Russia: Long-Term Partnership

By Trem Smith, President
Chevron Neftegaz Inc.

2nd Russian Petroleum & Gas Congress

Moscow, June 22, 2004

Ladies and gentlemen: Thank you very much for inviting me to speak at the 2nd Russian Petroleum & Gas Congress.

It's good to be here and an honor to share this program with such a distinguished group of speakers.

Before talking about our future plans and perspectives in Russia, let me give you some background on ChevronTexaco's existing activities in Commonwealth of Independent States (CIS). It's been more than 10 years since ChevronTexaco came to the CIS market and to Russia in particular. The company opened an office in Moscow in 1991 and since then has brought significant investment, technologies and skills to Russia.

We started our development program in the region with investments in Kazakhstan - the Tengiz Field. At that time, the field was producing about 8,000 tons (60,000 barrels per day). It is a complicated field - firstly because it is high pressure with high sulfur content and secondly because it is landlocked, and moving production to markets presents complex problems calling for imaginative solutions.

Today, having resolved these major challenges, this project is very much on track. Tengizchevroil (TCO) produced 12.7 million metric tons (277,000 barrels per day) of crude oil in 2003. On February 29, 2004, a new daily production record of 39,900 tons (319,700 barrels per day) was achieved. ChevronTexaco is making an important contribution to the development of the national and local economies, with total payments to date of around $5 billion in taxes and other payments and also is contributing in various ways to the national economy, such as development of the local infrastructure, use of national human resources and community investment.

During all these years, TCO also has had a strong, positive effect on the Russian economy. In 2003 alone, direct expenditure by TCO in Russia amounted to $295 million, and since 1993 the total is over $1.6 billion.

In October 2000 Tengizchevroil launched the Merichem liquefied gas (propane and butane) production and separation unit. All export volumes of liquefied gas are moved along Russian railroads: 1.8 million tons of liquefied gas have been transported since the plant was commissioned. Russia received $102 million in railroad tariffs and payments for the lease of cars.

ChevronTexaco's largest single investment in Russia is its participation in the Caspian Pipeline Consortium (CPC). ChevronTexaco is the major private CPC shareholder with 15 percent, providing 30 percent of the initial construction costs. It is also one of the largest foreign investors in Russia, with over $1 billion invested in the CPC and related activities.

For more than two years, CPC has been transporting crude oil to the Black Sea for export to world markets.

With an initial crude oil capacity of 28.2 million tons per year (about 600,000 barrels per day), the CPC has shipped to date a total of more than 35 million tons. On April 29, 2004, at the CPC marine terminal near Novorossiysk, the 300th vessel since the inauguration of the facility was loaded with Caspian crude.

In the beginning of June, the first tanker with crude from Karachaganak -- another major oil and gas field in Kazakhstan -- was loaded from the CPC terminal at the Black Sea. Karachaganak plans to export through CPC approximately 500,000 to 650,000 tons per month (more than 120,000 barrels per day).

CPC is now operating at capacity so far as Caspian-sourced crude is concerned - a rate of 26 million tons per year (550,000 barrels per day). CPC is set to expand capacity still further. This expansion project will increase capacity to around 67 million tons per year (1.4 million barrels per day), with some 25 percent of this capacity available for Russian crude oil, thus boosting Russian export output possibilities. The expansion makes good business sense for Russia and CPC, making our pipeline a win-win for everyone.

In recent years, the Chevron Oronite Company has become one of the leaders in supplying additives to the Russian motor oils market. The Oronite Company cooperates with leading Russian oil companies such as LUKOIL, Sibneft, YUKOS, TNK and with major Russian refineries Novoil, NORSI, Ufaneftekhim, Yaroslavnefteorgsyntez.

ChevronTexaco also sells and licenses Chevron refining technologies in Russia through its joint venture Chevron Lummus Global.

In November 2000 Chevron Research and Technology (CRTC) signed a contract with LUKOIL - Volgogradneftepererabotka, under which the Russian facility received the technology, industrial operation expertise and catalysts for the isodeparaffinization of raw wax to produce high-quality lubricants. This technology has been successfully applied on the working facility KM-3 in Volgograd in 2002.

In 1994, CRTC company sold a license on the use of the Isocracking process to Kirishinefteorgsyntez (Surgutneftegas). The largest Isocracking (hydrocracking) facility in the world will process 3 million tons of vacuum gasoil annually and will be commissioned in 2007-2008.

In 2000, the Ryazan Refinery (TNK) signed a contract to receive a license for the use of the hydrodesulphurisation process for vacuum fractions during the preparation of raw materials for FCC (catalytic cracking). The commissioning of this facility, with a capacity of 2.5 million tons of feed annually, is scheduled for later this year or early next year.

Chevron-branded lubricants also have been sold in Russia since 1999, and Chevron Lubricants is one of the leaders in Russia in selling lubricants for automotive, heavy-duty diesel and industrial applications.

ChevronTexaco believes that over the last few years, the Russian government has achieved significant progress in improving the business environment for foreign investment by making tangible reforms to government policies, laws, regulations and to everyday practices. These reforms should help attract significant capital, and technology and will improve economic prosperity.

Even though there are now so many positives, our past and recent experience indicates that we need to keep our eyes focused on issues that remain a cause of continuing concern. For example, property rights and contract sanctity remain issues, especially for long-term investors.

ChevronTexaco hopes the Russian government will continue to promote reforms to resolve these issues. For example, we fully support a transparent subsoil licensing process, open to participation by all investors.

We also welcome the increasing dialogue between Russia and Western governments in many spheres -- and in oil and gas sector in particular. The agenda of this dialogue - to promote more foreign investment -- sends a signal to the international community. This message is broadly positive.

A good example of this cooperation is the bilateral Commercial Energy Dialogue initiated by the Russian and U.S. Presidents in May 2002 and officially launched by the Energy and Commerce ministers of the two countries in Houston in October 2002.

The CEO and chairman of the ChevronTexaco Board, David J. O'Reilly, participated in the last conference of the U.S.-Russia Commercial Energy Dialogue in St. Petersburg in September 2003. He spoke about the importance of this dialogue and about the seriousness of ChevronTexaco's intention to make further investments in Russia to help develop its long-term energy potential.

We also are encouraged by the active discussions generated during the recent workshops on taxation and subsoil legislation and liquefied natural gas (LNG).

Today, more than ever, truly successful projects are built from the foundations of mutual trust, understanding and cooperation, where people work together focused on common goals to create value.

ChevronTexaco has been and remains committed to making new long-term partnerships a reality in Russia.

In 2003, ChevronTexaco incorporated a new company, ChevronTexaco Business Development Inc., headed by Sam Laidlaw, president of the company and executive vice president of the Corporation. A main focus of this company is the expansion of ChevronTexaco's activities in the territory of Russia through partnerships.

ChevronTexaco sees significant opportunities for long-term cooperation in Russia. These opportunities would include, but not be limited to, exploration, joint field development, technology applications, oil and gas processing, transportation and marketing.

In mature areas such as western Siberia and the Volga Urals, ChevronTexaco can bring its global experience, a mix of advanced reservoir management technologies, drilling techniques (horizontal and multilateral) and management skills to increase ultimate recovery of oil and gas in active reservoirs as well as in deeper and more technically challenging reservoirs.

In capital-intensive frontier areas, like the Yamal Peninsula, Barents Sea, East Siberia, and Sakhalin Island, ChevronTexaco could share and apply its expertise, technology and experience across the entire value chain. As a partner, ChevronTexaco could work with Russian oil and gas companies in developing these technically challenging reserves to maximize recovery, minimize costs and increase field efficiency, for example reduction of gas flaring. Specific techniques would include deep drilling, horizontal and multilateral wells, advanced condensate and liquid recovery methods.

ChevronTexaco is an industry leader in offshore deepwater drilling, subsea technologies and experience. Several of the industry's biggest projects under way today are applying these world-class leading technologies, including deepwater Angola (Kuito), Nigeria (Agbami) and Gulf of Mexico (Tahiti, Typhoon).

ChevronTexaco is no stranger to harsh operating conditions with projects such as Tengiz where temperatures can be experienced of plus 40 degrees and minus 40 degrees Celsius, and Hibernia where the challenges of intense cold are coupled with the risk from icebergs.

ChevronTexaco is also uniquely positioned to partner on large-scale LNG projects through its experience in several ongoing major LNG processing sites worldwide, including Australia's North West Shelf, West Africa and Venezuela.

With regard to regasification and U.S. marketing, permits were recently issued for our Port Pelican project, a large scale regasification terminal being constructed in the offshore Gulf of Mexico. Dave O'Reilly recently announced that significant progress also was being made on a second terminal offshore Baja California, Mexico.

Through our alliance partner Sasol Chevron, ChevronTexaco is a leader in gas-to-liquids (GTL) technologies, with major projects currently under way in Qatar and Nigeria. This technology could be particularly applicable in frontier areas lacking gas infrastructure.

And finally, on the long-term growth side ChevronTexaco has proved itself to be an industry leader in exploration by leveraging its proprietary geophysical imaging technology and by application of its people and work processes, including reservoir and project management.

I am confident that the combination of timing, technology and market access that ChevronTexaco brings to the table, will lead to a major investment in Russia in the future.

Cautionary Statement Relevant to Forward-Looking Information for the Purpose of "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.

Some of the items discussed in this speech are forward-looking statements about ChevronTexaco's plans for conducting business in Russia. The statements are based upon management's current expectations, estimates, and projections; are not guarantees of future performance; and are subject to certain risks, uncertainties and other factors, some of which are beyond the company's control and are difficult to predict. You should not place undue reliance on these forward-looking statements, which speak only as of the date of the press release. Unless legally required, ChevronTexaco undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Updated: June 2004