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A low-cost strategy in AzerbaijanJanuary 4, 2019
Andrea Cattaneo, CEO and president of Zenith Energy, talks to TOGY about Azerbaijan’s onshore upstream sector and the opportunities it offers to junior players. E&P company Zenith Energy signed a 25-year rehabilitation, exploration, development and production-sharing agreement (REDPSA) in 2016 for the Muradkhanli, Jafarli and Zardab onshore oilfields, operated by Zenith’s Azerbaijan subsidiary, Aran Oil Operating Company.
• On unlocking reserves: “The challenge, but at the same time the opportunity, we now have before us is that the shallower formations have already produced substantial volumes and we need to penetrate deeper, unexploited formations to unlock the very material reserves assessed to be in place.”
• On entering Azerbaijan: “For us specifically, entering Azerbaijan was a great opportunity because we were able to acquire a very large asset which very few junior companies of our can size can match. Zenith operates the largest onshore asset in the country by cumulative acreage with our REDPSA area covering 642.4 square kilometres, comprising mostly discovered and producing fields, but also highly prospective undeveloped exploration areas.”
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Why is Azerbaijan an interesting market for a junior company such as yours?
Azerbaijan is the oldest oil-producing country in the world. It has a very rich history of oil production. Azerbaijan started producing oil in 1846, even before Pennsylvania.
Today, Azerbaijan is a fast-developing and very stable country. It is a country of majors, the likes of BP, Total and Equinor, and being surrounded by such large companies really helps us access high-level people and opportunities.
For us specifically, entering Azerbaijan was a great opportunity because we were able to acquire a very large asset which very few junior companies of our can size can match. Zenith operates the largest onshore asset in the country by cumulative acreage with our REDPSA area covering 642.4 square kilometres, comprising mostly discovered and producing fields, but also highly prospective undeveloped exploration areas.
Onshore is the only real option for a company at our development stage. Capital expenditures are much lower and operations much less complex than offshore. We are a low-cost operator which means our financial model dictates that we should always seek to maximise profit and enforce high cost-efficiency in all our operations.
What opportunities do your new assets offer?
Our asset – which consists of three contingent fields – has been independently assessed to have significant reserves in place and Zenith’s primary goal is to systematically increase oil production from our asset to 3,000 barrels per day via drilling and workover activities by the close of 2020.
Our field has always been considered a “mega field,” and we still view it as such, especially as it has been dormant for many years. This is because to date production has taken place from the shallower formations and has sharply declined since Azerbaijan’s independence due to a series of mechanical failures affecting some of the field’s historically most productive wells.
During USSR period, the technical and geological understanding of the field was limited as the technology of the time could not enable the same geological and reservoir investigations possible today. Many wells were drilled in turn during the Soviet Union, often in lines as in other fields, and many of the wells produced very large quantities of oil. The challenge, but at the same time the opportunity, we now have before us is that the shallower formations have already produced substantial volumes and we need to penetrate deeper, unexploited formations to unlock the very material reserves assessed to be in place. Zenith’s independent Competent Person’s Report (CPR) as of March 31, 2018, has assessed 2P reserves (proved and probable) of 31.7 million barrels of oil.
The largest field in the REDPSA area is Muradkhanli, which is recorded to have produced at a peak rate of 15,000 bopd during USSR times. Indeed, it is said that this field was so highly productive that representatives from Moscow would travel to Azerbaijan to visit. Jafarli is the smallest field in the REDPSA area and is where some of the most recent wells have been drilled, whilst Zardab is the least developed field and presents geological challenges on account of its high pressure, but also potentially very high productivity.
Broadly, the technical and geological challenges presented by our asset require expert understanding in order to be tackled effectively. Indeed, Zenith’s field is arguably one of the most geologically challenging in onshore Azerbaijan.
However, after two years in this project, we have taken a number of steps towards improving our understanding of the field and positioned Zenith to successfully increase production. For example, in preparation for our drilling campaign during 2019 we have completed two comprehensive geological studies, one by an expert team from Italy specialised in fractured carbonates, and the second from an Azeri-American team based in Houston, Texas. In addition, a comprehensive reservoir study of our fields is currently ongoing [as of late 2018].
On the basis of these studies we intend to drill our first well in the Muradkhanli field to target the unexploited Upper Cretaceous formation. Jafarli also presents good opportunities, and the last operation we shall perform during 2018 will be the deepening of well C-37 in the Jafarli field to test the Upper Cretaceous formation. This is a virgin formation; it has never been properly targeted in our fields, and this will be one of the first times this formation is properly tested in Azerbaijan.
We still have some work to do in order to fully understand the potential of this formation, especially in the Muradkhanli field. We look forward to the results of our initial production tests in our well deepening operations in the Jafarli field which will give us valuable confirmations regarding its productivity.
Are you working with local contractors?
We are already working with many local drilling and services companies. When we initiate drilling, we shall work with even more. Our philosophy is to reduce costs wherever possible and maximise efficiency but always get the best result. If we have to invest substantially to achieve our operational objectives, we shall, but we always prefer to use our internal resources to fulfil our key operational tasks.
For example, we set up a service company within our holding called Zena Drilling. This company already owns a 1,200-HP drilling rig which can drill up to 4,500 metres. This rig will be taken from Italy to Azerbaijan by truck and is expected to arrive by the close of 2018.
The rig was purchased from a service company in Italy. At the moment it is being fully overhauled and maintenance is being undertaken. It will be deployed to initiate our drilling campaign. A second, 120-tonne workover rig is being built in Azerbaijan by a local manufacturer called Azneftmash, and we also have our own A-80 workover rig, which we inherited from SOCAR, already working in the field. In addition, we are planning to lease a 180-tonne drilling and workover rig following completion of a formal tender process, so we shall soon have four rigs operating in the field.
Aside from drilling new wells, what is your well workover programme?
Drilling is the main part of our strategy but we are also restoring old wells. Some of the well data and the wells themselves are unfortunately in poor condition, so we are assessing all the well data, reinterpreting it and trying to understand how accurate it is, and based on this we are selecting the best wells. We do that by doing well investigations by wireline, and then if we see potential, we might choose to workover, deepen or perform a sidetrack.
There are many wells that used to be fantastic producers but stopped producing, and in some cases if your perform a sidetrack or an acid job, you can unlock significant volumes of oil that would have not been accessible otherwise. We are also deepening existing wells. We are planning to do this in the Jafarli field at the moment, by approximately 250-300 metres to target the Upper Cretaceous formation.
Is the current oil price environment favourable to your operations?
Of course we want the oil price to be higher because it would increase our margin. However, prices did increase recently, and even if there is volatility in the markets and prices drop, we can still operate profitably because our production cost at the moment is just under USD 20 per barrel. When we started in 2016, the oil price was USD 40 per barrel, and now Urals oil, which is what we produce, is trading in the high 50s. It has been a big increase for us.
We started this project with a stable production of about 300 bopd. We want to increase our production tenfold, to 3,000 bopd, through drilling and workover activities. Currently our monthly revenue is approximately USD 500,000. When we achieve 3,000 bopd, the margin will be very significant – especially if the oil price rises to USD 100 as some highly respected analysts have predicted. We are naturally very excited about the journey ahead.
What is your strategy for the next five years?
In five years we expect to have successfully executed our drilling programme and to be producing in the region of 3,000 bopd, perhaps even 4,000-5,000 bopd.
We aim to increase our co-operation with SOCAR. If there are opportunities for other onshore fields in the country, fields in which SOCAR is not investing or where they would like us to apply our expertise, we would be very interested in exploring these. There are many valuable onshore fields in Azerbaijan which we could operate.
Zenith is also looking not only to Azerbaijan, but to the whole FSU [Former Soviet Union] region. There are many countries which offer similar opportunities and of course we would be interested to pursue these opportunities if they align with the company’s development strategy. However, our first priority is to succeed in Azerbaijan.
SOCAR has shown confidence in Zenith by offering the possibility of entering into a 25-year REDPSA for the largest onshore oilfield in Azerbaijan. We intend to show SOCAR that this was a good decision by systematically increasing production.
We want to be an example to other companies and show that Azerbaijan is a very good place to invest capital. The infrastructure here is good, we have always been paid on time, it is very safe, and the country is highly receptive to foreign investment and entrepreneurial activity.
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