Shared Challenges, Shared Rewards, Shared Destiny: A Chevron Perspective On Investing In Kazakhstan

By Richard H. Matzke, President
Chevron Overseas Petroleum Inc.

Third Annual Kazakhstan Investment Summit

Almaty, Kazakhstan

When people talk about the economy of Kazakhstan, they frequently talk also about oil. The reason, of course, is that energy-industry growth in this country – and in Central Asia in general – is critically important to building a robust, diversified economy in the region. But I think we need to keep in mind that oil itself is still only one element of the bigger picture. Investment in general, and creating the right climate for investment, are the larger priorities.

Yesterday, along with some of you, I attended the meeting of the Kazakhstan Foreign Investors Council. We had a very frank and open discussion on a number of issues of vital interest to foreign investors, and there was wide agreement that the council is an important forum to help improve the investment climate in Kazakhstan. The council has played a key role in helping to increase the level of international interest in Kazakhstan, and its existence proves that the leadership of Kazakhstan wants to create conditions which will attract and reward foreign investment.

Especially in light of that successful forum, I feel privileged to be invited here today to address the Third Kazakhstan Investment Summit.

The first investment summit back in 1997 was a smaller event. But we were still able to bring together participants from more than 40 different companies and 17 countries. The idea was to take the time to start exploring all the possibilities across multiple industries and to be open to the full business potential of Kazakhstan.

And I'd say that same perspective can be as valuable to the third summit here and now as it was to the first summit those two short years ago.

As I said a moment ago, in Central Asia, it's hard to talk about investment without also talking about oil, and one project in particular. Most of you know that Tengizchevroil – the joint venture between Chevron and Kazakhstan to develop the Tengiz oil field – was the first major foreign joint venture in this remarkable nation.

This cornerstone development on the shores of the Caspian Sea broke new ground, and has since grown into a world-class oil project. By its success, Tengizchevroil has become a premier example of the Kazakhstan's investment potential.

Most of us are probably aware of the regional economic damage done by recent low oil prices. As a result, we've seen reports and heard talk of delayed, deferred or cancelled investment in Kazakhstan, Azerbaijan and the entire Caspian oil industry.

World oil prices have jumped back up rapidly this year, and the outlook has improved for the Asian economies. Nobody can say for sure where oil prices will go next. But while we can't control oil prices, we can control how we prepare for them and react to them.

At Tengizchevroil, they've done more than "survive" the low oil prices. They've actually grown their production under some of the toughest conditions ever seen in the global oil industry. Indeed, the project's growth and operations have been so steady in recent years that I don't believe the outside world fully appreciates the quality and quantity of effort required to achieve that steady performance.

Tengizchevroil has used aggressive cost management to improve their short-term performance. At the same time, they've been able to sustain their investment program, because they've always kept one eye on the future.

Tengizchevroil has also aggressively marketed its oil despite the lack of a major export pipeline, recently negotiating transport agreements that have helped offset the effect of low oil prices.

Let me give you a few more facts about the Tengiz operation before I move on, because I believe the contributions of this project are relevant to the objectives of this conference.

Since the venture started in 1993, more than $1.3 billion has been invested to increase production capacity to 215,000 barrels a day. A second expansion will be completed by the fourth quarter of next year to bring capacity up to 261,000 barrels a day.

In 1998, Tengizchevroil brought more than $450 million in direct and indirect economic benefits to Kazakhstan despite the low oil prices.

In addition to the Atyrau Bonus Fund, which is aimed at the improvement of social infrastructure in the Atyrau region, Chevron this year started a program to support small- and medium-size enterprises in Atyrau.

The Chevron/UNDP Business Center and the loan program of Chevron and the European Bank for Reconstruction and Development are functioning exceptionally well. Over 200 clients have been provided with business advice and guidance. And since March, 13 loans have been given to small businesses in the areas of food processing, trade and manufacturing.

In addition, we're proud that our name is easily recognized with programs such as Little League Baseball, the Junior Achievement annual food drive, the mobile tuberculosis clinic and many others.

We hope that our name will also be associated with a sports complex in Astana, the construction of which Chevron is financing together with other companies.

As for jobs, Kazakhstan citizens now hold more than 70 percent of the 3,000 Tengizchevroil staff positions, compared with 55 percent when we started in 1993. Make no mistake: That kind of positive, job-and-paycheck impact not only increases the total security of the investment, it also helps support the regional economy, which is an essential element of any partnership.

Now let me turn to the other half of my story.

On May 12, I attended the formal groundbreaking ceremony for the Caspian Pipeline in Novorossiysk, Russia. It was a day long in coming, and it was rich in significance for everyone involved.

Vagit Alekperov, president of LUKoil, commented that nothing will influence the fate of this project anymore: "In a letter to President Nazarbayev, President Clinton said the pipeline 'will serve as a model of future cooperation and progress on the way to building a better world.'"

I couldn't agree more. As many of you know, Chevron has a 15 percent share in the pipeline project. All of the partners – but perhaps none more than us – are looking forward to that day in June 2000 when we begin to pump Tengiz oil through this new pipeline to a new terminal at Novorossyisk on the Black Sea.

Work has already begun. Contracts totaling nearly $2 billion for the marine terminal, the communications system and the pipeline construction have been awarded. And we've placed most of our orders for pipe, tankage and communications components, which will make a significant contribution to the economies of both Kazakhstan and Russia.

This pipeline will allow Tengiz to reach its full potential of almost 700,000 barrels a day in 10 years. Together, Tengiz and the Caspian Pipeline are expected to contribute $150 billion in direct and indirect economic benefits to Kazakhstan and Russia over the next 40 years.

Looking back on all we've accomplished, I can say that we've learned a great deal about doing business in Kazakhstan.

Of course every investment situation is different, but I'd like to offer some perspectives that might be useful to this summit and to future investors.

As you know, governments and multinational companies together share ownership of the Tengiz Field project and Caspian Pipeline project. With both of these, I think we've achieved the right blend of public and private commitment at this stage of development in the Caspian region.

What's more, everyone's behaving like true partners. We're sharing the risks and the rewards, and that's a very powerful combination for progress. I'll admit I never thought I'd stand up in front of an audience and say that it's better to have a lot of partners instead of just a few! But at least for the Caspian Pipeline, having multiple partners has proved to be a source of strength.

LUKARCO, the Russian government, Rosneft-Shell, the Kazkahstan government, the other companies – all eleven of the partners – have shared the risk. And they've been able to manage their financial exposure, a very important strategy in the Caspian region today. By working together they've learned the downside of delay and the upside of cooperation.

The partners have shown they can be both tenacious and flexible in their commitment to these projects. They've fought against many obstacles and difficult conditions to keep moving forward. They've proved that it's possible to successfully invest in this part of the world if you can keep your eye on your objectives and keep your problems in perspective.

I would add here that both projects – Tengiz and the pipeline – have never lost sight of the fact that they need to perform at a world-class level. They fully recognize the need to stay competitive and adhere to the very tough standards of the global oil industry. The severe downturn in oil prices last year taught us that while Kazakhstan may be geographically isolated from much of the world, it is not economically isolated from the ups and downs of world oil prices.

Indeed, regardless of which industry you're from, every Kazakhstan investor who recognizes the requirement to be globally competitive makes a contribution to the total business climate in Central Asia. Those investors help future investors and the country as well as themselves.

As I mentioned earlier, both Tengiz and the pipeline are providing clear and visible benefits to the regional and local economies. But there is more, because both projects also serve as examples of what we call "regional catalysts." They are symbols and working models for the cooperative economic and political systems that will define the Caspian in the next century.

Both projects have brought governments together and helped them to see a future based on common regional needs and priorities. Both have increased the sense of a shared regional destiny. And both are helping to build a foundation for stable relations among neighbors during a very difficult period of geopolitical transition.

Together, Tengiz and the pipeline do much more than link Caspian oil to the outside world. They help to link the Caspian countries to each other.

Many of us have heard the Caspian oil industry described as "the great game." But I don't think that historical reference fits today. The opportunity before us now is not a great game. It's really a great "gain."

And this is true for all kinds of industry and trade. Again, oil may be a keystone, but it is only part of the larger picture.

We stand at the beginning of a new era of shared benefits for Caspian countries, Caspian citizens and Caspian investors. Driving that new era and making the "great gain" a reality is the business before us at this conference.

Each of us here has the opportunity to help make history, to invest in the future and to benefit from the creation of a new economy. And we can do this, as Chevron has, by choosing the nation of Kazakhstan as our business partner.

Updated: June 1999