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Tengiz Oil in Search of a Pipeline

At the end of this summer, the Kazakhstani government is scheduled to reach a decision on the export route for Tengiz oil. Of course, in the AIOC main-export-pipeline tradition, it could decide to postpone the decision. Still, it is instructive to review the options. There are a number of possible routes. The principal ones are the Caspian Pipeline Consortium (CPC) line projected across southern Russia, the gigantic project eastwards into western China (and supposedly further east) signed with the Chinese National Petroleum Company (CNPC), undersea to Baku and out through Ceyhan, and south through Iran. This is an involved issue.

The Caspian Pipeline Consortium (CPC) line across southern Russia to Novorossiisk. There was great clamor last month when a new terminal near Novorossiisk was christened. This event was bruited as the real beginning of the construction of the delay-plagued CPC pipeline. But the CPC is to be constructed in two segments. The first is a shorter segment between the Black Sea terminal and Kropotkin, through which the existing, temporary-closure-plagued Baku-Novorossiisk pipeline already passes.

When the CPC project was first announced in its two segments, it was stated that this first segment would have to pay for itself if it were to be constructed. The implication of that statement of course was that if for any reason the second segment, west from Kropotkin to Tengiz, was not constructed, then the first segment would not be a loss. This could be achieved by increasing the flow northward from Baku, whether Tengiz oil is included in that flow or not.

The construction of the new terminal also represents a silent acknowledgment that climatic and hydrological conditions around the old terminal are indeed problematic, especially in winter months. Therefore the ceremony around the new terminal is not a celebration that Tengiz oil is expected sooner or even later to arrive there. It is an anticipation that Baku-Supsa will not be able to handle all the oil coming out of the Azerbaijani sector of the Caspian, before Baku-Ceyhan is constructed, if Baku-Ceyhan is constructed.

Recent Russian claims of large new finds in the Russian sector of the Caspian are in fact only claims of evidence permitting inference that the deposits are there yet without actual confirmatory data because the exploration has not yet happened. Yet even the assertion of new assets lying between Tengiz and Novorossiisk can only diminish one's confidence that Tengiz oil will ever flow west across Russia in large quantity, particularly since Russia recently tightened yet again the present low quota of Kazakhstani oil allowed into the existing Russian pipeline system.

Indeed, from the beginning Chevron wanted a direct pipeline to a port, but disputes arose over which port it should be, who should pay for construction, and how. Astoundingly enough, Chevron had no stake in the original make-up of the Caspian Pipeline Corporation, which was a joint venture among Kazakhstan, Russia, and the Oman Oil Corporation. Yet Chevron found itself being asked to finance most of the cost (then estimated at $1.4 billion) while being offered a minority share, at which it balked. As a result, the bulk of its share went instead to Oman Oil, which owned 33% of the CPC but whose financial participation was to be minimal.

This impasse led Chevron in May 1994 to slash its investment in Tengiz by 90% for 1994. In early 1995 Russia and Kazakhstan agreed to construct a $400 million section of the Caspian pipeline, with Oman Oil agreeing to seek financing from international banks. The first phase, for which the terminal was just opened, was to have been completed in 1997. Financing for the remaining link to the Tengiz field was still a problem. In late 1995, Kazakhstani officials reported that British Gas and Agip might join Chevron in financing it. This suggested that the Omanis had not been successful in raising the funds on international capital markets: which turned out to be the case.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/1999/06/tengiz_oil_in_search_of_a_pipe.html
First published in FSU Oil & Gas Monitor, No. 35 (8 June 1999): 2.

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