LUKArco May be Third Azeri Oil Group to Quit

BAKU (Reuters)–A Russian-American oil consortium could leave Azerbaijan by the end of May if seismic data from a field it is exploring does not point to reserves of more than 70 million tons of oil–the company said on Monday.

Under a clause in its production sharing agreement LUKArco–a joint venture between US Arco and Russia’s LUKoil–could leave its 1,000 square kilometer Yalama field in the Caspian Sea without drilling a single exploration well–said LUKArco Operating Company vice president Rim Bagmanov.

"We can exit our contract by May 30 if the shareholders decide the seismic results are not attractive enough," Bagmanov told Reuters in an interview.

If LUKArco decided to leave it would be the third foreign oil consortium to close here this year–further dashing hopes that the former Soviet republic may become a major oil producer.

Unlike the other 13 foreign oil consortiums operating in Azerbaijan–LUKArco does not have to drill up to three exploratory wells before they can quit.

LUKArco’s Yalama block–which is close to the Russian sector of the Caspian and has never before been drilled–was considered to have a higher level of risk than most.

Consequently under the contract–signed in 1997–the only obligation was to carry out a 3-D seismic survey–completed last summer.

The seismic results on 136 square miles of Yalama will be ready within the next two weeks and will be discussed at a shareholders meeting at the end of the month–said Bagmanov.

"Today it’s no secret that these are tough times for serious investment and this forces many companies to think seriously where there is a high level of risk," Bagmanov said.

Although the price of oil jumped on Friday on news of producer cuts of two million barrels per day–many feel they are still too low to justify major investment.

LUKArco’s Yalama structure is even more vulnerable to low prices than most Caspian projects.

Located 31 miles from the closest shore and 55 miles from Baku–it is further than any other project from drilling and pipeline infrastructure. Yalama is also in water depths of up to 800 meters.

As the region is unexplored and has a varied geology–only vague estimates of the field’s potential reserves exist–put at 50 to 70 million tons. There are no gas reserve estimates.

"We have some preliminary seismic results that show very complex geological structures with small amounts of oil in different strata in different areas–making it hard to exploit–and that really concerns our shareholders," said Bagmanov.

LUKoil and Arco together hold 60 percent of Yalama–with Azeri State Oil Company SOCAR holding the remainder.

LUKArco has a larger presence across the sea in Kazakhstan where it holds five percent of the country’s giant Tengiz field and a 12.5 percent stake in the Caspian Pipeline Consortium.

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