News from the Washington file: State Dept.'s Larson Warns Venezuela on Oil Reliability
usinfo.state.gov 07 March 2003
(He describes energy challenges in Russia, Caspian, Africa, Gulf) (3970)
Conflict in Venezuela has damaged its reputation as a reliable oil supplier, and all parties to the ongoing political turmoil there must work together to restore confidence, stability and rule of law, U.S. Under Secretary of State Alan Larson says.
"The damage done cannot be repaired overnight," Larson said in March 4 remarks in New York.
"And when the Venezuelan parties show a commitment to seek reconciliation and restore their position as a reliable partner of the United States, they will find a willing and ready partner in the United States," he said.
Aside from Venezuela, Larson described also challenges facing other major energy suppliers in Russia, the Caspian region, West Africa, North America, Saudi Arabia and the Gulf.
He expressed concern that growing opposition in Russia might jeopardize passage of legislation allowing production sharing agreements that would promote more foreign investment, citing the need to bring technology to Russia's frontiers.
Russia needs to adopt many other reforms, he said, including strengthening rule of law for business, allowing competition in energy and transportation, improving its technology and moving domestic oil prices to world levels.
Around the Caspian, Larson said, the key issues are completing the South Caucasus natural gas pipeline, improving the investment climate and bringing Kazakhstan oil into the East-West Energy Corridor.
In West Africa, he said, bribery threatens the hope of using oil and gas production to stimulate national economic development.
"We have an interest in helping West African nations solve these problems, not just out of altruism but also self-interest," Larson said. "West Africa will not be a fully reliable supplier if its energy sectors are corrupt."
The countries of the Gulf should not view the rise of other oil-producing regions with alarm, he said, because rising world demand will require expanded supply all around. He said Gulf producers should open their economies to expanded private investment and let market forces set price and production levels.
Following is the text of Larson's remarks: (Note: In the text "billion" means 1,000 million.) (begin text)
Reliable Supplies of Energy for a Growing World Economy
Alan Larson, Under Secretary for Economic, Business, and Agricultural Affairs Remarks to the Energy Forum, New York University New York, New York March 4, 2003
Good evening. Thank you for the opportunity to come to the Energy Forum to discuss the important and timely issue of international energy security. Energy remains a vital ingredient in the modern industrial economies where roughly one billion of the world's people live. Over the next 50 years, rapid economic progress in the rest of the world will require expanded supplies of energy, including oil and gas.
There no longer needs to be, of course, a one-for-one correlation between in economic output and energy inputs. In the United States, for example, we have reduced energy consumption per dollar of GDP [gross domestic product] to less than 60 percent of its 1973 level.
We can also help developing countries achieve growth in a less energy-intensive fashion than we experienced over the past 200 years. Nevertheless, it would be naïve to believe that continued strong economic growth in the United States and dramatic progress in reducing global poverty can be achieved without substantially increased supplies of energy.
I am not suggesting, of course, that growing world energy demand must lead inexorably to commensurate growth in greenhouse gas emissions. The U.S. is pursuing aggressive R and D [research and development] initiatives on such technologies as fusion, the next generation of nuclear fission, carbon sequestration and hydrogen.
The transportation sector has been the Achilles' heel of oil conservation. Ethanol has made a dent and the Administration is encouraging through tax incentives the expanded use of energy-efficient hybrid vehicles. Moreover, President Bush announced in his State of the Union address that the United States will more than double the amount of money spent on hydrogen technology research and the development of fuel cells to over $1.2 billion. We are actively seeking international partners for these technology initiatives.
Over the next generation, however, oil and natural gas will continue to play a central role in the world economy and international energy markets. We must find more oil and gas supplies, and these supplies must be reliable and made available at prices that permit sustained economic growth.
Long before "globalization" had become the defining concept of our era, the people in this room realized that the oil market was global, that energy independence was a mirage and that energy security had to be pursued in cooperation with friends and allies.
We knew that two-thirds of the world's known oil reserves were in the Middle East.
We knew that imports were supplying roughly half of our oil needs and an even greater share of the needs of some of our most important allies and economic partners.
We knew that OPEC [Organization of Petroleum Exporting Countries] nations were providing roughly one third of the total oil exports but also controlled two-thirds of world reserves.
And we knew that oil supply shocks in any region of the world would have an impact on our economy through the instantaneous operation of international oil markets.
Reliability Through Diversification
Energy investments are costly, risky and require long-term commitments. For that reason, neither companies nor countries can have all of their eggs in one basket. Recognizing this reality, American energy security policy has sought to encourage like-minded policies toward energy, emphasizing the expansion and diversification of energy supplies. We also have sought to broaden the scope of operation of market forces, both in our own economy, where energy price controls and archaic regulatory practices once diminished our energy security, and also in oil-exporting countries, where restrictions on foreign investment and government control of production decisions add additional layers of uncertainty.
At the moment, there are interesting possibilities for expanded oil and gas production from the Caspian region, Russia, West Africa and North America. There also is the prospect of increased oil and gas production in the Middle East. Finally, depending on political events there, Venezuela could be a source of expanded oil and gas production. American policy aims to give the private sector the best possible chance to exploit these opportunities by reducing the political uncertainty that otherwise might scare off the necessary investments.
Let me provide a few examples of what we are doing internationally to promote diversification, reliability and energy security.
Russia
Russia already is an energy super-power. Expanded oil and gas production in Russia can make a major contribution to its own economy and to a well-balanced global supply mix. We welcome strengthened energy ties with Russia, and their expanded energy production in the coming years could enhance U.S. and global energy security.
To achieve its full potential, Russia will need to strengthen its corporate governance and legal/regulatory framework for business, improve the foreign investment climate, allow competition in the transportation system, open Gazprom and Transneft up to reform and competition, improve its technological capabilities and move domestic energy prices to world levels. These reforms are also critical in furthering Russia's desire to accede to the World Trade Organization.
Enactment of legislation for Production Sharing Agreements [PSAs] would also open the door for greater foreign investment, including in technologically challenging frontier regions. However, we are concerned by recent actions that indicate growing opposition to PSA legislation. It also will be necessary to embrace competition and private investment in oil and gas transportation systems. Investment in oil and gas production will fall below potential if investors fear that Transneft and Gazprom have a hammerlock on the pipeline system. We also encourage Russia to have a positive attitude toward the development of multiple pipeline projects for the transportation of Caspian energy to Western markets.
Through the programs of Ex-Im Bank and OPIC [Export-Import Bank of the United States and Overseas Private Investment Corporation], we are providing financing and insurance to reduce the political risk of energy investments. We look forward to working with Russia as it strengthens its ties with the International Energy Agency.
The Caspian
The Caspian basin has tremendous potential, offering the possibility of production increases from 1.6 million b/d [barrels per day] in 2001 to 5.0 million b/d in 2010. This will represent the largest non-OPEC production growth in the world. The key issues in Caspian energy development at the moment are: 1) to complete the second pillar of the East-West Energy Corridor by developing the South Caucasus natural gas pipeline; 2) to improve the investment climate throughout the region; and 3) to bring Kazakhstani oil into the East-West corridor. To achieve its promising potential, it will be necessary to establish a new network of pipelines for transporting Caspian resources to Western markets and establish reliable investment regimes.
American policy has made significant headway in creating an East-West energy corridor from the Caspian to the Mediterranean. We support efforts to build multiple pipelines to strengthen the sovereignty and economic viability of the new nation states in the region and to allow the Caspian Basin to contribute new energy supplies for the world market on commercial terms. We welcome the groundbreaking on the Baku/Tbilsi/Ceyhan oil pipeline that will allow energy from Azerbaijan and Kazakhstan to reach world markets at competitive prices; and last week's announcement that the South Caucasus gas line, running from the offshore Shahdeniz gas field in Azerbaijan to central Turkey, is a "go."
Kazakhstan needs to work particularly hard to ensure that investors are given an open, fair and transparent environment. We are pleased that the dispute that clouded the TengizChevron project has moved toward closure. Our efforts in the Caspian are intended to complement -- not detract from -- our support for Russia's efforts to develop its energy export potential. We all win when transparency and free market conditions prevail.
West Africa: Significant Potential
West Africa is one of the world's fastest growing sources of oil and gas. Nigeria is currently the fifth largest supplier of crude oil to the U.S. Oil reserves generate a large share of government revenue in countries such as Nigeria, Angola, Gabon, Equatorial Guinea, Republic of Congo and Cameroon. Emerging potential producers, such as Sao Tome, Chad and Mauritania, also will begin producing significant new oil supplies in coming years.
Democratization and the development of responsible governing institutions are particularly important in reducing oil-related conflicts and promoting African supply stability. Accountability and transparency are necessary to ensure that oil revenues benefit the population and support development. Growing oil and gas production could be an engine for national economic development in these countries, but this will not happen if energy development is accompanied by corruption, rent-seeking and the suffocation of other economic sectors. We have an interest in helping West African nations solve these problems, not just out of altruism but also self-interest. West Africa will not be a fully reliable supplier if its energy sectors are corrupt.
Substantial foreign direct investment is needed to develop African energy resources both onshore and offshore deepwater. We support this process by encouraging the reforms needed to improve the investment climate. We have negotiated a bilateral energy cooperation framework agreement with Nigeria. We favor the World Bank's involvement in independent monitoring arrangements in the Chad-Cameroon pipeline project.
Another sign of our commitment is the opening of our new embassy in Equatorial Guinea. This new mission will support our ongoing work in the areas of energy security, human rights, and good governance in Equatorial Guinea.
We also will ensure vigorous enforcement of the OECD [Organization for Economic Cooperation and Development] Convention to prohibit bribery in international business transactions, an agreement that internationalizes the main elements of the U.S. Foreign Corrupt Practices Act. We are prepared to explore new partnerships to help West African countries make good on their commitment to good governance, transparent business practices, sound economic policies and market-based regulation.
North America: Energy Integration
Here in North America, we are strengthening our energy cooperation with Canada and Mexico. Senior energy experts from the three North American governments recently released a North American "Energy Picture" report that, for the first time, jointly measures the energy stocks, trading balances, and energy flows in the continent.
In the last few years, Mexico has begun to allow independent power producers (IPPs) to sell power to the public grid. Energy consumption in Mexico is expected to grow by 25 percent during the next five years; IPPs could attract the required investment in new generation and transmission infrastructure.
What often goes unrecognized is that North American energy trade is a two-way street. Mexico is becoming an important source of our oil imports. At the same time, the U.S. is a net natural gas exporter to Mexico, and our refineries supply over 15 percent of Mexico's refined petroleum products.
The reliability of North American energy trade is enhanced, of course, by geographic proximity. But more important than geography alone is the rule of law and predictable investment conditions created by NAFTA [North American Free Trade Agreement], integrated pipeline networks, closer cooperation between our governments and energy companies and long-term reliable supply relationships. Our policy is to deepen further this framework of rule of law and predictable investment conditions in North America even as we seek to build similar frameworks in other regions.
Saudi Arabia and the Gulf Producers
The Middle East holds some two-thirds of proven world oil reserves. The size of its reserves combined with its low production cost guarantees that the Middle East will continue to play a pivotal role in the world market. Despite frequently expressed concerns about "dependence" on the Middle East, our economy clearly benefits from these supplies. Without them, we would expend scarce economic resources to secure the energy we need at higher cost to our citizens and economy.
Producers of the Persian Gulf, therefore, are a vital part of a reliable energy supply system. Saudi Arabia plays a key role in global oil markets as the world's largest oil exporter. Moreover, the Saudis support international energy security by maintaining considerable excess production capacity that can be brought on line quickly in the event of a serious supply disruption anywhere in the world.
Saudi Arabia and the other major Gulf producers like the UAE [United Arab Emirates] and Kuwait repeatedly emphasize their commitment to be reliable suppliers. Saudi Arabia's own efforts in working with other major producers to offset the Venezuelan disruption is an example of its leadership role.
A policy of diversifying global oil supplies should not be interpreted as diversifying "away" from Saudi Arabia or other Gulf producers. Gulf producers will continue to have an indispensable role in the world market, and we encourage them to increase foreign investment and steadily expand supplies. What we seek is better balance and a more flexible, resilient oil market that responds to price signals.
In this regard, we believe Gulf producers would do well to open their economies to more private investment so that oil capacity could grow and oil supply could respond more fully to shifts in demand. The high prices of the last two years have been a drag on the world economy. OPEC's fear of a price collapse made it too slow to expand production.
I would encourage Gulf producers to view the expansion of oil and gas investments in Russia, the Caspian, West Africa and North America with equanimity. There is room in the market for these supplies and for continued, even expanded, supplies from the Gulf. The best response for Gulf producers in the long run is to open their economies to expanded private sector investment and allow greater scope for market forces to establish price and production levels.
Natural gas could be a good place to start. Once stranded for local or regional use, natural gas has become a globally traded oil substitute in certain key markets. For example, Saudi Arabia is contemplating a large-scale natural gas investment program that could involve several international oil companies.
The Saudi initiative would substitute gas for oil in producing electric power and desalinated water for the domestic market. If successful, this Saudi initiative also could serve as a bellwether for foreign direct investment in other sectors of that economy and expand economic growth and employment opportunities for Saudi Arabia's burgeoning population. Although the final shape of this proposed foreign direct investment in the Saudi energy sector is not yet clear, this investment would contribute to global energy security by expanding energy supplies and diversifying by fuel.
Qatar, another key Gulf state, has vast natural gas reserves. Working together with major international energy companies, the Qataris are becoming leading exporters of liquefied natural gas (LNG) to developing countries in Asia. In the UAE, the successful Taweelah power and water privatization project is another example of the dynamic role foreign investment can play in the energy sector.
We support these positive private investment initiatives because they expand and diversify energy sources, provide opportunities for American companies and foster economic growth in strategically important countries.
Venezuela
Closer to home, Venezuela and the United States have also enjoyed strong historical energy ties. Traditionally, we had considered Venezuela to be one of our most reliable oil partners, and we still very much want this to be the case. Venezuelan oil policy, until recently, has been built upon a reputation of reliability to international markets, which was of great mutual benefit. Through World Wars, politically inspired embargoes, and global dislocations, Venezuela found that its national interest was best advanced through maintaining a reputation of reliability.
Unfortunately, through a collective failure to come to consensus within the boundaries of their political system, it has been clearly demonstrated that Venezuela's democratic institutions and its reputation in the United States as a reliable supplier appear no longer matters of primary importance to President Chavez, PDVSA or the political opposition. Venezuela's turmoil has come at a difficult period for the world economy.
U.S. firms continue, of course, to be hard at work in Venezuela, and CITGO continues to operate in the U.S. as a commercial entity. The benefits that these reciprocal energy investments bring to both parties, and to the relationship, are clear to me, but they do not seem to be clear in Caracas.
The United States will continue to work to help Venezuelans resolve their political differences. The key to reverse the severe economic and political decline in Venezuela is a renewed dedication to find a constitutional, democratic, peaceful and electoral solution to the crisis. Democracy and the rule of law are essential elements of a sound investment climate. We are disturbed by measures taken by President Chavez and the Government of Venezuela that can only be seen as polarizing the conflict and eroding Venezuela's democratic institutions. We urge the Government of Venezuela and the Venezuelan opposition to engage in the dialogue facilitated by OAS [Organization of American States] Secretary General Gaviria under OAS Permanent Council Resolution 833.
However, until a sincere political compromise is achieved, and the level of rhetoric lowered, world energy markets simply cannot view Venezuela with the same certainty that they once did, and, sadly, neither can the United States. The damage done cannot be repaired overnight. We hope that Venezuelans, both in the Government and those involved in the strike, will take the necessary additional steps to restore confidence, stability and rule of law. And when the Venezuelan parties show a commitment to seek reconciliation and restore their position as a reliable partner of the United States, they will find a willing and ready partner in the United States.
Emergency Preparedness and the Role of Gulf Producers
Close cooperation with energy producers and consumers builds our collective emergency preparedness. In the event of a serious disruption, we will look to producers to make a maximum effort to use spare capacity to replace lost supply. We are intensifying consultations with our partners in the International Energy Agency (IEA) and, if necessary, we are ready, willing and able to make an appropriate emergency response, primarily based on coordinated drawdown of strategic stocks. The 26 IEA members collectively hold over 1.3 billion barrels of government-controlled stocks, representing 114 days' import coverage.
Here in the United States, the President has authority to draw upon our Strategic Petroleum Reserve (SPR) to counter a significant disruption in supply. The SPR contains almost 600 million barrels of crude oil. In the event of a drawdown, DOE can deliver oil to the market in 10-15 days, pumping at a maximum rate of 4.3 million barrels per day for up to 90 days, then at a declining rate thereafter.
Iraq and the Oil Market
Since we are talking about possible oil supply disruptions, let me say a word about Iraq. UN Security Council Resolution 1441 found Iraq to be in "material breach" of Security Council Resolutions. It called for immediate and complete cooperation and gave the Iraqi regime one last chance to give up its weapons of mass destruction and disarm. Iraq has failed to seize that opportunity. The credibility of the UN Security Council is now at stake.
This is not "about oil." As Secretary of State Powell said on November 18, "Iraqi oil belongs to the Iraqi people .... The United States is not going there to start dividing up that which belongs to the Iraqi people." Should military action be required to enforce UN Security Council Resolutions, the United States will work to ensure that Iraq's oil sector is protected from acts of sabotage and that its proceeds are applied for the benefit of the Iraqi people. Iraq's oil and other natural resources belong to all the Iraqi people -- and the United States will respect this fact.
We should not and need not allow short-term concerns about the oil market to dissuade us from following the resolute policy we need to protect global peace and security. One of the most important reasons why we have an energy security policy is to allow the President to advance American national security requirements without letting foreign oil suppliers hold us hostage.
Looking to the future, a vibrant, independent and responsible Iraqi government -- free of weapons of mass destruction and at peace with its neighbors -- will contribute to the stability of the international oil market, as well as the political stability of the region. That is and should be the goal, for the U.S. and for the international community.
Conclusion
In the long run we need new technologies that can fuel our economy without posing threats to the environment or our national security. In the interim, our international energy policy must address the familiar challenges posed by a hydrocarbon-based economy where oil reserves are concentrated in various challenging regions of the world.
Energy security is advanced by sustained improvements in the investment climates in Russia, the Caspian, Africa, and in our own hemisphere, as well as by improved investment opportunities in traditional regions such as the Gulf and Venezuela. We are placing special emphasis on making the integrated North American market work better. To counter short-term, physical disruptions, we increased the SPR to 600 million barrels; stand ready, with our IEA allies, to deploy a collective response if needed.
We intend to engage intensively with energy partners all over the world to diversify supplies, improve investment opportunities and assure that market forces work as transparently and efficiently as possible. Like the war on terrorism, achieving energy security will not be achieved by one dramatic breakthrough but rather by sustained, patient and determined efforts. Thank you very much.
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