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Subject: DNI-NEWS Digest - 19 Feb 1998

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There are 2 messages totalling 449 lines in this issue.

Topics of the day:

1. RFE; Turkmenistan/Iran: Oil Powers Race For Pakistan Market
2. Big Oil's pipe Dream


Date: Thu, 19 Feb 1998 23:57:34 -0500
From: Rahim Bajoghli <rbajoghli@JUNO.COM>
Subject: RFE; Turkmenistan/Iran: Oil Powers Race For Pakistan Market

Turkmenistan/Iran: Oil Powers Race For Pakistan Market

By Michael Lelyveld

Boston, 10 February 1998 (RFE/RL) -- After more than two years of delay,
the race to deliver gas to Pakistan has entered a new phase with Iran's
announcement last week that it will compete with Turkmenistan for the
strategic eastern market.

Competition appears inevitable as the result of the decision by one of
Iran's biggest organizations to invest $3 billion in a gas pipeline from
the Persian Gulf to Pakistan.

The huge investment comes from Bonyad-e Mostazafan va Janbazan (the
Foundation for the Deprived and the War Disabled), probably the largest
of the charitable institutions which control much of Iran's nationalized

According to the official news agency IRNA, the bonyad will join in a
consortium with Royal/Dutch Shell, British Gas and Petronas of Malaysia
to build a 1,400-kilometer pipeline to Pakistan from Iran's South Pars
offshore gas field in the Gulf. The deposit is the subject of a
$2-billion contract with Total SA of France, Russia's Gazprom and
Petronas to produce 20 billion cubic meters of gas per year starting in

At the same time, Turkmenistan is trying to speed up its own plans with a
consortium led by U.S.-based Unocal Corp. to pipe gas through Afghanistan
to Pakistan and possibly the larger market of India. A Unocal official
said last week that the company hopes to build the $2-billion line in the
next two years, also to supply 20 billion cubic meters per year.

The situation has made Turkmenistan and Iran both energy partners and
competitors. Since December, Turkmenistan has been supplying gas to
Iran's northern cities where fuel is in short supply. Most of Iran's
energy wealth is in the south, allowing it to compete for the Pakistani
market if it can successfully develop the South Pars field.

Both plans have disadvantages, making it unclear which one will win.
Turkmenistan's plan, which has U.S. backing, depends on peace in
Afghanistan. No financing is likely until stability comes to the divided
country, another Unocal official said last week. A further complication
is a lawsuit against Unocal by the Argentine company Bridas over an
earlier version of the Afghanistan pipeline plan, which Turkmenistan
decided to cancel.

The Iranian pipeline avoids Afghanistan and its problems altogether, but
it may run afoul of U.S. policy if Washington decides to apply sanctions
to the South Pars deal.

Although the Clinton administration has postponed a sanctions decision
several times, the latest reports indicate that an announcement will come
this month.

Iran needs western technology to develop the vast South Pars field, but
it may not need multilateral financing to raise its share of the pipeline
costs. The bonyad, a tax-free institution in
Iran, is believed to have ample funding of its own, as well as access to
government loans. On the other side of the argument, Iran's route to
Pakistan may be longer and more expensive.

There are serious questions as to whether the Turkmen and Iranian plans
can both succeed. While Turkmenistan's project is aimed mainly at serving
the Pakistani populations centers in
the north, the Iranian pipeline would join Pakistan's gas system in the
south, requiring the direction of the country's central line to be
reversed in order to get the gas to Islamabad.

It remains to be seen whether Iran, Turkmenistan and their respective
partners could agree to share the Pakistani market, given the problems of
serving both parts of the country and the high cost of building separate

Adding to the competition and the complexity is the role of Gazprom,
which recently announced that it would not join in the consortium to
build the Turkmenistan pipeline through
Afghanistan. The decision is probably good news for Turkmenistan, given
the republic's many problems in negotiating with Russia for gas
deliveries to Europe.

Western analysts have been concerned that Russia might use its role in
the Unocal consortium to frustrate progress in order to continue its
domination over Turkmenistan. Instead, Gazprom has cast its lot with the
Iranian development at South Pars and may eventually take a part in the
pipeline to Pakistan. The move makes Gazprom's competition with
Turkmenistan appear clear.

The relationship between Iran and Turkmenistan will probably be more
complicated. The two countries must still cooperate in building a
pipeline across Iran to Turkey, a project with vital interests for both
Turkmenistan and Iran. Until development gets underway at South Pars,
Iran will also depend on Turkmen gas for a portion of its domestic energy

That connection is likely to keep relations between Iran and Turkmenistan
from turning into the kind of conflict that has marked Turkmen
negotiations with Russia over pipeline access to Europe for the past
year. But it remains to be seen how a formula can be found that will
serve all interests in the race to supply gas to Pakistan.

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Date: Thu, 19 Feb 1998 23:49:55 -0500
From: Rahim Bajoghli <rbajoghli@JUNO.COM>
Subject: Big Oil's pipe Dream

March 2, 1998
Big Oil's Pipe Dream

Chevron thought it could turn a windswept corner of Kazakhstan, site of
the largest oil strike in 20 years, into the next Houston. Five years
later, the American oil giant is wiser but not richer.

Craig Mellow
Reporter Associate: Jeremy Kahn

To the loving eye of Phil Meek, president of Chevron Corp.'s Kazakhstan
subsidiary, the Caspian Sea city of Atyrau looks a lot like West Texas.
"It's flat, alkaline, not many trees," he says.

Yet few visitors would take Atyrau, where Chevron is gearing up
to exploit its biggest oil strike in decades, for what company
people like to call it: the next Houston. Idle Kazakhstanis line the
riverbank next to Chevron's new fitness center, fishing with stick and
twine like time travelers from Mark Twain's backwoods. An old woman, her
head wrapped in red flannel, drives a flock of
goats across Lenin Avenue, not far from where the San
Francisco-based petroleum giant plans a new regional headquarters. The
one public accommodation in sight: foot-washing troughs where the 200,000
Atyrauans swab their boots before daring to enter a government office.

And Atyrau is high civilization compared to where the oil actually
is. A rugged five-hour drive past loping camels and a very great
deal of swirling dust brings you to the wellhead at Tengiz. "We
had grass this summer, which is unusual," Chevron's on-site
public affairs chief Sherri Zippay reports, mustering all the
combined optimism of her home in California and her training in
PR. "This place kind of grows on you." It had better if you are
planing to stay. Temperatures at Tengiz range from 110 degrees
above zero Fahrenheit to 40 below.

But to Chevron and its big oil competitors, the oil reserves in
Central Asia should be well worth the trek. Tengiz is the Caspian's
richest proven strike--the world's largest new oil field in 20 years,
Chevron says. The company's planned investment of $20 billion over four
decades is the biggest risk anyone is taking on the region. And Chevron
has already spent more than any other major oil company in the
region--although it will not break out numbers. But its big-oil rivals
are all vying for a share of the riches. Across the water in Azerbaijan,
Amoco and British Petroleum are fronting the Azerbaijan International
Operating Co. (AIOC), which plans to sink $8 billion into offshore
drilling. Exxon and Pennzoil are among their ten junior partners. Shell
leads a consortium exploring offshore deposits on Kazakhstan's side of
the Caspian, which petroleum experts predict will be on a par with
Tengiz. Mobil is backing Shell and lately took a 25% stake in Tengiz

On the surface, big oil's reasoning looked unassailable. The
Caspian shelf could produce some 5% of the world's oil by 2010.
Assuming a price of $20 a barrel--which analysts consider a
reasonable benchmark for the medium term--the region could
generate about $27 billion a year in gross revenues. Tengiz alone
is slated to pump 700,000 barrels a day at its peak, which adds up
to $5.1 billion a year. That is nearly one-third of Russia's entire
current export volume. Tengiz crude, moreover, is almost
preternaturally high quality, rating over 50 "degrees of gravity" on the
standard American Petroleum Institute scale. Brent North Sea oil, the
global benchmark brand, runs no higher than 38 degrees.

If all goes well, "Chevron's going to have this giant money-making
machine for the next 50 years," gushes Steven Allen, petroleum analyst at
Deutsche Morgan Grenfell in Moscow.

But all is not going so well. Chevron's quintessentially American
assumption was that its technology, management, and wealth
could fast-forward the history of a place like Kazakhstan, where
annual per capita income is just $1,300. It also figured that
provincial former Soviet functionaries could be hastily reeducated
and transformed into perspicacious business partners, and that the
agony of a ruined empire could be glossed over with profits from
petroleum. Yet half a decade after Chevron signed the deal with
the Kazakh government, not much has happened in Tengiz. That's
in large part because neither Chevron nor its fellow big oil
companies on the other side of the Caspian have solved the key
problem they started out with--how to get their crude to world
markets without transport costs eating up the profit.

The crux of the problem lies in simple geography--they don't call
Kazakhstan Central Asia for nothing. The vast, mostly empty
country--one-third the size of the continental U.S., with only 16 million
people--is equally remote from the world's two main oil importing
regions: Western Europe and East Asia. Such distance is not a serious
problem in the oil business if it can be covered by ship--an easy enough
proposition for producers in West Africa, East Asia, or the Persian Gulf.
But the Caspian, though called a sea, is surrounded by land--five
different lands, in fact, and none of them easy places to do business.
The northern shore is dominated by Russia; the southern edge, by Iran.
Azerbaijan is on the west side of the Caspian, Kazakhstan and tiny
Turkmenistan on the east side.

The ideal export route from Kazakhstan would be south through
Iran to the Persian Gulf, oil executives say. "Considering the
demand growth in East Asia, everybody recognizes this wouldn't
be a bad way to go," says Ray Shepherd, Chevron's representative to the
Caspian Pipeline Consortium, which includes the governments of Kazakhstan
and Russia as well as Chevron, Mobil, and half a dozen other oil
companies. In time it might be a viable way to go. But even with a
moderate new President in Iran, it is risky to bet on Washington's
relaxing its economic embargo of Tehran. So serious pipeline negotiations
have focused on the northern route through Russia. At least Chevron
doesn't have to contend with the prospect of piping the oil through an
unstable region like Chechnya, as do BP, Amoco, and the other members of
the AIOC consortium in Azerbaijan.

Chevron's plan: to build a 900-mile-long pipeline around the north
side of the Caspian Sea and then through Russia to the Black Sea
port of Novorossisk. From there the oil will be transported on
tankers across the Black Sea and into the Mediterranean. But to
get to its destination, the oil must pass through the Bosporus
strait--in other words, right through the middle of Istanbul, with a
metropolitan population of 12 million. Turkey's government
insists this is out of the question for environmental reasons. "I
would like to see them talk about sending supertankers down the
Thames or the Hudson," snaps a diplomat at the Turkish embassy
in Moscow. "There seems to be a feeling that Turkish lives are
worth less."

Despite such heated rhetoric, many oil executives consider
Turkey's intransigence a bluff to jack up its fees. But with the
Tengiz-Novorossisk pipeline's cost estimated at $2 billion, it is an
extraordinarily expensive bluff to call. The Turks have helpfully
suggested bypassing the Bosporus with a long pipeline through their own
territory (via Georgia) to the Mediterranean port of Ceyhan. But aside
from costing up to $1 billion more, the route runs through the Kurdish
regions of eastern Turkey, where armed insurgency has simmered for
decades. So far, not a single meter of any pipeline has been built.

Instead Chevron has started shipping about half of the 160,000
barrels a day of crude it's producing at Tengiz by rail to Latvia or by
barge to Baku, from where the oil is sent overland to Batrimi, Georgia,
on the Black Sea. (The other half is sold locally.) To its own amazement,
the Tengiz Chevroil joint venture made a small operating profit last
year. "If you had told me a year ago we could make money putting oil on
railroad cars, I would have thought you were crazy," says Carl Burnett,
who directs Mobil's share of the Kazakhstan joint venture. But Chevron
didn't come to Atyrau to resurrect Rockefeller-era technology. If it is
to tap the project's full potential, it must figure out a way to build a

And fast. The corporate descendant of Rockefeller's mighty
Standard Oil of California, Chevron has slipped to ninth place
among the world's petroleum behemoths. With revenues last year
of $38.7 billion, the company is not exactly small. But it needs a
bold move to remain a player in a field dominated by giants like
Exxon and Shell. The Tengiz deal, signed before the Republic of
Kazakhstan's second birthday in 1993, seemed to fit the bill,
adding 25% to Chevron's worldwide reserves in one $20 billion
swoop. The agreement also looked like a coup for the young Kazakh
government, which had only to hand over the keys, sit back, and collect
80% of Tengiz's earnings.

But then Chevron got hit by a nasty surprise in the guise of John
Deuss. This peripatetic Dutch tycoon, with a fortune clocked at
well over $1 billion, works mostly out of Bermuda, where he runs
an outfit called Trans-World Oil. He sniffed Kazakhstan's potential
early, though, and went after it in a novel fashion. Deuss got himself
appointed president of the national oil company of Oman, one of the
Persian Gulf's petroleum-soaked principalities.

Soon after Chevron signed off on Tengiz, the Kazakh government
awarded to Oman Oil 25% of a consortium formed to build the
Tengiz pipeline. The Russian and Kazakh governments each took
another 25% of the pipeline consortium, and Chevron was offered
the remaining quarter. There was only one catch: Deuss wanted
Chevron to put up nearly all the money. The company predictably
refused, and there matters stood through 1995. Nazarbayev's
government soon realized that Deuss had merely served to stymie
the project with his demands rather than push it forward.

Finally Deuss and the Omanis parted ways, and the Caspian Pipeline
Consortium started over from scratch in April 1996, with nearly three
years down the drain. Deuss, who retreated to Bermuda, didn't return
phone calls seeking comment.

After Deuss' dust had cleared, a powerful new player emerged in
his place at Tengiz: Mobil. "We were asked to help jump-start the
pipeline," drawls Mobil's Carl Burnett. "But we were wary of doing that
without getting a piece of the field." The Kazakh government was
"reluctant" to yield equity, he recalls. But it swallowed hard and cut
Mobil a 25% share of Tengiz Chevroil, reducing its own stake to the same
size. The company paid $1.2 billion in return.

Chevron and other would-be Caspian oil producers have discovered that no
deal can be altogether firm in the former Soviet Union, where a thin coat
of capitalism sits uncertainly on a body of bad old Communist habits. The
U.S.S.R. lives on, too, in Russia's diplomacy toward its former
provinces, which Moscow cannot in its gut believe are now equal sovereign
nations. Boris Yeltsin's government, to its credit, has never considered
reclaiming by force Kazakhstan's treasures, which in addition to oil
include chrome, copper, zinc, uranium, aluminum, and potentially
gold--the whole periodic table, as patriots claim. But neither has it
resigned itself to Russia's being a mere transit corridor for Kazakh and
Azerbaijani wealth. It wants a big piece of the action.

First off, Russia has threatened to void the most basic
understanding underlying the Tengiz project by declaring that the
Caspian is not a sea after all but a lake. Seas, under international law,
include sovereign coastal waters; most of the Caspian's wealth is within
Kazakhstan's or Azerbaijan's. A lake's resources are divided equally
among its bordering states. Oil people devoutly hope Moscow's
re-definition (quietly backed by Tehran) is yet another bluff. "I don't
think Russia wants to scuttle Caspian exploration over this issue," says
Allen of Deut-sche Morgan Grenfell, "just use it to leverage a better
deal for themselves."

This issue was temporarily put on the back burner after Chevron
in 1995 ceded 5% of the Tengiz Chevroil venture--originally a
fifty-fifty split with the Kazakh government--to Russian petroleum
giant LUKoil for $200 million. "We understood we had to do this
to get the pipeline built, but we did get a fair price for it," Meek of
Chevron says.

Another pound of flesh is being hewn by the four Russian provinces along
the proposed pipeline route. Chevron and partners spent much of last year
waiting for the Russian "pipeline provinces" to hold public hearings on
their "investment feasibility study," the rough equivalent of an
environmental impact statement. That hurdle finally cleared, their papers
bounced back to the federal Environment Ministry in Moscow for several
more months of studying the fine print. Once that approval is obtained,
the pipeline consortium must draft a "construction feasibility study" and
run the gantlet all over again. If the project is not rolling by the end
of this year, Chevron and Mobil have the right to kill this consortium
and look elsewhere. That's not likely to happen. While Chevron is
currently in talks to try to "clarify management procedures" with its
Russian partners, says Mike Libbey, manager of media relations for
Chevron in San Francisco, "we are totally committed to this project. It
is the primary route we envision for export from Tengiz."

Indeed, Moscow's bureaucrats are acting as if the oil companies
have no choice. Ray Shepherd, Chevron's representative in the
pipeline consortium, thinks the real problem is Moscow and the
regions' dickering over tax revenue. With transit levies estimated
at $27 billion over four decades, neither side is rushing toward
any concessions.

Meanwhile, in Kazakhstan things look a bit more hopeful. President
Nursultan Nazarbayev, who very much wants this potentially lucrative
project to succeed, has created what passes in the region for a
pro-business environment. This former Communist Party boss has managed
the ex-U.S.S.R.'s smoothest political transition. He has no use for
Russia's noisy evolving democracy. Kazakhstan's parliament is strictly
pro forma, and local officials, like the lackluster crew ensconced in
Atyrau's "white house," are appointed from above. Yet neither has
Nazarbayev regressed to the demi-totalitarianism of his Central Asian
neighbors, Turkmenistan and Uzbekistan.

Multinational businesses applaud his middle course--no to chaos,
yes to capital. Kazakhstan led the former Soviet bloc in foreign
investment for 1997, drawing $3.5 billion. This was $300 million
more than runner-up Poland and $1.3 billion more than Russia,
where oil investment remains largely thwarted by the
Communist-dominated parliament.

But Nazarbayev's tight ship in Kazakhstan is no more immune to
corruption than Yeltsin's anarchic Russia. For instance, in the
small town of Kulsari, halfway from Atyrau to Tengiz, Chevron
built handsome new houses for flood victims. Local bosses moved
into them instead. Atyrau itself, despite the $50 million Chevron
has budgeted to win over its inhabitants' hearts and minds,
remains a portrait of backwater stasis. It has virtually none of the
cottage industries--hole-in-the-wall bakeries, sidewalk video
rentals--that brighten Russia's bleakest districts.

Things started looking up for Kazakhstan in general, however, around the
start of 1996. Bright young reformers gained the upper
hand in government, breathing life into the country's stagnant
privatization program. Most major non-oil enterprises have since
been flogged to foreign investors. Samsung now dominates
Kazakhstan's copper industry, while its Korean compatriot, Daewoo, owns
40% of the national phone company. A national stock exchange is promised
soon. The streets of Almaty are filling rapidly with Mercedes-Benzes.
Asked where they all come from, central bank governor Oraz Jandosov, the
young reformers' captain, replies obliquely: "Our first goal should be
stopping all the government-related ways of making money."

Chevron promised that 1997 would be the breakthrough year for
Tengiz. All pipeline permits would be stamped by year-end,
executives insisted, and oil would be gushing to Novorossisk by
early 2000. But Chevron now concedes that the deadlines have
been pushed back.

Meanwhile, the price of oil continues to sag. James Clark, an oil
analyst at CS First Boston, puts Tengiz' breakeven price for
current production levels at $15 to $16, about the same price
crude is fetching right now. Increased production--Tengiz Chevroil
announced last year that it would spend more than $300 million to boost
output 50%, to 240,000 barrels a day, by 2000--will of course add
economies of scale. (Current plans call for Tengiz to reach full capacity
by 2008.) But if prices languish in the middle to upper teens, Clark
cautions, Caspian oil in general becomes "a low-margin product." Chevron
concedes that it needs the pipeline to boost production and become more
profitable. Jay Aydin, an analyst at McDonald & Co., says that if Chevron
had anticipated prices this low, it never would have invested in Tengiz.

But he and other analysts say that since the company has already
made a hefty investment, it's worthwhile to keep pumping all it
can, even at the slimmest of profits. And analysts point out that
Tengiz has half a century's worth of reserves. "With a project this size,
momentum is more important than short-term profits," says Laurent
Ruseckas, who follows the region for Cambridge Energy
Research Associates.

Still, no one can guarantee that Kazakhstan will retain its current
political stability. The country's population is evenly divided between
ethnic Kazakhs--descendants of hard-riding steppe
nomads--and Russian-Ukrainian Slavs. Antagonism simmers just
beneath the surface, stoked by nationalists within Russia who
covet northern Kazakhstan's industrial belt, where their ethnic
brethren are a majority.

Nazarbayev, a Kazakh, showed how seriously he takes Slavic
restlessness by moving the country's administrative capital last
year from Almaty to Akmola, a barren, wind-tormented town
whose sole qualification is that it is up north, where the Russians are.

Prosperity tends to dampen such ethnic tension. But six years after
independence, the promises of oil-borne riches have worn thin in
Kazakhstan. "Maybe we'll catch up to you in 200 years," an
Atyrau cabby laughs on learning his fare is an American. "If we're
lucky." One hopes for the sake of Chevron and its partners that its
Caspian adventure will pay off sooner.

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End of DNI-NEWS Digest - 19 Feb 1998