May 15, 2001	atimes.com

Central Asia/Russia Kazakhstan puts the squeeze on Chevron STRATFOR.COM's Global Intelligence Update May 14, 2001 Summary On April 25, the Kazakh government accused Tengizchevroil, a joint venture extracting oil from the country's massive Tengiz field, of various environmental offenses. Since Kazakhstan's environmental laws are still embryonic in nature and their enforcement lackadaisical, the accusations are probably an effort to wring concessions out of Chevron, the joint venture's operator and largest stakeholder. Astana's heavy-handed tactics bode poorly for foreign investors. Analysis The stakes are high. Tengiz is one of the world's largest oil fields, with estimated reserves of 6 billion to 9 billion barrels. The field is expected to produce enough petroleum to supply the bulk of the Tengiz-Novorossiysk pipeline's 1.34 million barrels daily capacity. The agreements that sealed the Tengizchevroil deal in 1993 are worth at least US$20 billion. Chevron, a US company, should be concerned about the security of its investment. Last May, Kazakhstan booted out another large investor - Belgium's Tractebel - after disputes over the scope and direction of its investments. The natural gas company refused to play Kazakh President Nursultan Nazarbayev's political games, and it was shown the door. The allegations must be a particularly bitter pill for Chevron. Tengizchevroil is Kazakhstan's premier oil project, accounting for almost half of the country's total production. Chevron recently acquired enough equity to secure a 50 percent ownership stake. Tengizchevroil's corporate structure does little to protect foreign investors, however. The Kazakh government controls 20 percent of the venture, and thereby has a direct say in decision-making. Astana has another tool: the Russian firm LUKoil, which together with British Petroleum owns a 5 percent stake in Tengizchevroil. Kazakhstan has shown a willingness to transfer Western shares in major Kazakh projects to Russian firms. Russian natural gas giant Gazprom now controls what used to be Tractebel's Kazakh network. If Chevron confronts the government, Astana can put pressure on the Caspian Pipeline Consortium, which transports Tengiz oil to the Black Sea. Astana controls 19 percent of CPC, a larger share than Chevron's 14 percent. Astana also has an ally in the Russian government, which holds a 24 percent stake in CPC. Russian firms feature here as well, accounting for another 20 percent through various joint ventures. All have a vested interest in maximizing their ownership at the expense of Western firms. Now that all the heavy lifting is done - Tengiz currently produces nearly 300,000 barrels per day and the CPC pipeline is largely completed - Astana has few qualms about pressuring the consortiums into financial concessions. The government well knows that, in league with Russian firms, it can operate the new infrastructure on its own should Western partners prove unyielding. For the Kazakhs, there is one catch. There are even bigger fish to develop in Kazakhstan's sea of oil - the great white of which is the Kashagan oil field. The Offshore Kazakhstan International Operating Company (OKIOC), a consortium of nine multinational oil firms, manages this behemoth's development. But Kashagan lies offshore and is a deep, complex deposit that is as yet undeveloped. Kazakhstan lacks the cash, personnel, experience and technology to exploit the field by itself. If Astana leans too heavily on Chevron, it risks scaring investors away from OKIOC and leaving Kashagan permanently buried under three miles of earth and water. Astana, however, seems willing to take a calculated risk. BP and Chevron are the logical first targets. The UK-based BP, which has limited exposure in Kazakhstan, has been divesting itself of onshore oil investments, opting instead for natural gas or oil deposits offshore. While Chevron is a larger regional player that has no intention of surrendering its oil stakes, its activities focus on Tengizchevroil and the CPC. Chevron has no involvement in OKIOC. There is a possibility Astana can manipulate Chevron without unduly disrupting investor interest in Kashagan. Chevron will undoubtedly appeal to Washington for help, but there is little Washington can do. Moscow holds all the cards in Kazakhstan, while the United States has reduced its involvement in the region. There would be other fallout as well. Non-American firms run most of OKIOC; most are annoyed with the American members who, due to Washington's investment restrictions on Iran, do not back the most economically feasible export route. If Washington becomes too recalcitrant, Chevron and ExxonMobil could find not only Astana and Moscow arrayed against them, but Italy's ENI, Japan's Inpex, the Anglo/Dutch Shell and France's TotalFinaElf, as well. Copyright 2001 Strategic Forecasting, LLC. _________________________________ For republication policy contact: STRATFOR, Inc. 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: info@stratfor.com

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