Today starts a time that is pivotal to the future of oil and gas exploration and production there. After years of jockeying for position, hammering out deals and conducting preliminary seismic and geologic studies, international oil companies are finally beginning to sink exploratory wells in a region that's barely been touched.
In fact, one large gas discovery in the South Caspian Sea offshore Azerbaijan was announced last year, and a well that many oil analysts called "the exploratory well of 1999" was still drilling in the North Caspian just offshore the giant Tengiz Field at year-end.
In addition, various industry consortiums are set to test structures in the South Caspian in the coming months.
"I think most of the industry will agree that the drilling scheduled for the next two years is critical to the future of exploration in the Caspian," said Bill Maloney, vice president of exploration with Texaco.
"The series of wells planned in the next couple of years will clearly define the level of success the industry can expect in the Caspian -- and the region's ability to add enough reserves to bring some export plans to fruition," he added.
A few of the tests set for the coming months include:
- The Lenkoran Deniz prospect operated by Total.
- The Kurdasi prospect operated by Agip.
- The Inam prospect held by BP-Amoco as operator.
- The Tagiev prospect operated by Chevron.
All of these are within the South Caspian.
BP-Amoco's Hot Start
This round of exploratory drilling got off to a hot start thanks to BP-Amoco's recent discovery in the South Caspian.
Last July the firm announced a large gas condensate discovery at the SDX 1 well on the offshore Shah Deniz prospect south of the Apsheron peninsula in Azerbaijan. The well was drilled to a total depth of 6,316 meters and encountered gas condensate in three separate zones, with a total net pay zone of 220 meters.
The lowest horizon was tested and flowed gas at the maximum capacity of the on-board equipment of 50 million cubic feet a day, with 2,965 barrels of condensate daily.
Test results from the SDX 1 discovery suggest a large resource on the structure -- enough to justify establishing a joint working group to explore the possibilities for material gas exports, BP-Amoco said. Reserves for the new field are expected to fall in the 14-25 trillion cubic feet of gas range, according to a report in the IHS Energy Group International Oil Letter.
Azeri President Heidar Aliev called Shah Deniz a world-class discovery of global importance that would usher in a new strategy in the exploitation of the Caspian Sea.
BP-Amoco spudded a second well about six kilometers south of the discovery immediately following the completion of the SDX 1, but in late November the firm reported that drilling operations on SDX 2 have been delayed due to difficulties on the semi-submersible. The well had reached 5,120 meters and is scheduled for a total depth of 6,500 meters.
Problems were encountered with one of the blowout preventers.
"The second well should give us more information about other areas of the reservoir, and as work continues we will be able to build up a much more complete understanding of the resource," said Andy Hopwood, BP-Amoco's exploration business unit leader for Azerbaijan.
"But even at this early stage, this discovery has confirmed the exciting potential to create a new dimension," he said, "namely gas exports, to the development of Azerbaijan's energy industry."
Azeri geologists first identified the Shah Deniz prospect in 1954. However, it wasn't until 1996 -- when a production sharing agreement was signed with an international consortium of companies -- that work began on the structure.
Before the first well began drilling BP-Amoco conducted seabed surveys, 3-D seismic, hazard surveys and a rig upgrade.
BP-Amoco as operator holds a 25.5 percent interest in the Shah Deniz license. Other participants include Statoil Azerbaijan A.S. (25.5 percent), SOCAR Commercial Affiliate, Elf Petroleum Azerbaijan B.V., LukAgip N.V. and Oil Industries Engineering and Construction (each with 10 percent), and Turkish Petroleum Overseas Co. (9 percent).
First, Get the Big One
The nine member Offshore Kazakhstan International Operating Co. (OKIOC), with Shell as operator, spud the Kashagan East 1 exploratory well last summer in the North Caspian Sea offshore Kazakhstan.
On Jan. 1 the well many industry watchers view as the "most important wildcat of 1999" was reportedly at its objective.
The well is targeting the Kashagan carbonate platform on a structure with an areal size and reserve potential judged to be three times that of the Tengiz onshore super-giant, with six billion barrels of potentially recoverable reserves, according to the IHS International Oil Letter. The wildcat was planned for a total depth of 4,500 meters. Results were being held by the company at press deadline.
Companies with a stake in OKIOC, in addition to Shell, are Elf, Agip, British Gas, Inpex, Mobil, Phillips, Statoil and Total.
Following the Kashagan East well OKIOC plans to move the rig to a second location 40 to 50 kilometers west but still on the Kashagan structure. The second drillsite will require an artificial rock and sand platform since water depths average only about seven meters.
Initial costs for the two-well program are put at more than $100 million, said a report in the International Oil Letter. OKIOC signed a production sharing agreement for the block in November 1997 and is expected to invest up to $28 billion over the 40-year life of the Caspian project, including $3 billion on exploration.
The success or failure of this one well won't in itself be the final answer on this huge structure. There are more prospects in this play, but they are drilling the biggest one first, said one industry official.
In addition to the activity at Kashagan East, LukOil is delineating a 1999 discovery on its Severny license in the North Caspian offshore Russia. The company announced a significant discovery, but appraisal drilling will be needed to determine commerciality.
Deep Water Potential
While there is still some acreage remaining in the Caspian Sea, most of the highly prospective areas have been leased.
International oil companies have taken various approaches to the region, but most initially staked their positions through some sort of development arrangement. For example, BP-Amoco first entered Azerbaijan to develop the ACG field complex, then negotiated for exploration licenses.
Chevron used the same approach in Kazakhstan, where it signed on to develop Tengiz and then branched out into exploration operations in Azerbaijan.
Texaco is involved in the development of two large fields -- in Kazakhstan -- Karachaganak and North Buzachi -- but the firm has not elected to pursue independent exploration licenses.
Gregory Ulmishek with the U.S. Geological Survey in Denver has studied the geology of the Caspian region for years -- and as such can make some assessments of just how prospective the various basins in the region are.
"The potential of the known areas and known plays in the South Caspian Basin in Azerbaijan and Turkmenistan is substantial but not huge," he said.
"While discoveries in the one billion barrel reserve range will be important to individual companies or consortiums," he continued, "they are not as important in a global sense. Those kinds of discoveries will not make this basin a huge supplier of oil on the international market.
"I think the only area in this basin that can make that kind of difference is deep water, where there has not been a single well drilled.
Most of the oil that's been discovered in the South Caspian basin is on the Apsheron sill that connects the Apsheron peninsula on the west and extends across the sea onto the Chelelen Peninsula.
This zone contains the presently largest oil discovery in south Caspian, the Azeri-Guneshli-Chirag complex that may contain about five billion barrels of recoverable oil, according to Ulmishek. Some discoveries have been made outside this zone, particularly in the western shelf area and onshore Turkmenistan.
But Ulmishek likes the deep water.
"There are very large structures in the deep water, and we know there is a rich source rock," he said. "The stratigraphy also seems to be in place, but there is still a great deal of uncertainty concerning the presence of reservoir rocks. Because it is deep water, the only reservoir rocks that can be expected are turbidites."
And since this is not a real continental slope due to the lake depositional setting, there is some uncertainty.
"There are various models of how turbidites might be present in the deep water region, but that uncertainty can't be resolved until at least a couple of wells are drilled," Ulmishek said.
"The deep water may prove to be excellent with huge potential, or it may prove to have no potential at all."
Middle and North Caspian Potential
The Middle Caspian Basin is generally not as prospective as the South Caspian Basin -- but there is a good zone with high potential along the Dagestan coast on the western side of Russia, Ulmishek said.
This zone is offshore south of the Sulak River delta and along the mountains. There are strong indications that the zone is a chain of large anticlinal structures.
One of the structures was drilled in the late 1970s and it was a discovery.
"A few billion barrels of oil may be found along this zone," Ulmishek said, "but I don't think there is much chance for multi-billion barrel fields anywhere in the Middle Caspian Basin."
The Middle Caspian Basin is found in the central part of the Caspian Sea, with most of the basin located in Russia and Kazakhstan. During the last three years or so a consortium of international oil companies acquired a number of regional profiles across the northern and central parts of the sea, but none of that data is in the public domain, so little is known about what the consortium learned.
There are four known petroleum systems in the basin.
The North Caspian Basin, Ulmishek said, "is a huge, poorly understood, and poorly explored region, except for the margins of the basin."
Giant fields like Tengiz are found on the margins of the basin and the most obvious prospects are the offshore continuations of Tengiz, like the Kashagan East prospect currently being drilled.
"But basically I think this basin is grossly unexplored," he said, "and not only offshore, but onshore where there is huge unrealized potential."
The North Caspian Basin occupies the northern part of the Caspian Sea and a large plain north of the sea. It is one of the world's deepest basins, and its sedimentary section is more than 20 kilometers thick.
The basin covers about 500,000 square kilometers. Three-quarters of the basin lie in Kazakhstan with the remainder in Russia.
Ulmishek said oil and gas fields in the North Caspian Basin have been discovered in both subsalt and suprasalt sequences.
4 In the subsalt sequence, large oil and gas reserves occur in Upper Devonian through Lower Permian carbonate and clastic reservoirs in structural traps and reefs. All margins of the basin where subsalt rocks can be reached by drilling are productive.
4 In the Upper Permian to Tertiary suprasalt clastic section, productivity has been established over the entire basin area.
Only one petroleum system has been identified in the basin -- but what a petroleum system it is.
"The North Caspian Paleozoic petroleum system covers the entire area of the North Caspian Basin," Ulmishek said. "According to IHS, discovered reserves of oil, condensate and gas from the system are 45.7 billion barrels of oil equivalent, of which 57 percent is gas."
Most of the discovered hydrocarbons are in subsalt carbonates, he added, where three giant fields -- Tengiz, Karachaganak, and Astrakhan -- each with reserves of more than five billion barrels of oil equivalent have been discovered.
"The North Caspian is geologically complex," he said, "and until additional wells are drilled will remain poorly understood. But the potential in this basin is huge."
Pathways to Success?
Now that exploratory drilling has commenced, the biggest question still facing Caspian Sea participants is one of export routes.
The geopolitics of the whole region is a serious issue -- it's even the setting and plot device for the latest James Bond movie -- and a great deal of foreign policy is being conducted via these pipelines.
For example, the U.S. government supports the Baku to Ceyhan, Turkey, route for the southern Caspian because it bypasses Russia and Iran -- but more reserves will be necessary to make that route economically viable.
BP-Amoco currently is exporting its production through a pipeline that goes directly through Azerbaijan and Georgia to a port on the Black Sea.
The North Caspian will be well served by the Caspian Pipeline Consortium, which is currently constructing a 1,580-kilometer pipeline from the Tengiz Field in Kazakhstan to a marine terminal on the Black Sea near the port city of Novorossysk, Russia. Consortium shareholders recently approved a $1.3 billion budget for this year. The initial construction phase of the CPC project will be fully completed in October 2001, and will allow the transport of 28 million tons of oil per year.
The large gas discovery at Shah Deniz highlights another issue for the region -- transportation and markets for the large gas reserves in the southern Caspian area.
The likely markets are west of the region in Turkey and then Europe. But, Azerbaijan must compete with huge gas reserves in Turkmenistan, which is in a difficult spot with the majority of their gas resources landlocked on the eastern side of the country. Serious debate and foreign policy surround the various proposals for a natural gas pipeline to service the Caspian region.
"Looking at the overall picture, there is tremendous potential in the Caspian Sea, but the exploration risk is complicated by the geopolitical situation," said Texaco's Maloney. "There just haven't been enough wells drilled to prove one way or other what the full potential of the region is.
"We will just have to wait and see what exploratory drilling in the next couple of years brings."