Boston, MA -- (SBWIRE) -- 12/09/2013 -- While stabilisation of the ACG field and new volumes from the Chirag Oil Project should support production that has proven disappointing over recent years, the long term outlook for the liquids is bearish. Although there is upside from liquids volumes extracted alongside gas, with a number of sizable potentially condensate rich deposits identified in the Caspian, we have not yet priced such developments into our current forecast. This stems from a slow and uncertain development schedule, with a shortage of rigs for example and a lack of firm operator timeline among the factors preventing us from including first gas from discoveries in our current forecast.

The key developments in Azerbaijan's oil & gas sector are:

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- While BP has reportedly stabilised output at the key Azeri-Chirag-Guneshli (ACG) field, we maintain a largely bearish outlook for oil production given challenges encountered at the field to date.
- From 2014 onwards, first oil from the Chirag Oil Project (COP), part of the ACG complex, will help to offset some but not all of the lower-targeted volumes from other production sites. We retain our long-term view that on the back of production challenges at ACG and a failure to bring online major new liquids discovery, oil production is set to decline gradually from 2017. While we see upside from liquids volumes captured alongside major offshore gas discoveries, we are not currently pricing these in, given that development efforts remain in their infancy.
- A recent study from the EIA highlighted the country's untapped potential with 2P gas reserves placed at 1.43trn cubic meters and 2P liquids reserves estimated at 8.5bn bbl. However, the overwhelming majority of remaining resources is thought to be offshore, where territorial disagreements with Turkmenistan have prevented exploration in certain areas.
- Data from the EIA indicates production continues to disappoint and we expect production to average around 898,000b/d for 2013, before recovering in 2014 to 922,000b/d as stabilisation efforts at ACG and the start of the Chirag Oil Project support a recovery in output. SOCAR chief Rovnag Abduallayev reported in September that the period of production decline was over and from late 2013 a gain in production were possible. Abduallayev reported that the COP was on-track to come online from year end.
- We retain our long-term view that on the back of production challenges at ACG and a failure to bring online major new liquids discovery, oil production is set to decline gradually from 2017. While we see upside from liquids volumes captured alongside major offshore gas discoveries, we are not currently pricing these in, given that development efforts remain in their infancy.

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