Chevron's Caspian Commitment: Helping To Build Inter-Dependence in the New Central Asia

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

Fifth Kazakhstan International Oil & Gas Exposition

Almaty, Kazakhstan

I have been asked by our hosts here in Kazakhstan today to discuss the subject of Chevron's Caspian-region commitment.

But first I'd like to congratulate them for organizing yet another outstanding international oil and gas conference. This is the fifth annual, yet it seems like only yesterday that the Republic of Kazakhstan began working on two enormous challenges. One is re-creating itself as a nation, and the other is preparing for full participation in the global economy of the 21st Century.

I remember well my remarks to the first conference in the autumn of 1993. We had signed the Tengizchevroil joint venture in April and in May we achieved our first export sale, a shipment from Novorossiysk. And I told the audience that even though our venture was still new, it had already achieved significant momentum.

Tengizchevroil celebrated its fourth official anniversary this year. But for me and others here today, this year is really the fifth anniversary. It was actually in 1992 in Washington, D.C. that Chevron and Kazakhstan signed the foundation agreement that led to the formal joint venture.

That was the true beginning of Tengizchevroil. To show our confidence in a shared future and our commitment to partnership, we announced our marriage plans in a news release to a skeptical world. And since then, our foundation has only grown stronger.

Chevron and Kazakhstan are still committed -- and we're still confident -- and this year, Mobil, LUKoil and Arco cast their own votes of confidence by buying into the joint venture.

These are not mere investments, however. These are endorsements both for the strength of Tengizchevroil and for the future of the Kazakhstan and Caspian Region economies.

I believe they are yet another sign that a new chapter of stability and growth in Kazakhstan's oil industry has begun.

Let me turn now to Chevron's Caspian commitment, which currently consists of our Azerbaijan involvement, our Tengizchevroil venture and our investment and interest in regional oil-export capacity.

In Azerbaijan we have a new deep-water exploration agreement with SOCAR and Total to explore the Absheron structure. We will start with a 3-D seismic survey, with drilling to follow sometime in 1999.

As for Tengizchevroil, it has already passed beyond infancy, through adolescence and into young adulthood.

During this time, many critics have said that Chevron's investment in Kazakhstan would fail.

They said it was foolish for our company to make a major investment in the F.S.U. so soon after the break-up. But even though our critics were right about our joint venture's many challenges, they were wrong about our capability to meet those challenges.

Tengizchevroil is today the premier energy venture in the former Soviet Union. It clearly has the will, the strength and the resilience to succeed in the Caspian region, which has been in many ways a new frontier for the oil industry.

Oil projects can indeed move forward in this region if they focus continuously not on what can't be done, but instead on what can be done.

And I believe this viewpoint can bear fruit also for the Russian ventures which have recently seen some setbacks and delays.

Last year, Tengizchevroil produced 5 million tons of oil - twice as much as 1995. We expect 1997 production to exceed 7 million tons. And we anticipate achieving a production rate of more than 11 million tons per year by 1999.

In addition to investments to date, the venture expects to invest more than $1 billion to expand production over the next three years. But there is more to the Tengizchevroil story than just growth and investment numbers.

This project has been an engine of progress for the Atyrau Oblast region, for Kazakhstan and for Russia as well.

Tengizchevroil directly employs 3,300 people, and citizens of Kazakhstan hold 80 percent of the jobs. Many more local jobs are created as well, because of the many contractors needed to support the operations.

Employees have received more than 170,000 hours of training at a cost of $6 million. This has enriched both the project and the regional labor pool as well. Safety and environmental protection at Tengiz Field have been vastly improved. And soon Tengizchevroil will open a new headquarters in Atryau to house about 600 administrative and technical staff, who will move from Tengiz.

The joint venture's $50 million Atyrau Bonus Fund has supported improvements in housing, medical care and schools. A 50-ton-per-day bakery, a new boiler plant and a new water treatment plant have been built. Next year, a new medical clinic will be competed in Atyrau. And the joint venture is also working with the government to support economic and business education.

For 1996, Tengizchevroil financial benefits to Kazakhstan totaled more than $120 million, including royalties, taxes, cash distributions, pipeline-and-rail fees, payroll and the Atyrau Bonus Fund.

Further, Kazakhstani institutes have estimated that every one of these direct dollars generates another dollar-and-fifty-cents of value for the Kazakhstan gross national product.

I will add here that in June, Chevron sponsored the Kazakhstan Investment Summit.

More than 70 business leaders attended from 10 different industries and 18 countries, and representing 45 companies.

This is just one example of the fact that oil companies are in a unique position to help the national general economy grow. And I encourage all of those represented here today to work with the government on finding ways to provide that support.

Turning back to Tengizchevroil, the positive influence of the venture has not been limited to Kazakhstan alone.

This year, Tengizchevroil will spend as much as $100 million for Russian goods, services, transportation and technical support. Already, it has spent more than $145 million in Russia from 1994 through 1996.

So, what's good for Tengizchevroil is also good for the Caspian regional economy - and good also for all the nations participating in the expansion of that economy.

Now let me discuss the third element of Chevron's Caspian Commitment: oil exports.

Chevron holds a 15 percent stake in the Caspian Pipeline Consortium - and we've committed to invest about $600 million for our share. Chevron has played a key role in this project from the very beginning, and we believe it will overcome its remaining problems and become a great success.

Like Tengizchevroil, the pipeline will prove that great things can be achieved in the Caspian through partnership, hard work and determination.

Several years ago, I told an audience of geologists in Denver that success in the F.S.U. oil industry required "commitment, patience and trust." This year, at a conference in London, I told a group of Wall Street securities analysts that the Caspian pipeline agreements took five years to negotiate.

Clearly, the pipeline provides a good example of why patience has been so important.

Problems in finalizing the pipeline deal slowed-down the scheduled expansion of Tengiz production, and that delayed many of the associated economic benefits.

But we should remember that the initial CPC negotiations took place during the first formative years of what we might call the "new" Caspian regional oil industry. Back then, delays and disagreements were only to be expected.

Today, however, we have a pipeline deal. And our consortium is broader and stronger than we ever imagined possible in the beginning.

Also very important and positive is the healthy competition which has developed among several different export solutions for the Caspian region.

The CPC is of critical importance - but we have all known from the beginning that one export pipeline won't be enough. There is a lot of debate about which options are best.

I'm sure that to outsiders, this situation looks like chaos. But to me, it looks like progress.

The nations of the Caspian need oil-export solutions which are affordable, efficient, competitive, reliable and stable.

Pipeline projects which can guarantee these benefits will surely prevail over others which cannot. And the projects completed first will enjoy both immediate benefits and long-term customers.

These pipeline projects will deliver a steady flow of financial rewards to their owners.

The Caspian Pipeline alone, for example, over its lifetime is expected to contribute more than $20 billion in taxes and dividends to Russia.

Having covered the three main elements of Chevron's Caspian commitment, let me offer some final thoughts now on another subject: inter-dependence.

The Caspian Pipeline and Tengizchevroil are separate ventures, but Chevron has always viewed them as inseparable. Neither can fulfill its potential without the other.

Similarly, the Caspian Pipeline is structured as an inter-dependent partnership. Every participant benefits both from the pipeline and from the contributions of the other partners. And no participant can achieve its goal of shipping incremental volumes without the others also achieving theirs.

Here in Kazakhstan - and throughout the Caspian region - we've seen a tremendous increase in oil industry activity. Growth and competition promise to make the regional industry strong and profitable.

But as we focus on our separate projects and investments, we must also keep in mind the value of inter-dependence.

These are exciting times, but they are also unsettled times. Kazakhstan and its sister nations in the Caspian region face tremendous political and economic challenges. All companies, regardless of whether they are local or from the outside, need a stable business environment to give them confidence to invest.

They need stability in order to prosper and grow. And few industries have the potential to contribute to stability the way that the oil industry does. Ours is an inter-dependent industry, and few trade arrangements are as powerful or as important as on-going energy transactions and natural resource developments.

In the past, the nations of the Caspian were linked under a centrally planned economic structure - now abandoned.

In the future, the Caspian region nations will be linked by interaction in a free marketplace for mutual benefit.

The world oil industry has both an obligation and an opportunity to help drive the transition to that new order. Our ventures do more than link companies to companies, and they do more than link energy resources to customers and markets. They link capital to potential, projects to communities, payrolls to workers and tax benefits to citizens.

But of even greater importance to the Caspian today is that we also help to link nations to nations, governments to companies and people to a more promising economic future.

What our industry does here goes way beyond just business and development. We are a primary participant in the political re-birth and the economic transformation of one of the most important regions in the world.

And in this special role - under unique geo-political circumstances - we are helping to foster regional inter-dependence.

I believe this compels all of us to work harder, be more creative and commit ourselves to compromise and cooperation, no matter how long it takes to make progress happen.

Outside companies should come to the Caspian looking not just for ways to capitalize.

They should also come looking for ways to contribute.

Everything they can do to cultivate healthy institutions and inter-dependence will pay off in the years ahead in stability and good will.

This approach is not merely good world citizenship. It is good business - because for now and many years to come, the nation of Kazakhstan, the regional economy and the oil companies who invest here will share a common destiny.

To Chevron, no lesson is more clear than this one after five years of investment and participation in the Caspian oil industry. And I assure you, Tengizchevroil would not be a success today if not for this perspective.

I wish you all good fortune in your ventures.

Updated: October 1997