Question

•       In 1993 Chevron reached an agreement with the Kazakhstan government to create Tengizchevroil (T C O). The business, termed a partnership, allocated a 50% interest in the Tengiz oil field to Chevron as well as naming Chevron as the operator. The venture would involve a joint investment of $20 billion over 40 years, but it was estimated that the field would be even bigger than Alaska’s Prudhoe Bay

•       Tengiz is in far western Kazakhstan not far from the Caspian, a remote, barren, and forbidding place where temperatures range from -25F to 100°F. With little infrastructure, construction and support would be costly. Recruiting, training, and retention of the highly skilled workforce needed would also prove to be a major challenge.

•       In an attempt to manage what it considered high political risks, Chevron planned to invest gradually, using reinvestment of earnings to make up the majority of new investment and Chevron had carefully avoided making significant up-front payments. However, the Kazakhs saw this “invest as you go” approach as indicative of a low level of commitment. The Kazakhs also feared that inadequately regulated oil development would get too close to the home of the most famous beluga sturgeon and caviar near the Caspian

•       Chevron balked at the traditional Soviet habit of expecting foreign investors to support non-business-related social infrastructure such as roads, schools, and hospitals, limiting social spending to 3% of total investment.

Discussion Questions. Provide about 5 sentences for each question.

–      What were the “high political risks” Chevron faced in this venture? What are some economic risks faced by Chevron?

–      How did Chevron try to mitigate the risks of this project and what other mitigation techniques could it use?

Answer 1

1. The high political risks that Chevron faced in this venture was about invading the territories of Beluga sturgeon and caviar. The oil industry was inadequately regulated which made them invest as they earned. Chevron would face high penal charges as an outcome of disturbing beluga's environment. Hence this was one of their major political risks.

Chevron was not ready to invest upfront heavily as it wanted to study the local social and market environments. They started investing as they developed which in turn was observed as low commitment by the locals.

2. Chevron started mitigating these risks by involving in corporate social responsibility. They supported nonbusiness level social infrastructure and started contributing for social development which was close to 3% of total investment.