August 30th, 2019
Courtesy of The New York Times, a look at a Chevron-led joint venture among several energy companies that is spending billions of dollars in Kazakhstan to expand an oil field remarkable for its longevity, promise and risk:
In a windswept land of salt flats and wild horses, investors are pouring money into one of the largest and most lucrative oil fields outside the Middle East.
Oil has been pumped from this remote plain since the early 1990s at a pace that would have depleted other fields by now. Yet it is still gushing, and there is much more to come.
The field’s operators, led by the American giant Chevron, are defying conventional industry wisdom with an enormous expansion that they hope will increase production nearly 50percent, to the rarefied mark of a million barrels a day. They expect the oil field to be vibrant for decades.
But the project is complex, and the world’s demand for oil is flattening. A question hangs over the expanse of workers and heavy machinery: Is this a smart way to spend $37 billion?
About 48,000 people, most of them Kazakhs, are working on the expansion, many living in dormitory-like buildings. Pieces of equipment weighing hundreds of tons — hulking sections of electric power stations and oil-processing units — arrive daily from factories in Italy, South Korea and Turkey. After a voyage through Russia’s inland waterways to a newly built port on the Caspian Sea, the segments are hauled about 40 miles to the oil field, where a 3,200-ton crane hoists them up and eases them into place.
Wood Mackenzie, a market research firm, describes the effort as the industry’s largest undertaking in a decade.
“This is a project every company would like to have if they could,” said J. Robinson West, the managing director of the BCG Center for Energy Impact, a consulting firm.
The expansion is about three years from completion, but the Tengiz oil field already provides nearly a quarter of Kazakhstan’s national revenue, and about a quarter of Chevron’s profits. Chevron approved the project in 2016 at what may have seemed like an inopportune time: The world was awash in oil, and the industry was still reeling from a price collapse that had begun in 2014. Expanding the Tengiz operation appeared to be a good bet because the field had performed so well in the past and because Chevron places a high value on its relationship with Kazakhstan.
“When we looked at this, it was the major capital project that we felt was worthy,” said Todd Levy, Chevron’s exploration and production president for Europe, Eurasia and the Middle East.
Still, the expansion remains a calculated gamble.
It begins with the weather. Ice on the Caspian can halt shipments of equipment, idling thousands of workers. Chevron has had good luck so far, officials said, and the project is more than half finished.
Making progress at Tengiz also requires maintaining good relations with Moscow, which has not forgotten that Kazakhstan was a Soviet republic until the early 1990s. Russia looms over its neighbor along the 4,200-mile border they share, with equipment bound for Tengiz moving through Russia’s waterways and crude oil from Tengiz shipped through a Russian port on the Black Sea. It helps that the Russian company Lukoil is a partner in the joint venture, known as Tengizchevroil.
At some point, Kazakhstan could reconsider its relationship with Chevron and Exxon Mobil, the other American company involved in the expansion effort. Chevron has been careful to stay on government officials’ good side by engaging in frequent dialogue, but some analysts note that Kazakhstan is in the midst of a political transition after three decades under the same leader. The new government, analysts said, may decide that the terms of its decades-old agreement are too favorable to the oil companies and seek to rewrite it.
A continuing challenge is the hiring and training of tens of thousands of new workers. All of them must be fed, housed and transported with productivity in mind. “Do you have the ability to manage that effectively, efficiently, safely?” said Jim Mayeaux, the site manager assigned to the operation by Exxon Mobil.
For young Kazakh professionals, the project is a rare shot at the big time. Togzhan Abdeshova, 29, started working in Tengiz fresh out of college in 2011, before the expansion began, and is receiving engineering training from Chevron. “This experience will help us work at any other plants worldwide,” she said.
Expatriates like John Omelchenko, 58, a Chevron drilling supervisor known as Johnny O, are introducing the latest techniques to Tengiz. Flown in from Maryland, Mr. Omelchenko works weeks at a time: 28 days on, 28 days off.
He relishes the remote drilling sites, where pet dogs ward off foxes and wolves. But he said the long absences from home had been tough on his wife. “The car or the refrigerator are always breaking” in the months he is away, he said wryly.
Keeping the peace in an isolated work force of many ethnic backgrounds is another challenge. Kazakh workers have complained about inferior pay and working conditions compared with those of expatriates, and the concerns fed into a violent fracas in June that left 40 workers hurt.
Contractors pulled workers from the site, and management was forced to suspend operations. In the end, the locals were promised a 7 percent pay raise, said one contracting company official, and work slowly resumed.
The Tengiz project is expensive and tricky, but the most daunting risk may be broader concerns about fossil fuels’ role in climate change. In short, will demand for oil shrink before the full profits from the expansion flow? Barring recession, global oil consumption has tended to rise. But climate concerns are accelerating a shift toward alternative energy, and may eventually sap demand for oil.
Carbon Tracker, a nonprofit group that advises investors on risk, argues that future limits on oil consumption make it unlikely that Chevron can earn an acceptable return on the billions it is spending at Tengiz. Andrew Grant, a senior analyst at the group, said that the oil field expansion “amounts to a bet on the failure” of the world to keep temperatures within limits set by the Paris climate accord.
For Tengizchevroil, which is composed of Chevron, with a 50 percent stake; Exxon Mobil, at 25 percent; KazMunayGas, Kazakhstan’s national oil company, at 20 percent; and Lukoil, at 5 percent, the potential gains still outweigh the risks.
One simple reason is that oil fields the size of Tengiz — which, including a smaller nearby field, is estimated to have up to 11 billion barrels of recoverable oil — are rare.
“This is the quintessential project of my career and really in the industry today,” said Mick Kraly, a veteran Chevron manager who heads the expansion.
But Tengiz, which Soviet geologists discovered in the 1970s, is also more complicated than most other fields. Its oil comes out of the ground with a potentially fatal gas, hydrogen sulfide. Local oil people still talk about a towering well blowout in 1985 that spewed pollution for miles.
The need for huge installations to safely separate the oil from natural gas and hydrogen sulfide gave Chevron an opening when the Soviet Union crumbled in 1991. Nursultan Nazarbayev, who was Kazakhstan’s leader at the time and remained in the job until he retired in March, wanted to bring in a reliable operator to generate cash to bolster his fledgling independent country of 19 million people.
“It would have been very difficult to do this ourselves,” said Meiram Shldenov, a control room supervisor for Tengizchevroil. In 1993, Mr. Nazarbayev signed a 40-year contract with Chevron that began what most observers say has been a mutually beneficial relationship. Tengizchevroil is Kazakhstan’s largest taxpayer.
Mr. Nazarbayev’s handpicked successor, Kassym-Jomart Tokayev, is now running the country, and Chevron’s top executive in the country seems sanguine. Eimear Bonner, who is Tengizchevroil’s general director, said that she saw no problems if Chevron continued to deliver on its promises to meet production targets and treat workers well.
“We have had a very successful, transparent relationship,” Ms. Bonner said. “I am not concerned at all.”
Others are somewhat more guarded. Francisco Monaldi, a fellow at Rice University’s Baker Institute who has worked in Kazakhstan, said that “any transition in an authoritarian rule” could lead to political instability. That, he added, might push the government to grab a bigger share of the returns on investments like Chevron’s.
Ms. Bonner, a native of Northern Ireland, runs the joint venture from offices in Atyrau, the country’s oil capital, while her husband, an oil executive, stays home with their two daughters. She insisted that Chevron’s regular engagement with Kazakh officials and the steps the company was taking to fend off corruption, a major problem for businesses in Kazakhstan, were keeping the project on track.
“There is always a risk when you are a big business like our business anywhere in the world and when you are spending the amount of money you are spending,” she said.
Because the project is so crucial to Chevron’s future, the company has assembled a team of expatriate stalwarts to push it over the line. In addition, a team of biologists monitors the impact of excavation work on seals and birds. Although the steppes may seem barren, they nurture wildlife. Orange clouds of painted lady butterflies swarm there on their way to Northern Europe, and herds of wild horses roam among the oil installations.
For some industry veterans, Tengiz seems like a kind of last hurrah.
“This is our playground,” said Jay Pence, a construction manager from Port Arthur, Tex., walking toward a giant crane as heavy vehicles rumbled past. “For those who like this stuff, it is a blast.”
Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.