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Solving the Problems of Caspian Industrial Infrastructure (1/2)

This week I begin a new, short series on an issue that few people talk about and fewer people do anything about. This is the industrial infrastructure problem. It is already clear that problems of energy development in the Caspian are unique. Over the last 10 years, companies have devised new organizational methods of work to deal with human-resource issues. In international-legal and project-structuring terms, the Baku-Ceyhan agreement is apparently the first instance ever of a trilateral intergovernmental project that includes a transit country and that was concluded through intergovernmental accords, with industry consortia representing strategic alliances sitting at the table during negotiations and concluding side agreements to facilitate and implement the overall plan. However, infrastructure limitations add themselves to other idiosyncratic factors, political and economic, that slowed Caspian energy development in the 1990s.

Because the Caspian is land-locked, production systems cannot be built overseas and then towed to station. Overland routes and the Volga-Don Canal System limit access. The Caspian therefore has to be relatively self-sufficient in the development of basic infrastructure and the installation of production facilities. Of the undrilled Caspian structures (of which there are more than 250), three to four dozen are significantly larger than the others. At present, given the number of drilling rigs there are to go around, about 10 wells at most can be drilled at offshore Azerbaijani fields in any given year. The number of wells that participants in production-sharing agreements (PSAs) have already committed to drill in the next few years is over twice that, and this backlog does not include the other exploration and appraisal wells that would be desirable.

The amount of investment required to build up infrastructure capacity is a limiting factor on the pace of the region's development. In particular, steel fabrication capacity is crucial. It may be better to prefabricate, but bringing large steel structures is difficult or impossible. Prefabricated or not, all steel used for topsides and substructures will have to be imported. Solving this problem will not even address the shortage of marine installation barges and their capacity. Engineering has resolved, very creatively, all important problems up to now, and the precedents for project design and execution exist. However, the exceedingly small number of crane barges in Azerbaijan — to cite just one example — threatens to create intense competition within the industry, distorting the prices of available services and acting as a brake upon development.

Things are a bit different in the North Caspian, off the coasts of Kazakhstan and Russia, although infrastructure shortages are likewise to be found. The North and South Caspian differ greatly. Whereas in the south, water depth at drilling sites can attain 800 meters and the principal concerns are with seismic activity and storm winds (and the waves they propel), in the north the average depth is roughly eight meters. In some regions of prospective exploration, it is as shallow as two meters. The most northern sections are ice-covered for at least four months each year.

This is why the Offshore Kazakhstan International Operating Company (OKIOC) had to delay drilling work on its first exploration well in the Vostochny Kashagan field until this spring: It could not ensure limitation of ecological damage in case of technical failure in a hostile and untested climatic environment. Recall that Vostochny Kashagan is the deposit that, if its output were piped under the Caspian to Baku, could provide the volume necessary to overcome all final objections as to throughput on the Baku-Ceyhan pipeline.

The postponement of work on OKIOC's exploration well, the result of infrastructure limitations, has led some industry figures to suggest that the October 2000 deadline for coming up with financing for Baku-Ceyhan (announced late last year about the time of the Istanbul summit in mid-November) will have to be postponed a year, awaiting validation of eventual volume commitments from Kazakhstan. This would delay the construction of Baku-Ceyhan another 12 months. Whether this comes to pass or not, the OKIOC example is a case study of infrastructure limitations upon production development. As for Vostochny Kashagan itself, the recent Russian find at Severny in the North Caspian increases the likelihood that OKIOC's field will be proven and developed. During U.S. Secretary of State Madeleine Albright's recent trip to Kazakhstan, President Nursultan Nazarbaev hinted broadly that the first results, now just becoming available, are indeed favorable.

Offshore from Kazakhstan, the wells are deep, so any single exploration rig might be able to drill only two or three per year. However, prospects in the North Caspian could easily justify a demand for exploration wells ranging up to a dozen per year. Thus, one industry source suggests that in the North and South Caspian together, between five and 10 rigs will be needed to drill between 10 and 20 exploration wells per year. Yet the sheer number of structures available for exploration could easily create a demand (if the supply were there) for drilling four times that number of exploration wells every year during the first decade of the 21st century.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2000/04/solving_the_problems_of_caspia.html
First published in FSU Oil & Gas Monitor, No. 79 (25 April 2000): 4–5.

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This page contains a single entry from the blog posted on April 25, 2000 7:12 PM.

The previous post in this blog was Russia Slouches towards Central Asia.

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