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Quick jump to below stories:
Govt to give oil investors perks
Battle for Canada's underground resources
US scatters bases to control Eurasia
ChevronTexaco, Unocal to merge in $17 billion deal
Japan draws the line on energy

[As Indonesia's oil production continues its steep decline, the government looks for ways to draw new investment. Will there be many takers? -MCR]

Govt to give oil investors perks

Leony Aurora
The Jakarta Post, Jakarta
April 18, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

As part of its efforts to stem the steady decline in the country's oil output, the government is preparing incentive packages to lure investors to operate in marginal and aging oil fields, says a top official.

One of the alternatives was to offer investment credit -- which would allow investors to obtain a higher recovery on the investment they had made before the wells start producing -- vice chairman of the Oil and Gas Upstream Regulatory Agency (BP Migas) Kardaya Warnika said on Monday.

A contract between the government and oil field operators commonly states that production sharing shall be effective only after the initial investment made by the operator prior to oil production has been fully covered by the output.

"For example, if the cost of investment (before the well starts producing) is 100, the recovery will be 100 plus something," he said on the sidelines of a seminar on oil and gas here.

Indonesia, the biggest oil producer in Southeast Asia, is seeing a steady decline in its oil output, plunging from 1.52 million barrels per day (bpd) in 1999 to 1.07 million bpd last year, due to lack of new explorations and aging oil fields.

According to the Ministry of Energy and Mineral Resources, if no effort is conducted to halt the decline, oil production will drop by 16 percent every year.

There are 66 marginal fields -- areas with an estimated output at between 5,000 bpd and 10,000 bpd each -- across the archipelago as well as 21 aging fields that have not been fully utilized.

Iin Arifin Takhyan, the ministry's director general of oil and gas, said separately that the government might also increase the operators' share in such fields as another incentive.

"Usually it is 85 percent (for the government) and 15 percent (for the operator)," he said. "We may offer more," he added.

A study team, comprising representatives of the ministry as well as BP Migas, is still discussing the details of the incentive packages.

"Hopefully they can be concluded this year," said Iin.

The government targets to keep production at 1.125 million bpd -- a combination of crude oil and condensate -- this year, far less than a quota of 1.4 million bpd of crude oil set by the Organization of Petroleum Exporting Countries (OPEC).

BP Migas chairman Rachmat Sudibjo said last week that the country aimed to increase oil output to 1.3 million bpd by 2008.

To reach this target, the government is, among other things, pinning its hope on the Cepu oil field in Central Java, which is expected to produce about 180,000 bpd.

However, although ripe and ready, the area has yet to spurt oil pending a settlement of a dispute between state oil and gas firm Pertamina and ExxonMobil, the concession holder for the area. Pertamina has so far refused to extend ExxonMobil's contract, which expires in 2010, for another 20 years.

Another 150,000 bpd is expected to come from the Jeruk field in East Java. Australia's third largest oil and gas operator Santos Ltd. is currently investigating the actual reserves in the area.

"We're asking them to drill another well close to the second well," said Kardaya. "We hope production can start in 2008."

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[There are many great quotes and observations in this very important story highlighting the world's desperation to secure energy supplies. In Canada the risks to the environment may be every bit as deadly as those that might inflame Sino-US relations. Here's just one extract:

"The Chinese are doing what the United States is doing, scouring the planet for every molecule of oil production they can get their hands on."

Many Washington conservatives are seeing red. "It's definitely a big worry for the Chinese to be trying to monopolize the oil sands," said Frank Gaffney, president of the Center for Security Policy in Washington.

"We're in a race for energy supplies, and we can't allow China to win this one."


Battle for Canada's underground resources

by Robert Collier
Published on 24 Mar 2005 by SF Chronicle

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

While Congress debates whether to allow oil and gas drilling in Alaska's Arctic National Wildlife Refuge, a similar battle with much higher stakes is under way in northwest Canada.

The $6 billion Mackenzie Pipeline project would open the Canadian Arctic for natural gas drilling and send the gas 800 miles south down the Mackenzie River Valley to Alberta. There, much of this fuel would be used to throttle up production in a huge but hard-to-tap supply of petroleum dispersed in underground gravel formations. These so-called oil sands hold petroleum reserves that are second in size only to Saudi Arabia's, and analysts say they could supply a large portion of U.S. energy needs for decades to come.

But the project has sparked opposition from some native tribal groups, which call it a federal grab of their ancestral lands, and from environmentalists, who say it would churn out greenhouse gases linked to global warming.

It is a fight that is likely to forever set the course for Canada's vast and empty north. The project is full of continental superlatives -- North America's richest oil patch, its biggest construction project since the Alaska pipeline in the 1970s, its largest strip-mining operation.

"By far the most important thing for North America are those oil sands in Canada," said Robert Esser, director of oil and gas resources at Cambridge Energy Research Associates in New York. "It's nice we're going to have access to (the Alaska refuge), but there are a lot of unknown questions there. We have no idea whether there is oil or gas or how much. In the oil sands, we know the reserves are huge, much larger than in Alaska."

The Canadian government, which calls the project an economic necessity, is not required to seek approval from Parliament in Ottawa. Pipeline construction is expected to start in early 2007, with gas flowing two years later.

In Alaska, by contrast, congressional authorization is required to develop the wildlife refuge. Last week's Senate vote to allow drilling will be followed by several more months of legislative maneuvering and, if the plan is approved, about eight years of preparation before oil begins to be pumped.

Despite its bright prospects, Canada's pipeline could still be stopped in its tracks by opposition from one of the region's native tribes, which are known in Canada as First Nations. The Deh Cho First Nation, a tribe of about 4,200 people who occupy the southern third of the pipeline route, has filed suit in federal court in Vancouver, British Columbia, to block the project. Unlike tribes of the northern Mackenzie Valley that have settled their land disputes with the government and support the pipeline, the Deh Cho are holding out for autonomous powers in their area. Until a deal is reached on the land dispute, the government lacks legal authority for a pipeline right of way, the tribe insists.

"What we see today is Canada not living up to its obligations," said Noeline Villebrun, national chief of the Dene, the parent federation of Mackenzie Valley tribes. "If Canada hopes to settle the claims, then the Deh Cho have to see their rights being accommodated." The Deh Cho won a round last week, when a federal judge ordered the government to release briefing notes, minutes, draft plans, correspondence and other documents related to planning for the pipeline project.

Contained in the oil sands are vast quantities of so-called bitumen, or super-heavy oil, underneath an area of northern Alberta as big as Florida. One extraction process is similar to strip mining, in which sand is scooped out and cooked at high heat to extract the sludge. Another process pumps steam into the underground deposits, dissolving the bitumen and allowing it to be piped to the surface. Under both methods, the resulting goo is refined into commercial grades of crude oil and piped to customers, mostly in the western United States. About 2 tons of sand have to be dug up, heated and processed to make a single 42-gallon barrel of oil.

The crucial ingredient in this process is natural gas. Although other fuels have been used to cook the oil sands, such as coal and the bitumen itself, none works as well as gas. Production of gas from long-established fields in Alberta is expected to decline in coming years, and because demand for gas is rising fast, expansion of the oil sands will require new supplies.

The nearest major source is in three well-explored yet untapped gas fields in the delta of the Mackenzie River on the shore of the Arctic Ocean. If the pipeline is built, gas from the delta can be funneled down to Alberta, where it will connect with the province's pipeline system to reach the oil sands.

With international oil prices soaring over $50 per barrel and likely to remain high for years to come, the oil sands are a bonanza in the making. The oil sands are estimated to contain 174 billion barrels of oil, second only to Saudi Arabia's 260 billion barrels.

In contrast, the Arctic National Wildlife Refuge contains only about 10 billion barrels. The Energy Department predicts output there will reach a peak of about 1 million barrels per day within a few years after the estimated 2015 start, and will decline gradually thereafter. Companies such as ChevronTexaco, Shell, Exxon Mobil, Petro-Canada and Suncor Energy have made multibillion-dollar investments in the oil sands in recent years, raising total production to about 1 million barrels per day. If sufficient natural gas is available to cook the sludge, output from the oil sands is expected to reach 2 million barrels per day by 2010, rising to 3 million by 2020 and as much as 5 million for many decades to come.

"Imagine Saudi-type production levels just north of the U.S. border in a friendly country," said Roland George, an Alberta analyst with Purvin & Gertz, an oil industry consulting firm in Houston. But environmentalists say the process of burning large amounts of energy just to get more energy is reckless. "The oil sands are the world's dirtiest source of oil," said Stephen Hazell, director of the Sierra Club of Canada's campaign against the Mackenzie pipeline.

The oil sands expansion is expected to increase Canada's emissions of greenhouse gases by as much as 12 percent of the country's total allotment under the Kyoto Protocol, making it almost impossible for the government to meet its commitments for reducing emissions, Hazell said. The economic potential of the pipeline project has been a powerful lure for many of the region's Natives. Poverty is rampant in the ramshackle Native villages that dot the boreal forest. Unemployment can be as high as 50 percent.

"People need jobs, and although we're not sure the pipeline won't just hire outsiders from down south, there are a lot of people here who are really hopeful," Villebrun said.

Three tribes in the Mackenzie Valley have allied themselves with the oil and gas companies behind the pipeline project. The Sahtu Dene, Gwichin and Inuvialuit, which settled their federal land claims in the 1990s, hold a one- third stake in the pipeline project along with its corporate parents: Exxon Mobil, Shell and ConocoPhillips.

Although it supports the Mackenzie pipeline, the Gwichin tribe, whose 7, 000 members live on both sides of the Alaska-Canada border, oppose oil development in Alaska. Its leaders have long been active participants in U.S. environmentalists' lobbying campaigns in Washington against drilling in the wildlife refuge because the area is the main summer calving ground of migrating caribou herds that are a major source of the tribe's food supply.

"By destroying that one area in (the refuge), they will ultimately destroy the caribou," said Joe Linklater, chief of the Gwichin First Nation in Yukon Territory, who traveled to Washington earlier this month to lobby against the Alaska refuge proposal.

Linklater said he and his family, who live in the village of Old Crow, north of the Arctic Circle, hunt and kill several caribou each April and October during the animals' migration through the area. "That's what is in our freezer all year long -- the caribou -- and that's what we eat," he said. But he noted that the Canadian pipeline lies outside caribou migration areas.

Many other twists and turns lie ahead amid the complicated energy politics of the Far North. The Mackenzie project has caused consternation in Alaska because it could delay construction of the planned $20 billion, 3,500-mile natural-gas pipeline from Alaska's North Slope down into Canada. The existing trans-Alaska pipeline carries oil only, and natural gas extracted in the North Slope as part of the oil drilling process must be re-injected into the ground. Experts say income from a natural-gas pipeline is needed to allow full expansion of oil drilling in the Alaska refuge. The proposed Alaska pipeline route, which would parallel the Alaska- Canada Highway into the Yukon and British Columbia, is further behind in the Canadian regulatory process than its Mackenzie rival. Canadian officials are believed to be deliberately taking a go-slow stance to ensure that their pipeline gets built first.

Although U.S. officials hope the output from Alberta's oil sands will be exported mainly south of the border, Chinese officials are trying to lock up long-term contracts for oil that would be sent through a proposed pipeline to the coast at British Columbia and then exported via tanker to China. "There have been Chinese delegations in every skyscraper in Calgary," said George, the analyst. "The Chinese are doing what the United States is doing, scouring the planet for every molecule of oil production they can get their hands on."

Many Washington conservatives are seeing red. "It's definitely a big worry for the Chinese to be trying to monopolize the oil sands," said Frank Gaffney, president of the Center for Security Policy in Washington.

"We're in a race for energy supplies, and we can't allow China to win this one."

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US scatters bases to control Eurasia

By Ramtanu Maitra

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

The United States is beefing up its military presence in Afghanistan, at the same time encircling Iran. Washington will set up nine new bases in Afghanistan in the provinces of Helmand, Herat, Nimrouz, Balkh, Khost and Paktia.

Reports also make it clear that the decision to set up new US military bases was made during Secretary of Defense Donald Rumsfeld's visit to Kabul last December. Subsequently, Afghan President Hamid Karzai accepted the Pentagon diktat. Not that Karzai had a choice: US intelligence is of the view that he will not be able to hold on to his throne beyond June unless the US Army can speed up training of a large number of Afghan army recruits and protect Kabul. Even today, the inner core of Karzai's security is run by the US State Department with personnel provided by private US contractors.

Admittedly, Afghanistan is far from stable, even after four years of US presence. Still, the establishment of a rash of bases would seem to be overkill. Indeed, according to observers, the base expansion could be part of a US global military plan calling for small but flexible bases that make it easy to ferry supplies and can be used in due time as a springboard to assert a presence far beyond Afghanistan.

Afghanistan under control?
On February 23, according to the official Bakhter News Agency, 196 American military instructors arrived in Kabul. These instructors are scheduled to be in Afghanistan until the end of 2006. According to General H Head, commander of the US Phoenix Joint Working Force, the objective of the team is to expedite the educational and training programs of Afghan army personnel. The plan to protect Karzai and the new-found "democracy" in Afghanistan rests on the creation of a well-trained 70,000-man Afghan National Army (ANA) by the end of 2006. As of now, 20,000 ANA personnel help out 17,000-plus US troops and some 5,000-plus North Atlantic Treaty Organization (NATO) troops currently based in Afghanistan.

In addition, on February 28, in a move to bring a large number of militiamen into the ANA quickly, Karzai appointed General Abdur Rashid Dostum, a regional Uzbek-Afghan warlord of disrepute, as his personal military chief of staff. The list of what is wrong with Dostum is too long for this article, but he is important to Karzai and the Pentagon.

Dostum has at least 30,000 militiamen, members of his Jumbush-e- Milli, under him. A quick change of their uniforms would increase the ANA by 30,000 at a minimal cost. Moreover, Dostum's men do not need military training (what they do need is some understanding of and respect for law and order). Another important factor that comes into play with this union is the Pentagon-Karzai plan to counter the other major north Afghan ethnic grouping, the Tajik-Afghans.

Since the presidential election took place in Afghanistan last October, Washington has conveyed repeatedly that the poison fangs of al-Qaeda have been uprooted and the Taliban is split. There was also reliable news suggesting that a section of Taliban leaders have accepted the leadership of two fellow Pashtuns, Karzai and US Ambassador Zalmay Khalilzad, and are making their way into the Kabul government.

With al-Qaeda defanged and the Taliban split, one would tend to believe that the Afghan situation is well under control. But then, how does one explain that a bomb went off in the southern city of Kandahar, killing five people on March 17, the very day US Secretary of State Condoleezza Rice landed in Kabul on her first visit to Afghanistan? And why has Karzai pushed back the dates for Afghanistan's historical parliamentary elections, originally planned for 2004, and then to May 2005, now to September 2005?

One thing that is certainly not under control, and is surely the source of many threats to the region, is opium production. During the US occupation, opium production grew at a much faster rate than Washington's, and Karzai's, enemies weakened. In 2003, US occupied Afghanistan produced 4,200 tons of opium. In 2004, US occupied and semi-democratic Afghanistan produced a record 4,950 tons, breaking the all-time high of 4,600 tons produced under the Taliban in the year 2000.

Though the problem is known to the world, the Pentagon refuses to deal with it. It is not the military's job to eradicate poppy fields, says the Pentagon. Indeed, it would antagonize the warlords who remain the mainstays of the Pentagon in Afghanistan, say observers.

Back on the base
When all is said and done, one cannot but wonder why the new military bases are being set up. Given that al-Qaeda is only a shadow of the past, the Taliban leaders are queuing up to join the Kabul government, and the US military is not interested in tackling the opium explosion, why are the bases needed?

A ray of light was shed on this question during the recent trip to Afghanistan by five US senators, led by John McCain. On February 22, McCain, accompanied by Senators Hillary Clinton, Susan Collins, Lindsey Graham and Russ Feingold, held talks with Karzai.

After the talks, McCain, the No 2 Republican on the Senate Armed Services Committee, said he was committed to a "strategic partnership that we believe must endure for many, many years." McCain told reporters in Kabul that America's strategic partnership with Afghanistan should include "permanent bases" for US military forces. A spokesman for the Afghan president told news reporters that establishing permanent US bases required approval from the yet-to-be-created Afghan parliament.

Later, perhaps realizing that the image that Washington would like to project of Afghanistan is that of a sovereign nation, McCain's office amended his comments with a clarification: "The US will need to remain in Afghanistan to help the country rid itself of the last vestiges of Taliban and al-Qaeda." His office also indicated that what McCain meant was that the US needs to make a longterm commitment, not necessarily "permanent" bases.

On March 16, General Richard Myers, chairman of the US Joint Chiefs of Staff, said no decision had been reached on whether to seek permanent bases on Afghan soil. "But clearly we've developed good relationships and good partnerships in this part of the world, not only in Afghanistan," he added, also mentioning existing US bases in Uzbekistan and Kyrgyzstan.

A military pattern
But this is mere word play. Media reports coming out of the South Asian subcontinent point to a US intent that goes beyond bringing Afghanistan under control, to playing a determining role in the vast Eurasian region. In fact, one can argue that the landing of US troops in Afghanistan in the winter of 2001 was a deliberate policy to set up forward bases at the crossroads of three major areas: the Middle East, Central Asia and South Asia. Not only is the area energy-rich, but it is also the meeting point of three growing powers - China, India and Russia.

On February 23, the day after McCain called for "permanent bases" in Afghanistan, a senior political analyst and chief editor of the Kabul Journal, Mohammad Hassan Wulasmal, said, "The US wants to dominate Iran, Uzbekistan and China by using Afghanistan as a military base."

Other recent developments cohere with a US Air Force strategy to expand its operational scope across Afghanistan and the Caspian Sea region - with its vital oil reserves and natural resources: Central Asia, all of Iran, the Persian Gulf, the Strait of Hormuz and the northern Arabian Sea up to Yemen's Socotra Islands. This may also provide the US a commanding position in relation to Pakistan, India and the western fringes of China.

The base set up at Manas outside Bishkek, the capital of Kyrgyzstan - where, according to Central Asian reports, about 3,000 US troops are based - looks to be part of the same military pattern. It embodies a major commitment to maintain not just air operations over Afghanistan for the foreseeable future, but also a robust military presence in the region well after the war.

Prior to setting up the Manas Air Base, the US paid off the Uzbek government handsomely to set up an air base in Qarshi Hanabad. Qarshi Hanabad holds about 1,500 US soldiers, and agreements have been made for the use of Tajik and Kazakh airfields for military operations. Even neutral Turkmenistan has granted permission for military overflights. Ostensibly, the leaders of these Central Asian nations are providing military facilities to the US to help them eradicate the Islamic and other sorts of terrorists that threaten their nations.

These developments, particularly setting up bases in Manas and Qarshi Hanabad, are not an attempt by the US to find an exit strategy for Afghanistan, but the opposite: establishing a military presence.

Encircling Iran
On February 28, Asia Times Online pointed out that construction work had begun on a new NATO base in Herat, western Afghanistan (US digs in deeper in Afghanistan ). Another Asia Times Online article said US officials had confirmed that they would like more military bases in the country, in addition to the use of bases in Pakistan (see The remaking of al-Qaeda , February 25).

Last December, US Army spokesman Major Mark McCann said the United States was building four military bases in Afghanistan that would only be used by the Afghan National Army. On that occasion, McCann stated, "We are building a base in Herat. It is true." McCann added that Herat was one of four bases being built; the others were in the southern province of Kandahar, the southeastern city of Gardez in Paktia province, and Mazar-i-Sharif, the northern city controlling the main route to central Afghanistan. The US already has three operational bases inside Afghanistan; the main logistical center for the US-led coalition in Afghanistan is Bagram Air Field north of Kabul - known by US military forces as "BAF". Observers point out that Bagram is not a full-fledged air base.

Other key US-run logistical centers in Afghanistan include Kandahar Air Field, or "KAF", in southern Afghanistan and Shindand Air Field in the western province of Herat. Shindand is about 100 kilometers from the border with Iran, a location that makes it controversial. Moreover, according to the US-based thinktank Global Security, Shindand is the largest air base in Afghanistan.

The US is spending US$83 million to upgrade its bases at Bagram and Kandahar. Both are being equipped with new runways. US Brigadier General Jim Hunt, the commander of US air operations in Afghanistan, said at a news conference in Kabul Monday, "We are continuously improving runways, taxiways, navigation aids, airfield lighting, billeting and other facilities to support our demanding mission."

The proximity of Shindand to Iran could give Tehran cause for concern, says Paul Beaver, an independent defense analyst based in London. Beaver points out that with US ships in the Persian Gulf and Shindand sitting next to Iran, Tehran has a reason to claim that Washington is in the process of encircling Iran. But the US plays down the potential of Shindand, saying it will not remain with the US for long. Still, it has not been lost on Iranian strategists that the base in the province of Herat is a link in a formidable chain of new facilities the US is in the process of drawing around their country.

Shindand is not Tehran's only worry. In Pakistan, the Pervez Musharraf government has allowed the commercial airport at Jacobabad, about 420km north of Karachi and 420km southeast of Kandahar, as one of three Pakistani bases used by US and allied forces to support their campaign in Afghanistan. The other bases are at Dalbandin and Pasni. Under the terms of an agreement with Pakistan, the allied forces can use these bases for search and rescue missions, but are not permitted to use them to stage attacks on Taliban targets. Both Jacobabad and Pasni bases have been sealed off and a five-kilometer cordon set up around the bases by Pakistani security forces.

Reports of increased US operations in Pakistan go back to March 2004, when two air bases - Dalbandin and Shahbaz - in Pakistan were the focus for extensive movements to provide logistical support for Special Forces and intelligence operations. Shahbaz Air Base near Jacobabad appeared to be the key to the United States' 2004 spring offensive. At Jacobabad, C-17 transports were reportedly involved in the daily deliveries of supplies. A report in the Pakistani newspaper the Daily Times on March 10, 2004, claimed that the air base was under US control, with an inner ring of facilities off limits to Pakistan's military.

Ramtanu Maitra writes for a number of international journals and is a regular contributor to the Washington-based EIR and the New Delhi-based Indian Defence Review. He also writes for Aakrosh, India's defense-tied quarterly journal.

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[This was $3.4 billion higher than China's offer. We never thought China would get hold of Unocal -- or the juicy offshore leases they hold in the South China Sea. But will China ever let ChevronTexaco develop them? -MCR]

ChevronTexaco, Unocal to merge in $17 billion deal

The Sacramento Bee - Knight Ridder/Tribune Business News
Apr 05, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

In a merger of two California energy giants that have benefited from soaring petroleum prices, ChevronTexaco Corp. said Monday it's buying Unocal Corp. for roughly $17 billion.

The deal would unite San Ramon-based ChevronTexaco, the nation's second-largest oil company, with El Segundo-based Unocal, the ninth largest. In addition to its California gas stations, ChevronTexaco has refineries in Richmond and El Segundo and is the largest producer of oil and gas in the San Joaquin Valley.

The takeover likely will have few immediate impacts on the tumultuous California gasoline market, where an average gallon of gas cost a record $2.47 on Monday. Unocal got out of the refining business and sold its "76" brand gas stations in the 1990s.

In one indirect effect, a patent on the recipe for California gasoline, obtained by Unocal 11 years ago and thought to be inflating gas prices, would now change hands. Some think the dispute between Unocal and other oil companies, which had included ChevronTexaco, will now end.

In addition, the merger could have implications for the state's natural gas market, including controversial proposals to build coastal terminals for importing liquefied natural gas.

Unocal has vast natural gas holdings in Asia, and tapping into those could help ChevronTexaco get its project completed.

"Certainly it gives them a bigger supply base," said Paul Weissgarber of the A.T. Kearney consulting firm in Plano, Texas. "This gives them advancement on the chess board."

Weissgarber said the deal also would bring ChevronTexaco access to Unocal's ample petroleum reserves in the Gulf of Mexico and elsewhere. ChevronTexaco's "issue has been about access, about having enough areas to explore in," he said.

All told, ChevronTexaco said it expects its oil and natural gas production to increase by 6 percent a year through 2009.

It also expects the deal, which requires the approval of Unocal shareholders and state and federal officials, to generate $325 million in annual savings from layoffs and cost-cutting. ChevronTexaco has about 47,000 workers worldwide, while Unocal has more than 6,000.

The combined company would trail ExxonMobil, the largest oil company, by a wide margin. Exxon had sales of nearly $300 billion last year, while ChevronTexaco and Unocal combined for about $160 billion.

Unocal would "fit like a glove," ChevronTexaco Chairman David O'Reilly said Monday in a conference call with reporters.

Chevron shares fell $2.33 to close at $56.98 on the New York Stock Exchange. Unocal, whose stock had jumped in recent weeks amid speculation it would be taken over, dropped $4.75 to close at $59.60 on the New York Stock Exchange.

ChevronTexaco said it would pay a combination of cash and stock originally valued at $62 a share. ChevronTexaco also will assume $1.6 billion in debt and sell $2 billion in assets.

The deal comes at a time when oil and gas companies are enjoying big profits in the wake of higher energy prices. ChevronTexaco's profits nearly doubled last year to $13.33 billion, while Unocal's profits also nearly doubled to $1.21 billion.

Crude oil briefly topped $58 a barrel for the first time ever Monday before closing at $57.01. Oil is up almost $15 a barrel since January.

Some consultants, oil executives and the federal and state governments argue that Unocal is partly to blame for high prices. They say Unocal duped the California Air Resources Board in the early 1990s into adopting fuel recipes that mimicked formulas under development at Unocal's Brea labs. In 1994 Unocal obtained a patent on the formula.

A lawsuit followed, pitting Unocal against Chevron (before it bought Texaco) and other oil companies. A jury sided with Unocal and said the oil companies should pay 5.75 cents a gallon to Unocal. But the Federal Trade Commission is pursuing a complaint against Unocal, saying the patent could cost California motorists $500 million a year in higher prices.

Unocal said it did nothing wrong and is willing to sign royalty agreements for barely a penny a gallon.

O'Reilly, the ChevronTexaco chairman, had no comment on the patent Monday.

"They're going to find a way to settle up with the different players and move on," said Weissgarber. "I can't see them continuing to battle other industry players."

Natural gas also has proven to be a controversial commodity. Because so many power plants run on gas, soaring prices contributed to the historic runup in wholesale electricity costs during the energy crisis of 2000-01.

California officials say they want to bring more natural gas into the state to moderate prices, and energy companies have been lobbying to gain acceptance for liquefied natural gas terminals.

ChevronTexaco has contributed more than $200,000 to Gov. Arnold Schwarzenegger's campaign committees, while various companies joined with the California Manufacturers and Technology Association to hire two of Schwarzenegger's consultants to help make the case to the public.

The lobbying has angered some consumer advocates, and some environmentalists think the LNG projects could harm the environment or create tempting terrorist targets.

The Associated Press contributed to this report.

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Japan draws the line on energy

By James Brooke
The New York Times
Wednesday, March 30, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

NAHA, Japan -- Midway between Okinawa and China, a Norwegian seismic ship is performing seemingly routine survey work this spring, trawling with long seismic cables and using sound waves to create three-dimensional images of oil and gas deposits.

But nothing is routine when Japan commissions a survey of what is hidden below the contested waters of the East China Sea.

Chinese Coast Guard ships treat the surveyors on the Ramform Victory as spies, radioing warnings to leave and shadowing the ship for days on end. On one occasion, the Chinese ships nearly collided with the Norwegian vessel.

Japan's trade minister, Shoichi Nakagawa says the seismic ship found that two deposits under development by China extend into Japanese economic waters, according to Trade Ministry officials. Nakagawa, flying in a Japanese Coast Guard plane, conducted an ostentatious survey, circling over the bright yellow gas-production platform that China is building just west of waters claimed by Japan.

Later confronting the Chinese face to face, Nakagawa sat down in front of a Chinese negotiator, dropped two straws in a glass of orange juice, and forgoing customary Japanese politeness, complained that China was about to "suck out Japan's resources with a straw."

In days of sharply higher energy prices, dormant border disputes have suddenly come alive for Japan. Long cocooned by its buffer waters, Japan is now bumping shoulders over undersea oil and gas resources with China, South Korea and Russia.

In talks in Tokyo on Monday between Japan and China, the world's second- and third-largest oil consumers after the United States, Japanese negotiators demanded that China share their drilling data or drop the project, news agencies reported. The Chinese rejected the demand and repeated their proposal for a joint venture.

But calls are mounting for a Japanese-only project in waters of the East China Sea that both countries claim. On Friday, a panel of the Japanese governing party urged the government to invite companies to drill in the area, a call bolstered by the simultaneous release of a Foreign Ministry report that China conducted 22 "illegal" surveys of Japanese economic waters last year.

Tensions also are flaring between Japan and South Korea over a disputed island group. To the north of Japan, Japanese companies are investing about $1 billion a year to develop oil and gas reserves off Sakhalin, a Russian island that was partially owned by Japan until the end of World War II.

And last fall, China and Japan sparred over a pipeline to bring Siberian oil to Asia. Japan won the first round when Russia went for billions of dollars in Japanese financing to build the pipeline to the Sea of Japan.

In response, the Chinese prime minister, Wen Jiabao, said at a recent news conference that over the next 18 months Russian oil exports to China by rail would increase by 50 percent, to 300,000 barrels a day. He said the Russian government and President Vladimir Putin "have made it very clear that first consideration will be given to China when they build the Siberian oil-gas pipeline."

Spurred by high energy prices, China is pursuing a new energy realpolitik. Entering the Americas, Chinese energy officials are running rings around the United States, exploring deals with Canada, Cuba, Mexico and Venezuela. In Northeast Asia, the fact that China now is Japan's largest trading partner is not slowing China's plan to drain gas that potentially lies under an area Japan claims as its own.

In the energy brinkmanship on the high seas west of Okinawa, China's $1 billion project is to pump its first gas in August, sending the fuel through a pipeline to Shanghai, a distance of 500 kilometers, or 300 miles.

Compounding Japan's loss of face, Nakagawa told Parliament last month that the first 400 kilometers of the line were built with $120 million of Japanese development aid.

Japan now is tripling its exploration budget in the East China Sea, to $125 million this year, and is spending $100 million to build its own seismic survey ship.

On Feb. 22, a day after Prime Minister Junichiro Koizumi appealed to make the East China Sea "a sea of cooperation, not a sea of conflict," Nakagawa told reporters, "We will definitely call on China to stop its work." He said he might soon authorize two Japanese companies to start drilling in the contested area.

To strengthen oil and gas exploration worldwide, Japan is to disband Japan National Oil, its state-run energy exploration company, on Friday. With a record of drilling largely dry holes in its 305 projects around the world, the company will end its 38 years of existence with almost $7 billion in losses.

Its successor, Inpex, was listed on the Tokyo Stock Exchange last fall and is to be run for profit. Inheriting some of the state company's oil and gas reserves, Inpex will start as a midsized multinational exploration company, about the size of Unocal.

Over the next three years, Japanese oil companies and trading houses plan to invest about $20 billion in oil and gas exploration and production, roughly double the level of the past three years, according to the financial daily Nihon Keizai. China and Japan have suspected since the late 1960s that the waters between China and Okinawa contain large deposits of oil and gas.

"In the Japanese area, there is a high possibility we can find not only gas but oil," Tsutomu Toichi, managing director of the Institute of Energy Economics, a nonprofit group in Tokyo, said in an interview.

With the economic boundary in dispute, Asia's two giants had let the energy riches lie untouched, focusing instead on their larger economic relationship. Soon, China became Japan's largest destination for foreign investment. Last year, China displaced the United States as Japan's largest trading partner.

But with China's economy growing at 9.5 percent last year, and at an annual rate of 8.4 percent since 2000, Chinese officials fear energy shortages will cap growth.

Over the next 25 years, China's dependency on imported oil will double, hitting 80 percent of its total consumption, according to forecasts by the International Energy Agency, an intergovernmental agency based in Paris. In one setback, two foreign companies, Royal Dutch/Shell Group and Unocal, dropped out last fall from the Chinese gas development west of here, then China's largest gas joint venture with foreign partners.

Both companies cited commercial reasons, but a high-ranking Japanese energy official who asked not to be identified said: "Commercial reasons include political risks. I think they judged that it's not worth doing, even taking political risks."

Undeterred, the Chinese partners, China National Offshore Oil and China Petrochemical said they would move ahead with plans to start producing this summer. The Chinese may have the last laugh. China National is considering a $14 billion takeover of Unocal.

As Chinese workers were extending the seabed pipeline, Nakagawa, the Japanese trade minister, said preliminary results from his agency's 2004 survey indicate that two of three major gas fields China plans to develop in the area extend into Japan's economic zone.

"We demand that China hand over data and stop exploration in the East China Sea until this problem is resolved," said Nakagawa, a conservative with prime-ministerial ambitions.

China's Foreign Ministry spokesman, Kong Quan, replied that the two fields "completely fall under the framework of China's rights."

As the coast guards of both countries brace for confrontations this spring, the Japanese newspaper Yomiuri has reported that Beijing has awarded Chinese energy companies exploration rights over 12 blocks that extend into Japanese economic waters. Of the 12, three are entirely inside the Japanese economic area, Yomiuri said.

The UN Convention on the Law of the Sea gives each coastal nation an economic control zone extending from shorelines out 200 nautical miles, which is 230 miles or 370 kilometers. But the distance between Okinawa and China is about 350 nautical miles.

Japan advocates a median line between the two countries. China advocates using as its economic border the eastern extension of the continental shelf, which moves the economic border to an area about 50 nautical miles west of the Okinawa archipelago.

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