25 February 1998

TEXT: KALICKI DETAILS US POLICIES, INTERESTS IN CASPIAN OIL

(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.

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