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Transportation of Crude Oil
Beyond Early Oil, 1999
F. Robin Branagan, Vice President, Crude Oil Export, AIOC and
Berit Tvedt, Manager, Partner Relations, Main Export Pipeline, AIOC

Caspian Energy Transportation Infrastructure:
The Key to a Bright Future, 2000
Richard Matzke, Vice Chairman, Chevron Companies

Without question, the Caspian region has an abundance of hydrocarbon resources. The International Energy Agency noted in Caspian Oil and Gas, The Supply Potential of Central Asia and Transcaucasia (Caspian Oil and Gas): "Crude oil exports are expected to be the driving force behind the development of the country's (Azerbaijan's) industry and infrastructure. ... a secondary oil equipment and oil service industry should offer ample opportunities for a well-educated work force. Important infrastructure requirements such as the building of pipelines, telecommunications, power plants and petrochemical industries will provide further opportunities." Thus, the implementation of efficient reliable energy transportation infrastructure for Azerbaijan and other Caspian producing states is an essential prerequisite for the economic renaissance of the region.

In this paper, we will provide an update on the progress that has been made in developing this required energy transportation infrastructure. As will be clear from a review of the recent progress, investors can now be confident that the full potential of the Caspian states will be realized. Accordingly, the region clearly offers an outstanding opportunity for investors seeking to develop the broad range of other infrastructure projects necessary for the growing economies of the region.

Caspian Crude Oil
Projections for the First Decade of the New Millennium

The producing states of the Caspian region are linked by a shared history and environment. The leaders of the region have recognized that substantial economic benefits are possible through mutual cooperation in addressing the region's energy transportation issues. The following graph shows International Energy Agency's (IEA) projections of oil production for Azerbaijan, Kazakhstan and Turkmenistan through the year 2010. Source: International Energy Agency: Black Sea Energy Survey, 2000.

As impressive as these projections are, many industry experts expect this growth trend to continue well into this new century. An obvious question is whether the necessary energy transportation infrastructure can be implemented in time to convert this potential into reality? We believe the answer is a resounding yes!

Azerbaijan: A Rich History of Energy and Trade Relations

A brief review of the history of the region provides ample reason to be optimistic for the future of Azerbaijan and neighboring producing states.

Pre Soviet Era

This is the fourth millennium in which Azerbaijan has been involved in "the oil trade." The earliest record of involvement goes back to 700 - 600 BC, when oil from the Apsheron Peninsula was transported all the way to India for heating, lighting and medicinal purposes. In the twelfth century, Marco Polo noted in his travels in the region that there was a spring, which contained oil that was not edible. He also observed that this oil was highly valued and was traded to neighboring states.

The Apsheron Peninsula was one of the earliest regions in the entire world in which oil was commercially developed on a large scale. Between 1600 and 1806, there is record of a number of wells which were dug by hand. In the mid-1800s, the oil industry in Azerbaijan was in full swing. The industry can reasonably claim a series of firsts, specifically, those related to lubricating oils, drilling technology, "distillation factories," bulk marine transportation, etc. Starting in 1873, the region developed into an important refining center.

Then, as now, there was an urgent need to identify and implement energy transportation solutions. In 1874, the Nobel Brothers Association began constructing oil pipelines to connect the oil fields with the refineries in Baku. Initially, oil and products were shipped in barrels from Baku to Astrakhan, a city on the North Caspian Delta and then by barge via the Volga River. In 1877, the world's first steel tanker was constructed to transport kerosene on the Caspian Sea. Also, a number of pipelines were constructed between the Sabunchi fields and the refineries in Baku.

The wisdom of having a diversity of routes to access favorable markets was recognized even then. In 1879, the Sabunchi -"Black City" Railway was completed, followed in 1883 by the construction of the TransCaucasian Railway between Baku and Batumi (Georgia). The railway was developed primarily to transport oil by rail tank cars to the Port of Batumi for delivery to international markets. The mountainous terrain limited the flow of crude via rail and so the construction of the Baku-Batumi pipeline began. During the early history of the oil industry, Azerbaijan accounted for almost 50% of world crude production.

Azerbaijan became the center for the manufacturing of oil and gas equipment for Russia and the Caspian and pioneered many technical innovations that were adopted internationally.

Soviet Era

In the early portion of the Soviet era, Azerbaijan accounted for a majority of the oil production of the USSR. Oil output in Azerbaijan in 1940 constituted 70% of the total USSR crude production. Azerbaijan continued to develop as a major refining center and as the base for the manufacturing of oil field and service equipment for the entire Soviet Union. It also developed as an important academic and technical research center for the oil industry.

During the Soviet era, planning for the oil sector was managed on a centralized basis. Decisions with respect to all aspects of the oil industry (i.e. investment, pipeline routes and crude flows) were made by the central government. In the post war era, the focus of the Soviet oil industry turned to the Volga Basin and then subsequently to West Siberia. The major discoveries in these regions were exploited to meet rising demand.

The crude oil pipeline system for the Soviet Union was developed as a "unified technologically integrated crude oil transportation system" to serve the needs of the Soviet Union as a whole.

The construction of the pipeline that would eventually link Baku to Novorossiysk began in the 1960s with the construction of a segment between Tikhoretsk and Malgobek, a location near Grozny. Originally, the pipeline was built to deliver 7 mmta of crude from the Malgobek fields to Tikhoretsk. This pipeline segment was put in operation in 1969.

In 1974, the pipeline was refurbished and reversed to deliver oil to the refineries in Grozny. In 1979, because of the shortfall of feedstock at Grozny and the anticipated expansion of service to the Baku refineries, the pipeline throughput capacity was increased to 17 mmta. The maximum throughput achieved on this pipeline was 13 mmta in 1989.

In 1981, a 601-km pipeline was constructed from near Grozny to Baku. The pipeline was built to deliver West Siberian and Dagestan crude oils (Shemkhal-Bulak, Mahachkala and Izberbash fields) to the refineries of Azerbaijan. The design capacity of this pipeline was 9 mmta.

In the 1980s, the Ministry of Oil of the Soviet Union's focus turned to new development opportunities. These included Timan Pechora, East Siberia and once again, the Caspian region. In 1984, a 40-inch diameter pipeline system was constructed just North of the Caspian Sea to transport production from Kazakhstan to Grozny. This pipeline was approximately 800-km long and 40" in diameter. (Part of the pipeline is now incorporated as part of Caspian Pipeline Consortium (CPC) system). At this point in time, there was no pipeline outlet in place to transport Azerbaijani production to export markets.

1991 to 2001 Period of Transition

A period of transition throughout the former Soviet Union began in 1991 that is unparalleled in the history of the world in terms of scope and complexity. This period, in hindsight, is one of great accomplishment for each state in the region! New public and private institutions were built; legal regimes were adopted; and international treaties and bilateral agreements were negotiated. Almost every aspect of the economy was restructured, including the development of national currencies and banking systems. And these are only a few of the actions required and taken. Those of us who had the benefit of observing this process first hand have nothing but great respect for the stamina, wisdom and leadership demonstrated during this period.

An important priority for the newly independent states was to address concerns of domestic energy supply and the development of their own hydrocarbon resources. Given the recognized potential of the Caspian region, the Caspian states were able to attract widespread interest from international oil industry from almost all parts of the globe. A number of major agreements were signed. Chevron and partners signed licenses on the development of the Tengiz field in Kazakhstan in 1993. In 1994, Azerbaijan International Operating Company (AIOC), a consortium of 10 major international oil companies and SOCAR, signed a PSA agreement to develop the Azerbaijani, Chirag and deep-water portion of Gunashli fields in the Azerbaijani sector of the Caspian Sea. This transaction has been referred to as "the deal of the Century." Azerbaijan was successful in negotiating 19 PSA agreements with major regional and international oil companies in relatively quick succession. The IEA in its Caspian Oil and Gas report noted that Azerbaijan is expected to have the highest share of foreign investment in proportion to GDP of any of the regional states. As a result, the energy sector is expected to grow to 30 % of GDP by 2020. A significant number of PSA agreements were also negotiated by the neighboring states with international oil companies, including the major exploration agreement offshore Kazakhstan (Kashagan).

The serious business of addressing energy transportation infrastructure requirements began in earnest. In 1991, the only export route from the Caspian states to non-Soviet markets was via the Atyrau Samara pipeline segment. From Samara, it was possible to access all of the export outlets with which Transneft (the successor in the Russian Federation to Glavtransneft) interconnects. Although the capacity of this line was approximately 10 mmta, a majority of capacity was tied up in barter trade, and in 1991, only 1.5 mmta of the capacity was available for export to "hard currency" markets. As noted previously, the crude oil pipeline serving Azerbaijan was designed to transport crude in the direction of Baku.

Development of New Caspian Crude Oil Export Systems

The Caspian Pipeline Consortium (CPC)

The Caspian Pipeline Consortium (CPC) was initially formed in June of 1992 with a goal of providing this urgently needed export link for Tengiz and other fields in Kazakhstan. Progress was delayed because of disputes on the structure of the project and other commercial matters. In 1996, the project was restructured to allow for the ownership to be divided between the participating governments of Russia, Kazakhstan, the Sultanate of Oman and a consortium of domestic and international companies, including Chevron, LUKARCO, Rosneft-Shell, Mobil, Agip, BG, Amoco - Kazakoil and Oryx. On May 16, 1997, the restructuring was completed, and the newly constituted consortium committed to construct a 1,500 kilometer pipeline between Russia's Black Sea Coast and oil fields in Northwestern Kazakhstan, including the Tengiz field. Under the terms of the agreement, the oil producers in the consortium have the responsibility to finance the construction costs. As currently planned, the pipeline will become operational in mid-2001.

The CPC route extends from Kazakhstan, around the northern shore of the Caspian Sea through Russia to the Port at Novorossiysk. The route originates from the Tengiz field and reaches the Black Sea via Atyrau, Komsomolskaya, and Kroptkin, terminating at the at the new Yuzhnaya Ozerevka terminal near the Port of Novorossiysk where the crude will be loaded on to tankers using two SPMs. The design capacity for stage one will be 28.2 mmta, with an expected ultimate system capacity of 67 mmta.

At the outset of the project, the CPC general director stated, "The pipeline is a win-win project for Russia and Kazakhstan. Along with the revenues generated from the sale of crude oil on the international market, the pipeline will create tax revenues, new jobs during construction and after the pipeline is operational, as well as the transfer of new technologies." History has already proven him correct.

The $ 2.5 billion project includes the rehabilitation and upgrading of existing pipeline facilities, and the installation of a new pipeline and infrastructure including: pump stations, valve stations, cathodic protection, a supervisory control and data acquisition system (SCADA) to automatically monitor the pipeline, incorporating both a satellite and a microwave telecommunications system, storage tanks, volume metering and custody transfer facilities, and power supply systems. A new marine transportation terminal with two single-point mooring (SPM) facilities is being constructed at Yuzhnaya Ozerevka.

Early oil routes from Azerbaijan

The Early Oil Project, as initially contemplated, was to include the refurbishment of the Chirag-1 platform, the construction of a new onshore terminal at Sangachal and a 230 km subsea pipeline system, as well as the implementation of a northern and western export pipeline route to transport early oil production to world markets. The Northern route through the Russian Federation involved the reversal and rehabilitation of the existing pipeline linking Baku and Tikhorestsk. From Tikhoretsk, the early oil could be transported to the Port of Novorossiysk on the Black Sea. The original plan in establishing a western route through Georgia was to refurbish existing pipeline segments in the region and to construct the necessary pipeline links to interconnect these systems so as to create an export link to the Port of Supsa on the Black Sea.

As noted previously, an existing pipeline was already in place between Tikhoretsk to Baku. Azerbaijan entered into an intergovernmental agreement with the Russian Federation to reverse the line and to transport on an expanding scale Azerbaijani production to the Port of Novorossiysk. The Northern route became operational on October 25, 1997, and the first tanker lifted 80,000 tons of AIOC-produced oil on March 24, 1998. The Northern route experienced a number of interruptions, a few of a technical nature, but mainly caused by security breaches on the pipeline in the territory of Chechnya. Deliveries on the northern route were suspended in the fall of 1999.

In January of this year, Transneft proceeded with the construction of a new segment that would enable the transportation of crude oil from Baku to Novorossiysk to resume. The new segment is 311-km between Sulak and Trudovoya. The pipeline is scheduled to be placed in service in April 2000, and when completed, it will have a capacity of 6 mmta. In addition, Transneft has begun the construction of an 18-km segment from the Port of Mahachkala. This segment will enable crude deliveries to the Port to be directly connected to the pipeline to Tikhoretsk. This section will have a capacity of 5 mmta and is intended to serve Southern Caspian and Kazak producers. Transneft announced that the planned tariff for this route will be $8 per ton for deliveries to Novorossiysk.

Baku Supsa Pipeline

The second early oil route originates at the Sangachaly Terminal near Baku and ends at the Port of Supsa on the Georgian Coast. The first crude deliveries on this line occurred in April of 1999. The pipeline has an initial capacity of approximately 6 mmta. At the terminus, tanker loading takes place via a single point mooring system. The total distance of this route is approximately 850-kilometers. The pipeline is primarily used by the AIOC consortium, which operates the Guneshli-Cirag-Azerbaijani (GCA) field complex offshore Azerbaijan. AIOC had hoped to take advantage of existing infrastructure in place in constructing this pipeline. However, because of the condition of the existing pipelines, a decision was made to install new pipe along the entire route. With the addition of pumping capacity and some limited looping, the Supsa line could readily be expanded to over 10 mmta (200,000 b/d).

Transit Route through Azerbaijan and Georgia

Dubendi Batumi Transit Route

Chevron pioneered the re-establishment of the historic Eurasian transit route through Georgia. This combination of marine - rail - pipeline transportation system was placed in service in 1997. Given the limits of available export pipeline capacity to the north from Kazakhstan, TengizChevroil had to choose between slowing down field development activities in Tengiz or finding alternative export options. TengizChevroil chose the later. By taking advantage of existing rail and pipeline infrastructure, we implemented the Dubendi-Batumi export link. This system has a current capacity of 3.5 mmta. With minimal investment, the capacity of this rail pipeline network could be expanded to approximately 7 mmta.

Atyrau - Samara Pipeline Segment

The final "expansion of Caspian pipeline capacity" is not a physical expansion of pipeline capacity (as of yet!), but a combination of a "release" of capacity and the result of a more commercial attitude on the part of JSC Transneft. The current capacity of this pipeline is 10.4 mmta. In 1995, Kazakhstan and the Russian Federation agreed that the producers participating in CPC would be provided at least the same level of export access as was in place the previous year. This would help ensure continuing development of the fields that would eventually be connected to the CPC system. Once CPC is placed in service, this capacity will become available to other producers in Kazakhstan. Also, whereas historically the Russian Federation limited access to hard currency markets via this route, they have progressively increased the export quota each year. Transneft recently indicated their willingness to expand export access and cooperate on the expansion of the pipeline to its capacity limit of approximately 16 mmta. Kazak shippers can currently access directly 14 countries and 7 marine terminals via this pipeline.

Projected Caspian Crude Oil Export Capacity in Place as of June 2001

The following map shows the pipelines in place or in process as the region enters the new millennium.
Click here to view the enlarged version of the map

These facilities can be readily expanded to over 2 million barrels per day in relatively short order.