LUKOIL is the driving force in the energy dialogue between Russia and Azerbaijan and has made a significant contribution to several important projects. The Russian oil company’s largest project in Azerbaijan is the development of the Shah-Deniz gas-condensate field, which is located offshore about 62 miles south of Baku on the Caspian Sea shelf, at a water depth of up to 1,200 feet. The contract area covers 332 square miles and has recoverable reserves of 22 TCF of gas and more than 110 million tons of gas condensate. Azerbaijan enacted a law on October 17, 1996 ratifying an agreement for the exploration, development, and production sharing of Shah-Deniz field. At present, the international consortium members are BP (the project operator, with 25.5%), Statoil (25.5%), the State Oil Company of the Azerbaijan Republic (SOCAR) (10%), TotalFinaElf (10%), NICO (10%), and TPAO (9%). After acquiring the LUKAgip joint venture in January 2004, LUKOIL Overseas Holding increased its stake in the project to 10%. With the development of the Shah-Deniz field, LUKOIL increased natural gas production in Azerbaijan from 49 MMCF in 2006 to 11.3 BCF in 2009, while oil and gas condensate production grew from 330 tons to 97,000 tons.
Another important project is the development of the potential D-222 Block, a part of the large Yalama area, the most promising structure in the northeastern Caspian Sea, roughly equal parts of which are located in the Azerbaijani and Russian sectors of the Caspian, about 18 miles offshore. The water depth near the structure ranges from 260 to 2,300 feet.
The contract to develop this block was signed on July 3, 1997 and ratified on December 10 of the same year. Investment in the project is estimated at $2 billion. According to our estimates, the block has reserves of roughly 800 million barrels of oil and 1.8 TCF of gas. LUKOIL holds an 80% stake in the project, while SOCAR has a 20% interest. Contractual obligations called for the Russian oil company to drill two exploratory wells in the D-222 block. Drilling of the first exploratory well began in October 2004 and ended in June 2005. Unfortunately, drilling did not reveal any hydrocarbon reserves, although experts are hopeful that a second well will produce positive results.
LUKOIL has also made significant contributions to the development of the Azerbaijani fuel market. In 1995, the oil giant opened the first gas station in Baku that complied with international technical, environmental, and service standards. By 2008, LUKOIL was successfully operating more than 20 gas stations in Azerbaijan, in addition to one of the country’s most modern gas tank batteries. The high level of cooperation between Baku and LUKOIL, which has invested more than $1 billion in the Azerbaijan economy, provided an impetus for the Russian company to expand its operations in Georgia and Turkey. LUKOIL currently accounts for a considerable share of the fuel markets of these countries in addition to the bunker business in the Black Sea.
Russia’s energy relations with Uzbekistan and Turkmenistan have also been developing productively as of late. On November 29, 2007, LUKOIL Overseas Holding and Uzbekneftegaz commissioned the Hauzak gas field as part of a PSA on the Kandym-Hauzak-Shady-Kungrad project. Hauzak field, which is part of Dengizkul field, is located on the shore of Dengiz Lake in the Bukhara Region in southwest Uzbekistan about 118 miles from the city of Bukhara near the Turkmenian border. The field could have a maximum annual production level of roughly 388 BCF of natural gas (production is expected to peak in 2012–2013), giving LUKOIL one-fifth of overall gas production in Uzbekistan. The project could ultimately result in total output of more than 7 TCF of gas.
Existing intergovernmental agreements between Russia, Kazakhstan, Azerbaijan, Uzbekistan, and Turkmenistan emphasize enhanced cooperation in the oil and gas sector as well as coordination of the fundamental restructuring of their national economies. The key benefit of successful energy cooperation between Russia and its individual CIS partners is the opportunity to achieve total energy self-sufficiency and to substantially expand the export potential of both countries. Other important aspects of such cooperation include the establishment of the appropriate legal frame-work in the partner countries to promote development of trade and economic ties in the energy sector, conditions for free and uninterrupted transit of energy resources, and implementation of coordinated customs, tax, and tariff policies in branches of the energy sector.
Russia and its CIS partners could also enhance cooperation in such promising areas as the more efficient use of transit potential, the development of transportation infrastructure, and the expansion of export opportunities for the shipment of oil and gas resources to third countries. Kazakhstan has started building its segment of the Western Europe–Western China International Transit Corridor (overall length 5,247 miles, including 1,732 miles in Kazakhstan). The Kazakh segment of the corridor will bypass the southern regions of the country and eventually enter Russia at Aktyubinsk. According to the 2007–2011 program for the further development of the Khorgos International Border Cooperation Center (Kazakhstan-China), the Kazakh city of Aqtaw is viewed as a strategic point within the unified transportation and logistics system of the Central Asian Transport and Industrial Corridor, which will connect with the North-South and Transsib transport corridors in central Russia.
Today, both the price structure and the geopolitical structure of the global oil market are changing. Key centers of gravity are currently being set up in Northeast Asia, where multilateral cooperation in the energy sector is set to develop. Under these conditions, Russia, Kazakhstan, and Azerbaijan can play key structural roles in the establishment of multilateral Eurasian energy cooperation. Successful cooperation between these countries in the transportation of oil and gas resources to the West can and should be complemented by the joint export of hydrocarbons to the dynamically growing markets of East Asia—above all, China. It is clear that Russia, Kazakhstan, and Azerbaijan are of strategic importance to China thanks to their enormous hydrocarbon reserves, their close proximity to the Chinese border, and the undeniable convenience of transporting crude hydrocarbons.
The expansion of energy cooperation between Russia and its CIS partners naturally does not bind these countries to any harsh restrictions that infringe on their sovereignty or prevent them from participating in other international oil and gas projects. On April 24, 2008, the Kazakh Parliament ratified an agreement with Azerbaijan that envisions the accelerated creation of a Kazakh-Caspian hydrocarbon transportation system that will provide 25 million tons of oil supplies per year to the Baku–Tbilisi–Ceyhan pipeline system. Tankers will deliver Kazakh oil to Baku from the Port of Aktau.
So-called alternative oil transportation projects (the Baku–Tbilisi–Ceyhan and Odessa–Brody oil pipelines, etc.) have met with a mixed reception in the Russian political and business community. Some experts have gone so far as to call these routes an implicit anti-Russian move by Kazakh and Azerbaijani authorities. In this author’s view, however, these projects have several significant and constructive components to intensify mutually beneficial Eurasian cooperation. Kazakhstan and Azerbaijan both have an objective need to build new export oil pipelines outside Russian territory so that they can diversify export flows of crude hydrocarbons and thereby raise the overall level of energy security both within particular regions and in the world as a whole.
The creation of a common energy market in Russia and the CIS will promote the development of mutually beneficial economic relations in the energy sector, saturate the domestic market with inexpensive types of energy resources, cover consumer demand for such products, and expand opportunities to export energy resources to third countries. Some major achievements have been made here. President Medvedev paid his first state visit to the Republic of Kazakhstan on May 22–23, 2008. During talks with Kazakh President Nursultan Nazarbayev, the two leaders confirmed plans to form a joint fuel and energy budget for the period until 2020 as part of strategic bilateral cooperation. On the basis of this budget, the two countries will develop joint approaches to the use and development of an energy resource transportation system. The two countries also have a unified position on the issue of expanding CPC capacity from 35 million tons of oil per year to 74 million tons. The pipeline’s capacity is to be increased in two phases prior to 2012. In addition, as part of plans to develop the oil industry, another 19 million tons of Kazakh oil are to be shipped to fill the yet-to-be-completed Burgas–Alexandropol oil pipeline, which will substantially increase crude hydrocarbon supplies to southern Europe. For its part, LUKOIL has announced plans to significantly boost investment in Kazakhstan, and the company’s board of directors has set a goal of increasing hydrocarbon production in Kazakhstan to 8.8–11 million TOE per year by 2010.