Chevron Exit Hints At Trouble in Almaty
December 17, 2002 9:04am
ALMATY, Kazakhstan - The indefinite suspension of the biggest construction project in the former Soviet Union throws into doubt Kazakhstan's attractiveness to foreign investors, said bankers and oil executives in Almaty. Kazakhstan may be as corrupt and bureaucratic as anywhere in the former Soviet Union, foreign investors say, but it has two major advantages over Russia: There is virtually no mafia-style violence, and the government - often synonymous with the family of President Nursultan Nazarbayev - has the ability to get its decisions carried out in the provinces.
But last month, Tengizchevroil, or TCO, caused consternation in Kazakhstan when it demobilized contractors and announced that it would stop work on a nascent $3.5-billion project aimed at nearly doubling production at the Tengiz onshore Caspian oil field.
The field is Kazakhstan's biggest single source of revenue, accounting for 15 percent of the country's budget. Today, it produces 12 million tons of light crude a year and, after a three-year expansion, was due to produce 22 million tons a year.
ChevronTexaco owns half of TCO, ExxonMobil 25 percent, Kazakhstan state oil company Kazmunaigaz 20 percent and LUKArco 5 percent.
In a telephone interview from TCO offices in Atyrau, director Tom Winterton declined to discuss the reasons for the suspension, but he said no further meetings between the partners were scheduled.
He said that, while the existing investment in Tengiz, estimated at more than $2 billion, had been financed mostly through sales of crude, "This is a big project and there's going to be a need for a direct infusion of money from the partners, under the most realistic oil-price scenario."
Sources familiar with the negotiations said the government would not agree to the schedule of accelerated depreciation proposed by the oil companies. The companies decided that the schedule offered by the government did not offer a reasonable rate of return, they said.
The sources predicted it would probably take months for the two sides to wriggle out of the impasse.
The cancellation of the huge project - nearly double the size of Kazakhstan's annual budget - came at an awkward time for this country of 15 million people.
Agip KCO, the consortium working on the even larger Kashagan field, has submitted to the government its plan to spend some $20 billion over 13 years to develop the offshore field. Kashagan is the world's fifth-largest field, with recoverable reserves estimated at 13 billion barrels, while Tengiz is sixth with 9 billion barrels.
The government, which is not a partner in the Kashagan consortium, has until the end of the year to accept or reject the development plan, and sources close to the consortium worry that the government's attitude toward Tengiz make it likelier that Agip KCO would face similar problems.
In its first 11 years of independence, Kazakhstan has attracted more foreign investment than any country in the former Soviet Union.
The biggest single investor was Chevron, which, after years of negotiating with the Soviet and then the Kazakhstan government, took control of the giant Tengiz field on the parched shores of the northern Caspian Sea in 1993.
Tengiz proved highly profitable for the San Francisco-based company. Chevron, now ChevronTexaco, was able to increase production 10-fold and organize the world's biggest railroad-based transport system while overseeing construction of a $2.6 billion pipeline to carry Tengiz crude to the Black Sea.
In all, analysts estimate, ChevronTexaco has invested close to $2 billion in the field and the pipeline.
But, for the last two years, ChevronTexaco and other foreign investors have been complaining privately of government pressure to renegotiate contracts and of what one oil executive called "nibbling around the contracts."
Perhaps the most visible "nibble" is a $73-million-a-year fine that the government imposed on TCO for storing 5 million tons of sulfur under conditions identical to those allowed in North America. Kazakh officials say the comparison is meaningless because the Caspian climate is different. TCO has appealed the fine.
"It's about time someone drew the line," said a source close to the Kashagan consortium. "But it's disappointing that this had to happen."
"This kind of thing doesn't happen often," said another well-informed oil-industry official. "Sometimes you suspend things during negotiations, but it's done quietly."
Several sources said there were indications the government had not expected ChevronTexaco and ExxonMobil to throw in the towel on the investment project.
Officials at the Kazmunaigaz state oil concern declined to discuss the case, saying an official reaction may be issued soon. A spokesperson for the Energy Ministry declined comment.
Nazarbayev's management of the economy is drawing unqualified praise. Growth averaged 10 percent for the past three years and there is a budget surplus and no foreign debt.
But there was also unanimity among oil-company officials that the suspension of the ChevronTexaco project tarnishes the country's image just as it prepares to offer, for the first time, some 100 offshore blocs for exploration.
The suspension "will be seen as a clear sign that there's something wrong with the investment climate," said one senior executive. "There are not many oil and gas companies left with significant resources and who are used to operating in difficult offshore environments, and now this will have ratcheted up their concern one notch."
Kazakhstan depends on foreign companies' capital and know-how to lift oil from the country's deep and technically demanding Caspian fields and achieve Nazarbayev's goal of making the country one of the world's top half-dozen exporters by 2015, producing 3 million barrels a day.
While oil executives point out that in the country's three largest fields it will be years before companies have paid back investments and start making a profit, there is a widespread feeling, even in the Kazakh elite, that the majors took unfair advantage of the country's weakness in the early 1990s when negotiating contracts. Since these contracts are commercial secrets, the truth remains elusive. |
