The Caspian and Black Sea regions are tremendously important to U.S. interests, not just because of oil and gas wealth. In fact, as important as energy is, our goals go beyond earning money for producing countries and profits for U.S. companies. Our engagement covers a wide range of issues such as working to resolve regional conflicts, providing economic and humanitarian assistance, achieving the removal of nuclear weapons, and promoting democracy and the rule-of-law. Energy is undeniably pivotal, however, because of the energy-security concerns and because of the key role energy revenues will play in powering the region's economic and political future.
These countries deserve our special attention. Turkey has been a strong and longstanding U.S. ally and has been designated a "big emerging market" of primary importance to U.S. exporters. The states around the Caspian and Black Seas are also of high importance, and they have progressed since their independence earlier in the decade. For instance, Azerbaijan and Kazakhstan have made great strides moving beyond the initial post-Soviet exploration phase and are bringing impressive amounts of oil into production. With the TengizChevroil venture involving Chevron and Mobil producing around 200,000 bid, the Azerbaijan International Operating Company (AIOC) already at 40,000 b/d, and new fields coming on stream on both sides of the Caspian, the central question is becoming one of transportation. How will we move the large volumes of oil and gas to export markets?
COMPARING PIPELINE OPTIONS
A number of transportation proposals are on the able, and we will no doubt see more before the year is out. Some proposals are short-term solutions, such as shipping oil by rail, and some are longterm solutions, such as Chinese National Petroleum Company's (CNPC) grand plan to build an oil pipeline from the Uzen and Aktyubinsk fields across Kazakhstan to China. Because of the strategic importance of the Caspian and Black Sea regions to U.S. interests, the United States will pay close attention to all the proposals that are made. We will examine the merits of each proposal and pose four questions to determine our support or opposition:
- Does the proposal promote the independence, sovereignty and prosperity of the Caspian states, as well as their democratic and free-market development?
- Does the proposal promote regional cooperation and conflict resolution?
- Does it increase and diversify the sources of world energy for that time when global energy demand will reach unprecedented levels?
- Does it support the commercial pursuits of U.S. companies, which are some of the most advanced technologically and environmentally in the world?
The United States is implementing a vigorous strategy to ensure that the answers to all of these questions are "yes." We are engaging the regional governments, as well as the companies, at all levels. Over the past year, the United States has welcomed a number of regional leaders to Washington for energy discussions, including Prime Minister Yilmaz of Turkey and Presidents Aliyev of Azerbaijan, Shevardnadze of Georgia, Nazarbayev of Kazakhstan, Niyazov of Turkmenistan, Kuchma of Ukraine, and Karimov of Uzbekistan. In addition, both Federico Pena, the U.S. secretary of energy, and David Aaron, the under secretary of commerce for international trade, have joined with the three heads of the U.S. trade finance agencies - Eximbank, OPIC, and the Trade and Development Agency (TOA) - at a TOA-sponsored conference on regional infrastructure in Istanbul in May to underline the U.S. interest in providing effective financing support to East-West pipeline projects.
In all of these discussions we are emphasizing the four broad goals of U.S. Caspian policy.
- First, we support multiple pipeline routes to transport Caspian oil and gas lo the world markets. It makes no sense to give any one transit country a monopoly on export routes. Multiple routes foster competition, efficiency, and energy security by reducing reliance on any single path and by giving the producers the flexibility they need to maximize the value of their export stream. These multiple pipelines may go in a host of different directions - westward to the Black Sea, southwest through the Caucasus to the Mediterranean, northwest through Russia, eastward to China, and possibly even southeast through Afghanistan if a stable peace should emerge.
All of these paths would contribute to regional stability and mutual reliance.
- Second, we wish to see rapid development of a commercially viable east-west transportation corridor. We are constantly in contact with the companies to gain their thinking on what is commercially viable and what is not, and their calculations of the relative attractiveness of various transport routes are continuously being evaluated. Based on our current information, however, we think that three routes deserve careful attention: 1) an oil pipeline from Baku to the deepwater port of Ceyhan on Turkey's Mediterranean coast; 2) trans-Caspian oil transportation routes to link up with the oil pipeline to Ceyhan; and 3) a pipeline to carry gas across the Caspian to Azerbaijan and on to the Turkish market.
- Third, we believe Russian participation in Caspian development is important and in Russia's best interest. Russia may once have been the historic hegemon, but it is now a valuable partner. Lukoil, for instance, is involved in a host of projects such as the Caspian Pipeline Consortium (CPC) in Russia and Kazakhstan as well as AIOC and the Caspian International Petroleum Company (CIPCO) in Azerbaijan. In addition, with the deep experience of Transneft and Gazprom in regional transportation projects, pipeline decision makers should be and are considering Russian participants when they look for commercially viable transport routes. But the price has to be right and free access assured; otherwise, the oil and gas will flow in other directions.
- Fourth, the US government steadfastly opposes the transit of Caspian oil and gas through Iran. We welcome signs of positive change in Iran, and we will seek to encourage future change. But when it comes to energy - a commodity on which our economies depend - we must look to our overriding security needs and remember that Iran is a competitor of the Caspian states, not a partner. On gas, for instance, Iran has set its sights on the growing markets of Turkey, Europe and Pakistan - the same markets sought by Turkmenistan. At the risk of stating the obvious, it does not strike me as a smart business decision to run pipelines through the territory of a major competitor.
THE EAST-WEST CORRIDOR
The United States believes that an east-west transportation route, sometimes referred to as a Eurasian Transport Corridor or a New Silk Road, is especially promising.
The Strategic Dimension. An eastwest corridor would go a long way toward enhancing the region's energy - as well as economic and political - futures. It would ensure that the Caucasus and Central Asian countries develop as secure independent states, unfettered by dependence on regional powers such as Iran; it would give potential transit states such as Turkey and Georgia a stake in the region-wide economic development that will be fueled by energy exports; and it would strengthen our global energy security by avoiding an over-reliance on oil exports from the Persian Gulf. An oil pipeline running westward to the Mediterranean also would be able to bypass the Bosporous, resolving some of the safety and environmental concerns we all share about increased tanker traffic through those dangerous straits.
The Commercial Dimension. An east west corridor also looks competitive in economic terms. Oil transportation could run from Kazakhstan across the Caspian to Azerbaijan and then on to either the Black Sea or Mediterranean ports. A gas pipeline could follow a similar path, from the gas fields of Central Asia across the Caspian to the growing markets of Turkey and, depending on the scope of the project, possibly on to Europe. Such a route appears to be:
- Commercially viable, particularly at high volumes. It is worth noting that parallel oil and gas pipelines could exploit the same rights of way and other economies of scale, generating lower unit transportation costs than some other options;
- Technically feasible, with the biggest engineering challenge being the placement and maintenance of pipe along the Caspian seabed; and,
- Phasable in capital investment as producing volumes become available. Barges and tankers have been proposed as an initial cross-Caspian solution until stable oil volumes become sufficient to fill a major pipeline.
This east-west transportation corridor is already taking shape. Let me briefly mention the following developments:
- President Niyazov of Turkmenistan is sponsoring a feasibility study, to be funded by the U.S. Trade and Development Agency, of a cross-Caspian pipeline that would carry gas from Turkmenistan and possibly Kazakhstan, Uzbekistan and Azerbaijan to the growing and increasingly profitable Turkish market and possibly on to Europe.
- As pipeline experts investigate the attractiveness of an oil pipeline running south from Kazakhstan to the Persian Gulf, they are discovering that it might even be more expensive, in terms of capital costs and per unit transportation costs, than a cross-Caspian pipeline running on to the Mediterranean. This is an important insight and indicates that the conventional wisdom regarding the economic attractiveness of the Iranian route may be off the mark. We can expect to learn more about this when the findings of the recent pipeline conference in Almaty are made public.
- In Azerbaijan, planning continues for a main export pipeline, with AIOC scheduled to make a recommendation to the government by late October.
So the concept of a Eurasian Transport Corridor is moving into the development stage. But let me be clear: the U.S. supported concept of an east-west transportation corridor is not limited to just cross-Caspian oil and gas pipelines. Indeed, the United States would like to see multiple pipelines carrying Caspian oil and gas to world markets. Trans-Caspian pipelines represent just one segment of the infrastructure that will be required to export abundant volumes of Caspian oil and gas to world markets. Accordingly, the United States is supportive of other pipeline projects, including the CPC through Russia from Kazakhstan, which will be the Caspian' s first major oil pipeline when completed in 2000 or 2001. We are also encouraging the Black Sea countries such as Bulgaria, Romania and Ukraine to compete as potential transit corridors.
THE IMPORTANCE OF PARTNERSHIPS
Partnerships will be essential in monetizing the region's vast energy wealth. The producing states along the Caspian have vast oil and gas reserves, but they are landlocked and require the cooperation of transit states such as Russia, Turkey and Georgia to convert these assets into hard currency. In addition, many of the ventures throughout the region are difficult to develop, so the participation of international energy companies will be paramount. For these companies to commit billions of investment dollars, however, they will want reliable access to profitable export markets at predictable transportation costs. For their part, the transit states want the transit fees - as well as the development and security benefits of strategic pipelines - but need the companies and producing states to select routes through their territories.
So there is a web of interlocking interests that must be balanced to realize the full growth potential of the region, and the fortunes of all the participants clearly hinge on one another. This is especially true on the transportation front. Construction of a pipeline, particularly a large-scale oil or gas pipeline crossing multiple boundaries, is a complicated process with many potential points of stall or breakdown. There is the negotiation with potential transit states over route selection, the aggregation of volumes among shippers, the creation of an ownership structure involving the companies and transit states, the acquisition of financing, the lineup of rights-of-way, and many other steps that need to be accomplished before construction can begin. The challenge will be in doing all of this expeditiously and at the same time optimizing the benefits for the shippers and the transit states.
Ultimately, route selections will be a competitive process, so the states that take the initiative now are likely to be the ones that win the pipelines. Along these lines, we welcome Turkey's recent sponsorship of a Baku-to-Ceyhan oil pipeline feasibility study and its efforts to foster discussion among regional governments in support for this pipeline proposal. Given the scope and complexity of these projects, however, these are only the first key steps. Much more needs to be done, and it is important for all the interested parties to think creatively and proactively about financial incentives, tax holidays and other measures they might offer to make these pipelines happen.
One proactive near-term option the regional states should consider is an intergovernmental framework accord including pipeline investment guarantees. The purpose of such an agreement could be to create an attractive investment climate for the billions of dollars that will be necessary to build these pipelines. Investors will be looking for assurances that the regional states are committed to a high level of cooperation before they agree to commit funds to these projects. Such an accord could incorporate broad principles regarding freedom of transit, dispute resolution, pipeline security and other matters that would serve to protect the rights of investors, therefore making large scale pipeline projects less risky and more attractive.
A LEGACY OF PROSPERITY
Many key pipeline decisions will take place in the next year or so, with design and construction to follow in short order. If properly managed, these decisions can bring great benefits to all of their sponsors - the producing states, the transit states, the energy companies and consumers around the world that stand to benefit from greater energy security. Indeed, it is my hope that a decade or so from now we will see a peaceful region of secure independent states in which economic development across a range of sectors helps to create a lasting legacy of prosperity and stability. But we all need to work together to make this happen. No country or company will be able to succeed alone.