The History and Mystery
of the Chikuduk Field

The History

Largely due to their nomadic roots, the Kazaks have left little evidence of their historical origins. What is known is that they are descended from the Turkic and Mongol tribes that ebbed and flowed across the Central Asian steppe centuries ago. A distinct Kazak nation began to take shape in the 14th century as a branch of the Uzbeks, a Turkic people that had adopted Islam. The ethnographic split deepened over time, as Uzbeks settled down into a sedentary lifestyle, while Kazaks clung to nomadic traditions. Three branches of Kazaks emerged, each under control of a different khan but loosely bound by common linguistic and cultural ties. The golden age of the Kazak nomads was in the 16th century, when they roamed territory that spread as far south as Samar-kand, in present-day Uzbekistan, and well into western Siberia.

Decline began in the 17th century, when the Oyrats, a Mongolian people, overran most of what is now eastern Kazakstan. Then, the burgeoning state of Russia began to exert pressure on Kazak lands in the north. The first Russian settlements in northern Kazakstan, including the present-day cities of Pavlodar and Semipalatinsk, grew up around a defensive line of forts constructed in the first half of the 18th century. Russians continued their drive to the south during the next century, meeting little resistance from Kazaks. Indeed, many Kazaks viewed the Russians as protectors against the Mongol invaders. In 1854, Russian troops established an outpost at Verny, present-day Almaty, and within a decade, the last major Kazak areas around Turkestan and Shymkent were brought under Russian control. From its bases in Kazakstan, the imperial Russian army then moved on to subjugate three independent Central Asian khanates to the south—Khiva, Kokand, and Bukhara. Thus, by the mid-1870s, Russia controlled all of what now comprises the states of Central Asia.

Central Asia was the last major conquest by Russia. In governing the region, many Russians acted with messianic zeal, driven by what the author Fyodor Dostoyevsky described as a “civilizing mission.” While aware of their own backwardness in the late 19th century relative to Western Europe, Russians at the same time felt superior to Central Asians. Among Dostoyevsky’s collected works is a saying: “In Europe, we’re hangers-on and slaves, whereas to Asia we will go as masters. In Europe, we were Asiatics, whereas in Asia, we too are Europeans.”

During the tsarist era, what constitutes present-day Kazakstan did not exist as a single territorial entity. Parts of the territory were found in different administrative districts of the Russian Empire, including the gubernia, or province, of Turkestan and the oblasts, or districts, of the Steppe region. In the late 19th and early 20th centuries, more than one million Russians settled in northern Kazakstan, greatly expanding the amount of land under cultivation. The mass migration simultaneously solved two problems for the beleaguered Russian monarchy: easing the crowded conditions in the countryside of Russia proper, and helping cement Kazak territories into the empire. Russian policy towards the indigenous population, though imperial in outlook, relied mostly on passive measures in promoting Russification. Administration on the local level was left in the hands of indigenous leaders. At the same time, however, Russian officials willfully neglected the development of an educational system, causing Central Asia to have one of the lowest literacy rates in the empire. Russian officials also made little effort to improve the region’s physical infrastructure. Many of the projects that were undertaken had the sole aim of serving military needs for the defense of the territory.

The hope of Russian officials was that, over time, the Muslim population would abandon their traditional practices voluntarily and adopt Russian customs as the most practical way to improve their conditions. Kazaks, as well as other Central Asian peoples, proved more resistant to voluntary assimilation than Russian officialdom expected. Brief rebellions were put down on several occasions, the last coming in 1916.

The following year, against the backdrop of World War I, the Tsar was swept from power, creating a vacuum that allowed the Bolshevik coup of November 1917 to succeed. The upheaval led to the collapse of the empire, and it took several years before the Bolsheviks were able to establish their control over Central Asia. Isolated anti-Soviet guerrilla bands operated in the region into the 1930s.

Once Central Asia had been re-conquered by the Red Army, the fledgling Bolshevik regime launched policies that on the surface encouraged a resurgence of local traditions, but which were designed to divide the peoples of Central Asia, thereby preventing the region as a whole from challenging communist authority. The five states of Central Asia—Kazakstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—can trace the origins of their borders to the communists’ redrawing of the region’s geopolitical map in the early 1920s.

The Bolsheviks paid special attention to diluting the influence of Islam as a unifying force of the peoples of Central Asia. As part of this effort, a 1922 decree eliminated the Arabic script common to all Central Asian languages, replacing it with latinized alphabets for the various regional languages. The switch diminished the ability of different Central Asian peoples, including Kazaks, to communicate with each other. Eventually, the Cyrillic alphabet was introduced, and the Russian language was promoted as the lingua franca of the region. The Soviet Union under Stalin eventually imposed aggressive policies designed to “sovietize” the peoples of Central Asia, cracking down ruthlessly on religious expression and redoubling efforts to inculcate the Russian language in the regional consciousness.

The debate is ongoing about whether or not a Kazak state had ever existed before 1991. A few historians and political scientists argue that a Kazak state, featuring a central government, thrived during the 15th century, succumbing later to expansionist powers from the east and north. Many others insist that, until six years ago, Kazakstan never could have been considered a sovereign political entity. They add that in the 15th century, Kazakstan did not possess all the attributes of statehood, including a well-defined and defended border. The Kazaks' nomadic antecedents also hindered the development of a cohesive national consciousness, some historians assert, adding that the primary allegiance of most Kazaks was to their clan and not to the nation as a whole.

During Soviet rule, these "Muslim" republics, served as pseudo-colonial territories, used and abused through outdated irrigation techniques in the Amu Darya and Syr Darya river basins for cotton and wheat production and for their natural resource endowments of oil and natural gas. Fortunately, due to technological limitations and an already well endowed Russian petroleum base, the Soviets failed to fully explore and develop the oil and natural gas fields of the region, especially those of Kazakhstan and Turkmenistan.

On August 30, 1995, a new constitution was approved by the population in a countrywide referendum and the country is now developing into a modern democracy. The Kazakhstani government has liberalized prices, expanded its privatization plan, and begun the process of establishing a banking system. Kazakhstan moved quickly to draft favorable business laws protecting foreign investors and train professionals in Western business methods.

Kazakhstan, one the last of the former Soviet Republics to declare its independence, on December 16, 1991. It is among the largest countries in the world in terms of land mass, larger than Western Europe. Kazakhstan sits on Central Asia's Caspian Sea, which contains the third largest reserve of oil and natural gas in the world behind the Gulf region and Siberia. One of the richest oil reserves in the world, the Tengiz oil field, is in Kazakhstan, and the nation's proven oil reserves exceed 100 billion barrels. Kazakhstan also is a major world source for metals and minerals.

Kazakhstan enjoys a relatively stable political and economic environment, which, with its huge reserves, has attracted major oil companies such as Chevron, Exxon, Elf Aqutane, British Petroleum, Amoco, Chinese National Oil Company and others. The country's stability is largely due to Kazakhstani President Nursultan Nazarbaev's political savvy, reliance on Western advisors, and commitment to create a legal framework to attract foreign investment.

Yet, the development of the oil and natural gas sectors of all the republics of the former Soviet Union are still closely linked by the refinery and pipeline infrastructure already existing and by the interests of Russia, the heavy weight to the north. In a historical context, today's irony is that for much of its history, land locked central Asia served as a route for trade, while now as a source for highly demanded trade goods (i.e. petroleum products) it is at a loss as to how and via which routes to deliver their products to market.

The Mystery

In May 1997, American International Petroleum Corporation entered into an agreement with MED Shipping and Trading S.A., a Liberian corporation with offices in Frankfurt, Germany, to buy from MED a 70% working interest in Kazakstan Exploration License # 953. The License is located in the Ustyurt Basin, the Uzbekistan government estimates recoverable reserves in thier borders of the Ustyurt Basin to be 29 BBOE. Preliminary, independent evaluation indicates potential recoverable hydrocarbons from nine structures in the License area could be as much as 2.6 BB from Jurassic Age Sandstones. Eight additional structures have been identified but have not been evaluated.

The Chikuduk, with potential recoverable hydrocarbons of 1.5 BBOE in the Jurassic formation may additionally contain up to one trillion cubic feet of gas in the shallow Eocene formation. AIPC is currently evaluating the logs of eight shallow gas wells drilled by the Soviet Govrnment between 1985-1990, with a view towards developing the shallow gas reserves. AIPC currently intends to drill 3-5 wells to confirm the extent of gas deposits beginning in October 1998. Agreements have been reached with a Russian Drilling Company with Rigs available in our area. The company also intends to reach and agreement shortly with a western company to carry out independent well logging and analysis.

AIPC's License represents one of the largest exploration blocks currently under contract in Kazakstan. Sixteen structures have been identified in the western portion of the block by previous seismic programs. Government seismics show seven structures with four way closure at the upper and Middle Jurassic intervals with indications of hydrocarbon potential.

AIPC's 1998 seismic program has recorded about 900 kilometers in the Chikuduk area. This seismic is still being processed. The Chikuduk No.1 well penetrated oil and gas zones in the Upper and Middle Jurassic level. The well was plagued with several "catasrophic" events and was eventually abandined. During one event the well was reported to have flowed gas and condensate.

Geological studies of the region also indicate the possibility of Devonian Carboniferious plays throughout the License area. Seismic data appears to support this theory evidencing very large features at this level. There are two Chikuduk structures covering approximately 266,000 acres and is estimated by Huddleston to contain approximately 1.5 BB of Potential recoverable hydrocarbons utilizing a 15% recovery factor of initial oil in place.

So how did little old American International Petroleum Corporation get such a large and prolific license area. Two factors worked independently and once merged together worked in our favor, both oil industry and political system in the Soviet Union collapsed. The tumble of oil prices from $ 35 per barrel to $ 10 per barrel in late 1980' s paved the way of the great collapse. Export revenues dropped astronomically and the investments dropped even faster. A system that needed a lot of money to maintain, lost its source of funding and showed the great decline in a short period of time, which caused the entire Soviet system to become financially bankrupt. This was the situation for the Soviet Oil industry at the time of the disintegration of the Soviet Union.

In the process of oil exploration, the Soviet Union had sufficient, but maybe not enough technology in seismic prospecting and identified several shallow exploration prospects properly. Their technology lacked resolution in identifying deeper pays and in some isolated lithological environments. However, the geoscientists, both geologists and geophysicists were very competent and able to point at the right targets at producible depths.

The Soviet system made its first error after the drilling of exploratory wells. Much of the new discoveries were a result of well blow-outs. Once the discovery is made, the exploration departments abandoned each and every well, not allowing it for future production. After the exploratory drilling is done and the field is defined, only after the reserve calculations are done and approved by the central committees, they allowed the production departments to take the fields and re-drill and develop for regular production. The process, while fool proof for the reserves, is too expensive for the oil industry.

In AIPC's case the disintegration of the Soviet Union came at a beneficial time. Much exploration was occurring in the Caspian and Ustyurt Basins. Many fields were discovered and production wells even drilled, yet pipelines never materialized as planned by those same central committees. Thus we might not see the damage to the formations in our area that are common in Siberia and older Soviet production areas due to poor soviet well servicing. Unfortunately, almost all of the Soviet era wells are now subject to some type of service work and rehabilitation.

The difference between the exploratory and production departments were such that even the equipment and parts used were incompatible. Effectiveness and efficiency was not of concern. For example, the West Kazakstan wells, such as in the Tengiz field, took 3-4 years to complete. A normal western period for such a well may be 2-4 months. The difference is adequate supply of materials and faster drilling techniques. The Soviet system was more employment related rather then efficient usage of time and money. Therefore, in real terms, Soviet development was too expensive when compared to world averages.

In Western standards of field operations, capital costs (mostly initial discovery and development) and operating expenses are almost equal in money terms. The Soviet system had very high capital costs and very low operating costs. Much of the operating costs was for items other than the oil production, such as, a nearby hospital, school or police station.

Therefore the Soviet oil was too expensive to develop and too expensive to maintain. However it was a major source of foreign currency as were arms sales, gold and diamonds.

We see remnants of this centralized system on American International Petroleum's License area in Kazakstan. The 8 wells recently discovered by AIPC management were drilled between 1985 and 1990. These wells were intended for a natural gas producing field perhaps as and extension of the Chagyrly-Shomyshty field which has projected reserves of 1.4 TCF of natural gas. Due to the lack of pipelines to this area it is expected that these wells have never been used for production and were simply capped and are in fact leaking natural gas.

Location, location and location

Chikuduk is surrounded by 2 other known finds with commercial quantities of natural gas, they are the Chagyrly-Shomyshty and the Kyzyloy fields. This limited geographic area has and estimated 2.4 trillion cubic feet of natural gas. With gas pipelines traversing our license area west of Chikuduk by 60 kilometers and running east of Chikuduk by 80 miles the potential exists to capitalize on AIPC's finds and in fact have bookable proven reserves by January of 1999.

Much has been said about Gazproms an Uzbekistan and Turkmenistan's natural gas stalemate. Gazprom, the undisputed largest gas company in the world refuses to pay $2 per CF for the gas from the area as the former Soviet States require. In the wake of this stalemate nearby pipelines are under utilized and available for the production in our area. Gazprom was willing to pay around $1.10 for sweet or refined natural gas.

We must also keep in mind the dynamic political and economic needs of the Kazakstan government and peoples. Kazakstan, though choked with natural resources is still and importer of natural gas. AIPC's ability to produce an economical source for the internal natural gas needs of Kazakstan will set us in good standing with the Government and also be of immeasurable help in future negotiations that AIPC surely faces as the 5 year initial term of the Exploration License expires.

The Battle of the Belg!!

While many companies from the US have jumped into the next great oil and gas rush that the Former Soviet states represent, this is not a pure American play, Tractebel a Belgium based diversified Company has many interests in the area. They are a major supplier to Europe of natural gas and through their Electric and Gas business, service transmission lines all over the world. Tractebel has recently signed a contract with the Kazakstan government to manage the Kazakgas and Alaugas Pipeline networks, and is also committed to investing several hundred millions of US dollars during the concession period (20 years) to maintain and improve the network.

In this writers opinion a AIPC/Tractebel JV looks like our best near term chance of getting our gas to market. Tractebel would in fact carry the cost's of the pipeline and have a position as operator of the Chikuduk field. Tractebels dynamic market position in Kazakstan and Europe could lead to future production swap agreements with even Gazprom.

A structure for the deal might be something like, Tractebel sells the gas north to Gazprom for say $1.10 per CF and buys it back in Europe for 1.60 or some other below market rate. Either way AIPC gets hard currencies, Bookable reserves, and perhaps the type of political boost that all companies operating in the region need.

An AIPC/Tractebel JV would also mean that we could in fact send our gas south in the Kazakgas Pipeline into Uzbekistan and then be transmitted to the Alaugas Pipeline that feeds Almaty, Kazakstans old capitol city in the far south eastern corner of the country. Our customer would in fact be Tractebel so the concerns some have with the local Kazak economies ability to produce hard currencies to pay AIPC directly should be alleviated.

This is one fools understanding of the current marketability of our gas from the Chikuduk Fields. It seems ridiculous that some would have us believe that Natural Gas is some sort of negative commodity. We have heard sweeping generalizations about all the gas and oil in the region being of high sulfur content. This shows a deft understanding of the region and the geology involved. While the Tengiz field does in fact have a huge problem with Sulfur, they are in the North Caspian Basin and are at the Carboniferous levels, while our sweet natural gas is from the Ustyurt Basin at the Eocene level. While being physically proximate they are geologically millions of years different.

All comments are as always,welcome....