Oil Ventures in U.S.S.R.: Open Hands and Hurdles : Oil: The Soviets need help to tap vast reserves and bolster their economy. But benefits from joint ventures such as Chevron’s Tengiz deal are a long way off.
Chevron Corp.’s deal with the Soviet Union to study possible oil production there moves the Western petroleum industry’s nose a little farther into the Soviet tent.
The deal, announced over the weekend, would let Chevron study the feasibility of developing the massive Tengiz oil field in the northeast Caspian Sea area and could lead to the largest U.S.-Soviet oil joint venture ever.
Coming on the heels of an exploration and production agreement between the Soviets and France’s state-owned Elf Aquitaine oil concern last month, the deal signals stepped-up activity by the Soviets to bring Western companies in to help turn around their flagging oil industry.
The Soviet Union needs Western hard currency and technology to modernize an antiquated oil and gas infrastructure, reverse a drop in its massive oil production and exporting business, and bolster a sagging economy.
Of most significance this time around is Moscow’s apparent willingness to grant its Western partners an equity stake in the oil to be produced, comparable to arrangements reached to develop oil in the North Sea. For decades, the Soviets locked out Western partners, preferring to buy technology or expertise in exchange for a fee, trade experts said.
For Western companies, the deals promise a break in the bureaucratic logjam that has held up talks, sometimes for years, aimed at opening up the Soviet Union’s gigantic but fallow oil fields.
Chevron will get a crack at a field that is estimated to have 25 billion barrels of oil reserves--2 1/2 times as much as Alaska’s immense Prudhoe Bay field. Given that Alaska accounts for 20% of U.S. oil production, access to Soviet fields could significantly enhance the position of American companies and lessen the probability of price spikes resulting from production cuts by the Organization of Petroleum Exporting Countries, analysts said.
Among California’s other oil companies, Occidental Petroleum Corp. is perhaps farthest along with a couple of Soviet joint ventures. One is a proposed petrochemical complex near the Tengiz oil field, the other a second proposed chemical plant in the Ukraine.
But actual production from any Western-Soviet joint venture is a long way off, and analysts caution that many key details--especially how ownership of the oil will be divided and how revenue will be shared--remain to be worked out. For one thing, it’s tough to sort out who owns what in a nation that has been historically suspicious about the concept of private property and equally suspicious about selling off precious assets to foreigners.
“It would be very foolish not to articulate some reservations or caution about the venture,” said industry analyst Bernard J. Picchi at the Salomon Bros. investment firm in New York. “The experience of companies operating in the oil and gas area in the U.S.S.R. has not been a particularly encouraging one.”
Of more than 1,300 joint ventures that have been signed with the Soviets since they accepted the idea in 1987, fewer than 20% are operational, according to the consulting firm Booz, Allen & Hamilton Inc. in San Francisco. The firm said bureaucratic delays, difficulties with foreign exchange and lack of a legal framework on which to build agreements have been among the problems.
Complicating the matter is the changing political complexion of the Soviet Union. Where the central government once negotiated foreign ventures exclusively, now regional governments are asserting their own rights to income and are asking to be invited to the table.
That is reflected in the Chevron accord. It includes not only the Soviet Ministry of Oil and Gas Industry, the main government energy agency, but also the Kazakh Republic, where the field lies, and Tengizneftegaz, the Soviet operating company that would actually become Chevron’s partner. In previous arrangements, the operating company would simply have taken its cues from the central government, said Jeffrey A. Burt, a Washington lawyer and Soviet trade expert.
Once an agreement is signed, the project can run into other problems. As Occidental discovered recently when it was forced to postpone construction of its Ukrainian chemical plant, local groups are becoming much less shy about voicing environmental concerns.
For now, the Soviet Union remains the world’s largest producer and exporter of oil, accounting for roughly a fifth of worldwide production. Among producers, it is followed by the United States and Saudi Arabia.
But Soviet oil production has been declining, falling to about 11.8 million barrels a day in the first quarter of this year from 12.1 million in 1989 and 12.5 million in 1988, according to Booz, Allen & Hamilton.
That still dwarfs U.S. production, which has declined to about 7.5 million barrels a day in the first quarter of 1990 from 7.7 million last year.
Nevertheless, it’s an alarming trend to the Soviets, who supply much of the energy for Eastern Europe and rely on oil exports for income. Soviet exports fell to 3.9 million barrels a day in 1989 from 4.1 million in 1988, Booz Allen reported.
Some of the decline can be attributed to political strife, such as that in the oil industry centers of Kazakhstan and Azerbaijan, or to labor problems.
But much of the slide can be attributed to Soviet equipment and techniques that are sometimes 10 to 20 years behind the West, as well as lack of investment capital. And that’s where the West comes in, analysts said.
With minimal delays, Western ventures could boost Soviet oil production as much as 1 million to 2 million barrels a day by the end of the decade, said John Elting Treat, an international oil analyst with Booz Allen.
“Quite possibly, the capital is more of a constraint to them than the technology,” said Martin Pranga, manager of foreign affairs with Amoco Corp. in Chicago, which is talking with the Soviets about a number of potential oil projects.
On the technology side, the Soviets seem most interested in offshore oil drilling and so-called enhanced oil recovery, techniques that can extend the lives of mature fields, experts said.
Before the reforms precipitated by President Mikhail S. Gorbachev, the Soviet oil industry, under pressure to meet rigorous five-year-plan goals, not only overproduced in new oil fields but also diminished the fields’ longevity through imprudent production techniques. Enhanced oil recovery methods can revive those areas.
THE SOVIETS’ FLAGGING OIL PRODUCTION
Daily oil production, in billions of barrels:
First quarter, 1990: 11.8 billion barrels.
CHEVRON’S DEAL WITH THE SOVIETS
Joint development of the Tengiz field would provide the Soviets with needed hard currency and update its drilling equipment and techniques, which are sometimes 10 to 20 years behind the West.
