OKIOC to Drill the Remaining 500 m of the Bore-well in Eastern Kashagan


ALMATY, March 28


On Tuesday the OKIOC announced the beginning of the final drilling phase in Eastern Kashagan, which is �the last phase of oil prospecting�, according to the company's General Manager.

Kit Dallard said the final testing phase for the equipment had started last Sunday, and that work was due to begin in the middle of the week.

�We will drill the collector stratum and at the same time test the equipment, including associated apparatus, at high pressure, so that we will be able to carry out the necessary work over the next few weeks or months,� he said.

Mr. Dallard added that in the second quarter of the year they planned to conduct logging research and tests.

�By mid 2000 we will have solid data to know what is there. If the well is "dry", we will know this far earlier. If we are successful, we will start probing,� he announced.

The Kashagan 100 km structure is the biggest in the world. The predicted oil resources are over 1.5 billion tons. Today the depth of the Eastern Kashagan 1 well (where drilling began on August 12, 1999) is about 4,000m. There are plans to drill a further 500m (to a total depth of 4,650m, according to OKIOC calculations). The total area of the Kazakhstan part of the northern Caspian shelf, included in the OKIOC's program on prospecting drilling is about 6,000 sq. km.

�To have an idea of the size of the entire oilfield, we will have to drill the next well in Eastern Kashagan within 40km of where we are at present,� Kit Dallard underlined.

Drilling on that site is due to begin in the summer. Mr. Dallard has emphasised that the company is thoroughly preparing for the drilling, but that this drilling would depend entirely on the results from the first well.

�Kashagan oil will be close to oil from the Tengiz oilfield, the nearest well of which is 130 km from us. All liquids are expected to be saturated with sulphur, hydrogen and other elements. This will mean a higher cost for the works, but we have technical solutions for that,� he said.

The OKIOC General Manager said that since 1993 when the two-dimensional seismic prospecting program had been started, investment in those companies participating first in the �Kazakhstancaspishelf�, then OKIOC's investments in Kazakhstan had come to approximately US$600 million.

�Until we know the results, it is difficult to talk about the oil and gas transit route in concrete terms. We do not have any particular preferences, but we will see what systems there are, what additional systems need to be constructed, and by then we should have a clear idea of all of the options,� Kit Dallard remarked.

The OKIOC General Manager confirmed the company's interest in future exploitation of promising deposits in neighbouring Kalkamas, Aktoty and Kairan.

CPC Signs Contract with Turkish Company for Rehabilitation of the Kazakhstan Section of the Oil Pipeline System

Oil Pipeline to be Filled from Atyrau in January 2001


ALMATY, March 29


�The Caspian Pipeline Consortium (CPC) signed a US$45 million contract with the Turkish company Tekfen Construction and Installation Co. to rehabilitate the Kazakhstan section of the pipeline system,� the CPC General Director announced on Wednesday in Almaty.

The modernisation of Kazakhstan CPC assets includes the construction of a new pump station at Atyrau, an increase in the capacitiy of the pump station at Tengiz and the rehabilitation of the power transmission line from Tengiz to the Russian border.

�We have studied the section from Atyrau to Tengiz and the results are good. Soon we will start studying the next phase from Atyrau to the Russian border. The total value of the contract, either US$45.5 or US$55 million, will depend on this,� the General Director said.

Atyrau oblast Akim, Imangali Tasmagambetov, said that up to 25% of the total contract value would go to the local budget.

A significant part of works in the new contract will be carried out by a Kazakhstan subcontractor, Intergasstroy, exploiting the Karachaganak deposit.

This contract marks the completion of the tender process, according to Victor Fedotov.

Earlier contract tenders have also been concluded namely: for supply of pipes for the main oil pipeline (December 1998, US$155.6 million), for the construction of a sea terminal in Novorossyisk (March 1999, US$36 million), for construction and modernisation of the Russian power transmission line (April, 1999, US$270 million), for creation of a main communications system (May 1999), for the construction and modernisation of Russian oil pump stations (December 1999, US$80 million).

According to Victor Fedotov, the filling of the pipeline from Atyrau will be begin on January 1, 2001.

�Tengizchevroil (TCO) will provide us with 28 million tons of oil annually, or rather 5,000 tons per day. The initial construction phase, which will enable these volumes to be transported, will be fully completed in October 2001,� he added.

Three proposals for pipeline security (i.e. non-departmental, private or hired security) has been submitted to CPC shareholders for consideration.

The Deputy Minister of Energy, Industry and Trade said that currently Kazakhstan exported about 8.5 million tons of oil per year through the Russian oil pipeline system. According to Kanat Bozumbayev, all oil companies where the Ministry holds agreements on supplies to local refineries will be given higher quotas for supplies to foreign countries, as a compensation for possible reduction of profits. Nick Zana, Managing Director of Chevron, a shareholder of TCO and CPC, announced in a public statement that by the end of this year the construction of the fifth complex-technological line at Tengiz would help to increase oil production up to 12 million tons.

N.B.: the CPC was established in 1992 by Russia, Kazakhstan and Oman to construct a 1,580 km long pipeline and to transport crude oil from Tengiz and other oilfields neighbouring Kazakhstan to the terminal near Novorossyisk. The oil will pass through Kazakhstan territory (CPC-K), the Astrakhan oblast, then the Kalmykia, Stavropol and Krasnodar regions of Russia (CPC-R). The Kazakhstan part of the pipeline is about 452 km in length.

The initial capacity of the pipeline will be 28.2 million tons of oil per year, after completion of additional works it is expected to grow to 67 million tons.

Kazakhstan's ownership of CPC is 19%, with Russia holding 24%, Oman 7%,and the remaining 50% is distributed among different companies, including the CPC's main shareholders Chevron and Lukarko (15% and 12.5% respectively).

Overstretched Gazprom Seeks Vital Capital

March 28 (Stratfor)


For years, Russia's giant natural gas concern, Gazprom, has been a powerful player throughout Europe and the former Soviet Union. But the company's profits have suffered, as the government in Moscow has diverted capital from maintenance to politically useful projects. The rising costs of these projects will soon be joined by rising taxes; Gazprom's tax bill just doubled. As a result, the company will need greater help from the government in raising capital. The price will likely be even more government control as the company finds itself at the center of Moscow's efforts to assert greater influence over the economy.


Gazprom, Russia's natural gas monopoly, needs new capital to both repair and expand its 150,000 kilometer pipeline network � a network that supplies gas to most of the former Soviet Union and much of Europe. But because the company is partly owned by the Russian government, it has spent much of its capital on ambitious, though as yet unrealized projects, such as pipelines to Turkey and China. The result is an increasingly impoverished giant in need of either foreign or government investment.

The company is now poised to seek both. European utilities are the likeliest foreign investors; these utilities are anxious to secure their own gas supplies with which to furnish power. But Russian law only allows 20 percent of the stock to be held by foreigners. As a result, it seems likely that the Putin government now taking shape in Moscow will very soon have to deal with Gazprom, helping the company raise some of its money from within the Russian treasury. The price will likely be a greater level of government control over the company and ultimately the economy.

Despite Gazprom's monopoly, it lacks the power and punch that a company of its size should have. The Kremlin, which owns 38.37 percent of Gazprom, uses the company to advance political goals that don't yield profit. Examples include the $2 billion Blue Stream pipeline to Turkey and a proposed $4 billion line from Russia to China. A particularly good example can be found in the remote separatist region of eastern Moldova, known as Trans-Dnestr. The government in Moscow has forced Gazprom to sell $493 million worth of gas � in exchange for nothing but credit from the local government. The company endures its share of deadbeats abroad. Ukraine owes $1.9 billion. Moldova owes $270 million. At home, the company must supply Russia's biggest electricity provider with gas � for free.

Now the cash-strapped company faces a new problem: rising taxes. Moscow plans to carve $7.25 billion in taxes out of Gazprom's $9.2 billion of export earnings this year � over one quarter of the entire federal government's total revenues. This leaves less than $2 billion for maintaining its extensive pipeline network and sustaining its expansion plans. This amount is insufficient. According to the U.S. Department of Energy, as much as 20 percent of the company's gas leaks out of its lines en route to consumers; the $1.2 billion Gazprom estimates is required to maintain current production is likely an overly optimistic assessment.

Gazprom's dilapidated infrastructure leaves it with limited options and the company is entertaining a desperate measure: turning to nearby Turkmenistan for additional gas. Since the company cannot afford to repair its network, Gazprom deputy chief executive Valery Remezov stated on Feb. 27 that the company would cut its production from 545.6 billion cubic meters last year to 520 billion cubic meters this year. As a result, Remezov said Gazprom "will need to attract gas from Turkmenistan" � which holds the world's fourth largest gas reserves � to cover Gazprom's domestic and international commitments, Reuters reported.

But the Turkmen plan seems unlikely to succeed. The Turkmen government appears unwilling to strike any more deals with Gazprom under the generous terms of recent years. Iran and Turkey both purchase Turkmen gas for about $40 � paid in hard currency � for each 1,000 cubic meters of gas; the company only pays $36, only 40 percent of which is paid in cash. The rest is paid by barter. The Turkmen government has been insisting that Gazprom pay $42 per 1,000 feet with at least half of the payment in hard currency. Turkmenistan seems more interested in striking deals with Turkey, Iran and Europe � customers who can pay � than Russia.

The company, as a result, has little recourse but to seek foreign investment. Gazprom's deputy chief executive, Sergei Dubinin, said on March 23 that the percentage of Gazprom shares that could be held by foreigners would increase from 5.5 percent to 20 percent � the maximum under Russian law � over the next four years. Likely candidates include the primary foreign holder of Gazprom shares, Germany's Ruhrgas. European investors will likely wait until June, the month in which Gazprom selects its new board of directors. Companies too squeamish to invest directly will do what Italy's ENI has done: participate in joint ventures like the Blue Stream project.

Another option for foreign investment is to extend the consortium method already used in Russia's oil industry. Russian oil � like Russian gas � is extracted from remote and difficult locations. The prohibitive expense makes it almost impossible for a single company to carry the costs itself. Therefore Gazprom could engage in multi-national consortiums on a project-by-project basis with the Russian government in order to obtain the necessary funding. The Russian government and the Russian oil firm LUKoil already operate in this manner, in league with foreign firms such as Chevron and Mobil in building the massive Tengiz-Novorossiysk oil pipeline.

This increase of foreign involvement in Gazprom shows a glimpse into the way Russian President Vladimir Putin's plans for the economy might actually work. Putin has said that he wants to open the economy to foreign investment while consolidating central control over key industries. With a few nimble pitches to foreign gas buyers, Russia may just be able to make these seeming incompatible goals a reality.

Gazprom � and Moscow � may indeed allow foreigners to own a fifth of Russia's gas industry. But those shares will likely be taken from the fifth that are held by domestic investors � not from the Kremlin's own stocks. A twist in Russian law ensures that when sold on the international market, these shares fetch almost triple what they do on the Russian market. Such a move could raise as much as $3.3 billion, according to Bloomberg, without diluting Kremlin control.

In fact, there are already signs that the Kremlin is tightening its grip. Fuel and Energy Minister Viktor Kalyuzhny on Feb. 29 called on Gazprom to present his ministry with separate financial statements on its production and transport activities; such statements would make it easier for the government to manipulate Gazprom. Kalyuzhny is in a good position to make his demands a reality � Kalyuzhny and Deputy Prime Minister Viktor Khristenko are two of the 11 government representatives nominated to form Gazprom's board in June. Their election will demonstrate to foreign investors where the company is headed, and who is ultimately in charge.

Moscow is nationalizing Gazprom's leadership, instead of the company itself. This allows the Kremlin to continue to dictate Gazprom's project schedule, allowing Russia to pursue gas projects based on political expediency. However, by leaving shares open to foreign investors Moscow seeks to ensure that it will not have to pay for all of the projects alone � while continuing to sell gas to a Europe hungry for energy.

Gasprom, Russia's biggest company is being analysed by Stratfor, right after the Presidential election due to the fact that in June, two people from Putin's government, the Minister, Kalyuzhny, and the deputy Prime Minister, Khristenko, will form the Gasprom Board of Directors.

Stratfor attracts attention to both the strong and weak aspects of this veritable Russian giant. In the authors' opinion, the scenario could develop in two directions.

The first direction. President Putin will sell a certain number (not more than 20%) of shares to foreign investors. This is already being put into practice. On March 29 Gasprom and the German firm Rurgas AG signed an agreement, which stipulates joint ventures for transport, storage and the distribution gas. The second variant is the creation of consortiums according in the style of Russian oil industry models. For example, LUKoil works on the CPC jointly with Chevron and Mobil. In the same way Gasprom may participate in multi-national consortiums and obtain necessary financing.

Currently, however, the most important thing is Turkmen gas. Stratfor feels that Gasprom's plan on attracting Turkmen gas will not succeed, as Ashgabad is more interested in deals with Iran and Turkey, that are more certain to cost in.

In fact, Gasprom is oriented to the west and Central Europe, while the CIS has been directed towards the Itera company, which Russian reviewers call the key gas operator of the Commonwealth. It is noteworthy that Itera's first vice-President, Valery Otchertsov, once was the deputy Prime Minister of Turkmenistan. It is expected that Turkmenistan and Itera will sign a thirty-year agreement for the annual supply of 50 billion cubic meters of Turkmen gas.

Akela group

Turkmenistan's Gas Partners

Purchaser  Amount  Status of Deal
Russia  20 billion cmy   Signed, pipelin operational
(for one year only)
Iran  13 billion cmy  Signed, pipeline operational April 15
Iran  30 billion cmy  Under negotiation
Turkey  16 billion cmy  Signed, final route to be determined*
Europe  14 billion cmy  In negotiation **

* In February disputes with Azerbaijan over the proposed Transcaspian gas pipeline to Turkey threatened to scuttle the pipeline. Turkmenistan would have then be dependent upon Gazprom to ship the gas to Turkey. However, on March 17 Edward Smith, president of PSG International, the company that heads the consortium building the pipeline, stated that the line's capacity could be increased to 38 billion cmy � enough to supply both Azerbaijani and Turkmen export aspirations. This increase in capacity will almost guarantee that the Transcaspian will be the route for Turkmen exports.

** If the Transcaspian is built, Turkmenistan can use it to directly supply Europe using Turkey as a transit state.

Georgian Elections Set Stage For U.S.-Russian Struggle

In light of the collision of interests between the U.S.A. and Russia in the Caucasus, our correspondent Stratfor, provides an analysis of the various different situations and interests in Georgia. On the whole is it felt that Putin's administration will "try to destabilise Shevardnadze"s regime on the quiet �yet with enthusiasm.�

In connection with this, it is worth noting that certain other events have unfolded in a similar vein.

Russia has been extremely dissatisfied with Georgia's position on Chechnya. However, for the Georgians, the possibility that the Chechen war may spread to their territory is a perceived worry. (See THE GLOBE, 28.03.2000). Similar conclusions regarding Putin have also been made by others. Sabit Zhusupov points to Russia's possible interest in the increasingly tense situation at the Kazakh-Uzbek border (THE GLOBE, 04.02.2000). An element of this is probably just a historical phobia.

Nevertheless, it is obvious that for Moscow, Georgia is a key country, without which it could lose the entire Caucasus. Besides, there are functioning oil pipelines, such as the Baku-Supsa pipeline.

It is also important to mention the position of Robert Kocharyan. According to the information of our correspondent , he was encouraging the Armenians living in Georgia to support Eduard Shevardnadze. It was also considered that Yerevan was an obvious ally of Moscow, due to the presence of Karabakh ( and more importantly financially lucrative supplies of Russian weapons to Armenia). Moreover, one of the Georgian diplomats has mentioned the province of Djavahetia, where 80% of the population is Armenian. This diplomat ascertains that as well as "levers" in Abhasia and Adjaria, the Kremlin used the Armenians of Djavahetia to press Tbilisi, as it had also done in Yerevan.

What has changed? THE GLOBE will try to clarify the situation as it unfolds.

Akela group

March 29 (Stratfor)

Georgia's presidential elections, set for April 9, provide Russia's President-elect Vladimir Putin a chance to frame his policy toward neighboring Georgia. On a larger scale, the election provides another opportunity for Russia and the United States to play their ongoing tug-of-war for dominance in the Caucasus. Georgian President Eduard Shevardnadze has led Georgia since 1992 and seems likely to win by default in an election plagued by widespread voter apathy. Western powers are now trying to boost Shevardnadze's domestic image with high-level foreign visits. Russia, while maintaining a cool official stance, will soon take up the game as well.

Several meetings that Shevardnadze has scheduled for this week with high-level Western leaders are likely intended to polish the president's domestic image, but will also annoy Russian officials. On March 27, CIA Director George Tenet, arrived in Tbilisi for a one-day working visit with Shevardnadze, as well as the state security minister and the chief of foreign intelligence. Tenet discussed state and personal security with the officials � especially as regards the upcoming election � in light of past assassination attempts on Shevardnadze. German Chancellor Gerhard Schroeder will be in Tbilisi on March 30-31 to meet with Shevardnadze concerning the war in Chechnya, in addition to German interests in central Europe.

Regional leaders have also demonstrated their support for Shevardnadze. Azerbaijani President Geidar Aliev recently gave Georgia rights to Azerbaijan's transit fees for the proposed Baku-Ceyhan pipeline � a concession that will amount to approximately $2.1 billion over 40 years. Armenian President Robert Kocharian, while in Tbilisi March 28, urged Armenians living in Georgia to vote for Shevardnadze. Not only does this bolster Shevardnadze, but it is another step in Kocharian's campaign to pull Armenia away from Russian control, despite resistance from Armenia's prime minister and military.

In addition to the overt influence Russia holds through its military bases in Georgia, Moscow maintains an underlying support network, especially among the separatist regions. Of the seven presidential candidates, the two who are expected to give Shevardnadze competition. One competitor is separatist leader Aslan Abashidze, chairman of the Ajarian Supreme Council. During the Georgian parliamentary election last October, Russia made clear that it backed autonomy for Ajaria and a government position for Abashidze. Russia continues to back another separatist Georgian region, Abkhazia.

Putin, having recently received a popular mandate in recent presidential elections, will continue to follow Russia's course, obstructing the pro-Western Tbilisi administration and propping up a Moscow-oriented leadership, but he will do it with a new twist. Previously, the Kremlin financed Georgian opposition groups, encouraged the separatists regions and allegedly even backed assassination attempts. But Putin, unlike Russia's previous president, is entrenched in the intelligence community and is accustomed to working behind scenes. With Putin at the helm, we can expect to see Russia publicly tolerating the Georgian election � especially since one of Shevardnadze's platforms promotes increasing friendly relations with Russia. Covertly, however, Putin's administration will also be enthusiastically trying to destabilize Shevardnadze's government.

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