According to the Oil and Gas Journal, Azerbaijan has proven natural gas reserves of roughly 30 trillion cubic feet (Tcf), and BP estimates the country has 48 Tcf of proven reserves. IHS Energy estimates that ultimate recoverable resources are approximately 67 Tcf. In 2006, the country produced 241 billion cubic feet (Bcf), a 17 percent increase from 2005. Roughly 60 percent of natural gas production in Azerbaijan is produced by Azneft, a SOCAR subsidiary, and the rest is produced by joint ventures (the largest of which is AIOC). In 2008, increases in production from SOCAR and the Shah Deniz gas and condensate field should allow the country to increase production to over 500 Bcf per year, which will be offset by steadily increasing domestic consumption (400 Bcf during 2006). Azerbaijani government sources expect the country to produce up to 1.1 Tcf by 2011.

Virtually all of Azerbaijan's natural gas is produced from offshore fields. The country's leading natural gas field, the Bakhar oil and gas field, is located off the southern tip of the Absheron Peninsula and currently accounts for almost half of the country's natural gas output. Output at Bakhar has been declining in recent years, and according to press reports, SOCAR has begun efforts to develop a new deposit, known as Bakhar-2 located adjacent to Bakhar. SOCAR also has plans to invest roughly $580 million between 2007 and 2008 to develop gas production at the Shallow Water Guneshli field, which peaked in 1992 and is the company’s only profitable asset. Current production at the field is roughly 135 Bcf per year, and SOCAR expects it to increase to 245 Bcf in 2008.

Over the next 10 years, SOCAR plans to invest $224 million to expand natural gas production (see Fig. 2) in Azerbaijan by drilling 23 gas wells in the shallow-water Gunashli field, by expanding existing platforms, and by building underwater gas pipelines. The company hopes this will help increase (SOCAR-only) production to around 330 Bcf by 2010.

Azerbaijan's major natural gas production increases in the future are expected to come from the development of the Shah Deniz offshore natural gas and condensate field. Industry analysts estimate that Shah Deniz is one of the world's largest natural gas field discoveries of the last 20 years. According to the project's operator, BP, the field contains "potential recoverable resources" of roughly 15 Tcf of natural gas and 600 million barrels of condensate. However, other industry and trade sources, employing widely different definitions of "reserves", estimate the field's size to be as high as 35 Tcf. With the confirmation of a major new natural gas discovery below the existing reservoir, BP now says there is enough gas to justify Phase 2 development. Shah Deniz is located offshore, approximately 60 miles southeast of Baku (see Maps section), and is being developed by the Shah Deniz consortium (members: BP, Statoil, SOCAR, LukAgip, NICO, TotalFinaElf, and TPAO). The Shah Deniz production sharing agreement was signed in 1996.

The first phase of the Shah Deniz field's development was officially approved on February 27, 2003, and estimates place its cost at over $4 billion, a 25 percent increase from previous estimates. Phase 1 entails the installation of a new fixed offshore platform, two subsea pipelines to bring the hydrocarbons ashore, and a new onshore gas-processing terminal to be erected adjacent to the existing oil terminal at Sangachal, near Baku. Shah Deniz consortium members began producing natural gas for export during Spring 2007, several months after the planned start. According to Shah Deniz shareholders, the field is expected to produce almost 100 Bcf (2.8 Bcm) of natural gas and roughly 30,000 bbl/d of gas condensate during 2007. Shah Deniz will be capable of producing approximately 304 Bcf of natural gas per year as early as 2008 (roughly on par with 2005 natural gas production from Kuwait) as well as 45,000 bbl/d of condensate.

The large natural gas and condensate reservoir, which was discovered beneath the existing reservoir, will take years to assess and improve the consortium’s understanding of the entire field. Phase 2 of the project has the potential to produce roughly 700 Bcf but not until as early as 2013. The cost of developing Phase 2 of Shah Deniz will probably be "at least $10 billion", according to Jan Heiberg, vice-president of Statoil Azerbaijan, which holds a 25% stake in the consortium. Phase 2 is expected to help Europe lessen its dependence on Russian natural gas imports via deliveries through the new Turkey-Greece-Italy interconnector gas pipelines.

Source: US Government (click image above to enlarge).

Beyond existing fields in development, exploration in Azerbaijan has been disappointing, with 10 dry shows on the following offshore structures: Araz-Deniz, Lenkoran, Oguz, Kurdashi, Absheron, Nakhchivan, Yanan-Tava, Atashgah, Zafar, and Yalama. The negative results from these offshore tests have lowered expectations of undiscovered natural gas reserves in Azerbaijan, which IHS Energy now estimates at 20 Tcf.

Despite the large Shah Deniz natural gas field, Azerbaijan will only begin to be a net natural gas exporter in upcoming months with increasing associated gas production from ACG and production from Shah Deniz. With consumption at almost 400 Bcf in 2006, and production expected to total as much as 350 Bcf during 2007, Azerbaijan will remain a net importer during 2007. Gas purchases from Russia were officially suspended in early 2007 when Shah Deniz started producing, and Azerbaijan is still relying on associated natural gas from the ACG project. During 2007, AIOC will deliver around 77 Bcf (2.2 Bcm) to SOCAR for local distribution, 30 Bcf more than originally planned.

Azerbaijan also began exporting Shah Deniz gas in March 2007 to Georgia. In July 2007, the first natural gas began to flow into Turkey’s natural gas system via the South Caucasus Pipeline. The natural gas from Stage 1 of Shah Deniz is being sold to BTC, Georgia, and Turkey.

The main conduit for Azerbaijan's natural gas exports is the "South Caucasus Pipeline," also known as "Baku-T'bilisi-Erzurum," which will run parallel to the BTC pipeline for most of its route before connecting to the Turkish gas pipeline network near the town of Horasan (see Map above). The $1.3 billion pipeline's capacity is expected to carry 233 Bcf per year initially and can be increased later up to 700 Bcf with the future addition of compression stations. BP (technical operator for construction and operation) holds a 25.5 percent stake in the project, Norway's Statoil (responsible for business development and administration) holds a 25.5 percent shares, and SOCAR , Russia's Lukoil, Turkey's TPAO, France's Total, and UAE’s NICO hold around 10 percent each.

On March 12, 2001, Azerbaijan signed its first major natural gas export deal when it concluded an agreement to supply Turkey with natural gas beginning in 2004. In February 2003 the deal was renegotiated, intended for exports to begin in 2006 at a rate of 71 Bcf per year, increasing to an average rate of 222 Bcf per year in 2009. Since the SCP’s full integration into the Turkish network has not been completed, Georgia will take some of the natural gas and place it into storage. In the long term, doubts linger about Turkey's ability to consume and transport the quantities of gas that the country has agreed to purchase (for more on natural gas in Turkey see EIA's Turkey Country Analysis Brief).

Due to lingering tensions between Azerbaijan and Armenia, Azerbaijan began implementing a swap deal that provides natural gas to Azerbaijan’s geographically separate Nakhchivan enclave. Azerbaijan is sending natural gas into Iran via the Baku Astara Pipeline, and Iran then delivers the gas via a new 30 mile pipeline into the enclave. Iran will receive a 15 percent commission on transit fees. Transit levels will rise from 2.47 Bcf during 2006 to 12.4 Bcf per year by 2009.