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This Gusher May Finally Start Gushing (Int'l Edition)

International -- Intl' Business: KAZAKHSTAN


Not long ago, communist slogans extolling the working classes decorated the airport road near Almaty, capital of the former Soviet Republic of Kazakhstan. Those signs have since been replaced by propaganda of a capitalist sort--ads by San Francisco-based Chevron Corp. depicting the Golden Gate Bridge and promising a prosperous future for the oil-rich country.

So far the dreams of oil wealth have not been fulfilled. As soon as Chevron signed a landmark deal in 1992 to develop the $20 billion Tenghiz, one of the world's biggest oil fields, the project bogged down. It was stalled by disputes between Chevron and the chief of the Oman Oil Co., a maverick trader named John Deuss. The main disagreement was over how to finance a $1.5 billion pipeline to export the oil from the landlocked country. Oman Oil had control of pipeline rights through the Caspian Pipeline Consortium it headed and was leaning on Chevron to provide most of the financing in return for just 25% of the equity. Chevron said no deal. And there matters stood.

"FAIR PRICE." Now, there's a good chance of ending the impasse. Kazakhstan seems on the verge of cutting a deal with Deuss's most powerful backers, the Russians--to cut Oman Oil out of the action and move ahead with an alternate pipeline deal. "It was promised that by Oct. 1 of this year, financing would be in place for the pipeline. That did not happen," Kazakhstan President Nursultan Nazarbayev said in an interview with BUSINESS WEEK. He says he has agreed with the Russians as well as Chevron and Mobil Oil Corp. to form a new consortium to build an alternate pipeline. A Caspian Pipeline Consortium spokesman responds that the Kazakhs are to blame for the delays.

To get matters moving, the Kazakhs are bringing in some heavy artillery. According to President Nazarbayev, they are negotiating to sell a share of Tenghiz to Mobil Oil. Nazarbayev also says that he and Chevron Chief Executive Kenneth T. Derr have agreed that Chevron may sell 10% of its Tenghiz stake to Lukoil or some other Russian company. Chevron is prepared to sell a stake "for a fair price," Nazarbayev says. Chevron won't comment on details of the talks.

Bringing in Lukoil, which often acts as a surrogate for the Kremlin, would give Russia an incentive to relax its stranglehold on Tenghiz. Russia now controls the only pipeline for shipping oil out of Tenghiz, and it is limiting Chevron shipments to about 45,000 barrels a day, or roughly half of what the field is now capable of producing. The 4.5 billion-barrel Tenghiz eventually could produce many times that amount, but because of the pipeline problems, Chevron suspended capital expenditures this year after investing $714 million.

What may be going on behind the scenes is that Russia is being given a role in Tenghiz in return for backing off on the other big trove of Caspian oil in Azerbaijan. The Clinton Administration has put pressure on the $7.8 billion consortium led by Amoco Corp. and British Petroleum Co. in Azerbaijan to transport most of its oil out through Turkey rather than through Russia's Black Sea ports--as Moscow has demanded. Russia, which is capable of disrupting such plans if it wants to, may now be acceding to the Turkish route as long as it knows it can get a second major pipeline built from Tenghiz through its territory.

CAPITAL CHANGE? If the pipeline problems are sorted out, Kazakhstan will see a much bigger oil boom than the blip that raised expectations three years ago. Already, sleepy Almaty is getting something of a face-lift, as big-time players such as Agip, Elf Aquitane, and Mobil set up shop.

Nazarbayev is also trying to move ahead with liberalizing the economy. He says he is easing conditions for foreign investment in oil as well as other areas. But the question is how wisely he will spend the revenues--if they ever start flowing. One concern is Nazarbayev's peculiar insistence that the capital be moved about 500 miles north to the desolate town of Aqmola, which today lacks enough potable water or housing for the new status. Nazarbayev says that the move is necessary because Almaty is a "dead end" and has outgrown its location. But such a shift appears to be only a distraction from Kazakhstan's main show--namely, getting the oil to flow.By Peter Galuszka in Almaty, Kazakhstan, with Stanley Reed in New York and William C. Symonds in Toronto

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