in Azerbaijan. Oil was refined at Baku facilities (the Stalin Refinery, the Novo-Bakinsky Refinery, the Vano Sturua Refinery), and the Batumi Refinery to which crude oil was shipped by the Baku-Batumi pipeline and by rail.

In 1965, oil production level in Azer­baijan reached its second peak of 21.6 million tons.

However, in those years the Aspheron Peninsula reserves showed signs of deple­tion, and as of 1967, oil production began to decline. Major development efforts were moved to deep water areas where a major field named April 28 (known now the Gyuneshli field) was discovered in the early 80s. In subsequent years new major discov­eries were made - the Chirag (1985), Azeri (1987). and Kyapez (198) fields as an extension of the Neft Dashlary field.


The collapse of the Soviet Union entailed disruption of well established eco­nomic ties and economic chaos in Azerbai­jan. Most development wells were idle, exploration and development drilling reduced in scope, oil and gas production was rapidly declining. Oil machine building companies that used to meet 70% of the Soviet Union's demand for oil equipment reduced their output.

Seeking to design a consistent govern­ment oil policy President of the Azerbaijan Republic issued a decree creating the State Oil Company of Azerbaijan (SOCAR) in the fall of 1992 on the basis of the State Concern Azerineft and Production Association Azemeftekhimya.

SOCAR's business includes offshore and onshore oil field exploration, process­ing, refining, utilization, and transporta­tion of oil, gas, condensate, and petrole­um products, and meeting consumer demand for energy,

SOCAR is designing target and long-term industry development programs, acts as a liaison between government bodies, foreign companies, and domestic enterprises. The Company makes deci­sions on granting development rights to new fields, approves test-commercial pro­duction programs for the fields developed by other companies and development programs for oil, gas, and gas condensate fields. SOCAR is also responsible for approval of annual business programs of oil and gas producing companies, as well as crude oil and natural gas transporta­tion and processing.

The year of 1 994 was a turning point in Azerbaijan's history. In that year the first Production Sharing Agreement was signed with 12 world leading oil compa­nies from 8 countries for the develop­ment of the Azeri, Chirag, and deep-water Gyuneshli fields discovered as early as the 80s. Other large and small companies began to show interest in the country and Azerbaijan saw the begin­ning of investment inflow.

Subsequent years were the years of euphoria followed by disillusionment, con­flicting forecasts and opinions, withdrawal of a number of companies, and sharp geopolitical debates.

However, in the first years of the new cen­tury the situation gradually came back to normal based on a number of major projects. The year of 2003 could also be described as a benchmark year due to significant progress achieved by all major oil and gas projects. In addition to the Azeri-Chirag-Gyuneshli proj­ect progressing on schedule, it was the start­up year of the Shakh-Deniz project and the long-awaited construction of the legendary Baku-Tbilisi- Ceyhan pipeline.

In 2005, oil production frozen at a level of 14 to 15 million tons a year over the preceding 5 to 6 years jumped to 22.2 mil­lion tons reaching its second-highest peak after 1941. Accordingly, oil exports increased by 50%,

Last year, the construction of the Baku-Tbilisi- Ceyhan pipeline was completed, and in the spring of 2006, the first tanker carrying the Azeri crude will leave the Mediterranean port.

The Azerbaijan's International Operat­ing Company (AIOC), operator of the Azeri-Chirag-Gyuneshli project started oil pro­duction and export from the Azeri field. The country's major gas field Shakh-Deniz will soon be put on stream. The construc­tion of the South Caucasian gas pipeline to Turkey is in the final construction phase, first gas will be shipped to Turkey in the fall of 2006.

Cumulative hydrocarbon production in Azerbaijan over its entire history amounts to 1462 million tons of crude and about 380bcm of gas. Over the last decade over $1 5 billion was invested in Azerbaijan's oil industry $9 billion of which were invested in the country's major project - the Azeri-Chirag-Gyuneshli development.

The future of oil and gas development in Azerbaijan is primarily associated with offshore prospects. A total of 28 oil and gas fields have been discovered in Azerbai­jan's sector of the Caspian Sea (18 of them are presently in development), 130 prospects have been identified.

Oil Fund

In December 1999, the State Oil Fund was established in Azerbaijan as a govern­ment institution reporting to the Head of State and financed from non-budget funds. Its assets are formed primarily by revenues generated by Azeri companies from oil and gas sales, bonuses received under oil and gas development contracts, and lease payments for the use of state property under contracts executed with foreign companies.

The main idea behind the establish­ment of the State Oil Fund is to use oil revenues largely in the interests of the nation's future and as a source of occa­sional additions to the state budget. As of the early 2006, the State Oil Fund amounted to $1.18 billion. Its 2006 rev­enue has been approved at $896.6. Expected revenue from profit oil sales is estimated at 684 new Manats ($759M); from the Baku-Supsa oil pipeline transit tariffs, at about 13.5 million new Manats ($1 5M); from bonuses, 67.5 million new Manats ($75Mj; and acreage lease pay­ments, 7,4 million new Manats ($8.2M). In addition, proceeds from the Fund capital employed in 2006 are expected at a level of 35.3 new Manats ($39.1 M); other income and proceeds, 0.1 million new Manats ($0.11M).

The Fund expenses in 2006 will include 585 million new Manats ($649M) to be transferred to the state budget; 110.3 million new Manats {$ 1 22M) will be allocated to social and economic pro­grams in support of refugees and forced migrants; and 38 million new Manats ($42M) will cover Azerbaijan's share of financing the Baku-Tbilisi-Ceyhan pipeline construction.