Lack of Pipelines Frustrates Kazakh Oil

TENGIZ, Western Kazakhstan -- In the desert off the coast of the Caspian Sea, a neon pyramid lights up the night. It is a mountain of sulphur, extracted from the oil produced by Tengizchevroil, or TCO, a venture of Chevron, Mobil and the Kazakh government. Hydrogen sulfide is an invisible and lethal gas that makes the high-pressure field a risky and expensive operation.

The mountain is also the most visible reminder of the constraints of operating in Kazakhstan. The sulfur used to be sold to fertilizer factories, but most of these enterprises have shut down. Thousands of kilometers away from a depressed sulfur market, TCO has to stockpile three-quarters of its sulfur production just outside the processing plant.

The desert republic may be rich in oil, gas and gold reserves, but it is also far away from pretty much anywhere, landlocked and surrounded by impoverished states. Getting your product to a consumer who can pay is a major challenge to ventures such as Tengizchevroil, particularly as most are dependent on Russia for access to export routes.

"The oil will flow out of Kazakhstan one way or another," said Nick Zana, director general of Tengizchevroil. "But it's difficult without a dedicated pipeline. It won't kill TCO, but it will be hard."

The only existing export pipeline from Kazakhstan runs to Russia, and access has been kept to a trickle by a combination of real capacity limitations and political pressure from Moscow.

Tengizchevroil has been unable to export more than a few million tons of oil in the past few years, much of it to the port of Odessa, and has been forced to market much of its oil in former Soviet republics which lack the funds to pay market rates.

During the worst months last year, daily production at Tengiz dipped as low as 5,000 tons of oil, compared with a peak production of 90,000 tons planned for the next decade.

When Russian transporters claimed that Tengiz oil was too high on mercaptants -- sulfuric components that cause pipelines to rust -- TCO spent $120 million to install a demercaptanization plant, even though it knew Russian oil firms were happily pumping oil with just as many mercaptants. Negotiations with Russia, Kazakhstan and Oman on construction of a new pipeline to the Russian Black Sea port of Novorossiisk, which Chevron had counted on when it rushed in to exploit Tengiz, were stalled.

The breakthrough came this spring, when Russia, Kazakhstan and Oman agreed to offer 50 percent of the shares in the Caspian Pipeline Consortium to oil producers. On April 27, Chevron, Mobil and a number of other producers agreed to finance construction of the pipeline in return for guaranteed access. Mobil bought half of the government stake in Tengizchevroil a week later, a sign of confidence in the project's future. The parties are still negotiating a pipeline contract, however, and at best the pipeline will be ready in the first decade of the next century.

To finance expansion of annual production capacity to 8.5 million tons by the end of 1998, TCO has abandoned hopes of selling all of its oil on the Western market anytime soon. Crude goes by pipeline to Lithuania, by train to Finland and, in the future, by barge up the Volga river and down the Don to the Mediterranean. Natural gas is sold to a nearby power plant. Liquid gas is handed to the government and, sometimes, flared off.

"It is attractive compared to keeping it in the ground," TCO's Zana said, adding that he hopes Russia will allow more Kazakh oil through its pipelines once the pipeline contract is signed later this year. "It's not attractive compared to pumping it through a pipeline. Other means of transportation are simply stop-gap measures. They cannot ensure Tengiz's long-term growth.

"It's important to pump oil now not just for the investors but for the country. The country needs money, and it needs money now," Zana added. "If I don't produce, you don't get that revenue. And if I don't produce, the people don't work."

Tengizchevroil has engaged the Russian oil company LUKoil, which is eager to buy a stake in the venture from Chevron, to get 150,000 tons of oil a month to Lithuania. LUKoil has granted TCO parts of its quota for access to export pipelines to a refinery in Lithuania.

"A relationship with Russian companies is essential for the long-term growth of the Kazakh oil sector," Zana said. "I need to establish a relationship with Russian companies so that they see an economic benefit in working with us."

Some of the oil will even go to Iran, though an American boycott keeps U.S. companies from selling directly to Tehran. Kazakh President Nursultan Nazarbayev agreed with his Iranian counterpart in May to ship 2 million tons a year, and later 6 million tons to an Iranian port on the Caspian Sea. In return, Iran will hand over oil of equivalent value to customers of Kazakhstan at a port on the Persian Gulf.

Zana said TCO has nothing to do with this contract, but added that the Kazakh government has the right to obtain Tengiz oil as part of its share of the venture's revenues.Unable to earn major revenues until a pipeline is built but intent on financing operations from revenues only, TCO has cut operating costs to free up funds for capital investments.

"It's not all roses," Zana said. "But I've been more frustrated in other places. And this is a giant oil field. When it's up and running, Tengizchevroil will be one of the biggest oil companies in the world -- by itself!"