Commitment in the Caspian: A Chevron Perspective on Energy and Economic Development

Kenneth T. Derr, Chairman of the Board and
Chief Executive Officer Chevron Corporation

October 20, 1998

Thank you, Ambassador Platt*. I'm very pleased to be here. And I'm delighted that the Caspian is an area of interest to the Asia Society. Because it is not only a fascinating place but an area of great future importance.

The region is going through remarkable change -- that is historic in nature, broad in scope and profound in terms of an emerging regional identity.

I'd like to give you my perspective on energy and economic development in the Caspian and explain why this region is important -- to everyone who can -- and cannot -- find Azerbaijan or Turkmenistan on the map.

The region has tremendous energy resources and tremendous unrealized potential. It's also going through a dramatic transformation as countries embrace freedom -- and rebuild long-neglected industries.

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The U.S. Energy Information Administration puts the Caspian's proven oil reserves at 15 to 29 billion barrels -- making it comparable to the North Sea or the United States -- and ensuring the Caspian will be an important source of future oil. Proven reserves are those that can be economically produced with current technology.

However, what really excites people are that some experts have estimated ultimate Caspian petroleum resources at 100 to 200 billion barrels of oil. That's the total of known and possible future reserves. Although there might be some wishful thinking in these numbers, the estimates imply that the Caspian could become one of the world's major sources of energy.

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Chevron's entry into Central Asia began in a remote desert just northeast of the Caspian Sea.

In April 1993 in Almaty, Nursultan Nazarbaev, the president of the Republic of Kazakhstan, and I signed a 40-year agreement that formed a $20 billion partnership called Tengizchevroil, or TCO for short. That gave Chevron a 50 percent interest in the 6-to-9 billion barrel Tengiz Field. While it's only been five years since this landmark venture began, we've packed a whole lot of history into that period.

First, some background. We began negotiating with the Soviet Union for an oil exploration and production agreement in the late 1980s. Little did we -- or anyone -- realize what monumental events were about to unfold.

The fall of the Berlin Wall and the breakup of the Soviet Union left a familiar world in shreds. These changes sent waves of shock -- then of hope -- around the globe.

All at once, a cold war ended, newly independent nations emerged and centrally planned economies fell from favor.

At that point, we had all but signed an agreement for Tengiz with the Soviets. Fortunately, we had involved officials of Kazakhstan early on; so negotiations continued with the new republic, where Tengiz is located.

Difficult as that period was, some true leaders emerged -- among them, Nursultan Nazarbaev. Because of his vision and our persistence, Tengizchevroil became a reality in Kazakhstan's second year of independence.

According to the conventional wisdom of the time, a major alliance between a newly independent country and a western corporation wouldn't work. Better to wait out the squall of economic and political reform.

Tengizchevroil's main enterprise -- to operate the huge Tengiz oil field -- required focus, flexibility and patience by both partners. Meshed with the demands of business and technology were issues of culture and custom and the newness of a world redefining itself.

The 200 or so Chevron employees who left the U.S. and other countries for Kazakhstan found themselves in a multilingual world where Kazakh, Russian, Hungarian, Turkish and English speakers toiled feverishly to create an integrated workplace. In that environment, there was no such thing as "business as usual." The partnership took shape just as the new republic was being forged.

The employees did a magnificent job in taking over operation of this huge facility, and we have a superb leadership team taking us into the future.

In forming this alliance, we knew the risks were big -- but so was the Tengiz Field. Chevron's share in Tengiz will ultimately increase our oil reserves by more than 3 billion barrels.

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Forgive me for boasting about Tengizchevroil's accomplishments. It's been gratifying to prove the naysayers wrong. And, believe me, the world was watching our every move.

The Tengiz Field was discovered by the Soviets in 1979. It's a "supergiant" field -- the biggest oil find in the last 30 years. And we haven't hit bottom yet.

Tengiz has the potential to produce up to 9 billion barrels of oil over 40 years. That's comparable to Alaska's Prudhoe Bay Field.

In 1993, output was about 30,000 barrels of oil a day. Last May, we set a production record of 200,000 a day. And we expect to be running at more than 700,000 barrels a day in 2010. Furthermore, TCO has set an exemplary safety record: earlier this month, employees were honored for working 5 million hours without a lost-time injury.

To increase production capacity, the TCO partners will invest more than $1 billion over the next three years. TCO has been successful because -- every step of the way -- Kazakhstan has honored its agreements with us.

And in a strong vote of confidence, Mobil and LUKARCO - which is a joint venture of Russia's LUKoil and ARCO - have since joined TCO. Mobil bought half of the government's 50 percent share, and LUKARCO bought 5 percent from us.

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Producing the oil, however, is only half the story. Getting it to the marketplace has proved more challenging. The pipeline system in this part of the world was designed to meet the U.S.S.R.'s internal needs. Much of it is under Russian control.

We currently ship about 72,000 barrels of oil a day through Russian pipelines - a limit dictated by existing capacity and quotas. We're using Russian technology to strip Tengiz oil of mercaptans - sulfur compounds that cannot be handled by Russia's pipelines. On average, another 87,000 barrels a day was transported by rail in 1997.

Tengizchevroil has shipped oil to Azerbaijan, Georgia, the Ukraine, Finland and Estonia. We also sent a test shipment to Urumchi, China. Oil moves over land, across the Caspian Sea, up the Volga-Don Canal and through the Baltic, Black and Mediterranean seas.

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Transportation issues are key to unlocking the true wealth of this region, and I'll discuss the major pipelines being planned. First I want to emphasize how Tengizchevroil has been a cornerstone of economic development in this region.

What does Tengizchevroil mean to Kazakhstan?

In 1997, it paid more than $200 million in taxes, royalties, dividends, transport fees, community programs, and payroll. Incidentally, the payroll consists of 3,100 employees, more than 70 percent of whom are citizens of Kazakhstan. About 230 Chevron expatriates work for TCO, and, if you include contractors, a total of 9,000 work on the project.

Since 1993, the venture has invested more than $1 billion in construction, transportation, food and other services. In that five-year period, TCO spent $50 million on programs to improve the health, education and infrastructure of local communities.

The benefits enjoyed by Kazakhstan are spreading throughout the region. As new export pipelines are built, other countries -- just beginning to see the benefits of free markets -- also will reap rewards.

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Each of the Caspian countries provides an important link in the Eurasian transportation corridors -- collectively called the new Silk Road. By cooperating with governments of the region to transport Tengiz oil, Chevron already is proving the viability of these corridors.

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Comparisons of this growing network to the Silk Road of old are inevitable. And, in fact, there are similarities.

The Silk Road began linking the Chinese and Roman empires around 100 B.C. Despite its name, it wasn't a single artery, but a network of routes. Based on trade in silk, glass, perfume and horses, the Silk Road prospered, particularly in the sixth through eighth centuries. It experienced another great age beginning around 1260 -- and recounted, in part, by Marco Polo.

The Silk Road of old fostered the exchange not just of commodities but of people, customs and ideas. Likewise, the new Eurasian transportation corridors will not just trade in oil and gas. They will be catalysts for communication, cooperation and broad-based commerce.

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Petroleum has long played a role in the Caspian. Led by Azerbaijan, this region experienced an oil boom at the turn of the century -- a black-gold rush that came to be known as "The Great Game." Today's commentators have latched onto that term and take pains to draw parallels to current activities.

I think there's a big difference.

The earlier oil boom was a power play between the British and Russian empires. Today, we stress cooperation and mutual benefit. How else could 11 partners come together with a common goal -- as they have in the Caspian Pipeline Consortium?

I'd like to relegate The Great Game to history and focus instead on The Great Gain - the wealth that oil development can bring when cooperation supersedes political rivalry and new dreams replace old feuds.

The region has had its share of conflicts -- and divisiveness is a continuing threat in certain areas.

Some would say that's reason not to do business in this area. I say, all the more reason to press ahead with projects that support economic development. There will be no lasting independence -- no bulwark of prosperity without a strong energy infrastructure.

The economic gains that Tengizchevroil and the Caspian Pipeline Consortium are making will spill over to other businesses, such as manufacturing, construction and telecommunications, as well as to a host of smaller enterprises.

The power generation, agricultural processing, mining and steel industries already have made substantial investments in Kazakhstan.

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Tengizchevroil means a great deal to Russia too. TCO has spent more than $260 million on Russian goods and services since 1993. Russian economists point out that every Tengizchevroil dollar spent in Russia generates more than two dollars of gross domestic product.

Over 40 years, the project will contribute $28 billion to the Russian Federation's GDP while adding $10 billion in revenue to federal, regional and local governments.

No less dramatic is the impact on individuals. TCO expenditures in Russia will sustain more than 6,500 new jobs per year.

The Russian Academy of Science estimates that the Caspian pipeline will indirectly support more than 100,000 jobs annually in Russia and will add $22 billion in direct government revenue.

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Clearly, Tengizchevroil has stimulated regional growth. It also helped pave the way for other oil projects.

It's unlikely that Azerbaijan's "deal of the century" would have happened if TCO hadn't first succeeded. This agreement calls for 12 partners in the Azerbaijan International Operating Company - AIOC -- to develop 4 billion barrels of Caspian Sea reserves.

Several other large projects closely followed AIOC. Azerbaijan has concluded at least 15 major agreements with international oil companies.

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President Nazarbaev came under fire when he first invited foreign companies into Kazakhstan, and President Aliyev of Azerbaijan has been similarly criticized.

Both Nazarbaev and Aliyev have been resolute in their visions. By acting now they are building a platform for growth. Last year, Kazakhstan reported it already had attracted $7.5 billion in foreign direct investment -- with some 40 percent in oil and gas. To put that in perspective, Russia has attracted about $10.5 billion in foreign direct investment since 1991.

Timing is critical for nations struggling to make the most of new-found freedoms. The recent financial crisis in Russia demonstrates how fragile emerging free markets can be.

Clearly, Russians are at a crossroads, and we wish them every success in transforming their economy. What happens in Russia is very important to us and the rest of the world. But it doesn't change our commitment in the Caspian -- which we have always viewed as long-term.

In light of Russia's financial troubles, it's all the more important that pipeline projects move forward and regional cooperation be fostered.

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Both the Bush and Clinton administrations have been very supportive of Caspian energy projects. The Silk Road Strategy Act, which has many advocates in Congress, represents a commitment to the economic and political development of the Caspian countries. We agree with the bill's underlying philosophy -- that regional cooperation is the basis for sustainable growth.

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One of Chevron's key strategies is to accelerate growth in the Caspian. That includes developing infrastructure, new markets and regional businesses. In fact, we've formed a Caspian Action Team charged with that responsibility.

Improving transportation and expediting pipeline construction is a high priority. However, we're also expanding our lubricants business in the region, have opened three service stations in Kazakhstan and are pursuing other retail opportunities.

We're also interested in petrochemicals, because the Caspian offers low feedstock costs and a solid labor force. We hope to build a plant near Atyrau, Kazakhstan, to manufacture polyethylene pipe for use in infrastructure improvement projects.

In Atyrau, Chevron also aims to assist small business owners with loans and counseling. This would be done through a business support center that we're setting up in conjunction with the United Nations.

This assistance will allow, for example, local farmers to expand their businesses and provide our Tengiz camp with food and milk. It's a great example of mutual benefits -- for us and for the citizens of Kazakhstan.

As part of our expanding Caspian role, we joined with Azerbaijan and France's Total in 1997 to explore the Absheron Block, potentially one of the Caspian Sea's most prolific fields. We've completed a 3-D seismic survey of the area and currently are evaluating it -- with drilling to follow.

Azerbaijan's geographic blessings make it a natural transportation hub. The country will play a key role in producing and transporting petroleum and in ensuring regional stability.

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Let's take a look at the major pipeline projects being planned.

· An export pipeline, planned by the Caspian Pipeline Consortium and costing more than $2 billion, will connect Tengiz to the Russian Black Sea port of Novorossiysk in 2001. The initial capacity of 560,000 barrels a day is expected to more than double by 2014.

From Novorossiysk, tankers will move oil to Black Sea and Mediterranean markets.

Chevron has a 15 percent stake in the consortium, and we strongly support this route as the most economic means for exporting Tengiz oil. But we recognize that, as more oil is produced, multiple routes will be best for the region and for an oil-dependent world.

It's estimated that the Caspian will need more than 2 million barrels a day of new export capacity over the coming decade.

· AIOC is involved in two projects: The first is an upgrade of a 900-mile pipeline -- already in use by AIOC -- from Baku to Novorossiysk.

The second project is to build a new pipeline from Baku to the Georgian Black Sea port of Supsa. This route should be completed by year-end.

Each line will be able to move more than 100,000 barrels of oil per day.

· Chevron is working to increase the capacity of the system that links Baku to the Georgian port of Batumi.

Tengizchevroil is already using this route. It ships oil by rail to the Kazakh city of Aktau, then by small vessels across the Caspian, and from Baku to Batumi using rail and pipeline.

· Receiving great attention is a potential route from Baku to Ceyhan, Turkey, on the Mediterranean. And, as you can see, there are several suggested ways to link the two cities. Proponents point out that shipments to Ceyhan will help alleviate congestion in the Bosphorus.

This line will be part of a long-term transportation solution, but I think it's most important that we focus on completing pipeline projects already well under way.

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Many other pipelines have been proposed.

China recently became active in the Caspian. In a $9.5 billion agreement, China plans to develop onshore oil in Kazakhstan and envisions building, in several stages, a 2,000-mile pipeline that would carry Kazakh oil to western China.

In the coming decades, oil demand is expected to grow faster in China than anywhere else, due to rapid industrialization. Because China and other Far East nations are very dependent on Persian Gulf oil, they -- like the U.S. -- are interested in diversifying their energy supplies.

Iran also is part of the transportation equation. As a U.S. company, Chevron is governed by American sanctions against Iran, and, until those are lifted, our interest in this route is necessarily restricted.

However, some companies plan to deliver oil to Iranian terminals on the Caspian in exchange for oil at points on the Persian Gulf. Iran also plans to upgrade its existing pipelines between the Caspian and the Gulf.

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Not every proposed pipeline will become a reality, but clearly a new transportation network, driven by petroleum projects, is coming to life.

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The oil industry's re-emergence as a strong force in the Caspian is one of the great stories of our day. As oil projects succeed, investor confidence will rise, allowing the region to diversify its economy and open doors to a new generation of entrepreneurs.

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This region was described in the 13th century -- and still is today -- as a link between East and West, a fulcrum between two powers.

But the Caspian is more than a stopping point on the way to somewhere else. It's a rich, dynamic region in its own right -- a region whose natural resources are complemented by a wealth of cultures and a collective will to join the global economic community.

In Central Asia, we understand the importance of working with both national and local leaders -- the importance of being a part of the community, not just a passer-by.

In Kazakhstan, people know us for our oil field technology, but equally for our high environmental and safety standards.

They also know us as the people who built houses for flood victims, provided a heating plant and a bakery for the town of Atyrau. They know us as the people who support medical clinics, orphanages and schools.

Technical and business skills count for much. So, too, do commitment and credibility.

No one living in the Caspian countries expects things to remain the same. Change has become a constant. Imagine, then, how important a long-term commitment is -- how important is that strand of security in a turbulent environment.

Commitment in the Caspian goes beyond the daily demands of business, beyond the complexities of politics and beyond the fits and starts of new economies.

It means supporting -- long-term -- the independence of Caspian states. It means promoting regional cooperation. It means ensuring energy security and increasing and diversifying world energy supplies.

Commitment doesn't come easy. But, like the many great efforts that advance nationhood and support meaningful economic transitions, it is essential -- and it is, ultimately, rewarding.

Thank you very much.




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low honorees, members of the Asia Society and guests. I am very pleased to be here.