Russia's pipe dreams fuel oil rush on Caspian Sea

When Well No 37 exploded in flames 10 years ago the fire burned for 400 days and nights, fused earth into rock and shook the Tengiz Oil Field like an earthquake. A tank tried to seal the blazing well with shell fire.

But so plentiful and pure is oil beneath the lunar landscape of western Kazakhstan - as smooth as Jack Daniel's and honey-like in colour, the connoisseurs say - that Chevron Oil Corporation decided it could risk such perils.

After tortuous negotiations with Soviet and then Kazakh apparatchiks, it moved on to the desolate shore of the Caspian Sea in 1993 and promised to spend $20bn (pounds 12bn) over 40 years. But getting oil from the ground was the easy bit. Nature's torments are nothing to the fickle furies of pipeline politics.

"Sometimes it's difficult to drain the swamp when you are up to your ass in alligators," said Morley Dupre, the Louisiana oil man in charge of Tengizchevroil (TCO), a joint venture between America's third biggest oil company and Kazakhstan.

The scoreboard of what is called the new Great Game, a struggle for profit and political gain across the southern flank of the former Soviet Union, is a computer screen manned by Fatima Baimukhova. She is a Kazakh woman on the Chevron payroll, across whose console flash the vital statistics: the amount of oil leaving Tengiz via the pipeline to world markets.

The pipeline begins its long journey to a Black Sea port a few hundred yards from the "Pink Palace", a squat building faced in pink stone, stuffed with electronics and supervised by American engineers. Ultimate control of the tap lies 900 miles away in Moscow. It is through Russia that the most valuable assets of the former Soviet Union, whether gas from Turkmenistan or petroleum from Azerbaijan and Kazakhstan, must flow. The vast network, run by a body called Transneft, under the Fuel and Energy Ministry, may be rusting and prone to explosions, but it is Moscow's most powerful lever in the Commonwealth of Independent States.

"They control the flow by shutting the valve," said John Engelhardt, Chevron's operations manager in Tengiz. "They want to keep a choke on the CIS." Reasons cited by Russia for slowing the flow are that it was too smelly and salty and that it was corroding the pipeline.

The 19th century Great Game saw Britain and Russia wrestling over Central Asia with soldiers and spies. Today, the most important weapon is the pipeline. Russia's war in Chechnya is motivated in part by a desire to regain control of an oil route through Grozny. Yesterday, thick black smoke was billowing over that city, after oil-storage facilities were set alight by fighting between Russian and Chechen forces.

Other players include Turkey, Iran, many of the world's biggest energy companies, including British Gas and British Petroleum, the Sultan of Oman and a former car dealer from the Netherlands.

Tengiz was first developed in the Soviet-era and hailed as the biggest oil find since Alaska. It has the potential to produce 750,000 barrels of crude a day. Current capacity is about 130,000. Ms Baimukhova's screen registers only 65,000 barrels gushing into the pipeline.

Chevron has spent upwards of $1bn in Tengiz, a wasteland bedevilled by lethal gas, bandits, Arctic cold in winter and sweltering heat in summer. It formed a security force called Alpha, manned in part by former KGB agents, installed 12 satellite television channels, brought in barmaids from Britain to serve English beer, recruited a Scottish caterer to cook fried bread and bacon breakfasts, and flew in hundreds of Western oilmen.

"It is like the tower of Babel, only with English cooking," one American said.

The ultimate prize is enormous. Fields with more than a billion barrels are known as "elephants" in international oil parlance. Tengiz is a big elephant, containing 6 billion to 9 billion barrels of recoverable oil that nearly double Chevron's total reserves. Its quality makes hardened veterans sound romantic.

Chevron, though, is over a barrel. It cannot get more oil out of Kazakhstan by the existing pipeline. Plans to build a second artery are bogged down in bitter wrangling. Instead of investing $500m in Tengiz this year as planned, it will spend $50m.

What makes the oil Great Game difficult to play is that Russia is fragmented into competing fiefdoms, semi-privatised oil firms, ministries with varying interests and other power- brokers. Even President Yeltsin's chief bodyguard, Alexander Korzhakov, gives advice on energy policy.

And Russia is using its stranglehold over natural gas and petroleum pipelines to increase its influence.

The Russian gas monopoly, Gazprom, has muscled into Kazakhstan's Karachaganak gas field, obliging British Gas and Agip to give it a 15-per-cent stake. In Azerbaijan, the partly privatised Russian firm, Lukoil, gained a 10- per-cent stake in a $7.4 bn project involving British Petroleum. Azerbaijan's former president, Abulfaz Elchibey, tried to resist any such role for Russia. A military putsch forced Baku to reconsider. Mr Elchibey was removed from office, days before he was due in London to finalise a share-out of 4.4 billion barrels of off-shore oil that would have excluded Russia.

Russia now wants to entrench such gains in international law. It wants the Caspian Sea re- classified as a lake. This would deprive Kazakhstan and Azerbaijan of the exclusive rights they now claim over their own coastal waters, and place all Caspian decision-making under a joint "condominium".

Tengiz lies inland from the Caspian, and Chevron has avoided yielding a stake in its joint venture to Russian interests. But the American corporation is being pressed to foot most of the bill for a new pipeline planned from the Caspian shore to the Black Sea by a consortium comprising Russia, Kazakhstan and Oman. Chevron, while desperate for an alternative route for its oil, has rejected demands that it cough up most of the money in return for a quarter stake in the $1.2bn pipeline project.

Representing Oman, which was expected to provide much of the financing, is John Deuss, an elusive Dutch fortune-hunter typical of the murky world of money and oil in post-Soviet central Asia. He came to prominence in connection with allegations of sanctions-busting on behalf of South Africa. Another endeavour was a failed attempt to corner the market for North Sea Brent crude.

A senior Kazakh official, frustrated by haggling over the new pipeline and by Oman's fancy footwork, describes Mr Deuss as "odious". Mr Dupre says Chevron is also "chomping at the bit" but is more diplomatic about the Bermuda-based Dutchman: "He's a businessman trying to make a buck."

Turkey is lobbying for a pipeline that would skirt Russian territory and carry oil from the Caspian to the Mediterranean through Turkey. Such a route would dramatically alter petroleum - and power-politics in the region. Russia, which stands to lose its stranglehold, is not keen. The US supports the idea but has its worries; one of the proposed routes to Turkey passes through Iran.