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http://www.nytimes.com/2001/12/15/business/worldbusiness/15BIZ-OIL.html December 15, 2001 BUSINESS As the War Shifts Alliances, Oil Deals Follow By NEELA BANERJEE with SABRINA TAVERNISE There is no oil in Afghanistan, but there are oil politics, and Washington is subtly tending to them, using the promise of energy investments in Central Asia to nurture a budding set of political alliances in the region with Russia, Kazakhstan and, to some extent, Uzbekistan. Since the Sept. 11 attacks, the United States has lauded the region as a stable oil supplier, in a tacit comparison with the Persian Gulf states that have been viewed lately as less cooperative. The State Department is exploring the potential for post-Taliban energy projects in the region, which has more than 6 percent of the world's proven oil reserves and almost 40 percent of its gas reserves. The United States government cannot compel investment, but it can clear away diplomatic and bureaucratic obstacles. Western oil companies say warming relations with regional powers could yield small openings. Better ties between Russia and the United States, for example, have accelerated a thaw that began more than a year ago over pipeline routes from the Caspian Sea to the West. "The sharp edges are off that discussion, and things are seen as less of a threat," said Martijn Minderhoud, a senior regional vice president for Royal Dutch/Shell. But any payoff remains distant. The entrenched problems that hobbled oil investment in Russia and Central Asia before September still exist. Oil companies and regional experts wonder whether significant new oil and gas reservoirs will be opened to foreign investment, whether onerous laws and tax codes will be reworked and whether persistent corruption can be reduced. "This is a period of reassessments among oil companies, and a time of cautious optimism," said Scott Horton, a partner at the law firm of Patterson, Belknap Webb & Tyler in Manhattan. "But all have been badly burned in the former Soviet Union before." Skeptics, especially in the Islamic world, contend that oil interests lie at the heart of the West's war in Afghanistan. "The Pipeline of Greed," read the headline on a recent article in the Pakistani newspaper Dawn about the American-led attacks on the Taliban and Al Qaeda. "The war on terrorism may well be a war for resources," it said. The Bush administration says that its war goals have been clear and do not involve oil. "There is no such hidden agenda," said an administration official. "Operation Enduring Freedom is meant to get rid of terrorism in Afghanistan, Central Asia and the surrounding areas." Still, the administration lately has discreetly overlooked the pitfalls of doing business in the former Soviet Union. During a visit a week ago to Kazakhstan, Secretary of State Colin L. Powell said he was "particularly impressed" with the money that American oil companies were investing there. He estimated that $200 billion could flow into Kazakhstan during the next 5 to 10 years. Two weeks earlier, on a visit to Russia, Energy Secretary Spencer Abraham championed the cause of increased foreign investment in Russia's oil industry. On the same trip, David J. O'Reilly, the chairman of ChevronTexaco (news/quote), said his company was reviewing possible projects in the Russian Far East. Pipelines are the clearest realm of progress. For years the United States and Russia clashed over routes to transport oil and gas from the Caspian Sea region to lucrative Western markets and the political and economic power that control of those networks conferred. Russia wanted pipelines built on its territory, and some were. The United States backed a pipeline from Baku, Azerbaijan, to the Turkish Mediterranean port of Ceyhan, bypassing Russia entirely. The pipeline consortium is led by BP and represented by Baker & Botts, the law firm of James A. Baker III, a Bush family confidant and former secretary of state. Over the last year, Russia's opposition to that route has subsided, and in October, the oil ministry invited BP to make a presentation about it to domestic oil companies. Industry analysts said that meeting would have been unthinkable if ties between the United States and Russia had not improved. Russia's largest oil company, Lukoil, confirmed that it was seriously looking into investing in the project. The arc of countries in Central Asia where Western oil companies work grazes Afghanistan. But the value of Afghanistan itself, if any, might be as a pipeline route. Four years ago, the Unocal Corp. (news/quote) with the State Department's backing negotiated with the Taliban to build a pipeline through Afghanistan linking Turkmenistan, which is rich in natural gas but landlocked, to Pakistan. Although Pakistan has called for reviving the pipeline, industry experts say oil companies are so far not interested. But the plan could be dusted off. "Once we bomb the hell out of Afghanistan, we will have to cough up some projects there, and this pipeline is one of them," said Matthew J. Sagers of Cambridge Energy (news/quote) Research Associates, a research and consulting group. "Can oil companies be persuaded by the United States? It has happened before. Look at Baku-Ceyhan." That project exemplifies how Washington fosters oil investment. The White House began advocating the Baku-Ceyhan route about five years ago, but oil companies in the Caspian argued that it made little economic sense. At that time, there was little oil from the Caspian Sea. But there was plenty of natural gas, and companies needed a pipeline for it. They agreed to develop the Baku- Ceyhan oil pipeline if they could get the American government's help to build a parallel gas pipeline, a person close to the Baku-Ceyhan consortium said. The presence of an Iranian company, OIEC, as a 10 percent shareholder in the gas pipeline consortium might have prompted the United States to block the project. But it did not, and both pipelines are now proceeding. This fall, the antiterrorism campaign raised oil companies' hopes that relations between Iran and the United States might improve. The industry's favored export route for Caspian oil is through Iran. But while the Bush administration confirms that Iran is sharing intelligence about Afghanistan with the United States, the president is maintaining Washington's longstanding policy against doing business with Tehran. Western oil companies, showing a bit more faith than before in Central Asia and Russia, are gingerly looking for investment opportunities, industry consultants said. But the barriers are significant. Through the 1990's, the United States fostered good relations with Kazakhstan to circumvent Moscow. But the relationship cooled when the Justice Department last year began investigating accusations of high-level corruption in oil projects there. That investigation continues, but Kazakhstan which holds about 88 percent of Central Asia's oil wealth has offered the United States use of its airspace and military bases for the war. Its president, Nursultan Nazarbayev, is due in Washington next Friday to meet with President Bush and then will travel to Texas to mingle with oil executives. Russia would seem the most attractive candidate for investment, given its warming relations with the United States missile defense aside and its relatively extensive economic changes. But Russia is hard to figure. Its recent decision to acquiesce to OPEC's demand to cut exports has been interpreted in differing ways. Moscow might have come under American pressure to go along with the Middle East to protect oil prices, and so ensure political stability among the United States' Arab allies. Or the cut, which went against the official position of the United States, might have defied Washington. Either way, Western oil companies understand, Russia's underlying motivation is the same: the Russians pursue their interests, which occasionally coincide with America's. Those Russian interests still preclude serious involvement by Western oil companies in developing most Russian fields, except for complex offshore projects. Russia has tarried in developing tax laws and a production-sharing agreement for foreign oil concerns. Russian politicians fear surrendering oil to foreigners. After years of courting their wealthier and more-experienced Western counterparts, Russian oil companies, made richer by high oil prices, mostly want to go it alone. "In the last year, the attitude of Russian oil companies to Western ones has changed," said Yevgeny Khartukov, general director of the International Center for Petroleum Business Studies, a nonprofit research and consulting group in Moscow. 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