Today Kazakhstan, Tomorrow Russia?

Almost five years ago, Chevron Corp. executives scoured the So viet Union for a major oil project. Finally, they settled on Tenghiz, a huge field in an arid corner of Kazakhstan. Reserves there may be 2.5 times larger than Alaska's Prudhoe Bay. But history turned the deal on its head last August, when the botched coup firmly put the country on the road to disintegration. Suddenly, instead of the smooth Moscow bureaucrats it had become accustomed to, Chevron found itself dealing with newly independent Kazakhs, who took a tough new negotiating stand. By March, the project seemed doomed.

But chalk one up for persistence. On May 18, top Chevron officials and Kazakh President Nursultan Nazarbayev are set to sign an agreement in Washington to create a 50-50 joint venture to develop Tenghiz and sister oil field Korolev. A final agreement is due by yearend.

For Chevron, the deal guarantees a vital new source of crude: Tenghiz holds total reserves of up to 25 billion barrels, with as much as 10 billion barrels recoverable. For Kazakhstan, the agreement means $1.5 billion in investment over the next three years and much more later. When Tenghiz production is in full swing 15 years from now, it could be generating annual revenues of $6 billion at today's oil prices. Kazakhstan's take will be $4 billion, most of which will be plowed into industries ranging from food processing to metallurgy to petrochemicals, says Deputy Prime Minister Kalyk A. Abdullayev, Kazakhstan's chief Tenghiz negotiator. For the rest of the world, the Tenghiz field could put enough new crude on the market to temper OPEC price hikes for many years.

STALLED DEALS. The closely watched Chevron deal comes just as political and economic turmoil is stalling Western investment in the former Soviet Union. At least a dozen major oil companies, for example, are trying to put together similar deals in Russia, Azerbaijan, and different parts of Kazakhstan. But in Russia, at least, the talks have been hampered by stiff oil-export taxes and political chaos.

Take White Nights, a small Siberian oil venture owned partly by Houston-based Anglo-Suisse and Phibro Energy Inc. The 18-month-old deal could founder if Russian lawmakers don't rescind a $5.50-per-barrel levy approved early this year. And Marathon Oil Ltd. and McDermott International Inc. are part of a consortium that had hoped to drill off the island of Sakhalin, in Russia's Far East. But local authorities have slowed down the plan.

The chaos surrounding Russia's fledgling democracy works in Kazakhstan's favor. In Kazakhstan, "there's a very clear authority, a very popular President. They are open for business, and they are serious now," says James L. Smith, a University of Houston economist. The deal with Chevron also sends Russia an important message: "If the Russians don't get their act together, Western companies will start heading to other areas," says Jan Vanous, president of PlanEcon Inc., a Washington consulting firm. Indeed, Nazarbayev is expected to push hard for more U.S. investment during his May 16-23 visit to the White House and New York.

EXCLUSIVE RIGHTS. Still, dealing with the Kazakhs was no easy task for Chevron, which started talking about oil deals with former President Mikhail Gorbachev's government in the summer of 1987. By 1990, working mostly with Gorbachev's people, Chevron had settled on Tenghiz and won exclusive exploration rights. The deal got off track in 1991, when a state commission ripped apart the Tenghiz deal as too favorable to Chevron. It was turned completely upside down last Aug. 31, when Kazakhstan nationalized its resources. By yearend, the Soviet Union and the trade consortium were out of business.

Eventually, Kazakhstan and Chevron got talking again. The inexperienced Kazakhs hired J.P. Morgan, Oman Oil, and Slaughter & May, a London law firm, to help them negotiate with the oil giant. Nazarbayev wanted to prove to Chevron--and the world--that he was no pushover before major Western enterprises. "The weak spot in previous negotiations was that officials of the former Soviet Union didn't get qualified legal people to run the talks," says Abdullayev.

To prove his mettle, President Nazarbayev scotched Chevron's hopes ef winning rights to 50% of the oil revenues from the Tenghiz and Korolev fields. He demanded that Kazakhstan be guaranteed an 87% share of oil revenues after operating and investment costs, but later settled on 80%. The Kazakhs and Chevron will each hold a 50% equity stake in the deal. And Chevron isn't expected to recoup its initial investment for at least seven years. What's more, says Abdullayev, Chevron will be required to make investments and supply technology for the tiny Kazakh petrochemical industry.

Some key issues remain unresolved. One is the logistics of exporting oil. The easiest way is via pipeline to a Black Sea port, but pipeline connections need to be built through Russia, Azerbaijan, or Georgia. All are undergoing some political upheaval.

With oil production in the former Soviet Union in decline (chart, page 32), Russia, Kazakhstan, and Azerbaijan need all the investment they can get. But, as Chevron found, haggling with the newly independent states will require lots of money, fortitude--and persistence.

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