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Project delays remain the key threat to an Azeri energy sector capable of delivering much greater volumes and revenues. Gas export issues involving pipeline routes and other quasi-political decisions are critical if there is to be sustained field development and increased shipments. Meanwhile, liquids volumes have been falling short of expectations, and there are doubts with regard to the scale and timing of medium-term output growth.

Main trends and developments we highlight for Azerbaijan's Oil and Gas sector are:

- UK oil major BP is expected to take an investment decision on the second development phase of the Shah Deniz field by 2013, according to the Vice President of Azerbaijan's state-controlled State Oil Company of Azerbaijan Republic (SOCAR), Elshad Nasirov. He added that the Shah Deniz II project involves investment totalling US$20bn. The project is expected to allow exports of 10bcm of gas to Europe and 6bcm to Turkey by 2018.

- The Shah Deniz Consortium (SDC) was expected to reach a decision on which export pipeline it favours for the transportation of Azeri gas to southern Europe by the end of Q112. SDC includes BP (25.5%), Norway's Statoil (25.5%), Iran's NIOC (10%), SOCAR (10%), France's Total (10%), Russia's Lukoil (10%) and Turkey's TPAO (9%). Options on the table include the EU-backed Nabucco, the Italy-Turkey-Greece interconnector (ITGI), the Azerbaijan-Georgia-Romania Interconnector (AGRI), the Trans-Adriatic Pipeline (TAP) and the South East Europe Pipeline (SEEP). In BMI's view, the two most likely contenders are SEEP and TAP and we envisage an alternate solution that would result in the approval of SEEP as an initial project that could then evolve into TAP as more volumes come onstream.

- On October 25 2011 Azerbaijan and Turkey signed a number of key gas export-related agreements, which enable Turkey to buy gas from Azerbaijan and to transit Azeri gas to Europe. These agreements will allow Shah Deniz to proceed with its European pipeline selection process, and to confirm gas sales agreements with potential customers.

- According to Azerbaijan's finance ministry, oil production declined by 10% year-on-year (y-o-y) to 45.6mn tonnes – 916,000 barrels a day (b/d) – in 2011. The government statement, made in October 2011, did not disclose the reasons behind the decline. BMI had already reduced its estimate for 2011 production to around 935,000b/d (-10% y-o-y), but there may still be some downside risk to the current forecast if the government's bearish prediction proves accurate.

- BMI sees scope for overall liquids supply to recover to 1.00mn b/d in 2012, rising further to a peak of around 1.38mn b/d by 2018. The further development of the Azeri-Chirag-Gunashi (ACG) complex and liquids from the second phase of the Shah Deniz gas field could deliver a surprise on the upside in terms of volumes but, equally, project delays could undermine progress.

- Azerbaijan is likely to have earned US$30.7bn from oil exports in 2011, with gas bringing in a further US$3.2bn. With oil exports reaching an estimated 1.15mn b/d by 2016, plus rising gas sales, the country could be generating petroleum revenues of US$42.9bn by the end of our five-year forecast period.

Azerbaijan's dependence on energy prices leads to high volatility in the country's export revenues. Our anticipation of slower growth in China, a faltering recovery in the US and a worsening eurozone debt crisis, clearly pose a threat to global demand. As a result, we assume OPEC basket oil prices will fall from US$107.52 per barrel (bbl) in 2011 to US$99.38/bbl in 2012, thus creating a downside risk for the Azeri macroeconomic outlook.

Click for Report details:Azerbaijan Oil and Gas Report Q2 2012