Why The West May Come Up Empty In The World's Biggest Oil Patch

Just a year ago, remote Kazakhstan was considered the world's brightest energy frontier. Oil companies, led by Chevron, Elf Aquitaine, and Agip, flocked to its landlocked steppes and deserts to exploit the vast petroleum wealth and the pro-business policies of Nursultan Nazarbayev, the burly President of this former Soviet republic.

That was then. Now, several huge energy projects, not to mention Kazakhstan's economic future, face daunting obstacles. Would-be investors in Kazakhstan must contend with Russia's reassertion of its regional power, haggles over pipeline routes, and rising Kazakh nationalism. The turmoil is threatening even the showpiece $20 billion, 4.5 billion-barrel Tenghiz project pursued by Chevron Corp. since 1987. In early May, Chevron announced it was cutting spending at Tenghiz, stirring speculation that the project is in trouble.

Other potential investors are closely watching events in Kazakhstan and the fate of the Tenghiz project in particular. Because Kazakhstan has huge hydrocarbon deposits and a long history of dealing with Western oil companies, it is considered a bellwether for the upstart countries on Russia's southern tier.

The big oil projects planned for these countries already are having similar problems. In Azerbaijan, probably the most promising hydrocarbon lode after Kazakhstan, an international consortium including Amoco, BP, Statoil, Pennzoil, and Unocal finds itself stymied by local political chaos and Russia's muscling in on the oil wealth.

ETHNIC TURMOIL. At the same time, nascent Kazakh nationalism also has investors worried. After two centuries under Moscow's sometimes brutal sway, many Kazakhs are demanding to have their language, culture, and traditions restored and to have wealth redistributed to them from ethnic Russians. Accounting for 39% of Kazakhstan's 17 million people, Russians claim that they are encountering resistance to their ownership of property and are now meeting discrimination in business and in university admissions. There have been at least 20 clashes this year between Russians and Kazakhs. Any sustained armed conflict is likely to prompt calls for military retaliation from Russia's defense sector and its nationalist legislators. Says Professor Nurbulat Masanov, a historian at Kazakhstan State University: "The possibility of political collapse is becoming serious."

This ethnic tension arises just as Russia is trying to reassert claims to the oil wealth of these lands. Kazakhstan, Azerbaijan, and Turkmenistan are landlocked--which strengthens Moscow's hand. The Yeltsin government is twisting arms to make sure that virtually all pipelines from these places have their terminals at Russia's Black Sea port of Novorossiysk.

The Russian drive appears to be strongly influenced by Prime Minister Victor Chernomyrdin, a career gas-industry boss, who "has a sense of the importance" of all this, says Julia Nanay, an analyst at Petroleum Finance Co., a Washington-based consulting firm. Russia wants a slice of its neighbors' oil and gas revenues--through transit fees or otherwise. It also is seeking a choke hold on the Caspian countries' exports to make sure they don't displace Russia's output to Europe or use their earnings to turn themselves into Central Asian Libyas. Moscow has thousands of troops in the region to back up its demands. In the latest pressure move, the Russians, citing an old Soviet-Iranian treaty, are calling the Caspian Sea--where Azerbaijan, Kazakhstan, and Turkmenistan claim promising fields--a Russian-Iranian lake.

DIRE STRAIT. Even if Western companies give in and send exports through Russia, problems are likely to continue. Turkey also wants the pipelines and their revenues, and it is raising environmental concerns about too many oil tankers going through the Bosporus Strait. Iran is another possible route for exports, but Washington is determined to freeze Iran out. Some Western companies are pushing for multiple pipelines to make certain they can't be held hostage by a single power.

There also is uncertainty over who will pay for the pipelines. Right now, Chevron is balking at bearing most of the more than $1 billion cost of building a line eut of Tenghiz. The company had been working with other members of the Caspian Pipeline Consortium, including Kazakhstan, Russia, and the Oman Oil Co., which is headed by Bermuda-based trader John Deuss. Both Russia and Kazakhstan agreed to contribute only existing pipelines as their share. Oman would offer only a feasibility study, while requiring Chevron to put up most of the equity and shoulder the risk.

Still, Chevron won't be able to back away easily from Tenghiz, one of the world's last giant new fields. The California major is basing its growth strategies over the next two decades on new overseas projects, such as Tenghiz. Chevron and other companies pursuing former-Soviet megadeals will try hard to make them work. But some are beginning to wonder if they are chasing illusions.

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