ALEXANDER CORNELIUS General Director Tengizchevroil

Kazakhstan has entered the WEF-list of competitive economies. WTO-membership is imminent. The US have certainly expressed their long-term commitment to the country and they acknowledge the importance this country has in the whole region or as Ms. Condoleezza Rice puts it: "Kazakhstan is pulling the whole region forward, both economically and politically." What would you say it is that differentiates Kazakhstan so strongly from other CIS-countries?

I think there are a couple of success factors and there is no doubt that president Nazarbayev is one of them! He had to lead 17 million people who used to live under the soviet system and has brought them economic stability and is heading the country into the 21-century. He managed to do this with fiscal and regulatory policies as well as with friendships and diplomatic connections. The President has had a vision and, however you criticize him on whatever lens you look through; you have to recognize that he has been a great world leader for his people and this part of the world.

Further, Kazakhstan has tremendous natural resources in minerals and energy. The leader and his team have recognized this and tried to capitalize the investments. They asked themselves the right question: How do we become someone with these natural resources when we are not technically capable, administratively capable and we are not capable of materializing it ourselves?

The leadership, the natural resources and the willingness to recognize that you can't become somebody on your own and that you need help from others, were the main success factors in the development of Kazakhstan. The chemistry for success, when you look back on it, is amazing, other countries have tried this but either they haven't had the right leadership or they have had less proactive resources or they have had people who kept talking about who should do what. Here is somebody that leads the direction, persuaded the country to invite other countries in and shared the natural resources to get the engine running. These are the pieces of chemistry that I see that are successful for Kazakhstan. As I say there are other countries around us that have some natural resources but they don't have the alignment, they don't have the leadership and they are less politically and economically stable and therefore it's much more difficult for them.

Kazakhstan is making impressive strides to diversify its economy from Petroleum. The Oil- & Gas sector however is and will remain to be the key economic sector of Kazakhstan. Because of its significant proven reserves and sound policies to become an increasingly important player over the next decade in fact Kazakhstan has the potential to become the 5th largest producer worldwide. What challenges remain to achieve that goal?

I think every day, every month, every year this country still has a choice and the potential outcomes are wide. On the positive side we have: rapid investment, rapid growth in the energy sectors and spin-offs to other sectors, 3 million barrels a day of export for a population of 17 million people would be impressive. In our business we always work with probabilities, upsides and downsides - we are in the risk business. If you look at places that have had that opportunity, they did not always take advantage of it as Kazakhstan can. For instance, Nigeria has tremendous resources but people are starving and dying because they haven't realized the upsides and I think every day, every month and every year Kazakhstan is on the crossroads and can end up in a corrupt place destroying the value and with a few trying to pocket the proceeds that the mass should benefit from. There is a delicate balance going on, I think, the selection is just another piece of that balance. As there are others who would like to wreck the stability that we have enjoyed for the last few years and then we would end up like one of the other "Sstans".

There are some concerns within western oil companies about the feasibility of the Government's Import Substitution Program. Do you share these concerns?

I am a Chevron employee seconded here, and I'll probably be here for a few more years. That's the way our business works. Chevron's value system is about partnerships in different parts of the world, I think they recognized very early that you can'tcouldn't come to a place, plant the American flag and teach everyone. We have been in the energy business for a long time, and have learned if you are going to sustain business anywhere you have got to have a relationship with the people; what do we bring and what do we get in exchange for bringing. I always say to my team when you wake up in the morning and look at yourself in the mirror think about one question, why are you here, what do you bring?, because as soon as you stop bringing you are not here, if we don't have anything to value as a company or as individuals to bring to this place we shouldn't be here. Sustainable development is what this is about, about the fact that these people have needs. I can take you to places in this town where people have nothing, no running water no heating no gas and it goes to minus 40 degrees in winter, these are tough people living a survival life. I am in a business where I have to recognize that, and we have a social program where we have funds that are allocated for health, education, and infrastructure, projects around this place here. And that is part of this social conscious and to communicate to Kazakhstan that we are here for the long run! We want to be partners; we want Kazakhstan to recognize that we bring something. We want Kazakhstan to realize that we care about its development, its training, also to help our own business. We want to help Kazakhstan and if we can help the country by building gas lines, building a clinic or a school we will do that and have been very successful in doing that. We have 8 million dollars a year allocated for these projects and another 4 million dollars for the electrical infrastructure. As we work with the local people who are very smart but have to survive, work is not always easy because they have different processes than we do,. If you are a survivor you sometimes have to rob to feed your family. Norms are different in different parts of the world and we have to be very careful not to be over critical and impose our value system without understanding their value system first. We do social programs, we interface with local people, we are building houses to replace two villages, 750 houses for almost 4 thousand people, we don't decide who goes and lives there; we are just funding it, 73 million dollars worth of funding. At the same time there is a lot of imagination going on as you do these social programs and as you interface with places like this it is sometimes challenging to honor your own value system and to recognize what other people see as norm.
If you come here trying to be separate trying to be a little piece of the US or UK, disconnected from the system then you will not do too well, the authorities will be suspicious and they will think that you are taking rather than giving. This balance of taking and giving is extremely important for both parties.

TCO came here in 1993 to manage the 20 billion USD development project of the Tengiz field. How important was this in the development in the Oil and Gas sector of Kazakhstan. Chevron, ExxonMobil and LukArco where the first US companies to come here, to be allowed in. What does that mean historically and still today for the development of the country?

We are the largest energy company in Kazakhstan. When Chevron came here, the company was producing less than a million tons a year and now through the successful investments and expansions, we are going up to 13,5million tons/year and then gas and LPG on top of that, we are about to double the production or in other words, we have over one in 3 barrels that are produced in this country and the most efficient ones. And this is due to western influence, best practices, drilling improvements, technological improvements. Eventually people would figure out that we are bringing that technology a lot faster than you can generate in a place like this because the education processes are different and the practices are different. A company like Chevron or Exxon Mobil that have worldwide operations can bring all of that experience from all over the world to be here and work on the problems that are here. Another success factor is that solid set of foundation agreements that were signed by Ken Derr and President Nazarbayev that gave this company some rights that some other companies today don't have. A lot of things have changed since 1993. These foundation agreements are challenged every day, but they have stood the test for about 12 and a halfhalf years and that is a major success factor for Kazakhstan. One of the premises is the free right to export, so we have access to the world market by right not by understanding, but by our foundation agreements. Our joint venture is a tremendous example of a whole number of things, a great set of foundation agreements, that a couple of parties who are willing to honor these agreements and an energy environment that's allowed to maximize value of these agreements.

This sends confidence towards the outside world, potential investors see this happening and they feel that this is a trustworthy environment. Is this what they can expect?

If you look at the landscape today, it has changed, Kazakhstan has got energy resources and the big companies are desperate for the reserves. But the balance has changed. Kazakhstan is not interested in a deal that gives X % to the foreign investors, it limits it to a Y %, where Y is less than X, so all the foreign investors have a dilemma. They are asking themselves whether they can afford going to Kazakhstan for this rate of return on these billions of dollars.

I believe however that what has to be taken into account as well is that the deal one signs today is different from what we have signed before. The landscape is much more politically stable and we have established growth over here, we have established the fiscal environment as well as the regularity one. Today there is social stability in this country, which was unpredictable in 1993.

These companies still keep coming because the reserves are here like Kashagan, and there are other offshore prospects in the Caspian, so the investors keep coming here and want to invest in the energy sector. What President Nazarbayev recognizes is that he can not push the foreign investors too hard because when they stop coming here he will know that the deals are not good. So far the deals are still attractive as investors are still coming!

Tengizchevroil plans to double its output to 25million tons/year by 2007. Could you share with our readers the principle of SGI and the SGP?

Let me go back to the size of the reservoir. We have Tengiz, one of the 10 best reservoirs in the world, and then there is Korolev, which is a tenth of the size of Tengiz. It is not the optimum way to materialize this resource running at 300,000 barrels/day for 70-80 years. In fact the most economic and beneficial way to run a reservoir is to get all the oil you can today, but that is impractical, therefore you need to have a development plan. When you look at these tremendous resources, all these billions of barrels of oil in place and you look at the technology and how the oil is recovered; there is clearly a need to increase the production rate in order to optimize that value. We recognized this fact a number of years ago and decided that we needed to go for another tranche, at least, and probably another beyond that. We have some downsides about the resource: the reservoir is tremendous but it is a high H2S reservoir, with 13-15 % H2S. The oil cannot be transported safely with H2S either in a ship or in a pipeline. H2S has to be removed before transportation and it is very hazardous material, few hundred parts per millimeter could kill a person. The recognized way to remove H2S is to take it out and convert it to sulphur, which is a by-product, and handling it is expensive. So when we were looking at this next tranche we decided to try to get the oil and re-inject everything else back. Is there an advantage in doing that? In 1990 we talked about injection but the pressure of the reservoirs was so enormous and there were no technology then to re-inject 11500 PSI but the technology has improved since. We made a decision on this untried technology that we would put together a project that would have the capability of doubling what we make today, two-thirds of it would be used in conventional technology to guarantee to get production and one-third would be based on this new injection technology. We have done a lot of things to mitigate the issues and are very confident that this technology will work. This new technology allows us to take everything out of the oil, put the oil in the tank and take the rest of the material and inject it back into the reservoir. This means we don't have to make sulphur, and our studies show that re-injection also enhances the recovery from the reservoir. Here is an example of what we are bringing here and why we are here. We bring technology that would not come here otherwise. This massive expansion project, a 5 billion USD project, will produce about 8 million tons of oil through the conventional process of bringing crude from the wells, separating it out, producing oil, taking the gas, sweetening the gas, making LPG out of the sweet gas, taking the off gas from that gas into the Claus sulphur producing facility, producing sulphur, then tail gas from that needs to be cleaned up before it is released to the environment. All that equipment is there just to get the oil, and the second-generation facility is designed for 12 million tons at the front end and 8 million tons of oil equivalent of sulphur process. The sour gas injection piece of the project is 4 million tons of that front end with gas going to injection wells. That is how we get nominally 12million tons /year increased capacity added to the 13,5million tons now. My hope is that in my time here I will see the oil production double from 13,5 million tons/year to something like 26-28 million tons/year.

Can you share your view on the CPC expansion? You export mainly through the CPC. Agreement has finally been reached for the expansion project. Full capacity (67million tons) will only be reached by 2009. Will this be sufficient for TCO's increased production? Will there be a temporary use of BTC?

CPC expansion has been delayed through various complications. In fact when we embarked on the doubling of production, CPC expansion was a closer reality. It became evident about 2 years ago that it would take them longer to get their expansion done than it would take us to do our major expansion. The shareholders asked us to look at alternatives and we have already been doing that. All our 13,5million tons/year today all goes into CPC, and we can't squeeze any more into CPC and in fact we don't have any right to squeeze any more into CPC,. So we are putting together a project that will put 14 million tons of oil onto railcars, rail them North to the port of Odessa on the Black sea and put them onto boats, or rail South to Aktau, put into ships across to Baku. From therewe have an option of going either into the BTC line or up to Batumi or into Georgia by rail. This is a very complicated contingency plan; we hope that CPC will be expanded, that is the cheapest way of getting oil to the market places that we know. Other routes are complicated logistically, complicated contractually and more expensive than CPC. We see up to14 million tons going by rail. We had a rail operation before CPC was started up of something like 7,5 million tons a year, so we have done half of that. The challenge will be to double what we have demonstrated before.. It means putting 60 tons of crude oil in a rail car, hundreds and hundreds of thousands of times and sending these railcars, about 36 hundred tons at a time to various places, and that has to be done safely, with no spills. It is a much less elegant solution than sending it to CPC. The next question is what will happen when Kashagan is up and running. We will be running 560 thousand barrels a day and they will bring on 400 thousand barrels a day, what happens then? There are lines being put into China. CPC is due late 2008 but it could be 2009. We will be ready for that because one great thing about this company is when there is a challenge we just step up and do it. There were no pipelines when we started this or very few, maybe the Atyrau-Samara line, but we put 7,5million tons of oil/year on rail. While oil is at these prices we can still afford to do that. Kazakhstan needs to also recognize that their competitors are countries with lots of oil right by the water, and this gives these countries a competitive advantage. At these oil prices today, Kazakhstan can be competitive, but if we have 15USD a barrel of oil, Kazakhstan will struggle to be competitive with the rest of the world. I don't think we will have 15 USD/barrel ever again, but I think that a country like ours that is land locked needs to be careful to remain competitive.

The government is very eager to develop the petrochemical sector and they asked you to help deliver ethane. Will you go into that request?

We are in the final stages of an agreement between TCO and a company called ATOLL, which is a KMG, subsidiary charged with the establishment of a petrochemical industry. I know the President is very keen on this. This agreement or memorandum of understanding which we are about to sign between TCO and ATOLL states to ATOLL that they can have access to our gas, which we will supply gas from Tengiz, in a certain volume at a certain price, for extraction of ethane and then return for sale. We have this memorandum of understanding describing the commercial terms and the length of the contract. One of the difficulties we have is that some of our future options for the development of Tengiz and Korolev involve total re-injection of all the gas. We need to preserve these options for TengizChevroil and therefore we are willing to cooperate on this feed for the petrochemical business, so long as this option is preserved. Once we have established the injection technology, and require all our gas for re-injection, Atoll will have to look for an alternative to our gas at that time. I think everyone understands that. So ATOLL needs to work on an alternative gas supply plan.
It is interesting when we look where all the major petrochemical businesses are in the world, Gulf of Mexico, Rotterdam, Teesside, all of them are right beside the water and why, because we are dealing in a commodity where transportation worldwide is an necessity. Here we are, trying to establish a petrochemical business in Kazakhstan. Where is the market? It can only become a limited petrochemical business for the Kazakhstan market because if it is for export it's not going to make economic sense.. As a new country you have got to be careful to choose what businesses you want to be in. I'm not sure whether Kazakhstan has gone through all the thinking about the petrochemical industry. I spent half of my career in the Petrochemical business, and I learned one principle, the closer you stay to the well the more money you make. So don't let your value chain go too far.

For the expansion of Tengiz you will need many partners and contractors. You've already reached agreements with Honeywell, PFD UK and Able Instruments and Controls, Arctic Construction International and Versatec Engineering. Are you interested in further investments, further partnerships?

TCO is dealing with vast resources in the Tengiz and Korolev reservoirs, and what we know about today and the technology that we are confident in today will give us a 20-year life at 560.000 barrels/day, after SGI/SGP project. I know that the technology will improve over time and I know we will get enhanced recovery, so there is at least one further major expansion for TCO.
We have a project, which is in its embryo stage today and we call it Future Growth Project. .We have had a team working on this for almost a year. This team is also looking at where the oil goes, how to get it out, while others try to get theirs out. We have partner alignment issues, we have oil export issues, we have technology issues and we have facility issues. We're looking at another increment that could be anywhere between 10, 15 maybe even 20million tons a year. That is why this business is so incredibly exiting. There is not only spinning the plates of making the oil we need today, there also is the building facilities to be able to double the size of the company, and looking at what we do after that.