Azerbaijan: Offshore Oil Pioneer

Azerbaijan is one of the world's oldest oil producing countries and has played a significant role in the development of today's oil industry. The world's first paraffin factory was opened there in 1823, and the world's first oil field was drilled in 1846. Azerbaijan was the site of the first offshore oil field—the Neft Dashlary—in the shallow water of the Caspian Sea, which was completed in 1951 and still produces oil today.

The country's largest hydrocarbon basins are located offshore in the Caspian Sea, particularly the Azeri Chirag Guneshli (ACG) field, which accounted for almost 75 percent of Azerbaijan's total oil output in 2013. Similar to its share of total production, ACG also holds over 70 percent of Azerbaijan's total reserves, with about 5 billion barrels located in this field.

Although the State Oil Company of Azerbaijan Republic (SOCAR) is involved in all segments of the oil sector, it produces only about 20 percent of Azerbaijan's total oil output, with the remainder produced by international oil companies.

Almost immediately following its independence in 1991 from the Soviet Union, Azerbaijan allowed foreign participation in its oil sector, and it has signed the most production-sharing agreements among all former Soviet Union countries. In general, hydrocarbons are produced under production-sharing agreements, with the share of profits dependent on the internal rate of return achieved by the project.

SOCAR produces about 20 percent of the country's oil output. The company is responsible for exploration and production of oil and natural gas in Azerbaijan, operating the country's two refineries, running the country's pipeline system, and managing the country's oil and natural gas imports and exports. Although the Ministry of Industry and Energy handles exports as well as exploration and production agreements with foreign companies, SOCAR participates in all of the international consortia developing oil and gas projects in Azerbaijan.

The remaining 80 percent of Azerbaijan's output comes from the ACG oil fields by the BP-operated Azerbaijan International Operating Company (AIOC) and at the BP-operated Shah Deniz field (which produces oil condensate). AIOC is a consortium of 10 petroleum companies that have signed extraction contracts with Azerbaijan. The AIOC is led by BP and includes Chevron, Inpex, Statoil, Turkiye Petrolleri, ExxonMobil, SOCAR, ITOCHU, and Hess. BP and a number of other AIOC consortium members have made significant direct investments in the development of the ACG field, with some AIOC member companies also investing in the construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline. BP is the largest foreign investor and has been involved in Azerbaijan since 1992.

The ACG field, covers 167 square miles and is located 62 miles east of Baku in the Caspian Sea. Operators expected peak production to reach 1 million bbl/d, but production at this field so far failed to reach this target. Production problems have affected ACG output in the past couple years, with unexpected production declines occurring because of technical problems.

BP's Chirag Oil Project (COP), authorized by the government in 2010, planned to increase oil production and recovery from the ACG field through a new offshore facility at the West Chirag platform. COP began producing oil in January 2014 and produced an average of 66,000 bbl/d in 2014, according to BP. The platform has a capacity of 183,000 bbl/d.

In addition to the ACG output, the BP-operated Shah Deniz field produces a small but stable volume of 50,000 bbl/d of condensate, and SOCAR produces some condensate from the shallow-water Guneshli field.

Azerbaijan exported an estimated 738,000 bbl/d of crude oil in 2013, according the Azerbaijan's State Statistical Committee. Azerbaijan's crude oil exports peaked in 2010 when they averaged about 908,000 bbl/d, but exports have fallen every year since then as production declined.

Azerbaijan is mainly a crude oil and condensate exporter, although the country exports small volumes of refined petroleum products to its neighbors, including diesel, gasoline, and jet fuel. The majority of the refined product exports go to Russia and Georgia, according to Eastern Bloc Energy.