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Using the metaphor of a board game, Jack Carter explored issues surrounding the development of oil in the Caspian Sea. The first problem, he stated, is the name of the game itself. Experts do not even agree that the land-locked Caspian is in fact a sea, and this has produced a dispute on whether the sea can be divided into national shares for each littoral state or whether the sea must be jointly owned and managed. He then turned to a discussion of the gameÃs players. Most obviously, this includes those states that abut the Caspian, including Russia, Kazakstan, Turkmenistan, Iran and Azerbaijan. Georgia and Armenia are also crucial, because they lie along natural pipeline routes from the Caspian region to the Black Sea or the Mediterranean. Turkey is another player, important because much of this oil will have to go through its Bosporus Straits. Turkey wants to limit the amount of oil passing through these straits for ecological reasons, and is positioning itself to build a pipeline from the Caucasus to its Mediterranean port of Ceyhan. Oman is a player because it is part of the Caspian Pipeline Consortium that is developing KazakstanÃs Tengiz oil field. Afghanistan and Uzbekistan are also players. The United States is also an important player despite its distance. The primary US goal is to diversify its energy supply, finding sources other than the Middle East. A second prong of US policy is to support the development of the new independent states of the former Soviet Union. Their development will be driven largely by their ability to sell natural resources on world markets. The US has worked to convince Russia that this is in its interest, since these states will be more stable and better able to pay for Russian goods and services. A third aspect of US policy is to support US companies that are trying to invest in the region, pushing for them to be included in the development deals. Carter then discussed what he called the ìopening gambit,î which is the early oil. The early oil is the production from the initial wells that can be quickly marketed in order to finance ongoing development and to show companies whether the deal is going to work. The US has pressed for the use of multiple pipelines to get the early oil out, favoring the construction of one through Georgia to the Black Sea as well as the use of the existing pipeline going north from Azerbaijan to Russia. The US has also tried to get the littoral states to put together an experts conference to help resolve the legal status of the Caspian and to develop a regime for balancing the requirements of the environment and commercial exploitation. Carter then discussed the ìendgame,î which is the struggle over who will control the pipelines for the larger flows of oil that will come from the region. Turkey has been particularly active here, pushing for a route through the Caucasus that will allow it to build its planned pipeline to Ceyhan. The development of KazakstanÃs Tengiz oil field has been particularly problematic, since bankers have been refusing to finance the deal until it is restructured. A solution appears to have been reached, with the oil going north through Russia. The US has also encouraged the construction of a Turkish pipeline route from the Caspian, although this has not been resolved yet.
style="color: maroon;font-weight: bold;">PresentationCARTER: I entitled this talk "The Great Game: The Struggle for Caspian Oil" because of the obvious analogy and because this term was used by many writers to describe the struggle some hundred years ago between the two great powers of the time -- Britain and Russia -- for access to and perhaps dominance over India. During the Clinton Administration I have been fortunate enough to go to the Caspian region three times. I have not been in Tajikistan or Kyrgyzstan, but I have been to all the rest. I''ve not been to Iran, obviously; I''ve also not been to Iraq, obviously. I also can''t get anybody to let me go to Afghanistan, but that may come.
The main reason we travel there is to conclude deals, to conduct related business, and to engage the leaders of the countries in the region, explaining our US policy there, talking about transit rights to the extent that they relate to that policy, and urging on them the kinds of frameworks that will allow, encourage and promote investment by US and other companies in the region. I spend a fair amount of time in Russia as well, because those same issues are salient there, with some greater level of sophistication than in the other states because the Russians have been the leaders on these issues and the others simply used to take orders from the north.
As a parenthetical aside, the countries of the Caucasus and Central Asia both lack advice -- good, solid, independent advice for which one pays, as well as advice in which the allegiance is to the client or customer. There is just not that much available yet. The US and others have been encouraging it, but it is a slow process. The countries of the region are starting to build a repertory of investment bankers and lawyers and accountants; it is not that those are crucial on a continuing basis, but they do give the national leaders the ability to deal with foreign companies which are coming in and trying to invest and conduct similar activities. The ability to conduct these negotiations is one of the greatest needs I found in this area, and it is something which we stress in our many trips over there.
During those trips I have had the pleasure of sitting in private meetings with the heads of state of all of the Caspian states, and most recently with Ter-Petrosian, Aliev, and Shevardnadze. I have a great fondness for the Caspian region, and particularly for the Caucasus. In addition, each of the Central Asian states I have visited has a distinctive personality type; Turkmenistan, Kazakstan, and Uzbekistan are very different. Each has its own characteristics, which is something I am afraid my American friends and myself tend to forget. We have a tendency to lump countries together without respect to their ethnic and religious backgrounds and experiences and cultures and heritage. You make a great mistake if you don''t know something about the history of some of these regions, because they are not all friends, and historically they have not been.
I would like to conduct this discussion for a while as if discussing a game board, a parlor game, if you will, because I''ve found that this gives me a more effective means of going through some of the issues I want to talk about. But the title -- The Great Game -- was really something from which I worked backwards, because I have this marvelous map (see Map 2). It has gotten a little old now, but it does give you a pretty good shot of most of the region that we talking about. The only ''player'' not on here is Mongolia, and I think the Ulan-Bator government is very interested, as everybody is, in having pipelines come through Mongolia. That is one way to get to the markets of the East.
But I wanted to start with this map as the game board, if you will. I don''t have little pieces which everybody could have and move around the board, but I use this for reference and will be referring to it from time to time.
Continuing with the game analogy, I think we must start with the name of the game. This presents the first curiosity about the region in my mind, which is that we''re talking about the Caspian Sea. There is a dispute about that. Is it a sea? Can a land-locked inner body of water be a sea? The experts suggest not. Some experts say, "Yes, of course." But the consequence to the region is that there is a furious debate over how to share the sovereignty of the Caspian. And it has become part of the political struggle, and I will return to that after a bit; but I will just point out that there is some conflict even over the title of the game in the region because of a lack of unanimity on whether it is even a sea and what that means, owing the fact that it is a questionable sea. You see the players, and the players are all the countries abutting the sea: Russia, Kazakstan, Turkmenistan, Iran, and Azerbaijan. The players who do not abut, but are crucial, are Georgia and Armenia. The players who are not even close, but still important, are Turkey, Oman, because of some money and some interest, Afghanistan, and, from a natural resources standpoint, Uzbekistan as well. As you move around the West, South and East you see most of the players; obviously, the most dominant player is directly to the north, in the form of Russia.
One small fact, which I have discovered in my trips to Kazakstan, has given me an idea of the difficulty that we face when we talk about the relationship between Russia and these countries. And I am not talking about the fact that the geologists from Russia were the ones who found the Tengiz field in the Northern Caspian. I am talking about the very practical point that the former Soviet republics were considered the supply line for natural resources to Moscow, and were not truly independent in the sense of seeking their own natural or economic benefit. It was all part of a whole, and the center of the whole was in Moscow. As a result, if you look at Kazakstan, you will see some symbols for oil producing regions that go from Tengiz north -- huge oil reserves. Those lines from that area, the pipelines, move north to Russia. Those have been in place for many years. In the East, over toward Almaty and up in that region, are refineries. The refineries are operating all the time. The pipelines that supply the crude to those refineries come south, from Russia. There has not been any pipeline from the oil fields in the West to the refineries in the East. And there haven''t been any refineries in the West. So, recently, the Kazaks have started realizing that they do not want to bring Russian crude into Kazakstan and pay world prices simply so they can use their own refineries, when they are already producing a great deal of crude in the country, which they have to sell to Russia at below market prices or without due regard for the quality of that crude.
So you fly into Almaty and climb the mountains up to the ski lift outside of Almaty, you start asking questions about the relationship with Russia It gave me some insight to realize that not only is it a place that Russia considered "its own," but it also was reflected in the way the entire system worked to deliver products between those regions. So, Russia is clearly a dominant and very important player.
Turkey is a player mainly because of the Bosporus, and because of their own sense of the economic benefits from the oil lines that could come to them through Ceyhan, which is marked there on the map. And I''ll get into that a little bit more, as we go through the next phase of this game.
Armenia and Georgia are players because they happen to sit between the Caspian and the routes to the West for shipping, either through the Black Sea or through the Mediterranean. And so they are more true transit states. In addition, absent the situation in Nagorno-Karabakh and US policy toward Azerbaijan through the Freedom Support Act''s Section 907, there would be a possibility for a regional development in Georgia, Armenia and Azerbaijan that would unify them and make them probably stronger then they are individually. Georgia, of course, as you see and probably know, also has a port on the Black Sea. Armenia is the one without any port, and still, they are between Azerbaijan and Turkey, and could and want to play a role in that respect.
Kazakstan is obviously a major player, and a dominant player in Central Asia by virtue of its natural resources -- the North Caspian is very rich, as Azerbaijan is in the south with its offshore resources. Turkmenistan, of course, has a lot to develop offshore, and I think that it is the fifth (or so) largest gas producer in the world.
Iran and Iraq can''t even be described outside of the context of the United States policy when I am talking. From other people''s vantage point and from a purely geographic standpoint, and maybe economic, the straightest line from the Caspian Sea is due south to the Persian Gulf. So, absent the difficulties between Iran and the United States and others, that would be a very logical transit route for oil and gas from the Caspian Sea. Iraq, similarly, is not a player, as far as the United States is concerned and as far as the funding mechanisms in which we have a voice are concerned, and that, of course, is by virtue of the UN. This clearly takes them out of play for the Caspian. As you know by reading those great discussions about humanitarian assistance, an exemption from the prohibition of selling crude, provided that the proceeds go to humanitarian aid, has been proposed. That is currently being debated in the United Nations. While the amount of that oil that this brings into the market could be quite large, it will not be a significant part of the long-term game that I am talking about, because we still won''t be able to use Iraq as a transit route for the oil from the Caspian.
Turkmenistan and Uzbekistan are interesting to me for one reason I mentioned -- the gas. Turkmenistan, of course, would be the route for gas, and possibly the oil, that would go toward Afghanistan and Pakistan and India. Turkmenistan is very interested in, and, as a littoral state, has a voice in and will be involved in, the debate on how the Caspian will be utilized by the littoral states. When that debate is concluded, it may be by means of the five agreeing, or it may be by means of some super-multilateral organization that tries to urge some solution.
When I am mention the problem with delimitation for the littoral states of the Caspian sea, I am only talking about energy side of the issue. There are also significant environmental concerns. Obviously, there are fishing and commercial concerns, and those will be addressed. What I am talking about is whether the countries will decide that offshore gas and oil development can occur in someone''s offshore zone or region without obtaining the consent of any other littoral state, and whether a pipeline could cross the Caspian without requiring all five countries to agree.
From an energy standpoint, these are pretty important issues. I wanted to mention the environment, the fish -- for those who can afford caviar -- and the commercial activity surrounding these that is so important to so many people in that region. These interests might be addressed in a way that is different from addressing the development of the Caspian natural resources, except where they come into conflict, obviously, from an environmental standpoint. The final resolution of these disputes will take some time.
We, in terms of US policy, have been urging the countries to get experts together, to talk about how this could be resolved by reference to other examples and about how it could lead to the development of the Caspian''s natural resources and develop the countries of the region. Some of that may come about through an experts'' conference, although it is difficult to get all of these countries together for an experts'' conference on the issues of delimitation, the environment, and commercial exploitation of the sea. But that''s one thing. We do not think that it is in any one country''s best interests to lose the right to develop its own offshore region, and we have applauded those attempts to develop the offshore regions as a means to provide what somebody characterizes as "facts on the ground" -- I don''t like that phrase, but it is used -- which means that if you go ahead and do it, then who is going to come in later and undo it? Probably no one. So maybe you include de facto exceptions or different routes for energy development in the region. Some people get some comfort out of the fact that LUKoil is involved in offshore Azerbaijan.
So, I think I have covered the players generally. Before I go too much further, I think I should talk a little bit about the role of Turkey, and the route across the Black Sea and through the Bosporus. I don''t know how many of you have flown over the Bosporus or taken a ship through it, but it''s quite wide. There have been very serious accidents there, and the Turks are serious in their opposition to increasing the amount of crude passing through because they see millions of dollars a day going through there to their environmental detriment. Correspondingly, however, there is an economic benefit, from their perspective, to developing the pipeline going through the northeast to Ceyhan. Therefore, much of this debate is internal, and much of it involves environmental concerns with regard to the Bosporus.
Obviously, in each of the players about which I am talking, the state of politics makes it more interesting. As you all know, Turkey has just reached a rotational compromise for Prime Minister. In Afghanistan they did the same thing. The problem there was that when the Prime Minister got in and sat in the chair, they could not get him out, and they continue to have a war just to get him out. The real challenge for the Turks is to see whether there will be any willingness to get out of the chair and to let Ciller sit back into the chair she once had. But because of those political issues, everything in the region gets played a little differently. Needless to say, we have Russia going through presidential elections, and a lot of the things that we hear and see will be played through that very difficult political prism. So keep that in mind as you are looking at the overall game in the region.
As for other players, obviously the United States is one. Now, why the United States? Russia reminds us often that we are not a Caspian littoral state and, therefore, have no business there. We publicly dispute that assertion for several reasons. The first reason comes from the energy standpoint, and is the need to diversify our energy supply. This is an entirely different lecture that could take up the afternoon, with respect to energy supply and diversification of that supply. And it could get you into a discussion about world oil markets, demand and supply, estimates for the year 2010 and 2005, pricing, and all the rest. But suffice it to say that our national policy is: "We want to diversify our energy supply." We import seven million barrels of oil a day mas o menos, and that is more than half of our total crude needs. It is not more than half of our total consumption, because we have other refined products that are coming through that are consumed, to reach a total value of around 16 million barrels. But of the total amount of crude in the country provided by domestic and foreign sources, over 50% has been from foreign sources for many months now. So, our interest is to try to diversify that supply, because we think that our demand will continue, and that supply needs to come from many sources, so that we don''t become vulnerable to disruption in any one region. Since the Middle East is currently the dominant supplier, we would like to find other sources. The Caspian could be one of those sources, if not to the United States, then at least to the world market, thereby diversifying the supply.
In addition to the entirely different seminar that we could have on world oil markets and supply, we could also talk about where those supplies are going to come from, which would get me into my visits to South America and our interest in building sources of supply there. This is because a logical question, it would seem to me, might be: "If you are really interested in diversity and are trying to get rid of the dependence on the Middle East, which is a volatile place, you''re going to Chechnya? or to Turkmenistan? or the borders of Iran, Iraq, and Afghanistan?" I think that''s a fair inquiry, but again, if the discussion is just on this, I can explain, I think, that in a true policy position, we are urging and supporting the increase in crude oil production in places like Venezuela, which is our main supplier of crude and products, exceeding Saudi Arabia by a small amount.
Mexico, as well as Canada, are also major suppliers to the United States. Sources of supply which are closer to home do offer a certain comfort level as well. But the diversity of supply is the first prong of the US policy. The second is to encourage and support the development of the New Independent States (NIS). In this case, it happens to be those on the Caspian, and it happens to be ones whose development will be driven in large measure by the ability to sell their natural resources to world markets for money.
That is very important for them, and therefore it is important as a vehicle to realizing our policy of encouraging those countries'' independence and prosperity. This includes the likes of Ukraine, where we spent extraordinary amounts of time trying to help them. And implicit in that, is giving them the ability to be their own bosses and to control their own policies and more of their own destiny. Given the fact that until 1991 they were a curious appendage, a "resource provider," as I described Kazakstan, to Russia, this can present particular problems. Giving them the means to build infrastructure and laws is important -- I mean, we take for granted a lot of stuff, like parking tickets. They have lost the very basic things that were handled and provided by Russia; now they have to be handled and provided by the governors, or the local ministers, and city mayors, and the central governments of these countries.
US policy, then, toward the region is to help these states develop and become stronger and more prosperous. And of course, as you all know, I don''t want to get into the third lecture which belongs in another building, and that is American politics and the Administration line on the need for a global economic community and free trade. That''s a debate that Buchanan and Dole can have, much to my pleasure. But frankly, we do need to build markets where people will be stronger trading partners, and part of that policy in supporting these countries in the region, and the most difficult aspect of it, is to convince the Russians that trading with and supporting these countries is in their best interests. The Russians have a little bit of a catch when we preach that. But frankly, given the region, the stronger some of those countries are in the longer term, the better it might be for the stability of the region and particularly for Russia. And it certainly will not do Russia any harm to have those countries able to pay in cash for products and other goods and services that Russia could supply to them. So we think it''s a "win-win" opportunity for everybody on that.
The third prong of the policy is support for US companies that are trying to invest in the region. We have the Commerce Department and, to a lesser degree, the Energy Department, supporting that kind of thing all over the world. In the ways that we can, we both engage the governments, in terms of our policy, and urge that a US company be picked over a non-US company. I guess the most recent example was in having Exxon as the partner in the Azerbaijan international oil operating company over a French concern. And there was a major effort by the US urging President Aliev to take a US entry into that, which he did, and Exxon became a partner.
Those are the players. The next thing I want to talk about very briefly is what I call the opening gambit, though it''s not truly the only opening gambit; there are plenty of them. It is the one that is most obvious, however, and it is the one that helps people see the transit issues, the energy issues, and the geopolitical issues coming together in a true opening gambit sense, not an end-game sense. The end-game will come at the end of my talk.
The opening gambit, in the oil jargon, goes under the name of "early oil." Early oil is simply the production from the initial wells, production platforms that can be quickly marketed without the need for large-diameter oil pipelines, and can be used, in the case of this region, for two purposes. One is to help finance ongoing production and development activities, which cost a lot of money. Striking oil and finding it is just the beginning. That''s when you really have to come up with the money to develop it. So the early pipeline, early oil, serves that function.
Secondly, early oil allows the companies to see whether or not further production is going to work. Will the region permit oil to flow to markets and allow money to come in? How will they be taxed? Will the contracts be honored by the various governments? And the like.
That early oil has consumed most of our work for about a year and half, because it became the focal point for a lot of reasons, which I''ll try to reiterate, for the entire game. There were two routes, one obvious and a second alternative, for the early oil. There is a line that goes from Baku, north through Chechnya and over to Tikhoretsk and Novorossiisk. It''s an old line. Some of it flowed south -- there are some gas lines, there are easements, but it is an identifiable thing. And since I mentioned Chechnya, I will just quickly say, just to put the whole thing in perspective: having looked at this and thinking about what you know about each of these countries, you can quickly determine that there are no good routes. That is the only common denominator. They all have problems, whether you are going through Armenia and Georgia, through the Bosporus for reasons I cited, through Chechnya, through Afghanistan, because of our foreign policy rift, through Iraq and Iran, or through the regions in Russia. As I mentioned before, with respect to Russia''s almost paranoiac look at the former resources, they feel compelled to keep control, as much as they can, of the flow of the resource. So they have been very clear in wanting early oil to go north, as we say, through Russia out to the Black Sea.
Enter Turkey, enter Georgia, and enter the United States companies.
Before we get there, I just want quickly and parenthetically to mention the line from Tengiz to the Black Sea. This is a line that goes around from Tengiz through Kazakstan, and goes to Tikhoretsk, called the "Planned Kazakstan-Caspian Route."
This is an example of something which Russia can control. That line has not been concluded, and as a result the oil from Kazakstan-Tengiz has to go north to Samara and then into that main line down to Tikhoretsk to be sold to the markets, or through the friendship line that is going out to Belarus and elsewhere. For this reason, Chevron, who is the major US investor there, has put approximately $800 million into that project, and they still don''t have a pipeline that they can call their own, to get that oil out. And I will get back to that in a bit. But I wanted to mention it in the context of understanding why the US companies were a little apprehensive about having only one early oil route out of the region. They have seen what has happened to Chevron and its having to access the Russian pipelines to sell its crude, even though the entity is a Kazakstan-Chevron joint venture called Tengiz-Chevron. And so, the argument was not difficult to make that the companies would be in better shape if there were multiple routes for early oil.
The United States policy on this is very clear. We have said it to everybody, and I think it has been in the press, that we supported (I''ll explain why I use the past tense) multiple early oil routes. For all the reasons that I have sort of covered, in terms of making the Russians see some benefit, i.e., we would be supporting an early oil route through Russia, it does make some sense and it goes into their line. Also, the Turks were interested in not having all of that early oil go through the Black Sea, although, as you will see, it basically does. The Georgians were particularly interested because an early oil route going West would help the Georgians, and perhaps the Armenians, with whatever benefits really accrue when you have a pipeline of this kind going through your country.
So the United States announced to all the people who were interested that we were supporting multiple early oil routes. And we talked to a lot of people about that, and at first there were some objections -- the Russians seem intent on having just one. But at the end of the day, the AIOC (which is a consortium of many companies, British companies, Norwegian, one Saudi, and up to recently, five US, now down to four, and LUKoil from Russia) met, talked it over, and for a lot of reasons, with the encouragement of our government, decided that multiple routes sounded good to them. And the negotiations began. The negotiations wound up with the parties agreeing, and in fact, they are in the process now of reaching the final financing and other arrangements to begin the construction of a route to the north, to and through Russia, and a route to the west, through Georgia.
That early oil gambit, in which all the parties came in and started applying a little bit of pressure on where it was going to go, and expressing their interests in it, produced a good result, I think. And, of course, it all remains to be seen, because no oil has flowed through either one yet. But it will -- I feel pretty confident that it will.
Quickly, then, we move to what I call the endgame. The early oil, as I said, is modest -- 80,000 barrels a day up to maybe 130,000, 80 going north and 50-plus going west. But the thinking is that where the oil flows will dictate where the large-diameter pipelines go. And that nexus is what makes the early oil so important to all the players, and why Turkey was in there, even willing to try to find ways to finance the early oil line that would go to the Black Sea, to the Bosporus, through which they don''t want oil to pass, because if it flows west, there is a chance it will be the line that will eventually go south to Ceyhan. And that really is what it''s all about, as candidate Dole would say, the main pipelines out of the region.
I mentioned before the line from Tengiz. This is a story in and of itself. There is a consortium, the Caspian Pipeline Consortium (CPC). It was made up of Kazakstan, Russia, and you remember my reference to Oman. Those three countries had signed documents. It''s been ongoing for many, many years, at least three and some. They could need international financing for a number of reasons. United States policy, with respect to this, was that we took the position, with respect to the larger diameter pipelines, that there should be multiple lines out of the region for those too. Not just for early oil, but for the ultimate lines there should be multiple lines, and we think one of them should go to Ceyhan or at least traverse Turkey. And as for the other one, there is really no choice other than Russia, unless we were going south. So basically we are saying: "We, too, think that the lines should go: one to Russia and one to Turkey, and somewhat follow the early oil route."
So that is, again, our announced policy, and we have stated it over and over. The northern line, the CPC line, has been the source of a lot of difficulty, because, as I said, they were not able to get financing from the World Bank or the EBRD, for a variety of reasons. But one of the main reasons was that it was done as an oil promotion deal in which somebody would put in a lot of sweat, they would organize it, and they would get half the deal back. The half of the deal was for a partner who was not contributing as much, was in the Middle East, had no shipping role, and was not the country across whose territory the pipelines went. Russia, and Kazakstan, and Chevron, the main shipper, a US company, which got our interest, all said "Wait a minute. This does not seem quite right." And the multilaterals said: "We don''t like the way it is structured proportionally, and some of the other problems. We think that in order for it to get our financing, it needs to be restructured."
This is a huge subject, and I will not take you into it at this point, except to say that through a multitude of efforts by a lot of people (such as the Russians, including the new Russian Foreign Minister, the Kazakstanis and many others), and perhaps thanks more to the Omanis themselves than to anyone, they have restructured this thing. They restructured it last week; I think March 7 was when the documents were actually signed. And we will very probably see the pipeline from Tengiz to the Black Sea go forward in a restructured manner, with shippers involved, and with the involvement of Oman, to some degree, and certainly Kazakstan and Russia, who have the primary interest in it because it is crossing their land, and, in the case of Kazakstan, taking their oil out.
With respect to the South, that has not been resolved yet except for statements that the US policy is to encourage these dual routes or multiple routes. And a lot of that is working towards a conclusion now. The Turks are very interested in this, obviously, the early oil getting to Tbilisi, and then on to the Black Sea. But they are very strong to argue that the heavy volumes, the large-diameter line, should come through Turkey and down to Ceyhan and out that way. So that is the next major step, figuring out how that is going to be designed, where it is going to go, how it is going to be financed and how much volume will be running through that area.
The Caspian North-South total and the regions abutting it have a large quantity of oil. I have seen various estimates, but all agree that the total is very large. I read in a paper somewhere that somebody has said it will be in excess of 5 million barrels per day in 10 to 12 years. That''s a lot; that really is a lot. As I said, we are importing 7 million barrels a day right now. So, we are talking about total exported oil from this region, North and South, being just a million or two barrels shy -- actually, less than a million is the best figure that I''ve seen -- of the total that we import today. And it will mean a great deal to the entire region where these lines go through. And again the rationale was to aid these countries'' longer term efforts in developing their own resources and in finding the revenues to do the things that they need to do: education, public service, and infrastructure development. The rationale was also to provide more stability and to diversify the supply of energy. And it was also clearly to help Russia as it develops its pipeline structure to the Black Sea and perhaps north, as you see, to Finland and elsewhere, where they need to upgrade their pipelines.
So, in summary, it is not over. We have seen developments, we have seen some successes. The countries seem to have found a pragmatic solution, generally speaking, that is in all of their best interests. The US has supported these efforts for the reasons I gave you, and so far the outcomes have been pretty close to what we hoped would happen. If there is a line to Ceyhan, and the larger line is built that goes from Tengiz into the Black Sea, then I think it will be a successful conclusion. But the region is so difficult that there is no assurance that that will occur. But we are hopeful, because it is in each party''s own interest.
With that, I will call the game over, and maybe we can open it up for questions and comments.
style="color: maroon;font-weight: bold;">DiscussionQUESTION: What is the impact on these proposed lines through Tikhoretsk if the Russians aren''t able to calm down the Chechen situation, if that remains a festering war?
CARTER: First of all, with respect to the early oil, they are probably not going to be able to get it through if the Chechens decide that they don''t want it to go through. But, except for some instances in some places like Colombia where they believe that it is violating their own sovereignty, their patrimony, most countries do not seem to want to blow up the ticket to revenue. And they will be able negotiate some benefits from this. This is like stage coaches and going through the Kaiber Pass: you have to pay your tariff to go through, or they cut off some part of your body you don''t want to lose. And so, I think, as we have seen recently in some other countries, the money from the pipeline going through Chechnya will be guaranteed, or at least some portion of it will be guaranteed, to flow back to the area through which it goes. Thus if you are the mayor of Grozny, you are going to be trying to keep that oil flowing because it means some revenues for you. So I think that pragmatically it will go through. They can blow it up, but they can also repair it. Colombia has had such damage almost daily, but they get it repaired; however, they have lost $60 million of oil flow from Colombian pipelines because of harassment and sabotage. So, such activities can result in harm. But I think generally, as long as you position the benefit to the region correctly, the oil will flow there.
Now, if it doesn''t, and let''s say that we also don''t have the line yet built to Tbilisi and to the Black Sea and Poti, then we are where we are right now, which is: find other ways, certainly for the North. Kazakstan has been able to ship, and Tengiz has been able to ship, oil to Samara. And that has flowed. Not nearly as much as they would like, but some is flowing. So, they were able to use that route.
As for the southern part, Baku, there is an exception to the Iran policy that permits on application and in limited short-term events something called "swaps," where you can take some oil, say from Baku, ship it to the south, in the northern part of Iran, and then Iran would ship something similar out at some other exit port, and there would be an adjustment for the amount that would be in transport, although the oil would be transported and you net back whatever it is. That is possible. It is not very practical, however, and I am not sure even Iran will want to do it. And it is in Russia''s interest, clearly, to make sure that this pipeline to the north goes, because this game is truly still under way. Russia has not given up attempting to ensure that the bulk of the oil from the Caspian, even all of it, will travel through Russia. That, I believe, strategically would be their goal, but they are not going to go to war about it, although the economists a year ago suggested that there was an oil-control aspect to the very war which was going on in Chechnya. So, we don''t know how serious they would be, but if it''s just dual routes, I don''t think so. To keep the route open, I think they could get much tougher.
QUESTION: Can I follow up on this northern route issue? Novorossiisk -- the main Russian terminal for the oil there -- has had some very serious problems. I just saw in the last few days that extremely high winds had prevented tankers from leaving the port, and the port is frequently closed. So even if the oil gets to Novorossiisk, there doesn''t seem to be a guarantee that the port can physically handle the flows.
CARTER: There are two main parts to the project which have been discussed. First, you see Tikhoretsk, which is a huge point where big lines come into one spot and then to try to keep moving through a line out at the sea. It is a bottleneck of tremendous proportions which has to be addressed. And that will be addressed. As that line is opened and more volume is permitted, they will also be building some offshore terminal facilities to allow ships to come in and take out the crude in higher volumes. That is all part of what the total project is -- to "unbottleneck" that portion from Tikhoretsk to Novorossiisk, and also to upgrade the terminal and facilities.
The weather problems -- they are probably valid, but you need to check. Occasionally, when the Russians get mad at the Kazakstanis, suddenly there is a problem and they cannot not take the oil because there is a storm or because something else happened. It becomes sort of humorous, except that it is so serious, that these were means that they utilized to stop buying or shipping the crude. So I do think it closes for a portion of the year, but not enough not to allow it to be a major export area.
QUESTION: You mentioned that $800 million was being spent by Chevron on the pipeline and exploration. Can you give us an estimation of the amount of investment needed to reach the 5 million barrels per day mark? The reason I am asking is that there was an article in Foreign Affairs about three years ago which mentioned that Russia, in order to maintain its level of productivity at that time, 7 million barrels per day, needed an extra $50 billion. And in order to build new fields, they needed another $50 to $70 billion. So we are speaking about $120 billion. How many billions are we speaking about, and what is available?
CARTER: The amount for Kazakstan from Tengiz to the Black Sea is not as large. They have the line that today goes from Tengiz around the horn, if you can have a horn up top. That line goes around the north of the Caspian. So they have to build this line from that sea on the western side to Tikhoretsk, and they have to upgrade the Tikhoretsk facilities and the port. My recollection is that the total cost is somewhere in the high nine to a billion, mainly because some things are already there.
The cost of the line to the south has been estimated at about $1.5 billion. The difficulty you are raising is that the useful life of the Russian pipeline system has been over for several years. They did not build them, perhaps, to standards as high as they could have; they did not realize that there would be corrosion on the outside as well as from salt water on the inside. So their whole pipeline system needs to be reworked and upgraded, and new lines built and things like that, to allow them to export, though their current production is now under half of what you said before, because of the diminishment of the exports.
The amount of money that is going to go into that is maybe not as great as you stated, but it is huge. The World Bank has begun a series of feasibility studies to see what is needed and where it is needed. There is the "Druzhba" line which needs to be upgraded, their main line. There is a new line that they would like to have up to Finland, for the Baltic, that would come from the northern region in Timan Pechora. The whole infrastructure needs to be rebuilt, and I do not even want to guess how many millions of dollars that would cost. In order to get that money, either Russia is going to have to generate it internally, which I do not think they have enough to do, or somehow the system has to be providing incentives for investors in these pipelines.
If we get that, what will come along with it will be significant reform, in terms of a legal framework, a regulatory framework, and all the rest, and an opening that will be beneficial for all of us. But the problem is immense. It is probably their biggest dollar drain over the next 15, 10 years, because they already had a spill in Komi -- I guess it was in the October of 1994 -- that was awful and very difficult to clean up. I''ve flown over Western Siberia, and you can see the pipelines that are underground like lines on a map, because the oil seeps to the surface, and you can just see it stringing. So it is a big problem. But I am sorry, I do not have the exact number, but it is a lot. But for these pipelines, it is being done on an investment basis, and equity and return on equity, with financing provided, hopefully, by the EBRD or others. Those things are in a range you can put your arms around.
QUESTION: It seems to me that difficulties are far greater than you have mentioned. Let us begin with the Turkey line. Let us begin with Georgia, for instance. I am very glad that you have mentioned latest policy, but it seems to me that you have not even touched the surface of the major problems. Batumi and Sukhumi at the present time are completely controlled by Russia. This is the route that is the bastion of Kurds, and President Aliev has repeatedly suggested the danger of Kurds blowing up the pipelines, but we have always ignored that, obviously.
CARTER: As I said, there are no good choices out of that region, they''re all fraught with danger.
QUESTION: Furthermore, the Russians have signed a 30-year military agreement with Georgia, and with Armenia, to provide military assistance. That is obviously dangerous; 20% of Azerbaijan''s land is taken by the Armenians, and the idea, suggested by Turkey, that maybe a pipeline going through Armenia would be accepted by Azerbaijanis.... And most important of all, countries like Azerbaijan, Turkmenistan, etc., no longer have control. Control is with the consortium. And the fact is that countries like Azerbaijan literally have to borrow money from other countries, from Western countries, in order to be a player, or at least to have some kind of share.
CARTER: Let me just quickly respond to one part of what you said. I will agree that if something happens to President Aliev, there is a serious problem in Azerbaijan. As long as he is there, he has played this game as well as anybody I can see. He has been under terrible threat from the Russians. They have shut the borders off. Every time that a vote has come up that would offend the Russians, something happens -- either a little bombing up here or an assassination attempt over here. I don''t know who is behind it all. But there have been terrific problems and pressures on Aliev. Notwithstanding that, he has been a very, very good friend of the United States -- he has been a leader in the region. He has an interest in the AIOC, but more importantly, he is the final voice with SOCAR. He is the final voice on a lot of things that happen there. And the country knows that they will benefit from the development of these resources.
Most recently, when Pennzoil, Agip, and LUKoil signed, Pennzoil and Agip paid quite a nice sum of money. So the Azeris are getting some money. They also have difficulties, immense difficulties: they are not able to pay for some of their gas. I can go through a string of reasons why I consider the Azeris to be the leaders and heroes of this whole enterprise. But I was trying to just give you a general view of all of the pressure points. I think Georgia, similarly, has been very, very courageous, because, as you know, President Shevardnadze, with whom we met just a couple of months after his assassination attempt, has been extraordinarily good, and he and Aliev talk all the time. They see the possibility of regional development, which we would support if we could. We have a little bit of a problem with needing to settle the Nagorno-Karabakh conflict, and that is underway I hope. But clearly, those three countries (if they could get together, and that''s something we can''t decide for them, but if they could get together, with their various attributes and resources) would be a very strong regional force and we would like to see that, frankly. I do not mean to diminish any of these problems -- it''s just you make a shopping list and you put down everything that you can, and maybe something is missed.
QUESTION: May I suggest something? President Aliev, correctly, has always mentioned that the only way to keep Azerbaijan semi-independent is to keep the Western investment in there. So he''s given the carte blanche, virtually, and justly so, because he always argued that if Western companies, and particularly the United States, will pack up and leave, Russia will move in, so that Western investors are the only hope for semi-independence because Azerbaijan is the only one that is now sort of independent in this whole region. But speaking of development, everybody is all for Western assistance, particularly for American investments there; they have been crying out for years and years and we did not hear them at the beginning. But the fact is that two years ago at a conference I spoke to the presidents of Pennzoil and Brown & Co., which is there to clean the water. They all suggested that they had no interest in putting together any kind of deal to develop this region. None of those companies is willing so far to do anything to foster development. And you speak of development. People are starving to death because not only the oil has been reduced substantially. This whole game we are talking about is the 19th century game, when the Nobel brothers came and so on.
The fact remains that we and our companies are interested basically in just taking what they have and taking the crude oil out. In fact, President Aliev has suggested that perhaps we can build some kind of structure, invest in some kind of refineries, so that at least his country will benefit a little bit. But that has been rejected. So what is going to happen?
CARTER: I am afraid that your information may be a little stale. I deal with these companies every day. I was just with President Aliev in his country, and then met with President Shevardnadze and with Ter-Petrosian. Those people aren''t looking at the United States companies in that region simply to get in, take their money, and get out. They are trying to use them as best they can to assist through education, through local projects, communities and schools, and other things. And we are doing the same from the side of United States government, reminding these companies that they can be the best long-term partners if they take a stake in the building of the infrastructure, the education, and other aspects of these countries, and do not simply come through as tourists for revenues.
But more importantly, when you are talking about the percentages and how much interest these companies have in these things, remember that their take is a just a profit take. The taxes are paid by AIOC, and it provides a great deal of money. It is certainly not overly generous to the companies, under the recent deals that I have seen, and the one that was signed between Pennzoil, LUKoil, and Agip with SOCAR is a very competitive deal. They are putting a lot of money in; they have to develop it, and then when the revenues flow from it, the country gets the taxes. The taxes in some places, most recently in Venezuela, approach 90%. Now, 10% is maybe more then somebody wants to give to a private company, and I will not get into free-enterprise arguments with you, but I would tell you that there are not many countries in this world that are getting taken advantage of as the revenues flow from oil sales. They are doing very well. And Azerbaijan is also. They need more. But they are doing very well.
QUESTION: Could you say a little bit about the China option?
CARTER: I am intrigued by that. First of all, the original discussion was about gas. And the Turkmens, as I said, have huge amounts of gas. Uzbekistan has some, Kazakstan has some, and Russia has more than we can imagine. And so, the idea is that you have got to get the gas to market, and you need it to get there at a price at the end of the pipe that will allow people either to use it as a fuel or convert it into electricity through power generation. And those distances make it very difficult to keep the electricity that is created at the end reasonably priced. But as some of the technology develops and they can force this stuff through, it is possible, but the cost of the product, once it has traversed the line (it goes about 5,000 kilometers, something like that).... It is very hard.
Now, crude. We were talking before about the crude situation. That is a little different. The Tearum basin in Western China apparently is so big that it boggles the mind. I do not have figures, but it is big -- many billions of dollars are in the Tearum basin. Kazakstan borders China; you can see a little of bit of China that comes in from the right side of the page (see Map 2); but right there along Kazakstan''s eastern border, that is China. And the Tearum basin is a bit further in from that, but just miles and miles from the east. And so, how and where are you going to get it out? It could possibly go the other way.
I guess if I were in private business again, I would, say, "Why not" rather than, "Why" or "How? Why not look?" And so, I think what is happening with Exxon and BP, or British Gas, and some others who are doing feasibility studies on these lines going to the East, are just saying, "Why not look at it?" I think that as a result, you are going to see a gas line that is being planned to run from Uzbekistan and Turkmenistan to Pakistan. And then maybe to India, if Pakistan and India get together, which is as difficult as the smaller countries we were talking about. But you have to cross Afghanistan with the pipelines to get there. That one again is, "Is it possible?" And rather than some of these planners saying "No," I think there is a tendency now to look at it and to think that anything is possible, at least to look at. But I think the major burden is just the cost of transportation. And that is why going to the Persian Gulf, going to the Black Sea, is so appealing because you can get it on a big tanker and off it goes.
QUESTION: It''s too bad, I think, that your vision of the Caspian is looking at only three-fifths rather than the full picture. The shore on the Iranian side is very large and very attractive, I am sure, like the other areas. It is such a closed environment and subject to all the changes, environmental damage, that could happen. I see that as one of the biggest problems; even as revenues might mount, the cost of cleanup might be far greater than what the revenues are estimated at now. I think that as any person who undertakes a project, you would like to do it in a legal manner first. When you buy a condominium, you do a title search, you find out what the legal issues are. Why is it that the legal problem of this is always being pushed aside, as to what are the liabilities, who are the owners, in what fashion are they going to be liable for the future damages? Taking into account that oil is the immediate gain that they are going to have, but also having that vision (I will grant you that in Iran there are also many people who are also thinking along that line), how is that whole thing, the whole picture going to be worked out now?
CARTER: I''m going to offer a couple of comments which sort of combine to answer the question. The first is, I think that at least the American oil companies (and I think the British, too, and the Norwegians, who were working so much offshore in the North Sea -- and we''re offshore as well in the Gulf of Mexico, particularly) have got standards of drilling that have become very high. In fact, I have been told, though I do not have any facts to provide you with to show you that it is true, that the amount of pollution from oil drilling offshore is minimal, but is even smaller still when it is compared to accidents that have caused spills from the transport of oil by ship. Now, we have oil pipelines that spill, and that''s a problem that I have already alluded to in Russia, but the standards of drilling in offshore waters have been so high that there is, I am sure, some pollution, but it is fairly modest, though of course it always can be improved upon.
But I think that all of the US companies have been employing US standards, and, in fact, what we are urging through these experts'' conferences that will involve Iran and others is that the standards be employed at the highest levels possible, the US and other levels, for two reasons. First of all, clearly if you are drilling at the high standard the chances of a spill, or disruption, or danger, or hazards to the coast of Iran and the rest will be minimized. But from a selfish standpoint, it allows the US companies to compete with these other companies on the same technical safety and environmental basis because they do it anyway, and the other ones can bid less because they do not have to do it. So, what we are trying to do is lift the environmental and health and safety standards to highest level that we have, so that all that effort in that region is done on a consistent basis, and hopefully on a safer basis and a better basis for the environment.
These companies have seen, at least the US companies have seen, what happens when you cause any kind of damage. They get sued by somebody, someplace. And they have no interest in spending money defending those kind of cases. They do not want to pay lawyers to do that. They would rather do their job, get the oil out, sell it and make their profit, reasonable or unreasonable, as the case may be. That part of the question, I am pretty comfortable, is being addressed by US companies and by others, to ensure environmental standards that meet the highest type of standards.
With respect to Iran being such a large portion of it, this gets us into absolute US policy and the prohibition against dealing with Iran at this point. Unfortunately, that restricts us in our flexibility and in some of the practical approaches that you would like to employ whenever a company goes into a region and says, "OK. Where is the best way to go? What is the cheapest, what is the most practical?" and everything else. We have basically removed a huge portion of the territory from that consideration.
QUESTION: When you use the figure of 5 million barrels, does that exclude Iran or include Iran?
CARTER: Yes, everything including the waters of the Caspian. What they know, in terms of the reserves in the Caspian.
QUESTION: If production could go up to 5 million, does that include the portion of the Iranian coast?
CARTER: I think so. The number I saw was 7.5 million barrels of production: 1.3 used in the region, leaving 6.2 for export. I guess I assumed it included Iran''s portion from the Sea, but I am not sure. Maybe I could find that out and clarify it for you, or if you find out before I do, then we can talk. I assumed it did, because it is talking about Caspian as a whole. When you look at the fields, there are some that Iran is actually developing out there. We do not have any access to them; we are not partners.
QUESTION: Can you discuss the possibility of the oil pipeline going though Armenia? How does the US government feel about this route?
CARTER: The government is somewhat constrained by the problem in Nagorno-Karabakh. I think what we would like to see is the Armenians and the Azerbaijanis reach some kind of a resolution with respect to Nagorno-Karabakh, so that the region could be developed as a region. In addition to the conflict there, we also have the Congressional restraint in United States on Azerbaijan, which does not allow us to be of assistance to Azerbaijan except for certain humanitarian things, which hamstrings us a great deal. From all of our standpoints, if a solution could be found to allow commerce, oil, gas, electricity and other things, to go through the region from one country to the other, and through or around Nagorno-Karabakh and into the region to the south, that would be ideal for us. The problem that we have is that a few people have said and suggested: "Why don''t you have a peace pipeline?" where the pipeline is the vehicle to peace.
I think most of the foreign policy people dispute that ordering of things, thinking that if there is going to be peace, the parties have to see the economic benefits and bring that about, and only then should the commerce can proceed, at least when dealing with something so entrenched as the difficulties in those three regions. So, I think that we would find, absent some kind of accord between Armenia and Azerbaijan, that there would have to be some resolution there before governments would support such a line and the companies would want to traverse those countries.
In the meantime, the line that has been endorsed goes from Georgia to the Black Sea. We have been urging that there be a spur that would go down into Armenia and that someone actually try to find some money to build a refinery there, so that they would have access to that crude and be able to process and refine it there and supply some of their own needs, even though the pipeline does not go through. There were some suggestions to create a ''banana line,'' if you will -- one that goes through Georgia, and one that goes through Armenia -- so that they can answer all regional interests. But again, the difficulty between the parties is a bit of an obstacle there.
There has been consistent urging that the parties resolve their difficulties and that, I think, would simplify matters a great deal. And frankly, I think the same thing could happen if Iran and the United States resolve their difficulties.
QUESTION: Just going back for a minute to the environmental question, you were talking about the impact the American companies have, and can have, and that the American government has tried to have, in raising standards for the drilling. Does the same hold true in terms of raising standards for the construction of pipelines, and the reconstruction of the Russian pipelines, if there is foreign investment money and money from the international financial institutions involved in that?
CARTER: Yes, absolutely. Both the World Bank and the Export-Import Bank, which finances US exports -- almost everybody that is involved does that. I mean, it would be building it on the standards that we build in this country and in other parts of the world. I do not want to blame the Russians too much but, I mean, I think if they were starting over they would have been more careful too. Some of the technology they just did not have and did not understand at the time, but there will be very high standards, because nobody wants to revisit this issue in the future. In fact, there is a lot of innovation going on now, how better to protect the pipelines from spills and things like that.
QUESTION: I had a question about US motives in this whole game. It seems to me that the US conservative policy seems to be winning in this game. For one thing, Turkey is trying to be a regional superpower, and that''s clearly in the US interest in order to counter Iran. In addition, you mentioned that having a dual pipeline is in the US interest in order to diminish Russian influence in the region. But one thing I was curious about in this whole picture, and one thing I was concerned about, was jeopardizing US-Russian relations. One thing that you sort of alluded to was that you did not think Russia would go to war over this; however, clearly we have seen assassination attempts, as you have mentioned, Russia also looking to Iran, and trying to make other different types of connections with other countries in order to get what it wants to maintain its influence in the region. I am wondering if the US should really think twice about what it is doing, in terms of Russia, because it seems to me that it is a really important relationship to maintain.
CARTER: I agree with that. I did not want at all to leave the impression that our policy is in any way intending to threaten or cause Russia to feel threatened. On the contrary, as I said, what is difficult is convincing them that letting these former Soviet states prosper is in their own good interest. It''s a tough sell. But we have some evidence, in this hemisphere, about our own neighbors, and how we benefit in terms of trade and other things by letting them develop and not being the big brother, the big neighbor up in the north or in the south, as the case may be.
I think the difficulty we have is the nature of the relationship with Russia, the historic relationship of lack of trust and literally being at each others'' throats, and the fact that war was possible several times. And then suddenly they are supposed to be like Britain to us. That cannot happen. So what we have done is to establish a series of points of contact. The most significant regular ongoing one is the Gore-Chernomyrdin commission, which we just concluded in the United States. Our main involvement is through the energy side, but Victor Chernomyrdin was here. He met with Vice President Gore. Shafranik, the Minister of Energy, Fuel, and Mines was here. He met with Hazel O''Leary. We met with the deputy ministers. We met with the oil generals: LUKoil, YUKOS, Transneft, Gazprom. So there is both on the government level and the private sector level an extensive continuing dialogue, where we are trying to show our interest in Russia which, I believe, is as sincere as the United States can be. We are nervous about nuclear warheads and security. And I am sure the Russians are too. I mean, they do not want to have these things sailing around without control. They want to have control over them themselves. And I think, on a commercial basis, I just got back from where the Commerce Department, State and Energy were all talking about how to open it up.
And again, as I said, it is a political year, so it gets kind of tough when people are trying to run for office. You don''t run for office generally by showing how friendly you are with the United States, if you are trying to win in Russia. So, it is a difficult time. But what we are trying to do is maintain as many levels of relationship as we can, have them be personal, have them be grounded in the logic of actors'' own economic interests, trying to urge those things by examples in other places in the world, not just saying: "Do it as we do it." We need to show them other examples of how other people have done it, for whatever goal they have in mind. And one of their goals is to bring money in; they want to have joint ventures to develop these various projects; they want to develop their resources.
And we explain to them some of the things that need to be done in terms of the legal regime, the contracting. They have gone through an immense step to get passed a law on production-sharing agreements, which allows the oil companies from outside to invest in the oil companies inside under secure and predictable conditions. We counsel the American companies not to criticize the result; work toward improving it, but do not make them feel like they did not accomplish anything. Because they felt that they had taken a really significant step. And in fact, the Russian advisor, a fellow named Konoplyanik, who is the working group chairman, drew up a graph. He showed where they were before all this stuff started, where it would have gone if we had gotten everything they wanted, and it was about an inch to the left and four inches to the right of the starting point, where they wound up. And so we showed this to our American companies and said, "The glass is half full. Talk positively. And work with them on what your problems are, but don''t say ''this isn''t any good.'' Say what is good and what needs to be done."
I cite this as evidence that no matter how important this region is, the US-Russian relationship is bigger than it all, in my book. And the only way we can engage them in a constructive and positive way is when we go into regions like that and they do not think that we are trying to undermine their future. We have to try to convince them from a stability standpoint, from the fact that there is a benefit to be had from these countries being more prosperous, from trade and investment. So we keep repeating that, and keep trying to make sure that our policies, as in our two-line policy for early oil, and in our two-line or multiple-lines policy for the later and bigger pipelines, involve Russia in each case. And we have urged them to do things like that which we think are beneficial to them. It''s just that we are also saying, "Let''s have alternatives and let''s have multiple rather than single choices."
But you have hit on something very, very important and that is that I think the bulk of the planners (National Security Council and the White House, State Department), without exception, view our relationship with the Russian Federation as the number one relationship that we have to maintain where it is good and improve where it is less good.
QUESTION: On this question about the relations with Russia, can you give us just a brief picture of how the Western companies are involved in helping Russia and ex-Russian companies (or whatever you actually call them at this point) extract their own resources from within their own borders? There is an oil and gas situation there as well, and I do not have a picture of that.
CARTER: The joint ventures have been working there for some time, trying to get an agreement where they can ship to world markets, not be taxed too much, and make a profit. The main ones have been CONOCO, Anderman Smith, Occidental, Phibro, and one or two others. They have been there the longest. They have exemptions; they are all in joint ventures with Russian companies; and they are all screaming all the time because they pay the taxes, which anybody who knows the Russians and the Russian tax systems knows only certain people pay. And they do not police that nonpayment enough, so there is a shortfall in revenues that causes them to raise taxes to get the needed revenue from those who do pay. So, they actually have people going over from Treasury explaining how we collect taxes and how you create an incentive for people to pay, and all that kind of business. But the US companies are partners in almost all those examples because that is the way the system is set up.
I have been to one joint venture. I mentioned how the rig is a standing lawsuit, and that is between Occidental and a local oil company -- they are trying to increase production, and Occidental gets paid as it increases. I thought that was a good example of a logical kind of joint venture; but unfortunately the tax system gets in the way, and Occidental is not able to make any money, so I am not sure how that is going to proceed. But I think all of these production-sharing agreements will involve the Russians and outside companies -- the Timan Pechora, which is a big one up north, the Sakhalins, which have already been approved -- all are with various Russian and foreign companies (Japanese, US, and others). So, almost all of the development involves multiple companies. And now, the emerging sort of semi-state-owned oil companies, like LUKoil, YUKOS, Rosneft and the others, are becoming very important players because they were given the assets, basically, and the management, and they are trying to do this as nearly-independent oil companies, and are doing it pretty successfully, Gazprom being the best example.
QUESTION: If you are an American or Western oil company, given the politics, where would you go to launch a joint venture? Do you go to Kazakstan? Do you try to do this Caspian thing, or is Russia a safer bet? Also, is the oil in Russia itself more significant than in the Caspian Basin?
CARTER: Probably, but it is very hard to recover because of the way they went around, kind of digging holes and screwing up the reservoirs and losing the ability to extract. And so, one of the main things that will need be to be done in Russia is to find appropriate recovery techniques. And we have tremendous technical resources that we are exploring with them, where they can use this technology with US companies and without them. To get more than 25% recovery from these huge oil fields will take some effort -- they are bigger than almost anything, but they just do not look like they are going to be able to reach the recovery rates.
It is a good question: where do we invest? Let us say that this was a board meeting of a new oil company. And as you can do these days, I guess, we have had an initial public offering and raised $500 million based on everybody''s curriculum vitae. So, we have $500 million and we have some experts on geology for oil and gas. And we say: "Where do we go? Where do we invest?" And you look at the Caspian and you see the Chevron example: $800 million and no return. You look at the Russian example, taxed almost up to the top, and then you start looking at the other parts of the world. And our message to all of these countries is that there is competition for these investment dollars, and you need to put in a fair tax regime and to put in international arbitration and other kinds of predictable, stable, transparent procedures to allow people to invest and know they will get what they intended to get. Those kinds of systems have to be in place if you are going to win the competition.
I would say, generally speaking, that some of the newer areas, like Vietnam, might be more secure then those that are trying to wrestle with this change in an environment of weaning themselves from the mother, the mother not wanting to let the children go -- "I am still going to tell you what to do." They are having a lot of problems, and they did not rely on themselves, as I said at the very beginning. Vietnam seems to be working a little better, and companies are going there because they can kind of measure the return. Venezuela just opened their upstream. It is very expensive -- companies came in and paid the premium, but they can measure the return. And so, they are putting money in there and, in fact, I probably would have suggested that one of our investments go in the Apertura in Venezuela, because we could get some reserves and we could measure our return pretty predictably. For most of these companies, that is what they need. They need to have some reserves, and they need to measure their return with more predictability then you can get in some of these regions of the Caspian and Russia. And then you go to China and India -- who knows? So, I think, you are going to see a lot more investment going into this hemisphere then you will in Russia. If the Russians, after this election in June, start showing evidence of regulatory, legal and other kinds of framework reform, where they are encouraging investments and are leveling the field between the big domestic companies and the foreign companies, there is, according to one source, $60 billion in investment dollars waiting to flow into Russia.
And so, if you look at the Times this morning, and at the investment in various regions of the world, it is mind-boggling to think how these numbers would change. It is the World Bank comparison of investments in different parts of the world. Of course Asia, China particularly, is leading the way. This hemisphere is big. Russia and Central Asia are relatively small, compared to Asia, and China particularly. That number could go up by four times if they put in place some of these things that are necessary. And some of these problems in the Sea will be resolved, and you will find this money coming in. The $800 million that is in Tengiz is not being replicated by anybody else until they have a pipeline. Nobody is going to put their money in there until they know how they are going to get the oil out. It is the Chevron lesson; everybody cites it, and Chevron wishes it wasn''t having to be cited.
This document is a part of the Caucasus and the Caspian Seminar Transcripts collection.
Jack Carter is the Senior Advisor for International Affairs with the US Department of Energy. Mr. Carter received his Bachelor''s degree from Princeton University, and then went on to get a law degree at the University of Texas. He has served in the US military, saw action in Vietnam, and was in the US Special Forces. He has been with the Clinton Administration since October 1994 working on international energy affairs. He travels widely, not just within the Caspian region, but also throughout the rest of the former Soviet Union, Latin and Central America and Asia, dealing with energy issues for the US Government.