[Senate Hearing 111-105]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-105
 
        $150 OIL: INSTABILITY, TERRORISM AND ECONOMIC DISRUPTION

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



                                HEARING

                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2009

                               __________

       Printed for the use of the Committee on Foreign Relations


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


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                COMMITTEE ON FOREIGN RELATIONS         

             JOHN F. KERRY, Massachusetts, Chairman        
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin       Republican Leader designee
BARBARA BOXER, California            BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   JIM DeMINT, South Carolina
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
JEANNE SHAHEEN, New Hampshire        ROGER F. WICKER, Mississippi
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
                  David McKean, Staff Director        
        Kenneth A. Myers, Jr., Republican Staff Director        

                              (ii)        



                            C O N T E N T S

                              ----------                              
                                                                   Page

Carter, Hon. Phillip, III, Principal Deputy Assistant Secretary, 
  Bureau of African Affairs, Department of State, Washington, DC.     5
Schmierer, Dr. Richard J., Ambassador to Oman, Department of 
  State, accompanied by Hon. William Hudson, Acting Deputy 
  Assistant Secretary, Bureau of Near Eastern Affairs, Department 
  of State, Washington, DC.......................................     8
Kerry, John F., U.S. Senator from Massachusetts, opening 
  statement......................................................     3
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1
Morningstar, Hon. Richard L., Special Envoy for Eurasian Energy, 
  Department of State, Washington, DC............................     9

              Additional Material Submitted for the Record

Nabucco--European Project and Gas Pipeline Project...............    29

                                 (iii)



       $150 OIL: INSTABILITY, TERRORISM, AND ECONOMIC DISRUPTION

                              ----------                              


                        THURSDAY, JULY 16, 2009

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, presiding.
    Present: Senators Kerry, Feingold, Cardin, Casey, Shaheen, 
Kaufman, and Lugar.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    Senator Lugar. The chairman has asked me to call the 
hearing to order. He will be with us in a few minutes, but as a 
courtesy to our distinguished witnesses, and all who have 
joined us today, we'll begin now. I'll give my opening 
statement, and then I know the chairman will want to speak.
    I begin by thanking the chairman for calling this hearing, 
which continues the Foreign Relations Committee's multiyear, 
bipartisan efforts to examine the role of energy in our foreign 
policy. Energy security is a critical factor affecting nearly 
all of today's foreign policy challenges. The American public 
increasingly understands that greater energy independence is a 
national security necessity, and that energy security should be 
a top diplomatic priority of our Government.
    Three days ago, in Ankara, Turkey, Ambassador Richard 
Morningstar, who is with us today, and I, represented the 
United States at the signing of a milestone treaty on the 
development of the Nabucco natural gas pipeline. Nabucco will 
be a vital link in the East-West corridor that will connect the 
oil and gas rich Caspian region with Europe.
    During the past 4 years, Russia has repeatedly demonstrated 
its intent to use its dominant position in European natural gas 
markets to project its influence across Europe, the Caucasus, 
and Central Asia. Nabucco will help diversify gas supplies to 
many European countries. In the process, it will bring more 
competition and transparency to natural gas markets, and it 
will reduce the coercive potential of Russia's natural gas 
dominance.
    The significance of the Nabucco agreement is far greater 
than the natural gas it will carry. Agreement on Nabucco is a 
bold demonstration that governments representing diverse people 
and interests can overcome divisions, and it required 
substantial agreement on energy security between European Union 
nations, Turkey, Georgia, Azerbaijan, and the United States. 
It's a signal to the rest of the world that partner governments 
will not acquiesce to manipulation of energy supplies for 
political ends, and also has the potential to build new avenues 
for peaceful cooperation.
    This prospect was illustrated in the meeting that 
Ambassador Morningstar and I enjoyed with the Iraqi Prime 
Minister Maliki after the Nabucco signing this week. He 
indicated his desire to export natural gas via Nabucco, thus 
raising an opportunity for Iraq to establish stronger 
cooperation with Turkey and beyond, and raise money for the 
substantial postwar rehabilitation of his country.
    American diplomacy has been extremely important in moving 
the Nabucco project to this point. I want to recognize the 
special efforts of Ambassador Boyden Gray in 2008. Although the 
United States is neither a customer nor a producer of the 
natural gas that will traverse the pipeline, steadfast American 
support over many years was instrumental in keeping Nabucco on 
the agenda and bolstering the confidence of partner countries.
    Long-term, strategic thinking on energy security is needed 
across U.S. foreign policy. That is one reason that I authored 
legislation creating an international energy coordinator at the 
State Department. My conversation with Secretary Clinton 
indicated that this appointment will be made soon, and I am 
hopeful the energy coordinator will work to ensure that energy 
is at the top of our foreign policy agenda.
    In today's hearing, we'll focus on key oil and gas 
producing areas of the Middle East, Africa, and the greater 
Caspian region, where political developments have major 
consequences for global prices and markets. A global economic 
downturn has reduced energy demand, bringing price relief to 
consumers and greater flexibility to markets, for the moment.
    But predictably, the recession has also led to falling 
investment in the energy sector. The International Energy 
Agency projects that global investment in oil and natural gas 
production will fall by $100 billion in this year. Just last 
week, OPEC announced sharp reductions in production investment. 
These cuts come at a time when more investment is needed to 
counteract high oilfield decline rates. When major economies 
start to recover, energy demand will rebound, causing markets 
to tighten and prices to rise. Under such conditions, markets 
will be highly susceptible to vulnerabilities that can produce 
severe supply shocks.
    Three vulnerabilities stand out as areas of concern for 
energy diplomacy. First, instability and conflict may disrupt 
energy flows and undermine needed investment. Second, 
governments may make supply and investment decisions based upon 
politics, and not economics. And finally, terrorist activity 
may threaten major energy infrastructure.
    In the near term, if we fail to address these 
vulnerabilities, the prospects for economic recovery could be 
seriously imperiled. An oil price shock that hits just as the 
recovery is beginning and demand for energy is increasing would 
likely generate inflation, undermine market confidence, and 
increase the risk of conflict. Over the longer term, even if we 
hope for a conversion from a fossil-fuel-dominated economy to 
one that depends much more on renewable resources, failure to 
maintain consistent supplies of oil and natural gas in the 
interim could be debilitating to our economy and to our 
national security.
    These are problems that require cooperation with other 
governments. We can work on long-term U.S. energy independence 
largely through domestic efforts, but short-term and medium-
term energy security is highly dependent on the decisions, 
investments, and political attitudes of other countries. 
Consequently, there are few topics on which U.S. foreign policy 
has a greater responsibility to engage.
    I welcome, along with the chairman, our very distinguished 
witnesses this morning. We look forward to their insights in 
these matters.
    Mr. Chairman, I thank you for----
    The Chairman. Thank you very much.
    Senator Lugar [continuing]. Allowing me to proceed.

      STATEMENT OF HON. JOHN F. KERRY, U.S. SENATOR FROM 
                         MASSACHUSETTS

    The Chairman [presiding]. On the contrary, I thank you for 
proceeding, and I apologize for being momentarily delayed. 
Senator Lugar, thank you for your introductory comments; I am 
grateful to the panel as well for being here today. Dick 
Morningstar is a great old friend, and I am delighted that you 
traveled with the ranking member in these last days. We're 
happy to have all of you here.
    Let me beg your indulgence up front. Senator Kennedy has 
asked me to introduce a Massachusetts citizen to another panel 
where she is being heard today for confirmation. So I'm going 
to duck out of here in a few minutes to go do that. But, let me 
say up front a few things about this topic that brings us here 
today.
    First of all, there is a striking overlap between the 
world's sources of energy and the world's sources of 
instability. And we need to take careful note of that. Iran, 
Iraq, Sudan, Russia, the Caucasus, Nigeria, Venezuela, are all 
on the front lines of our energy supply challenge, but also on 
the fault lines of our geopolitics.
    Too often, our foreign policy debate has failed to reflect 
the importance, the connectedness, if you will, of this issue. 
Look back to President Carter: Back in the 1970s, he tried 
valiantly to make this connection clear to our country and set 
us on a path, but regrettably, we diverted from that path and 
have done so frequently. Senator Lugar has worked over many 
years to adjust that balance, and I'm grateful to him for his 
leadership in that effort. He's exhibited vigilance and 
leadership, and particularly in the development of biofuels.
    It may seem a little strange to some people that we're here 
discussing $150 oil barrel, with the price hovering in the $60 
range. But, given the incredible volatility of recent years, 
today's price is not the measurement of urgency. The volatility 
itself is a major problem in its own right. Last year, we 
almost reached the $150 per barrel. By the beginning of this 
year the price had plummeted to less than $35 a barrel. Since 
January, we've seen prices double. These dramatic swings are, 
frankly, devastating to the economy, and make it very difficult 
to conduct business planning, investment, and so forth.
    As the cost of oil soared last summer, gas prices rocketed, 
airlines cut routes, raised prices, businesses closed 
factories, trade slowed, and our economy began to plunge. Even 
with the lower prices today, the recent instability has left 
existing businesses reluctant to expand, and discouraged new 
businesses from opening.
    According to the McKinsey Global Institute, price 
volatility is going to continue. They predict another spike 
somewhere between 2010 and 2013--I suppose that's the freedom 
you have in economic predictions--just as our economy gets back 
into gear. However, they, and many others, see a solution: 
Manage the demand.
    Globally, we can reduce demand by up to 11 million barrels 
by 2020, at little or no cost, through higher energy 
efficiency, natural gas substitution, and the removal of 
subsidies internationally. That is more than the entire output 
of Saudi Arabia in 2008. Of course, we also have to understand 
and address the stability of our supply.
    Many argue that it was the shortage of spare capacity that 
fueled last year's price spikes. The good news is, new 
production may be coming down the pipeline. In Iraq, BP and 
CNPC, the winning bidders on the Rumaila oilfield, believe that 
they can increase production by 1.85 million barrels per day, 
roughly equivalent to France's oil use in 2008. Saudi Arabia is 
bringing another 1.2 million barrels per day online, and is 
committed to maintaining spare capacity of 1.5 to 2 million 
bbl/d to avoid future shocks.
    The bad news is, supply risks are simultaneously growing. 
In Nigeria, the militant group MEND has been, regrettably, 
successful in taking oil infrastructure offline, cutting oil 
flows nearly in half, and leaving exports significantly below 
the government's target. These conflicts are not easy to solve. 
MEND announced a cease-fire yesterday, which, after just a few 
hours, was already on the ropes.
    Underinvestment is another risk to supplies, straining the 
ability of Russia and other countries to bring new capacity 
online. Now, of course, as Europe was painfully reminded during 
the standoff between Russia and Ukraine, energy security 
extends beyond oil. Several European nations were left without 
a vital source of natural gas during a cold winter. The risks 
of undiversified supply can be profound.
    Again, I want to thank Senator Lugar for his leadership in 
this arena. As he mentioned in his opening statement, he has 
just returned from representing the United States in Ankara at 
the signing of the intergovernmental agreement on the Nabucco 
pipeline, which is going to bring natural gas from Iraq and the 
Caspian region through Turkey and into Europe. His advocacy 
played a critical role in moving plans for this pipeline 
forward, and in furthering the goals that we all share: 
Diversity in energy supply and free market access.
    So, before turning to the panel, let me just raise one 
final point about energy security. This is an important point, 
which we're spending a lot of time talking about now, and 
working on here in the Senate: We have to think not only about 
the threat to our carbon-based energy supply, but we also have 
to think about the threat that our carbon-based energy supply 
poses to us. Energy and climate security must ultimately 
advance hand in hand, and we need to keep both of these at the 
forefront of our energy policy as we go forward.
    We're very fortunate to have with us today four 
distinguished experts to discuss, region by region, current and 
future challenges to our supply of energy. As I mentioned, 
Ambassador Richard Morningstar is an old friend of mine. 
Special Envoy for Eurasian Energy, he has been covering these 
issues for years as Ambassador to the EU and special adviser 
for Caspian Basin energy diplomacy, and has just returned from 
a successful visit to Turkey with Senator Lugar.
    Ambassador Bill Hudson, Acting Deputy Assistant Secretary 
of State for Near Eastern Affairs, has had a long and 
distinguished career with the Foreign Service, serving 
previously as our Ambassador in Tunisia and opening our Embassy 
in Kabul.
    Ambassador Richard Schmierer, Deputy Assistant Secretary of 
State for Near Eastern Affairs, was just confirmed last week, 
and will be heading to Oman shortly as our Ambassador. He 
previously served as Director of the Office of Iraq Affairs.
    Ambassador Phil Carter, Principal Deputy Assistant 
Secretary of State for African Affairs, brings a wealth of 
experience on West African issues, having served as our 
Ambassador in Guinea, and Director for West African Affairs.
    We have a great deal of expertise at the table, and we're 
very grateful to all of you for being here today. I look 
forward to your testimony.
    And we'll begin with you, Ambassador Carter, if you'd 
start, and we'll just run right down the line, unless you guys 
have worked out a different scheme. Does that work for you? 
Thanks. OK.

    STATEMENT OF HON. PHILLIP CARTER III, PRINCIPAL DEPUTY 
 ASSISTANT SECRETARY, BUREAU OF AFRICAN AFFAIRS, DEPARTMENT OF 
                     STATE, WASHINGTON, DC

    Ambassador Carter. Mr. Chairman and Ranking Member Lugar, I 
would like to thank both of you, as well as the rest of the 
committee, for inviting the Bureau of African Affairs to 
participate in today's hearing.
    The Chairman. Is your mike on? Can you pull it a little 
closer?
    Ambassador Carter. OK. I would also like to commend the 
committee for its report of October 2008, on the Petroleum and 
Poverty Paradox. It is quite useful, quite insightful, and 
something that we're all taking on board.
    In his recent visit to Accra, Ghana, President Obama 
impressed upon African leadership the paramount importance of 
governance, the rule of law, and eradicating corruption. By 
highlighting governance, the President distilled a core reason 
as to why Africa--in particular, oil-producing states--has not 
fully benefited, either politically or economically, from its 
natural resource wealth.
    In line with the President's message, we have been working 
in earnest with governments in sub-Saharan Africa to assist 
them in drafting and implementing the necessary legal, 
judicial, and economic reforms to help improve governance and 
curb graft. Many governments must improve their poor records of 
corruption, governance, human rights, and democratization.
    In many countries, only a small percentage of the 
population has benefited from natural resource revenues. Few 
governments have developed plans for the prudent and well-
intentioned use of oil or mineral profits. Rampant economic 
instability undermines peace and security efforts. Moreover, 
undiversified and single-export economies have resulted in a 
``Dutch disease'' effect that has stunted economic growth and 
breadth across other sectors, most notably agriculture. Energy 
security, although important, is but one component in a broad 
range of issues--such as health, human rights, governance, 
democracy, and the environment--encompassing United States-
African relations. But, in the end, the key to energy security 
in Africa is good governance.
    As a net importer of oil, the United States relies on a 
diversified and extensive list of suppliers to import the 
approximate 12 million barrels per day to meet our current 
consumption needs. Two of the top 10 oil suppliers to the 
United States, Nigeria and Angola, are located in sub-Saharan 
Africa. Nigeria is our fifth-largest oil supplier, with around 
661,000 barrels per day to the United States, and Angola is our 
seventh, with around 582,000 barrels per day.
    United States companies operate extensively in these 
countries, as well as in Cameroon, Chad, Equatorial Guinea, and 
Gabon. Because there are direct shipping lines between Africa's 
west coast and the United States, West African states are 
strategically positioned to supply oil to the United States. 
Yet, in spite of their geographic advantage, these countries 
still face many challenges. As you mentioned, Mr. Chairman, 
Nigeria, in particular, must address Niger Delta militant 
activity, the shut-in of available oil, oil bunkering, gas 
flaring, and gas-sector expansion, and the environmental impact 
of the energy sector.
    The attacks in the Niger Delta are best described as 
routinely criminal. They do not represent the political vision 
of people striving for greater political rights and development 
for the region. Their frequency and potency demonstrate the 
challenges for the Nigerian Government's ability to provide a 
secure environment for the people of the Niger Delta. The 
criminal acts are costly to the Nigerian people through stolen 
oil, lost opportunity, and infrastructure destruction.
    Nigeria has the capacity to produce over 3 million barrels 
per day. However, recent anecdotal reports suggest that it's 
producing less than half of that. Poor governance and endemic 
corruption have also denied the vast majority of Nigerians hope 
for a better economic future. Despite its GDP of $220 billion, 
92 percent of Nigerians live on less than $2 a day. These 
economic challenges exacerbate Nigeria's already weak 
governance and security institutions.
    In addition to the criminal attacks on oil structures, and 
kidnapping in certain areas of the country, Nigeria also 
suffers economically from lost opportunities in gas, as a 
result of frequent gas flaring, which is also a detriment to 
the environment. In late May, senior Nigerian Government 
officials invited a United States team, led by a senior deputy 
official from the Bureau of Energy, Economics, and Business 
Affairs, Deputy Assistant Secretary Doug Hengel, to Abuja, to 
discuss energy and environment issues that focused on 
mitigating Nigeria's contribution to greenhouse gases, 
including flared gas, and deforestation. In addition, the 
United States Government, though USAID and other United States 
agencies, is working with the energy sector to reduce gas-
flaring and help support the Nigerian Government's desire to 
end all flaring by early 2010.
    More robust and better-developed liquefied natural gas and 
liquefied petroleum gas sectors would not only curb Nigeria's 
gas-flaring, but would also effectively address concerns about 
global climate change impacts, as LNG burns more cleanly than 
gasoline. Increased LPG availability would also help displace 
the use of kerosene and firewood.
    In short, we cannot imagine a peaceful and prosperous 
Africa without a peaceful and prosperous Nigeria. We intend to 
direct greater diplomatic engagement with the Government of 
Nigeria to help bring stability and strong institutions to 
Africa. And, although there is much work remaining for Angola, 
its desire to diversify and revitalize its economy--speaks to 
the determination of its people to overcome its tumultuous 
past. Angola's September 2008 parliamentary elections, where 
more than 8 million Angolans voted during the country's first 
poll in more than 16 years, were a testament to the will of the 
Angolan people to build a new Angola.
    Angola's internal economic revitalization, emanating from 
its national reconstruction program, is another sign of change 
in Angola, and is receiving international attention. In support 
of this ambitious and meticulous reconstruction program, the 
U.S. Department of Agriculture announced that it will provide 
$23.3 million through the McGovern-Dole Food for Education 
Program, to assist women, children, and other vulnerable 
populations, to help Angola reach its food security and self-
sufficiency goals.
    Beyond Nigeria and Angola, the United States continues to 
work with international and West and Central African partners, 
to strengthen national and regional capacities to deter and 
mitigate challenges, such as armed robbery at sea, illegal 
fishing, trafficking in persons, arms, and illicit material, 
and terrorism. For example, the United States Navy has helped 
to train Gulf of Guinea states' navies, including those of 
Gabon, Nigeria, and Cameroon, through the Africa Partnership 
Station Initiative. The United States is supporting this 
important work, as are an increasing number of international 
partners, such as the European Union and the International 
Maritime Organization.
    The African Union and subregional organizations such as the 
Gulf of Guinea Commission, the Maritime Organization of West 
and Central Africa, and the Economic Community of Central 
African States, are increasing their political awareness, and 
continuing to marshal and coordinate resources to maintain 
maritime security goals.
    In order to encourage effective governance, the United 
States Government works through the Extractive Industries 
Transparency Initiative, EITI. EITI and natural resource 
revenue transparency are part of our comprehensive, 
anticorruption strategy and international energy security 
strategy. EITI aims to improve fiscal transparency between 
extractive industries and the host governments of the countries 
in which they operate. Governments, the private sector, and 
civil society comprise EITI's three constituent groups.
    The price of oil is approximately $60 per barrel today, 
less than half of its historic high in July 2008. Oil prices 
will continue to vary. But, sub-Saharan Africa offers a 
strategic and increasing percentage of United States oil 
imports. Partnering with willing African Governments to 
effectively use natural resource revenues to develop 
transparent, accountable, and democratic institutions will not 
only serve the United States national interest as we work to 
grow a greener economy that is less dependent on fossil fuels, 
but will ultimately allow Africans to take responsibility for 
their own futures, a point underscored by President Obama in 
Ghana.
    Thank you very much, and I look forward to answering your 
questions.
    Senator Lugar. Thank you very much, Ambassador Carter.
    Ambassador Schmierer.

    STATEMENT OF DR. RICHARD J. SCHMIERER, DEPUTY ASSISTANT 
SECRETARY FOR IRAQ, BUREAU OF NEAR EASTERN AFFAIRS, DEPARTMENT 
 OF STATE, WASHINGTON, DC, ACCOMPANIED BY HON. WILLIAM HUDSON, 
   ACTING DEPUTY ASSISTANT SECRETARY, BUREAU OF NEAR EASTERN 
          AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC

    Dr. Schmierer. I'd like to thank the chairman, Ranking 
Member Lugar, the other members of the committee, for the 
invitation to appear here today and represent the Bureau of 
Near Eastern Affairs at the Department of State.
    I'm very pleased to be joined by my colleague Ambassador 
Bill Hudson, Acting Deputy Assistant Secretary of State 
responsible for Arabian Peninsula and Maghreb Affairs. With 
your permission, I'd like to make a few opening remarks, on 
behalf of Ambassador Hudson and myself, on the importance of 
the Middle East to U.S. energy requirements.
    We should start by considering a number of key facts 
concerning the importance of the Middle East and North Africa 
to the United States. The Middle East alone holds two-thirds of 
the proven world's oil reserves. Seventy-eight percent of these 
reserves are held by OPEC members. And, as a net importer of 
oil, the United States reliance--and that of Europe and Japan--
on petroleum imports from the Middle East and North Africa is 
significant, and it's growing.
    Petroleum imports from Saudi Arabia, Algeria, Iraq, and 
Kuwait account for some 21.6 percent of our overall imports. 
The security of the U.S. energy supply is therefore very much 
part of our diplomatic and economic relationship with the key 
suppliers in the region. Our overarching approach to engaging 
the region is to pursue policies which promote regional 
stability, particularly in the gulf region. Stability helps 
reduce price volatility and its wider impact on both the United 
States and the global economy.
    In this context, a productive and important interlocutor 
has been Saudi Arabia. Guaranteeing adequate petroleum supply 
is a significant theme of our energy security relationship with 
Saudi Arabia. The Kingdom is the world's leading producer and 
exporter of total petroleum liquids, and the third-largest 
petroleum supplier to the U.S. market. As OPEC's major swing 
producer, Saudi Arabia plays a crucial role in supplying world 
markets with a stable and reliable source of petroleum.
    The United States also continues to develop and cultivate 
its relationships with other key oil-producing states in the 
region. Kuwait, the United Arab Emirates, Qatar, and Algeria 
are all vital partners in the energy field.
    Iraq is also of growing importance in the world energy 
market. It has the third-largest conventional oil reserves in 
the world, approximately 115 billion barrels, and the tenth-
largest gas reserves in the world. However, due to years of 
war, sanctions, and underinvestment, Iraq's oil production 
remains flat.
    In North Africa, Algeria remains an important player in our 
international energy strategy. It is the world's third-largest 
producer of natural gas, and the ninth-largest producer of oil. 
Algeria is a leader in liquefied natural gas technology, and is 
developing solar and other renewable energy technologies.
    Let me close my remarks by addressing the important issue 
of physical energy infrastructure security. In response to the 
attempted attack, in 2006, on one of the world's largest oil 
facilities, Abqaiq, in Saudi Arabia, we are partnering with 
Saudi authorities in the field of critical infrastructure 
protection. In May of last year, the United States and Saudi 
Arabia signed a technical cooperation agreement aimed at 
providing a framework for this cooperation. Under this program, 
the United States is providing the Saudi Minister--Ministry of 
Interior--with technical assistance and advice to support 
safeguarding the kingdom's critical infrastructure. We have 
established a dedicated interagency office in Riyadh to 
implement projects related to United States/Saudi critical 
infrastructure cooperation. This project offers yet another 
example of the partnership between the United States and Saudi 
Arabia on a long list of issues of mutual interest.
    Thank you very much, and I look forward to answering any 
questions you may have.
    Senator Lugar [presiding]. Thank you very much, Ambassador.
    Secretary Hudson, do you wish to testify, or are you a team 
today?
    Ambassador Hudson. Yes, sir, we're a team, together.
    Senator Lugar. Very good. Thank you.
    I'd like to recognize, now, Ambassador Morningstar.

  STATEMENT OF HON. RICHARD L. MORNINGSTAR, SPECIAL ENVOY FOR 
      EURASIAN ENERGY, DEPARTMENT OF STATE, WASHINGTON, DC

    Ambassador Morningstar. Thank you, Senator Lugar.
    Senator Lugar and distinguished members of the committee, 
it's a great pleasure to be here today to talk about one of the 
important pillars of U.S. diplomacy: Energy security. And I'd 
like to thank the committee for inviting me to talk to you 
about what the United States is doing with regard to energy 
security in the Eurasia area.
    Before I get into the details, I'd like to express 
appreciation to Senator Lugar for the priority that you have 
placed on global energy security as a foundation for peace and 
security. I had the honor of traveling with you to Ankara 
earlier this week to represent the United States at the signing 
ceremony of the Intergovernmental Agreement on Nabucco. And I 
think that our presence there together underlined the strong 
bipartisan approach that we have on these issues.
    And the Nabucco agreement is a major milestone in opening a 
new natural gas corridor to Europe. It demonstrated the 
commitment of Turkey, and the other participating countries, to 
that project and to the needs of Europe. And this signing 
should provide a great impetus to the project. But, we also 
have to remember that there are still many steps that have to 
take place for the project ultimately to achieve reality.
    As you mentioned, Senator, one of the most interesting 
aspects of our day there was that Prime Minister Maliki 
attended the ceremony and announced that Iraq would like to 
supply 15 bcm to the Nabucco pipeline. Again, it's a long way 
from here to there, as indicated by the discussions we had in 
our meeting with him after the ceremony. But, it's significant. 
It's still very significant that he was there, and that he 
talked about participation in the project.
    What is our strategy with respect to Eurasian energy 
security? I would argue that there are three main components.
    First, we want to encourage the development of new oil and 
gas resources, and also promote efficiency and conservation in 
the use of all energy resources. Because there is a world 
market for oil, new production can meet growing demand anywhere 
in the world, including in the United States. When we're 
talking about new natural gas production in the Caspian region, 
it's unlikely that even one molecule of that gas will reach the 
United States. But it's still important, because it will add to 
the international gas supply. Additional supply in one place 
naturally frees up supply in another. And as the market for 
liquefied natural gas grows, we can start to think about gas 
moving around markets in much the same way that oil does.
    Second, we want to assist Europe in its quest for energy 
security. Taking goods and services together, the EU and the 
United States account for the largest bilateral trade 
relationship in the world. And Europe is our partner on any 
number of global issues. We have an interest in an economically 
strong Europe.
    Of course, Europe is composed of many different states, and 
energy security is a more pressing issue to some than to 
others. But, there are some countries in Europe that do not 
have a diverse energy mix, and depend to a great degree on one 
supplier and on one transport route. When that route is 
disrupted, as we witnessed in January 2009, the consequences 
can be severe. The populations of Bulgaria and Serbia, and 
other countries who suffered in the cold, can attest to that. 
So, our aim is to encourage the development of multiple energy 
sources, with multiple routes to market. This approach furthers 
competitive, efficient markets and the best prices for 
consumers.
    Third, we want to help the Caspian and Central Asian 
countries find new routes to the marketplace. We want to help 
foster economic growth and prosperity in these countries. By 
expanding export routes they can increase competition for their 
resources, and they can demand a higher price. And, in 
addition, as a corollary, I think that Turkey's involvement in 
the Caucasus and Central Asian region is critically important 
in helping those countries develop their economy and in 
maintaining their independence.
    Some people have portrayed our energy policy, and Russia's, 
as the next great game in Central Asia, and I would reject this 
analogy. Energy security should not be a zero-sum game. Zero-
sum games are too expensive these days, and we need to find 
ways where we can at least try to cooperate with Russia in the 
energy area.
    In this spirit, on July 6 the White House announced a new 
binational Presidential commission with Russia that will cover 
a host of different issues, including energy. We look forward 
to that engagement, and we hope that progress can be made in 
areas that we can agree on.
    How will we achieve our energy security goals? Well, 
private sector and free-market forces are the primary means 
through which oil and gas are produced, transported, and 
purchased. But governments can and should play a facilitating 
role. Governments should put in place the right business 
climate to attract investment, and should work with neighboring 
states to expand the market and increase interconnectivities. 
And we can encourage these efforts.
    At the heart of our policy is the belief that energy 
security is best achieved through diversity--diversity of 
suppliers, diversity of transportation routes, and diversity of 
consumers. We support, strongly support opening a new corridor, 
a southern corridor, to bring Caspian natural gas to Europe. 
This corridor could include Nabucco--and we'll work strongly 
toward that end--and could include the Turkey-Greece-Italy 
interconnector, both of which we support.
    These projects are extremely important from a 
diversification and from a strategic standpoint. They can help 
open up further upstream development, not just in Azerbaijan, 
of which there's been a lot of discussion, but also in 
countries such as Turkmenistan and Iraq, and will form a long-
term bond between Turkey, the countries of the Caspian region, 
and Europe.
    I should also add--I've talked a lot about gas, but oil is 
also critically important, and we support further production of 
oil in Kazakhstan, and new export routes from Kazakhstan to 
world markets. We can discuss that further if you have any 
questions on that.
    It's also important to emphasize that new pipelines alone 
will not sufficiently provide for Europe's energy security, and 
the United States supports the other initiatives that Europe is 
undertaking to increase its own energy security. Those 
initiatives focus on building a single market for energy, 
unbundling the distribution and supply functions of energy 
firms, building interconnectivity of European gas and 
electricity networks, enhancing LNG import capabilities, and 
increasing gas storage. All of these are pieces of the puzzle 
that will ensure European energy security.
    To summarize, the key to achieving our Eurasian energy 
strategy is engagement. We need to continue to engage with the 
private sector, with the EU, with individual European states, 
with Turkey, with Russia, and with the Caucasus and Central 
Asian nations. Our job is to listen, to identify common 
interests and priorities, and to play a facilitating role where 
we can.
    Thank you very much.
    Senator Lugar. Well, thank you very much, Ambassador 
Morningstar.
    We'll adopt a 10-minute question period for members as we 
question our panel members today. The Chair would like to 
mention that the Nabucco gas pipeline project handout has been 
made available, I believe, to committee members, but I'd like 
to make it a part of the record; by unanimous consent we'll do 
that.
    Senator Lugar. Let me begin the questioning with you, 
Ambassador Schmierer. You've heard Ambassador Morningstar 
discussing our visit with Prime Minister Maliki. One of the 
features of that visit was his concern that, in northern Iraq, 
contracts were being signed prior to passage of the long-
awaited petroleum legislation, and already smaller companies, 
by and large, perhaps feeling that this was worth the risk, 
have signed on. What is going to be the evolution of these 
contracts, and what is your prediction with regard to the 
petroleum law, and, for that matter, do you predict some coming 
together of Iraq as a country before too many transactions 
occur that may have implications down the road?
    Dr. Schmierer. Well, Senator, thank you very much. I think 
you've actually hit all the key issues right on the head. 
First, I just want to say that I was very pleased to see what 
did occur in Ankara with the Prime Minister, and really his 
commitment and his recognition of the importance of Iraq as a 
participant in stability and security in the energy spheres. I 
think that was a very important milestone, so it was very, very 
encouraging, for those of us who have been dealing with Iraq, 
to see that statement.
    As you've indicated, there are a number of issues that have 
prevented, to date, the Iraqis from finally coming together 
with their hydrocarbons package. And primarily, the fundamental 
one is the one that you cited, which is the difference between 
the Kurdistan Regional Government's view of who has the 
authorities, and the central government's view of who has the 
authorities. They continue to discuss it. There have been a 
number of drafts that have been introduced, but the Council of 
Representatives has decided not to proceed with that until they 
really have a political consensus and that's what's still being 
worked out.
    Now, there have been a number of positive practical 
developments. I think the one that you may be aware of is, 
recently both the Kurdistan Regional Government and the 
national government agreed on two contracts proceeding, such 
that two companies can now produce and export 50,000 barrels of 
oil a day from the Kurdistan region. And that, to me, 
represents a positive indication of a willingness to find 
compromises, to find middle positions. It's not a panacea, it 
doesn't solve all the problems, but it does indicate that both 
sides are looking for solutions.
    The recent bid round also was, I think, an important 
milestone, as much for what it taught the Iraqis and the major 
internationals as for what actually came out of it, which was 
not a significant amount of new oil agreements. But, I think it 
showed the Iraqis that there are some real benefits to bringing 
in the modern technology that the majors can bring, and I think 
it also convinced them that they really do have to offer 
incentives to get that investment. So, again, small steps, but 
I think those are important steps, and I think the commitment 
is there, and those two things together, we're hopeful, with 
support--we've been providing advice and support--will actually 
move this issue forward.
    Senator Lugar. Let me follow with another Iraq question. 
Certainly, at the Nabucco signing conference, the news that 
Iraq might provide as much as 15 bcm for the Nabucco pipeline, 
which has a capacity of 31 bcm, came as a startling 
development. Now, one of the skeptical aspects of Nabucco has 
always been: You can build the pipeline but who will provide 
the gas? Well, suddenly this announcement that Iraq might 
provide half of it--now, this has been modified by some, but 
probably at least 5 bcm, if not 15, a sizable contribution to a 
project that most of the world does not understand as being, 
essentially, a European supply situation--transiting through 
Turkey, with some use by the Turks, but then the pipeline runs 
north through Bulgaria, Romania, Hungary, and Austria.
    Now, the point that Ambassador Morningstar and I believe we 
heard Prime Minister Maliki make, in a broad vision of the 
future, is that a huge amount of reconstruction of Iraq is 
going to be required after the war. Furthermore, there is a 
need for a lot of infrastructure that never existed to begin 
with--it's not that it was destroyed--for example, power lines 
so that people can turn on the lights throughout the country. 
And this is going to cost tens, if not hundreds, of billions of 
dollars, ultimately.
    Ideally, in the ways of the world, the natural gas, and 
maybe, in due course, oil supplies coming out of a united Iraq, 
might provide this kind of capital. Such an outcome would be a 
miraculous happening and a wonderful ending to a very tragic 
period in their history. However, as a seasoned observer 
looking at Iraq, describe, really, the problems of this vision. 
Or does it have some degree of realism? In other words, as our 
overall look at Iraq envisions withdrawal of American troops, 
Iraq taking hold altogether of its affairs, is this provision 
of money and the potential infrastructure the beginning, 
really, of a new Iraq?
    Dr. Schmierer. Well, Senator, I think in very many ways it 
is, or at least the potential for such, and there are a number 
of very encouraging elements there. First of all, I think the 
leadership is committed, and understands the value of using 
those resources for the benefit of the Iraqi people, as you 
have described. The processes, the systems, are now fully 
transparent, so that even though there continues to be a 
problem of corruption in the country, the commitment to 
transparency and good governance, I think, will also play an 
important role.
    There are a number of very specific issues that will have 
to be addressed. I think you were made aware of those, in terms 
of production levels--associated gas--where the gas is. Those 
are things that do need to be addressed, but I think the 
strategic vision that you heard in Ankara is the important 
point to keep in mind.
    The Iraqis do recognize that these resources are something 
that can be used to make up for the underinvestment and the 
destruction that they've suffered over recent decades. I think 
there's a learning curve that's really beginning to kick in, in 
terms of understanding, now, sort of, how the new world works, 
particularly how the energy sector works. There continues to 
be--and I'm sure you heard this from the Prime Minister--
concern that these resources are for the Iraqi people, and so 
there's a great concern about any appearance that they're being 
made available to international oil companies in some way 
that's not absolutely appropriate.
    So, there's a sensitivity there. But I think the learning 
curve is really beginning to help both sides understand how 
they can cooperate. So, we're quite optimistic that, you know, 
if they can just get their internal issues together, the KRG 
and the national government, the rest, I think, will take off 
fairly rapidly.
    Senator Lugar. Thank you.
    Ambassador Carter, let me follow on your thoughts about 
Nigeria, a very, very important oil supplier to the United 
States, as well as to the rest of the world. And yet, there are 
real problems of engaging, or reengaging, in the Niger Delta. 
What is either our responsibility or the possibilities of the 
United States being able to work with Nigerians to bring about 
greater security for these resources? Is this perceived by 
Nigerians as intrusive in their business, even though it's our 
business when things are shut down and spikes in the futures 
markets occur with regularity? Describe, really, what the 
program might be for our country, or perhaps more what it is, 
in terms of bringing some regularity to this process.
    Ambassador Carter. Thank you, Senator. We are engaged 
currently with the Nigerian Government to look at the issues of 
the Niger Delta. Publicly we call on all the parties to 
persevere in their efforts to find some means to avoid 
violence, to develop some common ground. We have supported the 
discussions--the effort by the President Yar'Adua for this 
amnesty. But, the amnesty is only a part of the solution.
    The real problem for the Delta is governance. The problem 
of the Delta is corruption. And trying to engage the state 
governments is going to be key. We have started that process, 
but have a long way to go. We are working with them, with our 
bilateral resources, and trying to see the means by which 
international institutions, like the World Bank and others, can 
engage these state governments, as well as the Federal 
Government of Nigeria, to improve things like budget 
transparency, to work with civil society to put pressure on 
these state governments for the delivery of services in a 
transparent way. Those are the issues in which we are engaged.
    The Nigerians do not see this as their show. They recognize 
that this is something that they have to do, and it's also 
affecting the amount of energy available to the Nigerian 
economy. Ironically, Nigeria is a significant exporter of 
petroleum products, and yet they have a shortage of energy for 
their own use. Though--they see this as a problem they must 
solve, they are encouraged and look forward to working with us 
as we try to grapple with these problems.
    Senator Lugar. Well, thank you. I appreciate your 
highlighting the Nigerian situation and transparency as a 
general principle and likewise our involvement as a country, in 
ways that are diplomatically and economically successful.
    I would like to recognize, now, Senator Shaheen. Her 
distinguished colleague is pointing in that direction.
    Senator Shaheen. Well, thank you very much. I appreciate 
Senator Cardin's willingness to let me go first.
    I would like to follow up on Senator Lugar's questioning 
about Nigeria. I was there in both 2006 and 2007--before the 
elections, and during the elections in 2007--and couldn't agree 
more that governance is a major issue there, as we look at 
energy security.
    You talked a little bit about the kinds of efforts that we 
have underway to encourage civil society, and to encourage 
better governance. Is there a role for some of those private-
sector companies--oil companies that are benefiting from the 
oil that we're taking out of Nigeria, to also help promote 
better governance, more transparency, better business 
practices? And have there been efforts to engage them in that?
    Ambassador Carter. Madam Senator, yes, there have been 
efforts to engage the oil industry operating in the Niger Delta 
to improve their transparency. There have been direct efforts 
by parts of the Nigerian state governments, the federal 
government, as well as civil groups, to see how they can 
encourage civic activities by these firms. There has been some 
degree of work in that venue. But, more can be done.
    The real challenge, however, concerns what happens when 
oil-generated revenues are provided to the state governments. 
The Nigerian Government had established a program, with the 
support of the IMF and World Bank, to improve the transparency 
and accounting of those revenue flows to the federal 
government. The challenge was that, when they then provided 
these funds to the state governments, transparency just simply 
vanished.
    And that is the key. In my view, the key to getting 
ourselves on a road to resolving the problems of the Niger 
Delta is to engaging the state governments. The issue at hand 
for the companies that are there is that they work with civil 
society groups on certain levels, but their view is that, you 
know, our job is to pump the oil and provide the revenues. How 
that is moved forward is an issue.
    Looking at EITI, working with the World Bank, we need to 
ensure that the oil revenues to the federal government remain 
transparent. And we need to work even more aggressively with 
the local governments to essentially copy that effort.
    Senator Shaheen. I certainly would agree with that, that 
the Governors in Nigeria, by and large, did not share the 
commitment to transparency, and corruption was rampant.
    Let me change the subject and ask the rest of the panelists 
to give us your thoughts about NATO and its role in energy 
security. As you know, NATO is reviewing its strategic concept 
document, and I wonder if you think that energy security should 
be higher on the priority list for NATO as it looks at the 
challenges facing its member countries in Europe. And I would 
open it up to anybody who would like to answer.
    Ambassador Morningstar. I think they're pointing to me, 
Senator. I think that energy security should play a prominent 
role with NATO. The issue is what kind of actions can NATO 
take? And that's a lot more difficult than the general 
principle. There's a lot of talk, for example, about Article 5. 
Well, would there ever be agreement among NATO nations for 
Article 5 to actually be invoked in the event of an energy 
crisis?
    I think, from a more pragmatic standpoint, that NATO should 
work with its Member States to urge them and help them and 
encourage them to take the kinds of actions that will, in fact, 
protect them in the case of interruptions. NATO should work 
with the members of the North Atlantic Council, for example. 
The NATO political operation should be going back to their home 
governments and talking about the steps that need to be taken. 
If there had been more interconnectivity among European 
countries during the Ukrainian gas crisis, the crisis would 
have been lessened.
    Likewise, if there's a Nabucco--Nabucco isn't going to cure 
all of Europe's problems, but it would have created a diverse 
source of supply to those countries that were most adversely 
affected by the gas shutoff.
    So, I think that energy security is a national security 
issue. I think there's a limit to what NATO can do, but it 
certainly has a role in working with countries to make sure 
that those countries are taking all the steps necessary to 
protect themselves.
    Senator Shaheen. And do you see the kind of role that you 
just identified as being on the agenda for NATO? Do you see--is 
that in their vision for what they should be doing?
    Ambassador Morningstar. Well, I shouldn't speak for the 
people who are working on NATO in our Government. I think we 
do. And I think we need to encourage other Member States to 
take a similar view.
    Senator Shaheen. Thank you. Anybody else want to weigh in 
on that?
    [No response.]
    Senator Shaheen. I was interested that, in all of the 
testimony this morning, that nobody mentioned Iran. What role 
does Iran play, as we look at the energy security needs in the 
future, and what impact does our policy with respect to Iran 
have on our energy issue--interests in the region, and on the 
potential for Iranian resources to provide additional help to 
Europe?
    Dr. Schmierer. Of course, at present, our policy toward 
Iran is overshadowed by the sanction regimes associated with 
addressing the nuclear issue. And so, in terms of current 
policy and strategy, Iranian energy resources are not really 
viewed as being available, in that sense.
    Ultimately, of course--and as you know, the President has 
indicated an interest in engaging with Iran, and it would be 
very encouraging if some progress can be made so that Iran 
could become a partner, or a player, at least, in those 
discussions. But, at present, as I say, I think the primary 
focus is to deal with the other aspects of the Iranian 
relationship, and the sanctions associated with that really are 
inhibiting any effort to deal with their energy sector.
    Senator Shaheen. Are, then, Nabucco countries looking at 
Iran as a potential supplier of----
    Ambassador Morningstar. Maybe I can address that. I've 
probably been asked the Iran question at least 487 times since 
I took this job in April.
    Yes, I think some of them--some countries, certainly, in 
that region, would like to see Iran participate. I think that 
our position has been very clear. And that is that Iran should 
not participate now. We have engaged--tried to engage with 
Iran, but have really not gotten any positive response at this 
point. We don't know what the effect will be of recent events 
that have taken place in Iran.
    But, you know, if, in fact, they do make the choice to 
engage, and to resolve the issues--the outstanding issues we 
have, including, obviously, the nuclear issue, then 
participation in the energy sector would be a positive benefit 
to them, for doing so. And, whenever I'm visiting countries in 
the region, I always encourage them--and many of them have a 
decent relationship with Iran--to convince Iran that this is 
one of the benefits, and that they ought to take seriously the 
issue of solving their problems with us.
    But, this would be the absolute worst time to encourage 
Iran to participate in a project like Nabucco, when we've 
received absolutely nothing in return.
    Senator Shaheen. I appreciate--that's our position--I just 
want to be assured that that's the position of the other 
countries looking at the Nabucco pipeline.
    Ambassador Morningstar. Well, let's put it this way. Maybe 
the best way to describe it--Prime Minister Erdogan, at the 
conference on Monday, did talk about the possibility of Iran 
participation at some time in the future. I don't think that 
anybody expects participation now.
    We also still have the Iran Sanctions Act on the books, and 
I think that serves as an important deterrent. So, I don't 
think that there would ever be agreement, at this point, among 
the Nabucco Consortium for Iranian participation at this time. 
And our European allies are, I think, in sync with this 
position.
    Senator Shaheen. Thank you.
    Senator Lugar. Thank you very much, Senator Shaheen.
    Senator Cardin.
    Senator Cardin. Thank you, Mr. Chairman. And let me thank 
our witnesses.
    One thing is clear. Many of the countries in the world that 
have some of the highest levels of poverty among their citizens 
also have mineral wealth. This is a tragedy, and it's against 
the interests of the United States. We find that there are 
countries that have mineral wealth, and United States taxpayers 
are asked to help in foreign assistance because of the 
inability of that mineral wealth to be translated into the 
wealth of the nation. Now, that's a result of corruption as 
well as many different factors.
    The effort that we made internationally to deal with that--
I think, Secretary Carter, you mentioned it in your statement--
is the Extractive Industries Transparency Initiative, and many 
of these nations have some relationship to the Extractive 
Industries Transparency Initiative. My question is, Is that 
initiative adequate? Is it--I mean, we don't seem to have made 
as much progress as we should. Do we need to strengthen it? Do 
we need to strengthen participation in it? Does the United 
States have to make that a higher priority in our foreign 
policy objectives, to get more participation in that 
initiative? Should we be looking at something different than 
the initiative? Why hasn't that strategy been more successful 
in bringing about the type of transparency in nations that have 
mineral wealth, so that the people of that nation can benefit 
from the wealth of their country?
    Ambassador Carter. Senator, thank you for the question. 
It's a very, very valid point.
    First of all, EITI is a voluntary program, and as--you 
note, there are several candidate countries in EITI, but only, 
I think, one that has met the full parameters of compliance. I 
think that's Azerbaijan. Though it's ironic that one of the 
candidate countries that's moved further along in Africa on 
this issue is, in fact, Nigeria.
    EITI is a component of, I think, a broader strategy on our 
part to encourage membership--as we're trying to do, for 
example, with Angola, which is not a candidate country--to 
encourage their participation in EITI as an element of 
overarching good governance--trying to improve governance 
strategy on our part, both with our bilateral assistance, as 
well as looking at the country strategically in terms of its 
broader participation with the international donor community, 
international financial institutions.
    One of the things that we're trying to do, particularly on 
the development side with Africa, and particularly with oil and 
mineral producing states, is to push aggressively on this issue 
of accountability, on a transparency of revenues generated. 
EITI plays a role in that. If we're looking at other sectors, 
the Kimberley Process does it with diamonds. We are looking for 
ways to increease a similar accountability with mineral-
producing states.
    So, do we think EITI can be stronger, can be better? Yes. 
But, it's a voluntary program. It at least provides a framework 
for these countries to say that, ``Well, if you join this 
initiative, these are the things that must be done. And it 
provides us with the metrics upon which we can evaluate them in 
that area, in addition to providing other areas of assistance 
to improve fiscal responsibility by working with the central 
banks and finance ministries.''
    For example, in Angola, we're working productively with the 
Angolan Government to encourage the presence of a resident 
adviser from the Treasury Department to work in their central 
bank on this very same issue of fiscal clarity and 
transparency.
    In the end, however, it rests upon these governments, and 
the citizenry of these countries, to manage and to husband 
their resources effectively. We can only encourage them.
    Senator Cardin. Well, I understand that. Should the United 
States be doing more to encourage countries to comply with the 
EITI? Are we getting the support internationally from our 
traditional allies to get nations more interested in complying 
with EITI? Do we need to strengthen the provisions within EITI, 
the standards?
    It's a little frustrating. I believe in the EITI. I think 
it's a good initiative. I think those countries that are moving 
forward are making some progress. But, it's still frustrating 
to see how much leakage there is--it may be a poor choice of 
words--but how much leakage there is in the wealth that doesn't 
get to the people.
    Ambassador Carter. I share your frustrations, Senator. And, 
what we do in terms of specific countries like Nigeria, Angola, 
and Gabon is put EITI as a centerpiece, in terms of our 
bilateral engagement strategy, when we look at the questions of 
governance. So, bilaterally, EITI plays a major role, in terms 
of our dialogue with these countries.
    We then try to see what we can do to help these countries 
meet the criteria for compliance within the EITI structures. 
But it is voluntary. Should something overarching compel these 
countries to be more transparent? That's a difficult issue as 
the resources are theirs and they can control them.
    Some countries, like Chad, have walked away from this whole 
process. We're now trying to reengage the Chadian Government to 
be even more transparent, and try to reengage, for example, 
with the World Bank on the issue of the oil sector.
    With regard to our donor partners, EITI and the issue of 
governance is a central feature in that donor dialogue. How 
central this issue is to other donors varies. But, it is a 
central factor for those that work with us very, very closely.
    Senator Cardin. I would just make a couple of suggestions. 
First, I think we should evaluate the technical assistance that 
we provide to countries to comply with the EITI, to make it 
easier for them to go down that path, and to be able to share 
best practices as to what countries have done in similar 
circumstances to deal with their challenges.
    Second, I think there needs to be more attention paid to 
it. That is, those states that are saying they're doing one 
thing, but in fact are not doing that. We've done that in 
several human rights areas. We've done that in trafficking in 
persons. We've done that in human rights reports. I think it 
would be interesting, and I think helpful, to give more 
credibility to those nations that are making advancements. And 
on the other side, those that are not are highlighted.
    And, third, it should be a standard for international 
investment. A country's compliance with the EITI should be a 
standard for the participation of international organizations 
in the country. I know it's voluntary, but there should be a 
reward system for those that are making progress, beyond just 
doing the right thing. And there should be some degree of 
penalty for those that are not prepared to have more 
transparency in their mineral industries.
    I think the framework is right, but it's more urgent than 
ever that advancements be made in this area. In my own work 
with the international community through the OSCE, I think 
there's a willingness for OSCE Member States to take a stronger 
position on corruption within the mineral industries in 
countries.
    And I would just hope that we would develop a strategy that 
would try to implement that in a more aggressive way, through 
resources, and through reports, and through participation in 
international organizations.
    Thank you, Mr. Chairman.
    Senator Lugar. Thank you very much, Senator Cardin.
    Senator Feingold.
    Senator Feingold. Thanks so much. I thank the chairman and 
ranking member for holding this important hearing, and to the 
witnesses for testifying. I'll ask a few questions.
    Let's start with Iraq and the Kurdish region in particular, 
which was, as I'm told, discussed earlier, but I'd like to take 
a little different angle.
    The large oil and natural gas reserves there continue to 
generate significant tension between the Kurdistan Regional 
Government and, of course the central Iraqi Government, 
particularly as legitimate national reconciliation remains 
elusive. This has led to questions about the legality and terms 
of each government's oil contracts with international 
investors, but it has also not helped political reconciliation 
proceed. I'm interested to hear the panel's analysis of what 
needs to happen to ensure that this ongoing tension does not 
tip toward greater instability, and what you see as the 
appropriate role for the United States to play in order to see 
increased production revenue that can benefit the region.
    Dr. Schmierer. Well, Senator, thank you for that question. 
I'm the Deputy Assistant Secretary for Iraq, so I've been 
following those issues very closely, and I think you've 
identified, really, some of the key elements.
    As we had discussed a little bit earlier, one factor--
significant factor holding up Iraq's ability to get its oil 
sector moving has been the disagreement between the Kurdistan 
Regional Government and the central government on how to 
structure the hydrocarbon sector, and particularly the 
hydrocarbon legislation. But, the broader issues that you've 
raised, I think, are also really the key ones, because they 
will ultimately affect the ability to resolve those specific 
issues. As you've indicated, there continues to be tension, 
disagreement, in terms of boundaries. There's the disputed 
internal boundaries issue of the Kurdistan region. The good 
news on that is we have been very supportive of an effort that 
was launched by the United Nations Assistance Mission for Iraq, 
led by Special Representative Staffan de Mistura, to engage the 
two parties, the Kurdistan Regional Government, and the 
national government, in a dialogue to address these disputed 
boundaries and they've had a number of sessions. Both sides 
have named, we think, very capable, very, sort of, politically 
connected representatives to these discussions. So, we're 
optimistic that this might finally be the vehicle to get those 
issues resolved. And with that, then, would come a major 
breakthrough in terms of reconciliation.
    As you've indicated, one of the key areas there is Kirkuk, 
probably the most important, the most contentious area, and it 
is an oil-rich area. And so, this clearly is playing a role in 
that, as well.
    We have been engaged in a number of ways, but, 
specifically, one area that we have, I think, tried--and I 
think played a very helpful role has been in--how should I 
say?--using our goodwill to make sure that the two parties 
cooperate and don't get into a contentious or, potentially, 
even violent situation when there are security concerns.
    And so, I think we've had some great success in addressing 
those kinds of situations, and in generating greater 
understanding, and putting in place systems to ensure that 
those kinds of issues don't become more difficult.
    So, I think we've had some success. But, it's a process, 
and there's still quite some ways to go.
    Senator Feingold. Other responses from the panel?
    Dr. Schmierer. I think I'm really your Iraq guy this 
morning.
    Senator Feingold. All right. Let me move on.
    There's now widespread consensus that transparency in 
contracts and revenues and expenditures is a critical 
ingredient to guard against corruption and conflict in natural 
resource management. In fact, Senator Lugar's committee staff 
produced an excellent report on this, last year.
    In our discussion this morning, where does transparency 
fit? What steps is the Obama administration taking to 
substantively bolster transparency efforts, including 
prioritizing resource revenue and contract transparency in our 
engagement with oil-producing countries in places like Africa, 
the Middle East, and elsewhere?
    Ambassador Carter. Senator, with regard to Africa policy, 
as you know, we're in the midst of developing the strategy for 
this administration. Transparency and good governance are at 
the center of our development engagement on Africa, along human 
rights, to economic development, to the issue of 
democratization. So, transparency, both in terms of the 
engagement with civil society, not only--with the government 
but also the private sector--is at the center of our strategy 
toward engaging on Africa. And it plays an increasingly 
important role when we talk about those countries which are 
oil-exporting countries, specifically.
    In Nigeria, the Niger Delta question, is key, and I've 
stated before--that governance is the key to that solution. We 
looked at Angola, trying to engage with them, and they look to 
have a strategic partnership with us, and the centerpiece of 
that discussion is how we can do to assist them with technical 
systems on the issue of improved transparency at the central 
bank and finance ministries in the management of these 
resources, and the wealth that's generated by them.
    And now we look at Ghana, which has potential for being an 
oil and gas exporter, and an MCC compact. How they manage that 
revenue is central to our assistance and economic dialogue with 
the countries.
    Senator Feingold. Could you be more specific about Niger 
Delta? What is the Obama administration's policy on this issue, 
and what specific steps are being taken to reengage?
    Ambassador Carter. A few months ago, when the Nigerian 
Foreign Minister visited with Secretary Clinton, there was an 
agreement to establish a multilayered bilateral working group. 
And though we're still developing how that's going to move 
forward, but central to working group, as the Foreign Minister 
mentioned, is how do we work with them to engage on the social 
problems, the political problems, and the economic problems of 
the Delta. That's one.
    Second issue is that we had a team from AID and from State 
Department's Energy and Economic Bureau meet with Nigerian 
officials in May, in Abuja, to talk about how to best utilize 
the resources coming out of the Delta, to try to improve 
transparency. We are looking at our development program with 
Nigeria. Much of it is in the health sector. But, what is 
available outside of that, that we can focus on the Delta, in 
terms of engaging with civil society, improving our public 
diplomacy posture, in the Delta? It is an increasingly 
important role. We recognize that the stability of Nigeria 
rests with the stability also in the Delta.
    Senator Feingold. And I see that President Yar'Adua has 
recently made an offer of political amnesty to militants in the 
Delta, but I'm disappointed that it's not being combined with a 
serious initiative to address the underdevelopment of the 
region. What do you think we can expect from the Nigerian 
Ggovernment, in terms of directly addressing the poverty of the 
communities of the Delta while also taking steps to confront 
oil bunkering, and illicit war economy? And you were talking 
about some of the tangible steps we're taking, but I'd like to 
hear a little more.
    Ambassador Carter. I think--candidly, sir, I think the 
issue here is the--amnesty is one aspect of what needs to be a 
broader strategy. There's a lot of discussion within Nigeria, 
and within the government, of what else has to be done. 
Unfortunately, I think, they're focusing largely on the issue 
of this amnesty, and the type of military responses that are 
required to deal with what they see as a criminal activity in 
the Delta. It's not unknown to the parties there that the 
center of activity has to be with the governors and the 
governments of the states in the Delta region. However, we 
don't see the kind of political will, to be perfectly candid, 
by those states' leadership to engage on the social, political, 
and economic questions effectively. The amnesty's part of 
engagement. But I don't see them addressing development 
questions in any aggressive way. We're trying to encourage them 
to do that, but it's a challenge.
    Senator Feingold. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Lugar. Thank you very much, Senator Feingold.
    Let me ask a question I suspect that Chairman Kerry would 
ask if he were here. You touched upon the fact that, obviously, 
we are simply focused today on production of oil and natural 
gas, and the provision of adequate supplies. But, at the same 
time, the Congress is also, along with President Obama, taking 
a look at climate change, and ways in which carbon can be 
sequestered, or emitted in smaller quantities, along with other 
elements.
    What advice can you give us as we proceed with these very 
legitimate quests for these resources, and for the wealth that 
they bring to countries to, hopefully, be used transparently, 
promoting better governance and standards of living, yet also 
recognizing that, obviously, oil, to some extent natural gas, 
may contribute to the climate change dilemma? Have any of you 
any views on how we might approach these goals simultaneously?
    Yes, Ambassador Carter.
    Ambassador Carter. In terms of our development of Africa 
strategy, one of the things that's key is looking at the 
diversification of the economic base of African economies. 
That's critical. When we look at single-export countries, the 
problems of corruption and governance and the economic 
dysfunction are evident. So, one of the most important aspects 
that we look at, with regard to our economic development 
strategy, is diversification. And key to that diversification 
is the issue of food security and agricultural production. 
Managing resources, both in terms of mineral resources, oil 
resource, and also of the natural resources of the forests and 
arable land are critical aspects of this development strategy 
that we are in the process of formulating and launching.
    Senator Lugar. Ambassador Morningstar.
    Ambassador Morningstar. With your indulgence, if I could 
just make one or two comments on the transparency issue----
    Senator Lugar. Yes.
    Ambassador Morningstar [continuing]. Before answering that 
question.
    Senator Lugar. Fine.
    Ambassador Morningstar. I was hoping to respond before 
Senator Feingold left.
    I just want to emphasize that transparency is a very major 
part of our program in dealing with Eurasian energy. The G8 
principles from St. Petersburg, a few years ago, dealt very 
much with transparency. We signed the Sofia Declaration in 
April, which also emphasized transparency and other good 
business practices.
    With respect to EITI, we talk about that, and encourage all 
the countries that we're dealing with to comply. Azerbaijan is 
a success story, at this point, and is now a compliant member. 
Kazakhstan is a candidate member. We want to see Turkmenistan 
get involved, particularly as they deal more with Western 
companies, on transparency. But, we need to have a strategy in 
dealing with these countries, and we need to be able to show 
them that it's in their interest to comply with EITI, and have 
transparent business practices.
    Now, to your question with respect to energy and climate 
change. That's also a major part of our program. And I've 
actually been encouraged by the importance that I've seen in 
the countries that we've been dealing with, and how strongly 
they feel about these kinds of issues. Let me give you a couple 
of examples.
    We're trying to engage with Russia, as we've discussed. 
We're trying to find areas where we can have constructive 
discussions and have constructive results. The single area that 
they want to talk about most, with us, is energy efficiency. 
Because they have such terrible energy efficiency, right now, 
that they will admit to, and they also want to look at 
alternative technologies. They recognize these issues. And in 
the binational commission that the President announced in 
Moscow, the committee that will be dealing with energy is 
actually the Committee on Energy and the Environment. And so, 
these issues will play a very strong role.
    In Ukraine we are encouraging them to reform their gas 
sector to help mitigate some of the problems that they're 
dealing with in connection with Russia. One of the obvious 
things that has to be addressed immediately is efficiency, 
because they will also readily admit they may be the least 
efficient energy country in the world, and part of that is 
because energy is essentially free, for all intents and 
purposes, to consumers.
    And likewise, we're going to be working more closely on a 
structured basis with Kazakhstan and hopefully with 
Turkmenistan, and these issues will be involved with them. I 
was in Kazakhstan last week before going to Turkmenistan and 
then meeting you in Turkey, and they're also very much 
interested in this area. So, I think it is an area of 
opportunity, and we just can't let it pass by.
    Ambassador Hudson. If I could add to that.
    Senator Lugar. Of course.
    Ambassador Hudson. I think there are windows of 
opportunity. And I can cite one example. Algeria, which is a 
traditional energy exporter, is very interested in exporting 
solar energy. And we're--our Embassy in Algiers is quite 
engaged with--is engaged with the government and trying to see 
how we could bring our private sector into that kind of 
opportunity. There's also some opportunities in the gulf, as 
well. The UAE, for instance, sees the fact that its oil is not 
going to last forever, and they are looking at alternate 
energy--alternate ways to produce energy, and want to work with 
us quite closely. So, there are windows of opportunity, I 
think, that we can take advantage of.
    Senator Lugar. Well, those are very important points.
    Ambassador Carter, you mentioned, in discussing Nigeria 
earlier, ``flaring.'' What is ``flaring''? And why does it 
occur? Why does it continue? Describe this phenomenon, and the 
problem there.
    Ambassador Carter. Well, flaring is a byproduct of the 
extraction of oil, and natural gas is in there; and in order to 
effectively draw up the oil, the pipes are essentially drawn 
into the ground, and this gas is then burned off. And in parts 
of the Niger Delta there have been communities that have never 
seen a night. I mean, the flaring is 24/7, continues week upon 
week, month upon month, and years upon years. Flaring has a 
bearing in terms of the environment, with acid rain that has, 
in the mangrove areas of the Delta, destroyed the fishing 
industry, has placed condensates on the soil, has affected the 
health of local populations. It's a byproduct of lifting oil.
    However, there are technologies in place, to minimize and 
eliminate flaring. There is a clear effort by the Nigerian 
Government to eliminate flaring by 2010. This is an aspect of 
their dialogue with the various oil companies in the Delta to 
eliminate--or to turn that flaring into useful energy, and we 
are working with the Nigerian Government to that end, as well 
as other partners.
    Senator Lugar. Well, its encouraging to know that at least 
the problem is recognized by the Nigerians, and that they're 
working with the United States, perhaps with others. It's a 
phenomenon that occurs elsewhere on the Earth, and we're 
talking about the production of natural gas, so learning about 
the burning of it, uselessly, as the case may be, is important.
    Secretary Hudson, let me just mention. In 2005, in August, 
I visited Libya. I was staying at the Corinthia Hotel in 
Tripoli, and I noticed a substantial number of people from 
China and India were there. And with those having an English 
language facility, I got into conversations as to why there was 
such a profusion. It was the same answer for all of them. They 
were there in Libya to try to stake out claims for oil and 
natural gas that might be found. And I don't know how many 
succeeded, but discuss this for a moment--we've not yet touched 
upon Libya and its contribution and problems in the energy 
situation.
    Ambassador Hudson. Thank you for that question. As you 
know, we've just changed Ambassadors, and our relationship is 
progressing toward a more normal diplomatic relationship 
between our two countries. I'm happy to report that United 
States oil companies actually are probably the most active and 
the most successful, so far, as Libya is trying to revitalize 
its oil sector. When they were under sanctions, a lot of work 
was not done. They are seeking our technology because it's the 
best in the world. And we're doing quite well.
    The Chinese are also active, but our companies have really 
taken the lion's share, so far, of bidding on plots of--for oil 
production. And we can see Libya as becoming a major oil 
exporter, significantly increasing the amount of oil it exports 
over the next couple of years.
    Senator Lugar. Well, this is good news. I would mention 
that the reason I was there at that time was we had just had a 
successful release of prisoners in Algeria--Moroccans who had 
been in the desert for some time, and--you know the situation. 
I'd been asked by the State Department to go, because the 
President of the country wanted to go with me. He ultimately 
decided not to go with me. But I benefited from the assistance 
of Gen. Jim Jones and his aircraft, which was very important, 
in getting the people to Morocco to be liberated.
    But, while I was in Morocco, I received word from the State 
Department, in essence, ``While you're in the neighborhood, why 
don't you go via Libya, and see what can happen there.'' In 
those days, we had a very unsatisfactory relationship with the 
country, and we met with leader Qaddafi under a tent in the 
desert--an aircraft from the Air Force that got us out to that 
area. But Libya has moved on, thank goodness, in 4 years, to 
where now, I'm pleased to say, the sanctions were lifted. It's 
not just the Indian and Chinese personnel that are in the 
Corinthia Hotel, but also Americans who have been successful.
    Ambassador Hudson. That's right. And we have a very active 
Ambassador and Embassy there, now. So it's much better than it 
was.
    Senator Lugar. Thank you, sir.
    Senator Shaheen.
    Senator Shaheen. Yes, thank you, Mr. Chairman.
    I have one more followup that I would like to ask and--
since you've raised the issue of China, can you talk about 
what--China's growing demand for energy, how that is affecting 
our policies in the countries that you all are talking about, 
in the Middle East and Africa, and what, if anything, we should 
be doing to respond?
    Ambassador Carter. Madam Senator, the issue of China in 
Africa is something that has drawn an increasing amount of 
attention. With regard to China's investment, particularly in 
the oil sector, for example, it has been active. China's 
primary center of activity has been in the Sudan region, though 
it also is looking beyond that onto the west coast with Angola, 
as well as looking at the prospects in Ghana.
    I think, for us, the issue here is we see them as perhaps 
economic rivals, but not necessarily as a threat to our 
national security, only insofar as we work with the 
international community to ensure that the bidding process, the 
utilization of tender and such, is done according to 
international standards. It comes back to that whole question, 
once again, of transparency, that the Chinese investments are 
conducted in a way that meets the world's standards, that we 
can compete with them on an even footing. And that's what we 
seek to do.
    There have been questions in the past about that, but in 
the end, I think what we've seen is that the Chinese have not 
fared well when they've tried to seek sweetheart deals with 
certain African Governments. And there's a growing awareness 
that they need to conduct their business activities, 
particularly in Africa, in a way that is similar to how we or 
our European partners enter into agreements with African 
Governments.
    Senator Shaheen. Any other panelists' view on that? But, 
you know, we certainly saw, in our time in Africa, in Nigeria, 
and also in the Middle East, growing evidence of Chinese 
influence in business, in people as--in culture, in all aspects 
of life, in a way that made me have some concern about how we 
would be able to compete in the future, as the resources become 
more limited. So, I appreciate what you're saying about the 
business practices, with respect to making sure that we're on 
an even playing field, but certainly, when it came to influence 
in other areas, they are making tremendous inroads that I think 
we should really look at very carefully.
    Ambassador Morningstar.
    Ambassador Morningstar. Let me talk a little bit about the 
Eurasian area, because China is having an increasing and heavy 
influence in Central Asia. And let me, maybe, briefly talk 
about Turkmenistan as a case in point.
    China is building a pipeline, at its own cost, from 
Turkmenistan through to China, to transport gas. China has 
agreed to provide--I think it's a $3 billion loan for 
exploration at a major project site in Turkmenistan. And to 
some extent it's a good-news/bad-news situation. Maybe I'll 
start with the good news and get to the bad news. The good news 
is that it's good for China to get more gas. It's cleaner 
energy. And if they can import a lot of gas from that area 
that'll provide cleaner energy, it might free up supplies in 
other areas.
    There's a bad-news part of it, too. And that is that, at 
least theoretically, that gas that goes to China will compete 
with gas that could go westward. Although, if Turkmenistan 
really opens up, there's an awful lot of gas there that can be 
extracted.
    And the other issue that we have is that it is hard for us 
to compete with China in some of these countries, particularly 
countries that are a little more insular. It's easy for 
Turkmenistan to make a deal with China, when China can come in 
and say, ``Hey, we're going to write a check for X amount of 
money, and we're going to build a pipeline, and furthermore 
we're going to lend you money so that you can explore, and we 
will be paid back in gas that you, ultimately, deliver to us.'' 
You know, that's not a hard deal to accept. And we can't 
compete in that way.
    And I think we also have to develop a strategy to deal with 
that, and I think that Turkmenistan understands that, as it 
should not be dependent on Russia, it also should not be 
dependent on China, and needs to have diverse routes, including 
going westward.
    And we need to encourage our companies to negotiate with 
Turkmenistan in creative and in flexible ways to do projects 
there. I think Turkmenistan has some interest in that, and our 
companies do, and we have to keep working that through. So, it 
is a complicated situation and something that we have to really 
fully focus on how to deal with.
    Senator Shaheen. Are there more--any more opportunities to 
cooperate with China, when it comes to energy security and 
transport?
    Ambassador Morningstar. Well, it's an interesting question 
that I've certainly thought about, and it's something that we 
need to explore. We have technologies that we don't think China 
has, at this point. In fact, there are American companies that 
are working with the Chinese oil and gas companies--in China, 
with respect to deep extraction of gas. If you have to drill 
below a certain level you get into some very dangerous sour gas 
that has a lot of sulfur in it, and--literally, I think, in 
China, they had some explosions that killed a lot of people. 
And so, we have American companies working with them, in China.
    The question becomes, Does it make sense to us, or to our 
companies, or to China, to cooperate in a place like 
Turkmenistan? Does it make sense to Turkmenistan? These are 
questions that we have to think about, and I don't think we 
have a clear answer on it. I think our first priority is to get 
our companies into Turkmenistan. But, we also have to recognize 
that China is already there, and at least look at these 
opportunities.
    One of the issues that companies do have in dealing with 
China, particularly in third countries, as I think one of the 
other witnesses mentioned, is the values questions. And how 
easy is it to venture--what would be the safety standards, for 
example, of an operation in which we were working jointly 
together?
    So, all of these things have to be explored. But, it should 
be on our agenda, and I don't think there's a clear-cut answer 
yet.
    Senator Shaheen. Thank you.
    Senator Lugar. Thank you very much, Senator Shaheen.
    Senator Shaheen. Thank you.
    Senator Lugar. I have one more question, and that is, What 
is happening in Kuwait? Kuwait used to be very much on our 
radar screen because we had troops there, and there was a war 
going on, and destruction--at least at that time--of a certain 
amount of the productive capacity of the country. But can 
someone describe what kind of recovery occurred? Or rebuilding? 
Or has there been growth? Or what is the function of Kuwait, 
vis-a-vis the other producers in the area, as well as in our 
own interests?
    Ambassador Hudson. Well Kuwait is an active member of OPEC, 
and it really has been--its production has been restored to 
prewar levels, and destruction has been rectified.
    It's an interesting country for us, because it's a very 
active. It's the most active democracy we have in the Persian 
Gulf. They just recently had parliamentary elections, and four 
women were elected to the Parliament, which is quite 
extraordinary. They have a very noisy Parliament, sometimes its 
a problem for the ruling family. But, they have a very active 
democracy, and they're a full participant with us in working to 
stabilize energy prices, and to work with us to make sure that 
there's enough energy to meet demand. They're quite cooperative 
with us on that.
    They--by the way, Senator, they still host our military 
forces going in and out of Iraq, and we still have--there's a 
large base there, where our military people go in and out. So, 
they're still quite helpful in that regard, as well.
    Senator Lugar. Well, that's a very good report, and one 
that I think the American people would be pleased to know. We 
have crises from time to time, and then a decade-plus passes, 
and we lose track of where we were. But the thoughts you have 
expressed about growing democracy, about the elections, in 
addition to the revival of production capacity and their 
continued cooperation with us, is very good news.
    Ambassador Hudson. It is good news, I agree.
    Senator Lugar. Well, on that note of good news, I will 
conclude the hearing with thanks to each one of our panel 
members for your testimony and for your responses to our 
questions.
    Thank you, Senators, for the good questions, as well as the 
panel, for the good answers.
    We are adjourned.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record

           Nabucco--European Project and Gas Pipeline Project




















                                  
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