Business Week - 11 Sep 08

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 15 Dec 08)

Astana: Oil dollars have made the capital a glittering gem among the republics. -James Hill/Contact
Ray Vella
Kazakh President Nazarbayev is wary of antagonizing Moscow. - Shamil Zhumatov (KAZAKHSTAN) Reuters

IN DEPTH September 11, 2008, 5:00PM EST

Kazakh Oil: A War of Nerves

Russian brinkmanship could imperil the flow of oil and money across the Caspian to Europe

by Steve LeVine

ASTANA - On the scorching, scrub-dotted steppe along the east coast of the Caspian Sea, a Chevron (CVX)-led team is opening up the taps on 50 new wells at the supergiant Tengiz oil field. Fifteen years after snagging rights to the Kazakhstan field, the U.S. oil giant is at last doubling production to 540,000 barrels a day, its largest single source of oil in the world.

Tengiz is a prize, and Chevron has spent bundles to secure it. In the nearby city of Atyrau, the headquarters and logo of Chevron's joint venture dominate the skyline, while company townhouses in the city center include pools, a gym, and schools for the expat oilmen and their families. You would think Chevron's victory in this remote oil patch was complete.

Yet getting the oil out of the landlocked country has always been a tricky affair: Russia has blocked, stalled, and restricted the flow of Tengiz oil through its territory since the first day Chevron took over the field. Teaming up with the Kazakhs, Chevron has resorted to shipping some of its oil across the Caspian Sea to Baku, the capital of Azerbaijan, and then via pipeline and railroad to Georgia's Black Sea coast in an effort to avoid Russia. These days, Chevron does ship most of its oil through Russia, but for safety's sake it hopes to build a long, new pipeline across Georgia and export more through that route.


The plans for the corridor, though, were drawn before Russia's summer romp through Georgia. Suddenly, that tiny Caucasian state - embraced by Washington in a bold plan to pry it away from Moscow's grip - seems much less secure. The republics along the route and the companies working there are wearing their game faces, saying it's not clear the conflict in Georgia changed anything. Chevron regional vice-president Ian MacDonald says "it's too early to say" whether the Georgia events will cause transportation problems. But already Kazakhstan has canceled plans to build a refinery on the Georgian coast, and Big Oil is privately scrambling to assess how much of a setback its export plans have suffered.

The face-off with Moscow could affect not only Georgian sovereignty but also the energy business all the way from Kazakhstan to Western Europe. For the landlocked Caspian nations, it could become difficult or even impossible to secure the financing they need to expand the oil-and-gas corridor to the Georgian Black Sea. For Europe, which receives a full third of its natural gas and oil from Russia, the danger is that Moscow becomes far more demanding on political and economic issues. "There has been a decided shift in negotiating power," says Jonathan Simpson, a legal adviser on European gas pipeline deals with Russia. "This excursion has given [the Russians] a big stick at the table . . . . I don't see pressure from the U.S. having any impact at all."


Even before the Georgia mini-war, Russia was playing for keeps in the region. Starting in the 1990s, Russia often got its way by manipulating its oil and natural gas pipelines, which, despite the West's efforts, still dominate Caspian output. Russian pipelines ship more than 85% of the 6.3 million barrels of oil exported daily from the former Soviet Union. In its struggles with the republics, Russia has turned its spigots off and on repeatedly. In 1993, for instance, Moscow shut off Turkmenistan's gas exports to the West, forcing the Turkmen to sell at a lower price to Ukraine.

Kazakhstan has been the biggest prize of all. It didn't look that way in the Soviet Union's last days, when the flow of money from Moscow slowed considerably, and Kazakhstan had to take out a loan to feed its cattle. It had Tengiz, with at least 9 billion barrels of reserves, plus 13 billion-barrel Kashagan, the largest oil discovery anywhere in 40 years. Yet it was still hard to picture how a territory lacking a single private office building, in which the biggest business was importing Coke and whiskey, would become a petro-state.