To The Kazakhstan International Oil & Gas Exposition

By Kenneth E. Godard, Managing Director

Kazakhstan International Oil & Gas Exposition

Almaty, Kazakhstan

Chevron holds a 45 percent interest in Tengizchevroil. Other shareholders are the Republic of Kazakhstan (25 percent), Mobil Corp. (25 percent), and LukArco (5 percent).

I'm very pleased and proud to be here to give you an update on Tengizchevroil, the first big energy development project in the Republic of Kazakhstan.

Earlier this year, Tengizchevroil celebrated its fifth successful year of operation. Since April of 1993, when the historic operating agreement was signed, we have accomplished a great deal. This morning, I would like to cover some of those accomplishments in more detail.

I want to emphasize how important I think President Nazarbayev's leadership has been in guiding this country's march from a command economy toward a free-market economy. The President's successful efforts to promote and foster a healthy environment for investment here in Kazakhstan have been invaluable. Tengizchevroil wouldn't be where it is today without his leadership. So I would like to add my personal thanks to President Nazarbayev and to Prime Minister Balgimbayev for their unwavering support for our efforts to make Tengizchevroil a truly world-class project.

It wasn't that long ago that many people thought Chevron was foolish to sign a partnership agreement so soon after the breakup of the Soviet Union. Everyone else was taking a wait and see approach back then. But now everyone is beating a path to the Caspian. That's due, in large part, to the leadership of President Nazarbayev.

Tengizchevroil will be a critical indicator of the health of the industry in this region for some time to come. Everyone recognizes that developing the Caspian region's full energy potential will require the dedication and commitment of many players -- companies and governments alike. I think it's also true that Tengizchevroil's success will continue to serve as a magnet, pulling in investors from all over the world. At Tengizchevroil we take a great deal of satisfaction from being the first successful project in the Caspian area since Kazakhstan gained its independence.

This morning I'll begin by giving you a quick update of our operations. Then I'll move on to a broader discussion of the many benefits that have flowed from this world-class project. And then I'll finish with a few comments on where Tengizchevroil is headed in the future.

First, I'd like to recognize the efforts of those who came before us. I'm talking about the Kazakh oilmen who built the solid foundation on which our operation stands today. They were the ones who discovered the giant Tengiz Field, the ones who drilled the wells, who started up the first plant, before Tengizchevroil even existed. It was a truly remarkable accomplishment; one that stands as a monument to the proud 100-year history of Kazakhstan's petroleum industry. Tengizchevroil has benefited from this legacy, but Tengizchevroil has also been able to accomplish a lot itself over the last five years.

In the spring of 1993 Tengiz peak production stood at 35,000 barrels a day, or 1.6 million tonnes per year. Since then we've twinned the first processing facility and completed several debottlenecking projects. The result is that our total production now averages more than 200,000 barrels a day or 9 million tonnes per year. And we've been able to sell every barrel.

This is truly one of the great accomplishments of our partnership: marketing and transporting our product. Despite the lack of a dedicated export pipeline we've been able to market all of our oil. In addition to using all the available pipeline space, we're moving as much as 60 percent of our output by rail. To move that much oil we load more than 250 rail cars a day every day. I'd like to take this opportunity to thank the people at KazTransOil and the Western Railroad for providing us with such valuable and reliable service. As you might imagine, it's been a difficult logistical exercise at times. But so far it's been an unqualified success.

Since 1993, we've increased our output by more than 800 percent, and we've been successful in getting our oil to market. But we've also been able to steadily reduce our unit operating cost over the last five years as well. Through our many cost reduction efforts we've been able to keep a lid on our overall operating costs even though we've increased our production dramatically. The result is that we've pushed our unit operating cost down to less than two dollars a barrel -- a world-class standard. We believe that controlling our costs is an absolute imperative. Because, even though the Tengizchevroil partnership is located in Asia, we must compete with all other oil development projects anywhere in the world.

Now I'd like to move on to our safety and environmental protection efforts. At Tengizchevroil, we're very proud of our safety performance. So far this year our employees have had zero lost time incidents. Not one injury in over five million hours worked! That's an incredible accomplishment for any operation, much less an operation the size of Tengizchevroil. Every day our employees manage a very complex and potentially hazardous operation and do so very successfully.

Our contractors have also achieved world class standards in safety. As one example, Bechtel-Enka has worked over two-and-a-half million hours inside our plant on the debottlenecking projects without a lost time incident. So I repeat: we're very proud of our safety record.

We've also accomplished a great deal on the environmental front. Those of you familiar with our operation know the Tengiz reservoir is under very high pressure and the crude is high in sulfur. Despite H2S levels of 16 percent and reservoir pressures exceeding 10,000 pounds per square inch, we haven't had a single accident due to the high pressure or the sour gas. And we want to keep it that way.

Our environmental protection procedures follow a strict set of international guidelines, which were developed by our shareholder Chevron. Just to give you one example: We continuously monitor the ambient air quality at Tengizchevroil -- at our plant, in the camps where we live, and in the surrounding neighborhoods. And we've not only had no violations of safe standards, but our air quality has been improving every year since our partnership began.

As I said, we've accomplished a great deal at Tengizchevroil in the last five years from an operational point of view.

But as most everyone in the international petroleum business realizes today, operations are only part of the story. Oil companies can't simply show up, offer their services, take charge and then run everything from start to finish. We must become an integral part of the communities in which we operate. We must establish ourselves as a true partner in every sense of the word. We, at Tengizchevroil, are continually focused on being a good neighbor and a good partner to the government, to the local communities where we operate, and to the people who work at our facilities.

The success Tengizchevroil has enjoyed over the last five years is due entirely to the quality and hard work of our people. And since the beginning of our partnership we have striven to promote our Kazakhstani employees into positions of greater authority and responsibility -- positions formerly held by expatriate employees. The number of Kazakhstani citizens who work at our facilities has risen steadily from less than 2,300 back in 1993 to more than 7,200 today.

We require our contractors to seek out and hire local people. And our contractors also provide the necessary training to prepare those people to work at our facilities. For example, one contractor has trained over 400 local residents in a variety of construction skills including welding and scaffold erection.

Of course, Tengizchevroil also offers a wide range of training to our own employees to help them in their jobs and their careers. We offer them training in specific job skills, training in safety procedures, even language instruction. We also offer loans to our employees to help them buy and renovate homes for themselves and their families.

Let me show you the impact that Tengizchevroil has had on just one of our employees. Samat Azhenov is currently a senior attorney in our legal department. He began as an operator working on wells in the Tengiz Field in 1988, five years before Tengizchevroil was formed. But his dream was always to become a lawyer. So, on his own initiative and with no educational assistance, he began studying the law through correspondence courses. Although he was still an operator when Tengizchevroil was formed, his supervisors recognized his potential and helped him fulfill his dream.

Samat's story is really not unique. Ask any of our Kazakhstani employees if they think their jobs at Tengizchevroil are challenging and rewarding, and I'm pretty sure the answer would be yes.

Now, in addition to creating challenging and rewarding careers for our employees, we're also completing a 5-year, 50 million-dollar program which has funded important regional projects to help our local communities. Projects include medical clinics, a heating plant, housing, a bakery, a sports complex, and much more.

Let me give you just a couple of examples. We've helped sponsor a new treatment for tuberculosis that has reduced the treatment time from several years to just a few months. Nearly 3,000 patients have been treated since this program became available in 1994. We've also provided equipment and people to our neighbors in Kulsary to help them cope with several major floods. We've provided nearly 600 computers along with tables and chairs to local area schools. In addition to these worthy causes, we've also made some small business loans that have helped start a number of local businesses. This has resulted in increased employment and improved the local supply of goods and services.

And last but not least, we have made significant contributions to Kazakhstan as a whole. Since 1993, Tengizchevroil's contributions to Kazakhstan have increased four-fold and now exceed $400 million dollars a year.

While our primary job at Tengizchevroil is to get the oil out of the ground and get it to market, our responsibilities certainly don't stop there. We want people to truly benefit from our presence, to be able to say that they're glad that Tengizchevroil is a part of their community. That is one of our key goals -- to be a good partner, a good neighbor, and a good corporate citizen.

When we began this partnership five years ago, there were a lot of uncertainties. But as Tengizchevroil continues to demonstrate success, in spite of all the obstacles we've encountered, the future of our project, and indeed the Caspian oil industry itself, looks bright.

By the year 2000, we plan to complete our fifth processing plant, which will bring our capacity up to 260,000 barrels a day or 12 million tonnes per year. And within the next ten to twelve years we'll build several more plants, on our way to producing more than 500,000 barrels a day or 23 million tonnes per year. Reaching that production plateau, of course, will depend on the timely completion of the CPC pipeline, which is something I'm confident will happen.

Now I've given you a quick update on Tengizchevroil's operations, and I've described a few of the more significant benefits that our partnership has brought to Kazakhstan, to our local communities, and to our employees. And I'm sure, with the pending completion of the CPC pipeline in Russia, Tengizchevroil is well on its way to becoming one of the world's premier projects.

Granted, there are some dark clouds on the immediate horizon. The current economic situation in many countries, including our neighbor to the north, is cause for concern. Our thoughts and hopes go out to our Russian colleagues and friends as they go through this difficult period.

U.S. Energy Secretary Bill Richardson said recently that the energy industry would be expected to serve as a stabilizer during these uncertain times and a driver of economic recovery, stability and growth. If that's true, and I think it is, then the continued success of our project and all future projects in the Caspian area will take on added importance. We, at Tengizchevroil, are ready and willing to accept that responsibility.

Updated: October 1998