How had Chevron tried to mitigate the political risks of the project? Foreign Direct Investment and Political Risk CHAPTER 17553EXHIBIT A The Caspian Sea and Pipelines to Markets• Caspian Pipeline Consortium (CPC)Pipeline would be 980 miles in length from theCaspian Sea to the Russian Black Sea port ofUKRAINERUSSIAKAZAKHSTANNovorossiysk.• Largely linking existing pipeline segments,it was by far the most expeditious pipe forTengiz oil.• It would be under Russian control.CPC PipelineTengiz• Baku-Tbilisi-Ceyhan (BTC)Pipeline extended 1,000 miles from Baku,Azerbaijan, on the Caspian, through Georgia,and across Turkey, to the Mediterraneanport of Ceyhan.• Constructed intentionally to bypass Russia,BlackCaspianSeaSeaGEORGIAARMENIAAZERBAIJANit was constructed by a consortium ofcompanies and countries.• Requiring five years for construction,it opened in 2005.• Unused capacity made it one of thepromising pipes for Kashagan oil.TURKEYвтС РipelineTURKMENISTANSYRIAIRAQIRANago, fifteen years ago when contracts were written, peopledidn't understand the complexities.the world's leading expert on oil fires based in Houstón,capped it. The environmental impacts wère significant.In the following years as oil and gas developments weredictated by Moscow, the Kazakhs worried that their mostprecious delicacy, caviar, the eggs of the sturgeon found inthe Caspian and Black seas, could be put at risk.’ Any sug-gestion of oil and gas development near the Caspian, homeof the most famous beluga sturgeon and caviar, faced seri-ous public opposition. Baku, devastated by oil develop-ment in the late 19th century and lying just across theCaspian, served as a reminder of how damaging unregu-lated oil development could be. Baku was now considered-Richard Matzke, Chevron Texaco Vice Chairmanof the Board, 2007.In 2002, after more than $2 billion in development,already the largest foreign investment in any formerSoviet state, the project needed to enter a second costlystage: sour gas reinjection. This would require massive newcapital investments to reinject natural gas back into thereservoir.Growing TensionIn 2002 Chevron proposed financing the plannedexpansion of Tengiz production with the reinvestment of oilexports as part of its continuing “invest as you go" strategy.Kazakhstan objected. In addition to slowing the rate ofproduction growth, the reinvestment would dramaticallyreduce the consortium's taxable profits and payments tothe government-and the government needed the money.In 2003, after Kazakh courts confirmed fines against theconsortium, Chevron agreed to finance new productioncapacity with foreign capital, as well as to guaranteeKazakh tax authorities a minimum of $200 million peryear regardless of consortium profitability. As part of theagreement, President Nazarbayev passed a new foreigninvestment law that guaranteed that existing foreignone of the world's dirtiest cities.Sulfur was a continuing problem. Production of oil andgas produced massive quantities of sulfur, requiring exten-sive processing. By early 2001, Tengiz had 4.5 million tonsof sulfur spread out in football-field-sized cakes 7.5 metersthick. Chevron spent more than $40 million on a sulfur pel-let processing facility in 2001 to expand marketability, butwith mixed success.I don't think any of us understood the complexities ofwhat we were about to get ourselves involved in. Whatthe Kazakh government is worried about is fixing someof the issues that were relatively unknown when someof these projects began. The production of oil and gasin the Caspian is very complex, very difficult. Ten yearsDuring the 1970s the Soviet government had regularly conducted nuclear tests in Kazakhstan. 552PART 5 Foreign Investments and Investment AnalysisThe Tengiz Field– Tengiz means “sea" in the Kazak lan-guage-was discovered in 1979. Although it was thoughtto be one of the world's ten largest oil fields, the TengizField was largely ignored for years as the Soviets focusedtheir oil development efforts elsewhere. The field saw somepreliminary drilling and production in the mid-1980s, butneeded an investor-operator with technology, experience,and capital.The Tengiz reservoir is deep, 14,000 feet down, underextreme high pressure, and hot, averaging 200°F.The oil is asour crude, averaging 12.5% sulfur (high sulfur is anythingabove 0.5%). The resulting hydrogen sulfide, H2S, is highlypoisonous to humans and corrosive in pipelines. Tengizis in far western Kazakhstan not far from the Caspian, aremote, barren, and forbidding place where temperaturesrange from -25°F to 100°F. With little infrastructure, con-struction and support were costly. Recruiting, training, andretention of the highly skilled workforce needed proved tobe a major challenge.Chevron had carefully avoided making significant up-frontpayments. One such clause required that production reach250,000 barrels of oil per day (bopd) before Chevron hadto make its first $420 million installment on the purchaseprice of $800 million. The Kazakhs saw this “invest as yougo" approach as indicative of a low level of commitment,straining the relationship from the beginning. Chevron alsobalked at the traditional Soviet habit of expecting foreigninvestors to support non-business-related social infrastruc-ture such as roads, schools, and hospitals, limiting socialspending to 3% of total investment.Pipe DreamsAll dressed up and no place to go. That's the dilemmaChevron Corp. faces in far-off Kazakhstan. The nation'sthird-largest oil company is sitting on one of the world'sbiggest oil fields in the landlocked former Soviet republic.Trouble is, after more than two years of work and a$1 billion investment, Chevron has yet to make muchmoney on Tengizchevroil, its 50/50 joint venture with thegovernment of Kazakhstan.ChevronChevron Corporation (U.S.), through a variety of politicalchannels, succeeded in negotiating a 50% interest in thefield in 1990, one day after a summit between PresidentBush of the United States and President Gorbachev of the-“Chevron Struggling in Tengiz," by KennethHowe, San Francisco Chronicle, September 25, 1995.Somewhat unique to the Caspian, the right to produce oildid not mean the owner could sell the oil. Without a pipe-line for transportation, the oil had no market value. As pro-duction at Tengiz began in the mid-1990s, it still had no wayto market. Chevron wanted to get the oil west to the BlackSea; from there, it could then be moved by tanker to theMediterranean and markets beyond. Eventually, $2.7 billionlater and with the participation of two other major oil com-panies, one Russian (Lukoil) and one American (ARCO),the Caspian Pipeline Consortium (CPC) was created. TheCPC line would carry Tengiz oil the 1,510 kilometers to theBlack Sea. Operations began in 2003. A second pipeline,the Baku–Tbilisi–Ceyhan pipeline (BTC), began operationa few years later, as shown in Exhibit A.Soviet Union. But the ink was barely dry when the SovietUnion broke apart. With Kazakhstan's declared indepen-dence in December 1991, negotiations began again.Kazakhstan's independence was a tenuous one. Russiacontinued to have strong strategic interests in its hydrocar-bons. The two countries shared a 4,250-mile border and acommon people; Kazakhstan was home to more than sixmillion ethnic Russians. The war memorial in the center ofAlmaty, the old capital of Kazakhstan, celebrated theTwenty-Eight Panfilov Guardsmen–Kazakhs-whodefended Moscow from the German offensive in Septem-ber 1941. Chevron eventually reached a “careful agree-ment" with the Kazakhs in 1993, a 40-year businessagreement to create Tengizchevroil (TCO). The business,termed a partnership, allocated a 50% interest in the fieldto Chevron as well as naming Chevron as the operator.The company was structured as a joint venture betweenChevron and Kazakhstan.The EnvironmentChevron pledged $20 billion over the next 40 years. Inan attempt to manage what it considered high political risks,Chevron planned to invest gradually, using reinvestmentof earnings to make up the majority of new investment.Tengiz also posed major environmental and safety chal-lenges for TCO. In 1985, before Chevron ever gainedentry to Tengiz, Tengiz well #37 exploded, sending a200-meter-high column of gas, oil, and fire into the air. Theresult was a towering inferno visible for nearly 60 miles,picked up by U.S. satellites watching Kazakhstan. The fireburned for more than a year before Red Adair Company,*Ownership interests have changed over the years. In 2016 Tengiz was 50% owned by Chevron, with ExxonMobil holding 25%;KazMunaiGaz, the national oil company of Kazakhstan, holding 20%; and LukArco, a joint venture between ARCO (US) and Lukoil(Russia), holding 5%.

Political risk mitigation: These are methods to reduce the threats arising due to the political risk…

Answered: How had Chevron tried to mitigate the…

Business

Finance

How had Chevron tried to mitigate the political risks of the project?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks