North Caspian Oil Company (NCOC) is reported to have extracted the first oil from Kashagan field yesterday. Kashagan represents estimated reserves of 35 billion barrels (bbls) of oil in the vastly oil and gas rich Caspian Sea.

Caspian Sea

“Italian energy company Eni SpA (ADR) (NYSE:E) (BIT:ENI), in charge of the start of production, said initial Kashagan operations would give up around 180,000 barrels of oil per day and eventually ramp up from there,” reported OilPrice.

Oil and Gas reserves in Caspian sea

The U.S. Energy Information Administration (EIA) places the potential of the Caspian Sea at 48 billion bbls of oil and 292 trillion cubic feet (tcf) of natural gas. Most of the offshore oil reserves lie in the northern part of the Caspian Sea while most of the offshore natural gas lies in the southern parts of the Caspian Sea.

The U.S. Geological Survey (USGC) also estimated that another 20 billion bbls of oil and 243 tcf of natural gas are undiscovered at this time. Most of these undiscovered reserves lie in the South Caspian area where territorial disputes have posed a significant barrier to exploration growth.

Figure 1: Map of Caspian Sea

Source: Energy Information Administration (EIA)
Source: Energy Information Administration (EIA)

Caspian exploration activity

The Caspian Sea region participants include Russia, Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, and Iran and is the largest field of its kind in the world. Traditionally, crude oil was considered the primary treasure of the Caspian but recent discoveries of significant gas reserves has proven otherwise. Also, much of the Caspian exploration activity has been concentrated onshore but with the discovery of Kashgan offshore field in 2000, things have been moving quicker. It is expected that there are larger unexplored offshore reserves which will eventually be realized.

Table 1: Caspian Sea reserves, offshore and onshore

Source: Energy Information Administration (EIA)
Source: Energy Information Administration (EIA)

It is estimated that the Caspian Sea area produced 2.6 million bbl per day (bblpd) of crude oil and condensate in 2012 along with 2.8 tcf of natural gas.

Figure 2: Caspian Sea oil production, 2000-12

Source: Energy Information Administration (EIA)
Source: Energy Information Administration (EIA)

Figure 2: Caspian Sea natural gas production, 2000-12

Source: Energy Information Administration (EIA)
Source: Energy Information Administration (EIA)

Source of energy for European Union

There have also been talks over the potential of Caspian Sea output to replace Russian oil and gas as the source of energy for the EU. In June 2013, British Petroleum had finalized an export option to Europe which included the Trans-Adriatic Pipeline. The gas field of Shah Deniz in the Caspian Sea is to be the source of new gas for EU markets by 2019. OilPrice stated that this pipeline could ‘redraw the European energy map’.

“With Russian energy shifting its focus elsewhere, the Caspian region may be fast becoming Europe’s preferred choice for oil and gas… Discovered more than a decade ago, Shah Deniz should peak at 565 billion cubic feet of natural gas, making it one of the largest natural gas fields in the world. Production is expected to enter into full swing in 2017 and European markets should start getting gas through the Trans-Adriatic Pipeline by 2019,” said OilPrice.

The conflict between the countries bordering the Caspian Sea is very strong. As a practice in the area, either state-owned oil companies or a consortium of foreign companies with state support develop Caspian energy resources.

“The ability of countries to export greater volumes of Caspian crude oil and natural gas will depend on how quickly domestic energy demand rises in those countries, how quickly they can build additional export infrastructure, and whether expensive projects to develop Caspian resources can attract sufficient investment,” says the EIA.