More than capable: Azeri supply chain participation

Azerbaijan

Ian Cochran, director of McDermott Caspian Contractors, Azerbaijan branch, discusses the evolution of the Azeri engineering, procurement, construction and installation (EPCI) sector as well as opportunities in subsea operations. McDermott has collaborated with the State Oil Company of the Republic of Azerbaijian (SOCAR) and was one of the original signatories of the contract to develop the Azeri–Chirag–Guneshli (ACG) field.

How is Azerbaijan’s domestic supply chain expected to develop?

We will see the growth of experienced and qualified Azeri companies that may not be source manufacturers, but are integrators, assemblers or importers. Instead of needing to place their own purchase orders in, for example, Italy, they can place them in Azerbaijan. An Azeri procurement company can then fill the order. This is a step between being a manufacturer and having the business outsourced. It develops the engineering, procurement and construction supply chain, further helping the economy.

What current challenges are posed in the development of Azerbaijan’s EPCI sector?

The EPCI elements of the supply chain begin with engineering, onto procurement and then construction and installation. Development of the procurement supply chain is ongoing in a country the size of Azerbaijan. Much of the engineering design is done in key centres such as London. However, there is always a balance, as some of the work must be done locally.

Procurement is done in two parts. One is actually manufacturing components in your home country. A lot of the equipment needed is very sophisticated and there are relatively few places in the world that can produce it. You need a large domestic economy before you can invest in the tooling and equipment.

Nobody anticipates that Azerbaijan will become a global manufacturing centre for high-end wellhead equipment, since the US dominates that sector. High-end valves are predominantly manufactured in Italy. However, there is still a lot of opportunity for the procurement supply chain to develop and grow here.

The other part of the procurement sector is a strong domestic sourcing capability where there are qualified agents and suppliers bringing equipment into the country. In the past, it was necessary for foreign companies operating in Azerbaijan to do their own procurement outside the country and import it themselves.

What have been the up and downtime cycles for EPCI contractors in Azerbaijan?

During the early 1990s, after the signature of the Contract of the Century, the Oil Rocks project and the restart of the huge ACG field development required many projects, for which tendering started in 2000. All contractors were very busy between 2001 and 2007.

After 2007, the industry became quiet until the Chirag Oil Project in 2011. Now, the transition is from the Chirag Oil Project to Shah Deniz 2, which is currently the major project for the local industry. There has been a cycle of downturn, build up, plateau and downturn again.

Has the structure of operating consortiums adapted to industry development?

The initial BP model, through the Azerbaijan International Operating Company, has been to involve a number of different participants, always including SOCAR. The SOCAR model for Umid-Babek and Total’s model for Absheron include fewer participants, where SOCAR is expected to play a stronger role in project development.

A lot of foreign expertise and investment was needed in the first consortiums. Now, SOCAR needs less international support and can increase its role through alliances, joint ventures, consortiums or even tendering on its own.

Wherever there are significant natural resources, there is a national interest for their development. Therefore, it is important to have strong energy ministries and national oil companies and to encourage the inclusion of local content in Azerbaijan’s resources sector.

Are any opportunities in subsea operations available to the EPCI sector in Azerbaijan?

Subsea technology requires incredibly specialised high-end components that may have to be designed for a particular application or well stream. There is no reason that there cannot be more Azeri supply chain participation in that process.

Subsea projects require a lot more engineering content than conventional deepwater projects or shallow-water projects. The local community has the necessary skills for subsea projects and will continue to grow and develop.

There will eventually be more partnerships developing between SOCAR and international companies that are based in countries that have manufacturing capabilities. Different contractors and manufacturers might be able to have more contracts in Azerbaijan while liaising with manufacturing plants in other parts of the world.

Read our latest insights on:

• Azerbaijan