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BusinessWeek: January 11, 1993 |
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International Business
THE SCRAMBLE FOR OIL'S LAST FRONTIER That marked the darkest moment in Chevron's four-year effort to land Tenghiz, the biggest oil field to come up for grabs in more than two decades. Chevron's struggle to capture Soviet black gold reads more like a chapter out of a Russian novel than a business school case study. But it provides a glimpse of how a company managed to snatch a rich prize even as the Soviet Union collapsed amid mounting economic and political chaos. "It was like negotiating a deal on the front page," gripes Derr, 56, a tall, stocky Pennsylvanian who has been with Chevron since graduating from Cornell University. FINAL HANDSHAKE. At long last, Chevron's monster deal is nearly complete. "There were a lot of people, even inside our own company, who said: `These guys must have lost their damn minds,"' Derr told BUSINESS WEEK on his first visit to Tenghiz recently. But on Dec. 28, Chevron announced that all major issues regarding the 50-50 joint venture to produce oil at the Kazakhstan field had been agreed upon. Production is expected to begin in April. The Tenghiz project may turn out to be the first in a slew of oil deals in the former Soviet Union that could reshape the world oil industry in the next century. To be sure, the region's oil production has slumped drastically since 1988 and may not improve before the end of the decade. But huge reserves are waiting--by some counts, up to 250 billion barrels--in Russia, Kazakhstan, and Azerbaijan. Virtually all of the world's oil companies, including Conoco, Amoco, British Petroleum, Elf Aquitaine, Total, Exxon, and Mobil, are vying for a piece of the action. Chevron is far ahead of the pack. By gaining Tenghiz, it will have access to up to 4.5 billion barrels of oil--doubling its worldwide reserves in a snap. That could fuel its growth well into the next century. The field could be as important to the company as its predecessor's discovery of oil in Saudi Arabia in the 1930s. And even though Wall Street considers Chevron stodgy, the company has proven to be a big risk-taker: Before Tenghiz, it gambled and lost $1 billion in war-torn Sudan during the 1980s. Like many pioneering ventures, the Tenghiz project has involved lots of luck and an unusual cast of characters. It includes the low-key Derr, who worked his way up from Chevron refineries to chairman in 1988. Another is James H. Giffen, 51, a smooth New York lawyer and merchant banker who has dealt with Soviet trade for three decades. Now a U.S. representative for the Kazakh government, Giffen knows his way around the Kremlin and was close to several Soviet leaders, most prominently Mikhail Gorbachev. He stands to make millions of dollars from his work in helping Chevron land Tenghiz. EXCLUSIVE DEAL? Another key figure is Johannes Deuss, 50, a longtime oil trader from Holland who gained notoriety in the 1980s for helping to break the trade embargo on South Africa. Deuss, president of Bermuda-based Oman Oil Co., was instrumental in helping Chevron and the Kazakhs get past sticking points in their negotiations. Now, he stands to make millions, too, since his company may become sole operator of a large, new pipeline that will export Tenghiz oil. Then there's Nursultan Nazarbayev, the powerful Kazakhstan president and former Soviet Politburo member. He's on his way to becoming the world's newest oil potentate, since in 10 years, Kazakhstan's output could rival some of the Persian Gulf emirates. Sitting in his Waldorf-Astoria hotel suite recently, sipping a Heineken, he told BUSINESS WEEK: "We will become one of the world's leading oil exporters in the 21st century." The Tenghiz tale began in 1987, when Giffen approached Chevron about joining the new American Trade Consortium, aimed at setting up joint ventures in the former Soviet Union. Giffen's job as president of the U.S.-U.S.S.R. Trade & Economic Council gave him unique access to Gorbachev and potential U.S. partners. Realizing that the consortium needed a U.S. oil company to supply cash, Giffen arranged a meeting with Chevron Chairman George Keller and Derr, who was then vice-chairman. Derr was skeptical. "It was still the evil empire time. U.S.-Soviet relations weren't that great, and we already had problems doing business with countries the American government didn't like--like Angola," he recalls. Still, recognizing that it always needed new reserves, Chevron sent specialists to check out oil fields throughout the Soviet Union. They quickly zeroed in on an oil-rich stretch of land in western Kazakhstan that was once covered by the Caspian Sea. Camels roam freely on the flat, barren desert. The nearest villages, Karaton and Sarykamys, are windswept clusters of concrete-and-wood hovels. But here, in the middle of nowhere, were oil fields that ranked among the world's richest. The jewel is Tenghiz, discovered in 1979, just a few miles from the Caspian. Poisonous hydrogen-sulfide gas permeated the field, making it dangerous to develop. It was also under intense underground pressure. In 1985, a well that blew out shot a flame 600 feet high that could be seen for 90 miles. Tenghiz drillers began calling their rigs "rocket ships" because they never knew when they would take off. But even though Soviet officials knew they needed Western technology, they were wary of surrendering their richest new field. Instead, in 1989, they offered Chevron the chance to study an adjacent field called Korolev, just one-twelfth the size of Tenghiz. "Korolev was the loss leader," explains Richard H. Matzke, president of Chevron Overseas Petroleum Ltd. and its chief negotiator. "We agreed to develop it so we could get in on exploration." WINNING PITCH. But Giffen saw an opening. Capitalizing on the growing goodwill between Washington and Moscow, he wrote to Gorbachev in January, 1990, pointing out that Korolev was too small to help finance many spin-off projects for other consortium members, such as RJR Nabisco Inc. and Archer Daniels Midland Co. He suggested expanding the Chevron deal to include Tenghiz. Gorbachev bought the argument, and Chevron was soon offered exclusive rights to study Tenghiz. But just when the project seemed on track, Chevron got caught in the complex web of Moscow's increasingly unpredictable politics. In the spring of 1991, officials at the state planning agency appointed a commission to study the Chevron deal. Its leader was a little-known economist named Yegor T. Gaidar, who later served as Russia's acting prime minister for six months in 1992. Gaidar wrote a scathing report, condemning the Chevron deal as a shameless giveaway of national wealth. To blunt the criticism, Derr invited the dozen members of Gaidar's blue-ribbon commission to San Francisco late that spring. But in New York, on the way to California, Gaidar took a side trip to shop for legal and financial advice on whether the deal was up to snuff, sources say. He left the delegation, sensitive documents in hand, for meetings with the international law firm Cleary, Gottlieb, which he asked to organize an independent legal and financial review, sources say. Derr thought the project had been spiked by the August, 1991, coup, but the putsch actually saved it. On Aug. 31, Kazakhstan nationalized its oil assets. Suddenly, Chevron was dealing with a new set of players. Nazarbayev threatened to put Tenghiz up for international bidding if Chevron didn't agree to fork over a stiff 87% of the profits to Kazakhstan. And taking a cue from Gaidar, Nazarbayev called in a team of international advisers: investment bank J.P. Morgan, British law firm Slaughter & May, and, most important of all, Deuss's Oman Oil. NADIR. By the end of 1991, the Tenghiz deal looked dead again. The American Trade Consortium collapsed with the Soviet Union. Chevron canceled Giffen's consulting contract in early 1992. In April, Derr hinted to stock analysts that the deal might be off. But just a few weeks later, on May 5, Matzke was checking in at the Ritz Hotel in Paris for a negotiating session with Deuss. He hadn't even unpacked his bags when Deuss informed him that they were going to Alma Ata, the Kazakh capital. Nazarbayev had a final offer. After an overnight flight and an hour or so of rest, they plunged into talks, hammering out compromises on royalty rates, taxes, and other outstanding issues. At 5 a.m., they finally agreed to set up the joint venture. Deuss, it turned out, played the decisive role. He convinced Nazarbayev that Chevron's final offer--an 80%-20% profit split--was reasonable by world standards. But seven months of further negotiations followed. In December, following meetings in Texas and London, Chevron and the Kazakhs worked out all the leftover issues. Before the project can begin producing oil in April, the U.S. Congress and Kazakhstan must agree on a tax treaty. Kazakh Energy Minister Kadyr K. Baikenov expects approval within three months. Still, a longer-term project remains unresolved--the construction of a pipeline needed to handle Tenghiz' increased output. Without the pipeline, the venture can't attain its goal of boosting production to 200,000 barrels a day by 1996. A consortium linking Kazakhstan, Russia, Azerbaijan, and the Sultanate of Oman plans to give an initial $850 million contract to Bechtel Overseas Inc. to build the pipeline to Novorossiysk, on the Black Sea (map, page 43). But political disputes among the consortium partners and questions over Deuss's operational control of the pipeline project could slow it down. Derr is worried: "Clearly, the premise we're getting in on [with] this project is that the pipeline will be built." Another potential problem is that expectations are running high among the first of the project's 3,000 local workers at Tenghiz. Take the crew at well No.23, which is idle because there's no money to run it. Workers already dream of dollar salaries and trips to America. "Our wages will improve, our conditions, our food. We'll get American uniforms to wear--they promised," declares Nozhart Sartayev, a 30-year-old driller in khaki overalls and an orange hard hat. LITTLE BIG BROTHER? Nor is Chevron free of local politics. Local officials complain that Chevron has so far agreed to set aside only $50 million for investments in such social projects as hospitals and schools. At the same time, residents and officials around Tenghiz worry that Nazarbayev's government in Alma Ata will simply replace Moscow as a Big Brother that siphons off the oil money. For Chevron and other Western oil companies that are trying to do business in the former Soviet Union, such problems won't disappear soon. But former Soviet republics were shut off from dealing directly with Western partners and investment for 74 years. As their experience with world oil companies grows, it should become easier for them to understand and accept world standards in their projects. For Ken Derr, at least, hobnobbing with future Kazakh oil sheiks is already becoming routine. On his trip to Tenghiz and Alma Ata in October, he was feted three times with traditional banquets. As the evenings' guest of honor, he received from his Kazakh partners a traditional robe, a ceremonial hat--and the head of the ram he was eating. It's all in a day's work for Western investors in oil's new frontier. | |
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