The bloom is back on the rose that is the Caspian Sea.
It's been, in many ways, a torturous path. Initial euphoria following the break up of the former Soviet Union was followed by subsequent dejection, as international oil companies faced difficult working conditions and negotiations with new governments in the region.
But today, eight years later, political and economic stumbling blocks seem to be disappearing, and the international oil community is finally able to forge ahead with ambitious exploration programs.
The next several years should reveal the ultimate potential of the Caspian Sea region as a major petroleum province.
Exploration activity has been slow in coming to the Caspian region for a variety of reasons, according to Nick Zana, managing director of Chevron Overseas Petroleum's Eurasia business unit:
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Negotiations for production sharing agreements with newly formed countries "that only got their independence about seven years ago took a great deal of time."
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There was no seismic data.
"Industry had to come in and start almost from scratch," Zana said. "There was some 2-D seismic, but no modern 3-D seismic data available in the region."
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The lack of infrastructure hampered exploration activity.
"I wouldn't characterize these issues as delays," Zana said. "It's the normal process of exploring a basin when you consider where we started."
Wheels of Change
Zana said the political climate in the Caspian region has settled down in the last few years.
"I prefer to look at the situation as a glass half full," he said. "I think these countries have done a remarkably good job and have been very stable given the turmoil from which they were born.
"I don't think there are many analogies in the history of mankind to match the disruption they experienced," he continued. "Not only did they change their whole system of government that they had been living under for about 80 years literally overnight, but they also changed their economic system overnight.
"Faced with that kind of situation I think these countries have been incredibly stable."
Zana pointed out how Russia recently held its first free independent elections in which Vladimir V. Putin was elected president.
"From all accounts the elections were fair and free of influences," he said. "The country has a new president in place for the first time in Russia through a democratic transfer of power. To me that's incredible progress.
"What Putin's agenda will be regarding the oil industry is unknown, but we are encouraged," Zana added. "He is a strong supporter of our new pipeline currently under construction to carry Tengiz crude through Russia to the Black Sea.
"His administration views our pipeline as a strategic and economic opportunity for Russia."
Who Do You Trust?
From the petroleum industry's perspective the Caspian nations have come a long way in developing a framework for production sharing agreements and other guidelines, which have resulted in the recent exploratory activity.
"It's taken several years for Western companies to establish credibility with these governments," Zana admitted. "Chevron, for example, is a transparent company -- we operate in Russia and Kazakhstan with the same openness that we operate in the West and America. Initially people in these countries were understandably skeptical of outsiders.
"Although it slowed things down at times, we had to stay ethical and transparent," Zana said. "Today the long-term benefits of that approach are being realized. We have gained credibility over time through our business practices and built trust through establishing human relationships.
"We are now seeing activity accelerate as a result of this foundation we have laid over the last seven years."
Zana said it's obvious Chevron has a big stake in the future of the Caspian Sea region. Not only does the company hold a 45 percent interest as operator of the giant Tengiz oil field, but the firm also has a very large prospect offshore Azerbaijan and is an equity holder in the Caspian Pipeline Consortium -- making Chevron the largest foreign investor in the region.
"This is a very profitable region for our company and we look forward to adding to our portfolio in the Caspian," he said. "I believe the Caspian will be the single largest element in our international portfolio in 10 years when Tengiz is fully developed and other projects are brought on line."
Zana believes that the Caspian region, outside the Middle East, has the single most important potential for adding reserves in the world.
"In terms of potential the Caspian offers one of the greatest opportunities for us to explore virgin areas," he said. "Whether that potential proves to be as large as industry expects, only the drill bit will tell.
"But today there is no reason not to believe the potential will be tremendous. The Caspian is already a world class producing region and it's hardly been explored."
Votes of Confidence
The industry's renewed confidence is translating to exploration activity all around the Caspian region.
Currently the most watched well in the world is drilling in the North Caspian Sea, in a look-alike structure just offshore the Tengiz Field.
The eight-member Offshore Kazakhstan International Operating Co. (OKIOC) with Shell as operator spud the Kashagan East 1 exploratory test last summer. The well is reportedly at its objective and targeted the Kashagan carbonate platform on a structure with an areal size and reserve potential judged to be three times that of Tengiz, according to the International Oil Letter.
The well was planned for a total depth of 4,500 meters.
"If this well is a major discovery it will be an enormous boost for the Caspian region -- it will prove the world class potential of this region," Zana said.
The South Caspian region also is logging some major successes. Last July BP-Amoco announced a giant gas condensate discovery at the SDX 1 well offshore Azerbaijan on the Shah Deniz prospect. The firm indicated reserves for the field are expected to fall in the 14 to 25 trillion cubic feet of gas range.
While some industry watchers were disappointed by the discovery of natural gas, this world-class discovery could spur additional activity in the South Caspian.
"Drilling has just gotten started offshore Azerbaijan," Zana said. "There are many large structures under lease to international companies, and the only real limitation on exploration drilling today is the availability of deepwater rigs."
Chevron has a large structure under lease in deep water Azerbaijan where the company hopes to drill its first exploratory well later this year or early next year.
"Our lease is well positioned in relation to the Shah Deniz discovery and large onshore oil discoveries, so we are very optimistic that we will find a world-class accumulation," Zana said.
"Of course, you never know until you drill, but based on all the geological and geographical information on the structure we have put very low risk on not finding some hydrocarbons," he added.
"The question is what we will find and how much."
Bearing Fruit
In addition to exploration projects finally getting under way, contracts to develop previously discovered oil fields in the former Soviet Union also are now bearing fruit -- and none is more important than the giant Tengiz oil field on the northern edge of the Caspian Sea in Kazakhstan.
Chevron Overseas became a major early player in the new country in 1993 when it signed a deal to develop the field. The project was hampered in those early years by a variety of political, procedural and transportation issues.
Tengiz was a prize worth fighting for, however, with an estimated six to nine billion barrels of recoverable oil and an estimated 25 billion barrels of oil in place from a structure 12 miles wide and 13 miles long.
Perseverance has paid off. Today Tengiz is flourishing and Chevron is high on the future potential. Partners in the Tengizchevroil partnership are:
- Chevron with 45 percent.
- National Oil and Gas Company Kazakhoil, 25 percent.
- Mobil Kazakhstan Ventures Inc., 25 percent.
- LUKARCO, 5 percent.
"Current production from Tengiz is approximately 215,000 barrels per day, a considerable jump from the 60,000 barrels a day production when we signed the contract to develop the field," Zana said. "Tengiz crude has a high hydrogen sulfide content, and the only constraint to production is surface facilities to convert the hydrogen sulfide to sulfur and extract the sulfur."
There are four facilities that can each handle about 55,000 barrels of oil daily. A fifth facility will be completed in June that will jack production to 260,000 barrels a day. In addition, work is under way on a second-generation plant, scheduled for completion in 2004, that will have capacity of 110,000 barrels per day.
That facility will bring daily production to 370,000 barrels.
Chevron isn't resting on its laurels at Tengiz, as it looks for ways to improve efficiencies and recoveries at the giant field. Zana said the company is in the evaluation and pre-engineering phase of a project to re-inject gas into the Tengiz reservoirs.
"When the crude comes to the surface, solution gas comes out of the oil and the hydrogen sulfide is in that gas," he said. "To convert that hydrogen sulfide in the gas to sulfur requires a large investment in surface facilities, and we have always thought that by re-injecting gas into the reservoir we could enhance recoveries from the field through pressure maintenance as well as eliminate the investment requirements to convert the hydrogen sulfide.
"I am very optimistic this program is going to prove to be a significant addition to Tengiz reserves as well as make the field even more economic than it already is," he added. "We will know by the end of this year where we stand on this process."
In addition to these projects, Chevron will add two new drilling rigs to the field's fleet over the next 18 months and initiate production on the Korolev satellite field.
Move It or Lose It
Transportation always has been an enormous issue impacting Chevron's involvement at Tengiz -- but today that situation has been settled, and a new pipeline is under construction.
In the interim Chevron has perfected a system to move the crude by rail, and some production is routed through the Russian pipeline network.
"About 25 to 30 percent of our total production is shipped through Russia's pipeline network and 70 to 75 percent by rail," Zana said. "We have not shut in a single barrel of oil in the last several years due to transportation issues."
The new Caspian Pipeline Consortium 1,500-kilometer line will further enhance the transportation infrastructure from Tengiz as well as the entire North Caspian region.
About half of the pipeline was in place prior to the break up of the Soviet Union. The consortium will extend the line and build the first offshore loading system in the former Soviet Union at the Black Sea port city of Novorossysk.
The line's initial capacity will be 28 million tons of oil per year.
"After many many years of frustration in getting a dedicated line off the ground, we now have eight companies and three countries (Kazakhstan, Russia and Oman) involved in this project," Zana said.
"Construction is moving ahead on budget and on schedule, and first crude loading will be sometime in July 2001," he added, "with total completion of the line in October 2001."
Great Expectations
Has Tengiz lived up to Chevron's initial expectations?
"Absolutely," Zana said. "Everything we have learned over the years at Tengiz has been as good or better than we expected.
"We are not limited by the field's ability to produce," he observed. "We are only limited by how quickly we can design and construct surface facilities necessary to produce the field without wasting capital."
The geology, he added, "has been all we had hoped for, and as a result we have maintained our initial position on reserve and production potential."
"Yes, we had fallen behind on the project due primarily to transportation issues," he continued, "but after we implemented our rail transportation strategy and multiple pipeline routes, that constraint was lifted and we re-energized our redevelopment of the field."
About a year-and-a-half ago Chevron pulled ahead of initial production forecasts made almost 10 years ago, he said, and the company has been investing $500 to $600 million a year for several years at Tengiz.
"To say we are satisfied is an understatement," Zana said.
Tengiz development has been a major boost for all of Kazakhstan. The new governments in the region now see the enormous benefits these projects can have on their countries. In 1999 the Tengiz project contributed $490 million in financial benefits to Kazakhstan.
An independent study by the Institute of Economic Studies, Agency for Strategic Planning and Reforms of the Republic of Kazakhstan, found that every dollar the Tengiz consortium spends in the country generates another 52 cents for the Kazakh economy.
The unqualified success at Tengiz has had a larger impact on the entire region.
"We have demonstrated that with patience, perseverance, and creativity you can, in fact, make successful projects in a landlocked country like Kazakhstan," Zana said.
"The investment community has a renewed confidence in the Caspian region."