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. Last Updated: 07/27/2016

CPC Cuts Ribbon on $2.6Bln Pipeline

ALMATY, Kazakhstan -- Four months late and minus two presidents, the first pipeline to bring Kazakhstan's oil riches to the world market was officially opened Tuesday.

Officials of the Caspian Pipeline Consortium, including the Russian, U.S., Kazakh and Oman governments, gathered near the port of Novorossiisk for a ribbon-cutting ceremony for the $2.6 billion pipeline, the biggest foreign investment in the former Soviet Union.

"Today, we are opening a new route for Caspian oil to reach world markets," CPC general director Sergei Gnatchenko said, according to news agencies.

The pipeline from Kazakhstan's Tengiz oil field will ship 1 million tons of crude by year's end and be able to export 20 million tons a year by 2002.

But officials said the project will not pour fresh oil onto an already-flooded market. The Organization of the Petroleum Exporting Countries is trying to cut global output in a bid to shore up oil prices, which have dropped about 30 percent over the past two months.

"We are just optimizing routes," LUKoil president Vagit Alekperov said.

Speeches delivered at the ceremony called the 1,510-kilometer steel tube a symbol of international cooperation. And that it is indeed. The Russian government and U.S. and Russian oil companies covered most of its $2.6 billion cost, and Moscow stands to earn $20 billion over the expected 40-year life span of the pipeline.

The pipeline is also:

The first step to Kazakhstan's ambitious plan to deliver 3 million barrels per day in 15 years to world markets, making it one of the top three oil exporters in the world;

A multibillion-dollar bet made in 1993 by Chevron Corp. -- now ChevronTexaco -- that is now set to pay off handsomely;

A glaring example of the difficulty of doing business in Russia and proof that with perseverance, it can be done.

The pipeline built by the 11-member CPC starts on the desert shores of the northeast Caspian Sea at Tengiz, the world's sixth-largest oil field. The longest 120-centimeter-wide pipe in the world then curls around the Caspian before striking west across the broad plains north of the Caucasus range and ending at a tanker terminal 15 kilometers west of Novorossiisk.

Once completed, at an expected final cost of $4 billion, it will be able to carry up to 1.3 million bpd, more than double its initial capacity.

Production at the Tengiz field, now 270,000 bpd, is expected to rise to 700,000 bpd at the end of the decade, according to Tom Winterton, head of Tengizchevroil, or TCO, the consortium exploiting the field.

Thus, there is plenty of room in the pipe for oil from other fields -- and there lies one of the major disputes that drove a wedge between the American and Russian partners and delayed the opening.

When Chevron took over the Tengiz field from its post-Soviet managers, it created one consortium, TCO, for the field and a second one, CPC, to build an outlet for the oil.

For the first few years, TCO overcame such obstacles as the extreme 4,000-meter depth of the reservoir, its high content of poisonous sulfur dioxide and the high pressure at which the oil was coming out. Production steadily climbed from 25,000 bpd, and the jinx that gave Tengiz the longest uncontrolled blowout in Soviet history was overcome.

But in those years, CPC got strictly nowhere in its efforts to convince Russia and its pipeline monopoly Transneft to allow a pipeline through Russia.

It was not until 1996 that Russian companies LUKoil and Rosneft bought into the consortium, while the Russian government took a 24 percent share. Then things started moving.

"It was a waste of time to try to build a pipeline through Russia that would not benefit Russia," said Stephen O'Sullivan, head of research at United Financial Group.

Construction took less than three years.

Transneft director Semyon Vainshtok tried to fight a rear-guard battle, insisting that what was bad for Transneft was bad for Russia. But the pipeline consortium, headed by Gnatchenko, a Russian, and assisted by Chevron deputy director Fred Nelson, argued that Russia stood to gain from the added production in a non-zero-sum game.

But that was just the beginning.

"We had to go through five Russian local governments," Nelson said recently. "It wasn't always easy."

Twice, customs disputes halted the flow of the oil at the Russian-Kazakh border.

Earlier this year, a dispute over pricing turned ugly, derailing an opening ceremony scheduled for Aug. 6 with the Russian and Kazakh presidents in attendance.

Tengiz oil, until the pipeline was built, was exported entirely through Russia and mostly by rail. Part of its highly prized light sweet crude -- which sells for up to a dollar per barrel more than benchmark Brent -- was mixed along the way with less desirable Russian crudes to make Urals Blend, which trades at nearly a dollar less than Brent.

"The Russians got a free ride for years," said a diplomat familiar with the situation.

But for the pipeline, Chevron insisted on instituting what is called a quality bank, a system penalizing those who would add low-quality crude to the mostly-Tengiz CPC Blend.

Quality banks are used in most places in the world where low- and high-quality crudes are blended in pipelines, but the Russian partners only relented three days before the already rescheduled inauguration date, which had been due to coincide with the loading of the first tanker.

Then, the port authority of Novorossiisk, in a surprise move, extended its jurisdiction to the deserted piece of coast where holding tanks are buried near the end of the pipeline. There is no port -- floating hoses are used to fill the tankers as they lie moored offshore.

The move allowed the port authorities to demand a port tax. Negotiations caused further delays. Eventually, "they were bargained down quite a bit," said Ivan Mazalov, an oil analyst at Troika Dialog.

Other delays pushed back the date of the loading of the first tanker to Oct. 13. By the time all the difficulties were ironed out, five fully loaded tankers had weighed anchor and sailed to the Bosporus and refineries in Europe.

A sixth one was loading when the ceremony took place Tuesday.

Even a day before Tuesday's inauguration, a pipeline consortium spokesman could not provide a guest list of who would represent Russia.

In the end, for reasons not made clear, the senior Russian official ended up being Deputy Energy Minister Ivan Matlashov, whereas Kazakhstan and Oman, which owns 7 percent of the pipeline, sent full ministers. U.S. Energy Secretary Spencer Abraham had planned to attend but was stuck in Moscow due to bad weather. Assistant U.S. Energy Secretary Vicky Bailey took his place.

For ChevronTexaco officials, however, it was an event they could not afford to miss.

Both the pipeline and the giant oil field it serves are ChevronTexaco's babies, multibillion-dollar gambles that will finally begin paying off. The oil field and pipeline are testimony that with perseverance, Westerners and Russians can work together.

"This achievement comes at a time of increased partnership between the U.S., Russia, and Kazakhstan," ChevronTexaco chairman David O'Reilly said at the ceremony. "CPC is a bellwether project for successful international cooperation and demonstrates the confidence the international business community has to invest in Russia and Kazakhstan."

While Russia, Kazakhstan and world consumers can join ChevronTexaco in rejoicing at the pipeline's completion, Turkey has shown mostly concern.

The extra tankers carrying Tengiz oil, which will eventually number three a week, will further clog the Bosporus Strait that bisects Istanbul and increases the chances that the area will some day have to cope with a major oil spill or even a fire.

But Turkey is committed to upholding the 1936 Montreux Agreement and, barring a catastrophe, Caspian oil will be able to navigate the strait to reach European markets for the foreseeable future, analysts said.