Russia's oil future depends on Chevron case

Russia's oil future depends on Chevron case

By James Kynge

ALMA-ATA (Reuter): Russian restrictions on oil exports from
Kazakhstan have thrown in doubt billions of dollars in foreign
investment around the Caspian Sea and raised suspicions among
Western firms about Moscow's motives.

Senior oil industry executives are watching closely problems
experienced by U.S. oil giant Chevron Corp. in its Tengizchevroil
(TCO) venture with state oil company Kazakhstanmunaigaz.

"If the Chevron project doesn't start to fly soon, others will
take note and hold back," said one company official.

Russia restricted Kazakh crude oil exports last year, saying
supplies from the Tengiz field had too high a level of corrosive
sulfur compounds, known as mercaptans.

As a result, TCO had to reduce its planned output.

"I'll be quite blunt with you, it's a political issue,"
Charlie Auvermann, federal relations manager for the joint
venture, said in an interview.

"The Russians were accepting 330,000 tons a month of mercaptan
crude in the old days and now all of a sudden they have become
environmentally conscious," he said.

All Kazakh crude oil exports pass through Russia, which says
the high level of mercaptans would damage its pipeline system.

TCO, set up in 1993, is the biggest single foreign energy
sector investment in the former Soviet Union. Chevron plans to
invest about US$20 billion over 40 years.

"(TCO) is not something anyone wants to walk away from or
plans to walk away from," Auvermann said.

"But, on the other side of the coin, you cannot expect a
corporate partner to continue to pour those types of money into
an operation with little likelihood of resolving issues that are
keeping the cash flows so low."

Chevron has pulled out about 10 to 12 percent of its staff
working on the field without disrupting production capacity and
construction work on key areas.

Auvermann said the staff cuts had come from non crucial areas
such as teams building cinemas and accommodation.

Since Russia began limiting exports from Tengiz, which has
estimated recoverable reserves of between six billion and nine
billion barrels of oil, TCO has shipped only 120,000 tons a
month, down from the 330,000 tons pumped monthly before TCO began
operations.

Auvermann said the joint venture, in which Chevron has
invested $500 million, already had the capacity to extract 60,000
barrels per day and planned to double this figure by the end of
the year.

He also said Chevron could not keep up current investment in
Kazakhstan if transport problems were not solved.

"We cannot continue to invest $500 million, $600 million or
$700 million when we are not even getting a rate of return we
expected to get in 1993," Auvermann said.

The venture's problems threaten to block other projects in the
region, including possible deals with foreign companies to
develop Caspian Sea fields off Kazakhstan and Azerbaijan.

TCO plans to build a $40 million comprehensive
"demercaptanization" facility by the end of this year.

"Let's suppose we solve the mercaptan problem...If the
Russians do not want the oil they'll come up with another
excuse."

Auvermann did not elaborate on what Russia's political motives
may be. But Western oil analysts said Russia was increasingly
unwilling to pump crude from competitor producers to foreign
markets.

They also said Russia, which controls almost all of the former
Soviet pipelines, was showing muscle as it geared up to demand
equity shares in profitable Western oil deals around the Caspian
Sea.

Russia has not made demands for a stake in the Tengiz field,
but the Russian oil giant Lukoil has been given a stake in
Azerbaijan's project with a Western consortium to develop two
Caspian fields and has expressed interest in other areas.

All projects in the region depend on Russia at the moment for
access to export markets, and Russia appears to want to maintain
control over export routes.

Russia, Kazakhstan, Chevron and the Oman Oil Company are in
active negotiations to build a new oil pipeline from Tengiz to
the Russian Black Sea port of Novorossiisk, a major outlet for
crude exports.

But talks over the project have made little progress as the
parties have been so far unable to agree on financing.