Russia-Ukraine war boosts Azeri crude transit, but production is limping along

Azerbaijan is benefiting from the EU's pivot away from Russian energy, boosting oil transit shipments and enjoying higher prices for its own crude, according to market sources and data from S&P Global Commodity Insights.

But the country's own production has stagnated well below its OPEC+ quota and has little prospects for growth, limiting its gains.

Interest in alternative suppliers is growing after the EU agreed May 30 to ban Russian oil imports by sea, and some traditional buyers have turned away from Russian oil due to sanctions risks.

Azerbaijan pumped 580,000 b/d in April, compared to its quota of 682,000 b/d, according to the latest Platts OPEC+ production survey from S&P Global Commodity Insights. This was down 15% from its production level of 680,000 b/d just two years ago.

The bulk of Azerbaijan's production comes from the BP-led Azeri-Chirag-Gunashli, ACG, complex. BP does not provide data on production volumes, but the field's production is falling.

Gary Jones, regional president, BP Azerbaijan-Georgia-Turkey said June 2 that the project is in the decline phase and ACG production will see a boost from launch of the Azeri Central East project.

"This will come onstream towards the end of 2023 and will produce around 100,000 b/d of oil," Jones said.

State-owned Socar did not respond to a request for comment on Azerbaijan's oil production plans in 2022.

Analysts see Azerbaijan as unable to increase output in the immediate term, due to the lack of spare capacity at ACG.

Nareeka Ahir, a geopolitical adviser with S&P Global, said Azeri crude and condensate production is likely to remain flat through 2023, as declines at legacy Caspian fields are partially offset by growth from the Shah Deniz and Absheron condensate projects, and the Azeri Central East project.

"Additional growth beyond our forecast is unlikely with other projects operating at capacity," Ahir said.

Peter Wells, CEO of Strategic Petroleum Insights, who has extensive experience in Azerbaijan, said the country's OPEC+ quota "is unrealistically high," adding that he was not optimistic declines at the ACG project could be reversed.

ACG was produced to a rapid and high peak rate with high offtake rate, he said.

"We are well into a decline phase and the current production is all the field can do without additional investment," Wells added.

Growing demand

While Azerbaijan is unable to increase output, transit volumes of non-Azeri crude shipped via the Baku-Tbilisi-Ceyhan pipeline rose 22% in the first four months of the year, according to Azeri state statistics.

Deliveries were boosted by rising security risks to Black Sea shipping due to active fighting in the region, as well as disruption to loading at Novorossiisk earlier this year due to storm damage.

Brenda Shaffer, expert on Caspian energy and European energy security policy said that the war has created a need for increased oil export volumes via BTC.

"Due to the war, export via Russia's Black Sea oil ports has become more complicated, including due to high insurance rates for tankers entering the area. Thus, Kazakhstan is increasing its oil exports via the BTC pipeline that reaches the Mediterranean region via Turkey," Shaffer said.

BTC carries a blend of crudes from Kazakhstan, Turkmenistan and Russia, in addition to Azeri light that makes up the bulk of flows.

Azerbaijan's ability to ship securely has supported prices for Azeri Light in recent weeks. Azeri Light is attractive to traditional customers of Russian crude, because it produces a strong middle distillate yield.

Platts assessed Azeri Light at $124.735/b on June 1, above $122.96/b for Dated Brent, and $85.47/b for Russia's key grade Urals, according to data from S&P Global.

Demand for Azeri light is also strong due to a lack of rival crude from Libya.

With the radical changes to global oil supply triggered by Russia's invasion of Ukraine, potential investors may now re-evaluate future Azeri projects, and look to capitalize on untapped reserves and existing export routes to markets that are increasingly cut off from Russian crude.

Azerbaijan has significant deepwater oilfield potential, but these reserves are located in waters disputed with Iran and Turkmenistan.

"Longer term, if these issues were resolved, production from new fields could lift Azerbaijan's oil production," Wells said, but any such projects would likely require several years of exploration before production.