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U.S. Department of State

Department Seal John S. Wolf, Special Advisor to the President and the
Secretary of State for Caspian Basin Energy Diplomacy

Remarks, Kazakhstan International Oil and Gas Exposition
Almati, Kazakhstan, October 4, 2000
Blue Bar

Mr. Prime Minister, ministers, and other distinguished guests, I am honored to have another opportunity to address the Kazakhstan International Oil and Gas Exposition. Last year, I devoted much of my remarks to explaining to you why I thought the Baku-Tbilisi-Ceyhan ( BTC) oil pipeline and a Caspian gas pipeline could and should be realized. That's old news. There's a new storyline today.

Today, the Baku-Tbilisi-Ceyhan project is moving ahead. While some will still quibble, largely for tactical reasons, whether BTC will or will not happen, I believe the big question today is a different one. The real issue today is not whether there will be a pipeline from Baku to Ceyhan, but rather, whether Kazakhstan will play a leading role in a project that could/should become known as the Aktau-Baku-Tbilisi-Ceyhan oil pipeline. Whether that happens will depend on decisions Kazakhstan and its foreign producers make in the near future, and these decisions cannot be postponed any longer.

Regarding gas, we have refocused on how to realize an early gas delivery system from the Caspian to Georgia, and Turkey. Negotiations are well advanced on a project from Azerbaijan. The aim must be to secure an agreement very soon, even this month, that will permit gas from Azerbaijan's Shah Deniz field to arrive in Georgia and Turkey by the winter of 2002/2003. We would still like to see Turkmenistan join the project when it is ready. But the energy needs of Georgia and Turkey can't wait for decisions that may, or may never, be made elsewhere. The Azeri project will be a vital complement, both economically and politically, to the work on the main export pipeline for Caspian oil.

Looking back, one cannot overstate the historic importance of the Baku-Tbilisi-Ceyhan framework agreements concluded last November in Istanbul. President Clinton called the signings one of the most significant foreign policy accomplishments of 1999. Now, it is time to extend this spirit of cooperation to include the governments and companies operating here on the eastern, side of the Caspian. We encourage Kazakhstan to join Azerbaijan, Georgia and Turkey and to become party to BTC's Inter-Government Agreement. Such a step would constitute a strong statement of the Kazakhstani Government's commitment to expanding its energy cooperation with its western neighbors.

By extending its reach across the Caspian Sea, an Aktau-Baku-Tbilisi-Ceyhan (ABTC) project would strengthen regional cooperation and stability, encourage economic linkages that can mitigate regional conflicts, and help Kazakhstan secure direct access to world markets via Turkey and the Mediterranean, without subjecting its vital exports to the uncertainties of geographic chokepoints such as the Turkish Straits or Hormuz.

The transportation corridor I describe isn't just a means for moving oil. The security and stability it portends are prerequisites for securing and sustaining the massive investment needed for Caspian energy projects to proceed. An east-west transportation corridor will bolster the independence and prosperity of the new states of the Caspian, strengthen regional cooperation, and enhance investment opportunities for U.S. and other companies. It also will increase global energy security and benefit international energy markets by providing a safe, new oil export route that reaches world markets directly. The U.S. approach is simple, straightforward, and basically unselfish when compared with the historic efforts of others in the region.

Let me re-emphasize one point. The United States derives no direct economic benefit from any particular pipeline routes. We have no territorial ambitions. Some consider the United States a relative newcomer to the Caspian region. True, but we think that we have brought a needed, new perspective. We and our western partners also have brought new investment, modern business techniques, and environmentally safe technologies that are accelerating the area's development. Our underlying objective is to empower the people and governments of the Caspian region to build sustainable and balanced economic growth; to construct efficient and just government structures; and to acquire the world-class technologies and techniques that will safeguard the Caspian Sea's fragile and long suffering environment.

In short, this empowerment aims to help the region's governments and peoples to make their own decisions about their lives, their political welfare, and their future economic prosperity. Big changes have happened over the past decade; much more still is needed. One parenthetic point -- the work of institution building, and help to people of this region to build modern institutions is not a responsibility of governments alone. You in the private sector need to play a very active role building public/private partnerships. Why, because as you have learned all around the world, it makes enormous business good sense.

The United States Government and its partners here in Kazakhstan, Azerbaijan, Georgia, and Turkey all understand that Caspian pipelines will not be built unless they are commercially viable. We all have worked together very hard over the past year to develop a legal and commercial framework for the Aktau-Baku-Tbilisi-Ceyhan export route that will stand up to the razor sharp scrutiny of prospective investors. That work is virtually done. According to yesterday's Wall Street Journal -- and I think Azerbaijan International Operating Company (AIOC) source is a good one -- a group of major oil producers will announce shortly their agreement with the Azerbaijan Government on a business framework agreement and begin the 19-month and $120-million process of basic and detailed engineering.

If there is to be an "Aktau" affixed to the phrase "Baku-Tbilisi-Ceyhan," the time to move is now -- let producers operating in Kazakhstan simply be shippers in a line built and operated by others. Some industry observers believe sufficient oil might be available in Azerbaijan alone to launch the project. I've heard some analysts speculate that the Main Export Pipeline's capacity may even end up being oversubscribed. Getting in now means having a voice in the pipeline's design, its management, its tariff structure, and Kazak produced oil would help secure the profitability of the project for decades to come. Just as importantly, it is what is needed to help complete the vision, to secure the cross-Caspian cooperation that is needed to build the region's new future.

Our own economic analysis, which tracks with research done by companies here in Kazakhstan, convinces us that Aktau-Baku-Tbilisi-Ceyhan will offer the cheapest, most efficient, and most reliable export route for the large new oil volumes that will come on stream in Kazakhstan over the next decade. We believe this relates specifically to the early oil project we expect Off-Shore Kazakhstan International Operating Company's Kashagan (OKIOC) partners to develop at Kashagan in the second half of this decade.

Our analysis takes into account the tremendous commercial risks that would arise from increased oil tanker traffic through the Turkish Straits over the next 10 years without a new main export pipeline to Ceyhan. Absent BTC, there could be by 2010 an average of four transits of 150,000-ton tankers through the Bosporus each day, every day. Imagine the potential liability shippers will face given the Bosporus' treacherous combination of swirling currents, submerged shipwrecks, tight turns, and continuous cross-traffic that is the municipal lifeline of Istanbul. It is neither reasonable nor realistic to imagine a few oil tankers will displace the increasing numbers of freight, commuter, fishing, and other vessels that also must compete for space in the narrow Bosporus.

Already, for safety reasons, Turkey closes the waterway to two-way traffic when ships longer than 200 meters seek to transit. Even under the best operating circumstances, and even with a sophisticated vessel tracking system, catastrophic risks will increase as the number of transits and tanker sizes increase. While several proposed Bosporus bypass pipelines have grabbed a few headlines, we do not view them as competitive with ABTC, given the added costs and environmental risks that would result from their construction and their dependence on additional loading and unloading of tankers.

We have no doubt that Turkey will honor fully its obligations under the Montreux Convention to maintain freedom of navigation through the Straits. At the same time, much has changed since the treaty was adopted in 1936. Aktau-Baku-Tbilisi-Ceyhan will help us all work together to ensure freedom of navigation through the Turkish Straits in an environmentally sound and safe way.

Aktau-Baku-Tbilisi-Ceyhan is not the only pipeline in town. Tomorrow, I will travel to Moscow, where I hope to hear more good news about how the CPC project remains on-track for commissioning next June. U.S. support for CPC remains constant. But as CPC approaches completion, we look forward to the Government of Kazakhstan growing increasingly active on ABTC, which President Nazarbayev has called Kazakhstan's top priority pipeline after the CPC project. Remember, even CPC shipments add to the problems of the Turkish Straits. Our policy of supporting multiple export pipelines is premised on the simple fact that monopolies make neither commercial nor political sense. Yes, pre-existing infrastructure, such as the Atyrau-Samara pipeline, should be utilized in a commercially rational way as part of a regional system of multiple pipelines. But competition helps investors spread risk, and competition is critical for ensuring transportation costs are set by the market, not monopoly rent seekers. We have already seen the positive effects of this competition as, simultaneous with our efforts to develop westward pipelines, shipments of Kazakhstani oil via other routes have gained increased export quotas and lower transit fees. This is no coincidence.

Our views on energy cooperation with Iran are well known. Those who predict swift change after our elections next month are taking a somewhat myopic view of the complex factors that any U.S. administration must consider -- not to mention politicians in Teheran. Whatever the course of U.S./Iran ties -- and it's Washington's hope that Iran will take specific steps that would allow the relationship to improve -- I see no likelihood of a change in U.S. support for the east-west energy corridor. It has its own separate and distinct rationale. Our policies in this region have strong bipartisan support in Washington; they build not on U.S. interests, but the interests of the region's governments, and they make sense economically.

Gas is another important part of the region's energy development. The United States strongly supports the efforts of Turkeys and Georgia to diversify their natural gas supplies. We support Azerbaijan's initiative to sell them gas, and to sell gas through Turkey to Europe. We expect a gas sales agreement between Turkey and Azerbaijan will be concluded this fall, and that construction of a gas export pipeline could ensure Caspian deliveries to Turkey and Georgia in the 2002/2003 heating season. Once completed, this pipeline will form a key part of the gas portion of the east-west energy corridor.

In Istanbul last fall, President Clinton said the Overseas Private Investment Corporation (OPIC) and the Ex-Im Bank would be ready when their help was sought by the Main Export Pipeline's investors. That commitment remains true, for both oil and gas transportation projects.

In closing, I would like to leave you all with the clear understanding that the interests I have outlined above that form the foundation of our Caspian energy policy are strategic constants. We are going to continue our principled support for the independence and prosperity, for regional cooperation, energy security and increased foreign investment. The east-west corridor will provide a cost effective and environmentally sound way of reaching those markets. As anyone will tell you who was fortunate enough to have witnessed the energy signing ceremony in Istanbul last fall, the cooperation embodied in the east west corridor can provide the kind of firm political and economic sinews that are needed for this diverse region to move beyond its fractious and too often tumultuous past to a future that offers opportunities and benefits for all its peoples, and great opportunities for foreign investors like those in the room today.

Thank you

[end of document]

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