Role Of The Middle East And Caspian Regions In The 21st Century Energy Picture – Chevron's Perspective

By Peter J. Robertson, President
Chevron Overseas Petroleum Inc.

2000 Annual Convention

New Orleans, Louisiana

It's nice to be back in New Orleans, a town I've spent a great deal of time in during my 30-year Chevron career.

Most of my visits have been focused on Chevron's operations in the Gulf of Mexico where we are the largest operator on the Shelf, and where, last year, we brought on our first major development in deepwater at Genesis. Last year, we also participated with Texaco in bringing on Gemini, and this year we're working on our next operated development at Typhoon, along with a big program of exploratory wells.

It's great to be among all you earth scientists, because you're the ones who find the energy the world needs to grow. That may sound patronizing, but I really believe that professionals, like you, are the unsung heroes of the global economy.

I don't think you get enough credit, because without your efforts, the world would literally stop dead in its tracks – a fact that often gets lost in the current discussion about the new high tech economy vs. the old brick-and-mortar economy. I guess that means that people like me need to do a better job of getting the word out to the rest of the world.

Before I continue with my remarks, I'd like to thank the American Association of Petroleum Geologists (AAPG) conference organizers for the opportunity to be here today, to give you Chevron's perspective on the Middle East and the Caspian, two vitally important regions that will continue to influence the direction of the oil and gas industry for years to come.

Even to the casual observer, one is struck by the sheer size of the reserves base in the Middle East. We're all familiar with the numbers. Two-thirds of the proved oil reserves in the entire world exist in just five countries: Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran.

The picture's much the same for gas. Middle Eastern countries take four of the top six spots in proved gas reserves. They are Qatar, and once again, Iran, Saudi Arabia and the United Arab Emirates.

With those statistics, it's obvious that countries of the Middle East will continue to play a pivotal role in the global energy business and the global economy as well.

Even though the Caspian currently can't match the awesome proved reserves found in the Middle East, there's little doubt that the Caspian will play an important role in helping to meet the world's growing energy needs. How big a role remains to be seen, but no new world-class oil province with the potential of the Caspian has emerged since the discovery of the North Sea oil fields nearly 30 years ago.

But the Caspian could turn out to be the next North Sea or possibly even several North seas. We just don't know at this point. Until we do know, the Caspian's potential will continue to exert its influence on the direction of the worldwide petroleum industry.

Already, the Caspian region has attracted a great deal of attention – from big firms, small firms, national oil companies, multinational oil companies – from just about everybody, from just about everywhere.

The intense level of interest in the Caspian has been referred to as "The Great Game" by Dan Yergin and others, but we at Chevron prefer to call it "The Great Gain," because everyone stands to gain something from the development of this region's vast potential – if it's done right. If all the nations of the Caspian continue to work together, as they have, and people refrain from taking actions that impede progress.

Experienced, multinational companies like Chevron are poised to help any nation realize the full potential of its energy resources, whether that country is located in the Middle East or the Caspian or anywhere else. But we obviously can't offer our help, if we're prevented from doing so by artificial barriers.

We at Chevron find that most of the challenges we face -- cultural, social, economic -- are transitory ones that can be met with hard work, understanding and cooperation.

It's the political barriers that we find the most difficult to overcome once they're in place. I'll have a few more things to say about this critically important subject a little bit later in my talk.

When we in the West think about the Middle East or the Caspian, we sometimes forget that the countries making up these vast and diverse regions have rich histories and unique cultures, all their own. The nations of the Middle East and the Caspian may share some common traits, it's true, but they're certainly not interchangeable pieces of a monolithic puzzle. Recognizing and respecting the cultural, economic and political differences of each of these countries is the only way to ensure business success.

As these countries' societies and cultures are different and unique, so too are their resource development needs. Some countries are looking for the latest technology or project implementation expertise or capital, or sometimes they're looking for all three. Other countries already have the technology and the capital they need to develop their resources. They're merely looking for certain specific skills to help them maximize their resource recovery.

Because each country presents its own unique set of development needs, any multinational company wanting to do business in this part of the world has to build and implement a unique balance of skills -- technical skills, managerial skills, social skills -- that correspond to each country's specific needs. A company that brings the right fit of skills and experience to a partnership is the right one for the job.

For a country to take full advantage of this right fit of skills that a multinational company like Chevron can offer, however, becomes a moot point if that country restricts, or prohibits, outside investment. One has only to look at the level of benefits that flow to countries that allow foreign investment to be convinced that "economic engagement" is by far the better way to develop any nation's natural resources.

Let me use Chevron's Tengizchevroil joint venture in Kazakhstan as an example of how a multinational oil company can make a difference to a host country.

Since 1993, when the 40-year, $20 billion deal was signed, Tengizchevroil has increased production capacity from 60,000 barrels of oil a day to well over 200,000 barrels a day. At the same time, they've cut their unit production cost to less than a third of what it was when the project began.

The joint venture also recently achieved a safety milestone of 7.7 million man-hours without a lost-time incident. That's 16 months with no lost workdays. To put that into perspective, we might have expected to see 30 lost workday injuries at Tengiz over the same period five years ago. That's a terrific improvement -- something I think everyone at Tengizchevroil should take great pride in.

How about the financial benefits that Tengizchevroil brings to Kazakhstan? If we just look at last year alone, Tengizchevroil contributed nearly $500 million in taxes, royalties, and other benefits to Kazakhstan's economy. That's a huge amount of money. Put another way, for every dollar Tengizchevroil spends in the country, it adds an additional 52 cents to Kazakhstan's gross domestic product.

So, you can see, this groundbreaking joint venture has brought significant operational and financial benefits to the people of Kazakhstan.

But the shareholders are also committed to the overall social and economic development of the country. They recently completed a five-year, $50 million bonus program in the Atyrau Oblast, where the Tengizchevroil project resides. That program helped build a boiler plant, two medical clinics and new houses for flood victims, among other things.

As for jobs, Kazakhstan citizens now hold about 70 percent of the 3,000 staff jobs at Tengizchevroil, compared with 50 percent when the project started in 1993. In addition, the vast majority of those employed by Tengizchevroil's contractors -- some 5,000 people -- are Kazakh citizens.

Also, Chevron, in concert with the United Nations Development Program (UNDP), Citibank, and the European Bank for Reconstruction and Development, established a Business Advisory Center and two loan programs to support small and medium-sized enterprises in Atyrau.

The Business Center has only been up and running for about a year, but, so far, it's provided business advice and guidance to about 500 budding entrepreneurs in and around Atyrau. The Center has helped prepare business plans for over 90 enterprises, 34 of which have been approved, for more than $1.5 million dollars worth of loans. A bowling alley and a modern supermarket are just a couple of examples of the businesses that have secured loans.

So, the benefits that come from the involvement of multinational companies are clear. The kind of positive impact that a multinational company brings not only increases the total security of the investment, it also helps support the regional economy -- a essential part of any partnership.

The evolving relationship between government-owned national oil companies and private multinational oil companies will continue to have an impact on what kind of partnerships are formed not only in the Middle East and Caspian regions but everywhere else.

Prior to the 1970s, the basic relationship between multinational companies and host governments consisted of direct negotiations with high-level government officials for concessions to explore and develop.

Then came the oil embargo and OPEC's rise to prominence. Governments moved to exert more control over their energy resources and strengthened their national oil companies in the process. The multinationals had to adjust to a new and significant structural change.

In some cases, the multinationals were no longer allowed to compete. In others, direct competition between the nationals and the multinationals emerged. In still other cases, new kinds of partnerships were formed, driven by the need for creative and innovative alternatives to equity-holding.

Chevron's operating services agreement in Venezuela, our technical services agreement in Kuwait, or even Shell's recent buy-back contract in Iran are all examples of these new kinds of partnerships.

And they all have a common element: knowledge transfer.

It's an essential part of developing energy resources under these new contract relationships. What the multinationals have learned in one part of the world can easily be "transferred" elsewhere, to the benefit of the host country.

Look at the experience Chevron has gained, for example, exploring for and producing oil from the Papua New Guinea thrust belt. The things we've learned in that challenging and difficult environment could be easily applied to similar geological provinces in other parts of the world.

Take, for example, the thrust belt area of the Zagros Mountains in Iran. Of course, there are other examples. What we've learned about contractual relationships in Venezuela could also work in Saudi Arabia. What we've learned in the Permian Basin in West Texas could also work in Kuwait. And so on.

Transferring knowledge is all about having access to the latest and greatest solutions from similar operations around the world. It's all about having access to emerging technologies, and it's about learning from the best practices from a multitude of sources. This is what multinational oil companies like Chevron can bring to the table.

What could stand in the way of such a wide-open exchange of knowledge? Restrictive actions by governments, that's what.

Unfortunately, the U.S. government is one of the chief practitioners of these sorts of actions, and the unilateral sanction is its weapon of choice.

Here's what I mean. The President's Export Council lists 73 countries around the world -- 73 -- that are subject to some form of unilateral U.S. sanction. Here's another statistic: In just four years, from 1993 through 1996, 60 U.S. laws and executive actions were enacted authorizing unilateral sanctions.

The list of countries on which the United States has imposed sanctions goes on and on. It includes Algeria and Angola, India and Pakistan, China, Russia, Venezuela, Indonesia and Azerbaijan, just to name a few.

The sanctions on these and many other countries constitute a confusing maze of overlapping laws and regulations. Laws and regulations that authorize, or mandate, the imposition of sanctions to change the behavior of a foreign nation, or the conduct of its nationals.

That's as good a definition as any of what sanctions are designed to do.

Sanctions are complicated, too, but that hasn't kept them from being used a great deal. For instance, Iran, by itself, has 16 unilateral sanctions currently imposed on it by the United States. China has 11. Nigeria six.

There's not much disagreement on the facts. The debate begins when you start talking about whether or not unilateral sanctions are the best tool for achieving the diplomatic objectives of the United States.

On one side of the debate are those who favor unilateral sanctions. People who think they're a useful and effective tool for achieving the diplomatic objectives of this country. On the other side, are those who think unilateral sanctions hurt U.S. business and take away U.S. jobs.

How this debate is settled will have long-term repercussions. It could well decide America's future role in the world -- diplomatically, strategically and economically. I want to emphasize that multilateral sanctions, unlike unilateral sanctions, can sometimes be both appropriate and effective.

But I think the evidence clearly shows that unilateral sanctions just don't work. They almost never seem to bring about the changes their sponsors hope for. Instead, wherever they are imposed around the world, they cause U.S. companies to fall further and further behind their non-U.S. competitors.

They put us at the back of the line for negotiating new ventures, and they seriously weaken the likelihood that we can win business in places where sanctions might ultimately be lifted.

The fact is, there's a much better alternative to imposing sanctions. It's called engagement.

It's really just a fancy word for people working hard to build solid, long-lasting relationships with other people -- by listening to them, working with them, investing in them, every day.

I believe that engagement is the only effective way to build, and sustain, free and open markets. And free and open markets need foreign investment to thrive, and foreign investment is impossible if sanctions forbid it.

Unfortunately, the United States isn't the only country that uses sanctions.

Other countries impose "internal" sanctions of their own by limiting or outright prohibiting any foreign investment in their domestic industries – industries that include the oil and gas business. Government officials in these countries often say that sanctions are necessary to protect a vital national asset.

Unfortunately, what these investment restrictions really do, is push capital elsewhere by effectively "subsidizing" investment in higher-cost areas. And once production facilities are in place in these higher cost areas, history shows they will continue to produce even if oil prices fall.

History also shows that countries that limit outside investment are usually the ones who carry the greatest burden in limiting worldwide production in an effort to rebalance market supply and demand.

This self-defeating cycle of creating political barriers, followed by capital flight, followed by overproduction, followed by price collapse, promotes instability in global oil markets and in the economic and political structure of those nations that restrict foreign investment.

The message is clear.

The energy resources of the Middle East and the Caspian are vast -- a fact which will continue to exert tremendous influence on the industry and the worldwide economy for years to come. And because each country in the Middle East and the Caspian is truly unique, unique solutions will be required to fully develop their energy resources.

The most efficient and beneficial way to make that happen will be lost, however, if governments continue to take actions that prohibit free and open markets. It's those free and open markets, after all, that are responsible for establishing and maintaining a fair and competitive global business environment – an environment that's proven itself over the years to be the best one for creating wealth, prosperity and jobs, for a wider segment of society -- an environment that helps to provide long-term stability and moderate crude prices that support economic growth worldwide.

A growing number of countries in the Middle East and the Caspian have recognized that engagement through foreign investment provides the best way to realize the greatestvalue from their energy resources.

Let's hope that trend continues.

Updated: April 2000