[Senate Hearing 108-116]
[From the U.S. Government Publishing Office]
S. Hrg. 108-116
U.S. ENERGY SECURITY:
RUSSIA AND THE CASPIAN
=======================================================================
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
__________
APRIL 30, 2003
__________
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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
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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
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Page
Borg, Ms. Anna, Deputy Assistant Secretary for Energy, Sanctions
and Commodities, Bureau of Economic and Business Affairs,
Department of State............................................ 2
Prepared statement........................................... 5
Chow, Mr. Edward, visiting fellow, Carnegie Endowment for
International Peace............................................ 44
Prepared statement........................................... 48
Coburn, Mr. Leonard L., director, Office of Russian and Eurasian
Affairs, Department of Energy.................................. 9
Prepared statement........................................... 14
Hagel, Hon. Chuck, U.S. Senator from Nebraska, Opening Statement. 1
Nanay, Ms. Julia, senior director, PFC Energy.................... 28
Prepared statement........................................... 32
Somers, Andrew, president, American Chamber of Commerce in Russia 38
Prepared statement........................................... 42
U.S. ENERGY SECURITY:
RUSSIA AND THE CASPIAN
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Wednesday, April 30, 2003
U.S. Senate,
Committee on Foreign Relations,
Subcommittee on International Economic Policy, Export and
Trade Promotion,
Washington, D.C.
The committee met, pursuant to notice, at 2:33 p.m., in
Room SD-419, Dirksen Senate Office Building, the Hon. Chuck
Hagel, chairman of the subcommittee, presiding.
Present: Senator Hagel.
OPENING STATEMENT OF HON. CHUCK HAGEL,
U.S. SENATOR FROM NEBRASKA
Senator Hagel. Good afternoon. Earlier this month I
chaired a hearing on global energy security. At that hearing,
the administration and expert witnesses gave an overview of the
state of global energy as it relates to U.S. national security.
As witnesses testified at the last hearing, America's national
security cannot be separated from our interest in a stable
global energy market. America is the world's leading consumer
of crude oil with almost 60 percent of our economy dependent on
imported oil.
Our dependence on imported crude oil creates potential
vulnerabilities to our economy with implications for America's
national security. Because energy independence is not
achievable in the near term, America needs a comprehensive
energy policy that recognizes the realities of our inter-
connected world. Today we will examine how development of
energy resources in Russia and the Caspian Sea region and the
availability of those resources might affect U.S. national
energy security strategy.
Russia has the world's eighth largest share of oil reserves
and the largest natural gas reserves in the world. Russia holds
great promise as a global energy supplier. The U.S.-Russian
relationship will continue to be a high priority for all
aspects of America's national security policy.
From 1997 through 2000, I held a series of hearings in this
committee on the development of oil and gas pipelines in the
Caspian Sea region. While not a simple answer for reducing U.S.
dependence on Middle Eastern oil, the Caspian region holds
significant potential for energy development. The two primary
oil producers in the Caspian, Kazakhstan and Azerbaijan,
current produce 1 million and 300,000 barrels of oil per day
respectively. That production has the potential to double over
the next decade.
As we consider how best to realize the Caspian's potential,
we must focus on more than just production and reserves,
pipelines and infrastructure. We must take into account the
political and geopolitical realities in the region. The future
of both Iran and the U.S.-Iranian relationship will also
influence the Caspian region's energy development.
Encouraging, financing, and building export pipeline routes
can contribute to regional economic integration and stability.
But the Caspian countries must complement their economic
development with progress toward political reform, rule of law,
and human rights.
Here to help lend clarity to these important issues this
afternoon are two distinguished panels of experts. First we
will hear from Deputy Assistant Secretary of State for Energy,
Sanctions and Commodities Anna Borg. Ms. Borg will be followed
by Leonard Coburn, who is the Department of Energy's Director
of the Office of Newly Independent States, Russian and Middle
Eastern Affairs.
The second panel includes witnesses representing a variety
of perspectives. Andrew Somers is president of the American
Chamber of Commerce in Russia, based in Moscow. He was recently
appointed by Commerce Secretary Evans to chair the commercial
energy dialogue with Russia.
Next we will hear from Julia Nanay, senior director at PFC
Energy here in Washington. Ms. Nanay has worked in the oil
industry in various capacities since 1976 and specializes in
analyzing oil and gas sector risks in Russia and the Caspian
region.
And finally, we will receive testimony from Edward Chow.
Mr. Chow is a visiting scholar in the Russian and Eurasia
Program at the Carnegie Endowment for International Peace. Mr.
Chow has over 20 years of experience working on oil issues in
Russia and Asia, as well as the Middle East, Africa, South
America, and Europe.
To all of our witnesses, thank you very much for taking the
time to come before this committee today. I should say before
we start the ranking Democratic member of this committee,
Senator Sarbanes from Maryland, is recuperating after surgery.
He will be back, I understand, next week but regrets that he
will miss this hearing, sends his regards. And I am sure he
will hang on every word of testimony that you will give today,
as he reviews the transcript.
Again, thank you very, very much for coming. And we will
begin with you, Mr. Coburn--or, I am sorry, Ms. Borg is first.
Ms. Borg, please forgive me. And if you would proceed with
your testimony, thank you very much.
STATEMENT OF MS. ANNA BORG, DEPUTY ASSISTANT SECRETARY FOR
ENERGY, SANCTIONS AND COMMODITIES, BUREAU OF ECONOMIC AND
BUSINESS AFFAIRS, DEPARTMENT OF STATE
Ms. Borg. Mr. Chairman, thank you very much for this
opportunity. I have a longer written testimony, which I will
leave and just summarize the basic arguments in an oral
statement.
Senator Hagel. It will be included in the record, as well
as all the witnesses' complete statements. Thank you.
Ms. Borg. I am very pleased to be here today with the
Department of Energy to discuss energy issues in Russia and the
Caspian and the relationship to U.S. energy security and
commercial opportunities. We are particularly pleased that the
subcommittee has chosen this dynamic region to focus on first
in its follow-up to the earlier April hearing on international
aspects of U.S. energy security.
The President's national energy policy noted the importance
of Russia and the Caspian to global energy production and made
a number of recommendations to the Secretaries of State,
Commerce, and Energy on commercial conditions in the investment
climate. We are working with our colleagues at those
departments on implementing these recommendations. We have both
successes to report and areas for still further progress.
Russia, as you noted, is important to world energy markets
because it is the world's largest exporter of natural gas, the
second largest oil exporter, and the third largest energy
consumer. Russian oil production has rebounded from the lows of
the mid-1990s, thanks largely to capital investment by Russian
oil firms and the increasing use of Western oilfields service
companies.
Production in February 2003 was already about 8 million
barrels a day. And with sustained firm oil prices, it is
possible that production over the next 6 years could go to as
high as 11 million barrels a day. While estimates vary over the
size of Russian's proven oil reserves, going from about 50
billion to 60 billion barrels, Russia also has the world's
highest reserves of natural gas, about 1,700 trillion cubic
feet.
The Caspian, the non-Russian Caspian region is also rich in
these resources with oil production expected to increase from
the current level of about 1.5 million barrels a day to about 4
million barrels a day by 2010, possibly reaching as high as 5
million barrels a day in that time frame.
However, despite the impressive production rise since 1998,
there remain some challenges to sustaining Russia's rapid
growth rate over the long term. Huge investments will be
necessary to improve the aging infrastructure and the
transportation networks and to extend those networks to the
very remote areas where many of Russia's greatest undeveloped
fields lie.
The pace and scope of actual investments are, however, in
question. The key factors affecting the outcome are the
questions of limited export pipeline capacity, as well as the
investment climate. We have encouraged the Russian Government
to involve the private sector increasingly in pipeline
development. And so, while much has been achieved in Russia, we
continue to see room for improvement in the investment climate
and have concerns about the content and pace of reforms.
We continue to support passage of beneficial production
sharing agreement amendments to the Russian tax code. We also
look forward to the development of new subsoil legislation for
projects that do not need to be developed on PSA terms. We
promote these steps in our high-level contacts with Russia, in
addition to within the context of the U.S.-Russia energy
working group, the U.S.-Russia commercial energy dialogue, and
through the work of our Ambassador in Moscow, his staff, and
those of us from the State Department as we have a chance to
visit there or meet visitors here.
In the first wave of international focus on developing
Caspian resources in the mid-1990s, the key challenge was to
transport these vast reserves from a landlocked sea to world
markets in a manner that diversified pipelines as part of our
energy security policy while observing at the same time our
policy of discouraging investments in Iran's oil sector. The
transportation challenge has largely been overcome. Thanks in
large part to efforts by successive U.S. administrations, with
solid bi-partisan backing in Congress, we are succeeding in our
policy of developing an east-west energy corridor involving
multiple export pipelines.
Our focus will continue to be on both encouraging
improvements in the investment climate and on how these
countries use their revenue. In working on the investment
climate, we will continue to promote strengthening the rule of
law, stabilizing tax and fiscal requirements, combating
corruption, promoting respect for contract sanctity and
improving transparency.
Our engagement with Russia and the Caspian countries is
consistent with the key terms of our international energy
security policy, as outlined in the President's national energy
policy. Energy security, of course, is improved by all
increased and diversified production of energy that enters the
global marketplace.
Developments in Russia and the Caspian are having a
profound effect on global supply and diversification. The
Caspian, as you noted, is positioned to be the largest source
of non-OPEC supply growth globally in the coming years. Russia
already is an energy superpower. And their new energy
production, even if the rate of growth decelerates, will
enhance U.S. and global energy security and contribute
significantly to a well-balanced global supply mix. That said,
of course, it is important to remember that neither Russia nor
the Caspian region can replace Saudi Arabia as swing producers,
nor can they change the fact that two-thirds of proven world
oil reserves are in the Middle East.
As for natural gas, exports from Russia to Western Europe
contribute significantly to our allies' economic stability and
vitality. Russia supplies Europe with approximately 25 percent
of its natural gas. And with North Sea gas and oil production
slated to decline in the coming decade, Russia's gas exports
will bolster its contribution to global energy diversification.
Our relationship with Russia on energy issues is a key part
of our bilateral relationship, a piece of a broader matrix, of
course, of interaction on a range of issues both political and
economic. Our cooperation on energy was revitalized with
President Bush and President Putin's joint statement on energy
in May 2002 and continues with regular meetings of an
intergovernmental dialogue within the framework of the U.S.-
Russia energy working group. That process is supplemented by a
business-to-business dialogue called the Commercial Energy
Dialogue, which grew out of last October's highly successful
U.S.-Russia Commercial Energy Summit in Houston.
U.S. exploration and production companies are keenly
interested in Russia's potential, though they remain concerned
about the need for continued improvements in the investment
climate, further progress towards a liberalized energy market,
and increased export capacity. We are pleased with the very
energetic participation by a broad range of American firms in
the U.S.-Russia commercial energy dialogue and their
cooperation with their Russian private sector colleagues in
jointly developing draft recommendations to both of our
governments on ways to facilitate increased commercial
cooperation and investment in Russia. Those recommendations
will be presented at the next U.S.-Russia commercial energy
summit in September 2003. As of June a year ago, total U.S.
private investment in Russia's energy sector had totaled
already $500 million.
Prospects are also interesting for oil and gas field
equipment manufacturers. Russia is currently the fifth largest
export market for U.S.-made oil and gas field equipment, with
U.S. exports in this sector last year totaling about $328
million--an increase of 16 percent over 2001. There are
opportunities for more exports, although price is often an
obstacle as ours are often more expensive than domestic
alternatives.
Similarly, in the Caspian, we expect about $10 billion to
$12 billion in service and equipment opportunities in the next
3 to 5 years. And the figure could go as high as $200 billion
over the next 20 years.
At the State Department, we are working very closely with
American businesses to help them understand the Russian and
Caspian Basin environments and energy sector opportunities. The
State Department, for example, along with the Department of
Commerce, organized a Caspian Basin Energy Development
Conference in New Orleans in January of this year that
attracted 150 oil contractors and energy representatives. It
was well received. And we expect that we will do similar
seminars in the future to maximize American companies' chances
for success.
In addition, our Ambassadors in Russia and the Caspian
Basin region, as well as Ambassador Steven Mann, the senior
advisor for Caspian Basin energy diplomacy, are all working
with U.S. energy providers and advocating on their behalf.
In conclusion, this is a vibrant, important region. The
U.S. Government and the State Department are focusing on it
extensively, and we hope that we are able to continue
translating the opportunity it represents into increases in
both our energy security and commercial opportunities.
Senator Hagel. Ms. Borg, thank you.
[The prepared statement of Ms. Borg follows:]
Prepared Statement of Anna Borg
Mr. Chairman, distinguished Committee members, I am pleased to be
here today with the Department of Energy to discuss energy issues in
Russia and the Caspian and their relationship to U.S. energy security
and commercial opportunities. We are particularly pleased that the
Subcommittee has chosen this dynamic region to focus on first in its
follow-up to the April 8 hearing on the international aspects of U.S.
energy security. Under Secretary of State for Economic, Business and
Agricultural Affairs, Alan Larson, appreciated the opportunity to
appear before you on that occasion.
The President's National Energy Policy noted the importance of
Russia and the Caspian to global energy production, and made a number
of recommendations to the Secretaries of State, Commerce and Energy on
commercial conditions and the investment climate. We are working with
colleagues at Energy and Commerce on implementation these
recommendations, with both successes to report and areas for still
further progress.
Current Production and Reserves in Russia and the Caspian
Russia
Russian oil production has rebounded from the lows of the mid
1990s, thanks largely to capital investment by Russian oil companies
and increasing use of Western oilfield service companies and
technology, and has been growing at about 7 percent per year since
1998's average of 5.85 million barrels per day (mbd) . That rate of
growth may accelerate this year: 2002 average production of 7.6 mbd
could climb nearly 9 percent if oil prices remain near current levels--
production in February 2003 already topped 8 mbd. Sustained firm oil
prices could boost production over the next six years to as high as 11
mbd. Russian producers are optimistic that they can achieve this level
of growth.
Estimates vary over the size of Russia's proven oil reserves,
ranging conservatively from 50-60 billion barrels, with numerous
identified deposits in East and West Siberia, Timan-Pechora, the north
Caspian Sea, and Sakhalin Island. Russian off-shore Caspian may contain
some modest reserves. In addition, there are many remote ``frontier''
regions that may contain oil, and Russian oil companies assert that the
country's reserve numbers will actually prove much higher once these
areas are explored.
Russia contains one third of the world's natural gas reserves, with
over 1,700 trillion cubic feet (tcf) in proven reserves--the world's
highest. Russia's natural gas production also is the largest in the
world, with 595 produced in 2002. Gazprom, the state-run natural gas
monopoly, produces nearly 94 percent of Russia's natural gas, operates
Russia's 90,000-mile natural gas pipeline grid, and employs
approximately 38,000 people. Though a large consumer of gas, Russia has
plenty left over for export. With 6.7 tcf in net natural gas exports in
2001, Russia was the world's largest exporter. Though reserves are
extensive, the undeveloped major fields lie in remote locations lacking
infrastructure to deliver the gas to consumers, and will require much
higher levels of investment to develop.
Caspian
Oil production in the non-Russian Caspian region is expected to
increase from its current level of 1.5 million bpd, to about 4 million
bpd by 2010. If investment increases substantially, the Caspian could
produce even more--possibly reaching 5 million bpd by 2010. Independent
estimates now put non-Russian Caspian (Kazakhstan, Azerbaijan and
Turkmenistan) reserves at 34 billion barrels. To put that in
perspective, that is slightly more than U.S. reserves, and more than
double what remains in the North Sea. That figure could grow
substantially; one leading consultancy estimates regional reserves
could reach as high as 60-70 billion barrels. The Kashagan field in
Kazakhstan, with at least 10 billion barrels of recoverable oil, is the
fifth largest deposit ever discovered, and observers see rich promise
of additional discoveries in Kazakhstan's Caspian waters. Estimated
natural gas reserves in the Caspian region amount to about 170 trillion
cubic feet (tcf), with Turkmenistan holding the lion's share of 101
tcf. The first major foreign investment in the Caspian gas sector is in
the Shah Deniz gas field in the Azeri zone of the Caspian; this field
holds an estimated 400 billion cubic meters (bcm) of recoverable
reserves.
Challenges to Further Development
Despite the impressive production rise since 1998, there are some
challenges to sustaining Russia's rapid growth rate over the long term.
Its rate of oil production is exceeding its rate of discovery of new
reserves by a significant margin, and it is clear that significant
levels of domestic and foreign investment will be needed in order to
maintain production levels for the next 15 years. Huge investments will
be necessary to improve aging infrastructure and transportation
networks, and to extend those networks to the very remote areas (the
Arctic, offshore and Eastern Siberia) where many of Russia's greatest
undeveloped fields lie.
The pace and scope of actual investment are, however, in question.
The key factors affecting the outcome are the questions of limited
export pipeline capacity and investment climate. Russia's pipeline
network is run by a state-owned monopoly company, Transneft, which has
proposed its own new export pipelines, as have many private Russian
producers, and an internal debate continues over which routes to
develop and with what measure of private sector involvement. We agree
with many western and Russian oil company representatives who note that
capital needs and logistical challenges might make it difficult for
Transneft to expand Russia's pipeline capacity quickly enough to meet
Russia's export goals. We see merit in involving the private sector in
pipeline development, both for its capital and for its know-how, and
have encouraged the Russian government to do so.
Although much is being achieved in Russia, and we have shared
interests in Russia's being able to attract more investment and play
the pivotal role it seeks in promoting global energy security, we
continue to see room for improvement in Russia's investment climate and
have concerns about the content and pace of reforms. As recommended in
the President's National Energy Policy Plan, we continue to support
passage of beneficial Production Sharing Agreement (PSA) amendments to
the Russian tax code. An attractive PSA regime can facilitate
investment particularly in the development of ``difficult''--i.e.
remote, expensive, and technically challenging--oil and gas reserves.
We also look forward to the development of new subsoil legislation for
projects that do not need to be developed on PSA terms. We believe the
Russian government should strive for a tax and license regime that is
transparent, stable, enforceable, and that offers investors a fair
opportunity to earn a reasonable profit. We would also welcome
legislation giving investors access to international arbitration for
resolution of commercial disputes. We continue to promote these
important steps in our high-level contacts with Russia, in addition to
within the context of the U.S.-Russia Energy Working Group, the U.s.-
Russia Commercial Energy Dialogue, and through the work of our
Ambassador in Moscow and his staff.
In the first wave of international focus on developing Caspian
resources in the mid-1990's, the key challenge was to transport these
vast reserves of oil and gas from a land-locked sea to world markets in
a manner that diversified pipelines as part of our energy security
policy, while observing our policy of discouraging investments in
Iran's energy sector. The transport challenge largely has been
overcome. Thanks in large part to efforts by successive U.S.
administrations, with solid bi-partisan backing in Congress, we are
succeeding in our policy of developing an East-West Energy Corridor
involving multiple export pipelines: The Caspian Pipeline Consortium
(CPC) line connecting the Tengiz field in Kazakhstan with the Russian
port of Novorossisk began operations in 2001; the Baku Tbilisi Ceyhan
pipeline will start shipping oil in 2005, transporting 1 mbd at full
capacity; and development of the South Caucasus gas line from
Azerbaijan to Turkey is moving ahead, and should begin operations in
2006 with a peak capacity of 7.3 bcm/annually.
Our focus will continue to be on both encouraging improvements in
the investment climate, and on how these countries use their revenue.
In working on the investment climate, we will continue to promote
strengthening the rule of law, stabilizing tax and fiscal requirements,
combating corruption, promoting respect for contract sanctity, and
improving transparency. As in many countries around the world, there is
a sincere desire by both Kazakhstan and Azerbaijan to form partnerships
with Western companies in the energy sector--and, even more
importantly, a willingness to engage in dialogue when problems do
emerge.
A prime example was the recent negotiation between the Kazakhstan
government and the ChevronTexaco-led consortium partners of
Tengizchevroil (TCO) over TCO's expansion. Though some issues remain on
the table, the TCO parties did manage to reach the outlines of a deal
and agree to proceed with Phase Two expansion. The good news in this
disagreement was that there was extensive dialogue, and President
Nazarbayev intervened and facilitated a solution.
Apart from securing new oil supplies for world markets, our Caspian
policy is intended to strengthen the sovereignty and economic viability
of the new nation states in the region. As these countries continue
down their path of development, we hope they use their hydrocarbon
dollars to make the long-term investments in responsive governance,
education and infrastructure to help avoid falling victim to the so-
called ``resource curse'' that afflicts so many hydrocarbon-exporting
regions. That requires transparent management of oil and gas earnings
to start, and the political will and economic know-how to use those
earnings wisely to move development forward wisely across a multitude
of sectors. The establishment of ``oil funds'' in Kazakhstan and
Azerbaijan indicates a welcome recognition that revenue management is
critical, and we will be closely engaged to see that the funds
generated by energy exports support the broad-based development of
these countries.
Impact of Development in the Region on U.S. Energy Supply and
Diversification
Our engagement with Russia and the Caspian countries is consistent
with the key tenets of our international energy security policy as
outlined in the President's National Energy Policy:
1. Promote increased and diversified production of energy
from a range of foreign suppliers in many regions.
2. Coordinate effective international measures to respond to
physical oil supply disruptions.
3. Encourage major oil producing countries to maintain
responsible production policies to support a growing world
economy and reduce oil market price volatility.
U.S. energy security is improved by all increased and diversified
production of energy that enters the global marketplace. In other
words, that new and additional energy from different sources does not
need to enter our ports or our refineries to improve our security--it
only needs to enter the global supply chain.
Developments in these countries are having a profound effect on
global supply and diversification. The Caspian is positioned to be the
largest source of non-OPEC supply growth globally in the coming years.
Russia already is an energy super-power, and their new energy
production--even if the rate of growth decelerates--will enhance U.S.
and global energy security and contribute significantly to a well-
balanced global supply mix. Even with transportation bottlenecks,
Russia exported about 3.5 million barrels/day in 2002, and last week
forecast a rise to 4.3 mbd in 2003. When Venezuela went off line, and
Nigeria shut-in, and the liberation of Iraq affected supplies, the
steady pace of Russian exports, added to OPEC's increased production,
helped dampen the shocks.
With large projects in Sakhalin, Tengiz and Kashagan solidly
underway, and a multitude of less visible projects already in
production, a steady flow of Russian and Caspian oil into the
marketplace is assured. Though geography suggests closer markets than
the U.S. may be more economical targets for much of that oil, some of
it is also likely to flow into U.S. supplies as well. The first
supertanker shipments of Russian crude arrived in the U.S. last year
and more will arrive over time as Russian producers recognize that
market diversity is in their interests.
That said, it is important to remember that neither Russia nor the
Caspian region can replace Saudi Arabia as swing producers, nor can
they change the fact that two-thirds of proven world oil reserves are
in the Middle East. But their definitive arrival in the global energy
marketplace has changed the perceptions of the market, and of OPEC.
As for natural gas, exports from Russia to Western Europe
contribute significantly to our allies' economic stability and
vitality. Russia supplies Europe with approximately 25 percent of its
natural gas, and with several new export pipelines planned or already
under construction, Russia hopes to continue to help Europe meet
increasing demand. With North Sea gas and oil production of slated to
dwindle in the coming decade, Russia's gas exports will bolster its
contribution to global energy diversification.
Impact of Energy Issues on Overall U.S.-Russia Relationship
Our relationship with Russia on energy issues is a key part of our
bilateral relationship, but of course is not the only part. It is a
piece of a broader matrix of interaction on a range of issues both
political and economic. Our cooperation on energy was revitalized with
President Bush and Putin's Joint Statement on Energy in May 2002, and
continues with regular meetings of an intergovernmental dialogue within
the framework of the U.S.-Russia Energy Working Group. That process is
supplemented by a business-to-business dialogue called the Commercial
Energy Dialogue, which grew out of last October's highly successful
U.S.-Russia Commercial Energy summit in Houston, and was launched in
December by Secretaries Evans and Abraham and their Russian
counterparts.
Though it is difficult to quantify energy's impact in precise
terms, it is clear that our dialogue on energy issues contributes to
the overall vibrancy of our ties, and our support for market reforms in
the energy sector is one part of our broader advocacy for, and support
of, Russia's transition to a democratic, transparent and stable market
economy. In addition, as Russian private oil and gas firms continue to
improve their corporate governance and transparency in line with the
requirements for Western investment, they provide a stimulus for wider
such improvements in business practices.
Opportunities for U.S. Companies Given the Investment Climate in Russia
and the Caspian
U.S. exploration and production companies are keenly interested in
Russia's potential, though they remain concerned about the need for
continued improvements in the investment climate, further progress
toward a liberalized energy market, and increased export capacity. A
sign of their continued belief in Russia's promise, however, is the
energetic participation by a broad range of U.S. firms in the U.S.-
Russia Commercial Energy Dialogue, and their cooperation with Russian
private sector colleagues in jointly developing draft recommendations
to our governments on ways to facilitate increased commercial
cooperation and investment in Russia. Those recommendations will be
presented at the next U.S.-Russia Commercial Energy Summit in
September, 2003. As of June 2002, total U.S. private investment in
Russia's energy sector had totaled $500 million. Looking ahead, the
ExxonMobil-led Sakhalin-1 Consortium plans to invest a total or $15
billion over the lifetime of the project, which should produce 15
billion cubic meters of gas over its lifetime, and 250,000 bpd of oil.
The picture is somewhat different for U.S. oil and gas field
equipment manufacturers, for whom Russia should remain a significant
target of opportunity despite trouble spots in the investment climate
that may affect upstream companies dollar decisions. Russia is
currently the fifth largest export market for U.S.-made oil and gas
field equipment, with U.S. exports to Russia in this sector in 2002
totaling $328 million--an increase of 16 percent over 2001. Excellent
opportunities should exist for the foreseeable future: besides Russian
companies' reworking of existing fields and developing new ones, the
international consortia developing the huge oil fields offshore
Sakhalin Island are expected to invest a total of $30-$45 billion over
the lives of their projects. Price is usually the main obstacle to even
greater U.S. exports: though Russian oil companies often prefer U.S.-
made equipment, it is usually more expensive than domestic
alternatives.
In the Caspian, U.S. companies are watching the investment climate
closely but are moving forward with alacrity--and we are engaged in
helping them do so. We expect about $10-$12 billion in service and
equipment opportunities in the next 3-5 years; the figure could go as
high as $200 billion over the next twenty years. TCO's expansion alone
will cost a massive $3 billion: America's Parsons-Fluor-Daniel JV has
already been tapped as general contractor. In addition, with
Icazakhstan planning to hold tenders to develop over 100 offshore oil
and gas fields, American onshore and offshore entities have extensive
opportunity, and precedent for success: Sante Fe Drilling and Parker
Drilling are already engaged in projects in Azerbaijan and Kazakhstan,
respectively.
The State Department is working closely with U.S. businesses to
help them understand the Russian and Caspian Basin environments and
energy sector opportunities. The Department, along with the Department
of Commerce, organized a Caspian Basin Energy Development Conference in
New Orleans in January that was attended by 150 oil contractors and
energy representatives. It was well received and we will conduct
similar seminars in the future to maximize U.S. companies' chances for
success. In addition, our Ambassadors in Russia and the Caspian Basin
region, as well as Ambassador Steven Mann, the Senior Advisor for
Caspian Basin Energy Diplomacy, are all working closely with U.S.
energy providers and advocating on their behalf.
In conclusion: this is a vibrant, important region; the U.S.
government is focusing on it extensively; and we hope that we are able
to continue translating the opportunities it represents into increases
in our energy security.
Senator Hagel. Mr. Coburn.
STATEMENT OF MR. LEONARD L. COBURN, DIRECTOR, OFFICE OF RUSSIAN
AND EURASIAN AFFAIRS, U.S. DEPARTMENT OF ENERGY
Mr. Coburn. Thank you very much, Mr. Chairman. I am
pleased to appear before you today to discuss the role that
energy plays in Russia, Central Asia, and the Caspian region,
and the administration's efforts to enhance our cooperation
with these countries.
On April 8, Deputy Secretary Kyle McSlarrow provided this
subcommittee with an overview of the important role that energy
plays in a global economy and the administration's efforts to
enhance our energy security. Today we will focus and
concentrate on the administration's energy cooperation with
Russia and with the independent republics of Central Asia and
the Caspian.
The administration has been extremely proactive in its
relations to both regions. And there is a great deal of
progress to report on our efforts to enhance energy
cooperation. Production and reserve status will be discussed
first, and then our energy cooperation with Russia, followed by
Central Asia and the Caspian.
Oil production in Russia has rebounded significantly over
the last several years, as you mentioned in your opening
statement. The table that I handed out as part of my testimony
and written statements profiles Russia's oil production over
the last decade. In 2003, oil production continues to increase
and is now approaching about 8 million barrels a day. As
already mentioned, Russia is now the second largest oil
producer, the second largest exporter of crude oil behind Saudi
Arabia.
In the Central Asian and Caspian region, oil production
also has increased substantially over the last decade due to
the influx of foreign investment primarily in Azerbaijan and
Kazakhstan. Production in 2002 averaged about 1.5 million
barrels per day.
When we turn to reserve numbers for both Russian and the
Central Asian/Caspian region, these numbers vary widely and are
quite difficult to pin down. In Russia, oil and gas reserve
numbers remain a state secret. Thus, there are no official
reserve numbers. We have looked at various sources. And, for
example, the oil and gas journal in 2002 estimates that Russian
proven oil reserves are about 50 billion barrels. However, in
our conversations with Russian oil companies, we have found
that this reserve level is vastly understated. They estimate
that reserves should be in the 90 billion to 110 billion barrel
range. That would put them equal to about Iraq.
In the Central Asian and Caspian region, reserve numbers
also have varied wildly depending upon the source. The Energy
Information Administration, which is part of the Department of
Energy, indicates that proven reserves are somewhere between 17
billion and 33 billion barrels. There have been estimates to
resources, not proven reserves, but resources, in excess of 100
billion barrels.
Well, let's turn to Russia and our energy cooperation with
Russia. The U.S. Government's history of energy cooperation
engagement dates back to the early 1990s. But in the interest
of time, I will focus on this administration's energy
engagement with Russia.
The President recognized the importance of the United
States' relationship with Russia early on in his
administration, elaborating on this relationship in the
administration's National Energy Policy issued in May 2001.
These policies provide a guide for Russian engagement. And
since the policy's creation, the Department of Energy has been
active in filling and expanding upon these policies.
It is important to note that the National Energy Policy
continues policies that were discussed over the last decade.
So, for example, the U.S. Government has been unwavering in its
support of sound, legal, fiscal, and regulatory environments in
Russia over the last years. We have remained committed to
supporting market reform in the energy sector.
The U.S. has also been a strong supporter of oil and gas
development in the region. One way in which we, the United
States, have sought to enhance our energy supply security is to
promote Russian energy resource development and exports. We
have expressed our support for these efforts to export crude
oil to the United States and the future development of transit
routes and terminals that will allow Russian resources to reach
American markets. And we can discuss some of these efforts in
our follow-up question-and-answer session.
The administration's enhanced energy engagement with Russia
developed as a result of the summit held by Presidents Bush and
Putin in May 2002 in Russia, where they issued a joint
statement on a new U.S.-Russia energy dialogue. This joint
statement confirms the importance of energy in our bilateral
relations. And the Department of Energy is moving forward on
the elements of this dialogue in conjunction with our
colleagues at State and other agencies.
In order to accomplish these objectives laid out in the
joint statement, the Department of Energy and the Russian
Ministry of Energy created a U.S.-Russia energy working group.
In that working group, we will be concentrating on five areas
of discussion: global oil markets; investment; technology,
including energy-efficient, environmentally-friendly clean coal
technologies, and oil spill prevention and response; energy
information exchange; and small- and medium-sized enterprises.
To date, the energy working group has met three times, most
recently earlier this month, on April 7 and 8 here in
Washington. And there has been a great deal of progress in all
five of the areas that we have focused on.
Last October, in Houston, the Departments of Energy and
Commerce organized the first U.S.-Russia commercial energy
summit. The Houston summit was co-hosted by Secretaries Abraham
and Evans and Energy Minister Yusufov and Economic Development
and Trade Minister Gref. The summit was acknowledged by all the
participants as a great success.
At the summit, we discussed how to facilitate investment in
the Russian and American energy sectors. And we can pursue some
of that during our question-and-answer session. Cooperation and
partnerships already are under way. These include a variety of
projects, such as the Caspian Pipeline Consortium, which brings
crude oil from Kazakhstan through Russia to the Black Sea;
Sakhalin 1, the largest of the energy development projects out
in Sakhalin Island; most recently, Marathon Oil Corporation's
acquisition of Khanty Mansiysk Oil Corporation; and another
joint venture, the ConocoPhillips Polar Lights joint venture.
We at the Department of Energy and Department of Commerce
and State and other agencies will continue to promote
commercial partnerships between U.S. and Russian firms in the
U.S., Russia, and third countries. The summit we just talked
about in Houston featured the announcement of a U.S.-Russia
commercial energy dialogue already alluded to by Ms. Borg. And
this is industry-led and will increase communication and
cooperation among our companies.
The Departments of Energy and Commerce will consult with
this group to identify and help remove barriers to energy,
trade, and investment. The commercial energy dialogue provides
the opportunity for Russian and Western companies to sit
together to solve common problems on legislation and regulation
of the Russian energy complex. The level of cooperation among
our companies and the Russian companies could not be better.
The U.S.-Russia energy dialogue will focus on efforts to
promote energy security through discussions with Russian
officials of possible technical assistance with the Russian
Strategic Petroleum Reserve. Technology will continue to be a
focal point of the U.S.-Russia energy relationship. And energy
efficiency and gas flaring elimination and reduction strategies
will be given special attention in the short term.
We have also included environmental issues in our energy
dialogue. When the Secretary of Energy was in Moscow 6 weeks
ago, he signed a statement of intent to enter into a dialogue
on oil spill prevention and response. This is an important
area, as we move towards the reality of increased Russian
shipments of oil on the world's oceans.
This fall the U.S. Departments of Energy and Commerce,
Russian Ministry of Energy, and Russian Ministry of Economic
Development and Trade will be holding the second Commercial
Energy Summit. And this summit will have an expanded agenda,
which will also include electric power, in addition to oil and
gas.
Lest I give you the impression that there are no concerns
and problems in our energy dialogue and relationship, I would
like to indicate that the path forward is not smooth and not
straightforward. While oil production continues to increase,
Russian oil exports are hampered by serious infrastructure
problems. Today, Russian oil tankers do not have access to a
deep water port where crude oil can be transported long
distances in an economically sound and environmentally safe
manner. Long distance markets, such as the U.S., China, or the
Asian Pacific, are future targets of Russian crude oil. But
these markets require either access to deep water ports or new
long-distance pipelines or some combination of pipelines and
ports.
These facilities will be expensive. And they are now being
considered by the Russian Government. But who will own them,
operate them, and finance these projects is under active
consideration. The results of this debate and the development
of these new infrastructure projects will help determine
whether additional Russian oil will flow into world oil
markets, increasing the diversity of global supply and thereby
enhancing the U.S.'s energy security.
The opportunities for U.S. companies to invest in Russia
again are not so clear and straightforward. Russia has gone
through a series of changing attitudes towards Western
investment and its desirability and necessity. When oil prices
are relatively low or the Russian economy weak, Western
investment has been attractive. And Russian policymakers have
been active promoters of it. With a more robust Russian economy
and higher oil prices, Russian policymakers have changed their
tune. Regulatory, legal, and tax and other fiscal policies
reflect this changing environment.
The history of production-sharing legislation is a good
example of changing attitudes. And we can talk about the ups
and downs of production-sharing legislation and its
attractiveness in our question-and-answer session.
Let me turn to Central Asia and the Caspian, since the
experience there is both different and similar. Most important,
there have been substantial investment successes by Western and
U.S. companies in the region. Following the breakup of the
Soviet Union in 1991, this region attracted the interest of the
international energy community because of the huge oil and
natural gas reserves believed to lie both onshore and offshore
beneath the Caspian Sea.
With independence, both Azerbaijan and Kazakhstan welcomed
international investors, and big production-sharing agreement
contracts have been signed in both countries. These projects,
developed by Western investors, including companies from the
United States, have created thousands of jobs, provided access
to improved technology, including training for the labor force,
invested in social infrastructure, increased the commitment to
environmental protection, and encouraged the establishment of
many small- and medium-sized enterprises in these countries.
One of the major difficulties faced by Caspian states, as
they attempt to develop and export their energy resources, has
been the lack of export outlets. The administration has
consistently supported the development of new pipeline
projects, especially the east-west transport corridor that
would stretch from Kazakhstan, through Azerbaijan, Georgia, and
Turkey to the Mediterranean. The fulfillment of this transport
corridor is already in the works. The Caspian Pipeline
Consortium that I mentioned earlier is one element of it. The
Baku-Tbilisi-Ceyhan pipeline under construction is another
element of it. And negotiations are under way to facilitate the
shipment of oil from Kazakhstan for transport through this
line.
There is a second issue inhibiting oil and gas development
in the Caspian Sea. And that is the unresolved legal status of
the sea. And again, we could discuss that during the question
and answer.
As in Russia, the United States Government has consistently
supported the development of Central Asian countries' sound,
legal, fiscal, and regulatory policies to support economic
growth, including energy development. The Department of Energy
has maintained ongoing dialogues with energy officials from
Kazakhstan and Azerbaijan on market reform in the energy area.
And in December 2001, we established a U.S.-Kazakhstan energy
partnership in order to further this dialogue.
In Azerbaijan, Energy Department officials, including the
Secretary, have met on a regular basis with representatives of
the Azerbaijan Government. And we have recently begun an
initiative to expand our cooperation beyond oil and gas to
energy efficiencies and renewable technologies. As with Russia,
there are problems. With economic growth, the government of
Kazakhstan has developed somewhat ambiguous feelings about
foreign investment, just as it has happened in Russia. The
investment climate has been affected by such things as changes
in laws relating to domestic content and government policy on
visas for expatriate workers.
A recent dispute over the provisions of the production
sharing agreement with Tengizchevroil, which is the largest oil
development in Kazakhstan and is led by ChevronTexaco, while it
was resolved, led to a government statement that future
production-sharing agreements would have less favorable
provisions for foreign investors. We will continue to encourage
the government of Kazakhstan to improve its investment climate
and attract the billions of dollars in investment required to
develop projects.
This administration has had an extremely proactive approach
to energy dialogue with both Russian and the Central Asian and
Caspian regions. We have made good progress and have achieved
some successes. But we are by no means finished with our
agenda. We will continue to engage the governments of these
countries to enhance our cooperation and build upon the work
already under way.
Mr. Chairman, I would like to thank you for the opportunity
to testify before you today. And I welcome any questions that
you might have.
Senator Hagel. Mr. Coburn, thank you.
[The prepared statement of Mr. Coburn follows:]
Prepared Statement of Leonard L. Coburn
Thank you, Mr. Chairman. I am pleased to appear before you today to
discuss the important role that energy plays in Russia and Central Asia
and the Caspian region and the Administration's efforts to enhance our
cooperation with these countries.
Introduction
On April 8, 2003, Deputy Secretary Kyle McSlarrow provided this
Subcommittee with an overview of the important role that energy plays
in the global economy and the Administration's efforts to enhance our
energy security. Today, we will narrow our focus to concentrate on the
Administration's energy cooperation with Russia and with the
independent republics of Central Asia and the Caspian.
The Administration has been extremely proactive in its relations
with both regions, and there is a great deal of progress to report on
our efforts to enhance energy cooperation. Production and reserve
status will be discussed first and then our energy cooperation with
Russia followed by Central Asia and the Caspian.
Oil Production and Reserves
Oil production in Russia has rebounded significantly over the last
several years. The attached table profiles Russian oil production over
the last decade. If one looks further back, Russia (the Soviet Union)
produced about 12 million barrels per day at its peak. With the
dissolution of the Soviet Union, oil production dropped dramatically to
the level shown in the table and continue to drop through the mid-
1990s. The rebound started in 1999 due to several factors, including
higher oil prices, reinvestment by the privatized companies back into
the Russian oil industry, lower production costs due to Ruble
devaluation, and the introduction of western technology to upgrade
existing oil fields in Western Siberia. In 2003, oil production
continues to increase and is approaching eight million barrels per day.
Russia is now the second largest producer and second largest exporter
of crude oil behind Saudi Arabia.
In the Central Asian-Caspian region, oil production also has
increased substantially over the last decade, due to the influx of
foreign investment in Azerbaijan and Kazakhstan. If Russian oil
production is excluded from the production figures, the increase of
2001 over 1990 is about 31 percent. Production has continued to
increase from the region and in 2002 averaged about 1.5 million barrels
per day.
Reserve numbers for Russia and the Central Asia-Caspian region vary
widely and are difficult to pin down. In Russia, oil and gas reserve
numbers remain a state secret; thus there are no official reserve
numbers. There have been many estimates provided by consulting
companies and Russian oil companies. Oil and Gas Journal's 2002
estimates put Russian proven oil reserves at about 50 billion barrels.
Several Russian oil companies indicate that this reserve level vastly
understates the actual reserves. They estimate the reserves should be
in the 90 to 110 billion barrel range. If Russia unlocks its data and
no longer says that reserves numbers are a state secret, more accurate
estimates of reserves will be available.
In the Central Asia-Caspian region, reserve numbers also have
varied widely depending upon the source. EIA indicates that proven
reserves are somewhere between 17 and 33 billion barrels. The have been
estimates of resources (not proven reserves) in excess of 100 billion
barrels. As more exploration is done in the region and more delineation
of deposits is undertaken, better reserve figures will be forthcoming.
For the time being, we must make due with the current estimates.
Russia
The U.S. Government's history of energy engagement with Russia
dates from the early 1990's, but in the interest of time, I will focus
on this Administration's energy engagement with Russia. The President
recognized the importance of the United States' relationship with
Russia early on in his Administration, elaborating on this relationship
in the Administration's National Energy Policy, issued in May 2001.
The National Energy Policy provides that the U.S. will:
Make energy security a priority of our trade and foreign
policy,
Improve dialogue among energy producing and consuming
nations,
Deepen the focus of the discussions with Russia on energy
and the investment climate, and
Assist U.S. companies in their dialogue on the investment
and trade climate with Russian officials, to encourage reform
of the Production Sharing Agreement law and other regulations
and related tax provisions, as well as general improvements in
the overall investment climate. This will help expand private
investment opportunities in Russia and will increase the
international role of Russian firms.
These policies provide a guide for Russian engagement, and since
the policy's creation, the Department of Energy has been active in
fulfilling and expanding upon the policies. In the past decade, the
U.S. government has been unwavering in its support of sound legal,
fiscal, and regulatory environments in Russia.
The U.S. government has remained committed to supporting market
reform in the energy sector. The Department of Energy continues to work
with our counterparts to promote a fair and clear regulatory framework
and tax regime, sound corporate governance, environmental protection,
and increased partnership and investment.
The U.S. also has been a strong supporter of oil and gas
development in the region. One way in which we have sought to enhance
our energy supply security is to promote Russian energy resource
development and export. We have watched with great interest the
development of Russian oil and gas resources by the privatized Russian
oil companies and especially noted the rapid increase in oil production
over the past four years.
We have expressed our support for the efforts of Russian companies
to export crude to global markets, including the U.S., and the future
development of transit routes and terminals that will allow additional
Russian resources to reach the world market. While we are not in the
business of picking among the various proposals for new infrastructure,
we support efforts being made in general to enhance and expand the
current pipeline infrastructure so that exports can increase, and be
made on an economically and environmentally sound basis.
The Administration's enhanced energy engagement with Russia
developed as a result of the Summit held by Presidents Bush and Putin
in May 2002 in Russia where they issued a Joint Statement on a new
U.S.-Russian Energy Dialogue. It confirms the importance of energy in
our bilateral relations and the Department of Energy is moving forward
on the elements of this dialogue, which include:
Developing bilateral energy cooperation,
Enhancing our discussions on global oil and energy markets,
Facilitating commercial cooperation among our companies,
Encouraging investment in the Russian energy sector,
Promoting access to world markets for Russian energy,
Fostering the use of unconventional energy sources,
including energy efficient and environmentally clean
technologies, and
Cooperating in the development of safer nuclear power
technologies.
The emphasis that Presidents Bush and Putin place on the
development of energy cooperation between our two countries and our
many companies offers the promise of a bright energy future based on
partnership for the development not just of Russia's vast untapped
energy resources but on cooperation in energy projects of all kinds in
both countries and around the world.
In order to accomplish these objectives, the Department of Energy
and the Russian Ministry of Energy created a U.S.-Russia Energy Working
Group. We will be concentrating on five areas:
Global oil markets,
Investment,
Technology, including energy-efficient, environmentally
friendly, and clean coal technologies,
Energy information exchange, and
Small- and medium-sized enterprises.
Work plans for these areas have been finalized, and we are
cooperating on a variety of matters beneficial to both sides. The
Energy Working Group has met three times, most recently on April 7-8,
2003. There has been a great deal of progress in all five subgroups. We
have not limited our engagement just to the formal Energy Working Group
meetings. We have met in between these meetings where we have held
workshops and roundtable discussions to share ideas and experiences in
a variety of areas. For example, most recently our oil market and
investment subgroups met in Moscow in March where we engaged in
discussions on long-term energy forecasting, fiscal regimes for oil and
gas development and regulation of the electricity and natural gas
industries.
Last October, the Departments of Energy and Commerce organized the
first U.S.-Russia Commercial Energy Summit. The Houston summit was co-
hosted by Secretary Abraham, Commerce Secretary Evans, Energy Minister
Yusufov, and Economic Development and Trade Minister Gref. The Summit
was acknowledged by participants, co-chairs, and industry observers as
a great success.
At the outset of the Summit, Secretary Abraham stressed that the
government's job is to create the framework of laws and rules that will
allow our companies to form partnerships with confidence in the
security of their arrangements and to operate in a competitive market
and free trade environment.
At the summit we discussed how to facilitate investment in the
Russian and American energy sectors, and facilitated opportunities for
U.S. and Russian companies to work together on future investments in
each other's energy industries, and in other parts of the world. In
Houston, companies engaged in business-to business networking, learned
from their colleagues, and discussed avenues for cooperation and
partnership.
Cooperation and partnerships already are underway. Last year I was
in Russia for the opening of the Caspian Pipeline Consortium (CPC)
pipeline, which today carries about 270,000 barrels a day of oil from
Kazakhstan's Tengiz oil field across Russia to a deepwater port on the
Black Sea. By this time next year, CPC is expected to ship almost
double its present volumes as throughput reaches its design capacity of
450,000 barrels a day. The pipeline, which has eleven international
partners, will eventually reach a capacity of over one million barrels
of oil per day. It represents an enormous investment in a project that
required more than mere bilateral cooperation. There are other projects
involving U.S. companies, including Sakhalin I, with ExxonMobil in the
lead developing oil and gas resources off the coast of Sakhalin I,
which will eventually be the largest western investment project in
Russia, Marathon Oil Corporation's recent acquisition of Khanty
Mansiysk Oil Corporation, and ConocoPhillips Polar Lights joint
venture.
The summit highlighted the latest advances in environmentally
friendly energy technology. Other panel sessions focused on the
promotion of small- and medium-sized enterprises and training and
education programs in the energy sector. Summit participants also had
the opportunity to engage in site visits, where oil and gas leaders
showcased their latest technological achievements and facilities.
At the conclusion of the Summit, the four co-chairs, Secretary
Abraham, Secretary Evans, Minister Yusufov, and Minister Gref, signed a
joint statement outlining the future goals of the U.S.-Russia energy
relationship.
They declared their commitment to common goals: enhanced global
energy security, including through maintaining an energy dialogue
between energy consuming and producing countries; increased
diversification of supplies; improved business and investment
environment; expansion of commercial partnerships; and commitment to
environmentally responsible development of resources. The Joint
Statement also reaffirmed our commitment to cooperation in a number of
areas in the energy sector.
We will continue to promote commercial partnerships between U.S.
and Russian firms in the U.S., Russia, and third countries. The Summit
featured the announcement of a U.S.-Russia Commercial Energy Dialogue
that will be industry led and will increase communication and
cooperation. The Departments of Energy and Commerce will consult with
this group to identify and help remove barriers to energy trade and
investment. When I was in Moscow six weeks ago, I heard first hand from
many of the companies that are participating in the Commercial Energy
Dialogue. What I learned from these discussions is that for the first
time Russian and Western companies are sitting together to solve common
problems on legislation and regulation of the Russian energy complex.
The level of cooperation could not be better.
Efforts to promote energy security will continue through
discussions with Russian officials of possible technical assistance
with a Russian strategic petroleum reserve. During the Houston Summit,
Secretary Abraham accompanied Minister Yusufov on a visit to the
Strategic Petroleum Reserve location in Texas. They toured the site and
further discussed the possibility of the development of a Russian
Strategic Petroleum Reserve. We have discussed this idea in our energy
working group. The Russian government is still debating the need and
purpose of creating a strategic reserve.
Technology will continue to be a focal point of the U.S.-Russia
energy relationship, and energy efficiency and gas flaring elimination
and reduction strategies will be given special attention in the short
term. Advanced technology makes environmentally responsible energy
projects possible. It allows us to produce more, explore opportunities
with greater success, and solve challenges posed by the entire spectrum
of activities associated with the production and delivery of energy.
Advanced technology offers an important arena for increased trade,
investment and cooperation.
We also have included environmental issues in our energy dialogue.
When the Secretary of Energy was in Moscow six weeks ago, he signed a
Statement of Intent to enter into a dialogue on oil spill prevention
and response. This is an important area as we move towards the reality
of increased Russian shipments of oil on the world's oceans. We held
our first meetings to implement this dialogue in early April and more
meetings are being planned for the next couple of months.
U.S. Department of Energy, U.S. Department of Commerce, Russian
Ministry of Energy, and Russian Ministry of Economic Development and
Trade officials have started planning for the next Commercial Energy
Summit to take place in Russia in the fall. This next summit will
include discussion of electric power in addition to oil and gas. We
have been watching with great interest the passage of electricity
legislation in the Duma and Federation Council. In anticipation of
final passage later this spring, DOE and the major Russian electric
company Unified Energy Systems held an electricity markets conference
in late February in Washington to discuss the U.S. experience in
restructuring the electric power industry. We also heard from our
Russian colleagues on the challenges that lie ahead. It was an
excellent discussion and it will not be the last.
Lest I give you the impression that there are no concerns and
problems, I would like to indicate that the path forward is not smooth
and straightforward. While Russian oil production continues to
increase, Russian exports are hampered by serious infrastructure
problems. Today, Russian oil tankers do not have access to a deepwater
port where crude oil can be transported long distances in an
economically sound and environmental safe manner. The major ports of
Novorossiysk on the Black Sea and the ports either in the Baltics or at
Primorsk in the Gulf of Finland all have constraints on the size of
tankers that can transit the Turkish Straights or the Baltic Straights.
The Druzhba pipeline system into Europe also has limitations and
bottlenecks, but more importantly, there is insufficient demand in
Europe to accommodate growing Russian oil production. Thus, long-
distance markets such as the U.S., China or the Asia-Pacific are the
future targets of Russian crude oil. These markets require either
access to deep water ports, or new, long-distance pipelines, or some
combination of pipelines and ports. These facilities will be expensive,
but are now being considered by Russia. Who will own, operate and
finance these projects is under active consideration. The results of
this debate and the development of these new infrastructure will help
determine whether additional Russian oil will flow into world markets--
increasing the diversity of global supply, thereby enhancing the U.S.'s
own energy security.
The opportunities for U.S. companies to invest in Russia again are
not so clear and straightforward. Russia has gone through a series of
changing attitudes towards western investment and its desirability and
necessity. When oil prices are relatively low, or the Russian economy
weak, western investment has been attractive and Russian policymakers
have been active promoters of it. With a more robust Russian economy
and higher oil prices, Russian policymakers have changed their tune.
Regulatory, legal, and tax and other fiscal policies reflect this
changing environment. The history of Production Sharing Agreement (PSA)
legislation is a good example of changing attitudes. PSAs are
attractive to foreign investors in relatively unstable economies
because they state in one negotiated document how much a company will
have to pay to the government for the right to exploit the resource,
how costs will be recovered, which legal regime will be used in the
event of disputes and many other rights and obligations. Many nations
around the world have used PSAs as a tool to develop their energy
resources. At first, Russia accepted the use of PSAs and enacted
legislation in 1995 establishing the right to negotiate PSAs on
designated deposits. The legislation needed amending in order for it to
be successful, and these amendments took years, but were eventually
passed. More recently, as Russia has reformed its tax code, the PSA
legislation had to be harmonized with the new tax code. With a
resurgent domestic oil industry in Russia and the creation of a more
modern tax code, the need for PSAs has been questioned by the
government and strongly opposed by some Russian companies. Recent
pronouncements by the government indicate that only a relatively few
projects will be permitted under the PSA regime. This is a
disappointment to the more than 30 projects that had been designated
eligible for PSA treatment. Some western companies state they are not
willing to move forward without PSA protection on their projects.
Others have taken a more flexible approach. Still others are willing to
move forward under the current tax regime. It is a time of uncertainty,
especially for the large, high cost projects in high risk areas.
Central Asia-Caspian
The experience in Central Asia-Caspian region is both different and
similar. Most important, there have been substantial investment
successes by western and U.S. companies in the region. Following the
breakup of the Soviet Union in 1991, this region attracted the interest
of the international energy community because of the huge oil and
natural gas reserves believed to lie both on shore, but especially
offshore beneath the Caspian Sea. The Sea is 700 miles long and
contains six separate identified hydrocarbon basins, most of which have
not been developed.
With independence, both Azerbaijan and Kazakhstan welcomed
international investors. On September 20, 1994, Azerbaijan signed the
``Contract of the Century.'' This contact was in the form of a PSA with
a consortium of 11 foreign companies (three American companies) from
six nations for the development of three major oil fields in the
Azerbaijan sector of the Caspian Sea--the Azeri, Chirag and Gunashli
(ACG) fields.
In April 1993, Kazakhstan signed a PSA with a consortium led by
Chevron to develop the Tengiz oil field. The Tengizchevroil consortium
(with ChevronTexaco and ExxonMobil owning the majority share in the
project) is planning to invest $3 billion over the next few years. With
adequate export outlets, 750,000 bbl/d could be provided to
international markets by 2010. A second, huge oil deposit is being
developed in the offshore Kashagan block (again with U.S. company
participation).
These projects developed by western investors, including companies
from the United States, have created thousands of jobs, provided access
to improved technology including training for the labor force, invested
in social infrastructure, increased commitment to environmental
protection, and encouraged the establishment of many small and medium
sized enterprises in these countries.
One of the major difficulties faced by Caspian states as they
attempt to develop and export their energy resources has been the lack
of export outlets. During the Soviet era, all of the oil and natural
gas pipelines in the Caspian Sea region (aside from limited capacity in
northern Iran) were routed through Russia. Prior to 1997, exporters of
Caspian region oil had only one major pipeline option available to
them, a 240,000 bbl/d pipeline from Kazakhstan to Russia. Since
independence, several new oil export pipelines have been built,
including the CPC pipeline mentioned earlier. However, the relative
lack of export options continues to limit exports to markets outside
the former Soviet Union. The Administration has consistently supported
the development of new pipeline projects, especially an East-West
transport corridor that would stretch from Kazakhstan through
Azerbaijan, Georgia and Turkey to the Mediterranean. The Baku-Tbilisi-
Ceyhan (BTC) pipeline is under construction and negotiations are
underway to facilitate the shipment of oil from Kazakhstan for
transport through this line. In support of the Administration's
commitment to multiple pipelines, the Trade and Development Agency has
funded feasibility studies of several Bosporus Bypass pipeline projects
that would carry Russian and Central Asian oil from Western Black Sea
ports to Western Europe.
A second issue inhibiting oil and gas development in the Caspian
Sea is the unresolved legal status of the Sea. Prior to 1991, only two
countries--the Soviet Union and Iran--bordered the Caspian Sea, and the
legal status of the Sea was governed by 1921 and 1940 bilateral
treaties. With independence these treaties became invalid and the
ownership and development rights in the Sea have not been resolved.
While only the Caspian littoral states can negotiate an agreement, the
United States has provided technical legal expertise.
As in Russia, the United States Government has consistently
supported the development by Central Asian countries of sound legal,
fiscal and regulatory policies to support economic growth, including
energy development. The Department of Energy has maintained on-going
dialogues with energy officials from Kazakhstan and Azerbaijan on
market reform in the energy area. In December 2001, we established a
U.S.-Kazakhstan Energy Partnership. This Partnership has met three
times. In September 2002, Secretary Abraham and his counterpart signed
a Work Program that commits us to cooperation in the following areas:
Oil and gas project development;
Realization of multiple pipeline options for export of both
oil and gas;
Improving the investment climate;
Market reform and increased investment (including energy
efficiency and renewable technologies) in the electric power
sector;
Energy related environmental protection and regulation;
Energy facility security; and
Energy science research.
We have conducted workshops on oil spill response policy planning,
cooperation in environmentally related marine science, and facilities
security in Kazakhstan. A dialogue is underway in all of these areas.
Secretary Abraham visited Azerbaijan in September 2002 for the BTC
ground breaking ceremony and delivered a strong statement of
Administration support for the efforts of the government and the ACG
consortium to develop additional and alternative pipeline routes for
Caspian oil and gas. Departmental officials, including the Secretary,
meet on a regular basis with representatives of the Azerbaijan
government and have recently begun an initiative to expand our
cooperation beyond oil and gas to energy efficiency and renewable
technologies. Use of these technologies could provide significant long-
term energy savings for the Azerbaijan government as it invests in new
housing for its substantial refugee population.
Speaking of the long-term, we have also underway a program to
encourage development of joint research projects between scientists in
Central Asia and the Caucasus and scientists in the Department's
national laboratories. We had one meeting last August that included
representatives of U.S. government funding programs and will hold a
second meeting in August this year. We maintain a website (http://
pims.ed.ornl.gov/) in cooperation with the Department of Defense that
encourages this cooperation and offers a tool for research facilities
in these countries to demonstrate their capabilities.
As with Russia there are problems. With economic growth, the
government of Kazakhstan has developed ambiguous feelings about foreign
investment as has happened in Russia. The investment climate has been
affected by such things as changes in laws relating to domestic content
and government policy on visas for expatriate workers. A recent dispute
over provisions of the PSA with Tengizchevroil, while resolved, led to
a government statement that future PSAs would have less favorable
provisions for foreign investors. The Kazakhstan government concedes
that the original investors assumed a higher level of risk when they
entered the Kazakhstan market and appear willing to support the terms
originally negotiated. When a new series of blocks is offered for lease
later this year, the direction of the government with respect to
investment terms will become more clear. We will continue to encourage
the government of Kazakhstan to improve its investment climate and
thereby attract the billions of dollars in investment required to
develop these projects.
Russia's oil industry, which was largely privatized in the
mid-1990s, has bounced back over the past few years, posting
strong profits and healthy increases in production. Buoyed by
relatively high world oil prices in 1999 and 2000, as well as a
decline in production costs following the August 1998
devaluation of the ruble, Russian oil companies ramped up
production, and by 2002 the country was pumping out an average
of 7.65 million bbl/d--a 26 percent increase over the 1998
level.
Caspian Sea Region Oil Production
(thousand barrels per day)
----------------------------------------------------------------------------------------------------------------
Estimated Production
Country Production (1990) (2001)
----------------------------------------------------------------------------------------------------------------
Azerbaijan........................................................ 259 311.2
Kazakhstan........................................................ 602 811
Iran*............................................................. 0 0
Russia**.......................................................... 144 11
Turkmenistan...................................................... 125 159
Total........................................................... 1,130 1,292.2
----------------------------------------------------------------------------------------------------------------
Source: Energy Information Administration
* only the regions near the Caspian are included
** includes Astrakhan, Dagestan, and the North Caucasus region bordering the Caspian Sea
Overall, oil production in the Caspian Sea region reached
approximately 1.3 million bbl/d in 2001, this represents an
approximately 160,000-bbl/d increase since 1990.
Estimates of the Caspian Sea's oil reserves vary widely by
source. For this reason, we have presented proven oil reserves
as a range between 17 and 33 billion barrels.
The upper end of this range (33 billion barrels) is based on
an independent geological survey, conducted in 1998 by
Petroconsultants. The lower end of the range comes from 2003
industry publications. Given the region's rapid development,
EIA considers the higher estimates to be most plausible, and
may not include recently discovered reserves.
These 2002 figures include Oil and Gas Journal's estimates
of conventional world oil reserves. In 2003, Oil and Gas
Journal included Alberta's oil sands, which significantly
changes total world estimates by increasing Canadian proved
reserves from 5 billion to 180 billion barrels.
Conclusion
This Administration has had an extremely proactive approach to
energy dialogue with Russia and the Central Asia-Caspian regions. We
have made good progress and have achieved some successes, but we are by
no means finished with our agenda. We will continue to engage the
governments of these countries to enhance our cooperation and build
upon the work already underway.
Mr. Chairman, I would like to thank you for the opportunity to
testify before you today, and I welcome any questions you and the
Committee might have.
Senator Hagel. We appreciate both yours and Ms. Borg's
testimony.
Let me begin with a couple of questions of Russia for each
of you. What effect do you believe there will be on Russia's
attitudes toward oil recovery production overall as we sort out
the issues in Iraq? Obviously, you both are aware of the
Russian-Iraqi oil arrangements, or at least generally some of
those arrangements over the years. And if you each could
amplify a bit on what your thoughts are as to what effect the
outcome of the Iraqi situation will have or not have on
production in Iraq, Russia's relationship with that production,
with the United States or will it be affected at all.
Ms. Borg?
Ms. Borg. Thank you very much, Mr. Chairman. Iraq, of
course, had significant--Russia had very significant economic
ties, of course, with Iraq, being a leading supplier under the
Oil for Food Program and having a number of contracts that I
think we all had heard about, including the Lukoil, the large
Lukoil contract that was abrogated right before the war.
Dismantling the Oil for Food Program, of course, doesn't
mean an end to their ability to be a supplier, whether it is in
food or in oil contracts or any other ways. And so while we
have had differences, of course, with Russia on Iraq, our hope
is that, as we move forward in the post-conflict period, that
we will be able to have a more cooperative, that we will be
able to work with them in a cooperative way in addressing the
situation there, including the end of the oil--including
lifting sanctions.
We can imagine that they will have an interest, that Iraq,
of course, has huge, as Mr. Coburn has pointed out, huge oil
reserves. And I think that people will look to that with
interest. I think our policy has been very clear that we see,
as the President, Secretary Powell, and others have said, we
see Iraq oil as being for the Iraq people. And we hope that at
the earliest opportunity it will be turned over to Iraqis to
decide on both any existing contracts and any future contracts,
as well as contracts for oil and supply equipment.
Senator Hagel. Thank you.
Mr. Coburn?
Mr. Coburn. Well, I agree with everything that Ms. Borg
stated. I think it is very clear that the future relationship
of Russia and Iraq has to be sorted out by the new government
that is in Iraq when it becomes stable and is able to look out
to the future and settle its past claims and its past
contracts, it will be its decision.
Certainly the energy relationship with the United States
and Russia I do not think will be affected by what happens in
Iraq. For example, while we were at war in Iraq, we conducted
our energy working group meetings here in Washington, very
successful meetings. There was no discernible lessening of
interest in our relationship and what we were trying to achieve
because of what was going on in Iraq.
So I think in that respect the Iraq situation is somewhat
of a whole different element in what we are trying to achieve
with Russia and the Caspian states.
Senator Hagel. So you both essentially, in a general way,
do not believe there will be a significant impact one way or
the other. Okay. Thank you.
You mentioned the working group, the dialogue. You have
presented a rather positive picture of how that has been
progressing. Would you go a little deeper into that? What, for
example, would you point to over the last 6 months where we
could say that there are tangible results developing here, as a
result of that working group dialogue?
Mr. Coburn. I would be very pleased to address that. My
office at the Department of Energy, acts as the secretariat for
the Department of Energy in the energy working group. We help
manage this for the Government. In the five areas that we have
focused on, I would say that, for example, in oil market
discussions we have been able to have very robust discussions
about the U.S. role and the Russian role in oil markets,
something that the Russians are groping with as they become a
very significant player in oil markets. Their need to
understand how oil markets work, the impact of supply-demand
issues on oil markets, forecasts for the future are something
that they seek more information about. And we have been able to
go into rather detailed discussions over the last year on these
types of issues.
Senator Hagel. Markets for them?
Mr. Coburn. Markets for them, as well as the interaction
with OPEC, for example, the Organization of Petroleum Exporting
Countries, what the impact of spare capacity has on a market,
what is the impact of the ability to export to foreign markets,
how can they penetrate foreign markets, what is necessary for
them to do that.
So we have had some very good discussions about these
roles. And it has a feedback into what is going on in Russia in
terms of infrastructure development and their development of
their own internal investment needs as they see future markets
in the U.S. and elsewhere, as I mentioned in my statement.
Senator Hagel. And that would be part of it as well, where
there are opportunities in the United States for them, as well.
Mr. Coburn. Exactly, I mean, they are looking towards the
United States as a potential market. They are looking certainly
to the Far East as a potential market. They are very interested
in what those opportunities are, how they can set up marketing
arrangements in the United States. One company has already done
that. Lukoil has an arrangement with Getty and markets oil here
in the United States. Other companies are seeking to do similar
things, buy refineries, figure out how they gain access to deep
water ports.
So all those issues have been discussed and will be
continued to be discussed in the energy working group, as well
as in the energy dialogue that we have, the commercial energy
dialogue.
In the investment area, we have discussed a great deal the
productions-sharing issue that I mentioned earlier in my
testimony. This issue is important to U.S. companies, because
it looked like the mechanism, and the best mechanism, for
ensuring that companies could invest in Russia in a secure way
in high-risk projects. We continue to work the issue, although
we have had some disappointing twists and turns in the last few
months. We have heard government statements that there will be
a severe limitation on production-sharing agreements and the
ability to use them in the future.
But at the same time, this opens up different avenues of
discussion in terms of trying to find other ways to address
high-risk projects. And when I mean high risk, I mean the ones
that will cost $10 billion to $15 billion over the life of the
project, that are going into unexplored areas where there is no
infrastructure, places like Sakhalin Island or East Siberia.
The Russians are very receptive to hearing our ideas about,
as well as the companies' ideas about, how they can address
those types of projects and bring in investment from the
private sector, if it requires changes in their tax regime or
in their licensing and other subsoil laws. We have had all
those under discussion over the last several months and years.
Senator Hagel. Do they bring back resolutions, concepts,
when they come back for the next meeting after you have
discussed some of the examples you have just mentioned, as Ms.
Borg did, changes in tax laws, transparency, some of the other
issues that they are dealing with? How do you move that
forward? Do they come back with something tangible, when they
say, now we have been able to do this or we have gone to the
Duma, or how does that work? Other than just discussing it, how
do they come back with some results?
Mr. Coburn. Well, I think the way it works is primarily we
see progress in changes or proposals for changes in legislation
in the Duma. Certainly there has been a lot of discussion going
on regarding the tax regime about how to address the issue of
high-cost, long-term investment. There are a variety of
proposals that are on the table. We communicate, and I think it
gets translated into discussions at the company level. It comes
back up again in discussions at the Duma on alternatives and
ways to address these issues.
So if it is not necessarily brought back into the energy
working group, you can sort of see the ideas that we talk about
starting to proliferate through government action and
government proposals for change in what they are trying to do.
They certainly----
Senator Hagel. Has there been an increase that we have
noted in the last year, or a decrease, in American investment
in the Russian energy sector?
Mr. Coburn [continuing]. I do not think we have seen a
major change one way or the other. I think we have seen a
little hesitancy in some of the large projects. But as I
mentioned in my statement, we have just seen Marathon buy a
small company, Khanty Mansiysk. So there is an example of
continued investment. The largest investment right now is the
Caspian pipeline. Sakhalin 1 continues to move forward. And
they just recently announced their intent to commit to full
development of Sakhalin, which is led by ExxonMobil.
Some of the other companies are feeling a little under the
gun in the sense that they are not willing to make those
commitments absent a long-term arrangement, whether it is
production sharing or something else in high-risk areas.
So to say there has been a lessening, I do not think so. I
think it has been fairly steady. One area that I think Anna
mentioned, which has been really the best area for not
necessarily investment but for success, has been our service
companies working with Russian companies primarily, but also
with Western companies, in going back into the existing
oilfields and helping to achieve the level of production that
the Russians are now at, because of their ability to rely on
Western technology.
Senator Hagel. Before I turn to Ms. Borg--thank you. What
about natural gas in Russia? Same set of questions.
Mr. Coburn. Natural gas is a challenge in the sense that
it is controlled by Gazprom. About 90-plus percent of Russian
production is controlled by Gazprom. All the transportation is
controlled by Gazprom and their pipelines. I think there are
plans on the drawing board for reform of the system. When that
will take place is open to speculation.
The Russians have been moving faster on the electric power
side. And I think Gazprom is probably, and the natural gas
industry is probably, next in line for change and reform. But I
think that is going to take a number of years. And the pressure
is coming not only from the West, but it is also coming from
the Russian companies themselves, who are amassing large gas
reserves and would dearly like to be able to transport it to
third parties.
Senator Hagel. Where is most of the Russian energy sector
investment coming from, Europe?
Mr. Coburn. In terms of foreign investment?
Senator Hagel. Foreign investment.
Mr. Coburn. I would say probably the largest investor
right now is the United States. Secondly would be Europe. The
Germans have been very active. The French have been very active
in a variety of--the Italians, as well.
Senator Hagel. What arrangements are we aware of between
the Russians and the Chinese on a number of these energy
projects?
Mr. Coburn. Well, I think the most important one is the
announcement of a pipeline from Russia to China, going from
Angarsk, which is at the very eastern end of the Russian
pipeline system, to Daqing. This was originally proposed by
Yukos and has now been taken up by the Russian Government as a
proposal that it wants to pursue. And we heard an announcement
earlier this month from the Prime Minister indicating that that
pipeline will be built, the one form Angarsk to Daqing. So I
think that is an indication that Russia is attempting to
penetrate the Chinese market and will be successful with the
construction of that pipeline.
Senator Hagel. Thank you.
Ms. Borg, we have ranged out over a number of questions.
And so I would very much appreciate your thoughts on each of
those questions, if you care to offer them. Thank you.
Ms. Borg. Thank you very much, Mr. Chairman. We work very
closely on all these issues with the Department of Energy and
with Mr. Coburn and his colleagues. I might just make one
additional comment, a couple of different comments.
One, we have discussed a little bit what we are doing
bilaterally on the issue of investment climate and
liberalization and looking at other areas. We also work on
these issues multilaterally through the International Energy
Agency. I represent the State Department on the governing
board. And together, we go to most of their meetings.
Russia has now a very intense dialogue with the
International Energy Agency, which we have been very supportive
of, so that the agency has been providing advice to the
Russians and discussions with them on the whole range, from
liberalization of gas markets, how it is done, pricing,
transparency, a whole range of issues, including conferences
that have occurred and will occur in Russia and with a Russian
focus.
The Russian Energy Minister, for example, was a special
guest speaker yesterday at the International Energy Agency's
ministerial. I think this kind of dialogue, the multilateral
dialogue, also reinforces and helps the bilateral focus on some
of these questions. So that is also an interesting aspect.
On the gas aspects, we also look to see what the Russians
themselves produce when they come out with their own energy
plan sometime later in the month of May. We are watching
similarly with interest the proposals of private companies to
run oil and gas pipelines in Russia. And we have certainly
explained that we thought that would be very useful, that given
the possibilities for export, the markets for export, and the
constraints of the current pipeline system, that there is
considerable merit in moving to permitting some pipeline in
private hands.
So that comments a little bit on some of Len's excellent
answers already.
Senator Hagel. Do you care to respond to any of the
general areas we were talking about regarding investment in any
more depth from your perspective in the State Department?
Ms. Borg. No. I think he covered them in great detail. I
think we have also wanted to work very closely on commercial
opportunities, in addition to investment, investment climate.
And of course, as regards the Caspian, we have continued
the practice of having an ambassador, in this case Steven Mann,
who is our special advisor for Caspian Basin energy diplomacy,
who has devoted considerable time and travel and energy to
dealing with different issues as they come up related to
investment or other challenges that have occurred along the
Baku-Tbilisi-Ceyhan pipeline, as well as working to promote the
Shah Deniz gas pipeline.
So we have spent a tremendous amount of resources and time
also on those issues.
Senator Hagel. What is the Russian position on the Baku-
Ceyhan pipeline?
Mr. Coburn. I think at this point the Russians have always
said that pipelines need to be economically sound. If a
pipeline is economically sound and will be supported by the
private sector, then they have no objection to it and would
not, certainly not get in the way of its development.
As Baku-Tbilisi-Ceyhan has developed, it has developed into
a pipeline that is now economically sound. It has now received
the support of a large number of companies. They are, as we
speak, starting to construct the pipeline. And the Russians
have basically said, as long as the economics are there, they
have no objection to it.
Senator Hagel. Would you want to add anything to that, Ms.
Borg?
As this committee has looked into these issues over the
years, it is apparent that Turkey has had, still has concerns
about the Bosporus being used as an oil way with environmental
concerns, potential environmental damage. Would either of you
like to respond to those concerns? Have we made, do you
believe, progress on any of those concerns?
Obviously, the pipelines eliminating going around the Black
Sea would be, are, the answer. But there are still other uses,
energy, transportation facilities that will use the Black Sea.
And any kind of an update on the Bosporus would be important to
hear from either of you. Thank you.
Ms. Borg. Thank you, Mr. Chairman. I think, of course, one
of the key updates over the last number of years on the
Bosporus and what one can do about that was the commercial
viability of Baku-Tbilisi-Ceyhan pipeline. I think that in
recent weeks, in recent past weeks and months, we have heard a
lot of discussion of alternative pipelines. I think there is
great awareness that the Bosporus is handling a huge amount of
shipping tankers. And, in terms of energy security, one also
has an awareness that there need to be alternatives to that,
that should there be some sort of a problem with the Bosporus,
there need to be developed some diversification of supply
routes.
So we at the State Department have heard a number of
different discussions of alternatives of new pipelines that
could be built. And there are a number of different firms that
we realize are interested in these. Many of them are at the
discussion stage.
Senator Hagel. Mr. Coburn? Thank you.
Mr. Coburn. Well, I certainly agree with everything that
Anna Borg said. But what I would like to add is that the
Bosporus is an international waterway. It is under the control
of, or at least the authority of, the International Maritime
Organization, the IMO. And Turkey, although it has distinct
concerns about it, as well it should, if you have ever been
there and seen where it goes, through the heart of the city--it
is quite amazing.
Senator Hagel. I have, yes.
Mr. Coburn. The fundamental issue is really one of safe
passage through that international waterway. And Turkey has
done a number of things in terms of upgrading its traffic
navigation system and other things to ensure the safety of the
waterway.
One element that we have been working on, in cooperation
with Russia, as well as all the other Black Sea countries, is a
regional oil spill prevention and response plan. We have been
very active working with all the six littoral states in the
Black Sea to make sure that if something does occur, that there
is a way to manage that very quickly and very safely. We have
made some progress in that area. We will continue to work on
that area, because I think it is critical, as long as Bosporus
maintains its international status.
I also agree with Anna that bypasses, including the BTC
system, are essential for at least alleviating the future
traffic through the Bosporus.
Senator Hagel. Thank you. You mentioned in your testimony,
Mr. Coburn, I think you referenced that we can get back into
this in a little more detail, the issue of ownership of the
Caspian Sea energy resources. What can the United States do,
what are we doing, what should we do to help facilitate
untangling that in a peaceful way so that there is some
productive conclusion to that issue which hangs heavy over
probably the potential, as much as anything else, of really
developing the Caspian? And there may well be ongoing
activities in your departments that are addressing that.
But if you could address that question, what are we doing,
what should we be doing, what can we do, as well as the State
Department? Thank you.
Mr. Coburn. Thank you very much for that question. The
fundamental issue with the Caspian is how to delimit or to
divide up the resources that lie below it, as well as how to
regulate and control the water column, the surface as well, and
fishing rights and everything else. Right now the status is in
somewhat of a limbo. The treaties that were in effect on the
Caspian essentially were signed, the most recent one in the
1940s between the Soviet Union and Iran. There have been a huge
number of opinions about whether those treaties still obtain,
whether the other states have signed off and continue as part
of that, as they have become independent.
The U.S. has taken the position that delimitation needs to
be solved by the five littoral states. But there are things the
U.S. can do to help with whatever future development the
countries have decided to take. Three countries have now signed
treaties, Russia, Kazakhstan, and Azerbaijan, in delimiting the
seabed through what is called a median system. The U.S. has
provided expertise and technical assistance with respect to
satellite imagery and other types of very hands-on work on
where to draw that line. That has been something that has been
very welcomed by the three states that have now signed
treaties. Iran and Turkmenistan still have not agreed to
anything and still continue to have their own point of view.
But we have consistently said to all of them, it is really up
to the five states to solve the problem, but we can help with
technical assistance like satellite imagery and things like
that.
Senator Hagel. Ms. Borg? Thank you.
Ms. Borg. I have nothing really to add to his excellent
rundown of the issues. We have wanted to help facilitate
negotiations. We are not involved in the negotiations, but as
Len has said, we have tried to provide the technical assistance
that might help in the negotiations.
Senator Hagel. What is our position, the United States
position, regarding Iran on this issue? Are we encouraging Iran
working with these other Caspian areas to integrate some
agreement here, or what is our position as it relates to Iran
on these five states and trying to help untangle this?
Ms. Borg. Iran is, of course, the only country of these
countries that surround the Caspian that we have not provided
the technical assistance to because of our long-standing
position of not wanting to encourage development of energy in
Iran. And beyond that, we have looked at issues as they have
come up. There have been some sanctions-related issues as
surrounded the Shah Deniz development that came up. And we have
dealt with those on a case-by-case basis. But really, we have
drawn the line at not providing technical assistance to them.
Senator Hagel. So our position is with the other nations
in that area, you are on your own to try to work out what you
can with Iran. And we have no third party dialogue or any other
communication in that regard with Iran.
Anything you would like to add, Mr. Coburn?
Mr. Coburn. No. I think Ms. Borg answered that quite well.
Thank you.
Senator Hagel. Okay. You have both been here now more than
an hour. And I do not want to hold you any longer. I would like
to ask if we could keep the record open for a day in case any
of my colleagues would like to submit questions that we would
appreciate you answering. I again thank you on behalf of the
committee for you coming forward and both presenting important
testimony, which helps us here work our way through some of
these issues.
And I think as timely as this general area is in our
Nation's future, with all that is going on in the areas that we
have explored today, it is particularly important that you and
your colleagues continue to do the good work that you are
doing. So we appreciate it very much. Thank you.
Now, as the first panel clears out, if the second panel
could come in behind, we will get started. Thank you. [Pause.]
Senator Hagel. Welcome, again. Thank you. I appreciate
very much the three of you taking your time and organizing your
thoughts and making your presentation this afternoon. Since I
have introduced each of you, let me begin with asking Ms. Nanay
to open the second panel with her testimony. Ms. Nanay.
STATEMENT OF MS. JULIA NANAY,
SENIOR DIRECTOR, PFC ENERGY
Ms. Nanay. Thank you. I think the microphone is on.
Thank you. I really appreciate the opportunity to testify.
This is actually a very interesting topic for me to address. I
know Ed Chow well. It is really a pleasure, also, to be able to
be on a panel with both Andrew and Ed. I have a feeling that
our remarks will complement each other.
Again, my written statement is introduced for the record. I
would like to quickly summarize some of my arguments.
First, as it was mentioned by Ms. Borg, this issue of the
Middle East, it is always important to keep in mind that the
Middle East is at the core of our worldwide oil supply base.
There is a perception that the world has to find and develop
increasing sources of oil and gas outside of the Middle East
and at any cost, because the Middle East producers are
unreliable suppliers.
But as we have seen since September 11, many have
criticized certain Middle Eastern countries for various things.
But the last thing you can say about any Middle Eastern
producer is that they have been unreliable suppliers of oil;
because as the war in Iraq illustrates, the one Middle East
producer that has the surge capacity to balance the oil
markets, namely Saudi Arabia, remained a staunch U.S. ally and
kept the necessary amounts of oil flowing.
Anyone that works in the oil industry and comes before this
subcommittee will repeat the same fact: The Middle East remains
a core provider of oil supplies for world markets. And now, in
fact, in the Middle East we have a new U.S. ally, as was
mentioned earlier, in the form of Iraq, which is going to be an
important world oil supplier as well.
Second is the reaction of the U.S. Government to the
perception that we must diversify away from the Middle East at
any cost. Over the last years, this no-cost-is-too-high
strategy has led the U.S. Government to put the spotlight on
the Caspian and more recently on Russia. Again, as anyone who
comes before this subcommittee that works in the oil industry
will repeat, world oil markets are fungible. As long as oil is
produced somewhere, it will make it into the market somewhere,
and prices and supplies will adjust.
If you believe in markets, and the U.S. Government
supposedly does, this is the view you adopt. Over the last
years in the Caspian, the U.S. Government has challenged this
market-based view of energy security and opted for a targeted
destination-specific energy security view. The U.S. Government
has been involved in micromanaging energy security in the
Caspian by championing east-west pipeline routes that bypass
Russia and Iran and exit through Turkey. That is with the
exception of one pipeline going through Russia from the
Caspian. And that is the CPC pipeline, which I will discuss
later.
Recently, the bypass Russia--except for CPC--part of U.S.
policy is being dropped. The microsecurity energy agenda may
soon be transferred to Russia, where there is talk of the U.S.
Government lending political and maybe financial support to a
pipeline port project focused on Murmansk in the Russian north.
Until a few months ago, when this Murmansk pipeline import
project gathered momentum as a possible U.S. energy security
priority, U.S. policy in this greater Caspian region was based
on promoting pipelines which avoid Russia and Iran.
In fact, no heavily U.S.-backed pipeline project in the
Caspian epitomizes this goal like the Baku-Tbilisi-Ceyhan oil
pipeline, that by 2005, or 11 years after the upstream contract
for this project was signed, will carry oil from the BP-led
AIOC consortium offshore fields via Georgia to Turkey. As it
winds its way into the construction phase, BTC seems to merit
constant U.S. Government attention at the highest levels.
In the long term, it is thought that up to 2 million
barrels a day can flow through this corridor. While the U.S.
Government tried over the last year to achieve an inclusive
policy with BTC by encouraging Russian private companies to
invest in this pipeline, the only Russian company that was an
investor in the AIOC consortium which feeds BTC, Lukoil, sold
its interest in AIOC. And it just concluded this sale these
past days.
The Russian companies are focused first and foremost on
their Russian interests, which may also include Kazakhstan, as
I will discuss, and on pipeline projects that are steered from
Russia to various markets. They have refused U.S. Government
overtures for cooperation in the Caspian.
In Kazakhstan, we have what is arguably one of the most
important new upstream frontiers since the North Sea. It is
Kazakhstan which holds the key to great wealth in this region.
It was here that 10 years ago this month the U.S. company
Chevron, now ChevronTexaco, signed the region's first onshore
joint venture for one of the world's giant oilfields, Tengiz.
Mobil, now ExxonMobil, joined this joint venture in 1996.
These two companies cooperated in the construction of the first
major private oil pipeline that was built in this region from
Tengiz to Russia's Black Sea port of Novorossiysk and which
opened in October 2001, 8 years after the upstream contract was
signed.
The CPC private pipeline and the oil quality bank which
goes with it are the model that the regional industry and other
companies, both Western and Russian, want to repeat, namely in
Murmansk. The CPC could easily become Kazakhstan's, and
certainly one of Russia's, major export pipelines over the next
decade, if it were expanded from its current approximate
600,000-barrel-a-day capacity to at least double this size. But
it is Russian Government, and even to some extent Russian
company, reluctance to feed oil into this Western company-
partnered pipeline that has prevented a short spur line from
being built in Russia that would transport Russian oil into
this highly efficient and existing system.
In fact, before Murmansk is addressed or any other pipeline
options for Kazakhstan, it may be worthwhile to expand capacity
here in the CPC.
Fifth, a major field, Kashagan, is being developed offshore
Kazakhstan. And U.S. pipeline advocacy has moved to securing
substantial volumes from Kashagan to move by barge across the
Caspian Sea to Baku for supply to the BTC pipeline, which, like
the CPC, will have the potential for significant expansions.
U.S. energy security advocacy is now focused on somehow
bringing significant volumes of Kashagan oil into the BTC
through an export corridor being referred to as Aktau BTC, or
ABTC. At the same time, you have four Kashagan companies,
ConocoPhillips, Inpex, TotalFinaElf, and Agip, which are ready,
even without U.S. Government intervention, to commit about
150,000 barrels a day to ABTC, since these four companies have
bought stakes in the BTC pipeline.
You have a multitude of multinational companies sitting at
the table in the Kashagan consortium. And not all of them are
U.S. companies. They are trying to hammer out all sorts of
understandings with the Kazakh government on some extremely
difficult investment issues. Anyone in the oil industry that
follows Kazakhstan, and perhaps even some members of the
Senate, know that other than pipelines there are some serious
problems clouding the investment environment here.
The last thing you want is for the Kazakh government to
believe that the main emphasis of the U.S. Government is ABTC.
And by expressing Kazakh support for ABTC, other more important
issues can slip.
At the end of the day, the decision on which pipeline to
build or use for Kashagan exports will be based on commercial
considerations. But experience in the Caspian region has shown
that politics can play an important role in pipeline
commitments. Politics, though, can be very hard for companies
to predict. The U.S.-Russian relationship is a case in point
here. Until 9/11, the negatives of this relationship argued for
diversifying pipelines away from Russia. Last year saw the
implementation of a serious U.S.-Russian dialogue. Post-Iraq,
however, the relationship could still take other twists.
One thing which is now confusing to foreign oil company
producers in Kazakhstan is the ultimate U.S. strategy here with
regard to exit routes. If the goal is to have multiple
pipelines which bypass Russia and Iran, any policy that would
encourage additional oil shipments across Russia beyond the CPC
and existing Transneft options works against the diversify-
away-from-Russia element of the multiple pipeline strategy and
further solidifies Kazakh-Russian dependence.
Given the size and scale of the Kashagan resource base, a
third way beyond Russia and ABTC would be the logical solution
in the framework of stated U.S. policy which support multiple
pipeline routes. The next route favored by many non-U.S. oil
companies and by Kazakhstan is Iran. But this also undermines
the stated U.S. goal of avoiding both Russia and Iran.
So what is the primary U.S. objective now? Is it to not
avoid Russia but to avoid Iran? And how can commercially-driven
companies rationalize it and adjust what are long-term business
decisions to changing U.S. policies. Non-U.S. companies in the
Caspian are likely to stop second-guessing U.S. policies and
opt for commercial imperatives.
I am only going to make a few more points. And I know that
my time is running out. But I wanted to mention Murmansk. It is
interesting that you have many questions with this Murmansk
project, most importantly, who will pay for the magnitude of
costs of a project like this, which could run up to $5 billion?
Which fields will provide the oil?
Just today there was an announcement that the Russian
Government supports the construction of a 400,000 to 600,000
barrel a day Yukos-backed oil pipelines from fields in Western
Siberia to Daqing, China, and Manchuria. If this pipeline moves
forward, it could remove some of the oil that could have been
designated for Murmansk. Large investments will have to be made
and new field developments to support a pipeline the size and
scale of Murmansk.
If the U.S. Government takes an interest in helping this
Murmansk project succeed, is there a role for U.S. companies in
the upstream for oil that would feed Murmansk? And most
importantly, would the Russian Government provide the necessary
investment stability in the form of PSAs for U.S. companies to
undertake such investments?
Finally, if we notice, pipeline projects like the BTC and
CPC take nearly a decade to accomplish, placing a particular
burden on the direction of U.S. country policy. U.S. commitment
to specific countries and pipelines has to last at least as
long as it takes to construct these projects, but even longer,
if security guarantees are required. Supporting pipelines is
difficult geopolitical regions demands a political and military
commitment, and therefore costs money.
The Russian Murmansk project and the U.S.-Russian energy
partnership raises an interesting question. If BTC is built as
a route that intended to avoid Russia, then how is it that even
before construction starts on BTC, that goal of needing to
avoid Russia is being abandoned? In future decades, the
question will be asked in one of two ways. Was this goal valid,
or if circumstances change with Russia, then why did we abandon
this goal?
Similar questions might be asked if U.S.-Iran relations
change. Alternatively if, or since, U.S. country policy can
change within the course of a decade--the time it takes to
plan, finance, and build a major pipeline--why should companies
be willing to invest in policy-dependent projects? What will
companies do with a trade route that may last 40 years, if it
is undercut by another more efficient route that suddenly opens
up because of policy changes?
What this tells us is that, ultimately, projects must stand
on their own commercial merit. The economics of a project will
dictate its success.
Thank you.
Senator Hagel. Thank you very much.
[The prepared statement of Ms. Nanay follows:)
Prepared Statement of Julia Nanay
Good afternoon. Senator Hagel and distinguished members of this
subcommittee, thank you for allowing me to speak at this hearing. My
name is Julia Nanay, and I am a Senior Director at PFC Energy. PFC
Energy is a strategic advisory firm in global energy, 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. I advise our client companies
about different elements of the investment risk in the Caspian Region.
Today's hearing is specifically about energy security, so I will
address this region in the context of this topic. I will look at the
impact Azerbaijan, Kazakhstan and Russia have on the question of U.S.
Energy Security.
ENERGY SECURITY: PERCEPTION VS. REALITY
Before I start talking about the Caspian region specifically, I
want to make some general observations. There is a perception that the
U.S. should be concerned about its energy security given recent
developments in the Middle East. The reality is that despite a war in
the Middle East, the U.S. has not faced problems with its energy
supplies, nor have other nations. The U.S. is in the middle of winding
down a war in the Middle East and the reality is that the market
remains well-supplied. Over this past month, there was never any
disruption of oil supplies from the Persian Gulf beyond Iraq and what's
more, Saudi Arabia and other Gulf OPEC producers significantly
increased production to fill the gap. Despite this, consuming nations,
particularly Asian ones, behaved as if there would be a problem. India
has already reported big losses from buying inventories at market
highs, and those losses may be a fraction of what China sustained. The
inventories, including tens of millions of barrels that the Saudis are
holding in storage, are compounding the oil glut.
Today's very efficient global crude and product trading system,
combined with substantial surge capacity in Saudi Arabia, has the
ability to compensate for interruptions in supply, as numerous recent
examples, including Venezuela and Nigeria, demonstrate. Globally, there
are over 1 billion barrels of strategic reserves. Refiners today are
able to manage on lower inventories compared to 10 years ago. Increased
efficiency, together with flexible crude and product trading markets,
have allowed this to happen. Barring a major geopolitical fault line
being crossed, such as the highly unlikely event of the Saudis deciding
not to supply the US, the markets will effectively continue to manage
short-term discontinuities. The fundamentals of the oil markets did not
justify the high oil prices accompanying the war with Iraq. The problem
was around perceptions, not the reality.
The perception of energy security risk now matters a lot more than
the reality. The reality is that world oil supplies will certainly be
more than sufficient over the next few years. As for the longer-lasting
legacy of the Iraq war, when it comes to energy security, all projects
in regions other than the Middle East, will now be regarded more
closely as potential alternatives to the Middle East. The perception
will remain that the Middle East carries both a political and a
contractual risk. This may not be justified, because as the Iraq war
seems to demonstrate, the risks of depending on the Persian Gulf have
been exaggerated and billions of dollars in national product and
consumer income were spent unnecessarily on war premiums. The end
result of the Iraq war, however, is that a major Middle East producer
and exporter has been brought into the U.S. fold, and depending on how
stable Iraq becomes and how International Oil Company (IOC) access will
be decided, it could eventually attract investment dollars to large oil
and gas fields, which will rival and exceed opportunities on offer
elsewhere. By inference, this could affect investments in the Caspian
and Russia, particularly at a time when IOCs are struggling to work
under the right investment conditions in these places. On the other
hand, it is precisely this phenomenon of turning away from the Middle
East because of ``perceived'' risk that has raised the perception of
the strategic value to the U.S. of sources like the Caspian and Russia.
MICROSECURITY JUXTAPOSED AGAINST MACROECONOMICS
In the macro sense, the world oil market is fungible. As long as
oil is produced somewhere, it will make it into the market somewhere
and prices and supplies will adjust. If you believe in markets, this is
the view you would adopt. The U.S. government, in fact, says that it
espouses this view and statements by various officials stress that it
is up to the open market to determine future outcomes of oil and gas
supplies. Over the last years in the Caspian, the U.S. government has
challenged this market-based view of energy security and opted for the
targeted country and destination-specific energy security view. Part of
the U.S. involvement has been dictated by the location of the Caspian
just north of Iran, a country with which the U.S. has had troubled
relations since 1979. The U.S. government has been involved in
micromanaging energy security in the southern Caspian by micromanaging
east-west pipeline routes that bypass Iran and exit through Turkey.
While this U.S. microsecurity agenda is now factored into the accepted
business practices of some countries in the Caspian and many companies,
it may soon be applied in Russia as well. There is talk of constructing
a south-north pipeline route in Western Siberia, exiting through the
deepwater port of Murmansk. This pipeline is already receiving
increased U.S. government attention and even offers of possible
financial support. One could argue, however, that the case of the
Caspian and U.S. advocacy is different than the case of Russia in that
when pipelines cross more than one country (Azerbaijan to Georgia to
Turkey), intergovernmental intervention may be necessary to move the
process along. The Russian Murmansk pipeline is within one country.
Nonetheless, other countries which have been watching this U.S.
targeted country and destination-specific energy security strategy are
beginning to follow the U.S. lead. This can been seen in investments
made by China in Azerbaijan and Kazakhstan, with a pipeline being more
seriously discussed to target China from Kazakhstan. And, Japan is
eager to get an oil pipeline built from Russian Eastern Siberia to the
Russian Pacific Coast. Both China and Japan are concerned that none of
the pipeline projects championed by the U.S. specifically target Asian
markets, which is where Middle East oil use is the highest and where
the major oil demand growth is expected.
GEOPOLITICS AS THE DRIVER VS. ENERGY SECURITY
The location of the Caspian, between Russia and Iran, determined
the U.S. focus on this region. In part to create countries that could
stand on their own without Russia and become U.S. allies, and in part
to maintain the isolation of Iran, the U.S. government has devoted
enormous attention to the Caspian region over the last few years. One
could argue that the driver here has been geopolitics, not energy
security, even though one of the key manifestations of U.S. government
interest seems to be the Baku-Tblisi-Ceyhan (BTC) oil pipeline (to be
discussed below). And, with a heightened emphasis on a U.S.-Russia
energy dialogue, while relations with Iran remain problematic,
attention may now shift to another pipeline corridor through Russia to
Murmansk.
Azerbaijan
Over the last 6 years, or since June 1997 when the U.S. State
Department publicized very high numbers on potential oil reserves in
the Caspian countries, the U.S. government has focused most closely on
Azerbaijan. Sitting in a key location in the Southern Caucasus and
bordering on Iran, Azerbaijan became the pivotal country for the U.S.
government's investment advocacy agenda. And, under the watchful eye of
the U.S. government, Azerbaijan and its neighbor Georgia have come a
long way in these six years. A large number of the offshore and onshore
contracts were signed in Azerbaijan during the 1997-1999 period, even
though the only major offshore producing oil fields--under development
by the AIOC consortium--are attributed to a 1994 Production Sharing
Agreement (PSA). While the U.S. pushed and prodded to make Azerbaijan a
much bigger upstream success story than just AIOC, in the end, most of
the contract areas have proved disappointing. The only other field
which demonstrated success turned out to be a huge offshore gas field
called Shah Deniz. Based on Azerbaijan's one major oil project and its
one major gas project, the U.S. set out to help provide the stable
political environment necessary to create a pipeline hub in Azerbaijan,
with oil and gas export routes running from there through Georgia and
Turkey. The lead company in all these projects is the UK's BP with
Norway's Statoil playing a role in the Shah Deniz gas pipeline as
commercial operator.
The Baku-Tblisi-Ceyhan (BTC) Oil Pipeline
Perhaps no project in the Caspian epitomizes the U.S. vision of
providing new pipeline corridors in the Caspian region, and ones which
avoid Iran, like BTC. A huge undertaking, managed by BP, this 1 million
b/d $2.9 bn pipeline that has the potential for significant expansions
(as high as 1.8 mmb/d), is scheduled to deliver first oil by 2005.
Winding its way through complex project finance negotiations and having
to contend with the final details of land purchase, environmental
approvals, and Turkish government personnel changes, the BTC pipeline
appears to still merit the U.S. government's constant attention. At all
levels of the U.S. government--the White House, Congress, the
Department of Energy and other agencies--a huge commitment of staff
time has been devoted to Azerbaijan, Georgia and Turkey and to BTC in
the context of an east-west energy corridor. The long term goal is to
create an energy source that is independent of Russia and Iran and
emanates from countries we consider U.S. allies. In the long term, it
is hoped that up to 2 million barrels a day of Caspian oil can flow to
markets though this corridor.
While the destination for this oil may be northwest Europe, Asia,
as well as Israel--and not necessarily the US--since oil markets are
global, oil from BTC is viewed as enhancing the diversity of non-OPEC
supply sources, which again is also a U.S. goal when looking at energy
security.
The Key Role of Turkey
Even while the U.S. government has stressed Azerbaijan as an
upstream investment destination, Turkey has been designated as the
ultimate pipeline collector for both oil and gas. Turkey's formidable
role given its deepwater port at Ceyhan on the Mediterranean Sea
requires that it accommodate exports of both large volumes of oil from
Iraq (1 million b/d and eventually more) and Azerbaijan (1 million b/d
and eventually more). Turkey will also be an important transit corridor
for transferring Caspian, Iranian and maybe even Iraqi gas to growing
European markets. Turkey's pre-eminent position in this regard means
that the U.S. government has put tremendous emphasis on Turkey's
political and economic stability.
Because Turkey's link to new gas supply sources for Europe is also
vital, the European Union's (EU's) involvement in ensuring Turkish
political and economic stability is sure to increase. As Turkey is
going through its own difficult democratic evolution, at a time of
great strains on its economy given the Iraq situation, the U.S.
government has been striving to maintain good relations. By creating
pipeline corridors through Turkey in order to avoid Russia and Iran,
the U.S. government must ensure the security of these pipelines--which
will mean a financial and military commitment for many years to come.
It will also mean providing political cover for Georgia and Turkey as
they cement ties that are seen by Russia as being against its
interests.
As I will discuss later, while seeming to pose a threat to Russia
in the Caucasus, the U.S. will try to balance its interests with
Russia, since the latter is expected to be a critical growing non-OPEC
world oil supplier.
Kazakhstan
Moving to the East and to the North, we have what is arguably one
of the most important new upstream investment frontiers since the North
Sea: namely, Kazakhstan. Despite the preponderance of U.S. attention to
Azerbaijan because of its strategic location bordering Iran, it is
Kazakhstan which holds the key to the Caspian countries' oil wealth. It
was here that in April 1993--10 years ago this month--U.S. company
Chevron (now ChevronTexaco) signed the region's first onshore joint
venture for what is even today considered to be one of the world's
giant oil fields--Tengiz. U.S.-company ExxonMobil joined ChevronTexaco
in Tengiz in 1996. ChevronTexaco is also partnered in Kazakhstan's
other major onshore oil and gas producing field, Karachaganak. And,
ExxonMobil is a member of the consortium led by Italy's Agip, which is
exploring and developing the most exciting new offshore prospect in the
Caspian Sea, the Kashagan structure. Kashagan holds many billions of
barrels of oil reserves and its size and scale will probably exceed
even that of the Tengiz oil field. But because it is offshore in an
ecologically sensitive area and contains important volumes of
associated high sulfur gas, Kashagan's development poses many difficult
challenges, which are a matter of contentious debate between the
consortium and the Kazakh government. With a large number of already
discovered and producing oil fields, Kazakhstan's oil output keeps
rising and has exceeded 1 million b/d (vs. about 300,000 b/d in
Azerbaijan today).
The Caspian Pipeline Consortium (CPC)
The first major privately built oil pipeline to be completed in the
Caspian was the CPC, which became operational in October 2001 and
carries oil from Tengiz as well as some other smaller Kazakh fields to
the Russian Black Sea port of Novorossiysk. With a capacity of close to
600,000 b/d, the CPC could be expanded to at least twice this size and
were it not for problems in coordinating with the Russian partner/
owners in the pipeline, the CPC would easily become Kazakhstan's major
export route for the foreseeable future. However, problems with Russia
and issues posed by tanker transit through the Bosporus have led to the
serious study of other export options. It must be remembered that CPC
is the ``flagship'' pipeline project for the Caspian region. It is the
first pipeline to have been built without Russian pipeline monopoly
Transneft's involvement, and it was privately built and financed by the
western oil company partners. CPC designed and implemented an oil
quality bank, which will equalize the values of the different types of
oil that are fed into the pipeline. The CPC private pipeline and
quality bank model are now the standard in the regional industry that
other companies, both western and Russian, want to repeat.
Aktau-Baku-Tblisi-Ceyhan (ABTC)
Four companies which are members of the Kashagan consortium have
joined the BTC pipeline consortium: ConocoPhillips, Inpex,
TotalFinaElf, and Agip and could provide 150,000 b/d to BTC, with oil
moved on barges across the Caspian Sea from Aktau to Baku. The U.S.
government would like to see a commitment of 400,000 b/d from Kashagan
to BTC. Committing such volumes to ABTC would be costly for the
consortium. It would mean building the pipeline connection from
Kashagan's onshore processing facilities to Aktau port, paying for the
barge transport of oil from Aktau to Baku and then also for the
pipeline fees from Baku to Ceyhan. Of course, any option for moving
Kashagan oil will entail costs because the anticipated large volumes
which are expected to be produced here will require new export options
to be built in addition to the current transit opportunities across
Russia in the CPC and via Russian pipeline monopoly Transneft's system.
As it is, in the short to medium term, until Transneft's system is
expanded, Kazakh crudes are likely to experience increasing problems in
the Russian pipeline system, since Russian oil company heads (most
notably Mikhail Khodorkovsky, the CEO of newly merged YukosSibneft) are
agitating against Caspian crudes taking up export space that backs
their crudes out of the Transneft system. Currently just over 400,000
b/d can supposedly be transported through the Atyrau (Kazakhstan)-
Samara (Russia) pipeline link and the Aktau (Kazakhstan) by barge to
Makhachkala (Dagestan, Russia) export link. Additionally, while 20,000
b/d are currently being transferred by barge to Iran's northern Neka
port from Aktau, Kazakhstan under a swap arrangement, these volumes to
Iran could be increased, either through increased oil swaps or by a new
onshore pipeline through Turkmenistan to connect into Iran's pipeline
network.
Longer term, the Kashagan field will require another large pipeline
capable of transporting 1 million plus barrels in a direction other
than CPC, Transneft and/or BTC--and that would mean either toward China
or Iran. Russia may argue that once a major new south-north pipeline is
in place to Murmansk, more Kazakh oil could also be exported across
Russia--negating the need for a Chinese or Iranian pipeline. For now,
the U.S. government is stressing 400,000 b/d for shipment through ABTC.
However, with a multitude of multinational companies sitting at the
table in the Kashagan consortium, trying to reach decisions on many
different aspects of this project, U.S. advocacy for ABTC could slow
down the ability of the consortium to agree on any export direction. It
could also slow down the development of the overall Kashagan resource
base.
At the end of the day, the decision on which pipeline to build and/
or use for Kashagan exports will be based on commercial considerations,
including the timing of alternative available export options and
pipeline operational confidence. Still, experience in the region has
shown that politics can play an important role in pipeline commitments,
but politics can be hard for companies to predict. The U.S.-Russian
relationship is a case in point here. Until 9/11, the negatives of this
relationship argued for diversifying pipelines away from Russia. Last
year saw the implementation of a serious U.S.-Russian dialogue. Post-
Iraq, the relationship may take other twists. One thing which is now
confusing to foreign oil company producers in Kazakhstan is the
ultimate U.S. strategy here with regard to exit routes. If the goal is
to have multiple pipelines, which bypass Russia and Iran, any policy
that would encourage additional oil shipments across Russia beyond the
CPC and existing Transneft options, works against the ``diversify away
from Russia'' element of the multiple pipeline strategy and further
solidifies Kazakh-Russian dependence. Given the size and scale of the
Kashagan resource base, a third way, beyond Russia and ABTC, would be
the logical solution in the framework of stated U.S. policy which
supports multiple pipeline routes. The next route favored by many non-
U.S. oil companies in Kazakhstan is Iran, but this also undermines the
stated U.S. goal of avoiding both Russia and Iran. So what is the
primary U.S. objective now? Is it to not avoid Russia but to avoid
Iran? And how can commercially driven companies rationalize it and
adjust what are long-term business decisions to changing U.S. policies?
Non-U.S. companies in the Caspian are likely to stop second-guessing
U.S. policies and opt for commercial imperatives.
Russia
Perhaps the most impressive oil production gains by any single
country over the last two years have been made by Russia, with its
output rising from 6.8 million b/d in 2001 to close to 8.2 million b/d
today. This has been made possible by the efficiencies introduced into
the Russian oil industry by the Russian private companies. As Russian
production has been rising, Russian pipelines and ports have not kept
pace with the higher export expectations of the Russian companies.
Russian pipeline monopoly, state-owned Transneft, has been unable to
address the multitude of export-direction demands of the Russian
producers. In part because of the complexities of the existing Russian
pipeline system which spans a vast inhospitable territory and which
demands constant attention, in part because Transneft can only do so
much at once, and in part because Transneft has its own agenda of
pipelines and ports which it is promoting--there is now a clash between
private and state interests on the future of Russian oil exports.
Transneft's alleged oil export capacity is somewhere around 3.5 million
b/d (which also accommodates oil exports from Azerbaijan and
Kazakhstan). In addition, about 1.5 million b/d of products can be
exported, with considerable reliance on rail transport.
The Russian oil companies are determined to increase export outlets
and several of them are determined to make Murmansk in Russia's north,
the next major deepwater port that will handle the anticipated ongoing
growth in Russian oil production and exports. Tying into this deepwater
port, with an estimated start-up date of 2007-2008, will be a 1.6
million b/d oil pipeline (that could be expanded to 2.4 million b/d)
and which would cost between $3.4 billion and $4.5 billion to build.
Lukoil, YukosSibneft, TNK/BP, and possibly Surgutneftegaz could have an
ownership stake of up to 49 percent in this pipeline, creating a
consortium which somewhat mirrors the CPC formula, although Transneft
will have a significant role. If this arrangement move forward, it
would be a significant capitulation by the Russian state to accommodate
private industry's interests.
The Murmansk pipeline and deepwater port project still have many
imponderables. Who will pay for the project is still open to question,
although U.S. OPIC and Ex-Im have expressed an interest in providing
some assistance. Which fields will provide the oil? Is there a role for
IOCs, including U.S. companies, in upstream projects which could feed
Murmansk? And, most importantly, would the Russian government provide
the necessary investment stability in the form of Production Sharing
Agreements (PSAs) for IOCs to undertake multibillion dollar field
developments which might be necessary to fee a major pipeline which
Murmansk represents?
Diversity of Supply Sources Enhances Energy Security
Energy security is best enhanced by encouraging the development of
a diversity of supply sources and not necessarily by advocating or
directing pipeline flows. Pipelines are long life projects and yes,
politics and geopolitics can determine whether they operate or shut
down. However, over the long life of a pipeline, advocating a route one
day doesn't mean that unforeseen political and geopolitical
circumstances in the future will not alter the current judgment call.
There is no predictability over long-term political and geopolitical
relationships and alliances, especially in regions such as the Caspian
Sea and the Middle East.
Diversity of supply from countries where the U.S. government can
help to create stable, long-life responsible governments would be more
conducive to the sustainable development of resources than stressing
pipeline routes.
International Oil Companies (IOCs) and OPEC vs. Non-OPEC in the Energy
Security Equation
The Caspian region and now Russia are perceived as important for
the U.S. because they help diversify the world's supply of oil while
also being non-OPEC suppliers. However, the OPEC versus non-OPEC
conundrum in U.S. Energy Security debates is often misunderstood. Non-
OPEC supplies serve as a market baseload, consistently delivering the
full level of production those sources are capable of. Clearly,
diversifying and increasing these non-OPEC sources provides a more
secure core of supplies for the U.S. and other consumers to rely upon.
Non-OPEC production is growing and will increase by 1.2 million b/d in
2003 to 47.1 million b/d vs. OPEC production without Iraq of 24.4
million b/d.
After non-OPEC supplies are considered, the difference between them
and total global oil demand is then filled by OPEC. Because of their
domestic budgetary needs, OPEC member states have a strong self-
interest in adjusting production to promote a stable price that is
neither so high that consumer nations (and hence demand for oil)
suffer, nor so low that there is an oil glut that would also hurt U.S.
energy companies. In short, OPEC and U.S. interests coincide in a
desire for a moderate oil price as exemplified by OPEC's target $22-$28
per barrel price band.
So U.S. government emphasis is misplaced. The question is not OPEC
(who wish to see a moderate oil price) versus non-OPEC (who continue to
increase their oil production). Rather, the issue to address is how to
continue encouraging non-OPEC supply growth and diversity, preferably
with the involvement of IOCs (including U.S. oil companies). OPEC's
stated $22-$28 per barrel price range is sufficient to offer IOCs the
economic incentives to develop non-OPEC supplies. In both OPEC and non-
OPEC countries, governments determine how oil and gas reserves will be
developed. Thus, some issues to address are: (1) how much access IOCs
will have to support the development of these reserves and production;
(2) in which countries do IOCs have this access; and (3) how stable are
these countries to allow IOCs to produce and export their oil without
impediments. In Russia, IOCs currently have limited access. It will be
interesting to see if the recent BP equity investment in TNK/BP will be
a catalyst for more opportunities. In the Caspian, IOCs have a great
deal of access in Azerbaijan, but here the prospectivity is
diminishing. In Kazakhstan, IOCs have access but the investment climate
is difficult. Moreover, the location of Kazakhstan, bordering on
Russia, means that its energy future will have ties to Russia but how
strong these ties will be could be determined by the availability of
export pipelines that steer oil in other directions.
Conclusion
Longer term, one could argue that oil and gas supplies from the
Caspian region and Russia will be no different than supplies from the
North Sea or elsewhere. They will be just other sources.
However, one note of caution: pipeline projects like the BTC (and
CPC) take nearly a decade to accomplish placing a particular burden on
the direction of U.S. country policy. U.S. commitment to specific
countries and pipelines has to last at least as long as it takes to
construct these projects but even longer if security guarantees are
required. Supporting pipelines in difficult geopolitical regions
demands a political and military commitment and therefore, costs money.
The Russian Murmansk project and the U.S.-Russian energy partnership
raises an interesting question. If BTC is built as a route that
intended to avoid Russia, then how is it that even before construction
starts on BTC, that goal of needing to avoid Russia is being abandoned.
In future decades, the question will be asked in one of two ways: Was
this goal valid? Or if circumstances change with Russia, then: Why did
we abandon this goal? Similar questions might be asked if U.S.-Iran
relations change. Alternatively, if (or since) U.S. country policy can
change within the course of a decade--the time it takes to plan,
finance and build a major pipeline--why should companies be willing to
invest in policy-dependent projects? What will companies do with a
trade route that may last 40 years if it is undercut by another more
efficient route that suddenly opens up because of policy changes?
Ultimately, projects must stand on their own commercial merit and the
economics of a project will dictate its success.
Senator Hagel. I appreciate that very comprehensive
testimony. And we will come back to some of your points, as we
will after we hear from of your colleagues.
Mr. Somers, please proceed. Thank you.
STATEMENT OF ANDREW SOMERS, PRESIDENT, AMERICAN CHAMBER OF
COMMERCE IN RUSSIA
Mr. Somers. Thank you, Senator. On behalf of the 700
members of the American Chamber of Commerce in Russia, I would
like to express our appreciation of this opportunity to weigh
in on this important subject before your subcommittee.
A brief word about the chamber, so you understand who we
are, we are a totally independent, member-funded business
advocacy organization. Our mission is to promote trade and
investment between Russia and the United States in order to
facilitate sustainable penetration of the Russian market by our
members.
To this end, we are engaged in an ongoing dialogue with all
organs and all levels of the Russian Government and with the
representatives of the most influential private sector
businesses. We have achieved considerable bottom-line results
in this dialogue, and we are very encouraged by the openness
with which our Russian colleagues, both in the government and
in the private sector, listen to our views; that is across all
sectors.
There is no question that we have benefited, the American
business community, in Russia by the new Russian-American
strategic relationship, which has evolved under the leadership
of President Bush. And in that respect, I would like to
acknowledge the vital support of Secretary of Commerce Donald
Evans, as well as the American Ambassador to Russia Alexander
Vershbow.
It is the view of the American business community in Russia
that it is in their interest to see Russia's re-emergence as a
major oil producer continue, and also in our interest to see
Russia have the opportunity to share with other exporters a
share of the U.S. oil import market. As the Department of
Commerce ruled in June of 2002, Russia has made the difficult
transition to a market economy, as defined by U.S. trade laws.
And, of course, it is noteworthy that this difficult
transition, this change in the character of the Russian
economy, occurred within a democracy. It may not be a democracy
as mature as the United States, but nevertheless it is a
democracy. We feel that with Russia's participation in U.S.
energy strategy, in terms of import, share of import market,
the United States would contribute to the globalization of the
Russian economy and would help stabilize these very positive
developments to a market economy and a democracy.
Now of course in order for the U.S. to make this kind of
determination that Russia should play a major role in imports
into the U.S., Russian oil must be a viable option. We would
suggest there are at least three criteria to look at. One is
the Russian infrastructure and export capacity. Second is its
production and reserves. And third is the investment climate. I
would like to, with your permission, touch very briefly on
each.
It might be more logical to start with production and
reserves, but I speak from the perspective of an American
businessman who is living in Russia. It is an incontrovertible
fact that everyone involved in the Russian market recognizes
that Russian production far exceeds demand and far exceeds the
capacity of Transneft, which is the state-owned monopoly which
controls the transport of oil throughout Russia and to the
export facilities.
This is causing depression in local pricing for gasoline
and for oil. It is also hurting the small independent oil
companies who are struggling to compete with the larger majors,
because they have to sell the crude oil at depressed prices.
They lack the refining capacities of the majors to produce
secondary products, which can be then sold at a reasonable
markup.
So Russia can continue to produce an enormous amount of
oil. But if they cannot get it to their ports, it is not going
to do anyone any good.
My written statement that I submitted a couple of days ago
said that there is little evidence that the Russian Government
is making any kind of move toward relieving this pipeline clog.
But this is Russia. And as I was leaving Russia yesterday, I
learned that Minister of Energy Yusufov made a statement to the
effect that it was in the interest of Russia's energy security
to diversify its export facilities and that they were giving
serious consideration to developing transport to various points
in Russia which would facilitate export. So perhaps there is
something that is going to happen there in the positive sense.
Moving on to the future and the prospects of relieving this
infrastructure clog and improving exports, as referred to by
previous speakers, the Caspian pipeline exists now. It has been
in operation since late 2002. As you know, it focuses
primarily, at least in the initial stage, on Kazakh oil. The
pipeline runs from the Tengiz field in Kazakhstan through
almost 1,000 miles of Russian territory to the Russian Black
Sea port of Novorossiysk.
We think it is important to the relationship that although
this primarily focused on Kazakh oil from the Caspian, it does
involve a venture with Russia in terms of its territory and
permissions to go through the territory and American companies.
Russia is the largest stakeholder in the Caspian pipeline
consortium having 24 percent of the stake. Kazakhstan has 19.
Oman, I believe, is the third country with a much smaller
stake. And Chevron has the largest private sector stake of 15
percent. Exxon has about 7.5 percent.
With very little effort, as a previous speaker mentioned,
Russia could significantly increase the Russian production
portion of the Caspian pipeline exports by building a 40-mile
trunk line from its Transneft facility, its Transneft pipeline
network, to the Russian city of Kropotkin, which is on the
Caspian pipeline. The Caspian pipeline consortium has already
built state-of-the-art facilities there, pumping facilities, to
move Russian oil. And if the Russians decided to build this
very short trunk line, within 6 months it would add 150,000
barrels per day to the export capacity of the Caspian pipeline,
and within 2 years at 300,000 barrels per day. So in a sense,
Russia at least has moved to have the capacity to increase its
exports through the Caspian pipeline.
Perhaps more significantly is the Murmansk project, which
has been mentioned by the previous speaker and the previous
speakers in the first panel. Due to the lack of capacity
building by Transneft, the infrastructure network, the private
sector in Russia has decided that they have to do something.
And several months ago, the majors proposed that they would
construct at their own cost $4 billion to $5 billion, plenty of
cash in the Russian oil companies, a pipeline from Western
Siberia to Murmansk, Murmansk in the northwest, being a 12-
month ice-free deep water port, West Siberia being a primary
oilfield of Russia where most of the oil is coming from.
The prospects from the Western point of view, let me put it
this way, if I may, Western oil companies in Russia believe in
this project. And they believe that Murmansk, if the pipeline
is built and the port is renovated as the Russian companies say
they will, this facility could have the capacity of exporting
up to 1 million barrels today out of Murmansk.
The Russians clearly see it, that is to say the Russian
private sector clearly sees it, as a window on the United
States oil market. They have talked about the fact that the
cost of transportation of oil from Murmansk to the U.S. East
Coast would be equivalent to the transportation costs that are
now borne from the Mideast to the U.S. I think they quote $8 a
day.
When they look at an Arctic route from Murmansk, the
transportation cost would even be cheaper. So we think that
given the financial capacity and the commitment of the large
Russian majors, we will see development with respect to
Murmansk. As a previous speaker said early on, when I say early
on, a couple of months ago, the Russian Government voiced
dismay that a pipeline would be owned by the private sector.
But more recently, there has been some sign that there
might be a compromise. And only yesterday, again as I was
leaving Moscow, the Prime Minister was quoted in Itar-Tass, one
of the wire networks, that he would shortly sign an order
promoting a pipeline from Murmansk. It was not clear from this
brief description if he was talking about a different pipeline
than the one that the private sector was talking about, but I
would suspect it is the latter, that there is going to be some
kind of cooperation between the Government and the Russian
majors to construct this pipeline.
The second factor, of course, that is important for the
U.S. to consider is Russia's production capacity, as well as
its reserves. I will not touch on reserves. The previous
speakers on the previous panel have talked about the difficulty
of trying to quantify that, except everyone seems to agree that
it is very large.
With respect to production, almost all of the production in
Russia is coming out of Western Siberia, about 7.4 million
barrels a day. Western oil companies in Russia believe that
this capacity will continue at that rate for at least 3 or 4
more years, perhaps a couple more after that, but that then
this production capacity will decline.
For that reason, among others, Western companies believe
that the Russian Government and the Russian private sector
should be looking very hard at deep exploration to discover
reserves which have not been proven yet. This leads to the
discussion, and I will not dwell on it, of production-sharing
agreements, which is basically a legal solution to providing a
certain amount of predictability to investors who are talking
about 20- to 30-year payback periods in transactions, or rather
operations, which are far removed from infrastructure.
There is a bill before the Duma right now that will
probably pass in the spring. It is going to make some oil
companies somewhat happy. It is going to make other oil
companies not very happy. It will be a limited form of PSA. At
least that is my guess. Some companies will be happy that
something got through. Tactically in Russia in particular,
legislative tactics often mean you get a bill through the Duma,
and your tactic then is to try to amend it within 6 months or a
year. So that is always a factor in whether or not a final bill
is good or bad.
The Russian private sector has a somewhat different view,
some of the Russian private sector. We do find that some of the
majors support PSA publicly. Others, such as Yukos, which is
now the fourth largest oil company in the world after its
merger with Sibneft, which was the number five Russian oil
company, recently, is much less enthusiastic about PSAs,
although they have not publicly come out against it. But
essentially, they feel that Russia's capacity is sufficient to
not need PSAs to a large extent.
Recently, Yukos said there were sufficient reserves in
Russia, proved and provable reserves, easily provable reserves,
which would guarantee Russia over the next 30 years 9 million
to 10 million barrels per day of production. Yukos has publicly
said that they believe current Russian reserves could meet the
demands with respect to U.S. imports of a 15-percent share.
Yukos believes that Russia could provide a 15-percent share of
the imports into the U.S. of oil over the next 30 years
basically with the reserves that they have now. Yukos, by the
way, is a strong supporter of the Murmansk project.
Lastly, I will very briefly comment on the investment
climate. I think the macroeconomic numbers are very important
in this regard. Russia has had constant impressive GDP growth
over the past 3 years with a very surprising 6.4 GDP growth in
the first quarter of this year. No one expected that. The
Russian Government did not expect it. None of the Western
analysts expected it.
We see a continuing growth in consumer spending. The
reserves of the Central Bank are at the highest ever, about $55
billion. The real estate market in Moscow and some of the other
largest cities is growing. And overall, the economic prospects,
we think, look pretty good. And I am speaking from the
perspective of someone who every day has to battle the
bureaucracy and all of the other implementation issues of the
very progressive legislation that has been passed. So I do not
speak as a rosy-eyed optimist. It is a tough environment, but
it continues on an upward track.
So we believe that given that the legislative and the
macroeconomic situation have improved, that there is a very
open dialogue between American business, the Russian
Government, American business, and Russian business, that it is
in the interest of the United States to look, as it is,
seriously in terms of its energy security as to whether Russia
should play a major role as a contributor.
I will not touch upon the U.S.-Russia energy dialogue or
the commercial energy dialogue, in which I play a role as co-
chairman, because I think that has been addressed very
adequately by previous speakers; but I will say to the American
business community these are very strong signals of a very
strong potential relationship between the energy companies in
Russia and the United States.
Thank you very much.
Senator Hagel. Mr. Somers, thank you.
[The prepared statement of Mr. Somers follows:]
Prepared Statement of Andrew B. Somers
Senator Hagel, on behalf of the 700 member companies of the
American Chamber of Commerce in Russia operating in the Russian market,
I would like to express our appreciation for this opportunity to
testify on U.S. Energy Security: Russia and the Caspian.
A brief word about the American Chamber, known in Russia by the
acronym ``AmCham.'' We are an independent, self-funded business
advocacy organization with offices in Moscow and St. Petersburg. Our
mission is to promote trade and investment between the U.S. and Russia
in order to maximize sustainable penetration of the Russian market by
our member firms. To achieve this objective we are engaged in an on-
going, and we believe, effective dialogue with all relevant organs and
levels of the Russian government and the most influential
representatives of the Russian private sector. We benefit greatly from
the new U.S.-Russia strategic relationship which has emerged under the
leadership of President Bush. In this regard I should acknowledge in
particular the vital support of AmCham by U.S. Commerce Secretary
Donald Evans and the U.S. Ambassador to the Russian Federation
Alexander Vershbow.
It is in the interests of American business for Russia to continue
its re-emergence as a major oil producer and to gain a significant
share of the U.S. oil import market. As the U.S. Department of Commerce
held last June after an extensive public inquiry, Russia has succeeded
in making the difficult transition to a market economy. Moreover, this
fundamental change in the character of the Russian economy has occurred
within a new democracy, an historic transformation in itself. American
business prospers best in democratic market economies. By allowing such
an important sector of the Russian economy to contribute with other
oil-producing nations to meeting U.S. energy needs, the U.S. would help
to globalize the Russian economy and stabilize these positive
developments.
For the U.S. to make such a commitment requires, of course, a
judgment that Russian oil is a viable option for diversifying foreign-
sourced energy supply to the U.S. In our view 3 factors should be
considered when making this determination:
(1). Transportation infrastructure.
(2). Production and reserves.
(3). The investment climate.
1. Transportation Infrastructure.
(a) Current export constraints.
It is an incontrovertible fact acknowledged by all parties
operating in the Russian oil sector that Russian oil is export
constrained. Current production far exceeds both local demand and the
capacity of the Russian state oil transport system, Transneft. As a
result local oil prices are depressed and the volume of crude available
at export points is significantly compromised. An additional negative
effect is the decline in profitability of small independent oil
companies who must sell at low prices and lack the refinery facilities
common to the majors for the production and sale of secondary oil
products at a reasonable markup. With Duma elections ahead in the fall
and the Presidential elections looming in the spring of 2004 it is
perhaps not surprising that no vigorous steps have been taken to
relieve the pipeline clog and risk an increase in domestic oil prices.
However, for Russia to be a viable import option, substantial
improvement of the current oil transport infrastructure is imperative.
(b) Future export constraint relief.
Two important features of the current Russian oil environment
suggest that relief for Russia's export constant problem could be on
the way in the relative near term. I have in mind the existing Caspian
Pipeline and the proposed Murmansk Pipeline project.
(b)(i) Caspian Pipeline. Russia has already taken a
significant step toward the enhancement of its oil export
capability. A 24 percent majority shareholder in the Caspian
Pipeline Consortium (CPC), in which U.S.-owned Chevron Caspian
Pipeline holds the largest private sector stake of 15 percent
and Mobil Caspian Pipeline owns 7.5 percent, Russia can use the
pipeline to quickly increase its oil exports. Operational since
late 2002, the initial stage of the Caspian Pipeline delivery
system involves shipment from the Tengiz oil field in
Kazakhstan on the north-east shore of the Caspian through
almost 1000 miles of Russian territory to the Black Sea port of
Novorossisk. If the Russian state oil transport system
Transneft builds a 40-mile trunk line connecting its network to
the Caspian Pipeline at the Russian city of Kropotkin, where
CPC has already constructed the necessary pumping facilities,
Russia's export capacity on the Caspian Pipeline could be
increased by 150,000 barrels of oil per day in 6 months and by
300,000 barrels of oil per day within 2 years. As yet Transneft
has given no indication it plans to build this trunk line.
(b)(ii) Murmansk Pipeline Project. Due to Transneft's failure
over the past several years to add capacity to Russia's oil
transport infrastructure, substantial private investment is
needed. Several Russian oil majors recently proposed the
construction of a pipeline from Western Siberia to the northern
city of Murmansk, a deep-water, ice-free port. Private Russian
capital would cover the cost of this several billion dollar
investment, which would include renovation of the port.
Proponents of the project see it as the gateway to the U.S.
market, estimating that the cost of transport to the American
east coast would be comparable with that from the Middle East.
Initially the Russian government balked at the concept of
private ownership of the pipeline but more recently indications
of a compromise solution have emerged. Some Western analysts
estimate that Murmank export capacity could reach one million
barrels of oil per day. Given the commitment and resources of
the Russian majors and the lack of a governmental plan for
substantially increasing infrastructure, the Murmansk Pipeline
project may well be the long term solution to export
constraint.
2. Production and Reserves.
Russia's primary source of oil production is Western Siberia, with
a volume of 7.4 million barrels of oil per day, of which about \1/3\ is
exported by pipeline, and another \1/3\ exported as fuel oil by rail, a
very costly method of transportation. Western estimates see this level
of output from Western Siberia continuing for the next several years
and then declining. For this reason a number of Western experts urge
that Russia start developing major new reserves on both the Eastern and
Arctic Continental Shelf and Eastern Siberia. Several such projects
with foreign investment are already underway off the coast of Russia's
Sakhalin Island. The Sakhalin projects are beneficiaries of so-called
Production Sharing Agreements (PSAs). PSAs are intended to provide
investors in long-term projects, remote from infrastructure, with a
certain degree of predictability concerning taxes and fees over the 20-
30 year period required to make the project fully operational. PSA
legislation to cover some projects but exclude others is now pending in
the Duma and probably will pass into law this spring.
Some Russian private sector sources are more optimistic about
Russia's reserves and see little need for PSAs. Yukos, now the world's
fourth largest oil company recently asserted that reserves are
sufficient to assure the extraction of oil in Russia over the next 30
years at levels of 9-10 million barrels per day, with an export
capacity of 6-7 million barrels per day. A strong proponent of the
Murmansk project to resolve the export constraint problem discussed
above, Yukos claims that Russia can supply 15 percent of U.S. oil
imports with an estimated range of 1-2 million barrels of oil per day.
A word on the Russian Caspian: estimates put Russian Caspian
recoverable oil at about 3 billion barrels, or less than one 10th of
the resource base of Kazakhstan. The geology of the Russian Caspian is
very different from the Kazakhstan Caspian. The Russian Caspian
eventually may provide 400,000-500,000 barrels per day, a not
insignificant volume.
3. The Investment Climate.
There can be little doubt that the investment climate in Russia has
significantly improved during the Putin years. Political stability,
fiscal discipline, 3 successive years of constant GDP growth, including
a stunning 6.4 percent GDP growth for the first quarter of 2003 testify
to Russia's emergence as a strong investment candidate. American
companies operating in the Russian marketplace are experiencing strong
annual growth in revenues, market share and profit margins, with the
Russian operations of some U.S. global companies outperforming all
other units worldwide. In the energy sector the enormous potential for
fruitful cooperation between the two counties is reflected by the
creation of the government-to-government U.S.-Russia Energy Dialogue,
which had its first summit in Houston October 2002 and has scheduled
the second summit for St. Petersburg in September. Of equal
significance is the private sector Russian American Commercial Energy
Dialogue. Comprised of 5 working groups of American and Russian energy
company executives, the Commercial Energy Dialogue will identify
barriers to trade and investment and make concrete recommendations to
both governments to facilitate commerce in the energy sector.
Senator Hagel. Mr. Chow.
STATEMENT OF MR. EDWARD CHOW, VISITING FELLOW, CARNEGIE
ENDOWMENT FOR INTERNATIONAL PEACE
Mr. Chow. Thank you, Mr. Chairman. It is my honor to
appear before your subcommittee to discuss the role for Russian
and Caspian oil in U.S. energy security. I joined the Carnegie
Endowment for International Peace in Washington only this year
to focus on international energy policy. However, my views on
the subject are informed by 25 years of experience in the
international oil and gas industry, primarily with a major
American oil company.
In recent years, I have also advised foreign governments
and Western companies on strategy, investment policy, and
negotiations in the oil and gas sector, particularly in the
former Soviet Union. I hope to bring my industry perspective
from work not only in this part of the world but also Latin
America, West Africa, Middle East, East Asia, and Western
Europe to your committee's discussion on this important subject
for U.S. energy security.
No one can argue with the proposition that it is important
to policymakers to have a realistic view of the policy
environment. Otherwise political expectations are likely to be
inflated and policy misguided on the subject of oil and gas in
the former Soviet Union. It is, therefore, particularly
distressing to see the volume of misinformation and hyperbole,
not only from governments and industry in the region, which may
have a vested interest in exaggerating the significance, but
occasionally from our own Government.
A number of years ago, most of us in industry were shocked
to find a State Department report to Congress discussing the
possibility of close to 200 billion barrels of crude oil
reserves in the Caspian at a time when industry estimates were,
at best, 10 percent of that level. I was glad to hear Len
Coburn today give a more measured estimate of 17 billion to 33
billion barrels.
Senator Hagel. He is sitting right behind you. So he will
be very pleased to hear that.
Mr. Chow. But 30 billion barrels of crude oil reserves is
still barely only 3 percent of total world proven reserves. The
fact remains that there has been only one significant discovery
in the Caspian since the fall of the Soviet Union. In the
global context, the Caspian represents another North Sea or
Alaska. It is significant, but even full development will not
represent a fundamental shift in oil market dynamics or the
world supply picture.
It is one thing for the president of Azerbaijan to boast
about his country's signing the contract of the century, quite
another for U.S. officials to repeat this preposterous claim.
Worse still, if U.S. policy is based on mistaken expectations
and lack of understanding of petroleum industry realities.
In testimony today, as well as that before this committee
earlier this month, the State Department referred to Caspian
Basin production of 1.6 million barrels per day in 2001 and the
possibility of 5 million barrels per day in 2010. Most of us in
industry would have a hard time finding production in 2000 to
be much more than half of that level in what can be called the
Caspian Basin and believe that will be doing well if production
can be raised to 2 million barrels per day by 2010.
Industry expectations are moderated not only by geologic
risk, but significant technical, economic, and political risk
in oil development in the region. Major finds are challenged by
either being offshore or in deep high-pressure reservoirs or
with sulfur-laden associated gas that needs to be processed and
the sulfur removed or far away from market in a landlocked
location, oftentimes all of the above. Investments required are
measured in billions or tens of billion dollars.
Peaceful political succession is unproven in the region.
Political legitimacy of the governments in the region, as seen
by their own population, has declined since independence from
the Soviet Union. At the same time, the investment climate,
which was largely welcoming a decade ago, has deteriorated with
tougher contract terms, concerns over sanctity of contract, and
greater appetite on the part of ruling elites for rent-seeking
opportunities. Increased oil income has coincided with more
autocratic rule, enhanced the ruler's ability to temporarily
pay off parts of the elite by sharing some of this wealth, and
allowed deferral of desperately needed fundamental economic and
political reforms.
These unfortunate, but often repeated, developments
associated with sudden oil income have in the past led to
political instability, for example, in Latin American and West
Africa. No wonder oil folks around the world believe all the
easy oil has been found and produced a long time ago. More
importantly, if uncorrected, this troubling trend in the
Caspian region can give rise to longer term threats to U.S.
security interests beyond energy.
Turning now to Russia, most of the commentary on the
remarkable increase in Russia oil exports in the last 2 to 3
years has missed the fact that this has not been due to new
discoveries or even development of new oil provinces or new
fields. Russian oil production is around 8 million barrels per
day today. It was over 10 million barrels per day at peak
Soviet oil production reached in the late 1980s.
So the rise in exports, which has been dramatic, is driven
by the revival of Russian production in the last 3 years, but
more importantly by the total collapse of Russian oil demand
following a similar collapse in its economy since the fall of
the Soviet Union. Russian oil consumption dropped from 5
million barrels per day in 1991 to 2.5 million barrels per day
today, accounting for almost all of the export surge.
This oil consumption level can be compared to the United
States, where we consume 20 million barrels per day. This in a
country with approximately half our population and greater
transportation distances with twice the number of time zones
that we have. The short-term causes of the recovery of Russian
oil production are ruble devaluation after the 1998 financial
collapse improving the cost structure of Russian petroleum, the
return of domestic investment in the sector after owners of
privatized oil companies believed their property rights would
be largely honored by the Russian state, and the introduction
of Western technology by using international service
contractors in modern oilfield practices and reservoir
management.
Can Russian oil production increases be sustained without
more fundamental structural changes in the sector, including
those reforms required to attract investment not only from
domestic sources but internationally? With the sole exception
of Sakhalin, neither the Russian Government nor Russian
industry has been particularly welcoming to direct foreign
investment in the oil and gas sector, in spite of the public
rhetoric. Government fears loss of control, and industry
naturally wants to avoid competition.
Having achieved production and export growth by encouraging
domestic investment, the Russian Government seems to be
hesitant to pursue further restructuring in the oil and gas
structure. Reform of Gazprom, the natural gas monopoly, and
Transneft, the state pipeline monopoly is hardly even mentioned
anymore. Both are significant obstacles to investment, even by
Russian oil companies. Production-sharing agreements, or PSA
legislation, called for international oil companies wishing to
invest in Russia has been rejected for almost all projects
other than for frontier exploration. It remains to be seen
whether this trend of stalled reform will be maintained after
the coming round of Duma and presidential elections.
Before further reform can take place, there needs to be a
healthy political debate in Russia on the role the oil and gas
sector should play in its overall economy and the impact on its
politics, domestic and foreign policy. Given its population of
130 million people, industrial base, and agricultural
potential, it is questionable whether its economy should be
based on maximizing oil and gas exports, potentially crowding
out all other economic activity.
The oil industry is capital-intensive, not labor-intensive.
It demands centralization of decisionmaking both politically
and economically in a few hands. Of course, this suits the
interests of current political and business leaders. It is less
clear whether this benefits the Russian people overall. What is
clear is that with 5 percent of the world's known oil reserve
and a reserve production ratio of around 20 years, Russia will
always be a price taker in an oil market dominated by OPEC, not
a price setter.
Our own view of the role Russia can play in U.S. energy
security should also be informed by this reality. Russian and
Caspian oil development may be prospective and lucrative to
individual countries or oil companies, but nothing that is
happening there will challenge the fact that two-thirds of
known oil reserves are in the Persian Gulf.
Certainly, diversity of supply is important to the world
oil market and benefits the United States as the largest oil
importer in the world. So new supplies from Russia and the
Caspian are significant, just as new supplies from deep water
Gulf of Mexico, deep water West Africa, synthetic crude oils
from Canada and Venezuela, under-explored acreage in Alaska,
bringing Alaskan and Canadian Arctic gas to the lower 48s, new
LNG projects, gas-to-liquids conversion technology, all these
sources are important, not to mention conservation and energy
efficiency improvements.
These sources, diversity of supply sources, are important
because they stretch the time when the last incremental barrel
of oil demand must be satisfied by the Persian Gulf. However,
we should be under no illusion that a major supply disruption
of prolonged duration in the Middle East can be replaced by
such sources. Given their position as the world's swing
producers with the most abundant and cheapest oil to produce,
sitting between major oil markets in Europe and the United
States and rapidly rising demand in Asia, Persian Gulf
countries have a unique and irreplaceable position in the oil
supply chain.
Until a technological leap allows us to move beyond oil's
dominance in world energy consumption, a major supply
disruption of prolonged duration in the Middle East will have a
direct impact on U.S. energy supply and pricing, whether or not
we are importing a drop of Persian Gulf oil ourselves. Oil is a
largely fungible commodity in a fast-moving global market, as
Julia has pointed out. Supply will shift according to market
signals. We and other members of the International Energy
Agency are also under treaty obligations not only to host
strategic stockpiles, but also share those stockpiles in times
of supply crises.
Any policy on international energy security based on
bilateral oil relationships with other countries is therefore
unlikely to be effective. U.S. policy must be based on a
realistic assessment of the global energy situation and the
potential role these countries can play, not based on
unrealistic expectations or as a substitute for well-balanced
foreign policy in the region.
By focusing too much on energy relationships, we give these
countries the impression that this is all we care about. By
explicitly discussing specific projects, like individual
pipelines or laws that we favor, like PSA legislations, we give
the impression that we care less about improvement and
fundamental conditions, like the rule of law, transparency, and
more political openness. These are the conditions that will
lead to a better investment climate for domestic, as well as
foreign, investors, not just in the export-oriented natural
resource sector, but in the larger economy where the population
lives.
They hear our rhetoric, but do not believe us when our
Government keeps pushing projects. Leave that to industry and
companies. Government officials should focus on what they know
and can impact, which is how to foster a business climate
conducive to investment and to avoid market distortions. Better
that U.S. officials discuss lessons we learned in sector reform
from our own deregulation of the oil and natural gas industries
than lecture to the Russian Duma on what laws they should pass.
I am very sympathetic to the extremely difficult job U.S.
officials have to perform in this part of the world, having
traveled there on a regular basis since 1992. However, we
cannot reinforce the rulers and the general population's belief
that the U.S. cares only about oil and the war against
terrorism without having to face long-term the unintended
consequences of such a policy.
Russia, Central Asia, and the Caucasus are important to
U.S. foreign policy interests, whether these countries have any
oil or not. We should not allow exaggerated expectations in one
area, for them and for us, to detract from sound overall
policy.
Thank you.
Senator Hagel. Mr. Chow, thank you very much.
[The prepared statement of Mr. Chow follows:]
Prepared Statement of Edward C. Chow
Thank you, Mr. Chairman. It is my honor to appear before you and
Members of the Subcommittee to discuss the role for Russian and Caspian
oil in U.S. energy security. I joined Carnegie Endowment for
International Peace in Washington this year to focus on international
energy policy. My views on this subject are informed by 25 years of
experience in the international oil and gas industry, primarily with a
major American oil company (Chevron). In recent years, I have also
advised foreign governments and Western companies on strategy,
investment policy and negotiations in the oil and gas sector,
particularly in the former Soviet Union. I hope to bring some industry
perspective from my work not only in this part of the world, but also
Latin America, West Africa, Middle East, East Asia and Western Europe,
to your Committee's discussion on the important subject of U.S. energy
security.
No one can argue with the proposition that it is important for
policymakers to have a realistic view of the policy environment.
Otherwise political expectations are likely to be inflated and policy
misguided. On the subject of oil & gas in the former Soviet Union,
therefore, it is distressing to see the volume of misinformation and
hyperbole not only from governments and industry in the region, which
may have a vested interest in exaggerating the significance, but
occasionally from our own government.
A number of years ago, most of us in industry were shocked to find
a State Department report to Congress discussing the possibility of
close to 200 billion barrels of crude oil reserves in the Caspian, at a
time when industry estimates were at best 10 percent of that level.
Today that industry estimate may be more generous, perhaps 30 billion
barrels of oil reserves, but still barely 3 percent of total world
proven reserves. The fact remains there has been only one significant
discovery (Kashagan) in the Caspian since the fall of the Soviet Union.
In a global context, the Caspian represents another North Sea or
Alaska; it is significant, but even full development will not represent
a fundamental shift in oil market dynamics or the world supply picture.
It is one thing for the President of Azerbaijan to talk about his
country signing ``the contract of the century,'' quite another for U.S.
officials to repeat this claim. (After all, this is the same century,
the 20th, that had King Abdul Asis of Saudi Arabia signing the original
Aramco concession, which holds 25 percent of known world oil reserves.)
It is worse still if U.S. policy is based on mistaken expectations and
lack of understanding of petroleum industry realities. Even in his
testimony before this Committee earlier this month, Under Secretary of
State Al Larson, referred to Caspian Basin production of 1.6 million
barrels per day in 2001 and the possibility of 5 million barrels per
day in 2010. Most in industry would have a hard time finding Caspian
production in 2001 to be much more than half of that level and believe
that we will be doing well if production can be raised to 2 million
barrels per day by 2010.
Industry expectations are moderated not only by geologic risks, but
significant technical, economic and political risks in oil development
in the region. Major finds are challenged by either being offshore; or
in deep, high-pressure reservoirs; or with sulfur-laden associated gas
that needs to be processed and the sulfur removed; or far away from
market in a land-locked location--often times all of the above.
Investments required are measured in billions or tens of billion
dollars.
Peaceful political succession is unproven in the region. Political
legitimacy of the governments in the region, as seen by their own
population, has declined since independence from the Soviet Union. At
the same time, the investment climate, which was largely welcoming a
decade ago, has deteriorated with tougher contract terms, concerns over
sanctity of contract, and greater appetite on the part of ruling elites
for rent-seeking opportunities. Increased oil income has coincided with
more autocratic rule, enhanced the ruler's ability to temporarily ``pay
off'' parts of the elite by sharing some of this wealth, and allowed
deferral of desperately needed fundamental economic and political
reforms.
These unfortunate, but often repeated, developments associated with
sudden oil income have in the past led to political instability, for
example, in Latin America and West Africa. No wonder oil people around
the world believe all the easy oil has been found and produced long
time ago. More importantly, if uncorrected, this troubling trend in the
Caspian region can give rise to longer-term threats to U.S. security
interests, beyond energy.
Most of the commentary on the remarkable increase in Russian oil
exports in the last two to three years has missed the fact that this
has not been due to new discoveries or even development of new oil
provinces or new fields. Russian oil production is around 8 million
barrels per day today. It was over 10 million barrels per day (just in
Russia) in the peak of Soviet oil production reached in the late 1980s.
So the rise in exports, which has been dramatic, is driven by the
revival of Russian production in the last three years and by the total
collapse of Russian oil demand following a similar collapse in its
economy since the fall of the Soviet Union. Russian oil consumption
dropped from 5 million barrels per day in 1991 to 2\1/2\ million
barrels per day today, accounting for almost all the export surge. This
oil consumption level can be compared to the United States where we
consume 20 million barrels of oil per day. This is in a country with
approximately half our population and greater transportation distances
with twice the number of time zones as we have.
The short-term causes of the recovery of Russian oil production
are:
Ruble devaluation after the 1998 financial collapse
improving the cost structure of Russian petroleum industry;
Return of domestic investment in the sector after owners of
privatized oil companies believe their property rights will be
largely honored by the Russian state; and
Introduction of Western technology by using international
service contractors in modern oilfield practices and reservoir
management.
Can Russian oil production increases be sustained without more
fundamental structural changes in the sector, including those reforms
required to attract investment not only from domestic sources but
internationally? With the sole exception in Sakhalin Island, neither
the Russian government nor Russian industry has been particularly
welcoming to direct foreign investment in the oil & gas sector in spite
of the public rhetoric. Government fears loss of control and industry
naturally wants to avoid competition. This is clearly demonstrated by
recent events such as the rigged auction of Slavneft in December. From
this perspective, the recently announced BP-TNK merger should be seen
as BP deciding that, if you can't join the Russian oil party directly,
then you must partner with a strong domestic player. It should not be
seen as a sign that the Russian oil patch is now completely open to
direct foreign investment.
Having achieved production and export growth by encouraging
domestic investment, the Russian government seems to be hesitant to
pursue further restructuring in the oil & gas sector. Reform of
Gazprom, the natural gas monopoly, and Transneft, the state pipeline
monopoly, is hardly even mentioned anymore. Both are significant
obstacles to investment, even by Russian oil companies. Production
Sharing Agreement (PSA) legislation, called for by international oil
companies wishing to invest in Russia, has been rejected for almost all
projects other than frontier exploration. It remains to be seen whether
this trend of stalled reform will be maintained after the coming round
of Duma and presidential elections.
Before further reform can take place, there needs to be a healthy
political debate in Russia on the role the oil & gas sector should play
in its overall economy and the impact on its politics, domestic and
foreign policy. Given its population of 130 million people, industrial
base, and agricultural potential, it is questionable whether its
economy should be based on maximizing oil and gas exports, potentially
crowding out all other economic activity. The oil industry is capital
not labor intensive. It demands centralization of decision making both
politically and economically in a few hands. Of course, this suits the
interests of current political and business leaders. It is less clear
whether this benefits the Russian people overall.
With 5 percent of the world's known oil reserves and a reserve/
production ratio of around 20 years, Russia will always be a price
taker in an oil market dominated by OPEC, not a price setter. Our own
view of the role Russia can play in U.S. energy security should also be
informed by this reality. Nothing that is happening or might happen in
Russian or Caspian oil development, as prospective and lucrative as
they may be to individual countries or oil companies, will change the
fact that two-thirds of known oil reserves are in the Persian Gulf.
Certainly, diversity of supply is important to the world oil market
and benefits the United States as the largest oil importer in the
world. So new supplies from Russia and the Caspian are significant.
Just as new supplies from deep water Gulf of Mexico, deep water West
Africa, synthetic crude oils from Canadian tar sands and the Venezuelan
Orinoco belt, under-explored acreage in Alaska, bringing Alaskan and
Canadian Arctic gas to the lower 48s, new liquefied natural gas (LNG)
projects, gas-to-liquids conversion technology--not to mention
conservation and energy efficiency improvement--are all important,
because they stretch the time when the last incremental barrel of oil
demand must be satisfied by the Persian Gulf.
However, we should be under no illusion that a major supply
disruption of prolonged duration in the Middle East can be replaced by
such sources. Given their position as the world's swing producers with
the most abundant and cheapest oil to produce, sitting between major
oil markets in Europe and the United States and rapidly rising demand
in Asia, Persian Gulf countries have a unique and irreplaceable
position in the oil supply chain.
Until a technological leap allows us to move beyond oil's dominance
in world energy consumption, a major supply disruption of prolonged
duration in the Middle East will have a direct impact on U.S. energy
supply and pricing, whether or not we are importing a drop of Persian
Gulf oil ourselves. Oil is a largely fungible commodity in a fast-
moving global market and supply will shift according to market signals,
i.e., pricing. We and other members of the International Energy Agency
(IEA) are also under obligation to not only hold strategic stockpiles
(SPR in our case), but also share these strategic stockpiles in times
of supply crisis. Any policy on international energy security based on
bilateral oil relationships with other countries is, therefore,
unlikely to be effective.
U.S. policy must be based on a realistic assessment of the global
energy situation and the potential role these countries can play, not
based on unrealistic expectations or as a substitute for a well-
balanced foreign policy in the region. By focusing too much on energy
relationships, we give these countries the impression that this is all
we care about. By explicitly discussing specific projects (like
individual pipelines) or laws that we favor (like PSA legislation) in
bilateral meetings, we give the impression that we care less about
improvement in fundamental conditions--like the rule of law,
transparency, more political openness--that will lead to a better
investment climate for domestic as well as foreign investors, not just
in the export oriented natural resource sector, but in the larger real
economy where the population lives.
They hear our rhetoric but do not believe us when our government
keeps pushing projects. Leave that to industry and companies.
Government officials should focus on what they know and can impact--how
to foster a business climate conducive to investment and to avoid
market distortions. Better that U.S. officials discuss lessons we
learned in sectoral reform from our own deregulation of the oil and
natural gas industries, including removal of price controls and import
restrictions, in the 1980s that can be usefully applied than to lecture
the Russian Duma on what laws they should pass.
I am very sympathetic to the extremely difficult jobs U.S.
officials have to perform in this part of the world, having traveled
there on a regular basis since 1992. However, we cannot reinforce the
rulers and the general population's belief that the U.S. cares only
about oil and the war against terrorism, without having to face long
term the unintended consequences of such a policy. Russia, Central Asia
and the Caucasus are important to U.S. foreign policy interests whether
these countries have any oil or not. We should not allow exaggerated
expectations in one area, for them and for us, to detract from sound
overall policy.
Thank you.
Senator Hagel. Well, Mr. Chow, we get the definite
impression that you are not particularly enthusiastic about the
Caspian Sea oil resources developing in the magnitude of what
others have suggested over the last few years. Let me ask you,
Mr. Chow, to begin with, your closing comments here, what role
should the United States Government take, if any, in developing
an energy policy, as you have set out limitations here which
you think they should not do, and you have defined those
clearly. But what should the United States Government do in
developing an energy policy for the future security of this
country?
Mr. Chow. Thank you, Mr. Chairman. First of all, I want to
say that I spent a decade working on Caspian oil. So 2 to 3
million barrels a day is nothing to sneeze at. That is a lot of
supply. And companies do not want to be out of this play, just
like they do not want to be out of any giant play in any part
of the world.
I would say, to answer your question more directly, that if
the U.S.-stated policy, as Julia has referenced, is diversity
of supply routes, that should apply in the Caspian, for
example, to outlets, as well as to our receiving a diversified
supply from around the world. And therefore, a policy that
singles out a particular pipeline route forces host governments
to subsidize the pipeline route. And I am thinking in this case
particularly for Georgia and Turkey.
With, if you will, a single solution to the Azerbaijan oil
export problem, as opposed to diversified supply routes
necessarily including Russia and Iran, I find it difficult to
understand a Caspian policy that ignores the geographic fact
that Iran is a littoral state in the Caspian, as well as having
a pivotal position in the Persian Gulf, if we are interested in
energy security. A diversified outlet from the region should be
the answer to the world's supply question.
I am not suggesting, therefore, that the U.S. should
promote projects. But the U.S. should not be against projects
just because they happen to go through countries that we are
not particularly fond of today. We are talking about projects
that have a 20-, 40-year project life. I would like to think
that our relationship with countries in the region would change
over that period of time and hopefully improve.
Senator Hagel. So essentially a Government, specifically
the United States Government, policy should encourage
diversification but not go beyond that. Is that your point?
Mr. Chow. That is right.
Senator Hagel. Why don't you begin with that? Ms. Nanay,
would you care to respond to that question: What is the
appropriate responsible role of the United States Government in
developing energy policy?
Ms. Nanay. Well, I think if we are looking at this region,
I think the appropriate role is to, first of all, yes, it is
diversify routes and to try and work with governments on
perhaps helping to install democratic values. I do not know how
you go about doing that, but I think that investments in this
region, and ultimately U.S. energy security and exports, will
be better fostered by stable countries with governments that
have some sort of democratic aura to them where you have, you
know, some semblance of free and open elections.
As it is now, you go around this region. And what you have
is basically rulers who have declared themselves largely rulers
for life. And if they are gone, then their families continue.
And they are trying to base themselves on. What you have in the
Persian Gulf with monarchies. And, it is--and it is also based
on the fact that the countries that have probably the largest
to gain from the oil resources, Azerbaijan and Kazakhstan, the
families that are currently in power do not really want to let
go of the revenue stream from that in the future.
So I suppose it is a difficult one. I do believe that the
question of Iran is very important. I do not understand how
long this policy of isolating this country that is
geostrategically so important in this region and strategically
so important for the U.S. for the future, how long this policy
can sustain itself.
Senator Hagel. Well, you have laid out a very excellent
set of objectives, but they do not just happen, as you know.
And you have acknowledged that you do not know how to do that.
And that is not a reflection on you. But it points out how
difficult these things are. And we are engaged in a very
similar situation in Iraq today with noble goals and efforts to
try to accomplish exactly what you just laid out.
But the question that I would still like to have you take a
crack at as well, Mr. Somers, is: What is the role of the
United States Government here, as you protect the interests of
your country? It is a national security interest, energy.
Mr. Somers. Thank you, Senator. I am going to stick to
what I know, and that is Russia. I was interested to hear the
remark of the previous speaker about perhaps focusing on
supporting democracy, and I would on market economy. Of all the
countries that were mentioned, and I think they were described
very eloquently by previous speakers in terms of their regimes,
Russia stands out as something different. Russia is moving
toward the kind of society and the kind of economy that our own
values espouse. It is a very difficult road for them.
And I think that the U.S. energy policy, its effort to
develop a policy and a strategy, of diversification should
certainly consider strongly asking Russia if analysis makes the
viability of Russian oil stand up in terms of its ability to
export and its reserves, that certainly Russia should be
strongly considered to be a partner with other exporters in
contributing significantly to the import share of U.S. energy,
because we will be supporting a country which is making an
effort, and has made an effort now for some 10 years, to move
in the direction that our own values support.
So I would confine myself to Russia. That is what I know.
And I think that the U.S. efforts right now and this
committee's questions are something that I strongly support.
Senator Hagel. Thank you. Staying with Russia for a
moment, in your testimony that you gave, you mentioned, and I
am reading from your testimony, ``Yukos claims''--you are
talking about the Murmansk project and to resolve the export
constraint problem discussed above, ``Yukos claims that Russia
can supply 15 percent of U.S. oil imports with an estimated
range of 1 to 2 million barrels per day.''
How would that happen?
Mr. Somers. Well, it is a statement by Yukos that if,
essentially if, they solved their export constraint problem,
and if they continue at what Westerners consider to be merely
remedial efforts to upgrade their West Siberian fields, Russia,
without significant further exploration, could fairly easily
produce this type of oil output starting about--when I say the
next 30 years, I think exactly they said starting in the year
2005, 2006, they are in a position to produce this amount of
oil.
Now how mechanically and technically they do it, I do not
know the details of that except to say they are export
constrained now. They think the Murmansk project is going to
relieve this, including also the project to China. Although I
will say that the Russian oil companies have stressed that the
pipeline from West Siberia to Murmansk is much shorter than the
pipeline to China. It will have much quicker payoff. It will be
much cheaper to build.
So I cannot answer your question directly in terms of how,
except to say that it is the opinion of the Russian oil sector
that they are in pretty good shape right now to be able to
produce this type of oil over the next 30 years, based on what
they believe are their reserves now.
Senator Hagel. How would it be transported?
Mr. Somers. Well, if Transneft improves its internal
infrastructure through a pipeline from, for example, West
Siberia to Murmansk and some of the other routes that Minister
Yusufov mentioned yesterday when he said that Russia has to now
diversify its export pipelines. It would be primarily pipelines
to ports like Murmansk.
I should add that about of the 7.4 million barrels a day
that West Siberia is producing today, and even Western people
who criticize Russia for not exploring more say this will
continue for the next 3 or 4 years, about one-third of that
exported by Transneft. That is to say, the Transneft
infrastructure gets it to the ports. That is about 2.4 million
barrels a day.
Another third is actually exported by rail in the form of
motor oil. This is a very expensive form of transportation of
oil. If you take the figure Yukos gave that it would cost $8 a
day transportation costs per barrel from Murmansk to the East
Coast of the U.S., the estimates of rail transportation out of
Russia is about $15 a barrel.
So Russia is inefficiently transporting its oil right now.
And any efficient export system will have to replace that one-
third of rail transportation with the upgrade of its
infrastructure of pipelines.
Senator Hagel. So the anticipation of a pipeline then is
what we are talking about for that being cost effective.
Mr. Somers. That is right. That would make it much more
cost effective. That is right.
Now remember--excuse me. I am reminding myself that the
Russia private sector that is advocating Murmansk and is
stating that they could hit 9 million or 10 million barrels a
day with basically on current and expected easily recoverable
reserves is also a company that is not too enthusiastic about
production-sharing agreements and is more or less on the side
of the viewpoint that large Western investment in these
offshore projects is not needed.
So the statement that Yukos makes about 9 million or 10
million barrels a day may or may not be verifiable. You just do
not know.
Senator Hagel. Let me ask each of the three of you, when
you look at the breakdown of where we are now, the United
States, importing our crude oil from, and you have all touched
upon the diversification factor here to some extent, number
one, is it the--or what is each of your opinions regarding
Middle East sources of oil? Do we need to cut back, prepare to
cut back, diversify because it is Middle East oil, or is that
not as big a threat? And I say that realizing that we have just
replaced Saddam Hussein in Iraq. And you, Ms. Nanay, referenced
the Iraqi equation in your testimony.
Today the President of the United States, as well as the
Prime Minister of Great Britain, laid down the Middle East
peace plan, the road map, re-engaging, refocusing new energy,
new leadership. So the point here is, well, maybe things are
looking better in the Middle East than they have in a long
time, if you take just those two factors. No guarantees. We do
not know how Iraq is going to turn out. Iran, as you have
mentioned, is still a wild card.
But with that development as well, is it imperative, in
your opinion, that the United States move away from the Middle
Eastern crude oil sources? If it is not, why? Or you give me
your thoughts on this, especially as we look at the breakdown
of where we bring our oil in from today.
Mr. Chow, I will start with you.
Mr. Chow. Mr. Chairman, I think it is important to point
out that oil today is traded, bought, and sold on a spot basis
around the world. The U.S. Government makes no decisions on oil
purchases that I am aware of except for the strategic petroleum
reserve. And as a free market person, I kind of like it that
way. I am old enough to remember when government had a
tremendous amount of control with domestic oil price controls,
oil import restrictions into the United States, as well as
gasoline lines that came with them. So I kind of like having a
world that allocates supply to satisfy demand on the basis of
market signals.
The greatest, one of the greatest--it has been pointed out
that Russia has a lack of deep water oil terminals. I would
like to point out that we have a similar lack of deep water oil
terminals in our own country. So one of the--and the only
exception that I can think of is the Louisiana offshore oil
port or loop. So one of the things that we can do ourselves is
to modernize our oil-receiving facilities so that they can take
economic cargoes from around the world, if we are serious about
increasing our energy supply diversification.
Of course, that is going to involve all kinds of local
permitting, environmental concerns, and serious--and I do not
mean to minimize them. But that is something that we could do
and we should seriously think about doing.
Middle Eastern oil and whether Russia can export 15 percent
of our oil import requirements or not to me is not a relevant
question. I mean, oil moves around the world. If Russia is able
through Murmansk and other projects to move more oil into the
world market, that is the important part. If that displaces
West African crude exports to Western Europe, that crude will
come to the United States and just sit. So the market will sort
itself out.
What our Government can do, in talking to the Russian
Government, is to advocate structural reforms or at least
removing the barriers, the structural barriers, to their
increasing their own production and exports.
I would like to point out to you that, you know, it is not
that the Russians are unintelligent about these things. They
have their own motivations as to why the system is left the way
it is. Transneft is plain and simple a rent-extracting machine
in the Russian oil sector. They are a system to allocate
scarcity, because by having scarcity you can reward friends and
punish enemies. It is part of the leverage that the Kremlin
has. But it is also a mechanism from which the Russian oil
sector is corrupted, as well as neighbor producing countries,
such as Kazakhstan and Azerbaijan, as well as transit
countries, like Georgia or the Ukraine, for example.
So it is not that the Russians do not understand that
having an inefficient state monopoly pipeline system, which is
not transparent, not operated on a common carrier basis, has
economic costs. They understand that all too well. So what we
need to do is over a long period engage them in a discussion of
what are the consequences of those type of policies to their
economies, but not be so specific as to prescribe our own
solutions in the greatest detail. Because that is something, it
seems to me, that is up to the Russian political systems to
sort out.
Senator Hagel. Ms. Nanay?
Ms. Nanay. Well, I think Ed has said it so well. And in my
written testimony I outline quite a bit of this, also. I agree
with him entirely that we are not a country that decides who is
going to import what from where. Companies are free to do as
they like. And moreover, I think oil is a fungible commodity,
but it does come in different qualities. And different
refineries in different parts of the world are geared to taking
different oils from different places. And so, in fact, some of
the decisions on where this oil flows from where is also based
on this angle of the refineries.
I think a free market is best served by a free market.
Saudi Arabia is a very important supplier, as we have all
mentioned. And it is, one of the terms we like to use at PFC
Energy, it is the central bank for oil. How you manage to
replace that, that would be extremely difficult.
In any case, I agree, let the markets work. And I think the
Russians are themselves as private companies, they are
responding to price signals. This is most of what is happening
in the Russian oil industry because these private Russian
producers are responding to price signals, and they are
becoming more efficient. And they want to sell more of their
oil into world markets.
Of course, I put one word of caution here. Let us see what
happens if, over the next year, we get prices softening and
even down to $20 a barrel. Perhaps that will change what oil
comes to markets from what areas to some extent.
Thank you.
Senator Hagel. Thank you both.
Mr. Somers?
Mr. Somers. Thank you, Mr. Chairman. Well, to answer your
question, I would say yes, we should move away from the degree
of dependence we have now on Mideast oil. And I know you did
not mean by that question that it should be eliminated. But I
do think that given the history, at least of my lifetime, it
has been rather unstable. It is interesting to me in that
context that Venezuela suddenly disappeared from the map. And
Nigeria is now number two, if I understand it correctly.
So it seems to me that it would be of interest to the
United States to find a way to, particularly given the new
Russian-American strategic relationship, notwithstanding the
blip on the radar screen with Iraq, that a way be found to
diversify our energy supply through Russia.
I would also like to comment just briefly on what the U.S.
Government has been doing to support Russian reform. There has
not been an overemphasis on energy supply or energy policy.
There has been a lot of work on corporate governance,
transparency, business ethics, an enormous amount of programs
in Russia which are working the private sector, as well as with
the Russian Government. And I actually detect very little of
lecturing by the State Department or Department of Energy or
Department of Commerce in my two-and-a-half years in Russia. In
those meetings, they are very constructive. They are very, let
us put it this way, on an equal basis. And there is a true
dialogue of equals in terms of intellectual exchange of ideas
in an effort to get a bottom line.
So I think the U.S. Government under this administration
has been doing an excellent job in supporting the private
sector in many different ways. And certainly the private
sector, the American private sector, has been working with its
Russian counterparts on rule of law, redistribution of
resources, ideas, and many other things that have nothing to do
with energy, but which I think create an environment that
supports a closer U.S.-Russian energy relationship.
Senator Hagel. Thank you.
Would each of you address the--and you each have, to a
certain extent, in your testimony and some of the questions--
the Caspian Sea region potential for both natural gas and oil,
realizing that again you have each touched on it in different
ways. And some of the legal entanglements, obviously our first
panel addressed some of those. But I would be interested in
getting your experienced perspective on what you believe is the
future for the Caspian Sea region oil and natural gas
production.
Mr. Chow, I will start with you.
Mr. Chow. Having perhaps given the wrong impression that I
do not care much about Caspian oil, I do want to state that
Kashagan, the one discovery that I referred to, is a very
significant discovery. I mean, except for that, I think a lot
of us would say that exploration in the Caspian would have been
a big disappointment. Because all of the development of the
fields that we are talking about today are from past Soviet
discoveries.
Kashagan is a potentially very significant discovery. And
if it turns out to be the size that people believe it may be,
it will definitely be attractive to develop, but also attract
additional exploration that might prove up additional reserves.
The natural gas question is a slightly more complicated
question. There is a lot of gas in the Caspian region.
Unfortunately, it is also very far away from market. And gas is
a business that is dominated, particularly remote gas, by
transportation economics.
And here we have a region that is, to get the gas out to
market, has to pass through two other countries that both have
even more gas than they have, namely Russia and Iran. So
whether that gas will continue maybe to be stranded because of
the lack of export route and the lack of equitable treatment on
the part of transit countries that have their own legitimate
economic interests at stake is a much longer term proposition
for development, I feel, than oil is.
Senator Hagel. Thank you.
Ms. Nanay?
Ms. Nanay. Well, Kazakhstan is already producing a million
barrels a day. And that is without Tengiz at its full
potential, without Kashagan, and without future prospects. I
think it is very clear that not only Kashagan, but if you look
at some of the geological maps of offshore Kazakhstan, it could
potentially be a phenomenal oil-producing area, or maybe it is
going to be a lot more gas than oil eventually.
It is hard to tell, because in Azerbaijan, which I believe
will have about a million barrels a day within this decade
coming out of the AIOC consortium, but the future production
out of other fields there, including Shah Deniz, may well be
gas. So you are going to see, as Ed pointed out, a great deal
of gas being produced in the Caspian. This will hit up against
gas in Russia. What is interesting about Russia that we only
touched upon, earlier today on this issue of gas, is that
Yukos, YukosSibneft soon, the merged company, also has a major
stake in gas and has been trying to buy up gas properties.
There is an element to the Murmansk project, which again
has not been mentioned, is that it would also be a port from
where you would conceivably build an LNG facility and create
eventually an LNG export potential to the U.S. that
ConocoPhillips, a U.S. company, is already talking about.
But, again, the Russian oil companies have a great deal of
gas. There is gas that Gazprom owns in Russia. And then you
have Caspian gas. And my view is that what you will see with
the Caspian gas to some degree is that Russia will find a way
to use that gas at much lower prices, as it is already doing
with Turkmenistan to supply its own domestic needs, so that
Russian company Gazprom and the Russian private producers
eventually will find a way to get their gas to export markets.
Senator Hagel. Thank you.
Mr. Somers?
Mr. Somers. Thank you. I would agree with that last
comment on Caspian gas out of Russia. I think that is probably
the way they may go, certainly the Russian private sector. The
oil companies are very interested in gas.
My understanding of the Russian Caspian oil reserves, at
least in the estimate of American oil companies, is it is about
three billion barrels. But that is about, I do not think, even
one-tenth of the reserves of Kazakhstan oil. So the Russian
oil, the Russian Caspian oil, will play a lesser role than
certainly the Caspian Kazakh oil, perhaps producing 400,000 or
500,000 barrels a day when it finally gets going. But the
geology is very different in the Russian Caspian than the
Kazakh Caspian with respect to oil. So the Russian Caspian will
play a lesser role, but still could play a significant one.
And the gas, I agree with the previous speaker, that
probably this could serve the domestic, because of the
difficulty of getting it out, serve the domestic gas market,
which could facilitate exporting more gas abroad from Gazprom.
Senator Hagel. Thank you.
What about potential markets in China and India for Caspian
natural gas and oil, Mr. Chow?
Mr. Chow. Well, once again, geography raises its ugly
head. I think that the question on China will better be
answered after China builds its own west-east gas pipeline from
St. John to Shanghai, which, by itself, is also not economic
and kind of a loss leader that the Chinese, as well as Gazprom,
Shell, and ExxonMobil, are investing in. That project to me
only makes sense if, once it is built, it can feed additional
gas either from Russia or Central Asia into that system and
satisfying that the larger natural gas demands in China that
are real and growing, both because of fundamental primary
energy consumption growth, as well as the need to reduce coal
construction because of the environmental impact of coal use in
China.
Within India, it is a geographic issue, but it is also a
political question, because you do have to traverse difficult
areas in terms of both topography in Afghanistan and Pakistan,
but also political relationships in the region. India also is a
prospective gas market, but it is much closer to Middle Eastern
gas supplies. So a more logical supplier for the India gas
market might be LNG from the Persian Gulf or even Iranian gas
than compared to Turkmen or Kazakh gas.
Senator Hagel. Thank you.
Ms. Nanay?
Ms. Nanay. Well, let me touch on one thing that you raised
here that brings us back to another issue. It is the issue of
China. And as the question you raised before about
diversifying, U.S. diversifying, away from the Middle East,
since we raised this specter of the necessity to do this, I
think countries like China, India, Japan, they have begun
thinking that they have to emulate the U.S. strategy in this as
well.
And so what you are leading up to, to some degree, is
competition for non-OPEC suppliers and non-Middle East
suppliers for oil and for gas, from countries in Asia, like
China, Japan, and India, whose logical sources are really the
Middle East. But we may be competing for the same, non-OPEC and
non-Middle East sources of oil and gas, because we are all
afraid of the Middle East problem.
But on the gas issue, I think what is very interesting,
obviously, is this question of how you would get gas to Asian
markets, particularly India. And the question of a pipeline
across Afghanistan keeps being proposed and studied. But quite
honestly, it is such a longshot. If you look at what it took to
build CPC and BTC as oil pipelines in what are reasonably
secure areas that you are crossing through, I think this issue
of building a gas pipeline across Afghanistan is still really
far off into the future.
And for the Chinese, I believe that the solutions that they
will find could very well be related to Sakhalin. Sakhalin is a
very important development in terms of Western companies'
involvement, major LNG projects, which will be launched from
there, a pipeline project that ExxonMobil is proposing to build
to Japan. I think that area will be an important gas supplier.
I really do not believe that the issue of Caspian gas to
China is a realistic one to consider at this point.
Senator Hagel. Thank you.
Mr. Somers?
Mr. Somers. Well, I would certainly agree that Sakhalin,
which we have not mentioned much, could play a significant role
with respect to gas or oil to China. As far as the Caspian
goes, I think perhaps the statement by Minister of Energy
Yusufov yesterday in Paris deserves study. Again, I do not have
the statement, other than a summary. But he talked about
diversifying, as I had mentioned earlier, the infrastructure to
increase the ability to export gas and oil out of Russia. And
the quote I had was that with foremost emphasis on North
America and Northeast Asia, what countries in Northeast Asia
perhaps the speech talks about.
But he focused on the export from the north, the east, and
the south, which could well apply to the Caspian. So perhaps
there is some idea that the Caspian could serve a role that
way. But the logistics will be difficult.
Senator Hagel. Mr. Somers, thank you.
Well, I want to tell each of you how much I have
appreciated your taking the time to put your thoughts together
in very helpful and informative testimony and taking your time
to come here. Especially you, Mr. Somers. I do not know if you
have traveled the greatest distance to get here, but I do not
think Ms. Nanay, unless she has been somewhere else here
recently, has beat you on this. But Mr. Chow, I do not know
where you--are you downtown? Yes? That is what I thought.
So you get the prize, Mr. Somers, for the longest distance
traveled.
But you have all three been very helpful. And I know we
check in with the three of you occasionally, my staff and the
committee staff and other members of this committee, to get
your expertise and counsel. And we are always grateful for
that.
If you have any additional submissions for the record, let
the committee know, and we will assure that they are included,
as will be your testimony.
Thank you.
[Whereupon, at 4:55 p.m., the hearing was adjourned.]