Azerbaijan state oil company Socar is partnering with western companies in a drive to raise its international profile and establish a stronger upstream presence, writes Kama Mustafayeva.

However, limited financial resources and expertise are making the transformation a slow one.

Socar currently enters other markets mainly through the downstream, by opening retail service stations and through oil processing and petrochemicals.

The company has in recent years become a major investor in neighbouring Turkey, which has close political and economic ties to Azerbaijan.

Socar relies mainly on the state oil fund, a repository for profits from oil and gas production, to finance such investments.

The state played an important role in funding for the $40 billion Southern Gas Corridor infrastructure project that includes the BP-led Shah Deniz 2 development and a 3500-kilometre chain of pipelines to export produced gas to Turkey and Europe.

The government set up a special entity, the Southern Gas Corridor Closed Joint-Stock Company (SGC), to attract investment from the oil fund as well as from international markets. Socar has a 10% interest in the Shah Deniz development and SGC holds a 6.7% stake.

The state company became a major partner in Azeri-Chirag-Guneshli (ACG) under the terms of a 2017 production sharing agreement that raised its stake in the project from 11.65% to 25%, while operator BP’s share dropped from 35.8% to 30.37% along with the percentage of shares held by other international companies.

Socar is now seeking an equal share in new exploration deals.

The recent contracts signed with BP and Equinor, and potential agreements for Umid-Babek and other prospects, are based on this scheme.

“In the exploration stage, risks will be fully borne by a western partner. However, in case of discovery, all the money poured into costly exploration will be recovered. So more likely, Socar again relies on the government for funding its significant stakes in them,” says one local analyst.

Socar currently has a limited resource base, considering its operations are focused in the Caspian Sea region on ageing onshore and offshore fields that have been producing for decades. However, it has set up programmes to increase oil and gas production by the expansion of drilling activity and seismic data gathering to pinpoint possible untapped oil and gas reserves.

The company has announced an open tender for 3D seismic exploration around the Oil Rocks-Chilov-Gurgan Deniz fields in the Caspian.

“Geologist have hopes for some unexplored resources in the area despite hundreds of wells drilled here,” says one Socar source.

New 3D seismic will provide a clearer picture of the subsurface and further exploration and appraisal drilling will be assisted by the latest data processing and interpretation methods, the source says.

Socar expects to receive state funding next year to drill development wells in the Umid gas and condensate field, exploration probes in the Babek prospect, and appraisal and production wells in the Karabakh block, which will be developed in partnership with Equinor.

The government has authorised about $280 million to Socar for drilling in 2019, down from almost $400 million in state funding set aside for drilling in 2018.

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Socar teaming up with western players to boost international profile