07 March 2003
State Dept.'s Larson Warns Venezuela on Oil Reliability
(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.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)
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