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Kazakhstan: Largest Oil Venture Sticking With Expansion Plans, Despite Risks

  • Michael Lelyveld

Kazakhstan's largest oil investor is sticking with expansion plans despite the risk of a global recession following recent terrorist attacks on the United States. But the company says it could slow down its project a year from now if oil prices drop due to an economic slump.

Almaty, 20 September 2001 (RFE/RL) -- The biggest oil venture in Kazakhstan says it has no plans to slow down expansion but says it is keeping its options open in case of a worldwide recession.

Tom Winterton is general director of the joint venture called Tengizchevroil. He says the company is going ahead with a $2 billion program to boost production after the first major pipeline from the region opens as soon as next week.

The operation -- led by the U.S.-based Chevron Corporation at the giant Tengiz oilfield -- is poised to grow with the official opening of a 1,600-kilometer pipeline to the Black Sea.

The new export route to Russia's port of Novorossiysk will set the stage for greater investment at Tengiz, which could raise output from 12 million tons a year to 19 million tons by 2005.

There is now a risk, however, that the outlook for world oil supplies could turn from a situation of shortage to surplus if a global recession results from the 11 September terrorist attacks on the United States.

In an interview yesterday, Winterton acknowledged that the crisis could eventually affect the oil business by reducing economic activity and demand for energy around the world.

"Obviously, any time the oil price moves in one direction or another by any significant magnitude, it's going to have an impact on an operation like ours."

Development plans at Tengiz were slowed in 1998 and 1999, when world oil prices dipped to $10 per barrel. Winterton said the joint venture with Kazakhstan, ExxonMobil, and the Lukarco partnership could take similar steps if prices drop sharply again:

"Obviously, any time that the oil price moves down significantly, we'll be looking to conserve wherever we can, and we are always focused on minimizing our operating expenses. There is a level of capital programs that we would look at to see if we can't postpone. And then the last thing that you would consider would be a delay in the rate of implementing some of these other growth projects."

But Winterton said there is no point in delaying the opening of the $2.6 billion pipeline after two years of construction by the Caspian Pipeline Consortium.

"The money is spent on the pipeline, and the way to get the revenue out is to, as expeditiously as possible, put it in operation."

Winterton said his company will not have to make a decision on cutting spending for another year because the first phase of the expansion at Tengiz will involve early engineering work before any heavy construction begins.

But experience suggests that times could turn hard for many countries in the region if a slump in oil prices occurs. Big oil companies invest for the long term, knowing that markets rise and fall. But Kazakhstan, like Russia and the other Caspian countries, remains heavily reliant on oil for economic growth.

The higher prices of the past two years have brought annual economic growth rates of up to 10 percent to many countries in the region. Moukhit Akhanov is vice-president and managing director of the International Tax and Investment Center in Kazakhstan. In a recent interview, he credited the Kazakh government with cutting taxes to keep growth rates high, even though oil prices have leveled off.

Kazakhstan and Azerbaijan also have created national funds using surplus oil revenues that could help them weather a price drop, if it comes. But a prolonged slowdown is still likely to be a serious setback for the Caspian region, since most countries have pinned their hopes on revenues from oil.