Building The Caspian Oil Industry: Five Steps To Success

By Richard H. Matzke, President
Chevron Overseas Petroleum Inc.

Kazakhstan International Oil & Gas Exposition

Almaty, Kazakhstan

I've promised today to discuss "five steps to success" in building the Caspian oil industry.

I realize, of course, that we face many more steps than five -- and any list today will probably look much like a list from last year and the year before. It often takes longer to achieve our goals in this challenging region than we might like, and this makes it that much more important to be both patient and committed.

But even with all the work ahead of us, we should feel fortunate. After all, we have merely an oil industry to build. Kazakhstan President Nazarbayev has the much bigger job of building the entire economy of his country and without his leadership we would not be building an oil industry today. For his efforts -- and for leading difficult changes -- he is widely regarded as one of the most visionary leaders in Central Asia and the world as well.

In particular, the Caspian oil industry should applaud the president's courageous public statements and constant efforts for honesty in both business and government. Wherever corruption exists in the world economy, market forces are distorted, national reputations suffer and investors hesitate. The potential benefits of stable enterprise and new economic development are literally stolen from the people. But President Nazarbayev has shown repeatedly that he intends to condemn this activity to the past, where it belongs. And I think he made a good point two weeks ago at the first meeting of the Foreign Investors Council when he pointed out that the private sector also has a role to play here. As the president said, this is the coin with two sides: if bribes are being received, then someone must be paying them.

The president's fight against corruption, of course, is essential to his over-all effort to create and maintain a positive investment climate here in Kazakhstan. The president continues to emphasize a climate that attracts new ventures and seeks to reward all investors with a fair return, reasonable risk, consistent regulations and clear tax policies. Here is a leader serious about economic partnership.

This brings me to my first step to success for the Caspian oil industry: Keep striving toward the highest international standards of business performance and superior business-government relationships. This means more transparency in the awarding of contracts. It means new procurement practices that select the best suppliers for the best price. It means reasonable and efficient staffing for projects -- and both speed and efficiency in granting permits for new construction.

We also need the regional and local governments to follow the structural reforms of the national government. The low oil prices of 1998 strongly reminded the companies and countries invested here that our future depends on the discipline of world-class cost-management and operating effectiveness. Everything we do to make ourselves more competitive today will reward us tomorrow -- and we will pay dearly if we don't heed the lessons of 1998.

Even with our progress to date, the Caspian oil industry is still mostly promise and potential. For all the talk about the Caspian region being the next Middle East, its oil reserves still exist as much in our minds -- and in the world's expectations -- as they do in the ground or beneath the sea.

Together, the companies and countries trying to build the Caspian oil industry must prove we are both technically capable and financially responsible in exploration, production, marketing and transportation. When companies and governments share the management, the costs and the rewards of energy development, the outside world judges us by the same high performance standards that drive the private sector. And while those standards may at time seem harsh, they always reflect the competitive requirements of the larger world.

Fortunately, our industry has before it a perfect opportunity to prove we are ready to meet those requirements. And this brings me to the second step to success for the regional industry: Complete the Caspian Pipeline and make it an oil-export success story.

There was a time not long ago when CPC was the only truly serious export project for Caspian oil. Today, it's hard to keep up with all the pipeline proposals! And it seems like everybody has a favorite, sometimes regardless of costs. But the CPC has never been -- nor will it ever be -- merely one pipeline option on a list of many. It's the export project that made the most sense five years ago to build first, and it makes the most sense to build it first today. This is why the CPC has attracted the broad range of partners who now endorse it with their dollars, their flexibility, their cooperative spirit and their respect for the partnership.

Make no mistake, Chevron supports the concept of a competitive oil transportation system in the Caspian with multiple export options. But the entire industry needs the CPC -- either directly or symbolically -- and we need it as soon as possible.

The CPC can permanently enhance regional Russian-American relations over the long-term. It binds the United States, Russia and Kazakhstan together in a project of historic importance. We now have an outstanding Russian executive leading the project, and the three nations agree that the CPC is our first solution to begin the new era of high-volume Caspian exports. Leaders in all three nations are eager for the CPC to demonstrate that a pipeline can work under the management of Russian and Kazakh oil professionals, with new construction crossing Kazakh and Russian territory. I've been very pleased to see both national and regional governments have come to appreciate the very tough commercial requirements of building and operating a pipeline of this size. With positive relationships have come positive reforms. Our pipeline has the potential to prove that it can serve as a stable and dependable regional asset for the years ahead. Structural operational and management integrity are all well-within our grasp and we are making good progress.

Some have argued that perhaps the non-Russian export options are better for the Caspian region. I respect those efforts and I wish them all the fairest judgement of the marketplace. But working together on a major pipeline in a commercial partnership with Russia and in a consortium governed by internationally acceptable financial standards is absolutely critical to the future of the Caspian oil industry. I have believed this from my earliest involvement here. I believe it even more strongly today. And Chevron will continue to do all we can to help keep the forward momentum going.

The CPC is a catalyst for American, Kazakh and Russian oil companies to learn how to work effectively just as Western companies have found a welcome home here in Kazakhstan. Beyond that, the world is still watching and waiting to see if three governments and 11 companies from six different nations can make a $2.3 billion pipeline project work for everyone involved. Especially now, the pipeline project is viewed as a critical test of Russia's commitment to attracting new foreign investment. Lastly, the Caspian Pipeline will provide the giant Tengiz Field with the opportunity to achieve its true potential.

This brings me to my third step to success: Sustain the Tengizchevroil expansion. Just as the Tengiz Field depends on the development of the Caspian Pipeline, the pipeline depends on the development of the oil field. To be commercially successful, CPC will need an immediate, large and constant flow of oil, starting with a major quantity of crude from Tengiz. Of course, it's no surprise to hear me say this, as Chevron holds the largest share of TCO -- and we've been involved from the beginning. But even if another company had struck that historic deal with Kazakhstan in 1993, this project would still be a primary indicator of the health of the regional industry.

Last year, I told a conference in London that some day, the Tengiz development would be viewed as just one of many success stories in the Caspian oil industry. But that day is yet to come. The growth and performance at Tengiz remain unique and the project remains a pillar of the Caspian industry.

The partnership's commitment to the TCO capital program even in the face of low oil prices sets an important example. And its effort to find markets and export options for its rising output remains one of the regional industry's great success stories. Rail shipments. Exchanges. Barges. Short-haul pipelines. Regional refinery sales -- even an experimental train-load of oil delivered to China. And they've kept it up.

Many of you know the situation. Tengiz oil reaches a host of buyers despite limited access to the Russian pipeline system. And looking back, one could even say that successfully marketing its production against the odds has made TCO a stronger company. Even more impressive, the joint venture intends to sustain its sales and grow its production despite the fact that the Caspian Pipeline startup is two years away.

The expansion of Tengizchevroil -- like the Azerbaijan International Operating Company (AIOC) partnership on the other side of the sea -- is especially important because it gives our industry a glimpse what its future can be. And this brings me to my fourth step to success for the Caspian oil industry: We must tell our story -- our whole story -- and tell it widely, and often.

We need to systematically record our progress, chart the shared financial success to come, calculate our future benefits to the larger economy -- and to people -- and then communicate these findings to ourselves and to the larger world. The international news media has done some of this. But telling our story is a job too important to leave to others. We have to spread the good news ourselves. Chevron has made a special effort in this area during 1998. And we applaud other companies who do the same.

Quite often, the media has emphasized the negative news. And they have raised doubts about the future of the oil industry in a troubled region during troubled times. In fact, we need to hear those critical opinions and views. The political challenges of the region are -- in many ways -- severe and overwhelming. This is one reason the industry should continue to do its part to help the people and communities in the areas affected by our projects. And we should support the linkage of local jobs and business development to our projects wherever we can.

There is no better example than the TCO partnership, which today employs 3, 000 people, and more than 70 percent of those are Kazakhstani citizens. By telling our story -- even as the problems persist -- we ensure that people see the ways our industry is weaving strong new threads into the economic fabric of the Caspian region. We have to focus not on what we can't do but on what we're doing today and also on what we're committed to doing tomorrow. We must do this partly for our own benefit to help us feel proud of our achievements and to gain confidence from our work. Clear forecasts of future benefits can help keep us moving toward our business objectives and give us something to look forward to. We need all these things especially during a year like 1998, when industry conditions put us to the test as they no doubt will again.

Chevron, this year, has shared conservative data -- prepared in partnership with distinguished Kazakhstani and Russian institutes -- detailing the positive impact of TCO and the CPC on the people and the economies of both Kazakhstan and Russia. For example, we learned that building the Caspian Pipeline will create 4,000 direct regional jobs at the peak of construction. And we're going to keep compiling the data, broadening it and sharing it in 1999 and beyond.

My last step to success probably won't surprise any of you. And it is this: Keep working to settle the Caspian Sea ownership dispute. This, of course, is entirely and properly out of the hands of the companies represented here today. It's up to the five countries with Caspian shorelines and undeveloped energy resources to resolve.

Russia and Kazakhstan have shown positive and commendable initiative -- and results. And the recent agreement between Russia and Kazakhstan on Caspian Demarcation -- combined with the even more recent joint Azeri-Russian statement on Caspian Issues -- have given momentum for eventual consensus on the harder issues. These are encouraging developments because we know the remaining unfinished business will test the vision and leadership of all five nations.

Without a resolution, oil and gas development cannot make its full contribution to the regional economy -- but in fact, there's much more at stake. Developing the wealth of the Caspian Sea by mutually agreed means can help create a permanent basis for both peace and a clean environment in the region. Trying to share the Caspian without boundaries will likely have the opposite effect. I wish all my friends in the leadership of these five nations both strength and wisdom in this essential task.

Updated: October 1998