Challenge of getting oil to market

ATYRAU, Kazakhstan – Even as the petroleum industry continues
drilling in the Gulf of Mexico at considerable expense and risk, a single field
here in Central Asia stands ready to produce two-thirds as much oil each day as
the entire gulf does, with less danger to the environment.

But 30 years after its discovery,
this field, known as the Tengiz, is still running at only about half speed.
Blame geopolitics, not geology.

The problem with the Tengiz field,
whose lead operator is the American company Chevron Corp., is not a matter of
extracting the oil. More than 100 working wells have already been successfully
drilled into the scrub brush desert of western Kazakhstan, near the Caspian
Sea.

The challenge is getting the oil to
the market. The Tengiz field, one of the world’s largest known petroleum
reservoirs, is tied to a 1,500-kilometer pipeline to the Black Sea that the
Russian government has declined for years to expand. That refusal has held even
though Chevron is a minority partner in the Russian-led pipeline, the Caspian
Pipeline Consortium, or CPC, which agreed a dozen years ago to more than double
its carrying capacity when demand required.

As a result, instead of the 600,000
barrels a day from the Tengiz field that the planners had envisioned by now,
Chevron has been limited to pumping about 420,000 barrels through the CPC
pipeline to the Black Sea – the nearest entry point to international sea lanes.
And Chevron has held off on further production investment that would raise the
daily total to about a million barrels. (By comparison, the Gulf of Mexico’s
daily output is about 1.5 million barrels.)
For now, some of the Tengiz oil that cannot be accommodated by the pipeline moves
via a costly bucket brigade of ships on the Caspian and overland railway
tankers to the Black Sea. The effort has required Chevron to become
Kazakhstan’s largest railroad operator.

“If Chevron had our way and
everything worked beautifully, we would have CPC expanded five years ago,” said
Guy Hollingsworth, managing director for Chevron in Europe and Asia, referring
to the pipeline.
Chevron, though, does not decide. As the pipeline’s controlling partner, Russia
has declined to expand it while trying to line up investors and international
rights-of-way for a second, separate pipeline that would provide the next leg
of the oil’s journey by an overland link between the Black Sea and the Mediterranean.

Besides further controlling the
transport of oil in the region, Russia is seeking to bypass shipping through
the Bosporus Straits in Turkey, the typical passage out of the Black Sea, which
is a potential bottleneck already operating at full capacity for oil tankers.
Russian pipeline negotiations have long been led by the former president and
now prime minister, Vladimir V. Putin, who has taken a keen personal interest
in Eurasian energy politics.

The standoff over the CPC expansion
is a reminder that while environmental concerns pose a big risk to oil production
in the United States and its waters, global politics can pose their own
business risks to the industry.
In the years immediately after the breakup of the Soviet Union, many in the
industry had hoped the Caspian region could become a second Persian Gulf,
lifting the fortunes of companies and countries and helping shift world oil
supplies away from the Middle East.
The Caspian basin “has been a success, but it hasn’t lived up to the
exaggerated expectations,” Svante E. Cornell, research director for the Central
Asia-Caucasus Institute at the School for Advanced International Studies at
Johns Hopkins University, said. “One of the problems has been the Russian government’s
unwillingness to expand the flow of oil,” Cornell said.

Chevron is hardly the only company
in the Caspian region plagued with transportation woes. Finding an outlet to
world markets is a consuming headache of all the companies working in this
foreboding, landlocked oil basin in Central Asia. The operator of a separate,
gigantic Caspian oil field – a group whose partners include Exxon Mobil Corp.,
Shell, ConocoPhillips, Total and Eni – has yet to negotiate a suitable route
for exports. Neither has BP, which is managing a major gas field in this
region.

By comparison, Chevron’s troubles
are more subtle. The Tengiz field is productive and profitable, but is not
yielding nearly as much oil and money as it could be. Chevron executives
emphasize, too, that while exports by rail are more expensive, there is value
in having a diversified transportation system.
Chevron won the Tengiz contract in 1993, signing a deal with Kazakhstan’s
government, whose national oil company has a minority stake in the investor
group developing the field. (Besides Chevron, with its 50 percent stake, Exxon
Mobil and the Russian oil company Lukoil are also shareholders.)
Despite the state oil company’s involvement, the group is periodically squeezed
by the Kazakh government for additional taxes and fines to prop up the national
budget – something that has become more common during the recession. Just this
month, for example, Kazakh authorities announced a new export tax of $2.73 a
barrel, which will cost Chevron and its partners $1.6 million a day. The
government also said it was conducting an investigation into illegal drilling,
which could bring huge fines.

Back in the mid-’90s, a plan took
shape for an overland pipeline through Russia to the port of Novorossiysk on
the eastern shore of the Black Sea. From there it could move by tanker ships,
either to other Black Sea countries or, in most cases, through the Bosporus
Straits in Turkey, down to the Mediterranean and from there, various ports
around the world.

Under a 1998 deal, the Russian
government agreed to the pipeline’s being built in two phases – the first, at a
capacity of 650,000 barrels a day. The second phase would more than double it
to exceed 1.4 million barrels a day “when shareholder forecasts required the
capacity,” according to a CPC fact sheet.
Phase 1 was completed in October 2001. Phase 2, despite pent-up demand by
Chevron and its partners, has yet to begin.

On the basis of the 1990s-era
pipeline plans, the Chevron group invested hundreds of millions of dollars
drilling wells and bringing them online. The even bigger expense, though, was
constructing massive multibillion-dollar processing plants to remove the
lethally poisonous hydrogen sulfide gas from the petroleum to make it fit for
sale on the global market. Six such plants are now up and running.

The last to be built, at a cost of
$7.4 billion, is a behemoth of pipes and tanks that, in a recent visit here,
shimmered in the desert heat and occasionally issued a hissing burst of flame
from one of its towers. The complex separates oil from vast quantities of
hydrogen sulfide, then re-injects some of the gas into the earth. Yet even
before the plant was finished, Chevron learned that that pipeline expansion,
which would enable the company to export the plant’s output  would not be done in time.

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