Pipe Dreams
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    Tengiz refinery
Chevron's Tengiz oil field in northwestern Kazakhstan.
(By David B. Ottaway – The Washington Post)
Page Two
Seeking New Pipelines
Continued from preceding page

Chevron now possessed the prize. But vast stretches of Russian territory separated landlocked Tengiz from the ports and tankers that gave access to world markets.

As in Azerbaijan and Turkmenistan, the central problem remained: how to get the energy to customers who wanted it. The Soviets had left behind only one small, functioning pipeline running from Kazakhstan to a Russian refinery. A second line, never used and in disrepair, curved around the northern Caspian into Chechnya and Azerbaijan.

One initial proposal called for Chevron to finance a line from Tengiz to the Russian Black Sea port of Novorossisk. The plan envisaged refurbishing the idle Soviet pipe around the northern Caspian and tying it to a new line 400 miles long across southern Russia.

That brainstorm went nowhere. Chevron balked at spending as much as $3 billion on a pipeline that would be controlled exclusively by the Russian and Kazakh governments.

But legitimate alternatives were hard to come by. Proposals came and went, drawing board notions were born and died. For four years all efforts to find an export route for Tengiz oil came to naught, even as Chevron went ahead pouring hundreds of million of dollars into rehabilitating old Soviet installations and building a new gas-extraction plant. Hoping that more American muscle would help break the deadlock in negotiations over a pipeline route, Nazarbayev in April 1996 brought in Mobil Corp., selling the Virginia-based giant a 25 percent interest in Tengiz for $1.1 billion.

But Moscow had little incentive to help. Many Russians had long considered Tengiz a reserve for Russia's future; tapping the field would drain that legacy while strengthening Kazakh independence. Chevron and Mobil soon concluded that without bringing in a Russian company, the Moscow government – which held the key to building a line across southern Russia to Novorossisk – would remain obstructionist.

The one Russian enterprise eager for a piece of Tengiz was Lukoil. The company was led by Vagit Alekperov, a former senior Soviet energy official with connections to President Boris Yeltsin and Chernomyrdin. In Lukoil, Alekperov was cobbling together a new corporation from bits and pieces of the dismantled Soviet oil industry.

Pragmatic, direct and ambitious, Alekperov made it his goal to build the biggest privately owned oil company in Russia and turn it into an international giant, using his Moscow connections, Wall Street capital and Washington legal talent. He had already used the Russian government to help Lukoil elbow its way into several Western-dominated consortia around the Caspian.

Getting into Tengiz was another matter. Lukoil lacked the capital needed to buy its way into the big field. But in mid-1995, Alekperov cut a deal with a U.S. oil giant, Atlantic Richfield Co., under which ARCO would pay Lukoil $340 million in cash in exchange for an 8 percent interest in the Russian company. A year later, Lukoil set up a joint venture with ARCO, called LUKARCO, with a fat line of credit financed solely by the American partner for joint Caspian investments.

Thanks to ARCO's money, Lukoil was ready to be a player in Tengiz. In April 1997, LUKARCO purchased a 5 percent interest in Tengiz from Chevron. ARCO put up most of the $200 million purchase price.

Describing the deal later, Chevron's Matzke said Russian "opinion leaders" had strongly suggested to him that "it would be a good idea to have some Russian content in Tengiz ... that it might be wise to make sure the Russian interest is somehow represented." The Americans got the message.

With a direct interest in Tengiz, Lukoil threw its weight around Moscow to help break the impasse over building the Novorossisk pipeline. The Russian and Kazakh governments finally heeded the pleas of the private companies, including Lukoil, and agreed to bargain in earnest.

The result was a restructured Caspian Pipeline Consortium, known as the CPC, officially formed in Moscow in mid-May 1997. The consortium gave the private companies a 50 percent ownership of the future pipeline and voting rights in its operation. The companies agreed to put up all the money to build it; the Russian and Kazakh governments would get taxes and tariff revenues and a cut of the profits once oil started flowing.

Chevron came away with the largest holding within the consortium, 15 percent, while Mobil got a 7.5 percent stake. Two other American companies with oil concessions elsewhere in Kazakhstan – Amoco and Oryx – took smaller shares.

The Lukoil-ARCO joint venture came away with the second-largest holding, 12.5 percent. Lukoil was put in charge of constructing the pipeline and appointing the Caspian Pipeline Consortium's general director. No one realized it at the time, but therein lay trouble.


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© Copyright 1998 The Washington Post Company

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