Interview with Mr John Hoholick General Manager of Exxon Ventures (CIS) Inc. in Kazakhstan.
1. To our knowledge, Exxon’s projects in Kazakhstan are rather modest. Could you please describe them?
Since year 1991 we have had some technical research here and since 1993 we have opened an office in Kazakhstan. We have purchased in the year 1995 50% from Oryx Kazakhstan on the field Mervy Kultuk. We made a drilling there and it was noncommercial volume of hydrocarbons on this well. Now we are going to make another drilling on that field.
Also we are negotiating with Kazakhstan government on offshore drilling in Caspian. Our share in this project is 42,5 percent. So far negotiating process is going on and conditions are confidential.
2. “Mobil” has a 25% interest in Tengizchevroil and one of the OCIOC’s shareholders. How will the merger impact the new company’s participation in the project? What is your general assessment of the OCIOC’s perspective?
Tough question. Officially our merge has not been approved by FTC (Federal Trade Commission) in the States, and corresponding bodies in Ell. So, Mobil and Exxon are still competitors. And we treat each other as competitors.
Mobil has its share of 25 percent in Tengizchevroil, but Chevron has 40 percent. Operator in this case is Shevron and Mobil acts as an investor. Mobil is shareholder in OKIOC as well. We don’t and we cannot intervene in any operations of Mobil; it is different company.
- How will you assess OKIOC project?
I don’t know much about it. There are some expectations. I know a lot of money was invested in OKIOC. Many are expecting that it will work. Results of drilling will be known pretty soon. Investors in this project are big oil companies. They have invested substantial money in exploration. So they know what they do. Everyone will win if OKIOC will succeed.
3. Could you please describe the logo of the merged company?
I don’t know enough about it. Both brand names Mobil and Exxon are well known among consumers. Regions where Mobil and brand is more familiar; it will be employed. Where Exxon has stronger position; its logo will lork.
New company wiil be called Exxon Mobil and conbined logo has not been developed yet.
So far, as I said, we are competitors on the market and we use our own logo.
4. Do Exxon and Mobil plan any downsizing actions?
Some in formation was released that something around 9000 jobs all over the world will be eliminated in Exxon and Mobil. Merger’s aim is to make business more profitable. But we also have operations which duplicate each other. Down sizing is necessary to cut costs.
5. The press mentioned that the management styles of Exxon and Mobil are quite different. If there is such an issue, how will it be solved?
I cannot comment for Mobil because I have never worked for Mobil. I can say only that some combination of management units will come to existence.
This merge is something like a marriage. When people are going to marry, they make one of the biggest decisions in their lives for probably next 50 years.
People are different but they get married. Exxon and Mobil are different companies but they have merged. It is very balanced decision. They have long way ahead to work together.
6. What are Exxon’s accomplishment that you are proud of as an Exxon employee?
I am an employee for Exxon more than 20 years. I am a shareholder as well. It means I can judge Exxon accomplishments not only as an employee but as an owner of the company. You know that Exxon is one of the most profitable companies. It has paid last year 15% to its shareholders. The figure is very big taking into account lowering of oil prices in the world. But Exxon has managed to bring profits
By Aggei SEMENOV, Department of Economics Yakutsk State University, RUSSIA
Professor Carol DAHL, Director CSM/IFP Joint International Degree Program in Petroleum Economics and Management Division of Economics and Business Golden, CO 80401 USA Summer School in Economics 1999, HESP/KIMEP, ALMATY
(Specially for “THE ENERGY OF KAZAKHSTAN”)
Table 1 shows that OPEC contains very diverse countries. Some have high reserves, Gulf countries and Venezuela, the rest along with Kazakhstan have low reserves. Although Kazakhstan would fit in this latter category many believe that its reserves are as high as 80 billion barrels and that capital in the form of productive capacity and pipelines, rather than resources are the constraint on Kazakhstani production. Some OPEC countries have high populations - Indonesia, Nigeria, and Iran, the rest along with Kazakhstan have low populations. Some have low costs as measured by high production per well in the table, the Gulf countries and Libya, the rest along with Kazakhstan have higher costs. Nigeria would fall in the low cost category as well except that much of their production is offshore raising their costs.
Although Kazakhstan has many wells and production per well is low, production from newer Tengiz developments is 4000 barrels per well indicating that production costs may come down with new developments. One can speculate that were Kazakhstan to join OPEC today with its current reserves, it would probably receive a quota under 1 million barrels per day. If reserves develop according to the optimistic reports at the 80 billion level a quota between 2 and 3 million barrels per day may be more realistic. All OPEC countries with high reserves, low populations, and low costs have high per capita incomes. The heads of countries surrounding the Caspian Sea cannot sleep quietly hoping that oil will give their countries a super-high rent and will allow them to achieve the social-industrial level of these richer Gulf countries. Although Kazakhstan missed the days of $30 oil, it will likely find the reserves to have oil make a potential contribution to the well being of the country and may one day find that it is in the enviable position of being a high reserve country with low production costs and a low population. Transportation costs, however, are likely to remain high reducing some of the rents for this land locked state. Whether these reserves will be distributed across the population to improve infrastructure, health, education, and industry or used to line the pockets of the few also remains to be seen.
Although current Kazakhstani reserves are small, potential is large and OPEC is obviously interested in the Caspian oil. At present it seems that OPEC is more interested in Kazakhstan, than Kazakhstan in OPEC. One of the biggest OPEC members, Iran is trying to follow the policy of establishing OPEC control for the Caspian oil. Iran is the second in OPEC after Saudi Arabia as a producer of crude oil. Iran’s share is approximately 5% of the world’s production with 9% of the world’s oil reserves. The idea of the direct co-operation between Kazakhstan and OPEC appeared in 1996, when Iran offered to construct an oil pipeline to transport Kazakhstan oil to western consumers via Iran. Iran may be motivated by a desire to weaken the influence of the West and to lighten sanctions introduced by USA, and to influence the country through the oil market. Iran may also use Kazakh oil in Iranian domestic refineries allowing exports of Iranian crude oil and such oil swaps between Iran and Kazakhstan have already been undertaken. The keen interest of OPEC is also confirmed by the contract on modernization and widening of the existing system of the oil pipelines in Kazakhstan, which was signed by Saudi Arabian company “Alsuwaiket Group”. It is difficult to believe that OPEC is eager to have one more producer in the Persian Gulf but if Kazakhstani oil will flow in some direction, it is desirable to have some influence over its flow.
Advantages and Disadvantages of Kazakhstan Entering into OPEC
Advantages: If Kazakhstan joining the organization makes the organization stronger, there may be direct economic benefits in the form of higher oil prices to both OPEC and Kazakhstan. Thus, it is not surprising that OPEC is courting Kazakhstan. Higher prices are also extremely necessary for the Kazakhstan’s oil industry. For example, expenses of the Joint Venture (JV) “Tengizchevroil” including production, transportation and commission fee to the partners are about US$ 11.2 per barrel. A price below this figure will put the JV in an extremely unprofitable situation and finally will result in the collapse. Some argue that the critical price for a barrel of oil, which is necessary to attract investments to the country and initiate the social-economic development of Kazakhstan, is US$ 18.
The other major benefit to Kazakhstan from joining OPEC is the political support and strength to offset the geopolitical power of the other major players - USA, W. Europe, Turkey, Russia, and China, who all have their own economic and political agenda’s for the area. Although Kazakhstan is the 9th largest country in the world by geographic area, it has a small population and is economically underdeveloped economy with limited political or economic power. If Kazakhstan joins and contributes to a strong OPEC, the dominating force in the world oil market, Kazakhstan will gain political significance.
The USA and Western Europe would like to see Kazakhstan an independent state, which develops in a democratic way according to the ‘free market’ principles. They would like that the Kazakhstan government encourages western investments to prospect and exploit oil reserves, that will help American and European companies to diversify the world’s offer for oil and gas. This would help them to reduce dependence of the West on politically unstable energy markets such as the Middle East and Russia. The USA, in particular, would like to limit the power of Iran, Russia, and China in the area.
If Kazakhstan enters into OPEC, it would be possible to build an oil pipeline to the Persian Gulf via Turkmenistan and Iran, which is currently strongly opposed by the USA. From the economic point of view, the economics of this pipeline seem to be indisputable in comparison with other projects. The value of the project is just US$ 700 to 800 million, the capacity of the project is supposed to be 500,000 barrels/day, while transportation charges would be US$ 3 per barrel. In comparison the project of oil transportation via Azerbaijan and Turkey bypassing the Bosporus has an estimated tariff of US$ 5 per barrel with investments that are several times more.
Turkey on the fringe of W. Europe has similar aspirations to other western countries. It would prefer that Kazakhstan remain out of OPEC, would like to see oil pass through Turkey, but bypass the Bosporus for environmental regions. In addition the common language in Central Asia has Turkey aspiring to a panTurkish area looking to Turkey for leadership.
An Iranian or a Turkish pipeline, that bypasses Russia, would weaken the hold of Russia on Kazakhstani oil transportation but thwart Russia, who in its own turn, is eager to control the transportation of Kazakhstan oil to the West. This explains the hastening construction of the Novorossisk project, which is projected to be completed by 2001. Currently Kazakstan is incorporated into the Russian pipeline network, importing Siberian oil in the East and exporting oil in the West. However, this leaves them at the mercy of the Russian oil pipeline transportation monopoly Transneft, which restricts exports to 150,000 barrels per day. Further investment through Russia is not attractive for former soviet republics due to unstable political situation and often financial and economic crisis there.
Economically, Kazakhstan’s entering into OPEC is both profitable and unprofitable for Russia. Though it may seem strange, strengthening of OPEC is profitable for countries producing oil. On the other hand, if Kazakhstan joins OPEC, it will mean that its dependence on Russia is weakened. Despite all assurances regarding equality of the CIS members, Russia is striving for domination, if not political then economic. However, the interrelations between OPEC and Russia cannot be called easy. Russia acts in the world market as one of the main competitor of OPEC. Recently, OPEC countries have repeatedly criticized the destabilising role of Russia in the oil market. Russia supplied through “Druzhba” oil pipeline and Baltic terminals to the West European countries and world’s markets, that volume of oil which it considered necessary to meet its requirements. However, the crisis in the oil sphere, the global fall of prices of oil and oil products made Russia look for new ways to settle the problem. In April 1998 the Russian government and main oil companies decided to reduce the oil export by 2.3% and export of oil products by 3.2%. Thus Russia wants to demonstrate to OPEC its readiness to co-operate and wishes to establish good relations with OPEC countries. In general, it seems to us that this step will not influence much oil prices. Thus, Russia is rendering a psychological support to OPEC in its struggle to raise oil prices. Political disagreements should step aside before the economic problems. Russia has been losing billions of dollars due to the fall of prices and the problem of integration between countries producing oil to avoid a further fall is getting urgent. In this regards, Russia and Kazakhstan should act jointly with OPEC countries and other main oil producers. However, the events of the summer 1999, when there was another crisis in the Russian oil products market, demonstrated that despite good intentions of the government, leading oil companies and resellers of crude oil, so-called ‘givers’ negatively influence the government’s trials to stabilize oil exports. Recently the oil prices again abruptly increased, mainly due to the activity of OPEC and other countries-oil producers. Thus, in Russia there is a sharp misbalance between internal prices of oil products and export prices, which are used by companies and mediators. Once again Russia demonstrated its weakness in control for export and shortsightedness of Russian exporters, who are interested in just a momentary profit.
A last political benefit from joining OPEC might be as a counter balance to corruption in the Kazakhstani oil market. With more external visibility and monitoring of production, it might be less likely that great volumes of oil will disappear as has happened in some non-OPEC Central African countries.
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