Insights into Azerbaijan's key energy assets - Shah Deniz & ACG fields

The Shah Deniz field is one of the largest natural gas fields in Azerbaijan, and the broader Caspian Sea region. This field was discovered in 1999 by the Shah Deniz consortium during exploration drilling in the Caspian Sea. The consortium comprises several international oil and gas companies, with bp being the operator.

The development of the Shah Deniz field has been conducted in multiple phases to maximize its production capacity and economic viability. The initial phase, known as Shah Deniz Phase 1, involved the development of production infrastructure and facilities to produce and export natural gas to regional and international markets. Subsequent phases, including Shah Deniz Phase 2 and potential future expansions, aim at further increasing production capacity and exploring additional reserves within the field.

Shah Deniz field represents a significant strategic asset for Azerbaijan and its partners, contributing to the country's energy sector development, economic growth, and regional cooperation in the Caspian region and beyond.

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) earned $202.715 million from the Shah Deniz (gas and condensate) field from the beginning of the current year until May 1.

Revenues from the Shah Deniz field have experienced a drastic decline, plummeting by 4.6 times compared to the corresponding period last year.

Notably, revenues from condensate sales on the Shah Deniz field have seen a staggering 3.2 times decrease during this period, amounting to $60.784 million.

This downturn in revenues underscores the challenges facing the energy sector, necessitating a closer examination of market conditions and potential strategies for recovery.

The 4.6-fold decrease in revenues from the Shah Deniz field compared to the corresponding period of last year can be attributed to several factors:

Market Conditions: Fluctuations in global gas and condensate prices can significantly impact revenues from the Shah Deniz field. If prices have declined sharply compared to the previous year, it would directly affect the revenue generated, leading to a drastic decrease.

Production Levels: Reduced production levels from the Shah Deniz field could also contribute to the decline in revenues. Factors such as maintenance shutdowns, technical issues, or natural decline in reservoir productivity can lead to lower production volumes and consequently lower revenues.

Contractual Agreements: Changes in contractual agreements, including pricing structures or sales volumes, could influence revenue outcomes. If the terms of the agreements have become less favorable, it could result in decreased revenues even if production levels remain constant.

Market Demand: Changes in market demand for gas and condensate products can impact revenues. If demand decreased compared to the previous year due to factors such as economic downturns or shifts in energy consumption patterns, it would lead to lower sales volumes and revenues.

The decrease is also related to another field, ACG.

The "Azeri-Chirag-Gunashli" (ACG) oil field block is one of the largest and most significant oil-producing assets in Azerbaijan and the wider Caspian Sea region.

The ACG field is located in the Azerbaijani sector of the Caspian Sea. It encompasses several individual oil fields, including the Azeri, Chirag, and Gunashli fields, which are operated collectively under the ACG project.

The ACG project is operated by bp (British Petroleum) in collaboration with other international oil companies and Azerbaijan's state-owned oil company, SOCAR (State Oil Company of Azerbaijan Republic). The current shareholders in the ACG project and their respective stakes are as follows:

BP-30.37%, SOCAR-25%, MOL Group-9.57%, INPEX-9.31%, Equinor- 7.27%, ExxonMobil, 6.79%, TPAO (Turkish Petroleum Corporation)- 5.73%, ITOCHU-3.65%, ONGC Videsh Limited (OVL)-2.31%.

The Azeri-Chirag-Gunashli (ACG) oil field block represents a cornerstone of Azerbaijan's oil industry and a key driver of its economy, playing a crucial role in the country's energy security and prosperity.

In January-April of this year, the State Oil Fund of Azerbaijan (SOFAZ) reported an income of 1 billion 798.6 million US dollars from the "Azeri-Chirag-Gunashli" (ACG) oil field block located in the Azerbaijani sector of the Caspian Sea.

It is noted that this figure is 669.4 million US dollars, or 27.1% less than the revenue recorded in the same period of 2023.

It is worth noting that in January-April 2023, SOFAZ received an income of 2 billion 468 million US dollars from ACG.

Regarding the 27.1 percent decrease in revenues of the State Oil Fund of Azerbaijan (SOFAZ) for the "Azeri-Chirag-Gunashli" (ACG) field block during the four months of the current year compared to the same period last year:

Production Volume: One possible reason for the decrease in revenues from the ACG field block is a decline in production volume. If production levels have decreased due to factors such as reservoir depletion or operational issues, it would directly impact the revenue generated from oil sales.

Oil Prices: Fluctuations in global oil prices can significantly influence revenues from oil-producing assets like the ACG field block. If oil prices have decreased compared to the previous year, it would lead to lower revenues even if production levels remain constant.

Contractual Changes: Changes in contractual agreements, such as adjustments to revenue-sharing arrangements or taxation policies, could affect the revenue outcomes for the ACG field block. If the terms of the agreements have become less favorable, it could result in decreased revenues for SOFAZ.

Operational Costs: Increased operational costs associated with oil extraction and transportation could also contribute to the decline in revenues. If expenses have risen significantly compared to the previous year, it would impact the net revenue generated from oil sales.

Overall, a combination of factors including market conditions, production levels, contractual agreements, and operational costs likely contributed to the decrease in revenues from both the Shah Deniz and ACG field blocks.