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.