The United States and Russia in Global Energy Markets

By Peter J. Robertson, Vice Chairman
ChevronTexaco Corporation

U.S.-Russia Commercial Energy Summit, Oct. 1, 2002

Houston, Texas

Speech in Russian

Government and business leaders from the United States and Russia joined ChevronTexaco Vice Chairman Peter Robertson in the plenary session. They included U.S. Secretary of Commerce Donald Evans; U.S. Secretary of Energy Spencer Abraham; German Gref, minister of economic development and trade for the Russian Federation; Igor Yusufov, minister of energy for the Russian Federation; Simon Kukes, CEO of TNK; Alexei Kuznetsov, first vice president of Rosneft; and ConocoPhillips Chairman Archie Dunham. The goal of the conference was to encourage greater dialogue about the two countries' shared stake in the continued growth of the Russian energy sector.

I want to thank my fellow panelists for their remarks and Barry Worthington and the U.S. Energy Association (USEA) for inviting me to join this distinguished group. As the final speaker of this session, it's my obligation to point out that, while everything worth saying has already been said, it hasn't been said by everyone. So let me be brief - and may our lunch break run long.

As I said, it is an honor to represent ChevronTexaco here in Houston. It's a fitting place to launch this important dialogue. As some of you may have seen, one American journalist wrote recently that with Russia's growing energy sector, "Moscow is on its way to becoming the next Houston." Well, with all the Russian representation at this conference, I am tempted to say that this week Houston is looking a lot like the next Moscow.

We've come to Houston, all of us, to answer the call of presidents Bush and Putin for greater dialogue on our shared stake in the continued growth of the Russian energy sector. And if they were here with us in Houston, I think they would be encouraged by the ideas we've already exchanged -- and the common ground we've found. Today's dialogue is tomorrow's deal. And the relationships we form at summits like this one are the foundation of successful partnerships for the decades ahead.

The Renaissance of Russian Oil

We've been hearing a lot today about the remarkable growth in Russian energy. As we know, this is part of a much larger transformation -- more than a decade under way - of the old, Soviet command economy into a modern, global, market economy. The people of Russia chose a bold and challenging course — and now are finally unleashing the entrepreneurial spirit that has lain dormant so long.

The results have been impressive. Unemployment and labor costs have gone down. Between 1997 and 2000, the share of the Russian gross domestic product (GDP) that is made up by government consumption declined by half, and foreign exchange reserves doubled. State-owned enterprises are being replaced by private entities; citizens are using the power of free enterprise to own property and start businesses.

And for all the new businesses springing up across Russia, we're also seeing the revival of one of its oldest businesses: oil. In the past decade, we've witnessed the kind of explosive growth that marked the start of the Russian oil industry.

Between 1988 and 1998, Russian oil production fell almost in half -- from 12 million to around 6 million barrels a day. Drilling fell off sharply, as did investment, but the trend has been successfully reversed, and in 2001, production was already up 7.69 percent. The massive increase in output in the past couple of years — nearly half a million barrels a day each year - is the biggest boost in output of any country in the world.

It's little wonder that by the turn of the 21st century, energy exports accounted for 90 percent of Russia's growth in GDP. What we're seeing is nothing less than a renaissance of Russian oil.

As other speakers have made clear, that's required a significant restructuring of the industry itself and its relationships with the rest of the world.

As our Russian guests can confirm, the rise of Russian energy has taken the rapid reinvestment of capital, attention to efficiency measures and technologies, market reform and an improved climate for investment. It's taken new pipelines and oil terminals and new agreements for cooperation between companies and governments. In short, it's taken the combined efforts of the public and private sectors in Russia -- with the support of their partners here in the United States and elsewhere in the world.

So at the start of this new century, Russia stands poised to be an even bigger player in the global marketplace. We know that few countries can match its reserves; and no country can match Russia's unique position, standing astride two continents, stretching all the way to the steppe of east Siberia and the shores of Sakhalin Island.

The recent impressive growth in Russia's oil production has been largely based on turning around the productivity of Western Siberia. The next big step for Russian oil and gas development is clearly going to be in the frontier areas, including Sakhalin and the Arctic Shelf. Western Siberia still has a great deal of potential left and will continue to provide a steady and reliable source of cash for years to come. It is an area successfully managed by Russian companies, and production there is growing with Russian capital and the assistance of international service companies.

So what then is the role of international oil and gas majors in Russia in the future? I see that role as being defined by opportunities where companies like ChevronTexaco bring clear added value.

ChevronTexaco's strengths include the ability to bring proven and experienced management expertise to new ventures, cutting edge technology, ability to partner effectively, and, of course, capital resources.

There may be a role for international companies in established oil and gas producing areas such as Western Siberia, but our focus will be on the frontier areas.

Now, presented with an opportunity in an established oil region such as Western Siberia, there is an economic case that could be made for undertaking such a project under Russia's existing tax and license regime. The infrastructure already exists; the reserves are accessible; and revenue can be generated relatively quickly.

For a frontier plays, however, such as Sakhalin and the Arctic Shelf, everything is different -- complex, high risk, high cost and with huge investment amounts committed up front before there is any meaningful revenue. To undertake such an investment requires clear terms and conditions -- a commitment that the fiscal regime in place during the investment phase remains in place during the revenue phase; that sunk costs can be recovered with confidence.

In the short term, production sharing agreements (PSAs) can provide that confidence. Though I expect that their application will be limited over the next few years, PSA legislation will provide the necessary early stimulus to opening up the challenging, frontier areas to exploration.

The Kirinski Block in Sakhalin III is one such prospect, where ChevronTexaco has a 33 percent interest in partnership with Rosneft and ExxonMobil. We are encouraged by the progress that has been made with PSA legislation in Russia over the past few months and look forward to the PSA Tax Chapter becoming law before the end of the year.

PSAs have the ability to attract large amounts of capital that not only can open up the frontier but will build infrastructure that will facilitate the further development of Russia's continental shelf.

Looking beyond PSA, I am encouraged by the moves to reform the Law on the Subsoil. If that legislation can be developed successfully, it will be a natural successor to PSA and will eventually make PSA-type contracts redundant. However, in the near term, PSAs are necessary.

Fulfilling Potential through Partnership

U.S. companies, like ChevronTexaco, stand ready to help Russia fulfill this potential -- ready with investment not only of capital but of our other assets: our technology, our expertise, our personnel.

As our Russian partners are telling us, it will take all of these elements if we're going to replace more of Russia's maturing fields with new ones; it will take all these elements if we're going to develop the offshore opportunities we see in Sakhalin, for example. The most potentially rewarding opportunities are also the riskiest. And the best way to manage that risk is through partnership.

There is no "one-size-fits-all" definition for partnership - in Russia or anywhere else. At ChevronTexaco, we define partnership as "an unwavering commitment ... to building productive, collaborative, trusting and beneficial relationships with governments, other companies, our customers, our communities and each other."

We use this definition because it's not merely aspirational; it's practical. At its core, partnership is a pragmatic way for companies like ChevronTexaco and countries like the United States and Russia to tackle challenges that are too big, and risks that are too complex for any one of us to go it alone. Few if any industries face the kinds of obstacles that ours does on a daily basis: capital and technical, geopolitical and environmental, safety and health. It's crucial that we meet these challenges together.

Each partner needs to know up front what the other is expecting and stands to gain. Dependable partners set clear ground rules and make sure they're respected. No hidden agendas. No shifting standards. Just an honest dialogue about common interests -- the kind of talks we're having here today.

And those interests need to be balanced. For a partnership to succeed -- and be sustained -- both sides have to bring something to the table and have to walk away with something in hand. As Presidents Bush and Putin made clear in their joint statement last May, the way forward is through partnerships built "on a mutually beneficial basis."

The Way Forward

This vision of partnership has defined our company's efforts in Russia since the close of the Cold War, when we started doing business there. It's what Dave O'Reilly and I were in Moscow to discuss just last week. In fact, we took the entire ChevronTexaco board of directors to see the opportunities for themselves. ChevronTexaco has a long-term commitment to expanding our presence and our partnerships in Russia.

If anyone wants to know what partnership means in practice, I'd point them to the Caspian Pipeline Consortium (CPC). As Ian MacDonald, the general director of CPC, will surely describe later today, CPC shows what we can achieve when we work together. ChevronTexaco and its partners in CPC -- three governments, nine other companies, including Lukoil and Rosneft -- have, I think, shown convincingly that complex business arrangements, multiple cultures and technological challenges are not insurmountable obstacles to success.

Russia's participation has been critical to that success. And as a 24 percent shareholder, Russia will be a key partner and a key beneficiary as we move toward CPC expansion, as set forth in the 1996 agreement. Even with the CPC set to move an impressive 500,000 barrels of oil per day in 2003, CPC shipper owners tell us there's a clear need to substantially expand the pipeline from the end of 2005.

If we expand the pipeline in the same way we built the pipeline -- as partners who share risks as well as rewards -- then I am confident we can realize the full potential of this landmark project. At this point, I need to thank the involvement of Energy Minister Yusufov in the affairs of CPC. His commitment to uphold the principles of CPC's foundation agreements as well as his support for expanding CPC should give all foreign investors confidence that they can take on major projects in Russia with confidence.

CPC is important. But it's only one of the important and promising projects we see right now in Russia. Across the vast expanse of Siberia, in the Sea of Okhotsk, there's another. As I mentioned earlier, ChevronTexaco has a significant stake in the Kirinsky Block of Sakhalin III. It's highly prospective. It's certainly risky. But in our view, it's undoubtedly worth the investment and effort. Below those 150 meters of water lie an estimated 500 million metric tons of oil and gas equivalents.

To develop daunting offshore prospects in environmentally sensitive areas like these, we know what kind of commitment it's going to take -- financial and human capital. We know what kind of technology it's going to take

And we know what kind of rewards there may be for the Russian people who live on Sakhalin, who stand to gain in quality of life, and for the Russian companies who are poised to meet the demands of the expanding Asian energy market. My company looks forward to continuing our dialogue about Sakhalin and building a partnership that can turn these prospects into reality.

We're also looking carefully at the potential of other Russian projects, in the hopes of making greater investments and stronger partnerships. And we're not the only ones, as Mr. Dunham's remarks have made clear. Companies like ours are hearing -- and heeding -- the administration's call for greater direct U.S. investment in Russian energy.

In that spirit, we welcome all that Secretaries Evans and Abraham are doing to encourage more investment and put it on solid footing. We applaud Secretary Abraham's decision to fund a study of East Siberian oil reserves so we can all better understand the risks and opportunities in what is, in many ways, uncharted territory.

Of course, that's what we do in this business: We break new ground. Push the parameters of what was once thought impossible. And uncharted territory is often the most exciting place to be.

The challenges ahead are, as ever, considerable. But so are the opportunities.

For the United States, stronger partnerships in Russia could mean a crucial investment opportunity and greater diversity of supply. For Russia, it could mean expanded access to markets, capital, and expertise, as well as a quicker and more complete integration into the global economy.

For both countries, it could help fulfill our respective national energy strategies and move us toward not only greater energy cooperation but greater energy security for our nations and others in the industrialized and developing worlds.

That said, let's make sure that the dialogue we begin here in Houston doesn't end here in Houston. Let's match Presidents Bush and Putin's resolve with our own. And let's turn these opportunities into realities. As partners, there's no end to what we can achieve.

Thank you.

Updated: October 2002