25 February 1998
(Regional development, Turkey, Russia, Baku-Ceyhan route) (3930) Washington -- Jan Kalicki, the Commerce Department Counselor and Administration ombudsman for energy and commercial cooperation with the New Independent States of the former Soviet Union, gave a broad outline February 25 of the many U.S. policy interests and objectives associated with Caspian Sea oil and the construction of pipelines to take it to market. Appearing at the Senate Foreign Relations subcommitee on international economic policy, export and trade promotion, Kalicki said: "Our goal is for the investment and revenues generated by the region's energy resources to play a crucial role in furthering economic and political development" in the Caspian and Caucasus region." "We are promoting multiple pipeline routes as the best insurance that oil and gas will continue to flow unimpeded in the future," Kalicki said. "Building transportation systems for oil and gas will require unprecedented regional cooperation. ... Our approach is to work cooperatively with the key producing, transit, and consuming countries." "Stable and assured energy supplies from the Caspian will reduce our vulnerability to disruptions in world energy supplies," he said. "Current world events remind us how sensitive the world economy can be to a preponderance of oil exports through the Strait of Hormuz." Turning directly to Iran, Kalicki said: "We think the Caspian states, key consumers, and interested companies should not be hostage to an Iranian hand on the oil and gas spigot. Our objective is to make multiple pipelines from the Caspian a reality so that this does not occur." "Our position on energy pipelines through Iran is simple: we oppose them," the Commerce Department official said. "From an energy security standpoint, the drawbacks of sending more oil through Iran and the Strait of Hormuz are readily apparent. It is certainly not in the Western, Russian or regional interest to send more oil and gas through Iran." Turning to Russia, Kalicki said: "We strongly support the development of transport routes for Caspian energy through Russia, which we believe is in the interest of all the regional states. The ability of Kazakhstan, Turkmenistan, and Uzbekistan to ship oil and gas through Russia at fair prices would provide widespread benefits. We particularly support the completion of the Caspian Pipeline Consortium (CPC) project from Kazakhstan to Novorossiysk." The Administration is also urging the Congress to repeal Section 907 of the Freedom Support Act, which prevents most U.S. programs with Azerbaijan. Section 907 "unfairly disadvantages our companies and prohibits us from providing the technical and legal assistance to Azerbaijan that we give other countries in the region. In particular, it prevents us from sharing with Baku the valuable training and assistance in building economic institutions and fair legal practices that the Agency for International Development funds in other countries. And most importantly, a repeal of 907 will give us a fuller array of tools to strengthen energy security in the region, support the peace process in the Caucasus, and mitigate the destabilizing influence of Iran and Iraq," Kalicki said. Following is the text of Kalicki's remarks: (Begin text) Senator Hagel and distinguished members of this Committee, I appreciate the opportunity to appear before you to discuss the Administration's policy on Caspian energy development and outline what we are doing to advance US interests in this region. Your hearings are focusing attention on this important but, until recently, poorly known part of the world. Just as important, they are building bipartisan consensus behind policies which are of major consequence to our nation's interests. I know that you are acquainted with our overall Caspian policy from hearings you held last fall, especially the testimony of Under Secretary of State Eizenstat. I would like to recap the key elements of that policy and then discuss with you in some detail our strategy and the steps we are taking to advance our interests. Our Policy Why the Caspian is important. This hearing by the Senate Subcommittee on International Economic Policy, Export, and Trade Promotion is particularly appropriate, because the Caspian region is important to us not just for its abundant energy resources. In fact, and important as energy is, our goals go beyond earning money for the producing countries and profits for US companies. Our engagement involves a wide range of issues, including working to resolve regional conflicts, providing economic and humanitarian assistance, achieving the removal of nuclear weapons, and promoting democracy and the rule-of-law. As US policy has evolved, promoting energy development has become an integral part of this broader effort. Our goal is for the investment and revenues generated by the region's energy resources to play a crucial role in furthering economic and political development. The Caspian deserves our focused attention. Politically, the new states of the region are more stable, and more capable of defining and defending their national interests. On the energy front, we are leaving behind the post-Soviet pioneering phase of energy development when companies and governments worked together to establish the framework for oil and gas development. The central challenge now is to build the diversified transport network needed to bring large quantities of oil and gas to outside markets. Decisions are being shaped now on where oil and gas pipelines will be built and who will build them. These decisions will affect the competitiveness of US firms and products and our trade with these countries for decades to come. Key Elements of Our Strategy. In recognition of these changes, our strategy involves a number of mutually reinforcing efforts. -- Promoting the independence and sovereignty of the Caspian states. Energy revenues are critical to reviving the regional economies and enabling Caspian states to control their own destinies. We want to make sure that oil and gas investments and revenues help the region, not hurt it. Sudden wealth can be damaging and destabilizing. Independence also requires reliable export outlets for oil and gas. We are promoting multiple pipeline routes as the best insurance that oil and gas will continue to flow unimpeded in the future. As Deputy Secretary of State Talbott said last year about these states: "Today they have the chance to put behind them forever the experience of being pawns on a chess board, as big powers vie for wealth and influence at their expense." -- Supporting regional cooperation and conflict resolution. Building transportation systems for oil and gas will require unprecedented regional cooperation. Once in place, they can tremendously reinforce incentives for continued cooperation and avoiding conflict. Our approach is to work cooperatively with the key producing, transit, and consuming countries toward shared objectives in a partnership that replaces the "Great Game" competitiveness of the past with a new "win-win" strategy. -- Increasing and diversifying world energy supplies. Stable and assured energy supplies from the Caspian will reduce our vulnerability to disruptions in world energy supplies. Current world events remind us how sensitive the world economy can be to a preponderance of oil exports through the Strait of Hormuz. -- Supporting US companies. The Commerce Department has been especially active in supporting US companies and making sure they can compete on a level playing field. While US commercial involvement at the current stage of development is inevitably driven by big energy and construction companies, it is important to keep in mind that the success of these investments is already paving the way for more exports by small and medium sized US firms in equipment and services. -- Continuing pressure on Iran to change its unacceptable practices. We oppose Iran's pursuit of weapons of mass destruction, its support of terrorism, and its undermining the Middle East peace process. In addition, we think the Caspian states, key consumers, and interested companies should not be hostage to an Iranian hand on the oil and gas spigot. Our objective is to make multiple pipelines from the Caspian a reality so that this does not occur. What We Are Doing Our policy engagement with the Caspian region dates back to the breakup of the former Soviet Union. As the Administration's Ombudsman for Energy and Commercial Cooperation with the New Independent States, I have been personally involved since the very early stages in our efforts to advance our economic interests and to help these states construct a foundation for democracy, prosperity, and independence. Intensified Policy Implementation. Over the past year, we have greatly intensified our policy implementation by setting more specific policy goals and objectives, stepping up high level contacts with the region's political leaders, further strengthening our engagement with the private sector, and organizing interagency groups to coordinate all these activities. Our government-wide effort was galvanized in part by the timetable of firms considering a new main oil export pipeline from Azerbaijan and that of other companies planning a gas pipeline from Turkmenistan to Turkey. It was also prompted by the agreement of French, Russian, and Malaysian firms to develop Iran's South Pars gasfield and the contemplation of Caspian energy transport projects through Iran by a number of non-US firms. Defining Specific Goals. We have more clearly defined our specific goals to realize our broader policy objectives. These goals include development of an east-west transportation corridor that includes trans-Caspian oil and gas pipelines, gas links to Turkey and Ukraine, and a Baku-Ceyhan oil pipeline, as well as pipelines through Russia. Accelerating High-Level Contacts. To achieve these goals, we have stepped up high-level engagement with regional governments on a broad front, using the resources of all our agencies. Last summer President Aliyev of Azerbaijan and President Shevardnadze of Georgia visited Washington and expressed support for the Eurasian transport corridor, as did President Nazarbayev of Kazakhstan and Prime Minister Yilmaz of Turkey during visits later in the year. Last November I had the pleasure of accompanying Energy Secretary Pena to the region, where he spelled out our newly defined policy objectives and challenged regional leaders to gain commitments to trans-Caspian pipelines and a Baku-Ceyhan oil pipeline by October 1998. The First Lady recently traveled to Central Asia, and last month Commerce Secretary Daley led a successful trade mission to Turkey. In addition, my colleague Assistant Secretary of Energy Robert Gee led an interagency delegation to Turkey to address pipeline issues, and I engaged the Russians on Caspian issues during trips to Russia in December and January. Next month's session of the Gore-Chernomyrdin Commission and the planned April 21-23 visit by President Niyazov of Turkmenistan will afford additional opportunities to pursue our Caspian objectives. Recent visits by Congressional leaders to the Caspian region have further impressed regional leaders with our country's deep bipartisan interest in the political and economic development of their nascent states. We strongly support and encourage such trips. We have used our increased interaction with regional leaders to clarify our goals and to promote coordination among governments and with the private sector. For example, we have encouraged these states to form national working groups to address economic and technical pipeline issues, to serve as focal points for company contacts, and to facilitate coordination on a Baku-Ceyhan pipeline. We are meeting this week with a Turkish Government team, and Turkish Foreign Minister Cem is hosting the first regional intergovernmental session next week in Ankara, in order to move this process forward. It is important for Turkey to play a leading role in this process. It has a strong interest in attracting a main oil export pipeline that bypasses the environmentally sensitive Bosporus, such as the Baku-Ceyhan route. Turkey is also a major market for Caspian gas exports, and thus can play a pivotal role in the selection of a gas pipeline route. Our interaction also provides us the opportunity to address specific issues with regional leaders. We support the development of Caspian resources based on a sectoral division of the seabed and sub-sea resources, and are pleased that on January 24 Presidents Yeltsin and Nazarbayev issued a statement saying that consensus should be reached on conditions for a fair sectoral division. We are also working with Azerbaijan and Turkmenistan to help resolve their offshore boundary dispute. Last month we sent a pair of maritime boundary experts to Ashgabat and Baku, and this month we were pleased to see a joint statement by the two countries' foreign ministers that they have agreed to resolve their differences. I had the privilege of leading an interagency mission last month to Russia and Ukraine where I discussed Caspian issues. We strongly support the development of transport routes for Caspian energy through Russia, which we believe is in the interest of all the regional states. The ability of Kazakhstan, Turkmenistan, and Uzbekistan to ship oil and gas through Russia at fair prices would provide widespread benefits. We particularly support the completion of the Caspian Pipeline Consortium (CPC) project from Kazakhstan to Novorossiysk. This project was delayed for several years because of structural as well as other reasons. US firms involved in CPC say the project is back on track for now, and credit their government's support for helping to resolve outstanding issues. The CPC is a good example of private-public sector partnership in support of our commercial, energy, and broader national interests. Besides stepping up our exchanges with governments in the Caspian region, we are engaged with the Europeans and even the Chinese in our effort to build support for an east-west energy and trade corridor. Engagement with Companies. Our active and strong interaction with US energy, construction, finance, and transportation companies is a critical element of our policy implementation. Important decisions in the region have been and will be driven by commercial interests. I cannot stress enough the value we place on our partnership with the private sector in pursuing our objectives in the Caspian. With respect to pipelines, our companies have told us there is a role for the US government in helping to coordinate countries and companies that share common interests but face political and other barriers to key transportation projects. The companies know what needs to be done to make east-west pipelines commercially attractive. They point to the need for sufficient volumes of oil to reduce operating costs and to measures, such as enhanced access to rights of way, that can reduce capital costs. Our task of advocating on behalf of our companies is frankly complicated by lesser restrictions by other countries on commercial dealings with Iran. But there are very good reasons to oppose the involvement of any firms in transport projects that carry Caspian energy through Iran. We and other countries should not be conducting business with a country that sponsors terrorism, is seeking to acquire weapons of mass destruction, and is working actively to undermine the Middle East peace process. Nor, as I said earlier, should we be increasing Iran's control over energy transportation -- north-south or east-west -- or sending more oil through the Strait of Hormuz. As this Committee is aware, the Administration favors the repeal of Section 907 of the Freedom Support Act, which unfairly disadvantages our companies and prohibits us from providing the technical and legal assistance to Azerbaijan that we give other countries in the region. In particular, it prevents us from sharing with Baku the valuable training and assistance in building economic institutions and fair legal practices that the Agency for International Development funds in other countries. And most importantly, a repeal of 907 will give us a fuller array of tools to strengthen energy security in the region, support the peace process in the Caucasus, and mitigate the destabilizing influence of Iran and Iraq. Organizing for Action. To focus and integrate all of the government's activities, we have set up a number of interagency groups focused on the critical elements of our overall Caspian strategy. -- A Foreign Policy Group, chaired by the Department of State, coordinates our interaction with regional and other governments. This group ensures that our message is consistent and reinforcing. -- A Commercial Energy Policy Group, chaired by my colleague Bob Gee and myself, coordinates our interaction with companies. We invite companies to share their views with us on a confidential basis, and we regularly invite interested parties from the private sector to hear updates on our progress in advocating their interests. -- A Financial Policy Group, chaired by the Treasury Department, is engaged with financial institutions and analyzing ways we can help make east-west pipelines more financially attractive. -- These groups report to a Senior Interagency Working Group chaired by the National Security Council, which sets policy and coordinates activities to implement it. What's Ahead I now want to turn to the task ahead. The number and complexity of the issues facing this region are formidable, and we will need concrete and cooperative steps to deal with them. In a broad sense, our great challenge ahead is to help the Caspian states to strengthen their independence and commitment to democratization and the free market, not only by foreign assistance but even more through increased private sector trade and investment. A related goal is the integration of all of the New Independent States into the international economic and commercial system. This will require the development of free markets, democratization, resolution of regional conflicts, and regional economic cooperation. It will also require the development of oil and gas pipelines to transport the region's rich oil and gas resources to markets. But how do we ensure that these are reliable pipelines, that help promote the independence and democratization of the region, diversify global and US energy supplies, and reduce the chances of their disruption? Near-Term Oil and Gas Pipeline Decisions Will Affect Long-Term Interests. Key decisions are being shaped now that will determine the future of Caspian energy transportation and trade patterns for decades to come. Oil and gas pipelines are but one aspect of the overall transportation picture, but their placement will carry enormous implications for the orientation of future commerce. Much work lies ahead for us on a wide range of issues if we are to influence these decisions in a positive way. Piecing together an oil pipeline solution is particularly complex. Our commercial diplomacy has focused on catalyzing an integrated east-west pipeline system that includes trans-Caspian pipelines and pipelines through the Caucasus and Turkey. Because of safety and environmental concerns about shipping greater oil volumes through the Bosporus, a line terminating at the south Turkish Mediterranean port of Ceyhan is an attractive option. Oil from Kazakhstan on the east side of the Caspian and Azerbaijan on the west side could be combined to provide the large volumes needed for this route. Gas from both sides of the Caspian will also help meet Turkey's growing energy needs, and its transportation can contribute to economies of scale if coordinated with the transportation arrangements for oil. Commerciality is Key. Any solution must make sense commercially. It is the private sector, after all, that will make the investments and take the risks. Of course, our Agency for International Development and trade finance agencies can play a supporting role, as can those of other countries. In addition, Turkey and the other transit countries that benefit from a pipeline will need to make projects commercially attractive. This might include tariff and tax breaks, attractive insurance and financing costs, and assistance in procuring rights of way. One of the most difficult challenges ahead will be to convince companies to incorporate the environmental sensitivities and safety risks of the Bosporus into their economic calculations. At the same time, Turkey and other countries will have to be convinced of the need to make alternative routes commercially attractive. A main oil export route that bypasses the Bosporus is especially important to linking the east and west sides of the Caspian. A safe, reliable route is needed to attract and ship such large volumes of oil. We welcome the fact that many companies are studying main export routes as well as trans-Caspian pipelines. Our next step is to press for more concrete pipeline proposals, especially ones that take advantage of the economies of scale that can be achieved by combining the growing volumes of oil produced on both sides of the Caspian. We will also continue to work with the governments in the regions to ensure these projects receive a fair hearing and that the companies are getting the support they need to move these projects forward. We will take advantage of every opportunity to facilitate the exchange of information and promote real progress, as provided, for example, by the American Turkish Council sessions this week in Washington. But ultimately, the regional governments will have to work with one another and with the companies to make pipelines a reality. Natural Gas Pipelines Could Lead the Way. Developing an integrated approach to exporting natural gas is no less challenging, and in fact more urgent. Turkmenistan is capable of exporting large volumes of gas to Turkey as soon as a pipeline is available, and Turkey will have sufficient demand to consume it. Iran is pressing for a gas pipeline from Turkmenistan to Turkey through its territory. Preliminary assessments by several companies suggest a trans-Caspian gas pipeline to Turkey will be economically competitive, and we are pressing for this alternative. Such a system could also carry gas from Kazakhstan, Uzbekistan, and Azerbaijan, and even Russia. A significant political obstacle to a trans-Caspian pipeline has been the offshore boundary dispute between Azerbaijan and Turkmenistan. We welcome direct negotiations underway between Ashgabat and Baku, and we are asking them to encourage trans-Caspian routes to develop quickly while finalizing their demarcation agreement. This will be a priority issue during President Niyazov's upcoming visit. Iran Threatens Regional Independence and Energy Security. Our position on energy pipelines through Iran is simple: we oppose them. Iran is a competitor, not a partner, when it comes to oil and gas exports. In fact, Iran will be able to compete for the same gas markets as Turkmenistan in the not too distant future. Turkmenistan and Kazakhstan, having experienced considerable difficulty exporting their energy through one competitor in Russia, should not allow their independence and economic well-being to now become hostage to another. From an energy security standpoint, the drawbacks of sending more oil through Iran and the Strait of Hormuz are readily apparent. It is certainly not in the western, Russian, or regional interest to send more oil and gas through Iran. More at Stake Than Just Oil and Gas. If we look at the bigger geo-economic picture, we realize that there is more at stake than a single industry, a single region, or a single market. The bigger picture encompasses more than oil and gas. A variety of other products will all utilize the Eurasian corridor and help build the economies of the region. We also need to look past the energy producers in the region and engage energy-poor countries such as Turkey, Ukraine, Georgia, and Armenia, who will all play an important role in how this region develops. The countries of the Eurasian corridor have come a long way since 1990, and the United States has played a key role in helping with their transformation to market economies and, in some cases, developing democracies. There is still much to be done to reach economic and political stability. But as the old, isolated Soviet empire gives way to a fully established energy, economic, and political system more closely linked to the international market, we are convinced that the new Silk Road can be reconstructed in a way in which everybody wins.