Azerbaijan AIOC to Reduce Oil Output Cost

BAKU (Reuters)–Azerbaijan’s biggest foreign oil consortium plans to halve production costs and cut operating costs by up to 25 percent this year because of the low price of oil–the company’s president said on Monday.

"There’s limited capital available and Azerbaijan and the AIOC is competing for allocations for many other opportunities worldwide," David Woodward–president of the BP Amoco-led Azerbaijan International Operating Company (AIOC)–told Reuters in an interview.

"Caspian Sea oil is disadvantaged compared to the North Sea because it is further from the markets and the transport costs are higher. We need to compensate with lower production costs."

Woodward–who took over as president of AIOC on January 1–said total production costs last year were over $5 per barrel. This year AIOC aims to cut this to $2.50 per barrel–down from the $3 per barrel originally projected.

Operating expenses–initially set at $315 million for 1999–have also recently been revised down–to between $238 and $265 million.

The consortium’s main savings will come from exporting maximum volumes of crude through a new $560-million AIOC-built export pipeline running through Georgia to the Black Sea port of Supsa–due on stream in April.

The pipeline will have initial capacity of just over 100,000 barrels per day. AIOC production is expected to reach around 130,000 bpd by the middle of this year.

At present the only operational export route is through the Russian pipeline system to the Black Sea port of Novorossiisk.

The pipeline tariff for exporting through Russia is $2.20 per barrel–as against less than $0.18 through AIOC’s own pipeline to Supsa. Maximising Georgian exports would account for more than $2 per barrel of the planned $2.50 savings.

"There’s lots of incentive for us to get the western route up and running and use its maximum potential. At the moment–we’re losing between $1-$2 per barrel on quality differential when we send oil through the northern route," Woodward said.

When oil is exported through Russia–AIOC receives Russian Urals Blend–a heavier crude than its own production–at Novorossiisk.

At Supsa–AIOC receives the slightly better quality Azeri light. But Woodward said that although sending oil through Georgia was a priority for the consortium–the northern route would not be written off.

Oil industry leaders have said the oil price slump would hit Caspian development projects especially hard because of the high capital costs involved with their often hard-to-reach reserves.

Former AIOC president Terry Adams–now head of Caspian development for Britain’s Monument Oil and Gas–said recently that many producers believed Caspian projects would be unprofitable below around $12 per barrel.

Benchmark front month Brent crude futures were trading at below $11.40 per barrel in early trade on Monday on London’s International Petroleum Exchange.

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