DURING 1998, DEVELOPMENTS IN THE CASPIAN SEA region began to reach what an executive of one participating U.S. oil company called "critical commercial mass."

The year celebrated significant advances, Chevron Overseas Corp. Pres. Richard H. Matzke told a Centre for Global Energy Studies year-end 1998 meeting on Caspian oil and gas.

Action on several fronts highlighted 1998, he said.

Azerbaijan International Operating Co. (AIOC) lifted its first tanker of crude at the Black Sea port of Novorossiisk, Russia. AIOC`s production of "early oil" was expected to reach 100,000 b/d by year`s end. Meanwhile, the AIOC western pipeline across Georgia to Supsa overcame difficult cost issues and moved ahead, with start-up expected in April 1999.

In Georgia, Chevron and Caspian Transco agreed to improve and operate a smaller pipeline from Khashuri to Supsa and on to the port at Batumi. This link was critical to the plan to keep Kazakhstan`s Tengiz oil field exports growing, Matzke said.

Tengiz production averaged about 210,000 b/d. And despite reduced cash flow from low oil prices, the Tengiz partners approved a $500 million work program for 1999 to boost capacity to 260,000 b/d within a couple of years.

In northern Kazakhstan, the Karachaganak field project suffered a slowdown because of payment problems from sales to Russia. But Project Director Vincenzo di Lorenzo reaffirmed in October 1998 that the Karachaganak partnership planned to continue its $1.8 billion development program, which could boost output to more than 50 million bbl/year by 2001.

Meanwhile, the Caspian Pipeline Consortium put new leadership in place, and it obtained the critically important local permits from the four Russian regions it would cross. The strong relationships and knowledge of consortium member Lukoil were keys to that success.

"We`re very close to the go-ahead on this pipeline, which will add an initial 560,000 b/d of export capacity," Matzke said.

"The consortium plans to start ordering pipe from Russian mills as soon as we have a clear and final federal approval of this project. And once we get started, we intend to have this pipeline shipping Tengiz crude to markets in 2001."

Other high points:

- The British Petroleum-Amoco Corp. merger was a major event for the business world and the Caspian oil industry. Also important, a new national company-Kazakoil-joined the major players in the region. Phillips Petroleum and Japan`s Inpex bought stakes in the northern Kazakh offshore from Kazakoil for the reported price of $250 million.

- Texaco acquired a 65% stake in North Buzachi, where there`s more than 1 billion bbl of oil in place. The T5050 deep well was completed in Tengiz field during September 1998.

- In July 1998, Mobil Corp. and Monument Oil & Gas plc announced a new production-sharing agreement (PSA) for Garashsyzlyk field in Turkmenistan, a complement to the PSA the partners already held at Nebitdag field. And Monument began exporting crude by way of exchanges with Iran, at a lower cost than the other route through Baku.

- In the Azeri offshore, partnerships holding concessions continued to gather and study seismic data, confront rig shortages, pinpoint targets, and test a few prospects. On the Absheron block, Chevron, Total, and Socar completed their 3D survey and moved ahead on building a rig scheduled to start service by 2000.

- In Russian waters, Lukoil said it planned to move a rig out of Astrakhan for an exploratory test in the north Caspian. And word came from Cipco late in October 1998 that the third well at Karabakh had struck oil.

Considerations

Matzke said he believed that the industry should focus on five priorities for oil distribution and export:

- Continue to develop diversified shipping by rail, sea, and river, and by the Transneft system and exchanges as well. Tengizchevroil, in particular, had used these options to prove that the Caspian oil industry could get along fairly well in the short term, and even grow, without a "main export pipeline."

- Keep filling the northern pipeline and make it a permanent success.

- Complete the western pipeline across Georgia and get it running.

- Complete the Eurasian Transco pipeline link from Kashuri to Supsa to Batumi to help keep Tengiz field expansion on schedule.

- Complete the Caspian pipeline from Tengiz to Novorossiisk. This pipeline was the key to unlocking Tengiz. But just as important, the Caspian oil industry must have a pipeline that fully involved all the Caspian players-both companies and countries-and especially Russia, Matzke said. The CPC project met that test better than any other option.

As for the Baku-Ceyhan pipeline, after the Caspian Pipeline, a new line through Turkey would be a logical step to provide market access to the anticipated large new reserves from the east and west sides of the Caspian. This pipeline could also relieve future pressure on the Bosporus strait.

Exploration

The oil industry had barely begun to explore the Caspian, Matzke said.

Speculation about the region`s potential was mixed. A projection by the U.S. government estimated that Caspian reserves could total 178 billion bbl. Another estimate, by Wilfrid Kohl of Johns Hopkins University, put the potential as high as 218 billion bbl. "With numbers like that, and plenty of geopolitics to fan the flames, it`s no wonder there`s been so much heated debate about multiple, large-scale pipelines," Matzke said.

John Grace, an American geologist who had modeled the Caspian`s future development, described the oversized forecasts about Caspian reserves as "petrofantasies," which could be fulfilled only by years of very substantial investment and good luck as well.

"Whether you use Grace`s model or another, I think it`s clear that making bold and extreme statements about so many billions of undiscovered barrels has been premature and not especially productive," Matzke noted.

"The eager outside world and the rest of us will have to accept that it`s going to take quite a while to find out what`s down there. The Caspian offshore, particularly the Azeri offshore, has a long history of shallow-water activity, and now it wants to enter a new period of deeper-water exploration and production. The trouble is, even though we`ve got plenty of great prospects, we have too few drilling rigs capable of testing them."

The industry was considering $600-800 million in shared investment to establish an essential fleet of semisubmersible rigs. One rig was working in 1998, another was almost ready, and two more were expected to start service in 2000.

"So we aren`t going to know today-or next year-how much more oil is hidden beneath the Caspian region," Matzke said. "Actually, this would be true even without a rig shortage. None of the prime offshore areas of the world-the North Sea, Gulf of Mexico, West Africa, and the others-has revealed its oil and gas treasures in just a few years or a few wells. The Caspian region will be no different."