Remarks by Ambassador Richard H. Jones

Conference on Transit – Global Energy and Political Trends

November 1, 2006 at 9:00 am

University of Haifa

 

 

Thank you.  It is a pleasure to be here with you this morning to discuss “transit states in the global energy picture.”  I would first like to congratulate Haifa University on opening its new Center for Advanced Energy Studies.  The U.S. Embassy is pleased to support your efforts to promote energy studies, starting with this conference, and we look forward to our continued partnership.

 

Energy transit has long been vital to the world economy.  Fossil fuels are often concentrated in remote parts of the world far from major markets.  Recent important new discoveries of fossil fuels in the land-locked Central Asian states have brought the issue of transit states to the forefront of geopolitics. 

 

 

I served as the American Ambassador to one of these land locked Central Asian states, Kazakhstan, during the late 1990’s.  Today I would like to draw from this experience as we discuss the growing importance of transit states and how we can support them.

 

In an age of ever rising demand for energy and particularly for supplies of oil and gas, the role of transit states has become increasingly vital and their economic and political importance has grown commensurately. 

 

Producers and consumers of energy alike view diversity of energy trade routes as an important part of their respective energy security policies.  Diversity of routes allows energy producers access to more markets.  Diversity of routes provides consumers a greater choice among suppliers.  Diversity also reduces the threat of trade disruptions for both producers and consumers.  In short, diversity enhances competition, efficiency and security in energy trade.  It’s no wonder then that the United States sees diversity of trade routes for oil and gas as a key part of our policy of promoting diversity in US energy supplies.

 

This perspective has led us to a great appreciation for the important beneficial role that transit countries can play in today’s global energy markets.  In our view, it is natural that pipelines and similar energy transit projects should benefit transit countries by offering them a way to share in the prosperity which natural resources provide producers. 

 

Transit fees should be viewed not as a form of rent but rather as a fee for valuable services – access to markets and security of export-- provided to the producer.  It is fitting that a country providing such services should be allowed to earn income and improve its overall prospects for economic prosperity and security. 

 

On the other hand, producers should receive ample rewards for exploiting their natural resources.  Therefore, we also believe that redundancy and the existence of multiple outlets are best.  They lead to competition among transit states and provide a fair outcome for importers and exporters alike, while improving each state’s respective security. 

 

Multiple outlets are particularly important in the context of the Caspian region which contains some of the largest hydrocarbon discoveries in recent decades but is far removed from most major markets and landlocked. 

 

The Kashagan field in Kazakhstan’s sector of the Caspian Sea is the single largest oil field discovered since Alaska’s North Slope.  Together with Kazahkstan’s large shower field at Tengiz, it vaulted Kazakhstan to a major player in world energy markets.  Azerbaijan’s Azeri-Chirag-Guneshli field is pumping oil to global markets via the first Caspian pipelines that do not transit Russia.  And Azerbaijan’s giant Shah Deniz gas field could provide major gas exports to Europe within the next few years that will help establish a new, more competitive dynamic in European energy markets. 

 

U.S. national security, including energy security, is best served when energy and other markets function efficiently, according to liberal market principles, chief among them fair and open competition.  These principles were endorsed by the leaders of all G8 countries at their Summit in St. Petersburg in July.

 

As oil production from the Caspian Sea Basin has increased, the neighboring Caucasus region has become an integral export route for oil and natural gas.  This role will grow as Caspian production increases.  Kazakhstan alone is expected to triple its oil productivity between 2005 and 2015, from 1 plus MBD to 3.5 MBD.

 

As I said, to help ensure fair and open competition, the United States has supported the principle of multiple export options for Caspian exporters, and three of the largest projects to these ends cross through Georgia (Baku-Tbilisi-Ceyhan, South Caucasus Pipeline, and Baku-Supsa, a.k.a the “Western Early Oil Route”). 

 

In addition to super-giant fields like Kashagan and Tengiz, small-scale oil resources also exist in the region, and the new infrastructure will allow smaller projects (including refineries as well as smaller oil fields) to tie in to the pipeline and become more economically viable.

 

Roughly 150 miles of the pipeline corridor extending from Baku, Azerbaijan to Turkey will pass through Georgia.  This corridor will include the $3.9 billion Baku-Tbilisi-Ceyhan (BTC) oil pipeline, and the $1 billion South Caucasus natural gas pipeline (SCP), to be completed in late 2006.  Regional governments and international investors expect these pipelines to become two of the primary conduits for Caspian Sea region oil and natural gas exports over the next decade. 

 

Improving and expanding projects with transit states will demand significantly higher investments, and thus long-term political stability.  Cooperative relations among the linked states and between these states and investing companies will also be critical.  

 

The countries in Central Asia are now providing about 2 million barrels of oil per day to the global market, and, according to estimates from the U.S. Department of Energy, will be contributing up to 4 million barrels per day of oil in 2010.  Central Asian-Caspian gas production is expected to almost double from 14 billion cubic feet per day in 2005 to 24 billion cubic feet per day in 2010.

 

U.S. engagement with Caspian oil and gas producers has both public and private sector components.  More importantly, there have been substantial investments by western and U.S. companies in the region. 

 

However, developing resources in this region is not without obstacles.  One of the major difficulties faced by Caspian states as they began to develop and export their newly found energy resources was the lack of export outlets.  Our goal from the beginning was, and remains, to promote regional partnerships among the producing and transit countries. 

 

It is equally important that these countries take responsibility for encouraging the development of new commercially viable export routes and find ways they can work together and with commercial entities in order to create a win-win situation for all involved.  The U.S. government is steadfastly working with these countries to help solve their challenges.

 

U.S. policy in support of the further development of oil and gas reserves in Central Asia is predicated on the use of best commercial standards and transparency to ensure that energy resources are developed efficiently and for the benefit of the countries concerned.  In line with this, we have pursued a policy of encouraging multiple pipelines to afford the countries of the region options for export of their oil and gas. 

 

This policy is not directed against any country.  When I was in Kazakhstan, our support for the BTC pipeline was often mischaracterized in the media as anti-Russian.  I worked hard to debunk this myth, pointing out that the US had supported the Caspian Pipeline Consortium’s (CPC) pipeline, which transits Russia, as Kazakhstan’s first major new export outlet.  However, we didn’t want to see Kazakhstan put all its oil eggs in one basket, Russian or otherwise.  As Professor Swersky pointed out, our subsequent experience with the CPC has demonstrated the wisdom of this point of view.

 

I believe that in this regard our experience in natural gas is also instructive.  Russia for the most part has been a reliable supplier of natural gas for Europe over the past 30 years.  But Russian companies, sometimes with political support, have not shied from predatory and monopolistic behavior.  This had led to a dysfunctional gas market in Europe, with Gazprom exerting its monopolistic power to purchase natural gas in Central Asia for $100 per thousand cubic meters and selling it in Europe for $265 or even $285.  Russia’s position as a monopoly transit country for gas has allowed it to gain the lion’s share of the benefits of other countries’ development of this natural resource. 

 

On the other hand, dependency on Russia as a monopoly supplier of gas has made some countries, especially Georgia, Ukraine, and Moldova vulnerable to Moscow’s increasing tendency to use gas supply and prices to achieve political ends.  Armenia and even Azerbaijan have also come under price and supply pressures.  

 

These are unhealthy developments for the democratic development of large regions of Eurasia, as well as for the growth of market economies. Georgia and Armenia were also subject to energy cutoffs last January, at the depth of some of the most severe winter weather in the Caucasus for over a decade, as a result of a mysterious series of nearly simultaneous explosions on Russian gas pipelines and electricity transmission lines.

 

 Regardless of their causes, such supply disruptions underscore the need for our friends in the Caucasus, as well as in Moldova, Ukraine, and the rest of Europe, to develop multiple sources of supply and delivery systems of natural gas.  On behalf of the U.S. Government, I would therefore like to reiterate at this time our commitment to do all that we can to build on President Saakashvili’s remarkable energy sector reforms, and, in collaboration with the other members of the Euro Atlantic Community, to deter any such gas cutoffs this winter.

 

Monopolies -- while they may on the surface appear to provide security of supply -- in the end serve only the best interests of the monopolists, bring a wealth of disadvantages for consumers, and stifle development and innovation.  In fact, our pipeline policy for the Caspian region was and is a policy of antimonopoly.  Today we believe that it is changing the landscape of Eurasia in an important and welcome way. 

 

The largely successful operation of the CPC’s pipeline from Kazakhstan to Novorossiysk on the Black Sea in Russia and the recent inauguration of the BTC pipeline from Azerbaijan to Turkey are signal successes of this policy.  We are especially proud of the role that U.S. firms have played in these endeavors. 

 

As Ambassador to Kazakhstan, I was personally involved in US efforts to help the Kazakh government develop its energy production and export capacity.  I still remember how excited I was the day I received the news of tests confirming the promise of the Kashagan discovery.  Our regional energy partnership remains strong today and has already helped move Kazakhstan into the ranks of the world’s leading reliable suppliers of hydrocarbon resources.  Kazakhstan’s recent accession to the BTC pipeline has made a valuable contribution to this important multilateral project enhancing its commercial viability. 

 

 

More broadly, projects developed by western investors, including companies from the United States, throughout the Caspian Basin region are enhancing global competition by bringing diverse energy supplies to world markets.  They have also created thousands of jobs, provided access to improved technology, trained the domestic labor force in the countries involved, invested in social infrastructure, increased commitment to environmental protection, and encouraged the establishment of many small- and medium-sized enterprises in the countries of the region.  This has empowered them to develop their economies and become more self reliant.

 

For the United States, as our dialogues with transit states have matured, we have expanded the focus from primarily oil and gas issues to include a broad range of technologies, including energy efficiency, renewable energy, nuclear power, and an exchange of information on lessons learned, an example of which is the training we have conducted with Kazakhstan and other states on how to assess risk to energy facilities and protect them from sabotage and terrorist attacks. 

 

We want our partners in these countries to understand that we are not just interested in the contribution they can make to world oil and gas supplies, although that is vitally important. 

 

We want them to understand that in the long term, we share a common goal of building modern energy sectors in their countries that are balanced, efficient, and secure to support vibrant, growing economies and rising standards of living for their citizens.

 

Of course, there are other transit states outside of the Caspian Basin, some of which will be studied during this conference.  I understand that the last session today will explore Israel’s role as a potential transit state.  Israel’s unique position – on both the Mediterranean and the Red Seas and at the crossroads of three continents – means that it potentially can serve as a transit state for a number of energy export routes.  In the future, a developed network of pipelines carrying oil and natural gas from the Caspian, the Arabian Peninsula and North Africa to markets in Egypt, Israel, Turkey and throughout Europe is certainly possible. 

 

Thanks to Haifa University’s new Center for Advanced Energy Studies more people will have the opportunity to study such possibilities long after this conference.

 

In closing, I would like to again thank the Center organizing this conference and for providing me the opportunity to be here today with you this morning.