From Shared Success To Parallel Progress: A Chevron View Of The New Caspian Oil Industry

By Philip R. Meek, President
Chevron Munaigas Inc.

International Conference on Kazakhstan Oil and Gas: "Managing Reserves to Maximize Economic Benefits"

London, England

With apologies to our worthy competitors here today, I think it's fair to say that there is no better company than Chevron to provide opening remarks for this important international conference.

The official program title today is "Managing Reserves to Maximize Economic Benefits."

At the Tengiz oil field in Kazakhstan, where Chevron holds a 45 percent share of Tengizchevroil - the joint venture developing the reserves - maximizing benefits has been our primary intent and focus from the very beginning.

Indeed, the Tengiz project started its life determined to transform a known giant field into an engine of economic benefits that will reward its partners and help drive regional progress for at least four decades.

Fifth anniversary

Chevron and the Kazakhstan government formed the original Tengizchevroil partnership in 1993, and in April we celebrated our fifth anniversary.

I think we can say with confidence that we're achieving our objectives despite many challenges. When Mobil and LUKARCO joined with Tengizchevroil, it both confirmed and enhanced the project's overall reputation.

Tengizchevroil started producing about 30,000 barrels per day in 1993. Today it is averaging more than five times that amount - and peak production rates have hit over 190,000 barrels. For the year 2000, the production target is 240,000 barrels per day. That will require the partners to invest more than $1 billion - including $600 million for a third production-processing facility - over the next three years.

In 1993, Tengizchevroil was supporting 6,000 direct and indirect jobs. Recently, the job count for the project was 11,000.

The value of jobs

Few achievements can compare in value to creating new jobs. And few of the jobs available in the Caspian region today can compare in stability and importance to those created and supported by Tengizchevroil.

The fragile emerging economy of the Caspian region urgently needs more steady paychecks. This is sometimes hard for managers and leaders to remember. We sit in hotel ballrooms at conferences thousands of miles from the work itself. And we talk about pipelines and policies and politics and tons of production. True, this is part of our job, but I think we sometimes forget to fully appreciate the human factors.

If you visit our Tengizchevroil facilities, you will see in the faces of the Kazakh employees both pride and hope. And the Caspian region needs pride and hope as much as it needs drilling rigs and investment capital.

Certainly, President Nazarbayev understands these priorities, as he has demonstrated in his vision for his nation's development through the year 2030. He wants to build a diversified economy. And he understands - as we all do - that growth in oil production and exports must be the foundation for creating that economy.

Investment and yield

Petroleum engineers talk of managing oil reserves for maximum economic benefits. Managers do the same. But neither of them has as broad a vision for maximizing oil's benefits as President Nazarbayev has. He's aware, for example, that much of the more than $1 billion in expenditures at Tengiz during the next three years will be spent in Kazakhstan.

In 1997, Kazakhstan received more than $200 million in financial benefits from Tengizchevroil in the form of royalties, taxes, cash distributions, transit fees, payroll and community contributions.

But Kazakhstan isn't the sole beneficiary of Tengizchevroil's progress. The project's spending on other goods and services from Russia has totaled more than $260 million since 1993.

This spending has a ripple effect in the Caspian economies. For example, more than $2 of gross domestic pro-duct is generated for every $1 spent by Tengizchevroil, according to Russian economists.

Of course, we must recognize that Tengiz is an extraordinary development in the Caspian region. It is not only the first and most mature, it is also the largest and will likely remain so.

But more important, Tengiz has grown its production despite the fact that the region has not yet established major new export pipelines.

Currently, the Russian Ministry of Fuel and Energy allows Tengiz to ship only 3.5 million tons of crude per year by the Russian pipeline system - not enough.

Consequently, Tengizchevroil has found a variety of transport options for its production, and it has learned that this is the wisest arrangement for the long term.

Building this export capability required a great deal of hard work and creative determination. Today, Tengizchevroil ships by rail to Finland and Odessa, by barge through the Volga/Don Canal and by rail through Georgia and Azerbaijan. In 1997 alone, more than 4 million tons of Tengiz crude moved by rail. And as many of you know, we sent a trainload of Tengiz crude to China earlier this year to test the potential for adding that export option to our future marketing capabilities.

A new industry

Continuing on transportation and exports, let me turn now to the Caspian Pipeline Consortium (CPC).

Eleven companies from six different countries and three governments have joined forces to build this project. A consortium with so many different kinds of participants would be a difficult combination in any part of the world. Yet, the CPC has moved forward. And it stands today as an outstanding example of how new forms of economic integration are evolving in the Caspian region.

Many of you know that tremendous economic benefits - particularly jobs - will come once the pipeline is operational. But not all the pipeline's benefits can be stated in hard numbers.

The complex and sometimes painful process of forming a consortium of shippers and investors - and getting started on the Caspian Pipeline - has helped cement many new business and political relationships. These relationships, including some represented here this morning, will have lasting value to the region. And they are already a part of the history and the fabric of what one Chevron executive described recently as the new Caspian oil industry.

Oil conferences come and go. Some cover the globe. Others focus on mature oil and gas regions. But those focused on the Caspian region are unique, be-cause those who participate aren't just a typical collection of speakers and audiences. We're participants in the creation of the new Caspian oil industry.

This new industry's job - our job - is to manage the energy resources of yesterday's centrally planned economic system by using today's global partnership structures and technologies.

Yesterday's industry was driven by ideology. Today's is driven by enterprise and the need for the independent Caspian nations to unleash the economic power of their own energy resources. And all those nations see the importance of exporting to world markets. It is a responsibility and an opportunity they have never had in modern times.

Further, this new industry contains a large variety of companies, now including the privatized Russian oil companies, competing to offer the best terms.

Only yesterday, these companies either did not exist or had no presence or investments in Kazakhstan or the Caspian region.

Building it right

So ours is a truly new regional industry. It's a new beginning on a grand scale - rare in world oil. For all of us, it's a once-in-a-lifetime opportunity to build something of great importance and to build it right. We need look no further than Tengizchevroil for inspiration.

Chevron's objective is to be a superior partner. Our international advertising is based on the theme "Symbol of Partnership." Nowhere have we proven our commitment better than at Tengiz.

At the same time, Tengizchevroil has developed into an impressive competitor in its own right. Most people probably don't know that the official vision statement of this strong, young organization is to be "the world's most efficient oil company."

Earlier in its life, it sometimes seemed enough for this joint venture merely to survive. Now, in five short years, Tengizchevroil has left behind the struggles of start-up and stabilization. This is a company that has proven the critics wrong, beaten the odds and set a new ambition to be more than just the first and the biggest.

Now Tengizchevroil wants to be a leading competitor, focused on growth, working smarter, controlling costs and maximizing profits for its partners. It seeks not merely to be the superior oil-field operator in the Caspian region but to be a superior international example as well.

Parallel progress

Of course, Tengiz cannot achieve its potential for Kazakhstan without ex-port options, particularly the Caspian Pipeline. Although the oil field and pipeline projects are separately owned and managed, they are in many ways dependent on each other.

In fact, we are entering a critical period in which parallel progress is required. The goal of Tengizchevroil is to grow together toward a level of 240,000 barrels per day and to tie in to the Caspian Pipeline as soon as it's ready in the year 2000.

Depending on whether you look at recent averages or peak production, this is an increase of 50,000 to 90,000 barrels a day from Tengiz. The costly and time-consuming work on new facilities must begin now.

To finance this expansion plan, Tengizchevroil must constantly produce and sell its oil. And that means that for the next two or three years, it must continue its full range of marketing and distribution activities while the Caspian Pipeline is being completed.

Building the pipeline is also a very costly and time-consuming venture. The pipeline can only be profitable in its initial years of operation if it starts shipping substantial volumes immediately upon its completion.

If I could suggest a mission statement for the Caspian Pipeline Consortium, it would be to start business as soon as possible with the primary customer, Tengizchevroil.

The world is waiting

We must remember that there is more at stake here than just moving the oil and gaining the economic benefits I've discussed.

Also at stake is the reputation of the new Caspian oil industry. The world is waiting to see if the ventures formed by this industry will perform according to world-class business standards.

The yield from that performance will be heightened confidence in the region by investors and financial institutions.

The sooner this comes, the sooner the Caspian region can build a diversified economy less dependent on oil.

Elsewhere in the world, top international oil companies and their astute government partners make commitments to each other, and they meet them. They understand the costs of delay and the rewards of performance. This is what we must do also in the Caspian region.

If I asked you to name all the companies and countries invested in either the Caspian Pipeline or Tengizchevroil, I doubt most of you could do it easily. Indeed, it probably would be easier to list the companies and countries that are not invested in these two projects!

I think it is valid to say that Tengizchevroil and the pipeline consortium symbolize the new Caspian oil industry, and they are opening the next chapter of cooperation for our future.

What's required is three years of parallel progress and then a joining in the year 2000 - it can be done. The Tengizchevroil and Caspian Pipeline Consortium partners should accept no other outcome.

Winners and losers?

I have one final message for you today: The time is now for everyone who has invested in the new Caspian oil industry to focus on shared success.

Too often we see the countries in the region portrayed merely as potential winners or losers. In many magazine articles such as a recent special report in The Economist, clever journalists portray the Caspian oil industry as a gamble - a card game. We shouldn't be surprised, because there are risks, of course, and there is healthy competition. And not every country or company will get everything it wants.

But those who show commitment to shared regional success stand to benefit - and they will benefit sooner. Instead of viewing regional struggles as a win-or-lose situation, we can choose to view them as a win-win situation.

Our conference title reminds us that we came here to move closer to an ideal: "Managing Reserves to Maximize Economic Benefits." Only by working together in a spirit of common regional enterprise can the countries and companies of the new Caspian oil industry achieve this ideal.

If we remember only one thing from these two days, let it be this.

* Chevron Munaigas Inc. (CMI) is responsible for Chevron's direct business interests in Kazakhstan. Chevron also holds a 45 percent interest in Tengizchevroil (TCO), the joint venture which operates the Tengiz field.

Updated: April 1998