[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
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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
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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
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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.
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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.]