OIL AND GAS RESOURCES OF ARMENIA

Armenian News Network / Groong
June 24, 2002

By Tim Papworth

YEREVAN, ARMENIA


Is there oil and gas in Armenia?

Yes, there is, as proven by oil recovered from the Shorakhpur-1P well
east of Yerevan (the old Russian drilling rig can still be seen on the
right hand side of the main road to Garni, close to Voghchaberd
village), and the well south-west of Armavir (Oktemberyan-13E) which
flowed gas for six months. These prove that the right conditions for
oil and gas accumulations exist. The better question to ask is whether
commercially exploitable deposits can be found.

It is doubtful that large individual oil or gas fields exist in
Armenia.  Considering the convoluted geological history, it is much
more likely that any existing fields will be small and tectonically
complex. However even such fields would have a significant economic
impact, provided the average well productivity is high enough, and the
oil price remains at reasonable levels (250 barrels of oil per day at
$16 per barrel). It is very important to keep operational costs at a
reasonable level. With a fully functioning drilling rig still in
country, plus considerable amounts of ancillary equipment and
materials, this should be possible.

Armenia lies within the Caucasian orogenic belt situated between the
Black and Caspian seas.  This orogenic belt was formed as a result of
the closure of a number of Tethyan Ocean tracts since as long ago as
the Devonian.  The remnants of some of these paleo-oceans are
represented in Armenia by up to three narrow, discontinuous belts of
ophiolites, which are Jurassic to Cretaceous in age. These ophiolite
belts serve to divide the country into a series of NW-SE trending
tectonic zones.

The south-western zone is represented by three basins, the Oktemberyan,
Artashat and Surinaven. They lie along the course of the present day
River Araks, which forms the border with Turkey.  Their sedimentary
section is Tertiary in age and floored by ophiolites (Cretaceous or
Jurassic in age) or Paleozoic sediments. The Oktemberyan Basin, SW of
Armavir, is prospective for gas.

To the NE, the section rises onto a regional high composed of Paleozoic
metasediments, before dipping again into a large sedimentary basin known
as the Central Depression, which has oil potential. These sediments
range from Permian to Quaternary in age. The structure of this basin is
complex, with folding, wrench faulting, and possibly thrust faulting
present. Near the NW end of the Central Depression lies the Aragats
volcano, dormant since Pliocene times.

Serious exploration for oil and gas began in 1947. There have been two
phases - the first, 1947-1974 (the first borehole, Avan-1 was drilled to
5,600 feet in 1948); the second, 1981-1990.

During the first phase, 55 deep wells and 115 structural/mapping wells
were drilled. Shows of hydrocarbons were encountered in a number of
them.  The Oktemberyan-13E well tested gas at rates of 1.54 million
cubic feet per day, the flow continuing for six months. Oil and gas
shows recorded in Shorakhpur-31E led to further drilling on that
prospect at a later date. The USSR Ministry of Geology decided to
terminate exploration activities in 1974. Soviet planners decided that
exploration targets identified from this phase of exploration compared
unfavourably with other areas in the USSR, which had lower exploration
risk and were closer to existing production infrastructure.

The most significant result of the second phase was the recovery of
about one cubic metre of oil from a Lower Eocene / Paleocene reservoir
in Shorakhpur-1P. This was the first oil recovery of any significance in
Armenia, albeit a small one. Except for operational difficulties
considerably more oil could have been recovered. Extensive oil shows
were seen over 400 feet of rock section. In addition, the Oktemberyan-1P
well tested gas at the equivalent rate of  0.85 million cubic feet per
day for a short duration from fractures within an ophiolite. The second
phase ended with the collapse of the Soviet Union.

Many boreholes have been drilled in Armenia, mostly for research
purposes, but virtually none with serious commercial intent. Because of
severe technical difficulties in obtaining adequate seismic data over
areas covered with basalt, useable seismic data was not obtained until
the 1980's. Most boreholes predated the seismic, so that only those
drilled in the 1980's could have been located on seismically defined
structures. Even for the last four wells, it is apparent that seismic
data was used only in a limited manner.

Furthermore, drilling rates for boreholes were very slow, averaging less
than 16 feet a day. Many boreholes took two, even three years to drill
(the Shorakhpur-1P well took over four). This meant reservoirs were left
exposed for long periods, with unsuitable drilling muds being used,
which may have suppressed possible oil reservoir flow. The general
motivation of Soviet-style exploration was for quantity (number of feet
drilled), often at the expense of quality. For instance, many miles of
seismic data acquired completely lacked interpretable seismic
reflections. The level of technology employed in some regions, in terms
of equipment and techniques, were not adequate to the task.

In order to determine Armenia's real hydrocarbon potential, the Armenian
government requested the assistance of the U.S. Trade and Development
Agency (TDA). As a result, a study was carried out by consultants hired
by the California Energy Commission. The work was largely based upon a
two weeks visit to Armenia during a winter of extreme hardship, and
based upon a somewhat limited amount of material provided by several
local experts. The reserves of oil and gas calculated by the consultants
were significantly overestimated, because some of the data supplied was
not reliable.

During the period 1993-5 a serious attempt was made by a group of
concerned Armenian Diaspora businessmen to fund the drilling of two
exploration wells in the Oktemberyan  and Shorakhpur areas. This was
known as the Armoil project.  Unfortunately the project was never fully
realised in spite of a very large expenditure. As a result of this
project, modern seismic equipment was sent to Armenia, which was used
when seismic operations started during 1997.

A more comprehensive study, involving the analysis of all existing well
and seismic data (but no new seismic or drilling work), to assess the
hydrocarbon potential of Armenia commenced in July 1994. This was
undertaken by a Robertson Research (UK) / Partex (Portugal) consortium,
and funded by Tacis (EU Technical Assistance to CIS). The contract was
one year long and resulted in a four volume report and the setting up of
a comprehensive RA oil and gas exploration databank (comprised primarily
of seismic and well log data).

The Tacis study concluded that average resource-in-place prospects of 70
million barrels of oil (estimated 14 million barrels recoverable) exist
in the Garni-Shorakhpur area, east of Yerevan (part of the Central
Depression), and 144 bcf gas resource-in-place prospects (110 bcf plus
recoverable) in the Oktemberyan Basin area.

According to this study, when considering all the wells drilled between
1947 and 1989, only 16 have been drilled on valid prospects. Out of these,
13 penetrated the main objective, 3 did not, while 7 were inadequately
evaluated. For the remaining 6 wells, 4 were dry (Oktemberyan-13AE, 12E,
Markara-5P, Garni-1P), while 2 were non-commercial gas wells
(Oktemberyan-7P, 13E). The lack of exploration success in Armenia is
primarily due to the failure to identify and drill valid structures,
although other factors such as reservoir quality are also very important.

Following on from the initial project, there was a second Tacis project
assisting RA efforts to find oil and gas investors. In due course, this
resulted in the eventual signing in January 1997 of a Production Sharing
Agreement between the Ministry of Energy and the Armenian American
Exploration Company (`AAEC') from San Diego, California.

AAEC committed to a three well program and sixty kilometres of seismic
all to be completed within one year, and a minimum expenditure of ten
million dollars. The program itself, given the large size of the
concession, was a reasonable and fair one, but the time period for
achieving it proved to be unrealistic.

During the period July 1997 to March 1998, AAEC recorded over 200
kilometres of reflection seismic data using a local Armenian seismic
contractor (ArmEnergoSeismoProjects). In August 1997 AAEC purchased its
own Skytop Brewster drilling rig in France which was then shipped via
the Black Sea, arriving in October. AAEC set up its own camp, and
drilling of the Azat-1 exploration well commenced in December. By July
1998 the well had been drilled to 11,560 feet and had encountered minor
traces of oil. By this time over twenty million dollars had been spent.

Predominantly for financial reasons, drilling activity ceased although
technical studies continued. The northern part of the licence
(considered to be unprospective)  was relinquished in March this year,
and the licence for the southern Block 2 (7,250 square kilometres)
extended for a further two years until March 2004. The Ministry of
Energy released AAEC from its remaining work obligations. AAEC is
currently seeking new investment partners.

Currently AAEC is the only prospector in Armenia. Hunt Energy and
Minerals (Hemco) applied for an exploration licence in eastern Armenia
during 1998 but were unable to agree contract terms with the Ministry of
Energy. An unnamed company recently showed interest in a licence area in
NE Armenia, but detailed discussions with the Ministry of Energy have
yet to start.

Recent studies suggest that the two oil prospects, Shorakhpur and
Nubarashen, east of Yerevan, contain potential recoverable reserves of 20
million barrels each. Over a ten year period, the two fields combined
could produce 11,000 barrels of oil per day, which is about equal to the
current daily consumption of petroleum products (gasoline, diesel,
kerosene etc.)  in Armenia. Other fields of similar size could exist,
particularly northwards, towards the villages of Aramus and Fontan.

In the area SW of Armavir, at least four gas prospects have been
identified, with reserve sizes ranging from 10 to 40 bcf (billions of
cubic feet) of gas.  Statistically these are `most likely' estimates -
i.e. probabilities of at least 50% that these reserves exist; actual
reserves could be much greater. There are at least another eight
similar size (or larger) prospects known, but they require more
technical work. A reasonable estimate of gas potential so far is
therefore 500 bcf or greater, which represents a ten year supply for
Armenia, as the amount of gas currently imported is currently about 50
bcf per year. Northern and eastern parts of the Oktemberyan Basin
remain virtually unexplored and would be expected to yield further
deposits.

There remains hydrocarbon potential in areas outside Block 2 (AAEC's
licence area) which, so far, have had little serious study. For
instance:

- there were reports of releases of gas during the 1988 Spitak
earthquake in that region;

- Permian-age organic rich, mature, oil and gas prone calcareous shales
and mudstones are present largely in SE Armenia (there is an
unsubstantiated report of an oil show in the Meghri area);

- an oil seep at the Yeranos borehole, SE of Lake Sevan, is still
active;

- medium/light oil was recovered from drilling muds in the Mid-Jurassic
of the Ahkakhlu-3 borehole in the Idjevan coal field area;

- heavy waxy asphaltic residual oil was found in Triassic coals in the
Ghermanis-4 borehole, west of Yeghegnadzor.


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Tim Papworth is a UK-based petroleum exploration consultant with over
thirty years of experience in areas including the North Sea, onshore
UK, Libya, Egypt, Tunisia, Malaysia, Gabon, Namibia, Georgia and
Russia. He has worked intermittently in Armenia since 1994 and is
currently General Manager of the AAEC Yerevan office.

For further information on oil in Armenia one can contact the author
at timpap@arminco.com, or Dr. Andranik Aghabalyan, General Director
of Geoenergy CJSC, at geoenergy@netsys.am. Geoenergy represents the
RA Ministry of Energy in all negotiations.
The AAEC website is at: http://www.armeniaoil.am