KAZAKHSTAN - TCO Profit

By mid-1996, Chevron had spent about $700m on the JV and its Western competitors had been skeptical about the venture's viability. In 1995, Chevron had made a mere $1m in profit from its equity which then was 50%. But in February 1997, Chevron announced that its equity made a profit of more than $80m in 1996 - which meant TCO's profit was over $160m on the basis of $8/barrel profit from the oil produced - and its 50% share of the production in that year was 51,000 b/d. That was a period of record high oil prices since 1990, however. World crude oil prices in 1998 are half their 1996 level. The total cost of producing, processing and transporting Tengiz crude, after having separated the high content of sour gas, is said to be more than $10/barrel.

TCO was only producing about 54,000-60,000 b/d in 1994, of which 30,000 b/d were exported through the Russian system. Moscow approved an increase in TCO exports through the Russian system to 60,000 b/d in the second half of 1994.

But TCO production averaged less than 60,000 b/d in 1995, because of limited processing capacity and of Russia's pipeline problem. It rose to 160,000 b/d as an annual average in 1997. Chevron had hoped by end-1994 the output would reach 80,000 b/d and had set a target of 130,000 b/d for 1995. But Russia could not keep its promise, as the pipeline from Tengiz to Samara could only handle 200,000 b/d for Russian and Kazakh crudes.

Under the terms of the PSA, about 75% of TCO's output was supposed to be shipped to Russia in exchange for 32 deg. API Urals crude, with the rest to be exported to bring in hard currency, while the Kazakh government committed itself to build an export pipeline by 1995. But the Kazakh government failed to finalise a pipeline project by then. Moscow complained that Tengiz crude had a high content of mercaptan (similar to that of WTI in the US, though the US system separates this highly corrosive material before reaching the pipelines) and the H2S content of its associated gas was very high - at 18%.

The mercaptan threatened the Russian system and, as a result, Moscow's pipeline monopoly Transneft refused to let Tengiz exports to increase. Chevron is yet to build a major facility to separate this corrosive material and the H2S from the crude. Its pilot processing plant for this has been expanded at the cost of $100m to handle increased production and exports. A JV of Bechtel and Enka of Turkey is building a new processing facility enabling TCO to raise production to 250,000 b/d by late 1999 and thus exports will increase, with China having become an important market for Tengiz crude (see Part 3)

By end-1998, TCO would have invested $1.8 bn. A further investment will be made in the subsequent years. In September 1997, Chevron and Mobil said they were to invest $1 bn in TCO over a three-year period to boost production capacity and add major processing facilities at Tengiz. TCO's total investment in the 40 years would reach $20 bn. This excludes the CPC pipeline which has a different ownership structure.

Under the 1993 deal, TCO should produce and export all the 6-9 bn barrels of the recoverable oil from Tengiz/Korolev. If world crude oil prices firm up, TCO would generate a huge income during its long life-span. Chevron would take 20% of this. The remaining 80% will be taken by the Kazakh government, KazakhOil and the other partners.

Chevron began negotiations over Tengiz with the Soviets in the late 1980s. After the Soviet Union imploded and a brief lull in activity ensued, it negotiated with the Kazakhs in early 1992. An initial deal was signed at the White House, during President Nazarbayev's first visit to the US, with then President Bush looking on.

There were problems with the Kazakhs subsequently, adding to complex problems Chevron was facing in Moscow over a required pipeline. The US major fought its way through and, among various types of efforts, hired Kazakh expert Nurlan Balgimbayev who now is the prime minister (see who's who in Downstream Trends of next week).