In 2007, oil production has risen to 860,000 bbl/d, driven almost exclusively by growth from the Azeri-Chirag-Guneshli (ACG) field. Azerbaijan was the largest contributor to Non-OPEC supply growth during 2006 and 2007. Azerbaijan's net exports amounted to roughly 700,000 bbl/d in 2007, most of which was routed to Russia, Italy, Turkey, and Germany. The United States also imported around 50,000 bbl/d of Azerbaijani oil during 2007 due to favorable market conditions for Mediterranean crude. The ACG group of fields produces over 65 percent of the country’s oil, and this share is expected to continue to increase as ACG’s oil production grows.

Most estimates of Azerbaijan’s proven crude oil reserves range between 7 and 13 billion barrels according to industry journals and government sources. The State Oil Company of the Azerbaijan Republic (SOCAR) estimates proven reserves at 17.5 billion barrels which, under an antiquated Soviet reserve classification system, may include reserves that are either not viable or not fully proven. The country’s largest hydrocarbon structures are located offshore in the Caspian Sea and account for most of the country's current petroleum production. The majority of Azerbaijan’s oil output (80 percent in 2007) now comes from the Azerbaijani International Oil Consortium’s (AIOC) ACG fields, and SOCAR’s output has been declining by around 1 percent per year.

Although production from SOCAR’s Soviet-era fields are in decline, foreign direct investment since independence has revitalized the country’s oil sector through the development of large-scale new projects and the refurbishment of existing facilities. To date, Azerbaijan has signed over 20 major field agreements with approximately 30 companies from 15 countries. (For a listing of these agreements, see: Azerbaijan Production Sharing Agreements)

Azerbaijan's increase in oil production since 1997 came mainly from the international consortium known as the Azerbaijan International Operating Company (AIOC), which represents over 70 percent of Azerbaijan's total oil exports. AIOC (partners: BP, Chevron, SOCAR, Inpex, Statoil, ExxonMobil, TPAO, Devon Energy, Itochu, Delta/Hess) operates the offshore Azeri, Chirag, and deep water Guneshli (ACG) mega-structure (see Map 1), which is estimated to contain proven crude oil reserves of 5.4 billion barrels according to the field's operator and largest stakeholder, British Petroleum. In 2005, SOCAR raised its assessment of the field's recoverable reserves from 5.4 billion barrels to 6.9 billion barrels.

The start of oil production from the Central and West Azeri platforms in the ACG complex increased AIOC production from 140,000 bbl/d in January 2005 to average 650,000 bbl/d during the first nine months of 2007. Adding to the existing 130,000 bbl/d of “early” oil production from the Chirag field, output from the Central Azeri platform began in February 2005. Production at Central Azeri averaged roughly 240,000 bbl/d during 2007, with the exception of heavy maintenance at the platform in September 2007. The 18-day long maintenance was the largest of its kind for BP during 2007 and involved the installation of two large gas compressors on the Central Azeri platform, and the connection of a new pipeline from the Deepwater Guneshli gas field to export the associated natural gas.

The West Azeri platform began production in late December 2005 and is expected to reach a plateau rate of 300,000 bbl/d. Production of oil from the East Azeri platform came online in October 2006 as part of the second phase of ACG, and that field is expected to reach up to 260,000 bbl/d. With the addition of the Shah Deniz natural gas field, around 40,000 bbl/d of condensate production is also being blended into AIOC’s export blend. In total, oil production from AIOC and SOCAR fields is slated to average 840,000 bbl/d during 2007.

Finally, BP also announced that it would be decreasing its target of ACG production for 2008 from 708,000 bbl/d to 686,000 bbl/d due to the increase in water cut for several wells and the September 2007 maintenance. With the completion of ACG’s Phase 3 and the addition of the Deep-water Guneshli platform, expected sometime during the second quarter of 2008, EIA expects the country to be producing an average of over 1.3 million bbl/d by 2010.

SOCAR was established in September 1992 with the merger of Azerbaijan's two state oil companies, Azerineft and Azneftkimiya. SOCAR and its many subsidiaries are responsible for the production of oil and natural gas in Azerbaijan, for operation of the country's two refineries, for running the country's pipeline system (except the Baku-T’bilisi-Ceyhan pipeline), and for managing the country's oil and natural gas imports and exports.

Almost half of SOCAR's oil production in recent months came from the offshore field “shallow-water Guneshli,” known in the Soviet era as the “28th of April Field,” and located 60 miles off Azerbaijan’s Absheron Peninsula. The shallow-water Guneshli field, not to be confused with the Deep Water Guneshli part of the ACG field discussed above, first came online in 1981, but was developed only to a maximum water depth of 400 feet due to technological constraints. Recently, production levels have been at around 30,000 bbl/d and have been falling slightly. New wells are being drilled, but the structure is losing reservoir pressure. As a result, in August 2002 SOCAR began efforts to independently rehabilitate shallow-water Guneshli by adding new production platforms. SOCAR has recommissioned several new wells with improved production capacities, and has announced plans to launch up to 20 new wells during 2007, most recently in October 2007. Residual reserves at the field are estimated at 1.3 billion barrels of oil according to Interfax, a news service.

Although government ministries handle exploration and production agreements with foreign companies, SOCAR is party to all of the international consortia developing new oil and gas projects in Azerbaijan. The company does not have effective control over output levels. Further restructuring of SOCAR is likely in upcoming months as the company implements recommendations of an international consulting consortium that was funded by a European Bank for Reconstruction and Development (EBRD) grant.

SOCAR also operates 40 other older fields (both on- and off-shore), many of which are considered to be in similar disrepair and have been artificially stimulated for years using water injection. Press reports indicate that inefficiencies from aging equipment and largely depleted reservoirs have caused the cost of production of SOCAR's onshore crude oil to reach $15-$17 per barrel.

BP sources said talks on a possible fourth phase, which includes an additional platform to be installed in an undeveloped area between the Chirag and Guneshli fields, is active again after losing momentum during 2005. Also, additional completions of reinjector wells and additional drilling on these wells will increase production from the Central, East, and West Azeri platforms during 2008. AIOC expenditures during 2007 are expected to be roughly $396 million in operating expenditures and $2,569 million in capital expenditures.

Outside of the ACG field, not all of Azerbaijan's foreign investment projects have been successful, with several projects announcing disappointing drilling results and several production sharing agreements (PSAs) shutting down in recent years. Besides the ACG project, many of Azerbaijan's offshore prospects have been relatively disappointing in contrast to the high expectations for the Caspian Sea region during the 1990s.

Most recently, the failure of ExxonMobil and Lukoil to discover commercially viable hydrocarbon reserves at the Zafar-Mashal and Yalama blocks, respectively, will lower future production estimates from Azerbaijan's offshore area. The first well at Zafar-Mashal was the deepest in the Caspian Sea, reaching a total depth of over 22,000 feet (6,600 meters) and was the most expensive at around $100 million. Exxon Mobil announced in January 2006 that it will pay the Azerbaijani government $32 million claim to exit exploration at the Zafar-Mashal field. The Yalama Block was the last drilling program underway in offshore Azerbaijan. Finally, without an agreement on the maritime borders in the Caspian Sea, the Araz, Alov, and Sharg group of fields and the Serdar/Kyapaz field have been left untapped due to the lack of clarity on ownership. More information on BP’s activities during the first half of 2007 is available at BP’s Enterprise Center Website.

Azerbaijan is expected to export an average of around 730,000 bbl/d of oil during 2007. Almost all of this oil is being exported via the BTC pipeline system, thereby bypassing Russia. Small amounts of oil (less than 100,000 bbl/d on average) аre being exported via rail to the Georgian coast and by pipeline to Novorossiysk. The Baku-Supsa pipeline is undergoing repairs and maintenance.

On May 25, 2005 Azerbaijan began filling the Azeri section of the long-awaited Baku-T'blisi-Ceyhan (BTC) pipeline that runs 1,040 miles from the Azeri capital city of Baku, via Georgia, to the Mediterranean port of Ceyhan. At a cost of almost $4 billion, the BTC pipeline allows oil to bypass the crowded Bosporus and Dardanelles Straits. In July 2007, the 42-46 inch diameter pipeline reached a peak flow of 905,000 bbl/d thanks to the launching of compressor stations and from switching the fuel used to power the compressor stations from diesel to natural gas. In October 2007, the BTC line exported roughly 650,000 bbl/d of crude and condensate.

According to BP, during the first nine months of 2007 oil from ACG continued to flow via one 24” and two 30” subsea pipelines to the Sangachal terminal. With the completion of Phase 3 at ACG in October 2007, the Sangachal terminal expansion will allow the terminal to increase capacity to over 1 million bbl/d. The terminal is now an integrated facility incorporating ACG Phases 1-3 production, South Caucasus Pipeline facilities, the Shah Deniz plant, and SOCAR’s third party pipelines.

During 2006, AIOC announced it would only be providing 60 percent of the oil for the pipeline, which paved the way for Kazakhstan’s participation. Kazakhstan will be initially sending around 200,000 bbl/d of crude oil by tanker, and then up to 500,000 bbl/d. For more information about the significance of the pipeline, please consult the Caspian Regional Analysis Brief.

Azerbaijan's other export routes include the Baku-Novorossiysk pipeline ("northern route"), which exports roughly 40,000 bbl/d of SOCAR oil via Russia to the Black Sea. The Baku-Novorossiysk pipeline closed briefly in late June 2004 after oil thieves set off an explosion when they attempted to steal oil from the pipeline. AIOC only exports oil via pipeline from Baku to Supsa (also called the Western early oil pipeline) when BTC is not available (see Maps section). The Baku-Supsa line has an estimated capacity of 155,000 bbl/d, but has been shut down during 2007 to allow the completion of an extended repair program.

Early in June 2006, a small pipeline was completed to allow Exxon's share of ACG production to be pumped directly from BP's Sangachal terminal to the nearby Azpetrol rail tank-car terminal in Azerbaijan. Before the startup of BTC, Batumi offered shippers like Exxon the ability to keep their Azeri Light crude oil streams isolated in the rail system and maintain their price premium over the regional Russian Urals blend. ExxonMobil launched shipments in June 2005 and has since committed itself to supplying over 70 million barrels of oil over five years (roughly 40,000 bbl/d) via Batumi. The Exxon and Azpetrol rail links to Batumi have 120,000 bb/d of transport capacity. Exxon will continue to use its 8 percent share of Baku-Supsa to which it is entitled to as an ACG shareholder. Since it is not a member of the BTC consortium, it will avoid paying some of the capital costs of the pipeline.

Azeri crude oil is refined domestically at two refineries: the Azerineftyag (Baku) refinery, with a capacity of 242,000 bbl/d; and the Heydar Aliev (formerly called Azerneftyanajag) refinery, which has a capacity of 200,000 bbl/d. Overall refinery utilization rates are as low as 40 percent. Middle distillates (e.g. diesel fuel, kerosene) comprise the majority of Azeri refinery output. The two refineries together processed 7.45 million tonnes of oil products (roughly 150,000 bbl/d) in 2006, up 2.3% year-on-year. Azerbaijan is expected to consume almost 130,000 bbl/d of oil during 2007.

Azerbaijan also produces liquefied petroleum gasses (LPGs) at the Heydar Aliev refinery. In 2006 the plant produced 1.5 million barrels, a decrease of 17% from the previous year. At a cost of $120-140 million, Azerbaijan plans to build two high-quality gasoline production units at the Baku Heidar Aliyev refinery (formerly known as Azerneftyanajag refinery) between 2006 and 2008, boosting production by almost 50 percent. Azerbaijan’s automobile gasoline output rose 15% on the year to 8.9 million barrels in 2006.

Both of the country's refineries are in need of modernization and pollution control equipment. Under a $500 million modernization project approved in 2004, new equipment will be installed at both refineries and at the specialized port of Dubendi to increase throughput by 2010.