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from: The Official Committee record
19 Mar 2004
SPEAKERS CONTENTS INSERTS Page 1 TOP OF DOC 48–119 CC 1998 U.S. INTERESTS IN THE CENTRAL ASIAN REPUBLICS HEARING BEFORE THE SUBCOMMITTEE ON ASIA AND THE PACIFIC OF THE COMMITTEE ON INTERNATIONAL RELATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTH CONGRESS SECOND SESSION FEBRUARY 12, 1998 Printed for the use of the Committee on International Relations Page 2 PREV PAGE TOP OF DOC COMMITTEE ON INTERNATIONAL RELATIONS BENJAMIN A. GILMAN, New York, Chairman WILLIAM GOODLING, Pennsylvania JAMES A. LEACH, Iowa HENRY J. HYDE, Illinois DOUG BEREUTER, Nebraska CHRISTOPHER SMITH, New Jersey DAN BURTON, Indiana ELTON GALLEGLY, California ILEANA ROS-LEHTINEN, Florida CASS BALLENGER, North Carolina DANA ROHRABACHER, California DONALD A. MANZULLO, Illinois EDWARD R. ROYCE, California PETER T. KING, New York JAY KIM, California STEVEN J. CHABOT, Ohio MARSHALL ''MARK'' SANFORD, South Carolina MATT SALMON, Arizona AMO HOUGHTON, New York TOM CAMPBELL, California JON FOX, Pennsylvania Page 3 PREV PAGE TOP OF DOC LINDSEY O. GRAHAM, South Carolina JOHN McHUGH, New York ROY BLUNT, Missouri KEVIN BRADY, Texas LEE HAMILTON, Indiana SAM GEJDENSON, Connecticut TOM LANTOS, California HOWARD BERMAN, California GARY ACKERMAN, New York ENI F.H. FALEOMAVAEGA, American Samoa MATTHEW G. MARTINEZ, California DONALD M. PAYNE, New Jersey ROBERT ANDREWS, New Jersey ROBERT MENENDEZ, New Jersey SHERROD BROWN, Ohio CYNTHIA A. McKINNEY, Georgia ALCEE L. HASTINGS, Florida PAT DANNER, Missouri EARL HILLIARD, Alabama BRAD SHERMAN, California ROBERT WEXLER, Florida STEVE ROTHMAN, New Jersey BOB CLEMENT, Tennessee BILL LUTHER, Minnesota JIM DAVIS, Florida Page 4 PREV PAGE TOP OF DOC RICHARD J. GARON, Chief of Staff MICHAEL H. VAN DUSEN, Democratic Chief of Staff Subcommittee on Asia and the Pacific DOUG BEREUTER, Nebraska, Chairman JAMES A. LEACH, Iowa DANA ROHRABACHER, California PETER T. KING, New York JAY KIM, California MATT SALMON, Arizona JON FOX, Pennsylvania JOHN M. McHUGH, New York DONALD A. MANZULLO, Illinois EDWARD R. ROYCE, California HOWARD L. BERMAN, California ENI F.H. FALEOMAVAEGA, American Samoa ROBERT E. ANDREWS, New Jersey SHERROD BROWN, Ohio MATTHEW G. MARTINEZ, California ALCEE L. HASTINGS, Florida ROBERT WEXLER, Florida MIKE ENNIS, Subcommittee Staff Director RICHARD KESSLER, Democratic Professional Staff Member DAN MARTZ, Counsel HEIDI L. HENNIG, Staff Associate Page 5 PREV PAGE TOP OF DOC C O N T E N T S WITNESSES The Honorable Robert W. Gee, Assistant Secretary for Policy, U.S. Department of Energy Professor S. Frederick Starr, Johns Hopkins University Mr. John J. Maresca, Unocal Corporation APPENDIX Prepared statements: The Honorable Robert W. Gee Professor S. Frederick Starr Mr. John J. Maresca Additional material submitted for the record: Opening statement for the record by The Honorable Benjamin A. Gilman, a Representative in Congress from New York and chairman, Committee on International Relations Opening statement submitted for the record by The Honorable Alcee Hastings, a Representative in Congress from Florida HEARING ON U.S. INTERESTS IN THE CENTRAL ASIAN REPUBLICS THURSDAY, FEBRUARY 12, 1998 House of Representatives, Subcommittee on Asia and the Pacific, Committee on International Relations, Page 6 PREV PAGE TOP OF DOC Washington, DC. The Subcommittee met, pursuant to notice, at 2:12 p.m., in room 2172, Rayburn House Office Building, Hon. Doug Bereuter (chairman of the Subcommittee) presiding. Mr. BEREUTER. [presiding] The Subcommittee on Asia and the Pacific will come to order. Before we begin today's hearing, the Chair would ask our witnesses' indulgence to take care of a small matter of Subcommittee business, H. Res. 350. [Whereupon, at 2:13 p.m., the Subcommittee proceeded to other business.] [Whereupon, at 2:26 p.m., the Subcommittee resumed this hearing.] Mr. BEREUTER. I would like to proceed to the subject of the hearing for today, U.S. interests in the Central Asian Republics. I do have a statement. One hundred years ago, Central Asia was the arena for a great game played by Czarist Russia, Colonial Britain, Napoleon's France, and the Persian and the Ottoman Empires. Allegiances meant little during this struggle for empire building, where no single empire could gain the upper hand. One hundred years later, the collapse of the Soviet Union has unleashed a new great game, where the interests of the East India Trading Company have been replaced by those of Unocal and Total, and many other organizations and firms. Today the Subcommittee examines the interests of a new contestant in this new great game, the United States. The five countries which make up Central Asia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, attained their independence in 1991, and have once again captured worldwide attention due to the phenomenal reserves of oil and natural gas located in the region. In their desire for political stability as well as economic independence and prosperity, these nations are anxious to establish relations with the United States. In response, last November, Secretary of Energy Frederico Pena led a Presidential mission to the Caspian-Central Asian region for discussions. The area's energy resources were also discussed during November visits to Washington of Kazakhstani President Nazarbayev and Uzbek Prime Minister Sultanov. Page 7 PREV PAGE TOP OF DOC Kazakhstan and Turkmenistan possess large reserves of oil and natural gas, both on-shore and off-shore in the Caspian Sea, which they urgently seek to exploit. Uzbekistan has oil and gas reserves that may permit it to be self-sufficient in energy and gain revenue through exports. Estimates of Central Asian oil reserves vary widely, but are usually said to rival those of the North Sea or Alaska. More accurate estimates of oil and gas resources await wider exploration and the drilling of test wells. Stated U.S. policy goals regarding energy resources in this region include fostering the independence of the States and their ties to the West; breaking Russia's monopoly over oil and gas transport routes; promoting Western energy security through diversified suppliers; encouraging the construction of east-west pipelines that do not transit Iran; and denying Iran dangerous leverage over the Central Asian economies. In addition, as has been noted by Deputy Secretary of State Strobe Talbott, the United States seeks to discourage any one country from gaining control over the region, but rather urges all responsible States to cooperate in the exploitation of regional oil and other resources. Central Asia would seem to offer significant new investment opportunities for a broad range of American companies which, in turn, will serve as a valuable stimulus to the economic development of the region. Japan, Turkey, Iran, Western Europe, and China are all pursuing economic development opportunities and challenging Russian dominance in the region. It is essential that U.S. policymakers understand the stakes involved in Central Asia as we seek to craft a policy that serves the interests of the United States and U.S. business. On the other hand, some question the importance of the region to U.S. interests, and dispute the significance of its resources to U.S. national security interests. Others caution that it will take a great deal of time and money to bring these resources to world markets. Still others point to civil and ethnic conflicts in Tajikistan and Afghanistan as a reason to avoid involvement beyond a minimal diplomatic presence in the area. Page 8 PREV PAGE TOP OF DOC The Subcommittee is fortunate to have an outstanding panel of witnesses today. Testifying for the Administration will be Mr. Robert Gee, Assistant Secretary of Policy for the Department of Energy. As Assistant Secretary, he is a principal advisor to the Secretary, Deputy Secretary, and Under Secretary of DOE on all domestic and international energy matters. In our distinguished panel of private witnesses, we are privileged to welcome Professor Frederick Starr, founder and current chairman of Johns Hopkins Central Asian-Caspian Institute. Professor Starr, former president of Oberlin College, and founder of the Kennan Institute of Advanced Russian Studies at the Wilson Center, is a recognized authority on Russian and Central Asian affairs, and has authored recent articles which outline the emerging geopolitical relations in the Central Asia and the Caspian basin. Mr. John Maresca is vice president of international relations for Unocal Corporation, one of the world's largest energy resource development companies. Prior to his Unocal service, Mr. Maresca enjoyed a successful diplomatic career, having served as U.S. ambassador to the Organization for Security and Cooperation in Europe, as well as minister in our U.S. embassy in France. It is also good to have him before our Subcommittee. Mr. Berman, I moved through the process of taking up the Sri Lanka amendment, deferred any action, and would open to you now any comments you might like to make on that resolution before we proceed. [Whereupon, the hearing recessed and proceeded to the markup.] Mr. BEREUTER. Returning now to the subject of this hearing, I would just conclude my opening remarks by saying consistent with the policy of the Subcommittee, I would tell our witnesses that their entire statement will be made a part of the record. But I would ask them to summarize their testimony, approximately in 10 minutes if they can, 10 minutes each, and thus allowing time for the Members' questions. Mr. Berman, I recognize you now as the Ranking Democrat Member for any comments you might like to make on the hearing today. Page 9 PREV PAGE TOP OF DOC Mr. BERMAN. Thank you very much, Mr. Chairman. The Subcommittee has only been given jurisdiction over this region in this session of Congress. Many of us are just learning about this area. But all of us are quickly understanding the vital importance of the Caucasus to our future. The fact that the Subcommittee is holding a hearing on the region when at the time so much of the world's attention is diverted to events in the Middle East I think should be considered a signal that the United States is not solely focused on the Iraqi situation. I know that some analysts believe that the recent assassination attempt at Georgian President Edward Shevardnadze and the forced resignation of Armenia's President Ter-Petrossian are not unrelated. Some believe that forces with differing agendas think that the diversion of world attention toward Iraq provides a chance to destabilize Central Asia, playing the traditional great game of espionage, deceit, and treachery in an effort to dominate the region. American interests in the region are simply to ensure its progressive political and economic development and to prevent it from being under the thumb of any outside power, be it Iran or Russia. This hearing is an opportunity to draw attention to that objective and to signal to everyone that we remain focused on it, even as crises develop elsewhere. The region's geographical placement, its tremendous energy resources, are of major concern to us. We will do all we can to assist in the exploitation of that resource in a manner that benefits the people of the region. I look forward to the hearing, and hearing from the witnesses. I want to thank the Chairman for holding this hearing today. Mr. BEREUTER. Thank you very much, Mr. Berman. Mr. Hastings, the gentleman from Florida, could not be with us because of a conflict. He is a Member of the Subcommittee, and asked that his statement be made a part of the record. Without objection, that will be the order. Page 10 PREV PAGE TOP OF DOC [The prepared statement of Mr. Hastings appears in the appendix.] Mr. BEREUTER. Mr. Secretary, we are pleased to have your attendance today. We look forward to your testimony. Proceed as you wish. STATEMENT OF ROBERT W. GEE, ASSISTANT SECRETARY FOR POLICY AND INTERNATIONAL AFFAIRS, DEPARTMENT OF ENERGY Mr. GEE. Thank you, Mr. Chairman. Good afternoon, Mr. Chairman and Members of the Committee. My name is Robert Gee, Assistant Secretary for the Office of Policy and International Affairs at the Department of Energy. I am pleased and honored to appear before this Committee today to report on the U.S. energy policy in the Caspian region. I welcome the opportunity to discuss our government's strategic and economic interests in this important region, our policy to advance those interests, and how we can achieve our goals. I also appreciate the opportunity to appear before you as you begin consideration of H.R. 2867, the House version of the Silk Road Strategy Act. While the Administration does not yet have a formal position on the bill, the underlying theme of the proposed legislation is consistent with our policy objectives and strategic goals in the region. To begin, you may ask why is the United States active in the region? The United States has energy security, strategic, and commercial interests in promoting Caspian region energy development. We have an interest in strengthening global energy security through diversification, and the development of these new sources of supply. Caspian export routes would diversify rather than concentrate world energy supplies, while avoiding over-reliance on the Persian Gulf. We have strategic interests in supporting the independence, sovereignty, and prosperity of the Newly Independent States of the Caspian Basin. We want to assist the development of these States into democratic, sovereign members of the world community of nations, enjoying unfettered access to world markets without pressure or undue influence from regional powers. Page 11 PREV PAGE TOP OF DOC We also have an interest in maximizing commercial opportunities for U.S. firms and for U.S. and other foreign investment in the region's energy development. In short, our interests are rooted in achieving multiple objectives. Rapid development of the region's energy resources and trade linkages are critical to the independence, prosperity, democracy, and stability of all of the countries of that region. Four factors frame our policy. First, promoting multiple export routes. The Administration's policy is centered on rapid development of the region's resources and the transportation and sale of those resources to hard-currency markets to secure the independence of these new countries. Accordingly, our government has promoted the development of multiple pipelines and diversified infrastructure networks to open and integrate these countries into the global market and to foster regional cooperation. We have given priority to supporting efforts by the regional governments themselves and the private sector to develop and improve east-west trade linkages and infrastructure networks through Central Asia and the Caucasus. A Eurasian energy transport corridor incorporating a trans-Caspian segment with a route from Baku, Azerbaijan, through the Caucasus and Turkey to the Mediterranean port of Ceyhan is inclusive, providing benefits to transit as well as energy-producing countries. Second, emphasizing commerciality. While we recognize the influence regional politics will play on the development of export routes, we have always maintained that commercial considerations will principally determine the outcome. These massive infrastructure projects must be commercially competitive before the private sector and the international financial community can move forward. Our support of specific pipelines, such as the Baku-Ceyhan oil pipeline and trans-Caspian oil and gas lines, is not driven by any desire to intervene in private commercial decisions. Rather, it derives from our conclusion that it is not in the commercial interest of companies operating in the Caspian States, nor in the strategic interests of those host States, to rely on a major competitor for transit rights. Page 12 PREV PAGE TOP OF DOC In general, we support those transportation solutions that are commercially viable and address our environmental concerns and policy objectives. Based on discussions with the companies involved, a Baku-Ceyhan pipeline appears to be the most viable option. We have urged the Turks to take steps to make Baku-Ceyhan a commercially attractive option. For our part, we are also looking at steps the United States can take to provide political risk guarantees and to foster cooperation among the regional States on an approach that can lead to a regional solution for the longer term. Third, cooperating with Russia. Our Caspian policy is not intended to bypass or to thwart Russia. In fact, two key projects closest to fruition go through Russia, those of the Azerbaijan International Operating Company northern early pipeline, and the Caspian Pipeline Consortium from Kazakhstan through Russia to the Black Sea port of Novorossiysk. We have also financed a major study to look at ways to export more volumes through the existing Russian pipeline system. Russia is in the midst of tremendous change in its energy policy, moving toward privatization and embracing market reform. Russian energy companies are deeply involved in Azerbaijan and Kazakhstan. We support continued Russian participation in Caspian production and transportation. We would also welcome their participation in the Eurasian corridor. U.S. companies are working in partnership with Russian firms in the Caspian, and there will be future opportunities to expand that commercial cooperation. Development of the region's energy resources creates opportunities for these countries to cooperate in new ways for the benefit of all. The pace and extent of that regional cooperation will have a direct effect upon the future economic prosperity of the individual States. The United States supports regional approaches to Caspian energy development. The Eurasian corridor will enhance Turkey's energy security through diversification, and will ensure that Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan have reliable and diversified outlets for their resources. Page 13 PREV PAGE TOP OF DOC This corridor also addresses squarely the environmental issues associated with the Bosporus. We share Turkey's environmental concerns about the potential increase in traffic through the straits. Further, we seek to avoid having the Bosporus become a chokepoint for a significant share of the world's oil supplies, heightening environmental concerns and possibly impeding the development of Caspian energy. Fourth, isolating Iran. Our policy on Iran is unchanged. The U.S. Government opposes pipelines through Iran. Development of Iran's oil and gas industry and pipelines from the Caspian Basin south through Iran will seriously undercut the development of east-west infrastructure, and give Iran improper leverage over the economies of the Caucasus and Central Asian States. Moreover, from an energy security standpoint, it makes no sense to move yet more energy resources through the Persian Gulf, a potential major hot spot or chokepoint. From an economic standpoint, Iran competes with Turkmenistan for the lucrative Turkish gas market. Turkmenistan could provide the gas to build the pipeline, only to see itself displaced ultimately by Iran's own gas exports. How are we implementing U.S. policy? First, we have stepped up our engagement with the regional governments through Cabinet level and senior level visits to the region, and have established formal government-to-government dialogs. We also have invited regional leaders to Washington. Our Cabinet officers also are deeply engaged. Last fall Secretary Pena led a very successful Presidential mission to Turkey, Armenia, Azerbaijan, Georgia, and Turkmenistan. Secretary Daly recently returned from a trade mission to Turkey. I had the privilege of leading an inter-agency delegation to Turkey in mid-January to discuss Turkey's strategy for moving forward with development of its energy sector, meeting the growing demand for electricity, diversifying its gas supplies, and identifying further steps for the developing and constructing of oil and gas pipelines through Turkey. Second, we are pursuing an aggressive strategy with the regional governments. The Eurasian energy transport corridor, spanning at least six countries and disputed regions, presents complicated problems for even the most efficient governments. The number of potential players ensures that negotiations and equity structures will be enormously complicated. The United States has stressed the importance of achieving agreement on concrete project proposals among the relevant countries as early as possible. Along these lines, we have encouraged the regional governments to accelerate multilateral discussions with their neighboring States and with the private sector shippers through the establishment of national working groups. These groups have a critical role in resolving regulatory, legal, tariff, and other issues that will make the Eurasian corridor most commercially attractive. Page 14 PREV PAGE TOP OF DOC In sum, we enthusiastically support an ongoing dialog with Congress on Caspian and Central Asian issues. We also support and encourage the positive contribution of the numerous congressional delegations that have traveled to the Caspian region. We must maintain the momentum behind our support for these governments and for our private sector. Developments this year will be critical in advancing regional energy development and export. We look forward to working with you in meeting the upcoming challenges. Mr. Chairman, that concludes my prepared remarks. I stand available to answer any questions you may have. Thank you. [The prepared statement of Mr. Gee appears in the appendix.] Mr. BEREUTER. Mr. Secretary, thank you very much for your concise testimony, very significant information presented to us. On page two, you talk about the Baku into Turkey route. You indicate that this should take—likely to take tax and tariff regime changes that are attractive and ensuring ways for acquisition and development, and that our government is looking at ways that we can provide some political risk guarantees. Obviously one of them would be the traditional route through OPIC. But also, we have the World Bank's similar institution. What did you learn in your recent visit to Turkey beyond what you have told us here, about Turkey's interest, the actions that Turkey is likely to take to facilitate the total implementation of that proposal? Mr. GEE. Turkey is keenly interested. They are interested in building infrastructure that not only would allow their country to be a transit route for the export of oil that would be taken from the Caspian Sea, but also they are keenly interested in providing a consumption market for the natural gas that would be developed in that region. They strongly favor a pipeline that would carry the volumes of oil and gas from Baku, Azerbaijan, through Georgia, and ultimately through Turkey, ending in Ceyhan, a port on the Mediterranean. They recognize that they need to take proper steps to reform some of their governmental infrastructure in order to make the environment much more commercially viable. Among other things, they are experiencing some difficulties in reforming some of their legal requirements relative to the privatization of the power generation market in order to allow private investment to come in, with the necessary guarantees of securing investment, to provide the gas market that would facilitate the transport of gas into Turkey. Page 15 PREV PAGE TOP OF DOC We have worked with them, have given them some technical advice on some of the aspects of private sector expectations that are necessary to make a pipeline commercially viable through that region. They have indicated to us that they are willing to take a leadership role, both in securing a consensus within their own government to try to make the governmental reforms occur on a timely basis. They have also offered to assert a leadership role within the entire region in talking with all of the neighboring States through which that pipeline would be routed. Mr. BEREUTER. What, if any, major impediments do you see on the ability of the Turkish Government to take those steps? What impediments or significant hurdles do they see and discuss with you? What is the progress of their visitation with their neighbors as we can best determine it? Mr. GEE. Let me take your questions one by one. They have within their own government obviously different individuals and different ministries that work under the leadership of their Prime Minister. We have been talking separately both with their Foreign Ministry and with their Energy Ministry to ensure that their decision making process internally within their government can be expedited. So I guess it would be fair to say that one of the subjects that we did discuss with them is how best to facilitate decision making within their own government, to give the private sector the necessary measures of expectations that are needed, such as the necessary tariff regime that's required to be adopted by law, the rights of way that are explicit, the environmental policies that need to be made explicit. We are working with them. They are obviously interested in making sure that they can make their decision making more expeditious so that the private sector can make their own decisions timely. Another matter that we discussed was engaging them with their neighboring States to talk about developing a consensus on some of the issues I have just described relative to the proper tax and tariff regime and rights of way. Since this pipeline would traverse multiple governments, it's very important for each of those affected transit governments to be working in close cooperation so that they can coordinate their policies together. They realize that talking to other neighboring States is not an easy process because this is the first time they have been required to work in such close collaboration on a project of this magnitude. But they have made commitments to us that they are willing to advance the ball in that direction. Page 16 PREV PAGE TOP OF DOC I do understand that they are sending representatives to our country at the end of this month so that we can continue to get a progress report on how well those discussions have ensued between themselves and the governments of their neighboring States. They have committed to us that they will be working with the Foreign Ministry of each of those neighboring States through which the pipeline would be routed. We are looking forward to getting a progress report from them later this month. Mr. BEREUTER. Thank you. We would very much of course like to have an opportunity to also have that information from the department. I did mention, without asking a question, the role of OPIC and of course the multilateral organization, MEGA. OPIC would facilitate American firms' participation. We would expect to see other countries do something similar in a worthy project. Is it essential to the Turkish Government that there be a multilateral investment guarantee agency or are they satisfied with simply the various developed countries that have such loan guarantee programs like OPIC, to provide them one by one under a competitive kind of environment? Mr. GEE. I think that they are holding their options open. They expressed interest in whatever level of U.S. Government support could be provided, whether it's in the form of loan guarantees, underwriting insurance. We indicated to them that we are in discussions with OPIC, Eximbank, to see at what level of participation they could be involved. They have indicated to us that they are looking at the proper steps that need to be taken for their involvement. In fact, we did take an OPIC consultant with us on our visit to Turkey to give them advice on the fundamentals of pipeline finance so that they could begin to understand better exactly what the private sector requires and so that OPIC itself could be in a position to become a more active player. I think that the government of Turkey is willing to entertain any opportunities for the U.S. agencies to be involved. I think that they would also welcome other international agency participation as well. Page 17 PREV PAGE TOP OF DOC Mr. BEREUTER. Are there any impediments in American law to our cooperation and assistance to Turkey and to the countries of this region? Are there any, for example, sanctions in place that would have a negative effect? Mr. GEE. I think the only obstacle that we see, and I think it's indicated in my testimony, is section 907 of the Freedom Support Act. It has hindered our ability in working closer with the government of Azerbaijan, which is obviously an affected government through which oil and gas would be transported. In helping facilitate that government's development toward a transparent reliable legal regime, we have worked with the neighboring States of that region to build new legal institutions through the democratization process. Unfortunately, section 907 has been a barrier in our efforts to bring along similar improvements in Azerbaijan. That would be the only existing obstacle that I could relay to you today, Mr. Chairman. Mr. BEREUTER. Switching geography slightly, what is the status of proposals by Unocal and others to build a gas pipeline through Afghanistan to Pakistan? Mr. GEE. Perhaps the Unocal witness can give you more detail. I do understand that they do have an agreement with the government of Turkmenistan. They have also been in discussions with the various factions within Afghanistan through which that proposed pipeline would be routed. The U.S. Government's position is that we support multiple pipelines with the exception of the southern pipeline that would transit Iran. The Unocal pipeline is among those pipelines that would receive our support under that policy. I would caution that while we do support the project, the U.S. Government has not at this point recognized any governing regime of the transit country, one of the transit countries, Afghanistan, through which that pipeline would be routed. But we do support the project. Mr. BEREUTER. Secretary Gee, could you briefly tell us what the formal Chinese involvement in the region is at this moment with respect to energy resources? Page 18 PREV PAGE TOP OF DOC Mr. GEE. I believe China is interested in a potential project that would allow Turkmenistan production to be transported in an easterly direction through a pipeline that some have estimated would cost anywhere from $10 to $12 billion. Most technical experts are of the view that this is a project which is not feasible for the near or intermediate term. It may well be something that could be viable in the long term, particularly as the countries of East Asia undergo economic development and as their energy requirements begin to surge. But, given the enormous capital cost that undertaking the project would entail, it is not one of the projects that most observers are focused on over the next 5- to 10-year horizon. Mr. BEREUTER. Thank you. It is my pleasure now to turn to the distinguished Ranking Democrat Member of the Subcommittee, Mr. Berman, for comments or questions. Mr. BERMAN. Thank you very much, Mr. Chairman. I don't know all that much about the energy business generally nor this area specifically. So I would like to get a little help from you, if I could. The Baku-Ceyhan oil pipeline goes from Baku to Ceyhan. Where is Ceyhan? Mr. GEE. Mr. Congressman, Ceyhan is located at the southern part of Turkey near the Turkish-Syrian border. I don't know if you have a map before you. Mr. BERMAN. Yes. Alright. So it's—— Mr. GEE. It's on the Mediterranean Sea coast in southern Turkey. Mr. BERMAN. So this is how you avoid the Bosporus chokepoint? Mr. GEE. Correct. We would bypass the Bosporus, which is located in a northwesterly direction. Mr. BERMAN. Yes. I see that. Mr. GEE. It would bring the supply on a land-based route to the Mediterranean. Page 19 PREV PAGE TOP OF DOC Mr. BERMAN. Are pipelines exclusively oil or gas? Mr. GEE. The proposal is that there could be potentially both an oil and gas transit route that would run along parallel paths. This particular delivery point I believe is generally contemplated to be oil because that's where the oil would be discharged and loaded upon tankers. But the particular route could also be used for a parallel gas line that could be used to connect with the distribution grid within Turkey to serve Turkey as a gas market. Mr. BERMAN. And how would countries like Turkmenistan or Uzbekistan or Kazakhstan feed into this pipeline? Mr. GEE. That pipeline would require the building of a sub-sea pipeline through the Caspian Sea, roughly from Turkmenistan to Baku. There are different possible routes that this pipeline could transit, but generally it would run in the water on a sub-sea basis connecting at Baku in Azerbaijan. The pipeline would then go from Baku to—— Mr. BERMAN. This pipeline would have to go through Azerbaijan and Armenia I take it? Mr. GEE. One of the routes I saw would actually go around Armenia. Mr. BERMAN. Through Georgia? Mr. GEE. Through Georgia, yes. Mr. BERMAN. That would not be the most direct way. Mr. GEE. Correct. Mr. BERMAN. So the pipeline would go sub-Caspian Sea to some port presumably on the eastern side of the Caspian? Mr. GEE. Yes, in Baku. Mr. BERMAN. And then would be connected with other pipelines or would it be—— Page 20 PREV PAGE TOP OF DOC Mr. GEE. There is currently a pipeline that is already in place from Baku that goes northward and terminates in Novorossiysk, which is on the coast of the Black Sea in Russia. Mr. BERMAN. I am thinking of how Uzbekistan, Kazakhstan—is this a pipeline for their use or is this primarily for Caspian Sea oil? Mr. GEE. It would be a pipeline generally for production from Kazakhstan and Turkmenistan, which is where most of the potential reserves are thought to be located. Mr. BERMAN. In oil, OK. You write in your testimony, and you have said it as well, our support for this pipeline derives from our belief that it is not in the commercial interests of companies operating in the Caspian States nor in the strategic interest of the host States to rely on a single major competitor for transit rights. Who are you talking about? Mr. GEE. We are talking specifically about Russia and Iran, which would be potentially the two dominant players where most of the transit routes are situated in those two countries. Mr. BERMAN. We see transit routes, at least on that map. Obviously it's not a map of current pipelines because it has the Baku-Ceyhan pipeline, but you in your testimony mentioned there are now pipelines going from Baku through Russia, emptying in the Black Sea, right? Mr. GEE. Yes. Mr. BERMAN. So there is no pipeline at this present time from this area through Iran to the Persian Gulf. Is that correct? Mr. GEE. That's correct. Mr. BERMAN. And you do not take an Iranian pipeline as the appropriate competition for the Russian pipeline? Page 21 PREV PAGE TOP OF DOC Mr. GEE. Correct. Mr. BERMAN. That doesn't solve the problem. Mr. GEE. That is not an alternative. That is correct. Mr. BERMAN. The last Turkish Government, I believe, announced a deal with Iran to build a pipeline, I'm not sure if it was from this area, but it was a trans-Iranian pipeline. Mr. GEE. Yes. Mr. BERMAN. Through Turkey to empty I think in the Mediterranean. I haven't heard much about this agreement. What is the status of it? Mr. GEE. I believe you are referring to the agreement to purchase Turkmenistan gas. It was Turkey's purchase of Turkmen-istan gas that would be transported through Iran. It is my understanding that that particular agreement for that production is still in place. The building of the pipeline is the next critical phase that would transport that production from Turkmenistan through Iran. That is one of the projects that we are opposed to. The actual transaction is already in place. It is going to be dependent upon building the facilities that would transit that gas from Turkmenistan to Iran. Mr. BERMAN. Let me spin out a scenario here. I would like just to get your implications. Let's just say that the French and the Russians decided to make a major energy investment in Iran and it went ahead without any sanctions from the United States. Would you anticipate then that there would be other oil companies, energy companies that would seek then to move ahead on an Iranian pipeline to transmit Central Asian oil and gas reserves through Iran? Mr. GEE. Are you asking me if that were in the event there were no sanctions imposed by the United States? Mr. BERMAN. Yes. Mr. GEE. In the absence of ILSA or a decision by the United States not to impose sanctions which is now pending. Page 22 PREV PAGE TOP OF DOC Mr. BERMAN. Let's assume there was a waiver of the sanctions. Do you think that that act would encourage energy companies then to more seriously pursue the trans-shipping through Iran of Central Asian oil? Mr. GEE. That is a difficult question to answer. Mr. BERMAN. Why? It seems easy. Mr. GEE. Because, among other things, we have talked to a number of private sector companies who have indicated to us that even in a scenario, assuming the United States had normalized relations with Iran in the absence of ILSA, there is still some country risk relative to investments in Iran because of the unpredictability of the decision making process in Iran. I think that ultimately a commercial decision in the private sector would have to be made, factoring in all of these factors. I am not in the private sector. Mr. BERMAN. Well, Total is not a fly by-night operation. I understand it was a pretty good investment. Mr. GEE. I can only tell you based upon my discussions with members of the private sector. They have indicated to us that it would not be a certainty that they would necessarily seek to invest in Iran, even in the absence of sanctions. Mr. BERMAN. Let's put it a different way. Do you think the waiver of sanctions or the failure to impose sanctions would enhance the likelihood that these companies would more seriously consider investments in a trans-Iranian pipeline? Mr. GEE. I know that it would be a factor. I don't know whether that would be dispositive in ultimately forcing a decision in that direction, all things considered. Mr. BERMAN. Given our sanctions on our own American companies, would the consequence of European and other companies investing in such a pipeline put American energy companies at a competitive disadvantage? Page 23 PREV PAGE TOP OF DOC Mr. GEE. I would say it would depend. It would depend both upon exactly what other opportunities there are relative to the other investments in the Caspian. It would depend again upon how an individual company assesses country risk within Iran. If a company has determined that the existing Iranian regime or the Iranian regime for the foreseeable future is inherently unreliable in terms of committing a large capital investment, they may well conclude that this is a competitive market they wish to forego, even though others in the private sector have reached opposite conclusions. Mr. BERMAN. I'll stop my questioning at this point. I understand your predicament. Mr. GEE. Right. Mr. BERMAN. But I think it's fair to say that American efforts to dissuade the Europeans and others from investing in Iran was not out of a concern that those companies were seeking to engage in a commercially risky venture in a politically unreliable country. It was to achieve, I think, an important political and economic and security goals for, we thought, the United States, and these other countries should be sharing together. It was not an effort to persuade European-based companies these were commercially risky and you'd be making a terrible mistake. Thank you, Mr. Chairman. Mr. GEE. I understand. Let me add too that I think any company that assumes that a waiver by the United States of those foreign companies involved in that transaction signals an unwillingness of the United States to enforce the law under ILSA, is going to be proceeding at great risk. So I don't think it is reasonable to conclude necessarily that any U.S. company would necessarily jump into it feet first. They would have to assess whether the U.S. Government would look favorably upon their activity in that region. Mr. BERMAN. No, I understand that. I just didn't think the U.S. companies are at a significant competitive disadvantage. Thank you very much. Page 24 PREV PAGE TOP OF DOC Mr. GEE. Yes. Mr. BEREUTER. Mr. Secretary, I have two specific questions. The staff did hand me the note, if I interpret it correctly, that Royal Dutch has indicated it might invest $2 billion in a trans-Iranian line to Turkey? Is that correct? Mr. GEE. That's correct. Mr. BEREUTER. There is an oil field in Kazakhstan, Tengiz, or something like that. Mr. GEE. The Tengiz oil field, yes. Mr. BEREUTER. Reportedly the world's largest known untapped field. That may be subject to dispute. It began to be exploited apparently most recently about 1993, I am told. How much have U.S. firms invested? Have they received any substantial return on their investment at this point? Mr. GEE. I believe that the transit route for that field is still under development. I don't know whether there have actually been sales of production from the Tengiz field. I am informed by our staff that there have been sales from that field. I can provide that information to you. We don't have it available today as to any specific volumes or monetary returns from that sale. [Mr. Gee's reply was submitted following the hearing.] According to our calculations, total foreign direct investment in Kazakhstan's oil and gas sector from 1991 through 1996 was approximately U.S. $2 billion. Total commitments for new, future direct investment in Kazakhstan's oil and gas development now stands at over U.S. $35 billion. The Tengiz field has estimated reserves of 24 billion barrels of crude oil and over 1800 billion cubic meters of associated natural gas. Oil production has slowly risen to its current level of approximately 160,000 barrels per day. Production is currently being hampered by limited access to export pipelines. Once the Caspian Pipeline Consortium pipeline is constructed, oil production from Tengiz is expected to increase to 750,000 barrels per day by 2010. Even at production of 160,000 barrels per day, the venture has been profitable. Tengizchevroil, the consortium producing the Tengiz field, reported profits of U.S. $80 million in 1996, up from only U.S. $1 million in 1995. Page 25 PREV PAGE TOP OF DOC Mr. BEREUTER. Finally, Kazakhstan and Azerbaijan have agreed to explore building a large oil pipeline from Kazakhstan through Turkmenistan and under the Caspian Sea. We have had reference to that earlier, to link up with the plan, Azerbaijan-Georgian pipeline to Turkey. What support has the United States given to this plan beyond what we have talked about with respect to Turkey? Anything in addition to what we have been doing with the Turkish Government? Mr. GEE. This is the oil pipeline that would go from Kazakhstan, Turkmenistan—— Mr. BEREUTER. Yes. Mr. GEE. And then to Azerbaijan, Baku? Mr. BEREUTER. Then across the Caspian to Baku. Mr. GEE. This project that you have described is part and parcel, a piece of the entire project that the United States is vigorously seeking—— Mr. BEREUTER. What specifically in support have we given beyond what we have done to encourage the Turkish Government to make changes? Mr. GEE. Secretary Pena, when he was in that region in November, met with the Heads of State, I believe almost all of the Heads of State of those countries that you have just described. He was able to get from them assurances that they would give serious consideration. Mr. BEREUTER. Is there any financial support in any fashion or incentives that have been delivered at this point? Mr. GEE. The United States, to my knowledge, has not given in the form of any loan guarantees or insurance underwriting any specific support. I believe there may have been some participation by one of our agencies on some feasibility studies, but in terms of any underwriting support, as far as I know there have been none yet. Page 26 PREV PAGE TOP OF DOC Mr. BEREUTER. Thank you. Mr. Secretary, I appreciate very much your testimony. Are there any final words that you would like to call attention to here before you leave? Mr. GEE. My staff and I are available at your leisure for any additional discussions you may wish to have in private. We welcome the opportunity to engage you and your staff more deeply in this subject. It is a critical area and a high priority for our department to advance U.S. interests abroad. We welcome the opportunity to work with you. Mr. BEREUTER. Mr. Secretary, if you think that it would be appropriate from your point of view, for us to be informed in a classified briefing, would you let us know? Our Subcommittee would be convened for that purpose. Mr. GEE. Yes. I appreciate that. Mr. BEREUTER. Thank you. Mr. GEE. Thank you. Mr. BEREUTER. Thank you very much. We now call the second panel of two witnesses. Please come forward. Gentlemen, thank you very much for agreeing to testify today. We very much appreciate that you have done that. I have made a brief introduction for you previously. I think you were both in the room to hear that. Your entire statements will be made a part of the record. I would ask you to summarize, if you can, in approximately 10 minutes or so. Professor Starr, we'll proceed with you first since you are listed first. STATEMENT OF FREDERICK STARR, CHAIRMAN, CENTRAL ASIA INSTITUTE, NITZE SCHOOL OF ADVANCED INTERNATIONAL STUDIES, JOHNS HOPKINS UNIVERSITY Mr. STARR. Thank you very much. Mr. Chairman, I welcome the opportunity to comment on H.R. 2867 and also on the question of exploitation of Central Asian and Caspian energy. I want to note parenthetically that it has taken a while for U.S. policy to recognize this part of the world as warranting the kind of attention that it is now getting in your Committee rather than treating it as a sub-issue of some other world region. This is a very welcome step indeed. Page 27 PREV PAGE TOP OF DOC In this progress toward formulating an American policy toward this region, it seems to me that the so-called Silk Road Strategy Act, H.R. 2867, goes further than any previous official act of the U.S. Government toward translating our principles with regard to this region into concrete action. I want to comment if I may, on only a couple of points in the act. First, I want to observe that money is to be provided to enable the countries of the region to develop their security to the point that they can protect their borders from trans-border drug trafficking, arms trading, and organized crime. This is a laudable goal. I would simply note that, beyond this, the securing of one's border is an essential feature of sovereignty, and that this is therefore a very important measure indeed. I hope when the time comes, that we are generous in providing help of this sort because it is, as I say, an essential element of the development of the new states' sovereignty. Second, with regard to support for infrastructure development in the area: H.R. 2867 lists various areas in which infrastructure can be provided. I would like to suggest that water be added to this list as well. You know that Central Asia is a very arid region. For thousands of years conflicts over water have been among the most hard fought in the region. There is much knowledge that can be brought to bear on water problems there from elsewhere, including our own country. We should be eager to do so. Third, with regard to infrastructure projects: the legislation refers to ''energy'' and to support of projects for the transmission of gas and oil. It does not specify electricity. I would like to suggest that this be done. The two poorest countries of Central Asia in terms of resources are Tajikistan and Kyrgyzstan. Both of them are rich in water and rich in hydro-electric potential. Anything we can do to help them develop those assets will go far toward making them economically viable. Now please permit me to turn to the second issue before the Subcommittee, namely the exploitation of energy reserves in the region. The U.S. Government has over the last several years enunciated a series of what seem to me very sound principles on this. These have been repeated for us this afternoon by Secretary Gee. I have nothing to add. What I want to suggest is that these laudable principles are very complex in their application. If there exist problems, it is in the transition, if you will, from ''cup to lip''. Page 28 PREV PAGE TOP OF DOC I would like to draw your attention here to several concerns in the application of the principles that govern our action with regard to pipeline development. First, much has been said about the ''East-West energy corridor''. This corridor places Azerbaijan at the hub. That country is in an absolutely crucial position for the transport of energy not only from Azerbaijan itself, but from across the Caspian. Yet the section 907 of the Freedom Support Act of 1992 prevents the United States from extending to Azerbaijan most of the assistance that other Newly Independent States are receiving in order to foster their development. In other words, with one hand we are placing Azerbaijan in a position that calls for stable, free development, and internal security. Then with the other, we are undermining Azerbaijan's ability to achieve these ends. Meanwhile, the location of its neighboring State, Armenia, is problematic. Its border is a mere 4 miles from the pipeline that has been discussed here. Armenia has recently witnessed a seizure of power by a veiled military coup. This is the first and only military seizure of power to occur in any of the Newly Independent States. Prior to that, Armenia had a notoriously corrupt election. All this in a country that is receiving more support per capita from the United States under the Freedom Support Act than any other country. I would therefore propose that the Subcommittee consider removing the contradiction to U.S. principles and policy objectives in the region by striking section 499(F)(d)(3) from the proposed legislation. The second issue that I want to raise here concerns the place of Iran in our policy toward Central Asian energy. Let me stress and stress several times if necessary, that I am not here to defend or to criticize our policy toward Iran. Under any circumstances I would not consider myself qualified to do so. My concern here is to point out the apparent conflict between our goals in Central Asia and the Caspian and our policies vis a vis Iran. Now, I won't review the various legislative acts that are relevant here. I want simply to say that the heaviest burden of the measures we are taking toward Iran fall disproportionately on Azerbaijan, Kazakhstan and Turkmenistan, for it prevents them from exporting their gas and oil by one of the obvious alternative routes to Russia, namely Iran. The U.S. position has been to argue that this would not be in the Central Asians' own interest. None of our friends in the region agree. Page 29 PREV PAGE TOP OF DOC Meanwhile, French, Malaysian, Russian firms are already investing in the construction of facilities in Iran. Thus, a pipeline is being constructed across northern Iran from Turkmenistan. The United States has not objected to this, by the way. Turkmenistan and Kazakhstan are working out swap deals with Teheran to enable them, in effect, to export through Iran without really doing so. In short, the American quarantine of 1995–1996 is not holding. The recent events within Iran exacerbate this situation. I won't review them for they are well known to you: The election of President Khatami, his New Year's statements, et cetera. The impact of these is to change the environment for investment in the Caspian east-west pipeline. Everyone is waiting. There is no money yet in hand to build this supposedly favored pipeline. People are correctly waiting to see what is going to happen because anything in Iran will change the economic coefficients with regard to this project, on which the United States has placed such emphasis. It seems to me this leaves us with three options. First, the United States can seek to impose its sanctions against those investing in Iran with such severity as to cut off the flow of funds and projects. The problem with this is that events in Iran are making this approach more difficult to defend and are likely to make it even less sustainable in the future. Second, the United States can acknowledge that its policies toward Armenia and Iran are adding to the risk and cost of the east-west pipeline and seek to neutralize that political cost through additional forms of subsidies that would, if you will, create a level playing field for market forces. I would imagine, however, that such subsidies would raise eyebrows among those who would see them as unwarranted support for one favored industry over others. Third, the United States can adopt a wait-and-see posture toward Iran, one that would replace our current all-or-nothing approach. The objective of this wait-and-see approach would be to find a lot of nicely calibrated positions between all and nothing. I spell them out in the written statement. Suffice it to say that, by having such intermediate positions, we would be able to respond not only more effectively, but also more proactively to the evolving situation throughout the region as well as in Iran. Page 30 PREV PAGE TOP OF DOC On balance, it seems to me that the third of these alternatives holds the most promise for achieving a balance between U.S. objectives in Central Asia and the Caspian, on the one hand, and in Iran. But my point in raising them is not to champion one course of action or another. Rather, it is to suggest that it is no longer possible to treat U.S. policy toward Central Asia and toward Iran as totally separate from one another. Our Iranian policy, however just its goals, has a powerful and, for the most part, negative impact on our ability to achieve our stated objectives in Central Asia and the Caspian. Simply to acknowledge this reality would be to open a path to more sustainable effective policies toward both areas. Thank you, Mr. Chairman. [The prepared statement of Mr. Starr appears in the appendix.] Mr. BEREUTER. Thank you very much, Mr. Starr. Next we would like to hear from Mr. John J. Maresca, vice president of international relations, Unocal Corporation. You may proceed as you wish. STATEMENT OF JOHN J. MARESCA, VICE PRESIDENT OF INTERNATIONAL RELATIONS, Unocal CORPORATION Mr. MARESCA. Thank you, Mr. Chairman. It's nice to see you again. I am John Maresca, vice president for international relations of the Unocal Corporation. Unocal, as you know, is one of the world's leading energy resource and project development companies. I appreciate your invitation to speak here today. I believe these hearings are important and timely. I congratulate you for focusing on Central Asia oil and gas reserves and the role they play in shaping U.S. policy. I would like to focus today on three issues. First, the need for multiple pipeline routes for Central Asian oil and gas resources. Second, the need for U.S. support for international and regional efforts to achieve balanced and lasting political settlements to the conflicts in the region, including Afghanistan. Third, the need for structured assistance to encourage economic reforms and the development of appropriate investment climates in the region. In this regard, we specifically support repeal or removal of section 907 of the Freedom Support Act. Page 31 PREV PAGE TOP OF DOC Mr. Chairman, the Caspian region contains tremendous untapped hydrocarbon reserves. Just to give an idea of the scale, proven natural gas reserves equal more than 236 trillion cubic feet. The region's total oil reserves may well reach more than 60 billion barrels of oil. Some estimates are as high as 200 billion barrels. In 1995, the region was producing only 870,000 barrels per day. By 2010, western companies could increase production to about 4.5 million barrels a day, an increase of more than 500 percent in only 15 years. If this occurs, the region would represent about 5 percent of the world's total oil production. One major problem has yet to be resolved: how to get the region's vast energy resources to the markets where they are needed. Central Asia is isolated. Their natural resources are landlocked, both geographically and politically. Each of the countries in the Caucasus and Central Asia faces difficult political challenges. Some have unsettled wars or latent conflicts. Others have evolving systems where the laws and even the courts are dynamic and changing. In addition, a chief technical obstacle which we in the industry face in transporting oil is the region's existing pipeline infrastructure. Because the region's pipelines were constructed during the Moscow-centered Soviet period, they tend to head north and west toward Russia. There are no connections to the south and east. But Russia is currently unlikely to absorb large new quantities of foreign oil. It's unlikely to be a significant market for new energy in the next decade. It lacks the capacity to deliver it to other markets. Two major infrastructure projects are seeking to meet the need for additional export capacity. One, under the aegis of the Caspian Pipeline Consortium, plans to build a pipeline west from the northern Caspian to the Russian Black Sea port of Novorossiysk. Oil would then go by tanker through the Bosporus to the Mediterranean and world markets. The other project is sponsored by the Azerbaijan International Operating Company, a consortium of 11 foreign oil companies, including four American companies, Unocal, Amoco, Exxon and Pennzoil. This consortium conceives of two possible routes, one line would angle north and cross the north Caucasus to Novorossiysk. The other route would cross Georgia to a shipping terminal on the Black Sea. This second route could be extended west and south across Turkey to the Mediterranean port of Ceyhan. Page 32 PREV PAGE TOP OF DOC But even if both pipelines were built, they would not have enough total capacity to transport all the oil expected to flow from the region in the future. Nor would they have the capability to move it to the right markets. Other export pipelines must be built. At Unocal, we believe that the central factor in planning these pipelines should be the location of the future energy markets that are most likely to need these new supplies. Western Europe, Central and Eastern Europe, and the Newly Independent States of the former Soviet Union are all slow growth markets where demand will grow at only a half a percent to perhaps 1.2 percent per year during the period 1995 to 2010. Asia is a different story all together. It will have a rapidly increasing energy consumption need. Prior to the recent turbulence in the Asian Pacific economies, we at Unocal anticipated that this region's demand for oil would almost double by 2010. Although the short-term increase in demand will probably not meet these expectations, we stand behind our long-term estimates. I should note that it is in everyone's interest that there be adequate supplies for Asia's increasing energy requirements. If Asia's energy needs are not satisfied, they will simply put pressure on all world markets, driving prices upwards everywhere. The key question then is how the energy resources of Central Asia can be made available to nearby Asian markets. There are two possible solutions, with several variations. One option is to go east across China, but this would mean constructing a pipeline of more than 3,000 kilometers just to reach Central China. In addition, there would have to be a 2,000-kilometer connection to reach the main population centers along the coast. The question then is what will be the cost of transporting oil through this pipeline, and what would be the netback which the producers would receive. For those who are not familiar with the terminology, the netback is the price which the producer receives for his oil or gas at the wellhead after all the transportation costs have been deducted. So it's the price he receives for the oil he produces at the wellhead. Page 33 PREV PAGE TOP OF DOC The second option is to build a pipeline south from Central Asia to the Indian Ocean. One obvious route south would cross Iran, but this is foreclosed for American companies because of U.S. sanctions legislation. The only other possible route is across Afghanistan, which has of course its own unique challenges. The country has been involved in bitter warfare for almost two decades, and is still divided by civil war. From the outset, we have made it clear that construction of the pipeline we have proposed across Afghanistan could not begin until a recognized government is in place that has the confidence of governments, lenders, and our company. Mr. Chairman, as you know, we have worked very closely with the University of Nebraska at Omaha in developing a training program for Afghanistan which will be open to both men and women, and which will operate in both parts of the country, the north and south. Unocal foresees a pipeline which would become part of a regional system that will gather oil from existing pipeline infrastructure in Turkmenistan, Uzbekistan, Kazakhstan and Russia. The 1,040-mile long oil pipeline would extend south through Afghanistan to an export terminal that would be constructed on the Pakistan coast. This 42-inch diameter pipeline will have a shipping capacity of one million barrels of oil per day. The estimated cost of the project, which is similar in scope to the trans-Alaska pipeline, is about $2.5 billion. Given the plentiful natural gas supplies of Central Asia, our aim is to link gas resources with the nearest viable markets. This is basic for the commercial viability of any gas project. But these projects also face geopolitical challenges. Unocal and the Turkish company Koc Holding are interested in bringing competitive gas supplies to Turkey. The proposed Eurasia natural gas pipeline would transport gas from Turkmenistan directly across the Caspian Sea through Azerbaijan and Georgia to Turkey. Of course the demarcation of the Caspian remains an issue. Last October, the Central Asia Gas Pipeline Consortium, called CentGas, in which Unocal holds an interest, was formed to develop a gas pipeline which will link Turkmenistan's vast Dauletabad gas field with markets in Pakistan and possibly India. The proposed 790-mile pipeline will open up new markets for this gas, traveling from Turkmenistan through Afghanistan to Multan in Pakistan. The proposed extension would move gas on to New Delhi, where it would connect with an existing pipeline. As with the proposed Central Asia oil pipeline, CentGas can not begin construction until an internationally recognized Afghanistan Government is in place. Page 34 PREV PAGE TOP OF DOC The Central Asia and Caspian region is blessed with abundant oil and gas that can enhance the lives of the region's residents, and provide energy for growth in both Europe and Asia. The impact of these resources on U.S. commercial interests and U.S. foreign policy is also significant. Without peaceful settlement of the conflicts in the region, cross-border oil and gas pipelines are not likely to be built. We urge the Administration and the Congress to give strong support to the U.N.-led peace process in Afghanistan. The U.S. Government should use its influence to help find solutions to all of the region's conflicts. U.S. assistance in developing these new economies will be crucial to business success. We thus also encourage strong technical assistance programs throughout the region. Specifically, we urge repeal or removal of section 907 of the Freedom Support Act. This section unfairly restricts U.S. Government assistance to the government of Azerbaijan and limits U.S. influence in the region. Developing cost-effective export routes for Central Asian resources is a formidable task, but not an impossible one. Unocal and other American companies like it are fully prepared to undertake the job and to make Central Asia once again into the crossroads it has been in the past. Thank you, Mr. Chairman. [The prepared statement of Mr. Maresca appears in the appendix.] Mr. BEREUTER. Thank you, Mr. Maresca. In light of what you just said, I thought you might be interested to know I actually have a draft resolution on Afghanistan we have been looking at up here today which does indeed weigh in strongly in behalf of the U.N. peace process. Mr. Rohrabacher, it's good to see you. We'll proceed now with the questions. Thanks to both of you for your testimony. I think I'll start with Mr. Starr. I think we have adequate time for Mr. Rohrabacher and I to pursue all the questions we have here, so I'm not going to use the 5-minute light here today. Page 35 PREV PAGE TOP OF DOC Mr. Starr, it seems that Iran has made efforts to secure an economic foothold in the Central Asian republic. It's always had an interest of course. To what extent do you think they have made significant political inroads or taken political steps to gain a foothold in the region? To what extent has Iran attempted to utilize Islam in an effort to expand its influence? Do you think that Iranian interest in Central Asia by its very nature is anathema to U.S. interest or are there conditions under which U.S. and Iranian interests might be compatible? Mr. STARR. These are very important questions. In the early years after the independence of the Central Asian and Caspian States, Iran did indeed attempt quite vigorously to export its revolution and its ideology to the region. It pressed quite hard in some places, but without success. In fact, the uniformly secular regimes of Central Asia and the Caspian firmly told them, ''No. We're glad to trade with you, but keep your ideology at home.'' All this was probably most difficult for Azerbaijan because a quarter of the Iranian population are Azeris. But even there, and throughout the region, this clean separation of ideology and trade has been effective to the point that President Karimov of Uzbekistan, who is certainly no softy on this subject, has acknowledged that his country now participates in the Economic Cooperation Organization along with Iran, Turkey, and Pakistan, and trades with Iran without difficulty. Is this a win-win or a win-lose situation? It seems to me that Iran has always been a regional power, a trading power. Its role as an ideological power is recent and possibly waning. In the long run, and I emphasize long run, I think we can expect the trading tradition to revive. Assuming stability and the continuation of secular regimes in Central Asia and the Caspian, it seems to me that Iran poses no particular threat to us or them. Mr. BEREUTER. Do you see any reason why Iran would want to assist Russia to reassert its control over these former republics of the Soviet Union? Mr. STARR. The Iran-Russia relationship in the last 6 years is a curious one. Neither has great assets of oil and gas in their area of the Caspian, and both have felt themselves under pressure from U.S. policy. I think to the extent that they have teamed up, the tie was created by us and not by events themselves. I don't think Russia's and Iran's interests are compatible on most areas. They are in fact competitors in world energy markets. Page 36 PREV PAGE TOP OF DOC Mr. BEREUTER. Thank you, Professor Starr. Now I would like to turn to Turkey. I can see many areas where U.S. and Turkish interests coincide within the Central Asian area, but at what point would our interests diverge and who are Turkey's major adversaries in Central Asia or areas where they have substantial long-term political, religious, or ethnic difficulties? We know Armenia, of course. Mr. STARR. Yes. Turkey welcomed independence in Central Asia the way someone might welcome the discovery of a long-lost cousin. It rushed to help these benighted folks, but rapidly discovered that the educational level of Central Asia and the Caspian region is impressively high. So the Turks backed off somewhat from proselytizing the idea of Turkic unity. On the other hand, Turkey has built a presence in the region in an impressive and sustained way economically and also culturally. On a private basis, there have been over 100 secondary schools established in the region that are teaching Turkish and English, as well as local languages. They have established a number of universities in the region which acknowledge, but without beating people over the head with it, their common Turkic identity. It seems to me that at the level they have now reached, the Turks have established a quite harmonious series of relationships, even with Tajikistan, which is not Turkic. If they have an acknowledged competitor in the region, it's Russia, which has always viewed with suspicion anything that hints of Turkic unity or common endeavor. Mr. BEREUTER. Thank you, Professor Starr. I would like to turn now to Mr. Maresca. I do recognize and agree with you about the place where the major oil demand is growing in the world. I understand why a southern directed route is more advantageous to serve that. I heard what you had to say about the inadequacy of a pipeline to serve the oil potential if exploited in that region. I wonder if you could address this point to start with. Given the long history of violence in Afghanistan, can Unocal reasonably expect a pipeline to remain secure? Page 37 PREV PAGE TOP OF DOC The second thing I would ask is, if in fact the political and economic, mostly political problems are solved in Central Asia, how quickly do you think that the exportable oil resources would overwhelm the capacity of one pipeline? Is this something that all of a sudden when the keys are turned, we're going to have a huge amount of exportable oil and gas? Mr. MARESCA. First, on the question about Afghanistan, of course we're not in a phase where we are negotiating on a contract because there is no recognized government really to negotiate with. However, we have had talks and briefings with all the factions. It is clear that they all understand the significance for their country of this pipeline project, and they all support it, all of them. They all want it. They would like it to start tomorrow. All of the factions would like it to start tomorrow if we could do it. So I believe that over time, if it's built, it would be secure. I believe that the Afghans will see it as a national asset once it's built. It will provide them with many millions of dollars in transit fees. It will provide them with real jobs and technology and a lot of other things. Mr. BEREUTER. Mr. Maresca, if I could just interrupt here. Why wouldn't you have the situation whereby whoever is in power drawing resources from that pipeline would find that their adversaries would decide to damage their resource base and stop the flow? Mr. MARESCA. It's not going to be built until there is a single Afghan Government. That's the simple answer. We would not want to be in the situation where we became the target of the other faction. In any case, because of the financing situation, credits are not going to be available until there is a recognized government of Afghanistan. Mr. BEREUTER. So you are not making any suggestions about the prospects of that or timing of that. It's just you are not going to move or it's not going to be moved from another source until that happens. That would be your judgment? Mr. MARESCA. That's my judgment. We do of course follow very closely the negotiations which have been going on. We are hopeful that they will lead somewhere. All wars end. I think that's a universal rule. So one of these days this war too will end. Then I believe the pipeline will be secure. Page 38 PREV PAGE TOP OF DOC Now as for your other question, I would answer it by saying that the energy industry is a very far-sighted activity. We have to look 10, 20 years out into the future because the projects are vast. They take a long time to put together. We have to anticipate what volumes will be 20 years later. That's what we have been doing throughout the industry, not just Unocal. How quickly will oil volumes coming from this region overwhelm a few pipelines? I think it's very difficult to say. Certainly the first couple of pipelines that are built will be filled. After that, I think the third and fourth pipelines and the fifth pipeline that are built out of that area will probably also be filled. After that, it becomes a question as to which pipeline comes online first and which provides the cheapest route. That is why this question of netback is so important. Netback is essentially a measurement of the incentive of the producer to use a certain route because it measures what he is going to get as a return. That is why to a certain extent, these pipelines will be in competition on a commercial basis. Mr. BEREUTER. Thank you very much, Mr. Maresca. I want to recognize the fact that Secretary Gee is remaining. I very much appreciate that. That does not always happen. You are listening to the witnesses and our questions to them. I think that is very helpful for you, I hope, and certainly for us to know that you are also having this information. It's my pleasure now to turn to my colleague from California, Mr. Rohrabacher, for any questions he may have. Mr. ROHRABACHER. I am reminded of a joke where God is asked when peace will come to the Middle East. He says, ''Not in my lifetime.'' I am afraid that this may well be true of Afghanistan as well. In fact, I am more hopeful right now, having just returned from one trip to the Middle East and another trip to Central Asia that there is a greater chance for peace between Israel and its neighbors than there is for peace in Afghanistan. And I know Afghanistan probably better than anyone else in the Congress. I hate to tell you that. Page 39 PREV PAGE TOP OF DOC But let me ask a few questions. So there will be no pipeline until there is an internationally regionized government and a government that is recognized by the people of Afghanistan too, I would imagine that you wanted to put that caveat on it. Right? It's not just internationally recognized, but it has to be accepted by the people of the country. Right? Mr. MARESCA. It depends on who you mean by the people. I assume that no matter what government is put in place, there will be some people who are opposed to it. Mr. ROHRABACHER. I found something here. There seems to be a little attachment onto there that may be a little more controversial than people understood when they first heard what you were saying. So the government doesn't necessarily have to be acceptable to the people of Afghanistan as long as it's internationally recognized? Mr. MARESCA. Of course it has to be accepted by the people. What I mean is that there will always be factions in Afghanistan. There certainly will be factions even when a single government is formed. But when a government is formed that is recognized internationally, it will certainly have to be recognized by the people, yes. Mr. ROHRABACHER. The current government of Afghanistan or the current group of people who hold Kabul, I guess is the best way to say that, and about 60 percent of the country are known as the Taliban. What type of relationship does your company have to the Taliban? Mr. MARESCA. We have the same relationship as we have with the other factions, which is that we have talked with them, we have briefed them, we have invited them to our headquarters to see what our projects are. Mr. ROHRABACHER. Right. Mr. MARESCA. These are exactly the same things we have done with the other factions. Mr. ROHRABACHER. However, the Taliban, who are now in control of 60 percent of Afghanistan, could you give me an estimate of where the opium that's being produced in Afghanistan is being produced? Is it in the Taliban areas or is it in the northern areas of Afghanistan? Page 40 PREV PAGE TOP OF DOC Mr. MARESCA. I can't tell you precisely, but I think it's being produced all over Afghanistan. Mr. ROHRABACHER. Yes. To be precise, it's being produced in the Taliban areas. You are talking to someone who has studied it. Whether there is some minor amount of heroin and opium being produced in the other areas is debatable. There is some obviously being produced everywhere, but the major fields that are being produced are in the Taliban-controlled areas. What about the haven for international terrorists? There is a Saudi terrorist who is infamous for financing terrorism around the world. Is he in the Taliban area or is he up there with the northern people? Mr. MARESCA. If it is the person I am thinking of, he is there in the Taliban area. Mr. ROHRABACHER. Right. And in the northern area as compared to the place where the Taliban are in control, would you say that one has a better human rights record toward women than the other? Mr. MARESCA. With respect to women, yes. But I don't think either faction here has a very clean human rights record, to tell you the truth. Mr. ROHRABACHER. Well, it's one thing to say nobody has a clean civil rights record or human rights record and then just to ignore the fact that half of the people you are talking about totally obliterate the human rights of half of the population. I mean in the non-Taliban areas, there are some violations of human rights, but it's sort of spread out, and in the Taliban areas, half of the population—that's women—have no rights at all. It is sort of like saying that Hitler is kind of the same as these other dictators, and ignoring the fact that he also wants to kill all the Jewish people. That has to be a factor, doesn't it? The fact that half of the population of Afghanistan is being treated now like they have no rights at all and being oppressed so brutally? Doesn't that have to be part of the equation? You can't just say these are moral equivalents, because they are both bad. Isn't one worse because of that? Page 41 PREV PAGE TOP OF DOC Mr. MARESCA. Congressman, I am not here to defend the Taliban. That is not my role. We are a company that is trying to build a pipeline across this country. Mr. ROHRABACHER. I sympathize with that. By the way, you are right. All factions agree that the pipeline will be something that's good. But let me warn you that if the pipeline is constructed before there is a government that is acceptable at a general level to the population of Afghanistan and not just to international, other international entities, other governments, that your pipeline will be blown up. There is no doubt about that. I have been in and out of Afghanistan for 15 years. These are very brave, courageous people. If they think they are being stepped on, just like the Soviets found out, they are going to kick somebody back. They are not going to lay down and let somebody put the boot in their face. If the government that is receiving the funds that you are talking about is a government that is not accepted by a large number of people in Afghanistan, there will continue to be problems. You say you have had a positive relationship with all the factions. That is what you are presenting to us today. There was just a major earthquake in Afghanistan. Has Unocal stepped forward to help send supplies to those earthquake areas? Mr. MARESCA. Yes, sir. Mr. ROHRABACHER. OK. Because some people have hesitated to go into the earthquake areas, claiming that there's too much chaos there. But your company has decided to move forward with that type of humanitarian assistance anyway. Is that right? Mr. MARESCA. We are supporting both the Red Cross and the U.N. coordinating agency which coordinates the activities. Mr. ROHRABACHER. And they already have their supplies pouring into that earthquake area? Mr. MARESCA. Those two organizations are already active. We are providing support to them. Page 42 PREV PAGE TOP OF DOC Mr. ROHRABACHER. I read some reports that there was some hesitancy on the part of international organizations to actually ship supplies to those areas because they are too chaotic. You have not received any of those reports? Mr. MARESCA. No, sir. I think in so far as the Red Cross and United Nations are concerned, they were active right away. Mr. ROHRABACHER. OK. It was referred to earlier about a U.N. peace process. You know, I have been following things very closely. I just came back actually. Over the break I went to the Uzbeki-Afghan border and met with some of the leaders there. What peace process are you referring to? Because I didn't see any evidence of a U.N. peace process. Mr. MARESCA. I am referring to the talks which have been conducted in New York under the chairmanship of former Algerian Foreign Minister Brahimi, which have met a number of times, and which although it's difficult going, we think have some promise of success. At least it's the strongest effort which has been made so far. Mr. ROHRABACHER. Let me just note for the record, although I am being a little adversarial here, that the pipeline would be a tremendous asset to the people of Afghanistan, as it will be a tremendous asset to the region. As I say, most people recognize that. But the pipeline is not independent of everything that's going on in Afghanistan obviously. Mr. MARESCA. I agree 100 percent. Mr. ROHRABACHER. Yes. Unocal is under the gun in Burma for dealing with a dictatorial regime and in Afghanistan, I happen to consider the Taliban to be the worst kind of oppressors. But is there any commitment at all toward some kind of an election or a democratic process in order to legitimatize an election or legitimatize a government in Afghanistan? Mr. MARESCA. Do you mean by Unocal? Mr. ROHRABACHER. When you say that you want internationally recognized government that is accepted by the people, and of course not all the people are going to accept it, but is there any commitment at all to saying that part of that process has to be some kind of an accepted election or internationally supervised election? Page 43 PREV PAGE TOP OF DOC Mr. MARESCA. From the beginning of our contacts with the factions in Afghanistan we have encouraged them all in that direction. We are not a government. We are not an international organization. We are a company. But in so far as we can have that kind of influence, that is what we have tried to do. Mr. ROHRABACHER. OK. Let me just note that I have seen a lot of people talking to a lot of countries around Afghanistan, but there are very few people that have tried at all to use the democratic or go for the democratic option, because it always means that they have to argue with people who hold Kabul. This Congressman sees no reason in the world why the people of Afghanistan or any other country are incapable of some kind of an election to determine their own destiny. Just because there are a lot of people with guns over there doesn't mean that they aren't willing to put those guns down if they were guaranteed some type of democratic process. For the record, the Taliban, all they would have to do is to reach out to their fellow Afghans and say we will hold an election 18 months from now or whatever it was that is internationally supervised, and that whole conflict would probably be over. But they have not done that. They hold Kabul now, and their ability to do that and no other faction has the ability to do that. So if they are not willing to make that kind of commitment, I would be very hesitant to move forward on a $2.5-billion investment because without that commitment, I don't think there is going to be any tranquility in that land. Mr. MARESCA. We are hesitant too, Mr. Congressman. I appreciate the fact that you are a person well-read into these issues. I think you would agree with us that the international community needs to pay a lot more attention to this problem. We would like to see the international community focused hard on this problem and pushing for that kind of a peaceful resolution that you described. Page 44 PREV PAGE TOP OF DOC Mr. ROHRABACHER. As long as the international community is not just thinking of themselves, but also thinking of the rights of the people of Afghanistan, I would agree with that. At this point, you have got the Pakistanis and the Saudis on one side, and you have got the Iranians on one side. Every little faction has somebody who is supporting them from the outside. So let me again say I think Unocal is a fine company. I think they are trying to make the best of a bad situation. If indeed they succeed and democracy does happen to come or at least peace comes to Afghanistan, that pipeline will be a major boon to the people of that country. I wish you luck in the project. I will do my best to help your project succeed. But at the same time, I think that we have got to put the effort into bringing freedom and peace to Afghanistan. Mr. MARESCA. Thank you, sir. Mr. ROHRABACHER. Thank you. Mr. BEREUTER. Thank you, Mr. Rohrabacher. I have two final questions, gentlemen. You have noticed, I'm sure, that H.R. 2867, which was indirectly a part of our hearing today introduced by our chairman, Mr. Gilman, so-called Silk Road legislation, calls for issuing permanent MFN status to the region as a whole. I am talking about Central Asia, as well as consideration of zero-to-zero tariff. Given the current level of economic and political development in the region, what are your individual views about the appropriateness of those provisions in the Chairman's bill, the zero-to-zero tariff and permanent MFN, for country by country, Central Asian Republics? Mr. STARR. Well, pardon my ignorance on this but I didn't understand there is absolutely permanent MFN for anyone. That at any time, we have the right to reopen any MFN question. Mr. BEREUTER. Professor Starr, you are right. That is a short cut we use around here, to differentiate where we have the annual review process. Page 45 PREV PAGE TOP OF DOC Mr. STARR. Yes. Mr. BEREUTER. Certainly we can deny by legislative action normal tariff status or MFN. Mr. STARR. I think this is a sound idea, not because these countries have achieved some miraculous state of development in the areas that we are concerned over. But because with some notable exceptions, they seem to be moving in the right direction, not without backward steps here and there, and because engagement with this country has been a very positive force in that process. The key feature of Soviet rule in this region was to isolate it from the rest of the world. The southern border of the USSR was the longest, most closed border in the world. They cut these people off. Now they want to rejoin the world. Their hope is not to participate in some local trade organization of economically unpromising countries, but to move as fast as possible to participate in a world trade organization. It seems to me this is the best solution to their key geopolitical problems as well. MFN will foster that. Therefore, I support that. Mr. BEREUTER. Mr. Maresca. Mr. MARESCA. Mr. Chairman, like my colleague here, I haven't really studied the full implications of this. But my general feeling is that these countries are generally poor. Even the ones that have potential for wealth are generally poor. They were thrust into independence without preparation. They are still going through a revolutionary period of post-colonial adjustment. In short, they are deserving of our support. Any way we can support them I think is to the good. If that means MFN then I think that would be a good thing for them. I would support it too. Mr. BEREUTER. Thank you. Professor Starr, one final question then and it may be a bit of a surprise. What are Israel's strategic objectives vis a vis Central Asia? Page 46 PREV PAGE TOP OF DOC Mr. STARR. Partnership. This is an opportunity for Israel to form useful and mutually beneficial links with countries of Islamic culture and secular States, and to prove that that can be mutually productive. The Jewish population of Central Asia is a very ancient one. In many regards they were the bearers of local culture, and well regarded by the local populace. Many have emigrated but maintain cordial relations with the countries they left. Israel has noticed this, recognizes it, and seeks to build on it. In one area that I follow closely, namely water, Israel has a tremendous lot to offer this region: the knowledge of water management issues. Mr. BEREUTER. Thank you very much. I believe they do, along with some of our own agencies. Mr. STARR. Yes, sir. Mr. BEREUTER. Chairman Gilman had hoped to join us. Obviously his schedule didn't permit that today. He was very interested in this hearing. I would ask unanimous consent that his entire statement on this hearing's topic be made a part of the record. Without objection, that will be the order. [The prepared statement of Chairman Gilman appears in the appendix.] Mr. BEREUTER. I call finally for Mr. Rohrabacher. Mr. ROHRABACHER. If I could just say just a couple more words. During the break, I did manage to take a swing through Central Asia that took me to Turkey and Azerbaijan and Uzbekistan, Turkmenistan, Kazakhstan. I, Mr. Chairman, agree with the witness. The most important thing we can do now is to try to get this region that's been isolated for so long into the global economy. There is so much potential there, wealth as well as the people there, are fine. They are the traders of ancient times. They could do very well in the global economy. I think Turkey is playing a very positive role there. It's not trying to dominate like it was before—earlier on they thought they might dominate the region. Instead, they are playing a very positive role economically and bringing those people into the world economic system. So the subject of this hearing was well chosen. I do hope that, and I don't know if anybody else is going to get involved in Afghanistan now, but I would hope that people of the world focus a little more on these poor people. They helped us end the cold war. If it wasn't for the courage and the bravery of the people of Afghanistan, we would still be in the middle of a cold war, spending $100 billion a year more trying to defend ourselves from the Russians. It was their strength and courage that broke the will of the Kremlin leaders. They decided that they could not stand up to this kind of resistance among the people of the world. So we owe them a lot. They are still suffering. This pipeline will help them, if we can ever get it built. But in the meantime, we owe it to them to help try to bring peace to Afghanistan. The rest of Central Asia depends on it. Thank you very much. Page 47 PREV PAGE TOP OF DOC Mr. BEREUTER. Mr. Rohrabacher, I certainly do agree with you with respect to the contributions and plight of the Afghan people, and also the importance of what we have to do with respect to the Central Asian republics. I hope that the hearing today helps contribute to what you and I will have to pursue with our colleagues. I want to thank you gentlemen very much for making your contributions to our understanding of the issue. The information you presented us has been important and stimulating. Thank you very much. The Subcommittee will be adjourned. [Whereupon, at 3:58 p.m., the Subcommittee was adjourned, subject to the call of the Chair.] A P P E N D I X Insert "The Official Committee record contains additional material here."
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