UNITED STATES COMMISSION ON SECURITY AND COOPERATION IN EUROPE
(HELSINKI
COMMISSION) HOLDS BRIEFING:
"PIPELINE POLITICS: ACHIEVING ENERGY SECURITY IN
THE OSCE REGION"
JUNE 25, 2007
COMMISSIONERS:
REP.
ALCEE L. HASTINGS, D-FLA., CHAIRMAN
REP. LOUISE M. SLAUGHTER, D-N.Y.
REP.
MIKE MCINTYRE, D-N.C.
REP. HILDA L. SOLIS, D-CALIF.
REP. G.K. BUTTERFIELD,
D-N.C.
REP. CHRISTOPHER H. SMITH, R-N.J.
REP. ROBERT B. ADERHOLT, R-ALA.
REP. MIKE PENCE, R-IND.
REP. JOSEPH R. PITTS, R-PENN.
SEN. BENJAMIN L.
CARDIN, D-MD., CO-CHAIRMAN
SEN. CHRISTOPHER J. DODD, D-CONN.
SEN. RUSSELL
D. FEINGOLD, D-WIS.
SEN. HILLARY RODHAM CLINTON, D-N.Y.
SEN. JOHN F.
KERRY, D-MASS.
SEN. SAM BROWNBACK, R-KAN.
SEN. GORDON H. SMITH, R-ORE.
SEN. SAXBY CHAMBLISS, R-GA.
SEN. RICHARD BURR, R-N.C.
WITNESSES/PANELISTS:
GREG MANUEL,
SPECIAL ADVISER TO THE SECRETARY AND
INTERNATIONAL ENERGY
COORDINATOR,
DEPARTMENT OF STATE
AMBASSADOR
STEVEN R. MANN,
PRINCIPAL DEPUTY ASSISTANT SECRETARY OF STATE FOR
SOUTH
AND CENTRAL ASIAN AFFAIRS
MATTHEW BRYZA,
DEPUTY ASSISTANT SECRETARY OF
STATE FOR
EUROPEAN AND EURASIAN AFFAIRS
AL HEGBURG,
DEPUTY
ASSISTANT SECRETARY OF ENERGY FOR
INTERNATIONAL ENERGY POLICY
YASHAR
ALIYEV,
AMBASSADOR OF THE REPUBLIC OF AZERBAIJAN TO THE U.S.
MIKHAIL
KHVOSTOV,
AMBASSADOR OF THE REPUBLIC OF BELARUS TO THE U.S.
AMBASSADOR
KEITH SMITH,
SENIOR ADVISOR,
CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES
DR. PIERRE NOEL,
RESEARCH ASSOCIATE,
UNIVERSITY OF CAMBRIDGE
The briefing was held at 2:58 p.m. in Room 419 Dirksen Senate
Office Building, Washington, D.C., Rep. Alcee L. Hastings, moderating.
[*]
HASTINGS: Ladies and gentleman, good afternoon. I want to warmly welcome
you to this hearing of the Commission on Security and Cooperation in Europe.
I expect that Senator Cardin and others of my colleagues may come along, but in
the interest of time I certainly do not want to -- oh, there he is, as I speak.
Today's hearing is the first of three hearings the commission plans to hold
on the topic of energy security, an issue that spans the security, economic and
the environmental and human dimensions of the Helsinki process.
This
hearing series is designed to give the commission a comprehensive picture of
this complex issue and highlight areas where the commission, the U.S. government
and the OSCE can take effective action.
Today's hearing will focus on
conflict prevention and the security of supply and transit of oil and gas. The
supply and transit of energy is often a source of insecurity and conflict for
OSCE participating states. The recent challenges faced when Russia shut off gas
supplies to transit and consumer countries highlighted the potential for
political and economic conflict.
The second hearing in the series is going
to focus on the development of democracy and civil society in countries with
abundant energy resources. This problem is often referred to as "the resource
curse." In an economic sense, energy resources are a blessing, as they provide
countries with needed income. But these resources can also lead to unintended
consequences such as stunted economic and political development.
It's
remarkable that only two of the world's top 10 oil exporters are established
liberal democracies. You're going to have to come back to the other hearings to
find out who those two are.
(LAUGHTER)
The third hearing will address
the nexus of energy security and environmental security, focusing on the
diversification of energy supply and sustainable technologies. The quest for
diversification of energy supplies and greater energy security gives consumer
countries an opportunity to address the environmental challenges of energy
supplies by adopting new technologies that not only decrease dependence on
foreign sources but also help address environmental concerns.
But today, we
are going to take a geostrategic look at energy supply and transit.
Specifically, we hope to address questions such as: What are the factors in
ensuring reliable and predictable supply and transit of oil and natural gas?
What is the United States doing to ensure our own energy security? And what
role does the United States have to play in Eurasian energy security?
To
answer these complex questions, we are pleased to have an excellent slate of
witnesses. In addition to our exceptional and unusually large panel of U.S.
government witnesses, I'm quite pleased to welcome two distinguished ambassadors
from the OSCE participating states of Azerbaijan and Belarus. Both countries
represent different aspects of the issue of energy security, and we are pleased
to hear their experiences and insights on how they view energy security given
their geographic and political positions in the world.
Clearly, during
today's hearing, we're going to hear a lot about Russia. In today's newspaper,
I read of the "South Stream" that is being developed by Gazprom and others. So
my notes have not even caught up with what the events of the day are.
And
notice, when I talk of them as a supplier of oil and natural gas with no affront
meant, I didn't say reliable supplier. The jury is still out on that decision.
Just in the past week, President Putin stated that Russia has a major stake in
forming an infrastructure of trust in the global and regional economies,
including in the energy sector.
That would be a welcome development,
although many would say that there is already plenty of evidence to convict at
this point based on Russia's actions in the recent past.
I want to state for
the record that we did invite the Russian ambassador to join us here today so
that we could hear the Russian view on these issues, but he declined.
That
said, I'm very pleased with the assembled witnesses here today and I'll be
interested to hear from our panelists on the prospects for improving the energy
security situation, where they think Russia is going and actions the U.S. can
take to foster a more secure energy environment.
Before I introduce the
first panel, I'd like to hear from my distinguished friend and colleague for any
opening comments he may make, Senator Cardin my co-chair. Thank you, sir. You
have the floor.
CARDIN: Mr. Chairman, thank you very much for holding this
hearing. I think this subject is extremely important and one in which the
Helsinki Commission and the OSCE can take a major leadership role.
I regret
I will not be able to stay for much longer. We have the immigration bill that's
on the floor this week and there's a little bit of interest from our
constituents on that issue.
But let me just underscore this particular
hearing in a couple ways. First, I did chair, as the chairman knows, the second
committee, the OSCE Parliamentary Assembly, and I must tell you energy was one
of our top issues and we are concerned about it from a security point of view.
It is a challenge for the OSCE states.
One of my major concerns is that for
the United States to exercise leadership in this area, we need to start with our
own energy policies. And this last week, the United States Senate passed an
energy bill that I think moves us in the right direction. I would have liked to
have seen some additional provisions that we were unable to get, but it's a
strong bill and it speaks to the United States moving toward energy
independence.
Now, we're all going to be dependent on the region, there's
no question about it, but the United States uses too much energy and has not
made the type of investment in alternative fuels that it needs to if it's going
to be able to be a major player in the international community dealing with the
subject of this hearing.
So I've introduced legislation that calls upon our
nation to become energy independent. We were able to put a person on the moon.
You've heard this analogy made by many of us. Why not make an Apollo-type
commitment towards energy independence?
And my legislation requires us to
be 90 percent self-sufficient by the next decade. I think that can be achieved.
But it starts with conservation and must have a large ingredient for
alternative renewable energy sources and we need to continue our commitment to
research.
Now, why do we need to do this? Well, today's hearing is
concerning security and that's a major issue. A lot of the energy that's
consumed by OSCE states, the United States, in particular, has its roots in
countries that don't necessarily agree with our foreign policy objectives, and
that's putting it mildly.
So that when we fill up our tanks with gas here,
we are supplying resources to countries who, quite frankly, disagree with our
way of life and that's something that we need to make sure we avoid in the
future.
So there's strong security reasons why OSCE should be concerned
about its energy sources and the dependency among different states for energy.
It's also very important for economic reasons.
I just came back from the
eastern shore of Maryland, filled up my tank with gasoline and two of my
constituents took the opportunity to complain to me about the cost of gasoline.
Now, we might argue whether it's a fair price or not, but I can tell you the
unpredictability of energy costs in America is affecting our economy and, I dare
say, affects the entire OSCE's economic growth by the fact that it's
unpredictable.
Investors do not like to make decisions based upon
unpredictability. We've lost some plants in Maryland because of energy costs
and the unpredictability of energy costs.
And the last point I want to make,
which I think the United States must exercise leadership, is on the
environmental front. Global climate change is real. So as we look at the
security issues concerning energy, we also need to be mindful to get away from
the carbon-based energy sources so that we address the global climate change.
I come from the state of Maryland. We're a coastal state. Sea level change
has a dramatic impact on my state. Global climate change has an impact on the
entire OSCE and our entire world.
So, Mr. Chairman, I'm glad that this
hearing is taking place. I think it is of the utmost priority and I assure you
the fact that I am unable to stay for the witnesses is not my lack of my
interest and my staff will inform me and we intend to follow-up with the people
that are at the witness table.
I thank our governmental witnesses for being
here. I particularly thank our two ambassadors and our private sector experts
for sharing their wisdom with this committee.
HASTINGS: Thank you very
much, Senator.
We've also been joined by one of the newer members of the
Helsinki Commission, my good friend from North Carolina, G.K. Butterfield.
Congressman Butterfield, if you have any opening comment, we'll take it at this
time.
BUTTERFIELD: Thank you very much, Mr. Chairman. Let me thank you for
convening this hearing today and I apologize for being late. I've been
multitasking, as we all do from time to time.
But thank you, witnesses, for
coming forward today to give us your testimony. I'm going to try to stay for a
while and then I'm going to have to be at another event at 4:15 this afternoon,
but thank you all very much.
I am a new member of this commission, Mr.
Chairman, and so I'm in a learning mode right now and I'm eager to hear what the
witnesses have to say. I'm also looking forward to our upcoming trip that we
will be taking to Ukraine.
But, Mr. Chairman, looking at the issue of
energy, it doesn't take very long to realize that one of the greatest
vulnerabilities of America is our dependence on foreign oil. We talk about it
all the time.
I'm on the Energy and Commerce Committee and we're working
very hard right now to get out an energy independence bill by the Fourth of July
and I must say that we are right on target to do that.
For all of our
military strength and economic power, our country would come to nearly a halt
without foreign oil. That is very sad, but it is certainly true.
Today,
oil alone fuels 96 percent of our transportation needs and it's an indispensable
part of the manufacture of millions of goods and products in this country and
despite America's extreme dependence on oil, our country only has three percent
of the world's oil reserves.
After Hurricane Katrina, we saw how the loss of
just a fraction of refining capacity for even a few days can create enormous
economic unease and cause prices to soar. It was a strong display of our
vulnerability and it showed just how devastating any long-term interruption
could be for America.
America is not alone in its concern about how best to
address our future energy needs. Energy security has become a priority for the
European Union and its 27 member states, and they're certainly to be applauded
for that.
Together, the U.S. and Europe produce about 23 percent of the
world's energy, but they consume almost 40 percent of the world's supply.
Barring any significant policy changes, dependence on foreign sources of energy
is expected to rise even further in the future for both America and Europe.
Mr. Chairman, I'm encouraged that the U.S. and the European communities
continue to broaden the energy dialogue on the joint promotion of collective
energy security and energy efficiency and alternative energy sources and this
can only enhance our collective strength and security.
And so I'm looking
forward to this hearing more from the perspective of our panelists today and I
thank each of you for your participation.
I yield back.
HASTINGS: Thank
you very much, Congressman Butterfield.
From the State Department, we have
our first testimony, Mr. Greg Manuel, who is the special adviser to the
secretary and international energy coordinator charged with providing strategic
oversight, developing new policy approaches and initiatives and fully
integrating energy issues into the decision-making process at senior levels of
the State Department.
We also have two additional department witnesses that
may not provide testimony, but have graciously agreed to be available for
questions and answers.
We have Ambassador Steve Mann, who I know,
principal deputy assistant secretary for South and Central Asian affairs, who is
responsible for the full range of foreign policy issues in the region, including
management of region-wide energy issues.
From 2001 to 2005, he was the
senior U.S. official responsible for Caspian energy issues and was heavily
involved in our realizing the Baku-Tbilisi-Ceyhan oil pipeline and in the
successful launch of the Caspian Pipeline Consortium line.
From 1998 to
2001, he served as the United States ambassador to Turkmenistan.
Next to
Ambassador Mann is Mr. Matt Bryza, deputy assistant secretary of state for
European and Eurasian affairs, where he's responsible for policy oversight and
management of relations with countries in the Caucasus, and southern Europe.
Mr. Bryza coordinates U.S. energy policy in the region surrounding the Black and
Caspian Seas.
And, from the Department of Energy, I'm pleased to introduce
Mr. Hegburg, deputy assistant secretary for international energy policy. His
policy and management responsibilities cover international energy issues in the
Middle East, Russia and Caspian, and Africa, as well as functional areas, such
as energy security and markets.
Finally, since we have a very full witness
list today, I'd like to ask each of our witnesses to please abbreviate your
remarks as best you can. Your full statements will be accepted into the record
and are made a part of these proceedings.
And, ladies and gentlemen, I
believe those of you in the audience will learn that the witnesses' more
extensive biographies and their full statements will be available for handouts
at the table outside.
So with that, Mr. Manuel, please proceed with your
statement.
MANUEL: Thank you very much.
Chairman Hastings, co-Chairman
Cardin, thank you for this opportunity to discuss U.S. policy and energy
security in Europe and Eurasia. I think just from the opening remarks today, I
think you'll hear a number of issues discussed in these opening remarks that
touch not only on this session, but some concerns and interests that were
expressed both earlier, but, also, certainly the subject of future hearings that
you have scheduled.
I'm here today, as already acknowledged, with two of my
colleagues, Matt Bryza, the deputy assistant secretary for the Bureau of
European Affairs, and Steve Mann, who's principal deputy assistant secretary for
the Bureau of South and Central Asian Affairs, both of whom represent our front
line on European-Eurasian oil and gas issues.
I'm also joined by Al Hegburg,
an old acquaintance and colleague, the Department of Energy.
Our interests
in the regions, in the European-Eurasian region, encompassing Europe, Russia,
the South Caucasus and Central Asia, are far-reaching, anchored by our
five-pronged global energy strategy, which is to diversify the supply of
conventional fuels and expand production, to diversify our energy portfolio by
expanding the use of alternative and renewable energy, to promote increased
energy efficiency and conservation measures, to advance environmental
stewardship and to protect critical infrastructure and promote market stability.
We have adopted a comprehensive strategy tailored to Europe and Eurasia,
with the following objectives. The United States and our Euro-Atlantic allies
maintain reliable access to diversified supplies of energy, including oil,
natural gas, renewable and alternative fuels, and nuclear power; that
hydrocarbon producers and Azerbaijan in Central Asia realize the benefits from
multiple export routes to European and global markets; that European energy
markets function efficiently; that we decrease the potential for energy to be
used as a political or commercial weapon; that Eurasian energy producers manage
hydrocarbon wealth wisely to avoid corruption and economic instability; and, the
Euro-Atlantic community develops commercially viable technologies to reduce
carbon emissions without slowing economic growth.
These objectives, of
course, are interrelated. By increasing diversity of sources of supply and
transit routes, we can bolster market efficiency through competition and reduce
vulnerability to energy supply disruptions.
Relying on market-based
policies to manage energy revenue streams transparently can limit the corruption
and economic distortions that undermine economic growth and stability. And by
increasing diversity of types of energy, we also reduce the danger of
politically or commercially motivated energy cutoffs, while reducing our
dependence on hydrocarbons, which, in turn, reduces carbon emissions and
pollution, benefiting the environment.
To advance our international energy
strategy, we are pursuing a broad range of mechanisms, including enhanced trade
and transparency, intensified technology development, new regional energy
partnerships, bolstered energy dialogues, and novel public-private sector
partnerships, which I will speak to a little bit later.
While we explore
these issues in greater depth in the discussion ahead, I want to highlight a few
key areas of importance activity on each side of the conventional and
alternative energy divide.
On conventional energy, we have begun to see
dividends resulting from over a decade of intense diplomatic engagement by the
United States and Azerbaijan, Georgia and Turkey. Both the Baku-Tbilisi-Ceyhan,
VTC and South Caucasus pipelines are providing, for the first time, real, not
theoretical, alternative pipeline routes.
As the South Caucasus gas pipeline
comes fully on-stream in coming weeks, it will link Azerbaijan's giant Shah
Deniz gas field in the Caspian Sea with Turkey's gas grid. Development of the
Shah Deniz field has the potential to make Azerbaijan self-sufficient in natural
gas and will provide Georgia and Turkey with an invaluable alternative supplier.
Looking forward to 2020, we are working to create a ring of natural gas
infrastructure extending from the Caspian Sea, around the Black Sea, and into
Europe. This will occur through the expansion of the SCGP and to a larger
southern corridor, comprising two emerging projects, the Turkey-Greece-Italy and
the Nabucco pipelines.
The southern corridor will complement Gazprom's
existing pipeline infrastructure, as well as new supplies of liquid natural gas
from Norway and perhaps Russia and other countries.
Finally, we see an
inclusion of Kazakhstan, Turkmenistan and Iraq as important future suppliers of
gas into the Nabucco pipeline.
Our cooperation with the EU to realize the
southern corridor of natural gas infrastructure is accelerating. During the
recent USU summit, which was on April 30th, the United States and the European
Commission pledged to seek diversification of energy types, sources and supply
routes, with a particular focus on the Caspian region.
We're also working
to help our European allies unify their energy policies to elicit more equitable
and market-based energy deals with Russia and resist divide-and-conquer tactics.
We continue to oppose oil and gas pipelines that run to, from or through
Iran. By standing together, EU member states can transform into negotiating a
reality out of the theory that Russia is as dependent on revenue streams from
Europe as Europe is dependent on Russian natural gas flows.
We're also
working with our European partners to diversify sources of gas supply in
northern Europe. As Russia and Germany strive to develop the massive "Nord
Stream" pipeline to transport Russian and Central Asian natural gas under the
Baltic Sea to Germany, Nordic and Baltic countries are striving to increase
regional competition.
Norway is entering a new phase of large-scale natural
gas production. It already serves as a key alternative supplier of natural gas
to northern Europe. Oslo, Copenhagen and Warsaw may be moving closer to
agreement on a project to link Norway's gas fields with Denmark's gas pipelines
into the Baltic Sea, with an extension to Poland.
We are supporting this
initiative, as well as efforts by Poland, Estonia, Latvia and Lithuania to
develop commercially viable ventures involving regional liquid natural gas
terminals, natural gas storage and thermal power generation that could reduce
their dependence on Russian gas as the "Nord Stream" pipeline develops.
On
alternative energy and efficiency, over the last two years, the U.S. and EU have
greatly intensified cooperation aimed at accelerating the development and
deployment of alternative energy and efficiency technologies.
Beginning with
the 2006 U.S.-EU summit declaration, the U.S. and EU, for the first time,
outlined a systematized approach to cooperation on biofuels, carbon capture and
sequestration, energy efficiency, methane capture, and support of legislation to
stimulate the growth of alternative energy across the Atlantic.
On biofuels,
we are taking concrete steps to cooperate on research and development of
cellulosic or second generation bioethanol and looking at biodiesel, as well.
We're discussing regulatory and policy tools to promote biofuels development,
exchanging analysis of potential economic and environmental impacts of biofuels,
and comparing respective resources estimates of potential boifuels source
biomass.
On efficiency, we have renewed the U.S.-EU Energy Star agreement,
covering office equipment, and are exploring extensions of this agreement to
other products, such as consumer electronics.
We are examining the
development of international lighting efficiency standards and joint efforts to
improve efficiencies of buildings and housing. We are cooperating to promote
efficiency in key third countries, most specifically, by securing EU cooperation
in the development of a trilateral U.S.-EU-Ukraine energy efficiency action
plan. Enhancing efficiency of electricity and gas markets in Ukraine will have
an immediate benefit, providing more potential Ukrainian energy exports to the
EU.
We have recently joined jointly-held workshops on carbon capture and
storage and are preparing a report on possible areas of trans-Atlantic
cooperation on environmental, economic and regulatory coordination in the
development of this promising new technology.
In addition, we have
dramatically increased our direct engagement with the private sector to draw
upon firms' dynamism, creativity and adaptability in meeting these technology
challenges. The State Department and Germany's foreign ministry in March
convened the U.S.-EU energy technology CEO forum, which drew together 20 senior
trans-Atlantic private sector leaders to generate key recommendations on
speeding trans-Atlantic cooperation in the development and deployment of
advanced clean energy technologies.
The recommendations, covering biofuels,
energy production, energy efficiency and energy research, provided a set of
seven distinct initiatives that are being pursued by the U.S., EU and German
governments.
In conclusion, there is no silver bullet or quick fix to
increase energy security in Europe and Eurasia. The EU and the U.S. both
recognize the vital importance of diversification of supplies of hydrocarbons
upon which both the U.S. and Europe will depend on for many decades.
It will
take a multifaceted, long-term effort between the U.S. and the EU with producer
and consumer countries to increase supply diversification, develop alternative
energy sources, and encourage Russia to bring more of its oil and gas resources
to world markets within a free and competitive market framework.
To meet the
long-term energy and climate challenges that Europe and the U.S. both face, we
are working with Europe to help produce energy demand and diversify energy
sources. We are dramatically accelerating the deepening cooperation with the EU
to develop and deploy advanced clean energy technologies, such as biofuels,
renewables, clean coal and nuclear power, that will be critical to meeting our
joint energy security needs in the future.
We are collectively joining
forces with our private sectors and forging new partnerships to best leverage
our comparative advantages. Our collective energy challenges have undoubtedly
invigorated and focused many of our key European and Eurasian relationships.
Energy has grown to be a veritable critical center of gravity, exposing our
joint interests and vulnerabilities in the region. While our intensified
efforts have already begun to yield promising results, we continue to look for
opportunities to bolster our work in the region.
We are honored to be here
before you today. Thank you, again, Mr. Chairman and members of the committee,
for giving us this opportunity here this afternoon.
Thank you.
HASTINGS: Thank you very much, Mr. Manuel.
And I'll turn now to Mr. Al
Hegburg, the deputy assistant secretary of the Office of Policy and
International Affairs for the United States Department of Energy.
Mr.
Hegburg, let me also ask you to pass on to Secretary Bodman my thanks for your
appearance. One of the missing links in the Helsinki process has been a focus
on the energy aspects and the Department of Energy and Commerce has a
significant role to play in that regard and I had indicated during my tenure
that I wanted to highlight it.
So I thank you and I thank Secretary Bodman
especially.
Please proceed, sir.
HEGBURG: As the secretary said, we are
the nerd agency and I'm clearly not the nerd, because I don't even know how to
push the button.
Thank you very much for the invitation to be with you today
and for your kind words, which I will certainly pass on to the secretary.
I
would just like to say a couple of words about how we look at this period of
transition that we are in from the marketplace that we're in now to the
marketplace that we hope we'll be in the future, particularly as alternative
fuels penetrate the market and greater efficiency shows up in the marketplace,
and a variety of other things.
But I think I'd just like to say a couple of
things about we have to keep in mind that we live in a hydrocarbon economy and
will for some period of time, and there are sort of two ways to go about dealing
with that.
One is to try to adjust that economy very quickly and the other
is to try to influence it to change. I think it's important to try to influence
it to change, because I think it will be longstanding change that we will get as
opposed to abrupt and disruptive change.
Over the next 25 years, there is an
estimate that just to sustain the hydrocarbon economy we have in oil and gas,
the investment required will be on the order of $8 trillion, and that means that
oil and gas worldwide will require over $300 billion a year in investment, and
that's across the board, refining, production, transportation infrastructure and
all those things.
All the things Greg mentioned in his testimony about
pipelines, increased production in the Caspian is part of that estimate and that
is an expensive place to do business. And those investments are likely to be
made in the short-term, but there are some things that sort of have an influence
on the way in which that investment is made and the degree of penetration in the
marketplace that oil and gas will show.
First, there are, I think four
issues on the table that we have to deal with when looking forward on the oil
and gas supply-demand balance and those are climate change, which is obviously a
significant one and has a significant impact on the way in which this investment
takes place.
One is energy security, obviously, which everyone has referred
to here. But the other two, which are ones I would like to mention in passing,
are the question of governance and the question of the erosion of globalism.
If you go back and look over the past 30 years, the energy economy in the United
States has become fully integrated into the world. As everyone knows, we import
a great deal of oil. We are an attractive investment environment for foreign
investors who have actually invested in our refineries, our production and all
those kinds of things.
We have gained efficiency in the marketplace, largely
as a result of the removal of price regulation on oil and price controls on
natural gas. And the industry and people in general have responded by
investing. In other words, that marketplace was competitive, it was
international, it was global, and it was generally open.
We are seeing now
some changes which suggest that globalism is eroding. We see a fair amount of
resource nationalism in the world and that's not just in the way of extracting
additional rents out of producers and investors, but also actually turning the
country around to pursue a kind of energy nationalism that is counter to their
interest. Venezuela is, of course, a very important example here.
As that
country decided to essentially nationalize the industry, the industry and
investing industry started to accelerate the repatriation of their capital and
withheld investment.
And one thing that happens in the oil and gas sector is
you have to continually reinvest to maintain production, because it is a
declining asset. It continues to decline from the first day of production. So
there's a constant need for reinvestment.
And so Venezuela, as you've seen
over the past year or so, has eroded in terms of both the share owned by the
state and now the shares in heavy oil owned by the investors. And that is a
serious potential problem. It is a problem that we see elsewhere.
We may
even see it in Russia, which has serious problems with sustaining oil production
and gas production and is in the process of changing the nature of the
investors' relationship to the state, and I think that's something we need to
pay a fair amount of attention to, because it raises political questions, it
raises investment questions, it raises commitment to the international economy
that we all share and hope will benefit us all.
I would just like to say
briefly something about natural gas, because that is relevant obviously to the
Caspian, to pipelines and to future production. Russian gas production, as
controlled by Gazprom, is in decline and it's in decline for several reasons,
partly because they have not invested in new developments.
As the super
giant fields decline, their share of production is going down. That means the
question of their meeting their contractual obligations to the countries of
Europe is in question, unless they can find alternative supplies.
And
there are some alternative supplies out there for them. One is the independent
gas producers in Russia are increasing production and although they're quite a
bit smaller than Gazprom, they are making up some. The government has decided
to increase prices in the domestic market, which has been essentially a free
good for most of the Russian economy. And so the industrial sector will receive
-- gas prices will go up to the industrial sector.
There will be shifts away
from natural gas in the power sector, which is a quite large user of gas, to
natural gas to coal and nuclear. And, of course, they will have to rely on
increased deliveries from the countries of Central Asia, particularly
Turkmenistan, and that is actually, I think, the core issue for Russian gas
supplies is to what the net level of production in Turkmenistan will be to
supply the Russian market, and if all that gas will go to Russia or some of that
gas will go west, as has been mentioned, through some of the pipelines.
Those I want to sort of put on the table as concerns, because I think it relates
to the question of how we relate to Russia, but also how Russia relates to the
world energy economy, and that's something that I think deserves our attention,
your attention and others.
I think I'd just like to say, in closing, one
thing about energy economies. We tend to look at energy compartmentalized, but
the energy economy in this country is really quite impressive in a lot of
different ways and it can be even better, and it should have several
characteristics and we have what we call -- these are not the 12 Commandments
nor the 95 theses of Martin Luther, but there's some things that you would hope
that the energy economy could be.
The first is innovative, and this is a
very innovative economy. And we talk about technology, but the idea is to be
innovative in a way that that technology comes to the marketplace as quickly as
possible.
It has to be clean. It has to be inexpensive. It has to be
available. It has to meet the questions, as you've referred to, of people
saying how much it costs to fill up their gas tank. That is clearly a concern.
And I think we can do that. We can go through the transition and reach those
kinds of goals. It's not going to be easy and it's going to require a fair
amount of work, but I think it's important and I hope we can discuss that and
what the role of the Caspian is in meeting those goals.
Thank you very much.
HASTINGS: Thank you very much.
Mr. Mann and Mr. Bryza, I recognize
that you were not asked to offer comments, but I would permit you, in light of
the fact that you've been so kind as to come, if you care to take a minute or
two, I have no hesitancy if you wish to add something, if either of you would.
Mr. Bryza?
BRYZA: Thank you very much, Mr. Chairman, very much for this
opportunity maybe to clarify or even simplify the incredibly complex picture of
our energy security policy, and just a couple of pictures I'll show you that
have to do with what you mentioned at the beginning, how we deal with Russia as
a potential energy partner and as the major single supplier of natural gas, its
most important of commodities, to Europe.
Today, Gazprom is the largest
single supplier of gas to Europe and it provides anywhere between 25, 30, 35
percent of the gas consumed in Europe. It provides that gas through a network
of pipelines you see on this map here.
For those of you behind, you'll see
in the copy of the testimony this map that shows a whole bunch of red lines.
These red lines are an enormous infrastructure system that Gazprom uses to move
gas from Siberia and from Central Asia to European markets.
Gazprom is, by
law, a monopoly, passed by the Russian Duma, and Gazprom behaves as a monopoly.
It's not evil to be a monopoly. It's a good business to be in if you can be a
monopolist. But our country, however, has decided, our government has decided
we are not in favor of energy or any other monopolies and, as we know, the first
major antitrust case in our country's history was the breakup of Standard Oil.
Well, Gazprom is a monopoly and it functions relatively well based on this
enormous network of pipelines, which allows it to do what? This network allows
Gazprom to buy gas in Central Asia for around $100 per 1,000 cubic meters. This
is very important, because as Al was suggesting, the gas production in Russia's
own fields is declining.
So Gazprom's looking for the easy way out. It
absorbs the gas in Central Asia through that pipeline that runs diagonally from
Ashgabat, Turkmenistan up toward the European part of Russia, $100 per 1,000
cubic meters, sells it in Europe for nearly three times that cost.
That's a
problem for our Euro-Atlantic community, because such a differential in price
between $100 and close to $300 underscores an inefficiency in the market and we
believe our national security is best served when markets function efficiently.
But this difference in price also generates an enormous amount of rents that
are distributed often non-transparently in a way that undermines the rule of
law, undermines our broader goals at energy sector reform, which then gets at
what both Greg and what Al were talking about in terms of wanting to see the
resources and the revenue streams managed wisely so we see the advance of market
economies and democracy.
The way to deal with this is not by simply talking,
but it's by changing the facts on the ground through the increase of competition
and we're trying to do that, first and foremost, by expanding the delivery
options for gas from Central Asia and from Azerbaijan especially to Europe.
On this map, you'll see a very small yellow line at the bottom, on the lower
right. That's the Baku-Tbilisi-Erzerum gas pipeline, or the SCGP South Caucasus
gas pipeline that Mr. Manuel discussed.
It's becoming functional now, gas
is moving into it, and it'll be fully functional shortly. That alone, that
pipeline won't create the full degree of competition we seek.
As Greg
suggested in his testimony, we hope to see a ring of gas infrastructure
extending back to the Caspian Sea and around the Black Sea. That's on the
second graph I'll show you here in a second.
What this shows is a ring of
infrastructure in which that yellow line from Azerbaijan has expanded in two
more lines. There's the Turkey-Greece-Italy pipeline that Mr. Manuel talked
about and then Nabucco pipeline extending from Turkey all the way to Austria.
That, combined with liquid natural gas shipments from Norway, what you see at
the top of the graph, the blue line, and maybe liquid natural gas from Russia
and from other locations, coupled with increased deliveries of gas from North
Africa begin to provide Europe with some genuine diversity in gas supply.
The idea is once our allies in Europe have the ability to choose their suppliers
of gas rather than relying overwhelmingly on one supplier, we'll see a more
mutually beneficial relationship between Europe and Russia and Gazprom as the
Europeans can negotiate more equitable terms.
Finally, there's a question as
to whether or not this whole project can be realized. Is there enough gas, as
was often asked, in the Caspian region?
Often, observers say, "Well, there's
not enough gas in Azerbaijan to begin these pipelines." And the last graph I'll
show you -- here it comes -- demonstrates that, indeed, in Azerbaijan, there's
an enormous quantity of gas that will be available, we hope, in coming years,
sufficient to fill the Turkey-Greece-Italy pipeline and hopefully the first
phase of that Nabucco pipeline that goes from Turkey to Bulgaria, Romania,
Hungary and Austria.
This last graph is an optimistic version, granted,
upside, unriskesque (ph) projections, but based on data provided by the
international companies operating in Azerbaijan. And what it shows you, if you
simplify it, and each colored slice is another gas field that's either being
produced in Azerbaijan or will soon be.
What it shows you is that by the
period 2015 to 2016, there will be a dramatic, we hope, a dramatic increase in
gas production in Azerbaijan, getting the production up to a level such that
there'll be enough left over after gas is consumed in Azerbaijan and Georgia and
in Turkey to provide for those two pipelines I've been talking about.
We're doing a lot of other things I won't go into in the northern part of
Europe, around the Baltic Sea. All of these efforts are aimed at helping our
European allies pool their strategic vision and their negotiating ability so
that over time, they're able to negotiate more mutually beneficial relationships
with Gazprom, so that relationship really does work in two directions.
Thank
you very much.
HASTINGS: Thank you very much.
Ambassador Mann, do you
have a contribution?
MANN: Well, thank you, Mr. Chairman.
I think my
starting point for this is a feeling that I know all of my colleagues share of
gratitude to you, Mr. Chairman, for holding these hearings, for giving us this
opportunity to talk about an issue that is so important and for your personal
involvement in this issue, which I know is by no means new.
I handle the
Central Asian part of these issues and for Central Asia, it's an important
economic question and as with a number of other nations in the region, it's a
question of supporting the independence and the sovereignty of these countries,
when you get down to the base issues there.
So we have achieved a lot as a
government, as an interagency team, and my colleagues have pointed out the
challenges that we have in the future.
And just one final note, Mr.
Chairman. You have a full table here of representatives of the executive
branch. I think this shows the strength and the depth that we have because
there are the four of us up here, but behind us, also, is a team of tremendous
professionals in our departments, in Department of Commerce, Trade and
Development Agency (inaudible), Ex-Im (ph), and in the intelligence community,
who have been at the heart of the successes that we've had as a government.
So, anyway, thank you, again, Mr. Chairman, and to the committee.
HASTINGS: It's clear to me that we have an ongoing significant number of issues
and the questions are so numerous.
And I'm, in light of the other witnesses,
much more prone to be brief, which is not my custom and practice, but you all
have been very clear.
Mr. Hegburg, I was interested in something that you
said specifically and it's so obvious, and yet people don't think about it, that
you have to have continuing investment, I believe you spoke of, in order to
maintain the efforts that a country or a company wishes to put out, which caused
me, when you spoke of our market, meaning the U.S., and the fact that
significant investors from around the world have come to play in that house, I'm
curious about the refining aspect of it.
You did use the term that they've
invested in our refineries, but some of us have a continuing concern that there
has been no real development of new refineries in the United States for a
substantial period of time.
What are the implications of that?
HEGBURG:
Thank you, Chairman.
I'm defining -- let me just make -- I don't have the
numbers in front of me, but it is clear we have not invested in new refining
and, at the same time, our refining capacity in the United States has increased
by something on the order of six million barrels a day.
Don't hold me to
that number, but I think that's what I recollect. And that is because when
refiners invest, they invest in what are called their legacy assets. They
invest in the existing equipment that they have, because it's the cheapest place
to invest.
They have the land, they have the personnel, they have the
electric supply, they have all those kinds of things.
They have less of a
permitting requirement. They have a permitting requirement, obviously, to add
capacity, but it is cheaper to add a coker or a distillation facility or
something else to that refinery than it is to go out and build an entirely new
refinery on a greenfield investment.
So, yes, we have shut down refineries,
but at the same time, we've increased refining capacity in the United States
substantially.
HASTINGS: All right. I thank you.
And I do have a
concern with reference to regional and multilateral organizations. A lot of us
talk about GUAM, the Georgia, Ukraine, Azerbaijan and Moldova, and their recent
summit in Baku and the continuing question considering that Kazakhstan and
Turkmenistan didn't attend, how do we propose to be able to help them to achieve
their objective?
And perhaps even more important and significant is
something that is beyond the sphere of OSCE and that is that the International
Energy Agency was established quite some time ago, in '73 or '74 or thereabouts,
and it had as an objective the crisis that existed at that time and the key
energy demand centers in the world were all members of the Organization of
Economic Cooperation and Development.
Today, China, India, Brazil, just to
mention some big ones, are not involved in that multilateral structure.
And
I guess if I have a question, it is in what multilateral framework should the
United States and the EU be working to achieve energy security goals? And I
think there were two questions there. I'll lay them open to anyone who would
answer and then I'll ask Congressman Butterfield to put a question or two.
BRYZA: Thank you, Mr. Chairman. I'll answer the first one, if that's OK, on
GUAM, as the person responsible for our relations with some of those countries.
GUAM is emerging as an organization that will play, hopefully, a useful role,
a concrete role. It's been developing step-by-step its mechanisms to be able to
be really active and make a concrete contribution.
But it is not the main
forum in which we together are working with the countries you mentioned to
advance this vision that I described through the maps, a vision of gas supply
diversification and oil diversification.
A lot of this work has been done by
the United States, frankly, taking the lead, in cooperation with those very
countries during the course of a decade, including those years we talked about
when Ambassador Mann was our envoy to the Caspian region.
Years before that,
I was the deputy to our envoys when we began with Richard Morningstar and then
there was John Wolf and Beth Jones, Ambassador Mann's predecessors, and we
developed a pattern of cooperation that follows the path of the
Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus gas pipeline, a pattern
of cooperation that reflects a vision of those countries to bring in Turkey as a
positive strategic player in the region and as the gateway for those countries
to European and indeed global energy markets, and we used the infrastructure
projects of these two pipelines to forge that cooperation.
We're trying to
build on that decade of success in a new phase now that involves that sort of
increase in production of gas in Azerbaijan and then involves us reaching across
the Caspian Sea, as Ambassador Mann can describe, through diplomacy, hopefully
with the countries of Azerbaijan and Georgia and Turkey taking the lead in
building up, step by step, concrete cooperation with both Turkmenistan and
Kazakhstan at the pace at which Turkmenistan and Kazakhstan are comfortable in
integrating their infrastructure into this vision that I've tried to describe to
you.
HASTINGS: Mr. Hegburg and Mr. Manuel? We'll start with Mr. Hegburg.
HEGBURG: Just on the IEA and the OECD. In June, the OECD decided to invite
certain countries to open discussions with the OECD about membership. Those
included Chile, Estonia, Israel, Russia and Slovenia.
It also decided to
strengthen cooperation with Brazil, China, India, Indonesia and South Africa.
Now, that's material to -- I guess I'd make two points.
That's material to
the IEA, because you can't be in the IEA unless you're a member of the OECD. So
in the first group, that's on the road to joining the OECD.
In terms of
China, India, Brazil and South Africa, all of which are significant players in
the world oil and biofuel market, for example, there's been ongoing
conversations with those countries for the last several years, or some of them.
And I'm not part of these negotiations or discussions, but some of the issues
around IEA membership relate to energy policy, as well as the strategic stock
requirements.
It's important to keep in mind, you asked about which regional
organizations should we belong to, it strikes me that the IEA is the best. It
is expansive. It can move and incorporate new members.
It has two
elements that I think are central to energy markets. One is an energy policy
function, which it takes very seriously and which, in fact, investigates the
countries every year. In fact, the U.S. investigation is going on right now.
They're here talking to people about our energy policy.
And the other is not
just the stockholding requirement, but the collaborative nature of cooperation
during an oil supply disruption of some sort. And it was used during the
hurricanes, Katrina and Rita, in which our partners in Europe did make available
gasoline that came through arbitrage to the east coast.
And the mechanism
was both bilaterally with the countries in Europe that had surplus gasoline, but
also involved the IEA secretariat in Paris. So it has worked to the U.S.
benefit on several occasions and I think has stood the test of time.
HASTINGS: Mr. Manuel?
MANUEL: Mr. Chairman, I just wanted to very briefly
touch on two questions. One was on the IEA, the other was on investment issues
related to the domestic market.
On the IEA, I had the chance to speak to
Mr. Tanaka, who will be the incoming head of the IEA, I believe the first of
September, and we had exactly this discussion. We've been working very closely
with the IEA over the last year to bring China into the IEA as closely as we
could.
A lot of my colleagues have already mentioned a number of the
restrictions. The good news it that China and India both have been part of the
working groups, of which there are five, and have been invited as observers now
for just over six months and have been integrated in an unofficial sense.
The challenge is that because of the charter of the IEA being strictly linked to
the OECD and the fact that the voting rights in the IEA are tied to the oil
consumption of 1974, that if you were to bring in a China or India, the real
question would be, well, are we going to then normalize energy or oil
consumption based on 2005 or whatever metric.
If you were to do that, China
would have the second most votes on the IEA, just to give a sense of the
challenges that are ongoing now behind closed doors. But to your point, this is
a very important issue, integrating them into the world community and having the
IEA be sort of the centerpiece to make that happen has been a real interest of
ours and something we've been pushing for some time.
On investments, my
background in the private sector is as an investment banker and a venture
capitalist and entrepreneur and it is remarkable to see, outside of the
conventional sort of energy picture, how quickly investment is moving towards
alternative energy.
And I wanted to paint just a little bit of the other
side of the picture for you, that 16 percent, for example, 16 percent of venture
capital investments last quarter were in the energy technology sector, which is
roughly triple of where it was just two years ago.
The VC industry is a
great lead indicator of where things are going and my own sense from my previous
relationships in the private sector is that you are going to be seeing
fundamental shift changes in energy technology and the sorts of substitution
opportunities that they create vice the conventional energy sector, which we're
already seeing in Brazil and we are beginning to see here in the United States.
Thank you very much.
HASTINGS: That certainly is good news, because it
would be hard to hold this kind of hearing without talking about the alternative
energy needs that we have.
But perhaps we'll have some light shed by
Congressman Butterfield, since he serves on that committee that's cranking out
-- did you say before the Fourth of July recess?
I work here, but I don't
know these things. I'm on other committees. I do know that the Senate has been
very actively involved and I know that the House is developing its energy
package.
BUTTERFIELD: Well, Mr. Chairman, you have been around this place
much longer than I have and you know it changes by the day. But right now the
plan is to separate energy independence from climate change and hopefully by the
Fourth of July we will have some legislation on the floor that deals with energy
independence.
It will not have some of the more controversial provisions
that you've read about, that will take place on a later date, but we are going
to roll out some very cutting edge, innovative ideas for consideration.
But
let's talk about Europe for a minute, Mr. Manuel, if we can. And I'm also new
to this commission and so much I need to learn about our friends in Europe. And
let's be very basic in this conversation.
Let me ask you, is there a
comprehensive energy policy that all of the European countries have signed onto
it or is that still work in progress?
MANUEL: Yes, there is. It's a
package that was put together just a few months ago and adopted and the various
degrees of adoption, of course, are still subject to a number of countries'
domestic legislative bodies and, of course, just taking the impetus beyond just
the notional interest in moving in this direction.
But, yes, there are
several goals, everything from renewable standards to efficiency gains that the
Europeans have...
BUTTERFIELD: But I get the impression that not all of the
European countries are on the same page. I know they're striving for
commonality, but I get the impression that they're not there yet.
HASTINGS:
And as a segue to that, what do you make if Italy, for example, with (inaudible)
making their move with Russia? How does that factor?
MANUEL: I think Matt
Bryza would like to take the Italian question. But on the European, we're
working very closely with the Europeans in ways, frankly, that we never have
done before, beyond just the...
BUTTERFIELD: Is that productive or
counterproductive?
MANUEL: It's very productive. I myself have been
assisting at countless working groups on various aspects of alternative energy
that we've been pushing. So I'm much more focused on the non-conventional
aspects of what we're pushing ahead with the Europeans.
The very good news
is that the sources, the political commitment and I think the tangible and
concrete results sort of down the road are being formulated today. The amount
of research and development efforts around biofuels, energy efficiency programs
that we're looking to put together, new ways that we're coordinating and working
with our private sectors, which I mentioned happened in March with Secretary
Rice and Foreign Minister Steinmeier.
All of these efforts are novel. All
of these efforts are more coordinated than ever before and really yielding,
beginning to yield some very formative changes in how the trans-Atlantic
relationship is helping to solve our more global energy challenges.
BUTTERFIELD: Are there some things that this commission can do or even the
Congress can do to encourage European countries to formulate better energy
policy?
MANUEL: There are a whole lot, standards and codes, having our
regulators, for example, meet with their regulators and everything from
distributed energy integration into the grid, something I had a conference call
on this morning, huge concerns between where the IEEE is going and the IEC,
which is the European standard body, the sort of focus and commitment that
Congress can bring to these issues could be very helpful and I'm more than happy
to talk at length with you about a number of different areas that I think we
could...
BUTTERFIELD: And, finally, let me ask you, is it conceivable, in
your mind, that the European countries and the U.S. could develop a consensus on
how to approach China and the challenges that the China factor presents?
MANUEL: I'm not sure that we'll say the Europeans have developed a consensus on
anything. There is a growing consensus, let's say, a growing consensus on a
number of issues, climate change, China. Even Russia, we've made a lot of
advances in terms of moving political opinion and leaders' opinions on what one
might do.
But, no, I think that there's still a number of areas of
opportunity along those lines.
BUTTERFIELD: Thank you. Thank all of you
very much. I yield back.
HASTINGS: Thank you very much, Mr. Butterfield.
Gentlemen, because I have the other panelists, I do have a substantial number
of questions and as I did in a recent hearing, if you would permit, I will send
to you in writing a few questions and if you would be so kind as to answer them,
then I would incorporate them into this hearing, but, in addition there, to put
the questions and the answers on the Helsinki website so that the discussion can
continue in that fashion.
I'm deeply appreciative to all of you and I hope
you will participate with us in our continuing efforts in this regard.
Thank
you so very much.
And I'd invite our next panel up now, our two ambassadors,
ambassador of the Republic of Azerbaijan, Yashar Aliyev, and my friend, the
ambassador of Belarus, Mikhail Khvostov.
As they come forward, to lay bona
fides on the table, occasionally, ladies and gentlemen, those of you that are in
the audience think that we operate inside the beltway in a vacuum. In fact, we
do not.
Long before I became chairman of the Helsinki Commission, both these
ambassadors and I have had opportunities to have meetings and I also have the
distinction in both their countries, with their assistance and the assistance of
Mr. Aliyev's predecessor, to have been the lead observer to elections in both
their countries.
So unrelated to just this issue, I get to know them and
have gotten to know them in a variety of ways and I've been to both their
countries and was treated more than admirably by the officials that had
responsibility in attending and expediting.
But I'd take this opportunity to
thank both of them for their assistance as we've moved about.
Gentlemen, I
hope you won't mind that I will avoid reading your comprehensive biographies and
say, as I said earlier to the audience, that they are available at the table
outside. But I'm much more interested in getting to them and our panel that
comes after them.
So I don't know which of you cares to go first. I don't
know what -- "A" comes before "B," at least in the United States' language.
So, Ambassador Aliyev, if you would go forward, please.
ALIYEV: Thank you,
distinguished Mr. Chairman, distinguished members of the commission. Just allow
me to thank you for inviting me to participate in today's hearings.
I will
summarize my testimony and request to include its full text in the record of the
hearing.
HASTINGS: Without objection.
ALIYEV: Implementing its energy
strategy, Azerbaijan has always received the strong political support from the
United States. Without U.S. assistance, it would have been impossible to
complete several pipeline mega projects in the region.
Today, as the
Baku-Tbilisi-Ceyhan oil pipeline and the Baku-Tbilisi-Erzerum gas pipeline have
become a reality, they now represent key elements of the oil and gas
transportation system in the region.
In addition to its role as a large
energy producer, Azerbaijan is also becoming an important transit hub for
multimodal transportation of vast hydrocarbon resources of Central Asia to world
markets, in particular, the European ones, through the east-west energy
corridor.
Evidence of this emerging role is the June 2006 agreement between
Azerbaijan and Kazakhstan on transportation of Kazakh oil to international
markets via Baku-Tbilisi-Ceyhan pipeline.
Diversification of transportation
routes, as well as of energy suppliers and markets, are key factors for ensuring
the reliable and predictable supply and transit of oil and gas to European
consumers.
Existence of multiple transportation routes from a number of
suppliers would also reduce a possibility of tensions on our energy supply. As
the international community has witnessed in several cases over the last few
years, supply chain disruptions can cause energy insecurity in European
countries.
Having signed, in November 2006, memorandum of understanding
with the European Union on strategic partnership in the field of energy, my
country has proved its ability to be a reliable partner in ensuring
predictability and transparency in energy supply and in enhancing the European
energy security, both as a supplier and a transit country.
Along with that,
Kazakhstan and Turkmenistan can become important elements in ensuring the
European energy security with Azerbaijan as a transitional hub for delivering
the Central Asian hydrocarbons to the European markets via BTC and BTE
pipelines.
Meanwhile, if they would opt for other routes of transportation,
Azerbaijan is in a position to fill Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum
pipelines with its resources.
Azerbaijan and the United States
productively cooperate in many areas. My country is a staunch ally of the
United States in the global war on terror. The economic cooperation between the
two countries has been recently elevated to the level of partnership. The first
meeting of the bilateral economic partnership commission in February this year
was followed by the energy dialogue last March, when our countries signed
memorandum of understanding on energy security.
This particular memorandum,
as well as the one signed between Azerbaijan and the European Union, represents
an important contribution in ensuring energy security in Europe.
In order to
manage oil revenues, maintain macroeconomic stability and finance implementation
of strategically important social and infrastructure projects in the country, my
government has established the state oil fund.
In 2003, my country has
joined the extractive industries transparency initiative proposed by the United
Kingdom. The state oil fund is the responsible organ for implementation of this
particular initiative.
Democratization is another crucial task for my
government in pursuing economic development. Being one of the most dynamical
developing economies, with increasing inflow of petrol dollars, Azerbaijan is
determined to steadily diversify its economy and pursue with reforms to
strengthen its democracy, ensure protection of human rights, fight corruption,
to further independence of court system, and ensure transparency and efficiency
of state governance.
Azerbaijan is the most (inaudible) of its economy and
is promoting democracy and the rule of law in the country, as well as on the
regional level.
The second summit of GUAM Organization for Democracy and
Economic Development, which was successfully held in Baku just a week ago, is
another manifestation of the above-mentioned commitments of my country, which
assumed one-year chairmanship in the organization.
The energy security
matter is of profound importance in bilateral relations between Azerbaijan and
United States of America. So, therefore, I would like to appeal to members of
this committee and for you, Mr. Chairman, to the members of the United States
Congress to repeal Section 907 of Freedom Support Act of 1992 that restricts
United States assistance to Azerbaijan.
It does not comply with the spirit
and level of bilateral relations between our countries and it is for that
reason, annually waived by the president of the United States since 2002.
I
thank you, Mr. Chairman.
HASTINGS: Thank you very much, Ambassador.
Mr.
Ambassador, you may proceed, Ambassador Khvostov.
KHVOSTOV: Thank you, Mr.
Chairman.
Mr. Chairman, Mr. Butterfield, members of the staff, thank you for
the invitation to speak on the issue so important for us, which is the energy
security.
It's important that we recognize today's problems of global energy
security and those of tomorrow. It's more important that we act now to address
them. Energy security is no longer a matter solely of national sovereignty.
Today, security is an indispensable issue, even in general discussions about
foreign policy.
Energy security requires that we recognize our energy
dependence. Individually, we are powerless to affect the global debate on
energy security.
Why the United States is indispensable for us in this wide
discussion on energy is because without it, we will suffer a political power
cut. There is a general desire to make energy cooperation mutual advantages and
equal, but still the interests do not always coincide.
What to do? The
answer, in my view, is to develop a model of energy security cooperation and
implement mechanisms of mutual interests, which may be long-term energy supply,
uninterrupted supply, acceptable terms and conditions, equality and mutual
benefits, strong dialogue and cooperation, and, of course, mutual approach.
We should strengthen the dialogue and cooperation to meet the challenges and our
dependence on oil and gas needs to be balanced by stable and reliable supply,
which includes the sole role of transit countries, and I count Belarus in this
group of reliable partners.
The significance of transit countries becomes
more and more considerable. Clear bilateral regional and international rules
could improve predictability for transit and supply of energy, deepen
interdependence and stability.
This approach does not deny the right of a
producer to benefit from its oil and gas reserves, as well as the right to
consume or to benefit from the supply.
Belarus lies on the gas transit
route from Russia to Europe and is the second largest transit country for
Russian gas by volume after Ukraine. Russia is the leading gas exporter to
Europe and is the second important source of crude oil.
And the transit
country should benefit from the benefits of producer and consumer, with a clear
regulatory framework for transit which will help us to avoid much more expensive
alternatives of building long, roundabout pipelines.
Events of the beginning
of 2007 remind us that supply in the OSCE region is not as secure as it should
be. We in Belarus are not oversensitive regarding the sensation of energy trade
to market prices, but I have to recognize that we are sensitive regarding the
bilateral agreements we have with Russia, including those with preferential
arrangements and terms, subsequent to the bilateral treaty on the union state.
We understand that pacts must be respected. Belarus is among the countries
most dependent on external energy sources. Eighty percent of Belarus' energy
comes from Russia. Energy cooperation between Belarus and Russia is closed and,
also, Gazprom's business strategy remains a matter of concern to my government.
The sufficient and affordable availability of energy is a precondition for
Belarus competitiveness and economic growth. The government is convinced that
our energy dependence cannot be forever increased and our first thing is to
reduce dependency by increasing share of carbon-free energy sources and gradual
introduction of energy efficiency.
By 2010, we expect to invest in energy
efficiency $5 billion U.S. Belarus is in the same situation as most of the OSCE
countries that are large energy importers, all of which have to face the
increasing prices of oil and gas in the coming years.
A key issue for
Belarus' energy security is its dependency on a single supplier. In the near
future, Belarus can import oil from different sources. We have two refineries
and we can afford transport expansions.
Energy security and sustainable
growth are critical for the OEC region. Belarus will remain a country actively
involved in energy security in the region, primarily in the European Union. As
a reliable transit country, Belarus is important for both sides of the east-west
corridor.
The European Union is trying to set up a common energy policy
today for member-states. We agree with the EU position that mutual energy
relationships between states must be predictable, transparent and reliable, but
my view is the OSCE countries and not the European Union have to come together
as a special ad hoc "'Committee of the Whole" for energy producing, transiting
and consuming countries to generate binding decisions on energy security, and
the OSCE framework is relevant.
The only matter which matters is our
collective determination. The OSCE cannot be transformed across into a regional
OPEC. Yet, energy is an issue of importance to the development of the OSCE
members and the role of the OSCE is in enhancing dialogue energy security and
generating binding decisions.
And the OSCE can be a platform not only for
political dialogue conversation, but also for addressing energy security issues,
which, in the last instance, may be of a political nature.
Thank you very
much.
HASTINGS: Thank you very much, Ambassador Khvostov.
I'll start
my questions with you and, as I said to the previous panel, I'll just have a
couple of questions, and I do want to have the full array of panelists to have
an opportunity to participate and there are two more waiting to testify.
But, Ambassador Khvostov, what has been the impact of the January Russia
increase in energy prices on the Belarusian economy?
I could go into great
detail, but I'd just share with you my personal observation when I learned that
the energy supply had been temporarily shut off by Russia. It highlighted the
fact for me what you say in your testimony, and that is that Belarus is in the
same position as a large number of OSCE countries by having a single supplier.
And at the same time, I personally did not do very much comprehensive study
regarding what affect that had on your economy and if you could elucidate for me
your thoughts on that, I'd appreciate it.
KHVOSTOV: Well, it's a very good
question, Mr. Chairman. Of course, the situation will impact the economy. Our
losses are, although not as big as we expected, maybe due to our GDP amount in
$35 billion U.S.
So I'm not sure about the right figures, but maybe it's
around $300 million, $350 million U.S., maybe. But although the government had
foreseen this situation and with the purpose to minimize the consequences found
for national development has been created in the last year and into which some
$700 million U.S. have been paid at the end of the last year, and, of course, it
will be fulfilled with every coming year.
But, yes, I can agree with you
that there was an impact of general gas prices on the Belarusian economy.
HASTINGS: Right. Well, as I did say to the other witnesses and say again to
you, I am going to have some follow-up questions. If you choose to answer them,
I will place them on the website of the Helsinki Commission, but I won't go into
great detail.
I must make, however, the observation that it would seem to me
that Belarus and other countries similarly situated, for example, you have a
responsibility contractually to Lithuania and if you are not getting your
supplies, you're not able to fulfill those contractual responsibilities.
I
also am keenly observant of Russia using oil and gas as leverage in other
places. I go next week to the parliamentary assembly in Ukraine and previous to
what happened in Belarus, it happened in Ukraine, pervious to that, in Georgia,
as well, and then Poland also had this kind of usage.
I have some concerns,
Ambassador, and perhaps you and I can follow-up with personal visits and I'll
express them to you in greater detail, but I will send to you some additional
questions and hope that you would answer them.
But I am so very grateful to
you for being here today.
Ambassador Aliyev, I used the term in my opening
comments that we're having a hearing soon on the issue of the resource curse.
Azerbaijan was one of the first countries to sign on the extractive industries
transparency initiative designed to inject greater transparency into
international oil deals.
And I was heartened by your comments about things
that are taking place in regards of the establishment of democratic values. But
how is Azerbaijan working to ensure that its energy revenues contribute to the
growth of a well rounded economy in your country?
ALIYEV: Thank you very
much for this question.
First of all, I need to mention that long ago, in
December of 1999, my government established a state oil fund, an organization
which is designed to, first of all, be executive body that is responsible for
collection of the petrol dollars and it is a transparent and open organization
through which, in the year 2003, we joined to the EITE proposed by Great
Britain.
And I'm very proud to inform you, Mr. Chairman, that tomorrow, in
Vienna, on the 26th of June, this particular fund will be granted the United
Nations public service award, which is another manifestation of how transparent
and open oil or petrol dollars are collecting in Azerbaijan.
As of today,
the state oil fund has collected about $1.8 billion, which is to be allocated
for national economy development, in particular, non-oil sector, which is of
paramount importance for my country to avoid so-called Dutch disease.
Thank
you.
HASTINGS: Thank you both very much and we'll follow-up personally with
both of you. I'm grateful to you for being here. And when you see yours and my
friend from Russia, this is my second hearing that I've invited him and he
hasn't attended.
You tell him I'm interested in his views. I appreciate it
very much. Thank you very much.
I'd invite now Keith Smith and Pierre Noel.
And thank you all for your patience, Mr. Noel and Mr. Smith.
Mr. Smith is
the senior associate for the Center for Strategic and International Studies and
Mr. Noel is a research associate at the University of Cambridge.
And as I
have said previously, their biographies in full are available outside.
I
also thank you all, ladies and gentlemen. I can say to you this is the second
hearing I've chaired. I chaired a briefing as chair of Helsinki. And I do
intend, before these energy hearings, if you're interested in attending others,
I intend by that time to try to find some mechanism to have greater audience
participation.
I, for one, find it awfully boring to have to sit up and
listen and not to be able to say anything. So at some point, I'm going to
change the format. I don't care what the rest of the Congress does. Somehow or
another, when people take up their time, come from their offices, their staff,
lots of you have information and ideas out there that would be beneficial to us.
And at the very least, we could develop a questionnaire or something that
would permit that you offer your views. So expect that from me in the future so
that you don't just have to come to a dry hearing.
But we have scintillating
witnesses now, so I invite you to stay.
Mr. Noel, you are going to kick us
off, or Mr. Smith? Either.
SMITH: Thank you very much, Mr. Chairman. It's
a pleasure to be here.
I've been writing about this subject for a number of
years and there wasn't much interest, quite frankly, until particularly in --
well, in the U.S. and I would say in western Europe until the Gazprom cutoff of
gas to Ukraine in January of 2006.
It suddenly became a topical issue and
there was a lot of interest and excitement about the issue. On the other hand,
there's a lot more excitement and talk than there is action. Some of my Russian
colleagues know that I'm a strong critic of the present government's policies on
energy, but I also criticize, to some extent, the European reaction to this.
And I say that having lived 13 years of my life in Europe and dealt for many
other years with European issues, but my European-born wife keeps insisting that
I should give equal criticism to the United States and Europe. But I tell her I
really don't deal with that, I deal with Russian and European energy issues.
But I think that there has been, for a long time, too long, ignored the growing
use of Russian energy resources for political and strategic purposes and while
January of 2006 was, to some extent, a wakeup call or at least a snooze alarm
for a lot of people on energy, the use of Russian energy goes back to 1990.
And in 1992, I was in Latvia and Estonia and experienced a situation where I had
to sleep in my clothes at night because the energy had been turned off. It had
been turned off for the reason that the Russian government wanted to pressure
the Estonians and Latvians into allowing Russian military officers to stay there
in their countries.
Then in 1993-94, we saw the cutoffs to the Ukraine, had
a lot of political implications. Some of this is in my testimony and I won't go
into it.
From 1997 to 2000, lived in Lithuania, where, because of
negotiations between an American and a Russian company and the Lithuanians --
the Russian Transneft, the monopoly exporter of Russian oil, cut off oil
shipments nine times during the three years I was there.
And we've seen it
happen, it happened in Latvia almost four years ago. Oil was cut off to Latvia,
even though Latvia's an EU member. Nothing was done. There was almost no
reaction in Brussels. Lithuania was cut off many times since, but definitively,
it was cut off last July.
The reaction in the European Commission was a weak
letter, quite frankly, from the president of the EU, was never replied to, never
followed-up. Now, beginning, there's some follow-up, but the Russians announced
definitively that this problem with the pipeline that they had in Russia, they
can't fix it and it will never be fixed and there won't be any oil going to
Lithuania.
It's obviously a political thing and we know more about this all
the time. This is something that I think that people need to pay attention to.
For too long, in Europe, the European energy policy was really decided by Mr.
Putin, Mr. Schroeder, Mr. Chirac and Mr. Berlusconi in private meetings.
It's becoming more open now, but I think that there's still a legacy in Europe
of the large countries kind of deciding what they're going to do to support
their own companies and the smaller countries kind of had to make do.
So the
idea of a European energy policy, somewhat like the U.S., is more talk than it
really is action. There has been movement in Europe and I think in the right
direction, but meanwhile you've got a Kremlin which is very agile, knows how to
operate behind the scenes, non-transparent action.
You've got intelligence
officers running the energy policy in Russia. These intelligence officers, they
know how to operate and they know how to operate quickly and they've been very
successful over the last couple of years in checkmating European attempts to
develop alternative supplies of energy into Europe.
I think some of the
deals recently reached, very non-transparent deals with Hungary, with Slovakia,
with Bulgaria, Serbia, I think these things, these are going to really hurt the
European policy and make it much more difficult for Europe to find alternative
supplies of energy.
I think the Nord Stream or the pipeline that the Germans
-- Mr. Schroeder particularly reached with Mr. Putin, an undersea pipeline, gas
pipeline deal from Russia to Germany, the way it was done was not in the
interest of Europe and I don't believe in the interest of Germany.
I mean,
the fact that the Germans will be paying more than twice what they would if
there was a free market in gas and this was done, as we all remember, the man
that put this deal together was a former Stasi agent, east German intelligence
agent, who worked closely with Mr. Putin during the Cold War and he's now the
deputy CEO of the company located in Zug, Switzerland, and the CEO is Mr.
Schroeder.
So there's been a lack of transparency, a lack of, I think,
working together for the common European interest. This is changing, but Europe
is dealing, I think -- it's like all democracies and democratic organizations.
It works slowly and by consensus and meanwhile you have a very fast running
Kremlin which has worked quite effectively, I think, in cutting off some of the
plans that the Europeans had to bring in alternative energy.
So a lot of the
stuff announced today, the plans for alternative energy are good, I applaud
them, but, quite frankly, I think they're going to be -- some are going to be
too late and some are going to be slow and it's going to take a long time in
developing.
I think there are some things that Europe can do. There's a
mythology, I think, in Europe which has developed that Russia is not bound by
the energy charter treaty which it signed in 1997, because it hasn't ratified
that treaty. Well, Article 45 of that same treaty says that it should go into
force on signature, not on ratification. And, in fact, Russia has ratified --
has signed these 40 agreements, which is put into force and not ratified.
So I think the Europeans would have been wise to kind of push that and push
Russia to open up its pipeline systems using that.
The second thing I think
the Europeans have some clout with, and we could support that, is the
implementation of Article 82 of the EC treaty, which has to do with antimonopoly
and antitrust legislation. They used it against the horrendous attempt at
Microsoft to bundle its music program with its Windows program and Microsoft has
paid a hefty fine as a result of that.
But meanwhile, Gazprom and Transneft,
which are massive monopolies and which cost the European consumer billions of
euros, have not been touched by Article 82 yet and I think there's some things
that can be done there.
I think Mr. Bryza, in fact, and Mr. Mann mentioned
some of the projects, specific projects in Central Asian and the Caspian area
and I think that our support of those projects, I think, are very, very
important. This is one case where I believe in the movie "Field of Dreams," if
you build it, they will come. And I think if you build those pipelines, there
will be oil and gas to fill those and it will help Europe and by helping Europe,
I think you help ensure the security of Europe and the own interest, the
security interest of the United States.
Thank you, sir.
HASTINGS: Mr.
Noel?
NOEL: Thank you very much, Mr. Chairman, for inviting me today. I am
Pierre Noel. I work at the Judge Business School at the University of Cambridge
in the UK, but you will have already noticed from my accent that I am from
another European country.
I will talk today on the EU-Russia gas
relationship and the security, security treaties and what can be done about
them.
What is the interest of Europe? The interest of Europe is quite
clear. It's in the de-politicization of the gas relationship with Russia and it
is in bringing Russian gas into a competitive framework to supply the European
markets.
These two objectives were embedded into the energy charter treaty
and its transit protocol.
What are Russia's interests? Russia's interests
are maintaining and growing politicization of the gas relationship with Europe
and toward limiting competition against Russian gas in Europe, in the European
market, especially alternative gas from Central Asia.
So the gap between
these two positions could not be greater. They are completely opposed and this
gap cannot reasonably be bridged by some sort of a compromise position, and this
fact is now well, I think, acknowledged in Europe it has always been the case
over the past 10-15 years. But this is now quite well acknowledged in Brussels
and in the European capitols.
This gap, I believe, is the root cause of the
uneasiness in Europe, the growing uneasiness towards our dependence on Russian
gas.
So where does it leave us? Can we live in such a situation? Well,
we have (inaudible), our big external supplier, which has a conception, a
perception of what this relationship should be, which is completely at odds with
ours.
Can we live with that? What are the risks? What can be done to hedge
against these risks?
I think that there are two risks, basically. One is
the risk of supply disruption and the other one is what I would call the
scarcity risk. The risk of supply disruption, it's important to note, would be
with us even if Russia shared our view of what this conventional energy
relationship should be.
What can be done? The key measure, I believe, is
purely an EU-centered or EU-focused measure, is the creation of an integrated
competitive European gas market. If we at last created this common gas market,
we would create de facto solidarity between EU, EU countries. We would
massively increase the fungibility of the EU gas market, just as the North
American gas market is now completely integrated, completely competitive and
completely fungible.
That's absolutely not the case in Europe. So the
member countries, and I will not name them, but the member countries who oppose
such a move against the will of the EU commission and some of the member
countries, these countries do the EU and energy security a disservice and they
should, I believe, amend their policy.
You have (inaudible) to ensure
quality review exceptions in terms of building strategic gas storage. We have,
as everybody has, a lot of commercial gas storage, but no strategic gas storage.
Maybe we should think more carefully about that.
We can also increase the
shortened demand elasticity by requiring gas-fired power stations to maintain
petroleum products inventory in case their gas supply contract had to be
interrupted.
We can also, it would probably be expensive, but we can also
mandate spare LNG re-gasification capacities to allow the gas market to attract
more LNG (inaudible) from the open international market in time of crisis.
The second risk is the scarcity risk. It's, to be clear, the risk of -- I mean,
if we have to face a sustained restrictive gas policy from Russia, in other
words, if Russia is either unable or unwilling to expand its gas supply to
Europe as our needs grow.
Well, it's very much the situation we are in,
but how should we react? How should we respond to the prospects of this
situation going into the future?
First of all, I think it's important to
note that this Russian strategy is a self-defeating strategy. Russia is pricing
itself out of the European markets, and I can give you the numbers, if you're
interested, afterwards.
Beyond that, I mean, beyond the fact that they are
damaging their own market share in Europe, we can do several things to maximize
competition against Russian gas in Europe. Norway is benefiting massively from
the Russian restrictive gas strategy in the European market. We have more
liquid natural gas coming into Europe from various places in the world and we
increase our North African imports.
The U.S., as far as Central Asia is
concerned, and I will not repeat what has been said by the State Department
officials, but the U.S. has worked quite effectively towards increasing
competition against Russian gas in Europe from Central Asia.
I have to
touch briefly upon the Iranian question. If you think globally, I mean, one of
the obvious potential candidates to sort of check the Russian monopoly power on
the gas market is Iran and, on this issue, the U.S. has been much less helpful
than on the Central Asian case, though there are other barriers and it doesn't
mean that there are not serious issues for treating Iran differently, but I
think this had to be said.
Then, of course, competition against gas does not
only mean non-Russian gas. It also means all the technologies to purchase
electricity and so continuing and expanding R&D investment into clean coal and
renewables and next generation nuclear power are all strategies that can make a
difference in terms of reducing Russian market power in Europe and also in Asia.
So just to conclude, just a few thoughts as we have conclusion. I think the
threat perception in Europe has been exacerbated by the Ukraine crisis. I
believe that the level of threat perception currently in Europe is probably a
bit exaggerated as far as the risks are concerned linked to our dependence on
Russia.
I think that provided we put in place the policies to deal with
these risks, we can live with this gas relationship as it is, even given the
deteriorating political context of this commercial relationship. But the
perception gap between Russia and the EU that I have outlined at the beginning
of this presentation makes it, I think, very unlikely that this trade between
Russia and Europe will grow into the future. I think it will, at best, plateau
and probably decline.
Thank you very much.
HASTINGS: That's fairly
optimistic, all things considered. I would have a little bit of concern for the
geopolitics if I were to take face value what you said, Mr. Noel.
It's easy
to say that it's exaggerated, the emphasis that some in Europe and here in the
United States are placing on what Russia's actions have been that have been
manifested. But with the lack of transparency and added to that what Mr. Smith
just got through saying regarding who actually runs the Russian energy policy
without identifying Gazprom, with their efforts toward developing monopolies
with countries that are totally reliant upon them for their energy.
It's
easy for us in room 419, an air-conditioned, well lighted room, to conclude that
everything is worth the risk. I do agree with all of the things that you said
regarding what must be done in the way of dialogue and then enforcement of
treaties, but as I sit here listening to everything today, the one thing that
I'm absolutely certain of is that there is instability in this market at this
point and there is uncertainty as to which way it's going to go.
And why I
part company with you is if you had been in Belarus in January and oil or gas
had been cut off, you'd have a different view about it, and the same would hold
for Ukraine or Lithuania or Poland or in Georgia, where other levers are used.
And something we haven't talked about, nor do either of you need to for my
purposes, but with the ongoing instability in the areas where pipelines run, and
I'm not talking about anything less than serious conflicts that are commonly
referred to as frozen conflicts, with those things ongoing and the likelihood of
interruption of any of these pipelines being something that could take place,
there are some serious, serious problems out there that are being discussed.
But I join company with Mr. Smith and believe that it's a distinct possibility
that it may be too little too late. So it doesn't mean that all is lost or that
we should not do all of the things. I was happy that you brought up Iran,
because that's what I wanted to start with Mr. Smith about.
What is the role
of Iran in discussions of European energy security? And very little has been
said here today other than until Mr. Noel brought it up.
What's your take,
Mr. Smith?
SMITH: You know, Mr. Chairman, I'm kind of schizophrenic on this
issue. I agree, to some extent, that we need to keep pressure on Iran because
of the nuclear issue. At the same time, I think that Iran can be, as Mr. Noel
said, I agree with him, can be part of the answer by providing an alternative
exit point for not only Iranian, but Caspian Sea oil and gas, and especially
gas, and I would like to see that done.
If there's a way to kind of square
that circle, I would be in favor of it. I don't know -- I don't know really
what I would propose at the moment. I think that we're -- in some ways, I'm
probably leaning toward working with the Iranians or allowing other countries to
work with the Iranians to get gas and oil out, Caspian Sea oil and gas out.
Without Iranian support, there won't be a delimitation of the Caspian Sea and
without a delimitation of the Caspian Sea, there probably won't be pipelines
underneath the Caspian Sea which are needed to bring gas and oil from the
eastern Caspian to the western part.
So I would say probably I come down on
the side of allowing European and other companies to use Iran as a transit
point, not necessarily as a source, but as a transit point for oil and gas from
other countries. That's probably where I'd come out, but I have to confess I'm
a little conflicted on the issue of how we deal with Iran.
HASTINGS: I
understand. Let me follow-up on -- not follow-up, but ask another question.
When the GATT round came into effect, a lot of countries were not involved in
being able to be contracting parties with the GATT and that holds true for
countries that are non-WTO countries.
How do you use some of the (inaudible)
that are in existence? The energy charter treaty, for example, how do you
utilize that with non-WTO countries to try to gain greater transparency in this
particular area, Mr. Smith?
SMITH: Well, you don't have to be a WTO member
or even a GATT member to sign on to transparency agreements and there are
international conventions on transparency in business that anybody can sign onto
and which is designed actually to increase a country's attractiveness to foreign
investors.
So the two are not incompatible and I think there are countries
-- and you have countries like Ukraine which are not WTO members, but which have
-- I hope they will be by the end of the year, but which have signed on to some
of these transparency measures, but unfortunately are not enforcing them.
I
don't know how you deal with some of the countries. I mean, there are a lot of
oil producers and gas producers, especially around the Central Asian area, who
lack a lot of transparency.
I think over a period of time, though, working
with them, I think it's important for the U.S. and Europe to work with these
countries, not to isolate them, not to treat them as pariahs, and I would
include Uzbekistan in that, which is going to be an important gas producer and
the Russians believe that they have locked up all the gas supplies for the next
20 years from Uzbekistan.
But I believe that a deal is a deal, if maybe in
Central Asia, and I think that if the Europeans and the United States work
together in a little more -- I think a little more closely in dealing with some
of these producer countries, I think there's some hope.
Also, the
enforcement of European standards, for instance, on, as I had mentioned before,
antitrust, antimonopoly legislation. But I think keeping the pressure on
without really beating up on these governments I think is part of a key and I
think -- for instance, I think Turkmenistan and Kazakhstan would very much like
to have a kind of multidirectional energy policy, but right now they feel like
they're being held hostage by Russian pipelines.
But they would like to be
able to ship to China, to ship to Europe, because the prices are much more
favorable for them. So that's where I think that Europe has got a problem,
because right now Europe is paying over $300, as somebody mentioned earlier,
$300 a 1,000 cubic meters for gas, which Russia purchases really from $70 to
$100 a 1,000 cubic meters.
And Mr. Putin keeps claiming that, in fact, we've
been subsidizing these countries for a long time by giving them cheap oil and
gas. Well, who's been subsidizing whom? I mean, the Central Asians have been
subsidizing Russia. It's the Central Asians that are subsidizing Ukraine,
because most of Ukraine's gas comes from Turkmenistan.
So I think that more
publicity, working with these governments on transparency. I think the EU has,
for instance, some very good capacity in some of their programs that they call
the twinning program, where they take EU officials, put them in ministries in
some of the key energy and other ministries in these governments that are not
members of the WTO or Gatt, and it has an effect.
I've seen this have an
effect because it's a little harder to be corrupt when you've got somebody from
the European Commission looking over your shoulder and I think this is a very
good policy and I think the Europeans have an excellent opportunity, I think, to
increase transparency in some of these countries.
HASTINGS: I appreciate it
very much, Mr. Smith.
Mr. Noel, I'll give you the last say at the hearing
and add the question, do you have optimism that the European Union will be able
to forge a common energy policy or is that not necessarily?
I wasn't
kidding. When I picked up the newspaper today, I was reading for the first time
about ENI and Gazprom and it just kind of struck me how fast things are
happening and how much different people are on different pages, and I'm just
curious. So you have the last word.
NOEL: Thank you very much, Mr.
Chairman. I'd like to go back for one minute to your previous question. You
were absolutely right. I do not underestimate the challenge that the new EU
member countries or some of these countries are not appearing, not yet, EU
member countries, the challenges they face because they have only one supplier
and they have this historical relationship which makes it that they have only
one supplier, and this supplier is, to say the least, quite difficult to deal
with.
There is no easy, rapidly implementable solution to that. The
solution can only be a dynamic one and I am thinking of two things. The first
one is gradually bringing some diversity into the energy supply of these
countries, and it is already happening and I think it will continue to happen.
There are two LNG projects, one of the advanced, in the Baltic Sea. There is
one in the Adriatic Sea, one on the north, one on the south, which will bring
diversity, more diversity into the gas supply of central and eastern Europe.
Then if Europe, as I hope it will, finally integrates its gas grid, there will
be possibilities in times of crisis for west-to-east gas flow for these
countries. So that's the first thing.
The other thing which can also be
dynamic is Russia -- we can also be hopeful that Russia eventually will
understand that the way it deals with its immediate neighbors, the transit
countries to Europe, affects the way it is perceived in Europe as a reliable or
unreliable supplier.
And the Ukraine crisis of January 2006 is a perfect
example of that. The way Russia dealt with Ukraine destroyed Russia's
credibility and Russia's credibility as a reliable supplier in Europe.
So
Russia can learn, first, and, second, gradually, there will be more diversity to
these countries. There is no rapid solution to this problem.
Your second
question, Mr. Chairman, it's a mixed bag. Yes, there already is a strong
agreement between EU member countries in energy, but these countries come from
energy situations, not to speak about policies, but energy situations which are
very different.
Nuclear energy produces 85 percent of electricity consumed
in France, 85 percent. Nuclear energy is an illegal technology in Austria and
the Republic of Ireland. This is only one example.
Natural gas, the UK
natural gas market is one of the only two truly competitive natural gas markets
in the world with the North American market. The French or the Italian or the
German gas markets are completely different. They are organized under
completely different lines than the UK market, and I could continue. Norway
produces much of its electricity from hydroelectricity, whereas most of the
other countries do not.
So we come from -- and Norway's not a member
country, sorry. But we come from very, very different backgrounds in terms of
our energy systems. So you can imagine that when we talk about nuclear energy
in an EU meeting, when you have Austria and the Republic of Ireland, on the one
hand, and France on the other hand, it's quite difficult to reach an agreement
on what our nuclear energy policy should be.
And I could go on and on and
on. So it's a very difficult process, but it's a process which has advanced
significantly over the past few years and which I believe will continue to
advance towards a more coherent integrated energy policy in Europe.
HASTINGS: Well, one thing I wish that we had more time to deal with, and we
will in the future, and that is the world implications. And, you know, you go
through an energy hearing and you only hear Venezuela mentioned one time, India
and China are mentioned without talking about Malaysia and Indonesia and
Pakistan, somewhere along the line, Japan is left out of this equation and all
they can do is import, significant.
Then we haven't spoken about some of the
others, aside from the Gulf states or Algeria and how they play a significant
role. I guess we could go on and on.
I appreciate you all so very much, as
well as all of the witnesses. While there may not have been any news made here
today, the simple fact of the matter is I think we all now understand and are
beginning, as you have for some time, Mr. Smith, to recognize that it is going
to require a concerted effort on behalf of the world.
And I thoroughly agree
with you, something that you said and it sticks with me, when I'm interfacing
not only as the chair of this commission, but as the previous president of the
parliamentary assembly, I took a softer approach in talking with colleagues that
some referred to as pariah states and somehow or another, in my heart of hearts,
I don't see things that way.
I don't think you can ignore places that do
have very bad governance, from my point of view, without taking into
consideration a need to deal with them in a realistic way and to see how
incrementally you may be able to produce change.
Case in point would be
Turkmenistan, great opportunities exist after Niyazov's death and I'm not so
sure people moved swiftly enough to try to have some impact, albeit the change
may not have been one that would be favored by some.
The fact of the matter
is the people have a lot of gas and it would be a good thing of people
understood how to talk to them on their terms.
I'm pleased to report that if
it follows in July in Ukraine, as I suspect it will next week, Turkmenistan is
sending a representative for the first time in a long time to the parliamentary
assembly.
And if there is anything that I learn from all of this, as I
determine to make energy my highest priority, I know that you cannot deal with
this particular problem without dealing with the other components of the
Helsinki process and that is the human rights aspect of it or governance aspects
or rule of law aspects are equally important, and not to suggest by any stretch
of the imagination that there is anything less than political dynamics that are
at work here all the time.
And I join your wife -- sometimes this country
needs to be criticized, as well, Mr. Smith.
Thank you.
SMITH: I'll tell
her that.
HASTINGS: Thank you all. Hearing adjourned.
[Whereupon
the briefing ended at 4:59 p.m.]
END
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