Commitment In Kazakhstan: Thoughts On The Challenge Of Undertaking Major Ventures In The Former Soviet Union
Espy P. Price, Vice President
Chevron Overseas Petroleum Inc.
I appreciate this opportunity to address the World Affairs Council.
And it's a privilege to share the program with Mr. Aitken, whose book includes an account of a speech Mr. Nixon gave just two years ago here in Orange County.
The speech called for stronger U.S. support for the economic and political changes under way in the former Soviet Union . . .
As Mr. Aitken's noted in his book, the former president saw those changes as some of the most important events of our century.
I can certainly agree with that . . . and they are definitely some of the most important events in the history of our company -- Chevron.
As many of you know, we're pursuing a major oil project in the Republic of Kazakhstan . . . which is part of the former Soviet Union.
My job is to oversee that venture.
I've provided some maps -- just so you can see the part of the world we're talking about -- and get an idea of the challenge we face in exporting the project's oil to world markets.
Tengiz is the yellow dot right in the middle of the map. . . and you can see . . . it's right there on the shore of the Caspian Sea.
Let me bring you up to date on the project:
- Through our joint venture with Kazakhstan -- called Tengizchevroil -- we're developing the giant Tengiz Field . . . you can refer to the second map for more detail.
- It holds between 6 billion and 9 billion barrels of oil -- that's about the size of the Prudhoe Bay field in Alaska, which is the largest field ever discovered in the United States.
- Our joint venture has invested more than $500 million dollars since April of 1993 . . . that's about a third of the initial development plan which we agreed to when we formed the joint venture.
- Over the life of the project, total investment could reach $20 billion.
- Chevron didn't discover this major field -- it was already partly developed when we started the project.
- . . . so a lot of the work so far has been catching up on badly needed maintenance --which was overdue because of a lack of funds in the new republics -- and making the operation safe and environmentally sound was our top priority.
- Kazakhstan is a remote nation, surrounded by other countries and so it has no direct access to a major port for exporting its resources . . .
- We are currently using the existing pipeline systems of the former Soviet Union, but will eventually need a big export pipeline -- out of Kazakhstan and across other countries -- to ship our joint venture's crude oil to world markets.
- Unfortunately, we don't have a deal to get a pipeline built.
- But once we have export capability in place, we believe this field can be expanded to produce at a rate of more than 700,000 barrels per day.
There are about 4,000 Tengizchevroil employees at Tengiz . . . more than 90 percent are Kazakh nationals . . . and we also have a lot of contract workers.
It's a diverse collection of people --Russians . . . Texans . . . Kazakhs . . . Hungarians . . . Australians . . . so you hear a unique mix of accents and languages in the cafeterias . . . where they serve more than 10,000 meals every 24 hours.
The project area is a desert on the shore of a giant salton sea -- the Caspian . . . where most of the world's caviar comes from.
We get sub-zero winters and summers as hot as Death Valley.
The wind blows most of the time, and it throws dust over everybody and everthing at Tengiz. When we installed a big computer in last year, we had to build a triple-walled enclosure to protect it.
Then there are the transportation issues.
Nothing is easy . . . whether you're trying to do it by rail, by road or by air. Half the problem is that Tengiz is so far from everything else. The other half is lack of infrastructure . . . aging facilities . . . rough roads . . . and breakdowns of the old equipment.
Everything you plan can be -- and usually is -- affected by transportation problems, so everything takes longer than you would normally expect it to.
It's a rough place to try to live, so we rotate most of the Chevron people in and out of Tengiz on a four weeks-on, four weeks off basis . . . and the trip in or out usually involves four or five aircraft changes.
Most of the year, when our people arrive in the major town of Atyrau, they take a one-hour helicopter ride to get out to Tengiz.
However, we can't use the choppers in winter . . . so a lot of staff members have had the unique experience of stepping out into the dead of a western Kazakhstan winter . . . to push their own bus out of a snowdrift.
Let's come back to California for a moment.
Chevron has a major technical center in La Habra, and a number of our scientists and engineers at that facility are supporting Tengiz.
They do an outstanding job . . . and we need all the help we can get . . . because developing Tengiz will be the oil-industry equivalent of alligator wrestling.
Some oil fields are simple and inexpensive to develop. But Tengiz is something else altogether. It's a geologist's dream -- but a petroleum engineer's nightmare.
The field is deep . . . two-to-three miles down . . . and it's hot down there . . . and under extremely high pressure. So the wells cost a lot to drill and the wellheads have to be big, strong and elaborate.
Tengiz holds not just oil, but a lot of natural gas as well. The oil and gas come out of the ground together, and the gas is laced with toxic hydrogen sulfide -- which can be dealy if you don't contain it.
So the gas has to be processed in big, expensive facilities that look like oil refineries.
Anyway . . . our La Habra facility helps us deal with all this -- but there's another way they help us that's almost as important.
They host visitors from other countries . . . and when our visitors get tired of looking at petroleum labs . . . we often take them to see another local marvel of technology -- Disneyland.
The last time I went to Disneyland, I was with the former energy minister of Russia.
He was a major negotiator for the Soviet Union, but right in the middle of our negotiations in 1991, the Soviet Union disintegrated, and we found ourselves negotiating with the brand-new republic of Kazakhstan.
And when we finally signed an agreement for Tengiz . . . it was with Kazakhstan.
Anyway, there I was at Disneyland with the Russian energy minister . . . and we had our wives along . . . everybody was having a good time . . .
And as we stepped on to the Alice in Wonderland ride . . . I couldn't help but notice the situation had a familiar feel to it.
Because for me, the process of negotiating a major deal with the largest Communist nation on earth was a little like going "through the looking glass."
Now, if you've been on the Alice in Wonderland ride, you may recall that the cart bumps along into unknown territory . . . down a rabbit hole . . . just like in the story . . .
And then the ride makes you feel like Alice did -- that one minute you're small . . . and then you grow big . . . and then small again.
Alice keeps losing her way . . . so the ride takes you one direction and then the other . . . and the rules of correct behavior keep changing.
And on the ride you get to meet all the different characters that Alice met in the story . . .
And they're not like anybody you've ever met before . . . and they aren't always what they seem to be . . .
And that's the way it feels . . . trying to get started in business in the former Soviet Union.
You know, looking back on that trip to Disneyland got me thinking.
You could say Chevron started out in Fantasy-Land . . .
That was the period where a major project in that part of the world was, in fact, a dream.
And when we signed a deal with Kazakhstan in April of 1993, you could say we moved on to Adventure-Land . . .
We were on our way and excited about the project, but weren't really fully involved yet.
Then the project sort of got to be more like Frontier-Land.
Because the principal characteristics of a frontier are risk and hardship.
And now we're working on getting to Tomorrow-Land.
A lot of you will remember that in Tommorrow-Land, the future was our friend . . . it was where all humanity's good works and technology came together in perfect harmony.
We're not quite there yet with our Tengiz project.
But I believe we can get there.
You may be getting some idea by now that nobody is as deeply involved . . . and nobody has invested as much . . . in the former Soviet Union as Chevron.
That qualifies us for a lot of labels -- some good, some bad -- and we don't have any magic formula for success over there . . .
And for better or worse, our approach to Kazakhstan was to commit ourselves fully . . . to get in there . . . to get to know our partners . . . and to make things work.
Of course, we built some standard mechanisms and qualifiers into our deal.
It is a true joint venture -- with both partners funding development . . .
half of the payment we agreed to pay to Kazakhstan for getting a share of the Tengiz field is tied to a major expansion of the oil export system . . .
and we've linked the growth in sales of Tengiz oil to growth in tax revenue for the government.
So if WE don't do well, neither do our partners.
There's mutual risk, and mutual benefit if we can make things go right.
I know a lot of other companies are waiting for things to stabilize before they invest -- and I can respect that.
But the reality of the former Soviet Union is that you can't be IN . . . and OUT . . . at the same time.
Until you're invested, you won't become involved enough to learn how to make things work.
And more important, until you're invested, you can't cross over from just being engaged -- which is a promise -- to getting married, which is a working relationship . . . a long-term commitment . . . a real joint venture.
Now I know I'm not the only engineer here tonight . . . so a lot of you know that it's one thing to engineer a project . . . quite another to engineer a relationship.
I think my wife Ann would agree with that one . . .
In fact, when I try to characterize the challenge of Chevron's joint venture in Kazakhstan, the institution of marriage keeps coming to mind.
You see, the technical and logistical challenges are not the hardest part of the Tengiz project.
The hardest part -- for both Chevron and our partners -- has been the human side . . .
I'm talking about the building of relationships . . . appreciating each other's viewpoints . . . and building a stable foundation for our joint venture.
Half of it is understanding your partner's point of view. The trouble is . . . that's not easy.
For example, I like to think that Ann understands why I spent our 30th wedding anniversary last August in Kazakhstan with the energy minister . . . instead of with her.
The reason was: I was half-way around the world and stuck in extended negotiations on a multi-billion-dollar oil project.
I'm not sure that excuse was ever viewed as fully justified at home . . .
But I didn't forget that important date . . . and when I told the minister it was my anniversary . . . we got up from the table . . . and we went into a modest room . . . and we opened a couple of cokes and he offered a toast to my wife.
The interesting thing is, Kazakhstan has since replaced that particular government official . . . but Ann hasn't seen fit to replace me -- despite the pressures of my current assignment.
There's another thing about being committed over there . . . and it's the fact that American companies -- whether they like it or not -- are in a position to play a critical role that the world business community would like them to play.
I'm talking about the stabilizing role of the partners who help the former Soviet countries achieve the transformation they want to achieve.
That's not a pitch for any of you to go over there and play Mr. Nice Guy.
You absolutely have to look out for your interests. You have to set a high standard of good business practices and to set an example . . . and you have to assert your need to make a fair profit.
And you sometimes have to be willing to assert your business needs by displaying a packed suitcase and a one-way ticket home . . . that you are prepared to use.
The fact is, you have a lot to gain from setting this example.
Your partners will come to respect you -- and on the way, they will learn how to think more like capitalists themselves.
You see, they NEED to do that -- and the sooner the better -- in order to earn the trust of the international banking community.
One of the biggest problems in the former Soviet Union is nobody wants to lend them any money until they make a commitment to international business standards.
One simple example of how things can work is Chevron's recent agreement with Russia's biggest oil company.
We said we will buy about 70,000 barrels of oil a day from them under an eight-year agreement. . .
That agreement is expected to allow a Japanese bank to feel secure enough to lend the Russians about $700 million . . .
And the Russians will then have the means to buy . . . and-then-import . . . new equipment for their oil fields.
That deal is separate from Tengiz . . . but it's helping us build long-term relationships with Russia and also learn more about their oil industry.
Actually, that deal brings to mind a couple of points about Chevron and about energy ventures in the former Soviet Union.
You know, Chevron looked at different deals over there for about five years before we looked at Tengiz. And we continue to look for other opportunities today.
Because regardless of its unstable environment, the former Soviet Union . . . especially Russia . . . is one of the world's great storehouses of oil and gas.
In fact, Russia has more than 220 known undeveloped fields.
Just one field we've looked at -- Bovanenko in Northern Siberia -- holds 155 trillion cubic feet of natural gas -- roughly the same as the entire United States.
Another field nearby that we're looking at -- Karasavey -- has 42 trillion cubic feet . . . that's about 10 trillion more than Chevron's total estimated gas holdings world-wide.
Unfortunately, many of these monster-fields are so remote that transporting the oil and gas is a far bigger challenge than getting it out of the ground.
But there are other options . . .
Russia has more than 40,000 idle oil wells . . .
So a company could go in there with modern technology and a reasonable investment and help restore production in those wells.
But for now, Chevron's main focus in the former Soviet Union is Tengiz . . .
And I have to tell you, it really wouldn't be prudent to take on more than one Tengiz at a time.
Well, I've offered you some advice this evening on the former Soviet Union. Now let me offer a little more.
Advice is all well and good, but if you're serious about doing business over there, you'll have to go find things out for yourself. You can't hire somebody to go over and see what the situation is.
You have to go over and see for yourself.
Since being assigned to the former Soviet Union two years ago, I've been to Moscow eight times . . . I've been to the Kazakh capital of Almaty nine times . . . and to Tengiz six times.
And all those trips have helped me see and appreciate exactly what people in the former Soviet Union have been going through.
The fact is, there's no such thing as business-as-usual when your country is trying to shift to totally different economic and political systems.
Try to imagine what it would be like if we were trying to replace our economy and government --both at the same time . . . here in the United States . . . with a totally different system . . . a system you were taught all your life not to trust.
Imagine that right here in Orange County, you found yourselves in the middle of a complete transformation.
The price of everything -- from a pair of shoes to a gallon of gasoline -- would shoot up over night -- and you might not be able to get even the basic essentials at any price . . . Anaheim would be trying to work things out with Santa Ana and the other cities . . .
And of course the state of California would be at the table with its agenda . . . and the federal people would be there, too . . . and the military.
And we'd want to keep the school buses running and the water and power flowing . . . and all the businesses and corporations and employees would be trying to figure out where they fit in.
And there would probably be a lot of middle-men trying to make an easy buck, just like there are in the former Soviet Union right now.
And you and me and all our relatives and neighbors and friends . . . all of us would feel very uncertain . . . and very anxious.
Anyway, if your future business partners are dealing with a situation like that, you need to appreciate it.
This brings us back to the issue of building relationships.
That's another thing you can't send somebody else to do.
. . . . .and it takes time.
Last winter, over in Kazakhstan, I started out to make a three-hour flight from the capital to the project area . . . and I ended up spending 34 hours on the plane . . . and getting a first-hand look at one of that country's famous blizzards.
Now . . . a person wants to try to maintain a positive attitude in a situation like that . . .
We couldn't even get off the plane when we were forced to land half-way to our destination. It was after dark . . . so all the ground facilities were shut-down.
But we had lots of time for building relationships.
Stuck on that flight with me was a Kazakh named Nurlan Baglimbaev . . . he was just finishing-up a two-year study program that included spending quite a bit of time with Chevron.
Fortunately for me, Nurlan had been studying English -- so we were able to talk --- and I learned a great deal about the Kakakhstan oil industry and the government just talking with him.
I also learned some valuable things about the people in that part of the world . . . his people.
We came through the ordeal, and now we're friends . . . not just associates. I'm pleased to report Nurlan has just joined Chevron Overseas Petroleum in our business unit as a special project consultant.
Talking to him on that flight, I was also reminded of something else you can't appreciate until you go over and experience it.
I'm talking about the gap between our political cultures. I don't need to tell any of the Americans in this room that most of us grew up fearing Communism -- and we were taught not to trust anyone from Russia or the Soviet Union . . .
But you see . . . everybody over there was taught the opposite.
It would be very convenient if both sides could just forget their conditioning . . . trust each other and get on with business . . .
But that's not the way things are working out.
There was another nice thing that happened during my 34-hour ordeal on the airplane.
Though everybody sort of lost track of time, we realized . . . at one point . . . that it was International Women's Day. The reason I knew this was that they had some Women's Day celebrations scheduled for the employees at Tengiz.
So somewhere in southern Kazakhstan . . . we gathered together the women on the plane . . . they were all Kazakh women who were assigned to the flight . . . and we raised a toast to them.
Everybody got a kick out of it, and of course it didn't seem like a big deal at the time.
But this kind of shared human experience can mean a lot when you're trying to get a business venture up and running over in that part of the world.
I like to keep reminding Chevron's business director in Kazakhstan -- Bruce Kososki -- of the nicer moments on that 34-hour flight.
You see, he doesn't remember it as fondly as I do . . . because it was his first trip over there . . . and he had just agreed to move himself and his family to Kazakhstan.
Bruce helps me monitor the financial performance of the project . . . and I can tell you he sees a lot of money flowing mostly one way, which is the spending direction.
But we're determined to get some of that flowing back the other way, which is the earning direction.
And I can assure you, "EARN" is a good word for whatever Chevron will eventually achieve in Kazakhstan.
One reason is that you have to become comfortable with the special type of risk you find in this part of the world -- and that isn't easy.
When you think you're in over your head . . . and you can't swim back to your home shore . . . you have to tread water until you feel comfortable just floating for a while.
If you read the newspapers, you could argue that I'M treading water right now.
I'm in charge of a joint venture that's been spending money faster than we had planned . . . and earning slower than forecasted.
Today, we have the capability to produce 65,000 barrels a day . . . but for most of this year, we've been stuck producing only half that much.
It was only this month that we've been able to get our production up to about 50,000 barrels a day . . .
and we are hopeful we can keep things at that higher level through the end of the year.
Meanwhile, we're working on new facilities to increase our capacity to 130,000 barrels a day by early next year.
That's right . . . we're completing our investment plan for new facilities . . . even though we are still working on exporting all of the oil that our existing facilities can produce.
And for the long-term, we still don't have a deal for a large export pipeline -- and without that, this project won't realize its full potential . . . for either Chevron or Kazakhstan.
So, you might ask . . . What in the world are we doing over there?
It's important to keep in mind the other side of the story . . .
We might be treading water . . . but because we've structured our deal the right way . . . our partners aren't just watching us struggle.
They're in there treading water with us.
We're talking about a field with the potential to produce more than 700,000 barrels a day. Tengiz is a national treasure . . . our partners need help getting it to market . . . and that's what the joint venture is all about.
Right now, we've got two main problems. The first is that we and our partners need to convince Russia to transport more of the Tengiz Field production so it can be exported.
The way it works is, we produce into the existing Russain pipeline system, and we receive -- in exchange -- an equal amount of oil at an export point.
Once exported, the barrels earn hard currency, and that's the whole idea of the Tengiz project.
But that's just an interim solution -- good for maybe three or four years.
The other main problem is the big pipeline --it's the key to long-term production growth . . . for Tengiz . . . and the entire region.
And as many of you probably know, Chevron is still negotiating on that. In fact, we've been negotiating on it for more than two years now.
We're dealing not just with Kazakhstan, but with Russia, on both these matters. The Kazakhs want oil exports, but the pipeline will probably have to cross a portion of Russia to get the oil out to world markets.
Whatever solutions we find must have advantages for both countries. And the only way to find them is to hang in there . . . stay committed . . . and keep working at it.
I should add that we clearly can't keep investing at Tengiz at the present rate of spending if we don't find these solutions soon.
We have to sell more oil in order to get more cash flowing and make the investment worthwhile for ourselves and Kazakhstan.
Our partners know this . . . and the Russians know this . . .
And I can assure you that as neighbors . . . the Russians and the Kazakhs are well aware of the importance of success at Tengiz.
They are well aware, too, that the entire former Soviet Union needs to build more export pipelines.
And they know Tengiz is more than an oil project. It is the first major test of whether the former Soviet countries can work successfully with outside oil developers in particular . . . and outside companies in general.
It has been widely observed that failure at Tengiz would throw a wet blanket on investment in general over there.
That's one reason the U.S. government has done quite a lot of diplomatic work to help our joint venture move ahead.
We've had a lot of support particularly from the Department of Energy and the State Department . . . as well as Vice President Gore . . .
And we're grateful for their efforts.
I have one final thought for those of you who want to do business in the former Soviet Union.
Get ready for an emotional roller coaster.
Speaking for myself, nothing I learned at petroleum engineering school -- or during my 30-year career -- fully prepared me for this kind of assignment.
It seems to me that it wasn't that long ago that most of us assumed only James Bond would ever have to personally take care of business behind the Iron Curtain.
Now, with all the business opportunities over in the former Soviet Union, regular Americans like me and you have to get in and handle things.
So whatever talents you've got going for you, they will be tested if you or your company goes after a serious investment over there.
Personally, I consider Tengiz to be the challenge of a lifetime.
And I believe that what happens at Tengiz will become a significant part of history . . .
We're right smack in the middle of the former Soviet Union's attempt to leave behind the 20th century . . .
They're trying to learn to operate as independent states . . . and create alliances based on mutual benefit . . .
The only deals that will work are those that bring together the right participants and that have something for everyone involved.
And that's the kind of opportunity we have at Tengiz.
Now, I'll admit I've had my dark moments, where I've wondered if everything would come crashing down.
And we're not out of the woods on this thing yet.
But when I see what's been accomplished over there, I tend to believe that we will prevail --we will succeed.
Our people are putting their experience and their skills on the line, and what they've done over there . . . in the face of some very tough odds . . . is just extraordinary.
None of them is here tonight . . . but I want to take a moment to say how proud I am of their dedication and their role in Chevron's commitment to Kazakhstan.
Tengiz is the kind of opportunity that drains all your energy . . .
It tests your patience . . . and it sometimes makes you even question your sanity.
But at the same time it pumps you back up . . .
Because it's a chance to be a part of something almost bigger than life.
Not even Disneyland has come up with a ride like this one.
Updated: August 1994