TEXT: PENA ANNOUNCES CASPIAN SEA INITIATIVE AT CONFERENCE
(Speech at "Crossroads of the World" Conference May 27)

June 1, 1998


Istanbul -- U.S. Energy Secretary Federico Pena announced May 27 "a new Caspian Sea Initiative that brings together, for the first time, the heads of the U.S. government's three independent trade and investment agencies -- Ex-Im, OPIC, and TDA -- to coordinate the development and support of concrete project opportunities in the Caspian."

Pena, speaking at the "Crossroads of the World" conference, said that under this initiative, the United States will bring to bear "the diplomatic and financial resources needed to promote the rapid and effective development of Caspian energy resources and multiple export routes."

The goal, he said, is to "mobilize and leverage private sector capital from the United States and other countries, as well as government participation from the countries of the region."

Pena pointed out that Ex-Im Bank "has portfolios of more than $5 billion ($5,000 million) in both China and Mexico. We are ready to meet and to exceed those levels here in the Caspian region if commercial opportunities allow."

The secretary said: "It is the belief of the United States government that rapid development of the vast energy resources in this region and trade linkages among the countries are critical to the prosperity, the stability, and the democracy of the countries of Central Asia and the Caucasus."

He discussed some major U.S. policy concerns, including the Iran-Libya Sanctions Act (ILSA) and continuing U.S. opposition to a pipeline through Iran, the commercial viability of an east-west Baku-Ceyhan pipeline route, envirionmental concerns, boundary disputes, and Russia's involvement in Caspian development.

"Russia, as both an energy producer and transit country, will be an important player in developing the Caspian region," Pena said. "We would welcome Russian participation in the east-west energy corridor."

Following is the text of his remarks:

(Note: In the following text, "billion" equals 1,000 million.)

(Begin text)

PREPARED REMARKS U.S. SECRETARY OF ENERGY FEDERICO PENA CROSSROADS OF THE WORLD CONFERENCE ISTANBUL, TURKEY MAY 27, 1998

Acknowledgments

I want to thank Joseph Grandmaison and the United States Trade and Development Agency for hosting this important conference. I also want to acknowledge and thank DEIK and other groups for their support of the conference. I want to acknowledge George Munoz from OPIC, Jim Harmon from Ex-Im Bank, and Ambassador Richard Morningstar. We are fortunate to have Senator Chuck Hagel with us today. And Ambassador Mark Parris, thank you for all of the work you do to keep our relationship with Turkey strong.

Minister Ersumer, it is a pleasure to see you again. We had a very productive meeting earlier today and I want to congratulate and thank you for the leadership you have shown in working with the other states of the region to make our intergovernmental efforts so successful. I am sure that you will demonstrate the same leadership in working with the private sector.

I also want to thank you for your government's hospitality. I am very excited to be here in Istanbul this morning -- the "City of the World's Desire." For centuries Istanbul has been at the crossroads of East and West. It is appropriate that we come here at the "Crossroads of the World" to discuss a tremendous undertaking that will bring the East and West together in a historic effort to develop the energy resources of the Caspian Basin.

Announcement

Toward that end, today we are pleased to announce a new Caspian Sea Initiative that brings together, for the first time, the heads of the U.S. government's three independent trade and investment agencies -- EXIM, OPIC, and TDA -- to coordinate the development and support of concrete project opportunities in the Caspian.

Through these agencies, the United States will dedicate and coordinate the diplomatic and financial resources needed to promote the rapid and effective development of Caspian energy resources and multiple export routes. This focus will help to mobilize and leverage private sector capital from the United States and other countries, as well as government participation from the countries of the region.

The participation of all three agency heads for the first time at one conference is indicative of the priority the United States government has placed on this effort. While these agencies have always worked closely together, our new Caspian Sea Initiative organizes these individual efforts to make them more effective. This will, in essence, provide a synergistic package of financing for feasibility studies, American exports, and investments.

These agencies have recently formalized their longstanding working relationship by establishing a Caspian Finance Working Group. This group meets regularly to ensure that information on projects and funding opportunities can be shared and acted upon quickly. This Caspian Finance Working Group reports to a multi-agency group on Caspian issues convened at the White House. This high-level policy attention will help ensure that American commercial interests and diplomatic interests work together in the Caspian region.

Let me put this into context -- Ex-Im has portfolios of more than $5 billion in both China and Mexico. We are ready to meet and to exceed those levels here in the Caspian region if commercial opportunities allow. Congratulations to all three agency heads on this unprecedented effort.

Introduction

Turkey, as you know, is a land of great history, beautiful legends, and profound wisdom. Knowing this, I searched for an ancient Turkish proverb that might appropriately capture the essence of why we are here today. I found quite a few gems, including this sage piece of advice, "People who live in glass houses should not undress with the lights on..." But my favorite Turkish proverb is this -- "A long journey is shortened by good companions."

I just arrived this morning, and it has indeed been a long journey, but I am glad to be here with all of you -- my good companions. Today, I want to speak to you about the journey that we still have in front of us -- the journey toward building prosperity, stability, and democracy in this most vital region of the world through the development of energy resources.

This is my second journey to the Caspian region. And I am here because it is the belief of the United States government that rapid development of the vast energy resources in this region and trade linkages among the countries are critical to the prosperity, the stability, and the democracy of the countries of Central Asia and the Caucasus.

We have focused our efforts on promoting the development of multiple pipelines and diversified infrastructure networks to integrate these countries into the global market, to provide countries of the region with alternative energy supplies and transportation routes, and to foster the regional cooperation needed for peace and stability.

To implement the east-west pipeline strategy, I led a Presidential Mission last fall to five Caspian region capitals, including Ankara. What we accomplished on that mission has since guided President Clinton's efforts in working with key regional leaders and the private sector to reach our journey's destination of prosperity, stability, and democracy for the nations of the region.

But as we undertake our journey, questions have been raised. Today, I want to directly address each of these questions in order to clarify U.S. policy in the Caspian and offer us a road map for arriving at our final destination. There are five issues I want to address.

1. ILSA

First and foremost, as many of you know, last week President Clinton announced Secretary of State Albright's decision to waive sanctions against three companies who signed a deal with Iran to develop the South Pars field. Questions have been raised about how this decision on the Iran Libya Sanctions Act will affect Caspian energy development.

Let me make one thing absolutely clear. U.S. opposition to building a pipeline through Iran has not changed. We will continue to oppose such lines and to support alternate non-Iranian routes for the export of Caspian energy resources.

The decision on ILSA sanctions was made after careful consideration of all factors involved. Although we still oppose the project, we determined that it was important to the national interest of the United States to waive the imposition of sanctions against the three firms involved. Among other factors that led to this decision, we considered the significant, enhanced cooperation we have achieved with the European Union and Russia in accomplishing ILSA's primary objective of inhibiting Iran's ability to develop weapons of mass destruction and support terrorism.

We have and will continue to make it clear to our friends and allies that we expect appropriate steps will be taken in response to any Iranian involvement in terrorist activities. We will continue to press for enhanced international cooperation to counter Iran's efforts to acquire weapons of mass destruction and its support for terrorism. Our decision to waive sanctions was designed to strengthen that cooperation and should not be interpreted, in any way, as a shift in our policy toward trans-Iranian pipelines.

2. Commercial Viability

Of course, we know that the reason for commercial interest in a trans-Iranian route is the belief that this route would be more economically viable than a non-Iranian route. This is the second issue I want to address.

The most economical route to transport Caspian energy is not necessarily through Iran. In fact, at a recent pipeline conference in Almaty, the companies reported their findings that an oil pipeline running south from Kazakhstan to the Persian Gulf might actually be more expensive, in terms of capital costs and per unit transportation costs, than an oil pipeline running from Kazakhstan across the Caspian to Ceyhan.

Besides raising transport costs for Caspian producers, an oil pipeline to the Gulf would also increase the amount of oil flowing through the Gulf, and therefore could depress the price Iran receives for its own crude -- which Iran would take into account when establishing tariffs. Furthermore, from the standpoint of energy consuming countries, it would be extremely difficult to lend financial support to pipelines that send more oil to the Persian Gulf. All of these factors must be taken into account in determining the most economically competitive route.

Pipeline choices will, and must, be made in accordance with commercial considerations. What does that mean? First, it means that pipelines will be built, not by governments, but by the private sector.

The United States does not hold equity interest in pipelines -- companies hold equity interest in pipelines. And companies do not invest in pipeline projects unless they are assured of favorable terms, conditions, taxes and tariffs. Companies do not invest in pipeline projects unless there is political stability. Companies do not invest in pipeline projects unless they are environmentally sound. Companies do not invest in pipeline projects unless all of these commercial considerations are taken into account.

Commercial considerations will be the true test of any pipeline route. But commercial considerations encompass more than simply the up-front capital costs for a project. Commercial considerations include taxes, tariffs, netbacks, political risk, and environmental risk. Taking into account all commercial considerations, we believe the optimum route is the east-west Baku-Ceyhan corridor.

We have been working very closely with the governments of the region, especially the Turkish government, on these commercial considerations. The Turkish hosted a March meeting of regional foreign ministers here in Istanbul where Turkey, Georgia, Azerbaijan, Turkmenistan, and Kazakhstan issued a joint communique supporting an east-west corridor for transportation of Caspian oil and gas, including trans-Caspian pipelines. I congratulate you on the success of your meeting and look forward to the results of the meeting that the Georgians have offered to host in June.

We are also working with Turkey to make the east-west route more commercially attractive. Under the agreement I signed with Prime Minister Yilmaz during his visit to Washington in December, we have had a number of strategy sessions to make this main export pipeline a reality. It is our goal that through the regional working groups we have established, we will finalize terms, tariffs, and taxes for the private sector by this fall.

We have also been working with U.S. energy firms who are interested in trans-Caspian Baku-Ceyhan pipeline routes. These companies believe that trans-Caspian oil and gas pipelines are economically and technically feasible, that they can compete on a commercial basis with a trans-Iranian line, and that they can be built on a timely basis.

3. Environmental Concerns

These companies also believe that environmental concerns can be squarely addressed by an east-west energy corridor -- the third issue often raised by those who oppose the corridor. We do not want to see the Bosporus become a potential choke point for a significant share of the world's oil supplies, which would heighten environmental concerns and possibly impede the development of Caspian energy.

We would seriously question any proposal which would force more oil through the Straits of Hormuz or result in increased vessel traffic through the Turkish Straits. Not only are we concerned about the energy supply disruptions that could result in the event of an accident in the Bosporus, we believe it would be imprudent to trade the current choke point in the Persian Gulf for one in the Bosporus.

U.S. companies expend billions of dollars to develop environmentally sound technologies. Western firms utilize the same environmentally sound methods to explore and develop oil and gas resources in the U.S. as they do all over the world.

Several major European and U.S. energy and engineering firms have conducted pre-feasibility studies on the construction of oil and gas pipelines across the Caspian. These firms have looked at several routes -- from Kazakhstan to Azerbaijan and from Turkmenistan to Azerbaijan.

Environmental factors were considered, including protection of wildlife and sturgeon, and the reported existence of sub-sea mud volcanoes near the Azerbaijan coast. The companies concluded that construction and operation can be completed in an environmentally sound manner with currently available technology.

But I want to stress that environmental protection is not just the job of Western companies. The consortia in Azerbaijan and Kazakhstan must comply with provisions in their respective production sharing agreements which ensure that operations do not adversely affect the environment of the Caspian. Specifically, these agreements call for environmental baseline surveys, on-shore site assessments, environmental impact assessments, and development of waste management strategies.

Environmental concerns will play a role in any decision on a main export line. It is the U.S. position that an east-west energy corridor, incorporating trans-Caspian oil and gas pipeline segments, with a route from Baku, Azerbaijan through the Caucasus to Turkey can address all relevant environmental concerns.

4. Boundary Disputes

Fourth, turning toward boundary disputes, division of development rights among the five littoral states remains a critical issue. Our policy is that Caspian legal issues should be resolved in a way that permits prompt exploitation and export of oil and gas. Russia has recently indicated a position to support sectoral division of sea bed mineral resources, but remains committed to communal management of navigation, fishing, and environment.

We believe that boundary disputes can be resolved in a timely fashion through bilateral and multilateral talks. In addition, we have sent a team of legal experts to assist Azerbaijan and Turkmenistan in resolving their border dispute. It is our hope that progress will continue between President Aliyev and President Niyazov toward reaching agreement on this critical issue.

We are engaged in addressing the politics that complicate Caspian sea bed development and trans-Caspian pipelines. Certainly, the Caspian region is replete with complex political considerations. However, it is our position that politics should not impede the development of the energy resources of the region -- this development will actually be the key to prosperity, stability, and democracy for all of the nations involved.

5. Russia

Finally, let me address the concern expressed by some that the United States is attempting to exclude Russia from Caspian development. Caspian issues were discussed at length at the most recent Gore-Chernomyrdin Commission meeting in Washington and at the G-8 energy ministerial, which recently took place in Moscow.

At both of these sessions, I assured now Prime Minister Kiriyenko that the U.S. supports the Caspian Pipeline Consortium and that we welcome the participation of Russian companies in Caspian development. As I discussed with the prime minister, Russia, as both an energy producer and transit country, will be an important player in developing the Caspian region. I have shared the same philosophy with Russian energy companies.

Russia has been and, in our view, should continue to play a major role in the Caspian region's energy development. Two of the key transportation routes closest to fruition go through Russia -- Azerbaijan International Operating Company's (AIOC) northern early pipeline, and the Caspian Pipeline Consortium (CPC) from Kazakhstan through Russia to the Black Sea port of Novorossiysk.

U.S. companies are working in partnership with Russian firms in the Caspian, and there will be additional opportunities to expand that commercial cooperation. And, as I personally expressed to my Russian colleagues and Russian companies in my many meetings with them, we would welcome Russian participation in the east-west energy corridor.

Conclusion

In the next year, many key decisions will be made that affect each of the issues I have raised this afternoon. Let me assure you that although I have decided to leave office at the end of next month, Caspian development will continue to be a major priority for both my Department and the entire Clinton Administration. Though I am leaving, U.S. policy will remain the same.

The Caspian region is a place where American foreign policy and commercial interests meet. And the Caspian initiative that we announced today between Ex-Im, OPIC and TDA reflects a unique undertaking for the United States government. We will work in concert with the private sector, and with the governments of the region, to achieve the conditions necessary for the realization of the Caspian's great potential.

In conclusion, I want to remind you of the Turkish proverb with which I began my remarks -- "A long journey is shortened by good companions." Developing the resources of the Caspian Basin will indeed be a long journey -- a journey toward prosperity, stability, and democracy for the nations of this vital region. I am excited about this journey, but especially excited because the United States has such good companions. Let us work together to make the journey as short as possible and reach our mutual destination together of prosperity, stability, and peace.

Thank you.

(End text)

NNNN