Pipe Dreams - The Struggle for Caspian Oil (1998)

Azerbaijan's Riches Alter the Chessboard

Amoco's T. Don Stacy educated U.S. officials on the Caspian's wealth.

First of three articles

By Dan Morgan and David B. Ottaway
Washington Post Staff Writers
Sunday, October 4, 1998; Page A1

BAKU, Azerbaijan – The message that Amoco Corp.'s T. Don Stacy took to a small political gathering on the morning of Aug. 6, 1996, seemed hopelessly obscure compared with the usual concerns of the lobbyists and business tycoons assembled at the White House.

Stacy, who directed Eurasian operations for the Chicago-based oil company, was incensed at what he considered misguided U.S. policies toward a remote Central Asian country on the western shore of the Caspian Sea – hardly a preoccupation of, for example, New York Yankees' owner George Steinbrenner, one of those on hand.

But as Stacy pressed his points on the strategic importance of Azerbaijan's oil deposits, one listener was riveted. Without waiting for Stacy to finish, President Clinton jumped in to clarify several geopolitical points, then strode to a blackboard and drew a remarkably accurate map of the Caspian region.

Before the meeting ended, Amoco – the largest U.S. investor in Azerbaijan's oil boom – had what it wanted: a promise from Clinton to invite the Azerbaijani president to Washington. Six months later the company, which traditionally donated heavily to the Republicans, contributed $50,000 to the Democratic Party. In August 1997, Clinton received President Heydar Aliyev with full honors, witnessed the signing of a new Amoco oil exploration deal and promised to lobby Congress to lift U.S. economic sanctions on Azerbaijan.

The ties between Amoco and Azerbaijan – and Amoco's role in pushing the United States closer to this Caspian nation – reflect a complex new choreography involving oil companies, big powers and regional governments vying for influence in the strategic borderlands between Russia and the Middle East.

The key players are not only familiar companies such as Amoco, Mobil Corp. and Chevron Corp., but also senior officials of governments stretching from Washington to Moscow, and Beijing to Tehran. The stakes are enormous financially and, as Clinton's energetic intervention suggested, geopolitically. Azerbaijan, like neighboring Turkmenistan and Kazakhstan, sought to lure American oil companies and then the U.S. government to help shore up its financial and political independence.

The ultimate prize is an oil and gas patch potentially larger than those discovered three decades ago in the North Sea and Alaska's North Slope. U.S. experts estimate that the region could produce at least 3 million barrels of oil a day by 2010, worth $14 billion a year at current prices. That is far less than Saudi Arabia but more than Kuwait – although a vocal minority of analysts believes the Caspian's reserves have been substantially overestimated. The region's reserves of natural gas – a relatively clean fuel for a world fretting over pollution and global warming – are the world's third largest behind the Middle East and Russia, according to a State Department report.

The drive by U.S. companies to exploit these resources already has produced a political realignment of historic dimensions, including an unprecedented American presence in a region that had been under almost continuous Russian control since the mid-19th century.

Oil companies claim U.S. sanctions against Azerbaijan limit U.S. aid to Azeri refugees like these at Saatli.(By Dan Morgan – The Washington Post)

But U.S. interest in the region also poses risks and policy dilemmas for the United States that seem likely to intensify. 

Foremost is the U.S. relationship with Moscow. Both imperial Russia and the Soviet Union viewed the Caspian resources as a birthright. Now Russia accuses Washington of maneuvering to limit Moscow's control and establish a U.S. sphere of influence in the region. 

Caspian oil also is central to the Clinton administration's internal debate over U.S. relations with Tehran. Some American oil companies view Iran as the cheapest, fastest exit route for Caspian oil; that's counter to other interests – and Clinton administration policy – favoring continued U.S. government efforts to isolate the Islamic state.

American involvement is just what the leaders of the newly independent nations of Azerbaijan, Kazakhstan and Turkmenistan wanted when they set about early in the decade to woo companies flying the flag of the world's only superpower.

"They recognized that with the forces they have around them – Russia and Iran – only a strong relationship with the United States provides an opportunity for stability and for not being totally dominated," said a U.S. oil executive who requested anonymity. "Since the U.S. government was slow to pick up on the importance of the region, they forged relations with U.S. business."

"We used oil for our major goal ... to become a real country," said Ilham Aliyev, vice president of Azerbaijan's state oil company and son of the country's president.

By investing more than $2 billion in the three former Soviet republics with most of the Caspian's oil and gas, American oil companies helped revive collapsed economies and end more than a century of economic dependence on Russia. But there were political and strategic gains as well.

American oil companies became advocates in Washington for the Caspian governments, calling attention to Caspian wealth, supporting Caspian political causes and putting the Caspian on the agenda of Washington's policy debates.

Representatives of American oil companies in Azerbaijan, for example, pressed administration officials "at every forum, meeting and luncheon" to become more involved in ending a bloody territorial dispute between Azerbaijan and Armenia, according to one U.S. executive. Last year, with Clinton's support, they also lobbied successfully in Congress to ease U.S. economic sanctions on Azerbaijan imposed in 1992 because of its war with Armenia.

Chevron Corp., the U.S. oil company with the largest investment in Kazakhstan, has battled in Moscow and Washington on behalf of a Kazakh plan to redirect the country's oil exports from the Russian market to hard-currency Western ones – crucial to the economic independence of Kazakhstan. Mobil Corp. placed advertisements in U.S. newspapers earlier this year extolling the accomplishments of the government of Turkmenistan, led by a controversial, former Communist strongman.

These relationships are binding the U.S. government closer to a region beset by ethnic rivalries and armed separatist movements, and ruled by corrupt, autocratic regimes. The United States, in pursuing Caspian oil, risks becoming embroiled in a "zone of instability and crisis," according to Martha Brill Olcott, a Russian specialist at the Carnegie Endowment for International Peace.

The ties that bind the United States to the Caspian region seem certain to tighten, if only because U.S. energy companies have few alternatives as attractive. They are blocked by U.S. policy from investing in Iran and Iraq, and prospects elsewhere pale compared with the Caspian.

The blunt truth, according to one American oil man, is that "there are not a lot of Caspians out there."

How the United States came to be a player so far from home is a story of post-Cold War geopolitics and old-fashioned wildcatters, of a weakened Moscow and an emboldened Washington, of oil and money and power. And it is a tale with an ending still being written. 

Turkish workers build a pipeline from Baku, Azerbaijan, on the Caspian Sea, to Supsa, Georgia, on the Black Sea.(AIOC photo)

Page TwoGrasping the Potential

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By the time Don Stacy met Clinton in 1996, Amoco was the most prominent U.S. institution in Azerbaijan. From its headquarters in a handsomely restored mansion in Baku's old town, the company ran child-immunization programs, subsidized Azerbaijani musicians and sponsored student exchanges. 

But in the early years of the Baku oil rush, it was far from certain that Amoco – or any American company – would prevail over a small cast of fortune hunters, polyglot middlemen and oil company agents who were the first to sense a bonanza. Before an American company could muscle its way in, others had to be muscled out. The British in particular – albeit represented by a trio of Americans – had the early edge in Azerbaijan.

Baku was still a provincial Soviet capital in 1990, and few U.S. oil executives appreciated its potential. Azerbaijan's oil industry had fallen on hard times since the 19th century, when the Rothschilds and the brothers of dynamite inventor Alfred Nobel turned Baku into a world oil center capable of challenging John D. Rockefeller's Standard Oil for control of Europe's kerosene markets.

By 1990, unbridled Soviet exploitation had left an environmental wasteland of ancient derricks and black puddles of oil. Azerbaijani production was plummeting. Yet Soviet geologists had glimpsed the future in discovering 4.7 billion barrels of premium oil in a sausage-shaped stretch of the Caspian Sea called the Absheron Sill. Fabulous as it was, the treasure lay beneath hundreds of feet of water and beyond the reach of Soviet drilling technology.

One of the first Westerners to grasp the potential of the Absheron Sill was an American-born oil entrepreneur and dealmaker named Stephen E. Remp. A lanky, restless man who rode motorcycles and restored Scottish castles for recreation, Remp had been running Ramco, a small oil-services company in Aberdeen, Scotland, since 1977. But at 41, he was tired of cleaning other companies' oil pipes. He wanted to be in exploration and production – to "play with the elephants," as he told friends.

An attraction for oil frontiers ran in Remp's blood. His great-grandfather, a West Virginia oil driller, had followed oil west to California, the United States' oil frontier of the day. Remp began traveling to Baku in 1989, arriving on white-knuckle Aeroflot flights from Moscow, hoisting vodka glasses with local officials and learning what he could about the local prospects.

Baku was not a place for the faint-hearted. Tensions between Azerbaijan and neighboring Armenia were rising. In January 1990, Soviet President Mikhail Gorbachev sent his army into Baku to suppress a nationalist uprising. Nearly 200 demonstrators were killed in the capital. Tanks prowled the streets for months, and Azerbaijanis wore black to commemorate the dead.

Remp thrived on the turmoil, which, he knew, would keep the big boys away as he cultivated his connections and gathered information.

Later in 1990, after the uprising had been quelled, Remp got a big break. The Azerbaijani state oil company hired him to identify Western oil companies that could develop its principal offshore plum, soon to be named the Azeri Field. Remp contacted British Petroleum PLC, the huge British multinational. BP, he learned, had picked up its own tantalizing reports about a Caspian Kuwait and had sent two American-born executives to check them out.

BP's men in Baku were Rondo Fehlberg, a former all-American wrestler from Brigham Young University, and Thomas M. Hamilton, a veteran of oil exploration from Alaska to Burma. They initially believed BP could make its own deal in Azerbaijan, but soon thought better of trying to exclude Remp and risk having him allied with competitors.

By October 1990, a consortium of BP, Remp's Ramco and the Norwegian state oil company, a longtime BP partner, had "the keys to the kingdom," as Fehlberg put it in an interview: an informal promise to exclusively develop the Azeri Field.

That very month, however, a 30-year-old Georgetown University political science professor arrived in Baku and upset their plans.

Georgetown professor S. Rob Sobhani got American companies a shot at the Azeri Field.(By Gerald Martineau – The Washington Post)

S. Rob Sobhani's Azerbaijani family had emigrated to the United States from northern Iran in 1979. An Azerbaijani-speaking American was a novelty in Baku in those days, and Sobhani was summoned for a chat in the cavernous office of Communist Party boss Ayaz Mutalibov. 

A bust of Soviet state founder Vladimir Lenin on the mantel caught Sobhani's eye as Mutalibov waxed enthusiastic about his plans for American-style democracy in post-Soviet Azerbaijan. The party boss then confided his oil deal with BP.

Sobhani eventually would work as a paid consultant for Amoco. Then, however, he was an independent professor doing what he would later describe as his patriotic duty.

"Look," Sobhani recalled saying, "you can't do this with BP. There's only one America and only one true superpower and you've got to work with it."

Sobhani cited the "heavy-handed" behavior in the Middle East of BP's ancestor, Anglo-Iranian Oil Co. Groping for an example of the "fine" American oil companies whose virtues he had extolled, Sobhani thought of one: Amoco.

The idea of inviting in the Americans seemed to hit Mutalibov as if delivered from the bust of Lenin perched behind his shoulder.

That same day, Remp was in the office of the head of the Azerbaijani state oil and gas agency when Mutalibov telephoned with a command: Cancel the exclusive BP deal and give the Americans a shot at the Azeri Field.

Jockeying for Position

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The playing field had been leveled for U.S. companies, but success was not guaranteed.

In April 1991, an Amoco delegation presented the company's bid for developing the Azeri Field. Two months later the Azerbaijanis anointed Amoco and its partner, McDermott International Inc., to negotiate a binding contract.

But now it was Amoco's turn to find the treasure suddenly yanked away. Azerbaijan declared independence on Aug. 30, 1991. During the next three years, the new nation was humiliated in a bloody war with Armenia that made refugees of hundreds of thousands of Azerbaijanis and gave Armenia control of Nagorno-Karabakh, a mountainous piece of Azerbaijani territory the size of Rhode Island. Rival political groups and local militias jockeyed for power. Before a cease-fire in March 1994, Baku would witness four changes of government.

As regimes rose and fell, the foreign oil men holed up at the Hotel Intourist near the Baku waterfront and maneuvered to keep their bids alive. With neither BP nor Amoco able to close a deal, other companies – including the U.S. giants Pennzoil Co. and Unocal Corp. – dispatched agents to work the Azerbaijani bureaucracy.

Seedy as it was, the Intourist was a refuge where foreign oil men traded rumors and kept tabs on one another – a "close community that enabled you to know who was in town and who they were seeing on any given day," as an American executive put it.

Remp imported single malt Scotch and Scottish shortbreads to keep up morale. At night, the oil men repaired to the Intourist's dingy bar, the door of which was papered with oil company decals, or to Charlie's, a restaurant run by an expatriate American who immortalized regulars by putting their caricatures on the wall.

By day, when it was safe enough to venture out, the oil men pressed their causes and curried favor at the Azerbaijani ministries, where officials changed with each new government. Unocal, for example, catering to Azerbaijani desires to improve ties with Islamic countries, took in a Saudi partner. Pennzoil launched a project to capture the gas flaring off uselessly from the Azerbaijanis' decrepit oil fields.

Business in Baku invariably was conducted in an atmosphere of intrigue, in which personal relationships counted for much and public officials expected favors and gratuities. American companies, subject to criminal penalties if they violated U.S. anti-bribery statutes, often felt at a disadvantage.

"It was whimsical," said Frank A. Verrastro, then a Pennzoil representative in Baku and now a company lobbyist in Washington. "One day you were the favored and featured. Then someone could take a dislike to you and you couldn't get a meeting for a week." 

Turkish workers check a section of the pipeline.(By Dan Morgan – The Washington Post)

Page ThreeA British 'Coup' 

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In September 1992, BP pulled off a coup that unnerved its competitors and appeared to put the British firm back on top. Former British prime minister Margaret Thatcher arrived in Baku and handed the Azerbaijani government two BP checks totaling $30 million. 

The money was a down payment for a proven field called Chirag and for an unproven bloc called Shak-Deniz. To Azerbaijani officials, a deal with BP was tantamount to a deal with the British government; not only did visiting British officials lobby relentlessly for the company, but for months Britain's diplomatic mission to Azerbaijan had operated out of the BP offices. 

By contrast, Azerbaijani officials didn't know what to make of the American companies, whose government seemed ignorant about – or even hostile to – their involvement in Azerbaijan. In the fall of 1992, for example, Congress – heavily lobbied by Armenian-American groups – banned most direct U.S. aid to Azerbaijan, while earmarking generous assistance to Armenia. 

For U.S. oil men in Baku, "the chill was there immediately" after the passage of Section 907, as the restrictive legislation was called, according to Tom Hamilton, who had left BP to become Pennzoil's chief of worldwide exploration. Section 907 "was always a lever, always a club, that they beat on you with when nothing else was working," Hamilton recalled. 

To Stacy, who took over Amoco's Caspian operations in mid-1993, Washington needed to be educated.

"We were the 'American Oil Company' and the Azeris felt like we had more pull with our government than we really did," Stacy later said. He began meeting with administration officials and members of Congress, offering primers on Central Asia's potential and geopolitics. Given the level of ignorance about the Caspian in Washington, he usually took along a map of the region.

The American Comeback

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Heydar Aliyev took power in June 1993, after an armed insurrection ousted the country's elected president, Abulfez Elchibey. Aliyev was a 70-year-old former KGB chief who had served on the Soviet Politburo during the regime of Leonid Brezhnev. Some Azerbaijanis and Western oil men believed Moscow had engineered the coup in hopes of blocking a major oil deal by Baku with Western companies.

But Aliyev turned out to be the leader U.S. oil companies had been waiting for – a shrewd operator who understood petro-politics. After a shaky period when the Azerbaijanis put a pistol-toting Slovak businessman in charge of oil negotiations, Aliyev himself stepped in by directing his minions to pursue a deal at Amoco's office in Houston, heart of the U.S. oil industry.

Working in shirt sleeves on the fifth floor of the Amoco building and ordering pizza when talks dragged on at night, the negotiators hammered out an agreement, using Amoco computers to check their figures. On Sept. 20, 1994, Aliyev and oil executives gathered in Baku for the ceremonial signing of what the Azerbaijani president called the "deal of the century."

A consortium called the Azerbaijan International Operating Co. (AIOC) agreed to spend $7.4 billion to develop the three major fields: Azeri, Chirag and an adjacent patch, Guneshli. The avowed goal was to produce 800,000 to 1 million barrels a day by 2010.

U.S. companies – Amoco, McDermott, Unocal and Pennzoil – collectively took more than 40 percent, by far the largest bloc. Exxon Corp. would join the consortium the following year. BP was given a 17 percent share, and the rest was divided up among the Azeri oil company and a variety of smaller foreign concessionaires.

Remp was handsomely rewarded as the first foreign oil man into Baku in 1989. His Ramco got 2 percent; the little Scottish company could count on 8,000 to 12,000 barrels a day free and clear once pipelines were completed, potentially netting $30 million a year as long as the consortium stayed in business.

Pennzoil was in, but only after playing hardball. Before the final deal was announced, Azerbaijani officials summoned Hamilton and told him Pennzoil would be excluded.

"Basically the conversation started out that Pennzoil wasn't going to get any share, and at the end I had explained why we were going to get a share," Hamilton recalled. Hamilton reminded the Azerbaijanis that Pennzoil had recovered $3 billion from Texaco in a 1987 lawsuit settlement.

That, Hamilton suggested, was more money than Azerbaijan could afford to lose.

The Azerbaijan International Operating Co. oil platform, off Baku.(AIOC photo)

The Pipeline Problem

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In 1995, the AIOC consortium moved into a building in Baku once occupied by the Soviet Navy's House of Culture. The symbolism was not lost on Moscow.

Russia already had signaled its resistance to any U.S. inroads in the Caspian. Before his first trip to the region in 1994, Deputy Secretary of Energy William H. White took a phone call from Russian Energy Minister Yuri Shafranik.

"Remember," Shafranik warned, according to White, "those are Russian reserves. They will be developed by Russia."

Russia had only a modest piece of the AIOC deal – a 10 percent interest held by Russia's largest private oil company, Lukoil. But Russia possessed the leverage of geography.

The Caspian's landlocked resources could reach world markets only by crossing the territory of politically unstable neighbors or commercial competitors such as Iran and Russia. In Azerbaijan's case, all that was left of the Nobels' 19th-century pipeline from Baku to the Black Sea was "a trail of rust," as Hamilton put it. Azerbaijan's link to the world oil market consisted of a few rusty barges that could haul oil up the Volga River and a lone pipeline that ran the wrong way – from Russia into Azerbaijan – and passed through war-battered Chechnya.

The exporters also faced a unique legal conundrum: Who owned the Caspian and its resources? Earlier in the century, Iran and the Soviet Union had signed treaties designating the sea as their common lake. Now the Soviet Union was no more, but Moscow continued to assert its special treaty rights.

The situation left AIOC companies unusually dependent on international diplomacy to negotiate pipeline transit routes.

By early 1995, the U.S. oil companies operating in Azerbaijan had set up a Foreign Oil Companies group in Washington. It met with National Security Council energy expert Sheila Heslin and later with an interagency committee headed by her boss, Samuel R. "Sandy" Berger.

Government documents show that the NSC and oil companies worked together in June 1995 to forestall an attempt by Lebanese-American oil financier Roger Tamraz to promote his own pipeline from Baku to Turkey, via Armenia. Pennzoil's Hamilton alerted NSC officials of oil company opposition to the Tamraz initiative, effectively killing any White House support for the project.

The immediate issue facing the administration and the AIOC was the choice of an exit route for the initial flow of Caspian oil. A decision on a main export pipeline was deferred.

The Russian pipeline could be reversed cheaply, allowing oil to be pumped out of Azerbaijan. But that would allow Russia to dictate commercial terms for shipping AIOC oil; the pipeline also ran to the Black Sea port of Novorossiysk, closed by ice several months a year.

The Clinton administration and U.S. companies wanted other options. Ever since Chevron acquired the huge Tengiz field in Kazakhstan in 1990, Russia had imposed obstacles preventing a pipeline for Tengiz oil across its territory.

"If there wasn't an alternative [route], we'd be in the same boat as Chevron," one American oil company official later explained. "Russia had continually screwed them over. ... You really needed to have some leverage."

During the summer of 1995, Berger twice met with the AIOC companies. He worked to convince Terry Adams, a BP executive who served as AIOC president, of the need for a new $250 million pipeline west from Baku to Georgia's Black Sea port of Supsa, free of Russian control. BP favored the cheaper solution of spending $50 million to fix the pipeline through Russia.

Berger was persuasive. In September 1995, AIOC agreed to use both the Russian line and the new U.S.-backed western route. In the Clinton administration, a policy had emerged: "multiple pipelines" for Caspian oil.

Agreement at Last

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The decision still had to be sold to Aliyev, whose government would negotiate the pipeline routes with neighboring countries. Given the pressures from Russia, that support was far from certain.

Soon after the AIOC decision, national security adviser Anthony Lake privately asked Zbigniew Brzezinski, his predecessor in the Carter administration, to carry a letter from Clinton to Aliyev. The letter stressed the U.S. preference for two pipelines and, as an incentive, offered Washington's help in resolving the dispute with Armenia.

Brzezinski eventually would become a paid consultant to Amoco. But as he left for Baku in September 1995, he later recalled, he was motivated by anxiety over Russian intentions in the Caucasus. The Clinton letter burned a hole in Brzezinski's pocket at a large dinner hosted by Aliyev at the presidential palace. When the Azerbaijani president invited the guests to his private "cave" in the basement, Brzezinski followed, wondering how to get Aliyev alone.

The cave was illuminated by lights resembling stalactites. Guests lounged on chairs and couches covered with sheepskin while Aliyev regaled his guests with stories from the Brezhnev days.

It was approaching midnight before Brzezinski could whisper to the president that they must talk alone. Looking regretful at having to leave the party, Aliyev led Brzezinski to his office. There Brzezinski pulled out the letter and summarized its contents.

Over the next several days, the two men held protracted talks. The Russians, Brzezinski learned, had demanded that all Azerbaijani oil go through Russia and that Russian troops be based in Azerbaijan.

On Oct. 2, Clinton called Aliyev to lobby for the double-route plan. Fortified by his new tacit alliance with Washington, Aliyev gave his approval a week later.

By early 1996, the Russians folded a weak hand, concluding that control over one of the two pipelines out of Azerbaijan was better than being excluded completely. But Russian-American frictions were only just beginning.

Gas Pipeline Bounces Between Agendas

Turkmenistan President Saparmurad Niyazov visited President Clinton in April. The prospect of much of the world's natural gas flowing through Iran thawed U.S.-Turkmen relations.(Reuters)

Second of three articles

By David B. Ottaway and Dan Morgan
Washington Post Staff Writers
Monday, October 5, 1998; Page A1

DAULETABAD GAS FIELD, Turkmenistan – Far out in a remote corner of this Central Asian desert, not a half-hour's drive from where the ancient Silk Road once crossed the tawny sand hills, a tangle of pipes rises out of nowhere. 

The 100-acre complex is the collection facility for one of the world's largest gas fields – "a jewel given to us by God," as one Turkmen gas official described it. But for more than a year Dauletabad has been as silent as the half-buried cities that lie along the abandoned caravan route between China and the Mediterranean. 

In August 1997, in a bold move that conjured up memories of 19th-century Turkmen khans staving off would-be Russian conquerors, President Saparmurad Niyazov halted gas deliveries to the Russian-controlled pipeline system that was built during the Soviet era. Niyazov said he "smelled old Soviet ambitions" in Russia's use of its pipeline monopoly to keep Turkmenistan's gas from competing with Russian gas in European markets. Soon, he hinted, Turkmen gas could be shipped south through Iran. 

For Niyazov, a product of the Soviet system, the closing of the valves was a dramatic declaration that business as usual was over. The sudden availability of 2.8 trillion cubic feet per year of gas previously committed to the Russian pipeline system propelled Niyazov from an obscure Central Asian strongman to a central figure in an intricate geopolitical drama that has drawn in Washington, Tehran, Moscow and assorted regional capitals. 

While the prize in the Caspian is an energy patch whose size is believed by many to exceed those in Alaska and the North Sea, the overarching issue is how to get the commodity out of landlocked Central Asia. The politics of pipelines seems as tangled as the routes themselves, and each route carried its own treacherous obstacles. But a simple ambition had come to unify American policy in the region: Tap the Caspian mother lodes while giving as little leverage as possible to Russia in the north and Iran in the south. 

Across the Caspian, Azerbaijan had already enlisted U.S. oil companies and pulled the Clinton administration into a crusade to build pipelines that would skirt Russia on the way to the Black Sea and the Mediterranean. In Kazakhstan, the Clinton administration was about to risk provoking Moscow again by promoting pipelines that would carry Kazakh oil to western markets without Russian interference. 

Now Turkmenistan had entered the game. By defying the Russians and hinting at a partnership with Iran, Niyazov was suddenly someone to be reckoned with. From Washington's perspective, the stakes were high enough to put this remote nation of 4 million people on the U.S. policy agenda. Niyazov was a player, and he had anted up one of the biggest gas reserves on Earth. 

Choice Fields Sold Off 

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In the first years after winning independence in 1991, Turkmenistan seemed as obscure and unobtrusive as ever. Naive Turkmen officials auctioned off choice oil and gas fields for as little as $100,000 to foreign opportunity seekers. Among those who picked up cut-rate concessions were a Dubai car salesman, a Swedish real estate magnate and Roger E. Tamraz, the Lebanese American entrepreneur who subsequently became entangled in a U.S. Senate investigation of his donations to the Democratic National Committee. 

Turkmenistan's potential was enormous. Just inland from the Caspian shore were some of the world's oldest oil fields, and Soviet-era geological surveys indicated that the prospect for offshore finds was good. In the trackless Garagum Desert, away from a thin line of irrigated valleys, geologists had discovered one gas field after another beginning in the 1960s. By 1990, Dauletabad and the adjoining Sovietabad field were producing 1.6 trillion cubic feet a year, rivaling the gigantic gas fields of Siberia. 

Almost all of this gas was pumped north across Uzbekistan and Kazakhstan into a Russian pipeline and on to markets in Europe and the former Soviet republics. 

Alexander M. Haig Jr., a businessman who had served as NATO commander and secretary of state, was one of the first Westerners to propose that Niyazov end his dependence on Russian pipelines. Haig arrived in Turkmenistan in 1992 representing a U.S. investment company. The retired general stood apart from other foreign businessmen courting Niyazov's favors. As a denizen of boardrooms and executive suites, he seemed an unlikely comrade for Niyazov, a former Communist party boss partial to boisterous evenings of vodka-drinking. But Niyazov believed that in Haig he had access to the U.S. power structure, according to sources who observed the relationship. 

Haig became an unofficial Niyazov adviser and confidant, screening foreign companies and helping arrange a Niyazov visit to Washington in 1993. But the autocratic Turkmen leader was still being shunned by the new Clinton administration, and the closest Niyazov got to the White House was his room at the Madison Hotel five blocks away. 

That same year Haig formed a consortium with the idea of building a small pipeline to carry modest amounts of Turkmen gas across Iran to Turkey. But the project did not involve U.S. companies; Haig's pipeline enterprise was registered in the British Virgin Islands. 

Haig's consortium won endorsements from the energy ministers of Kazakhstan, Iran and Turkey, and the sultan of oil-rich Brunei was ready to invest, according to Charles D. Hartman, a Haig associate. But in Washington, economic initiatives involving Iran were still poison. The Clinton administration, like its predecessors, favored relentless international isolation of the Tehran regime for allegedly supporting terrorism. 

In March 1995, the White House stepped in to block a $1 billion oil deal between Conoco Inc. and Iran. Soon afterward, National Security Council officials let Haig know that the government opposed his project, too, and the idea died.

Workers inspect the shut-down gas well in eastern Turkmenistan.(By Dan Morgan – The Washington Post)

Page TwoThe Route to Pakistan 

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To State Department strategists, the perfect pipeline out of Dauletabad lay in a different direction: from Turkmenistan across Afghanistan to Pakistan, connecting the gas resources of Central Asia to the surging economies of South Asia. Such a line would deprive Iran of transit fees for Turkmen gas crossing its territory while capturing the South Asian gas market coveted by Iran. 

The initial enthusiast for the Afghan route was not an American, however, but Carlos Bulgheroni, the short, workaholic chairman of the Bridas Group, an Argentine company. In 1993, a Bridas joint venture with Turkmenistan had begun laying more than 2,000 miles of seismic lines to map the geology of a potential gas field in eastern Turkmenistan. Two test wells confirmed a huge gas deposit 150 miles from the Afghan border. 

In the spring of 1995, Turkmenistan and Pakistan commissioned Bulgheroni's company to study the Afghan route. But that summer, a rival entered the game. John Imle, president of California-based Unocal Corp., wooed Niyazov and Benazir Bhutto, then prime minister of Pakistan, throughout July with a vision of a Unocal pipeline following roughly the same route as the one proposed by Bridas. 

A Unocal link had strong appeal for Niyazov. Afghanistan was in turmoil. A big American oil company could draw on the political muscle of the United States to promote Turkmenistan's energy interests. 

In October 1995, both Bulgheroni and Imle followed Niyazov to New York for the opening of the U.N. General Assembly. Each expected to be chosen to build the Afghan pipeline, according to sources close to the two men. On Oct. 21, the nod went to the Americans as Niyazov announced the selection of Unocal. Looking on at the announcement ceremony was former secretary of state Henry A. Kissinger, now a Unocal consultant. Given the uncertain political situation in Afghanistan, Kissinger said, the deal looked like "the triumph of hope over experience." 

Arrests Cloud Relationship 

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The Clinton administration's relationship with Niyazov had begun sourly when the Turkmen leader jailed a group of opposition leaders just before the arrival in September 1993 of Assistant Secretary of State Strobe Talbott. A miffed Talbott canceled most of his meetings and left without even spending the night. 

But by 1996, Niyazov looked less offensive. His embrace of Unocal and his interest in a South Asian pipeline had piqued U.S. interest. That is clear from memos written in 1996 by Tsalik Nayberg, a Unocal representative in Ashgabat, the Turkmen capital. Some of Nayberg's reports to his superiors are part of the record in a civil lawsuit that Bridas filed against Unocal in Texas two years ago, charging Unocal with interfering with its business in Turkmenistan. 

Nayberg reported to Unocal on Sept. 17, 1996, that U.S. Ambassador "Michael Cotter feels President Niyazov is unhappy with us and is not entirely educated on major steps required to implement a project of such magnitude." 

Unocal was, in fact, in a difficult spot. Bridas had signed an exclusive contract in Afghanistan for pipeline transit rights, thwarting the American company. The defeat of the Kabul government by Taliban fundamentalist guerrillas in late 1996 brought Unocal new hope of cutting a deal in Afghanistan, but it proved short-lived. 

The Taliban quickly alienated U.S. public opinion by forcing women out of schools and workplaces and imposing a stringent new code of dress and behavior. While maintaining contacts with the Taliban, the Clinton administration shelved any idea of recognizing the regime. Without that U.S. imprimatur, banks and international financial institutions would not lend money to build the pipeline from Turkmenistan to Pakistan. 

The indefinite delay left Niyazov with few options at a time when he was under pressure to find new sources of gas revenue. 

Turkmenistan's gas exports had peaked in 1991 before sliding sharply. Debt-ridden customers such as Ukraine and Georgia fell behind on payments, and deliveries were reduced. Niyazov began scouting potential new customers in Pakistan, Turkey and China. 

In August 1997, the Russian gas monopoly Gazprom abruptly severed an arrangement that had allowed Turkmenistan to use Gaz prom's pipeline system to export 700 billion cubic feet of gas annually to Western Europe for payment in dollars. 

Gazprom's diminutive but volatile chief, Rem Vyakhirev, announced that Turkmenistan could keep using his pipeline network to supply customers in the former Soviet Union but not to reach European customers. Russia would keep those markets for itself. Vyakhirev sarcastically promised to do what he could to keep the Turkmen population "from starving to death." 

At an angry meeting with Vyakhirev in Moscow, Niyazov made his countermove. According to an account he later gave an American, the Turkmen leader declared, "We will cut off our gas." 

With the route to Pakistan blocked and relations with the Russians on the rocks, Niyazov was running out of options. He still had one obvious outlet, however, one certain to catch the attention of both Washington and Moscow.

Niyazov's interest in Iran as a pipeline route had not ended with the failure of the Haig proposal. In the summer of 1997, a $200 million pipeline to carry modest amounts of Turkmen gas into northern Iran was already under construction. Niyazov had also hired the British-Dutch conglomerate Royal Dutch/Shell to study various pipeline options, including one across northern Iran to Turkish power plants. 

For centuries, Turkmenistan's trade routes had run westward across northern Iran, home to at least 1 million ethnic Turkmen. Now tractor-trailers carrying goods from the Persian Gulf crossed into Turkmenistan from Iran and barreled north to old Silk Road cities such as Bukhara and Samarkand, in Uzbekistan, and Almaty, in Kazakhstan. Trains hauling Japanese and South Korean cars entered Turkmenistan from Iran at a new railroad crossing at the town of Sarakhs. 

The sudden prospect of a substantial share of the world's natural gas flowing through Iran galvanized the Clinton administration last fall into taking a harder look at its Caspian policy. Administration support for U.S. oil companies in the Caspian had been fitful at best since 1993. Many oil executives were unhappy with the Clinton team, complaining of turf battles, heavy turnover of key officials and lack of coordination. 

In Azerbaijan the main consortium of Western oil companies could detect few clear signals from Washington as it pondered a decision about the route of the principal pipeline to carry 1 million barrels a day of Azeri oil to world markets. 

The shortest and cheapest path led to a tanker port on Georgia's Black Sea coast, but the added oil cargoes would jeopardize the narrow, environmentally fragile Bosphorus Strait en route to the Mediterranean. Instead, Turkey favored a big pipeline from Baku to Ceyhan, a well-outfitted Turkish oil port in the eastern Mediterranean. 

That debate, along with Niyazov's overtures to Iran, forced an inter agency group in Washington to pull together a comprehensive Caspian policy reflecting U.S. interests. 

The result, unveiled last November by Federico Peña, then energy secretary, was a proposed Eurasian Transportation Corridor made up of gas and oil lines skirting both Russia and Iran. The plan envisioned a skein of east-west pipelines starting on the east side of the Caspian and passing under the sea before continuing to Turkey and the Mediterranean. 

The trans-Caspian oil connection fit the needs of a number of U.S. oil giants. To Chevron Corp., Mobil Corp. and Texaco Inc., which had major oil concessions east of the Caspian, it offered an alternative to Russia. Amoco Corp., Exxon Corp., Pennzoil Co. and Unocal also wanted more crude coming from east of the Caspian to help defray costs of the big pipeline planned to transport Azeri oil. 

A parallel trans-Caspian corridor for gas had a more openly geopolitical purpose. It would, according to oil analysts, reassure pro-Israeli factions and anti-Iranian hard-liners in the United States of the administration's commitment to isolate the Tehran regime. When Niyazov made his first official visit to Washington last spring, President Clinton touted the trans-Caspian gas line as an alternative to the Shell pipeline across Iran. 

Hardly had the administration unveiled its policy, however, than hints of a U.S. thaw toward Iran muddied the issue once again. In May, the White House announced it would not sanction French, Russian and Malaysian companies for developing Iran's largest offshore gas field. A month later, Secretary of State Madeleine K. Albright called for the United States and Iran to develop "a road map leading to normal relations." 

The possibility of U.S.-Iranian detente undercut the argument against a gas line across northern Iran and divided the big U.S. oil companies. 

Mobil, which wanted U.S permission to deliver small amounts of oil to Iran from its concession in western Turkmenistan, urged the Clinton administration to seize "a unique opportunity to engage" Tehran. But Amoco, representing the consortium developing Azeri fields, warned State Department officials in July that an Iranian pipeline could divert the volumes needed to justify building the Azerbaijan-Turkey route. 

That high-level meeting reflected Niyazov's success in drawing the U.S. government into a search for solutions to his energy problems. Even so, it was becoming evident that the administration's ability to convert its pipeline vision into a reality was circumscribed by budgetary, ethnic and foreign policy factors. 

For example, the U.S. government could provide only limited assistance to pipeline construction across the Caspian, administration officials said, because Congress would not subsidize U.S. oil and gas companies. Barring subsidized loans, the administration was limited to offering modest loan guarantees and political risk insurance. 

Greek American and Armenian American lobbies also denounced legislation that supported the administration's east-west pipeline corridor. The ethnic lobbies contended the corridor would strengthen Turkey and Azerbaijan, enemies of their ancestral homelands. The legislation languishes. 

But those obstacles proved minor compared to the greatest risk posed by the U.S. pipeline proposal: the prospect of a conflict with Moscow. 

Morgan reported from Turkmenistan, Scotland and Texas; Ottaway reported from Moscow, Washington and Texas.

Kazakh Field Stirs U.S.-Russian Rivalry

Richard H. Matzke, left, who took Chevron into the Caspian, and Vagit Alekperov, who wanted to make Lukoil the biggest privately owned oil company in Russia. (Chevron)

Last of three articles

By Dan Morgan and David B. Ottaway
Washington Post Staff Writers
Tuesday, October 6, 1998; Page A1

TENGIZ OIL FIELD, Kazakhstan – In late January, as most of Washington fixated on bawdy revelations about a former White House intern and the president of the United States, a top Clinton administration expert on Central Asia flew to Moscow for urgent meetings with senior Russian officials. His mission: to salvage a multibillion-dollar American-Russian venture to exploit the world's biggest oil discovery in three decades – the Tengiz oil field in the former Soviet republic of Kazakhstan.

For four days, Commerce Department troubleshooter Jan H. Kalicki met repeatedly with Russian Oil Minister Sergei Kiriyenko. Kalicki sought to disabuse Kiriyenko of the belief, widely held in Moscow, that the joint project to build a 900-mile pipeline from Kazakhstan across southern Russia to the Black Sea was being sabotaged by the U.S. government and American oil companies.

A project once emblematic of U.S.-Russian cooperation in the post-Cold War era now threatened to become a geopolitical fiasco and the latest source of tension between Washington and Moscow over control of Caspian energy riches.

In one sense, the squabble over Tengiz oil fit the Caspian pattern already established in Azerbaijan and Turkmenistan. Kazakhstan, like the two other former Soviet republics, had sought to buttress its independence and counter Russian hegemony by luring U.S. oil giants with its largely untapped energy wealth. Behind the American companies loomed the U.S. government, now eager to further American commercial interests and limit the influence of Russia to the north and Iran to the south.

But Kazakhstan was different from its Caspian neighbors – bigger, richer and more intimately lashed to Russia. Sharing a 4,250-mile border with Russia, Kazakhstan also was home to 6 million ethnic Russians and beneficiary of billions of rubles in Soviet energy investments. Any American effort to woo the Kazakhs or tap their oil patch provoked suspicious resentment in Moscow.

Drawing on a soothing bedside manner and 20 years of foreign policy experience, Kalicki tried to patch things up with Kiriyenko. He knew that the Russian grievances were only the latest uproar in the star-crossed, eight-year history of the Tengiz project. In December, in a tense confrontation at Moscow's Radisson Hotel, the principal American companies in the project – led by California-based Chevron – had leveled charges of incompetence and cronyism at their partners from Lukoil, Russia's largest oil company. Chevron and its partners threatened to stop financing the entire project by the end of the month.

The Russians countered that the Americans were double-dealing, professing to want partnership with Moscow in building the pipeline from Tengiz to the Black Sea while concocting a "Eurasian Transportation Corridor" – which the Clinton administration had announced in November – that would bypass Russia altogether with a skein of oil and gas lines from the Caspian to European markets.

By the time Kalicki left Moscow on Jan. 28, he had managed to avert a complete rupture of the Russian-American partnership and to enlist then-Prime Minister Viktor Chernomyrdin in trying to salvage the pipeline venture. But the truce was fragile, the alliance shaky, suspicions rampant. As he flew back to Washington, Kalicki knew that months if not years of intense dickering lay ahead. He also knew that the price of failure in the game of Caspian oil diplomacy would be much greater than a simple pipeline.

Tengiz's Sea of Oil

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Soviet geologists had discovered the Kazakh prize in 1979 in a remote, windblown steppe on the northeast shore of the Caspian. They called it Tengiz, the Kazakh word for "sea." But Tengiz's sea of oil lay unusually deep, as much as three miles below a salt dome that itself was 900 yards thick. Soviet engineers spent more than $1 billion drilling dozens of wells before concluding that foreign technology was needed.

A Chevron vice president, Richard H. Matzke, who was responsible for his company's forays into the Caspian, first heard about Tengiz while scouting for Soviet bargains in the late 1980s. Matzke, now 61, was a hardened veteran of risky Chevron ventures in such war-torn countries as Sudan and Angola. In pressing his case for a Chevron role in developing Tengiz, he found Soviet officials ambivalent about letting in the Americans. But he persisted, and in June 1990 he negotiated an agreement giving Chevron a 50 percent interest in the huge field. Tensions, however, were never far from the surface; the night before the deal was signed during a summit meeting between President George Bush and Soviet President Mikhail Gorbachev, Matzke and a top Soviet energy official were up until 3 a.m. in a Washington hotel room shouting at each other over contract terms.

Petroleum engineers and geologists believed the 156-square-mile patch at Tengiz potentially could yield more than 1 million barrels a day – a third more than the present output of Alaska's Prudhoe Bay. That offered a heady vision for Chevron, then the world's fifth-largest private oil company. Years later, a Chevron executive would liken Tengiz to "stumbling over the Hope Diamond."

Tengiz was indeed a jewel – one which, like the Hope Diamond, often brought trouble to its possessor. And trouble was quick in coming. A year later, on Aug. 31, 1991, as the Soviet Union was disintegrating, the government of newly independent Kazakhstan lay claim to all the country's mineral resources. Chevron's deal was in peril, but the company had taken precautions. About the time that the contract had been signed, Chevron had invited an obscure Kazakh shepherd's son to the United States and entertained him at its San Francisco corporate headquarters. Now that shepherd's son was the Kazakh president.

Nursultan Nazarbayev, who had built his career in the Kazakh Communist Party, was quick to see the value of American connections. Years earlier he had sought out the U.S. ambassador to the Soviet Union, Robert S. Strauss, for discussions of American politics over Sunday morning breakfasts. Now, as president, Nazarbayev retained Strauss's Washington law firm, as well as a Manhattan merchant banker, U.S. investment and accounting firms, and other American consultants.

Given Kazakhstan's long border with Russia, it was "simple logic to have the United States as your friend because it's the most powerful country in the world," a top Kazakh official explained recently. Only the United States, he added, could provide "a counterbalance for big powers such as China and Russia."

Even so, it took Matzke until April 1993 to complete a new Tengiz deal with the Kazakh government. Chevron again got a 50 percent interest, this time in a joint venture with the Kazakh state oil company.

Chevron pledged to invest $20 billion in Tengiz over 40 years. But the contract sharply limited any initial cash outlays. For example, not until Tengiz production reached 250,000 barrels a day would the company have to pay a $420 million installment on the purchase price. The provision in effect allowed Chevron to hang on to a substantial portion of its obligated payment until a pipeline had been built to sell Tengiz oil in Western markets. 

Chevron's Tengiz oil field in northwestern Kazakhstan.(By David B. Ottaway – The Washington Post)

Page TwoSeeking New Pipelines 

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Chevron now possessed the prize. But vast stretches of Russian territory separated landlocked Tengiz from the ports and tankers that gave access to world markets.

As in Azerbaijan and Turkmenistan, the central problem remained: how to get the energy to customers who wanted it. The Soviets had left behind only one small, functioning pipeline running from Kazakhstan to a Russian refinery. A second line, never used and in disrepair, curved around the northern Caspian into Chechnya and Azerbaijan.

One initial proposal called for Chevron to finance a line from Tengiz to the Russian Black Sea port of Novorossisk. The plan envisaged refurbishing the idle Soviet pipe around the northern Caspian and tying it to a new line 400 miles long across southern Russia.

That brainstorm went nowhere. Chevron balked at spending as much as $3 billion on a pipeline that would be controlled exclusively by the Russian and Kazakh governments.

But legitimate alternatives were hard to come by. Proposals came and went, drawing board notions were born and died. For four years all efforts to find an export route for Tengiz oil came to naught, even as Chevron went ahead pouring hundreds of million of dollars into rehabilitating old Soviet installations and building a new gas-extraction plant. Hoping that more American muscle would help break the deadlock in negotiations over a pipeline route, Nazarbayev in April 1996 brought in Mobil Corp., selling the Virginia-based giant a 25 percent interest in Tengiz for $1.1 billion.

But Moscow had little incentive to help. Many Russians had long considered Tengiz a reserve for Russia's future; tapping the field would drain that legacy while strengthening Kazakh independence. Chevron and Mobil soon concluded that without bringing in a Russian company, the Moscow government – which held the key to building a line across southern Russia to Novorossisk – would remain obstructionist.

The one Russian enterprise eager for a piece of Tengiz was Lukoil. The company was led by Vagit Alekperov, a former senior Soviet energy official with connections to President Boris Yeltsin and Chernomyrdin. In Lukoil, Alekperov was cobbling together a new corporation from bits and pieces of the dismantled Soviet oil industry.

Pragmatic, direct and ambitious, Alekperov made it his goal to build the biggest privately owned oil company in Russia and turn it into an international giant, using his Moscow connections, Wall Street capital and Washington legal talent. He had already used the Russian government to help Lukoil elbow its way into several Western-dominated consortia around the Caspian.

Getting into Tengiz was another matter. Lukoil lacked the capital needed to buy its way into the big field. But in mid-1995, Alekperov cut a deal with a U.S. oil giant, Atlantic Richfield Co., under which ARCO would pay Lukoil $340 million in cash in exchange for an 8 percent interest in the Russian company. A year later, Lukoil set up a joint venture with ARCO, called LUKARCO, with a fat line of credit financed solely by the American partner for joint Caspian investments.

Thanks to ARCO's money, Lukoil was ready to be a player in Tengiz. In April 1997, LUKARCO purchased a 5 percent interest in Tengiz from Chevron. ARCO put up most of the $200 million purchase price.

Describing the deal later, Chevron's Matzke said Russian "opinion leaders" had strongly suggested to him that "it would be a good idea to have some Russian content in Tengiz ... that it might be wise to make sure the Russian interest is somehow represented." The Americans got the message.

With a direct interest in Tengiz, Lukoil threw its weight around Moscow to help break the impasse over building the Novorossisk pipeline. The Russian and Kazakh governments finally heeded the pleas of the private companies, including Lukoil, and agreed to bargain in earnest.

The result was a restructured Caspian Pipeline Consortium, known as the CPC, officially formed in Moscow in mid-May 1997. The consortium gave the private companies a 50 percent ownership of the future pipeline and voting rights in its operation. The companies agreed to put up all the money to build it; the Russian and Kazakh governments would get taxes and tariff revenues and a cut of the profits once oil started flowing.

Chevron came away with the largest holding within the consortium, 15 percent, while Mobil got a 7.5 percent stake. Two other American companies with oil concessions elsewhere in Kazakhstan – Amoco and Oryx – took smaller shares.

The Lukoil-ARCO joint venture came away with the second-largest holding, 12.5 percent. Lukoil was put in charge of constructing the pipeline and appointing the Caspian Pipeline Consortium's general director. No one realized it at the time, but therein lay trouble. 

Page ThreeU.S.-Russian Discord 

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Trouble also was brewing between Washington and Moscow. Through the first half of the decade, U.S. oil companies had grown increasingly restive at what they considered insufficient White House attention to Caspian issues. The Clinton administration – belatedly in the minds of some oil people – had formed an interagency group in 1995 and gradually began to treat the remote, arcane pipeline conundrum as a national interest.

The unveiling of the administration's Eurasian Transportation Corridor last November reflected a policy decision to encourage multiple pipelines out of Azerbaijan, Turkmenistan and Kazakhstan to Turkey – without crossing Iran and without giving Russia undue sway over the routes. Federico Pen~a, then energy secretary, traveled to Baku and other Caspian capitals, as well as to Istanbul, mustering support for the plan.

This sat badly in Moscow. Russian nationalists had warned of an expanding American presence in Central Asia. Now Russian newspapers denounced "American imperialism" and Yeltsin decried U.S. "penetration" in the region. Russian oil executives viewed the Eurasian corridor as an American plot to thwart the trans-Russian pipeline out of Tengiz.

When Commerce Department troubleshooter Jan Kalicki arrived in Moscow Jan. 25 he murmured the same message over and over: The corridor to Turkey and the trans-Russian proposals were complementary, not competing options. The trans-Russian pipeline, with its anticipated capacity of 1.5 million barrels a day, was crucial to the U.S. strategy for Caspian energy development, Kalicki insisted.

The Russians were civil, but unconvinced. Throughout the first half of this year, the issue festered. When Vice President Gore met Chernomyrdin in mid-March, the Eurasian corridor proposal prevented broader agreement on U.S.-Russian cooperation in exploiting the Caspian, according to officials from both governments. Russian officials launched a counteroffensive, pressuring Nazarbayev and other Caspian leaders to oppose the corridor route.

As the two governments sparred, the commercial partners developing Tengiz tried to resolve the issues still preventing construction on the trans-Russian line. Notwithstanding the consortium agreement in May, not a foot of pipe had been laid. Vladimir Stanev, who had been appointed by Lukoil as manager of the Caspian Pipeline Consortium, was slow to obtain construction permits from local and regional governments. Chevron and the other American firms also decried what they saw as Stanev's autocratic style and empire building. Stanev declined to be interviewed for this article.

From mid-January to late March, Chevron's Matzke met four times with Lukoil's Alekperov about the construction glitches and Stanev's alleged shortcomings. (One lunch at Dupont Circle was arranged by legendary fixer Strauss, whose law firm was representing Lukoil as well as the Kazakh government.)

Matzke summed up the Russian attitude as: "Your company ought to do it our way if you want to get it done." While he and Alekperov had been friendly enough to discuss taking an excursion with their wives to a mountain dacha, this was business. The American firms, Matzke told Alekperov, were about to yank their financing from the pipeline project unless changes were made and Stanev was fired. Chevron's investment alone had now topped $1 billion.

By June 1, a deal was struck. Stanev was out, but so too were his top two American deputies. New procedures would allow the consortium's non-Russian deputy directors greater decision-making authority. A new deadline of Oct. 1 was set for the Russians to obtain local construction permits and rights of way for the pipeline.

In late June, Matzke toured the future trans-Russian pipeline route for the first time, accompanied by Alekperov. The two got a warm welcome from mayors and other local officials. There were vodka toasts and plenty of caviar. In Novorossisk and Astrakhan, the regional governors presented Matzke with documents assuring pipeline rights through their territories.

Back home in San Francisco, Matzke was elated. "I've been messing around with this [pipeline] thing since its inception," he said. "When you get the chairman of Lukoil out there for three days beating the bush and talking about why things need to go forward ... you can't help but feel we're going to get it done this time." A Boon for U.S. Firms 

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In the seven years since the collapse of the Soviet Union, the United States has evolved from a bit actor into a major player in the Caspian. American involvement – a goal vigorously pursued by the Caspian governments – has brought a heightened U.S. awareness of the region, billions of dollars in new investments and less dependence on Russia.

Big American oil is benefiting, too.

Last November, American oil executives flew with Azerbaijan's President Heydar Aliyev to a drilling rig in the Caspian and lathered their faces with the first new oil pumped by a Western consortium off Baku. Today, the consortium exports 60,000 barrels a day via a pipeline through war-ravaged Chechnya, a route once regarded as impossibly risky. The consortium also is laying a new pipeline between the Caspian Sea and the Georgian port of Supsa on the Black Sea – a route Russia once vigorously opposed.

"We never dreamed of this in 1989," said Hoshbacht Yusufzade, a senior official of the Azerbaijan state oil company. "I did not think that I would live to see it."

In June, Chevron and Mobil were pumping 200,000 barrels a day from Kazakhstan's Tengiz field, and pioneering their own "trans-Caspian" oil-ferry system, using small tankers to carry 35,000-barrel loads to a new port in Azerbaijan, then via rail to Georgia's Black Sea city of Batumi – the oil port developed by the Rothschilds more than a century ago.

But weighed against the potential benefits of deepening U.S. engagement are risks and uncertainties, including Russian instability.

A recent Rice University analysis warned against exaggerated expectations of the Caspian as an alternative to the Persian Gulf, and advised against "too close [U.S.] association with the regimes of the Caspian basin." The study cited corruption, human rights abuses and ancient ethnic rivalries that could entangle Washington.

Even as the magnitude of the Caspian lode remains uncertain, pipeline costs are soaring. Building the first from Baku to Supsa on the Black Sea has cost nearly $600 million, twice the original estimate. The latest Russian projections for a Tengiz-to-Novorossisk line have jumped from $2.1 billion to $3.7 billion. The main pipeline from Baku to Ceyhan is now expected to cost $4 billion.

Given the risks, costs and uncertainties, Geoffrey Kemp of the Nixon Center in Washington scoffs at comparing today's oil scramble and the "great game," the 19th century maneuvering between imperial Russia and Britain for domination of Central Asia and the Caucasus.

"This is not a great game," Kemp said. "This is a great gamble."

Morgan reported from New York and Washington, Ottaway from Kazakhstan and Russia.