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U.S. Department of State

Department Seal Ambassador John S. Wolf
London Oil and Gas Symposium,
London, United Kingdom, May 31, 2000

Blue Bar

I welcome this chance to discuss energy developments in the Caspian. Monday was an enormously important step forward for regional cooperation and the concept of an east-energy corridor, and I thank Arthur Andersen, our host, for the foresight to schedule this seminar two days after the first meeting of potential investors for the Baku-Tbilisi-Ceyhan Main Export Oil Pipeline.

Before I go into that, though, I'd like for a moment to review U.S. Caspian energy goals. I am always mindful of what others say U.S. policy is. In fact, the U.S. seeks to:

  • Strengthen the independence and prosperity of the new states of the Caspian region;

  • Bolster U.S. energy security by ensuring the free flow of new sources of hydrocarbons to world markets unfettered by regional competitors and geographic choke-points such as the Bosporus and the Straits of Hormuz;

  • Reestablish economic linkages among the new states of the Caspian region to mitigate regional conflicts; and

  • Enhance business opportunities for companies from the U.S. and other countries.

We pursue these objectives by supporting five specific pipelines. The Baku-Novorossiysk early oil pipeline has been operating since November 1997, carrying oil to the Russian Black Sea port of Novorossiysk. The Baku-Supsa early oil pipeline, operational since April 1999, is carrying oil to Georgia's Black Sea port of Supsa. The Caspian Pipeline Consortium, or CPC pipeline has been under construction since November of last year, and will carry oil from the giant Tengiz field in Kazakhstan to Novorossiysk. The last two pipelines have attracted all the headlines recently. The Baku-Tbilisi-Ceyhan main export pipeline will carry oil from both sides of the Caspian across Azerbaijan and Georgia to Turkey's Mediterranean port of Ceyhan. Finally, the Trans-Caspian gas pipeline will carry gas produced in Turkmenistan and Azerbaijan to Georgia and Turkey.

I often am asked whether or not U.S. policy will change next year. My personal view is that the answer is "no." I believe that whatever administration comes to office the policies I've just stated will remain the central thrust of our policy -- for several reasons. First, the U.S. Caspian policy enjoys broad bipartisan support -- witness the fact that sponsors of the Silk Road Strategy in the Senate and House are Republicans; second, these are policies that build on the aspirations and policies of the countries and governments in the region.

A few weeks ago, I attended the semi-annual conference of Cambridge Energy Research Associates, or CERA. What struck me most about this year's CERA conference was Dan Yergin's sense that the east-west energy corridor is now moving from vision to fact, especially with respect to Baku-Tbilisi-Ceyhan. Last year, Dan and his CERA team were highly dubious as to whether Baku-Tbilisi-Ceyhan would ever appear commercially viable. This year, they recognized that Baku-Tbilisi-Ceyhan is moving ahead at a healthy pace. Potential sponsors from both sides of the Caspian met this past Monday in Baku to begin discussions on establishing a Main Export Pipeline Company that will build, own and operate the pipeline. It's this entity that will contract for basic and detailed engineering, pursue financing, and aggregate necessary oil volumes. There were several dozen companies at that session. My understanding is that at least some from that group are likely to indicate by late June or early July their willingness to begin spending money for the basic and detailed engineering phases of the pipeline.

I'd make two key points about the U.S. Government's approach to Baku-Tbilisi-Ceyhan. First, the United States will continue -- diplomatically and financially -- to support the efforts of the countries and companies to secure a fair and attractive deal that serves the interests of the region as a whole. On the latter point, Export Import Bank financing can be an essential part of the financing package, and Overseas Private Investment Corporation (OPIC) insurance will be a visible demonstration of U.S. commitment to the project even after construction finishes.

Second, we could not support an effort exclusively benefiting a single country or a small group of companies. There's enormous potential value to the countries on both sides of the Caspian in a cooperative effort to secure a pipeline corridor that meets the commercial requirements of oil companies operating on both sides of the Caspian, and helps reduce potential environmental catastrophe in the Turkish Straits.

Some analysts have expressed doubt that sufficient oil volume will be available at the right time to ensure Baku-Tbilisi-Ceyhan's commercial viability. Many observers have argued -- sometimes heatedly -- that the answer will be unequivocally negative. My point is that we are now moving beyond this hypothetical discussion. The convening of a sponsors group begins the process of testing in the marketplace the question of who will agree to build the pipeline and under what terms. The U.S. continues to believe their decision will be positive and that this main export pipeline will come into operation in 2004.

A number of promising developments underwrite U.S. optimism. These include: promising on-shore prospects in Azerbaijan, Lukoil's recent announcement of a major oil find in the northern Caspian, and increasing reports about what could be an enormous discovery in the Off-Shore Kazakhstan International Operating Company's Kashagan (OKIOC) field. As was the case with Lukoil's discovery, several years will be required to produce significant volumes of oil from Kashagan and OKIOC's other fields; however, the terms of OKIOC's contract would appear to require very prompt development of the field. The U.S. believes that Kazakhstan could become one of the world's major oil-producing countries over the next few decades. We are convinced that Baku-Tbilisi-Ceyhan can provide a commercially unbeatable export route to world markets for those exports and other oil from Kazakhstan.

Some have argued that there are other preferable routes for Caspian oil exports. The Russians often cite the surplus capacity in their system and the attractive deals they are prepared to make to attract volumes northward. In contrast, we have heard concerns repeatedly from investors about concentrating a high percentage of their exports in any one direction even were there not problems. And there are problems in the Russian system, things like the absence of quality banking, uncertainty about quotas, and a genuine bottlenecking problem. I suspect we will hear more when I finish about the possibility of exporting oil southward. Let me come back to that question in a moment.

Many commentators like to posit some great new game between the U.S. and Russia. They are off-base. We see Russia as an important part of regional cooperation. The Presidents of the United States and Russia agreed two years ago that both countries should work together to maximize cooperation on Caspian energy projects between companies from their respective countries. The United States has tried to proceed in this cooperative spirit. With CPC, for instance, we have shown we are prepared to match our words with concrete action. There is room for a more two-way effort.

Last week I met with the head of the Russian Foreign Ministry's Caspian Working Group. We appeared to share a common interest in the political and economic maturing of the newly independent states of the Caucasus and Caspian region. We both said publicly we hoped that stability will be strengthened as growth becomes more sustainable and as regional cooperation replaces historic tendencies toward competition. And I told Ambassador Urnov we hoped that Lukoil will be able to look carefully at the economics and not just the politics of putting its Azeri-produced oil into Baku-Tbilisi-Ceyhan. But I must admit some worry about his statements at Johns Hopkins University and again at a forum on Capitol Hill that Russia would define its economic interests in the former Soviet Republics on its own and defend those interests by any means necessary.

At the Capitol Hill meeting last week in Washington, a number of private sector speakers mentioned a broader set of issues that needs to be considered even as the questions of upstream investment and mid-stream export routes are developed. This relates to the high priority of helping the countries of the region build their human and capital infrastructure, strengthen public and private institutions, and do much more to foster the rule of law. I know I heard much about this from Arthur Andersen's representative in Baku last winter. The point for the region's governments is that there is no guarantee that, without improvements, the multibillion dollar investments that are necessary to produce and transport hydrocarbons will take place. Even if revenues increase, there are too many cases of countries that have not coped well with new wealth. Everyone concerned about the security and stability of the region needs to join in efforts to make sure this is not the fate of the Caspian.

One other point -- the U.S. Government's multiple pipeline strategy proceeds from the premise that monopolies, whether in production or transportation, make neither commercial nor political sense. U.S. talks with the Russians last week recognized that this difference in approach could lead to competition between Russia on the one hand and the U.S. and the other countries of the Caspian region on the other. But commercial competition need not be dangerous or destabilizing as long as parties remain cognizant of shared interests and cognizant too that each of the countries in the Caucasus and Caspian has the right to make its own decisions on how to diversify risk and maximize trade opportunities.

Caspian gas exports provide a case in point. Turkey currently receives approximately 80 percent of its gas supplies from Russia. It has a contract to buy 16 billion cubic meters more via the Black Sea. So be it. But Turkey has signaled its desire also to diversify its suppliers of natural gas. It has concluded gas sales agreements with several producing nations. We have been most interested in a trans-Caspian gas pipeline. Like Turkey, we see a trans-Caspian pipeline as a means of fostering regional cooperation on both sides of the Caspian; providing a strategic link between Central Asia, the Caucasus, and the global economy via Turkey; and securing the economic prosperity of the gas-producing states. The point is that, in the area of gas pipelines, Turkey's cooperation with Russia and with Turkey's neighbors to the east need not be mutually exclusive. The same is true for the Caspian gas producers.

Realizing the trans-Caspian pipeline will require partnership among the region's countries and companies as well. In the case of Caspian gas exports to Turkey, any pipeline will need to take into account the economic interests of Turkmenistan and Azerbaijan as well as Georgia which will be a key transit state. The commercial benefits of such cooperation should be clear to all. For the U.S.' part, we stand ready to cooperate economically and politically with Turkmenistan, Azerbaijan, Georgia, and Turkey to achieve the early realization of trans-Caspian pipeline with the resultant gas deliveries to Georgia and Turkey, and to ensure the project's long-term success.

Finally, I'd like to say a word about Iran. Much has been said about the shifting tide of U.S. policy vis-a-vis Iran. President Clinton has taken visible steps to recognize the positive developments that have taken place in Iran and to give impetus to the government-to-government dialogue that the U.S. proposed some time ago. But the U.S. has not changed its policy on energy cooperation with Iran. The U.S. remains opposed to investment in Iran's energy sector and to the construction and use of pipelines to, from, or through Iran. There are serious issues that still divide the U.S. and Iran, and there will have to be real responses to these concerns before relations can improve. Regardless of the status of our relations with Iran, the United States will continue its strong support for Baku-Tbilisi-Ceyhan, a trans-Caspian gas pipeline, as well as the Caspian Pipeline Consortium and the other pipelines comprising the east-west energy corridor. We share the view of the region's governments that east-west pipelines strengthen the independence, cooperation, and integration of the new states of the Caspian and the community of western democratic nations. East-west pipelines enhance their energy security and that of the U.S. by diversifying sources and routes of supply and provide a highly attractive way of exporting Caspian energy resources to hard currency markets in southern Europe and beyond. For all of these reasons, we believe developing the east-west energy corridor is in the interests of all of our partners, both corporate and government, in the Caspian region.

A few of us were witness last fall to the remarkable sight of the region's Presidents signing, and President Clinton witnessing, the framework documents, Istanbul Declaration and the agreement on gas. The east-west energy corridor owes much to the vision and statesmanship personified in that signing -- and the personal role the region's leaders took. Energy cooperation is a tool, it is not the end in itself. The process of developing the Baku-Ceyhan and trans-Caspian pipelines entails more than just moving hydrocarbons from wells to markets. It helps ingrain legal systems and practices which attract investors beyond the energy companies, and it creates the habits of state practice that make it more likely in the future that differences -- and differences are inevitable -- will be resolved peacefully.

We have come far, but there is still much to do to maintain momentum and bring to fruition projects critical to the future of this region and critical to the welfare of the peoples who inhabit it.

[end of document]

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