PROPOSED CHEVRON TENGIZ VENTURE STALLS AMID SOVIET POLITICAL SQUABBLE
The status of foreign investment in Soviet oil and gas joint ventures has reached a critical juncture.
Just as the U.S. is considering granting most favored nation trade status to the U.S.S.R., the joint venture petroleum deal seen as the litmus test for such deals-Chevron Corp.'s proposed addition of supergiant Tengiz oil field to its Caspian Sea joint venture-has stalled amid controversy.
Unconfirmed reports from Soviet officials and other foreign joint venture participants in the U.S.S.R. have Chevron pulling out of the long negotiated, multibillion dollar project after the Soviets rejected the company's terms. Chevron, however, insists the project is still alive, and in an interview with Oil & Gas Journal, Chevron Overseas Petroleum Inc. Pres. Richard Matzke sought to dispel the flurry of rumors surrounding the status of the tentative joint venture agreement.
He said the project is caught up in countervailing political forces in a country deep in the throes of fundamental change and will proceed once that process has begun to sort itself out. The question remains whether key conflicts in that process are resolved quickly or drag out over another year.
"I can't say enough times that this deal is not dead in the water," Matzke said. "The progress that has been made in the (Soviet republics') all-union agreement has shifted authority from the ministry to Kazakhstan. The Kazakhs are in the process of organizing and evaluating how they wish to proceed."
Developing Tengiz, on the northeastern Caspian coast in Kazakhstan and one of the world's biggest oil fields, could boost export of other Soviet crudes and thus hike Soviet foreign hard currency earnings by billions of dollars a year. Some Soviet estimates peg ultimate field production, currently under development by the Soviets, at as much as 1 million b/d.
Recent reports and commentary by Soviet publications generally seen as favoring foreign investment in Soviet industry and movement toward a market economy in U.S.S.R. claimed Soviet officials had offered a "sweetheart deal" to Chevron in the Tengiz project and even alluded at improprieties in negotiations.
Chevron has refuted the claims, angrily denying suggestions of improprieties on its part, and called terms of the deal fair to both sides.
FALLOUT?
It isn't clear what effect the controversy will have on other joint ventures in the Soviet Union. Some Soviet observers see it having a chilling effect on new ventures. Others see the damage as negligible.
In any event, the Tengiz venture has become a political football in the Soviet Union as opposing forces grapple over the country's attempts at economic reform within the framework of a still Communist dominated economy. All of this plays out against a backdrop of a Soviet economy careening toward disaster, led by an ever-worsening energy sector (see story, p. 16).
And the Soviet oil and gas industry is seen as increasingly vital to world oil markets. Further losses in Soviet oil export levels are expected this year and next. That comes at a time when Iraqi and Kuwaiti oil exports are at a fraction of their pre-Persian Gulf war levels, oil demand is expected to rise in the second half, and there is no other spare productive capacity of significant volume in the world.
The result could be supply shortfalls and another oil price rollercoaster in late 1991 and early 1992. Oil market problems also could worsen as dramatic shortfalls of refined products in the Soviet Union force it to step up imports of products, straining refining capacity worldwide.
TENGIZ PROJECT EFFECTS
Accelerated development of Tengiz could have a fairly rapid effect on the U.S.S.R.'s failing oil production and exports.
If Tengiz crude production could be raised quickly to 700,000 b/d, as some Soviet officials believe possible, the U.S.S.R. could hike annual foreign petroleum sales by billions of dollars at current world prices.
Under terms of Chevron's Tengizchevroil protocol reported by the Soviet press, Tengiz crude would be consumed in the U.S.S.R., while an equal value in crude would be exported from western Siberian and Volga-Ural area fields.
Even if charges by independent Moscow newspapers that the proposed Tengiz venture is too generous to Chevron are justified, the deal would yield Moscow a large amount of hard currency when it is sorely needed.
It is critical for the U.S.S.R. to implement major upstream joint ventures with foreign companies if it is to avoid becoming a net oil importer in the next few years. If anything, Tengizchevroil is seen as the flagship of that movement.
The joint venture by Canadian Fracmaster Ltd., Calgary, to boost production from western Siberian wells with a big hydraulic fracturing program appears to be successful and has drawn high praise from Soviet officials.
If the 20,000 Soviet wells reported idle (OGJ, July 29, p. 38) because of equipment shortages can be brought back on stream with foreign assistance, the U.S.S.R.'s oil slump may be halted before production bottoms at a little more than 9 million b/d in 1995, as some western analysts predict.
In the longer term, Japanese, South Korean, and other joint ventures to hike eastern Siberian and offshore Sakhalin Island oil and gas production could add billions of dollars more to Soviet export revenues by the late 1990s.
CHEVRON DEAL COLLAPSING?
Officials with other companies that have joint venture deals in the Soviet Union report negotiations on the Tengiz joint venture have collapsed and Chevron is preparing to pull out of the deal ' The head of joint ventures of the Russian Ministry of Oil and Gas said Chevron and Soviet officials negotiating the Tengiz joint venture could not come to terms, with both sides claiming the other wanted too many concessions to close the deal, an official of another company said.
"I don't know the exact terms of the profit sharing agreement being negotiated," he said. "But they broke off talks and Chevron began pulling out about 2 weeks ago."
Among the sticking points he noted: Chevron reportedly had asked for a 5 year holiday from the Soviet Union's 40% profits tax citing the need to invest about $2 billion before beginning production because of the difficulty of developing oil and gas reserves in the geologically complex harsh environment field.
He also noted opinion was split on whether claims in the Soviet press about the "sweetheart deal" Soviet officials had reportedly offered Chevron would create problems for other joint venture negotiations.
"I thought it would be a negative influence," he said. "But other people in the industry watching the negotiations disagreed."
Those observers compared a breakdown in Chevron's negotiations with the failure of British Petroleum Co. plc to win the joint venture deal to develop Azeri field in the Caspian Sea off Azerbaijan, he noted.
"(They said) BP was too tough on the Russians, and they didn't come to an agreement because BP wanted way too much," the official said.
According to another executive with a Soviet joint venture participating company, Chevron reportedly sought 50% of the venture in exchange for a specified investment to get the Tengiz project on track.
"For a foreign company to not feel like it is at least an equal partner in an oil venture would be very hard for a big company to take ... They would be totally dominated by the Soviets," the executive said.
He also said Chevron employees told his company they were being reassigned to other possible Soviet joint venture projects, and the company's Tengiz proposal is dead.
"As for criticism in the Soviet press, there has been a lot of negative press on that thing, but I don't think it has affected other joint ventures, mainly because (the other ventures) have a much lower profile.
"Chevron's an awfully big target, and they went at it in a way in which Gorbachev witnessed signing their protocol ... I think they just had too high a profile and made themselves a target for the whole antijoint venture movement, if there is one."
Chevron won't comment on details of the joint venture proposal beyond what it has previously revealed (OGJ, June 11, 1990, p. 18).
SOVIET PRESS ATTACKS
If the Chevron Tengiz venture survives, it will have weathered a withering attack by independent, non-Communist newspapers in Moscow in addition to tough Soviet negotiations.
Essentially the attacks were aimed at Soviet officials conducting the joint venture negotiations and not at Chevron.
The initial blast came from an "investigation" by Moscow News, which headlined its story "A Dirty Deal."
Latest attack on the deal was made by the Moscow weekly Argumenty i Fakty (AIF), believed to have the largest newspaper circulation in the U.S.S.R. The publication's editorial board concluded that tentative terms of the agreement are so favorable to Chevron an investigation by an international team should be made to clear the air of charges the Soviet Union may be victimized by a flagrantly one sided contract.
Shortly before the June 12 presidential election in the Russian republic, Moscow News alleged Nikolai Ryzhkov, the U.S.S.R.'s former premier, had engineered a sellout to foreign interests in negotiations to create the Tengizchevroil joint venture.
AIF and Moscow News are pro-West, promarket economy publications. They have in the past repudiated hard line, xenophobic Soviet Communists who tried to undermine the U.S.S.R.'s joint ventures with the West by claiming the Soviet Union was being exploited and would continue to be exploited by capitalist business and financial circles.
AIF's editors, like their Moscow News colleagues, emphasized they were in no way trying to malign Chevron, "which is quite naturally pursuing its own interests." Rather, the newspapers said, the onus for negotiating a contract detrimental to the U.S.S.R. falls on Soviet officials who deliberately or because of inexperience were ready to give Chevron a sweetheart deal.
AIF expressed concern that rumors of irregularities surrounding the Tengizchevroil deal might jeopardize future Soviet joint ventures by providing ammunition for anti-West reactionaries in the U.S.S.R. and raise new fears in the West concerning the Soviet Union's reliability as a business partner if the Tengizchevroil transaction falls through.
Specifically, AIF suggested a scandal involving Soviet-western cooperation in Tengiz oil field development might set back negotiations on a similar arrangement involving huge Shtokmanovskoye gas field in the Barents Sea.
Moscow News, in criticizing the Soviet-Chevron transaction earlier, claimed previous joint venture "scandals," widely publicized in the Commnunist press, were blown out of proportion in an effort to discredit free market and democratic reforms. It said Communist hard liners were, in fact, attempting to divert attention from the Tengiz venture, which it described as "a dirty deal designed to turn a huge Soviet oil reserve into a black hole without yielding a profit (to the U.S.S.R.)."
TENGIZ POTENTIAL
Moscow News tagged Tengiz as the biggest undeveloped oil reservoir in the U.S.S.R.
It said its potential reserves nearly equal those of western Siberia's supergiant Samotlor field, whose cumulative projected production, estimated at almost 20 billion bbl, is by far the largest in the Soviet Union.
A May report in the Moscow newspaper Trud said Tengiz oil production can rise to 700,000 b/d "in the very near future." Trud, like AIF, placed Tengiz's "commercial" (recoverable) reserves at about 7.3 billion bbl (OGJ, June 3, p. 54).
The newspaper said Tengiz's "geological reserves" have been estimated at almost 36.5 billion bbl. That is in line with earlier estimates by some Soviet sources that the field contains as much as 35-40 billion bbl of oil in place.
But Moscow News said there also is a "practically unprospected" second Tengiz near the supergiant field that has been largely defined. The article did not explain whether it was referring to a big new onshore deposit or a possible extension of the Tengiz structure westward to the promising area on the Caspian Sea shelf.
The Soviet weekly cited forecasts that "in less than a decade Tengiz will provide 10% of the U.S.S.R.'s oil flow."
With Soviet crude and condensate production now down to about 10.7 million b/d and heading toward only 9.25 million b/d in 1995, according to a Salomon Bros. estimate, that would indicate Tengiz flow by 2000 will be close to the 1 million b/d frequently mentioned.
Moscow News claimed Tengiz holds more than 2 trillion cu m (70.6 tcf) of gas. That is considerably higher than previous Soviet estimates of 46 tcf of gas in place.
In addition, the newspaper said, Tengiz has 609 million metric tons of sulfur.
"Let us be frank," Moscow News said. "We are faced with the real threat of a permanent reduction in oil exports.
"Tengiz is a trump card in the present day foreign trade game in which the stakes are higher than the life of our generation alone. (The field) is brought up whenever a decision is made on giving us (the U.S.S.R.) loans. Tengiz is used to establish our credit-worthiness.
"This is by no means an attack on the heir to the famous Standard Oil Co. Chevron operates within the framework of legal norms and complies with the laws of business to further its shareholders' profits."
Moscow News called upon the government to reject the proposed draft joint venture agreement and open Tengiz development to competitive negotiations.
Following the first articles by Moscow News and AIF, a follow-up appeared in Moscow News in response to Chevron's denial, in which the newspaper stood by its original claims and further decried the proposed export of about 700,000 b/d of oil under a long term contract at a time when the U.S.S.R. faces a possible need to import oil.
CHEVRON'S DENIAL
After the first Moscow News article, Chevron issued a statement flatly denying there have been any improprieties regarding its negotiations with Soviet officials on the Tengiz venture.
"Clearly someone in the Soviet Union is trying to undermine our proposed joint venture, which already has been negotiated in tentative form," Chevron said. "While this is unfortunate, we're not surprised, in light of the volatile political atmosphere in the Soviet Union.
"We can say, however, that the Moscow News article is irresponsible and contains inaccurate, confused, and distorted interpretations of our tentative joint venture agreement.
"An important factor in our decision to issue this statement is the erroneous suggestion in Moscow News that Chevron has spent money improperly. This is an irresponsible, ludicrous allegation, and it implies that the company's investment in planning, negotiations, technical studies, and travel related to these items is somehow tainted.
"We can guarantee that we have not made any improper payments to anyone. None has been solicited, and we have not made any.
"As a matter of policy, we will not comment on the specific numbers contained in the Moscow News story because the story deals with ongoing negotiations.
"We are confident, however, that anyone who understands our tentative joint venture agreement would agree that it is consistent with commercial, international economic standards and is fair to both partners."
MATZKE'S VIEWS
Matzke suggested the two Moscow newspapers may have been caught up in the recent-and first-presidential election in the Russian republic matching Ryzhkov and Boris Yeltsin, the eventual victor.
Ryzhkov had a key role in creation of the American Trade Consortium, the group of U.S. companies that first forayed into emerging joint venture opportunities in the Soviet Union as perestroika was getting under way in 1988. His opposition exploited that role in the election, Matzke said.
"It looked to me like they took a lesson from the U.S. and the western press and decided to join in a little bit of political mudslinging against the opposition," Matzke told OGJ. "They had to pick up some issue, and they decided, well, here's something Ryzhkov has participated in, putting together what has become one of the first big resource ventures in the Soviet Union, and let's see if we can find something wrong and spin it around."
The meat of the controversy, Matzke contends, came after Moscow, Kazakhstan, and Chevron agreed to terms of the proposed joint venture, put together a feasibility study, and submitted both for official review.
"The Kazakhs orchestrated a blue ribbon committee of experts that represented a cross section of society ... to take a look at this," Matzke said. "At the same time, the central government, probably resisting the reform minded changes of their leaders, said we're going to have our old traditional Gosplan type review. So another committee was assigned the job of reviewing our project. Now all of a sudden we're the ham in the sandwich between two review committees, both of which are trying to establish their turf."
The resulting conflict, said Matzke, has mushroomed into a political football "to the extent that there are mistakes, innuendoes, and confusion in the Soviet media. They took advantage of these two committees reporting substantially different results and opinions of our project, and that's where we sit today.
"Admittedly, both sides have gone into the trenches ... until the dust from the political elections in the Russian republic has ended and until the media have found another crisis to worry about."
Matzke returned to Moscow in late July to gauge the status of the joint venture before the review committees.
"Essentially, it was a week of nothing but optimism to get on with this thing. Now that most of the conflict has settled down, they felt it was time to get back to the negotiating table, which both of us have avoided the past month while all this activity was taking place."
At the same time, Tengizchevroil was a topic of discussion during the Bush-Gorbachev summit.
"it would be a terrible mistake to imply that this thing has fallen apart. But I don't think it would be a mistake to say we've been hunkered down in the trenches the past month until the dust settled over events that we don't think were really directly related to our project. They were related to ... changes in conditions in the Soviet hierarchy."
CHEVRON PERSONNEL STATUS
Responding to reports that Chevron had reassigned employees assigned to Tengiz, Matzke noted Soviet officials would not approve Chevron visas to Tengiz during the past few months.
"We had geared up for about 300 people by Sept. 1. We're not going to let our people stand around and twiddle their thumbs ... Those people are going to be working on something else because they are not working on Tengiz," he said.
Safety reasons were cited in the denials.
"The energy minister went to Tengiz to start up the first oil and gas processing plant. That's a high personal risk deal. Anybody who's starting up a hydrogen sulfide plant is not going to want nonessential people around. The plant is running fine, but it's still essentially in start-up condition. The minister said it would be in the interest of all of us not to have Chevron people around in the event we had some sort of incident. That's why we're not getting visas.
"This is some of the sourest crude you've ever laid your eyes on. This is high pressure, sour crude, and that's why it's all sifting in the ground and not being produced."
Matzke estimated recovery of 30 lb of sulfur for every barrel of crude produced.
Tengiz plans involve an oil and gas processing plant for each 65,000 b/d of production, amounting to a huge complex costing about $1.5 billion, Matzke pointed out (OGJ, Sept. 17, 1990, p. 68).
"They have one that's running. They have two in various stages of construction. That's one of the hangups with this project: You don't just connect a pipeline to the wellhead and send the oil off to an export terminal somewhere. You go through a whole desulfurization process for sour crude, and that (calls for) refinery type caution."
MAJOR STICKING POINT
A major sticking point, Matzke contends, is distribution of revenue. He cited Yeltsin's recent announcement that the Russian president had initialed the final paragraph of the all-union agreement. That final paragraph deals with distribution of tax revenues.
"But we have had initialed agreements before, and they don't necessarily carry a lot of weight in the Soviet Union."
Because the republics don't truly control their resources until the all union agreement is in place, said Matzke, the Kazakhs aren't likely to approve any deal until the all union agreement is final.
"If it takes a year for them to do it, then it takes a year for us to cut a deal, I imagine. If they do it next week, our deal will come to a close much quicker.
"These republics are right on the threshold of getting control of this stuff. And they aren't about to let a deal go through on a set of terms that won't apply for the next 15 years."
Matzke also criticized the Soviet media for overlooking the benefits of a major Chevron contribution toward development of the urban infrastructure in the Tengiz area.
"The Soviet media have never discussed the amount of jobs that would create, the trickle-down (effect) ... Things that would flow to the benefit of affected people without worrying about the distribution of tax revenues," he said.
Matzke also offered a word of advice for companies seeking to invest in the Soviet Union:
"You spend months talking with one organization, then you find out they're through, and you switch over to another one. That's precisely the drill we're going through. Now it's suggested that the Kazakhs are in control, and why don't we just sit down and modify arrangements a little bit that meet the Kazakhs' needs? Well, that's just one more iteration in a very long iteration of different-call it organizing management, or perceived people in control-in the Soviet Union."
CONTROVERSY FALLOUT
The Tengiz controversy may halt some new entrants' efforts to participate in the joint venture scramble in the Soviet Union but not slow the overall momentum for those with a foot already in the door, some Soviet observers contend.
George Reese, Ernst & Young country managing partner in Moscow, thinks the controversy should be viewed within the context of the political drama playing out in the Soviet Union.
"Overall," he said, "the climate in the Soviet Union is more positive than it has ever been. Potential joint venture areas are getting more into a tender situation. It's opening up and getting more competitive, and that's not unhealthy."
Reese contends that in considering the Tengiz controversy focus is directed at how the deal was handled, it is easy to forget the Chevron deal is unique because Chevron was blazing a trail in the U.S.S.R.
"People forget Chevron has been negotiating there for years, and when they came, the environment was completely different. Now a company begins with the local production association, works on up through the republic, and then on to the ministry in Moscow. Chevron started at the center."
Reese said observers of the controversy also tend to forget the U.S.S.R. "is still a Communist country, and there are many there who still believe very strongly that a move to a market economy is wrong.
"Something the West is going to have be cognizant of is that when you're talking to a typical Soviet about a production sharing contract ... you can't be sure all Soviets really grasp what that means.
"This (Tengiz controversy) could slow things down, but it won't stop the movement. The Soviets need this investment too much, and foreign companies need too much to be here. This is it. This is the place everyone's going to be for some time, and it has to be viewed as a long term situation.
"The pendulum will be swinging back and forth for a long time as the Soviets make sure they're not being taken advantage of.
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