[Senate Hearing 106-875]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-875

 THE STATUS OF INFRASTRUCTURE PROJECTS FOR CASPIAN SEA ENERGY RESOURCES

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 12, 2000

                               __________

       Printed for the use of the Committee on Foreign Relations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate
                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
69-745                     WASHINGTON : 2001



                     COMMITTEE ON FOREIGN RELATIONS

                 JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana            JOSEPH R. BIDEN, Jr., Delaware
CHUCK HAGEL, Nebraska                PAUL S. SARBANES, Maryland
GORDON H. SMITH, Oregon              CHRISTOPHER J. DODD, Connecticut
ROD GRAMS, Minnesota                 JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                RUSSELL D. FEINGOLD, Wisconsin
CRAIG THOMAS, Wyoming                PAUL D. WELLSTONE, Minnesota
JOHN ASHCROFT, Missouri              BARBARA BOXER, California
BILL FRIST, Tennessee                ROBERT G. TORRICELLI, New Jersey
LINCOLN D. CHAFEE, Rhode Island
                   Stephen E. Biegun, Staff Director
                 Edwin K. Hall, Minority Staff Director

                                 ------                                

             SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
                       EXPORT AND TRADE PROMOTION

                    CHUCK HAGEL, Nebraska, Chairman
CRAIG THOMAS, Wyoming                PAUL S. SARBANES, Maryland
BILL FRIST, Tennessee                JOHN F. KERRY, Massachusetts
RICHARD G. LUGAR, Indiana            BARBARA BOXER, California

                                  (ii)



                            C O N T E N T S

                              ----------                              
                                                                   Page

Alexander, Ralph, group vice president, BP Amoco Corporation, 
  London, England................................................    28
    Prepared statement...........................................    30
Goldwyn, Hon. David L., Assistant Secretary of Energy for 
  International Affairs, Department of Energy, Washington, DC....     3
    Prepared statement...........................................     6
Olcott, Dr. Martha Brill, senior associate, Carnegie Endowment 
  for International Peace, Washington, DC........................    43
    Prepared statement...........................................    47
West, J. Robinson (Robin), chairman, Petroleum Finance 
  Corporation, Washington, DC....................................    34
    Prepared statement...........................................    36
Wolf, Hon. John S., Special Advisor to the President and 
  Secretary of State for Caspian Basin Energy Diplomacy, 
  Washington, DC.................................................    16
    Prepared statement...........................................    19
        .........................................................    00

                                 (iii)

  

 
                      THE STATUS OF INFRASTRUCTURE
                        PROJECTS FOR CASPIAN SEA
                            ENERGY RESOURCES

                              ----------                              


                       WEDNESDAY, APRIL 12, 2000

                           U.S. Senate,    
     Subcommittee on International Economic
                        Policy and Trade Promotion,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Chuck Hagel 
(chairman of the subcommittee) presiding.
    Present: Senators Hagel, Lugar and Sarbanes.
    Senator Hagel. Good afternoon.
    Let me announce before we begin the hearing that we have a 
vote scheduled at 2:30. And what we will most likely do is get 
as much done as we can in the next 45 minutes, and then 
probably break for a quick vote recess and come right back and 
pick it up from there.
    I know one of our lead-off witnesses, Mr. Wolf, is delayed, 
so we are going to go ahead and introduce the witnesses and 
Secretary Goldwyn will have an opportunity to present his 
testimony. So, Mr. Goldwyn, if you will bear with me here for a 
moment, I will introduce our witnesses, and then we will get to 
your testimony.
    Our first witness today, who is delayed as I mentioned, is 
Ambassador John Wolf. Mr. Wolf, is the Special Advisor to the 
President and Secretary of State on Caspian Basin Energy 
Diplomacy. Ambassador Wolf is the lead administration official 
on U.S. policy for energy development in the region. A career 
Foreign Service Officer, Ambassador Wolf has served in a 
variety of positions. He most recently served as Ambassador to 
the Asia-Pacific Economic Cooperation Forum. Before that, he 
served as Principal Deputy Assistant Secretary for 
International Organization Affairs. His other postings have 
included Australia, Vietnam, Greece, and Pakistan.
    Do you think he would approve of that, Secretary Goldwyn?
    Mr. Goldwyn. He would be flattered.
    Senator Hagel. Now, on to you, sir.
    Ambassador Wolf will be followed by the Hon. David L. 
Goldwyn, Assistant Secretary of Energy for International 
Affairs. Mr. Goldwyn has a strong background in Caspian Sea 
energy issues. Previous to his appointment as Assistant 
Secretary, he served as Counselor to Secretary Richardson on 
special initiatives, including Caspian Sea policy. His earlier 
career has been at the U.S. Mission to the United Nations, and 
at the State Department, under both Bush and Clinton 
administrations.
    We will have three distinguished private sector witnesses 
in our second panel. The first is Mr. Ralph Alexander, Group 
Vice President of BP Amoco. We are pleased to have one of BP 
Amoco's most senior executives here today. As a 34-percent 
shareholder of the Azerbaijani International Operating Company, 
the AIOC, BP Amoco is the most important oil company involved 
in the Caspian Sea region. And I note that before the merger, 
our first oil company witness on this issue, a couple of years 
ago, was Mr. Chuck Pittman, then president and CEO of Amoco 
Eurasia Petroleum Company.
    Our second private sector witness brings a vital 
perspective to these issues. He is Mr. Robin West, chairman of 
the board of the Petroleum Finance Corporation, [PFC]. PFC 
consults with all the major international oil companies, as 
well as many national governments, on oil and gas development 
strategies, project financing, and other complicated aspects of 
today's energy industry. Before founding PFC in 1984, Mr. West 
served in the Reagan administration. He served as Assistant 
Secretary of the Interior, with responsibility for offshore oil 
policy. He has also worked as first vice president of Blyth, 
Eastman, Dillon & Company, an investment banking firm.
    Our final witness, Dr. Martha Brill Olcott, is a noted 
scholar of the region. Dr. Olcott testified before this 
subcommittee 2 years ago on this subject. She is professor of 
Political Science at Colgate University, and also serves as 
senior associate at the Carnegie Endowment for International 
Peace. Since 1994, Dr. Olcott has served at the Central Asia-
America Enterprise Fund, where she currently is vice chairman. 
She has worked as a consultant on Central Asian Affairs to 
former Secretary of State Larry Eagleburger, and has also 
consulted on the region with a variety of businesses. She has 
written widely on the region.
    There have been recent dramatic developments in the Caspian 
Sea region, as many of you know. Recent press reports have 
indicated some disappointing offshore oil drilling results in 
the Caspian Sea. What has not been as well reported is the fact 
that instead of discovering significant new oil reserves, AIOC 
has discovered major new natural gas reserves. This has 
dramatically changed the calculus on the options for delivering 
gas to the Turkish market.
    Now, Azerbaijan alone has enough gas reserves to quickly 
serve the Turkish market. Oil reserves have been slow to 
develop. However, major new exploration is underway in 
Kazakastani waters in the northern Caspian Sea. Exploration 
also continues in the southern Caspian Sea. Ultimately, there 
will be sufficient volumes to turn the Caspian Sea region into 
a major new source of petroleum.
    The Caspian Sea region is estimated to have oil reserves of 
from 16 billion to 32 billion barrels. This compares to North 
Sea reserves of about 17 billion barrels, and remaining U.S. 
reserves of 22 billion barrels. It is well below, as most of 
you note, the massive reserves of the Persian Gulf.
    We look forward to our witnesses' views today on what we 
can do to encourage Caspian Sea energy development in a way 
that serves U.S. interests in supporting the independence and 
sovereignty of the newly emerged nations of the region.
    My friend and colleague, Senator Sarbanes, will be here 
shortly, but in the interest of time and getting your testimony 
in, Secretary Goldwyn, we would ask you to go ahead and proceed 
with your testimony. Thank you for being here. We are grateful.

 STATEMENT OF DAVID L. GOLDWYN, ASSISTANT SECRETARY OF ENERGY 
FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF ENERGY, WASHINGTON, DC

    Mr. Goldwyn. Thank you, Mr. Chairman. I am pleased to be 
here. Most of the members on your panel spend a lot of time 
talking to each other and talking to the governments, and so we 
are pleased to have the opportunity to talk to you and explain 
what we have been up to, because we have made some progress.
    I will not steal too much of Ambassador Wolf's thunder. He 
is going to talk about the status of the negotiations and our 
interests in general. So let me talk about U.S. energy 
interests in the Caspian and why this policy is good for 
America's energy security.
    Our U.S. policy in the Caspian advances the 
administration's overall comprehensive national energy 
strategy. This strategy is about establishing clear, measurable 
objectives to help ensure that America has affordable, clean 
and secure energy supplies well into the 21st century. To 
accomplish that strategy, we work on improving the efficiency 
of the overall energy system, ensuring against energy supply 
disruptions, promoting energy production and use in ways that 
respect our health and environmental values, expanding future 
energy choices, and seeking international cooperation on global 
energy issues.
    Our energy policy in the Caspian specifically addresses 
these goals. Our Caspian policy promotes the development of 
diverse, stable and reliable sources of energy in an important 
region. Developing Caspian oil and gas expands global supply. 
Creating multiple east-west pipelines helps ensure against 
national or international supply disruptions by diversifying 
transportation routes. Supporting investment by U.S. and 
Western companies in the region helps our economy, but also 
protects the environment they operate in by their deployment of 
state-of-the-art technologies and industry practices. It is 
also in our interest to increase non-OPEC oil supply, which 
contributes to the overall efficiency of a global oil market.
    International cooperation and collaboration to increase and 
diversify world supply is crucial. By the year 2015, the 
world's energy consumption is expected to be 48 percent higher 
than it was in 1995. As much as we look at renewables and other 
sources of energy, we are all going to need more oil.
    The intense competition for scarce energy resources makes 
it important for us to cooperate internationally to meet the 
world's growing demand for oil through stable, market-driven 
means. Under Secretary Richardson's leadership, the Department 
of Energy has taken a number of steps to strengthen domestic 
production and improve America's energy security for the long 
term.
    We have been working to diversify the supply of oil for the 
United States, so we are not dependent on any one region. We 
have made some major efforts in Latin America, Africa, East 
Asia and the Middle East, but we have also spent quite a bit of 
time in the Caspian. And we are doing this because it is 
important both to our national and to our economic security 
interests.
    One question that is fair to ask is how important the 
Caspian is as a source of oil and gas. And, Mr. Chairman, you 
have given the numbers that I was going to rely on, so I will 
not spend a lot of time going over them. But the estimates are 
that regional oil and gas reserves, more or less, are on the 
order of magnitude of the North Sea. The proven reserves are, 
as you stated, between 16 billion and 32 billion barrels. But 
it is possible that there is up to 186 billion additional 
barrels, which is about a quarter of the size of the Middle 
East's reserves. And those remain to be discovered, and we are 
hopeful, any day now, to have some good news, for example, 
offshore in Kazakhstan.
    How much the region actually produces and when it reaches 
peak production depends on a number of factors. And there is no 
question that the operating environment in the Caspian is 
challenging. The region lacks supporting industries and 
infrastructure, and there is a shortage of drilling rigs. If 
investments continue in the region at the current pace, and if 
there are sufficient export outlets, then our Energy 
Information Agency's high scenario projects annual oil 
production to reach 4.2 million barrels a day by 2010. Their 
low scenario, which assumes some project delays, looks at about 
2.5 million barrels a day by 2010.
    At the high side, these figures mean that, at best, the 
Caspian region could account for about 4.5 percent of total 
world oil supply in 2010. This represents almost half of new 
non-OPEC oil supply. So the development of Caspian energy 
resources at this order of magnitude is quite important.
    The Caspian also represents an important commercial 
opportunity for U.S. companies and for the U.S. economy. Both 
the opportunities and the investments are quite large. Since 
1995, multinational oil companies have entered into 
arrangements to explore and produce in the region, resulting in 
potential capital expenditures of up to $90 billion. To date, 
multinationals have actually spent somewhere between $5 billion 
and $10 billion in developing these projects. And the 
potential, in addition to exploration and production, is 
engineering, construction, rehabilitation and redevelopment of 
onshore oil fields, which is important to a lot of our 
independent producers, feasibility studies, and financing.
    So with this huge investment exposure, planning now for the 
long-term export and distribution of this oil and gas is 
prudent. And in the United States Department of Energy and in 
the administration, we want to both promote and protect those 
investments. And we do this in a number of ways. One is by 
advocacy. And we advocate for U.S. companies to win the 
available commercial opportunities. Our technology is unrivaled 
and our companies use the best environmental practices and 
technologies. Their involvement is going to help ensure that 
development in the Caspian reaches a desirable balance between 
maximizing production and environmental stewardship.
    The other way we try and promote and protect these 
investments is by engaging almost all of the regions' 
governments in policy dialogues to foster an open, transparent 
and inviting investment climate. We talked about diversifying 
the investment of the reserves from hydrocarbons into different 
areas and to maximize the efficiency and safety of their energy 
sectors.
    We recognize that there is an appropriate and, as a 
consequence, an inappropriate role for government in this 
process. And it is important, I would say, to repeat, if John 
was here and had started, but it is worth saying now that our 
Caspian policy focuses on advancing America's strategic and 
policy interests. But we know and will insist that the 
transportation regime we are supporting be commercially 
competitive. Because neither the private sector nor the 
international financing community will move forward unless it 
is.
    So our support of specific pipelines, like Baku-Tblisi-
Ceyhan and the Trans-Caspian Gas Pipeline, is not driven by a 
desire to intervene or interfere or to direct private 
commercial decisions. But it comes from our support for the 
governments in the region, who are either export, transit or 
consuming countries, and their belief, which we agree with, 
that they should secure transportation routes which are not 
dependent on their major commercial competitors. Our support is 
based on the belief that in advancing their interests in this 
case, we advance our own national economic and energy security 
interests.
    I want to talk briefly about Russia and Turkey. On Russia, 
it is important to recognize that Russia has had a long and 
important role in Central Asia and in the Caspian. They are 
still the largest trading partner for each of the nations in 
the Caspian, and they are a littoral state of the Caspian Sea. 
Right now, they also have the principal transportation routes 
for oil and gas out of the region.
    In 2001, Kazakhstani exports are expected to begin flowing 
through the Caspian Pipeline Consortium to the Russian Black 
Sea port of Novorossiysk. CPC, as that line is called, includes 
both U.S. and Russian companies, and will be an important new 
pipeline system, and we are very supportive of it. The United 
States has always viewed Russia as an important partner in the 
development of oil and gas in the Caspian, and we have 
encouraged Russia to participate in the development of multiple 
transport routes from the region. They will continue to be an 
important partner.
    With respect to Turkey, it is important to say that we want 
to help Turkey as an ally in strengthening its energy security 
and meeting its development goals. We also share their 
environmental concerns about the potential increase in traffic 
through the Bosporus. We do not want to see the Bosporus become 
a potential choke point for a significant share of the world's 
oil supplies, which not only heightens environmental concerns 
but could possibly impede the development of Caspian energy. 
One of the strengths of the Baku-Tblisi-Ceyhan route that we 
support is that it would provide an alternative to increased 
flows of oil through the Bosporus.
    Development of natural gas pipelines is also important to 
the countries in the region. Turkey currently has a gas 
shortage and plans to increase its gas imports more than 
fivefold by 2010. Potential alternatives to reliance on Russia 
or Iran include purchases of gas from Turkmenistan and 
Azerbaijan, and export of Caspian gas to other European 
markets.
    The U.S. Government and Secretary Richardson have spent a 
lot of time and effort in this region, because it is important 
to our interests. The Secretary has traveled to Caspian 
capitals three times, most recently last November, when he 
accompanied President Clinton to take part in signing 
agreements on Baku-Tblisi-Ceyhan and the Trans-Caspian Gas 
Pipeline. In the last year, Ambassador Wolf and I have probably 
had more shoshlik than we need to last us a lifetime. But we 
are seeing results.
    We welcome an ongoing dialog with the Congress on Caspian 
energy development, and we really appreciate the opportunity to 
bring the committee up to date on the progress we have made so 
far. We have not had one of these hearings in a while, and we 
have made some progress and we are a little proud of how well 
we have done.
    We followed with interest the numerous congressional 
delegations that have traveled to the region, and we look 
forward to working with you on this important issue. Thank you.
    [The prepared statement of Mr. Goldwyn follows:]

              Prepared Statement of Hon. David L. Goldwyn

    Mr. Chairman and Members of the Subcommittee:
    I am pleased to appear before you today. I am also pleased to 
appear on this panel with Amb. John Wolf, with whom our Department 
works very closely on issues related to Caspian energy development. 
Amb. Wolf has outlined the Administration's Caspian policy and 
presented an up-to-date status report of the specific pipeline 
projects. Thank you for giving me the opportunity to address U.S. 
Caspian policy in an energy security, energy diversity and energy 
policy context.

                  U.S. ENERGY INTERESTS IN THE CASPIAN

    In support of the Administration's overall policy of promoting 
Caspian energy production and exports, the Department of Energy has 
pursued the following broad objectives:

   Ensuring global energy security in a way that adequately 
        addresses the strategic and economic interests of the United 
        States as well as those of our allies and regional partners;

   Promote the economic development of the countries in the 
        region;

   Promoting energy sector reform in the Caspian countries to 
        attract foreign investment, thereby fostering regional 
        prosperity and stability;

   Supporting U.S. companies in their efforts to speed 
        development of the region's energy resources;

   Fostering viable and reliable alternatives for energy 
        export; and

   Ensuring energy development occurs in an environmentally 
        responsible manner.

    U.S. policy in the Caspian is both supported by and embodied in the 
Administration's National energy strategy which establishes clear, 
measurable objectives to help ensure that Americans will have 
affordable, clean and secure energy supplies into the 21st century. The 
goals of our energy strategy are to: (1) improve the efficiency of the 
overall energy system; (2) ensure against energy supply disruptions; 
(3) promote energy production and use in ways that respect our health 
and environmental values; (4) expand future energy choices, and (5) 
seek international cooperation of global energy issues.
    Energy policy in the Caspian region specifically addresses these 
goals. Our Caspian policy reflects our view that the development of 
diverse, stable and reliable sources of energy is important to our 
national security and to the global economy. We can help ensure against 
national or international supply disruptions by diversifying sources of 
supply.
    International cooperation and collaboration to increase and 
diversify world supply is crucial. The Energy Information 
Administration (EIA) expects world oil consumption to grow by an 
average annual rate of nearly two percent, reaching almost 84 million 
barrels in 2005 and over 103 million barrels a day in the year 2015. By 
the year 2015, the world's energy consumption is expected to be 48 
percent higher than it was in 1995. The intense competition for scarce 
energy resources dictates the need for high levels of international 
cooperation to meet the world's energy demands through stable, market-
driven means.
    Under Secretary Richardson's leadership, we have taken several 
steps to strengthen domestic production and improve America's energy 
security for the long term. We have also been working to diversify 
world oil supplies so we're not dependent exclusively on any one 
region. Our efforts have focused on maintaining strong relationships 
with the major oil and gas producing nations, and encouraging their 
continued movement toward open markets, privatization and regulatory 
reform; promoting the development of new sources of supply and the 
infrastructure to support them--in the Caspian, in Africa and in Latin 
America; and promoting regional integration and infrastructure 
linkages.
    There's concrete evidence that this approach is working. Since 
1974, U.S. petroleum consumption has increased 16.4% while the economy 
has grown nearly 110%. Our top supplier of oil varies from week to week 
among Canada, Venezuela, Saudi Arabia and Mexico. We are less dependent 
on OPEC oil, and last year imported crude oil from 40 different 
countries.

            HOW IMPORTANT OF A RESOURCE BASE IS THE CASPIAN?

    Moving Caspian energy supplies into the global market figures 
prominently in our national security equation. While estimates of the 
size of regional oil and gas reserves vary widely, most observers 
consider that its resources will be on the same order of magnitude as 
those of the North Sea. Proven reserves in the Caspian region are 
estimated at 16 to 32 billion barrels of oil, which are comparable to 
North Sea reserves. It is possible that 186 billion additional barrels, 
roughly equivalent to more than a quarter of the Middle East's 
reserves, remain to be discovered.
    We believe developing these resources and facilitating their 
delivery to world markets will help make energy markets more 
competitive, transparent and market-sensitive, three prerequisites of 
an efficient and smoothly functioning world energy sector.
    How much the Caspian region actually produces and when it reaches 
peak production depends upon a number of factors. For illustrative 
purposes, it took 25 years for oil production in the North Sea to reach 
6 million barrels per day under favorable circumstances. In the Caspian 
region, circumstances are less favorable. The region lacks supporting 
industries and infrastructure, and there is a shortage of drilling 
rigs. If investments continue in the Caspian region at the current 
pace, and if sufficient export outlets are developed, the Energy 
Information Agency's (EIA) ``high'' non-OPEC supply case scenario 
projects annual oil production to reach 4.2 million barrels a day by 
2010. In the ``low'' non-OPEC supply case scenario, which assumes some 
project delays, oil production would reach 2.5 million b/d by 2010. 
These figures mean that at best the Caspian region will account for 
about 4.5% of total world oil supply in 2010. Nevertheless, this 
represents almost one-half of new non-OPEC supply. By way of 
comparison, in recent years Middle East-OPEC has supplied over 30% of 
total world oil consumption, and could supply 40% by 2020. The Caspian 
region will never replace the Middle East as a primary source of 
supply, but it will limit the extent of the growth of world oil and gas 
dependence on the Middle East. Thus, development of Caspian energy 
resources at the margin will play an important role.

      ENSURING A COMMERCIAL STAKE AND SUPPORTING U.S. INVESTMENTS

    We continue to support worldwide trade and investments by U.S. 
energy companies; such investments are key to unlocking Caspian energy 
resources and will have a corresponding benefit of promoting regional 
stability and prosperity, as well as contributing to our nation's 
economy. U.S. technology is unrivaled and our companies employ the 
world's highest environmental protection practices and technologies. 
Their involvement will help ensure that development in the Caspian 
region achieves a desirable balance between maximizing production and 
environmental stewardship.
    A fundamental thrust of our policy also relates to commerciality. 
That is, while we recognize the influence regional politics will play 
on the development of export routes, we have always maintained that 
commercial considerations first and foremost will determine the 
outcome. These massive infrastructure projects must be commercially 
competitive before the private sector and the international community 
will move forward. Our support of specific pipelines such as the Baku-
Tbilisi-Ceyhan oil pipeline and trans-Caspian gas pipeline is not 
driven by a desire to intervene in private, commercial decisions. 
Rather, it derives from our belief that it is not in the commercial 
interests of companies operating in the Caspian states--nor in the 
strategic interest of the host states--to rely on a single, major 
competitor for transit rights. Since 1995, multinational oil companies 
have entered into joint arrangements to explore and produce the Caspian 
region resources, resulting in potential capital expenditures of up to 
$90 billion. To date, multinationals have actually spent anywhere from 
$5 billion to $10 billion in developing these projects. To protect 
these investments, we must take a sensible, long-term view of the 
region's development, oil demand, and price trends in the oil market. 
Many (actually most) of the U.S. major oil and gas firms and 
engineering and construction firms have invested large sums of capital 
in huge offshore projects in the Caspian region. There will, also be 
increased opportunities for American independents to invest in 
rehabilitating and redeveloping onshore oilfields. Feasibility studies, 
engineering, design, construction, and financing combine to make a 
protracted process. With this huge investment exposure, planning now 
for long-term export and domestic distribution of the region's oil and 
gas is only prudent. That's one reason we are so aggressive in urging 
these countries to forge ahead now on infrastructure development in 
order to plan for the future.

         FOSTERING REGIONAL COOPERATION AND ENERGY DEVELOPMENT

    The development of multiple pipelines and diversified 
infrastructure networks to transport Caspian oil and gas resources will 
have the additional benefit of fostering the regional cooperation 
needed for peace and stability. Construction of oil and gas pipelines 
in an ``east-west energy corridor'' will serve to bind all of the 
countries together. The development of the region's energy resources 
creates opportunities for these countries to cooperate in new ways for 
the benefit of all. The speed and depth of that regional cooperation 
will have a direct effect upon the future economic prosperity of the 
individual countries.

                             ROLE OF RUSSIA

    Russia has had a long and important role in Central Asia and the 
Caspian. Russia remains an important influence in the area since Russia 
is still the largest trading partner for each nation, Russia is a 
littoral state of the Caspian Sea, and Russia has the principal 
transportation routes for oil and gas out of the region.
    In fact, until the recent opening of an ``early oil'' pipeline from 
Baku, Azerbaijan to Supsa, Georgia, Russia provided the only pipeline 
transportation out of the region and most of the rail transportation 
from the region. Kazakhstan and Turkmenistan currently ship oil through 
Russia, and Azerbaijan is expected to resume shipments through Russia 
soon. Moreover, in 2001, Kazakhstani exports are expected to begin 
flowing through the Caspian Pipeline Consortium (or CPC) pipeline to 
the Russian Black Sea port of Novorossiysk. CPC, which includes both 
U.S. and Russian companies, will be an important new pipeline system. 
We strongly support it.
    Most recently, Lukoil, the largest Russian oil company, has found a 
significant deposit of oil and gas in the Russian sector of the 
Caspian. As more wells are drilled over the next couple of years, the 
extent of this discovery will become clearer. If commercially viable, 
this oil could be used either in local refineries, or shipped in the 
CPC, since Lukoil has a small interest in the CPC.
    The U.S. always has viewed Russia as an important partner in the 
development of oil and gas resources in the Caspian and has encouraged 
Russia to participate in the development of multiple transport routes 
from the region. As a littoral state, Russia has made its voice known 
regarding how resources should be developed in the Caspian Sea in an 
environmentally sound manner. Since the Caspian is an important fishery 
for Russia, use of the Caspian for transportation either across it or 
under it, can have an economic impact on Russia. As a result, its views 
are important to the overall development of the hydrocarbon resources 
around or in the Caspian Sea. We look forward to the continuation of 
our work with the new government in Russia to develop economic, 
environmentally sound transportation alternatives through and from the 
Caspian region.

                             ROLE OF TURKEY

    We want to assist our European ally, Turkey, in strengthening its 
energy security and meet its development goals. Just two weeks ago, I 
had the privilege of leading the 8th session of U.S.-Turkey energy 
consultations. This interagency effort was established to discuss 
Turkey's strategy for moving forward with development of its energy 
sector, meeting the growing demand for electricity, diversifying its 
gas supplies, developing alternative fuels to diversify energy sources, 
and identifying further steps for development and construction of oil 
and gas pipelines through Turkey for Caspian resources.
    In this regard, we share Turkey's environmental concerns about the 
potential increase in traffic through the Bosporus. Further, we do not 
want to see the Bosporus become a potential choke point for a 
significant share of the world's oil supplies, which would heighten 
environmental concerns and possibly impede the development of Caspian 
energy. One of the strengths of the Baku-Tbilisi-Ceyhan route we 
support is that it would provide an alternative to increased flows of 
oil through the Bosporus.
    Development of natural gas pipelines is also important to the 
countries in the region. Turkey currently has gas shortages and plans 
to increase its gas imports more than five-fold by 2010. Potential 
alternatives to reliance on Russia or Iran include purchases of gas 
from Turkmenistan and Azerbaijan.

         INTENSIFYING OUR ENGAGEMENT WITH REGIONAL GOVERNMENTS

    One of the more visible ways we are implementing our Caspian policy 
involves the engagement of Cabinet-level and senior-level visits to the 
region, and the establishment of formal government-to-government 
dialogues. For example, Secretary Richardson has traveled to Caspian 
capitols three times, most recently last November with President 
Clinton to take part in signing agreements on Baku-Tbilisi-Ceyhan and 
the trans-Caspian Gas Pipeline.
    As the countries in the region develop their political systems, new 
governmental structures and new legal frameworks, they will constantly 
struggle to achieve sometimes conflicting goals. They will have to 
formulate and implement domestic policies that create an investment 
friendly environment. This is not always an easy task, because as you 
are all keenly aware, there is sometimes tension between political and 
economic realities. As we establish a sound basis for trust with these 
countries, it will be our role to share our best advice based on our 
own experiences with energy development, to work with them to identify 
international resources, and to work in partnership with U.S. industry 
to resolve problems that will inevitably arise.
    At the Department of Energy, we have established a dialogue with 
the countries of the region on issues such as climate change, energy 
efficiency and conservation, and environmentally sustainable energy 
development. We are working with them on policy issues such as energy 
sector liberalization and energy regulation, and establishing policies 
that support balance in energy development. And we are looking for new 
areas where we can be helpful, including developing a regional system 
for oil spill response. This cooperation is an integral part of our 
efforts to establish a positive relationship with the countries of the 
region that will contribute to regional development, political 
stability, and healthy and growing trade linkages.
    The Caspian countries continue to reach out to the U.S. and to 
foreign investment. We are working to maintain the momentum behind our 
support for these governments and the private sector. We welcome an 
ongoing dialogue with Congress on Caspian energy development. We have 
followed with interest the numerous Congressional delegations that have 
traveled to the region. We look forward to working with you in meeting 
the many challenges ahead.

    Senator Hagel. Mr. Secretary, thank you.
    We have been joined by the ranking Republican member and 
former chairman of this committee, Senator Lugar. Welcome, sir. 
If you would like to offer a statement and go right into your 
questions.
    Senator Lugar. I have a statement. I will just follow you.
    Senator Hagel. Thank you. You probably know, Senator, that 
we are scheduled for a vote around 2:30, and we will see how we 
can maybe shuttle that and we will go from there. Our other 
first panel witness, Ambassador Wolf, has been delayed, so we 
are going to just go forward with Secretary Goldwyn.
    Mr. Secretary, you mentioned in your testimony that any day 
now you were anticipating some good news from the Kazakhstan 
region of the Caspian. What did you mean by that?
    Mr. Goldwyn. There is a consortium, OKOIC is the acronym 
for it, which is drilling for oil offshore of Kazakhstan. The 
expectation is that this will be an enormous oil find. But as 
you mentioned in your introduction, Mr. Chairman, some of the 
exploration in the Caspian has turned up gas rather than turned 
up oil. And we are kind of hoping this one is going to turn up 
oil.
    The signs are good. I think there has been some drilling 
done, and the results are expected very soon. So we are hoping 
the results will be made public and that they will indicate 
that there are significant oil structures. That will not be 
indispensable, but it will certainly be a helpful piece of news 
with respect to transportation of Caspian oil.
    Senator Hagel. How much American energy firm investment do 
you know of that we have in that part of the Caspian in the 
Kazakhstani area?
    Mr. Goldwyn. In Kazakhstan specifically, I would have to 
submit something to break that out to you. It is sort of $5 
billion to $10 billion in the Caspian overall. A big piece of 
that is in Azerbaijan. But Chevron, for example, is a major 
partner in CPC, and so they and other U.S. companies that are 
in that consortium--I believe Mobil is in that consortium 
also--have invested quite a bit of money in exploration and 
production and also in construction of the CPC pipeline.
    Senator Hagel. Thank you. You know that the Director of the 
Central Intelligence Agency, George Tenet, was in the Caspian 
region I think last month. What security issues are now part of 
the Energy Department's working through and dealings as we 
start to move into the next phase of anticipating pipelines 
based on anticipation of what the results will be on drilling?
    I have not read Mr. Tenet's report, if he has made one. I 
know of the concerns he has expressed. Could you take the 
security dynamic of that and maybe frame that up for us in 
regard to the Department of Energy on this issue?
    Mr. Goldwyn. Sure, I would be happy to, Mr. Chairman.
    We are concerned about security at a couple of levels. 
Obviously pipelines, the pipeline across Russia and the 
proposed pipeline which would transit Azerbaijan, Georgia and 
Turkey, like any pipeline, will have security concerns. They 
need to be protected, and we look first at the governments to 
fulfill their responsibilities to provide that protection.
    We have seen in the last year, with respect to Chechnya, 
that these pipelines can be the subject of attack, as we have 
seen all over the world. They are favorite targets for 
terrorists, for guerrillas and for other people who want to get 
the attention of either the host government or the U.S. 
Government in a big hurry. And so we are concerned about that.
    Part of the theory behind multiple east-west pipelines is 
to provide alternatives in the event that any one pipeline is 
interrupted. And that provides a security system. I think, with 
respect to the proposed pipelines, we are not yet at the stage 
of talking about security arrangements, but we have talked to 
each of the governments, and they have talked to each other as 
they negotiate the intergovernmental agreements and the host 
government agreements, a number of which contain their 
obligations to provide security to these pipelines, about the 
importance of those issues.
    And as we get into the financing for these pipelines, OPIC 
will be having discussions with them, as an insurer of these 
pipelines, to make sure we have appropriate assurances that 
security will be provided.
    Senator Hagel. Do those security discussions include 
Russia?
    Mr. Goldwyn. They do with respect to CPC. I think we are 
sort of well along. The agreements are signed and being 
implemented with Russia. We talk to Russia in our bilateral 
dialog, through now the Gore-Putin Commission, about a host of 
energy issues, trade and investment, but also security.
    I think, with respect to the CPC line, it is just under 
construction now and there has not been a problem that I am 
aware of that we have been asked to engage on. But the subject 
of the interruption of the northern line has been part of our 
discussions, yes, sir.
    Senator Hagel. In your testimony, of course you talked 
about the role of Russia. Where does the Blue Stream gas 
pipeline fit into your calculations?
    Mr. Goldwyn. Blue Stream is one of several competitors for 
the Turkish market. We support multiple lines, but our belief 
is that America's interests lie in ensuring that there is an 
east-west gas transportation route. Russia has I think now 
somewhere near 70 percent of the Turkish market. And President 
Demirel has said that he finds it in Turkey's interest to 
diversify their sources of supply.
    Blue Stream started before the Trans-Caspian Gas Pipeline 
did, and it is farther ahead. From what I read in the press, 
they are close to reaching financing, but we have been reading 
that in the press for about 9 months. And every couple of 
months they are just around the corner. But it seems to be 
making good progress.
    They are an economic competitor. Russia is an economic 
competitor both to Turkmenistan and Azerbaijan and also to Iran 
and to Egypt and a number of other countries that want to 
supply gas to the Turkish market. So, from a U.S. Government 
perspective, we keep an eye on that. And we are using our 
efforts to make sure that there is another horse in the race 
and that it is unfettered in its ability to compete with Blue 
Stream. We do not oppose Blue Stream. We do not try and set 
roadblocks in its way. We are trying to help the governments 
that are going from east to west, to enable them to have a 
competitor for that market.
    It seems to be very important to Turkey, both because they 
have signed gas purchase agreements with Turkmenistan and 
because they have provided a number of times, and publicly and 
with the President and in the Ankara Declaration and the 
Istanbul Declaration, assurance that they view creation of this 
east-west line as a national priority.
    Senator Hagel. In order to ensure that we get all Senators 
time here on questions before we start to rotate on the votes, 
let me introduce the ranking Democrat on our subcommittee, 
Senator Sarbanes.
    Senator Sarbanes. Let Senator Lugar go ahead.
    Senator Hagel. All right. Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman and 
Senator Sarbanes.
    Secretary Goldwyn, in some of the testimony that will 
follow there are suggestions that although the east-west idea 
is, best in terms of strategic interests of our country and our 
friends, that from a commercial standpoint, it may not work 
nearly so well. Stated another way, commercial interests have 
not driven this project; essentially political interests have. 
And that is an important set of principles. The dilemma, 
however, is that it is not clear that there are proven 
resources that will support the Ceyhan pipeline, over the 
course of time, although that may come in time.
    Beyond that, sometimes commercial interests have a feeling 
that improvement of relations with Iran might change the whole 
business. Given the political developments in Iran if we wait 
around long enough, that may be the way to go. So there is no 
need to hurry.
    Since I visited the area--and I have not been there since 
the summer of 1999--this project has gone through many 
permutations. You have seen many more variations given your 
travels, including representations from Turkey and others who 
have come to Washington, and suggested they would be willing to 
bear more of the burden or that the cost would be less than we 
have been led to believe.
    In an overall view of this situation, what is the 
probability that the parties involved, governmental or private, 
will sign all of these agreements, and that they will start 
construction? Or is this a project that is still a bridge too 
far, and we are talking about a matter of years down the trail, 
rather than something that you may see in the next 12- or 18-
month period?
    Mr. Goldwyn. Senator, let me try and answer that in a 
couple of ways. First, I think the fair answer to your question 
is that the commerciality of this project is in the process of 
being tested right now.
    Senator Lugar. Being tested in what way?
    Mr. Goldwyn. In the last year, we have not only had renewed 
commitments by the governments of the region--which, by the 
way, have put their assets where their mouth is, so to speak, 
because they are partners in these ventures, and their income 
will derive from the successful transportation of this. So it 
is not in their interest at all to go for a politically 
expedient but commercially unviable transportation route 
because they will not earn the reserves which they need. And in 
these countries, as dependent as they are for oil, they need 
those reserves.
    So they have not only made political commitments, but they 
have also, Azerbaijan and Turkey, have signed intergovernmental 
agreements committing themselves on the route and committing 
themselves on a number of important commitments on how this 
will be done. This week, Georgia is in town because Georgia is 
an important transit country, to settle the remaining issues. 
And we have every confidence that we will settle all those 
remaining issues, so that we can move from the next phase. And 
the next phase is to invite the sponsors to participate and 
then to look at financing.
    So we are moving ahead on a commercial pace. Is there 
enough oil to fill this line? I think our belief is that there 
is. The question is, is there is enough oil produced in the 
region? And by the time this line would come on board, there 
will be more oil as more of the ventures like Azeri-Chiraz-
Ganeshli and the AIOC consortium begin to produce oil.
    There will be enough oil in the region to fill the line. 
The question will be, will the commercial provisions of the 
line be sufficiently attractive to attract that oil to ship 
through it, or will the variety of ways in which oil is 
transported now, by barge, by rail, by smaller pipelines, be 
more economically attractive? And it is incumbent on the 
governments to put together a package that is going to draw 
that oil or this line will not happen. And we are confident 
that they can.
    As you inferred, Turkey agreed to provide a cap on the cost 
of construction, which was indispensable in reaching these 
agreements. So the governments have stepped up and said, we are 
putting our money down on the table and we will take a haircut 
to meet our security interests. And now what will happen, once 
the rest of the host government and intergovernmental 
agreements are signed, there will be a testing in the 
marketplace.
    And that testing will first be a meeting of sponsors, where 
everyone who has an interest or could have an interest in the 
Caspian will be invited to show up, be briefed on what these 
agreements are, and to commit to contributing toward design and 
construction. On a parallel track we will be looking at how 
this line is going to be financed, who will buy what share, 
what will their rate of return be, how will the line be 
managed.
    And then there will be another testing, which will come 
maybe a year out, where they will be able to say to potential 
shippers, this is the deal, this is how much it is going to 
cost you to ship your oil. These are the guarantees that you 
are going to have if something goes wrong. And either they will 
make that attractive enough and people will commit to ship 
their oil or they will not and the project will fail.
    But I think when you have the governments committed, you 
have companies like BP Amoco, which you will hear from later on 
today, have not only their chairman say that this is a 
strategic priority, but be leading the consortium to do this, 
they are not in the business of wasting their people or their 
money either. So I think there is a belief that this can be 
done. But it is not a done deal now. And what we will have to 
do over the next year is to make this attractive.
    The United States, through Eximbank and OPIC and TDA, will 
do its part. But we are not going to bankroll this line either. 
It is going to have to be commercial. And we believe, with the 
companies, that this line is commercially viable and that if we 
work hard, through these steps that I have outlined, that when 
it comes time to have shippers commit their oil, that they will 
line up and we will fill this line and it will be a competitor.
    Senator Lugar. Thank you.
    Thank you, Mr. Chairman.
    Senator Hagel. Senator Sarbanes.
    Senator Sarbanes. The first question I would like to put to 
you, Secretary Goldwyn, is do you expect a U.S. Government 
financial undertaking or commitment to develop these 
transportation corridors?
    Mr. Goldwyn. Only Eximbank, OPIC and TDA. There are U.S. 
products that are going to be used in there, and they meet the 
standards for Eximbank financing. Eximbank has indicated and in 
fact created a Caspian financing center in Istanbul to promoted 
U.S. exports and provide traditional Eximbank financing.
    OPIC, it will have to meet its requirements. No one is 
talking about bending the rules. But they have looked closely 
at this project and is ready to step forward. And TDA has 
already committed substantial sums and is willing to commit 
more to enable this project to be completed. But that is the 
limit of the U.S. Government financing which the administration 
entertains at this time.
    Senator Sarbanes [presiding]. We are going to have a vote 
here soon and I think we are going to probably have to adjourn 
and then resume. I see that we have been joined by Tom Wolf. 
But I will just address my questions to you, because presumably 
we can then excuse you and we will resume with Mr. Wolf when we 
come back from the vote.
    Is there a problem in pushing forth as many pipelines as 
we, the U.S., seem to be pushing? How do we sort all of that 
out? Presumably the finances vary considerably depending on how 
many different projects we are pushing. Because I assume that 
some undercut others or, in effect, compete with others. Is 
that the case or not?
    Mr. Goldwyn. Not exactly, Senator. And since we do not 
lead--while we support east-west lines and multiple lines, it 
is precisely so that we do not put ourselves in place of the 
companies or the countries by picking routes. We are driven by 
the oil or the gas, as the case may be. So Kazakhstan had huge 
oil. They needed an export route. And CPC, the line across 
Russia, was the result.
    AIOC, the consortium we talked about earlier, was obliged, 
under its production share agreement, to select a main export 
pipeline route. And the Government of Azerbaijan and the other 
governments in that region urged that main export pipeline to 
be a line that would go from Baku, through Tblisi, to Ceyhan, 
both to deal with the Bosporus problem and also as the best 
route.
    That was a long and difficult negotiation, and we had 
interest in how it came out, and the governments had interest 
in how it came out. But ultimately the companies had to agree, 
led by the AIOC consortium, on what their route would be. So 
those are the only oil pipelines that are on the table right 
now, and we support east-west. We are not proposing a third one 
because we would like to have three. So we are driven by the 
oil.
    With respect to gas, east-west is also what we are 
supporting. And the volume of that line and the gas that goes 
into it is driven by the commercial factors and by the 
countries, in this case, Turkmenistan and Azerbaijan, which 
have gas to transport. But we are not shopping lines which are 
disconnected from either the sources of the hydrocarbons or the 
commercial need to have an export route.
    Senator Sarbanes. And it is very clear to all the parties 
involved that there cannot be any expectation of a U.S. 
Government financial involvement other than the agencies you 
mentioned, and especially if they get into difficulty in 
carrying the projects through; is that correct?
    Mr. Goldwyn. Yes, it is crystal clear, Senator, because, as 
you can imagine, we have been asked more than once. The 
question has come up and we have hit many bumps in the road. 
And it is an important interest. That is why we have maintained 
publicly, constantly, and every opportunity we have, that it 
has to be commercially viable, because there is no support, no 
proposal----
    Senator Sarbanes. By commercially viable, you mean without 
any U.S. Government financial involvement; is that correct?
    Mr. Goldwyn. That is correct. They should go to the 
marketplace. That is right.
    Senator Sarbanes. Now, in the thinking of the Department of 
Energy, how much does the lack of transparency and the 
difficulty of governance and indeed the high factor of 
corruption which exists in a number of these countries, how 
relevant a concern is that? And how relevant a concern are the 
pretty dismal human rights and democracy performances in these 
countries? Are you simply saying, well, look, those are 
important but we are just putting them to one side because we 
have got to do this energy project? Or are they highly relevant 
considerations? And if so, what is it that you are doing about 
them?
    Mr. Goldwyn. It is a relevant concern. And it is a relevant 
fact that in many places, not just in the Caspian, where we 
rely on production of oil, there are these kinds of concerns. 
We deal with them in a couple of ways. With respect to 
transparency and corruption and general business practices, we 
have policy dialogues with most of the region's governments, 
where--I mean the governments are probably here, but not too 
fine a point on it--where we complain to them about the 
problems. But we also talk to them about policy reforms and the 
connection between open, transparent regimes and attracting 
investment.
    They want the investment; they have to provide an 
environment where people can trust that they are going to get 
their money back and where they are not going to have to pay 
appropriate funds in order to get the deal that they want. So 
we talk to each of the governments. We do it bilaterally. We do 
it through a number of binational commissions. We have with 
Russia. We have with Kazakhstan. But we talk to all the 
governments about it.
    With respect to human rights, it is a concern. And 
environment is also a concern. The State Department leads the 
dialog on human rights. But the treatment of workers, the 
treatment of people in these countries is a factor in the U.S. 
Government's willingness to engage, in the international 
financial community's willingness to engage, and also in the 
security and comfort that U.S. companies have in operating. So 
we do pay attention to that, Senator.
    Senator Sarbanes. We will pursue these other items with Mr. 
Wolf and the State Department since you have put at least some 
of them in their court, so to speak.
    With that, we are going to adjourn the hearing in order to 
enable the Members to vote. Senator Hagel will be back shortly, 
and I think we will be prepared to resume.
    Mr. Goldwyn. Senator, I appreciate the committee's 
indulgence for my needs today. I will stay as long as I can, 
until it is time for me to catch my car. I will answer as many 
questions as I can until then.
    Senator Sarbanes. We are not quite clear whether Senator 
Hagel wants to put further questions to you or not, so you 
better hang on then. As far as I am concerned you could leave, 
but I think until we ascertain that, which should be shortly, 
you should stay put.
    Mr. Goldwyn. I would be happy to wait for the chairman.
    Senator Sarbanes. We will recess the hearing for a brief 
period of time, subject to the call of the chair. Thank you 
very much.
    Mr. Goldwyn. Thank you, Senator.
    [Recess.]
    Senator Hagel [presiding]. Ladies and gentlemen, take your 
seats. Thank you.
    Ambassador Wolf, welcome.
    Ambassador Wolf. Thank you, Senator.
    Senator Hagel. We began, as you can see, without you. We 
knew that you would find that the most expeditious use of 
government time. I know you are concerned about the taxpayers 
getting their money's worth. And we praised you, we lauded you, 
we said very nice things about you. And Secretary Goldwyn said 
that it was acceptable.
    With that, Mr. Secretary, you need to go before 3 o'clock, 
is that correct?
    Mr. Goldwyn. About 3 o'clock.
    Senator Hagel. Whenever you need to go, just dart out of 
here. We are grateful to have you come up. What we would do, 
since we have had an opportunity to visit with you a little 
bit, is take the testimony of Ambassador Wolf and then maybe, 
with the time remaining while you can stay with us, maybe have 
the two of you answer some questions jointly. So thank you.
    Ambassador Wolf, we are pleased you are here. Please 
proceed.

    STATEMENT OF HON. JOHN S. WOLF, SPECIAL ADVISOR TO THE 
   PRESIDENT AND SECRETARY OF STATE FOR CASPIAN BASIN ENERGY 
                   DIPLOMACY, WASHINGTON, DC

    Ambassador Wolf. Thank you, Mr. Chairman.
    Again, I apologize for being late. We were in the basement 
of the Courtyard Marriott, negotiating with the Turks, 
Georgians and Azeris and technology is one thing but it does 
not reach down into those levels. So we did not hear the change 
from 2:30 to 2.
    Senator Hagel. A successful negotiation I hope?
    Ambassador Wolf. We made an enormous amount of progress, I 
think. Thank you.
    Senator Hagel. Good.
    Ambassador Wolf. And we have a seamless team. So I am sure 
that Mr. Goldwyn said all the things that I would have said, 
and I subscribe to them all, I am sure.
    If I might, Senator, I had a brief oral statement and a 
just slightly longer one that I would submit for the record. 
But I am pleased to have a chance to testify before you today 
on the developments in the Caspian. We have made enormous 
progress in the months since my predecessor last briefed 
members of this committee. The President's participation in the 
November summit meeting in Istanbul concerning the part that 
they dealt with on Caspian energy underscored the continuing 
U.S. commitment to these projects and their importance to the 
United States and to our energy security interests.
    But, that said, what is even more important than our 
participation is the message that the Istanbul Summit sent 
concerning the commitment of the region's governments. We have 
four objectives: strengthening the independence and prosperity 
of the new states of the Caspian region; bolstering U.S. energy 
security by ensuring the free flow of new sources of 
hydrocarbons to world markets unfettered by regional 
competitors and geographic choke points. The third one is 
reestablishing economic linkages among the states of the 
Caspian. And the fourth is enhancing business opportunities. 
And we are making progress on all.
    Some have argued that the United States policy is an 
attempt to impose ``Made in America'' solutions. We are not. 
This is not a great game. These energy ideas are part of the 
east-west energy corridor concept that was born in Tblisi, in 
Ankara and in Baku, not in Washington. And President after 
President in the region has said repeatedly that the east-west 
corridor is the cornerstone of his government's foreign policy. 
Our role is that of facilitator.
    We are encouraging partnerships among countries and 
companies, but the task of the actual negotiations is theirs. 
That is why I can be up here and they can be there negotiating 
in our absence, because they make the decisions. We are 
supporting five pipelines as part of our multiple pipeline 
strategy:
    The Caspian Pipeline Consortium pipeline, construction is 
underway; the Baku-Novorossiysk early oil pipeline is 
operating; the Baku-Supsa pipeline, it is operating; the Baku-
Tblisi-Ceyhan main oil export pipeline, which we hope will 
start in 2004; and the Trans-Caspian Gas Pipeline, which we 
hope will come into operation in 2002.
    Russia was, is and will remain a major player on Caspian 
energy issues. We have a vision of cooperation based on a 
recognition that our interests are largely compatible. We work 
with our counterparts and we have worked in support of the CPC 
pipeline and Baku-Novorossiysk. We are going to continue to try 
to foster that cooperation among United States and Russian 
companies. Russia's security, economic and other interests we 
believe will be better served by having strong cooperative 
neighbors on its borders.
    I think also much has been said about U.S. policy vis-a-vis 
Iran. The President has taken visible steps to recognize 
positive developments there, but we have not changed our policy 
on energy cooperation with Iran. We remain opposed to 
investments in Iran's energy sector and to the construction and 
use of pipelines to, from and through. Regardless, though, of 
our relations with Iran, we will continue to support the east-
west energy corridor--Baku-Tblisi-Ceyhan, Trans-Caspian, among 
others.
    We share the view of the region's governments that the 
east-west corridor strengthens their security, independence and 
cooperation and it is good to tie them into the Western 
democratic nations.
    I would like to take one moment to look at one other issue, 
an important complement to the energy issue. And that is the 
importance of building sustainable institutions, better legal 
frameworks, predictable laws, and balanced economic growth. It 
is important that each of the countries move in that direction 
in order to sustain their stability and to avoid distortions to 
their economic development. We all--governments, private sector 
and international financial institutions--need to help the 
countries to accomplish that task.
    We do some of it through our aid programs, but restrictions 
on the United States' ability to help countries like Azerbaijan 
directly because of Section 907 of the Freedom Support Act do 
impede our ability to foster that kind of economic and 
political institutional development, the kind that Congress so 
often champions.
    On the pipelines, we are making progress. This is 
especially true after President Aliyev's visit to Tblisi, when 
he and President Shevardnadze reached agreement on the level of 
transit fees. Their meeting made an important point, that this 
is not just about national gain but rather the Baku-Tblisi-
Ceyhan is intended to be a regional effort. And that is an 
important part, the cooperating together.
    As well, they made the point, and we continue to make it, 
that this pipeline is designed to ship oil to world markets 
from the entire Caspian, not just from Azerbaijan. So oil 
produced in Kazakhstan will be particularly important to this 
project. And during her upcoming visit to Kazakhstan, Secretary 
Albright will encourage Kazakh participation in Baku-Tblisi-
Ceyhan.
    The hope is to send the main export pipeline agreements to 
parliaments in April. That will open the way for sponsors 
meetings, basic and detailed engineering, and work on financial 
arrangements. And hopefully all of this will lead to an open 
season this summer. The United States will continue to help in 
this process.
    Regarding the Trans-Caspian Gas Pipeline, the situation is 
more complicated. The economic case is easily demonstrated, but 
political differences between Ashgabat and Baku have blocked 
forward movement. We understand the competitive pressures that 
each government faces, but we believe there is a good case for 
why the countries of the region should cooperate, reasons that 
center not only on national self-interest but regional and 
common interests as well.
    From our vantage point, the proposition is straightforward. 
It is time for Turkmenistan and Azerbaijan to clear away the 
impediments. The TCGP, the Trans-Caspian Gas Pipeline 
Consortium, now, finally, has an excellent offer on the table. 
It is not an offer that is going to get any better. There is no 
more room for complacency. There is no more scope for 
manipulation. Delay now puts this project at risk and puts at 
risk the benefits that would accrue to all of the parties, not 
just Turkmenistan and Azerbaijan, but Georgia and Turkey as 
well.
    Mr. Chairman, I see November's decision by the region's 
leaders at Istanbul to sign the packet of agreements on Baku-
Tblisi-Ceyhan and the Trans-Caspian Gas Pipeline as a seminal 
moment. I wish I had the photograph of the signing, because it 
is far more eloquent than I could ever be.
    But the hard work is not over. Indeed, it is only 
beginning. Neither of these pipelines are sure things. But what 
is sure is the promise that these pipelines offer. The 
President summed this up in November by saying: ``Today these 
countries have the freedom, they have the security, and today 
their leaders have shown the vision that will enable this 
ancient crossroads once again to light the world and brighten 
all our futures.''
    It is an enormous vision. It is an enormous undertaking. 
There is an enormous amount of goodwill that has been shown. We 
saw it again today at the meetings that are taking place on 
Rhode Island Avenue. It is very constructive. It represents the 
commitment of the leaders of the region. And it is an effort to 
move this from governments into the marketplace, where the real 
and final decisions will have to be taken.
    Thank you, Mr. Chairman. And I would be glad to answer your 
questions.
    [The prepared statement of Ambassador Wolf follows:]

                Prepared Statement of Hon. John S. Wolf

    I am pleased to have a chance to testify today concerning 
developments on Caspian energy policy. We have made enormous progress 
in the months since my predecessor last briefed this committee. 
President Clinton's participation in last November's Istanbul Summit 
ceremony on Caspian energy underscored the continuing U.S. commitment 
to these projects and their importance to the U.S. and U.S. energy 
security interests. That said, what is even more important is the 
message that the Summit sent concerning the commitment of the region's 
governments.
    You will recall that United States policy on Caspian energy pursues 
four major objectives, which are to:

   Strengthen the independence and prosperity of the new states 
        of the Caspian region;

   Bolster U.S. energy security by ensuring the free flow of 
        new sources of hydrocarbons to world markets, unfettered by 
        regional competitors and geographic choke-points, such as the 
        Bosporus and the Straits of Hormuz;

   Reestablish economic linkages among the new states of the 
        Caspian region to mitigate regional conflicts; and

   Enhance business opportunities for companies from the U.S. 
        and other countries.

    Some have argued that the U.S. is attempting to impose made-in-
America solutions on the region. We are not. This is no repeat of some 
``great game;'' we have no territorial ambitions, and direct U.S. 
economic interests constitute only a fraction of total foreign 
investment. The idea of an east-west energy corridor was born in 
Tbilisi, Ankara and Baku, not in Washington. President after president 
has said repeatedly that the east-west corridor is a cornerstone of his 
government's foreign and economic policies. Several weeks ago, it was 
President Demirel in Ashgabat; prior to that President Aliyev and 
Shevardnadze in Tbilisi.
    The U.S. role is that of facilitator, encouraging all parties to 
conclude the agreements required to ensure these pipelines' commercial 
viability. While we actively encourage the establishment of 
partnerships among countries and companies, the task of negotiating 
commercially viable agreements is the responsibility of the countries 
and companies involved in specific projects.
    It is in this context that the United States has supported five 
specific pipelines, which we believe offer the best mix of projects for 
achieving the four key objectives I outlined above. These projects are:

   The Caspian Pipeline Consortium or CPC Pipeline; 
        construction began last November;

   The Baku-Novorossiysk early oil pipeline; operations began 
        in November 1997;

   The Baku-Supsa early oil pipeline; it became operational 
        last April;

   The Baku-Tbilisi-Ceyhan main export pipeline; starting in 
        2004 it will carry oil produced on both sides of the Caspian 
        from Baku to the Turkish port of Ceyhan on the Mediterranean 
        Sea; and

   The Trans-Caspian Gas Pipeline (or TCGP); in three years, it 
        can carry gas from Turkmenistan and Azerbaijan across Georgia 
        to Turkey.

    Russia was, is, and will remain a major player on Caspian energy 
issues. Our vision of cooperation derives from our belief that our 
interests here are largely compatible. We and our Russian counterparts 
have worked together in support of the CPC and Baku-Novorossiysk early 
oil pipeline projects. We will continue to seek cooperation between 
U.S. and Russian companies on future Caspian energy projects. We also 
have helped and will continue to help the energy producing countries of 
the Caspian region--including Russia--develop the multiple means of 
access to international markets that they each need and desire. We 
believe that Russia's security, economic and other interests will be 
better served by having strong, cooperative neighbors on its border.
    We are delighted by the oil discovery just announced by Lukoil in 
the northern Caspian. Such a discovery, if commercially viable, would 
reinvigorate oil exploration and reassure potential investors that 
there is indeed more oil to be found in the Caspian Sea. As they 
proceed with development of their offshore fields, we hope Lukoil 
officials will consider carefully the commercial benefits of 
participating in Baku-Thiblisi-Ceyhan; it would provide Lukoil with an 
economic and environmentally attractive way of reaching the 
Mediterranean.
    Much has been said about the shifting tide of U.S. policy vis-a-vis 
Iran. Certainly, President Clinton has taken visible steps to recognize 
the positive developments that have taken place in Iran and to give 
impetus to the government-to-government dialogue that we proposed some 
time ago. But we have not changed our policy on energy cooperation with 
Iran. We remain opposed to investment in Iran's energy sector and to 
the construction and use of pipelines to, from, or through Iran. As one 
considers how the bilateral relationship will evolve, it would be wise 
not to underestimate the depth of U.S. concern about Iran's stance on 
the serious issues that still divide us, such as its support for 
terrorism, its active opposition to the Middle East peace process, and 
its efforts to develop weapons of mass destruction.
    Regardless of the status of our relations with Iran, the United 
States will continue its strong support for Baku-Tbilisi-Ceyhan, TCGP, 
and the other pipelines comprising the east-west energy corridor. We 
share the view of the region's governments that east-west pipelines 
strengthen the independence, cooperation and integration of the new 
states of the Caspian and the community of western, democratic nations. 
East-west pipelines enhance their energy security and ours by 
diversifying sources and routes of supply. I understand that some 
energy companies believe their interests would be served by an early 
return to Iran. But, even discounting the difficulty of investment in 
Iran, I wonder why these companies really would want to channel large 
new volumes of their Caspian oil and gas holdings through a region and 
waterway where they are already highly exposed.
    I'd like to take a moment to look at another issue that's an 
important complement to any sustainable energy policy. At independence, 
the regions' governments inherited institutions and legal systems ill-
suited for today's global economy. A mad rush toward exports that 
neglects the need for effective institutions, transparent and 
predictable laws, and balanced economic growth will only undermine that 
country's stability and distort economic development.
    We, and that means not only industrialized nations, but also 
private companies and international financial institutions, need to do 
more to encourage these countries to develop the policies and enact 
public sector reforms that enable them to cope with current austerity, 
and to prepare wisely for the increased revenue flows that will result 
from expanded energy exports. Restrictions on the United States' 
ability to help countries like Azerbaijan directly, because of Section 
907 of the Freedom Support Act, clearly impede our ability to foster 
the kind of economic and political institutional development that this 
Congress so often champions.
    Turning to the pipelines more specifically, I am quite upbeat about 
prospects for the main oil export pipeline (MEP). This is especially 
true after the very productive visit that President Aliyev made to 
Tbilisi in March, when he and President Shevardnadze agreed on the 
level of transit fees that each country will derive from the project. 
Their wisdom and foresight in concluding an agreement that places 
regional cooperation ahead of narrow self-interest helped underscore 
once again that the MEP is a regional pipeline. Those who claim that 
insufficient oil has been discovered in Azerbaijan to justify Baku-
Tbilisi-Ceyhan miss the crucial point: namely, that this pipeline is 
intended to ship oil to world markets from the entire Caspian region 
and not only from Azerbaijan. Oil produced in Kazakhstan will be 
particularly important to this project. During her upcoming visit to 
Kazakhstan, Secretary Albright will explore ways to encourage future 
exports of oil from Kazakhstan via Baku-Tbilisi-Ceyhan.
    Presidents Aliyev and Shevardnadze also committed to send the MEP 
framework agreements to their countries' respective parliaments for 
ratification in April. Meetings here this week are designed to put the 
final touches on the one outstanding document, Georgia's draft contract 
with potential investors. Submission of documents (Intergovernmental 
agreement/Host Government Agreements) to parliaments will open the way 
for a meeting of potential project sponsors shortly thereafter. It is 
these sponsors who will focus on basic and detailed engineering and 
financial arrangements, and hopefully this summer launch an effort to 
gain throughput commitments through a process known as an ``open 
season.'' For our part, the U.S. Trade and Development Agency plans to 
organize a meeting of interested financial agencies and prospective 
investors in Baku-Tbilisi-Ceyhan in London shortly after the sponsors' 
meeting. This effort by TDA will reflect the commitment made by 
President Clinton last November that our export credit and trade 
finance agencies will remain actively engaged fostering the realization 
of a commercially-viable Baku-Tbilisi-Ceyhan pipeline.
    Regarding the Trans Caspian Gas Pipeline (TCGP), the situation is 
more complicated. While the economic case for TCGP seems easily 
demonstrated, political differences between Ashgabat and Baku have 
blocked forward movement. We understand the competitive pressures each 
government faces, but there are good reasons why the countries of the 
region should cooperate, reasons that center on the individual nations' 
self-interest as well as common interests. From our vantage point, the 
proposition is straightforward. In the wake of President Demirel's late 
March visit, it is time for Turkmenistan and Azerbaijan to clear away 
the impediments. My sense is that the current TCGP consortium now, 
finally, has an excellent offer on the table. It's not likely the offer 
will get any better. There is no more room for complacency, and 
certainly no more scope for manipulation. It's time for all parties to 
agree and move forward. Delay puts this project at risk, and puts at 
risk the benefits that would accrue to all the parties involved.
    So that's our oil and gas story. What does it all mean? I see last 
November's decision by the region's leaders at the Istanbul Summit to 
sign the packet of agreements on Baku-Tbilisi-Ceyhan and the 
declaration in support of TCGP as a seminal moment for the region. I 
wish I had the photograph here, because it speaks far more eloquently 
than I ever could. It shows the five regional presidents and the 
President of the United States joining to support commercial projects 
that can shape the futures of the states of the Caucasus and Caspian 
for decades to come.
    The hard work is not over; indeed it only is beginning. Neither 
Baku-Tbilisi-Ceyhan nor the Trans Caspian Gas Pipeline, are sure 
things. But what is sure is the promise they offer to the region. In 
November, President Clinton summed matters up by saying: ``Today (these 
countries) have the freedom, they have the security, and today their 
leaders have shown the vision that will enable this ancient crossroads 
once again to light the world and brighten all our futures.''

    Senator Hagel. Mr. Ambassador, thank you.
    As you know, coming behind you we have a panel of private 
sector witnesses, and we will get into some detail here after 
you and Secretary Goldwyn leave with that second panel on some 
of the more specific points that you made on timeframes and 
routes and how this is a new day, new freedoms, new securities 
and so on.
    Let me start with a couple of points you made in your 
statement. You said the Baku-Tblisi-Ceyhan main export pipeline 
is starting in 2004. It will carry oil produced on both sides 
of the Caspian, from Baku and so on. How realistic is that do 
you believe?
    Ambassador Wolf. It is a stretch. The timeframe is very 
tight. We believe that it is possible. And we are basing that 
on what the companies are forecasting. We have been working 
closely with several of the companies that are involved in this 
project. I guess it is fair to say in particular with BP Amoco, 
that is the lead member of the Azeri International Oil Company. 
So they have taken a lead in a lot of this.
    It is a stretch. It is important to get the framework 
documents to parliament this month and get them ratified. It is 
important to have a sponsors' meeting in the next couple of 
months. It is important to get on with basic and detailed 
engineering. We think that between November and now we have 
been burning up some of the surplus time that was probably 
built into the original timeframe. There is not a lot more time 
to burn.
    And it is another matter, too. It is that various producing 
companies are looking at their prospective routes. There are 
other routes, particularly for the companies in Kazakhstan. And 
so very quickly they want to know, is there going to be a main 
export route to the West or do they have to search for other 
options?
    If they search for and find other options, then their oil 
will not be available for Baku-Tblisi-Ceyhan. There is a 
certain anxiety. There is a limit on how much oil is available, 
not already pledged to existing pipelines. And so the effort is 
to corral all of that into Baku-Tblisi-Ceyhan. That effort 
cannot wait indefinitely. It needs to get on. And Azerbaijan 
needs to get on with the investment in its next phase of oil 
development. So the time is closing in on us.
    Senator Hagel. It really comes down to the economic 
feasibility, obviously, of the justification of building these 
pipelines, where we are now at that critical point. Who is 
going to ante up to take it the next step? And if in fact there 
is not enough oil, I am still somewhat at a loss to understand 
how this is all going to work.
    Maybe you could explain it to me again. If we are not 
finding much oil and we need to put a lot more investment in--
and I would take some issue, by the way, with security of that 
area, how secure it is, especially in the north. I know the 
Georgians would not give you, I do not think--they have not 
given me--a very sanguine sense of how safe they feel they are 
with the Russians, what they are doing in Chechnya.
    I think it is not quite as rosy as you say it is, Mr. 
Ambassador, but maybe you can convince me otherwise. Let us 
take another run at it. If there is not enough oil, then how 
are we going to build pipelines?
    Ambassador Wolf. Let us start with that question and then 
switch to some of the other ones then. On the, is there enough 
oil, the discussion has been somewhat hypothetical. And 
especially last year, a lot of the discussion was about whether 
AIOC did or did not have enough oil to build a main export 
pipeline. Our view has been that this is not just an Azeri or 
an AIOC pipeline, that this is a regional pipeline. And we 
believe that there are other volumes, as yet uncommitted, to 
export pipelines that would be available if the price is right, 
if the tariff is right, and if the terms are right.
    So we are very close to agreements that will set a very 
attractive, very competitive tariff, that we hope will 
encourage potential producers, or producers in Kazakhstan and 
perhaps even Turkmenistan, to commit oil across the Caspian and 
into Baku-Tblisi-Ceyhan. That starts to change the balance 
some. And then it is a question for the consortium. They have 
to also look at the rate at which they will develop the Azeri-
Chiraz oil structures. The rate at which they do that will also 
help to describe whether or not this is a financially 
realizable pipeline.
    But we believe, with the right tariff and the right 
documentation, that sufficient barrels of oil will be available 
and pledged to make this pipeline feasible to finance 
commercially.
    Senator Hagel. Mr. Secretary, do you wish to add anything?
    Mr. Goldwyn. I agree with what the Ambassador has said. 
Just to add a clarification, there is lots of oil that goes by 
other routes. It goes by rail. It goes by barge. And if this 
line is attractive enough, then it should be safer and we hope 
cost competitive for them to ship. So you have got what AIOC 
produces. You have got volumes from other forms of shipment 
that you are going to draw, plus new production coming on line.
    And how quickly new production comes on line is hard to 
predict. What they call the flow rate, the rate at which a 
particular structure produces oil, for AIOC so far, has proven 
to be better than they expected. If you have more good news 
than that, you may get your volumes up quicker.
    We also have some flexibility, frankly, on that it is a 
million-barrel pipeline. But if on day one you have 995, you 
are still going to be able to push oil through that pipeline. 
So you have some flexibility. And it is without question that, 
given the billions of dollars that companies have invested in 
this area and the fact that there are more structures under 
exploration and expected to come on line, it is going to make 
sense for them to have a system in place rather than wait until 
they got a bunch of oil on their hands and then figure out how 
they are going to get it to market.
    Senator Hagel. What do you mean by ``a system in place''?
    Mr. Goldwyn. A transportation system. The CPC line, that 
holds a million barrels, and that is pretty much that 
Kazakhstan is committed to that. And you have got these early 
oil lines, these two other lines, which are pretty close to 
capacity. So if you have more oil discovered, they are going to 
have to figure out how to ship that to market. And it can go by 
barge and by rail, but they probably would like an alternative.
    Frankly, I think even people who are relying on rail routes 
across Russia would like the idea of another pipeline to ship 
their oil through. So there is lots more oil under exploration. 
And the question is a timing question, about when it is going 
to be ready for market and how they are going to get it there. 
But if we have this line under construction, I think other 
shippers are going to look ahead to their investment and want 
to have another pipeline going from east to west in place.
    Senator Hagel. We will ask the private panel and get a 
little more information of those coming in behind you.
    Mr. Ambassador, you wanted to make a point.
    Ambassador Wolf. Yes. I just wanted to say something along 
the same lines. There are other people with oil, with fields 
where they know there is oil, but they have not had a means to 
export the oil. Without a means to export the oil, it is 
difficult for them to get the capital to develop the field. If 
there is an export route, they can develop the field, and we 
believe that that will flush out, that that will enable some 
people to come forward who are not currently producing who 
might produce if the MEP is there.
    Senator Hagel. You mentioned in your statement--your 
words--``it is time for Turkmenistan and Azerbaijan to clear 
away the impediments.'' Would you amplify on that? Are you 
talking about the new natural gas that Azerbaijan found, and 
that has obviously put a new dynamic into the Turkmenistan 
natural gas, getting it across the Caspian? What did you mean 
when you were referring to that?
    Ambassador Wolf. Mr. Chairman, these are two countries 
which have not had particularly congenial relations, and the 
importance of something like the trans-Caspian gas pipeline, 
part of the real benefit that comes, is by helping to encourage 
regional cooperation, cooperation between countries which have 
traditionally been competitors or adversaries.
    It is our belief that it is possible for them to find a 
compromise on volumes that would be shipped, that would enable 
both Turkmenistan and Azerbaijan to benefit from the trans-
Caspian pipeline. Over the course of the last months each 
country has had differing views depending on the day, the week, 
the month, about how much of a 30 billion cubic meter pipeline 
needed to be reserved for it alone.
    They are moving closer. Indeed, they talk about the same 
kinds of numbers, 16 billion cubic meters for Turkmenistan, 5 
billion cubic meters the first phase of the Shah Deniz 
development for Azerbaijan. Now it is a question really of the 
leaders agreeing, this will work, we will work together, but it 
is also a question of coming up with a commercially attractive 
deal for both countries.
    A lot of progress has been made there, and more discussions 
are taking place between the private companies that are 
involved in this project, and they are talking very intensely, 
but it has taken a while to get the suspicion and the mistrust 
resolved. They still will have to resolve issues like the 
crossing, and they will have to put aside or deal with the 
differences on demarkation of the Caspian, not that it is a 
directly related issue, but it is not an unrelated issue. It is 
just that they have to learn to work together. They have not 
done so well, but they are inching closer.
    But again, it is a market solution that cannot wait. The 
Turks have a requirement for gas. They have a desire to 
diversify their gas, their sources of gas. They have a strong 
desire to get Caspian gas as part of that diversification. If 
one project does not work, they have other options, but the 
risk is that if the Caspian producers keep sparring with each 
other, that they will get shut out of the important market that 
Turkey is, so it is time to move forward.
    Senator Hagel. But you speak of markets. Is it not rather 
clear that there have been new natural gas finds in Azerbaijani 
waters of the Caspian? Doesn't that present a situation where 
you get that Azerbaijani natural gas to Turkey much cheaper and 
much quicker? Then where does that leave the Turkmen, realizing 
what you are talking about, geopolitical and other reasons to 
cooperate? If we are talking market forces here, explain to me 
how that works.
    Ambassador Wolf. Well, I hesitate to speak too assertively 
for Turkey what I understand from a whole series of 
conversations from President Demirel down has suggested to me, 
that Turkey sees a broad strategic region for building 
cooperation and for helping to improve the ties throughout the 
South Caucasus and Caspian.
    They have a sense of a Turkic identity. You will be aware 
that a number of the Turkic presidents met last weekend in 
Baku. Turkey has been trying to promote that cooperation, 
promote that regional dialog, and they have been prepared to 
pay somewhat more for the gas that they would get from 
Turkmenistan in order to make that happen.
    That is a sovereign decision that they have made, but they 
also, I believe, want to ensure that the pipeline serves the 
interests of all of the countries, Turkmenistan and Azerbaijan 
and, very importantly, Georgia, because Georgia is a pivotal 
country for all of the energy routes through to Turkey, and for 
Turkey as well. I mean, this is a decision that was developed 
in Ankara and in the other capitals, and we have supported that 
effort through the use of our good offices, the President's 
good offices.
    Senator Hagel. Where is Iran showing up in this? I know you 
have referenced in your statement the administration policy on 
energy investment in Iran, but where do you see Iran fitting 
into this?
    Ambassador Wolf. We have very specific legislation and 
administration regulations about energy cooperation with Iran. 
They have not changed. I frankly do not see--I do not 
understand the real advantages that some companies see in 
funneling more energy through a country that is a price hog, 
and through another choke point, the Strait of Hormuz, but it 
is not really just our view. It is--again, it is a view of the 
countries of the region that they are trying to promote an 
east-west corridor. We have supported that, and we do not see 
any reason to change.
    And as I said in my statement, our policy notwithstanding 
on Iran, and we think there are good reasons to hold back on 
cooperation, notwithstanding that, we would still be supporting 
Baku-Tbilisi-Ceyhan. We would still be supporting trans-Caspian 
gas and east-west corridor because we believe it is in the 
interests of the countries involved, and it is in our interest 
to get those energy sources more directly to the West.
    Senator Hagel. In 1997, 1996, if I recall, China and Iran 
each signed agreements with Kazakhstan to move oil through 
Iran, and I do not know where all that stands. Maybe you could 
first of all give me some kind of a status as to what you 
understand that current situation is with the China arrangement 
with Kazakhstan, as well as the Iranian arrangement.
    But back to the bigger picture on Iran, which is part of 
what I know you were taking into consideration, as you must. 
Iran is rather a significant player sitting there on the 
southern tier of the Caspian, with some interests that are not 
benign to play. As you suggested, there are energy companies 
who are at least intrigued, if not outright interested, in 
dealing with the Iranians, so maybe you could fill that in a 
little bit, and specifically talk a little bit about the 
Chinese arrangement with Kazakhstan.
    Ambassador Wolf. Mr. Chairman, my understanding, at least 
of one arrangement that was there, was the idea that China 
would build an eastward pipeline perhaps linking the field for 
which they have development rights at Ouzen to another 
exploration in western China, and then to the east of China.
    Well, it turns out, as I understand it, that what was 
discovered in western China was gas, not oil, and the economics 
of that pipeline do not seem to justify the decision to build a 
large and very long pipeline, so that has not moved forward, 
notwithstanding the continuing declarations of support for the 
concept.
    We think there might be other ways for Kazakhstan to work 
swap arrangements that would end up being more efficient. It is 
our hope that Kazakhstan would look at the economic benefits of 
perhaps redirecting some of that oil, including perhaps the oil 
at Ouzen, to a westward route. That is a decision they are 
going to have to make, but the economics of it might be very 
good, but that is for somebody else really to decide.
    I agree with your statement that some of Iran's interests 
in the region have not always been so benign, and I think that 
is another reason why the governments are leery of cooperation, 
but there are also some economic factors that pertain. I 
understand from one of our Ambassadors in the region that in a 
discussion between a foreign oil company and the Iranians about 
swap arrangements that the discount that Iran would insist on 
to do a swap arrangement make that trade, make that swap 
noneconomic.
    This is a hard country to do business with, and I can only 
imagine that the more oil that were put into that market as 
potential swaps, the more difficult the negotiations might 
become, so our view is quite firm. Pipelines, swaps, sales are 
not a good thing and, indeed, they would trigger potential 
difficulties with U.S. law and U.S. regulation.
    Senator Hagel. With this administration about 8 months away 
from retirement, can you see any possibility that this 
administration would ask for any change in that Iranian 
relationship, specifically focused on what you just talked 
about, swaps, energy?
    Ambassador Wolf. I think that the President has made--I 
mean, this is not my area, Senator, so--the President has made 
a very significant initiative to recognize progress that has 
been taking place, and to make visible some of what has been 
discussed privately, but I think, as I said in my written 
testimony, it is important for no one to underestimate the 
concerns about various activities--the Iranian attitude toward 
the Middle East, toward weapons of mass destruction, toward 
terrorism--and I think that it will be necessary to see 
concrete progress on issues like that.
    This is not something where one keeps piling more and more 
chips out there to be enticing. The things that the President 
did were significant, and I would suspect that what needs to 
come next is a significant, substantively significant response, 
not just a decision to talk, but rather, actions, and not just 
words.
    Senator Hagel. Thank you. What is your understanding of the 
status of the Blue Stream Gas Pipeline?
    Ambassador Wolf. There is construction taking place on both 
sides. The financing is not fully in place for the undersea 
portion, and the construction schedule is not entirely clear.
    The barge, and there is really only one barge that is 
capable of laying pipe at that depth, is currently in the Gulf 
of Mexico and is expected to be staying there for a while, so 
that project would seem to be on a trajectory, best case, 
sometime in 2000, 2001, assuming that the project sponsors have 
the answers that will satisfy the people who provide the 
financing.
    We have tended to try to stay out of the business of 
talking for or against Blue Stream. We have enough to do on 
trans-Caspian, but the sponsors of that pipeline have quite a 
lot to do to get that pipeline built and to keep it operating.
    Senator Hagel. So essentially there is not a lot of 
progress being made, as you understand it.
    Ambassador Wolf. They are building on both sides, but the 
sub-Black Sea portion remains to be done. The plan was to do it 
this spring. That does not seem to be likely to happen.
    Senator Hagel. As you know, the Director of the CIA, Mr. 
Tenet, was in the Caspian Sea region last month. Have you met 
with Director Tenet since he has returned?
    Ambassador Wolf. I have not met with him. We have regular 
meetings with his staff.
    Senator Hagel. Meaning----
    Ambassador Wolf. We have weekly meetings that include the 
whole interagency interested community, and so CIA is a part of 
those discussions.
    Senator Hagel. Have you reviewed his trip, or talked to any 
of his people about sharing information with you regarding the 
Caspian Sea region?
    Ambassador Wolf. I am not sure of the--I mean, issues come 
up in the course of our discussions. I am not sure I could 
answer them.
    Senator Hagel. Well, this is rather specific, I would say, 
though, if the CIA Director takes a trip to the Caspian Sea.
    Ambassador Wolf. His people then feed their appraisal of 
the countries that are security issues, the developments in the 
region, in a very regular way.
    Senator Hagel. Would you not be somewhat intrigued by what 
the CIA Director had to say on his assessment of the Caspian 
Sea region, since that is your area?
    Ambassador Wolf. Yes, Mr. Chairman, and I think we do see 
it in the publications that the CIA puts forward to the 
interagency group.
    Senator Hagel. Publications meaning----
    Ambassador Wolf. They regularly summarize not only his 
visit but other sources of information as well.
    Senator Hagel. Well, I would think that that might be an 
interesting conversation that you might want to have with the 
Director.
    Ambassador Wolf. I take your hint, Mr. Chairman.
    Senator Hagel. You know, information is rather important, 
especially in light of some of the things that you said in your 
testimony about the President being so assured of security over 
there, and how well they are all doing, and again, as I said, 
the Georgians do not quite share that, and some other people 
are a little nervous there, too.
    Ambassador Wolf. Mr. Chairman, I am not sure which line it 
is in my statement that triggers that. I would not want to 
suggest that this is not a very difficult part of the region to 
work in, but we believe that by cooperating together, by 
developing this energy infrastructure, and by using the 
resources that would come from energy exports wisely, that 
these countries will both improve their cooperation with each 
other and their ability to provide for the needs of their 
citizens.
    There are many ways in which development in this region 
could go badly, and there are a variety of issues that relate 
to the security of the pipeline, some of which we are 
discussing, for instance, with the Georgian foreign minister 
who is in town this week as part of the negotiating process.
    We do not underestimate the difficulties of the process. I 
was discussing with one oil company--I have often said to the 
oil companies, would it not be nice if you could develop all of 
your needs from the Gulf of Mexico, or from the North Sea, but 
it turns out that energy turns up in some very difficult 
places. It is important for the countries of the region to 
recognize that they are a difficult locality, that there is a 
risk for that kind of investment. They need to take measures 
not only to agree on pipeline documents, but they need to do 
things to improve their laws, their transparency, to remove 
corruption, to build institutions, to create incentives for 
investors, and to deal with difficult security issues.
    I do not think we are underestimating this, but nor are 
we--but we would not want to say--this is an important region. 
It has a significant source of energy that can help world 
supplies. It is not the Persian Gulf, but it is significant.
    There is a reason that we have supported Turkey and the 
countries of the region. We do this through a variety of 
mechanisms, through our aid programs, some of which--some 
portions of our aid programs help the countries to work on 
their security, and their security situation. We will look at 
others, and in particular with regard to a country like 
Georgia, if that is their desire, we will look at how we might 
be helpful. Turkey will look at how it can be helpful. These 
are parts of what we are trying to accomplish.
    Senator Hagel. Well, just for the record, Mr. Ambassador, 
the last paragraph of your statement, what I was referring to, 
and I will read it back to you: ``President Clinton summed 
matters up by saying,'' quote, ``today these countries have the 
freedom, they have the security,'' and so on and so on. That is 
what I was referring to.
    Mr. Ambassador, you have been very generous with your time, 
and we are grateful that you would come up. We obviously will 
be talking as we go along. We have a big job to do, and we are 
grateful for your leadership. Thank you.
    Ambassador Wolf. Thank you. We appreciate the help of the 
Senate on this, and yours personally.
    Senator Hagel. Thank you.
    If the second set of witnesses will come forward, we will 
take your testimony.
    I see, Mr. West got two glasses of water, Mr. Alexander 
two, and poor Dr. Olcott only one. Now, we will remedy that, 
Dr. Olcott. I do not know if you were here earlier, but we said 
glowing things about you as well.
    Dr. Olcott. Thank you so much, and I am sorry I was 
detained on the House side.
    Senator Hagel. Let us begin with Mr. Alexander, again, who 
is group vice president of BP Amoco Corporation, and to each of 
you, thank you for coming and taking your time. This is 
important, and we are grateful for your contribution.
    Welcome, Mr. Alexander.

  STATEMENT OF MR. RALPH ALEXANDER, GROUP VICE PRESIDENT FOR 
   EXPLORATION AND PRODUCTION, BP AMOCO CORPORATION, LONDON, 
                            ENGLAND

    Mr. Alexander. Thank you, Chairman Hagel, for the 
opportunity to be here. In the introduction you mentioned that 
we were an investor in both the AIOC consortium, which is an 
oil consortia, and in the Shah Deniz Gas Project, and I just 
wanted to be clear coming in that we are speaking on behalf of 
the Amoco, not either of the consortia. They are multiple 
partnerships, different interests, and we can only speak for 
ourselves at this point, and although, for example, as we speak 
about Baku-to-Ceyhan and supporting that, that is not something 
that the AIOC partners have actually voted to do, so I just 
want to make that very clear.
    Senator Hagel. The record will be very clear on that, Mr. 
Alexander, thank you.
    Mr. Alexander. Thank you.
    BP Amoco's experience to date has been primarily in the 
Azeri part of the Caspian Sea, and I thought I would take some 
time to give you the state of play on what has happened so far 
with us.
    Now, what we found, much like other people exploring out 
there is that the area not only contains world-class oilfields, 
but actually contains a lot of gas, and world-class gas 
opportunities. In fact, to put it in context, recent industry 
projections would suggest that the Caspian Sea represents about 
2 years of U.S. oil supply and about 8 years of U.S. gas 
supply, just to give you a sense of the scale of oil to gas in 
the Caspian.
    Now, given this outcome, we are now considering development 
and export potential of both oil and gas out of the Caspian. 
Let me turn to oil first.
    BP Amoco is firmly committed to the Baku-to-Ceyhan 
pipeline. We share many of the comments and questions and line 
of questioning that you raised, and other committee members did 
today, but the reason we do is because Azerbaijan, who is the 
host country who owns the resources, has expressed through 
international treaties a strong interest, along with Georgia, 
Turkey, and the United States, to build the Baku-to-Ceyhan 
pipeline.
    We believe we must be responsive to the aspirations and 
goals of the Azeri Government, and are determined to do all we 
can to find a way to progress this project. At the same time, 
we also recognize an equal responsibility to both our 
shareholders and our partners in meeting their commercial 
expectations. This is the challenge that we face, and it will 
be very hard to do. You touched on some of the issues we have 
to fix.
    What we are trying to do collectively will test the 
boundaries of doability in many areas, particularly in terms of 
complexity and scale. To do both the gas discovery and the 
Azeri initial development, including pipelines, we would 
estimate an investment on the order of $16 billion. As I 
understand it, this is more than the entire U.S. foreign aid 
budget, just to give you a sense of scale here. I suspect that 
would put pressure on financial institutions globally to be 
able to come up with that sort of resource.
    In addition, you have heard about the three countries 
representing Baku-to-Ceyhan, but within AIOC itself there are 
11 companies representing seven nations, and in Shah Deniz 
there is a consortium that is made up of seven companies, so we 
have a lot of alignment issues and so forth.
    On a practical level, we face unprecedented logistics and 
implementation challenges for the region, given the massive 
investment required. Our industry track record, frankly, has 
not been good. We have been behind schedule on delivery, costs 
have been higher than what we have estimated, and on the 
commercial front Baku-to-Ceyhan, to attract the volumes it will 
need, it needs to be the cost-efficient, safest, and most 
secure route.
    If we can do this, this will stimulate development of small 
fields, as well as attract exploration capital to the area.
    So to make this project work, we need scale in terms of 
barrels through the line, we will need innovative financial 
structures, and we will need to control the cost and deliver 
things on time.
    Now, given what we know today, we believe about 6 billion 
barrels is required to make this work in terms of economics. So 
far, AIOC has found 4 billion barrels to date, and again there 
is no commitment that all those 4 billion barrels would 
necessarily go to Baku-to-Ceyhan.
    On the financial side, we need to finish and ratify the 
transit agreements Ambassador Wolf spoke about. In this 
respect, we encourage the U.S. Government's support to get that 
done, and also are thankful for the U.S. Government's support 
to try to get more oil through the pipeline, but if we are to 
have any chance of making Baku-to-Ceyhan operational by 2004, 
we need to have confidence this project will work by the end of 
the summer.
    Now, I would like to turn a bit to gas. In February of this 
year, BP Amoco confirmed the discovery of an oil world-class 
resource called Shah Deniz. Now, it is an interesting 
discovery, and it has some features that I would like to make 
you aware of. First of all, we believe it is likely to be the 
most competitive source of gas to Turkey and Georgia in the 
region. We believe the project can be adjusted or phased in a 
way that would better match the patterns of demand within 
Georgia and Turkey themselves, as opposed to big slugs of gas 
which is required to underpin big, big pipelines.
    We believe we can get gas to market by the winter of 2002, 
2003, and it does support the east-west corridor, and makes it 
a reality, and we also believe the project would be 
commercially viable today.
    So the question is, how does this all come together? I just 
want to be clear that I believe, and we believe that the 
regional governments and the industry investors carry the 
majority of the burden here, but we also think the 
international community and the U.S. administration and 
Congress can help in shaping the pace and the context for the 
region.
    Principally, the focus is on oil. We need to continue to 
work on the innovative financing structures. We need to 
encourage specific funding support by U.S. agencies, if that 
can happen, support energy infrastructure, and we need 
continuing support by--to the regional governments to 
coordinate and aggregate volumes of oil and gas to support the 
pipeline.
    Mr. Chairman, the Caspian Sea presents us all with a 
challenge, but we believe collectively we are up to the 
challenge, and we are certainly going to give it our best shot.
    Thank you for the opportunity to speak, and I am happy to 
answer any questions you may have.
    [The prepared statement of Mr. Alexander follows:]

                 Prepared Statement of Ralph Alexander

    Thank you Chairman Hagel for the opportunity to appear before this 
Subcommittee. My name is Ralph Alexander, I am the Group Vice President 
for Exploration and Production, BP Amoco corporation. Although BP Amoco 
is the largest shareholder and operator of the Shah Deniz Gas 
Condensate Project and the Azerbaijan International Operating Company, 
or AIOC--a consortium of companies planning the development of the 
largest oil field and largest oil project in the Caspian Sea, I am 
appearing today on behalf of BP Amoco only. I appreciate the 
opportunity to present an overview of BP Amoco's activities in the 
Caspian.

                                SUMMARY

    Ambassador Wolf has already stated the strategic and political 
significance of the Caspian region. Therefore, I will focus my remarks 
on the commercial issues affecting the development of oil and gas 
reserves there.
    BP Amoco plays a leading role in the development of the Caspian 
region's oil and gas sectors. We believe that our efforts can be a 
force for good by developing a world class energy resource bringing 
prosperity and economic growth to Azerbaijan and the neighboring 
transit countries through regional interdependence.
    In addition to our Caspian Sea oil reserves, BP Amoco recently 
discovered huge gas reserves in the Shah Deniz field which will be 
available to supply gas to Turkey and Georgia by 2002/3. Development of 
Azerbaijan's presently discovered oil and gas reserves will require 
more than $12 billion in field investment and more than $4 billion to 
create the pipeline access to world markets.
    Such large investments in this part of the world require innovative 
approaches to developing these resources. The challenges to be faced 
and in which BP Amoco is playing its full part are:

          1. Work to try to make the Baku-Tbilisi-Ceyhan oil pipeline a 
        competitive transportation option so that a world class energy 
        resource can be developed for the benefit of the Azerbaijan and 
        the transit countries;

          2. Seek solutions that overcome the enormous complexity 
        involved which are sustainable for all the stakeholders, and to 
        resolve these issues quickly. Companies must make decisions 
        today which will impact the development of these resources for 
        the next 50 years;

          3. Provide solutions for exporting early Caspian gas to 
        Turkey thereby providing much needed energy supplies to Turkey 
        and Georgia, and paving the way to explore for synergies 
        between oil and gas exports; and

          4. Encourage the U.S. government and the international 
        community to provide the right environment to allow investors 
        clear economic and competitive choices for both oil and gas 
        development and export.

                    THE BAKU-TBILISI-CEYHAN PIPELINE

    BP Amoco supports the concept of an energy transportation corridor 
from the Caspian to the Mediterranean via Turkey although this 
aspiration is not without its challenges. We favor a Baku-Tbilisi-
Ceyhan pipeline that provides competitive transportation to world 
markets. At the same time, we endorse multiple export routes for oil 
and gas from any region to ensure competition, security of access to 
markets and regional interdependence.
    For the Baku-Tbilisi-Ceyhan pipeline to make economic sense as 
currently envisioned, companies developing oil reserves in the region 
will need to commit to shipping approximately 6 billion barrels of oil 
through it. To date, the AIOC and the State Oil Company of Azerbaijan 
have approximately 4 billion barrels waiting for an export solution. 
Even if all the individual AIOC partners commit their oil to the Baku-
Tbilisi-Ceyhan pipeline this is one-third short of the volumes required 
for the Baku-Tbilisi-Ceyhan pipeline to work. To address this 
shortfall, BP Amoco is:

   Encouraging producers outside of AIOC to commit specific oil 
        volumes to the pipeline;

   Working with the State Oil Company of Azerbaijan and the 
        U.S. Government through Ambassador Wolf, to find the additional 
        volumes essential for progress; and

   Working with the multilateral lending institutions to find 
        innovative ways to help finance the project.

    In short, BP Amoco is making every effort to find the volumes of 
oil necessary and exploring new ideas to make this pipeline viable. 
However, no one company can make this project a reality on its own.

               BP AMOCO EFFORTS TO RESOLVE COMPLEX ISSUES

    The Baku-Tbilisi-Ceyhan pipeline will pass through Azerbaijan, 
Georgia and Turkey. In addition to BP Amoco's efforts to search for the 
necessary volumes for this pipeline, BP Amoco has assisted in the 
development and negotiation of innovative model agreements between 
these three countries on many government levels to provide investors 
with the proper legal and commercial framework and protections to 
undertake massive infrastructure investment.

                           TIMING IS CRITICAL

    We are now at a critical juncture. The governments of Turkey, 
Georgia, and Azerbaijan have yet to finalize the agreements providing 
the legal and commercial terms for the pipeline. Despite the signing in 
November of arrangements between the three countries (which were 
witnessed by President Clinton) the details are still not complete. So 
far the delays in achieving an export solution have resulted in an 
approximate six month delay to the next phase of AIOC's project and 
production start up. Investment in offshore field development and 
pipelines will not go forward until these agreements are finalized.

              ROLE OF THE U.S. AND INTERNATIONAL COMMUNITY

    In order to make the sizable investments necessary to develop and 
transport Caspian oil resources to world markets, commercial loans will 
be necessary. However, since volumes of oil necessary to make the 
pipeline viable have yet to be committed, commercial lenders would have 
to be convinced through other means that the Baku-Tbilisi-Ceyhan 
pipeline is viable. Therefore, assistance from the United States 
Government and the international community is essential to realizing 
the pipeline. The U.S. Government can take the following five steps to 
enhance the economic viability of the project:

          1. Work with international financial institutions to find 
        innovative ways to finance the project.

          2. Make specific funds from the Export-Import Bank, the Trade 
        and Development Agency, and the Overseas Private Investment 
        Corporation available to the project.

          3. Urge direct World Bank involvement to provide a 
        stabilizing presence in the project.

          4. Provide funds to support energy infrastructure development 
        in the region.

          5. Continue to support regional governments efforts' to 
        coordinate and aggregate oil volumes.

    If the Baku-Tbilisi-Ceyhan pipeline comes to fruition, it will be a 
joint success by the governments of Azerbaijan, Georgia, Turkey, the 
United States, and the investors, bringing not only commercial and 
economic benefits but also regional interdependence.

                        EXPORT SOLUTIONS FOR GAS

    What I have said today about the challenges of developing and 
transporting oil to market is also true for gas.
    The BP Amoco led Shah Deniz partnership is currently working on an 
early field development scheme and securing a pipeline to deliver gas 
to the Georgian and Turkish energy markets by the winter of 2002-2003. 
This effort was supported by the gas memorandum signed between the 
governments of Azerbaijan, Turkey and Georgia last November. BP Amoco 
believes that by building a pipeline from its gas field to markets in 
Georgia and Turkey, it will meet the 2002/3 deadline and will provide 
Turkey with competitive gas sooner than other pipeline options.
    Shah Deniz is a project which does not need to search for volumes 
and finance as a condition for realization. Early gas deliveries 
benefit not only the Turkish consumer but also the stability of the 
region, by offering a solution to the current energy crisis in Georgia. 
They will also underpin the economic growth of Azerbaijan and Georgia 
by bringing them early investment and revenues as well as gas. This 
project provides an outstanding opportunity for government and 
commercial interests to deliver on the benefits of the East-West energy 
transportation corridor. We should do our best to realize these 
benefits and not put hurdles in its way.

                           CONCLUDING REMARKS

    In conclusion, BP Amoco will continue doing everything in our power 
to help make the Baku-Tbilisi-Ceyhan pipeline come to fruition. We will 
also strive to supply the region with a new natural gas resource. We 
are committed to bringing Caspian oil and gas resources to 
international markets. I extend my sincere thanks for the opportunity 
to appear before you today and to clarify BP Amoco's position to the 
Members of this Subcommittee. I hope that my appearance here today 
helps this important committee understand the challenges we face in 
developing and transporting Caspian resources to world markets. I look 
forward to any questions you might have. Thank you.


    Senator Hagel. Mr. Alexander, thank you. Now let me ask Mr. 
Robin West, who is chairman of Petroleum Finance Company, for 
his testimony. Welcome. Thank you.

STATEMENT OF MR. J. ROBINSON (ROBIN) WEST, CHAIRMAN, PETROLEUM 
                FINANCE COMPANY, WASHINGTON, DC

    Mr. West. Thank you, Mr. Chairman. I am delighted to be 
here. I am joined by my associate, Julia Nanay, who is a well-
known expert on the region. I have a rather long statement I 
would submit for the record, and I just have some comments I 
would like to make which will summarize the statement, and 
frankly I would like to pick up on a few points that some of 
the earlier witnesses made.
    The first is to put the Caspian in context. Mr. Chairman, 
you pointed out, and others, that the Caspian is not the Middle 
East. In fact, its resources are much more comparable to, for 
example, the North Sea, or even West Africa, but it is 
interesting to note that, for example, much more industry 
capital is flowing into West Africa than is flowing into the 
Caspian. This is because not only is there higher 
prospectivity, but there are lower risks, and people can make 
commercial decisions and get on with it.
    In terms of the North Sea, which Secretary Goldwyn compared 
it to, there is a very important difference from not only just 
the resource issue, but the fact is that the private sector was 
permitted to develop this, and that infrastructure decisions 
such as pipelines were made on the basis of commercial 
decisions, not political decisions.
    Now, one of the things to keep in mind also is, as you look 
at the industry, that companies manage their assets through 
portfolios, and different assets have to perform over time and 
under different risks, and if companies cannot get the 
necessary return from assets, they take their money and go 
elsewhere.
    Now, the classic example of this was Russia. Russia has 
enormous resources. The risks of doing business in Russia were 
just prohibitive, and people could not get a return, and so 
they took their money and went elsewhere.
    As one looks at the Caspian, there are really two critical 
projects. There was a discussion earlier about Kazakhstan and 
Tengiz. I will not go into a discussion of it except to make 
two points: First, that the CPC pipeline solution was the best 
commercial and political solution. It was a win-win for 
companies and Governments. It also made sense; it was a good 
deal, but it was a difficult deal, and it took 7 years to get 
done.
    Second, what is important to remember is that for CPC there 
was proven reserves of 6 to 9 billion barrels. This is enough 
oil to guarantee throughput of a million barrels a day for a 
long period of time. The companies were then prepared to 
finance these projects on their own balance sheet. This was 
funded straight out of equity.
    AIOC is a very different situation. First thing, there are 
several pipelines already in place, one north through Dagestan, 
to Novorossisk in Russia. The other is west, from Baku to 
Supsa. The companies have already invested close to $1 billion 
in pipelines and related infrastructure. With further 
investment, it is possible to increase the throughput of these 
existing pipelines to about 450,000 barrels by 2004.
    The Baku-Tbilisi-Ceyhan pipeline, this has been discussed 
before, requires about 6 billion barrels proven reserves to 
support a million barrels a day. Now, the issue being made is 
that there are only 4 billion barrels of reserves, but as Mr. 
Alexander pointed out, not all of those reserves, not all of 
that 4 billion barrels, will be committed to this pipeline.
    For example, Lukoil, the Russian oil company which has 10 
percent of this deal, they are going to take their oil north to 
Russia. They are not going to put it through this pipeline. 
Furthermore, I think the notion that one can draw on all the 
crude from the area is false. It is very important that the CPC 
pipeline and the oil that is dedicated to that remain dedicated 
to that.
    The second point, which I think is very important, is, 
there is something in this called MEPCO, which is the Main 
Export Pipeline Company. This is actually the pipeline company. 
AIOC will not be the oil pipeline company, and the problem is 
that nobody knows yet who will be the partners in MEPCO. It is 
still an abstract concept, and certain companies in AIOC are 
trying to do their best, certainly BP Amoco is, but they are 
not going to do it all.
    For example, SOCAR, the State oil company in Azerbaijan, 
wants 50 percent of MEPCO, but SOCAR has no capital and very 
limited credit. The government companies got equity in CPC. 
They did contribute rights of way, but they also contributed 
existing pipelines which they have, so this is a different 
deal. So how MEPCO--you know, what will be the structure, the 
financial structure of this pipeline is completely unclear.
    Now, shifting a bit, Azerbaijan has been frankly a 
disappointment to oil companies in terms of oil prospectivities 
and discoveries, but has been a huge gas success, but it is 
important to recognize that the gas business works entirely 
differently than the oil business.
    In the oil business the risk is essentially an exploration 
risk. If you can find oil in commercial amounts, at a 
commercial price, you can sell it into the world market. The 
gas business does not work like this. Essentially, the world is 
awash with gas, and what becomes critical in gas are markets, 
and there is intense competition to reach markets.
    But gas markets such as the Turkish market are finite. 
Turkey can absorb only so much gas, but as I say, the region is 
awash with gas. There are enormous amounts of gas in Russia. 
There are enormous amounts in Turkmenistan. There are enormous 
amounts in Iran. There are enormous amounts in Iraq. There are 
enormous amounts now in Azerbaijan.
    But I do not think most people realize that Turkey is even 
importing LNG from Nigeria now, so that the gas business, this 
is a different business than the oil business, and the kinds of 
commercial considerations are fundamentally different.
    Now, the key is to be able to get gas into a market. Here, 
price and reliability become essential, and speed, and one of 
the things which I think Mr. Alexander pointed out was that 
there may be enough gas in Azerbaijan now to take a substantial 
piece of the Turkish market on a very competitive basis and use 
existing infrastructure. If you want an east-west corridor, 
energy corridor, and you want it to happen fast, gas may be the 
answer, not oil.
    One of the things I note with interest from Mr. Wolf's 
testimony that, quote, ``the idea of an East-West energy 
corridor was born in Tbilisi, Ankara, and Baku,'' I find this 
is interesting, but I would respectfully submit that neither 
Tbilisi, Ankara, nor Baku are going to fund these projects. 
They are not making commercial decisions, they are making 
political decisions, and until the real source of the capital 
can get behind this project and are given a real commercial 
project, with specifics that they can act on which are 
competitive, this will not work.
    I would like to stop there, I think, Mr. Chairman, if I 
may.
    [The prepared statement of Mr. West follows:]

                 Prepared Statement of J. Robinson West

    Good afternoon. Senator Hagel and distinguished members of this 
Subcommittee. It is a pleasure to come before you today to address such 
a timely and critical issue for many companies in the oil and gas 
industry. My name is J. Robinson West and I am the Chairman of The 
Petroleum Finance Company (PFC). PFC is a strategic advisory firm, 
based in Washington, DC. We work with most of the companies in the 
petroleum industry on some aspect of their international oil and gas 
investment strategies. Our client base includes many of the companies 
active in the Caspian region.
    I come before you today not to argue the policy merits of 
infrastructure projects in the Caspian region. Even though I have held 
senior policy positions in the U.S. government in the past, over the 
last 16 years. I have worked in the private sector and have focused 
solely on the commercial aspects of the petroleum business. I help 
companies make business decisions based on sound commercial principles. 
Ultimately petroleum companies, like any other business, are profit-
driven entities, accountable to their shareholders. They are in the 
business of making money and not in the business of setting policies or 
achieving a government's strategic political objectives.
    That's not to say that this business isn't sensitive to political 
agendas. It most definitely is. After all, over 90% of the world's oil 
and gas reserves are owned by governments, which means that accessing 
these reserves requires that companies be extremely attuned to what 
these governments' need and want in return for their participation. The 
petroleum industry today is in the business of partnering with many 
different types of governments around the world. Petroleum companies 
are becoming much smarter in handling what we like to call ``above 
ground risks.'' Very often nowadays, the risk is not in finding the oil 
and gas, but in juggling the multitude of risks associated with 
operating in very difficult host country environments.
    In addition, many of the most prospective oil and gas producing 
countries are off limits to the industry because they are under some 
form of U.S. government or multilateral sanctions. U.S. companies 
understand well the impact the U.S. government can have on their 
business. But because we are talking about a ``globalized'' economy, 
where the asset base of companies in the petroleum industry is often 
transnational, most international oil and gas companies of any 
significant size are impacted by U.S. government decisions. Clearly, 
the U.S. government and its policies play a sizable role in the ``above 
ground risks'' for petroleum companies.
    No other region brings together so many ``above ground risks'' and 
in such a complex package, as the Caspian. When companies first entered 
this region in the early 1990s, they never anticipated the multitude of 
commercial challenges they would be faced with. These were in some 
measure the normal commercial challenges that could have been expected 
from launching into projects in difficult domestic political 
environments. After all, Azerbaijan, Kazakhstan and Turkmenistan were 
emerging from the shadows of the monolithic control of Moscow. These 
were new states being formed. No one thought it would be easy. But 
companies were willing to underwrite the commercial risks because of 
the huge size of the resources that could be accessed.
    At the time, companies were attracted to the Caspian because of 
declining production in the last great oil provinces of the Alaskan 
North Slope and the North Sea. With the Middle East largely off limits, 
companies were searching for new international growth opportunities of 
a certain size and scale in non-sanctioned countries. The Caspian 
region held out the promise for companies of such opportunities.
    But since 1993, when the first contract was signed by Chevron in 
the Tengiz field in Kazakhstan and 1994, when BP and Amoco, as members 
of the 11 company AIOC consortium, signed their contract in Azerbaijan, 
progress in these and other ventures has been limited. There have been 
a few small steps forward, but also many disappointments.
    Managing the domestic commercial and political risks of operating 
in these countries turned out to be just a small part of a much bigger 
package of risks. This bigger package of risks involves the 
geostrategic agendas of an array of peripheral countries--namely 
Russia, Turkey and Iran--and a number of players outside the region, 
most importantly, the U.S.
    These geostrategic agendas became reflected in a series of pipeline 
plans, because pipelines were a way to cement relationships between 
countries. Rather than being seen as commercial outlets for oil and 
gas, pipelines came to symbolize political dominance over the countries 
of the Caspian region: Russian dominance vs. Turkish dominance vs. 
Iranian dominance. Since 1997, as the U.S. became increasingly wedded 
to East-West pipeline routes, Turkish dominance also became synonymous 
with U.S. dominance. A new cold war of sorts was born. With the U.S. 
determined to keep Iran off limits as an export outlet for Caspian 
crudes, this cold war has pitted the U.S. against Iran. At the same 
time, because Iran has been largely marginalized until now, the more 
serious and potentially dangerous repercussion of the U.S.-Turkish 
geostrategic agenda has been a pipeline cold war pitting the U.S. 
against Russia.
    Companies operating in the Caspian have gotten caught up in this 
``cold war,'' even as they are being forced to take sides in an all or 
nothing game--either do it the way the U.S. wants and potentially 
sacrifice your business imperative of making money or don't get your 
resources to market. The countries of the Caspian region have eagerly 
embraced the U.S. geostrategic agenda because it has brought with it 
some explicit and implicit promised benefits from the U.S. government, 
both of an economic nature and military/security guarantees. In any 
case, the leaders of these countries feel that the U.S. through East-
West pipeline routes will ensure their future independent power bases.
    As the U.S. government continues to pursue this geostrategic 
agenda. commercial considerations have become secondary and companies 
are being asked to shoulder the financial burden of paying for it. The 
companies that operate in the Caspian are being asked to assume the 
role of nation-builders when, in fact, they are commercial entities 
accountable to their shareholders.
    Let's just see where this leaves us currently. First, the claim 
that the Caspian region is tremendously important to U.S. interests 
because it will be a large new source of oil and gas needs to be 
examined. Some experts put the likely volume of proven and probable oil 
and gas reserves in the Caspian at about 60 billion barrels of oil 
equivalent (BOE). That's a far cry from the 674 billion barrels of oil 
reserves in the Middle East. It is about equal to the proven and 
probable oil reserves (not including gas) of West Africa (57 billion 
barrels).
    Second, since 1993-94, the only two major oil plays in this region 
remain Kazakhstan's TengizChevroil (TCO) joint venture for the Tengiz 
field with estimated reserves of 6-9 billion barrels, which is a U.S.-
led consortium (Chevron, ExxonMobil, Lukoil/ARCO and Kazakhoil), and 
the BP Amoco-led 11 member AIOC consortium for the Azeri. Chirag and 
shallow water Guneshli fields also includes Unocal, ExxonMobil, Devon 
and Amerada Hess) with 4 billion barrels of reserves. A total of seven 
countries are represented in AIOC (U.K., U.S., Norway, Russia, Turkey, 
Saudi Arabia, and Japan). TCO currently produces about 210,000 b/d and 
AIOC, about half that, with 105,000 b/d.
    In Kazakhstan, additional oil is available from some smaller 
onshore fields. The emphasis in Azerbaijan is offshore; in Kazakhstan, 
it is still onshore, although the drilling of the Kashagan structure 
offshore, if it proves up oil, will change that. Azerbaijan's total oil 
production is 230,000 b/d: Kazakhstan is 600,000 b/d.

                     AZERBAIJAN/MORE GAS THAN OIL?

    During the last four years. several prospects were drilled offshore 
in Azerbaijan which proved up no commercial volumes of oil or gas. This 
changed with the recent major discovery of a huge gas field offshore 
Azerbaijan, in the BP Amoco-operated Shah Deniz prospect. Azerbaijan, 
in fact, looks increasingly like a gas play, rather than an oil play.
    Other prospects in the queue for development, some by U.S. 
companies, are already projected to yield additional reserves of gas.
    The gas aspect of Azerbaijan's future export potential is important 
to emphasize. Given Azerbaijan's close proximity to Turkey, gas exports 
from Azerbaijan to the Turkish market appear to be the best way to 
ensure the U.S. vision of an East-West pipeline corridor. Since a gas 
pipeline looks to be more feasible in the near term than an oil 
pipeline, it would make sense for Azerbaijan, Georgia, Turkey and the 
U.S. to focus first and foremost on this gas export corridor. Existing 
pipelines along the Azerbaijan-Georgia route could be rehabilitated at 
low cost and shipments of 5 billion cubic meters per year (bcm/y) of 
gas to the Turkish market could begin by the winter of 2002-2003.

                             KAZAKHSTAN/CPC

    The most important U.S. commercial interest is in Kazakhstan. 
Tengiz is among the largest oil fields in the world today. New drilling 
at the Tengiz concession area could prove up even more reserves. 
Chevron was the first company to embark on trying to build a pipeline 
in the Caspian region. When Chevron signed its contract for Tengiz in 
April 1993, it correctly identified the Russian route for oil exports 
as the most commercially expedient for this crude.
    Seven years later, Chevron is finally close to realizing this goal, 
as the construction of a 560,000 b/d, 1580 km (1,000 mile) pipeline to 
the Russian Black Sea port of Novorossiysk winds its way toward 
completion at 4 km/day, with an anticipated start-up date of June 2001. 
Referred to as the Caspian Pipeline Consortium (CPC) and joining a 
number of Western companies and Russian companies with the Russian, 
Kazakh and Omani governments (the government/company split is 50%/50%), 
this $2.5 billion project appears to be seeing the proverbial light at 
the end of the tunnel.
    As their 50% share of costs, the Russian and Kazakh governments 
agreed to contribute rights of way and existing Russian and Kazakh 
pipeline assets to the project. There are 740 km of existing pipes 
which will be used, or about half the length of the project. The 
companies (Chevron, Lukoil/ARCO, ExxonMobil, Rosneft/Shell, British 
Gas, Agip, Kerr McGee, Kazakhoil/BP) are using equity financing to pay 
the $2.5 billion cost of old pipe refurbishment, new pipe construction 
and for a new terminal in Novorossiysk. The new terminal will be 
comprised of a state-of-the-art offshore buoy system that will permit 
operation for much of the year, avoiding the shutdowns that 
Novorossiysk currently experiences because of bad weather. Essentially 
this means that each company is financing two times its share in CPC to 
cover the 50% cost burden that governments aren't paying. Chevron (15%) 
and ExxonMobil (7.5%) are contributing over $1 billion to the 
construction of the CPC. Add to this the costs of developing the Tengiz 
field (about $2.00/bbl), and you can say that these two companies have 
about $2 billion already invested in Tengiz. In step with expansions at 
the Tengiz concession, Chevron is committed to carry out further 
expansions on the CPC pipeline, which could eventually reach a capacity 
of 1.3 million barrels per day (mmb/d).
    While putting together the financing and construction package for 
CPC, TCO has worked tirelessly and with great creativity over the last 
six years to forge a multiplicity of interim exit routes for Tengiz 
crude, consisting of both rail and existing pipeline access through 
Russia. TCO is also barging crude to Baku and railing it to Batumi, 
Georgia.
    When Chevron embarked on its pipeline quest through Russia 
(construction began in October 1998), the U.S. government still favored 
a close relationship between the Russian and U.S. governments, although 
the ties had begun to weaken. While the U.S. was and continues to be 
supportive of the CPC, it has simultaneously embarked on a ``Silk Road 
Strategy,'' which favors the construction of East-West pipeline routes. 
Largely directed at the southern Caspian, namely Azerbaijan and 
Turkmenistan, the U.S. seeks to anchor these countries to Turkey with 
an oil and gas pipeline network that is envisaged as a transport 
corridor that will bring resources from the eastern side of the 
Caspian, under the sea, to Azerbaijan, Georgia and Turkey.

                      AZERBAIJAN AND GEORGIA/SUPSA

    In November 1997, then Energy Secretary Pena went to Baku to 
celebrate first oil production by AIOC. While there, he spoke out in 
favor of non-Russian and non-Iranian routes. At that point, the 
northern pipeline route from Azerbaijan, that traversed Dagestan and 
Chechnya into Russia, was already experiencing problems. Plans were 
underway to build a second 830 km pipeline (just over half the length 
of CPC) to the Georgian port of Supsa. Taking some lessons from the 
vision for CPC, Supsa was going to be built on the premise that 
existing pipes in Azerbaijan and Georgia could be refurbished at low 
cost. This turned out to be a more difficult proposition for the oil 
pipelines in these countries, and the companies eventually found 
themselves having to build a new pipeline at a cost of $560 million, 
almost double the original $315 million that had been budgeted by AIOC 
for the Supsa connection. Supsa was completed in December 1998. Sorting 
out who pays for this cost overrun remains an issue between the AIOC 
member companies and the Azeri government. Supsa is currently 
transporting all of AIOC's 105,000 b/d of production and could carry up 
to 150,000 b/d. The transport tariff to Supsa is $0.43/bbl (split as 
$0.17/bbl for Georgia and $0.26/bbl for Azerbaijan).

                AZERBAIJAN/NORTHERN ROUTE THROUGH RUSSIA

    In early April 2000, Russian pipeline company, Transneft, announced 
that it had completed a $160 million, 312 km bypass pipeline around 
Chechnya, heading north out of Azerbaijan via Dagestan. The entire 
length of the northern pipeline is probably close to 1500 km, 
comparable to CPC, and, according to a recent account, it can 
eventually carry up to 18 million tonnes/y or 360,000 b/d. Azeri 
company, Socar, on April 7 said it would begin shipping some of its own 
oil through it. Socar has committed to ship 5 million tonnes/y (mmt/y) 
or 100,000 b/d through the northern route.
    While the northern route option is less ideal because the oil 
received at the other end (in the Russian Black Sea port of 
Novorossiysk) is priced as Urals Blend crude vs. the higher quality 
Azeri Light, hence the value of the barrel is $0.30-$0.90/bbl less, the 
infrastructure is not costing the companies or the Azeri government 
anything to build. Thus, even the $2.15/bbl transport fee (though 
higher than on the Supsa route) is competitive. Moreover, having the 
northern route option available gives all investors in Azerbaijan a 
measure of comfort.
    For the AIOC consortium, it makes business sense to ensure that the 
northern route is supplied. It also makes business sense to ensure that 
the western route to Supsa is supplied. These two routes provide AIOC 
export outlets for at least 200,000 b/d and up to 450,000 b/d with 
relatively inexpensive expansions. The total amount translates into 
2.0-2.5 billion barrels of reserves or the amount that AIOC expects to 
produce starting in 2004.

                            AZERBAIJAN/AIOC

    Today, AIOC could produce 115,000 b/d from the Chirag field, which 
is the only field producing oil in the ACG development scheme (Azeri, 
Chirag, deepwater Guneshli). In early April, AIOC began drilling in the 
Azeri field. By 2002, AIOC may be producing 150,000 b/d from the Azeri 
and Chirag fields. In order to move to the next level of development, 
however, which is referred to as Phase I and which would yield another 
300,000 b/d by 2004. AIOC needs to have a pipeline solution available. 
The total production in 2004 is thus estimated at 450,000 b/d.
    What are the options? Clearly, some of this oil, if not all of it, 
could be transported through the northern and western routes that are 
currently in place (and/or can be expanded).

              AZERBAIJAN/BAKU-TBLISI-CEYHAN (BTC) PIPELINE

    The other option being promoted by the U.S. government and now the 
favored option of the governments of Azerbaijan, Georgia and Turkey is 
the Baku-Tblisi-Ceyhan (BTC) pipeline (as opposed to a Baku-Supsa-
Ceyhan or Baku-Batumi-Ceyhan pipeline). BTC would be 1,730 km in length 
of new pipe construction (vs. the CPC with 1,530 km and some existing 
pipes). BTC is estimated to cost $2.4 billion (vs. $2.5 billion for the 
CPC). BTC will traverse 3 countries (465 km in Azerbaijan, 255 km in 
Georgia, and 1,010 km in Turkey) and cross a mountain range in Turkey 
that is up to 2,500 meters high.
    BTC is not an easy pipeline to build. Its technical challenges are 
compounded by enormous political risks particularly on the territory of 
Georgia, where four Russian military bases and elements of Russian 
troops everywhere, create an environment of insecurity and instability. 
A pipeline headed south from Tblisi will have to cross through or by 
the Armenian-populated enclave of Javekhetia, which hosts a Russian 
military base.
    Because of the many risks involved in building BTC, any companies 
that participate would project finance this pipeline, and get 
multilateral institution investment guarantees. To the extent that 
financing is made available, the multilateral institutions will have 
the effect of providing some ``political risk'' insurance, but these 
institutions will insist on laying off most of this risk to the 
borrowers. This is why some companies typically do not use this type of 
financing. It is expensive and the risks are rarely really shifted to 
the financial institution.
    Most troubling for the companies, however, is that there are 
insufficient reserves at present in Azerbaijan to commit to BTC. A 1 
million barrel per day (mmb/d) pipeline would need 6 billion barrels of 
reserves. The maximum reserves AIOC could bring to the pipeline are 4 
billion barrels, but as we will show below, less than 4 billion barrels 
will actually be available.
    Building pipelines based on speculative reserves is not something 
companies like to undertake. Speculation about future exploration 
successes does not merit premature commitments to pipelines. This is 
particularly important to understand in Azerbaijan, where you currently 
only have two semi-submersibles available to drill and where the wells 
are deep and tough to drill. Committed ship-or-pay barrels for the 
purpose of financing a pipeline are different than ``maybe'' barrels. 
Both investors in BTC and lenders will require commercial proven 
reserves to back up the project. Remember that in this case, project 
finance and not equity finance is being used. Without commercial proven 
reserves as collateral, project financing will be difficult, if not 
impossible, to arrange. While investors and lenders will be making some 
forward looking judgments as to risks because any pipeline that is 
built will have to be sustainable for some forty plus years, the lack 
of commercial reserves today will be a strong negative risk factor.

                         BTC/RESERVES AVAILABLE

    The reserves available to export pipelines out of Azerbaijan in 
2004 from AIOC will be 2.0-2.5 billion barrels or about 450.000 b/d of 
production. This production will be split among routes. Presuming that 
BTC does get built, it will not all be available for BTC. No matter 
what happens with BTC, it would be too risky for AIOC to put all these 
reserves behind a single project.
    Full project development of the 3 ACG fields will cost between $10-
$12 billion and is not expected to be realized until 2007-2008. At the 
full development stage, 35%-40% of the 4 billion barrels of reserves 
will accrue to Azerbaijan's state company, Socar. Socar's commitment to 
ship-or-pay does not carry the same weight for financial institutions, 
as the commitment of the private companies, which could complicate 
financing. In addition, as was pointed out earlier, Socar is 
contractually committed to ship some volumes north. Other AIOC members 
are also likely to seek route diversification, making less than their 
respective reserve volumes available to BTC. What's more, Russian 
company, Lukoil, which is also a member of AIOC (with 10%), is likely 
to commit its volumes to the northern route and the western Supsa 
route.
    AIOC is not a monolithic entity and the member companies 
(representing seven countries) are contractually free to decide which 
direction they want to send their oil. The only impediment that exists 
is for U.S. companies, which currently cannot pursue a southern option 
through Iran, and are being asked to support BTC. U.S. companies 
(Unocal, ExxonMobil, Devon, Amerada Hess) carry a 24% share in AIOC. 
They are not the majority shareholders. These U.S. companies will have 
to commit to BTC and ask for U.S. Ex-Im and OPIC financing, if these 
institutions are to participate in the financing.
    Investors also like to compare and contrast options. Azerbaijan's 
location provides a series of options, which could be studied: to the 
north, to the west and to the south. In this sense, AIOC is better 
positioned than TCO in Kazakhstan. While investors like to control the 
pace and timing of investments, in the case of Azerbaijan, investors 
are being asked to study only one option--BTC--and to complete that 
option within an unrealistic timeframe.

                             BTC TIMEFRAME

    Other than the need to bring more reserves to BTC, what are the 
steps still outstanding before construction can begin on BTC? Each 
government has to sign certain key agreements, which will then need to 
be ratified by their individual parliaments. Turkey has completed its 
agreements. Georgia and Azerbaijan are in the process of wrapping these 
up. The agreements will then have to be approved by the respective 
parliaments of these countries so as to ensure that the force of law is 
applied to the agreements in every country. While BP Amoco is 
negotiating these agreements on behalf of the other companies in AIOC, 
the BTC pipeline is outside the purview of the Production Sharing 
Contract (PSC) that was signed by AIOC. The PSC required AIOC to 
undertake detailed route negotiations, but it is not a contract that 
covers route construction. Hence. a new set of investors or a new 
``sponsor group'' must be arranged for a Main Export Pipeline Company 
(MEPCO). At the end of the day, however, the other companies in AIOC 
have the option but not the obligation to join MEPCO.
    MEPCO must be formed prior to carrying out preliminary engineering 
studies on BTC since MEPCO will fund all engineering studies. If 
lessons learned from CPC are any indication, the formation of MEPCO 
will in itself be a time-consuming process. Decisions on which company 
owns how many shares and on capacity rules and rights, as well as exit 
rules, cannot be made overnight. When it comes to members of AIOC, 
Russian company Lukoil, for example, may decide not to join MEPCO 
because it prefers to ship its volumes north through Russia or it 
prefers to ship its volumes west through Supsa, from where it can 
access its company-owned refineries in Black Sea markets. The process 
of forming MEPCO could get underway parallel to the ratification of the 
agreements by host country parliaments.
    One problem already looming is Azeri state company Socar's 
insistence that it have a 50% share in MEPCO. While this parallels the 
strategies used by governments for the construction of CPC, this is a 
very different project with different risks. Hammering out a ``sponsor 
group'' agreement, where the private company participants in MEPCO will 
have to carry the Azeri government's 50% share, will raise serious 
obstacles. This lends an additional complexity to an already complex 
set of arrangements.
    After the parliaments of Azerbaijan, Georgia and Turkey ratify 
their countries' respective agreements, the 6 month preliminary 
engineering phase can begin, which will consist of scoping out the BTC 
route. This will lead to a 13 month detailed engineering study by the 
members of MEPCO to define the actual cost of the pipeline. The cost 
could well exceed the $2.4 billion current estimated cost by as much as 
$1 billion or more.
    If BTC is to be finished by 2004, there is no time allotted for the 
orderly formation of MEPCO or for carrying out project finance 
negotiations. This is because the end of the detailed engineering 
phase, immediately triggers the start-up of construction. Under this 
``politically motivated'' scenario, it is presumed that construction 
can begin before any money is lined up. However, private companies do 
not operate this way. A time period must be built in for financing 
arrangements to be secured. Even if MEPCO participants agree to start 
negotiating a financing package while engineering studies get underway, 
this will still require extra time. This will delay the start-up of BTC 
until sometime closer to 2006 (at best).
    Project finance negotiations will have to depend on the pipeline 
costs that are defined through detailed engineering. Project finance 
negotiations can be protracted and it's not unreasonable to expect that 
it could take at least a year to secure the money (or longer). Actual 
construction will take 32 months. If you exclude the window for raising 
the money, BTC will be finished in 51 months after parliamentary 
ratification of the agreements (that's four years and three months). 
This is a very best case scenario, for completing BTC in 2004. Again, 
this is without the key element of financing and it is impossible to 
build the BTC if the money is not secured. Without full knowledge of 
the full cost of the system or about the source of adequate reserves, 
it is impossible for private companies to address where the money will 
come from.

                   SOURCES OF MONEY/THE MULTILATERALS

    With project finance/private sector lending being difficult and 
complex to arrange, what can the multilateral institutions do? Economic 
intervention from the multilaterals or directly from the U.S. 
government may be required to offset the non-commerciality of BTC.
    The International Finance Corporation (IFC) limits direct project 
lending to $125 million but can arrange two to three times this amount 
(or up to $375 million) in syndicated private-sector financing. U.S. 
Ex-Im Bank has no limit on financing but can provide loan guarantees 
only for the supply of U.S. goods and services at 85% of total cost, at 
the request of U.S. companies. OPIC has individual project limits of 
$200 mn each on political risk insurance and direct financing (for U.S. 
companies). U.S. companies must have at least 50% for insurance and 25% 
equity for the project to qualify for OPIC financing. For BTC, OPIC is 
prepared to go over $200 mn. The nationality of the investor at project 
registration can potentially play role here (i.e., U.S. Amoco's 
registration of Baku Ceyhan with OPIC prior to the BP Amoco merger). If 
the U.S. government weighs in, OPIC may be prepared to take significant 
exposure.
    Other organizations which could be involved are the World Bank and 
EBRD. But the mandate of the World Bank has shifted away from lending 
to oil and gas projects and it may have difficulty in justifying 
lending for a pipeline project--except of course if strong poverty 
alleviation and or/environmental arguments can be made to justify BTC. 
Shareholders in each organization (World Bank and EBRD) could block 
financing if developmental (incl. environmental--Turkey/Bosporus) 
benefits to each country (Azerbaijan, Georgia and Turkey) are not 
detailed. French influence in EBRD could block Baku Cevhan. In the 
World Bank, France, Italy, Russia and Iran could try to block 
financing.
    As was pointed out earlier, however, to the extent that financing 
is made available, the multilateral institutions will have the effect 
of providing some ``political risk'' insurance, but these institutions 
will insist on laying off most of this risk to the borrowers. This is 
why some companies typically do not use this type of financing. It is 
expensive and the risks are rarely really shifted to the financial 
institution.

                       STUDY OTHER ROUTE OPTIONS

    In the long run, the most efficient pipeline will be the most 
successful. Also in the longer term, export commitments will align 
themselves with the lowest cost alternative. If other systems are in 
place that are cheaper to build and can set their costs according to 
the market, BTC will not attract future barrels. At the end of the day, 
the markets will win. If a pipeline is less economic than other 
alternatives, future shippers will not use it.
    This also means that the end-user markets that are the most 
attractive will be the markets that win. Currently, Mediterranean (Med) 
markets are the markets of choice for Tengiz and Azeri crude sales. 
These crudes can command a premium in the Med, backing out Middle East 
crudes, because they are closer to the Med than these other crudes. 
However, if there is another major oil find in the Caspian, Asian 
markets will be preferred. The fastest rate of growth in oil demand is 
in Asia, and the highest netbacks for these future barrels will be in 
Asia. The oil will flow to those markets where the demand is greatest 
and where it can command the largest premiums. Another end-user market 
option is the domestic market in Iran.
    Some non-U.S. companies have studied the option of supplying oil to 
Iran's northern oil refineries. Iran has four refineries in the north 
of the country: Tebran (230,000 b/d); Tabriz (120,000 b/d); Isfahan 
(290,000 b/d) and Arak (170,000 b/d). The total capacity is 810,000 b/
d. These refineries are currently supplied with oil that is shipped 
from the south of the country. Iran would like to buy or swap Caspian 
crudes into these refineries and save the cost of shipping its oil 
north.
    Iran has proposed to the Azeris that they sell 220,000 b/d under a 
long-term contract to its refineries. Iran would buy the oil outright 
from the Azeris for its Tabriz and Tehran refineries. Iran has said it 
would be ready to pay $2/barrel more than the oil would earn at Ceyhan. 
The oil would be delivered through a new oil pipeline Iran has looked 
at building from Baku to Tabriz.
    While this would be an outright purchase, Iran has also proposed 
oil swap arrangements to Caspian countries. Currently, minor amounts of 
oil from Turkmenistan are swapped through an existing pipeline from the 
northeastern Caspian port of Neka to the Tehran refinery. An equivalent 
volume of crude oil, with quality differentials accounted for, is then 
swapped out from Iran's southern export terminal at Kharg Island. Kharg 
Island currently handles between 2.0-2.5 million b/d of exports, but 
could accommodate up to 8 million b/d. Iran is about to embark on 
building a new 370,000 b/d oil pipeline from Neka to Tehran, with the 
purpose of providing an outlet for Caspian crudes.
    Outright oil sales to Iran or swaps through Iran bring the oil to 
Iran's domestic market and/or closer to Asian markets, where the demand 
growth will occur. Kazakhstan and Turkmenistan, with their oil 
potential centered along the eastern shore of the Caspian, see the 
economics of a pipeline straight down to Iran as their most cost 
effective solution. For Azerbaijan, the choice is a Catch-22. The 
AIOC's production sharing contract takes transport costs into account, 
with the government's take directly linked to these costs--the lower 
the transport costs, the more revenues accruing to Baku.
    What prevents the economics from prevailing in terms of the Iranian 
export option is U.S. sanctions on Iran. Since the issuance of two 
Executive Orders in 1995 by the Clinton Administration, which bar U.S. 
companies from trading with or investing in Iran and the passage in 
August 1996 of the Iran-Libya Sanctions Act (ILSA), which bars foreign 
companies from investing more than $20 million a year in oil and gas 
developments in Iran, the U.S. has spent enormous financial and 
political capital on isolating Iran. The U.S. has translated this into 
excluding Iran at all costs from benefitting from infrastructure and 
pipeline projects for evacuating oil and gas from the Caspian Basin.
    The U.S. rationale for sanctions is Iran's support for terrorism 
and its procurement of weapons of mass destruction, especially nuclear 
and long-range missile capabilities. Under Iran's moderate President 
Khatami, progress is being made to address these concerns.
    A route through Turkey is definitely desirable, but private 
companies should be called upon to build it only if they determine that 
the economics warrant it. Multiple pipelines are the most politically 
desirable result for unlocking the resources of the Caspian--through 
Russia, Turkey, Georgia, Iran, China and even Afghanistan, once that 
option becomes available. Let the markets decide the order in which 
they are built. This would benefit the countries of the Caspian.
    In the end, if private companies find themselves saddled with 
projects that are suboptimal from a commercial standpoint, they have 
some choices. They can shut in production and take their capital 
elsewhere. This is an industry that has choices. If it's not the 
Caspian, there is Latin America, West Africa, Asia, and for non-U.S. 
companies, there is even Iran.

    Senator Hagel. Thank you.
    Dr. Olcott, welcome back. You were here, what, 2 years ago?

  STATEMENT OF MARTHA BRILL OLCOTT, Ph.D., SENIOR ASSOCIATE, 
CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, WASHINGTON, DC, AND 
        PROFESSOR, POLITICAL SCIENCE, COLGATE UNIVERSITY

    Dr. Olcott. Yes.
    Senator Hagel. Time flies, doesn't it? We are glad you are 
back. Thank you. I recall your testimony then, and it was 
helpful, so we are glad you are back.
    Dr. Olcott. Thank you very much.
    I was asked to talk about the politics of economic 
development in the Caspian region and some of the social 
problems of the area to bring up to date the testimony that I 
gave 2 years ago.
    I argue at greater length in my testimony, and I am just 
going to highlight some of the key points, that with time the 
Caspian region seems almost certain to turn into more of a 
strategic burden to the United States than it is a strategic 
asset, and I would like to argue some of the ways that this is 
true.
    There is a real question as to whether the Caspian region 
is, in fact, a major strategic one for the United States, 
despite much of the symbolic position that we have given to the 
region in many of the public statements of the Clinton 
administration.
    I argue that despite the important rhetorical level that 
the Caspian region has assumed, the area has at best been an 
area of secondary security interest for the United States, and 
that our interest in the area is derivative of our broader 
security concerns, those having to do with Russia, South Asia, 
and a host of global issues such as terrorism, the 
proliferation of weapons of mass destruction, international 
crime, and drugs.
    Moreover, as U.S. officials have come to better understand 
the difficulties inherent in the development of Caspian oil, 
our general security concerns have begun to become more of a 
focus of the respective bilateral U.S.-Caspian relationships. I 
would argue that with time they will become an even greater 
focus, as some of the states of the Caspian region go from 
being strategic assets to becoming active threats to their 
neighbors or the global community more generally.
    Our preoccupation with energy development has led us to 
form a partial picture of these states. However, it is not too 
late to widen our visual horizons and to recognize the risks 
that exist in the region, and the ways in which proposed plans 
for energy development may be increasing some of them.
    From the point of view of the administration, the United 
States is caught in a dilemma. As we recognize that Caspian 
energy reserves could make the region a strategic importance to 
the United States this presumes that these reserves are 
developed in a timely fashion by Western firms, and that we can 
assure that our enemies or potential enemies are unable to 
cutoff the flow of oil and gas.
    This is obviously why we strongly support the idea of 
pipelines which bypass both Russia and Iran. However, the need 
for such pipelines has not been considered of sufficient 
strategic interest for the United States to be willing to 
underwrite substantial costs of its construction, although we 
are obviously willing to provide U.S. firms with some degree of 
investment security.
    The partial nature of our commitment to the development of 
Caspian reserves has led us to create the illusion of a 
stronger strategic relationship with these states than actually 
exist in fact. Given our reluctance to spend significant 
amounts of money, we are trying to substitute symbolic goods 
for material ones in order to create the illusion that our 
partnership with these states is stronger than, in fact, it is, 
and it is, indeed, in fact. Otherwise, there is no prospect 
that the development of the region's energy reserves will 
proceed in a way that advances U.S. strategic interest.
    U.S. preoccupation with energy politics was such that until 
recently we allowed many other issues of state-building in this 
region to take a back seat, especially if they created the 
potential to undermine U.S. efforts in the energy sector. By 
the time we began to realize that the three most important 
states from the point of view of energy production, Azerbaijan, 
Kazakhstan, and Turkmenistan, were beginning to undermine their 
own long-term well-being because of the corrupt practices of 
their leaders, we had lost much of the leverage that we had 
enjoyed a few years previously.
    The leaders of these countries are now rich men, and much 
more worldly wise. They now have a better understanding of how 
to evaluate the difference between symbolic offerings and firm 
financial commitments when offered in international 
negotiations. Five years ago, they had an unrealistic sense of 
how easy it would be to develop their reserves, and thought 
that talk of strategic engagement might signal a major shift in 
U.S. priorities, to bring in the United States as an active 
partner to be called on to help them out of all kinds of 
difficulties, both economic and security ones.
    Today, the leaders of all three of the Caspian oil and gas-
rich states understand the nature of the U.S. commitment quite 
differently. They are learning to make brilliant use of the 
photo ops presented to them to impress their own domestic 
constituencies, but they do not do much bowing in private when 
pressured by visiting American officials. In other words, we 
are becoming less and less successful with regard to 
influencing these societies to develop in ways that serve U.S. 
interests.
    Let me just make a few comments about each of these 
countries. Turkmenistan is the state that I view as the most 
problematic from the point of view of its own internal 
security: In the first years of independence it looked like oil 
and gas wealth was right around the corner, and that there 
would be plenty of revenue to raise the general standard of 
living in this small overpopulated population. However--and 
there was greater attitude of tolerance on the part of the 
elites and the masses of the President's use of foreign 
interest in Turkmenistan's oil and gas reserve to accrue 
personal wealth for his family and close cronies, partly 
because he had granted other leading families the ability to 
continue to operate fairly freely in the cotton sector.
    However, the failure to engage in systematic economic 
reform has put the country at potential risk, and there is 
strong evidence that chronic unemployment is already becoming a 
serious problem throughout the country. The age structure of 
the population exacerbates this problem, and in 1997 only 37 
percent of the Turkmen population were employed. That situation 
has gotten substantially worse.
    However, instead of taking advice, the Turkmen have chosen 
to distance themselves from the international financial 
community, and today U.S.-Turkmen relations appear to be more 
strained than at any time in our recent history. They are also 
not getting on very well with their neighbors, including border 
problems with Uzbekistan.
    One of the recent developments in Turkmenistan is that they 
appear to be--these economic problems contribute to the reason 
why Turkmenistan appears to be on the verge of returning to 
marketing gas via Russia. This latter will give the Turkmen 
much-needed cash, but it will set them back on the road to 
long-term dependency on Russia.
    The states are grouped in the area of the severity of what 
I see their domestic problems.
    Just a few words about Azerbaijan. By contrast with 
Turkmenistan, President Heydar Aliyev has made skillful use of 
Western firms in the region, and representatives of most 
Western countries are involved in at least one of the 
international consortia that have been formed to develop 
Azerbaijan's resources.
    From Aliyev's point of view, the goal is to try to 
skillfully lead Azerbaijan through the difficult years until 
the pipeline can be built, and then groom his son to succeed 
him. Aliyev recognizes that he has problems. For example, one 
of the damning things about the future is that almost the 
entire education system in Azerbaijan, which was already 
failing under Soviet rule, has come into a state of near total 
collapse, with about 50 percent of the secondary schools in the 
country closed and an acute shortage of primary schools, 
primary education.
    Aliyev is also learning first-hand what it is like to be 
tied to the fluctuation of the world oil prices. Low prices 
meant unexpected budget deficits, while high ones made it more 
profitable to sell oil versus refining it, one of the things 
which has contributed to Baku running out of oil to fuel power 
plants, and the recent restrictions on electricity use in Baku.
    High oil prices, though, have done little to resolve 
Azerbaijan's security dilemma. The Armenian-Azerbaijan dispute 
is unsolved, and largely frozen in time. National consolidation 
in Georgia is still stalled, and the war in Chechnya puts them 
at risk.
    Azerbaijan also is concerned about whether the United 
States will serve as a security guarantor for the region, and 
it is not clear how they will respond to whatever new 
incentives Vladimir Putin is willing to put on the table, 
because he is traveling through the CIS offering the Newly 
Independent States a host of new carrots to go along with the 
old set of sticks.
    I will now turn for a minute or two to Kazakhstan. We see 
lots of evidence that the Kazakh-Russian relationship is also 
ripe for redefinition. Old debts are being settled, and the two 
States are looking for new ways to have a dialog.
    Kazakhstan is the state that I am the most optimistic about 
in the region, despite the fact that President Nazarbeyev is 
certainly trying to manipulate the country's political system 
to serve his own purposes. The 1999 elections were very 
questionable, both the Presidential and parliamentary, but the 
crackdown in Kazakhstan need not kill the prospects of the 
country having a democratic future, although it ensures that it 
will have an undemocratic present.
    Kazakhstan is implicitly pluralistic, given the country's 
enormous size, its economic complexity, and its economic 
diversity, and to be sure, much of Kazakhstan's future 
stability depends on the success of economic reform. Economic 
reform, and not simply investment in the oil and gas sector. 
There has been an enormous amount of economic activity in 
Kazakhstan in recent years in terms of economic assistance and 
foreign direct investment, and this has created a host of new 
stakeholders in the Kazakh economy, and these stakeholders come 
most importantly outside of the oil and gas sector, for control 
of the oil and gas sector has remained largely in the hands of 
the official family.
    This is a very, very positive development, because it 
creates an elite group that can help Kazakhstan make the 
transition from its current quasi-autocratic situation to a 
more pluralistic and a more normal-functioning economy.
    The government, however, has to be able to deal with the 
increasingly more impoverished half to a third of the 
population. This means better tax collection. The growing 
criminalization of the economies have threatened Kazakhstan as 
well, although Kazakhstan is far removed from the risks of 
extremists or terrorist groups than either neighboring 
Kyrgistan or Uzbekistan.
    In conclusion, for 30 seconds, the Caspian area is an area 
of potential wealth and potential danger. With time, the former 
is proving more difficult to access, and the latter more 
difficult to avoid. In fact, U.S. policy is already implicitly 
beginning to recognize this. Secretary of State Madeleine 
Albright's upcoming trip to the region will take her to 
Kazakhstan, Kyrgistan, and Uzbekistan, and will focus on the 
relationship between democracy and security rather than on 
energy issues.
    In the past year or two, we have seen the cause of 
democracy take a hit throughout the region. Three states that 
were most promising with regard to their commitments to 
democratic values have been showing serious slippage. There 
were political assassinations in Armenia, the most prominent 
Kyrgyz opposition figure is in jail, and the recent 
Presidential elections in Georgia were judged to be seriously 
flawed.
    The loss of the democratization process in one state has 
implication in all others. The war in Chechnya remains a major 
source of political instability for all three Caucasian states, 
adding to a serious regional refugee problem, stimulating 
traffic in weapons, and creating new incentives for 
international terrorist groups to travel to the region.
    The situation in the Central Asian region, including in 
Kazakhstan, is destabilized by their proximity to Afghanistan 
and Pakistan, which has also brought terrorist groups, global 
terrorist networks into the region and has integrated Central 
Asia, unfortunately, into the growing drug trade.
    Improving security measures alone will not solve these 
problems. The countries of the region must add to the numbers 
of stakeholders in their countries. This can be done in a 
variety of ways, through economic reforms which increase the 
number of medium and small entrepreneurs, by broadening the 
nature of political institutions and the range of topics open 
for public debate, and by local empowerment.
    Unfortunately, the role of the United States in this 
process is limited. We can serve as a model, a source of 
investment in desirable economic projects, a training ground 
for young people, and even, as appropriate, a source of 
assistance in preventive security. However, we cannot solve 
their problems for them, and this is true no matter what 
timetable is agreed on for building new oil and gas pipelines 
in the region.
    Thank you.
    [The prepared statement of Dr. Olcott follows:]

             Prepared Statement of Dr. Martha Brill Olcott

    With time the Caspian region seems certain to turn into more of a 
strategic burden to the U.S. than it is a strategic asset. The area is 
a fascinating one, with layers of different civilizations piled on top 
of one another, set against a background of beautiful and exotic 
scenery that seemingly conceal the promise of wealth. This has been 
enough to lure romantic adventurers to the Caspian for hundreds if not 
thousands of years. But does this make it an area of strategic interest 
to the U.S.?
    When we first asked that question, at the time that these states 
were granted independence, we were hesitant to answer yes. The U.S. 
initially opened embassies in only one of these three major oil and gas 
producing countries, in Kazakhstan because it had nuclear weapons. We 
quickly moved to open embassies throughout the region, although for the 
first couple of years of independence we still assumed that these 
states would remain as part of some still ill-defined Russian orbit, 
and we did little to diminish the influence of Moscow in the region.
    However, then the Russians began to misbehave to some of their new 
neighbors, and in particular to Azerbaijan and Georgia, both of which 
were then led by former dissidents who refused to sign on for 
membership in the CIS. We were disturbed by these Russian actions, in 
part because the U.S. is a traditional champion of vulnerable and weak 
states but also because we had come to be aware of the natural 
resources found in this region. This of course was something that the 
Russians were long aware of, as Soviet officials had mapped most of the 
strategic resources found in theft country, and had had plans to 
develop much of the region's oil, gas and gold reserves in the 21st 
century, when some of the easier to work deposits in Russia proper 
would already be depleted.
    So the second-term Clinton administration in particular came to 
reevaluate the importance of the Caspian region, and began a policy of 
weaning these states from Russia as a means of insuring their 
independence and economic well-being. One of the features of this 
policy is to maintain, at least on a rhetorical level, that the Caspian 
Region is an area of strategic importance to the U.S. When witnessing 
the signing of the inter-state agreements that endorsed the idea of the 
Baku-Ceyhan pipeline, President Clinton declared that: ``These 
agreements . . . are truly historic. They will advance the prosperity 
and security of a region critical to the future of the entire world.'' 
The signing ceremony took place during the Istanbul OSCE summit of 
November 1999, and was attended by the presidents of Turkey, 
Azerbaijan, Georgia, Kazakhstan, and Turkmenistan.
    Yet such statements beg the question of whether the Caspian region 
is in fact a strategic one for the U.S. I think that the answer to this 
questions is no.
    At best this has been an area of secondary security interest for 
the U.S., and even this interest is derivative of our broader security 
concerns, having to do with Russia, South Asia and a host of global 
issues such as terrorism, the proliferation of weapons of mass 
destruction, international crime and drugs. Moreover, as U.S. officials 
have come to better understand the difficulties inherent in the 
development of Caspian oil our more general security concerns are 
beginning to become more of a focus of these relationships.
    I would argue that with time they will become an even greater 
focus, as some of the states of the Caspian region go from being 
potential strategic assets to become active threats to their neighbors 
and the global community more generally. Our preoccupation with energy 
development has led us to form a partial picture of these states, 
However, it is not too late to widen our visual horizons, and recognize 
the risks that exist in the region, and the ways in which proposed 
plans for energy development may be increasing some of them.

                  HOW IMPORTANT ARE CASPIAN RESERVES?

    The U.S. has never treated the Caspian region as if it were of 
primary strategic importance for the U.S. The President has never been 
there, and the Secretary of State will be making her first trip out to 
the region next week.
    However, we were caught in a dilemma, as we recognize that Caspian 
energy reserves could make the region of strategic importance to the 
U.S. This presumes that these reserves are developed in a timely 
fashion by Western firms, and that we can insure that our enemies or 
potential rivals are unable to cut off the flow of the oil and the gas. 
This is obviously why we strongly support the idea of pipelines which 
by-pass both Russia and Iran. However, the need for such a pipeline is 
not considered to be of sufficient strategic interest to the U.S. that 
we will underwrite the cost of its construction by using public funds, 
although we will provide U.S. firms with some degree of investment 
security.
    The partial nature of our commitment to the development of Caspian 
reserves has led us to create the illusion of a stronger strategic 
relationship with these states than exists in fact. Given our 
reluctance to spend significant amounts of money, we are trying to 
substitute symbolic goods for material ones, in order to create the 
illusion that our ``partnership'' with these states is stronger than in 
fact is the case. Otherwise, there is no prospect that the development 
of the region's energy reserves will proceed in a way that advances 
U.S. strategic interests.
    U.S. preoccupation with energy politics was such that until 
recently we allowed many other issues of state-building in this region 
to take a back seat, especially if they created the potential to 
undermine U.S. efforts to gain preferential treatment in the energy 
sector. By the time that we began to realize that the three most 
important states from the point of view of energy production--
Azerbaijan, Kazakhstan and Turkmenistan--were beginning to undermine 
their own long-term well-being because of their corrupt practices we 
had lost much of the leverage that we had enjoyed a few years 
previously.
    The leaders of these countries are now rich men, and much more 
worldly wise. They now have a better understanding of how to evaluate 
the difference between symbolic offerings and firm financial 
commitments when offered in international negotiations. Five years ago 
they had an unrealistic sense of how easy it would be to develop their 
reserves, and thought that talk of strategic engagement might signal a 
major shift in U.S. priorities sufficient to bring in the U.S. as 
active partners to be called on to help them out of all kinds of 
difficulties, including security ones.
    Today the leaders of all three of the Caspian states understand the 
nature of the U.S. commitment quite differently. They are learning to 
make brilliant use of the photo-ops presented to them to impress their 
own domestic constituencies, but don't do much bowing in private when 
being pressured by visiting American officials. In other words, we are 
becoming less and less successful with regard to influencing these 
societies to develop in ways that serve U.S. interests.

                              TURKMENISTAN

    The best example is probably the case of Turkmenistan, the most 
opaque of the Caspian states. President Saparmurad Niyazov has taken 
the name Turkmenbashi (head Turkmen) in the style of Attaturk, but has 
constructed a cult of personality that makes him more like a space-age 
version of a traditional medieval Khan. A seventy-five foot gold 
likeness of himself sits atop the Arch of Neutrality, which rotates 
with the sun to cast Niyazov's shadow over most of downtown Ashgabat, 
the nation's capital. Most prominent institutions are named after 
Niyazov, his photo at just about every important intersection and on 
all but the most insignificant of the Turkmen currency. Media is 
tightly controlled, and there is no intellectual life to speak of in 
the country.
    In the first years of independence, when it looked like oil and gas 
wealth was just around the corner and that there would be plenty of 
revenue to raise the general standard of living of this small 
underpopulated nation, the peculiarities of the Turkmen political 
system seemed less troubling to us as well as to potential political 
and economic stakeholders in the country. Now with no new pipeline 
routes likely to rapidly materialize the situation in this increasingly 
more cash starved country is looking more dire. Fortunately 
Turkmenistan is a significant cotton producer as well, and this sector 
has continued to create jobs and opportunities for a part of the 
overwhelmingly rural population.
    This country has never had a political opposition, and Niyazov's 
rivals from within the old communist party elite have been forced to 
leave the country. The President has managed to use foreign interest in 
Turkmenistan's oil and gas resources to accrue personal wealth for his 
family and close cronies. However, the other branches of the economy 
(especially the cotton sector) have allowed leading regional families 
(often powerful because of their tribal background) to continue to 
maintain some economic influence. Niyazov has tried to keep them at 
arm's length by periodically rotating the cadre close to him (which 
include representatives of these families), but these powerful regional 
families are certain to try and assert their influences in any 
subsequent succession struggle. Moreover, repeated rumors about 
Niyazov's ill-health mean that a succession struggle could be triggered 
at any time.
    Turkmenistan is also struggling to define a distinct international 
identity. It recently reaffirmed its status as a internationally 
recognized neutral state. But Turkmenistan has not yet reached the 
point where it has made its neutrality work. It has not yet turned 
itself into a regional forum. It is unclear that it will ever be able 
to do this unless it moves forward with some sort of well-though out 
policy of social, economic and political reform.
    The failure to engage in systematic economic reform puts the 
country at potential risk. There is strong evidence that chronic 
unemployment is already becoming a serious problem throughout the 
region. The age structure of the population exacerbates the 
unemployment problem brought on by even the limited degree of economic 
restructuring. For example in Turkmenistan, the average population age 
is 23 years; 43 percent of population are children and adolescents and 
10 percent of the population are retirees. As of 1997 only 37 percent 
of the population were employed.
    However instead of taking advice the Turkmen have chosen to 
distance themselves from the international financial institutions. They 
also have more strained relations with the U.S. than any time in our 
shared history, and have put up a well-enforced visa regime to separate 
themselves from theft neighbors. The Turkmen and Uzbeks have begun 
discussion on formal border demarcation between the two states, and 
must now deal with the troubling issue of water. Also of concern is the 
relationship between Turkmenistan and Azerbaijan, potential rivals in 
the Caspian region. The two states have found it difficult to agree on 
terms of transit of gas along the proposed Baku-Ceyhan route, and these 
problems are one reason why Turkmenistan appears on the verge of 
returning to marketing their gas via Russia. The latter will give the 
Turkmen some much needed cash (even if much of the payment comes in the 
form of rubles and barter) but it will set them back on the road of a 
long-term dependency relationship with Russia.

                               AZERBAIJAN

    By contrast with Turkmenistan, Azerbaijan seems determined to 
remain an independent actor in the energy world. President Heydar 
Aliyev has made skillful use of the interest of western firms in the 
region, and most western countries are involved in at least one of the 
international consortia that have been formed to exploit Azerbaijan's 
resources. Disappointments in oil exploration have revealed that 
Azerbaijan has huge gas reserves. Given their pivotal geographic 
position they should have no trouble marketing these reserves, although 
Azerbaijani gas could push some of the Turkmen and the Kazakh out of 
the markets that they had planned to serve.
    From Aliyev's point of view the goal was to try to skillfully lead 
Azerbaijan through the difficult years until the pipelines would be 
built, and then groom his son to succeed him. Ilham is now first vice 
president of SOCAR, the Azerbaijan State Oil Company and chairs the 
Yeni Azerbaijan (Young Azerbaijan) Party. Thus Aliyev has tried to 
restrict the scope and range of independent political activities in the 
country, pressuring the media, and making life difficult for the many 
opposition figures that remain in the country.
    Certainly Aliyev recognizes that he has problems. For example the 
education system that was already beginning to fail under Soviet rule 
was now in a state of virtual collapse, with teachers fleeing the 
profession as their salaries were roughly $24 a month, or enough to buy 
50 kilograms of potatoes.
    Aliyev is also learning first hand what it is like to be tied to 
fluctuations in the world old price. Low prices mean unexpected budget 
deficits, while high ones could also create unexpected problems. For 
example, rising world oil prices made it more profitable to sell oil 
rather than to refine it. As a result, while Azerbaijan's foreign 
partners in the Caspian have been exporting up to 115,000 barrels of 
crude oil per day, the country has run out of fuel oil to fire its 
power plants. In January 2000 the government of Azerbaijan introduced a 
schedule for the electricity supply. The official explanation for such 
measures was the corruption among the energy officials, but this did 
little to appease the Azerbaijanis, who are certainly used to the 
problem of corruption and familiar with the empty promises to eliminate 
it.
    High oil prices, though, have done little to change the shape of 
Azerbaijan's security dilemma, and the uncertainty of their 
relationship with Russia as well as with their Caucasian neighbors. All 
that is familiar to us in the Caucasus has not changed, the Armenian 
and Azerbaijan dispute is unsolved and largely frozen in time, the 
process of national consolidation in Georgia is also stalled, and 
Russia's inability to secure its control of the north Caucasus combined 
with its refusal to withdraw means that the security of the entire 
region is put at risk.
    Two things have changed though, Azerbaijani no longer holds out any 
real expectation that the U.S. will serve as some sort of security 
guarantor of the region. Nothing of course has come of Azerbaijan's 
statement of interest in having a NATO base on their territory, and 
there seem to be in-built constraints on the expansion of the close 
relationships that are developing between Georgian and various NATO 
forces. The second thing that has changed is the emergence of Vladmir 
Putin and his willingness to offer the leaders of the other post-Soviet 
states a new set of carrots to go along with the old set of sticks. It 
is too soon to know how attractive Putin's offers will seem, but like 
the Turkmen, if Azerbaijan gets into a serious cash crunch in the next 
few years, they are apt to seriously consider whatever Russia has on 
offer.
    This is especially true because the Russians have no interest in 
influencing the course of political or economic institution building in 
these countries. Elections can be as manipulated as corrupt leaders 
want them to be, and economic reform as sluggish as it suits the local 
power-holders. After all, it is bad times that help bring back the 
Russians and not the good ones.

                               KAZAKHSTAN

    The nature of the Kazakh-Russian relationship also seems ripe for 
redefinition, and both sides seem ready to bring a new realism to the 
table, as recent negotiations over Kazakhstan's long-term debt seem to 
suggest. These resulted in the transfer of partial ownership of 
Kazakhstan's state power company to Russia's UES. The Kazakhs, who now 
make up the majority of the population in the country that bears their 
name, are more self-confident about what the demographics of their 
country mean for national security. The border demarcation that is 
going on now along their border with Russia may have troubling 
implications for trade between the two states, but it does mean that 
Moscow is learning to accept the idea that Kazakhstan is a sovereign 
state with fixed boundaries.
    Russia is also concerned about contagion from Kazakhstan. 
Deteriorating social conditions also feed the criminal underclass. Drug 
trafficking in particular is becoming more pervasive. Over 260 tons of 
drugs were seized in Central Asia between 1993 and 1999, most of which 
would have transited through Russia, and the increase in the 
trafficking in heroin is of particular concern. Drug enforcement 
estimate that only about 5 percent of drugs passing through the region 
are intercepted. In parts of Tajikistan and Kyrgyzstan drugs have 
already undermined the state. Drugs are creating a new virtual economy 
in parts of Kazakhstan as well. Trafficking though affects all of these 
states, and is aided by a political culture that tolerates an 
increasingly more pervasive pattern of official corruption. A culture 
of payoff and privilege is becoming an ever more dominant one 
throughout the Caspian region.
    This is especially true in Kazakhstan, where there is a great deal 
of hypocrisy in the very public anti-corruption campaign that President 
Nursultan Nazarbayev has engaged in. The campaign has led to dismissals 
of a chief justice, a minister of economics and a minister of the 
interior among others. It has also led to major charges being levied 
against a former prime minister (Akezhan Kazhegeldin) who is President 
Nazarbaev's chief rival. This underscores the atmosphere of political 
convenience in which such charges are made. President Nazarbaev's 
statements about the moral purity of current appointees has done little 
or nothing to quash the rumors about current members of the government 
that are on the take, or about the growing economic power of the 
official family itself. Little wonder when Nazarbayev's daughter, 
Dariga, controls the national television network and her husband, 
Rakhat Aliyev, is head of the tax police, while another son-in-law, 
Timur Kulidayev, is the financial director and vice president of 
Kazakhoil. In fact, when the Nazarbaev machine tried to generated Swiss 
press coverage about Kazhegeldin's secret Swiss bank-accounts they 
inadvertently triggered coverage about their own alleged holdings.
    Nazarbayev has certainly tried to manipulate the country's 
political system to serve his own purposes. In 1999 Kazakhstan held 
very questionable parliamentary and presidential elections. Opposition 
was sharply limited in their participation, and the main political 
opponent of the president, Kazhegeldin was arrested in order to bar him 
from seeking office.
    The current crackdown in Kazakhstan need not kill the prospects of 
the country having a democratic future, but it will insure that it has 
a non-democratic present. Kazakhstan is implicitly pluralistic, given 
the country's enormous size (roughly two thirds that of the continental 
U.S.), its economic complexity and its ethnic diversity.
    This informal pluralism is not a substitute for formal pluralism, 
but it does help keep alive the potential for democratic development in 
the absence of a supportive environment. That supportive environment is 
no longer present in Kazakhstan. Initially, until about 1995, the 
government of Kazakhstan pursued a policy of encouraging the 
development of pluralistic institutions, or at least not actively 
seeking to restrict their development.
    From that time on the government has been on the defensive in the 
political arena, although considerably increasing the scope of 
independent economic activity. Executive power has been strengthened, 
legislative power has diminished, and the judiciary serves the 
interests of the incumbent regime. Kazakh media is also growing less 
free with time. Economic reform has been episodic, but has been largely 
linear, and it is currently much easier for foreigners to do business 
in Kazakhstan than anywhere else in the region. This does not mean that 
investment is secure, or that the playing field a level one. Although 
the presidential family and ``court'' dominate, currency is freely 
tradable, property is relatively sacrosanct, and the diversity of the 
economy is such that independent economic stakeholders are beginning to 
develop throughout the country. Regional economies are also beginning 
to develop. As yet neither the regions, nor the independent political 
actors have much political influence. They are also still too cautious 
to actively seek it, but they are likely to be a force that will need 
to be reckoned with at the time that power begins to ebb away from 
President Nazarbayev.
    Much of Kazakhstan's future stability depends upon the success of 
economic reform. There has been an enormous amount of economic activity 
in Kazakhstan in recent years, in terms of economic assistance and 
foreign direct investment. Kazakhstan received $1.65 billion in World 
Bank loans between 1992 and 1998 and $500 million in IMF loans between 
1993 and 1998. In addition, the country has attracted the highest rate 
of per capita direct foreign investment in the CIS, having received 
more than $7 billion by 1998.\1\ In the first quarter of 1999 another 
$366 million were invested. In 1998 Kazakhstan was in fourth place for 
FDI per capita within the CIS and CEE. Most of this money was 
concentrated in oil and gas sectors, which received 47.9 percent of the 
total FDI from 1993 and 1998 and 82.1 percent of FDI in the first 
quarter of 1999.
---------------------------------------------------------------------------
    \1\ This figure represents total foreign direct investment from 
1995 through the first quarter of 1995. IMF, International Financial 
Statistics, p. 916.
---------------------------------------------------------------------------
    However the government has to be able to help the increasingly more 
impoverished lower third to half of the population maintain a minimal 
standard of living. The economy shows signs of real recovery, after a 
decline in 1998, the real GDP grew by 1.7 percent in 1999. The recovery 
in the oil industry helped the Kazakhs avert a large budget deficit, 
and they have been trying to insulate the needs of their domestic 
market from pressure to export oil in order to increase their foreign 
reserves. As is true of all the other newly independent states, 
Kazakhstan is coming up on a potential crisis of debt service, but as 
its successful Eurobond issues show, it is among the most credit-worthy 
of them.
    The growing criminalization of the economy is a threat in 
Kazakhstan as well, although Kazakhstan is more removed from the risks 
of extremist or terrorist groups than is either Kyrgyzstan or 
Uzbekistan, both of which had violent incidents in 1999. Downtown 
Tashkent was rocked by a series of explosions in February 1999, while 
Uzbek terrorists held Kyrgyz (and Japanese) hostages for several months 
near the Tajik-Kyrgyz border. The situation in Tajikistan too remains a 
fragile one. Unrest in neighboring states would cast a shadow over 
prospects of foreign investment in Kazakhstan as well, and make the 
potentially diverse economy of the country more dependent upon oil and 
gas development, pipelines and pipeline politics. This would be 
troubling, as economic development is Kazakhstan's best recipe for 
success and for the eventual development of a civil and pluralistic 
society.

            THE CASPIAN AS AN AREA OF GROWING SECURITY RISK

    The Caspian region is an area of potential wealth and of potential 
danger. With time the former is proving more difficult to access and 
the latter more difficult to avoid. In fact U.S. policy is already 
implicitly beginning to recognize this. Secretary of State Madeleine 
Albright's upcoming trip to region will take her to Kazakhstan, 
Kyrgyzstan and Uzbekistan, and will focus on the relationship between 
democracy and security rather than on energy issues.
    The Clinton administration has regularly said that the development 
of Caspian energy reserves has to be driven by market forces. These 
market forces are already expressing themselves, and have made it clear 
that the pace of development in the Caspian will be a much slower one 
than the administration had originally projected. As it proceeds these 
societies are likely to continue to evolve, and to do so in ways that 
are not necessarily much to our liking.
    In the past year or two we have seen the cause of democracy ``take 
a hit'' throughout the region. Three states that seemed most promising 
with regard to their commitments to democratic values have begun to 
show serious signs of political reversal. There have been political 
assassinations in Armenia, the one political figure in Kyrgyzstan who 
might have beaten President Akaev in upcoming elections now sits in 
jail, and recent presidential elections in Georgia were filled with 
irregularities.
    The war in Chechnya is a major source of potential instability for 
all three Caucasian states, adding to a serious regional refugee 
problem, stimulating the traffic of weapons and creating new incentives 
for international terrorist groups to travel to the region. The 
situation in Central Asia is being destabilized by its proximity to 
Afghanistan and Pakistan. This has enabled opposition groups from 
Tajikistan and more recently from Uzbekistan to become linked to global 
terrorist networks as well as to the criminal groups that run the 
growing drug trade through the region.
    Drugs undermine weak states, and the developing situation in 
Central Asia is following true to course. Deteriorating economic 
conditions throughout much of the region are tailor-made to the needs 
of the drug industry. Economic necessity makes police and border guards 
more receptive to bribes and ordinary citizens more willing to take the 
risks associated with the transport or cultivation of drugs.
    The proliferation of drugs is undermining these societies. It is a 
blight on the economic and social environment and a threat to the 
traditional system of values. Drugs are wreaking particular havoc on 
the younger generation. The flourishing drug trade in the region 
enables separatist, radical religious, and terrorist movements that 
have already sprung up in Central Asia to become financially self-
sufficient.
    However, improving security measures alone will not solve these 
problems. The countries of the region must add to the number of 
stakeholders in their countries. They can do this in a variety of ways, 
through economic reforms that increases the number of small and medium 
sized entrepreneurs, by broadening the nature of national political 
institutions and range of topics open for public debate, or by 
empowering local or other forms of traditional institutions. The role 
of the U.S. in this process is a limited one. We can serve as a model, 
a source of investment in desirable economic projects, a training 
ground for young people, and where appropriate even as a source of 
assistance in the area of preventive security. However, we can't solve 
their problems for them, and this is true no matter what timetable is 
agreed on for building new oil and gas pipelines from the region.

    Senator Hagel. Dr. Olcott, thank you.
    Mr. Alexander, you have sat through very cheery, glowing 
evaluations of your investment. Would you like to respond to 
some of what you heard?
    Mr. Alexander. Well, I think for BP Amoco the risks 
associated with my new-found colleagues, identified today, are 
risks that are part of our overall portfolio investment 
worldwide. I mean, clearly in this part of the world the 
technical risks to be faced, for example, in the deep water 
Gulf of Mexico versus the political risk we face are things we 
need to balance.
    For us, we believe, as a company, that to ignore the 
aspirations and goals of the host countries we are in, to 
ignore the wishes of our potential customers--we are a big 
player in Turkey today--is not something we ought to do. We 
also believe deeply in holding on to the basic fundamental 
reason for firms, around economic performance and so forth. 
That has to be met, too.
    The real question for us is, is this a paradox, can we 
solve it, and we are trying like crazy to see if we can do it, 
but we are clear this will not be something that is fictitious. 
This cannot be something that is engineered, with an outcome 
that is not the lowest cost, most competitive outcome for us 
here. If it cannot be that way, then we will have to reconsider 
our positioning, as everybody else in the business.
    So it is tough, something this firm has done for a long, 
long time. We have been in business around the world in a lot 
of different places, have faced these risks, believe we can 
manage them in a way that is consistent with our goals and 
consistent with our own internal policies, if that helps.
    Senator Hagel. The issue that Mr. West raised regarding 
MEPCO, can you clarify any of that, or can you enlighten your 
friend?
    Mr. Alexander. No. I think he is absolutely right. I mean, 
the reality is, we are sort of in what I will call data-free 
zone. We actually do not know how much oil will go into this 
pipeline, or who will be committed to it. We really do not know 
the tariffs yet, because it is really difficult to figure out 
the tariff structure not knowing through-puts.
    Senator Hagel. Without knowing, I am sorry, what?
    Mr. Alexander. We do not know what the through-puts are. 
All the tariffs that are being talked about are on some 
theoretical through-put, but until the host government 
agreements are signed, until there is a backbone framework 
where we can actually begin to do the work of understanding the 
commercial viability, what the gaps are between where we stand 
today and what we will need to do to be economic. I cannot sit 
here today and tell you this is a go, no-go. We do not know the 
answer to these questions. We do not know whether this will be 
attractive enough to entice other oil through, into the 
pipeline. This is the only way this will work. There has got to 
be the low cost sink, if you will, with an envelope wide enough 
to bring enough reserves into it.
    So again, I think the next step for all of us is to get the 
host government agreements signed. Ambassador Wolf talked about 
his negotiations as we speak. To the extent that that is 
landed, we, along with our partners and other people that are 
interested in this, will have some data to begin to seriously 
subscribe, or get subscription into this pipeline. Today, we do 
not have that.
    Senator Hagel. Do you have any sense of how much private 
money has been invested over the last 2 or 3 years in the 
Caspian Sea, not just your consortium, but all private funding?
    Mr. Alexander. I do not have it handy. I know our number is 
around $1 billion. I would suspect we are probably in this, the 
Caspian Sea, probably three or four times that amount, and that 
would not include anything around Tengiz and so forth.
    Senator Hagel. Mr. West.
    Mr. West. My guess, Tengiz, that much alone or more, but 
there are some other--Texaco and Agip and British Gas have an 
interest in a field called Karachaganek. That is a substantial 
field. My guess is something in the order of $10 billion or so.
    Senator Hagel. The point that Mr. West made regarding 
already several pipelines in place, and having had some sense 
of this issue over the last 3 years here from our perspective 
here on the committee, and I have been to the area and visited 
most of the countries, I would be interested, Mr. Alexander, in 
having you take us through the process that you, your 
consortium used factoring those dynamics into the equation on 
whether this was a risk reward that could pay off, specifically 
Mr. West's point about existing pipelines, and now we have been 
talking all afternoon about enough oil to get it through, and 
where, and the instability.
    But if you would, just focus a little bit on the economics 
of this, and the pipelines already in existence.
    Mr. Alexander. I want to be clear that the consortium, 
again, has not made any decisions on which export route will be 
taken. That is a matter of vote, debate, and classical 
commercial assessment. Where we are taking the position has 
been on the pipeline to the Baku-to-Ceyhan, which is a 
different issue, and is one that we are taking the lead to try 
to see if we can come to a resolution on.
    Clearly, as Mr. West said, there are other pipelines 
available. They have less scale. They are pipelines that are 
unclear to me that the tariff structure long-term is any better 
or worse than what we might be able to do in Baku-to-Ceyhan.
    It is unclear to me that any of the security issues that 
were raised, lines going through Russia, provide any additional 
security than any line going through Georgia into Turkey. It is 
unclear to me that as the Caspian develops, and perhaps the 
Lukoil announcement, which I do not know much about, or 
Kashagan, which is drilling, more oil going through Russia is 
likely to exacerbate any issues around the Bosporous and some 
of the environmental issues.
    So when we look at the overall package, basically where we 
are is saying we want to take a good, hard look at real data, 
real facts, and we will have to bring this forward to the AIOC. 
At the end of the day, if we cannot develop a competitive, 
commercial and economic alternative to the current pipeline 
systems, then I suspect AIOC will have no choice but to go that 
latter route, but we are not there yet.
    Senator Hagel. What is your timeframe on these kinds of 
decisions? I know they float, and they depend on the 
uncontrollables.
    Mr. Alexander. I think the timing is fundamentally dictated 
by the Azeris. To the extent we are all aiming for 2004, first 
of all, on the phase development, that is--to do that we are 
going to have to have this thing pretty well resolved by late 
summer.
    Senator Hagel. Late this summer?
    Mr. Alexander. Yes, and if you look at all the risks you 
have heard about, probablistically we have got a lot of work to 
do very, very fast.
    Senator Hagel. Thank you.
    Dr. Olcott, is there anything that you see at all that is 
positive about the potential of the Caspian Sea?
    Dr. Olcott. I thought I was being upbeat.
    Senator Hagel. You thought you were being upbeat.
    Dr. Olcott. Yes. I think that--I am trying to think of how 
to answer that.
    Senator Hagel. Don't strain yourself.
    Dr. Olcott. I think that the oil resources in the Caspian 
will be developed. I am just not confident that there are not 
going to be some fairly major upheavals in the area before the 
newly constructed pipelines are in place, and that I think the 
assumption in U.S. policy that the actors that we are dealing 
with are going to be the actors in place--the actors that we 
are dealing with at the beginning of the process are going to 
be the actors in place at the end is probably very mistaken, 
and that is I think what I was trying to say about Kazakhstan.
    That is the one place I feel that we are in a relatively 
stable situation, and the country is developing in ways in 
which you would expect a quasi-authoritarian former Communist 
state to develop. It is less democratic than we want, but 
slightly more democratic than he wants, and the infrastructure 
is being developed for economic reforms necessary to support an 
active oil and gas sector.
    You see other kinds of industry emerging, and that is where 
I think the United States should be putting its influence, to 
try to push the Kazakhs along even faster.
    The Turkmen case, I do not see anything very positive 
occurring, and a lot will depend upon the health of Niyazov and 
how quickly he passes from the scene, and that is a terrible 
thing to say, but I do not think that under Niyazov we will see 
much positive in Turkmenistan.
    In the Azerbaijani case I am not as familiar with the 
domestic politics as I am with the five Central Asian states, 
but there I think the question of stability puts it some place 
between the two. There is more infrastructure development, more 
economic reform than in Turkmenistan, but I would say that the 
survival, stability in Azerbaijan is not as preordained as 
stability in Kazakhstan.
    It lives in a more dangerous neighborhood, and its ruler is 
older, and has not made the same use of the elite, potential 
elite of Azerbaijan, the talent of the Azerbaijani alternative 
elite and the talent of the Azerbaijani population that 
Nazarbayev has.
    Azerbaijan is a small state, and so corruption is more 
insidious than in a large state like Kazakhstan where it can be 
more dispersed across the population, so the question is, when 
will people be sufficiently turned off in Azerbaijan that they 
do not come back into the economy in the ways that we need them 
to. They are not at this point yet, but again I think the 
United States can be a more active pressure for more meaningful 
economic reform and keep the pressure on for political reform, 
because I would say Azerbaijan is far from a lost cause.
    So I think that is relatively upbeat.
    Senator Hagel. So that is the best you can do here.
    Thank you.
    Mr. West, you referenced Iran on a couple of occasions. I 
would like to draw you out a little bit more on your thoughts 
regarding Iran. What is going on, what may go on, any potential 
there? Anything that you would like to offer in addition to 
what you talked about in your testimony?
    Mr. West. I think there are several points. One is that, 
first, Iran is in a relationship with the Caspian. Obviously, 
it is the name that cannot be mentioned, at least to American 
companies or to companies that have significant interests in 
the United States.
    But that, you know, our view is that if you want these 
projects to get going, irrespective of the pipelines, you 
want--particularly the AIOC consortium, you want to be able to 
have as many alternatives as possible, and I think Iran is 
clearly an alternative, and you know, there does not 
necessarily have to be investment in infrastructure by Western 
companies for some of this oil to flow into northern Iran and 
be swapped. The Iranians are actually moving crude oil from the 
Gulf up to northern Iran to be processed and consumed there.
    The other is that obviously Iran is an area of tremendous 
interest. Again, in this whole portfolio issue, if you are a 
world-class company like BP or Exxon Mobil, or Total, or 
Chevron or whatever, Iran is on everybody's target. It is 
highly prospective. There are a lot of risks. The U.S. 
Government is a big risk right now, and doing business in Iran 
is going to be very complex.
    Getting things done with the Iranians is very complex, but 
I think people have to recognize that Iran is a factor. It is a 
country with 70 million people. It has shown in the last 20 
years extraordinary strength. It is not going away, and I think 
eventually we have to come to terms with Iran and deal with 
Iran. We just cannot ignore Iran.
    Senator Hagel. Mr. Alexander, any perspective on Iran?
    Mr. Alexander. I think it is difficult to dispute anything 
Mr. West has said. I mean, the geographic positioning of the 
nation, the resource base of the nation is something that needs 
to be considered.
    Clearly, our position has been one where, at least in terms 
of the Caspian, in all our actions we have not--we do not 
believe that is a practical solution today, so something that 
we are not considering.
    Senator Hagel. How much of a realistic threat do you 
believe--and I would like to ask each of you this--Russia is to 
this specific issue of energy in the Caspian?
    I know it is unpredictable, and no one can give any 
accurate assessment, but as you heard the give-and-take earlier 
this afternoon between Ambassador Wolf and myself, and 
Secretary Goldwyn, this is a very serious issue, and you 
brought it up, too, Dr. Olcott, that those people in that 
region are those emerging republics, and emerging market 
economies, using the term somewhat loosely, are very concerned.
    And that has been registered with me personally by the 
leadership of those countries, by my colleagues, I suspect by 
your company, and we have to factor that in to some extent, so 
I would be interested in each of your three observations on 
that issue.
    Mr. West.
    Mr. West. From my standpoint, I think historically, one, 
you have to keep in mind the concept of the near-abroad, that 
the Russians considered this their territory, and the Russian 
oil industry considered some field such as Tengiz as theirs. 
They discovered it, and there are certain factors in Russia 
which are still apoplectic that a field like Tengiz, which is 
really one of the largest new fields in the world, is not under 
their control.
    With all due respect to the U.S. Government, I think that 
if you want to minimize the impact of the Russians commercially 
what you need to do is to have as many possible commercial 
outlets as possible.
    At times, I honestly believe that by closing off Iran, and 
the complexities of trying to force outlets to the West, what 
we have done is, we have essentially eliminated a lot of 
negotiating leverage, and given the Russians a veto over a lot 
of things. I think that is a mistake, and I think the best way 
to get the Russians to the table on reasonable terms is to have 
alternatives, and at times we have not done that.
    I think that the probabilities are quite high that Russia 
is going to try and impose as much influence as it can. The new 
government there is very sensitive to what they lost. These are 
hard currency-generating assets, and they do not have to own 
them to get a cut from them. I think also that frankly if you 
want to help the countries in this region the best thing is to 
get the projects going, not necessarily build a big pipeline, 
but to get each project going, to get hard currency generated.
    Whether the hard currency is going to move to the people's 
pockets or to banks in Zurich is another matter, but at least 
to get the cash-flow moving, and at times I think U.S. policy 
has had the opposite effect.
    Senator Hagel. Thank you.
    Mr. Alexander.
    Mr. Alexander. I think--I mean, just a couple of angles 
into this. I am not an expert on this particular area, but I 
think Mr. Putin is in the process of forming a position of the 
Russian country. I mean, internally to Russia, the level of 
direct foreign investment they are getting is not exactly 
through the roof, either. I think it meets the same test as the 
West Africa test and fails, so I do think there is a serious 
issue about how do you attract direct foreign investment, and 
how does that tie into foreign policy, particularly in this 
region?
    It seems to me the Governments of Kazakhstan, Azerbaijan, 
one of the ways they are dealing with this is inviting large 
consortia into the country. I mean, despite all you heard about 
the risks and so forth, the reality is, AIOC and Shah Deniz 
have 14 different companies involved, one Russian--14 different 
companies are the who's who of oil and gas, and they have 
chosen all of us collectively to spread our risk and try to see 
what we can do to develop this.
    So I think it seems to me there are historic issues, as 
Robin has pointed out, but it is unclear to me what the overall 
impact will be of Russia on this region.
    Senator Hagel. Obviously, your company and the consortia 
had to factor some of that into their thinking.
    Mr. Alexander. Yes. I think this situation is changing 
rapidly, day by day. As you know, we are the largest investor--
you may know, we are the largest investor in Russia in the oil 
industry. We have had a much-publicized series of issues in 
Sidanca, and are looking in investing in major development in 
Siberia. Again, we remain optimistic, or stubborn, or whatever 
the adjective is, but at the end of the day we believe that we 
can actually help our presence there and our engagement there 
to reshape the way this industry works in those countries.
    Senator Hagel. Well, your little company has done pretty 
well over the years. It is a joke, Dr. Olcott.
    Dr. Olcott. Thank you. I think that the question is a very 
good one, and that we should expect to see some redefinition of 
Russia's relationship with the Caspian States as part of 
Putin's maturation process. It is hard yet to predict how 
successful a leader he is going to be. We have some signs I 
think that we can work with him. He has given two different 
kinds of signs, I would say.
    First, he has gone back to the whole question of debt for 
asset swaps which was done at the beginning of independence, 
which was associated with Chubais and that group of performers. 
Now Chubais has come back with it, and recently the Russian 
energy company that Chubais heads took a piece of Kazakhstan's 
energy company as part of a swap of debts.
    This is, I think, a very important development, because it 
can occur in other places in the region. I do not think we have 
to worry at any point very soon about Russia reasserting its 
Imperial presence, but it will try to nudge into these oil and 
gas projects, and may do so fairly--somewhat successfully on a 
limited basis.
    The role of Gazprom is changing. This hearing is about oil, 
but their relationship to the gas industry and the CIS is 
important. I think we will see a lot of changes in the next 
couple of years and that they will grow as an actor in the CIS, 
or at least they will attempt to grow as an actor in the CIS, 
and they may well succeed.
    The only other thing I would say about Putin is that energy 
policy does not exist in a vacuum for Russia, and he has, as I 
mentioned in my testimony, a host of carrots to bring to the 
table, and Russia's relationship to the security concerns of 
all of these states is really critical. As they become less 
democratic and more pariah-like, then Russia becomes or there 
is a chance that Russia will become the only dependable actor 
they can look to.
    Now, it is not clear how dependable Russia will be, and it 
is not clear how much security assistance Russia will provide, 
but there is more of a chance that Russia will provide more 
security backup than we will. I mean, we are going to provide 
security training, but that is just it, and so in the end there 
is an uneven deck of cards between Russia and the United 
States, and the circumstances in the region will dictate how 
the shuffling of the cards on the Russian part works as much as 
the cards that Russia holds.
    Senator Hagel. Well, you all have been patient, insightful, 
and I am grateful. Thank you all very much.
    Any last comments? Thank you.
    [Whereupon, at 4:11 p.m., the subcommittee adjourned.]
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