Why Soviet Oil Wells Won't Be Gushing Soon

A mirage? For more than three years, executives at Chevron Corp. have been tantalized by visions of the 25 billion-barrel lake of oil under the dusty terrain of Kazakhstan in Soviet Central Asia. That's 2.5 times the size of Alaska's Prudhoe Bay when it was discovered in 1968. But every time Chevron felt it was close to securing drilling rights, its megadeal vanished. One problem was the tussle for control between the Kazakh and central Soviet governments. And Chevron's deal was singled out forattack by Moscow hard-liners, who branded it a giveaway of precious natural resources.

Suddenly, Kazakhstan beckons again. The aftermath of the abortive coup has sent Soviet hard-liners packing and shifted power to the republics. That bodes well for Chevron and many other Western oil companies that have been getting bogged down. Myriad problems remain, but oil executives and industry experts see the door opening to full-scale Western production and exploration in the Soviet Union, which has the largest oil reserves outside the Mideast. One optimist is James H. Giffen, president of the American Trade Consortium, a multicompany negotiating group that includes Chevron. "If the Kazakhs take control of this," he says, "Chevron will go forward by the first of the year or earlier."

BEDEVILED. Such confidence is based on a simple fact of life: The Soviet Union and its republics are heavily indebted and struggling economically yet have few products the world wants to buy. As the world's single largest oil producer, the Soviet Union earns nearly half its foreign currency from oil exports. But bedeviled by outdated technology and problems with equipment and transport, production and exports have been falling steadily (chart). No matter how Soviet politics shake out, only massive investment and advanced technology from Western oil companies can turn the situation around.

Today's enthusiasm won't get huge numbers of Western-owned oil pumps bobbing on the Soviet landscape next year or even the year after. First, the Soviet central government and the republics need to resolve questions of sovereignty over oil. And most of the republics have yet to finalize critical laws on taxation, private property, and repatriation of profits. Western companies may be rushing to sign agreements but won't make huge investments until they're reasonably confident they can get their money back. "Everything we take for granted is new to them," says Constantine S. Nicandros, chief executive of Conoco Inc., a Du Pont Co. unit that hopes to begin production in Siberia by 1993. He adds: "It'll take years for Conoco to be a sizable presence."

Indeed, all the changes could create new obstacles. Deals already being negotiated with Soviet ministries may have to be renegotiated with the republics. And even if the republics grant drilling rights, Western producers need access to pipelines and other transport links. It's not certain who will control those.

Then, there are difficulties arising from the Soviet Union's sheer size and harsh climate. Jebco Seismic Ltd., a London-based oil-services company, is looking at one field in eastern Siberia that's 500 miles from the nearest pipeline. Other infrastructure, such as roads and warehouse facilities, also must be built before large-scale drilling becomes viable in many areas. "We're running a marathon here, not a sprint," sighs one European oil executive before jetting off to Moscow again.

TRANSPORT ANXIETY. Infrastructure has become a major issue in Amoco Production Co.'s negotiations to develop a huge oil field in Azerbaijan. To avoid building a costly pipeline, it is seeking an oil-swap provision by which Amoco would receive crude at an export location in return for oil it pumps from the region. "The whole question of how oil will be transported will be very significant," says Peter Kennel, an Amoco vice-president.

Western oil companies can probably expect more help from their own governments, which are eager to find ways to aid the Soviets. The European governments are aggressively pushing a plan for an energy charter that would commit the Soviet Union and its key republics, as well as Eastern European countries, to a raft of Western-style legal rights on energy investments. If signed, it would ease many oil company concerns.

Thane Gustafson, a Soviet oil watcher in the Washington office of Cambridge Energy Research Associates, predicts that the Bush Administration will also be backing Big Oil with more determination. "Yeltsin will be back to the West, begging, and the U.S. has no money," Gustafson says. So the U.S. will help pave the way for the Soviets to receive crucial needed private investment. For example, the Administration could put oil deals and oil-related issues higher up on the agenda in bilateral meetings with Soviet and republic officials. Or it could sign a tax treaty with the Soviets or various republics that would eliminate the fear of companies being taxed doubly--once abroad, a second time at home. Britain has already signed such a treaty. And Gustafson thinks a more positive Administration attitude could loosen purse strings at banks for financing oil deals.

Even before the coup, a handful of oil companies had already made some headway. In June, Amoco signed a pact to help the Soviets develop a field in the Caspian Sea. France's Societe Nationale Elf Aquitaine last year won the right to search for crude on a 13,500-square-mile tract in Kazakhstan. But signing papers is one thing; drilling for oil is another. Elf, for example, has been bogged down in difficulties over taxes, sharing of local costs, and housing for employees. Seismic studies, scheduled to start four months ago, haven't yet begun.

MAJOR CURE. The best progress has been made by aggressive independents. In July, White Nights, a joint venture between Houston-based Anglo-Suisse and Salomon Brothers Inc.'s energy unit, Phibro Energy, became the first foreign driller to export Soviet crude from its fields in western Siberia. It has just ordered a fourth drilling rig and is negotiating final details of a second venture covering nearby fields.

Yet at just 20,000 barrels a day so far, White Nights is a drop in the bucket. Only the majors can cure the Soviet oil malaise. While Chevron has received the most attention, other titans such as British Petroleum, Exxon, Royal Dutch Shell, and Unocal have all been negotiating with authorities and hope to clinch deals in the next year or so. Still, no matter how quickly the Soviet republics and oil companies get around to signing deals, it will be at least a decade before Soviet gil production gets back to the levels of 1988, a peak year. With some of the richest and least-tapped reserves in the world, the region remains one of the most alluring spots on earth for oilers.

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