Ambassador Richard Morningstar, Special Advisor to the President and Secretary of State, for Caspian Basin Energy Diplomacy, Address to CERA Conference, Washington, DC, December 7, 1998


I am pleased to have an opportunity today to discuss U.S. energy policy
toward the Caspian Basin with the distinguished audience that Dan
Yergin and CERA always attract.   Tomorrow, Secretary Richardson will
describe in considerable detail the status of our efforts to promote a
network of multiple pipelines and an East-West energy transit corridor
that will bring Caspian energy to world markets.  Today, I hope to
offer you a slightly different perspective, exploring the overall
policy framework that forms the foundation of our activities in the
Caspian.

U.S. policy on Caspian pipelines is based on a clear logic. The
pipelines we support serve our four strategic objectives in the Caspian
region:

-- Strengthening the independence and prosperity of the new Caspian
states and encouraging political and economic reform;

-- Mitigating regional conflicts by building economic linkages between
the new states of the region;

-- Enhancing commercial opportunities for U.S. and other companies; and

-- Bolstering the energy security of the U.S. and our allies and the
energy independence of the Caspian region by ensuring the free flow of
oil and gas to the world market place.


All of these objectives are important in their own right.  They are
also closely inter-related.  For example, enhancing commercial
opportunities means increasing foreign investment.  Higher levels of
investment by energy and other companies should lead to sustained
economic growth and, hopefully, a more equitable distribution of wealth
in the countries of the Caspian region.  The establishment of
prosperity and market economic institutions goes hand in hand with the
development of the emergence of democratic institutions, which, coupled
with economic growth, will solidify the viability of the new states of
the Caspian as independent and sovereign countries.  These developments
will also encourage these new states to cooperate with each other in
pursuit of mutual economic interests.  As these linkages evolve, they
will help bind the economies of these countries into broader European
and global economic institutions.

The fundamental objective of U.S. policy in the Caspian, therefore, is
not simply to build oil and gas pipelines.  Rather, it is to use those
pipelines, which must be commercially viable,  as tools for
establishing a political and economic framework that will strengthen
regional cooperation and stability and encourage reform for the next
several decades.

Turkey will play a critical role in this effort, serving as the
geographic, commercial, and cultural bridge between the Caspian region
and Europe.  It would indeed be difficult to overstate Turkey's
importance to the emergence of this framework.   Turkey, the United
States' only NATO ally in the region, enjoys immense geographic
significance, straddling the continents of Europe and Asia, bordering
directly on Syria, Iraq, Iran, Georgia, Armenia, Bulgaria, and Greece,
as well as Ukraine and Russia across the Black Sea.  In addition,
Turkey is the region's commercial locomotive, with Istanbul serving as
the financial and business hub of the entire Caspian Basin.  Moreover,
modern-day Turks enjoy a centuries-old heritage of ethnic ties to the
Turkic peoples on both sides of the Caspian Sea.

Russia is also central to this vision.  Russia is, after all, a new
independent state of the Caspian region.  We seek to work with Russia
as a partner in the development of Caspian energy resources.  Our
underlying goal is to build win-win situations for U.S. and Russian
companies and to get away from any tendency toward zero-sum thinking
when looking at the region.  Russian firms such as Lukoil and Central
Fuels have already acquired shares of international consortia in
Azerbaijan and Kazakhstan.  We seek to encourage this sort of
collaboration on pipeline and other Caspian energy projects, as the
U.S. and Russian Governments agreed during our last Summit meeting in
Moscow.  We even hope to see Russian companies gaining access to global
markets by lifting their oil onto supertankers in the Mediterranean via
a commercially competitive Baku-Ceyhan pipeline.

The strategic objectives that I outlined above, along with the
political and economic framework that they underlie, explain why the
United States policy endorses five particular pipelines in the Caspian
region.  We have strongly supported the CPC and northern early oil
pipelines as commercially viable ways to build cooperation with Russia
in the Caspian.  We warmly welcome the Russian Federation Government's
approval last month of the final two right-of-way permits required to
permit construction to begin on the CPC pipeline.  Prime Minister
Primakov hosted a ceremony in Moscow on November 24 marking this
important event.  During that ceremony, the prime minister hailed the
CPC pipeline as a vehicle for deepening Russia's involvement on Caspian
energy projects and providing jobs and revenues for Russian workers and
companies.  We couldn't agree more with Prime Minister Primakov.  We
hope the CPC pipeline will foster a new spirit of cooperation with
Russia on Caspian energy projects.

The Baku-Supsa early oil pipeline forms another key component of U.S.
strategy in the Caspian region by providing an East-West export route
for oil produced in Azerbaijan and strengthening economic linkages
between Georgia and Azerbaijan.  These sorts of ties are at the heart
of the East-West transit corridor, which aims to build cooperation
throughout the Caucasus and Central Asia through transportation
infrastructure projects.  We hope to see construction completed on this
pipeline in the next few months and oil flowing out through Supsa by
the middle of next spring.

The trans-Caspian gas pipeline (or TCP) is vitally important to
Turkmenistan's future.  Faced with no reliable export route for its
natural gas through Iran or Russia, Turkmenistan's economic problems
will grow increasingly severe absent a trans-Caspian pipeline.  The TCP
will provide Turkmenistan with its most viable option for reaching gas
markets in Turkey and the rest of Europe, thereby supplying with a
vitally important  revenue stream. But beyond the benefits of gas
revenues, the trans-Caspian pipeline provides a vehicle for coaxing
Turkmenistan toward the international financial community, thereby
encouraging an extended process of economic reform.

The trans-Caspian gas pipeline TCP is now moving ahead at a healthy
pace. Progress on the TCP accelerated on October 29 with the signing of
a preliminary gas purchase agreement by Presidents Demirel and Niyazov.
On November 17, Enron delivered the results of its TDA-financed
feasibility study to the Turkmen Government.  The study concluded that
the TCP is technically feasible and commercially competitive.   We are
now urging Turkmenistan to move as quickly as possible to choose a
consortium of companies that will arrange financing and build the
pipeline.  We hope the Turkmen will announce that decision within the
next month.

Finally, the Baku-Ceyhan pipeline, which has been the subject of
extensive media attention over the past few months, can provide a
commercially viable way of carrying Caspian oil to the deep water of
the Mediterranean, thereby creating a robust economic linkage between
Central Asia, the Caucasus, and Turkey.  Baku-Ceyhan will avoid the
commercial, environmental and safety risks posed by a significant
increase in oil shipments through the Bosporus.  Moreover, Baku-Ceyhan
will ensure that Turkey remains an integral player in the development
of Caspian energy resources.  Turkey can play a stabilizing role in the
volatile regions of the Caucasus and Central Asia.  Encouraging Turkey
to do so is important not only from the U.S. foreign policy perspective
that I sketched out a few moments ago.  It is also critical to securing
the immense investments now under consideration by private companies.

All of the relevant companies and countries in the Caspian region now
seem to understand why these political realities make Baku-Ceyhan so
important.  This realization has helped to change the commercial and
political landscape surrounding  Caspian pipelines.  Our primary focus
is now to encourage the companies and countries to get down to business
in order to make Baku-Ceyhan a reality.  We believe this process is now
underway, and welcome the AIOC's announcement last Friday that
negotiations geared toward resolution of commercial issues are
intensifying.  Turkey clearly shoulders a major responsibility for
providing incentives required to make Baku-Ceyhan as commercially
attractive as possible.  The U.S. believes Turkey is willing to do so,
and we are convinced that continued discussions between the companies
and countries of the region will lead to agreement to build a
commercially viable pipeline to Ceyhan.  Of course, key issues such as
the availability of oil volumes will have to be worked into such an
agreement.  The key point, however, is that these sorts of commercial
issues can be worked out.

In addition to serving as an honest broker of these sorts of
discussions, the U.S. Government views its proper role with respect to
Caspian pipelines as a catalyst on financing through our trade finance
and investment agencies. Last May, we announced our Caspian Sea
Initiative, an unprecedented effort by the U.S. Government's s three
finance and investment agencies, the Trade and Development Agency
(TDA), the Overseas Private Investment Corporation (OPIC), and EXIM
Bank, to coordinate their efforts to promote investment in energy
projects throughout the Caspian region.   The first major step in this
effort was TDA's launching last June of a feasibility study for a
trans-Caspian gas pipeline.  In October, TDA announced a new grant of
$823,000 to BOTAS, the Turkish pipeline consortium, for U.S. technical
assistance.  The grant will allow BOTAS to gain access to U.S.
expertise on technical, financial, environmental, and legal matters
associated with negotiation of the Baku-Ceyhan oil pipeline and the
trans-Caspian gas pipeline.  TDA, OPIC, and EXIM Bank are also opening
a Caspian Trade and Investment Finance Center in Ankara.  The Center,
staffed by representatives of the three U.S. Government trade finance
agencies, will spearhead U.S. efforts to mobilize financing for
projects in the region.  Congress also has underscored its support for
the Caspian Sea Initiative by including language in this year's report
language for the Foreign Operations Act that encourages OPIC to raise
its internal limits on participation in Caspian energy projects,
subject to normal due diligence and prudent underwriting practices.

In conclusion, it is important to note that the notion that the U.S.
Government is "forcing" private companies to build Baku-Ceyhan is flat
wrong.  The United States views its proper role with respect to Caspian
pipelines as that of a facilitator.  Our job is to encourage the
relevant companies and countries of the region to negotiate in good
faith on the commercial and political factors that must be satisfied in
order to make any of these pipelines viable.  It is true that we have
worked hard to convey to the companies that political realities prevent
Baku-Supsa from providing a viable option for a main export pipeline
for oil.  The U.S. simply believes that when the full range of
political and economic and commercial factors are taken into
consideration, Baku-Ceyhan provides a far superior route, which, unlike
Baku-Supsa, is attainable.  That being said, the starting point of our
own deliberations is that Baku-Ceyhan, like any of these pipelines,
must be commercially viable.  We believe this is indeed the case, and
are convinced the parties can work out the commercial issues.

The U.S. is therefore attempting to strike a balance between commercial
and political objectives.  Commerciality is at the heart of our entire
approach.  After all, enhancing commercial opportunities for U.S. and
other companies is one of our strategic objectives in the Caspian
region.  As a creature of the private sector for all but the past 5 1/2
years, I clearly understand that pipelines will not be built if they
don't make commercial sense.  It is in this spirit of understanding
that I urge all interested parties to get down to business and work
together to build a pipeline network that will satisfy the broadest
possible range of commercial, political, and economic factors.


[End of Document]


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