(FORTUNE Magazine) – To the loving eye of Phil Meek, president of Chevron Corp.'s Kazakhstan subsidiary, the Caspian Sea city of Atyrau looks a lot like West Texas. "It's flat, alkaline, not many trees," he says.

Yet few visitors would take Atyrau, where Chevron is gearing up to exploit its biggest oil strike in decades, for what company people like to call it: the next Houston. Idle Kazakhstanis line the riverbank next to Chevron's new fitness center, fishing with stick and twine like time travelers from Mark Twain's backwoods. An old woman, her head wrapped in red flannel, drives a flock of goats across Lenin Avenue, not far from where the San Francisco-based petroleum giant plans a new regional headquarters. The one public accommodation in sight: foot-washing troughs where the 200,000 Atyrauans swab their boots before daring to enter a government office.

And Atyrau is high civilization compared to where the oil actually is. A rugged five-hour drive past loping camels and a very great deal of swirling dust brings you to the wellhead at Tengiz. "We had grass this summer, which is unusual," Chevron's on-site public affairs chief Sherri Zippay reports, mustering all the combined optimism of her home in California and her training in PR. "This place kind of grows on you." It had better if you are planing to stay. Temperatures at Tengiz range from 110 degrees above zero Fahrenheit to 40 below.

But to Chevron and its big oil competitors, the oil reserves in Central Asia should be well worth the trek. Tengiz is the Caspian's richest proven strike--the world's largest new oil field in 20 years, Chevron says. The company's planned investment of $20 billion over four decades is the biggest risk anyone is taking on the region. And Chevron has already spent more than any other major oil company in the region--although it will not break out numbers. But its big-oil rivals are all vying for a share of the riches. Across the water in Azerbaijan, Amoco and British Petroleum are fronting the Azerbaijan International Operating Co. (AIOC), which plans to sink $8 billion into offshore drilling. Exxon and Pennzoil are among their ten junior partners. Shell leads a consortium exploring offshore deposits on Kazakhstan's side of the Caspian, which petroleum experts predict will be on a par with Tengiz. Mobil is backing Shell and lately took a 25% stake in Tengiz itself.

On the surface, big oil's reasoning looked unassailable. The Caspian shelf could produce some 5% of the world's oil by 2010. Assuming a price of $20 a barrel--which analysts consider a reasonable benchmark for the medium term--the region could generate about $27 billion a year in gross revenues. Tengiz alone is slated to pump 700,000 barrels a day at its peak, which adds up to $5.1 billion a year. That is nearly one-third of Russia's entire current export volume. Tengiz crude, moreover, is almost preternaturally high quality, rating over 50 "degrees of gravity" on the standard American Petroleum Institute scale. Brent North Sea oil, the global benchmark brand, runs no higher than 38 degrees. If all goes well, "Chevron's going to have this giant money-making machine for the next 50 years," gushes Steven Allen, petroleum analyst at Deutsche Morgan Grenfell in Moscow.

But all is not going so well. Chevron's quintessentially American assumption was that its technology, management, and wealth could fast-forward the history of a place like Kazakhstan, where annual per capita income is just $1,300. It also figured that provincial former Soviet functionaries could be hastily reeducated and transformed into perspicacious business partners, and that the agony of a ruined empire could be glossed over with profits from petroleum. Yet half a decade after Chevron signed the deal with the Kazakh government, not much has happened in Tengiz. That's in large part because neither Chevron nor its fellow big oil companies on the other side of the Caspian have solved the key problem they started out with--how to get their crude to world markets without transport costs eating up the profit.

The crux of the problem lies in simple geography--they don't call Kazakhstan Central Asia for nothing. The vast, mostly empty country--one-third the size of the continental U.S., with only 16 million people--is equally remote from the world's two main oil importing regions: Western Europe and East Asia. Such distance is not a serious problem in the oil business if it can be covered by ship--an easy enough proposition for producers in West Africa, East Asia, or the Persian Gulf. But the Caspian, though called a sea, is surrounded by land--five different lands, in fact, and none of them easy places to do business. The northern shore is dominated by Russia; the southern edge, by Iran. Azerbaijan is on the west side of the Caspian, Kazakhstan and tiny Turkmenistan on the east side.

The ideal export route from Kazakhstan would be south through Iran to the Persian Gulf, oil executives say. "Considering the demand growth in East Asia, everybody recognizes this wouldn't be a bad way to go," says Ray Shepherd, Chevron's representative to the Caspian Pipeline Consortium, which includes the governments of Kazakhstan and Russia as well as Chevron, Mobil, and half a dozen other oil companies. In time it might be a viable way to go. But even with a moderate new President in Iran, it is risky to bet on Washington's relaxing its economic embargo of Tehran. So serious pipeline negotiations have focused on the northern route through Russia. At least Chevron doesn't have to contend with the prospect of piping the oil through an unstable region like Chechnya, as do BP, Amoco, and the other members of the AIOC consortium in Azerbaijan.

Chevron's plan: to build a 900-mile-long pipeline around the north side of the Caspian Sea and then through Russia to the Black Sea port of Novorossisk. From there the oil will be transported on tankers across the Black Sea and into the Mediterranean. But to get to its destination, the oil must pass through the Bosporus strait--in other words, right through the middle of Istanbul, with a metropolitan population of 12 million. Turkey's government insists this is out of the question for environmental reasons. "I would like to see them talk about sending supertankers down the Thames or the Hudson," snaps a diplomat at the Turkish embassy in Moscow. "There seems to be a feeling that Turkish lives are worth less."

Despite such heated rhetoric, many oil executives consider Turkey's intransigence a bluff to jack up its fees. But with the Tengiz-Novorossisk pipeline's cost estimated at $2 billion, it is an extraordinarily expensive bluff to call. The Turks have helpfully suggested bypassing the Bosporus with a long pipeline through their own territory (via Georgia) to the Mediterranean port of Ceyhan. But aside from costing up to $1 billion more, the route runs through the Kurdish regions of eastern Turkey, where armed insurgency has simmered for decades. So far, not a single meter of any pipeline has been built.

Instead Chevron has started shipping about half of the 160,000 barrels a day of crude it's producing at Tengiz by rail to Latvia or by barge to Baku, from where the oil is sent overland to Batrimi, Georgia, on the Black Sea. (The other half is sold locally.) To its own amazement, the Tengiz Chevroil joint venture made a small operating profit last year. "If you had told me a year ago we could make money putting oil on railroad cars, I would have thought you were crazy," says Carl Burnett, who directs Mobil's share of the Kazakhstan joint venture. But Chevron didn't come to Atyrau to resurrect Rockefeller-era technology. If it is to tap the project's full potential, it must figure out a way to build a pipeline.

And fast. The corporate descendant of Rockefeller's mighty Standard Oil of California, Chevron has slipped to ninth place among the world's petroleum behemoths. With revenues last year of $38.7 billion, the company is not exactly small. But it needs a bold move to remain a player in a field dominated by giants like Exxon and Shell. The Tengiz deal, signed before the Republic of Kazakhstan's second birthday in 1993, seemed to fit the bill, adding 25% to Chevron's worldwide reserves in one $20 billion swoop. The agreement also looked like a coup for the young Kazakh government, which had only to hand over the keys, sit back, and collect 80% of Tengiz's earnings.

But then Chevron got hit by a nasty surprise in the guise of John Deuss. This peripatetic Dutch tycoon, with a fortune clocked at well over $1 billion, works mostly out of Bermuda, where he runs an outfit called Trans-World Oil. He sniffed Kazakhstan's potential early, though, and went after it in a novel fashion. Deuss got himself appointed president of the national oil company of Oman, one of the Persian Gulf's petroleum-soaked principalities.

Soon after Chevron signed off on Tengiz, the Kazakh government awarded to Oman Oil 25% of a consortium formed to build the Tengiz pipeline. The Russian and Kazakh governments each took another 25% of the pipeline consortium, and Chevron was offered the remaining quarter. There was only one catch: Deuss wanted Chevron to put up nearly all the money. The company predictably refused, and there matters stood through 1995. Nazarbayev's government soon realized that Deuss had merely served to stymie the project with his demands rather than push it forward.

Finally Deuss and the Omanis parted ways, and the Caspian Pipeline Consortium started over from scratch in April 1996, with nearly three years down the drain. Deuss, who retreated to Bermuda, didn't return phone calls seeking comment.

After Deuss' dust had cleared, a powerful new player emerged in his place at Tengiz: Mobil. "We were asked to help jump-start the pipeline," drawls Mobil's Carl Burnett. "But we were wary of doing that without getting a piece of the field." The Kazakh government was "reluctant" to yield equity, he recalls. But it swallowed hard and cut Mobil a 25% share of Tengiz Chevroil, reducing its own stake to the same size. The company paid $1.2 billion in return.

Chevron and other would-be Caspian oil producers have discovered that no deal can be altogether firm in the former Soviet Union, where a thin coat of capitalism sits uncertainly on a body of bad old Communist habits. The U.S.S.R. lives on, too, in Russia's diplomacy toward its former provinces, which Moscow cannot in its gut believe are now equal sovereign nations. Boris Yeltsin's government, to its credit, has never considered reclaiming by force Kazakhstan's treasures, which in addition to oil include chrome, copper, zinc, uranium, aluminum, and potentially gold--the whole periodic table, as patriots claim. But neither has it resigned itself to Russia's being a mere transit corridor for Kazakh and Azerbaijani wealth. It wants a big piece of the action.

First off, Russia has threatened to void the most basic understanding underlying the Tengiz project by declaring that the Caspian is not a sea after all but a lake. Seas, under international law, include sovereign coastal waters; most of the Caspian's wealth is within Kazakhstan's or Azerbaijan's. A lake's resources are divided equally among its bordering states. Oil people devoutly hope Moscow's re-definition (quietly backed by Tehran) is yet another bluff. "I don't think Russia wants to scuttle Caspian exploration over this issue," says Allen of Deut-sche Morgan Grenfell, "just use it to leverage a better deal for themselves."

This issue was temporarily put on the back burner after Chevron in 1995 ceded 5% of the Tengiz Chevroil venture--originally a fifty-fifty split with the Kazakh government--to Russian petroleum giant LUKoil for $200 million. "We understood we had to do this to get the pipeline built, but we did get a fair price for it," Meek of Chevron says.

Another pound of flesh is being hewn by the four Russian provinces along the proposed pipeline route. Chevron and partners spent much of last year waiting for the Russian "pipeline provinces" to hold public hearings on their "investment feasibility study," the rough equivalent of an environmental impact statement. That hurdle finally cleared, their papers bounced back to the federal Environment Ministry in Moscow for several more months of studying the fine print. Once that approval is obtained, the pipeline consortium must draft a "construction feasibility study" and run the gantlet all over again. If the project is not rolling by the end of this year, Chevron and Mobil have the right to kill this consortium and look elsewhere. That's not likely to happen. While Chevron is currently in talks to try to "clarify management procedures" with its Russian partners, says Mike Libbey, manager of media relations for Chevron in San Francisco, "we are totally committed to this project. It is the primary route we envision for export from Tengiz."

Indeed, Moscow's bureaucrats are acting as if the oil companies have no choice. Ray Shepherd, Chevron's representative in the pipeline consortium, thinks the real problem is Moscow and the regions' dickering over tax revenue. With transit levies estimated at $27 billion over four decades, neither side is rushing toward any concessions.

Meanwhile, in Kazakhstan things look a bit more hopeful. President Nursultan Nazarbayev, who very much wants this potentially lucrative project to succeed, has created what passes in the region for a pro-business environment. This former Communist Party boss has managed the ex-U.S.S.R.'s smoothest political transition. He has no use for Russia's noisy evolving democracy. Kazakhstan's parliament is strictly pro forma, and local officials, like the lackluster crew ensconced in Atyrau's "white house," are appointed from above. Yet neither has Nazarbayev regressed to the demi-totalitarianism of his Central Asian neighbors, Turkmenistan and Uzbekistan.

Multinational businesses applaud his middle course--no to chaos, yes to capital. Kazakhstan led the former Soviet bloc in foreign investment for 1997, drawing $3.5 billion. This was $300 million more than runner-up Poland and $1.3 billion more than Russia, where oil investment remains largely thwarted by the Communist-dominated parliament.

But Nazarbayev's tight ship in Kazakhstan is no more immune to corruption than Yeltsin's anarchic Russia. For instance, in the small town of Kulsari, halfway from Atyrau to Tengiz, Chevron built handsome new houses for flood victims. Local bosses moved into them instead. Atyrau itself, despite the $50 million Chevron has budgeted to win over its inhabitants' hearts and minds, remains a portrait of backwater stasis. It has virtually none of the cottage industries--hole-in-the-wall bakeries, sidewalk video rentals--that brighten Russia's bleakest districts.

Things started looking up for Kazakhstan in general, however, around the start of 1996. Bright young reformers gained the upper hand in government, breathing life into the country's stagnant privatization program. Most major non-oil enterprises have since been flogged to foreign investors. Samsung now dominates Kazakhstan's copper industry, while its Korean compatriot, Daewoo, owns 40% of the national phone company. A national stock exchange is promised soon. The streets of Almaty are filling rapidly with Mercedes-Benzes. Asked where they all come from, central bank governor Oraz Jandosov, the young reformers' captain, replies obliquely: "Our first goal should be stopping all the government-related ways of making money."

Chevron promised that 1997 would be the breakthrough year for Tengiz. All pipeline permits would be stamped by year-end, executives insisted, and oil would be gushing to Novorossisk by early 2000. But Chevron now concedes that the deadlines have been pushed back.

Meanwhile, the price of oil continues to sag. James Clark, an oil analyst at CS First Boston, puts Tengiz' breakeven price for current production levels at $15 to $16, about the same price crude is fetching right now. Increased production--Tengiz Chevroil announced last year that it would spend more than $300 million to boost output 50%, to 240,000 barrels a day, by 2000--will of course add economies of scale. (Current plans call for Tengiz to reach full capacity by 2008.) But if prices languish in the middle to upper teens, Clark cautions, Caspian oil in general becomes "a low-margin product." Chevron concedes that it needs the pipeline to boost production and become more profitable. Jay Aydin, an analyst at McDonald & Co., says that if Chevron had anticipated prices this low, it never would have invested in Tengiz.

But he and other analysts say that since the company has already made a hefty investment, it's worthwhile to keep pumping all it can, even at the slimmest of profits. And analysts point out that Tengiz has half a century's worth of reserves. "With a project this size, momentum is more important than short-term profits," says Laurent Ruseckas, who follows the region for Cambridge Energy Research Associates.

Still, no one can guarantee that Kazakhstan will retain its current political stability. The country's population is evenly divided between ethnic Kazakhs--descendants of hard-riding steppe nomads--and Russian-Ukrainian Slavs. Antagonism simmers just beneath the surface, stoked by nationalists within Russia who covet northern Kazakhstan's industrial belt, where their ethnic brethren are a majority.

Nazarbayev, a Kazakh, showed how seriously he takes Slavic restlessness by moving the country's administrative capital last year from Almaty to Akmola, a barren, wind-tormented town whose sole qualification is that it is up north, where the Russians are.

Prosperity tends to dampen such ethnic tension. But six years after independence, the promises of oil-borne riches have worn thin in Kazakhstan. "Maybe we'll catch up to you in 200 years," an Atyrau cabby laughs on learning his fare is an American. "If we're lucky." One hopes for the sake of Chevron and its partners that its Caspian adventure will pay off sooner.

REPORTER ASSOCIATE Jeremy Kahn