From Great Game to Great Gain: The Unfolding Story of Caspian Oil
Richard H. Matzke, Vice Chairman of the Board
It's a privilege to address the Houston World Affairs Council, especially at a time when world events remind us that Houston truly is the center of the global energy industry.
Less than two years ago, our industry figuratively fell in the tank as energy prices collapsed. Before long, however, the recovery began, and today we're at $34-a-barrel oil and climbing. But a lot of damage was done on the assumption that a recovery would take much longer if, in fact, it ever came. The number of production and service companies that disappeared is too numerous to recall.
Today, energy tops the news. Most of it is not good, and much of it dominates the foreplay of our presidential election. There was the heating-oil price crisis in New England during the presidential primary, and then the Midwest gasoline price spike. Natural gas prices have more than doubled, and future supplies are in question. We're seeing electric power shortages and brownouts. Interruptible contracts are now being interrupted. The Strategic Petroleum Reserve is no longer a national security issue but rather a constituency development issue.
And let's not overlook the recent gasoline-tax protest in Europe, which should remind us all that gasoline is a transportation fuel, not a revenue generator for spendthrift government. OPEC is at center stage in all of this and seems to be catching more tomatoes than applause.
This chain of events would have been interesting enough by itself, but in the same period we also saw the stock market fall head-over-heels in love with the dot-com companies. And investors gave these "virtual" companies more growth and credibility in their share prices than they gave the premier oil, gas and service companies, even as we report record earnings!
Of course, while all of that was going on, there was another drama -- with even higher stakes -- happening half-a-world away. This is the unfolding story of Caspian oil, my topic today, and I'd like to start off by mentioning two winners in that story who are helping the Caspian take its place among the great energy-producing regions of the world.
Parker Drilling from Tulsa, as well as Transocean from right here in Houston, has both brought state-of-the-art drilling rigs into the Caspian. Parker rebuilt a barge that had been working for Chevron in Nigeria, then moved it to the shallow waters of the northern Caspian. There it drilled the discovery well on what might be the largest oil field found in the world during the last 50 years! Separately, Transocean built the components of a jackup rig in Singapore and shipped them all the way to Azerbaijan for assembly. Soon that rig will start work for the Azeri consortium in the Caspian offshore Baku, helping to ease a serious rig shortage in this emerging oil and gas province.
The reports that the Caspian contains world-class oil and gas reserves are indeed correct. But let me remind you that the Caspian is distant from everything familiar to Americans. It is different from everywhere else. And it is more difficult than just about anyplace you've ever been.
Russia and its newly independent neighbors are all still getting on their feet economically. And of course, the five countries that ring the Caspian Sea -- including Iran -- are trying to decide who owns what within that body of water. And they're not just talking about oil and gas. They're talking about fishing rights and environmental protection -- who pollutes and who pays.
As for Caspian "Topic A" – energy development – the story is mixed. It was seven years ago that Chevron and Kazakhstan agreed to jointly develop the 9-billion-barrel Tengiz oil field. A year later, 10 other companies from eight countries signed deals with Azerbaijan to develop its offshore oil and gas. They called it the "deal of the century." Other deals followed, and now the Azeris and Kazakhs are projecting billions in foreign investment in their energy sectors.
Now from the northeastern Caspian in Kazakhstan comes news of a giant oil discovery called Kashagan. Some insiders pronounce that "cash-be-gone." But in any case, it may be even bigger than Tengiz. So there's new cause to believe Caspian oil can someday play a key role in meeting world demand.
And yet, the United States, Russia, Turkey, Iran, the Azeris, the Georgians, are all still arguing over pipelines to move all this new oil out of the land-locked Caspian to world markets.
The United States wants a pipeline across Turkey to the Mediterranean, so that Russia has less control over the flow of Caspian oil. Meanwhile, Iran is arguing that a new Iranian pipeline would be the cheapest export solution, but U.S. policy also blocks that option for now. And both countries resent the U.S. involvement.
All of this adds to the geopolitical tension in the region. Still, the natural gas issues are even more difficult. Russia has the world's largest gas reserves. Iran has the second-largest reserves. And the biggest new discovery so far in Azerbaijan is not oil but gas. Now all the Caspian states want to serve the same gas markets in Turkey and other European countries. And this has sparked a contest as heated as the argument over oil pipelines.
With that very brief update as a backdrop, I'd like to share with you now five lessons that I've learned during my 10 years of working with Caspian countries.
First, the Caspian is a long-term business environment.
We got involved at Tengiz just a few months after Kazakhstan declared its independence but before they had a flag, a viable judicial system or a clear tax policy. They didn't yet have banks or their own currency. But we kept our long-term view and our vision of success. We never wavered, not even when oil prices collapsed. Tengiz has grown from almost nothing to 275,000 barrels a day. And still we remain focused on the future, because we intend to keep growing.
Let me sum it up this way: The Caspian states want to catch up to the business standards and the pace of the outside world. They absolutely know they must do this to attract outside investment. Their progress is all the more remarkable when you consider that their frame of reference was almost a century of centrally planned economic structure -- and programmed hostility for the West.
But even after almost 10 years of change, you still have to approach with patience and respect for their cultures. Stand firm on values, but be open to compromise.
So come to the Caspian, and bring your investment capital. But don't come thinking that globalization has rewritten the rules of enterprise everywhere in the world just yet. Don't come believing history can be erased in a decade. Don't come to the Caspian expecting things to pay off overnight.
Those realities lead us now to my second lesson: In the Caspian, you have to make it happen.
In short, you have to find your own markets. It's not like discovering oil and gas in the United States, where customers and pipelines eagerly await new supplies.
Consider the problem of marketing the oil from Tengiz. We found export solutions when none appeared to exist. We move oil by pipeline, barge, rail, tanker and sometimes all four. Tengiz today moves 70 percent of its oil by rail and is the largest single customer of the Russian rail system.
And while we were making that happen, we were working hard to advance one of the most important business ventures in Central Asia, the $2.5 billion Caspian pipe line.
We knew from the start that if Tengiz was ever to fulfill its true potential and achieve the ultimate goal of 700,000 barrels a day, then we had to have major new export capability. It took years to negotiate, but now the Caspian pipeline is marching toward completion. It's more than 900 miles long and will initially have more than half-a-million barrels of daily capacity.
It's the biggest foreign-investment project in Russia: 11 companies from six countries and three governments. And by this time next year, we expect this pipeline to be filling tankers with Tengiz crude at our new terminal on the Black Sea coast.
I assure you, no invisible hand was going to reach through an imaginary pipeline and pull those barrels to the world market. Only a partnership committed to making it happen was going to work in the Caspian -- partners determined to push those barrels through, within a shared enterprise that included the Russians.
This brings me to my third point. Since the early '90s, people have described Caspian energy as the "new Great Game." I've never liked this comparison to the 19th century struggle between Russia and Great Britain for control of Central Asia, because this is anything but a game to the Caspian states. So instead of looking backward to the Great Game, we believe in celebrating the present -- what we call the "great gain" -- and looking forward to the gains yet to come.
I recall my first visits after the Soviet Union collapsed. Kazakhstan and the other states were materially depleted and left with nothing. It was empty stores and low spirits as new governments started over. Today, a lot of the problems remain unsolved. But many lives are better, and the future holds promise.
Compared with the early '90s, both the governments and foreign companies are much more civil and sophisticated in dealing together. Before, it was always conflict, challenge and confrontation. It was table pounding and name calling. We made slow progress, and it felt like combat.
But the climate today is far more cooperative and compatible -- not to an extreme -- but things are just better. It comes from learning on both sides. And it comes from building relationships. But I think most of all, it comes from the compelling truth of the commercial model. They've seen for themselves the great gains that investment and partnership with world-class companies can bring.
Again, I would cite the Tengiz and Caspian Pipeline projects. I wish there could be a hundred others just like them! In 1999 alone, the total economic contribution of the Tengiz project to Kazakhstan was more than $500 million. The project and its contractors together support more than 8,000 jobs, held mostly by Kazakh citizens. And our small-and-medium-sized enterprise program has already granted loans to more than 200 new businesses.
The Caspian pipeline over its lifetime is expected to contribute $33 billion to the Russian central and regional governments. Then there's the ripple effect of buying supplies and materials in Russia. Much of the project's pipe came from a Russian mill at Volzhsky. I visited that mill, near Volgagrad, and I saw the energizing effect of paychecks and new business. Out on the pipeline route, you witness the direct impact of foreign investment on everyday citizens. And you understand that the "great gain" includes small things, too, like pride and hope.
And this brings me to my fourth point: People in the Caspian states want to work with us.
A couple of years back, early in the Caspian pipeline project, we were having trouble getting permits from the local leaders in southern Russia. At the time, there was no effective central government, and the hangover of history was still strong. They just plain didn't trust Americans.
So I asked Chairman Alekperov of LUKOIL, whose company is an investor in the pipeline, to take me out to meet these people face-to-face to present our case. At first, he reacted with skepticism and amusement. Such a stunt was unheard of. But based on our years of working together, he trusted me. So he set up the trip. And for three days, we walked the pipeline route as partners. We talked with the local people, and after that, they became some of our greatest allies. The economic case for helping to make things happen -- and the future benefits of a viable, successful pipeline to these local governments -- just blew away the political case for standing in the way.
And this is a good place to turn to the final lesson I've learned: Commercial relationships -- not politics -- are the keys to the Caspian's future.
We currently ship some of the Tengiz oil across Georgia by rail to the Black Sea. We move even more by Russian rail and through Russian pipelines to various markets. But everyone in the region knows that within a year, most of that same oil will go through the new Caspian pipeline instead. And now our current shippers are offering rate reductions for their services.
The Caspian pipeline isn't even completed yet. But it is already casting a magnetic field of market forces, and that competitive influence reaches all the way to Iran.
I visited Tehran recently to meet with their energy officials. We talked about a lot of things, but they were especially interested in the Caspian pipeline. They already knew quite a lot about it. And the reason was simple: They want to attract future Caspian oil to a future Iranian pipeline. And they know that every regional producer will want the cheapest route.
Depending on which expert you choose, forecasts tell us that Caspian oil production should double to more than 3 million barrels per day within 10 years. The less it costs to get that oil to market, the sooner we'll see a 3-million-barrel regional oil industry.
This is why regional transportation needs to evolve with market forces. I realize the U.S. government doesn't want Iran or Russia to have too much influence over the flow of Caspian oil. But the message I get from these two regional powers is that they are far more interested in the commercial benefits of that flow than in any geopolitical influence they might gain from it.
These people want to move away from politics and talk about commercial relationships. And I think this raises a question: If the Cold War is really over, why not let business create the foundation for diplomacy, instead of the other way around? Why not start with the common ground of commerce? The common goal of economic development?
This is the opportunity facing the United States in Iran -- an opportunity still closed to American companies by unilateral sanctions. Why don't we find a way to fix that, and help American companies be ambassadors of progress in Iran, just as they are in other parts of the Caspian?
Even a situation where no companies are involved -- the demarcation of the Caspian Sea -- needs a balanced commercial relationship among five countries to resolve it. And when it comes, this will be the true "deal of the century" in the Caspian, a deal that rises above politics and above just dividing the pie. A deal that could help bind neighbors together in this volatile region for the long term.
I'm sure that by now it's obvious I'm proud of Chevron's commitment to the Caspian. And I know that to some people I probably sound too optimistic. Anyone can see just from reading the news reports that the basket of unresolved issues in this region includes ethnic conflict, environmental problems, concerns about terrorism and the slow pace of democratic reforms. And we all have our own individual views on these hard issues.
But let me just leave you with a story: Over the years, I've formed friendships with many of the senior government officials in the Caspian. Earlier this year, just as the U.S. political season was getting into high gear, I was on a hunting trip with one of these officials.
He was talking about how the United States is always criticizing the Caspian states for not being as principled as America. And then he posed a simple question: How is it, he asked, that Americans can call other countries "corrupt," and yet, an American presidential candidate can accept millions of dollars in contributions at just one dinner? He held up a copy of the Herald Tribune with the headlines and stories about fund-raising events here in our country. And I have to tell you, I was stumped.
Then he went on to ask: How can the United States feel OK about dictating ideology to the Caspian states, and at the same time, feel OK about buying huge amounts of oil from other countries where all the resources are owned by a ruling elite? I had to admit I couldn't explain it.
And thinking back on that trip, I realized, as I have so many other times in the last decade, that perhaps we have as much to learn from our Caspian partners as they have to learn from us.
Updated: September 2000