[Senate Hearing 108-351]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 108-351

                  U.S. ENERGY SECURITY: WEST AFRICA AND
                             LATIN AMERICA

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 21, 2003

                               __________

       Printed for the use of the Committee on Foreign Relations


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


91-959              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001


                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                 ------                                

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                    CHUCK HAGEL, Nebraska, Chairman

LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
MICHAEL B. ENZI, Wyoming             JOHN D. ROCKEFELLER IV, West 
LAMAR ALEXANDER, Tennessee               Virginia
NORM COLEMAN, Minnesota              JON S. CORZINE, New Jersey
                                     CHRISTOPHER J. DODD, Connecticut

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page

Brodman, Mr. John R., Deputy Assistant Secretary of Energy for 
  International Energy Policy, Office of Policy and International 
  Affairs, U.S. Department of Energy, Washington, DC.............     4
    Prepared statement...........................................     7
Goldwyn, Mr. David L., president, Goldwyn International 
  Strategies, LLC, Washington, DC................................    53
    Prepared statement...........................................    57
Hagel, Hon. Chuck, U.S. Senator from Nebraska, opening statement.     2
McManus, Mr. Matthew T., Acting Director, International Energy 
  and Commodity Policy Office, Economic and Business Affairs 
  Bureau, U.S. Department of State, Washington, DC...............    19
    Prepared statement...........................................    21
Ottaway, Dr. Marina, senior associate, Democracy and Rule of Law 
  Project, Carnegie Endowment for International Peace, 
  Washington, DC.................................................    64
    Prepared statement...........................................    67
West, Mr. J. Robinson, chairman, PFC Energy, Washington, DC......    42
    Prepared statement...........................................    44

                                 (iii)

  

 
          U.S. ENERGY SECURITY: WEST AFRICA AND LATIN AMERICA

                              ----------                              


                       TUESDAY, OCTOBER 21, 2003

                           U.S. Senate,    
     Subcommittee on International Economic
                Policy, Export and Trade Promotion,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met at 2:36 p.m., in room SD-419, Dirksen 
Senate Office Building, Hon. Chuck Hagel (chairman of the 
subcommittee), presiding.
    Present: Senators Hagel and Coleman.
    Senator Hagel. Good afternoon. This is the third 
subcommittee hearing this year on energy security. Prior 
witnesses have given the committee an overview of U.S. energy 
security policy and how that policy is affected by events 
around the world.
    Because U.S. energy independence is not achievable in the 
near term, America needs a comprehensive energy policy that 
recognizes the realities of our interconnected world and the 
linkages between political stability and energy security. Those 
realities vary from region to region. We cannot take a one-
size-fits-all approach to this effort.
    Our first hearing in April of this year on energy security 
focused on an overview of global energy security issues. Our 
second hearing focused specifically on Russia and the Caspian 
Sea region. Today's witnesses will testify on the impact of 
recent developments in West Africa, specifically in Liberia and 
Nigeria, and in Latin America, especially in Venezuela and 
Mexico.
    Both Latin America and West Africa are regions rich in 
resources but bedeviled by instability and conflict. Both 
regions can also play even greater roles as major suppliers of 
energy to the United States over the years to come. 
Approximately 30 percent of America's crude oil and petroleum 
imports come from Latin America, primarily Mexico and 
Venezuela.
    This energy relationship cannot be separated from our 
bilateral relationships, including trade and immigration. While 
the U.S. imports crude oil and electricity from Mexico, we also 
are a net exporter of natural gas to Mexico.
    The political unrest in Venezuela and the instability in 
the Venezuelan oil market underscore the need for 
diversification of U.S. energy supplies.
    I will ask today's witnesses to comment on how the oil 
strikes against President Chavez in Venezuela have affected 
U.S. energy policy and how the geostrategic implications of 
continued political volatility in Venezuela could affect our 
economic and political interests in South America.
    Other countries in Latin America hold promise with regard 
to energy production, particularly in the natural gas sector. 
Brazil and Chile are examples of potential suppliers of natural 
gas, and they could fit into an overall global energy security 
strategy.
    West Africa holds significant potential for future energy 
development. Nigeria has the ninth largest proven natural gas 
reserves in the world and could significantly increase its 
crude oil production. Nigeria is the greatest energy force in 
West Africa at this time, but other countries in the region, 
Cameroon, Equatorial Guinea, and Gabon, to name a few, are also 
potential suppliers.
    Sao Tome, off the West African coast near Gabon and 
Nigeria, has what may be billions of barrels of crude lying off 
of its coast. However, a military coup seized control of the 
government for a week in July. West Africa will only realize 
its energy potential when it addresses the political 
instability and conflicts that plague the region.
    In both Latin America and West Africa, political 
instability and corruption will stymie long-term development 
efforts. Rule of law reforms must accompany energy development 
efforts in order to attract investment, promote prosperity, and 
ensure peace.
    Today we have two panels of expert witnesses to discuss 
these important issues. On the first panel, we will first hear 
from Deputy Assistant Secretary of Energy for Political and 
International Affairs, John Brodman, who will testify on how 
the Energy Department views energy security issues as they 
pertain to Latin America and West Africa. Then we will receive 
testimony from Matthew McManus, Acting Director of the Office 
of International Energy and Commodity Policy, who will discuss 
energy issues in the Western Hemisphere and Africa and their 
relationship to U.S. energy security and commercial 
opportunities.
    On the second panel, we will hear from the president of 
Goldwyn International Strategies, David Goldwyn; the chairman 
of PFC Energy, Robin West; and a senior associate at the 
Carnegie Endowment for International Peace, Dr. Marina Ottaway.
    Thank you all for coming. We appreciate your time, your 
efforts, and we look forward to your testimony. Welcome.
    [The opening statement of Senator Hagel follows:]

                Opening Statement of Senator Chuck Hagel

    This is the third subcommittee hearing this year on energy 
security. Prior witnesses have given the committee an overview of U.S. 
energy security policy and how that policy is affected by events around 
the world.
    Because U.S. energy independence is not achievable in the near 
term, America needs a comprehensive energy policy that recognizes the 
realities of our interconnected world, and the linkages between 
political stability and energy security. Those realities vary from 
region to region. We cannot take a one-size-fits-all approach.
    Our first hearing in April on energy security focused on an 
overview of global energy security issues. Our second hearing focused 
specifically on Russia and the Caspian Sea Region. Today's witnesses 
will testify on the impact of recent developments in West Africa, 
specifically in Liberia and Nigeria, and in Latin America, especially 
Venezuela and Mexico.
    Both Latin America and West Africa are regions rich in resources 
but bedeviled by instability and conflict. Both regions can also play 
even greater roles as major suppliers of energy to the United States. 
Approximately 30 percent of America's crude oil and petroleum imports 
come from Latin America--primarily from Mexico and Venezuela.
    This energy relationship cannot be separated from our bilateral 
relationships, including trade and immigration. While the U.S. imports 
crude oil and electricity from Mexico, we also are a net exporter of 
natural gas to Mexico.
    The political unrest in Venezuela and the instability in the 
Venezuelan oil market underscore the need for diversification of U.S. 
energy supplies. I'll ask today's witnesses to comment on how the oil 
strikes against President Chavez in Venezuela have affected U.S. energy 
policy and how the geostrategic implications of continued political 
volatility in Venezuela could affect our economic and political 
interests in South America.
    Other countries in Latin America hold promise with regard to energy 
production, particularly in the natural gas sector. Brazil and Chile, 
for example, have potential as suppliers of natural gas and could fit 
into an overall global energy security strategy.
    West Africa holds significant potential for future energy 
development. Nigeria has the 9th largest proven natural gas reserves in 
the world and could significantly increase its crude oil production. 
Nigeria is the greatest energy force in West Africa at this time, but 
other countries in the region--Cameroon, Equatorial Guinea and Gabon to 
name a few--are promising.
    Sao Tome, off the West African coast near Gabon and Nigeria, has 
what may be billions of barrels of crude lying off its coast; however, 
a military coup seized control of the government for a week in July. 
West Africa will only realize its energy potential when it addresses 
the political instability and conflicts that plague the region.
    In both Latin America and West Africa, political instability and 
corruption will stymie long-term development efforts. Rule of law 
reforms must accompany energy development efforts in order to attract 
investment, promote prosperity, and ensure peace.
    We have two panels of expert witnesses with us today to discuss 
these important issues. First, we will hear from Matthew McManus, 
Acting Director of the Office of International Energy and Commodity 
Policy, who will discuss energy issues in the Western Hemisphere and 
Africa and their relationship to U.S. energy security and commercial 
opportunities.
    Then, we will receive testimony from Deputy Assistant Secretary of 
Energy for Political and International Affairs, John Brodman, who will 
testify on how the Energy Department views energy security issues as 
they pertain to Latin America and West Africa.
    On the second panel, we will hear from the president of Goldwyn 
International Strategies, David Goldwyn; the chairman of PFC Energy, 
Robin West; and a senior associate at the Carnegie Endowment for 
International Peace, Dr. Marina Ottaway.
    Thank you all for coming and welcome.

    Senator Hagel. I have been joined by the distinguished 
Senator from Minnesota. Senator Coleman, would you like to 
offer a statement before we hear from the witnesses?
    Senator Coleman. Just very briefly, Mr. Chairman. First, 
thank you for holding this very, very important hearing. I have 
an interest from two perspectives, one representing a farm 
State, an interest in reducing reliance upon foreign oil and 
increasing the use of renewables. I bring that perspective to 
the table, but also as chair of the Western Hemisphere 
Subcommittee within Foreign Relations, concern about both the 
challenges and opportunities, concern about the situation in 
Venezuela which you referenced in your opening statement, 
concerns most recently about the political situation in 
Bolivia, some challenges regarding energy production in 
Colombia, and though perhaps not part of this hearing, I look 
forward to some discussion about some of the opportunities in 
Trinidad that have been discussed recently.
    So again, this is a very, very important hearing, and I 
look forward to the testimony. Thank you, Mr. Chairman.
    Senator Hagel. Senator Coleman, thank you very much.
    Gentlemen, we are prepared for your testimony. We will 
begin with you Secretary Brodman. Thank you.

  STATEMENT OF JOHN R. BRODMAN, DEPUTY ASSISTANT SECRETARY OF 
 ENERGY FOR INTERNATIONAL ENERGY POLICY, OFFICE OF POLICY AND 
 INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY, WASHINGTON, 
                               DC

    Mr. Brodman. Thank you, Mr. Chairman, Senator Coleman. I am 
pleased to appear before you today to discuss the 
administration's efforts to address our Nation's energy 
security with a particular focus on West Africa and Latin 
America. I have submitted for the record a much longer written 
statement and I believe I can keep my oral remarks today to 
less than 10 minutes.
    Senator Hagel. All the written statements will be included 
in the record. So that will be fine, Secretary Brodman, and 
other witnesses today, if they would like to do the same, we 
will treat your statements the same as Secretary Brodman. 
Please proceed.
    Mr. Brodman. Thank you.
    President Bush's National Energy Plan recognizes that the 
United States cannot address its energy concerns alone, that 
our energy security is intricately linked to international 
markets as a result of our increasing dependence on external 
sources of supply. We recognize that energy policy has a strong 
role to play in assuring that our energy supplies represent a 
diverse set of energy resources from a diverse set of energy 
suppliers. Therefore, security of supply is the driving force 
behind our policy engagement on energy issues with many 
countries.
    While our policy of supply diversity has been successful to 
some degree, the development of many frontier oil provinces 
carries with it its own set of political, economic, and 
security risks. Our policy of diversifying supplies relies on 
commercial investment in energy projects. We do not tell our 
companies where to invest or where to buy oil. It is up to 
them.
    And there are a considerable number of obstacles to 
realizing this commercial investment directly related to 
economic, political, and security risks. We have seen that an 
unfavorable business climate may keep needed energy resources 
locked away from development for a long time.
    The emerging threats to energy security in many new 
producing countries and regions and, indeed, as recent 
developments in Venezuela and Nigeria have demonstrated, in 
older producing regions as well are somewhat different than 
those we have faced in the past. These new threats to energy 
security, clearly recognized in the National Energy Plan, call 
for a continued and possible enhancement of the balanced and 
sustained engagement with the oil-producing countries that we 
have been pursuing to help them manage and utilize their 
revenues in a way that promotes political stability and 
sustainable economic growth.
    The Western Hemisphere and Africa are important sources of 
our imports of oil and natural gas and their importance is 
likely to grow in the future. Even though their proven reserves 
and production will never allow them to replace the Middle East 
in importance to world energy markets, they will nonetheless be 
an important source of additional supplies for years to come.
    We have learned from experience that it is the marginal 
barrels that are the important factor in determining conditions 
in the oil market. Over the past decade, non-OPEC oil 
production has on average more than kept pace with the rise in 
world oil demand, thereby limiting OPEC's share of the market. 
This trend is expected to continue in the years ahead, and 
Africa and Latin America together could contribute 5 million to 
7 million barrels a day of additional oil to the market in the 
next 10 to 15 years.
    Turning to our hemisphere and to Latin America, as you 
know, the United States, Canada, and Mexico are working 
together to create ways to facilitate the development of a true 
North American energy market that will deliver reliable, 
affordable energy to the citizens of all three countries. The 
President's National Energy Policy also recommends ongoing 
energy consultations with other countries in Latin America to 
improve the energy investment climate. The energy sector 
requires capital inflows to achieve adequate growth, especially 
in the oil and natural gas sectors.
    Latin America, Mexico, and the Caribbean currently account 
for 10.5 million barrels a day of global oil production which 
could rise to 13 million barrels a day or more in the next 
decade. If we add Canada to this equation, 52 percent of U.S. 
crude oil imports and 54 percent of U.S. petroleum product 
imports come from the Western Hemisphere. Of the top five 
exporters to the United States, three, Canada, Mexico, and 
Venezuela, are in our hemisphere. These three countries account 
for a large percentage of the 314 billion barrels of proven oil 
reserves in the region, a level of over 10 times the current 
U.S. oil reserves.
    Nine other countries, Argentina, Bolivia, Brazil, Chile, 
Colombia, Ecuador, Guatemala, Peru, and Trinidad and Tobago, 
have oil and gas reserves of varying sizes. While not large by 
international standards, the oil reserves of these nine 
countries can provide an important source of energy, and the 
region is also richly endowed with natural gas and 
hydroelectric power potential.
    The hemisphere's economic future and energy security is 
contingent upon the availability of ample energy supplies. 
Therefore, the countries in the hemisphere must have in place a 
set of policies that support increased energy production, 
energy integration, diversification of supply, and increased 
foreign investment. The Department of Energy has been working 
with its neighbors through various mechanisms to foster a 
climate that will produce these results.
    The loss of Venezuelan oil supply during December, January, 
and February was a serious blow to U.S. oil supplies. There is 
a wide range of estimates about Venezuela's ability to restore 
oil production and export of oil. Many analysts are also 
questioning whether current production can be sustained. The 
strike-related loss of revenue and the political climate in 
Venezuela make it highly unlikely that Venezuela will be able 
to generate internally or attract from the outside the revenues 
it needs to sustain or expand oil production capacity in the 
immediate future. Experts have not seen evidence of the 
investment such as drilling activity necessary to sustain 
production. The lack of clarity in the information regarding 
Venezuela's production, exports, and future prospects is an 
important element that is adding to the current uncertainty and 
instability in the marketplace.
    In Mexico, on the other hand, there are positive signs for 
the long term. In the recent past, the current administration 
has come out in favor of greater private sector participation 
in Mexico's oil and gas development. While this is just the 
first step, and recognizing that there are immense political 
obstacles and hurdles to be overcome for Mexico to reach this 
goal, it is nevertheless the first positive sign of an opening 
of the Mexican hydrocarbon sector since nationalization 
occurred more than 60 years ago.
    Now, with regard to Africa, the President has recognized 
the importance of the United States' relationship with Africa 
and the National Energy Policy outlines some specific 
recommendations for continued engagement that include actions 
to promote a more receptive environment for U.S. oil and gas 
trade and investment and to support more transparent, 
accountable, and responsible use of oil resources in African 
producer countries to enhance stability and the security of 
trade and investment environments.
    West Africa is a conflicted region that is suffering the 
effects of corruption, political instability, border disputes, 
ethnic and religious strife, governance issues, and poverty. 
Conflicts produce risks that have a destabilizing impact on the 
investment climate, on the social and economic development 
aspirations of the African people, and on our energy security. 
Finding affordable and effective ways to help these countries 
overcome these barriers is one of the new challenges to our 
energy security aspirations.
    Democratization and the development of responsible 
governing institutions are particularly important in reducing 
oil-related conflicts and promoting African supply stability. 
Accountability and transparency are necessary to ensure that 
oil revenues benefit the population and support economic and 
social development. Managed effectively, revenues from 
expanding oil and gas production could be the engine for 
national and regional economic development and political 
stability in West Africa.
    Africa is currently producing a little more than 8 million 
barrels of oil per day. Africa currently supplies the United 
States with about 12 percent of our oil import requirements, 
and production in Africa could rise to 11 million to 13 million 
barrels per day in the next 10 years, and even higher in 
subsequent years if the geology and investment climates are 
favorable.
    West Africa is one of the world's fastest growing sources 
of oil and gas. Oil production generates a large share of 
government revenue in many African countries. There are also 
several potential producers who will soon begin producing new 
oil supplies and several prospective oil-producing countries 
which are currently or soon hope to be exploring for oil.
    Africa is important to us because it is an important source 
of the marginal barrels and because African oil is a key engine 
for economic and social development in Africa.
    Before concluding, I would just like to say a word on 
natural gas. Our dependence on imported liquified natural gas 
is expected to rise and much of this could come from Africa and 
Latin America. Significant increases in liquified natural gas 
imports from West Africa and Latin America, along with new 
supplies from the Middle East, Russia, and North Africa are 
likely to meet our rising demand.
    In closing, Mr. Chairman, I believe that my written 
statement covers all the topics you requested for us to discuss 
today in greater detail than this short summary. Therefore, at 
this point I would like to end my prepared remarks and thank 
you for the opportunity to testify before you today. I welcome 
any questions that the committee might have.
    [The prepared statement of Mr. Brodman follows:]

 Prepared Statement of John R. Brodman, Deputy Assistant Secretary of 
     Energy for International Energy Policy, Office of Policy and 
            International Affairs, U.S. Department of Energy

    Mr. Chairman and Members of the Subcommittee. I am pleased to 
appear before you today to discuss the Administration's efforts to 
address our nation's energy security with a particular focus on Latin 
America and West Africa. Before discussing these two regions, however, 
I would like to say a few words about the evolution of our approach to 
energy security, and the challenges facing us today.
    Energy security, like beauty, is in the eye of the beholder. What 
is it? How do you define it or measure it? How much is enough? While 
the answers to these questions depend in large measure on your 
perspective, our energy security concerns are a dominant factor in U.S. 
energy policy for many reasons:

          1. Many of our long-standing concerns about energy security 
        stemming from developments in the Middle East are still with 
        us;

          2. Energy security is often an entry point for government 
        interference or involvement in energy markets;

          3. There are many new challenges in the area of energy 
        security itself, some stemming predominantly from our growing 
        concerns with terrorism;

          4. Oil producing countries, old and new, large and small, are 
        increasingly facing new challenges and new threats, often from 
        internal sources of instability, which can have an impact on 
        our energy security; and

          5. There is concern that our growing dependence on oil and 
        gas imports may have considerable influence on our foreign 
        policy.

    President Bush recognizes that the dynamics and necessities of our 
energy marketplace, in terms of addressing energy supply and demand and 
ensuring energy security to promote economic growth, are the key focus 
of our national energy policy.
    U.S. energy policy is founded on the belief that open markets 
ensure optimal production and supply of energy. President Bush's 
Administration also recognizes that open markets largely reflect the 
situation here and now, and that the government has a role in assuring 
that technologies are developed to ensure the most efficient use of 
energy, to facilitate the use of alternative fuels and energy carriers 
such as hydrogen, fusion and nuclear, and to develop new, secure energy 
supplies to meet the energy needs of today and the future.
    Also, from an energy security point of view, U.S. Government energy 
policy has a strong role to play in assuring our energy supplies 
represent a diverse set of energy resources from a diverse set of 
energy suppliers. President Bush's National Energy Plan, issued in May 
2001, embodies these fundamental principles and recommends actions that 
will help achieve these objectives. The Plan also recognizes that the 
United States cannot address its energy concerns alone, that our energy 
security is intricately linked to international markets as a result of 
our increasing dependence on external sources of supply.
    In the past, disruptions in supply were largely the result of 
sovereign political decisions and conventional wars. As we shift toward 
new sources, there are increased threats and risks stemming from 
corruption and governance issues, ethnic/religious strife, border or 
territorial disputes, poverty and other issues. These new threats to 
security of supply may require new policy approaches to our energy 
security.
    President Bush recognizes these new international challenges, and 
the National Energy Plan calls for strengthening our global alliances 
through such important mechanisms as our existing bilateral 
relationships with key countries and regions around the world. 
Secretary Abraham has made energy security one of his top priorities, 
and security of supply is the driving force behind our policy 
engagement on energy issues with most countries.
    The Western Hemisphere and Africa are important sources of our 
imports of oil and natural gas, and their importance is likely to grow 
in the future. Even though their proven reserves and production will 
never allow them to replace the Middle East in importance to world 
energy markets, they will nonetheless be an important source of 
additional supplies for decades to come.

                         ENERGY SECURITY POLICY

    What have we learned? In the last thirty years, developments in the 
world oil market dominated our energy security concerns, and we have 
been impacted by six serious interruptions of supply:

   The Arab oil embargo

   The Iranian revolution

   The Iran/Iraq war

   The Iraqi invasion of Kuwait, the first Gulf war, and the 
        subsequent embargo

   The recent strike in Venezuela, and

   Regime change in Iraq

    We have devoted a great deal of effort over the years to analyzing 
the differences between import dependence on the one hand, and 
vulnerability to supply disruptions on the other. In the short term, we 
learned to allow market forces to allocate supplies, and to depend on 
the use of excess production capacity and strategic reserves to augment 
supplies if required. We learned that oil is a fungible commodity, and 
that the marginal barrels are the determining factor in the 
marketplace. In the longer term, we strove to improve our energy 
security through diversity, in both the types of energy we use and in 
the sources of supply, and through efficiency gains, which limit the 
economic damages of price shocks on our economy.
    We developed over lime, with varying degrees of success, a flexible 
energy security policy that was based on a combination of policies. 
This combination of policies is a mix of:

   Reliance on market forces

   Opening markets to free trade and investment in energy 
        resources

   Energy efficiency

   Diversification of supplies

   Science and technology, research and development for the 
        long term

   Good relations with the rest of the world

   A strong military to protect our interests, and

   Strategic petroleum reserves, both as a deterrent and as a 
        supply of last resort.

    At the heart of this flexible, multiple policy approach was and is 
a desire to promote and protect resilient international oil and energy 
markets through the application of sustained policies that transcend 
political partisanship and stand the test of time. The goal was to 
reduce the threat and incidence of disruption, and to mitigate the 
effects of a disruption if it did occur.
    It would appear that many of the threats to energy security that we 
have experienced in the past, remain with us today. Looking forward, 
there are also several new threats to energy security today that we 
will have to learn to cope with, especially in oil producing developing 
countries. Thirty years ago oil was produced in commercial quantities 
in just over 60 countries around the world, and the share of the top 
ten producers in overall world supply was greater than 80 percent. 
Today, oil is being produced in commercial quantities in over 90 
countries, and the share of the top ten producers has fallen to about 
60 percent. While some of this increase in the number of producers can 
be attributed to the breakup of the former USSR into separate 
countries, there are also many new producers, in Africa, Latin America 
and elsewhere.
    Now what does that mean for energy security? In the first place, we 
have always favored a strategy that promotes diversity of supplies, 
both among the different forms of energy (oil, gas, coal, renewables, 
etc.) and in the sources of supply for any one form. In this sense, 
this new diversity is generally viewed as a good thing. While you can 
argue that more oil from diverse sources might raise the risk of 
disruption simply because there are more producers, you can also argue 
that the disruption will likely be smaller in the first place, and more 
likely to be offset by compensating increases from the other sources.
    While our policy of supply diversity has been successful to some 
degree, the development of many frontier oil provinces carries with it 
its own set of political, economic and security risks. Our policy of 
diversifying supplies relies on commercial investment in energy 
projects. We don't tell our companies where to invest or where to buy 
oil. It is up to them, and there are a considerable number of obstacles 
to realizing this commercial investment, directly related to economic, 
political, and security risks.
    An unfavorable business climate may keep needed resources locked 
away from development for a long time.
    The emerging threats to energy security in many new producing 
countries and regions, and indeed, as recent developments in Venezuela 
and Nigeria have demonstrated, in older producing regions as well, are 
somewhat different than those we have faced in the past. As a result, 
they may also require new policy responses. In the past, supply 
disruptions came from sovereign political decisions, revolutions, and 
conventional wars. Today there are increased risks from non-
traditional, and often internal, sources of conflict, such as:

   Corruption and a lack of transparency

   Governance issues

   Federal, state, and local jurisdictional disputes

   Ethnic/religious conflicts

   Border and territorial disputes

   Energy sector revenue management issues

   Local content requirements

   Lack of managerial capacity

   Political instability

   Environmental issues

   Poverty and the distribution of income

   Lack of ``rule of law'' and dispute settlement procedures

    These threats to energy security, clearly recognized in the 
National Energy Plan, may not always lend themselves to conventional 
security solutions. These new threats call for a continuation (and 
possible enhancement) of the balanced and sustained engagement with the 
oil-producing countries that we have been pursuing, to help them manage 
and utilize their revenues in a way that promotes political stability 
and sustainable economic growth. For this reason, it may be that 
sustainable development is the real frontier battleground for energy 
security in the 21st century. The lack of good governance is also a 
fertile breeding ground for terrorism, and we may have not yet grasped 
the full implications of terrorism for the energy sector.
    Speaking rhetorically, it may be reasonable to ask why and whether 
oil consumers or developers should be responsible for promoting 
sustainable economic development in oil producing countries? We may 
need to be more engaged on sustainable development issues with energy 
producers in order to minimize many of these new, internal threats to 
stability, and to promote, protect and defend our own security of 
supply, and our own security in commercial energy and trade 
relationships.

        CURRENT U.S. ENERGY POLICY WITH REGARD TO OUR HEMISPHERE

    President Bush's Administration is committed to working with 
Canada, Mexico and other countries, particularly in our hemisphere, to 
strengthen and create energy partnerships. We are fortunate to have 
secure and reliable North American partners that supply a significant 
part of our energy requirements.
    A key recommendation of the National Energy Policy is the formation 
of the North American Energy Working Group. President Bush, Canadian 
Prime Minister Chretien and Mexican President Fox directed their Energy 
Departments to work together to create ways to facilitate the 
development of a true North American energy market that will deliver 
reliable, affordable energy to the citizens of all three countries. An 
overarching goal of the Working Group is to foster communication and 
cooperation among the three governments on matters of common interest.
    The National Energy Policy recommends ongoing energy consultations 
with Brazil and other countries in Latin America, to improve the energy 
investment climate for the growing level of energy investment flows 
between the United States and this region. During the U.S.-Brazil 
Presidential Summit of June 2003, DOE and Brazilian energy officials 
agreed on a number of mechanisms to strengthen the energy cooperation 
between the United States and Brazil.
Investment Climate in Latin America and Prospects for Improvement
    As a region, Latin America's Gross Domestic Product contracted by 
1.3 percent in 2002, with deep recessions in Argentina, Uruguay, and 
Venezuela. Foreign direct investment fell from $69 billion in 2001 to 
$42 billion in 2002 (40 percent decline). Demand for exports was 
depressed due to sluggish growth in Europe and the United States. 
Despite generally sound economic fundamentals, there was lower investor 
confidence due to concerns about the political direction in several 
countries and overall debt dynamics. This slowed capital flows, 
hindering economic recovery.
    Political and economic reforms are still seen as the most important 
factors influencing investment in the region. The energy sector 
requires capital inflows to achieve adequate growth, especially in the 
oil and natural gas sectors.
    Privatization in Bolivia has attracted companies interested in 
commercializing the region's second largest natural gas reserves. 
Liberalization in Brazil's oil sector has attracted necessary 
investment and technology to explore and produce deep-water oil 
reserves--enough so that Brazil now produces 1.5 million barrels of oil 
per day, an increase of over 500,000 barrels per day in the last five 
years. Prior to the recent economic crisis, privatization efforts had 
transformed Argentina into a net oil exporter. On the other hand, 
countries that have placed new limits on private investment are now 
confronting diminished capacity, antiquated infrastructure, and 
declining production rates. Vast energy resources in these countries 
may remain under-utilized or untapped and economic growth will 
stagnate.
    Unfortunately, several countries in the Hemisphere continue to 
weather severe economic problems. Venezuela's economic downturn was 
propelled by both a loss of business confidence and the devaluation of 
the Bolivar, which lost almost half of its value since being allowed to 
float freely in February 2002. Reports of the partial recovery of daily 
oil production levels are encouraging, although not the whole answer 
for the economies of Venezuela and the region.
    Colombia continues to weather difficult political and economic 
conditions. However, improved U.S. and Latin American economic outlooks 
for the second half of 2003 are likely to have positive implications 
for the Colombian economy. Additionally, recent higher world oil prices 
provided a significant boost to Colombian export earnings, as oil is 
Colombia's top export product.
    Argentina's economy continues to suffer. The most pronounced of 
President Duhalde's crisis management measures was to abandon the 
country's 1991 Convertibility Law, which had pegged the Argentine Peso 
1:1 to the U.S. dollar for eleven years. After almost four years of 
recession, the Argentine economy ground to a halt in December 2001, as 
Buenos Aires defaulted on its approximately $140 billion debt. Civil 
unrest swept the nation as citizens were locked out of the country's 
banks and unemployment reached a record high of 18 percent.
    We are encouraged by the efforts of many of our neighbors in the 
region to work with private investors in developing a solution to 
problems in the energy sector. We hope the countries in the hemisphere 
will continue to strengthen their public dialogue on energy sector 
issues.
Prospects for Increasing Energy Production in Latin America
    Latin America, Mexico and the Caribbean accounts for 10.5 million 
barrels a day of global oil production (includes natural gas liquids 
and alcohol fuels), which is estimated to increase to 12.8 million 
barrels per day by 2010. Fifty two percent of U.S. crude oil imports, 
and fifty four percent of petroleum product imports come from the 
Western Hemisphere. Of the top five exporters to the United States, 
three--Canada, Mexico, and Venezuela--are in our hemisphere. These 
three countries account for a large percentage of the 314 billion 
barrels of proven reserves in the region (a level of over ten times the 
current U.S. oil reserves).
    Nine other countries (Argentina, Bolivia, Brazil, Chile, Colombia, 
Ecuador, Guatemala, Peru and Trinidad and Tobago) have oil and gas 
reserves of varying sizes. While the oil reserves of these nine 
countries are clearly not as significant as reserves in the Persian 
Gulf, they provide an important source of energy to the domestic 
economy and reduce the region's dependency on imported oil. The region 
is also richly endowed with natural gas and hydroelectric power 
potential, and some countries, primarily Colombia and Venezuela, have 
been developing their coal reserves for export. Peru is also developing 
its huge Camisea gas field, which is expected to yield benefits in the 
form of increased LNG exports to the West Coast of the United States.
    The United States' economic future and energy security is 
contingent upon the availability of ample energy supplies. If the 
region expects to increase the reliability and security of its energy 
supply, reduce long-term dependence on imported oil (outside of the 
Western Hemisphere), and maintain its economic vitality and viability, 
it must have in place a set of policies that support increased energy 
production, energy integration, diversification of supply, and 
increased foreign investment.
    Consequently, the Department of Energy has been working with its 
neighbors to improve their technical and managerial skills in their 
energy sector. Through various mechanisms, we are promoting a reliance 
on market forces and the elimination of monopolistic controls, 
emphasizing the importance of regulatory reform, fostering the 
implementation of clear and transparent trade practices, and stressing 
the importance of foreign investment in meeting the hemisphere's future 
energy needs.
    We are also encouraging major oil producing countries in our region 
to maintain responsible production policies to support a growing 
hemispheric economy and help reduce oil market price volatility.
    By promoting these policies and efforts, we hope to continue to see 
energy production grow to meet the future energy needs of the United 
States and other countries of the region. Over the next few decades, 
oil and natural gas will continue to play a central role in the world 
economy and international energy markets. We must find more oil and gas 
supplies, and these supplies must be reliable and made available at 
prices that permit sustained economic growth.
    Examples of possible prospects for increasing production include:

   Argentina is the fourth largest oil producer in Latin 
        America, with 2.9 billion barrels of proven reserves. 
        Argentina's oil production was as high as 900,000 barrels per 
        day in the late 1990s; however, recent estimates put production 
        at about 800,000 barrels per day as a result of the 2002 
        financial crisis and the government's economic policies, 
        (particularly a 20 percent tax imposed on oil exports, as well 
        as a briefly imposed oil export cap). Argentina's oil sector is 
        completely privatized, although the largest company, Repsol-
        YPF, remains the dominant player. The economic difficulties 
        faced by Argentina have adversely affected oil production.

   Colombia has around 1.84 billion barrels of proven oil 
        reserves. Colombia's oil production has fallen over the last 
        three years after hitting a high in 1999 at 830,000 barrels per 
        day. The government has taken positive steps to make the 
        investment climate friendlier to foreign oil companies, but 
        security issues remain a significant problem. Rebel groups have 
        attacked the production and transportation facilities of oil 
        companies operating in the country, which has hampered 
        Colombia's ability to maintain production levels at 1999 
        levels.

   Ecuador is counting on foreign investment to boost oil 
        production for the new 450,000 bid heavy oil pipeline that will 
        start pumping in June, and will enable the country to 
        significantly boost production and will double the country's 
        transport capacity from the Amazon jungle to its coastal port.

   Mexico's current (first quarter of 2003) total oil 
        production is 3.8 million barrels per day (3.3 million barrels 
        per day of crude), making it the fifth largest oil producer in 
        the world. Mexico ranks fourteenth in the world for proven oil 
        reserves, with 13 billion barrels. Oil production (crude oil 
        and natural gas liquids) is forecast to grow through 2010. 
        Natural gas production is forecast to grow significantly 
        through 2010, when it is expected to nearly double to 3.2 Tcf. 
        With 8.8 Tcf of gas reserves, Mexico ranks 40th in the world 
        for proven gas reserves.

   Venezuela is a key oil producing country with the Western 
        Hemisphere's largest conventional proven reserves. Venezuela 
        has experienced a great deal of turmoil in its energy sector 
        recently, with increasing government intervention and labor 
        unrest. In the past few years under President Chavez, cuts in 
        the state oil company, Petroleos de Venezuela, S.A, (PDVSA), a 
        lack of foreign direct investment and a policy of strict 
        adherence to OPEC quotas have hindered the country's long-term 
        expansion and production.
The Outlook for Venezuela
    The loss of Venezuelan oil supply during December, January and 
February was a serious blow to U.S. oil supplies. The Administration 
monitored the situation closely. We also encouraged other oil producers 
to activate their spare production capacity in response to the market 
signals that were generated by the Venezuelan loss. OPEC's decision to 
increase its production was a positive development. We are continuing 
our close monitoring of the Venezuelan situation and are prepared to 
act quickly should a need arise.
    Venezuela is a significant source of oil for the U.S. and we have 
kept a close eye on events in that country. Over the past few months, 
the Department of Energy has met on several occasions with officials 
from Venezuela's Ministry of Mines and Energy and PDVSA. In February 
and again in July, Deputy Secretary McSlarrow met with Minister Ramirez 
and PDVSA President Ali Rodriguez. There have also been ongoing DOE 
staff level meetings and exchanges of data with PDVSA representatives 
to discuss current production and export levels in an attempt to 
improve the transparency of information coming out of the country. The 
worst effects of the strike in Venezuela appear to be over. Venezuelan 
oil production and exports have been significantly restored.
    The increase in oil supplies from Venezuela, as well as from other 
producers, has helped relieve pressure on crude and product markets 
over the past several months. However, crude and product inventories 
remain at historically low levels, due in part to the Venezuelan 
disruption.
    Production--There are a wide range of estimates about Venezuela's 
ability to restore full production and export of oil. Venezuelan 
government sources claim that production is at 3.1 million bpd. On the 
other hand, most industry experts place production around 2.5 million 
bpd.
    EIA is using 2.35 million bpd for its calculations since that is 
what can be confirmed based on available data. Industry analysts cite 
field damage and lack of maintenance resources as preventing the 
restoration of the remaining 500,000 bpd. Before the strike, Venezuela 
produced about 3 million bpd and exported 2.5 million bpd.
    Many analysts also question whether current production can be 
sustained. Venezuela's oil fields have natural depletion rates up to 25 
percent per year, which has, in the past, required PDVSA to invest 
heavily to maintain production capacity. Experts have not seen evidence 
of the investment--such as drilling activity--necessary to sustain 
production.
    Exports--Unofficial EIA data from the last few weeks show that U.S. 
crude imports from Venezuela continue to be above one million barrels 
per day--higher than levels seen in January and February but still 
below pre-strike levels of 1.5-1.6 million barrels per day.
    Refining--Reports indicate that several refineries are operational 
and running, but the amount and quality of refined products being 
produced, by Venezuela, particularly gasoline, are unknown. Venezuelan 
domestic demand for gasoline has dropped due to economic constraints, 
which may allow for more exports.
    There have been reports of gasoline shipments to the U.S. but it is 
possible that the gasoline came from storage or was imported to 
Venezuela during the strike. Venezuelan gasoline exports to the U.S. 
have not yet consistently returned to pre-strike levels of around 
60,000 bpd (100,000 bpd with imports from PDVSA's Caribbean 
refineries).
    Technical Consultations--The Department of Energy has had long-
standing technical and policy cooperation with Venezuela. We believe it 
is important to maintain that relationship. We have made initial 
efforts to resume technical level cooperation. We have not yet set 
dates for policy level consultations.
            current u.s. energy policy with regard to africa
    The President has recognized the importance of the United States' 
relationship with Africa, and the National Energy Policy outlined some 
specific recommendations for continued engagement, that include actions 
to:

   Use the U.S.-Africa Trade and Economic Cooperation Forum and 
        the U.S.-African Energy Ministerial process; deepen bilateral 
        and multilateral engagement to promote a more receptive 
        environment for U.S. oil and gas trade, investment, and 
        operations; and promote geographic diversification of energy 
        supplies, addressing such issues as transparency, sanctity of 
        contracts, and security; and

   Support more transparent, accountable, and responsible use 
        of oil resources in African producer countries to enhance the 
        stability and security of trade and investment environments.

    In June 2002, DOE co-sponsored the Third U.S.-African Energy 
Ministerial Conference in Casablanca, Morocco, where Secretary Abraham 
and ministers or representatives from nearly 40 African countries 
reaffirmed a commitment to good governance and stable regulatory 
structures, and discussed additional steps to encourage private sector 
investment in the energy sector. At the Ministerial, we met with 
government and industry representatives to discuss ways to improve 
energy trade and facilitate energy sector development in order to 
better serve U.S. and African economic growth and development.
    Routinely, DOE meets with a number of African government officials 
on a variety of energy issues. In late 2002, we organized a Gulf of 
Guinea Business Roundtable to discuss energy issues with U.S. oil and 
gas company representatives doing business in the region. Also, over 
the last year or so, we have been engaging more actively in various 
trade policy mechanisms, including the African Growth and Opportunity 
Act (AGOA) process.
    I would also like to highlight some of our specific activities with 
African countries:

   Through an interagency agreement with USAID, DOE implemented 
        a comprehensive energy program with Nigeria, which included 
        energy sector reforms and power and natural gas development 
        activities. In cooperation with the Department of State and 
        USAID, DOE is initiating a similar formal bilateral energy 
        program with the Angolan Government.

   In terms of natural gas development and reduction of 
        flaring, DOE is working with Nigeria and South Africa, and 
        routinely advocating our support for the West African Gas 
        Pipeline Project, which will transport Nigeria gas to markets 
        in Benin, Togo and Ghana. USAID is assisting the four nations 
        involved in completing a series of cross-border agreements and 
        harmonization of their respective regulatory environments.

   USAID has been actively involved in designing a global 
        development alliance for the West Africa Power Pool whose 
        purpose is to produce an abundant, reliable, efficient and 
        affordable energy supply, while attracting private sector 
        investment, by means of institutionalized regional cooperation 
        among the fifteen member states of the Economic Community of 
        West Africa (ECOWAS).

   We are active participants, and a member of the steering 
        committee, in the World Bank's Gas Flaring Reduction 
        Initiative, which involves several African countries.

   We participated in and spoke at the Africa Growth and 
        Opportunity Act (AGOA) Economic Forum, which was held in 
        January in Mauritius, and emphasized issues related to small- 
        and medium-sized enterprises, local content, and capacity 
        building opportunities.

   We are participating in the negotiations for the U.S.-South 
        African Customs Union Free Trade Agreement with Botswana, 
        Lesotho, Namibia, South Africa, and Swaziland, among other 
        energy-oriented activities with African countries.

Investment Climate in West Africa and Prospects for Improvement
    Democratization and the development of responsible governing 
institutions are particularly important in reducing oil related 
conflicts and promoting African supply stability. Accountability and 
transparency are necessary to ensure that oil revenues benefit the 
population and support economic and social development. Managed 
effectively, revenues from expanding oil and gas production could be 
the engine for national and regional economic development and political 
stability in these countries. However, this will not happen if energy 
development is accompanied by corruption, the disruption of other 
economic sectors, and a disenfranchisement of the citizenry.
    We have an interest in helping African nations solve these problems 
and in helping them to become fully reliable energy suppliers to 
international markets. Substantial foreign direct investment is needed 
to develop African energy resources both onshore and offshore. Broadly, 
we support this process by encouraging the reforms needed to improve 
the investment climate. For instance, we have negotiated a bilateral 
energy cooperation framework with Nigeria, we advocate on behalf of 
U.S. energy concerns, and we support the World Bank's involvement in 
independent monitoring arrangements in the Chad-Cameroon Pipeline 
Project and other regional energy infrastructure projects. The G-8 
countries agreed in Evian on an action plan to fight corruption and 
improve transparency, which will enable us to help oil-producing West 
African states to improve transparency in the management of their oil 
revenues to ensure they support broad-based, sustainable development.
Prospects for Increasing Production in West Africa
    West Africa is currently producing about 4 million barrels of oil 
per day. Production in West Africa could rise to 7 million barrels per 
day or more by 2010, and even higher in subsequent years if the geology 
and investment climates are favorable. West Africa is one of the 
world's fastest growing sources of oil and gas. Oil production 
generates a large share of government revenue in countries such as 
Nigeria, Angola, Gabon, Equatorial Guinea, Republic of Congo, and 
Cameroon. Much oil remains to be discovered and developed in some of 
these countries. Additionally, emerging potential producers, such as 
Mauritania, and Sao Tome and Principe, will soon begin producing 
significant new oil supplies. Chad began producing oil for the first 
time this summer and production could reach 150,000 bpd in 2004.
    Other current prospective African oil producing countries include 
Senegal, The Gambia, Liberia, Sierra Leone, Benin and Togo, all of 
which are currently, or soon hope to be, exploring for oil. So, the 
prospects for increasing oil and gas production in West Africa are very 
high. While Africa as a whole holds only about 6 percent of the world's 
proven oil reserves, and while it will never replace Middle East oil, 
West Africa will nevertheless be the source of about 3-4 million 
barrels per day of additional oil supplies over the next ten years. 
This is important to us because it is the incremental or marginal 
barrels that have the most impact on the world market and our energy 
security.
    One of the largest infrastructure projects in Sub-Saharan Africa is 
the $3.5+ billion, 650-mile Chad-Cameroon oil pipeline project. This 
project has the potential to bring up to 250,000 bpd of oil to the 
market and promote development of other reserves in the region. The 
project is led by ExxonMobil and includes ChevronTexaco. The oil is 
located in landlocked southern Chad and is being transported by the 
pipeline to the coast of Cameroon.

Rising U.S. Energy Stakes in Western Africa
    Energy from West Africa plays an increasingly important role in our 
energy security as we diversify our sources of oil supply. Currently, 
more than 12 percent of imported U.S. oil is from Africa. However, 
Africa's oil exports to the U.S. are set to rise. African oil is a key 
engine for economic development in Africa.
    Nigeria, an OPEC member, has proven oil reserves of 24.0 billion 
barrels and currently produces nearly 2.2 million barrels per day. The 
largest U.S. oil producing companies in Nigeria are ExxonMobil and 
ChevronTexaco, but many other companies are involved as well.
    Angola, a non-OPEC member, is the second largest Sub-Saharan 
African oil exporter to the U.S. Total oil production in Angola in 2002 
was over 900,000 barrels per day, with production projected to top 1 
million barrels per day in 2003. Angola's total proven reserves are 5.4 
billion barrels, and rising with new discoveries. ChevronTexaco, 
ExxonMobil, Marathon Oil, Occidental, Devon Energy Ocean Energy and 
ConocoPhillips are U.S. oil companies with holdings in Angola. Only 
Chevron and Exxon are currently operators.
    Equatorial Guinea's oil production is currently about 200,000 bpd. 
It is a non-OPEC producer and has proven reserves of 12 million 
barrels. The U.S. plans to re-open an embassy in Equatorial Guinea 
within the next year. Major U.S. oil companies operating in Equatorial 
Guinea are Amerada Hess, ChevronTexaco, ExxonMobil, and Marathon Oil.
    Gabon is Sub-Saharan Africa's third largest oil producer and 
exporter, producing about 294,000 bpd in 2002. While Gabon's oil 
production has decreased in recent years, its proven oil reserves are 
2.5 billion barrels.
    Republic of Congo (Brazzaville) has estimated proven oil reserves 
of 1.5 billion barrels. The majority of its crude oil production is 
located offshore, with Total as the dominant operator. Congo produced 
about 249,000 bpd in 2002.
    Natural Gas--With regard to natural gas, the U.S. consumed more 
than 22.5 trillion cubic feet in 2002. Currently, the natural gas 
market in the U.S. is tight, with inventory levels lagging behind 
normal levels. This shortfall is reflected in spot natural gas prices 
and the expectation that demand will remain at a high level relative to 
domestic natural gas supply capability. Our dependence on imported 
liquefied natural gas (LNG) is expected to rise, and much of that could 
come from Africa and Latin America. As such, Secretary Abraham will be 
convening the LNG Global Summit in November, which will include major 
and emerging LNG producers and explore ways to facilitate increased 
exports to the U.S.
    By 2025, total natural gas consumption is expected to increase to 
almost 36 trillion cubic feet, or 26 percent of U.S. delivered energy 
consumption. Such a demand level represents an increase of about 59 
percent from the expected 2003 level. U.S. domestic gas production is 
expected to increase more slowly than consumption. As a result, U.S. 
dependence on imported natural gas is expected to rise. Significant 
increases in LNG imports from West Africa and Latin America, along with 
new supplies from the Middle East, Russia and North Africa are likely 
to meet our rising demands.
    The use of natural gas, increased LNG exports and the associated 
increase of revenues from gas development to governments, will help to 
eliminate gas flaring and provide opportunities for enhanced socio-
economic development. DOE is working with various countries and 
organizations in Africa to promote the development and utilization of 
natural gas resources, which, in turn, will directly contribute to the 
reduction of gas flaring and venting.
    Nigeria has the 9th largest natural gas reserves in the world and 
the largest of any country in Sub-Saharan Africa. In 2001, the most 
current data available, Nigeria vented and flared an amount equal to 44 
percent of its gross natural gas production and reinjected an amount 
equal to 10 percent of its gross natural gas production. Nigeria has an 
LNG plant with three trains operational, two additional ones due to 
come online by the end of 2005, and a sixth train being considered. In 
addition, many companies have active proposals to develop additional 
LNG projects in Nigeria.
    The West African Gas Pipeline (WAGP) is a gas transmission project 
designed to connect Nigeria's gas reserves, including some flared gas, 
to markets in Benin, Togo, and Ghana (with Ghana being the primary 
market for the gas). The governments of these four countries, 
ChevronTexaco, and Shell are partners in the project. When completed, 
the open access pipeline will help to bring some of the regions gas 
resources to commercial markets for electric power and industrial uses.
    Angola and Equatorial Guinea have substantial reserves of natural 
gas, and both countries are pursuing LNG projects to utilize the gas.
The Status of the Conflict in West Africa
    West Africa is a conflicted region that is suffering the effects of 
corruption, political instability, border disputes, ethnic/religious 
strife, governance issues, and poverty. These conflicts produce risks 
that must be overcome if the region is to attract the investment it 
needs to sustain and expand energy resource development.
    The recent effect of the political and ethnic instability in the 
Niger Delta was a temporary loss of about 800,000 bpd of Nigerian crude 
oil production and an upward pressure on oil prices during the lead up 
to the Iraq war earlier this year. This represented 37 percent of 
Nigeria's daily oil production of nearly 2.2 million barrels per day. 
Today, 272,500 barrels per day of crude oil remains shut-in in Nigeria 
due to ongoing civil strife in the Delta.
    Nigeria supplied 621,000 barrels per day of oil to the U.S. in 
2002. This represents over 5 percent of U.S. imported oil in 2002. Also 
in 2002, Nigeria was the fifth largest foreign supplier of crude oil to 
the U.S.
    Angola currently produces about 930,000 barrels per day of oil, is 
the second largest Sub-Saharan African exporter of oil to the U.S., and 
is not a member of the Organization of Petroleum Exporting Countries or 
OPEC. Until a little over a year ago, Angola was immersed in a nearly 
30-year civil war. However, because most of Angola's oil production is 
offshore and was removed from the largest population centers and 
closest proximity to the fighting, oil production was relatively 
unaffected in Angola during the war. A final peace agreement has been 
successfully implemented and the U.S. Government is supporting the 
peace process and rebuilding of Angola.
    I visited Angola earlier this year and engaged in a dialogue on 
identifying possible areas for bilateral and multilateral cooperation. 
We want to establish a formal framework that will facilitate enhanced 
cooperation on such issues as policy and regulatory reforms, natural 
gas development, electrification, and infrastructure development. An 
interagency agreement has been signed between DOE and USAID to assist 
the Government of Angola in developing a national energy strategy.
    Conflict and political instability plague some countries in the 
region that have not even begun exploring for or producing oil. For 
example, on July 16th of this year, there was a military coup in the 
small country of Sao Tome and Principe. The coup leaders demanded 
better government, pay and facilities. In some ways this coup may have 
been precipitated by the expectation that the country will soon realize 
significant revenue increases from signing bonuses received, and from 
oil production that may result from development of the offshore Joint 
Development Zone with Nigeria. Sao Tome highlights how the large 
natural resource rents that often accompany oil development projects in 
developing countries can, in certain circumstances, become a source of 
instability.
    These conflicts in West Africa have a destabilizing impact on the 
investment climate, on the social and economic development aspirations 
of the African people, and on our energy security. Finding affordable 
and effective ways to help these countries overcome these barriers is 
one of the new challenges to our energy security aspirations.

                                CLOSING

    Mr. Chairman, I believe that my statement covers all of the topics 
you requested for today.
    At this point, I would therefore like to end my prepared remarks 
and thank you for the opportunity to testify before you today. I 
welcome any questions that the Committee might have.

    An appendix of charts regarding Western Hemisphere and African Oil 
and Gas Production and Resources. Also appendixed is a chart on U.S. 
Petroleum Imports by Source.







    Senator Hagel. Secretary Brodman, thank you.
    Mr. McManus.

STATEMENT OF MATTHEW T. McMANUS, ACTING DIRECTOR, INTERNATIONAL 
   ENERGY AND COMMODITY POLICY OFFICE, ECONOMIC AND BUSINESS 
    AFFAIRS BUREAU, U.S. DEPARTMENT OF STATE, WASHINGTON, DC

    Mr. McManus. Mr. Chairman, we are pleased that you have 
invited us today, you have picked out two very important 
regions of the world that provided 60 percent of our imports 
alone in 2002. An effective energy security policy must, as 
outlined in the President's National Energy Policy, look for 
and promote diverse production in energy from a wide range of 
geographical regions, including these two. And I am happy to 
provide you just a few concrete examples of what we are doing 
at the State Department to advance these goals.
    First, we have made strengthening our relations with Canada 
and Mexico a real pillar of our energy policy. We have 
established a North American Energy Working Group to serve as a 
forum for exchanging information and pursuing joint strategies. 
In an unprecedented step, the three governments jointly 
published a North American energy picture, that we have asked 
our staffs to provide you, that measures the energy reserves, 
trading flows, and energy infrastructure for all of North 
America. This is the first time that the three governments have 
looked at the resources of all of North America at one time and 
cooperatively. We plan to build on this energy picture as a 
common basis to explore new ways that the three North American 
nations can work together to expand interconnections and 
maximize trade. Our group will meet again in December.
    Now, looking at the North American resource base--and we 
include Canada in the Western Hemisphere--if you look at their 
heavy oil reserves, they have dramatically shifted the 
distribution of world oil reserves. The Department of Energy 
now characterizes Canada's heavy oil as proven, meaning that 
with 180 billion barrels of oil, Canada holds the world's 
second largest oil reserves. This is not just record keeping, 
as Canada's heavy oil production now exceeds 1 million barrels 
per day. Looked at another way, at the chart on my right, 
inclusion of Canadian heavy oil increases North America's 
energy share of world oil reserves--in yellow it is shown 
without heavy oil--from 13 to 26 percent of world oil reserves, 
and it decreases the Middle East share in red from 66 to 57. 
And here you can see the relative change in simply the heavy 
oil from Canada, oil that we now have proven in the Western 
Hemisphere.
    Given the grave importance of that really tectonic shift, 
we have annual energy consultations with the Canadians, an 
energy consultative mechanism that the State Department chairs. 
We bring together many U.S. Government agencies. We met July 17 
in Ottawa, and it is a terrific way to stay in touch on the 
many important issues with our single largest oil and gas, as 
well as electricity, supplier.
    Mexico also in North America is one of our leading energy 
and trading partners, and its production, as Secretary Brodman 
reflected, is at recent high levels. Like Canada, our energy 
trade with Mexico is a two-way street, with oil flowing to the 
United States and, as the chairman mentioned, refined products 
and natural gas flowing to Mexico.
    On our side of the border, we are doing everything we can 
to speed and support integration. For example, in April the 
State Department approved PEMEX's application for a 
Presidential permit to cross the international boundary for a 
new diesel fuel pipeline that will bring 10,000 barrels a day 
of diesel fuel from a refinery in Monterey, Mexico.
    As Secretary Brodman has said, traditionally Venezuela in 
South America and the United States have enjoyed reliable and 
strong energy ties. Venezuela's reliability was, unfortunately, 
damaged with the oil disruption at the beginning of this year, 
and while production and refinery operations and exports to the 
United States have all recovered to a large degree, it will 
take more time to accurately determine the sustainability of 
this recovery. The United States will continue to work with the 
Organization of American States to be supportive of Venezuelans 
as they resolve their political differences finding a 
constitutional, democratic, peaceful, and electoral solution to 
their crisis, as called for in OAS Permanent Council Resolution 
833.
    You have also mentioned the important role of Brazil. In 
our National Energy Policy report, we recognize the important 
role of offshore production in Brazil, and for the first time, 
later this year we will host formal bilaterals, much as we do 
with Canada, with the Government of Brazil to take into account 
their growing role in world oil reserves.
    Senator Coleman also mentioned the important developments 
in Trinidad and Tobago. They have the largest single LNG 
facility in the Western Hemisphere. They have become our No. 1 
supplier of LNG, and we think it reflects that when you have a 
very good investment climate, investors will come.
    Turning to Africa, only last week the Chad-Cameroon 
pipeline was inaugurated, which will bring, at peak capacity, 
an additional 250,000 barrels per day to world markets. And 
that pipeline is an example of a cooperative effort between 
governments, international financial institutions, the oil 
companies, NGOs, and civil society. It will balance economic 
benefits, transparency, humanitarian, and environmental 
concerns. We assure you that our Ambassador in Chad is deeply 
engaged with local governments to ensure that the unique 
capacity building and transparency measures incorporated in 
this project are carried forward. The administration recognizes 
Africa's important role not only diplomatically but in energy, 
and our Secretary of State is there today.
    Nigeria has been, in fact, the fifth largest supplier of 
crude oil to the United States, and we also recognize that 
Nigeria's oil-producing Niger Delta remains volatile with 
intermittent communal violence and labor disputes that have 
disrupted production in some areas. Our mission in Nigeria 
remains committed to supporting democracy, economic reform, and 
poverty alleviation in Nigeria, and we have dedicated a new 
embassy position to working with oil companies, NGOs, and 
indigenous groups on these issues and corporate responsibility.
    Existing and new producers in Africa, such as Angola, 
Gabon, Equatorial Guinea, Sao Tome, and Chad will continue to 
develop new oil and gas reserves in coming years, and U.S. 
energy firms are key in Africa's ongoing emergence as an energy 
supplying region.
    Equatorial Guinea is emerging as a major oil producer in 
the Gulf of Guinea. We opened an embassy office in Malabo only 
this month that will enhance our dialog with the government and 
signal our commitment to broad engagement with Equatorial 
Guinea, including human rights.
    We have a strong interest in assisting oil-producing 
countries overall on transparency to channel receipts from 
their energy resources into economic development that will 
benefit their populations over the long term. At its Evian 
Summit in June, the Group of Eight countries endorsed a 
comprehensive action plan on fighting corruption and improving 
transparency to help developing countries acquire the tools to 
strengthen domestic institutions and enhance transparency and 
accountability.
    In summary, new energy resources from existing producers 
such as Canada, Venezuela, Angola, combined with those from 
emerging producers of oil and gas, such as Equatorial Guinea, 
Chad, among others, are helping to meet our energy security 
goals by diversifying world oil supplies, and the State 
Department remains deeply engaged in each case. As noted 
throughout the testimony, we are working with host governments, 
both in Washington and through our embassies overseas, to build 
and support open and stable business environments for U.S. 
firms to play a role in developing these energy resources. And 
we are doing so in a manner that promotes corporate 
responsibility, which encourages the very best practices to 
promote human rights, to promote transparency and 
accountability, and to make sure that energy development 
advances overall development.
    Thank you very much, Mr. Chairman, committee members, and I 
too would welcome your questions.
    [The prepared statement of Mr. McManus follows:]

     Prepared Statement of Matthew T. McManus, Acting Director of 
International Energy and Commodity Policy Office, Economic and Business 
        Affairs Bureau, U.S. Department of State, Washington, DC

    Mr. Chairman, distinguished Committee members, I am pleased to be 
here today with the Department of Energy to discuss the important role 
West Africa and Latin America play in our energy security. We are 
particularly pleased that the Subcommittee has chosen these key regions 
to discuss: they are important both in an energy security sense and for 
the commercial opportunities they present for U.S. firms. Just to 
highlight at the outset the importance of the Western Hemisphere and 
West Africa to U.S. energy security, nearly 60 percent of 2002 U.S. 
imports of crude oil and oil products came from these two regions. As I 
will outline in my testimony, these regions will continue to play 
important roles as significant contributors to the diversity of supply 
called for in our energy policy.
    The President's National Energy Policy noted the importance of the 
Western Hemisphere and Africa to global energy production. Given the 
role Canada plays in our energy security and the importance of our 
North American Energy Framework, I have taken the liberty of including 
Canada and expanding my testimony to cover the Western Hemisphere 
rather than just Latin America. The National Energy Policy directs the 
Secretaries of State, Commerce and Energy to put a particular focus on 
regulatory harmonization and integration of markets, as well as to work 
with our foreign partners to improve commercial conditions and 
investment climates. We are working with colleagues at the Departments 
of Energy and Commerce to implement these directives, in West Africa 
and the Western Hemisphere and across all regions. I am pleased that we 
have successes to report, as well as areas for additional work for our 
agencies.
    As Under Secretary Larson testified in April, we approach 
international energy policy aware of a number of hard facts that must 
be at the nexus of an effective energy security and foreign policy. 
These hard facts include net import levels of roughly half of our 
energy needs, higher dependence by our trading partners on oil imports 
from one region of the world, and the reality that a disruption 
anywhere affects all market participants.
    Taken together, these facts mean that one key element of an 
effective international energy policy must be to promote increased and 
diversified production of energy from a range of foreign suppliers in 
many regions, as outlined in the President's National Energy Policy. 
Today's hearing on the Western Hemisphere and West Africa will enable 
us to report to you how we are promoting the diversification that is 
central to our strategy in these two key regions of the world.

                  RELIABILITY THROUGH DIVERSIFICATION

    Energy investments are costly, risky and require longterm 
commitments. For that reason, neither companies nor countries can 
afford to have all of their eggs in one basket. Recognizing this 
reality, our energy policy seeks to encourage in countries around the 
world like-minded free market policies toward energy and investment, 
emphasizing the expansion and diversification of energy supplies.
    Let me provide you with just a few concrete examples that 
demonstrate what we are doing to achieve these goals.

                   NORTH AMERICA: ENERGY INTEGRATION

    We have made strengthening our energy cooperation with Canada and 
Mexico a top priority of U.S. energy policy. We established a North 
American Energy Working Group (NAEWG) in 2001 to serve as a forum for 
exchanging information and pursuing joint strategies. Last year, senior 
energy experts from the three North American governments released a 
North American ``Energy Picture'' report that, for the first time, 
jointly measures energy stocks, trading balances, and energy flows in 
the continent. This marks the first time we have truly looked at the 
North American market as a unified one. These NAEWG meetings enable us 
to harness the work of five sub-groups addressing the science and 
technology of energy, energy efficiency, electricity regulation, 
natural gas regulation, and critical infrastructure protection. This is 
not a negotiation, for each country makes its own sovereign energy 
policies. But we do see the NAEWG as an excellent forum from which to 
learn from one another, and from which to evaluate the barriers that 
still impede a truly unified market.

                                 CANADA

    I would like to take a few minutes to describe how Canada, our most 
important energy supplier, factors into the energy security equation, 
as we are trying to take a hemispheric approach to energy in the 
Americas. I start with Canada because it remains our leading supplier 
of imported electricity, natural gas and petroleum. All three flow 
across the border in both directions. The Canadian energy sector is 
developing its heavy oil reserves, with production expected to reach 
nearly one million barrels per day by year-end. These heavy oil 
reserves are anchoring Canada as a pillar of hemispheric energy 
security.
    Canada's heavy oil is important to our energy security. DOE's 
Energy Information Administration compiles an annual reference citing 
various private sector compilations of overall energy reserves. This 
year, they have included the Oil and Gas Journal's new estimate that 
characterizes a significant portion of Canada's heavy oil as proven 
reserves. This one change, recognizing the commercial viability of oil 
sands, raises Canada's proven reserves estimate to some 180 billion 
barrels, making it the world's second largest holder of reserves after 
Saudi Arabia's 264 billion barrels and just ahead of Iraq. And 175 
billion of those 180 billion barrels are in oil sands. Over time this 
number will rise as advances in technology make even more heavy oil 
reserves recoverable at prevailing market prices.
    As a point of illustration, the shift in Canadian reserves is 
telling, as it alters overall distribution of world oil reserves. 
Including Canada's heavy oil reserves raises North America's share of 
the world's proven reserves from 6 to 18 percent (and the Western 
Hemisphere's from 13 to 26 percent), while those in the Middle East 
fall from 66 to 57 percent. This comparison is presented graphically at 
the end of my testimony.
    And given this big shift, I also wanted to provide a brief overview 
of some of the commercial projects we see there, and some that may be 
over the horizon, and to note that many of these projects involve 
partially or majority-owned subsidiaries of U.S. energy concerns. 
Suncor and Syncrude (Canadian companies with major U.S. investors) have 
decades-old projects in the oil sands which, with production costs now 
down to about $10 per barrel, are strongly economic. They have 
contributed much of the pioneering technical development that made this 
gigantic resource viable. More recently, ChevronTexaco, Shell and 
others have undertaken multi-billion dollar investments that can be 
expected, perhaps by the end of this decade, to lift production to two 
million barrels per day. This should make up for expected reduced 
traditional oil field production in Canada. The main constraint to 
bringing these resources to market will not be their availability, but 
pipeline and refinery capacity.
    World-class oil and natural gas projects are also underway in the 
Canadian Maritimes, which until recently had no oil or gas production, 
but is now the fastest-growing source of natural gas for New England, 
the region of our country most dependent on home heating oil. In 2000 
Nova Scotia began producing natural gas and shipping it southwest by 
pipeline to the Boston area.
    Newfoundland began producing oil from its offshore continental 
shelf less than a decade ago, and it is showing increasing promise as a 
long-term component of North America's energy supply picture. Using 
technology and experience from Europe's North Sea developments, 
Newfoundland's oil output has been growing by 20 to 30 percent per 
year, and is at about 135,000 barrels per day from the first field, 
Hibernia. Production could double in the next six years as new fields 
come online.
    Major U.S. companies, or U.S. divisions of major multinationals, 
involved in various facets of the offshore energy sector (exploration, 
production, pipeline systems, offshore support services, etc.) in 
Maritime Canada include: ExxonMobil, BP, Shell Oil, Bechtel, Chevron, 
El Paso Pipeline, Hunt Oil, Marathon, Rowan Offshore, and Global 
SantaFe. The State Department offers these firms our support, through 
our Embassy in Ottawa and Consulates in Calgary and Halifax, in dealing 
with occasional regulatory difficulties.
    Given the importance of our energy partnership with Canada, the 
State Department has for years chaired an interagency bilateral 
``Energy Consultative Mechanism'' between the two federal governments, 
allowing each side to work towards common ends and to address issues of 
concern. Canada hosted the latest meeting of the Mechanism in Ottawa on 
July 17, where we discussed their oil sands production and our natural 
gas summit, as well as our shared electrical grid and numerous other 
topics. We have had numerous discussions with our Canadian colleagues 
since the August 14 blackout in Toronto, Ottawa, Washington and 
Detroit.

                                 MEXICO

    Mexico is one of our leading energy and trading partners, and has, 
with other major producers, increased production in recent months to 
help global oil markets meet the challenges arising from recent events 
in Iraq and Venezuela. Mexico is generally among our top five foreign 
oil suppliers. In February of this year, crude oil imports from Mexico 
exceeded those of both Saudi Arabia and Canada, and Mexico has 
maintained higher than normal oil exports to the United States since 
then.
    Our energy trade with Mexico is not a one-way street. We import 
crude oil and electricity from Mexico. But we also supply Mexico with 
over 10 percent of its refined petroleum products, and we remain a net 
natural gas exporter to Mexico.
    Mexico has taken steps to liberalize transportation, distribution, 
and storage of natural gas, and has successfully attracted domestic and 
foreign investment there and in other parts of its energy sector. Some 
of you may have already met Mexico's new Energy Minister, Felipe 
Calderon who, as a member of the Mexican Congress and a leader in 
President Fox's National Action Party (PAN) party, participated in 
meetings of the U.S.-Mexico Inter-parliamentary Union in the 1990's. 
Minister Calderon was appointed September 2 and is expected to continue 
the sector's liberalization.
    In recent months, integration has increased at the border. For 
example, PEMEX applied for a Presidential Permit to cross the 
international boundary to Brownsville, Texas, with a petroleum products 
pipeline that initially allows imports of about 10,000 barrels per day 
of diesel from a refinery in Monterey, Mexico. The pipeline will 
ultimately have a capacity of up to 100,000 barrels per day. The State 
Department issues such permits, and this one was signed in April after 
a thorough consideration of public comments and inter-agency review.
    Mexico is also proceeding with plans to permit numerous LNG import 
terminals in Baja California and along its Gulf Coast. Although not all 
of these projects will ultimately be constructed, industry analysts 
believe several will be operational by around 2007. Foreign investors, 
including U.S. companies such as Sempra Energy, ChevronTexaco, and 
Marathon, are actively pursuing these projects, which will serve both 
the Mexican and U.S. natural gas markets.
    Since 1992, Mexico has allowed private sector participation in the 
generation of electricity for self-supply, small production, 
cogeneration and independent power production (IPP). U.S. firms are 
major investors and suppliers in this new market. Mexico projects an 
overall annual growth rate in electricity demand through 2010 of 5.6 
percent, and somewhat higher (6.5 to 7.6 percent) in industrial 
regions. Privately financed generating capacity is expected to grow at 
14.2 percent annually, and Mexico expects to add over 28,000 Megawatts 
of new capacity by 2010. IPPs could play a major role in attracting the 
required investment in new generation and transmission infrastructure.
    The reliability of North American energy trade is also enhanced, of 
course, by geographic proximity. But more important than geography 
alone are the rule of law and the predictable investment conditions 
created by NAFTA, integrated pipeline networks, close cooperation among 
our governments and energy companies, and long-term stable supply 
relationships.




           lng: a bright new industry for trinidad and tobago
    Recent natural gas finds in Trinidad's waters have reinforced that 
country's position as a reliable supplier of liquefied natural gas 
(LNG) to the U.S. and global LNG markets. In fact, the country is home 
to the single largest LNG facility in the hemisphere, a clear signal 
that, with the right investment climate, investors will come. 
Currently, Trinidad and Tobago supplies about two-thirds of the U.S. 
LNG market, some 2.4 percent of total natural gas imports and 0.4 
percent of total natural gas consumption. Trinidadian gas exports (98 
billion cubic feet in 2001, valued at just under $400 million) 
contribute a significant portion of gas used in the Northeast. Trinidad 
hopes to triple its share of the U.S. market by the end of the decade.
    Several discoveries in 2001 increased Trinidad's substantial proven 
reserves to around 30 trillion cubic feet, with total potential 
reserves estimated at 90 to 100 trillion cubic feet. Low exploration, 
production and transportation costs make Trinidadian gas competitive 
with most other foreign sources of gas.

       VENEZUELA: HISTORIC, STRAINED, BUT RECOVERING OIL SUPPLIER

    Venezuela and the United States have also enjoyed historically 
strong energy ties. Traditionally, Venezuela has been one of our most 
reliable oil partners, and maintained an oil policy built upon a 
reputation of reliability, which was of great mutual benefit to 
Venezuela and consumers of its oil exports. Through World Wars, 
politically inspired embargoes, and global dislocations, Venezuela 
found that its national interest was best advanced through maintaining 
that reputation of reliability.
    This reliability was, unfortunately, seriously eroded with the oil 
disruption at the beginning of this year. Venezuela's turmoil came at a 
difficult period for the world economy. It is up to the Venezuelans to 
work to restore that reliability with world petroleum markets. While 
production and refinery operations have recovered significantly, many 
industry experts assess that the sustainability of the recovery is 
questionable due to the lack of skilled manpower, deferred maintenance 
activities, and lack of capital investment. Many argue Venezuela will 
experience an actual decline in capacity if these trends are not 
reversed.
    Commercial aspects of the relationship continue to run deep. In the 
1990s, Venezuela opened parts of its energy sector to international 
firms, most of them American. These firms, such as ConocoPhillips, 
ChevronTexaco and ExxonMobil as well as independents like Harvest 
International, Sampson and Anadarko remain hard at work there. In fact, 
foreign energy firms are producing an increasing share of Venezuela's 
oil. U.S. firms are also working with Venezuela as it begins to tap its 
large LNG potential in projects such as Plataforma Deltana. Venezuela's 
vast heavy and extra heavy oil reserves also deserve special mention in 
this regard. Joint-venture projects with major international partners 
are now on stream, and as the commercialization of Venezuela's heavy 
oil potential deepens, it seems likely that the private sector will 
book more and more of these reserves as proven, as in the case of 
Canada, and tip the Hemisphere's reserve balance yet further.
    The investment relationship with Venezuela is a two-way street. In 
fact, Venezuela is one of the top ten overall foreign investors in the 
U.S. through CITGO, a major refinery and petroleum products marketer 
here. These reciprocal energy investments bring benefits to both 
parties. We will continue to maintain a robust, if possibly more 
difficult, energy dialog with Venezuela.
    The United States will continue to work to help Venezuelans resolve 
their political differences. The key to reversing the severe economic 
and political decline in Venezuela, and the key to recapturing their 
oil sector reliability, is a continued dedication to finding a 
constitutional, democratic, peaceful and electoral solution to the 
crisis, as called for in Organization of American States (OAS) 
Permanent Council Resolution 833 of December 16, 2002. The 
international community, including the OAS and the Friends of the OAS 
Secretary General's Mission for Venezuela, of which the United States 
is a member, stand ready to support Venezuelans' efforts to resolve 
their differences. Venezuela's newly instituted National Elections 
Council has the responsibility of determining when a recall referendum 
will be scheduled.

              BRAZIL: DEEP WATER RESOURCES, NEW GAS FINDS

    On April 29, Petrobras confirmed the largest gas discovery ever in 
the Brazilian continental shelf, with reserves of about 70 billion 
cubic meters, compared to prior total proven natural gas reserves of 
about 231 billion cubic meters. The discovery was made in the BS-400 
block of the Santos basin, offshore from the State of Sao Paulo and 
Brazil's largest national energy consumer market.
    As of summer 2002, the Campos Basin offshore of Rio de Janeiro 
State produced an average 1.26 mbd of oil and 18.42 million cubic 
meters of natural gas per day. At that time Petrobras was forecasting 
oil production by 2005 of 1.6 mbd in the Campos Basin and 1.9 mbd 
countrywide.
    The National Energy Policy report recognized Brazil's growing 
importance to the global energy picture, and its excellence in 
producing deep water hydrocarbons.

                                NIGERIA

    The Administration recognizes Africa's role as a major energy 
supplier. For example, Nigeria has been the fifth largest supplier of 
crude oil to the U.S., with exports to the U.S. averaging nearly 
600,000 bpd in 2002. Overall Nigerian crude oil production averaged 
2.118 million barrels per day (bbl/d) in 2002. Approximately 65 percent 
of Nigerian crude oil production is light and sweet, making it 
particularly suited for U.S. refineries since it yields high volumes of 
gasoline. Nigeria has the potential to increase its crude oil 
production significantly in the next few years as recent deep-water 
discoveries come on stream.
    U.S. firms are playing an important, and very positive role in 
supporting development in Nigeria. On October 15 Secretary Powell 
presented ChevronTexaco with the 2003 Corporate Excellence award for 
the company's work in Nigeria. ChevronTexaco has done far more than 
drill for oil and gas. The company's riverboat clinic brings badly 
needed healthcare to thousands of people in the Niger Delta. Like many 
parts of Africa, HIV/AIDS has cast its shadow over Nigeria. The 
company's AIDS prevention program recently prompted Nigerian President 
Obasanjo to designate Chevron Nigeria's managing director as co-chair 
of the country's public-private sector alliance to fight HIV/AIDS. We 
applaud Chevron Nigeria's commitment to its employees, and to the 
people of the delta.
    Nigeria also has an estimated 124 trillion cubic feet (Tcf) of 
proven natural gas reserves (9th largest in the world). However, due to 
a lack of infrastructure, Nigeria currently flares much of the natural 
gas it produces and re-injects only about 12 percent to enhance oil 
recovery. Nigeria is beginning to develop its gas resources with its 
most ambitious natural gas project, a $3.8 billion LNG facility on 
Bonny Island completed in September 1999. This facility is slated to 
expand to more than double its current capacity over the next three 
years. Plans for additional LNG facilities are being developed. In 
February 2001, Nigeria and ChevronTexaco, Conoco, and ExxonMobil 
announced an MOU to conduct feasibility studies for an LNG facility, 
West Niger Delta LNG, expected to be on stream by 2005. An MOU for a 
third LNG plant in Nigeria was signed in September 2001 with Phillips 
and Agip. This facility, planned to begin operating in 2007, will be 
the world's first offshore LNG plant.
    The West Africa Gas Pipeline (WAGP), being developed by a 
consortium led by ChevronTexaco, is an important regional gas 
development project that will bring needed energy supplies to West 
Africa and reduce wasteful flaring. The project received $1.55 million 
in technical assistance from the United States Agency for International 
Development (USAID). USAID assisted the pipeline countries in 
developing market mechanisms for natural gas and for building capacity 
of local government and regulatory agencies to ensure they could 
actively and effectively participate in the WAGP project. The $500-
million WAGP will initially transport 120 Mmcf/d of gas from Nigeria to 
Ghana, Benin and Togo beginning in June 2005. The World Bank estimates 
that Benin, Togo and Ghana can save nearly $500 million in energy costs 
over a 20-year period as WAGP-supplied gas is substituted for more 
expensive fuels in power generation. Ghana estimates that it will 
reduce its imports by 15,000-20,000 barrels of crude oil per day by 
using WAGP gas in its power plants.
    Nigeria's oil producing Niger Delta remains politically volatile, 
with intermittent communal violence and labor disputes disrupting 
production in some areas. Ethnic violence involved well-armed 
militants, and the Nigerian military forced foreign operators to shut-
in some 800,000 barrels per day during parts of March and April. 
Although overall production has returned to near previous levels, we 
remain in close contact with the Nigerian government, the local 
communities, and the firms operating in the Niger Delta region as they 
work to address recurring problems. Our mission in Nigeria remains 
committed to supporting democracy, economic reform, and poverty 
alleviation in Nigeria.



                       EMERGING AFRICAN PRODUCERS

    Existing and new producers, such as Angola, Gabon, Equatorial 
Guinea, Sao Tome, and Chad will continue to develop new oil and gas 
resources in coming years, and U.S. energy firms are key in Africa's 
on-going emergence as an energy-supplying region. From the large firms, 
such as ExxonMobil and ChevronTexaco, to the smaller oil firms such as 
Amerada Hess, Marathon, Devon Energy, Vanco, Kerr-McGee and others, 
U.S. companies bring the most advanced technologies, resources and 
capital to assist African countries in developing their energy 
resources.
    The Angolan petroleum industry now produces up to 900,000 barrels 
per day, a figure that will increase substantially in the coming years 
as new fields are brought on-line. During 2003 more than 350,000 
barrels per day of Angola's production has come to the U.S. Current 
production is concentrated off-shore of the northern province of 
Cabinda. ChevronTexaco is the largest operator in Angola with shallow 
and deep-water fields in and around Cabinda. We continue to engage the 
Angolan government on the humanitarian situation, and urge the Angolan 
military and rebel groups to take necessary steps to protect 
internationally recognized human rights in the Cabinda region.
    Production from the Cabinda fields will be eclipsed by deepwater 
production further south in the Kwanza Basin scheduled to come on-line 
by 2007. ExxonMobil, BP, Norsk Hydro, and Agip have all made 
significant discoveries in concessions in this area that are under 
development. BP made the first significant ultra-deep water discovery 
in this area in 2002 and other ultra-deep water concessionaires remain 
optimistic.
    Our Embassy is actively working with the Angolan government to 
support the development of a comprehensive national energy strategy. 
USAID recently completed an assessment of Angola's energy policies and 
institutions to assist in identifying critical policy questions and 
possible solutions. The State Department is following on this effort by 
providing $200,000 in Economic Support Funding to the Department of 
Energy to support the energy strategy effort with Angola.
    Gabon, sub-Saharan Africa's third largest oil producer, currently 
produces about 300,000 barrels of oil per day, although this is 
expected to decline over the next five years. Gabon is an eligible 
beneficiary under the Africa Growth and Opportunity Act (AGOA), and its 
duty-free exports to the United States in 2001 were valued at $938.8 
million, almost all of which were oil or energy-related products. Over 
45 percent of Gabon's oil output is exported to the United States.
    Equatorial Guinea is emerging as a major oil producer in the Gulf 
of Guinea. On average, Equatorial Guinea produced 179,000 barrels per 
day of liquids (including crude and natural gas liquids) in 2002. By 
2010 Equatorial Guinea should have 515,000 barrels per day of oil and 
natural gas liquids, given current trends, and will also be a supplier 
of LNG. ChevronTexaco, Amerada Hess, ExxonMobil, Marathon Oil, and 
Devon Energy are some of the U.S. firms with investments in 
exploration, production, and service activities in Equatorial Guinea. 
We opened an Embassy office in Malabo this month that will enhance our 
dialog with the government and signal our commitment to broad 
engagement with Equatorial Guinea.
    Sao Tome and Principe, though it currently has no oil and gas 
production, is another promising emerging producer in the Gulf of 
Guinea. Sao Tome's petroleum reserves span both its own Exclusive 
Economic Zone (EEZ) and a Joint Development Zone (JDZ) with Nigeria. 
The JDZ is estimated to hold substantial reserves, possibly as much as 
6-10 billion barrels. ExxonMobil has already made investments in Sao 
Tome, and now that recent political turmoil has been resolved with the 
return to the island of President Menezes, more U.S. firms are likely 
to bring their capital and technological expertise to the table.
    Oil began flowing this summer through the $3.7 billion Chad-
Cameroon Pipeline, the largest single private U.S. investment in Africa 
led by ExxonMobil, with the participation of ChevronTexaco. The 
Pipeline is a good example of sustained cooperative efforts among 
various entities--governments, international financial institutions, 
the oil consortium developing the project, NGOs and civil society--to 
balance economic benefits, transparency, and humanitarian and 
environmental concerns. Our Ambassador in Chad is deeply engaged with 
the government of Chad to ensure that the unique capacity building and 
transparency measures incorporated into this project are implemented.
    While the unique circumstances mean that some aspects of the Chad-
Cameroon project may not translate directly to other projects, many 
invaluable lessons are being learned. According to projections released 
by the World Bank, total receipts for the project are expected to reach 
$12 billion over a 28-year period. Chad could earn $2.5 billion over 
the life of the project with annual revenues of up to $200 million. 
Chad's Revenue Management College, an independent body that will help 
assure that oil wealth is used to benefit the citizens of Chad, is now 
established to monitor and assess the effectiveness of Chad's oil 
revenue expenditures. The College is a unique feature of this project 
that we worked closely with the World Bank to see put in place. Its aim 
is to ensure transparent use of Chad's oil revenues to alleviate 
poverty and to enhance its economic development.
    Some concerns remain regarding adequate administrative capacity and 
oversight of the use of pipeline revenues, but the project has 
established channels for discussion and resolution of problems that are 
inclusive and sensitive to impacts on the local population.

          PROMOTING TRANSPARENCY AND A GOOD INVESTMENT CLIMATE

    We have a strong interest in assisting oil-producing countries to 
channel receipts from their energy resources into solid and sustainable 
economic development that will benefit their populations over the long 
term. Democratization and the development of responsible governing 
institutions are particularly important in reducing oil related 
conflicts and promoting supply stability from oil and gas producers 
around the world. Substantial foreign direct investment is needed to 
develop energy resources both onshore and offshore in the Western 
Hemisphere and Africa.
    The Administration has demonstrated a clear commitment to 
encouraging the reforms needed to improve the investment climate. 
Transparency and accountability are central to good governance and to 
ensure that oil revenues benefit local populations and support 
development. We have an interest in helping nations solve these 
problems, not just out of altruism, but also in our own self-interest. 
We are prepared to explore new partnerships to help countries make good 
on commitments to good governance, transparent business practices, 
sound economic policies and market-based regulation. Countries with 
these attributes make better hosts to the huge investments needed to 
develop energy resources, and they make more reliable contributors to 
our own energy security.
    At its June Evian Summit the Group of Eight (G-8) countries 
endorsed a comprehensive action plan on ``Fighting Corruption and 
Improving Transparency'' to help developing countries acquire the tools 
to strengthen domestic institutions and enhance transparency and 
accountability. The initiative focuses on host government commitments 
to fight corruption, and to enhance transparency, especially in their 
budgets--both on revenues and expenditures--and procurement processes, 
because these are the channels through which resources are used and 
controlled. The G-8 approach recognizes that government commitment to 
transparency and good governance is central to ensuring sound and 
accountable use of their energy sector resources. The G-8 countries 
have therefore resolved to target assistance on countries with a 
commitment to improved performance on transparency.
    The Action Plan also commits the G-8 to:

   Deny safe haven to corrupt leaders and their assets by among 
        other things denying visas to corrupt officials;

   Push for accelerated implementation of the OECD Anti-Bribery 
        convention;

   Encourage the World Bank and other IFIs to insist on 
        increased transparency in the use of funds by borrowing 
        countries.

    In addition to these commitments, the G-8 countries agreed to 
support voluntary compacts between governments and companies to 
disclose revenue flows and payments from the extractive sectors, 
including oil, gas and mining. The G-8 committed to support those 
governments that wish to implement such voluntary partnerships through 
capacity building assistance and by encouraging IFIs to provide 
technical assistance. We support an approach based on voluntary 
compacts between willing ``pilot'' developing countries and the 
companies operating in those countries, and civil society aimed at 
establishing a strong relationship among partners in public expenditure 
transparency. Our philosophy is that, to be effective, this approach 
must focus primarily on how governments allocate and use the resources 
associated with these key sectors. In most cases, their own state-owned 
enterprises have active control over much of the activity in these 
sectors.

  WESTERN HEMISPHERE AND AFRICA--HELPING TO MEET OUR ENERGY SECURITY 
                                 GOALS

    New energy resources, from existing producers such as Canada, 
Venezuela, Nigeria, and Angola combined with those from emerging 
producers of oil and gas such as Peru, Equatorial Guinea and Chad, 
among others, are helping to meet our energy security goals by 
diversifying global energy supplies. As noted throughout my testimony 
we are working with host governments, both in Washington and through 
our Embassies overseas, to build and support open and stable business 
environments for U.S. firms to play a role in developing energy 
resources throughout the world. We are building on the National Energy 
Strategy goal of maintaining a diverse global energy market that 
enhances economic growth and stability.









    Senator Hagel. Mr. McManus, thank you.
    Senator Coleman, I would propose that we alternate here for 
maybe 7 minutes at a time, and we have another panel. So if 
that is agreeable, I will begin the questions.
    Senator Coleman. Thank you, Mr. Chairman.
    Senator Hagel. Thank you, and we appreciate very much your 
attendance because, as was noted, Senator Coleman is the 
chairman of the Foreign Relations Subcommittee on the Western 
Hemisphere. So thank you.
    Let me begin with you, Mr. McManus. How would you rate the 
energy issue in the rating evaluation of what is important when 
the State Department in our foreign policy lays out an agenda 
of a relationship, human rights, religious freedoms, trade, 
transparency, all other important parts of a foreign policy, 
American foreign policy? Where does energy fit in that list of 
priorities?
    Mr. McManus. I think we look to advance our energy policy 
by keeping our principles, which is why we are working through 
the G-8 on enhancing transparency, which is why we have added a 
new position to our embassy in Nigeria to work on corporate 
responsibility, and why with the Department of Energy we 
maintain a dialog with countries throughout the world, even 
countries such as Venezuela where there are larger political 
issues at stake. So I think that it is a fundamental part of 
our overall foreign policy, and it is well implemented and 
integrated into our policymaking system.
    Senator Hagel. Secretary Brodman, would you care to comment 
on that at all?
    Mr. Brodman. Yes, thank you, Mr. Chairman. I think that 
many of the new challenges that we see emerging today to our 
energy security really come from the kinds of things that we 
have not seen in the past. As you know, in the past our supply 
disruptions came primarily from sovereign political decisions, 
revolutions, and conventional wars, but today they are just as 
likely to come from corruption and the lack of transparency, 
from governance issues, from ethnic and religious conflicts, 
from border and territorial disputes, from political 
instability and other internal sources of conflict, and from 
the failure of the revenues from oil development to trickle 
down to support the economic and social development aspirations 
of the people directly involved.
    In many ways I think the new challenges to our energy 
security today really go beyond energy policy per se to touch 
on the things that Mr. McManus mentioned. I think resolving a 
lot of these issues really gets down to the United States 
helping these countries to manage the revenues they earn from 
oil, gas, and other natural resource development in a way that 
will support sustainable social and economic development. I 
really think that this is the new frontier for our energy 
security in the 21st century, especially when we look to Latin 
America and Africa.
    Senator Hagel. How much of a role do multilateral 
institutions/organizations play in our overall effort here, as 
you have just described, both of you, in your testimony, to 
help these developing nations through these political crises, 
border problems, all the other specifics that you mentioned, 
focusing on trying to help them develop some stability and 
security, as you just noted, managing assets--and many of these 
countries have tremendous assets, as you have each laid those 
numbers out fairly clearly. World Bank, United Nations, how 
much of a role do they play, can they play, should they play in 
this effort? I would like to hear from both of you. Thank you.
    Secretary Brodman.
    Mr. Brodman. Thank you. I believe they are playing an 
increasing role and there are a lot of very innovative 
activities going on, being undertaken I think by the World 
Bank, by regional development banks, by the United Nations, and 
by other organizations such as the International Energy Agency 
and the newly evolving International Energy Forum, which is a 
forum for improving the dialog between oil-producing and oil-
consuming countries.
    I think one excellent example of the role that 
international institutions can play is the role that the World 
Bank played in the development of the Chad-Cameroon pipeline to 
bring newly discovered oil from Chad to market, the fund that 
that organization set up to channel the revenues from oil 
development projects in Chad into sustainable economic 
development projects within the country, to make sure that the 
country as a whole benefits from the development of those 
natural resources.
    The World Bank has also been highly instrumental in doing 
accounting to help oil-producing countries get a better handle 
on the disposition of revenues that come from natural resource 
development and I think in this sense in supporting the efforts 
that we have undertaken in the G-8 and in other places to 
improve the transparency of transactions in natural resource 
development in developing countries. In many countries around 
the world, for years a large portion of the revenues coming 
from natural resource development have never adequately been 
reported or reflected in published budget figures, and they 
have just been a potential source of funds for corruption and 
other activities that have proved problematic across the board.
    Strictly speaking now on the energy technical side, we have 
a number of activities underway in the International Energy 
Agency to reach out to developing countries to help them 
improve their data collection and their understanding of world 
energy markets and the forces at work that do impact their 
ability to develop their resources and to sell them gainfully 
in the world market.
    As I mentioned before too, we are strong supporters of this 
new International Energy Forum which is an outgrowth of the 
producer/consumer dialog discussions that have been going on 
for the last 10 years.
    Mr. McManus. I think many of the larger OPEC oil producers 
do not qualify for the IMF standard financial packages, and as 
Secretary Brodman said, it is therefore more important that 
when they focus their energies on a Chad, that they can make 
that a model. In Chad, they have set up a revenue college where 
5 percent of the revenues from the Chad-Cameroon pipeline will 
go to the local population. Ten percent will go into a trust 
fund for future generations, and some 90 or 80 percent will be 
earmarked for health, education, and welfare. The World Bank 
role there for really developing countries I think is critical 
and probably where they have their highest valued use.
    Senator Hagel. Thank you. Rather than start a new question, 
Senator Coleman?
    Senator Coleman. Thank you, Mr. Chairman.
    A question to both gentlemen. I agree with the sentiment of 
the importance of the United States helping countries manage 
resources so you can truly sustain economic development, but I 
want to explore how we do that and some of the challenges of 
that. Let me use Bolivia as an example.
    Over the weekend, President de Lozada faced protests, 
ultimately stepped down, and it seemed to me that this issue 
was in part at the heart of some of the challenges he faced, 
that indigenous and other Bolivians who objected to a natural 
gas export plan sensed that the energy resources were somehow 
not getting down to the benefits of that, not getting down to 
the folks at kind of the bottom rung of the economic ladder. 
And I have very deep concerns over the prospects of Evo Morales 
and his message and the impact that will have on the 
opportunity for Bolivians.
    So the question I have is using Bolivia perhaps as an 
object lesson here. Are there things that we could have done 
differently in working with Bolivia? Is there a role that the 
United States should be playing in situations like that or is 
the concern that we would be seen as meddling in the internal 
affairs of another country, and so we have to step back but 
then get the results we get? Can you help me try to understand 
the Bolivian situation as kind of an example here?
    Mr. McManus. Well, first of all, we very much regret the 
loss of life, and we commend ex-President Sanchez de Lozada for 
his commitment to democracy and the constitutional transfer to 
Vice President Carlos Mesa who is now the President. We think 
the events of the last week have really underscored the needs 
for all Bolivians to work together to strengthen their 
democratic institutions through more peaceful dialog and 
constitutional means. We hope that it will be the 
responsibility of all Bolivians to take the steps to end the 
political polarization and to guarantee respect for human life 
and rule of law.
    I would not want to delve into such a sensitive issue 
because there was loss of life, but on a practical matter, 
Senator, I think you have identified a lot of countries in our 
hemisphere would rather not have the U.S. come in and tell them 
how to allocate revenues. In the case of Bolivia, there were no 
gas exports.
    I think looking to Trinidad that you had pointed out 
earlier, you have the investment climate. Companies will come. 
What we do is our market is open to Trinidadian gas. Our market 
is open to any Latin American country that can produce gas at a 
market price and bring it to one of our few LNG import 
terminals.
    Senator Coleman. Secretary Brodman.
    Mr. Brodman. I agree with everything my colleague has said 
here, but I think the Bolivian situation points out a problem 
that many energy-rich or potentially energy-rich developing 
countries face and that is the problem of managing expectations 
of the wealth that will be created from energy development. As 
you know, in many countries just the expectation that there 
will soon be substantial revenues from natural resource 
development has led to sometimes irresponsible spending sprees 
and over-commitments and over-promises on the part of 
governments that they subsequently have a hard time delivering 
on. Rapid energy sector development sometimes in the past has 
also come at the expense of other sectors of the economy which 
have tended to become ignored.
    Now, these are all areas that I think the United States can 
help developing countries manage if we are asked. But of 
course, we cannot come in and help countries unless they ask us 
and if they want our assistance. But in many cases, we find 
that it is easier for us to provide help and assistance through 
these international organizations that have been developed and 
through some of the programs they have to help countries manage 
these kind of expectations.
    In the case of Bolivia, we have worked closely with Bolivia 
in the past on development of their natural gas resources for 
export by pipeline to Brazil in particular, and in this most 
recent past, I agree with everything my colleague has said 
here. There is not much I think that the Department of Energy 
in particular can say or add to that.
    Senator Coleman. Mr. McManus, you mentioned Trinidad and 
talked about the investment climate, and really that parallels, 
Mr. Brodman, your comments about you need investment to sustain 
production. So it is clear that there has to be a climate in 
which folks are willing to invest. I am trying to sort out what 
is it that we do to foster that. In Colombia, security becomes 
an issue, and I have talked to the folks involved there. 
Clearly in both of your comments you talked about rule of law, 
transparency.
    Are there ways in which this Congress could be investing in 
efforts regarding rule of law, upholding rule of law, teaching 
rule of law, those other things that would then be helpful in 
generating the kind of investment climate that you both 
referenced?
    Mr. McManus. I think from the executive branch one of the 
things we have done in the Latin American energy sector under 
the Summit of the Americas was to have a Hemispheric Energy 
Initiative, which is co-chaired by the U.S. Secretary of Energy 
and I think most recently met at a ministerial where Secretary 
Abraham went to Mexico City. In that context, we are trying to 
work as an equal with our 33 democratic partners in the 
hemisphere to share best practices and to hold up countries 
like Trinidad that have the investment climate and companies 
will come and to work on transparency and to work on regulatory 
sharing. So it is Argentines who had done a lot of 
privatization earlier who can talk to their colleagues in 
Uruguay or Brazil and not simply the Americans, and we have 
involved the Organization of American States in that effort as 
well and international experts. That has been quite a fruitful 
process.
    Senator Coleman. Thank you.
    Mr. Brodman. I would just like to add that we have similar 
activities going on in the Energy Working Group of APEC, the 
Asian Pacific Economic Cooperation Group, and in Africa we have 
a U.S.-Africa energy ministerial process.
    But I would like to also point out that many of the things 
we are talking about here go strictly well beyond what we have 
in the past referred to as energy policy. Helping countries 
with the whole process of economic development really requires 
a sustained engagement that can be very expensive in the long 
run. As you know, the Department of Energy is not a development 
assistance organization, but we have in the past been able to 
receive some funds from the Agency for International 
Development to work with countries on a number of the issues 
that we are talking about here to try and promote responsible 
energy development and responsible use of energy resources to 
promote sustainable economic development and political 
stability.
    Senator Coleman. I thank you. Thank you, Mr. Chairman.
    Senator Hagel. Senator Coleman, thank you.
    Gentlemen, would you each respond to this question? NAFTA. 
Has NAFTA encouraged, inhibited, attracted, impaired, had any 
impact at all on our energy relationships with Mexico and 
Canada since NAFTA has been in effect?
    Mr. Brodman. Mr. Chairman, I am not sure I could quantify 
my answer in any exact way, but I believe NAFTA and just the 
negotiation of NAFTA itself was a very important milestone in 
creating the kind of environment that we see today between 
Canada, the United States, and Mexico. Mexico and Canada are 
our two most important trading partners, and I think if we take 
those two countries together, they are responsible for a large 
portion of the energy that we import and export. I think a lot 
of the activities that we have underway today in the North 
American Energy Working Group are in fact an outgrowth of the 
North American Free Trade Agreement.
    There are a number of challenges still ahead of us that I 
think will have to be undertaken in a broader context, such as 
the WTO, especially in the area of energy services trade, and 
those kinds of things. But I think NAFTA overall has had a very 
positive development on the relationship and the development of 
trade in energy between our three countries.
    Senator Hagel. Thank you.
    Mr. McManus.
    Mr. McManus. Well, I was fortunate 13 years ago to have 
been a negotiator on the NAFTA energy chapter, and the first 
word of chapter 8 I believe is that each party will respect 
each party's constitution. So oil and gas is largely hived off 
in NAFTA for reasons of sovereignty, obviously, for Mexico, but 
with Canada we have a much broader free trade agreement that 
does touch on security of supply. On the margins in NAFTA, it 
does provide liberalization and independent power projects. But 
I would say fundamentally it had not altered the energy 
landscape, and that was very much at the insistence of the 
Government of Mexico.
    Senator Hagel. Thank you.
    You each touched upon the Venezuelan situation, political 
problems, instability, the issues that have confronted 
President Chavez. Could you each respond in a little more 
detail to the question have those difficulties impaired our 
energy policy relationship with Venezuela? Have they forced us 
to take a more lateral approach or a more roundabout approach? 
How has that changed our policies and how do you foresee that 
Chavez government issue prolonging additional progress, and any 
other dimension that you want to add to the question?
    Secretary Brodman.
    Mr. Brodman. Mr. Chairman, I think the Venezuelan strike, 
while it was not completely unexpected, was a severe blow to 
the United States for the first few months that it was ongoing 
primarily because Venezuela is such an important source of 
crude oil that is nearby, and it was very difficult for us to 
replace Venezuelan oil, which takes about 10 days to deliver 
from ports in Venezuela to ports in the United States, with 
alternative supplies of oil which can take up to 45 days to 
deliver from the Persian Gulf, for example, to ports in the 
United States.
    So I think one thing that we have clearly learned from 
Venezuela is the importance of having a diverse set of energy 
suppliers supplying energy to the United States. I think as the 
situation unfolded, it became very clear to us that it was also 
important that the world and other producing countries try and 
maintain spare production capacity so that they are able to 
make up for these unexpected losses of supply that occur really 
more frequently than I think we would like them to, but always 
with a major surprise.
    The fact of the matter is other producers were able to 
increase their production and exports to the United States, and 
while we did suffer a major dip in our imports and in our stock 
levels for the first couple of months following the Venezuelan 
strike, by late February/early March, our imports of oil from 
other sources had been able to recover.
    Now, where we go from here in Venezuela I think depends a 
lot on what happens in Venezuela itself. But unfortunately, we 
have also learned from disruptions that have taken place in 
other countries that oftentimes production never recovers fully 
once a country has undergone a serious internal problem like 
Venezuela has. We have seen it in Iran in the case of the 
Iranian revolution. We have seen it in Iraq, as a matter of 
fact, after the Iran-Iraq war really, and I am not talking 
about the effects of the first Gulf War and the subsequent 
embargo on Iraqi production, but I am talking about the failure 
of Iraq to maintain its production capacity as a result of the 
Iran-Iraq war. And we have seen it in a number of other 
countries too where an internal event, such as that that 
occurred in Venezuela, really created a climate that made 
continued and enhanced natural resource development much more 
difficult than it had been in the past.
    Senator Hagel. Mr. McManus.
    Mr. McManus. I would just add to that. I think for 
Venezuela to fully recover their reliability as an oil 
supplier, they will have to solve their political situation in 
a constitutional, democratic, peaceful, and electoral solution. 
That is why we are working with the OAS. That is one of the 
many reasons why we are working with the OAS and the OAS is 
working with Venezuela so they will do that. But as John says, 
the ball is largely in their court.
    The great energy policy victory would be that other 
producers were able to compensate for a disruption in any one 
region of the world. Oftentimes people talk about a disruption 
from the Middle East. I think Venezuela has shown that you can 
have a disruption from any one region in the world, and in this 
case it was Middle East suppliers led by Saudi Arabia that 
largely compensated for a Western Hemisphere supplier. So we 
need to engage with all of our major suppliers, and I 
understand Secretary Brodman is off the plane from Saudi Arabia 
hours ago.
    Senator Hagel. Well, let me probe this a little deeper, 
specifically Chavez. Have we put in place, have we changed 
procedures, have we changed policy, have we adjusted in 
dramatic ways our energy policy, our relationship with 
Venezuela to deal with his government, to deal with him, deal 
with the instability after what happened?
    Mr. McManus. We have to deal with the sovereign Government 
of Venezuela. So we continue at a lower level a dialog between 
technical people of both governments on energy. They are our 
third largest supplier. They are a major investor in the U.S. 
through Citgo. So the dialog between the two governments is 
ongoing, and we are able to have a full exchange of views with 
them, including our concerns about their lack of reliability in 
December and onward.
    Senator Hagel. So we speak directly.
    Mr. McManus. Absolutely.
    Senator Hagel. Secretary Brodman, would you like to add 
anything to that?
    Mr. Brodman. I would agree fully with what my colleague 
from the Department of State has said.
    We do engage with the Venezuelan Government in technical 
consultations on a regular basis, and we make all the points 
about the need for stability and we are very frank with them 
about our concerns.
    Senator Hagel. Gentlemen, September 11, 2001. How has that 
changed over the last 2 years, or has it, our energy 
relationship with West African countries? Has it had any 
effect? Have we changed? We obviously have frozen our 
immigration policies. We have focused entirely on security 
issues, not inappropriately. I suspect as a result of that over 
the last 2 years, we have let a number of things drift, and we 
have deferred some tough decisions that we are going to have to 
get back to like immigration reform. Has it affected our 
relationship with many of these developing West African 
nations?
    Mr. Brodman. Senator, I believe that in many cases U.S. oil 
companies have been involved in the exploration and development 
of oil in West Africa for a number of years. I think in some 
countries our companies' involvement in West Africa has gone 
back 45 or 50 years and even more. Oil investment and 
development decisions are very long term in their nature. 
Developing an oil field sometimes takes 5 or 6 years and 
production will go on for as long as 20 or 30 years. I think 
many of the developments of West African oil and gas that we 
see coming to fruition today and those in the pipeline actually 
got started and were well underway by the time 9/11 took place. 
I am thinking here in particular of Angola and the new offshore 
developments in Nigeria.
    For many of our international oil companies, ExxonMobil, 
for example, ChevronTexaco, Conoco, Phillips, West Africa is 
one of their single largest and most important focuses of 
attention for investment right now of any other place in the 
world. I do not see that being affected itself by September 11.
    On the other hand, we have heard from large numbers of 
developing, oil-producing countries that the new security 
procedures in the United States are inhibiting the growth and 
the kind of relationships I think we would like to develop with 
these oil-producing countries in building long-term, secure 
relationships.
    For example, many of the countries in West Africa used to 
send students oftentimes on scholarships, supported by energy 
development projects, to universities in the United States for 
their education. Today many of these programs are thwarted by 
the inability of these countries to get visas for the students 
to come to the United States. So as a result, many of the 
students are going to universities in France or Britain or in 
Japan or other places in the world. If this continues for a 
long time, then there will be a whole new generation of young 
people in these producing countries that will, I think, more 
naturally look to the countries they are familiar with where 
they got their education to do business in the long term.
    So we have heard a lot of anecdotal evidence of that sort, 
but I think overall much of the investment and development that 
we see going on in Africa right now actually got started well 
before 9/11 and will continue on its own merits.
    Senator Hagel. Secretary Brodman, thank you. I appreciate 
your taking us into the future a little bit here based on what 
has worked in the past and what has helped develop a culture, a 
relationship, a base, an understanding. I appreciated your 
comments about that. Thank you.
    Mr. McManus.
    Mr. McManus. I would just agree with that and our National 
Energy Policy, which came out in May of 2001, was very centered 
on what we needed to do to advance transparency in Africa. We 
have redoubled our efforts with your help, as you know, on the 
African Growth and Opportunity Act, which on December 31, 2002 
was expanded so that we can address more countries in the 
region. The President visited in July and the Secretary of 
State is there today. So I think Africa remains a real core 
priority of ours.
    Senator Hagel. Gentlemen, thank you. I know we could stay 
at this for quite some time. Secretary Brodman, you have made a 
valiant effort to come forward here with probably little 
awareness of what country you are in or time zones.
    We appreciate your effort. You both have made very 
important contributions to our effort. We will talk again. In 
the interest of the second panel, unless either one of you have 
an additional comment, I would again say your full statements 
will be placed in the record and the committee thanks you for 
what you are doing for our country as well.
    Mr. Brodman. Thank you, Mr. Chairman, and I am sure I am 
speaking on behalf of my colleague here when I say that the 
Department of State and the Department of Energy are fully 
supportive of you and your efforts to improve the energy 
security of the United States. Thank you.
    Senator Hagel. Well, thank you. You know, Secretary Abraham 
learned everything he knows up here in the Senate.
    Sometimes he will not acknowledge that, but he did. Give 
the Secretary our regards. Thank you, gentlemen.
    As the first panel is making its way toward the exit, our 
second panel is welcome to step up to the table. Thank you.
    Ladies and gentlemen, thank you. I have introduced each of 
you not, I suspect, in the glorious fashion that you deserve, 
but nonetheless to stay with the point here, we appreciate very 
much your each giving us some time this afternoon and putting 
your thoughts together in a statement, which we look forward to 
hearing, and then an opportunity to exchange some views as 
well. You are not strangers to this effort. You have all 
testified before. For that, we very much appreciate it.
    Since the order that I have been given reads Mr. West as 
the first presenter, then I will stay with the order as they 
have given it to me. Mr. West, again I remind all who are 
present you are chairman of PFC Energy here in Washington, DC 
and an experienced hand at all this. So welcome back. Thank 
you. Please proceed.

     STATEMENT OF J. ROBINSON WEST, CHAIRMAN, PFC ENERGY, 
                         WASHINGTON, DC

    Mr. West. Thank you, Mr. Chairman. I have submitted a 
substantial statement. I would like to hit a few high points 
from that.
    The first is the discussion of energy security, and we 
define energy security as sustainable, reliable supplies at 
reasonable price. A lot of people assume energy security means 
interruption of supply, and there is really a very important 
difference between the two, and we will come to that.
    Also, I would submit that energy security means natural gas 
too. A lot of energy security discussion is about oil where, in 
fact, I think the U.S. economy is much more vulnerable on 
natural gas, and frankly I think there is much more that the 
U.S. Congress can do about it.
    A couple of points also in terms of oil----
    Mr. West, excuse me just for a moment. I will get back to 
you on that point, as you suspect I would, as to why you said 
what you did. But I just want to let you know that I would be 
interested in getting your colleagues' answer to that as well. 
So please proceed.
    Mr. West. OK.
    A couple of points. One, energy independence for the United 
States we believe is a meaningless concept. U.S. production of 
oil is falling, and even if there is some greater energy 
efficiency, this is a fundamental trend that will continue.
    Also, the concept of diversity. We think diversity of 
supply is important, but we think what is also important--and 
it was highlighted a bit in the earlier discussion discussion 
on Venezuela, for example--is that the role of the swing 
producer is central to the orderly operation of the 
international oil markets and cannot be ignored. I think some 
people over-emphasize the importance of diversity and under-
emphasize having a producer which maintains excess capacity. 
Without it, there would be cyclical booms and busts which would 
destabilize economies in countries. Saudi Arabia is that swing 
producer. It is, in effect, the central bank of oil. It 
provides liquidity and stability in the market. In the case 
when Venezuelan production collapsed, it was Saudi Arabia which 
really played a critical role.
    A couple of other points. Again, I will try and be brief. 
In terms of looking at the various regions, Mexico is an area 
that has enormous potential and it has a role to play in the 
United States. It is an important supplier, but there is a 
contradiction in their policy. You discussed NAFTA. NAFTA has 
encouraged a great deal of inward investment and more economic 
activity. But it was earlier pointed out investment in the 
energy sector is precluded, and the government of President Fox 
has been unable to liberalize their investment framework in oil 
and gas, and this has really damaged Mexican production.
    On the other hand, Venezuela was discussed. But the fact of 
the matter is that as Senator Coleman pointed out, investment 
sustains production. The Venezuelans themselves are unable to 
make those investments. So Venezuela now is moving to the point 
where it is starting to welcome international investment, and 
there are a number of large American and foreign companies 
which are investing in Venezuela, and they have found the 
Venezuelan Government to be quite a reliable partner. In our 
view, if the local players can restrain their actions to within 
constitutional means, we believe that the perceived risk of 
Venezuela is higher than the real risk. But Venezuela is 
important and is very important to U.S. energy security.
    In terms of turning to West Africa, a lot of things are 
going wrong in West Africa but some things are going right. The 
investment environment and the oil sector logistics in West 
Africa are the opposite of a number of other areas that are 
widely discussed such as Russia. The terms and conditions for 
investment are very competitive. There is a high geologic 
potential for oil and gas. As a result, more capital has flowed 
into West Africa in recent years than from the international 
companies than has gone into Latin America or Russia or the 
Middle East. West Africa has a very important role in 
attracting capital.
    There are a lot of political problems there. There is very, 
very poor governance, which one of my fellow panelists will be 
discussing. But also there is the physical attribute that the 
production is occurring offshore, so it is somewhat isolated. 
But there clearly are problems.
    Nigeria is key, but Angola and Equatorial Guinea are 
ramping up production and will play an important role as well.
    I would like to turn to natural gas because I think it is 
an important area that has been largely neglected.
    As I said, I believe that there really is a looming crisis 
in terms of energy supplies in this country and that gas supply 
production is falling simply due to growing demand and limited 
geologic potential. There is much discussion of Canada as an 
important supplier but its growing supplies are not necessarily 
assured partly because of what was discussed earlier. They are 
going to require natural gas to produce their tar sands and 
their unconventional oil.
    The star in gas in the Western Hemisphere is Trinidad and 
Tobago. They have proven to be a very good partner. They have 
managed it well. They have an attractive regime. It has been 
well managed, and they play an important role in providing 
natural gas primarily to New England.
    Venezuela is in the early phase of being an gas exporter to 
the United States, and it is going to play an increasing role 
in that area.
    West Africa also. Nigeria is already moving some gas here, 
and Equatorial Guinea and Angola will play that role.
    One point that Mr. McManus said on natural gas is that our 
market is open. That is not true. Our market is not open and it 
is not open because we do not have the physical facilities to 
accept the gas we are going to need. I would respectfully 
submit that there is actually very little that political 
officials can do about the international oil markets. Oil is a 
global market. It is efficient. It works pretty well. Gas works 
very differently, and it is actually within the power of the 
administration, of Federal officials and very importantly State 
officials, in terms of permitting the infrastructure to come. 
If the United States does not want the lights to go out and 
schools to go dark, at some point then some action really is 
going to have to be taken if Latin America and West Africa are 
going to play a constructive role.
    So on that point, I would like to stop.
    [The prepared statement of Mr. West follows:]

     Prepared Statement of J. Robinson West, Chairman, PFC Energy, 
                             Washington, DC

    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. My name is Robin West and I am the 
Chairman of PFC Energy. PFC Energy is a strategic advisory firm, based 
in Washington, DC. We work with most of the companies in the global 
petroleum industry on various aspects of their international oil and 
gas investments and market strategies.

 KEY CONCEPTS UNDERPINNING OUR UNDERSTANDING OF ENERGY SECURITY ISSUES

    There are a number of key conceptual points concerning global 
energy security issues that our firm believes are essential for getting 
to the heart of the matter.
    The definitions of supply security of oil and natural gas are the 
same: sustainable, reliable supplies at reasonable prices. However, an 
important distinction must be made between security of crude oil 
supplies and security of natural gas supplies, because these two 
commodities represent entirely different security challenges globally, 
and particularly for the United States. Oil is a global commodity. 
Global oil markets equilibrate. Gas is not a global commodity. By the 
word ``gas'' I refer here always to natural gas, the same fuel that is 
burned on stoves in our homes, and not gasoline, the oil product used 
in automobiles.
    Vast natural gas resources in various parts of the world remain 
stranded because natural gas cannot be transported as easily as crude 
oil. Global gas markets do not always equilibrate. Basically, if oil 
prices go up or down in Houston, they will go up or down in Singapore 
and Rotterdam. This is not true for natural gas, where prices vary 
widely from market to market.

   There is a misplaced concern with ``dependence'' on foreign 
        oil suppliers. We will always depend on imported oil. 
        Interdependence among nations is not a bad thing. ``Energy 
        independence'' for the U.S. is a meaningless concept. U.S. 
        production of oil is falling due to the maturity of U.S. oil 
        fields. U.S. reliance on imported oil has already surged by 1.2 
        million barrels per day in the last five years, and is likely 
        to continue at a similar pace in the next ten years, bringing 
        U.S. net imports to 13 million barrels per day, equivalent to 
        the combined 2002 production of the entire North Sea and Saudi 
        Arabia. Greater energy efficiency can help slow down the 
        increase in imports, but the direction is inevitable in the 
        medium term.

   The proper way to frame concerns about ``dependence on 
        foreign oil'' is to talk about vulnerability to oil supply 
        disruptions. In this regard, diversity of supply clearly 
        enhances security of supply.

   But the role of diversity in providing security, though 
        extremely important, can be exaggerated. Given the highly 
        skewed distribution of oil reserves in various geographic 
        regions, there is a limit to how much diversity can achieve in 
        terms of security of supplies and there is an even more 
        critical limit to the ability of some producers to replace 
        others as strategic suppliers of crude oil.

   The role of a swing producer is central to an orderly 
        operation in the international oil markets. The excess capacity 
        that Saudi Arabia maintains at high cost allows the world 
        markets not to panic at every incident, civil war or 
        revolution. Without it, there would be cyclical booms and busts 
        which would destabilize economies and countries. Saudi Arabia 
        is the guarantor of last resort, the Central Bank of the oil 
        market that provides liquidity and reassurance in difficult 
        times.

   The domestic pressure on natural gas supplies and prices 
        poses a greater threat to energy security and the U.S. economy 
        than the rising cost of crude oil. U.S. demand for natural gas 
        is outstripping supply. Demand will rise even further when the 
        economy rebounds. Complacency rose with the recent unusually 
        warm winters and slowing economy. This past winter, which was 
        colder than the norm, should be a wake up call that gas 
        supplies, not oil, are actually a greater threat to the 
        nation's ability to provide a reliable supply to consumers at a 
        reasonable price.

    Given the differences between oil and gas as global commodities, 
U.S. government officials can do little about oil security, but they 
can do a great deal about U.S. gas security, which relies on 
government-regulated infrastructure. This Administration deserves 
credit for addressing some of these problems, but Congress must focus 
on these issues as well if it is serious about energy security.

   THE SIGNIFICANCE OF LATIN AMERICA AND WEST AFRICA TO U.S. ENERGY 
                                SECURITY

Oil Issues
    The global oil markets are a unified single entity, however, in 
reality they are an aggregate of several ``basins'' linked together by 
consumers and producers reaching out to other basins to secure supplies 
and expand markets. There are two large ``net consuming'' basins: The 
Atlantic Basin and the Asia Pacific Basin. By ``net consuming'' basin 
we mean that they consume more than they produce and have to reach out 
to other basins to make up for regional short falls. The key ``net 
producing'' basin that swings to make shortfalls in the ``net 
consuming'' basins is the Persian Gulf region, with Saudi Arabia as the 
principal supplier in that area. Hence, its critical role as the 
world's swing producer. But regional supplies mailer and in terms of 
diversity and proximity of supplies, regional producers are extremely 
important. In fact, they are the first line in defense of our oil 
security needs. In the Atlantic Basin, where the U.S. is the largest 
net crude oil importer, key regional suppliers outside of the U.S. are 
located in North West Europe (Norway and the UK), Latin America and 
West Africa. In the context of this testimony, therefore, for the U.S., 
other than the European producers, Latin American and West African 
producers make up our first line of defense in oil security.
    Four important factors related to these regional crude oil 
suppliers have a critical influence on future output:

   Investment activity as a result of investment regimes 
        created by these producers and its impact on future oil 
        supplies

   Attempts by crude oil producers to secure captive refining 
        capacity in the U.S. to ensure market share for their crude oil

   The perceptions of political risk within these countries and 
        its impact on current supplies and future investment activity

   Cooperation between regional producers and OPEC and its 
        impact on regional supplies and prices

    The U.S. does not only depend on crude oil to meet our petroleum 
needs. We import sizable amounts of derivative products. Here the 
regional markets, and in our case the Atlantic Basin, is even more 
critical for domestic prices of products. An examination of the 
dynamics of this market with special reference to Venezuela is also 
important in assessing our energy security.

                             LATIN AMERICA

    The important producers in Latin America are Mexico, Venezuela, 
Brazil, Colombia, and Ecuador. Most of these Latin American countries 
have long been important exporters of crude oil to the U.S. In fact, a 
sizable portion of the region's oil sector was developed by U.S. oil 
companies as early as the 1920s. U.S. company control over the sector 
in these countries contributed to domestic resource nationalism and 
colored relations with the U.S. The region has also been a trend seller 
in global oil politics, from the nationalizations of the Mexican sector 
in 1938 to Venezuela's lead in the creation of OPEC in the early 1960s.
    Oil revenues and the expenditures that they financed profoundly 
shaped the domestic political economies of the region creating groups 
of have's and have-nots. The funds were--and still are--one of the key 
sources of political competition in these countries. Economic and 
political reform efforts have been enhanced or hampered by production 
trends at home and oil price trends globally.
    The hike in oil prices in the 1970s, along with greater control 
over the sector that countries gained (notably, Venezuela, Ecuador and 
Colombia nationalized the local producing assets), greatly boosted 
government revenues. This was particularly true of Mexico (which had 
retionalized its sector much earlier) and those in the Andean region of 
the continent. But higher oil revenues severely distorted the domestic 
economies, leading to sharply higher and unsustainable spending, 
generating large budget deficits when prices fell in the mid-1980s and 
the resort to excessive external debt financing. The debt crisis that 
the region suffered in the 1980s--the region's ``lost decade''--can 
partly be blamed on the hike in oil prices, mismanagement of higher 
revenues and ultimately a stagnation or decline in oil production from 
the region. As the region embraced ``neo-liberalism'' in the 1990s as a 
means out of the debt trap, many reformist politicians proposed 
liberalizing the oil sector to reinvigorate supplies.
    A decade later, and after attempts at reforming the sector, the 
region in general has made little progress in expanding regional crude 
oil supplies in the aggregate. National oil company officials, labor 
unions and volatile domestic politics have slowed the entry of foreign 
investment and hampered the expansion of supplies. There was a brief 
period at the end of the 1990s when it appeared that these countries 
would succeed in raising supplies but local politics in general have 
led to recent setbacks in production. The notable exception is Brazil, 
where the partially privatized Petrobras used its considerable 
technological prowess and good indigenous management skills (unshackled 
from government control) to raise output in a physically challenging 
sector.
    Looking forward, there are grounds for hope that regional supplies 
will grow for a number of reasons. First, lagging production and in 
some cases fears of sharply lower output due to under-investment, 
strikes by oil workers and civil unrest in some countries, have forced 
governments to redouble efforts to liberalize the sector. Second, with 
energy security reemerging as a national issue in the U.S. following 
the attacks on the World Trade Center and the Pentagon, and fears of 
over-dependence on the Middle East oil in the U.S., Latin American 
countries see a competitive opportunity in gaining market share in the 
U.S. Third, democratic politics have brought to fore politicians that 
want to break the political power of the old entrenched bureaucratic 
elite and labor leaders and want to forge new alliances with foreign 
companies as means to increase production. Nonetheless, there is 
considerable uncertainty about whether foreign oil companies will 
overcome their perceptions of country risk despite improving 
contractual terms and greater access to the physical resources.
    A closer examination of individual country attempts to raise output 
produces a more complex picture, but the generalities mentioned above 
hold true. Local trends in the important Latin American producing 
countries are the following:
    Mexico has enormous potential in both oil and gas, but there are 
very limited upstream investment opportunities for private firms. The 
U.S. imported 1.49 million barrels a day from Mexico in 2002 making it 
the second largest source after Saudi Arabia and ahead of Canada. 
Moreover, Mexico's importance lies more in the potential upside that 
the country's resources suggest rather than current supplies only. 
Pemex, the national oil company, remains in full control over the oil 
assets of the country protected by constitutional prohibitions against 
privatization or other types of participation of foreign oil companies.
    There is a growing contradiction between the economic development 
model Mexico has developed since joining NAFTA and the investment 
regime existing in the oil sector. This is even more true in the gas 
sector but that will be discussed below. Countries attempting to 
integrate into the world economy and spawn an efficient and competitive 
industrial sector often will find it necessary to privatize their 
resource sectors to maximize output and lower input costs. Success in 
building an industrial sector reduces the relative importance of the 
primary sectors both in terms of employment and government revenues, 
especially since the government can diversify its tax revenues now that 
other productive sectors have been created. Mexico has been very 
successful in attracting foreign investment into its manufacturing 
sector and has greatly expanded exports of manufactures to the U.S. and 
other countries. However, because of limited reforms in taxation and 
labor policy and strong nationalist concerns regarding the hydrocarbon 
sector, the current government of Vicente Fox has been unable to 
liberalize the investment framework in both the oil and gas sectors. 
Whether future governments in Mexico will rectify this anomaly and open 
up the country to foreign investment (and achieve the production 
successes seen in the U.S. both for the onshore gas and the deepwater 
oil sectors) depends on continued growth of the non-oil industry and a 
political power shift away from vested interests stymieing changes in 
the hydrocarbon sector. More oil out of Mexico will certainly enhance 
our ``first line of defense'' and enhance our energy security.
    Venezuela's oil sector is at the very heart of the country's 
politics and the two go hand in hand. With the virtual bankruptcy of 
Venezuela in 1992--a culmination of the extravagant and corrupt 
economic policies of President Carlos Andres Peres--the region's most 
important oil producer adopted neo-liberal economic policies to 
diversify the economy away from oil. The national oil company PDVSA, 
under the stewardship of Luis Giusti, accelerated its move to expand 
oil output (partly through inviting foreign oil companies to invest in 
specific types of oil producing regions) and to increase captive 
refining capacity overseas (namely through PDVSA's U.S. subsidiary, 
CITGO) in order to grab market share in the U.S. The country also 
signaled less cooperation with OPEC in managing the global oil price 
during the 1990's. Giusti's move to increase oil supplies was designed 
to position Venezuela as the key supplier to the U.S. But his move 
proved ill timed given the economic situation within his own country.
    The situation came to a head in 1998, when OPEC members in the 
Persian Gulf refocused their sales effort on the Atlantic Basin after 
demand collapsed in Asia due to the Asian financial crisis. The rising 
barrels from the Persian Gulf met rising Venezuelan production and 
competition. This was one reason that oil prices collapsed in 1998 with 
what seemed like little prospect for OPEC to manage prices back up to 
acceptable levels.
    Low oil prices triggered a financial collapse in Venezuela and with 
growing disparities in income over the last several decades and the 
pain of economic reform falling mainly on the Venezuelan underclass, it 
was no surprise that in the 1998 elections Hugo Chavez emerged a 
victor. After his election, Chavez's attitude towards OPEC changed 
dramatically, and he promoted cooperation and higher oil prices. As a 
result, by 1999 Venezuela's cooperation with OPEC led to a strong 
recovery in oil prices which has been sustained to this day. While this 
stabilized the economic situation in Venezuela, the growing ``class 
war'' between the old and new government elites and some degree of 
economic mismanagement made the restoration of economic stability 
temporary.
    In early 2003, a large number of employees of PDVSA struck against 
the Chavez government in solidarity with the opposition. That crippled 
oil supplies into the Atlantic Basin. It showed the importance of 
regional supplies and the dislocations caused by the stoppage at a 
particularly difficult time as the U.S. embarked on a war in the 
Persian Gulf. Moreover, given the fact that a large number of CITGO's 
and other U.S. refineries were dedicated to buying Venezuelan crude, 
switching to other suppliers at short notice proved particularly 
difficult. Luckily Saudi Arabia was able to make up some of the short 
fall but not without a temporary sharp increase in world oil prices. 
With the loss of personnel--Chavez fired 18,000 workers for striking--
PDVSA's ability to produce at pre-strike levels continues to be 
stymied, and even though production has risen, Venezuelan output 
remains constrained and prospects are growing for future declines 
without substantial investment, probably from international companies.
    The weakening of PDVSA presents a strong opportunity for several 
players. The government is once again attempting to attract foreign 
investment in oil in its sector. It is hampered by foreign oil company 
perceptions of country risk (violence), an unfavorable hydrocarbon 
investment law, and anxiety that the return of the ``ancien regime'' to 
power if Chavez is removed from office may disqualify interested 
investors. An increase in Venezuela's production in the future is 
uncertain as the domestic political situation of recall referendums, 
coup attempts and considerable civil strife plays out. However if all 
the political competitors restrain their actions to within 
constitutional means, for international companies investing in 
Venezuela, the perceived risk of operating in that country may be 
greater than the actual risk.
    Political risk also clouds the supply picture of the two other 
Andean suppliers: Colombia and Ecuador. In Colombia, the oil sector has 
become enmeshed into the ongoing civil war between guerrilla groups and 
militias and the government. For a while in the 1990s, there was great 
hope that foreign oil companies would rapidly expand production in 
Colombia. There was a period of success with the expansion of the 
Cusiana field. However, the expansion of the Cupiaga field, the next 
big development proved to be disappointing. Moreover, initial success 
in expanding production led to more onerous investment terms which 
along with the violence in the country soured foreign company interest. 
In fact, guerrilla attacks consumed huge resources of the foreign 
companies as they attempted to maintain production and protect their 
personnel and their facilities, in particular, the Cano Limon pipeline.
    President Uribe is attempting to revive investment in the sector by 
offering better terms to foreign oil companies. His hope is that with 
growing oil revenues he will be able to dedicate more resources to 
fighting the narco-guerrillas and transform the investment environment 
for foreign oil companies. However, a more forceful stance towards the 
guerrillas has led to more violence and scared off potential investors. 
As a result, Colombia is caught in a Catch-22 with investors seeking a 
more stable and peaceful investment environment and the government 
hoping it will be the savior of the political and economic system of 
the country.
    In Ecuador, a new government hopes to accelerate new investment in 
oil rich areas and build a new pipeline to boost exports. The OCP 
pipeline will not only sharply increase export capacity but also enable 
Ecuador to improve the relative quality of its crude to the market and 
thereby increase its yield.
    Brazil is one of the remarkable success stories in the world oil 
industry. It has been able to become self sufficient in meeting its 
domestic oil consumption requirements through its own rapid oil 
production growth and is on the verge of becoming a net oil exporter. 
The new oil production has been developed in the very challenging 
deepwater offshore. Brazil's Petrobras is recognized as a world leader 
in deepwater technology. Although Brazil exports some gasoline to the 
U.S., its resource size and its own potential needs will prevent it 
from being a large net addition to the Atlantic Basin's supplies.

                              WEST AFRICA

    In contrast to Latin America, oil supply is surging in West Africa, 
notably Nigeria, Angola, and Equatorial Guinea. Industry capital and 
technology is pouring in to explore and produce in the offshore. 
Production will be rising at an annual average rate of 6% in the next 
five years, and total production will grow from 3.6 million barrels per 
day in 2001 to over six million barrels per day by 2007.
    The investment environment and oil sector logistics in West Africa 
are the opposite of those in Russia, a region often described as the 
key for America's energy security. Terms and conditions are very 
competitive, which, combined with its high potential for oil, has 
attracted massive investment from international oil and gas companies--
far more industry investment in recent years than Russia, the Caspian 
or the Middle East. As a result, production is swelling. Unlike the 
Caspian or Russia, West African oil can be easily loaded and moved 
anywhere by ship.
    However, there are serious concerns about the political stability 
of the region. Unrest in Nigeria has been in the headlines recently. 
The problem in West Africa is that governments are weak, unstable and 
deeply corrupt. Billions of dollars of oil revenues are squandered or 
stolen. The populations resent their politicians, who live in great 
wealth, while they exist in poverty. The condition of the people is 
appalling and political systems are ineffective.
    Despite the growing political instability in the region, foreign 
oil companies have flocked to the region partly because of the location 
of the assets. The growth in oil production in the region has occurred 
``offshore''. Investors consider this safer because they are not 
located near or among local communities, and as a result, these 
companies seem confident that they will avoid the problems encountered 
in onshore areas such the Niger Delta area of Nigeria. In the Niger 
Delta, local communities are using a variety of methods to extract oil 
rents directly from the foreign operating companies to compensate for 
the lack of services provided by governments. Although companies have 
attempted to improve local community relations through a variety of 
means including development and aid projects in association with non-
governmental organizations, the problems they face with local political 
violence continues almost unabated. The companies remain confident, 
however, that they will not encounter this from the offshore sector. To 
some extent this confidence may be misplaced as political activists 
learn new means of pressuring the companies and reach their facilities 
offshore.
    This is true at least in Nigeria, where some offshore facilities 
have already been a target, meaning the potential for production 
disruption exists for both onshore and offshore operations. Nigeria is 
set to see its production capacity to increase by 700,000 b/d by 2007, 
with much of the ramp up coming from deepwater blocks miles offshore. 
This will mitigate some political risk for companies and fear of 
production disruptions for global oil markets. The new production will 
target the U.S. market as well as Europe and Asia.
    In Angola and Equatorial Guinea, the threat of production 
disruptions is less pronounced. Both countries' production is largely 
offshore, and its governments are stable--even with a civil war in 
Angola. But these governments face increasing pressure for revenue 
distribution beyond the elite structures. Production and oil revenues 
are increasing fast in the next five years, and their populations want 
to see the benefits. This in itself is not too terrible a challenge, 
but Angola and Equatorial Guinea both face possible succession issues 
in the next few years--and its political leadership could be less 
stable than it has been over the past decades.
    With the cease fire in 2002, the ruling MPLA government in Angola 
no longer has the civil war with UNITA rebels as its raison d'etre. 
Although the government maintains strong control right now, the country 
is preparing for the first post-peace elections in 2005. The country's 
production will double to 1.8 mb/d by 2007 from 0.9 million b/d now, 
largely due to a handful of deepwater projects coming onstream.
    Likewise, in Equatorial Guinea, President Obiang has maintained 
strong control since 1979 by preventing power centers from emerging. 
But at some point Obiang will have to cede power, making way for 
individuals and groups to jockey for power. Equatorial Guinea will see 
its oil production rise to 340,000 b/d from less than 200,000 b/d now. 
This increase in oil production, combined with its LNG plans, deepens 
the country's dependency on the hydrocarbon sector for revenues.
    Overall, West Africa will add diversity to oil markets in the next 
five years, with most of the increase coming from the offshore areas, 
where the political instability of the regime will not matter much. 
However, oil companies operating in these countries will be pressured 
to increase the transparency of their dealings with local governments.
    The long term stability of supply may be effected by our ability to 
combat corruption, which is fundamental to governance. Should the 
appalling levels of mismanagement and theft continue there is a 
possibility of civil unrest, if not actual dissolution, particularly in 
Nigeria.

        NATURAL GAS SUPPLIES FROM LATIN AMERICA AND WEST AFRICA

    Latin America and West Africa could prove critical as the ``first 
line of defense'' in the area of natural gas. As noted above, the 
looming crisis in terms of energy supplies in this country is more 
related to faltering domestic gas supplies being outstripped by demand 
rather than availability or price of crude oil. Increasing imports of 
natural gas is critical and depends on the development of foreign 
resources and the ability to get the resources to the U.S. market. 
Canada is critical in this regard. PFC Energy believes that although 
Canada is an important supplier of gas to the U.S., further supplies 
are not assured because of issues related to the development of 
Canadian tar sands and unconventional oil and the construction of major 
pipelines into the U.S.
    Latin American suppliers, particularly from three countries--
Mexico, Venezuela and Trinidad and Tobago--will play a very important 
role in supplying gas to the U.S. Mexico has a dual role to play. For 
one, it has to reform and open its gas sector to foreign investment. 
The fact that it has not is another sign of the deep contradiction 
between its economic planning and energy policy. To reiterate: a 
country that needs cheap and efficient supplies cannot run an energy 
policy that retards development of its oil and gas sector and actually 
leads to the importation of expensive gas from its North American 
neighbor. When this is rectified, Mexican industry will benefit from 
cheap and efficient supplies of this essential industrial input, and 
the energy industry can capture rents north of the border far in excess 
of what it currently earns. The second role Mexico can play is to be 
the transshipment point for liquefied natural gas (LNG) supplies from 
other Latin American countries or even other regions to the U.S. 
Because U.S. environmental and local policies obstruct the construction 
of LNG import facilities within the U.S., Mexico could provide the 
location of these regas terminals and then the gas could be shipped by 
pipeline to the U.S.
    Venezuela is in the early stages of becoming an important exporter 
of gas to the U.S. After delaying LNG export projects for virtually a 
decade, the government's acute financial needs have pushed it into 
negotiating deals with foreign companies. The gas will come from two 
areas: North Paria and the Deltana Platform. The gas will be liquefied 
onshore or sent to Trinidad for liquefaction. Regas facilities will 
have to be found in Mexico, the Caribbean or the U.S.
    The real success story in terms of regional gas has been Trinidad 
and Tobago. A U.S. company, Amoco developed the assets. Amoco, which 
merged with BP in 1999, built on a trend of falling costs in the LNG 
industry to achieve new benchmarks in competitively priced LNG. This 
gas from Trinidad's Atlantic LNG competes in the U.S. market and has 
been arriving in growing volumes at the existing U.S. import terminals. 
These LNG imports can play a key role in meeting peak demand in the 
Northeast. The expansion of Trinidad's LNG facility has fueled overall 
growth in Atlantic basin LNG trade and benefits the U.S. by 
contributing to a more robust LNG marketplace.
    There is additional potential LNG supply from Peru and Bolivia, but 
these are not near-term solutions. Plans for supply of LNG from Peru 
and Bolivia face significant hurdles to market and are considered high 
risk endeavors at this time. While possible volumes for export exceed 
25 tcf, internal and cross border political problems continue to stymie 
investment decisions and have caused several iterations in shareholder 
structures in both the Camisea (Peru) and Pacific LNG (Bolivia) 
projects. It is unlikely that these issues will be resolved to the 
satisfaction of international buyers who will be looking for reliable 
supply into the market place in the near term, which will mean that 
other more proven projects in the Pacific Basin will supply the U.S. 
and could force the west coast Latin American projects out to the 
latter half of the decade.
    West Africa will take on additional importance to the U.S. owing to 
the projections of growing demand for LNG into the U.S. market. Nigeria 
holds more than 124 tcf of proven gas reserves. LNG projects in Nigeria 
and those proposed for Angola are further driven by the push to end the 
gas-flaring that accompanies oil production in these countries. The 
U.S. has been receiving Nigerian LNG since 2000 and could become the 
market for proposed additional LNG from Nigeria, Angola and Equatorial 
Guinea.
    Even with strike issues that have impacted the oil sector out of 
West Africa, the natural gas export sector has been left unscathed 
because most of the projects affiliated with export also support the 
domestic market and the existing LNG facilities are not located near 
the most troubled areas. This does not mean that these projects are 
immune to rampant corruption or civil unrest, just that these 
facilities have so far been less vulnerable to disruptions than oil.

                               CONCLUSION

    A key point to be made in conclusion is that the Atlantic Basin 
contains large sources of oil and gas. However, fractured and unstable 
political systems increase perceptions of country risk among foreign 
investors leading to slower development of these supplies. Moreover, 
local impediments--lack of funds, national oil company or bureaucratic 
blockages--stymie the efficient development of supplies.
The U.S. must do the following:
    With natural gas, the U.S. will not have affordable gas for all its 
needs, from home heating to industrial production, unless new sources 
are able to reach the market. The most economic solution for the U.S. 
will be found when both LNG and pipeline imports have access to our 
market.
    Today, permitting of both LNG infrastructure and gas pipelines 
remains a significant obstacle to expanding gas supply. The federal 
permit process for onshore LNG infrastructure should be driven by 
deadlines (both for FERC and the applicant) so that the review is 
completed in a timely, resource-efficient manner. Federal authorities 
need the political mandate and resources to coordinate better with 
authorities issuing state and local permits. In addition, politicians 
and public policymakers should help to make the case that importing LNG 
is safe. The LNG industry has an impeccable safety record, but if 
misconceptions about this issue persist, securing reliable natural gas 
for the U.S. will be all the more difficult.
    Political leadership has the opportunity and the need to re-examine 
the process and laws by which environmental choices are traded off 
against energy choices to make indirect decisions about the future.
    In conclusion, there are limited policy options for energy security 
and oil. Fighting corruption will lead to greater stability in 
producing countries. It is on natural gas however, that Congress and 
the Administration, as well as the state and local governments, must 
focus their attention. Foreign gas supplies are ample but U.S. 
infrastructure is very constrained. The permitting process is often 
disorganized and unfocused. This is a situation which Congress can and 
should rectify.





    Senator Hagel. Mr. West, thank you. We will make sure that 
your entire statement is included in the record. We, as always, 
appreciate your contributions and look forward to our 
questions.
    Mr. Goldwyn, let me remind everyone who you are. You are 
president of Goldwyn International Strategies here in 
Washington, DC, and welcome. We appreciate your being here.

STATEMENT OF DAVID L. GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL 
                STRATEGIES, LLC, WASHINGTON, DC

    Mr. Goldwyn. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify.
    There is no question that Latin America and West and 
Central Africa are important to U.S. energy security. You have 
heard from the government witnesses and they have talked about 
how important it is for the United States to have access to 
reliable, diverse, affordable, ample supplies of oil and gas. 
Latin America and Africa are critical suppliers to that effort. 
I think the United States has energy security and even national 
security interests in making sure that these nations fulfill 
their potential as suppliers. But I would submit to you today 
that our key suppliers in each of these regions are at risk and 
that U.S. policy today does not address, much less redress, the 
risks that we face.
    Let me talk a moment about what I mean by energy security. 
I agree energy security is more than just access to supplies of 
oil. In a global market, the United States can pretty much buy 
what it needs by bidding it away from other consuming nations. 
The greatest risk to our energy security, I believe, is the 
volatility of the price of oil. If we can buy oil at $50 a 
barrel, but we see our airline, trucking, and travel industry 
suffer, we are not very secure. And if a major supplier goes 
off line and only Saudi Arabia has the excess capacity to 
replace that production, in my view we are not secure. And if 
oil drops to $10 and our domestic producers go bankrupt, we are 
not secure. And if that low oil price forces non-OPEC but high-
cost producers out of the market, pushing us further into 
dependence on Middle East oil, that does not enhance our energy 
security either. So volatility is a serious threat.
    Prices are volatile because too many producers are 
unstable. If you look back 30 years--and I think you have heard 
all the examples today--and ask what caused the greatest price 
spikes, it is not embargoes. It is internal unrest. It is war. 
It is strikes. The Iranian revolution, the Iran-Iraq war, the 
two Persian Gulf wars, the Venezuelan strike, and recent 
strikes in Nigeria.
    Our old system of energy security does not address today's 
threats. Our old system was one of deterrence. We buildup big 
reserves; we will deter an embargo. That worked pretty well, 
but we cannot deter today's threats. We cannot defeat them by 
military force, and since the threats to the producers' 
stability are largely internal, their problems can still become 
our problems if they stop producing. I think we have to use 
diplomacy and trade and the creative intervention of the 
international financial institutions to overcome these threats.
    The risks, just to make clear what they are, are that these 
nations will either fail to fulfill their production potential 
so in 10 years they will not be there if we need them, or that 
they will produce supply dislocations, or both. Either 
scenario, whichever way it happens, increases the volatility of 
the price of energy, damages the U.S. economy and makes us more 
dependent on Middle East oil.
    Let me start with Latin America. Latin America is more 
important than Africa right now in terms of how much oil it 
provides to the United States. Venezuela and Mexico, as you 
pointed out, Mr. Chairman, are the two most important 
suppliers, but they and the entire region are in pretty deep 
trouble.
    Mexico is still deadlocked over the desirability of foreign 
investment, particularly in the energy sector, and as a nation, 
Mexico is de-industrializing. It does not have the energy to 
compete for manufacturing with other developing countries. And 
if Mexico has economic problems, we have economic problems, and 
we have other kinds of problems as well. None of the things 
that have been talked about today, not a new energy minister, 
not multi-service contracts, not even a record high level of 
investment for PEMEX are very likely to change this in Mexico 
because they are so politically deadlocked. And that is a 
problem.
    Venezuela is recovering from a crippling strike and it is 
undergoing a major reorganization of the national oil company. 
The national government is trying as best it can, I believe, to 
make sure they muster the capital and the management that PDVSA 
needs, but it is very unclear whether they will succeed, and if 
they continue to reject all of the workers who have been fired 
from PDVSA back into the fold, then it is going to be very hard 
for them to get the management talent they need to not just 
sustain production, but to increase it and increase it is what 
we need them to do. Industrial actions continue to plague the 
refining sector, and Venezuela's civil society remains in 
turmoil over the potential referendum and the potential recall 
of President Chavez. So Venezuela's future remains in question.
    I will just touch briefly on the other countries. Colombia 
you have talked about. They still suffer from war and terror. 
Bolivia has just seen a reform-minded President resign over a 
gas pipeline to provide the United States with LNG. The main 
reason that he lost power, part of it was because it was going 
to Chile instead of going to Peru, but the other reason is they 
did not trust the government to spend the money. Other than 
Trinidad and Tobago, there are no bright spots in Latin America 
right now.
    Let me turn to Africa. Africa could supply 25 percent of 
our oil in a decade, but energy security that depends on Africa 
is going to depend on the United States and others promoting 
political development in those countries or they will not be 
the countries we want them to be a decade from now. Internal 
unrest is a serious threat to the ability of all those African 
nations to maintain investments and exports.
    Nigeria is well documented. The unrest in the delta remains 
unresolved. We have had sabotage, hostage-taking, major 
strikes, and work stoppages. And 800,000 barrels of oil off the 
market last March, adding pressure to already high oil prices, 
and production is not even back today. There is also organized 
theft of quite a lot of oil. The numbers range from 45,000 to 
200,000 barrels a day. That oil is going partially into the 
pockets of the government and partially funding militias in the 
delta and some of it is ending up in Cote d'Ivoire as well. So 
this is a regional stability problem, and until the political 
issues are addressed, oil interruptions from Nigeria are going 
to be a continuing part of our future.
    Angola's oil industry has been isolated from the war. But 
they have not isolated or insulated themselves from corruption 
or starvation or under-development or repression of their 
political opposition. And if Angola does not address its 
problems, Angola is going to end up being a pariah nation too.
    The fate of the new producers, Chad, Equatorial Guinea, and 
Sao Tome, remains uncertain. They are going to have a large 
ramp-up in oil revenues, and that will pretty soon make these 
countries immune to any kind of influence, including positive 
influence. So we have got a window right now to address these 
issues of transparency and development. If we address them, 
then I think we have a chance to make progress. If we do not, 
they will be faced with either coups or unrest or sanctions 
depending on their behavior. It is a lot more important that 
the governments of those nations respect their own people than 
that they supply us with oil, but if we do nothing now, they 
may fail to do either one.
    The threats to each of these nations are different, but 
poor governance is at the root of all of them. All the oil-
producing nations fail to address poverty, fail to address 
corruption, fail to invest in development, and they have 
allowed the non-oil sector to atrophy. They have also let 
national oil companies become so big they are immune to reform. 
So when we are talking to governments about reform, we are 
probably talking to the enemy a lot of the time. And as a 
result, all of our major suppliers are under-performing as 
producers and face continued instability.
    So what should we do? I have given you a longer list in my 
written testimony, but let me suggest four steps in Latin 
America and six steps in Africa.
    In Latin America, the first thing we have to do is re-
engage diplomatically. Latin America has dropped off the 
diplomatic map other than do you support us on Iraq, and I am 
trying to think of what the other one is. So the first thing we 
have to do is start dealing with the region, start dealing with 
them as countries, and Free Trade of the Americas is the No. 1 
critical first step.
    The second step, with Mexico, is to revisit the migration 
agenda. If they are going to help us, we have to help them. 
This is about giving Mexico the courage, the political courage, 
to reform. Part of that means letting President Fox succeed at 
something. A deep friendship with Mexico I think, is more 
important than a loyalty test over Iraq.
    With respect to Venezuela, we need a fresh approach for our 
Venezuela policy. Today's policy is one I call a policy of 
wishful thinking. The administration wishes the Chavez regime 
would go away, but it will not. So as a result, they have 
pretty much ignored them. I do not think we have an energy 
policy, positive or negative, other than talking at an expert 
level to the Venezuelans about how is it going, we hope you get 
these problems fixed. So there are a number of things I think 
we can do. We need to engage them. We need to work on improving 
their electoral institutions, and we need to talk about the 
serious energy sector problems, and talk to Venezuelans about 
these problems. I think we need to add a little bit of 
diplomacy to the relationship.
    And fourth, I think we need to deal with energy poverty and 
other poverty in Latin America, and that is using the 
international financial institutions to foster development and 
better governance.
    In Africa, the main thing we need to do is use governments 
to press their governments to be transparent about what they 
take in and be transparent about what they spend. We cannot do 
it alone. This has to be multilateral, and I think the G-7 is 
the vehicle. I think the summit next year is the venue, and I 
think if the United States steps up to the plate, we can do 
some good. But we have to create an environment where it is 
worth it for African governments who are frankly now benefiting 
from this kind of corruption to want to reform. There has got 
to be something in it for them. This is why I think we need to 
think of some new policies.
    One is what I call debt for transparency. I think we ought 
to think about offering debt relief to places like Angola and 
Nigeria in particular in exchange for enforceable commitments 
to be transparent about their public finances and if they 
commit to a verifiable development plan.
    We ought to think about infrastructure for development. The 
World Bank has been moving away from investment in 
infrastructure. I think it ought to be the carrot. If you want 
a pipeline, electric power, telecommunications, we will help 
you get bank financing, but you commit to transparency. You 
commit to a plan of development.
    Conditional trade finance I think is the third one. We did 
pretty well getting all countries to say there have to be 
environmental standards in order to finance some of our 
projects if you want our trade finance. We could apply the same 
principles to transparency and I think make progress.
    We could raise the standards for access to Western banks. 
We could use the G-8 Financial Action Task Force to say that 
banks in Nigeria and Angola, correspondent banks, have to 
declare who the owners are so we can trace where the money 
goes. And we might think about tagging oil the way we have 
tagged diamonds to eliminate illicit smuggling in oil.
    We could give better policy advice, and one of the things I 
think we ought to consider is whether the Bank, the Fund, 
ourselves ought to be encouraging countries--and Bolivia might 
be one of them--to promise to commit some of their revenues 
from oil or gas either directly to the people or to put it into 
pension funds or to put it into education so people trust that 
the money will go there, so you do not create these governments 
who frankly have no need for their people because they do not 
tax them to collect the revenue.
    The next thing we could do is practice more assertive 
diplomacy. All of this is about getting political leaders in 
the regions to have the political will to change. They care 
what we think. They care if it is important. Contrary to what 
the government witnesses told you earlier, energy is never high 
on the agenda for any serious talk by a Secretary of State 
unless we are talking to Saudi Arabia or it is Iraq or there is 
some kind of a war going on. There is just too much other stuff 
going on. And it is delinked from foreign policy and I think 
that happens to our detriment. Secretary Powell has actually 
done great work with Angola on transparency and seen results, 
but we need to apply it to Sao Tome and we need to apply it to 
Nigeria, we need to apply it to other places.
    Sorry. I have gone on for a long time, but I think we are 
going to be stuck with relying on hydrocarbons for the next two 
decades and our national security is going to depend on making 
sure we have people other than OPEC to rely on and countries 
other than Saudi Arabia to have excess capacity. This is going 
to require the practice of diplomacy, so we need to seriously 
re-engage. We have lots of tools we could use. We are not using 
them. It is not helping our energy security now, and I think 
there is clearly more that can be done.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Goldwyn follows:]

      Prepared Statement of David L. Goldwyn, President, Goldwyn 
             International Strategies, LLC, Washington, DC

    Mr. Chairman and Members of the Committee, it is an honor to speak 
with you today about the importance of Latin America and West Africa to 
US energy security.
    Latin America and West Africa are and will remain critical to US 
energy security. US energy security depends on access to diverse, 
reliable, abundant and affordable supplies of oil and gas. The oil 
exporting nations of Latin America and Western and Southern Africa 
provide 43 percent of US oil imports. They hold 12 percent of global 
oil reserves and 7.3 percent of global gas reserves. They are far 
closer to the US market than the Middle East. Most welcome foreign 
investment. The leaders of these nations are often a threat to their 
own people, but they do not harbor or finance groups that threaten US 
interests. The non-OPEC producers in these regions exert counter-
pressure on OPEC's monopoly power.
    Our key suppliers from these regions are at risk. The risks are 
that they will either fail to fulfill their production potential or 
expose the global economy to supply dislocations due to internal 
unrest, or both. Either scenario increases the volatility of the price 
of energy, damages the US economy and makes the United States more 
dependent on Middle East oil.
    Our major suppliers in this hemisphere, Venezuela and Mexico, face 
serious challenges to their development of oil and gas for export. US 
policy towards these countries today is a combination of benign and 
malign neglect. Our policies are not advancing our energy security 
interests. The producing nations of West and Central Africa are poised 
to significantly increase oil and gas production in the next decade. 
Our key suppliers there, Nigeria and Angola, have weak governments and 
corrupt systems, and they face political instability that can impact 
their ability to supply the US market. They are about to get a lot 
wealthier very soon, as new deepwater discoveries come to market. The 
United States and its allies have a chance to help these governments 
move off the path of corruption and internal destruction, but the 
chance will not last long. New West African exporters, such as 
Equatorial Guinea and Sao Tome face a brief window of opportunity to 
avoid the so-called ``curse of oil'' if the US exercises the leadership 
to move them in the right direction.
    US policy today does not utilize the leverage we have or the 
incentives we can provide to meet the challenges we face in this 
region. This afternoon I will address why Latin America and West Africa 
matter, why each region's potential to remain a key supplier is at risk 
and what steps the US can take to address these risks and enhance our 
energy security.

            LATIN AMERICA IS CRITICAL TO US ENERGY SECURITY

    Latin America is critical to US energy security. The most important 
exporters, Venezuela and Mexico, consistently rank in the top four 
sources of US oil supply. Venezuela averaged 1.37 million barrels per 
day in 2002; Mexico averaged 1.28 mbpd. Many other countries are 
significant producers but more modest exporters or net importers. I 
refer to Brazil, Ecuador, Colombia and Argentina. As the populations of 
these latter countries grow, the energy they produce will increasingly 
be consumed internally. The US has two primary energy security 
interests at stake in the region. One is to maintain and increase 
hydrocarbons investment in Mexico and Venezuela so they remain 
significant exporters. The second is to encourage investment in the 
other oil producing countries in the region so they can help meet their 
own demand.
    In the past two decades US policy in Latin America and elsewhere 
has been reasonably successful in fostering diversity of supply by 
encouraging open markets, liberalized trade regimes, privatization or 
commercialization of national oil and power companies and decontrol of 
energy prices. The so-called Washington Consensus has led to major 
deregulation of power and downstream markets, a welcoming environment 
for investment in natural gas, and in the case of Brazil's offshore, 
and more recently Colombia, better terms for foreign investment in the 
upstream oil sector as well. US and other international oil companies 
have billions invested in Venezuela, Colombia, Argentina and Ecuador. 
Unlike Mexico, each of these countries welcomes foreign investment in 
their upstream sector. Power markets, gas markets and downstream crude 
oil product markets are being deregulated across the region. US 
offshore drilling technology and an investment-friendly regime have 
made deepwater Brazil a major source of international exploration 
activity in recent years. Latin America is also critical to the US 
electric power sector, as an important supplier of liquefied natural 
gas (LNG). Trinidad and Tobago is the top LNG exporter, with Venezuela 
poised to increase its production as well. The countries of the region 
are also among our most reliable suppliers. None participated in the 
Arab oil embargo of 1973-74. Venezuela is a founding member of OPEC, 
but has never used oil as a political weapon.
    If we look to the future, we are going to need Latin America to 
maintain some diversity of supply. South and Central America possess 
approximately 9.1% of the world's proven oil supplies, with 6.4% in 
Venezuela alone. Mexico holds another 1.04% of proven oil reserves. In 
aggregate that is more than Africa (7.3%) or the former Soviet Union 
(6.2%). The region is also a major refining center, with nearly 8% of 
the world's refining capacity. The region's proximity to US markets 
makes Latin American oil and products easy to access in a crisis. 
Regional refineries are designed to serve the specialized needs of US 
markets. In the future, Latin American nations could be a reliable 
source of natural gas for the US market. This will depend on whether 
plans to create new pipelines to bring stranded gas to market and 
projects to develop LNG gasification plants come to fruition.
    From a US energy security or national security perspective, the 
policy objectives should be quite clear: maintain stable democratic 
governments, strengthen partnerships with key suppliers, and support 
the rule of law, including contract sanctity and the preservation of a 
secure investment climate. Regrettably, many countries in the region 
are suspicious of the benefits of the Washington Consensus. They have 
not rejected market solutions, but the appetite for further 
deregulation has waned. Many of the regions' economies have degraded 
seriously and the climate for investment has suffered as a consequence. 
The ability of our suppliers to sustain their roles as partners in 
energy security is at risk. US policy today is to ignore these 
countries and hope for better leadership. It is not working. For the 
sake of our energy security, as well as the fate of the people of the 
region, this policy needs to change.

                           A REGION IN CRISIS

    The hemisphere has undergone a period of economic and political 
crisis in the past few years. The majority of the reasons are internal 
to these countries. Persistent corruption, economic mismanagement and 
under-development have put the region's governments under heavy 
pressure. Per capita income in the region has shrunk for two years in a 
row. Unemployment is up. The Washington Consensus of open markets, 
liberalized trade regimes and democracy has not produced prosperity or 
security. Poverty has not been reduced. Income distribution has not 
improved. Populist regimes have taken power in Venezuela, Brazil, 
Ecuador and Peru. All of the oil producing countries have avoided 
serious economic reform thanks to record high oil prices. With prices 
widely predicted to decline to $25 WTI levels or lower in the next 
year, financial pressure will only increase on regional governments.
    In the past two years, Argentina has endured a collapse of its 
economy, taking Uruguay and Paraguay down with it. Mexico remains 
deadlocked over the desirability of foreign investment, particularly in 
the energy sector, while it imports gas from the US and risks a power 
shortage that could undermine its modest economic growth. As a nation 
Mexico is deindustrializing; it lacks the energy to compete for 
manufacturing with other developing countries. Mexico's proven reserves 
declined in 2002, but even a historic new allocation to PEMEX for 
exploration and production is only likely to help Mexico maintain its 
production levels or grow them slightly. Under-funding and 
underinvestment remain persistent problems in Mexico's hydrocarbons and 
power sector. The victory of the PRI in Mexico's midterm elections only 
complicated the chance for President Fox and minority PAN supporters to 
effect legislative reforms in the energy sector. The prevalence of 
currency controls and political uncertainty has slowed investment in 
Venezuela, Ecuador and Argentina. Security concerns, and until recently 
uncompetitive economic terms, have slowed investment in Colombia to the 
point where it may become a net oil importer.
    Venezuela has the most fragile government in the region. Despite 
enormous oil wealth, poverty and income inequality have grown 
dramatically in Venezuela. In 1998 President Chavez won a populist 
victory that was in large part a rejection of the ruling elite's 
failure to address poverty. Before President Chavez, Venezuela was a 
country with weak civil institutions. Only the military and the 
national oil company had strong professional cadres committed to the 
long-term development of the country. We have seen a deep erosion of 
those institutions. The first erosion was from new constitutional 
reforms that did not provide adequate protection of minority rights. 
The second was by the militarization and politicization of the 
government civil service and of the national oil company, PDVSA. The 
third erosion was by a clumsy coup attempt, foolishly applauded by the 
US, and by a general strike that brought the country's economy to its 
knees. Without a doubt the single greatest factor in high world oil 
prices this January and tight gasoline markets in the US this winter 
was the strike in Venezuela, not the threat of war in Iraq.
    Today the strike in Venezuela is over, the country has outperformed 
most industry expectations of its ability to restore crude oil and 
product exports, and US companies have resumed investments in both 
offshore and heavy oil production. But much uncertainty remains. 
Venezuela's new hydrocarbons law, which allows PDVSA a majority share 
in any new oil development, is about to be tested. With so many 
competing sources for revenue in Venezuela, it remains to be seen if 
PDVSA will have the capital to invest to stop the decline in Venezuelan 
oil reserves. Industry experts are skeptical about PDVSA's plans to 
grow its exports, both because of OPEC quotas, and questions about 
PDVSA's post-strike managerial capability and capital needs. If 
Venezuela does not invest and grow, its economy will be further damaged 
and its role as a long-term supplier to the US could be impaired. 
Venezuela's energy leaders, including PDVSA President Ali Rodriguez and 
Energy Minister Ramirez, are campaigning hard to prove that Venezuela 
will remain a reliable supplier.
    Apart from the fate of its energy sector, Venezuela's economic and 
social crises continue. A campaign for a recall referendum is likely to 
begin this fall, but there are numerous legal and technical obstacles 
that make a referendum resulting in a change of leadership unlikely. 
The failure of the opposition to stage a referendum by next April could 
accelerate the polarization of the conflict in Venezuela Reconciliation 
efforts by the OAS and the Friends of Venezuela appear stalled. The 
situation cries out for diplomatic attention.

                               US POLICY

    US policy towards the region has been a combination of benign and 
malign neglect. We have ignored the region in most cases, opposed IMF 
help to Argentina when it began its slide into crisis, and hammered 
Chile and Mexico when they did not toe the US line in UN fora. Most 
importantly, the US response to the April 2002 coup attempt in 
Venezuela was an unmitigated diplomatic fiasco. Our credibility in the 
region was severely damaged, and our ability to play a constructive 
role in fostering reconciliation in Venezuela, perhaps the most 
important issue in the region today, was deeply impaired.
    For a time, it was understandable that hemispheric relations would 
take a back seat to the tragedy of September 11. But since that time, 
other than the counterterrorism efforts in Colombia, Latin America has 
dropped off the diplomatic map. Our partners in the region often accuse 
the US of being fickle or inconstant, only interested episodically in 
partnership when it comes to issues external to the region: opposition 
to communism, opposition to Castro or opposition to Iraq. It should be 
axiomatic that to secure true allies, and engage countries on security, 
economic, social and political issues, you must treat them with respect 
and engage them on the merits of the bilateral relationship.
    Today this is not the case. Imperiousness goes down uniquely poorly 
in Latin America and they are getting a heavy dose. Regional 
cooperation on counter-narcotics and trade, acceptance of IMF 
restructuring programs, and historic support for US efforts in Haiti, 
Bosnia and Kosovo seem to count for naught. The President of Mexico is 
snubbed for insufficient loyalty. Brazil is held at a respectful 
distance. And, Argentina was left to twist in the economic wind.
    All this is bad for US diplomacy and worse for energy security. To 
keep markets open for trade and investment, the US must engage when 
regional economies drop into crisis. To foster reform in countries with 
inefficient state-owned industries, the White House and State 
Department must engage our partners at senior levels. Noble efforts by 
technical agencies, such as Energy and Commerce, are laudable. But true 
reform takes high-level engagement. US companies, customarily the 
partners of choice for the hemisphere's producers, could be harmed if 
the countries of the hemisphere believe they must look to Europe or 
elsewhere for respect and support.

                         WHAT THE US SHOULD DO

    US relations in the hemisphere are at low ebb, but they can recover 
quickly. For better or worse, US power and influence are indispensable 
to conflict resolution in the region. Our hemispheric partners will 
welcome a new page in our relations. I suggest four steps.
    First, the US must reengage on hemispheric issues. Strong support 
for the Free Trade Agreement of the Americas is the critical first 
step.
    Second, the US must revisit the migration agenda with Mexico. The 
US has a powerful interest in ensuring that President Fox and his 
reform agenda succeed. US interests in Mexico, and our deep friendship, 
transcend a loyalty test over Iraq. Mexico's ability to create jobs for 
its citizens, to grow a diverse industry and to sustain its role as a 
key energy supplier to the US depends on the success of its economic 
reform.
    Third, the US must take a fresh approach to its Venezuela policy. 
Today's policy is one of wishful thinking. The Administration wishes 
the Chavez regime would just go away, but it is here to stay. To the 
region, it appears that regime change is our policy in Venezuela as 
well as the Middle East. The US cannot facilitate reconciliation by 
isolating or ignoring the regime in power. Venezuela needs support for 
civil society and reconciliation. The Administration should engage 
Venezuela at a high political level to talk seriously about our common 
concerns and disagreements. The US Congress should engage Venezuela's 
legislature directly and offer the support of the National Democratic 
Institute and International Republican Institute to strengthen 
Venezuela's frail electoral institutions. The US Energy and Commerce 
Departments should intensify and accelerate their expert level talks 
and resume their Strategic Dialogue to talk frankly and in detail about 
the problems that must be overcome and the solutions that can be 
brought to bear. There is a need for training, for much better and more 
current data on crude and product supplies, and for cooperative 
research. We have a common interest in restoring and expanding 
production and in helping revive PDVSA.
    The US needs to engage Venezuela's neighbors in a collective effort 
to build a process that will enable all sectors of society to 
participate in political life. Through the IMF and World Bank, the US 
and its partners need to provide clear and direct economic advice and 
assistance to Venezuela to restore its fiscal house to order.
    Fourth, the US must craft a way to use the leverage of the IMF, the 
World Bank and the Inter-American Development Bank to foster energy 
security and better governance. These institutions must use their 
support for energy sector reform and investment in the infrastructure 
of oil, gas and power to elicit more transparency in how those 
governments spend the revenue they earn. The US will directly benefit 
from the development of an integrated regional gas and power 
infrastructure. An external push is needed to finish, or in some cases 
start, the process of energy sector reform. An infrastructure fund tied 
to conditions of transparency and fiscal integrity could kick-start 
growth in the region again.

             WEST AFRICA IS CRITICAL TO US ENERGY SECURITY

    West and Central Africa are increasingly important to US energy 
security. In this case I am speaking about Nigeria, Angola, Chad, 
Equatorial Guinea, Gabon, Sao Tome and Principe and the Gambia. Today 
these countries supply 13-14% of US oil imports. Sub-Saharan Africa 
holds approximately 3 percent of the world's oil reserves, and 3 
percent of the world's natural gas reserves. In ten years they could 
supply up to 25% of our imported oil. Nigeria produces 2.12 million bid 
and exports 1.85 million bid. It exports 621,000 b/d to the US which 
makes it our fifth largest supplier. Angola produces 900,000 b/d and 
exports 866,000 b/d. It exports 332,000 b/d to the US which makes 
Angola our ninth largest supplier, and our third largest non-OPEC 
supplier outside of the Western Hemisphere. According to EIA estimates, 
this year Cameroon, Chad, Equatorial Guinea and Gabon are projected to 
export approximately 500,000 b/d in aggregate, with 221,000 b/d going 
to the US.
    These countries will not replace Middle East oil, but that is 
beside the point. The marginal barrels of oil set the price, and the 
ability of these mostly non-OPEC countries to compete with OPEC, when 
all of them are half the hauling distance to the US of the Middle East, 
is indispensable. The countries of West Africa are open to foreign 
investment and have offered competitive commercial terms and a 
relatively stable investment climate, despite enormous internal 
turmoil.
    West Africa is one of the honest oil prospects in the world today. 
Advanced offshore finding and drilling technologies have uncovered 
large commercial oil deposits off Nigeria, Angola, Equatorial Guinea 
and perhaps Sao Tome and the Gambia. The use of Floating Production, 
Storage and Offloading platforms (FPSOs) has reduced the environmental 
footprint of drilling and reduced production costs. Offshore oil is 
also less risky and therefore more attractive.
    As in Latin America, US energy security policy objectives should be 
to maintain stable governments and open markets, strengthen 
partnerships with key suppliers, and promote the rule of law and 
contract sanctity. But unlike Latin America, energy security will 
require that the US and others promote political development in West 
and Central Africa. Only Nigeria is a true democracy and it is riven by 
civil unrest. The rest of the exporters are at a rudimentary stage of 
political development. Internal unrest is a serious threat to the 
ability of these nations to maintain investment and exports.
    US policy in this area is headed in the right direction, but at 
present is insufficient to accomplish its aims.

                   A REGION IN CRISIS AND TRANSITION

    Effective management of oil revenues is the most important factor 
in Africa's economic development, bar none. Africa attracts only one 
percent of the world's trade and investment, but 90% of that amount is 
in the oil sector. West African oil producers have the chance to use 
the rapid increase in wealth they will soon earn for development. It is 
in US interests to see that they do. If they fail, as all of their 
resource-rich predecessor governments in Africa (other than Botswana) 
have failed, we will see civil unrest or war, strikes, and dislocation, 
as well as poverty, death and economic degradation. Today, oil prices 
are high and revenues are good. Foreign investment is flooding into the 
energy sector to develop strong exploration prospects. Nigeria has had 
a historic democratic succession. Angola has welcomed a limited, but 
important, audit of some of its oil revenue and has just completed a 
very positive Article IV consultation with the IMF. Chad will see the 
first oil from the Chad-Cameroon pipeline this year, and the World Bank 
supervised system for monitoring Chad's oil revenues and ensuring that 
they are spent on development may prove to be a model for other 
countries in channeling oil revenue into development Equatorial Guinea, 
Sao Tome and others are welcoming and receiving engagement with the US 
on human rights and development issues.
    But our major exporters are at risk. Nigeria's unrest in the Delta 
region is unresolved. Foreign workers have been held hostage for weeks 
at a time. Sabotage of oil pipelines has killed hundreds of Nigerians. 
A major strike in March knocked 800,000 barrels of oil per day off the 
market, adding pressure to already high oil prices. Production was shut 
down for months for security reasons; it is not fully back even today. 
Labor unions, accurately foreseeing the reduction in personnel needed 
to maintain offshore oil operations, are also threatening to shut down 
operations. Furthermore, the organized theft of 100,000 to 200,000 
barrels per day in the Niger Delta, reportedly involving armed militias 
and criminal groups that use some of the proceeds to acquire weapons, 
is an indication that oil mismanagement can threaten regional 
stability. The Nigerian government has no credible plan at this time to 
foster development and reconciliation in that troubled region. Oil 
interruptions from Nigeria are likely to continue or worsen unless 
these issues are addressed.
    Angola has enjoyed the benefit of an isolated oil-producing region 
and has insulated production from civil war. Angola has not insulated 
itself from corruption, starvation, underdevelopment, and repression of 
political opposition. The Angolan government may indeed be willing to 
tackle these problems, but it is unclear if they will be able to. If 
Angola fails, and if it remains a nation that ranks 161 out of 173 on 
the Human Development Index, Angola could well turn itself into a 
pariah nation.
    Sao Tome, while not yet a producer, saw a coup attempt against its 
President--only weeks after he had followed Secretary Powell to the 
stage of the Corporate Council on Africa Summit, espousing the need for 
transparency in the use of potential oil revenues.
    The new producers, Equatorial Guinea, Chad and Sao Tome in 
particular, are about to face a choice. They will soon begin to see 
large revenues from the investments in their nations. Their governments 
may invest in their people, develop their nations, and earn the trust 
and recognition and support of the West, or they may follow the path 
that Nigeria and Angola have followed, and earn the same opprobrium.
    Today the US can have a major influence on these nations. We are 
major investors and consumers. Nigeria and Angola have large external 
debts that are leverage for US policy. US influence at the IMF and 
World Bank can be wielded to ensure that these nations are democratic 
and stable. But the window of opportunity is short China is the fastest 
growing purchaser of Angolan oil. China will not use its economic 
leverage to push for democratic reform and transparency. A large ramp-
up in oil revenues could make many of these producers immune to 
positive influence. A forceful US policy with multilateral support is 
essential. If we fail, these states can be faced with war, coups, or 
sanctions or other pressures that could threaten their ability to 
supply the world market. It is more important that they respect their 
own people than that they supply us with oil. But if we do not act, 
they may not do either.

                               US POLICY

    After September 11, 2001, West Africa became a priority because 
regional instability, failed states and maritime security were viewed 
as a potential security threat. US policy in Africa is headed in the 
right direction. The State Department is focused on the key anchor 
states. It is maximizing the use of subregional organization like 
ECOWAS and SADC. It is focused on combating AIDS and promoting 
stability and good governance. The pursuit of an AGOA II will be a 
major positive step.
    After an initial period where the Administration suspended any 
bilateral or multilateral diplomatic efforts they inherited, the 
Administration has retained the US-Africa Energy Ministers process 
created when I was at the Energy Department, renewed the bilateral 
energy dialogs with Angola and Nigeria, and engaged rather than 
isolated Equatorial Guinea and committed to open a Special Embassy Post 
there this year. Technical assistance programs by the US Department of 
Energy, the US Trade and Development Agency, the Department of Commerce 
and USAID are helping build capacity in these fragile states. The 
Millennium Challenge Account is an innovative concept which, when it is 
funded and ready to disburse funds, may magnetize good behavior.
    But despite these efforts, the US has not yet wielded the leverage 
or the leadership to crack the so-called ``curse of oil.'' In Nigeria 
and Angola in particular, oil has created ``rentier'' states. Many 
scholars have written extensively about this issue. The newly published 
study by Catholic Relief Services, titled ``Bottom of the Barrel,'' 
provides a very useful synthesis of the literature on the problems oil 
wealth can produce and some creative ideas about how to redress them. 
The governments of Angola and Nigeria get their revenues from their 
share of oil proceeds and not from the taxation of their citizens. They 
do not need the consent of the governed to stay in power. The revenue 
is easy to capture and control and therefore to steal or to waste. Even 
leaders with honest intentions, such as President Obasanjo, have little 
influence over a deep and pervasive corrupt system that extends to the 
customs officers and drivers of delivery vehicles.

                         WHAT THE US SHOULD DO

    To ensure that the West African energy producers of today are 
reliable, stable energy producers of tomorrow, US policy must be geared 
to encourage or to pressure producing governments to spend the money 
they earn on their people, to do so wisely, and to conduct their own 
public finances in a transparent manner. The key steps are: 1) enhance 
revenue and expenditure transparency, 2) provide more creative economic 
policy advice, 3) use our leverage, and 4) exercise more assertive 
diplomacy.
    Enhance Transparency. It is broadly accepted that making public the 
aggregate amount of taxes, royalties and other payments earned by 
producing governments, and accounting for where the money is spent 
would empower their publics to demand accountability. The debate has 
largely been over who bears the burden of disclosure and how best to 
ensure that all the entities that compete for oil development--such as 
national oil companies and state owned enterprises--must meet the same 
burden. The UK-led Extractive Industries Transparency Initiative (EITI) 
proposes a voluntary system. The Publish What You Pay Campaign proposes 
mandatory rules for publicly listed companies, which regrettably would 
not cover the bulk of the world's oil producers. I believe that the 
burden must fall on the producing governments, and that Western 
governments should use their considerable leverage to extract 
disclosure and transparency commitments from producing governments. As 
long as the playing field is level, and aggregate industry wide figures 
are published, US industry is unlikely to object to revenue disclosure. 
In most countries companies would like nothing better than for the 
public to know how much revenue the government is taking in, so that 
the burden of nation-building would rest more with national authorities 
and less on the local operators. The US should lead a G-7 effort to 
create a new set of incentives and pressures on developing nation oil 
producers to disclose the revenues they earn and how they spend them.
    Give Better Policy Advice. The US needs to consider whether we can 
give oil producers better economic advice than we have to date on how 
to manage revenues. We need to say more than ``open your markets, 
deregulate your prices and introduce competition'' if we want to 
produce real economic development in Nigeria, Angola and other nations. 
The Chad-Cameroon example of creating a college of leaders to supervise 
a national development may work, but in the end it relies on the good 
graces of a state that may or may not respect the rule of law. There is 
new thinking by the IMF and the New America Foundation on the benefits 
of distributing some large portion of oil revenues directly to a 
population. The theory holds that this method empowers people, creates 
economic demand and undercuts the power of the state by forcing them to 
seek money through taxation and the consent of the governed. It is a 
theory that is being considered for Iraq. It is possible that the IMF 
and World Bank should be advising Nigeria and Angola to consider this 
mechanism as a means of enhancing both economic and political 
development. I would urge Congress to commission some serious analysis 
of its own on this issue.
    Use Our Leverage. The key sources of leverage over oil producing 
nations today are: 1) renegotiation of sovereign debt, 2) help 
financing energy infrastructure, 3) access to trade financing, and 4) 
access to Western banks and capital markets. The US should muster the 
G-7 to lead a coalition to use this leverage to ``extract'' 
transparency and development commitments from oil producers.
    Debt for transparency. The greatest source of influence that the 
West has over Nigeria and Angola is their sovereign debt. The US should 
consider a G-7 initiative to forgive the debt of developing oil 
producers that make enforceable commitments to publish the aggregate 
amounts of their tax, royalty and other resource payments and public 
expenditures, to commit to a plan of development, and to accept IMF 
monitoring of their commitments. Such an offer might offend the 
sovereign sensibilities of many nations, but it would create a domestic 
debate in those nations over the costs and benefits of transparency.
    Infrastructure for Development. A second great need of African 
nations is for electric power and telecommunications. Many of these 
projects can be financed commercially, but most must be publicly 
financed. The World Bank has been reluctant to make a strong commitment 
to infrastructure finance for fear of interfering with private markets. 
They also rightly insist on policy reform before they are willing to 
invest in project finance. But a new fund, with new capital 
contributions by the Bank's members, could provide a magnet for 
financing infrastructure for those nations willing to make a commitment 
to development and transparency. The Chad-Cameroon pipeline is an 
example of how this may work, but Chad-Cameroon was a unique case: the 
oil was landlocked, Exxon-Mobil refused to finance the pipeline without 
World Bank support, and Chad was not wealthy enough to publicly finance 
the project on its own. But a fund that would help finance 
infrastructure along with private capital could incentivize countries 
to swap transparency for development.
    Conditional Trade Finance. The US, the World Bank and others have 
made great strides on conditioning trade finance on enforcement of 
environmental standards. The need for impact statements and remediation 
plans has changed some projects for the better and stopped others 
altogether. A G-7 effort to have all G-7 nations condition trade 
finance on some commitments to transparency and use of revenues could 
be a powerful tool to press developing nations to adopt honest 
practices.
    Raise the Standards for Access to Western Banks. One new concept, 
well documented by Jonathan Winer, a former State Department colleague 
of mine, bears examination. This is a proposal to use the successful G-
8 Financial Action Task Force (FATF) to create new standards for access 
to Western banks and to mimic the Kimberly Process for deterring trade 
in conflict diamonds to deter illegal trade in oil. In briefest 
summary, the proposal would beto require national banks in countries 
like Nigeria and Angola to disclose their ownership and document the 
validity of their transactions before they gain access to correspondent 
Western banks. This would deny capital access to illegitimate banks and 
track outflows from governments known for corruption. A second proposal 
would ``tag'' oil sales to ensure that all legitimate sales were 
traceable to their owner. This would not harm legitimate Western 
operators or national oil companies, but could help deter those in or 
out of government who divert the proceeds of oil sales for their own 
benefit.
    More Assertive Diplomacy. Achieving better governance in Africa 
depends on the leaders of African countries having the political will 
to change. They care a great deal about how the US and others perceive 
them and whether their behavior has political price. US high level 
diplomacy is a powerful tool we must exercise. With Angola, Secretary 
Powell has put transparency high on the agenda and he is getting 
results. We have many interests in Nigeria and their internal problems 
and the issue of their relations with their neighbors is not making it 
to the top of the agenda. The US must also be willing to step in with 
forceful diplomacy when internal forces threaten democratic African oil 
states. The US rhetorical response to the recent coup attempt in Sao 
Tome was strong and helpful, but in the aftermath US and UK leadership 
have been absent. The coup attempt was an effort by those in the 
military and external forces to allocate the proceeds Sao Tome may earn 
from its 40% share in the Joint Development Zone with Nigeria President 
Obasanjo's offer to ``protect'' Sao Tome was as unwelcome as it was 
unwise. Wedged between those in Nigeria and Angola who would compete 
for control of its oil, Sao Tome cries out for a US or UK commitment to 
preserve its independence! The US should put a USAID mission on the 
ground in Sao Tome, help Sao Tome build the capacity to manage its 
potential wealth, and warn its neighbors not to interfere. Sao Tome 
could be a prime case for the EITI. The US could lead an effort to get 
Sao Tome to pledge its signing bonuses and future revenues to the World 
Bank in exchange for a line of credit for development today.

                               CONCLUSION

    The global economy is likely to rely on hydrocarbons for 
transportation fuel and power for at least the next two decades. Our 
national security will depend on securing diverse supplies of oil and 
gas and on ensuring that the governments who supply us do not use our 
money to harm us. As a bilateral matter this will require serious 
diplomatic engagement with our key suppliers and concern about their 
political stability. Where we can, we need to use our leverage to 
encourage better governance in oil producing nations so they will be 
stable and humane. We have many tools we can use. We are neglecting 
these tools, and basic tenets of diplomacy, to our detriment. A little 
Congressional sunshine on these issues may help the Administration to 
see the light. I commend you for your efforts here today.

    Senator Hagel. Mr. Goldwyn, thank you.
    Dr. Ottaway, welcome. Nice to have you. Let me remind 
everyone who you are: senior associate, Carnegie Endowment for 
International Peace here in Washington, among other 
achievements. We are glad you are here and we look forward to 
your testimony.

 STATEMENT OF DR. MARINA OTTAWAY, SENIOR ASSOCIATE, DEMOCRACY 
 AND RULE OF LAW PROJECT, CARNEGIE ENDOWMENT FOR INTERNATIONAL 
                     PEACE, WASHINGTON, DC

    Dr. Ottaway. Thank you, Mr. Chairman. Being the last 
speaker, I will try to avoid repeating what other people have 
said, and I will depart somewhat from my prepared remarks.
    I think there is widespread agreement among the witnesses 
that the main threat to energy security in both Latin America 
and in West Africa is really the problem of political 
instability. I would like to point out that the instability 
that threatens our oil supply takes two forms.
    One is the instability that directly affects the oil 
fields. For example, we see that in West Africa very clearly in 
the case of Nigeria where the entire oil-producing area of the 
delta is a bubbling caldron at this point with almost daily 
incidents that affect oil production.
    But there is perhaps an even more insidious kind of 
instability that affects all oil-producing countries which is 
the potential for instability that comes from the misuse of oil 
revenue and from the tremendous income inequalities that 
develop in these countries. If you look at the case of 
Venezuela, that is a good reminder of it. The problem there is 
not that the oil fields themselves are threatened, but it is 
the overall political situation that has developed in the 
country that affects the supply of oil.
    When you look at West Africa I do not think we should be 
complacent to think that, because in Angola the oil fields are 
mostly offshore, instability is not going to be a problem that 
affects oil supplies. The oil fields are not going to be 
threatened. They are too far offshore. We are unlikely to see 
any real problem. That is why Angola was capable of greatly 
increasing oil production during a war. But if the political 
situation in Angola itself becomes unstable, if the resentment 
of the population about the misuse of oil revenue increases, 
which is very likely to happen now that the war is over and 
people are going to focus more on that kind of issue, then I 
think the supplies from Angola can also be threatened. So I 
think it is important to keep this in consideration.
    The second point that I would like to make is that while 
certainly the United States is committed to promoting democracy 
and transparency in these countries, the conflicting interests 
of the United States sometimes lead to the implementation of 
policies that clearly are not very helpful in terms of 
promoting democracy and transparency. Let me give you one 
example of that.
    One problem that we have particularly in Nigeria now that 
the United States wants two very different things from Nigeria. 
The United States wants oil supplies and the United States 
wants Nigeria to play a major role as a peacekeeper in West 
Africa. I think they are both important goals, and it is quite 
understandable that the U.S. Government would want them both. 
But the two work at cross purposes with each other because one 
of the tendencies that we have right now, because we need 
Nigeria to help in Liberia, to help in other unstable countries 
in West Africa, is not perhaps to put sufficient pressure on 
President Obasanjo on the domestic political reforms that are 
badly needed in the country. In a sense, it is very difficult 
to rely on a country to help police the region and at the same 
time to slap him on the wrist too often on issues of domestic 
governance. There is a built-in conflict here that we need to 
sort out.
    There are other policies that we are trying to promote in 
Nigeria and promote in the entire region, as a matter of fact, 
which can work at cross purposes to our goal of reducing 
corruption and improving transparency. In the name of 
democracy, we have been promoting decentralization in Nigeria, 
for example, and I am sure we do the same thing in Angola now 
that the war is over. I do not want to sound as if I were 
defending centralization because there are big problems with 
that too. But one of the unexpected consequences or unwanted 
consequences of decentralization in Nigeria has been the 
decentralization of corruption so that instead of having very 
corrupt management of oil revenue at the level of the Federal 
Government, now you also have the problem of a very corrupt 
management of oil revenue at the level of the 36 state 
governments.
    So essentially this is an issue that requires more 
rethinking about how we can both promote decentralization and 
at the same time try to combat the problems that arise when 
governments are not sufficiently monitored and when there are 
not sufficient checks and balances. I would argue that the 
policy of decentralization has really not been very helpful in 
the case of Nigeria, and that is a policy which is supported by 
the United States and by the international financial 
institutions. So, again, there are conflicts in what we are 
doing.
    There is certainly need to think seriously about what can 
be done by the United States, by again the international 
financial institutions, other countries to improve the 
management of oil revenue by particularly African countries, 
but all developing countries essentially. I would caution about 
jumping to conclusion too quickly about the fact that we know 
what the solution is. I hear too much about the Chad model 
because the Chad model, while it sounds fairly promising on 
paper, is still untested. We really will not know how the Chad 
model works until oil production in Chad is fully on stream and 
there is more of a track record of whether these organizations 
that have been set up, whether the participation by NGOs, both 
domestic and international, is really improving the management 
of oil revenue or it is not.
    I also hear a lot about following more the example of 
Alaska, trying to distribute part of the oil revenue directly 
to citizens. Again, I think the countries have to be studied 
one by one in terms of what would work in the particular 
situation. There are many such countries in Africa totally 
dependent on oil--Chad is certainly going to be one of them; 
Angola is another one. And even Nigeria, which has in many ways 
a more diversified economy, falls in that category--where the 
government has virtually no revenue except what comes from oil. 
Under those circumstances, it is difficult to distribute oil 
money to citizens. Oil revenues are really not quite sufficient 
even to pay for the basic tasks of government. So I do not 
think one can jump to conclusions that the solution for these 
countries is to distribute part of the oil revenue directly to 
citizens. I think the cases have to be considered one by one.
    The last point that I would like to make concerning 
transparency is the fact that in many of these countries there 
is a role that the oil companies can play and have to play in 
many ways in promoting transparency, and not in the sense that 
I think it is the role of the oil companies to reform these 
governments, but that the oil companies are in a position to 
provide information about how much money is being paid to these 
governments, and just having those figures would help 
tremendously the domestic process of monitoring how the money 
is being spent and is being allocated. So I think, 
unfortunately, whether or not they like it--and I know this is 
an extremely sensitive issue on which there has been a lot of 
resistance--the oil companies may have to step up their efforts 
in this area of helping make available the information on which 
then efforts to promote transparency of the governments can be 
based.
    Thank you.
    [The prepared statement of Dr. Ottaway follows:]

 Prepared Statement of Marina Ottaway, Senior Associate, Democracy and 
   Rule of Law Project, Carnegie Endowment for International Peace, 
                             Washington, DC

   SECURING OIL FROM WEST AFRICA AND LATIN AMERICA: THE CHALLENGE OF 
                            INTERNAL TURMOIL

    A key factor in protecting United States energy security is gaining 
and maintaining access to diversified sources of oil and gas from 
different regions in order to minimize the likelihood of severe 
disruption. West Africa and Latin America are already important sources 
of diversity in the US oil supply. In particular, Venezuela accounted 
for over 13 percent of US imports of crude oil in 2002, while Nigeria 
and Angola accounted for 6.4 percent and 3.5 percent respectively. 
Furthermore, oil exploration and development of extractive capacity in 
West Africa are increasing rapidly. Angola's production alone is 
expected to increase from an average of 696,000 barrels per day in 2001 
to over a million barrels per day in the next few years and it could go 
as high as 3.2 million by 2020, according to some estimates.
    US continued access to these important sources of oil, however, is 
threatened by the political instability that affects all three 
countries. Oil supplies from Nigeria are routinely disrupted by 
politically motivated incidents that close down pipelines and, more 
rarely, production facilities. In December 2002 a general strike sent 
Venezuela's exports plummeting.
    The problems of oil producing developing countries are related at 
least in part to the negative impact of oil exploitation. Some analysts 
have talked about the ``curse of oil'' that afflicts countries where 
oil is the major, often the only, asset and thus dominates the economy. 
These countries suffer from a typical set of problems. Other economic 
sectors, including agriculture and manufacturing, are usually 
neglected; unemployment levels are high as a result, and the oil 
industry, which is capital intensive, does little to alleviate the 
problem; and income disparities tend to be very wide, as a privileged 
few profit from the oil revenue, often through corruption, while the 
rest of the country stagnates. Even more serious are the political 
problems associated with oil wealth in poor countries. The first is 
corruption, an endemic problem when large amounts of revenue start 
pouring suddenly into countries with weak institutions and systems of 
accountability. Indeed, a lot of the oil revenue of countries like 
Nigeria and Angola has never been accounted for, disappearing in the 
hands of politicians and their cronies without ever appearing in the 
state books. Finally, the population of oil producing countries often 
develops a sense of entitlement to wealth--if the country is rich in 
oil, the population should also be rich. The expectation that oil 
revenue can take care of all problems is usually unrealistic, 
particularly in countries with a large population.
    The distortions created by oil revenue are not the only cause of 
the problems that produce instability in countries such as Nigeria, 
Angola and Venezuela, but they are an important part of it. As a 
result, these countries cannot achieve stability without addressing the 
problem of how oil revenue is used and accounted for. If the United 
States wants to secure undisrupted access to oil from these countries, 
it must help them find a more transparent and more beneficial way to 
use oil revenue. Oil companies also have to play a role. While in 
recent years oil companies have become much more aware of the 
disruption their presence causes and have taken some steps, many 
problems persist and need to be addressed.

Nigeria and Angola
    Both Nigeria and Angola are deeply troubled countries. Political 
problems have proven, and continue to prove, extremely disruptive to 
oil production in Nigeria. In Angola, the oil industry has been 
somewhat insulated from the civil war that raged in that country since 
it attained independence in 1975 because most oil deposits are off-
shore. Indeed, Angola became an important oil producer in the midst of 
war. After the death of UNITA leader Jonas Savimbi in early 2002, the 
war has largely ended and the country is struggling toward stability. 
Paradoxically, oil may well become a new source of domestic strife, as 
Angolans turn their attention from wartime survival to the present 
socio-economic problems and discover how much of the oil revenue has 
been misused or, worse, has disappeared without a trace.
    With or without oil, Nigeria would be a very troubled, difficult to 
govern country, but oil has created additional complications. At the 
root of all problems is the extreme ethnic diversity of the country. 
There are over three hundred ethnic groups, but most importantly three 
dominant blocs. Northerners have historically dominated the military, 
the Yorubas from the west have been prominent in the business sector, 
and Ibos from the east have provided disproportionate numbers to the 
civil service and business. The tensions among the three major blocs 
exploded in the civil war of 1967-69, which started when the Ibos of 
the eastern region seceded from Nigeria and set up their own state of 
Biafra. Biafra was eventually defeated and Nigeria was reunited, but 
the underlying problem of achieving stability in such diverse country 
remains.
    In fact, the political picture has become even more complicated 
recently. The division between Muslims, that dominate the north, and 
Christians, more numerous in the rest of the country, has become 
politicized, as Muslims in Nigeria follow the worldwide trend toward 
greater assertiveness. Several northern states have recently 
incorporated aspects of the Islamic sharia into their legal systems. 
Another very important source of tension is the increasing militancy of 
the population of the oil producing Niger Delta. This population, 
composed of many small ethnic groups, has long paid the price of oil 
exploitation, losing land and suffering from the consequences of high 
levels of air and water pollution. However, very little of the oil 
revenue has been invested to alleviate its problems. Until recently, 
all oil revenue has gone to the federal government, which doled it out 
to states and localities. Oil producing areas, which have little 
political clout, were short-changed. While the distribution of oil 
revenue has become much more equitable in the last few years under 
President Obasanjo and control has been decentralized, many militant 
ethnic-based organizations continue to operate throughout the delta. 
These groups cause considerable disruption of oil production by 
sabotaging pipelines and occasionally even taking over oil platforms. 
To their activities must be added the problems caused by 
``entrepreneurs'' who tap into the pipeline to siphon off and resell 
oil. This highly dangerous business has repeatedly caused fires and 
explosions, killing or seriously injuring hundreds and forcing the 
temporary shut-down of pipelines.
    An additional source of instability in Nigeria is the ever-present 
threat that the military, which has governed the country through most 
of its existence, will seek to seize power again. Nigeria's return to 
civilian government with the election of 1999 remains fragile and a 
renewal of military rule is a possibility. The new government has taken 
some steps to address the country's economic and social problems, 
particularly in the Niger Delta, but the challenges are immense and 
popular confidence in the government is low.
    Even this abbreviated sketch should make it clear that many of 
Nigeria's problems are not caused by the misuse of its oil riches, and 
would not go away completely even if oil revenue was used better and 
more equitably and if oil companies implemented more effective remedies 
for the ills their operations produce. But whether oil is the cause or 
not, Nigeria's problems can disrupt oil flows and cannot be ignored.
    The Angola situation is somewhat less complicated. Although the 
country has experienced almost thirty years of civil war, the conflict 
was a bilateral one between the ruling MPLA and the insurgent UNITA, 
and did not have the intricacy of Nigeria's multiple layers of 
conflicts. Furthermore, it did not seriously affect the growth of the 
oil industry because fields are located mostly off-shore. The civil war 
ended after the death of Unita's leader Jonas Savimbi in February 2002. 
Angola is moving toward elections and there is a real possibility that 
elections results will be respected, rather than precipitating a new 
conflict as they did in 1992. This does not mean that Angola will soon 
be a democratic country. Elections are unlikely to be truly free and 
fair, given UNITA's present weakness, the MPLA's strong grip over the 
country and the oil revenue, and the virtual absence of any other 
viable political party. But elections will at least be a step in the 
right direction.
    With the return of peace, however, the enormity of the socio-
economic problems the country faces is becoming more evident and it is 
more urgent to address them, lest they become source of new conflicts. 
Many of these problems are related to oil and the misuse of oil 
revenue. Thus, oil production in the future will be at the center of 
political conflict in Angola, while during the civil war it was not. 
The first problem that needs addressing urgently is the fact that the 
country's economy is dead, except for the oil sector. This is the 
result of war--agriculture has been completely undermined by the 
fighting and above all by mines both sides planted in large numbers, 
making it impossible for peasants to tend their fields in many areas. 
Furthermore, the urban economy was initially choked by the government's 
socialist policies, which put all enterprises under state control. 
While those policies have now been abandoned, the pace of economic 
restructuring has been painfully slow and stagnation continues. Unless 
the economy revives and creates jobs, the cities will become unstable. 
Economic revival depends on restructuring and investing oil revenue in 
the development of economic sectors that can become viable on their own 
after the start up period. Unfortunately, many oil-producing countries 
succumb to the temptation to use oil revenue to subsidize consumption 
or invest in enterprises that seem prestigious but never become viable.
    The second problem Angola needs to tackle immediately is that of 
establishing accountability for oil revenue. Oil royalties so far have 
been spent financing war and lining the pocket of government officials. 
Large amounts have never been accounted for--for example, increase in 
oil prices during the Gulf war were never reflected in the Angolan 
official oil revenue figures.
    Failure to address these problems is likely to create further 
instability in Angola. This could affect oil production. While the oil 
installations are not particularly vulnerable to sabotage because of 
their off-shore location, sabotage of installations is not the only 
form disruption of oil production can take. The strikes of December 
2002 and early 2003 in Venezuela, discussed briefly below, show that 
political action, particularly strikes, can have a dramatic effect on 
oil production. An additional problem in Angola is that one of the 
major oil producing areas is the Cabinda enclave, where an independence 
movement has been operating persistently, although without much 
success, since Angola became independent.

                               VENEZUELA

    The problems experienced by the oil industry in Venezuela, when a 
politically motivated strike beginning in December 2002 cut oil 
production from over 3 million + barrels a day to under 400,000 a day, 
are a reminder that oil supplies can easily be disrupted by political 
unrest. Equally importantly, the crisis that led to the strikes, which 
is far from resolved, shows the economic and ultimately political 
problems that can emerge in a country overly dependent on oil revenue.
    Venezuela, for forty years considered to be the most democratic and 
stable country in Latin America, has been in turmoil for over a decade 
now. At the heart of the crisis is the breakdown of the social and 
political pact on which democracy was based as the country outgrew its 
ability to live off oil revenue without having developed sufficient 
sources of alternative revenue. Venezuela's stability was based on a 
power-sharing agreement among major political parties, backed up by oil 
revenue that allowed the government to keep the population relatively 
prosperous. As the population increased and oil revenue failed to keep 
pace, the pact started unraveling. An impoverished population became 
increasingly distrustful of the old political class. The resentment 
only increased when drastic economic reforms enacted to wean the 
country away from dependence on oil and revive the economy were 
introduced suddenly without explanation.
    The crisis stretched for several years, through two attempted coup 
d'etat and eventually led to the demise of the old political class and 
the election of a populist former army officer, Hugo Chavez in 1998. 
Under his leadership, the government slipped toward semi-
authoritarianism, and the opposition became more willing to resort to 
direct action rather than the ballot box, leading to the December 2002 
crisis. At the time of this writing, there is a good chance that 
Chavez's presidential mandate will be terminated by a recall referendum 
and that new elections will be held. Even if this happens, the crisis 
will not be over--and Venezuela will not become again a dependable 
source of oil for the United States--unless a new social compact is 
negotiated that addresses the grievances of the large impoverished 
segment of the population.

                              TAKING STEPS

    Neither the US government nor the oil companies have the capacity, 
let alone the obligation, to address all the problems these countries 
face. On the other hand, it is in the interest of both to do something 
to help make these oil producers into more reliable sources of energy 
and easier environments in which to operate. The chance that the US 
government and the oil companies will have a positive impact is greater 
in Angola and by far most remote in Nigeria. I will deal with the case 
of Venezuela separately, because the situation in that country is very 
different.
    In general, the measures the US government can attempt fall into 
two categories: first, support for the attempts to resolve the 
conflicts created by oil in a democratic fashion, through negotiations 
and compromise, rather than through violence. While support for a 
democracy writ large in Nigeria and Angola is a good thing in itself, 
it is unlikely to have much impact on oil-related conflicts. Even in a 
best case scenario, it will take many years before the political 
systems of Nigeria and Angola function democratically. But the problems 
of how to distribute oil revenue among levels governments and regions, 
of how to use it, and how to ensure that it will be used productively 
have to be addressed immediately. The government needs to engage the 
governments of Nigeria and Angola and the groups with a stake in the 
distribution and use of oil revenue these issues.
    It is also important that in encouraging this process the US does 
not try to impose solutions based on models that are either unproven or 
modeled on countries with very different characteristics. For example, 
there has been much talk recently of the advantages of the ``Chad 
model'' or the ``Alaska model.'' The Chad model takes control over oil 
revenue out of the hands of the executive, giving it instead to a broad 
coalition of government officials and NGOs, under international 
supervision. While it has appealing features, it is also cumbersome, 
gives much responsibility to non-elected domestic groups and to foreign 
bodies. Most importantly, the system is still untested and will remain 
such until Chad's oil fields go into full production and generate a 
steady revenue stream. The Alaska model puts part of the oil revenue 
into a trust fund, the dividends of which are distributed directly to 
the citizens. This works well for Alaska, where state and localities 
also have revenue from taxes. It may not be a realistic model for 
countries where oil is the only source of public revenue and thus has 
to finance the entire budget, including all public services such as 
education, health, and the provision of basic infrastructure. The US 
should help countries design a system to allocate and control oil 
revenue that fit each country's requirements but not try to impose 
specific solutions.
    The second step the US can and should take is much easier in 
theory, although it requires political will: working simultaneously 
with the governments of the oil producing countries and the oil 
companies to ensure that the information about how much revenue the 
government is receiving becomes public domain. Transparency will help 
stop the corrupt diversion of oil revenue to private bank accounts. It 
will also facilitate an apportioning of funds among regions and levels 
of government based on real figures rather than myths. Finally, it may 
also help curb the unrealistic expectation of the population that oil 
revenue can make everybody rich. The Extractive Industry Transparency 
Initiative, launched by British Prime Minister Tony Blair in June as a 
result of NGO pressure, deserves full US support. The initiative would 
make it mandatory for oil companies and other extractive industries to 
disclose how much they pay to the producing countries. Information 
about oil revenue is not a sufficient condition to ensure transparency 
in how the recipient government spends that money, but it is a 
precondition for it. Oil companies should be required to make that 
information public, but certainly have no responsibility for monitoring 
the expenditure.
    The case of Venezuela is different. The problem there is not the 
absence of mechanisms of accountability or even less the incapacity to 
manage a democratic political system--only a few years ago Venezuela 
was considered, and in fact was, a consolidated democracy. Rather, the 
problem is the breakdown of the social and political pact that ensured 
the country's stability. It is in the interest of the US to help as 
much as possible in the renegotiations of such a pact. This is much 
more important than trying to support Chavez's ouster in a referendum 
or specific candidates in the next elections. Who wins is less 
important than whether the winner represents a new consensus rather 
than another deep division in the body politic.
    Major oil producing countries in West Africa and Latin America can 
make an important contribution to US energy security, since they are 
not affected by the difficult problems of the Middle East. However, 
they have considerable problems of their own, which the US cannot 
ignore.

    Senator Hagel. Dr. Ottaway, thank you very much. Each of 
you have presented excellent statements. Again, I remind you 
that I will assure that each of your full statements are 
included in the record.
    Mr. West, let me get back to you and your opening comments 
about things that Congress can do. Obviously, you ended up with 
some of that referencing natural gas and you made some 
important points that we should be listening to. But let me 
open that up and go back to your statement and allow you to 
answer the question, what do you mean, what can we do, what 
should we be doing, the Congress.
    Mr. West. I think natural gas is the area, to me, which 
Congress should be focusing on. Again, the oil markets and the 
gas markets work very differently, and I believe that there are 
all kinds of problems, but there are diverse suppliers and 
there is massive infrastructure available to move oil in this 
global market. Natural gas works differently given its physical 
characteristics. It can only be moved by pipeline or by a 
super-cold ship or change the form completely into methanol or 
something.
    The fact is that the world is awash with natural gas. There 
are vast resources of natural gas, but they are in places like 
Russia, Iran, West Africa, Latin America. So how can you move 
it here? You need infrastructure. The fact of the matter is 
that there was a lot of concern in the spring that there was 
going to be a big natural gas shortage this winter because 
storage numbers were quite low. Now storage numbers are back 
within the range. But there has been an uptick in the price, 
and the general floor price of natural gas has moved up to 
about $3.50. The net effect is that the price of gas is moving 
up. This is going to affect a lot of industries, and we simply 
cannot get the natural gas in North America unless we change 
the infrastructure, whether it is pipelines, moving Alaskan gas 
in. There is a possibility of opening up some areas of the 
western overthrust belt. That is I believe in the energy bill. 
There may be some tax incentives.
    But I think one area is also, when you get into these 
international issues, the permitting of liquified natural gas 
facilities. This is a critical issue. Four terminals in the 
continental United States were built in the 1970s, and none 
were built since then. The natural gas business has been 
completely deregulated. My view is government officials--if 
they do not have a form to fill out, then no form will be 
filled out. And they do not know how to do this.
    The administration is focusing more on this. I think they 
deserve credit, but there is a complete lack of understanding 
on LNG. There is a perceived in LNG, which I do not think is 
realistic, but this is deemed threatening to neighborhoods, to 
communities where this LNG will be brought in. So there are 
opposition groups now forming against this, which I do not 
think are really necessary or reflect the facts.
    So you have got the Federal Government and you have State 
governments. You have unclear permitting and you have an 
unclear understanding, but throughout all this, there is a 
fundamental need. Over 20 terminals have been proposed; 20 
terminals are not going to be built. But a number of these 
terminals are going to be built, and I think we should do 
everything we can to facilitate it. I think it should be a 
national priority.
    Senator Hagel. Would either of you like to respond to 
anything Mr. West said or the question itself?
    Mr. Goldwyn. Sure. I would like to agree. I think for 
electric power, I think for diversity of supply, natural gas is 
the future. For the environment, we are going to use cleaner 
fuels. Natural gas is going to be key, and if we cannot get it 
into the country, then we are not going to have affordable 
prices, and if we cannot get it into the country, we are not 
going to have diversity of supply because we will not have as 
many choices in terms of suppliers.
    It was in the National Energy Policy to try and assert 
Federal jurisdiction--nicely worded--to try and help with some 
of this permitting and planning and it has not happened. I 
think something needs to be done. I think not just the heavy 
hand of the Federal Government over State governments saying 
this is where you need to put this plant. I think there are 
ways you can be creative and work with local communities so 
either they get some of the benefit of having an LNG plant in 
their area or at least there is a little bit more of a 
cooperative effort to try and site these things.
    But the other thing I think the Federal Government can do, 
the Department of Energy can do is have an education program to 
take some of the fear out of LNG. People think it is going to 
be a magnet for terrorist attacks or that somebody can put a 
match near it and the thing is going to blow up. And it is just 
not the case. But people do not know and they do not 
understand, and that is a role the Federal Government can play, 
is to educate people about what the reality is.
    Senator Hagel. Thank you.
    Dr. Ottaway.
    Dr. Ottaway. This is not my field.
    Senator Hagel. Well, thank you. We will get into some 
specific areas that I wanted to pursue with you here in a 
moment, doctor.
    Mr. West. Mr. Chairman, can I make one point?
    Senator Hagel. Yes.
    Mr. West. I agree with everything Mr. Goldwyn said, but I 
wanted to expand it. High natural gas prices are going to 
affect more than just electricity. It will have a huge impact, 
for example, on American agriculture which relies on the 
production of ammonia and urea for fertilizer. It is already 
having a big impact on the chemical industry in the United 
States. This is a big deal. There are whole industries that are 
built on the concept of cheap natural gas, and that is a thing 
of the past.
    Senator Hagel. As a United States Senator who represents an 
agriculture State, I am well aware of your comment, and you are 
right.
    Staying with this current theme, I would be interested--and 
you touched on it very briefly, Mr. West--in each of your sense 
of the current energy bill that is now in the conference 
committee between the House and Senate, especially in regard to 
the areas that you have talked about, production and pipelines, 
incentives. Now, it is floating, as we all know, and what we 
will get as the final product no one is quite sure. But we are 
getting close I believe to something here that will get out of 
the conference committee. What you know now, the general themes 
addressed in the two bills and what we will most likely come up 
with, I would appreciate each of your evaluations of that, 
beginning with you, Mr. West.
    Mr. West. It seems to me there are two things. There are 
some financial incentives and there is also accelerating the 
permitting process. I do not disagree with either of those, but 
I think in the end we have a fundamental problem. Mr. Goldwyn 
said, well, we can always bid up the price of oil and get oil 
even if it is at $50 a barrel. It is important to understand 
that if we have a very cold winter, a prolonged cold snap, you 
cannot bid up the price of natural gas. There will be no 
natural gas. This is entirely different than oil. So I just 
think we have got to go beyond the bill.
    This is a very serious problem. Alan Greenspan spoke about 
this in the spring when the storage level was very low. I like 
to quote a joke about a lobster man from Maine. They asked, 
have you been a lobster man all your life? Not yet. Do you 
think the fog will clear? Always does. Is there going to be a 
natural gas shortage in the United States? The answer is yes. 
The only question is when.
    Senator Hagel. Mr. Goldwyn.
    Mr. Goldwyn. Mr. Chairman, it is a little hard to tell what 
is in the bill because I guess both sides of the aisle have not 
had a chance to look at it, so it is a little hard to comment 
on it. But from what I understand from previous versions, I 
think the current bill does virtually nothing to address our 
energy security. I think the measures to try and promote the 
building of an Alaska gas pipeline are important and positive.
    I think from my understanding, steps to try and create a 
more reliable electric grid, to reduce our vulnerability there 
are absolutely marginal.
    In terms of international energy, I do not think there is 
anything in the bill that does anything to try and promote the 
diversity of supply or enhance stability.
    I think there are ample subsidies and tax credits on both 
sides, too many for me to probably take a stab at, but I think 
that since most of them are directed internally--and as Mr. 
West has very accurately said, we are not going to solve this 
problem by energy independence--I am not sure that a lot of 
those are really a productive use of the taxpayers' funds. I 
think there are some funds for promotion of alternatives and 
renewables which are an important and positive thing, but also 
not a short-term solution. I hate to be sort of glib about it, 
but my general sense is we would be better off without it.
    Senator Hagel. Without the bill from what you know of it.
    Mr. Goldwyn. Yes, sir.
    Senator Hagel. Well, I appreciate you both being very 
delicate regarding ethanol, not knowing exactly where you come 
out on that. But thank you for skirting around that.
    Dr. Ottaway, before we get into some of your universe, is 
there anything that you would like to respond to on what you 
have heard?
    Dr. Ottaway. No.
    Senator Hagel. Doctor, let us talk a little bit about your 
testimony, your thoughts. One of the things, as you noted I am 
sure as you listened to your colleagues' presentations--Mr. 
Goldwyn talked about these new threats, challenges that we face 
in the world today across the spectrum, but specifically in 
regard to our energy challenges. I believe he said something to 
the effect that great militaries are not going to be able to 
address those issues. He was referencing trade, diplomacy, 
specifically some of the things that you have talked about.
    Would you take that and define that, the threats that we 
know are out there, the threats that we will most likely 
continue to face in some variation of new forms? But we are 
getting a sense, as we start this new century, of what is ahead 
here, and yes, militaries are important and laser-guided 
munitions are important, but that is not going to deal with the 
kind of threats that not just the United States but the world 
is facing today. Since this is your general area, I would like 
to hear more about what you think we should be doing and we are 
not doing in the way of developing policy in the United States 
to deal with these new threats, not just from the deterrence 
perspective, but let us take some initiative.
    Dr. Ottaway. Well, I think in general the most important 
threat on the political level, not on the military level, comes 
from the domestic instability of a large number of countries. I 
would argue that practically all African countries and a good 
number of countries in Latin America are extremely vulnerable 
to domestic political unrest because of the kind of economic 
conditions that exist, and not only chronic conditions of 
under-development but also what has been a great increase in 
income inequality which has developed during the last 15 years, 
which is, for example, one of the problems that is at the root 
of the popularity of Chavez in Venezuela. What brought Chavez 
to power originally was a resentment by a large segment of the 
population that had fallen below the poverty line in the 
previous 15 years concerning what was going on.
    So that being the case, I think the steps that we can take 
are unfortunately long-term steps because one of the problems 
that we are dealing with here is that we are dealing with sort 
of short-term threats that exist here and now, the solution for 
which are long-term solutions. I think the only thing we can do 
is to try and give sustained attention to the issues of 
development and to the issues of democratic transformation of 
these countries beginning now but to stay these countries all 
along. Unfortunately, because of the large number of countries 
involved, we tend to pay attention to these issues in the short 
term while there is a crisis and then again to forget about it.
    I think, for example, one example is the contrast between 
what we are seeing in the case of Nigeria and we are seeing in 
the case of Angola. In the case of Nigeria, because there has 
been this direct threat to the oil installations, direct loss 
of production, siphoning off of oil and so on, as we heard from 
the previous panel, the U.S. Embassy, for example, has in place 
personnel to try and deal with those issues, to try to work 
with the NGOs, with the oil companies, with the governments of 
the oil-producing areas and so on to try and address those 
issues.
    Angola can also be threatened by instability at some point, 
because you have the same conditions of an enormously 
impoverished population while oil revenue keeps on growing. 
Particularly now that the war is over, there is really no good 
explanation for the population what is happening to this money. 
Unfortunately, because we are not seeing direct threats to the 
oil installations, there is not that much attention being paid 
to that issue. I think there is certain complacency to say, 
well, you know, Angola is not democratic, but it is stable and 
there is no threat to the oil installations, so we do not pay 
much attention to the problem. I think because the problems are 
so difficult to address and are so long-term, we cannot wait to 
address them once the acute phase has started. What we need to 
do--and I realize that this is very difficult, is to pay 
sustained attention to these problems of economic development 
and political transformation before the situation reaches a 
critical phase.
    Senator Hagel. With that, I suspect in your opinion you 
would include things that Mr. Goldwyn referred to, trade, 
diplomacy, humanitarian, all the other efforts that----
    Dr. Ottaway. And development assistance, yes.
    Senator Hagel. Thank you.
    Robin West, would you like to respond to any of this?
    Mr. West. Yes. One point I would like to make is I think 
that in fact--and Dr. Ottaway wrote an excellent paper which if 
one is interested in the subject, I commend to you, on what is 
the role of the oil companies. But it is important to recognize 
in places like Mexico and Venezuela, the international oil 
company has had little or no presence.
    In West Africa, I think that it is the international oil 
companies, sometimes encouragement from other parties, but they 
are becoming some of the most productive agents for change. 
They actually have much bigger presence in the country than any 
foreign government, and in some cases they are trying to put 
pressure because they feel sensitive from pressure in their 
home countries. But they actually have been a conduit to help 
try and move some of this. There are limits to what they can 
do, but I think in recent years that they tried to be 
constructive.
    Dr. Ottaway. If I can add on that point, I think the oil 
companies have taken almost a disproportionate share of the 
burden for local government in a place like Nigeria, for 
example. The oil companies end up running entire towns, 
providing whatever education is provided, and so on.
    Where there is more reluctance, understandably so, on the 
part of the oil companies is to deal with the national 
government and particularly to make available internationally 
some of the figures about oil production and oil payments and 
how much money is being paid into the coffers of these 
governments. That is one area where I think there is room for 
improvement. I do not expect the oil companies to end up 
becoming a substitute government for countries like Nigeria. I 
mean, that will not be very desirable. It is not their role.
    Senator Hagel. Thank you.
    Mr. Goldwyn, any thoughts on all this?
    Mr. Goldwyn. Just two. I think one is that I agree with Dr. 
Ottaway that you need a case-by-case approach. I think in each 
of these countries, we have got to ask ourselves, do we have 
any leverage and what is it and how do we use it? Is it 
bilateral? Is it multilateral? I think there is some urgency 
because a lot of these countries, particularly in West Africa, 
are going to be very, very rich very soon, not now, but if you 
look at the curve of how much revenue they are going to get, it 
is like this now and then it goes off the roof. We have 3 
years, 4 years, or there will be no touching these governments.
    So I think you have got to look at the leverage you have 
got now. Some of that is debt. Some of it is their need for 
capacity building. Right now some of it is their need for 
development assistance, but it is not really a money issue. It 
is creating a political environment where the people who have 
been on the wrong side of this question for a long time have a 
political motivation to change. That is part reputation and 
that is part monetizing future revenues for development now, 
and it is letting them be successful political leaders. So I 
think that is where our focus ought to lie is to use that sort 
of leverage.
    On the publish what you pay oil revenue question, it is an 
important issue, and I have to say I have struggled with it 
myself. I think if we could get to a place where governments, 
the U.S. Government and other governments, push producing 
governments to say we want companies to report aggregates of 
payments to the IMF and the IMF will publish those aggregates, 
I think you would find companies willing to do that. They are 
not going to violate confidentiality agreements. They are not 
going to take on the job of renegotiating anything with the 
government. It is not in their interest to do it. But if 
governments push governments for that kind of transparency and 
there is a level playing field so national oil companies like 
Saudi Aramco or PDVSA are also required to have their payments 
published, I think that is a formula. I think if you build that 
policy, the oil companies will come along because they will be 
respecting the will of the governments in which they are guest 
operators.
    Senator Hagel. Thank you.
    Mr. West, you wanted to respond?
    Mr. West. Yes. Two points. One is that my firm is doing an 
analysis for CSIS on West African oil revenues. In fact, we 
understand basically what the contracts are and the timing of 
the contracts and what production comes from the contracts. So 
we can get a pretty good idea of what the aggregate amounts of 
money that are flowing now.
    The second thing that is important to understand is how the 
contracts work in West Africa. Mr. Goldwyn is absolutely 
correct, that production will be surging, but there is a cost 
recovery factor that in fact the governments in the early days 
do not get that much money. It is in the out-years when they 
get a lot of free cash-flow. So understanding the nature of the 
contracts becomes very important to following the money.
    Senator Hagel. Dr. Ottaway.
    Dr. Ottaway. That is very important politically. Mr. West 
said something that is interesting; that is, his organization 
can get a pretty good fix on those figures. The population of 
the country cannot, and there is a great deal of misconception 
very often because nobody knows how much money is coming in. 
Very often people at the popular level develop this idea that 
there is a huge amount of money, and therefore everybody should 
be rich in the country. That is a mentality that has played 
havoc with the politics of a lot of oil-producing countries, 
that there is an exaggerated expectation of what oil revenue 
could do and how much is really coming and so on.
    Senator Hagel. I have been informed we are going to have a 
vote here shortly, but let me get to a point you made, Mr. 
West, in your testimony. You were talking about West Africa and 
I believe you said something to the effect that a lot of things 
are going right there. We heard not all the problems, but we 
have heard today about a lot of problems. Tell us a little bit 
about what you perceive is going right.
    Mr. West. Well, what is right is the investment environment 
and the fact is that the operations are offshore so there is 
less physical security issues. There is a world market in 
exploration rights. The governments and the companies 
understand that so that a lot of capital has flowed in. The 
point I tried to make is that there is more industry capital 
that has flowed in in recent years to West Africa than there 
has been to Russia, Latin America, or the Middle East. Most 
people are surprised when you say that. So the international 
companies have come in. They have stayed offshore. From a pure 
oil operations investment standpoint, it has worked pretty 
well. From a government standpoint, I am in complete agreement 
with my two committee members.
    But you have other situations. There are other countries 
where you have very dubious governments and you also have very 
unstable operating regimes. So the glass is half full at least 
in West Africa.
    Senator Hagel. Does anyone else want to respond to that 
question?
    Dr. Ottaway. No.
    Senator Hagel. Unless the three of you have any additional 
comments, I am going to adjourn our subcommittee hearing, but I 
want to again, on behalf of the committee, thank you for your 
testimony. It is important. We will, as we often do, be back to 
you for more assistance and get your counsel on these big 
issues. These are issues that are as important as any we are 
dealing with and will deal with for many years to come. So your 
contributions are important and we appreciate it very much. 
Thank you.
    [Whereupon, at 4:33 p.m., the subcommittee adjourned, to 
reconvene subject to the call of the Chair.]