Black Gold Rush ;

By John Greenwald

Is this any place to drill for oil? the temperature plunges to -40F in winter, then soars to 120F in summer, when swarms of mosquitoes make life even more unbearable. On top of that, workers must wear gas masks and carry oxygen packs, since just a whiff of the invisible hydrosulfide gas that seeps from the ground can cause instant death. "In winter it is difficult to motivate anyone to work," says Larry Barthold, general manager of the joint venture that U.S. oil giant Chevron and the former Soviet republic of Kazakhstan have formed to tap the wealth that lies beneath this forbidding site. "In summer everyone smells funny because of the antimosquito spray. And it's so hot, work does not continue at a steady pace."

Yet it is here, on the steppes of Central Asia, that Chevron has staked much of its future and doubled its potential worldwide oil reserves by the stroke of a pen on a contract. Over the next 40 years, the company and the Kazakh government plan to invest $20 billion to develop the vast Tengiz field near the Caspian Sea, which contains some of the richest sources of oil and gas on earth. So deep are the deposits that geologists have yet to find the bottom. The oil-saturated rock formations are "two or three times the thickness of anywhere else in the world," estimates a senior official of the U.S. Department of Energy. "We're talking about trillions of dollars of revenues from the 30 billion to 60 billion barrels of oil."

Chevron's foray into Kazakhstan is part of the biggest global oil rush since energy explorers moved into the Middle East after World War II. Starting with the end of the cold war a few years ago, immense stretches of oil and gas lands -- from the Arctic Circle to China's Tarim Basin to the waters off Vietnam -- have opened up to multinational firms as host countries strive to develop their resources and earn hard currency.

The end of the cold war is only part of the story. Countries that were not part of the communist orbit but kept their oil industries under tight national control are also opening their arms to the capital, technology and management skills that international oil firms offer. Venezuela's state-owned oil industry took in foreign partners last year, entering joint ventures with Conoco, Mitsubishi and Shell. Foreign firms have flocked into Colombia to develop the Cusiana and Cupiagua fields, which together constitute the largest find in the western hemisphere since wildcatters struck oil in 1967 in Alaska's Prudhoe Bay.

Because most of the new fields are in inhospitable regions, exploitation costs are huge. In Canada a consortium led by Mobil is investing $4 billion to build and install the world's heaviest -- and costliest -- drilling platform 200 miles southeast of the coast of Newfoundland. The 1.1 million-ton rig, designed to withstand collisions with the giant icebergs that regularly drift through the area, will begin tapping the North Atlantic's 2 billion-bbl. Hibernia field in 1997.

Coincidentally, the great oil chase comes at the very time a supply glut has been depressing petroleum prices. While the U.S. economic recovery has jacked up prices, the cost of benchmark Arab light crude (about $16 per bbl. as of last week) is only slightly higher, after adjusting for inflation, than it was just before the 1973 Arab oil embargo. Yet so vital, still, is oil to the world's economy that companies must constantly hunt for vast new "elephant" fields to replace dwindling reserves. And U.S. firms are increasingly being driven abroad by the shortage of easily extractable oil in the lower 48 states and by environmental restrictions that prevent exploitation of oil-rich regions like the Santa Barbara Channel, off Southern California.

The risks could be as great as the potential rewards. Among other hazards, the oilmen are having to cope with a corrupt bureaucracy in Russia, rebellion in Colombia, civil war in Africa and demands from angry tribespeople in Papua New Guinea. Not the least of the problems is bringing the oil to market from some of the most remote spots on earth: required are hundreds, even thousands of miles of pipeline through jungles and deserts and across sometimes squabbling political jurisdictions whose refusal to cooperate can sink a project.

A look at the oil rush around the world:

THE FORMER SOVIET UNION. When Kazakhstan's President Nursultan Nazarbayev ended a three-day visit to the U.S. last February, he took home a Clinton Administration pledge to boost aid to his country from $91 million last year to more than $311 million in 1994. The unspoken reason: Kazakhstan's huge oil reserves, which Washington would like U.S. firms to develop. "We're talking about the greatest number of super-giant oil fields outside the Persian Gulf," says an Energy Department official.

Chevron has encountered obstacles in Kazakhstan that go well beyond the hostile climate. Executives were dismayed to find the Kazakhs clinging to outmoded production methods developed 20 years ago, when the region was still under Moscow's rule. Safety became an issue too. "The safety equipment is outdated, but by law we have to follow Kazakh practices," says Bret Thibodeaux, a Chevron consultant. "They insist that we use their safety equipment instead of our own."

The biggest hurdle for Chevron will be getting the crude to market as production increases from 30,000 bbl. to 700,000 bbl. a day by 2010. Russia has restricted the flow of Kazakh oil through a Russian pipeline to the Black Sea port of Novorossiysk because the crude contains corrosive sulfur -- a problem Chevron plans to rectify by year's end by installing special cleanup equipment. The high cost of removing the toxins has forced Chevron to cancel some roadbuilding plans and to recall about 10% of its 250 U.S. employees.

Rather than rely on the aging and limited-capacity Russian pipeline, Chevron is considering alternatives that include construction of a $1.2 billion, 1,200-mile line to Novorossiysk. The fate of that proposal and others has yet to be resolved in what Chevron concedes have been "difficult" negotiations with Russia and Kazakhstan over issues ranging from transport routes to financing.

By controlling pipelines from oil-rich neighbors such as Kazakhstan and Azerbaijan, Moscow could cash in on the energy wealth of its former empire. While Russia has the largest oil and gas reserves in what had been the Soviet Union, political and economic instability has kept Moscow from developing them in recent years. Russian oil production fell from more than 11 million bbl. a day in 1988 to fewer than 7 million bbl. last year, as domestic demand slackened and outmoded equipment was not replaced. At the same time, Moscow's uncertain tax and legal climate has discouraged foreign investors.

Even so, Amoco and Shell are developing sites in the Khanty-Mansiisk region of western Siberia, the source of most of Russia's current production. And in April a consortium of Western firms led by Texaco, Exxon and Amoco signed an agreement with Moscow to invest $100 million in drilling in the Pechora Sea.

Sites in the Caspian Sea have attracted investors to Azerbaijan, which remains locked in a conflict with neighboring Armenia over Nagorno-Karabakh, the ethnic Armenian enclave on Azeri soil. Despite the violence, a group of companies that includes Amoco, British Petroleum, Pennzoil and Unocal has been negotiating for more than a year to develop the Chirag field, which contains an estimated 1.5 billion bbl. of oil.

CHINA. The locals call the Tarim Basin, in the northwestern corner of the country, "the Sea of Death." On either side of the ribbon of asphalt that runs through the desert for more than 120 miles, there are few signs of life. Sand dunes tower as high as 150 ft. and are held in place by reeds woven into grids to keep the sand from covering the road. The vast hinterland, an area slightly larger than France, where temperatures range from subzero to 120F, may contain more than 70 billion bbl. of crude -- equal to nearly one-third of Saudi Arabia's proven reserves.

Beijing says more than 60 companies from 17 countries have expressed interest in the Tarim Basin. Last December Exxon and Japan-Indonesia Petroleum won the right to explore the first major block; a group of five firms including Texaco, Japan Petroleum and France's Elf Aquitaine submitted the winning bid for a second block in February.

China has thrown the Tarim open to foreign investment in a frantic effort to obtain the oil it needs to fuel its economic boom. The basin has yielded more than 15 million bbl. to domestic drilling since 1989, making it the country's sixth largest oil field. That is not enough to slake a thirst that will turn China into a net importer of crude this year for the first time since 1965.

VIETNAM. In late 1974 Mobil explored the Blue Dragon field in the South China Sea, 200 miles off the South Vietnamese coast. North Vietnam's victory in 1975 denied Mobil the chance to exploit finds in the region, but now Hanoi wants the company to return. A Mobil-led consortium is happy to oblige: it believes that Blue Dragon could hold up to 500 million bbl. of oil.

The field's potential has put it at the center of a possibly explosive territorial dispute. Mobil is rushing to sink a well this summer in defiance of a claim by China, which insists that its international waters extend as far as the Blue Dragon site. Beijing meanwhile has granted a small U.S. oil company, Crestone Energy Corp., a concession just east of Blue Dragon in waters claimed by Vietnam; Hanoi is looking for a company to explore the same site.

COLOMBIA. The Cusiana field yielded nothing more than a pair of dry holes before the Triton Energy Corp. of Dallas staked a claim in the mid-'80s. Because Triton lacked the capital to explore the area, it sold an 80% share to British Petroleum, which took in France's Total as an equal partner. Today the consortium is part of a joint venture with the state oil company, Ecopetrol, which is developing an estimated 2 billion bbl. in Cusiana and the neighboring Cupiagua field. That could be just the beginning: the partners' plan to invest $6 billion over the next 40 months to bring in Cusiana and explore other sites in the foothills of the Andes.

The oil bonanza has not only turned once sleepy villages into bawdy boomtowns but also given guerrillas of the National Liberation Army attractive targets. The rebels have sabotaged oil installations more than 500 times since 1987, and have lately taken to kidnapping and assassinating local officials in an attempt to extort some of the oil wealth that has flooded into the region. "It's a plague," said Gustavo Wilches, governor of the area where Cusiana is located, in January. "The discovery of petroleum is destroying us." The very day he spoke, guerrillas shot down a helicopter over an oil field and others kidnapped the husband of one of the area's most powerful politicians.

PAPUA NEW GUINEA. "We started from a postage stamp. Our toehold was as small as that." So recalls Greg Gurbach, a field construction manager for Chevron, of the company's initial sortie into the mountainous jungle that surrounds Lake Kutubu, one of the most pristine spots in the South Pacific. The year was 1986; Chevron headed a consortium that had come to explore a reservoir 1.5 miles beneath the jungle floor that was thought to contain 225 million bbl. of high-quality oil.

Tapping the crude was one thing, getting it to market another. Without roads or navigable waterways, Chevron built a 165-mile pipeline that followed the Kikori River to the Gulf of Papua, where the first tanker filled up in 1992.

Chevron also had to contend with irate Foi and Fasu tribesmen who, armed with spears, axes and bows and arrows, occupied the project's airstrip and attacked some company officials. The tribespeople demanded a more favorable split of the oil royalties between them and the provincial government and fulminated over damage to their hunting and fishing grounds. The take was subsequently improved from a 20%-80% division to 30%-70%; after Chevron built medical facilities for the villagers and buried the pipeline, peace was restored.

How long can oil companies afford to sink billions of dollars into projects at the ends of the earth -- all at a time of near rock-bottom oil prices? Never before has so much been spent to find and produce oil with so little hope of immediate profit. But Big Oil has few doubts about the value of its investments. "You can prospect at any time because oil is the fabric of our society and there is always going to be demand," says Mark Bononi, who assesses the energy industry for the investment firm Smith Barney. Moreover, huge projects like Chevron's Tengiz field in Kazakhstan are long-term ventures necessarily designed to take decades to pay off. By prospecting while oil is cheap, companies hope to secure reserves that will enable them to profit handsomely once prices rise again.

With reporting by Jordan Bonfante/San Ramon, Jaime A. FlorCruz/Korla and Ann M. Simmons/Washington, with other bureaus