CASPIAN OIL (A): TENGIZ

Michael H. Moffett Andrew Inkpen

Chevron Corp. said Monday that its joint venture with Kazakhstan to develop one of the worlds largest oil fields could produce 700,000 barrels of oil a day and involve a joint investment of $20 billion over 40 years. Earlier this month, Chevron and the former Soviet republic announced a preliminary agreement to develop the Tengiz and Korolev fields, estimated to be even bigger than Alaskas Prudhoe Bay. Chevron to Pump Billions into Tengiz, The Los Angeles Times, May 19, 1992. After grabbing a few hours of sleep, the visitors gathered in front of a snooker table on which their Kazakh hosts unfurled a giant set of two-dimension seismic charts and well logs, in effect a geological blueprint of the Tengiz field and its surroundings. Inspecting the seismic lines, Hamilton saw that some zigzagged up the coast from Tengiz, and a few drifted offshore, clearly revealing carbonate reefs. Suddenly, said Hamilton, we saw this enormous feature .. It wasnt continuous coverage a few lines of 2-D. But you could see the enormous reef, meaning the offshore reservoir, twice the size of Tengiz, that had so tantalized Chevron. As for Tengiz itself, Hamilton could not find the bottom of the oil column, it was so deep. Hamilton and his companions thanked the Kazakhs and suggested that they take a break. Holy shit, Hamilton blurted out when they were alone. These were Ray Charles kind of structures a blind man could see what they were. The Oil and the Glory: The Pursuit of Empire and Fortune on the Caspian Sea, Steve LeVine, 2009, p. 110.

The Tengiz Field (Tengiz means sea in the Kazak language), was discovered by Soviet geologists in 1979, but was largely ignored for years as the Soviets focused their oil development efforts elsewhere. The field saw some preliminary drilling in the mid-1980s, but only after Chevron (U.S.) entered into a joint venture with the Kazakh government in 1992 did true scale development take place. Tengiz, when discovered, was thought to be one of the worlds ten largest fields. But by the spring of 2011, although producing 700,000 barrels per day (bbls/d), the joint venture was still yielding only half the oil which all involved agreed it could and should. Chevron was under increasing pressure from its partners, including the Kazakh government, to bring the joint venture to its productive promise. Tengiz and Kazakhstan As illustrated by Exhibit 1, Kazakhstan lies to the north and east of the Caspian Sea, south of Russia, west of China, and to the north of a number of other stans including Kyrgyzstan, Uzbekistan, Turkmenistan, and Iran. To its west, across the Caspian, lie Azerbaijan, Armenia, and Georgia. Although it borders the Caspian Sea, the Caspian is itself land-locked, as is Kazakhstan, the worlds largest land-locked country, and the worlds ninth largest country. Sparsely populated, it has a population estimated at 16 million. The country is often classified as either Eastern European or Central Asian. Formerly a member of the Soviet Union, it was the last to declare itself an independent republic from the Soviet state in December 1991. Kazakhstan has the largest reserves of crude oil and gas in the Caspian Sea region, estimated to be between 9 and 40 billion barrels, putting it on par with OPEC members like Algeria and Libya. But finding it was not the same as producing it and marketing it.

Copyright 2011 Thunderbird, School of Global Management. All rights reserved. This case was prepared by Professors Michael H. Moffett and Andrew Inkpen for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

Challenges were great both above and below the surface. The Tengiz field, below the surface, was a deep reservoir for its time, roughly 14,000 feet, but given its size, the deepest large scale producing field in the world. It lay beneath a 900 foot deep salt dome, adding to the technical challenge. The reservoir was under extreme high pressure, about 0.82 psi/ft, when fields average roughly 0.45 psi/ft globally. The column of crude oil was estimated to be 1.6 kilometers thick. The reservoir was hot, averaging 200F. And last but not least, the reservoir was extremely high in both natural gas and sulfur content. The resulting mix, hydrogen sulfide (H2S), was highly poisonous to humans and corrosive in pipelines. Tengiz was a sour crude, averaging 12.5% in sulfur, when anything above 0.5% was considered sour. Its production therefore required significant processing and sulfur extraction before transportation.

Exhibit 1. Kazakhstans Major Oil Fields

Karachganak

Tengiz

The Tengiz field, above the surface, was located in a remote, barren, and forbidding environment. It was subject to annual swings in temperature from -25 F to 100 F. Infrastructure, particularly in the early years, was very basic and difficult, making construction and support costly. Chevron, through a variety of political and relationship channels, succeeded in negotiating a 50% interest in the field in June 1990, one day after a summit meeting between President George Bush of the United States and President Mikhail Gorbachev of the Soviet Union. But the ink was barely dry when the Soviet Union broke apart. With Kazakhstans declared independence in December 1991, negotiations began again. Chevron would be the first major foreign investor in Kazakhstan following its independence, but Kazakhstans independence was a tenuous one. Russia continued to have strong strategic and financial interests in the hydrocarbon resources of Kazakhstan. The two countries shared a 4,250 mile border and a common people; Kazakhstan was home to more than six million ethnic Russians. The war memorial in the center of Almaty, the traditional capital of Kazakhstan, celebrated the Twenty-Eight Panfilov Guardsmen Kazakhs who defended Moscow from the German offensive in September 1941. The linkages between Russia and Kazakhstan ran deep.

Richard Matzke, President of Chevron Overseas Petroleum, eventually concluded what was termed a careful agreement with the Kazakh government in April 1993. Kazakhstan President Nursultan Nazarbayev and Chevron's Chairman, Kenneth Derr, signed a 40-year agreement to found Tengizchevroil on April 6, 1993 in Almaty. The business, termed a partnership, allocated a 50% interest in the field to Chevron as well as naming it the operator.2 Chevron pledged $20 billion over the next 40 years.3 The business organization, TengizChevroil LLP (TCO), was structured as a joint venture between Chevron and the Kazakh state oil company rather than the more common forms used in the global oil industry, oil concessions or production sharing agreements. One of Chevrons concerns from that beginning was that Tengizs production costs were considered moderate to high by global standards, about $3/bbl. Small fields around the world typically averaged $3.5/bbl to $4.50/bbl, and a field of the scale of Tengiz should see significantly lower per barrel costs for competitiveness during low crude oil price periods. The complexity of Tengiz, however, its pressure, depth, sulfur content, all added significantly to both capital and operating costs. In an attempt to manage what it considered high political and country risks, Chevron planned to invest gradually, using reinvestment of earnings to make up the majority of new investment. For example, Chevron had carefully avoided making significant up-front payments. One such clause required that annual production reach 250,000 barrels per day (bbls/d) before Chevron had to make its first $420 million installment on the purchase price of $800 million. Predictably, the Kazakhs saw this invest as you go approach as indicative of a low level of commitment and relations between the parties were strained from the beginning.4 Pipe Dreams
All dressed up and no place to go. That's the dilemma Chevron Corp. faces in far-off Kazakhstan. The nation's third-largest oil company is sitting on one of the world's biggest oil fields in the landlocked former Soviet republic. Under the lunar-like landscape of the western Kazakhstan desert -- where temperatures can soar to 130 degrees in summer and plummet to 30 below in winter -- lies a huge pool of crude. Called the Tengiz Field, it holds an estimated 8 billion barrels of oil, rivaling the 12-billion-barrel Prudhoe Bay Field in Alaska. Trouble is, after more than two years of work and a $1 billion investment, Chevron has yet to make much money on Tengizchevroil, its 50/50 joint venture with the government of Kazakhstan. Part of the problem is that the company cannot get more than a dribble of crude out of Kazakhstan. That's because the only way out is through Russian territory, and Moscow refuses to allow more oil to flow through its old pipelines. But San Francisco-based Chevron's biggest problem is that an effort to build a new oil pipeline around the Caspian Sea and through Russia to the Black Sea has been stymied. Chevron Struggling in Tengiz, by Kenneth Howe, San Francisco Chronicle, September 25, 1995.

Somewhat unique to the Caspian, the right to produce oil did not assure the owner much in terms of its right to sell oil. Transportation would prove the strategic fulcrum for negotiations for the following decade. As production at Tengiz began expanding during the mid-1990s, one of the primary problems for Tengiz oil was access to Western markets. Chevrons interests were in getting the oil to the Black Sea, where it could then be moved by tanker through the Bosporus Straits to the Mediterranean and more profitable markets.

Ownership interests have changed over the years. In 2011 Tengiz was 50% owned by Chevron, with ExxonMobil holding 25%, KazMunaiGaz (Kazakhstan) 20%, and LukArco, a subsidiary of Lukoil (Russia) 5%. Kazakh Fields Stirs U.S.-Russian Rivalry, The Washington Post, October 6, 1998, p. A1.

Chevron also balked at the traditional Soviet habit of expecting foreign investors to support non-business related social infrastructure such as roads, schools, and hospitals, limiting social infrastructure spending to 3% of total investment.

Once the oil reached the Black Sea, a number of potential market destinations opened up. All of the countries bordering the Black Sea Russia, Ukraine, Romania, Bulgaria, Turkey had their own oil and gas developments and transportation interests. Of particular interest for Kazakhstan oil, however, was the ability to potentially move its oil farther west through Romania or Bulgaria to markets in Poland by pipeline, or even to Western Europe via the Mediterranean after passing through the Bosporus Straits. But the Straits themselves were a problem, as shipping and tanker traffic was now very high, at capacity given the one-shipabreast passage, as well as anxiety over the possibility of tanker accidents and environmental risks. One alternative would be for Tengiz oil to gain access to the Odessa-Brody pipeline in the Ukraine. The Odessa-Brody pipeline, finished in 2001, sat idle for three years because Russia would not allow Kazakhstan oil arriving at Novorossiysk to enter the line and compete with Russian oil and gas in Europe. (The pipeline was eventually reversed, moving Russian oil southwards to Odessa and the Black Sea for export to the Mediterranean.) If, however, Kazakhstan could get its oil to Batumi in Georgia, it would be free of Russian control to move the oil across the Black Sea to Odessa, and then on to Poland via the Odessa-Brody pipeline, once again reversing the pipeline back to its original intended direction. The construction of a pipeline to the Black Sea quickly became a lightning rod for controversy between the Kazakh government, Chevron, and the Russian government. Russia wished to control the flow of oil from Tengiz, but did not have the capital to fund pipeline construction across Russia to the Black Sea. Chevron openly refused to invest what it saw as $3 billion to build a pipeline which would be controlled from Moscow. The only real solution, at least temporarily, was a massive mobilization of rail use. By 2000 six trains were leaving Tengiz daily for the 1500 kilometer trip to the Black Sea. Rail was expensive, however, averaging $6/bbl in the early years.5

Exhibit 2. The CPC Pipeline

Caspian Pipeline Consortium (CPC) - 980 miles in length from the Caspian Sea oil deposits to the Russian Black Sea port of Novorossiysk - Phase I capacity of 650,000 bbl/d with a planned capacity expansion to 1,400,000 bbl/d when Tengiz production justified the additional investment - The consortium has 11 different members, including Chevron (Tengiz operator) and the Russian government (ultimate pipeline control)

Kazakhstan Fields Riches Come with a Price, Christopher Pala, The St. Petersburg Times, October 23, 2001.

John Deuss, a Dutch oil trader, banker, and general oil entrepreneur, a fixer in industry jargon, moved quickly to exploit what he believed to be a golden opportunity to build and control a pipeline for Tengiz oil. Deuss believed that if he could place himself between Tengiz and access to Western markets he could demand significantly higher transport tariffs than those traditionally paid by pipeline operators (typically $1 to $1.5 per barrel). But Deuss needed capital. Chevron estimated pipeline construction costs at $1.25 billion, but Deuss planned to use a series of older Russian pipelines to cut construction costs to $1 billion. Deuss had a strong relationship with the Omani royal family, and they were willing to make a minimal equity contribution, $25 million, towards pipeline construction. Deusss strategy was to use large quantities of debt (not unusual for pipeline financing). Debt financing, however, would require that Chevron commit to a throughput agreement guaranteeing pipeline revenues. Deuss moved to form the Caspian Pipeline Consortium (CPC), designed to follow the routing described in Exhibit 2. As part of his capital raising campaign, Deuss approached the European Bank for Reconstruction and Development (EBRD) to gauge its interest in lending for pipeline construction. Although EBRD had been founded specifically for the purpose of aiding in the development of business in the region, it objected to Deuss's proposal that pipeline profits be granted a tax waiver by both the Russian and Kazakh governments. EBRD saw this as inconsistent with its mission of building solid market economics in former Soviet states. Chevrons CEO, Ken Derr, did not trust Deuss and considered his positioning on the pipeline and proposed pipeline tariff of $3.25/bbl profiteering. But Chevrons position itself was tenuous, as it had booked the Tengiz reserves very aggressively (assuming nearly one-third recovery of the oil-in-place), and needed to ramp-up production quickly, which it could not do until a pipeline became operational. As pipeline negotiations stretched on, Chevrons share price and the Kazakh economy both dwindled. Kazakh president Nursultan Nazarbayev became increasingly critical of John Deusss positioning:
The problem is that money has to be invested. What difference is it to me if it is Americans, Omanis, Russians? The main thing is that oil comes out. Kazakh President Nursultan Nazarbayev

Kazakhstan then brought in its own fixer, an American named Jim Giffen. Giffen, a friend to President Nazarbayev and the original relationship link between Chevron and Kazakhstan on Tengiz, now moved quickly to bring other players to the table for pipeline financing. Giffen approached Lou Noto, CEO of Mobil (U.S.), as a possible investor in the pipeline. Noto was interested, but only if Mobil could gain an interest in Tengiz itself. Eventually Noto got what he wished, a 5% interest in Tengiz in exchange for $145 million in funds which the Kazakh government badly needed.6 In the fall of 1995 a series of events expedited the pipelines construction. First, John Deusss relationship with the Omanis was broken when his key link, Omar al-Zawawi, a member of the royal family, was killed in an automobile accident. Deuss was pushed to the sidelines in future discussions. Following that, Lukoil of Russia demanded that it gain some interest in Tengiz in order for Russia to support and allow the pipelines construction. Although Chevron did not wish Lukoil to gain a foothold in Tengiz, the political tensions between Washington and Moscow over a Western oil company developing Kazakh oil and transporting it across Russian territory to gain access to the Western market was simply too much. Russian interest was in the words of one analyst, a necessary evil.

Much later it was announced that Mobil purchased 25% interest in Tengiz for $1.05 billion. It is this Mobil interest that eventually resulted in ExxonMobils interest in Tengiz after Exxons acquisition of Mobil.

But Lukoil had no money. The solution, ironically, was for another American oil company, ARCO, to gain a partial interest in Lukoil itself in return for providing a capital injection which would allow LukArco (Kazakh subsidiary now formed) to buy its way into Tengiz, a 5% interest in return for $200 million. After years of negotiations a final pipeline consortium was created between eight companies and three governments to build what would now cost $2.7 billion.7 Russia agreed to a two-phase development. The first phase would commence immediately. The CPC line would travel 1,510 kilometers (940 miles), use five pumping stations, and move 650,000 bbl/d. It was indeed built as an extension of an older oil pipeline system which passed across the northern end of the Caspian Sea, as seen in Exhibit 2. Full-time operations of the first phase began in 2003. A second phase, expanding the lines capacity to 1.4 million bbl/d, would be undertaken when production at Tengiz justified it.8 Production now justified it, but Chevron and its partners had made little progress in moving the CPC into phase two. The Environment Tengiz also posed major environmental and safety challenges for TCO. In 1985, before Chevron ever gained entry to Tengiz, an early Tengiz well, well #37, exploded sending a 200-meter high column of gas and oil into the air. Because the gas contained deadly levels of hydrogen sulfide, the plume was ignited to consume the gases. The result was a towering inferno visible for nearly 60 miles (and was picked up by U.S. satellites watching Kazakhstan at the time). The fire burned for more than a year before Red Adair, the worlds leading expert on oil fires based in Houston, was successful in capping it. Although only suffering one fatality, the environmental impacts were significant. In the following years as oil and gas developments were dictated by Moscow, the Kazakhs worried that their most precious delicacy, caviar, the eggs of the sturgeon found in the Caspian and Black seas, could be put at risk.9 Any suggestion of oil and gas development near the Caspian, home of the most famous beluga sturgeon and caviar, faced serious public opposition. Baku, devastated by oil development in the late 19th century and lying just across the Caspian, served as a reminder of how devastating unregulated oil development could be, as illustrated by Exhibit 3. Sulfur was a major problem. Not only did the oil and gas produced from Tengiz require extensive processing for sulfur reduction, dispensing with the sulfur itself was a continual problem. By early 2001 Tengiz had 4.5 million tons of sulfur spread out on football-field-sized cakes of sulfur 7.5 meters thick (Exhibit 4). Transporting sulfur to European markets was costly. Chevron spent more than $40 million on a pellet processing facility in 2001-2002 to expand marketability (pellets were more attractive commercially than powdered sulfur), but with mixed success. I dont think any of us understood the complexities of what were about to get ourselves involved in. What the Kazakh government is worried about is fixing some of the issues that were relatively unknown when some of these projects began. The production of oil and gas in the Caspian is very complex, very difficult. Ten years ago, fifteen years ago when contracts were written, people didnt understand the complexities. Richard Matzke, Chevron Texaco Vice Chairman of the Board, 2007.

The consortium consisted of British Gas (2%), Chevron (15%), Eni (2%), ExxonMobil CPC (7.5%), Kazakhstan (19%), Kazakhstan Pipeline Ventures (1.75%), LukArco (12.5%), Oman (7%), Oryx (1.75%), Rosneft-Shell (7.5%), and RussiaTransneft (24%).
8

A Big Oil Field in Central Asia Isnt Earning What Chevron Planned On, The New York Times, July 22, 2010. During the 1970s the Soviet government had regularly conducted nuclear tests in Kazakhstan.

Exhibit 3. Bakus Environmental Legacy

Source: The Worlds 25 Dirtiest Cities, Forbes.com. Baku is number 1 on the list.

Exhibit 4. The Tengiz Complex and Sulfur Storage

Source: Kazakhstan Fields Riches Come With a Price, by Christopher Pala, The St. Petersburg Times, October 23, 2001.

Sulfur was not the only problem. Tengiz had been flaring massive quantities of natural gas for years given the limited capability to capture and transport it. Kazakh President Nursultan Nazarbayev had argued for years that TCO needed to capture and utilize the gas, not flare it, but the consortium had argued that the capital costs for capture were large and the marketability of gas impossible since the only gas pipeline available was to southern Russia and the Russians would not pay for the gas.
The oil fields other eye-catching features are the five flaring towers that, day in and day out, send plumes of smoky orange flames into the air. With all gas pipelines leading to Russia a country awash in gas building the facilities to break it down and sell to Russia is not an effort that makes any economical sense. Kazakhstan Fields Riches Come with a Price, Christopher Pala, The St. Petersburg Times, October 23, 2001.

As 2001 drew to a close, the Kazakh government pressed TCO to stop its flaring, handle and market the sulfur more aggressively, and expand Tengiz production volumes. After more than $2 billion in development (which was already the largest foreign investment in any former Soviet state), the project needed to enter a second and more costly stage: to invest in technology to recover and re-inject the gas into the reservoir. As the director of TCO at the time put it, Selling oil is more profitable than selling gas.10 Growing Tension Tengizs on-going operations from 2002 to 2007 were in constant conflict with both the Kazakh government and the CPC pipeline consortium. Not surprisingly, most of the conflicts involved money and politics. In 2002 Chevron had proposed financing the planned expansion of Tengiz production with the reinvestment of oil export proceeds, as part of its continuing invest as you go strategy. The Kazakh government objected. In addition to implicitly supporting a slower rate of growth, the reinvestment would reduce the consortiums taxable profits and payments to Kazakhstan dramatically and the government needed the money. TCO then announced it was suspending the next stage of development, a $3 billion second generation gas injection project. In January 2003, after Kazakh courts confirmed fines against the consortium and after much public debate, Chevron agreed to finance new production capacity with foreign capital, as well as guarantee Kazakh tax authorities a minimum of $200 million per year regardless of consortium profitability. In conjunction with this agreement, President Nazarbayev pushed through a new foreign investment law which guaranteed that existing foreign investments in the country would not be revised, but that no such guarantee would be provided future investments.11 Phase two of the project was underway, with significant expansion of production and reduction of flaring. But the sulfur debate continued.
The two sides [ChevronTexaco and the Kazakhstan government] seemed to patch up some of their differences in December in an equally public display of affectionat least on the Kazakhstani side. It is perhaps surprising, given the degree to which Tengiz is seen as a template for development in the region, that the two should have fallen out at all. As the biggest producer of oil in Central Asia outside Russia, and the country with the most to gain from an expected surge in demand for its exports, Kazakhstan should be cultivating foreign investors. Instead, it is in danger of putting them off. Field of Dreams, The Economist, January 9, 2003.

10

Kazakhstan Fields Riches Come with a Price, Christopher Pala, The St. Petersburg Times, October 23, 2001. Kazakhstans New Foreign Investment Law, Robert M. Cutler, Central Asia-Caucasus Analyst, February 26, 2003.

11

In 2006 Kazakh environmental authorities demanded that TCO shut down operations as a result of the continued open-air storage of sulfur. TCO believed that the environmental debates were partly the result of intra-Kazakhstan tax debates, as the Kazakh federal government had recently garnered all consortium taxes to the federal level, eliminating tax flows to the producing regions government. The local area courts at that time began imposing ecological damage assessments and fines on the consortium. After paying fines of more than $150 million in 2006, the consortium agreed to spend another $300 million over the 2007-2010 period on a variety of environmental protection measures, again primarily around sulfur storage. TCO now made major new investments in both sulfur pellet production facilities as well as sour gas injection (SGI) facilities, in which the hydrogen sulfide gases were re-injected into the Tengiz reservoir. Tengiz now had six sulfur processing facilities in operation, the last of which alone cost $7.4 billion. The SGI facilities came on-line in early 2008, allowing Tengiz production to hit more than 540,000 bbls/d in 2008, and 700,000 bbls/d in 2009, as seen in Exhibit 5.

Exhibit 5. Tengiz Production and Events

Bbls/day
1,200,000
Tengiz field discovered in 1979 and operated by Kazakh government on minimal level until 1992. TCO completes $7.4 billion 2nd expansion of Tengiz including Sour Gas Injection (SGI) facilities and sulfur processing plants TCO & Kazakh government debate how Tengiz expansion to be financed CPC pipeline consortium finally organized May 1997 TCO commits to $15 billion expansion by 2016

1,000,000

800,000

600,000

TCO fined for open-air sulfur storage

400,000

Chevron forms TengizChevroil (TCO) and enters partnership with Kazakhstan to develop Tengiz

200,000

In 2010 TCO sending 420,000 bbls/d through CPC, another 200,000 bbls/d by rail to the Black Sea, and 100,000 bbls/d to Baku and BTC pipe

TengizChevroil (TCO): Chevron 50% (US), ExxonMobil 25% (US), KazMunaiGas 20% (Kazakhstan), LukArco 5% (Russia).

The Caspian 2010 Thirty years after the fields discovery, Tengiz production was only now approaching levels thought imminent a decade ago. TCO continued to postpone additional production capacity until transportation primarily CPC pipeline capacity expansion happens.

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By 2009 Tengiz was exporting 400,000 bbls/d via the CPC pipeline (at capacity) and another 300,000 bbls/d (plus sulfur and liquefied petroleum gas, LPG) by rail.12 The rail routes are complex; 200,000 bbls/d go north around the Caspian and across Russia to the Black Sea, with the other 100,000 bbls/d going south to a Kazakh port on the Caspian, across the Caspian Sea by barge to Baku, where it is loaded once again on rail cars for passage to the Black Sea port city of Batumi in Georgia. Rail transportation continues to be costly, roughly $6/bbl, and capacity limits are in sight. And although both transit routes end at the Black Sea, one is Russian-controlled and the other is not. The summer of 2010 saw a number of new events, some positive, some negative, for Tengizs outlook. First, the Russian government, which had repeatedly argued that it never promised an expansion in CPCs capacity, announced it would soon begin the expansion after all. TCO responded soon after that it would also begin a major expansion of Tengiz, estimated at $16 billion over the 2012 to 2017 period, but only if a number of other new issues were settled with a variety of government ministries. C Export tax. The Kazakh Oil and Gas Ministry announced in July that it was re-imposing an export tax on all hydrocarbons, and Tengiz would have to pay. Previously the joint venture had not been subject to the tax. TCO argued that it had a permanent exemption under its operating agreement. Illegal production. The Oil and Gas Ministry launched a criminal investigation against TCO in July for what it termed illegal production, for producing oil and gas from depths at Tengiz not allowed under its production agreement. TCO argued that the production agreement had no such restrictions. Illegal flaring. The Kazakh Environmental Ministry imposed a $1.4 million fine on TCO for recent gas flaring. TCO, which had recently finished a $258 million investment in gas capture and recycling facilities, explained that the flaring was the result of an emergency situation. International employee work permits. The Kazakh Labor Ministry announced in August that all international employees of TCO would now be required to have both work visas and work permits. The work permits, never required before, are customarily much more difficult to obtain.

Despite Chevrons continuing problems with the Kazakh government and the difficulty in producing and moving ever-greater volumes of crude from Tengiz, the development had been an economic windfall to Kazakhstan. As illustrated in Exhibit 6, total payments to Kazakhstan had reached $10 billion in 2010, approaching 10% of the countrys entire GDP. Cumulatively, since startup, TCO had contributed $45 billion to the newborn country. Although Tengiz was now producing and profitable, it was still far from reaching its productive promise. A field with a productive capability of more than 1 million barrels per day continued to produce only 70% of that. Chevron now needed to reassess prospective returns on new investment in Tengiz.
Kazakhstans plans to boost oil output by 60 percent over the next decade may hinge on the states ability to reassure foreign majors that their billion-dollar investments will be protected by law, industry officials said. Foreign oil executives say privately they are concerned about growing state influence in Kazakhstans lucrative energy sector and changes to the tax regime in a country with slightly more than 3 percent of the worlds recoverable oil reserves.The laws are relatively simple, but they leave too much to the discretion of the government, said a lawyer active in the energy sector. Kazakh Oil Plans Vex Foreigners, The Moscow Times, October 13, 2010.

12

New Regional Export Capability Critical to Realising Kazakhstans Oil Potential, Ian MacDonald, Vice President of Chevron Europe, Eurasia and Middle East Exploration and Production, Exploration and Production, Volume 7 Issue 2, 2009, p. 27-30.

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Exhibit 6. TCO Payments to Kazakhstan (millions of US$)

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Payments = payments to employees and Kazakhstani goods and services, including salaries, rail and pipeline tariffs, and payments to local suppliers and other. Distributions are dividends distributed by the joint venture to Kazakhstan (KMG). Royalties and taxes are composed nearly entirely of corporate income taxes paid by the joint venture to the Republic of Kazakhstan. Source: Tengizchevroil, April 2011.

Payments

Distributions

Royalties & Taxes