CPC - Caspian Policy Center


socar acquires new rig from kazakhstan

SOCAR Acquires New Rig from Kazakhstan


Jul 17, 2019

SOCAR, Azerbaijan’s state oil and gas company, announced in a June 24 press release that they had accepted delivery of the Satti, a jack-up rig for offshore drilling, from erstwhile owner KazMunayGas. The rig is almost new, having been completed at the Aktau Shipyard in 2016. Why would KazMunayGas go through all the difficulties of building a new rig only to sell it shortly thereafter? The answer relates to the atypical nature of the Caspian market for rigs and the vicissitudes of exploration for oil and gas. There is a robust rental market for mobile offshore drilling rigs that exhibits global scale since rigs can be moved in response to changes in local price fluctuations or changes in regional demand. However, the Caspian is separated from the global market because it is an inland sea. Transporting a rig to the Caspian requires deconstructing it, shipping the pieces overland and then reassembling the components in a shipyard on the shores of the inland sea, a complex and expensive process. As a result of the impediments to increasing local supply, the market for rig rentals could become very ‘tight’ during periods of high demand. Precisely these conditions existed in 2015. Drilling was occurring in brownfields all over the Caspian but there were a large number of exploration licenses for blocks where no exploration was occurring, suggesting an insufficient rig supply. KazMunayGas, eager to explore the Satpayev prospect in the northern Caspian, had arranged for a rented rig to drill one exploratory well but needed an another rig for additional drilling. Thus, the Kazakh parastatal elected to invest in the construction of the Satti in order to further their exploratory activity in Satpayev, where Satti drilled a second well after the vessel’s completion in 2016. Unfortunately for KazMunayGas, exploratory drilling in Satpayev failed to produce hydrocarbons in commercially exploitable quantities. KazMunayGas has largely remained quiet about the endeavor, preferring to avoid the negative publicity that accompanies any announcement of unsuccessful exploration. However, the story received attention in the South Asian press when an Indian firm with a minority interest in the Satpayev oil block announced that they were pulling out of the venture. ONCG Videsh Limited (OVL), the subsidiary of India’s state-owned Oil and Natural Gas Corporation responsible for overseas investments, acquired a 25 percent stake in the Satpayev block in 2011. In return for this stake, OVL paid an $80 million assignment fee to KazMunayGas and a $13 million signing bonus to the Kazakh government in addition to OVL’s commitment to a minimum exploration investment of $165 million. Having spent more than a quarter-billion dollars for discouraging results, OVL elected not to extend their exploration agreement for Satpayev and allowed the 2011 contract to expire on June 15, 2018. Set-backs on the Satpayev project left KazMunayGas with excessive capacity in offshore drilling rigs, prompting the sale of the Satti. The disappointing results of exploratory drilling in Satpayev undermined the economic case for further development, while the loss of OVL as a partner eliminated a large source of funding for the project. No developments regarding Satpayev have appeared in the media since OVL announced that they had abandoned the project, and this silence suggests that the Kazakhs have likely suspended any further work on it. Without the ability to use the Satti in Satpayev, ownership of the rig had become much less attractive from an economic perspective. KazMunayGas was further limited by the technical constraints of the vessel: as a jack-up rig, the Satti is designed for use in shallow water and cannot drill into deep-water offshore formations. Many of the best prospects for new exploration in the Caspian are deep-water oilfields, so KazMunayGas had relatively few potential buyers looking for a jack-up rig to increase shallow-water drilling. SOCAR was, therefore, able to acquire Satti to support brownfield development in the Umid-Babek block and exploratory drilling in the Shallow Water Absheron Peninsula (SWAP), which the Azerbaijani firm is developing in collaboration with BP. In late 2018, the British firm announced its intention to drill two exploratory wells in SWAP, while BP’s regional head stated in May 2019 that the company planned to complete three exploratory wells in SWAP by the end of 2020. SOCAR’s acquisition of a new jack-up rig will help keep the SWAP project on track and provide it and BP with the means to fully develop the block if exploratory drilling yields positive results. Photo: Adobe Stock

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