[Senate Hearing 108-351]
[From the U.S. Government Publishing Office]
S. Hrg. 108-351
U.S. ENERGY SECURITY: WEST AFRICA AND
LATIN AMERICA
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
POLICY, EXPORT AND TRADE PROMOTION
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 21, 2003
__________
Printed for the use of the Committee on Foreign Relations
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee BILL NELSON, Florida
NORM COLEMAN, Minnesota JOHN D. ROCKEFELLER IV, West
JOHN E. SUNUNU, New Hampshire Virginia
JON S. CORZINE, New Jersey
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
------
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
POLICY, EXPORT AND TRADE PROMOTION
CHUCK HAGEL, Nebraska, Chairman
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
MICHAEL B. ENZI, Wyoming JOHN D. ROCKEFELLER IV, West
LAMAR ALEXANDER, Tennessee Virginia
NORM COLEMAN, Minnesota JON S. CORZINE, New Jersey
CHRISTOPHER J. DODD, Connecticut
(ii)
?
C O N T E N T S
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Page
Brodman, Mr. John R., Deputy Assistant Secretary of Energy for
International Energy Policy, Office of Policy and International
Affairs, U.S. Department of Energy, Washington, DC............. 4
Prepared statement........................................... 7
Goldwyn, Mr. David L., president, Goldwyn International
Strategies, LLC, Washington, DC................................ 53
Prepared statement........................................... 57
Hagel, Hon. Chuck, U.S. Senator from Nebraska, opening statement. 2
McManus, Mr. Matthew T., Acting Director, International Energy
and Commodity Policy Office, Economic and Business Affairs
Bureau, U.S. Department of State, Washington, DC............... 19
Prepared statement........................................... 21
Ottaway, Dr. Marina, senior associate, Democracy and Rule of Law
Project, Carnegie Endowment for International Peace,
Washington, DC................................................. 64
Prepared statement........................................... 67
West, Mr. J. Robinson, chairman, PFC Energy, Washington, DC...... 42
Prepared statement........................................... 44
(iii)
U.S. ENERGY SECURITY: WEST AFRICA AND LATIN AMERICA
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TUESDAY, OCTOBER 21, 2003
U.S. Senate,
Subcommittee on International Economic
Policy, Export and Trade Promotion,
Committee on Foreign Relations,
Washington, DC.
The subcommittee met at 2:36 p.m., in room SD-419, Dirksen
Senate Office Building, Hon. Chuck Hagel (chairman of the
subcommittee), presiding.
Present: Senators Hagel and Coleman.
Senator Hagel. Good afternoon. This is the third
subcommittee hearing this year on energy security. Prior
witnesses have given the committee an overview of U.S. energy
security policy and how that policy is affected by events
around the world.
Because U.S. energy independence is not achievable in the
near term, America needs a comprehensive energy policy that
recognizes the realities of our interconnected world and the
linkages between political stability and energy security. Those
realities vary from region to region. We cannot take a one-
size-fits-all approach to this effort.
Our first hearing in April of this year on energy security
focused on an overview of global energy security issues. Our
second hearing focused specifically on Russia and the Caspian
Sea region. Today's witnesses will testify on the impact of
recent developments in West Africa, specifically in Liberia and
Nigeria, and in Latin America, especially in Venezuela and
Mexico.
Both Latin America and West Africa are regions rich in
resources but bedeviled by instability and conflict. Both
regions can also play even greater roles as major suppliers of
energy to the United States over the years to come.
Approximately 30 percent of America's crude oil and petroleum
imports come from Latin America, primarily Mexico and
Venezuela.
This energy relationship cannot be separated from our
bilateral relationships, including trade and immigration. While
the U.S. imports crude oil and electricity from Mexico, we also
are a net exporter of natural gas to Mexico.
The political unrest in Venezuela and the instability in
the Venezuelan oil market underscore the need for
diversification of U.S. energy supplies.
I will ask today's witnesses to comment on how the oil
strikes against President Chavez in Venezuela have affected
U.S. energy policy and how the geostrategic implications of
continued political volatility in Venezuela could affect our
economic and political interests in South America.
Other countries in Latin America hold promise with regard
to energy production, particularly in the natural gas sector.
Brazil and Chile are examples of potential suppliers of natural
gas, and they could fit into an overall global energy security
strategy.
West Africa holds significant potential for future energy
development. Nigeria has the ninth largest proven natural gas
reserves in the world and could significantly increase its
crude oil production. Nigeria is the greatest energy force in
West Africa at this time, but other countries in the region,
Cameroon, Equatorial Guinea, and Gabon, to name a few, are also
potential suppliers.
Sao Tome, off the West African coast near Gabon and
Nigeria, has what may be billions of barrels of crude lying off
of its coast. However, a military coup seized control of the
government for a week in July. West Africa will only realize
its energy potential when it addresses the political
instability and conflicts that plague the region.
In both Latin America and West Africa, political
instability and corruption will stymie long-term development
efforts. Rule of law reforms must accompany energy development
efforts in order to attract investment, promote prosperity, and
ensure peace.
Today we have two panels of expert witnesses to discuss
these important issues. On the first panel, we will first hear
from Deputy Assistant Secretary of Energy for Political and
International Affairs, John Brodman, who will testify on how
the Energy Department views energy security issues as they
pertain to Latin America and West Africa. Then we will receive
testimony from Matthew McManus, Acting Director of the Office
of International Energy and Commodity Policy, who will discuss
energy issues in the Western Hemisphere and Africa and their
relationship to U.S. energy security and commercial
opportunities.
On the second panel, we will hear from the president of
Goldwyn International Strategies, David Goldwyn; the chairman
of PFC Energy, Robin West; and a senior associate at the
Carnegie Endowment for International Peace, Dr. Marina Ottaway.
Thank you all for coming. We appreciate your time, your
efforts, and we look forward to your testimony. Welcome.
[The opening statement of Senator Hagel follows:]
Opening Statement of Senator Chuck Hagel
This is the third subcommittee hearing this year on energy
security. Prior witnesses have given the committee an overview of U.S.
energy security policy and how that policy is affected by events around
the world.
Because U.S. energy independence is not achievable in the near
term, America needs a comprehensive energy policy that recognizes the
realities of our interconnected world, and the linkages between
political stability and energy security. Those realities vary from
region to region. We cannot take a one-size-fits-all approach.
Our first hearing in April on energy security focused on an
overview of global energy security issues. Our second hearing focused
specifically on Russia and the Caspian Sea Region. Today's witnesses
will testify on the impact of recent developments in West Africa,
specifically in Liberia and Nigeria, and in Latin America, especially
Venezuela and Mexico.
Both Latin America and West Africa are regions rich in resources
but bedeviled by instability and conflict. Both regions can also play
even greater roles as major suppliers of energy to the United States.
Approximately 30 percent of America's crude oil and petroleum imports
come from Latin America--primarily from Mexico and Venezuela.
This energy relationship cannot be separated from our bilateral
relationships, including trade and immigration. While the U.S. imports
crude oil and electricity from Mexico, we also are a net exporter of
natural gas to Mexico.
The political unrest in Venezuela and the instability in the
Venezuelan oil market underscore the need for diversification of U.S.
energy supplies. I'll ask today's witnesses to comment on how the oil
strikes against President Chavez in Venezuela have affected U.S. energy
policy and how the geostrategic implications of continued political
volatility in Venezuela could affect our economic and political
interests in South America.
Other countries in Latin America hold promise with regard to energy
production, particularly in the natural gas sector. Brazil and Chile,
for example, have potential as suppliers of natural gas and could fit
into an overall global energy security strategy.
West Africa holds significant potential for future energy
development. Nigeria has the 9th largest proven natural gas reserves in
the world and could significantly increase its crude oil production.
Nigeria is the greatest energy force in West Africa at this time, but
other countries in the region--Cameroon, Equatorial Guinea and Gabon to
name a few--are promising.
Sao Tome, off the West African coast near Gabon and Nigeria, has
what may be billions of barrels of crude lying off its coast; however,
a military coup seized control of the government for a week in July.
West Africa will only realize its energy potential when it addresses
the political instability and conflicts that plague the region.
In both Latin America and West Africa, political instability and
corruption will stymie long-term development efforts. Rule of law
reforms must accompany energy development efforts in order to attract
investment, promote prosperity, and ensure peace.
We have two panels of expert witnesses with us today to discuss
these important issues. First, we will hear from Matthew McManus,
Acting Director of the Office of International Energy and Commodity
Policy, who will discuss energy issues in the Western Hemisphere and
Africa and their relationship to U.S. energy security and commercial
opportunities.
Then, we will receive testimony from Deputy Assistant Secretary of
Energy for Political and International Affairs, John Brodman, who will
testify on how the Energy Department views energy security issues as
they pertain to Latin America and West Africa.
On the second panel, we will hear from the president of Goldwyn
International Strategies, David Goldwyn; the chairman of PFC Energy,
Robin West; and a senior associate at the Carnegie Endowment for
International Peace, Dr. Marina Ottaway.
Thank you all for coming and welcome.
Senator Hagel. I have been joined by the distinguished
Senator from Minnesota. Senator Coleman, would you like to
offer a statement before we hear from the witnesses?
Senator Coleman. Just very briefly, Mr. Chairman. First,
thank you for holding this very, very important hearing. I have
an interest from two perspectives, one representing a farm
State, an interest in reducing reliance upon foreign oil and
increasing the use of renewables. I bring that perspective to
the table, but also as chair of the Western Hemisphere
Subcommittee within Foreign Relations, concern about both the
challenges and opportunities, concern about the situation in
Venezuela which you referenced in your opening statement,
concerns most recently about the political situation in
Bolivia, some challenges regarding energy production in
Colombia, and though perhaps not part of this hearing, I look
forward to some discussion about some of the opportunities in
Trinidad that have been discussed recently.
So again, this is a very, very important hearing, and I
look forward to the testimony. Thank you, Mr. Chairman.
Senator Hagel. Senator Coleman, thank you very much.
Gentlemen, we are prepared for your testimony. We will
begin with you Secretary Brodman. Thank you.
STATEMENT OF JOHN R. BRODMAN, DEPUTY ASSISTANT SECRETARY OF
ENERGY FOR INTERNATIONAL ENERGY POLICY, OFFICE OF POLICY AND
INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY, WASHINGTON,
DC
Mr. Brodman. Thank you, Mr. Chairman, Senator Coleman. I am
pleased to appear before you today to discuss the
administration's efforts to address our Nation's energy
security with a particular focus on West Africa and Latin
America. I have submitted for the record a much longer written
statement and I believe I can keep my oral remarks today to
less than 10 minutes.
Senator Hagel. All the written statements will be included
in the record. So that will be fine, Secretary Brodman, and
other witnesses today, if they would like to do the same, we
will treat your statements the same as Secretary Brodman.
Please proceed.
Mr. Brodman. Thank you.
President Bush's National Energy Plan recognizes that the
United States cannot address its energy concerns alone, that
our energy security is intricately linked to international
markets as a result of our increasing dependence on external
sources of supply. We recognize that energy policy has a strong
role to play in assuring that our energy supplies represent a
diverse set of energy resources from a diverse set of energy
suppliers. Therefore, security of supply is the driving force
behind our policy engagement on energy issues with many
countries.
While our policy of supply diversity has been successful to
some degree, the development of many frontier oil provinces
carries with it its own set of political, economic, and
security risks. Our policy of diversifying supplies relies on
commercial investment in energy projects. We do not tell our
companies where to invest or where to buy oil. It is up to
them.
And there are a considerable number of obstacles to
realizing this commercial investment directly related to
economic, political, and security risks. We have seen that an
unfavorable business climate may keep needed energy resources
locked away from development for a long time.
The emerging threats to energy security in many new
producing countries and regions and, indeed, as recent
developments in Venezuela and Nigeria have demonstrated, in
older producing regions as well are somewhat different than
those we have faced in the past. These new threats to energy
security, clearly recognized in the National Energy Plan, call
for a continued and possible enhancement of the balanced and
sustained engagement with the oil-producing countries that we
have been pursuing to help them manage and utilize their
revenues in a way that promotes political stability and
sustainable economic growth.
The Western Hemisphere and Africa are important sources of
our imports of oil and natural gas and their importance is
likely to grow in the future. Even though their proven reserves
and production will never allow them to replace the Middle East
in importance to world energy markets, they will nonetheless be
an important source of additional supplies for years to come.
We have learned from experience that it is the marginal
barrels that are the important factor in determining conditions
in the oil market. Over the past decade, non-OPEC oil
production has on average more than kept pace with the rise in
world oil demand, thereby limiting OPEC's share of the market.
This trend is expected to continue in the years ahead, and
Africa and Latin America together could contribute 5 million to
7 million barrels a day of additional oil to the market in the
next 10 to 15 years.
Turning to our hemisphere and to Latin America, as you
know, the United States, Canada, and Mexico are working
together to create ways to facilitate the development of a true
North American energy market that will deliver reliable,
affordable energy to the citizens of all three countries. The
President's National Energy Policy also recommends ongoing
energy consultations with other countries in Latin America to
improve the energy investment climate. The energy sector
requires capital inflows to achieve adequate growth, especially
in the oil and natural gas sectors.
Latin America, Mexico, and the Caribbean currently account
for 10.5 million barrels a day of global oil production which
could rise to 13 million barrels a day or more in the next
decade. If we add Canada to this equation, 52 percent of U.S.
crude oil imports and 54 percent of U.S. petroleum product
imports come from the Western Hemisphere. Of the top five
exporters to the United States, three, Canada, Mexico, and
Venezuela, are in our hemisphere. These three countries account
for a large percentage of the 314 billion barrels of proven oil
reserves in the region, a level of over 10 times the current
U.S. oil reserves.
Nine other countries, Argentina, Bolivia, Brazil, Chile,
Colombia, Ecuador, Guatemala, Peru, and Trinidad and Tobago,
have oil and gas reserves of varying sizes. While not large by
international standards, the oil reserves of these nine
countries can provide an important source of energy, and the
region is also richly endowed with natural gas and
hydroelectric power potential.
The hemisphere's economic future and energy security is
contingent upon the availability of ample energy supplies.
Therefore, the countries in the hemisphere must have in place a
set of policies that support increased energy production,
energy integration, diversification of supply, and increased
foreign investment. The Department of Energy has been working
with its neighbors through various mechanisms to foster a
climate that will produce these results.
The loss of Venezuelan oil supply during December, January,
and February was a serious blow to U.S. oil supplies. There is
a wide range of estimates about Venezuela's ability to restore
oil production and export of oil. Many analysts are also
questioning whether current production can be sustained. The
strike-related loss of revenue and the political climate in
Venezuela make it highly unlikely that Venezuela will be able
to generate internally or attract from the outside the revenues
it needs to sustain or expand oil production capacity in the
immediate future. Experts have not seen evidence of the
investment such as drilling activity necessary to sustain
production. The lack of clarity in the information regarding
Venezuela's production, exports, and future prospects is an
important element that is adding to the current uncertainty and
instability in the marketplace.
In Mexico, on the other hand, there are positive signs for
the long term. In the recent past, the current administration
has come out in favor of greater private sector participation
in Mexico's oil and gas development. While this is just the
first step, and recognizing that there are immense political
obstacles and hurdles to be overcome for Mexico to reach this
goal, it is nevertheless the first positive sign of an opening
of the Mexican hydrocarbon sector since nationalization
occurred more than 60 years ago.
Now, with regard to Africa, the President has recognized
the importance of the United States' relationship with Africa
and the National Energy Policy outlines some specific
recommendations for continued engagement that include actions
to promote a more receptive environment for U.S. oil and gas
trade and investment and to support more transparent,
accountable, and responsible use of oil resources in African
producer countries to enhance stability and the security of
trade and investment environments.
West Africa is a conflicted region that is suffering the
effects of corruption, political instability, border disputes,
ethnic and religious strife, governance issues, and poverty.
Conflicts produce risks that have a destabilizing impact on the
investment climate, on the social and economic development
aspirations of the African people, and on our energy security.
Finding affordable and effective ways to help these countries
overcome these barriers is one of the new challenges to our
energy security aspirations.
Democratization and the development of responsible
governing institutions are particularly important in reducing
oil-related conflicts and promoting African supply stability.
Accountability and transparency are necessary to ensure that
oil revenues benefit the population and support economic and
social development. Managed effectively, revenues from
expanding oil and gas production could be the engine for
national and regional economic development and political
stability in West Africa.
Africa is currently producing a little more than 8 million
barrels of oil per day. Africa currently supplies the United
States with about 12 percent of our oil import requirements,
and production in Africa could rise to 11 million to 13 million
barrels per day in the next 10 years, and even higher in
subsequent years if the geology and investment climates are
favorable.
West Africa is one of the world's fastest growing sources
of oil and gas. Oil production generates a large share of
government revenue in many African countries. There are also
several potential producers who will soon begin producing new
oil supplies and several prospective oil-producing countries
which are currently or soon hope to be exploring for oil.
Africa is important to us because it is an important source
of the marginal barrels and because African oil is a key engine
for economic and social development in Africa.
Before concluding, I would just like to say a word on
natural gas. Our dependence on imported liquified natural gas
is expected to rise and much of this could come from Africa and
Latin America. Significant increases in liquified natural gas
imports from West Africa and Latin America, along with new
supplies from the Middle East, Russia, and North Africa are
likely to meet our rising demand.
In closing, Mr. Chairman, I believe that my written
statement covers all the topics you requested for us to discuss
today in greater detail than this short summary. Therefore, at
this point I would like to end my prepared remarks and thank
you for the opportunity to testify before you today. I welcome
any questions that the committee might have.
[The prepared statement of Mr. Brodman follows:]
Prepared Statement of John R. Brodman, Deputy Assistant Secretary of
Energy for International Energy Policy, Office of Policy and
International Affairs, U.S. Department of Energy
Mr. Chairman and Members of the Subcommittee. I am pleased to
appear before you today to discuss the Administration's efforts to
address our nation's energy security with a particular focus on Latin
America and West Africa. Before discussing these two regions, however,
I would like to say a few words about the evolution of our approach to
energy security, and the challenges facing us today.
Energy security, like beauty, is in the eye of the beholder. What
is it? How do you define it or measure it? How much is enough? While
the answers to these questions depend in large measure on your
perspective, our energy security concerns are a dominant factor in U.S.
energy policy for many reasons:
1. Many of our long-standing concerns about energy security
stemming from developments in the Middle East are still with
us;
2. Energy security is often an entry point for government
interference or involvement in energy markets;
3. There are many new challenges in the area of energy
security itself, some stemming predominantly from our growing
concerns with terrorism;
4. Oil producing countries, old and new, large and small, are
increasingly facing new challenges and new threats, often from
internal sources of instability, which can have an impact on
our energy security; and
5. There is concern that our growing dependence on oil and
gas imports may have considerable influence on our foreign
policy.
President Bush recognizes that the dynamics and necessities of our
energy marketplace, in terms of addressing energy supply and demand and
ensuring energy security to promote economic growth, are the key focus
of our national energy policy.
U.S. energy policy is founded on the belief that open markets
ensure optimal production and supply of energy. President Bush's
Administration also recognizes that open markets largely reflect the
situation here and now, and that the government has a role in assuring
that technologies are developed to ensure the most efficient use of
energy, to facilitate the use of alternative fuels and energy carriers
such as hydrogen, fusion and nuclear, and to develop new, secure energy
supplies to meet the energy needs of today and the future.
Also, from an energy security point of view, U.S. Government energy
policy has a strong role to play in assuring our energy supplies
represent a diverse set of energy resources from a diverse set of
energy suppliers. President Bush's National Energy Plan, issued in May
2001, embodies these fundamental principles and recommends actions that
will help achieve these objectives. The Plan also recognizes that the
United States cannot address its energy concerns alone, that our energy
security is intricately linked to international markets as a result of
our increasing dependence on external sources of supply.
In the past, disruptions in supply were largely the result of
sovereign political decisions and conventional wars. As we shift toward
new sources, there are increased threats and risks stemming from
corruption and governance issues, ethnic/religious strife, border or
territorial disputes, poverty and other issues. These new threats to
security of supply may require new policy approaches to our energy
security.
President Bush recognizes these new international challenges, and
the National Energy Plan calls for strengthening our global alliances
through such important mechanisms as our existing bilateral
relationships with key countries and regions around the world.
Secretary Abraham has made energy security one of his top priorities,
and security of supply is the driving force behind our policy
engagement on energy issues with most countries.
The Western Hemisphere and Africa are important sources of our
imports of oil and natural gas, and their importance is likely to grow
in the future. Even though their proven reserves and production will
never allow them to replace the Middle East in importance to world
energy markets, they will nonetheless be an important source of
additional supplies for decades to come.
ENERGY SECURITY POLICY
What have we learned? In the last thirty years, developments in the
world oil market dominated our energy security concerns, and we have
been impacted by six serious interruptions of supply:
The Arab oil embargo
The Iranian revolution
The Iran/Iraq war
The Iraqi invasion of Kuwait, the first Gulf war, and the
subsequent embargo
The recent strike in Venezuela, and
Regime change in Iraq
We have devoted a great deal of effort over the years to analyzing
the differences between import dependence on the one hand, and
vulnerability to supply disruptions on the other. In the short term, we
learned to allow market forces to allocate supplies, and to depend on
the use of excess production capacity and strategic reserves to augment
supplies if required. We learned that oil is a fungible commodity, and
that the marginal barrels are the determining factor in the
marketplace. In the longer term, we strove to improve our energy
security through diversity, in both the types of energy we use and in
the sources of supply, and through efficiency gains, which limit the
economic damages of price shocks on our economy.
We developed over lime, with varying degrees of success, a flexible
energy security policy that was based on a combination of policies.
This combination of policies is a mix of:
Reliance on market forces
Opening markets to free trade and investment in energy
resources
Energy efficiency
Diversification of supplies
Science and technology, research and development for the
long term
Good relations with the rest of the world
A strong military to protect our interests, and
Strategic petroleum reserves, both as a deterrent and as a
supply of last resort.
At the heart of this flexible, multiple policy approach was and is
a desire to promote and protect resilient international oil and energy
markets through the application of sustained policies that transcend
political partisanship and stand the test of time. The goal was to
reduce the threat and incidence of disruption, and to mitigate the
effects of a disruption if it did occur.
It would appear that many of the threats to energy security that we
have experienced in the past, remain with us today. Looking forward,
there are also several new threats to energy security today that we
will have to learn to cope with, especially in oil producing developing
countries. Thirty years ago oil was produced in commercial quantities
in just over 60 countries around the world, and the share of the top
ten producers in overall world supply was greater than 80 percent.
Today, oil is being produced in commercial quantities in over 90
countries, and the share of the top ten producers has fallen to about
60 percent. While some of this increase in the number of producers can
be attributed to the breakup of the former USSR into separate
countries, there are also many new producers, in Africa, Latin America
and elsewhere.
Now what does that mean for energy security? In the first place, we
have always favored a strategy that promotes diversity of supplies,
both among the different forms of energy (oil, gas, coal, renewables,
etc.) and in the sources of supply for any one form. In this sense,
this new diversity is generally viewed as a good thing. While you can
argue that more oil from diverse sources might raise the risk of
disruption simply because there are more producers, you can also argue
that the disruption will likely be smaller in the first place, and more
likely to be offset by compensating increases from the other sources.
While our policy of supply diversity has been successful to some
degree, the development of many frontier oil provinces carries with it
its own set of political, economic and security risks. Our policy of
diversifying supplies relies on commercial investment in energy
projects. We don't tell our companies where to invest or where to buy
oil. It is up to them, and there are a considerable number of obstacles
to realizing this commercial investment, directly related to economic,
political, and security risks.
An unfavorable business climate may keep needed resources locked
away from development for a long time.
The emerging threats to energy security in many new producing
countries and regions, and indeed, as recent developments in Venezuela
and Nigeria have demonstrated, in older producing regions as well, are
somewhat different than those we have faced in the past. As a result,
they may also require new policy responses. In the past, supply
disruptions came from sovereign political decisions, revolutions, and
conventional wars. Today there are increased risks from non-
traditional, and often internal, sources of conflict, such as:
Corruption and a lack of transparency
Governance issues
Federal, state, and local jurisdictional disputes
Ethnic/religious conflicts
Border and territorial disputes
Energy sector revenue management issues
Local content requirements
Lack of managerial capacity
Political instability
Environmental issues
Poverty and the distribution of income
Lack of ``rule of law'' and dispute settlement procedures
These threats to energy security, clearly recognized in the
National Energy Plan, may not always lend themselves to conventional
security solutions. These new threats call for a continuation (and
possible enhancement) of the balanced and sustained engagement with the
oil-producing countries that we have been pursuing, to help them manage
and utilize their revenues in a way that promotes political stability
and sustainable economic growth. For this reason, it may be that
sustainable development is the real frontier battleground for energy
security in the 21st century. The lack of good governance is also a
fertile breeding ground for terrorism, and we may have not yet grasped
the full implications of terrorism for the energy sector.
Speaking rhetorically, it may be reasonable to ask why and whether
oil consumers or developers should be responsible for promoting
sustainable economic development in oil producing countries? We may
need to be more engaged on sustainable development issues with energy
producers in order to minimize many of these new, internal threats to
stability, and to promote, protect and defend our own security of
supply, and our own security in commercial energy and trade
relationships.
CURRENT U.S. ENERGY POLICY WITH REGARD TO OUR HEMISPHERE
President Bush's Administration is committed to working with
Canada, Mexico and other countries, particularly in our hemisphere, to
strengthen and create energy partnerships. We are fortunate to have
secure and reliable North American partners that supply a significant
part of our energy requirements.
A key recommendation of the National Energy Policy is the formation
of the North American Energy Working Group. President Bush, Canadian
Prime Minister Chretien and Mexican President Fox directed their Energy
Departments to work together to create ways to facilitate the
development of a true North American energy market that will deliver
reliable, affordable energy to the citizens of all three countries. An
overarching goal of the Working Group is to foster communication and
cooperation among the three governments on matters of common interest.
The National Energy Policy recommends ongoing energy consultations
with Brazil and other countries in Latin America, to improve the energy
investment climate for the growing level of energy investment flows
between the United States and this region. During the U.S.-Brazil
Presidential Summit of June 2003, DOE and Brazilian energy officials
agreed on a number of mechanisms to strengthen the energy cooperation
between the United States and Brazil.
Investment Climate in Latin America and Prospects for Improvement
As a region, Latin America's Gross Domestic Product contracted by
1.3 percent in 2002, with deep recessions in Argentina, Uruguay, and
Venezuela. Foreign direct investment fell from $69 billion in 2001 to
$42 billion in 2002 (40 percent decline). Demand for exports was
depressed due to sluggish growth in Europe and the United States.
Despite generally sound economic fundamentals, there was lower investor
confidence due to concerns about the political direction in several
countries and overall debt dynamics. This slowed capital flows,
hindering economic recovery.
Political and economic reforms are still seen as the most important
factors influencing investment in the region. The energy sector
requires capital inflows to achieve adequate growth, especially in the
oil and natural gas sectors.
Privatization in Bolivia has attracted companies interested in
commercializing the region's second largest natural gas reserves.
Liberalization in Brazil's oil sector has attracted necessary
investment and technology to explore and produce deep-water oil
reserves--enough so that Brazil now produces 1.5 million barrels of oil
per day, an increase of over 500,000 barrels per day in the last five
years. Prior to the recent economic crisis, privatization efforts had
transformed Argentina into a net oil exporter. On the other hand,
countries that have placed new limits on private investment are now
confronting diminished capacity, antiquated infrastructure, and
declining production rates. Vast energy resources in these countries
may remain under-utilized or untapped and economic growth will
stagnate.
Unfortunately, several countries in the Hemisphere continue to
weather severe economic problems. Venezuela's economic downturn was
propelled by both a loss of business confidence and the devaluation of
the Bolivar, which lost almost half of its value since being allowed to
float freely in February 2002. Reports of the partial recovery of daily
oil production levels are encouraging, although not the whole answer
for the economies of Venezuela and the region.
Colombia continues to weather difficult political and economic
conditions. However, improved U.S. and Latin American economic outlooks
for the second half of 2003 are likely to have positive implications
for the Colombian economy. Additionally, recent higher world oil prices
provided a significant boost to Colombian export earnings, as oil is
Colombia's top export product.
Argentina's economy continues to suffer. The most pronounced of
President Duhalde's crisis management measures was to abandon the
country's 1991 Convertibility Law, which had pegged the Argentine Peso
1:1 to the U.S. dollar for eleven years. After almost four years of
recession, the Argentine economy ground to a halt in December 2001, as
Buenos Aires defaulted on its approximately $140 billion debt. Civil
unrest swept the nation as citizens were locked out of the country's
banks and unemployment reached a record high of 18 percent.
We are encouraged by the efforts of many of our neighbors in the
region to work with private investors in developing a solution to
problems in the energy sector. We hope the countries in the hemisphere
will continue to strengthen their public dialogue on energy sector
issues.
Prospects for Increasing Energy Production in Latin America
Latin America, Mexico and the Caribbean accounts for 10.5 million
barrels a day of global oil production (includes natural gas liquids
and alcohol fuels), which is estimated to increase to 12.8 million
barrels per day by 2010. Fifty two percent of U.S. crude oil imports,
and fifty four percent of petroleum product imports come from the
Western Hemisphere. Of the top five exporters to the United States,
three--Canada, Mexico, and Venezuela--are in our hemisphere. These
three countries account for a large percentage of the 314 billion
barrels of proven reserves in the region (a level of over ten times the
current U.S. oil reserves).
Nine other countries (Argentina, Bolivia, Brazil, Chile, Colombia,
Ecuador, Guatemala, Peru and Trinidad and Tobago) have oil and gas
reserves of varying sizes. While the oil reserves of these nine
countries are clearly not as significant as reserves in the Persian
Gulf, they provide an important source of energy to the domestic
economy and reduce the region's dependency on imported oil. The region
is also richly endowed with natural gas and hydroelectric power
potential, and some countries, primarily Colombia and Venezuela, have
been developing their coal reserves for export. Peru is also developing
its huge Camisea gas field, which is expected to yield benefits in the
form of increased LNG exports to the West Coast of the United States.
The United States' economic future and energy security is
contingent upon the availability of ample energy supplies. If the
region expects to increase the reliability and security of its energy
supply, reduce long-term dependence on imported oil (outside of the
Western Hemisphere), and maintain its economic vitality and viability,
it must have in place a set of policies that support increased energy
production, energy integration, diversification of supply, and
increased foreign investment.
Consequently, the Department of Energy has been working with its
neighbors to improve their technical and managerial skills in their
energy sector. Through various mechanisms, we are promoting a reliance
on market forces and the elimination of monopolistic controls,
emphasizing the importance of regulatory reform, fostering the
implementation of clear and transparent trade practices, and stressing
the importance of foreign investment in meeting the hemisphere's future
energy needs.
We are also encouraging major oil producing countries in our region
to maintain responsible production policies to support a growing
hemispheric economy and help reduce oil market price volatility.
By promoting these policies and efforts, we hope to continue to see
energy production grow to meet the future energy needs of the United
States and other countries of the region. Over the next few decades,
oil and natural gas will continue to play a central role in the world
economy and international energy markets. We must find more oil and gas
supplies, and these supplies must be reliable and made available at
prices that permit sustained economic growth.
Examples of possible prospects for increasing production include:
Argentina is the fourth largest oil producer in Latin
America, with 2.9 billion barrels of proven reserves.
Argentina's oil production was as high as 900,000 barrels per
day in the late 1990s; however, recent estimates put production
at about 800,000 barrels per day as a result of the 2002
financial crisis and the government's economic policies,
(particularly a 20 percent tax imposed on oil exports, as well
as a briefly imposed oil export cap). Argentina's oil sector is
completely privatized, although the largest company, Repsol-
YPF, remains the dominant player. The economic difficulties
faced by Argentina have adversely affected oil production.
Colombia has around 1.84 billion barrels of proven oil
reserves. Colombia's oil production has fallen over the last
three years after hitting a high in 1999 at 830,000 barrels per
day. The government has taken positive steps to make the
investment climate friendlier to foreign oil companies, but
security issues remain a significant problem. Rebel groups have
attacked the production and transportation facilities of oil
companies operating in the country, which has hampered
Colombia's ability to maintain production levels at 1999
levels.
Ecuador is counting on foreign investment to boost oil
production for the new 450,000 bid heavy oil pipeline that will
start pumping in June, and will enable the country to
significantly boost production and will double the country's
transport capacity from the Amazon jungle to its coastal port.
Mexico's current (first quarter of 2003) total oil
production is 3.8 million barrels per day (3.3 million barrels
per day of crude), making it the fifth largest oil producer in
the world. Mexico ranks fourteenth in the world for proven oil
reserves, with 13 billion barrels. Oil production (crude oil
and natural gas liquids) is forecast to grow through 2010.
Natural gas production is forecast to grow significantly
through 2010, when it is expected to nearly double to 3.2 Tcf.
With 8.8 Tcf of gas reserves, Mexico ranks 40th in the world
for proven gas reserves.
Venezuela is a key oil producing country with the Western
Hemisphere's largest conventional proven reserves. Venezuela
has experienced a great deal of turmoil in its energy sector
recently, with increasing government intervention and labor
unrest. In the past few years under President Chavez, cuts in
the state oil company, Petroleos de Venezuela, S.A, (PDVSA), a
lack of foreign direct investment and a policy of strict
adherence to OPEC quotas have hindered the country's long-term
expansion and production.
The Outlook for Venezuela
The loss of Venezuelan oil supply during December, January and
February was a serious blow to U.S. oil supplies. The Administration
monitored the situation closely. We also encouraged other oil producers
to activate their spare production capacity in response to the market
signals that were generated by the Venezuelan loss. OPEC's decision to
increase its production was a positive development. We are continuing
our close monitoring of the Venezuelan situation and are prepared to
act quickly should a need arise.
Venezuela is a significant source of oil for the U.S. and we have
kept a close eye on events in that country. Over the past few months,
the Department of Energy has met on several occasions with officials
from Venezuela's Ministry of Mines and Energy and PDVSA. In February
and again in July, Deputy Secretary McSlarrow met with Minister Ramirez
and PDVSA President Ali Rodriguez. There have also been ongoing DOE
staff level meetings and exchanges of data with PDVSA representatives
to discuss current production and export levels in an attempt to
improve the transparency of information coming out of the country. The
worst effects of the strike in Venezuela appear to be over. Venezuelan
oil production and exports have been significantly restored.
The increase in oil supplies from Venezuela, as well as from other
producers, has helped relieve pressure on crude and product markets
over the past several months. However, crude and product inventories
remain at historically low levels, due in part to the Venezuelan
disruption.
Production--There are a wide range of estimates about Venezuela's
ability to restore full production and export of oil. Venezuelan
government sources claim that production is at 3.1 million bpd. On the
other hand, most industry experts place production around 2.5 million
bpd.
EIA is using 2.35 million bpd for its calculations since that is
what can be confirmed based on available data. Industry analysts cite
field damage and lack of maintenance resources as preventing the
restoration of the remaining 500,000 bpd. Before the strike, Venezuela
produced about 3 million bpd and exported 2.5 million bpd.
Many analysts also question whether current production can be
sustained. Venezuela's oil fields have natural depletion rates up to 25
percent per year, which has, in the past, required PDVSA to invest
heavily to maintain production capacity. Experts have not seen evidence
of the investment--such as drilling activity--necessary to sustain
production.
Exports--Unofficial EIA data from the last few weeks show that U.S.
crude imports from Venezuela continue to be above one million barrels
per day--higher than levels seen in January and February but still
below pre-strike levels of 1.5-1.6 million barrels per day.
Refining--Reports indicate that several refineries are operational
and running, but the amount and quality of refined products being
produced, by Venezuela, particularly gasoline, are unknown. Venezuelan
domestic demand for gasoline has dropped due to economic constraints,
which may allow for more exports.
There have been reports of gasoline shipments to the U.S. but it is
possible that the gasoline came from storage or was imported to
Venezuela during the strike. Venezuelan gasoline exports to the U.S.
have not yet consistently returned to pre-strike levels of around
60,000 bpd (100,000 bpd with imports from PDVSA's Caribbean
refineries).
Technical Consultations--The Department of Energy has had long-
standing technical and policy cooperation with Venezuela. We believe it
is important to maintain that relationship. We have made initial
efforts to resume technical level cooperation. We have not yet set
dates for policy level consultations.
current u.s. energy policy with regard to africa
The President has recognized the importance of the United States'
relationship with Africa, and the National Energy Policy outlined some
specific recommendations for continued engagement, that include actions
to:
Use the U.S.-Africa Trade and Economic Cooperation Forum and
the U.S.-African Energy Ministerial process; deepen bilateral
and multilateral engagement to promote a more receptive
environment for U.S. oil and gas trade, investment, and
operations; and promote geographic diversification of energy
supplies, addressing such issues as transparency, sanctity of
contracts, and security; and
Support more transparent, accountable, and responsible use
of oil resources in African producer countries to enhance the
stability and security of trade and investment environments.
In June 2002, DOE co-sponsored the Third U.S.-African Energy
Ministerial Conference in Casablanca, Morocco, where Secretary Abraham
and ministers or representatives from nearly 40 African countries
reaffirmed a commitment to good governance and stable regulatory
structures, and discussed additional steps to encourage private sector
investment in the energy sector. At the Ministerial, we met with
government and industry representatives to discuss ways to improve
energy trade and facilitate energy sector development in order to
better serve U.S. and African economic growth and development.
Routinely, DOE meets with a number of African government officials
on a variety of energy issues. In late 2002, we organized a Gulf of
Guinea Business Roundtable to discuss energy issues with U.S. oil and
gas company representatives doing business in the region. Also, over
the last year or so, we have been engaging more actively in various
trade policy mechanisms, including the African Growth and Opportunity
Act (AGOA) process.
I would also like to highlight some of our specific activities with
African countries:
Through an interagency agreement with USAID, DOE implemented
a comprehensive energy program with Nigeria, which included
energy sector reforms and power and natural gas development
activities. In cooperation with the Department of State and
USAID, DOE is initiating a similar formal bilateral energy
program with the Angolan Government.
In terms of natural gas development and reduction of
flaring, DOE is working with Nigeria and South Africa, and
routinely advocating our support for the West African Gas
Pipeline Project, which will transport Nigeria gas to markets
in Benin, Togo and Ghana. USAID is assisting the four nations
involved in completing a series of cross-border agreements and
harmonization of their respective regulatory environments.
USAID has been actively involved in designing a global
development alliance for the West Africa Power Pool whose
purpose is to produce an abundant, reliable, efficient and
affordable energy supply, while attracting private sector
investment, by means of institutionalized regional cooperation
among the fifteen member states of the Economic Community of
West Africa (ECOWAS).
We are active participants, and a member of the steering
committee, in the World Bank's Gas Flaring Reduction
Initiative, which involves several African countries.
We participated in and spoke at the Africa Growth and
Opportunity Act (AGOA) Economic Forum, which was held in
January in Mauritius, and emphasized issues related to small-
and medium-sized enterprises, local content, and capacity
building opportunities.
We are participating in the negotiations for the U.S.-South
African Customs Union Free Trade Agreement with Botswana,
Lesotho, Namibia, South Africa, and Swaziland, among other
energy-oriented activities with African countries.
Investment Climate in West Africa and Prospects for Improvement
Democratization and the development of responsible governing
institutions are particularly important in reducing oil related
conflicts and promoting African supply stability. Accountability and
transparency are necessary to ensure that oil revenues benefit the
population and support economic and social development. Managed
effectively, revenues from expanding oil and gas production could be
the engine for national and regional economic development and political
stability in these countries. However, this will not happen if energy
development is accompanied by corruption, the disruption of other
economic sectors, and a disenfranchisement of the citizenry.
We have an interest in helping African nations solve these problems
and in helping them to become fully reliable energy suppliers to
international markets. Substantial foreign direct investment is needed
to develop African energy resources both onshore and offshore. Broadly,
we support this process by encouraging the reforms needed to improve
the investment climate. For instance, we have negotiated a bilateral
energy cooperation framework with Nigeria, we advocate on behalf of
U.S. energy concerns, and we support the World Bank's involvement in
independent monitoring arrangements in the Chad-Cameroon Pipeline
Project and other regional energy infrastructure projects. The G-8
countries agreed in Evian on an action plan to fight corruption and
improve transparency, which will enable us to help oil-producing West
African states to improve transparency in the management of their oil
revenues to ensure they support broad-based, sustainable development.
Prospects for Increasing Production in West Africa
West Africa is currently producing about 4 million barrels of oil
per day. Production in West Africa could rise to 7 million barrels per
day or more by 2010, and even higher in subsequent years if the geology
and investment climates are favorable. West Africa is one of the
world's fastest growing sources of oil and gas. Oil production
generates a large share of government revenue in countries such as
Nigeria, Angola, Gabon, Equatorial Guinea, Republic of Congo, and
Cameroon. Much oil remains to be discovered and developed in some of
these countries. Additionally, emerging potential producers, such as
Mauritania, and Sao Tome and Principe, will soon begin producing
significant new oil supplies. Chad began producing oil for the first
time this summer and production could reach 150,000 bpd in 2004.
Other current prospective African oil producing countries include
Senegal, The Gambia, Liberia, Sierra Leone, Benin and Togo, all of
which are currently, or soon hope to be, exploring for oil. So, the
prospects for increasing oil and gas production in West Africa are very
high. While Africa as a whole holds only about 6 percent of the world's
proven oil reserves, and while it will never replace Middle East oil,
West Africa will nevertheless be the source of about 3-4 million
barrels per day of additional oil supplies over the next ten years.
This is important to us because it is the incremental or marginal
barrels that have the most impact on the world market and our energy
security.
One of the largest infrastructure projects in Sub-Saharan Africa is
the $3.5+ billion, 650-mile Chad-Cameroon oil pipeline project. This
project has the potential to bring up to 250,000 bpd of oil to the
market and promote development of other reserves in the region. The
project is led by ExxonMobil and includes ChevronTexaco. The oil is
located in landlocked southern Chad and is being transported by the
pipeline to the coast of Cameroon.
Rising U.S. Energy Stakes in Western Africa
Energy from West Africa plays an increasingly important role in our
energy security as we diversify our sources of oil supply. Currently,
more than 12 percent of imported U.S. oil is from Africa. However,
Africa's oil exports to the U.S. are set to rise. African oil is a key
engine for economic development in Africa.
Nigeria, an OPEC member, has proven oil reserves of 24.0 billion
barrels and currently produces nearly 2.2 million barrels per day. The
largest U.S. oil producing companies in Nigeria are ExxonMobil and
ChevronTexaco, but many other companies are involved as well.
Angola, a non-OPEC member, is the second largest Sub-Saharan
African oil exporter to the U.S. Total oil production in Angola in 2002
was over 900,000 barrels per day, with production projected to top 1
million barrels per day in 2003. Angola's total proven reserves are 5.4
billion barrels, and rising with new discoveries. ChevronTexaco,
ExxonMobil, Marathon Oil, Occidental, Devon Energy Ocean Energy and
ConocoPhillips are U.S. oil companies with holdings in Angola. Only
Chevron and Exxon are currently operators.
Equatorial Guinea's oil production is currently about 200,000 bpd.
It is a non-OPEC producer and has proven reserves of 12 million
barrels. The U.S. plans to re-open an embassy in Equatorial Guinea
within the next year. Major U.S. oil companies operating in Equatorial
Guinea are Amerada Hess, ChevronTexaco, ExxonMobil, and Marathon Oil.
Gabon is Sub-Saharan Africa's third largest oil producer and
exporter, producing about 294,000 bpd in 2002. While Gabon's oil
production has decreased in recent years, its proven oil reserves are
2.5 billion barrels.
Republic of Congo (Brazzaville) has estimated proven oil reserves
of 1.5 billion barrels. The majority of its crude oil production is
located offshore, with Total as the dominant operator. Congo produced
about 249,000 bpd in 2002.
Natural Gas--With regard to natural gas, the U.S. consumed more
than 22.5 trillion cubic feet in 2002. Currently, the natural gas
market in the U.S. is tight, with inventory levels lagging behind
normal levels. This shortfall is reflected in spot natural gas prices
and the expectation that demand will remain at a high level relative to
domestic natural gas supply capability. Our dependence on imported
liquefied natural gas (LNG) is expected to rise, and much of that could
come from Africa and Latin America. As such, Secretary Abraham will be
convening the LNG Global Summit in November, which will include major
and emerging LNG producers and explore ways to facilitate increased
exports to the U.S.
By 2025, total natural gas consumption is expected to increase to
almost 36 trillion cubic feet, or 26 percent of U.S. delivered energy
consumption. Such a demand level represents an increase of about 59
percent from the expected 2003 level. U.S. domestic gas production is
expected to increase more slowly than consumption. As a result, U.S.
dependence on imported natural gas is expected to rise. Significant
increases in LNG imports from West Africa and Latin America, along with
new supplies from the Middle East, Russia and North Africa are likely
to meet our rising demands.
The use of natural gas, increased LNG exports and the associated
increase of revenues from gas development to governments, will help to
eliminate gas flaring and provide opportunities for enhanced socio-
economic development. DOE is working with various countries and
organizations in Africa to promote the development and utilization of
natural gas resources, which, in turn, will directly contribute to the
reduction of gas flaring and venting.
Nigeria has the 9th largest natural gas reserves in the world and
the largest of any country in Sub-Saharan Africa. In 2001, the most
current data available, Nigeria vented and flared an amount equal to 44
percent of its gross natural gas production and reinjected an amount
equal to 10 percent of its gross natural gas production. Nigeria has an
LNG plant with three trains operational, two additional ones due to
come online by the end of 2005, and a sixth train being considered. In
addition, many companies have active proposals to develop additional
LNG projects in Nigeria.
The West African Gas Pipeline (WAGP) is a gas transmission project
designed to connect Nigeria's gas reserves, including some flared gas,
to markets in Benin, Togo, and Ghana (with Ghana being the primary
market for the gas). The governments of these four countries,
ChevronTexaco, and Shell are partners in the project. When completed,
the open access pipeline will help to bring some of the regions gas
resources to commercial markets for electric power and industrial uses.
Angola and Equatorial Guinea have substantial reserves of natural
gas, and both countries are pursuing LNG projects to utilize the gas.
The Status of the Conflict in West Africa
West Africa is a conflicted region that is suffering the effects of
corruption, political instability, border disputes, ethnic/religious
strife, governance issues, and poverty. These conflicts produce risks
that must be overcome if the region is to attract the investment it
needs to sustain and expand energy resource development.
The recent effect of the political and ethnic instability in the
Niger Delta was a temporary loss of about 800,000 bpd of Nigerian crude
oil production and an upward pressure on oil prices during the lead up
to the Iraq war earlier this year. This represented 37 percent of
Nigeria's daily oil production of nearly 2.2 million barrels per day.
Today, 272,500 barrels per day of crude oil remains shut-in in Nigeria
due to ongoing civil strife in the Delta.
Nigeria supplied 621,000 barrels per day of oil to the U.S. in
2002. This represents over 5 percent of U.S. imported oil in 2002. Also
in 2002, Nigeria was the fifth largest foreign supplier of crude oil to
the U.S.
Angola currently produces about 930,000 barrels per day of oil, is
the second largest Sub-Saharan African exporter of oil to the U.S., and
is not a member of the Organization of Petroleum Exporting Countries or
OPEC. Until a little over a year ago, Angola was immersed in a nearly
30-year civil war. However, because most of Angola's oil production is
offshore and was removed from the largest population centers and
closest proximity to the fighting, oil production was relatively
unaffected in Angola during the war. A final peace agreement has been
successfully implemented and the U.S. Government is supporting the
peace process and rebuilding of Angola.
I visited Angola earlier this year and engaged in a dialogue on
identifying possible areas for bilateral and multilateral cooperation.
We want to establish a formal framework that will facilitate enhanced
cooperation on such issues as policy and regulatory reforms, natural
gas development, electrification, and infrastructure development. An
interagency agreement has been signed between DOE and USAID to assist
the Government of Angola in developing a national energy strategy.
Conflict and political instability plague some countries in the
region that have not even begun exploring for or producing oil. For
example, on July 16th of this year, there was a military coup in the
small country of Sao Tome and Principe. The coup leaders demanded
better government, pay and facilities. In some ways this coup may have
been precipitated by the expectation that the country will soon realize
significant revenue increases from signing bonuses received, and from
oil production that may result from development of the offshore Joint
Development Zone with Nigeria. Sao Tome highlights how the large
natural resource rents that often accompany oil development projects in
developing countries can, in certain circumstances, become a source of
instability.
These conflicts in West Africa have a destabilizing impact on the
investment climate, on the social and economic development aspirations
of the African people, and on our energy security. Finding affordable
and effective ways to help these countries overcome these barriers is
one of the new challenges to our energy security aspirations.
CLOSING
Mr. Chairman, I believe that my statement covers all of the topics
you requested for today.
At this point, I would therefore like to end my prepared remarks
and thank you for the opportunity to testify before you today. I
welcome any questions that the Committee might have.
An appendix of charts regarding Western Hemisphere and African Oil
and Gas Production and Resources. Also appendixed is a chart on U.S.
Petroleum Imports by Source.
Senator Hagel. Secretary Brodman, thank you.
Mr. McManus.
STATEMENT OF MATTHEW T. McMANUS, ACTING DIRECTOR, INTERNATIONAL
ENERGY AND COMMODITY POLICY OFFICE, ECONOMIC AND BUSINESS
AFFAIRS BUREAU, U.S. DEPARTMENT OF STATE, WASHINGTON, DC
Mr. McManus. Mr. Chairman, we are pleased that you have
invited us today, you have picked out two very important
regions of the world that provided 60 percent of our imports
alone in 2002. An effective energy security policy must, as
outlined in the President's National Energy Policy, look for
and promote diverse production in energy from a wide range of
geographical regions, including these two. And I am happy to
provide you just a few concrete examples of what we are doing
at the State Department to advance these goals.
First, we have made strengthening our relations with Canada
and Mexico a real pillar of our energy policy. We have
established a North American Energy Working Group to serve as a
forum for exchanging information and pursuing joint strategies.
In an unprecedented step, the three governments jointly
published a North American energy picture, that we have asked
our staffs to provide you, that measures the energy reserves,
trading flows, and energy infrastructure for all of North
America. This is the first time that the three governments have
looked at the resources of all of North America at one time and
cooperatively. We plan to build on this energy picture as a
common basis to explore new ways that the three North American
nations can work together to expand interconnections and
maximize trade. Our group will meet again in December.
Now, looking at the North American resource base--and we
include Canada in the Western Hemisphere--if you look at their
heavy oil reserves, they have dramatically shifted the
distribution of world oil reserves. The Department of Energy
now characterizes Canada's heavy oil as proven, meaning that
with 180 billion barrels of oil, Canada holds the world's
second largest oil reserves. This is not just record keeping,
as Canada's heavy oil production now exceeds 1 million barrels
per day. Looked at another way, at the chart on my right,
inclusion of Canadian heavy oil increases North America's
energy share of world oil reserves--in yellow it is shown
without heavy oil--from 13 to 26 percent of world oil reserves,
and it decreases the Middle East share in red from 66 to 57.
And here you can see the relative change in simply the heavy
oil from Canada, oil that we now have proven in the Western
Hemisphere.
Given the grave importance of that really tectonic shift,
we have annual energy consultations with the Canadians, an
energy consultative mechanism that the State Department chairs.
We bring together many U.S. Government agencies. We met July 17
in Ottawa, and it is a terrific way to stay in touch on the
many important issues with our single largest oil and gas, as
well as electricity, supplier.
Mexico also in North America is one of our leading energy
and trading partners, and its production, as Secretary Brodman
reflected, is at recent high levels. Like Canada, our energy
trade with Mexico is a two-way street, with oil flowing to the
United States and, as the chairman mentioned, refined products
and natural gas flowing to Mexico.
On our side of the border, we are doing everything we can
to speed and support integration. For example, in April the
State Department approved PEMEX's application for a
Presidential permit to cross the international boundary for a
new diesel fuel pipeline that will bring 10,000 barrels a day
of diesel fuel from a refinery in Monterey, Mexico.
As Secretary Brodman has said, traditionally Venezuela in
South America and the United States have enjoyed reliable and
strong energy ties. Venezuela's reliability was, unfortunately,
damaged with the oil disruption at the beginning of this year,
and while production and refinery operations and exports to the
United States have all recovered to a large degree, it will
take more time to accurately determine the sustainability of
this recovery. The United States will continue to work with the
Organization of American States to be supportive of Venezuelans
as they resolve their political differences finding a
constitutional, democratic, peaceful, and electoral solution to
their crisis, as called for in OAS Permanent Council Resolution
833.
You have also mentioned the important role of Brazil. In
our National Energy Policy report, we recognize the important
role of offshore production in Brazil, and for the first time,
later this year we will host formal bilaterals, much as we do
with Canada, with the Government of Brazil to take into account
their growing role in world oil reserves.
Senator Coleman also mentioned the important developments
in Trinidad and Tobago. They have the largest single LNG
facility in the Western Hemisphere. They have become our No. 1
supplier of LNG, and we think it reflects that when you have a
very good investment climate, investors will come.
Turning to Africa, only last week the Chad-Cameroon
pipeline was inaugurated, which will bring, at peak capacity,
an additional 250,000 barrels per day to world markets. And
that pipeline is an example of a cooperative effort between
governments, international financial institutions, the oil
companies, NGOs, and civil society. It will balance economic
benefits, transparency, humanitarian, and environmental
concerns. We assure you that our Ambassador in Chad is deeply
engaged with local governments to ensure that the unique
capacity building and transparency measures incorporated in
this project are carried forward. The administration recognizes
Africa's important role not only diplomatically but in energy,
and our Secretary of State is there today.
Nigeria has been, in fact, the fifth largest supplier of
crude oil to the United States, and we also recognize that
Nigeria's oil-producing Niger Delta remains volatile with
intermittent communal violence and labor disputes that have
disrupted production in some areas. Our mission in Nigeria
remains committed to supporting democracy, economic reform, and
poverty alleviation in Nigeria, and we have dedicated a new
embassy position to working with oil companies, NGOs, and
indigenous groups on these issues and corporate responsibility.
Existing and new producers in Africa, such as Angola,
Gabon, Equatorial Guinea, Sao Tome, and Chad will continue to
develop new oil and gas reserves in coming years, and U.S.
energy firms are key in Africa's ongoing emergence as an energy
supplying region.
Equatorial Guinea is emerging as a major oil producer in
the Gulf of Guinea. We opened an embassy office in Malabo only
this month that will enhance our dialog with the government and
signal our commitment to broad engagement with Equatorial
Guinea, including human rights.
We have a strong interest in assisting oil-producing
countries overall on transparency to channel receipts from
their energy resources into economic development that will
benefit their populations over the long term. At its Evian
Summit in June, the Group of Eight countries endorsed a
comprehensive action plan on fighting corruption and improving
transparency to help developing countries acquire the tools to
strengthen domestic institutions and enhance transparency and
accountability.
In summary, new energy resources from existing producers
such as Canada, Venezuela, Angola, combined with those from
emerging producers of oil and gas, such as Equatorial Guinea,
Chad, among others, are helping to meet our energy security
goals by diversifying world oil supplies, and the State
Department remains deeply engaged in each case. As noted
throughout the testimony, we are working with host governments,
both in Washington and through our embassies overseas, to build
and support open and stable business environments for U.S.
firms to play a role in developing these energy resources. And
we are doing so in a manner that promotes corporate
responsibility, which encourages the very best practices to
promote human rights, to promote transparency and
accountability, and to make sure that energy development
advances overall development.
Thank you very much, Mr. Chairman, committee members, and I
too would welcome your questions.
[The prepared statement of Mr. McManus follows:]
Prepared Statement of Matthew T. McManus, Acting Director of
International Energy and Commodity Policy Office, Economic and Business
Affairs Bureau, U.S. Department of State, Washington, DC
Mr. Chairman, distinguished Committee members, I am pleased to be
here today with the Department of Energy to discuss the important role
West Africa and Latin America play in our energy security. We are
particularly pleased that the Subcommittee has chosen these key regions
to discuss: they are important both in an energy security sense and for
the commercial opportunities they present for U.S. firms. Just to
highlight at the outset the importance of the Western Hemisphere and
West Africa to U.S. energy security, nearly 60 percent of 2002 U.S.
imports of crude oil and oil products came from these two regions. As I
will outline in my testimony, these regions will continue to play
important roles as significant contributors to the diversity of supply
called for in our energy policy.
The President's National Energy Policy noted the importance of the
Western Hemisphere and Africa to global energy production. Given the
role Canada plays in our energy security and the importance of our
North American Energy Framework, I have taken the liberty of including
Canada and expanding my testimony to cover the Western Hemisphere
rather than just Latin America. The National Energy Policy directs the
Secretaries of State, Commerce and Energy to put a particular focus on
regulatory harmonization and integration of markets, as well as to work
with our foreign partners to improve commercial conditions and
investment climates. We are working with colleagues at the Departments
of Energy and Commerce to implement these directives, in West Africa
and the Western Hemisphere and across all regions. I am pleased that we
have successes to report, as well as areas for additional work for our
agencies.
As Under Secretary Larson testified in April, we approach
international energy policy aware of a number of hard facts that must
be at the nexus of an effective energy security and foreign policy.
These hard facts include net import levels of roughly half of our
energy needs, higher dependence by our trading partners on oil imports
from one region of the world, and the reality that a disruption
anywhere affects all market participants.
Taken together, these facts mean that one key element of an
effective international energy policy must be to promote increased and
diversified production of energy from a range of foreign suppliers in
many regions, as outlined in the President's National Energy Policy.
Today's hearing on the Western Hemisphere and West Africa will enable
us to report to you how we are promoting the diversification that is
central to our strategy in these two key regions of the world.
RELIABILITY THROUGH DIVERSIFICATION
Energy investments are costly, risky and require longterm
commitments. For that reason, neither companies nor countries can
afford to have all of their eggs in one basket. Recognizing this
reality, our energy policy seeks to encourage in countries around the
world like-minded free market policies toward energy and investment,
emphasizing the expansion and diversification of energy supplies.
Let me provide you with just a few concrete examples that
demonstrate what we are doing to achieve these goals.
NORTH AMERICA: ENERGY INTEGRATION
We have made strengthening our energy cooperation with Canada and
Mexico a top priority of U.S. energy policy. We established a North
American Energy Working Group (NAEWG) in 2001 to serve as a forum for
exchanging information and pursuing joint strategies. Last year, senior
energy experts from the three North American governments released a
North American ``Energy Picture'' report that, for the first time,
jointly measures energy stocks, trading balances, and energy flows in
the continent. This marks the first time we have truly looked at the
North American market as a unified one. These NAEWG meetings enable us
to harness the work of five sub-groups addressing the science and
technology of energy, energy efficiency, electricity regulation,
natural gas regulation, and critical infrastructure protection. This is
not a negotiation, for each country makes its own sovereign energy
policies. But we do see the NAEWG as an excellent forum from which to
learn from one another, and from which to evaluate the barriers that
still impede a truly unified market.
CANADA
I would like to take a few minutes to describe how Canada, our most
important energy supplier, factors into the energy security equation,
as we are trying to take a hemispheric approach to energy in the
Americas. I start with Canada because it remains our leading supplier
of imported electricity, natural gas and petroleum. All three flow
across the border in both directions. The Canadian energy sector is
developing its heavy oil reserves, with production expected to reach
nearly one million barrels per day by year-end. These heavy oil
reserves are anchoring Canada as a pillar of hemispheric energy
security.
Canada's heavy oil is important to our energy security. DOE's
Energy Information Administration compiles an annual reference citing
various private sector compilations of overall energy reserves. This
year, they have included the Oil and Gas Journal's new estimate that
characterizes a significant portion of Canada's heavy oil as proven
reserves. This one change, recognizing the commercial viability of oil
sands, raises Canada's proven reserves estimate to some 180 billion
barrels, making it the world's second largest holder of reserves after
Saudi Arabia's 264 billion barrels and just ahead of Iraq. And 175
billion of those 180 billion barrels are in oil sands. Over time this
number will rise as advances in technology make even more heavy oil
reserves recoverable at prevailing market prices.
As a point of illustration, the shift in Canadian reserves is
telling, as it alters overall distribution of world oil reserves.
Including Canada's heavy oil reserves raises North America's share of
the world's proven reserves from 6 to 18 percent (and the Western
Hemisphere's from 13 to 26 percent), while those in the Middle East
fall from 66 to 57 percent. This comparison is presented graphically at
the end of my testimony.
And given this big shift, I also wanted to provide a brief overview
of some of the commercial projects we see there, and some that may be
over the horizon, and to note that many of these projects involve
partially or majority-owned subsidiaries of U.S. energy concerns.
Suncor and Syncrude (Canadian companies with major U.S. investors) have
decades-old projects in the oil sands which, with production costs now
down to about $10 per barrel, are strongly economic. They have
contributed much of the pioneering technical development that made this
gigantic resource viable. More recently, ChevronTexaco, Shell and
others have undertaken multi-billion dollar investments that can be
expected, perhaps by the end of this decade, to lift production to two
million barrels per day. This should make up for expected reduced
traditional oil field production in Canada. The main constraint to
bringing these resources to market will not be their availability, but
pipeline and refinery capacity.
World-class oil and natural gas projects are also underway in the
Canadian Maritimes, which until recently had no oil or gas production,
but is now the fastest-growing source of natural gas for New England,
the region of our country most dependent on home heating oil. In 2000
Nova Scotia began producing natural gas and shipping it southwest by
pipeline to the Boston area.
Newfoundland began producing oil from its offshore continental
shelf less than a decade ago, and it is showing increasing promise as a
long-term component of North America's energy supply picture. Using
technology and experience from Europe's North Sea developments,
Newfoundland's oil output has been growing by 20 to 30 percent per
year, and is at about 135,000 barrels per day from the first field,
Hibernia. Production could double in the next six years as new fields
come online.
Major U.S. companies, or U.S. divisions of major multinationals,
involved in various facets of the offshore energy sector (exploration,
production, pipeline systems, offshore support services, etc.) in
Maritime Canada include: ExxonMobil, BP, Shell Oil, Bechtel, Chevron,
El Paso Pipeline, Hunt Oil, Marathon, Rowan Offshore, and Global
SantaFe. The State Department offers these firms our support, through
our Embassy in Ottawa and Consulates in Calgary and Halifax, in dealing
with occasional regulatory difficulties.
Given the importance of our energy partnership with Canada, the
State Department has for years chaired an interagency bilateral
``Energy Consultative Mechanism'' between the two federal governments,
allowing each side to work towards common ends and to address issues of
concern. Canada hosted the latest meeting of the Mechanism in Ottawa on
July 17, where we discussed their oil sands production and our natural
gas summit, as well as our shared electrical grid and numerous other
topics. We have had numerous discussions with our Canadian colleagues
since the August 14 blackout in Toronto, Ottawa, Washington and
Detroit.
MEXICO
Mexico is one of our leading energy and trading partners, and has,
with other major producers, increased production in recent months to
help global oil markets meet the challenges arising from recent events
in Iraq and Venezuela. Mexico is generally among our top five foreign
oil suppliers. In February of this year, crude oil imports from Mexico
exceeded those of both Saudi Arabia and Canada, and Mexico has
maintained higher than normal oil exports to the United States since
then.
Our energy trade with Mexico is not a one-way street. We import
crude oil and electricity from Mexico. But we also supply Mexico with
over 10 percent of its refined petroleum products, and we remain a net
natural gas exporter to Mexico.
Mexico has taken steps to liberalize transportation, distribution,
and storage of natural gas, and has successfully attracted domestic and
foreign investment there and in other parts of its energy sector. Some
of you may have already met Mexico's new Energy Minister, Felipe
Calderon who, as a member of the Mexican Congress and a leader in
President Fox's National Action Party (PAN) party, participated in
meetings of the U.S.-Mexico Inter-parliamentary Union in the 1990's.
Minister Calderon was appointed September 2 and is expected to continue
the sector's liberalization.
In recent months, integration has increased at the border. For
example, PEMEX applied for a Presidential Permit to cross the
international boundary to Brownsville, Texas, with a petroleum products
pipeline that initially allows imports of about 10,000 barrels per day
of diesel from a refinery in Monterey, Mexico. The pipeline will
ultimately have a capacity of up to 100,000 barrels per day. The State
Department issues such permits, and this one was signed in April after
a thorough consideration of public comments and inter-agency review.
Mexico is also proceeding with plans to permit numerous LNG import
terminals in Baja California and along its Gulf Coast. Although not all
of these projects will ultimately be constructed, industry analysts
believe several will be operational by around 2007. Foreign investors,
including U.S. companies such as Sempra Energy, ChevronTexaco, and
Marathon, are actively pursuing these projects, which will serve both
the Mexican and U.S. natural gas markets.
Since 1992, Mexico has allowed private sector participation in the
generation of electricity for self-supply, small production,
cogeneration and independent power production (IPP). U.S. firms are
major investors and suppliers in this new market. Mexico projects an
overall annual growth rate in electricity demand through 2010 of 5.6
percent, and somewhat higher (6.5 to 7.6 percent) in industrial
regions. Privately financed generating capacity is expected to grow at
14.2 percent annually, and Mexico expects to add over 28,000 Megawatts
of new capacity by 2010. IPPs could play a major role in attracting the
required investment in new generation and transmission infrastructure.
The reliability of North American energy trade is also enhanced, of
course, by geographic proximity. But more important than geography
alone are the rule of law and the predictable investment conditions
created by NAFTA, integrated pipeline networks, close cooperation among
our governments and energy companies, and long-term stable supply
relationships.
lng: a bright new industry for trinidad and tobago
Recent natural gas finds in Trinidad's waters have reinforced that
country's position as a reliable supplier of liquefied natural gas
(LNG) to the U.S. and global LNG markets. In fact, the country is home
to the single largest LNG facility in the hemisphere, a clear signal
that, with the right investment climate, investors will come.
Currently, Trinidad and Tobago supplies about two-thirds of the U.S.
LNG market, some 2.4 percent of total natural gas imports and 0.4
percent of total natural gas consumption. Trinidadian gas exports (98
billion cubic feet in 2001, valued at just under $400 million)
contribute a significant portion of gas used in the Northeast. Trinidad
hopes to triple its share of the U.S. market by the end of the decade.
Several discoveries in 2001 increased Trinidad's substantial proven
reserves to around 30 trillion cubic feet, with total potential
reserves estimated at 90 to 100 trillion cubic feet. Low exploration,
production and transportation costs make Trinidadian gas competitive
with most other foreign sources of gas.
VENEZUELA: HISTORIC, STRAINED, BUT RECOVERING OIL SUPPLIER
Venezuela and the United States have also enjoyed historically
strong energy ties. Traditionally, Venezuela has been one of our most
reliable oil partners, and maintained an oil policy built upon a
reputation of reliability, which was of great mutual benefit to
Venezuela and consumers of its oil exports. Through World Wars,
politically inspired embargoes, and global dislocations, Venezuela
found that its national interest was best advanced through maintaining
that reputation of reliability.
This reliability was, unfortunately, seriously eroded with the oil
disruption at the beginning of this year. Venezuela's turmoil came at a
difficult period for the world economy. It is up to the Venezuelans to
work to restore that reliability with world petroleum markets. While
production and refinery operations have recovered significantly, many
industry experts assess that the sustainability of the recovery is
questionable due to the lack of skilled manpower, deferred maintenance
activities, and lack of capital investment. Many argue Venezuela will
experience an actual decline in capacity if these trends are not
reversed.
Commercial aspects of the relationship continue to run deep. In the
1990s, Venezuela opened parts of its energy sector to international
firms, most of them American. These firms, such as ConocoPhillips,
ChevronTexaco and ExxonMobil as well as independents like Harvest
International, Sampson and Anadarko remain hard at work there. In fact,
foreign energy firms are producing an increasing share of Venezuela's
oil. U.S. firms are also working with Venezuela as it begins to tap its
large LNG potential in projects such as Plataforma Deltana. Venezuela's
vast heavy and extra heavy oil reserves also deserve special mention in
this regard. Joint-venture projects with major international partners
are now on stream, and as the commercialization of Venezuela's heavy
oil potential deepens, it seems likely that the private sector will
book more and more of these reserves as proven, as in the case of
Canada, and tip the Hemisphere's reserve balance yet further.
The investment relationship with Venezuela is a two-way street. In
fact, Venezuela is one of the top ten overall foreign investors in the
U.S. through CITGO, a major refinery and petroleum products marketer
here. These reciprocal energy investments bring benefits to both
parties. We will continue to maintain a robust, if possibly more
difficult, energy dialog with Venezuela.
The United States will continue to work to help Venezuelans resolve
their political differences. The key to reversing the severe economic
and political decline in Venezuela, and the key to recapturing their
oil sector reliability, is a continued dedication to finding a
constitutional, democratic, peaceful and electoral solution to the
crisis, as called for in Organization of American States (OAS)
Permanent Council Resolution 833 of December 16, 2002. The
international community, including the OAS and the Friends of the OAS
Secretary General's Mission for Venezuela, of which the United States
is a member, stand ready to support Venezuelans' efforts to resolve
their differences. Venezuela's newly instituted National Elections
Council has the responsibility of determining when a recall referendum
will be scheduled.
BRAZIL: DEEP WATER RESOURCES, NEW GAS FINDS
On April 29, Petrobras confirmed the largest gas discovery ever in
the Brazilian continental shelf, with reserves of about 70 billion
cubic meters, compared to prior total proven natural gas reserves of
about 231 billion cubic meters. The discovery was made in the BS-400
block of the Santos basin, offshore from the State of Sao Paulo and
Brazil's largest national energy consumer market.
As of summer 2002, the Campos Basin offshore of Rio de Janeiro
State produced an average 1.26 mbd of oil and 18.42 million cubic
meters of natural gas per day. At that time Petrobras was forecasting
oil production by 2005 of 1.6 mbd in the Campos Basin and 1.9 mbd
countrywide.
The National Energy Policy report recognized Brazil's growing
importance to the global energy picture, and its excellence in
producing deep water hydrocarbons.
NIGERIA
The Administration recognizes Africa's role as a major energy
supplier. For example, Nigeria has been the fifth largest supplier of
crude oil to the U.S., with exports to the U.S. averaging nearly
600,000 bpd in 2002. Overall Nigerian crude oil production averaged
2.118 million barrels per day (bbl/d) in 2002. Approximately 65 percent
of Nigerian crude oil production is light and sweet, making it
particularly suited for U.S. refineries since it yields high volumes of
gasoline. Nigeria has the potential to increase its crude oil
production significantly in the next few years as recent deep-water
discoveries come on stream.
U.S. firms are playing an important, and very positive role in
supporting development in Nigeria. On October 15 Secretary Powell
presented ChevronTexaco with the 2003 Corporate Excellence award for
the company's work in Nigeria. ChevronTexaco has done far more than
drill for oil and gas. The company's riverboat clinic brings badly
needed healthcare to thousands of people in the Niger Delta. Like many
parts of Africa, HIV/AIDS has cast its shadow over Nigeria. The
company's AIDS prevention program recently prompted Nigerian President
Obasanjo to designate Chevron Nigeria's managing director as co-chair
of the country's public-private sector alliance to fight HIV/AIDS. We
applaud Chevron Nigeria's commitment to its employees, and to the
people of the delta.
Nigeria also has an estimated 124 trillion cubic feet (Tcf) of
proven natural gas reserves (9th largest in the world). However, due to
a lack of infrastructure, Nigeria currently flares much of the natural
gas it produces and re-injects only about 12 percent to enhance oil
recovery. Nigeria is beginning to develop its gas resources with its
most ambitious natural gas project, a $3.8 billion LNG facility on
Bonny Island completed in September 1999. This facility is slated to
expand to more than double its current capacity over the next three
years. Plans for additional LNG facilities are being developed. In
February 2001, Nigeria and ChevronTexaco, Conoco, and ExxonMobil
announced an MOU to conduct feasibility studies for an LNG facility,
West Niger Delta LNG, expected to be on stream by 2005. An MOU for a
third LNG plant in Nigeria was signed in September 2001 with Phillips
and Agip. This facility, planned to begin operating in 2007, will be
the world's first offshore LNG plant.
The West Africa Gas Pipeline (WAGP), being developed by a
consortium led by ChevronTexaco, is an important regional gas
development project that will bring needed energy supplies to West
Africa and reduce wasteful flaring. The project received $1.55 million
in technical assistance from the United States Agency for International
Development (USAID). USAID assisted the pipeline countries in
developing market mechanisms for natural gas and for building capacity
of local government and regulatory agencies to ensure they could
actively and effectively participate in the WAGP project. The $500-
million WAGP will initially transport 120 Mmcf/d of gas from Nigeria to
Ghana, Benin and Togo beginning in June 2005. The World Bank estimates
that Benin, Togo and Ghana can save nearly $500 million in energy costs
over a 20-year period as WAGP-supplied gas is substituted for more
expensive fuels in power generation. Ghana estimates that it will
reduce its imports by 15,000-20,000 barrels of crude oil per day by
using WAGP gas in its power plants.
Nigeria's oil producing Niger Delta remains politically volatile,
with intermittent communal violence and labor disputes disrupting
production in some areas. Ethnic violence involved well-armed
militants, and the Nigerian military forced foreign operators to shut-
in some 800,000 barrels per day during parts of March and April.
Although overall production has returned to near previous levels, we
remain in close contact with the Nigerian government, the local
communities, and the firms operating in the Niger Delta region as they
work to address recurring problems. Our mission in Nigeria remains
committed to supporting democracy, economic reform, and poverty
alleviation in Nigeria.
EMERGING AFRICAN PRODUCERS
Existing and new producers, such as Angola, Gabon, Equatorial
Guinea, Sao Tome, and Chad will continue to develop new oil and gas
resources in coming years, and U.S. energy firms are key in Africa's
on-going emergence as an energy-supplying region. From the large firms,
such as ExxonMobil and ChevronTexaco, to the smaller oil firms such as
Amerada Hess, Marathon, Devon Energy, Vanco, Kerr-McGee and others,
U.S. companies bring the most advanced technologies, resources and
capital to assist African countries in developing their energy
resources.
The Angolan petroleum industry now produces up to 900,000 barrels
per day, a figure that will increase substantially in the coming years
as new fields are brought on-line. During 2003 more than 350,000
barrels per day of Angola's production has come to the U.S. Current
production is concentrated off-shore of the northern province of
Cabinda. ChevronTexaco is the largest operator in Angola with shallow
and deep-water fields in and around Cabinda. We continue to engage the
Angolan government on the humanitarian situation, and urge the Angolan
military and rebel groups to take necessary steps to protect
internationally recognized human rights in the Cabinda region.
Production from the Cabinda fields will be eclipsed by deepwater
production further south in the Kwanza Basin scheduled to come on-line
by 2007. ExxonMobil, BP, Norsk Hydro, and Agip have all made
significant discoveries in concessions in this area that are under
development. BP made the first significant ultra-deep water discovery
in this area in 2002 and other ultra-deep water concessionaires remain
optimistic.
Our Embassy is actively working with the Angolan government to
support the development of a comprehensive national energy strategy.
USAID recently completed an assessment of Angola's energy policies and
institutions to assist in identifying critical policy questions and
possible solutions. The State Department is following on this effort by
providing $200,000 in Economic Support Funding to the Department of
Energy to support the energy strategy effort with Angola.
Gabon, sub-Saharan Africa's third largest oil producer, currently
produces about 300,000 barrels of oil per day, although this is
expected to decline over the next five years. Gabon is an eligible
beneficiary under the Africa Growth and Opportunity Act (AGOA), and its
duty-free exports to the United States in 2001 were valued at $938.8
million, almost all of which were oil or energy-related products. Over
45 percent of Gabon's oil output is exported to the United States.
Equatorial Guinea is emerging as a major oil producer in the Gulf
of Guinea. On average, Equatorial Guinea produced 179,000 barrels per
day of liquids (including crude and natural gas liquids) in 2002. By
2010 Equatorial Guinea should have 515,000 barrels per day of oil and
natural gas liquids, given current trends, and will also be a supplier
of LNG. ChevronTexaco, Amerada Hess, ExxonMobil, Marathon Oil, and
Devon Energy are some of the U.S. firms with investments in
exploration, production, and service activities in Equatorial Guinea.
We opened an Embassy office in Malabo this month that will enhance our
dialog with the government and signal our commitment to broad
engagement with Equatorial Guinea.
Sao Tome and Principe, though it currently has no oil and gas
production, is another promising emerging producer in the Gulf of
Guinea. Sao Tome's petroleum reserves span both its own Exclusive
Economic Zone (EEZ) and a Joint Development Zone (JDZ) with Nigeria.
The JDZ is estimated to hold substantial reserves, possibly as much as
6-10 billion barrels. ExxonMobil has already made investments in Sao
Tome, and now that recent political turmoil has been resolved with the
return to the island of President Menezes, more U.S. firms are likely
to bring their capital and technological expertise to the table.
Oil began flowing this summer through the $3.7 billion Chad-
Cameroon Pipeline, the largest single private U.S. investment in Africa
led by ExxonMobil, with the participation of ChevronTexaco. The
Pipeline is a good example of sustained cooperative efforts among
various entities--governments, international financial institutions,
the oil consortium developing the project, NGOs and civil society--to
balance economic benefits, transparency, and humanitarian and
environmental concerns. Our Ambassador in Chad is deeply engaged with
the government of Chad to ensure that the unique capacity building and
transparency measures incorporated into this project are implemented.
While the unique circumstances mean that some aspects of the Chad-
Cameroon project may not translate directly to other projects, many
invaluable lessons are being learned. According to projections released
by the World Bank, total receipts for the project are expected to reach
$12 billion over a 28-year period. Chad could earn $2.5 billion over
the life of the project with annual revenues of up to $200 million.
Chad's Revenue Management College, an independent body that will help
assure that oil wealth is used to benefit the citizens of Chad, is now
established to monitor and assess the effectiveness of Chad's oil
revenue expenditures. The College is a unique feature of this project
that we worked closely with the World Bank to see put in place. Its aim
is to ensure transparent use of Chad's oil revenues to alleviate
poverty and to enhance its economic development.
Some concerns remain regarding adequate administrative capacity and
oversight of the use of pipeline revenues, but the project has
established channels for discussion and resolution of problems that are
inclusive and sensitive to impacts on the local population.
PROMOTING TRANSPARENCY AND A GOOD INVESTMENT CLIMATE
We have a strong interest in assisting oil-producing countries to
channel receipts from their energy resources into solid and sustainable
economic development that will benefit their populations over the long
term. Democratization and the development of responsible governing
institutions are particularly important in reducing oil related
conflicts and promoting supply stability from oil and gas producers
around the world. Substantial foreign direct investment is needed to
develop energy resources both onshore and offshore in the Western
Hemisphere and Africa.
The Administration has demonstrated a clear commitment to
encouraging the reforms needed to improve the investment climate.
Transparency and accountability are central to good governance and to
ensure that oil revenues benefit local populations and support
development. We have an interest in helping nations solve these
problems, not just out of altruism, but also in our own self-interest.
We are prepared to explore new partnerships to help countries make good
on commitments to good governance, transparent business practices,
sound economic policies and market-based regulation. Countries with
these attributes make better hosts to the huge investments needed to
develop energy resources, and they make more reliable contributors to
our own energy security.
At its June Evian Summit the Group of Eight (G-8) countries
endorsed a comprehensive action plan on ``Fighting Corruption and
Improving Transparency'' to help developing countries acquire the tools
to strengthen domestic institutions and enhance transparency and
accountability. The initiative focuses on host government commitments
to fight corruption, and to enhance transparency, especially in their
budgets--both on revenues and expenditures--and procurement processes,
because these are the channels through which resources are used and
controlled. The G-8 approach recognizes that government commitment to
transparency and good governance is central to ensuring sound and
accountable use of their energy sector resources. The G-8 countries
have therefore resolved to target assistance on countries with a
commitment to improved performance on transparency.
The Action Plan also commits the G-8 to:
Deny safe haven to corrupt leaders and their assets by among
other things denying visas to corrupt officials;
Push for accelerated implementation of the OECD Anti-Bribery
convention;
Encourage the World Bank and other IFIs to insist on
increased transparency in the use of funds by borrowing
countries.
In addition to these commitments, the G-8 countries agreed to
support voluntary compacts between governments and companies to
disclose revenue flows and payments from the extractive sectors,
including oil, gas and mining. The G-8 committed to support those
governments that wish to implement such voluntary partnerships through
capacity building assistance and by encouraging IFIs to provide
technical assistance. We support an approach based on voluntary
compacts between willing ``pilot'' developing countries and the
companies operating in those countries, and civil society aimed at
establishing a strong relationship among partners in public expenditure
transparency. Our philosophy is that, to be effective, this approach
must focus primarily on how governments allocate and use the resources
associated with these key sectors. In most cases, their own state-owned
enterprises have active control over much of the activity in these
sectors.
WESTERN HEMISPHERE AND AFRICA--HELPING TO MEET OUR ENERGY SECURITY
GOALS
New energy resources, from existing producers such as Canada,
Venezuela, Nigeria, and Angola combined with those from emerging
producers of oil and gas such as Peru, Equatorial Guinea and Chad,
among others, are helping to meet our energy security goals by
diversifying global energy supplies. As noted throughout my testimony
we are working with host governments, both in Washington and through
our Embassies overseas, to build and support open and stable business
environments for U.S. firms to play a role in developing energy
resources throughout the world. We are building on the National Energy
Strategy goal of maintaining a diverse global energy market that
enhances economic growth and stability.
Senator Hagel. Mr. McManus, thank you.
Senator Coleman, I would propose that we alternate here for
maybe 7 minutes at a time, and we have another panel. So if
that is agreeable, I will begin the questions.
Senator Coleman. Thank you, Mr. Chairman.
Senator Hagel. Thank you, and we appreciate very much your
attendance because, as was noted, Senator Coleman is the
chairman of the Foreign Relations Subcommittee on the Western
Hemisphere. So thank you.
Let me begin with you, Mr. McManus. How would you rate the
energy issue in the rating evaluation of what is important when
the State Department in our foreign policy lays out an agenda
of a relationship, human rights, religious freedoms, trade,
transparency, all other important parts of a foreign policy,
American foreign policy? Where does energy fit in that list of
priorities?
Mr. McManus. I think we look to advance our energy policy
by keeping our principles, which is why we are working through
the G-8 on enhancing transparency, which is why we have added a
new position to our embassy in Nigeria to work on corporate
responsibility, and why with the Department of Energy we
maintain a dialog with countries throughout the world, even
countries such as Venezuela where there are larger political
issues at stake. So I think that it is a fundamental part of
our overall foreign policy, and it is well implemented and
integrated into our policymaking system.
Senator Hagel. Secretary Brodman, would you care to comment
on that at all?
Mr. Brodman. Yes, thank you, Mr. Chairman. I think that
many of the new challenges that we see emerging today to our
energy security really come from the kinds of things that we
have not seen in the past. As you know, in the past our supply
disruptions came primarily from sovereign political decisions,
revolutions, and conventional wars, but today they are just as
likely to come from corruption and the lack of transparency,
from governance issues, from ethnic and religious conflicts,
from border and territorial disputes, from political
instability and other internal sources of conflict, and from
the failure of the revenues from oil development to trickle
down to support the economic and social development aspirations
of the people directly involved.
In many ways I think the new challenges to our energy
security today really go beyond energy policy per se to touch
on the things that Mr. McManus mentioned. I think resolving a
lot of these issues really gets down to the United States
helping these countries to manage the revenues they earn from
oil, gas, and other natural resource development in a way that
will support sustainable social and economic development. I
really think that this is the new frontier for our energy
security in the 21st century, especially when we look to Latin
America and Africa.
Senator Hagel. How much of a role do multilateral
institutions/organizations play in our overall effort here, as
you have just described, both of you, in your testimony, to
help these developing nations through these political crises,
border problems, all the other specifics that you mentioned,
focusing on trying to help them develop some stability and
security, as you just noted, managing assets--and many of these
countries have tremendous assets, as you have each laid those
numbers out fairly clearly. World Bank, United Nations, how
much of a role do they play, can they play, should they play in
this effort? I would like to hear from both of you. Thank you.
Secretary Brodman.
Mr. Brodman. Thank you. I believe they are playing an
increasing role and there are a lot of very innovative
activities going on, being undertaken I think by the World
Bank, by regional development banks, by the United Nations, and
by other organizations such as the International Energy Agency
and the newly evolving International Energy Forum, which is a
forum for improving the dialog between oil-producing and oil-
consuming countries.
I think one excellent example of the role that
international institutions can play is the role that the World
Bank played in the development of the Chad-Cameroon pipeline to
bring newly discovered oil from Chad to market, the fund that
that organization set up to channel the revenues from oil
development projects in Chad into sustainable economic
development projects within the country, to make sure that the
country as a whole benefits from the development of those
natural resources.
The World Bank has also been highly instrumental in doing
accounting to help oil-producing countries get a better handle
on the disposition of revenues that come from natural resource
development and I think in this sense in supporting the efforts
that we have undertaken in the G-8 and in other places to
improve the transparency of transactions in natural resource
development in developing countries. In many countries around
the world, for years a large portion of the revenues coming
from natural resource development have never adequately been
reported or reflected in published budget figures, and they
have just been a potential source of funds for corruption and
other activities that have proved problematic across the board.
Strictly speaking now on the energy technical side, we have
a number of activities underway in the International Energy
Agency to reach out to developing countries to help them
improve their data collection and their understanding of world
energy markets and the forces at work that do impact their
ability to develop their resources and to sell them gainfully
in the world market.
As I mentioned before too, we are strong supporters of this
new International Energy Forum which is an outgrowth of the
producer/consumer dialog discussions that have been going on
for the last 10 years.
Mr. McManus. I think many of the larger OPEC oil producers
do not qualify for the IMF standard financial packages, and as
Secretary Brodman said, it is therefore more important that
when they focus their energies on a Chad, that they can make
that a model. In Chad, they have set up a revenue college where
5 percent of the revenues from the Chad-Cameroon pipeline will
go to the local population. Ten percent will go into a trust
fund for future generations, and some 90 or 80 percent will be
earmarked for health, education, and welfare. The World Bank
role there for really developing countries I think is critical
and probably where they have their highest valued use.
Senator Hagel. Thank you. Rather than start a new question,
Senator Coleman?
Senator Coleman. Thank you, Mr. Chairman.
A question to both gentlemen. I agree with the sentiment of
the importance of the United States helping countries manage
resources so you can truly sustain economic development, but I
want to explore how we do that and some of the challenges of
that. Let me use Bolivia as an example.
Over the weekend, President de Lozada faced protests,
ultimately stepped down, and it seemed to me that this issue
was in part at the heart of some of the challenges he faced,
that indigenous and other Bolivians who objected to a natural
gas export plan sensed that the energy resources were somehow
not getting down to the benefits of that, not getting down to
the folks at kind of the bottom rung of the economic ladder.
And I have very deep concerns over the prospects of Evo Morales
and his message and the impact that will have on the
opportunity for Bolivians.
So the question I have is using Bolivia perhaps as an
object lesson here. Are there things that we could have done
differently in working with Bolivia? Is there a role that the
United States should be playing in situations like that or is
the concern that we would be seen as meddling in the internal
affairs of another country, and so we have to step back but
then get the results we get? Can you help me try to understand
the Bolivian situation as kind of an example here?
Mr. McManus. Well, first of all, we very much regret the
loss of life, and we commend ex-President Sanchez de Lozada for
his commitment to democracy and the constitutional transfer to
Vice President Carlos Mesa who is now the President. We think
the events of the last week have really underscored the needs
for all Bolivians to work together to strengthen their
democratic institutions through more peaceful dialog and
constitutional means. We hope that it will be the
responsibility of all Bolivians to take the steps to end the
political polarization and to guarantee respect for human life
and rule of law.
I would not want to delve into such a sensitive issue
because there was loss of life, but on a practical matter,
Senator, I think you have identified a lot of countries in our
hemisphere would rather not have the U.S. come in and tell them
how to allocate revenues. In the case of Bolivia, there were no
gas exports.
I think looking to Trinidad that you had pointed out
earlier, you have the investment climate. Companies will come.
What we do is our market is open to Trinidadian gas. Our market
is open to any Latin American country that can produce gas at a
market price and bring it to one of our few LNG import
terminals.
Senator Coleman. Secretary Brodman.
Mr. Brodman. I agree with everything my colleague has said
here, but I think the Bolivian situation points out a problem
that many energy-rich or potentially energy-rich developing
countries face and that is the problem of managing expectations
of the wealth that will be created from energy development. As
you know, in many countries just the expectation that there
will soon be substantial revenues from natural resource
development has led to sometimes irresponsible spending sprees
and over-commitments and over-promises on the part of
governments that they subsequently have a hard time delivering
on. Rapid energy sector development sometimes in the past has
also come at the expense of other sectors of the economy which
have tended to become ignored.
Now, these are all areas that I think the United States can
help developing countries manage if we are asked. But of
course, we cannot come in and help countries unless they ask us
and if they want our assistance. But in many cases, we find
that it is easier for us to provide help and assistance through
these international organizations that have been developed and
through some of the programs they have to help countries manage
these kind of expectations.
In the case of Bolivia, we have worked closely with Bolivia
in the past on development of their natural gas resources for
export by pipeline to Brazil in particular, and in this most
recent past, I agree with everything my colleague has said
here. There is not much I think that the Department of Energy
in particular can say or add to that.
Senator Coleman. Mr. McManus, you mentioned Trinidad and
talked about the investment climate, and really that parallels,
Mr. Brodman, your comments about you need investment to sustain
production. So it is clear that there has to be a climate in
which folks are willing to invest. I am trying to sort out what
is it that we do to foster that. In Colombia, security becomes
an issue, and I have talked to the folks involved there.
Clearly in both of your comments you talked about rule of law,
transparency.
Are there ways in which this Congress could be investing in
efforts regarding rule of law, upholding rule of law, teaching
rule of law, those other things that would then be helpful in
generating the kind of investment climate that you both
referenced?
Mr. McManus. I think from the executive branch one of the
things we have done in the Latin American energy sector under
the Summit of the Americas was to have a Hemispheric Energy
Initiative, which is co-chaired by the U.S. Secretary of Energy
and I think most recently met at a ministerial where Secretary
Abraham went to Mexico City. In that context, we are trying to
work as an equal with our 33 democratic partners in the
hemisphere to share best practices and to hold up countries
like Trinidad that have the investment climate and companies
will come and to work on transparency and to work on regulatory
sharing. So it is Argentines who had done a lot of
privatization earlier who can talk to their colleagues in
Uruguay or Brazil and not simply the Americans, and we have
involved the Organization of American States in that effort as
well and international experts. That has been quite a fruitful
process.
Senator Coleman. Thank you.
Mr. Brodman. I would just like to add that we have similar
activities going on in the Energy Working Group of APEC, the
Asian Pacific Economic Cooperation Group, and in Africa we have
a U.S.-Africa energy ministerial process.
But I would like to also point out that many of the things
we are talking about here go strictly well beyond what we have
in the past referred to as energy policy. Helping countries
with the whole process of economic development really requires
a sustained engagement that can be very expensive in the long
run. As you know, the Department of Energy is not a development
assistance organization, but we have in the past been able to
receive some funds from the Agency for International
Development to work with countries on a number of the issues
that we are talking about here to try and promote responsible
energy development and responsible use of energy resources to
promote sustainable economic development and political
stability.
Senator Coleman. I thank you. Thank you, Mr. Chairman.
Senator Hagel. Senator Coleman, thank you.
Gentlemen, would you each respond to this question? NAFTA.
Has NAFTA encouraged, inhibited, attracted, impaired, had any
impact at all on our energy relationships with Mexico and
Canada since NAFTA has been in effect?
Mr. Brodman. Mr. Chairman, I am not sure I could quantify
my answer in any exact way, but I believe NAFTA and just the
negotiation of NAFTA itself was a very important milestone in
creating the kind of environment that we see today between
Canada, the United States, and Mexico. Mexico and Canada are
our two most important trading partners, and I think if we take
those two countries together, they are responsible for a large
portion of the energy that we import and export. I think a lot
of the activities that we have underway today in the North
American Energy Working Group are in fact an outgrowth of the
North American Free Trade Agreement.
There are a number of challenges still ahead of us that I
think will have to be undertaken in a broader context, such as
the WTO, especially in the area of energy services trade, and
those kinds of things. But I think NAFTA overall has had a very
positive development on the relationship and the development of
trade in energy between our three countries.
Senator Hagel. Thank you.
Mr. McManus.
Mr. McManus. Well, I was fortunate 13 years ago to have
been a negotiator on the NAFTA energy chapter, and the first
word of chapter 8 I believe is that each party will respect
each party's constitution. So oil and gas is largely hived off
in NAFTA for reasons of sovereignty, obviously, for Mexico, but
with Canada we have a much broader free trade agreement that
does touch on security of supply. On the margins in NAFTA, it
does provide liberalization and independent power projects. But
I would say fundamentally it had not altered the energy
landscape, and that was very much at the insistence of the
Government of Mexico.
Senator Hagel. Thank you.
You each touched upon the Venezuelan situation, political
problems, instability, the issues that have confronted
President Chavez. Could you each respond in a little more
detail to the question have those difficulties impaired our
energy policy relationship with Venezuela? Have they forced us
to take a more lateral approach or a more roundabout approach?
How has that changed our policies and how do you foresee that
Chavez government issue prolonging additional progress, and any
other dimension that you want to add to the question?
Secretary Brodman.
Mr. Brodman. Mr. Chairman, I think the Venezuelan strike,
while it was not completely unexpected, was a severe blow to
the United States for the first few months that it was ongoing
primarily because Venezuela is such an important source of
crude oil that is nearby, and it was very difficult for us to
replace Venezuelan oil, which takes about 10 days to deliver
from ports in Venezuela to ports in the United States, with
alternative supplies of oil which can take up to 45 days to
deliver from the Persian Gulf, for example, to ports in the
United States.
So I think one thing that we have clearly learned from
Venezuela is the importance of having a diverse set of energy
suppliers supplying energy to the United States. I think as the
situation unfolded, it became very clear to us that it was also
important that the world and other producing countries try and
maintain spare production capacity so that they are able to
make up for these unexpected losses of supply that occur really
more frequently than I think we would like them to, but always
with a major surprise.
The fact of the matter is other producers were able to
increase their production and exports to the United States, and
while we did suffer a major dip in our imports and in our stock
levels for the first couple of months following the Venezuelan
strike, by late February/early March, our imports of oil from
other sources had been able to recover.
Now, where we go from here in Venezuela I think depends a
lot on what happens in Venezuela itself. But unfortunately, we
have also learned from disruptions that have taken place in
other countries that oftentimes production never recovers fully
once a country has undergone a serious internal problem like
Venezuela has. We have seen it in Iran in the case of the
Iranian revolution. We have seen it in Iraq, as a matter of
fact, after the Iran-Iraq war really, and I am not talking
about the effects of the first Gulf War and the subsequent
embargo on Iraqi production, but I am talking about the failure
of Iraq to maintain its production capacity as a result of the
Iran-Iraq war. And we have seen it in a number of other
countries too where an internal event, such as that that
occurred in Venezuela, really created a climate that made
continued and enhanced natural resource development much more
difficult than it had been in the past.
Senator Hagel. Mr. McManus.
Mr. McManus. I would just add to that. I think for
Venezuela to fully recover their reliability as an oil
supplier, they will have to solve their political situation in
a constitutional, democratic, peaceful, and electoral solution.
That is why we are working with the OAS. That is one of the
many reasons why we are working with the OAS and the OAS is
working with Venezuela so they will do that. But as John says,
the ball is largely in their court.
The great energy policy victory would be that other
producers were able to compensate for a disruption in any one
region of the world. Oftentimes people talk about a disruption
from the Middle East. I think Venezuela has shown that you can
have a disruption from any one region in the world, and in this
case it was Middle East suppliers led by Saudi Arabia that
largely compensated for a Western Hemisphere supplier. So we
need to engage with all of our major suppliers, and I
understand Secretary Brodman is off the plane from Saudi Arabia
hours ago.
Senator Hagel. Well, let me probe this a little deeper,
specifically Chavez. Have we put in place, have we changed
procedures, have we changed policy, have we adjusted in
dramatic ways our energy policy, our relationship with
Venezuela to deal with his government, to deal with him, deal
with the instability after what happened?
Mr. McManus. We have to deal with the sovereign Government
of Venezuela. So we continue at a lower level a dialog between
technical people of both governments on energy. They are our
third largest supplier. They are a major investor in the U.S.
through Citgo. So the dialog between the two governments is
ongoing, and we are able to have a full exchange of views with
them, including our concerns about their lack of reliability in
December and onward.
Senator Hagel. So we speak directly.
Mr. McManus. Absolutely.
Senator Hagel. Secretary Brodman, would you like to add
anything to that?
Mr. Brodman. I would agree fully with what my colleague
from the Department of State has said.
We do engage with the Venezuelan Government in technical
consultations on a regular basis, and we make all the points
about the need for stability and we are very frank with them
about our concerns.
Senator Hagel. Gentlemen, September 11, 2001. How has that
changed over the last 2 years, or has it, our energy
relationship with West African countries? Has it had any
effect? Have we changed? We obviously have frozen our
immigration policies. We have focused entirely on security
issues, not inappropriately. I suspect as a result of that over
the last 2 years, we have let a number of things drift, and we
have deferred some tough decisions that we are going to have to
get back to like immigration reform. Has it affected our
relationship with many of these developing West African
nations?
Mr. Brodman. Senator, I believe that in many cases U.S. oil
companies have been involved in the exploration and development
of oil in West Africa for a number of years. I think in some
countries our companies' involvement in West Africa has gone
back 45 or 50 years and even more. Oil investment and
development decisions are very long term in their nature.
Developing an oil field sometimes takes 5 or 6 years and
production will go on for as long as 20 or 30 years. I think
many of the developments of West African oil and gas that we
see coming to fruition today and those in the pipeline actually
got started and were well underway by the time 9/11 took place.
I am thinking here in particular of Angola and the new offshore
developments in Nigeria.
For many of our international oil companies, ExxonMobil,
for example, ChevronTexaco, Conoco, Phillips, West Africa is
one of their single largest and most important focuses of
attention for investment right now of any other place in the
world. I do not see that being affected itself by September 11.
On the other hand, we have heard from large numbers of
developing, oil-producing countries that the new security
procedures in the United States are inhibiting the growth and
the kind of relationships I think we would like to develop with
these oil-producing countries in building long-term, secure
relationships.
For example, many of the countries in West Africa used to
send students oftentimes on scholarships, supported by energy
development projects, to universities in the United States for
their education. Today many of these programs are thwarted by
the inability of these countries to get visas for the students
to come to the United States. So as a result, many of the
students are going to universities in France or Britain or in
Japan or other places in the world. If this continues for a
long time, then there will be a whole new generation of young
people in these producing countries that will, I think, more
naturally look to the countries they are familiar with where
they got their education to do business in the long term.
So we have heard a lot of anecdotal evidence of that sort,
but I think overall much of the investment and development that
we see going on in Africa right now actually got started well
before 9/11 and will continue on its own merits.
Senator Hagel. Secretary Brodman, thank you. I appreciate
your taking us into the future a little bit here based on what
has worked in the past and what has helped develop a culture, a
relationship, a base, an understanding. I appreciated your
comments about that. Thank you.
Mr. McManus.
Mr. McManus. I would just agree with that and our National
Energy Policy, which came out in May of 2001, was very centered
on what we needed to do to advance transparency in Africa. We
have redoubled our efforts with your help, as you know, on the
African Growth and Opportunity Act, which on December 31, 2002
was expanded so that we can address more countries in the
region. The President visited in July and the Secretary of
State is there today. So I think Africa remains a real core
priority of ours.
Senator Hagel. Gentlemen, thank you. I know we could stay
at this for quite some time. Secretary Brodman, you have made a
valiant effort to come forward here with probably little
awareness of what country you are in or time zones.
We appreciate your effort. You both have made very
important contributions to our effort. We will talk again. In
the interest of the second panel, unless either one of you have
an additional comment, I would again say your full statements
will be placed in the record and the committee thanks you for
what you are doing for our country as well.
Mr. Brodman. Thank you, Mr. Chairman, and I am sure I am
speaking on behalf of my colleague here when I say that the
Department of State and the Department of Energy are fully
supportive of you and your efforts to improve the energy
security of the United States. Thank you.
Senator Hagel. Well, thank you. You know, Secretary Abraham
learned everything he knows up here in the Senate.
Sometimes he will not acknowledge that, but he did. Give
the Secretary our regards. Thank you, gentlemen.
As the first panel is making its way toward the exit, our
second panel is welcome to step up to the table. Thank you.
Ladies and gentlemen, thank you. I have introduced each of
you not, I suspect, in the glorious fashion that you deserve,
but nonetheless to stay with the point here, we appreciate very
much your each giving us some time this afternoon and putting
your thoughts together in a statement, which we look forward to
hearing, and then an opportunity to exchange some views as
well. You are not strangers to this effort. You have all
testified before. For that, we very much appreciate it.
Since the order that I have been given reads Mr. West as
the first presenter, then I will stay with the order as they
have given it to me. Mr. West, again I remind all who are
present you are chairman of PFC Energy here in Washington, DC
and an experienced hand at all this. So welcome back. Thank
you. Please proceed.
STATEMENT OF J. ROBINSON WEST, CHAIRMAN, PFC ENERGY,
WASHINGTON, DC
Mr. West. Thank you, Mr. Chairman. I have submitted a
substantial statement. I would like to hit a few high points
from that.
The first is the discussion of energy security, and we
define energy security as sustainable, reliable supplies at
reasonable price. A lot of people assume energy security means
interruption of supply, and there is really a very important
difference between the two, and we will come to that.
Also, I would submit that energy security means natural gas
too. A lot of energy security discussion is about oil where, in
fact, I think the U.S. economy is much more vulnerable on
natural gas, and frankly I think there is much more that the
U.S. Congress can do about it.
A couple of points also in terms of oil----
Mr. West, excuse me just for a moment. I will get back to
you on that point, as you suspect I would, as to why you said
what you did. But I just want to let you know that I would be
interested in getting your colleagues' answer to that as well.
So please proceed.
Mr. West. OK.
A couple of points. One, energy independence for the United
States we believe is a meaningless concept. U.S. production of
oil is falling, and even if there is some greater energy
efficiency, this is a fundamental trend that will continue.
Also, the concept of diversity. We think diversity of
supply is important, but we think what is also important--and
it was highlighted a bit in the earlier discussion discussion
on Venezuela, for example--is that the role of the swing
producer is central to the orderly operation of the
international oil markets and cannot be ignored. I think some
people over-emphasize the importance of diversity and under-
emphasize having a producer which maintains excess capacity.
Without it, there would be cyclical booms and busts which would
destabilize economies in countries. Saudi Arabia is that swing
producer. It is, in effect, the central bank of oil. It
provides liquidity and stability in the market. In the case
when Venezuelan production collapsed, it was Saudi Arabia which
really played a critical role.
A couple of other points. Again, I will try and be brief.
In terms of looking at the various regions, Mexico is an area
that has enormous potential and it has a role to play in the
United States. It is an important supplier, but there is a
contradiction in their policy. You discussed NAFTA. NAFTA has
encouraged a great deal of inward investment and more economic
activity. But it was earlier pointed out investment in the
energy sector is precluded, and the government of President Fox
has been unable to liberalize their investment framework in oil
and gas, and this has really damaged Mexican production.
On the other hand, Venezuela was discussed. But the fact of
the matter is that as Senator Coleman pointed out, investment
sustains production. The Venezuelans themselves are unable to
make those investments. So Venezuela now is moving to the point
where it is starting to welcome international investment, and
there are a number of large American and foreign companies
which are investing in Venezuela, and they have found the
Venezuelan Government to be quite a reliable partner. In our
view, if the local players can restrain their actions to within
constitutional means, we believe that the perceived risk of
Venezuela is higher than the real risk. But Venezuela is
important and is very important to U.S. energy security.
In terms of turning to West Africa, a lot of things are
going wrong in West Africa but some things are going right. The
investment environment and the oil sector logistics in West
Africa are the opposite of a number of other areas that are
widely discussed such as Russia. The terms and conditions for
investment are very competitive. There is a high geologic
potential for oil and gas. As a result, more capital has flowed
into West Africa in recent years than from the international
companies than has gone into Latin America or Russia or the
Middle East. West Africa has a very important role in
attracting capital.
There are a lot of political problems there. There is very,
very poor governance, which one of my fellow panelists will be
discussing. But also there is the physical attribute that the
production is occurring offshore, so it is somewhat isolated.
But there clearly are problems.
Nigeria is key, but Angola and Equatorial Guinea are
ramping up production and will play an important role as well.
I would like to turn to natural gas because I think it is
an important area that has been largely neglected.
As I said, I believe that there really is a looming crisis
in terms of energy supplies in this country and that gas supply
production is falling simply due to growing demand and limited
geologic potential. There is much discussion of Canada as an
important supplier but its growing supplies are not necessarily
assured partly because of what was discussed earlier. They are
going to require natural gas to produce their tar sands and
their unconventional oil.
The star in gas in the Western Hemisphere is Trinidad and
Tobago. They have proven to be a very good partner. They have
managed it well. They have an attractive regime. It has been
well managed, and they play an important role in providing
natural gas primarily to New England.
Venezuela is in the early phase of being an gas exporter to
the United States, and it is going to play an increasing role
in that area.
West Africa also. Nigeria is already moving some gas here,
and Equatorial Guinea and Angola will play that role.
One point that Mr. McManus said on natural gas is that our
market is open. That is not true. Our market is not open and it
is not open because we do not have the physical facilities to
accept the gas we are going to need. I would respectfully
submit that there is actually very little that political
officials can do about the international oil markets. Oil is a
global market. It is efficient. It works pretty well. Gas works
very differently, and it is actually within the power of the
administration, of Federal officials and very importantly State
officials, in terms of permitting the infrastructure to come.
If the United States does not want the lights to go out and
schools to go dark, at some point then some action really is
going to have to be taken if Latin America and West Africa are
going to play a constructive role.
So on that point, I would like to stop.
[The prepared statement of Mr. West follows:]
Prepared Statement of J. Robinson West, Chairman, PFC Energy,
Washington, DC
Good afternoon. Senator Hagel and distinguished members of this
Subcommittee, it is a pleasure to come before you today to address such
a timely and critical issue. My name is Robin West and I am the
Chairman of PFC Energy. PFC Energy is a strategic advisory firm, based
in Washington, DC. We work with most of the companies in the global
petroleum industry on various aspects of their international oil and
gas investments and market strategies.
KEY CONCEPTS UNDERPINNING OUR UNDERSTANDING OF ENERGY SECURITY ISSUES
There are a number of key conceptual points concerning global
energy security issues that our firm believes are essential for getting
to the heart of the matter.
The definitions of supply security of oil and natural gas are the
same: sustainable, reliable supplies at reasonable prices. However, an
important distinction must be made between security of crude oil
supplies and security of natural gas supplies, because these two
commodities represent entirely different security challenges globally,
and particularly for the United States. Oil is a global commodity.
Global oil markets equilibrate. Gas is not a global commodity. By the
word ``gas'' I refer here always to natural gas, the same fuel that is
burned on stoves in our homes, and not gasoline, the oil product used
in automobiles.
Vast natural gas resources in various parts of the world remain
stranded because natural gas cannot be transported as easily as crude
oil. Global gas markets do not always equilibrate. Basically, if oil
prices go up or down in Houston, they will go up or down in Singapore
and Rotterdam. This is not true for natural gas, where prices vary
widely from market to market.
There is a misplaced concern with ``dependence'' on foreign
oil suppliers. We will always depend on imported oil.
Interdependence among nations is not a bad thing. ``Energy
independence'' for the U.S. is a meaningless concept. U.S.
production of oil is falling due to the maturity of U.S. oil
fields. U.S. reliance on imported oil has already surged by 1.2
million barrels per day in the last five years, and is likely
to continue at a similar pace in the next ten years, bringing
U.S. net imports to 13 million barrels per day, equivalent to
the combined 2002 production of the entire North Sea and Saudi
Arabia. Greater energy efficiency can help slow down the
increase in imports, but the direction is inevitable in the
medium term.
The proper way to frame concerns about ``dependence on
foreign oil'' is to talk about vulnerability to oil supply
disruptions. In this regard, diversity of supply clearly
enhances security of supply.
But the role of diversity in providing security, though
extremely important, can be exaggerated. Given the highly
skewed distribution of oil reserves in various geographic
regions, there is a limit to how much diversity can achieve in
terms of security of supplies and there is an even more
critical limit to the ability of some producers to replace
others as strategic suppliers of crude oil.
The role of a swing producer is central to an orderly
operation in the international oil markets. The excess capacity
that Saudi Arabia maintains at high cost allows the world
markets not to panic at every incident, civil war or
revolution. Without it, there would be cyclical booms and busts
which would destabilize economies and countries. Saudi Arabia
is the guarantor of last resort, the Central Bank of the oil
market that provides liquidity and reassurance in difficult
times.
The domestic pressure on natural gas supplies and prices
poses a greater threat to energy security and the U.S. economy
than the rising cost of crude oil. U.S. demand for natural gas
is outstripping supply. Demand will rise even further when the
economy rebounds. Complacency rose with the recent unusually
warm winters and slowing economy. This past winter, which was
colder than the norm, should be a wake up call that gas
supplies, not oil, are actually a greater threat to the
nation's ability to provide a reliable supply to consumers at a
reasonable price.
Given the differences between oil and gas as global commodities,
U.S. government officials can do little about oil security, but they
can do a great deal about U.S. gas security, which relies on
government-regulated infrastructure. This Administration deserves
credit for addressing some of these problems, but Congress must focus
on these issues as well if it is serious about energy security.
THE SIGNIFICANCE OF LATIN AMERICA AND WEST AFRICA TO U.S. ENERGY
SECURITY
Oil Issues
The global oil markets are a unified single entity, however, in
reality they are an aggregate of several ``basins'' linked together by
consumers and producers reaching out to other basins to secure supplies
and expand markets. There are two large ``net consuming'' basins: The
Atlantic Basin and the Asia Pacific Basin. By ``net consuming'' basin
we mean that they consume more than they produce and have to reach out
to other basins to make up for regional short falls. The key ``net
producing'' basin that swings to make shortfalls in the ``net
consuming'' basins is the Persian Gulf region, with Saudi Arabia as the
principal supplier in that area. Hence, its critical role as the
world's swing producer. But regional supplies mailer and in terms of
diversity and proximity of supplies, regional producers are extremely
important. In fact, they are the first line in defense of our oil
security needs. In the Atlantic Basin, where the U.S. is the largest
net crude oil importer, key regional suppliers outside of the U.S. are
located in North West Europe (Norway and the UK), Latin America and
West Africa. In the context of this testimony, therefore, for the U.S.,
other than the European producers, Latin American and West African
producers make up our first line of defense in oil security.
Four important factors related to these regional crude oil
suppliers have a critical influence on future output:
Investment activity as a result of investment regimes
created by these producers and its impact on future oil
supplies
Attempts by crude oil producers to secure captive refining
capacity in the U.S. to ensure market share for their crude oil
The perceptions of political risk within these countries and
its impact on current supplies and future investment activity
Cooperation between regional producers and OPEC and its
impact on regional supplies and prices
The U.S. does not only depend on crude oil to meet our petroleum
needs. We import sizable amounts of derivative products. Here the
regional markets, and in our case the Atlantic Basin, is even more
critical for domestic prices of products. An examination of the
dynamics of this market with special reference to Venezuela is also
important in assessing our energy security.
LATIN AMERICA
The important producers in Latin America are Mexico, Venezuela,
Brazil, Colombia, and Ecuador. Most of these Latin American countries
have long been important exporters of crude oil to the U.S. In fact, a
sizable portion of the region's oil sector was developed by U.S. oil
companies as early as the 1920s. U.S. company control over the sector
in these countries contributed to domestic resource nationalism and
colored relations with the U.S. The region has also been a trend seller
in global oil politics, from the nationalizations of the Mexican sector
in 1938 to Venezuela's lead in the creation of OPEC in the early 1960s.
Oil revenues and the expenditures that they financed profoundly
shaped the domestic political economies of the region creating groups
of have's and have-nots. The funds were--and still are--one of the key
sources of political competition in these countries. Economic and
political reform efforts have been enhanced or hampered by production
trends at home and oil price trends globally.
The hike in oil prices in the 1970s, along with greater control
over the sector that countries gained (notably, Venezuela, Ecuador and
Colombia nationalized the local producing assets), greatly boosted
government revenues. This was particularly true of Mexico (which had
retionalized its sector much earlier) and those in the Andean region of
the continent. But higher oil revenues severely distorted the domestic
economies, leading to sharply higher and unsustainable spending,
generating large budget deficits when prices fell in the mid-1980s and
the resort to excessive external debt financing. The debt crisis that
the region suffered in the 1980s--the region's ``lost decade''--can
partly be blamed on the hike in oil prices, mismanagement of higher
revenues and ultimately a stagnation or decline in oil production from
the region. As the region embraced ``neo-liberalism'' in the 1990s as a
means out of the debt trap, many reformist politicians proposed
liberalizing the oil sector to reinvigorate supplies.
A decade later, and after attempts at reforming the sector, the
region in general has made little progress in expanding regional crude
oil supplies in the aggregate. National oil company officials, labor
unions and volatile domestic politics have slowed the entry of foreign
investment and hampered the expansion of supplies. There was a brief
period at the end of the 1990s when it appeared that these countries
would succeed in raising supplies but local politics in general have
led to recent setbacks in production. The notable exception is Brazil,
where the partially privatized Petrobras used its considerable
technological prowess and good indigenous management skills (unshackled
from government control) to raise output in a physically challenging
sector.
Looking forward, there are grounds for hope that regional supplies
will grow for a number of reasons. First, lagging production and in
some cases fears of sharply lower output due to under-investment,
strikes by oil workers and civil unrest in some countries, have forced
governments to redouble efforts to liberalize the sector. Second, with
energy security reemerging as a national issue in the U.S. following
the attacks on the World Trade Center and the Pentagon, and fears of
over-dependence on the Middle East oil in the U.S., Latin American
countries see a competitive opportunity in gaining market share in the
U.S. Third, democratic politics have brought to fore politicians that
want to break the political power of the old entrenched bureaucratic
elite and labor leaders and want to forge new alliances with foreign
companies as means to increase production. Nonetheless, there is
considerable uncertainty about whether foreign oil companies will
overcome their perceptions of country risk despite improving
contractual terms and greater access to the physical resources.
A closer examination of individual country attempts to raise output
produces a more complex picture, but the generalities mentioned above
hold true. Local trends in the important Latin American producing
countries are the following:
Mexico has enormous potential in both oil and gas, but there are
very limited upstream investment opportunities for private firms. The
U.S. imported 1.49 million barrels a day from Mexico in 2002 making it
the second largest source after Saudi Arabia and ahead of Canada.
Moreover, Mexico's importance lies more in the potential upside that
the country's resources suggest rather than current supplies only.
Pemex, the national oil company, remains in full control over the oil
assets of the country protected by constitutional prohibitions against
privatization or other types of participation of foreign oil companies.
There is a growing contradiction between the economic development
model Mexico has developed since joining NAFTA and the investment
regime existing in the oil sector. This is even more true in the gas
sector but that will be discussed below. Countries attempting to
integrate into the world economy and spawn an efficient and competitive
industrial sector often will find it necessary to privatize their
resource sectors to maximize output and lower input costs. Success in
building an industrial sector reduces the relative importance of the
primary sectors both in terms of employment and government revenues,
especially since the government can diversify its tax revenues now that
other productive sectors have been created. Mexico has been very
successful in attracting foreign investment into its manufacturing
sector and has greatly expanded exports of manufactures to the U.S. and
other countries. However, because of limited reforms in taxation and
labor policy and strong nationalist concerns regarding the hydrocarbon
sector, the current government of Vicente Fox has been unable to
liberalize the investment framework in both the oil and gas sectors.
Whether future governments in Mexico will rectify this anomaly and open
up the country to foreign investment (and achieve the production
successes seen in the U.S. both for the onshore gas and the deepwater
oil sectors) depends on continued growth of the non-oil industry and a
political power shift away from vested interests stymieing changes in
the hydrocarbon sector. More oil out of Mexico will certainly enhance
our ``first line of defense'' and enhance our energy security.
Venezuela's oil sector is at the very heart of the country's
politics and the two go hand in hand. With the virtual bankruptcy of
Venezuela in 1992--a culmination of the extravagant and corrupt
economic policies of President Carlos Andres Peres--the region's most
important oil producer adopted neo-liberal economic policies to
diversify the economy away from oil. The national oil company PDVSA,
under the stewardship of Luis Giusti, accelerated its move to expand
oil output (partly through inviting foreign oil companies to invest in
specific types of oil producing regions) and to increase captive
refining capacity overseas (namely through PDVSA's U.S. subsidiary,
CITGO) in order to grab market share in the U.S. The country also
signaled less cooperation with OPEC in managing the global oil price
during the 1990's. Giusti's move to increase oil supplies was designed
to position Venezuela as the key supplier to the U.S. But his move
proved ill timed given the economic situation within his own country.
The situation came to a head in 1998, when OPEC members in the
Persian Gulf refocused their sales effort on the Atlantic Basin after
demand collapsed in Asia due to the Asian financial crisis. The rising
barrels from the Persian Gulf met rising Venezuelan production and
competition. This was one reason that oil prices collapsed in 1998 with
what seemed like little prospect for OPEC to manage prices back up to
acceptable levels.
Low oil prices triggered a financial collapse in Venezuela and with
growing disparities in income over the last several decades and the
pain of economic reform falling mainly on the Venezuelan underclass, it
was no surprise that in the 1998 elections Hugo Chavez emerged a
victor. After his election, Chavez's attitude towards OPEC changed
dramatically, and he promoted cooperation and higher oil prices. As a
result, by 1999 Venezuela's cooperation with OPEC led to a strong
recovery in oil prices which has been sustained to this day. While this
stabilized the economic situation in Venezuela, the growing ``class
war'' between the old and new government elites and some degree of
economic mismanagement made the restoration of economic stability
temporary.
In early 2003, a large number of employees of PDVSA struck against
the Chavez government in solidarity with the opposition. That crippled
oil supplies into the Atlantic Basin. It showed the importance of
regional supplies and the dislocations caused by the stoppage at a
particularly difficult time as the U.S. embarked on a war in the
Persian Gulf. Moreover, given the fact that a large number of CITGO's
and other U.S. refineries were dedicated to buying Venezuelan crude,
switching to other suppliers at short notice proved particularly
difficult. Luckily Saudi Arabia was able to make up some of the short
fall but not without a temporary sharp increase in world oil prices.
With the loss of personnel--Chavez fired 18,000 workers for striking--
PDVSA's ability to produce at pre-strike levels continues to be
stymied, and even though production has risen, Venezuelan output
remains constrained and prospects are growing for future declines
without substantial investment, probably from international companies.
The weakening of PDVSA presents a strong opportunity for several
players. The government is once again attempting to attract foreign
investment in oil in its sector. It is hampered by foreign oil company
perceptions of country risk (violence), an unfavorable hydrocarbon
investment law, and anxiety that the return of the ``ancien regime'' to
power if Chavez is removed from office may disqualify interested
investors. An increase in Venezuela's production in the future is
uncertain as the domestic political situation of recall referendums,
coup attempts and considerable civil strife plays out. However if all
the political competitors restrain their actions to within
constitutional means, for international companies investing in
Venezuela, the perceived risk of operating in that country may be
greater than the actual risk.
Political risk also clouds the supply picture of the two other
Andean suppliers: Colombia and Ecuador. In Colombia, the oil sector has
become enmeshed into the ongoing civil war between guerrilla groups and
militias and the government. For a while in the 1990s, there was great
hope that foreign oil companies would rapidly expand production in
Colombia. There was a period of success with the expansion of the
Cusiana field. However, the expansion of the Cupiaga field, the next
big development proved to be disappointing. Moreover, initial success
in expanding production led to more onerous investment terms which
along with the violence in the country soured foreign company interest.
In fact, guerrilla attacks consumed huge resources of the foreign
companies as they attempted to maintain production and protect their
personnel and their facilities, in particular, the Cano Limon pipeline.
President Uribe is attempting to revive investment in the sector by
offering better terms to foreign oil companies. His hope is that with
growing oil revenues he will be able to dedicate more resources to
fighting the narco-guerrillas and transform the investment environment
for foreign oil companies. However, a more forceful stance towards the
guerrillas has led to more violence and scared off potential investors.
As a result, Colombia is caught in a Catch-22 with investors seeking a
more stable and peaceful investment environment and the government
hoping it will be the savior of the political and economic system of
the country.
In Ecuador, a new government hopes to accelerate new investment in
oil rich areas and build a new pipeline to boost exports. The OCP
pipeline will not only sharply increase export capacity but also enable
Ecuador to improve the relative quality of its crude to the market and
thereby increase its yield.
Brazil is one of the remarkable success stories in the world oil
industry. It has been able to become self sufficient in meeting its
domestic oil consumption requirements through its own rapid oil
production growth and is on the verge of becoming a net oil exporter.
The new oil production has been developed in the very challenging
deepwater offshore. Brazil's Petrobras is recognized as a world leader
in deepwater technology. Although Brazil exports some gasoline to the
U.S., its resource size and its own potential needs will prevent it
from being a large net addition to the Atlantic Basin's supplies.
WEST AFRICA
In contrast to Latin America, oil supply is surging in West Africa,
notably Nigeria, Angola, and Equatorial Guinea. Industry capital and
technology is pouring in to explore and produce in the offshore.
Production will be rising at an annual average rate of 6% in the next
five years, and total production will grow from 3.6 million barrels per
day in 2001 to over six million barrels per day by 2007.
The investment environment and oil sector logistics in West Africa
are the opposite of those in Russia, a region often described as the
key for America's energy security. Terms and conditions are very
competitive, which, combined with its high potential for oil, has
attracted massive investment from international oil and gas companies--
far more industry investment in recent years than Russia, the Caspian
or the Middle East. As a result, production is swelling. Unlike the
Caspian or Russia, West African oil can be easily loaded and moved
anywhere by ship.
However, there are serious concerns about the political stability
of the region. Unrest in Nigeria has been in the headlines recently.
The problem in West Africa is that governments are weak, unstable and
deeply corrupt. Billions of dollars of oil revenues are squandered or
stolen. The populations resent their politicians, who live in great
wealth, while they exist in poverty. The condition of the people is
appalling and political systems are ineffective.
Despite the growing political instability in the region, foreign
oil companies have flocked to the region partly because of the location
of the assets. The growth in oil production in the region has occurred
``offshore''. Investors consider this safer because they are not
located near or among local communities, and as a result, these
companies seem confident that they will avoid the problems encountered
in onshore areas such the Niger Delta area of Nigeria. In the Niger
Delta, local communities are using a variety of methods to extract oil
rents directly from the foreign operating companies to compensate for
the lack of services provided by governments. Although companies have
attempted to improve local community relations through a variety of
means including development and aid projects in association with non-
governmental organizations, the problems they face with local political
violence continues almost unabated. The companies remain confident,
however, that they will not encounter this from the offshore sector. To
some extent this confidence may be misplaced as political activists
learn new means of pressuring the companies and reach their facilities
offshore.
This is true at least in Nigeria, where some offshore facilities
have already been a target, meaning the potential for production
disruption exists for both onshore and offshore operations. Nigeria is
set to see its production capacity to increase by 700,000 b/d by 2007,
with much of the ramp up coming from deepwater blocks miles offshore.
This will mitigate some political risk for companies and fear of
production disruptions for global oil markets. The new production will
target the U.S. market as well as Europe and Asia.
In Angola and Equatorial Guinea, the threat of production
disruptions is less pronounced. Both countries' production is largely
offshore, and its governments are stable--even with a civil war in
Angola. But these governments face increasing pressure for revenue
distribution beyond the elite structures. Production and oil revenues
are increasing fast in the next five years, and their populations want
to see the benefits. This in itself is not too terrible a challenge,
but Angola and Equatorial Guinea both face possible succession issues
in the next few years--and its political leadership could be less
stable than it has been over the past decades.
With the cease fire in 2002, the ruling MPLA government in Angola
no longer has the civil war with UNITA rebels as its raison d'etre.
Although the government maintains strong control right now, the country
is preparing for the first post-peace elections in 2005. The country's
production will double to 1.8 mb/d by 2007 from 0.9 million b/d now,
largely due to a handful of deepwater projects coming onstream.
Likewise, in Equatorial Guinea, President Obiang has maintained
strong control since 1979 by preventing power centers from emerging.
But at some point Obiang will have to cede power, making way for
individuals and groups to jockey for power. Equatorial Guinea will see
its oil production rise to 340,000 b/d from less than 200,000 b/d now.
This increase in oil production, combined with its LNG plans, deepens
the country's dependency on the hydrocarbon sector for revenues.
Overall, West Africa will add diversity to oil markets in the next
five years, with most of the increase coming from the offshore areas,
where the political instability of the regime will not matter much.
However, oil companies operating in these countries will be pressured
to increase the transparency of their dealings with local governments.
The long term stability of supply may be effected by our ability to
combat corruption, which is fundamental to governance. Should the
appalling levels of mismanagement and theft continue there is a
possibility of civil unrest, if not actual dissolution, particularly in
Nigeria.
NATURAL GAS SUPPLIES FROM LATIN AMERICA AND WEST AFRICA
Latin America and West Africa could prove critical as the ``first
line of defense'' in the area of natural gas. As noted above, the
looming crisis in terms of energy supplies in this country is more
related to faltering domestic gas supplies being outstripped by demand
rather than availability or price of crude oil. Increasing imports of
natural gas is critical and depends on the development of foreign
resources and the ability to get the resources to the U.S. market.
Canada is critical in this regard. PFC Energy believes that although
Canada is an important supplier of gas to the U.S., further supplies
are not assured because of issues related to the development of
Canadian tar sands and unconventional oil and the construction of major
pipelines into the U.S.
Latin American suppliers, particularly from three countries--
Mexico, Venezuela and Trinidad and Tobago--will play a very important
role in supplying gas to the U.S. Mexico has a dual role to play. For
one, it has to reform and open its gas sector to foreign investment.
The fact that it has not is another sign of the deep contradiction
between its economic planning and energy policy. To reiterate: a
country that needs cheap and efficient supplies cannot run an energy
policy that retards development of its oil and gas sector and actually
leads to the importation of expensive gas from its North American
neighbor. When this is rectified, Mexican industry will benefit from
cheap and efficient supplies of this essential industrial input, and
the energy industry can capture rents north of the border far in excess
of what it currently earns. The second role Mexico can play is to be
the transshipment point for liquefied natural gas (LNG) supplies from
other Latin American countries or even other regions to the U.S.
Because U.S. environmental and local policies obstruct the construction
of LNG import facilities within the U.S., Mexico could provide the
location of these regas terminals and then the gas could be shipped by
pipeline to the U.S.
Venezuela is in the early stages of becoming an important exporter
of gas to the U.S. After delaying LNG export projects for virtually a
decade, the government's acute financial needs have pushed it into
negotiating deals with foreign companies. The gas will come from two
areas: North Paria and the Deltana Platform. The gas will be liquefied
onshore or sent to Trinidad for liquefaction. Regas facilities will
have to be found in Mexico, the Caribbean or the U.S.
The real success story in terms of regional gas has been Trinidad
and Tobago. A U.S. company, Amoco developed the assets. Amoco, which
merged with BP in 1999, built on a trend of falling costs in the LNG
industry to achieve new benchmarks in competitively priced LNG. This
gas from Trinidad's Atlantic LNG competes in the U.S. market and has
been arriving in growing volumes at the existing U.S. import terminals.
These LNG imports can play a key role in meeting peak demand in the
Northeast. The expansion of Trinidad's LNG facility has fueled overall
growth in Atlantic basin LNG trade and benefits the U.S. by
contributing to a more robust LNG marketplace.
There is additional potential LNG supply from Peru and Bolivia, but
these are not near-term solutions. Plans for supply of LNG from Peru
and Bolivia face significant hurdles to market and are considered high
risk endeavors at this time. While possible volumes for export exceed
25 tcf, internal and cross border political problems continue to stymie
investment decisions and have caused several iterations in shareholder
structures in both the Camisea (Peru) and Pacific LNG (Bolivia)
projects. It is unlikely that these issues will be resolved to the
satisfaction of international buyers who will be looking for reliable
supply into the market place in the near term, which will mean that
other more proven projects in the Pacific Basin will supply the U.S.
and could force the west coast Latin American projects out to the
latter half of the decade.
West Africa will take on additional importance to the U.S. owing to
the projections of growing demand for LNG into the U.S. market. Nigeria
holds more than 124 tcf of proven gas reserves. LNG projects in Nigeria
and those proposed for Angola are further driven by the push to end the
gas-flaring that accompanies oil production in these countries. The
U.S. has been receiving Nigerian LNG since 2000 and could become the
market for proposed additional LNG from Nigeria, Angola and Equatorial
Guinea.
Even with strike issues that have impacted the oil sector out of
West Africa, the natural gas export sector has been left unscathed
because most of the projects affiliated with export also support the
domestic market and the existing LNG facilities are not located near
the most troubled areas. This does not mean that these projects are
immune to rampant corruption or civil unrest, just that these
facilities have so far been less vulnerable to disruptions than oil.
CONCLUSION
A key point to be made in conclusion is that the Atlantic Basin
contains large sources of oil and gas. However, fractured and unstable
political systems increase perceptions of country risk among foreign
investors leading to slower development of these supplies. Moreover,
local impediments--lack of funds, national oil company or bureaucratic
blockages--stymie the efficient development of supplies.
The U.S. must do the following:
With natural gas, the U.S. will not have affordable gas for all its
needs, from home heating to industrial production, unless new sources
are able to reach the market. The most economic solution for the U.S.
will be found when both LNG and pipeline imports have access to our
market.
Today, permitting of both LNG infrastructure and gas pipelines
remains a significant obstacle to expanding gas supply. The federal
permit process for onshore LNG infrastructure should be driven by
deadlines (both for FERC and the applicant) so that the review is
completed in a timely, resource-efficient manner. Federal authorities
need the political mandate and resources to coordinate better with
authorities issuing state and local permits. In addition, politicians
and public policymakers should help to make the case that importing LNG
is safe. The LNG industry has an impeccable safety record, but if
misconceptions about this issue persist, securing reliable natural gas
for the U.S. will be all the more difficult.
Political leadership has the opportunity and the need to re-examine
the process and laws by which environmental choices are traded off
against energy choices to make indirect decisions about the future.
In conclusion, there are limited policy options for energy security
and oil. Fighting corruption will lead to greater stability in
producing countries. It is on natural gas however, that Congress and
the Administration, as well as the state and local governments, must
focus their attention. Foreign gas supplies are ample but U.S.
infrastructure is very constrained. The permitting process is often
disorganized and unfocused. This is a situation which Congress can and
should rectify.
Senator Hagel. Mr. West, thank you. We will make sure that
your entire statement is included in the record. We, as always,
appreciate your contributions and look forward to our
questions.
Mr. Goldwyn, let me remind everyone who you are. You are
president of Goldwyn International Strategies here in
Washington, DC, and welcome. We appreciate your being here.
STATEMENT OF DAVID L. GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL
STRATEGIES, LLC, WASHINGTON, DC
Mr. Goldwyn. Thank you, Mr. Chairman. Thank you for the
opportunity to testify.
There is no question that Latin America and West and
Central Africa are important to U.S. energy security. You have
heard from the government witnesses and they have talked about
how important it is for the United States to have access to
reliable, diverse, affordable, ample supplies of oil and gas.
Latin America and Africa are critical suppliers to that effort.
I think the United States has energy security and even national
security interests in making sure that these nations fulfill
their potential as suppliers. But I would submit to you today
that our key suppliers in each of these regions are at risk and
that U.S. policy today does not address, much less redress, the
risks that we face.
Let me talk a moment about what I mean by energy security.
I agree energy security is more than just access to supplies of
oil. In a global market, the United States can pretty much buy
what it needs by bidding it away from other consuming nations.
The greatest risk to our energy security, I believe, is the
volatility of the price of oil. If we can buy oil at $50 a
barrel, but we see our airline, trucking, and travel industry
suffer, we are not very secure. And if a major supplier goes
off line and only Saudi Arabia has the excess capacity to
replace that production, in my view we are not secure. And if
oil drops to $10 and our domestic producers go bankrupt, we are
not secure. And if that low oil price forces non-OPEC but high-
cost producers out of the market, pushing us further into
dependence on Middle East oil, that does not enhance our energy
security either. So volatility is a serious threat.
Prices are volatile because too many producers are
unstable. If you look back 30 years--and I think you have heard
all the examples today--and ask what caused the greatest price
spikes, it is not embargoes. It is internal unrest. It is war.
It is strikes. The Iranian revolution, the Iran-Iraq war, the
two Persian Gulf wars, the Venezuelan strike, and recent
strikes in Nigeria.
Our old system of energy security does not address today's
threats. Our old system was one of deterrence. We buildup big
reserves; we will deter an embargo. That worked pretty well,
but we cannot deter today's threats. We cannot defeat them by
military force, and since the threats to the producers'
stability are largely internal, their problems can still become
our problems if they stop producing. I think we have to use
diplomacy and trade and the creative intervention of the
international financial institutions to overcome these threats.
The risks, just to make clear what they are, are that these
nations will either fail to fulfill their production potential
so in 10 years they will not be there if we need them, or that
they will produce supply dislocations, or both. Either
scenario, whichever way it happens, increases the volatility of
the price of energy, damages the U.S. economy and makes us more
dependent on Middle East oil.
Let me start with Latin America. Latin America is more
important than Africa right now in terms of how much oil it
provides to the United States. Venezuela and Mexico, as you
pointed out, Mr. Chairman, are the two most important
suppliers, but they and the entire region are in pretty deep
trouble.
Mexico is still deadlocked over the desirability of foreign
investment, particularly in the energy sector, and as a nation,
Mexico is de-industrializing. It does not have the energy to
compete for manufacturing with other developing countries. And
if Mexico has economic problems, we have economic problems, and
we have other kinds of problems as well. None of the things
that have been talked about today, not a new energy minister,
not multi-service contracts, not even a record high level of
investment for PEMEX are very likely to change this in Mexico
because they are so politically deadlocked. And that is a
problem.
Venezuela is recovering from a crippling strike and it is
undergoing a major reorganization of the national oil company.
The national government is trying as best it can, I believe, to
make sure they muster the capital and the management that PDVSA
needs, but it is very unclear whether they will succeed, and if
they continue to reject all of the workers who have been fired
from PDVSA back into the fold, then it is going to be very hard
for them to get the management talent they need to not just
sustain production, but to increase it and increase it is what
we need them to do. Industrial actions continue to plague the
refining sector, and Venezuela's civil society remains in
turmoil over the potential referendum and the potential recall
of President Chavez. So Venezuela's future remains in question.
I will just touch briefly on the other countries. Colombia
you have talked about. They still suffer from war and terror.
Bolivia has just seen a reform-minded President resign over a
gas pipeline to provide the United States with LNG. The main
reason that he lost power, part of it was because it was going
to Chile instead of going to Peru, but the other reason is they
did not trust the government to spend the money. Other than
Trinidad and Tobago, there are no bright spots in Latin America
right now.
Let me turn to Africa. Africa could supply 25 percent of
our oil in a decade, but energy security that depends on Africa
is going to depend on the United States and others promoting
political development in those countries or they will not be
the countries we want them to be a decade from now. Internal
unrest is a serious threat to the ability of all those African
nations to maintain investments and exports.
Nigeria is well documented. The unrest in the delta remains
unresolved. We have had sabotage, hostage-taking, major
strikes, and work stoppages. And 800,000 barrels of oil off the
market last March, adding pressure to already high oil prices,
and production is not even back today. There is also organized
theft of quite a lot of oil. The numbers range from 45,000 to
200,000 barrels a day. That oil is going partially into the
pockets of the government and partially funding militias in the
delta and some of it is ending up in Cote d'Ivoire as well. So
this is a regional stability problem, and until the political
issues are addressed, oil interruptions from Nigeria are going
to be a continuing part of our future.
Angola's oil industry has been isolated from the war. But
they have not isolated or insulated themselves from corruption
or starvation or under-development or repression of their
political opposition. And if Angola does not address its
problems, Angola is going to end up being a pariah nation too.
The fate of the new producers, Chad, Equatorial Guinea, and
Sao Tome, remains uncertain. They are going to have a large
ramp-up in oil revenues, and that will pretty soon make these
countries immune to any kind of influence, including positive
influence. So we have got a window right now to address these
issues of transparency and development. If we address them,
then I think we have a chance to make progress. If we do not,
they will be faced with either coups or unrest or sanctions
depending on their behavior. It is a lot more important that
the governments of those nations respect their own people than
that they supply us with oil, but if we do nothing now, they
may fail to do either one.
The threats to each of these nations are different, but
poor governance is at the root of all of them. All the oil-
producing nations fail to address poverty, fail to address
corruption, fail to invest in development, and they have
allowed the non-oil sector to atrophy. They have also let
national oil companies become so big they are immune to reform.
So when we are talking to governments about reform, we are
probably talking to the enemy a lot of the time. And as a
result, all of our major suppliers are under-performing as
producers and face continued instability.
So what should we do? I have given you a longer list in my
written testimony, but let me suggest four steps in Latin
America and six steps in Africa.
In Latin America, the first thing we have to do is re-
engage diplomatically. Latin America has dropped off the
diplomatic map other than do you support us on Iraq, and I am
trying to think of what the other one is. So the first thing we
have to do is start dealing with the region, start dealing with
them as countries, and Free Trade of the Americas is the No. 1
critical first step.
The second step, with Mexico, is to revisit the migration
agenda. If they are going to help us, we have to help them.
This is about giving Mexico the courage, the political courage,
to reform. Part of that means letting President Fox succeed at
something. A deep friendship with Mexico I think, is more
important than a loyalty test over Iraq.
With respect to Venezuela, we need a fresh approach for our
Venezuela policy. Today's policy is one I call a policy of
wishful thinking. The administration wishes the Chavez regime
would go away, but it will not. So as a result, they have
pretty much ignored them. I do not think we have an energy
policy, positive or negative, other than talking at an expert
level to the Venezuelans about how is it going, we hope you get
these problems fixed. So there are a number of things I think
we can do. We need to engage them. We need to work on improving
their electoral institutions, and we need to talk about the
serious energy sector problems, and talk to Venezuelans about
these problems. I think we need to add a little bit of
diplomacy to the relationship.
And fourth, I think we need to deal with energy poverty and
other poverty in Latin America, and that is using the
international financial institutions to foster development and
better governance.
In Africa, the main thing we need to do is use governments
to press their governments to be transparent about what they
take in and be transparent about what they spend. We cannot do
it alone. This has to be multilateral, and I think the G-7 is
the vehicle. I think the summit next year is the venue, and I
think if the United States steps up to the plate, we can do
some good. But we have to create an environment where it is
worth it for African governments who are frankly now benefiting
from this kind of corruption to want to reform. There has got
to be something in it for them. This is why I think we need to
think of some new policies.
One is what I call debt for transparency. I think we ought
to think about offering debt relief to places like Angola and
Nigeria in particular in exchange for enforceable commitments
to be transparent about their public finances and if they
commit to a verifiable development plan.
We ought to think about infrastructure for development. The
World Bank has been moving away from investment in
infrastructure. I think it ought to be the carrot. If you want
a pipeline, electric power, telecommunications, we will help
you get bank financing, but you commit to transparency. You
commit to a plan of development.
Conditional trade finance I think is the third one. We did
pretty well getting all countries to say there have to be
environmental standards in order to finance some of our
projects if you want our trade finance. We could apply the same
principles to transparency and I think make progress.
We could raise the standards for access to Western banks.
We could use the G-8 Financial Action Task Force to say that
banks in Nigeria and Angola, correspondent banks, have to
declare who the owners are so we can trace where the money
goes. And we might think about tagging oil the way we have
tagged diamonds to eliminate illicit smuggling in oil.
We could give better policy advice, and one of the things I
think we ought to consider is whether the Bank, the Fund,
ourselves ought to be encouraging countries--and Bolivia might
be one of them--to promise to commit some of their revenues
from oil or gas either directly to the people or to put it into
pension funds or to put it into education so people trust that
the money will go there, so you do not create these governments
who frankly have no need for their people because they do not
tax them to collect the revenue.
The next thing we could do is practice more assertive
diplomacy. All of this is about getting political leaders in
the regions to have the political will to change. They care
what we think. They care if it is important. Contrary to what
the government witnesses told you earlier, energy is never high
on the agenda for any serious talk by a Secretary of State
unless we are talking to Saudi Arabia or it is Iraq or there is
some kind of a war going on. There is just too much other stuff
going on. And it is delinked from foreign policy and I think
that happens to our detriment. Secretary Powell has actually
done great work with Angola on transparency and seen results,
but we need to apply it to Sao Tome and we need to apply it to
Nigeria, we need to apply it to other places.
Sorry. I have gone on for a long time, but I think we are
going to be stuck with relying on hydrocarbons for the next two
decades and our national security is going to depend on making
sure we have people other than OPEC to rely on and countries
other than Saudi Arabia to have excess capacity. This is going
to require the practice of diplomacy, so we need to seriously
re-engage. We have lots of tools we could use. We are not using
them. It is not helping our energy security now, and I think
there is clearly more that can be done.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Goldwyn follows:]
Prepared Statement of David L. Goldwyn, President, Goldwyn
International Strategies, LLC, Washington, DC
Mr. Chairman and Members of the Committee, it is an honor to speak
with you today about the importance of Latin America and West Africa to
US energy security.
Latin America and West Africa are and will remain critical to US
energy security. US energy security depends on access to diverse,
reliable, abundant and affordable supplies of oil and gas. The oil
exporting nations of Latin America and Western and Southern Africa
provide 43 percent of US oil imports. They hold 12 percent of global
oil reserves and 7.3 percent of global gas reserves. They are far
closer to the US market than the Middle East. Most welcome foreign
investment. The leaders of these nations are often a threat to their
own people, but they do not harbor or finance groups that threaten US
interests. The non-OPEC producers in these regions exert counter-
pressure on OPEC's monopoly power.
Our key suppliers from these regions are at risk. The risks are
that they will either fail to fulfill their production potential or
expose the global economy to supply dislocations due to internal
unrest, or both. Either scenario increases the volatility of the price
of energy, damages the US economy and makes the United States more
dependent on Middle East oil.
Our major suppliers in this hemisphere, Venezuela and Mexico, face
serious challenges to their development of oil and gas for export. US
policy towards these countries today is a combination of benign and
malign neglect. Our policies are not advancing our energy security
interests. The producing nations of West and Central Africa are poised
to significantly increase oil and gas production in the next decade.
Our key suppliers there, Nigeria and Angola, have weak governments and
corrupt systems, and they face political instability that can impact
their ability to supply the US market. They are about to get a lot
wealthier very soon, as new deepwater discoveries come to market. The
United States and its allies have a chance to help these governments
move off the path of corruption and internal destruction, but the
chance will not last long. New West African exporters, such as
Equatorial Guinea and Sao Tome face a brief window of opportunity to
avoid the so-called ``curse of oil'' if the US exercises the leadership
to move them in the right direction.
US policy today does not utilize the leverage we have or the
incentives we can provide to meet the challenges we face in this
region. This afternoon I will address why Latin America and West Africa
matter, why each region's potential to remain a key supplier is at risk
and what steps the US can take to address these risks and enhance our
energy security.
LATIN AMERICA IS CRITICAL TO US ENERGY SECURITY
Latin America is critical to US energy security. The most important
exporters, Venezuela and Mexico, consistently rank in the top four
sources of US oil supply. Venezuela averaged 1.37 million barrels per
day in 2002; Mexico averaged 1.28 mbpd. Many other countries are
significant producers but more modest exporters or net importers. I
refer to Brazil, Ecuador, Colombia and Argentina. As the populations of
these latter countries grow, the energy they produce will increasingly
be consumed internally. The US has two primary energy security
interests at stake in the region. One is to maintain and increase
hydrocarbons investment in Mexico and Venezuela so they remain
significant exporters. The second is to encourage investment in the
other oil producing countries in the region so they can help meet their
own demand.
In the past two decades US policy in Latin America and elsewhere
has been reasonably successful in fostering diversity of supply by
encouraging open markets, liberalized trade regimes, privatization or
commercialization of national oil and power companies and decontrol of
energy prices. The so-called Washington Consensus has led to major
deregulation of power and downstream markets, a welcoming environment
for investment in natural gas, and in the case of Brazil's offshore,
and more recently Colombia, better terms for foreign investment in the
upstream oil sector as well. US and other international oil companies
have billions invested in Venezuela, Colombia, Argentina and Ecuador.
Unlike Mexico, each of these countries welcomes foreign investment in
their upstream sector. Power markets, gas markets and downstream crude
oil product markets are being deregulated across the region. US
offshore drilling technology and an investment-friendly regime have
made deepwater Brazil a major source of international exploration
activity in recent years. Latin America is also critical to the US
electric power sector, as an important supplier of liquefied natural
gas (LNG). Trinidad and Tobago is the top LNG exporter, with Venezuela
poised to increase its production as well. The countries of the region
are also among our most reliable suppliers. None participated in the
Arab oil embargo of 1973-74. Venezuela is a founding member of OPEC,
but has never used oil as a political weapon.
If we look to the future, we are going to need Latin America to
maintain some diversity of supply. South and Central America possess
approximately 9.1% of the world's proven oil supplies, with 6.4% in
Venezuela alone. Mexico holds another 1.04% of proven oil reserves. In
aggregate that is more than Africa (7.3%) or the former Soviet Union
(6.2%). The region is also a major refining center, with nearly 8% of
the world's refining capacity. The region's proximity to US markets
makes Latin American oil and products easy to access in a crisis.
Regional refineries are designed to serve the specialized needs of US
markets. In the future, Latin American nations could be a reliable
source of natural gas for the US market. This will depend on whether
plans to create new pipelines to bring stranded gas to market and
projects to develop LNG gasification plants come to fruition.
From a US energy security or national security perspective, the
policy objectives should be quite clear: maintain stable democratic
governments, strengthen partnerships with key suppliers, and support
the rule of law, including contract sanctity and the preservation of a
secure investment climate. Regrettably, many countries in the region
are suspicious of the benefits of the Washington Consensus. They have
not rejected market solutions, but the appetite for further
deregulation has waned. Many of the regions' economies have degraded
seriously and the climate for investment has suffered as a consequence.
The ability of our suppliers to sustain their roles as partners in
energy security is at risk. US policy today is to ignore these
countries and hope for better leadership. It is not working. For the
sake of our energy security, as well as the fate of the people of the
region, this policy needs to change.
A REGION IN CRISIS
The hemisphere has undergone a period of economic and political
crisis in the past few years. The majority of the reasons are internal
to these countries. Persistent corruption, economic mismanagement and
under-development have put the region's governments under heavy
pressure. Per capita income in the region has shrunk for two years in a
row. Unemployment is up. The Washington Consensus of open markets,
liberalized trade regimes and democracy has not produced prosperity or
security. Poverty has not been reduced. Income distribution has not
improved. Populist regimes have taken power in Venezuela, Brazil,
Ecuador and Peru. All of the oil producing countries have avoided
serious economic reform thanks to record high oil prices. With prices
widely predicted to decline to $25 WTI levels or lower in the next
year, financial pressure will only increase on regional governments.
In the past two years, Argentina has endured a collapse of its
economy, taking Uruguay and Paraguay down with it. Mexico remains
deadlocked over the desirability of foreign investment, particularly in
the energy sector, while it imports gas from the US and risks a power
shortage that could undermine its modest economic growth. As a nation
Mexico is deindustrializing; it lacks the energy to compete for
manufacturing with other developing countries. Mexico's proven reserves
declined in 2002, but even a historic new allocation to PEMEX for
exploration and production is only likely to help Mexico maintain its
production levels or grow them slightly. Under-funding and
underinvestment remain persistent problems in Mexico's hydrocarbons and
power sector. The victory of the PRI in Mexico's midterm elections only
complicated the chance for President Fox and minority PAN supporters to
effect legislative reforms in the energy sector. The prevalence of
currency controls and political uncertainty has slowed investment in
Venezuela, Ecuador and Argentina. Security concerns, and until recently
uncompetitive economic terms, have slowed investment in Colombia to the
point where it may become a net oil importer.
Venezuela has the most fragile government in the region. Despite
enormous oil wealth, poverty and income inequality have grown
dramatically in Venezuela. In 1998 President Chavez won a populist
victory that was in large part a rejection of the ruling elite's
failure to address poverty. Before President Chavez, Venezuela was a
country with weak civil institutions. Only the military and the
national oil company had strong professional cadres committed to the
long-term development of the country. We have seen a deep erosion of
those institutions. The first erosion was from new constitutional
reforms that did not provide adequate protection of minority rights.
The second was by the militarization and politicization of the
government civil service and of the national oil company, PDVSA. The
third erosion was by a clumsy coup attempt, foolishly applauded by the
US, and by a general strike that brought the country's economy to its
knees. Without a doubt the single greatest factor in high world oil
prices this January and tight gasoline markets in the US this winter
was the strike in Venezuela, not the threat of war in Iraq.
Today the strike in Venezuela is over, the country has outperformed
most industry expectations of its ability to restore crude oil and
product exports, and US companies have resumed investments in both
offshore and heavy oil production. But much uncertainty remains.
Venezuela's new hydrocarbons law, which allows PDVSA a majority share
in any new oil development, is about to be tested. With so many
competing sources for revenue in Venezuela, it remains to be seen if
PDVSA will have the capital to invest to stop the decline in Venezuelan
oil reserves. Industry experts are skeptical about PDVSA's plans to
grow its exports, both because of OPEC quotas, and questions about
PDVSA's post-strike managerial capability and capital needs. If
Venezuela does not invest and grow, its economy will be further damaged
and its role as a long-term supplier to the US could be impaired.
Venezuela's energy leaders, including PDVSA President Ali Rodriguez and
Energy Minister Ramirez, are campaigning hard to prove that Venezuela
will remain a reliable supplier.
Apart from the fate of its energy sector, Venezuela's economic and
social crises continue. A campaign for a recall referendum is likely to
begin this fall, but there are numerous legal and technical obstacles
that make a referendum resulting in a change of leadership unlikely.
The failure of the opposition to stage a referendum by next April could
accelerate the polarization of the conflict in Venezuela Reconciliation
efforts by the OAS and the Friends of Venezuela appear stalled. The
situation cries out for diplomatic attention.
US POLICY
US policy towards the region has been a combination of benign and
malign neglect. We have ignored the region in most cases, opposed IMF
help to Argentina when it began its slide into crisis, and hammered
Chile and Mexico when they did not toe the US line in UN fora. Most
importantly, the US response to the April 2002 coup attempt in
Venezuela was an unmitigated diplomatic fiasco. Our credibility in the
region was severely damaged, and our ability to play a constructive
role in fostering reconciliation in Venezuela, perhaps the most
important issue in the region today, was deeply impaired.
For a time, it was understandable that hemispheric relations would
take a back seat to the tragedy of September 11. But since that time,
other than the counterterrorism efforts in Colombia, Latin America has
dropped off the diplomatic map. Our partners in the region often accuse
the US of being fickle or inconstant, only interested episodically in
partnership when it comes to issues external to the region: opposition
to communism, opposition to Castro or opposition to Iraq. It should be
axiomatic that to secure true allies, and engage countries on security,
economic, social and political issues, you must treat them with respect
and engage them on the merits of the bilateral relationship.
Today this is not the case. Imperiousness goes down uniquely poorly
in Latin America and they are getting a heavy dose. Regional
cooperation on counter-narcotics and trade, acceptance of IMF
restructuring programs, and historic support for US efforts in Haiti,
Bosnia and Kosovo seem to count for naught. The President of Mexico is
snubbed for insufficient loyalty. Brazil is held at a respectful
distance. And, Argentina was left to twist in the economic wind.
All this is bad for US diplomacy and worse for energy security. To
keep markets open for trade and investment, the US must engage when
regional economies drop into crisis. To foster reform in countries with
inefficient state-owned industries, the White House and State
Department must engage our partners at senior levels. Noble efforts by
technical agencies, such as Energy and Commerce, are laudable. But true
reform takes high-level engagement. US companies, customarily the
partners of choice for the hemisphere's producers, could be harmed if
the countries of the hemisphere believe they must look to Europe or
elsewhere for respect and support.
WHAT THE US SHOULD DO
US relations in the hemisphere are at low ebb, but they can recover
quickly. For better or worse, US power and influence are indispensable
to conflict resolution in the region. Our hemispheric partners will
welcome a new page in our relations. I suggest four steps.
First, the US must reengage on hemispheric issues. Strong support
for the Free Trade Agreement of the Americas is the critical first
step.
Second, the US must revisit the migration agenda with Mexico. The
US has a powerful interest in ensuring that President Fox and his
reform agenda succeed. US interests in Mexico, and our deep friendship,
transcend a loyalty test over Iraq. Mexico's ability to create jobs for
its citizens, to grow a diverse industry and to sustain its role as a
key energy supplier to the US depends on the success of its economic
reform.
Third, the US must take a fresh approach to its Venezuela policy.
Today's policy is one of wishful thinking. The Administration wishes
the Chavez regime would just go away, but it is here to stay. To the
region, it appears that regime change is our policy in Venezuela as
well as the Middle East. The US cannot facilitate reconciliation by
isolating or ignoring the regime in power. Venezuela needs support for
civil society and reconciliation. The Administration should engage
Venezuela at a high political level to talk seriously about our common
concerns and disagreements. The US Congress should engage Venezuela's
legislature directly and offer the support of the National Democratic
Institute and International Republican Institute to strengthen
Venezuela's frail electoral institutions. The US Energy and Commerce
Departments should intensify and accelerate their expert level talks
and resume their Strategic Dialogue to talk frankly and in detail about
the problems that must be overcome and the solutions that can be
brought to bear. There is a need for training, for much better and more
current data on crude and product supplies, and for cooperative
research. We have a common interest in restoring and expanding
production and in helping revive PDVSA.
The US needs to engage Venezuela's neighbors in a collective effort
to build a process that will enable all sectors of society to
participate in political life. Through the IMF and World Bank, the US
and its partners need to provide clear and direct economic advice and
assistance to Venezuela to restore its fiscal house to order.
Fourth, the US must craft a way to use the leverage of the IMF, the
World Bank and the Inter-American Development Bank to foster energy
security and better governance. These institutions must use their
support for energy sector reform and investment in the infrastructure
of oil, gas and power to elicit more transparency in how those
governments spend the revenue they earn. The US will directly benefit
from the development of an integrated regional gas and power
infrastructure. An external push is needed to finish, or in some cases
start, the process of energy sector reform. An infrastructure fund tied
to conditions of transparency and fiscal integrity could kick-start
growth in the region again.
WEST AFRICA IS CRITICAL TO US ENERGY SECURITY
West and Central Africa are increasingly important to US energy
security. In this case I am speaking about Nigeria, Angola, Chad,
Equatorial Guinea, Gabon, Sao Tome and Principe and the Gambia. Today
these countries supply 13-14% of US oil imports. Sub-Saharan Africa
holds approximately 3 percent of the world's oil reserves, and 3
percent of the world's natural gas reserves. In ten years they could
supply up to 25% of our imported oil. Nigeria produces 2.12 million bid
and exports 1.85 million bid. It exports 621,000 b/d to the US which
makes it our fifth largest supplier. Angola produces 900,000 b/d and
exports 866,000 b/d. It exports 332,000 b/d to the US which makes
Angola our ninth largest supplier, and our third largest non-OPEC
supplier outside of the Western Hemisphere. According to EIA estimates,
this year Cameroon, Chad, Equatorial Guinea and Gabon are projected to
export approximately 500,000 b/d in aggregate, with 221,000 b/d going
to the US.
These countries will not replace Middle East oil, but that is
beside the point. The marginal barrels of oil set the price, and the
ability of these mostly non-OPEC countries to compete with OPEC, when
all of them are half the hauling distance to the US of the Middle East,
is indispensable. The countries of West Africa are open to foreign
investment and have offered competitive commercial terms and a
relatively stable investment climate, despite enormous internal
turmoil.
West Africa is one of the honest oil prospects in the world today.
Advanced offshore finding and drilling technologies have uncovered
large commercial oil deposits off Nigeria, Angola, Equatorial Guinea
and perhaps Sao Tome and the Gambia. The use of Floating Production,
Storage and Offloading platforms (FPSOs) has reduced the environmental
footprint of drilling and reduced production costs. Offshore oil is
also less risky and therefore more attractive.
As in Latin America, US energy security policy objectives should be
to maintain stable governments and open markets, strengthen
partnerships with key suppliers, and promote the rule of law and
contract sanctity. But unlike Latin America, energy security will
require that the US and others promote political development in West
and Central Africa. Only Nigeria is a true democracy and it is riven by
civil unrest. The rest of the exporters are at a rudimentary stage of
political development. Internal unrest is a serious threat to the
ability of these nations to maintain investment and exports.
US policy in this area is headed in the right direction, but at
present is insufficient to accomplish its aims.
A REGION IN CRISIS AND TRANSITION
Effective management of oil revenues is the most important factor
in Africa's economic development, bar none. Africa attracts only one
percent of the world's trade and investment, but 90% of that amount is
in the oil sector. West African oil producers have the chance to use
the rapid increase in wealth they will soon earn for development. It is
in US interests to see that they do. If they fail, as all of their
resource-rich predecessor governments in Africa (other than Botswana)
have failed, we will see civil unrest or war, strikes, and dislocation,
as well as poverty, death and economic degradation. Today, oil prices
are high and revenues are good. Foreign investment is flooding into the
energy sector to develop strong exploration prospects. Nigeria has had
a historic democratic succession. Angola has welcomed a limited, but
important, audit of some of its oil revenue and has just completed a
very positive Article IV consultation with the IMF. Chad will see the
first oil from the Chad-Cameroon pipeline this year, and the World Bank
supervised system for monitoring Chad's oil revenues and ensuring that
they are spent on development may prove to be a model for other
countries in channeling oil revenue into development Equatorial Guinea,
Sao Tome and others are welcoming and receiving engagement with the US
on human rights and development issues.
But our major exporters are at risk. Nigeria's unrest in the Delta
region is unresolved. Foreign workers have been held hostage for weeks
at a time. Sabotage of oil pipelines has killed hundreds of Nigerians.
A major strike in March knocked 800,000 barrels of oil per day off the
market, adding pressure to already high oil prices. Production was shut
down for months for security reasons; it is not fully back even today.
Labor unions, accurately foreseeing the reduction in personnel needed
to maintain offshore oil operations, are also threatening to shut down
operations. Furthermore, the organized theft of 100,000 to 200,000
barrels per day in the Niger Delta, reportedly involving armed militias
and criminal groups that use some of the proceeds to acquire weapons,
is an indication that oil mismanagement can threaten regional
stability. The Nigerian government has no credible plan at this time to
foster development and reconciliation in that troubled region. Oil
interruptions from Nigeria are likely to continue or worsen unless
these issues are addressed.
Angola has enjoyed the benefit of an isolated oil-producing region
and has insulated production from civil war. Angola has not insulated
itself from corruption, starvation, underdevelopment, and repression of
political opposition. The Angolan government may indeed be willing to
tackle these problems, but it is unclear if they will be able to. If
Angola fails, and if it remains a nation that ranks 161 out of 173 on
the Human Development Index, Angola could well turn itself into a
pariah nation.
Sao Tome, while not yet a producer, saw a coup attempt against its
President--only weeks after he had followed Secretary Powell to the
stage of the Corporate Council on Africa Summit, espousing the need for
transparency in the use of potential oil revenues.
The new producers, Equatorial Guinea, Chad and Sao Tome in
particular, are about to face a choice. They will soon begin to see
large revenues from the investments in their nations. Their governments
may invest in their people, develop their nations, and earn the trust
and recognition and support of the West, or they may follow the path
that Nigeria and Angola have followed, and earn the same opprobrium.
Today the US can have a major influence on these nations. We are
major investors and consumers. Nigeria and Angola have large external
debts that are leverage for US policy. US influence at the IMF and
World Bank can be wielded to ensure that these nations are democratic
and stable. But the window of opportunity is short China is the fastest
growing purchaser of Angolan oil. China will not use its economic
leverage to push for democratic reform and transparency. A large ramp-
up in oil revenues could make many of these producers immune to
positive influence. A forceful US policy with multilateral support is
essential. If we fail, these states can be faced with war, coups, or
sanctions or other pressures that could threaten their ability to
supply the world market. It is more important that they respect their
own people than that they supply us with oil. But if we do not act,
they may not do either.
US POLICY
After September 11, 2001, West Africa became a priority because
regional instability, failed states and maritime security were viewed
as a potential security threat. US policy in Africa is headed in the
right direction. The State Department is focused on the key anchor
states. It is maximizing the use of subregional organization like
ECOWAS and SADC. It is focused on combating AIDS and promoting
stability and good governance. The pursuit of an AGOA II will be a
major positive step.
After an initial period where the Administration suspended any
bilateral or multilateral diplomatic efforts they inherited, the
Administration has retained the US-Africa Energy Ministers process
created when I was at the Energy Department, renewed the bilateral
energy dialogs with Angola and Nigeria, and engaged rather than
isolated Equatorial Guinea and committed to open a Special Embassy Post
there this year. Technical assistance programs by the US Department of
Energy, the US Trade and Development Agency, the Department of Commerce
and USAID are helping build capacity in these fragile states. The
Millennium Challenge Account is an innovative concept which, when it is
funded and ready to disburse funds, may magnetize good behavior.
But despite these efforts, the US has not yet wielded the leverage
or the leadership to crack the so-called ``curse of oil.'' In Nigeria
and Angola in particular, oil has created ``rentier'' states. Many
scholars have written extensively about this issue. The newly published
study by Catholic Relief Services, titled ``Bottom of the Barrel,''
provides a very useful synthesis of the literature on the problems oil
wealth can produce and some creative ideas about how to redress them.
The governments of Angola and Nigeria get their revenues from their
share of oil proceeds and not from the taxation of their citizens. They
do not need the consent of the governed to stay in power. The revenue
is easy to capture and control and therefore to steal or to waste. Even
leaders with honest intentions, such as President Obasanjo, have little
influence over a deep and pervasive corrupt system that extends to the
customs officers and drivers of delivery vehicles.
WHAT THE US SHOULD DO
To ensure that the West African energy producers of today are
reliable, stable energy producers of tomorrow, US policy must be geared
to encourage or to pressure producing governments to spend the money
they earn on their people, to do so wisely, and to conduct their own
public finances in a transparent manner. The key steps are: 1) enhance
revenue and expenditure transparency, 2) provide more creative economic
policy advice, 3) use our leverage, and 4) exercise more assertive
diplomacy.
Enhance Transparency. It is broadly accepted that making public the
aggregate amount of taxes, royalties and other payments earned by
producing governments, and accounting for where the money is spent
would empower their publics to demand accountability. The debate has
largely been over who bears the burden of disclosure and how best to
ensure that all the entities that compete for oil development--such as
national oil companies and state owned enterprises--must meet the same
burden. The UK-led Extractive Industries Transparency Initiative (EITI)
proposes a voluntary system. The Publish What You Pay Campaign proposes
mandatory rules for publicly listed companies, which regrettably would
not cover the bulk of the world's oil producers. I believe that the
burden must fall on the producing governments, and that Western
governments should use their considerable leverage to extract
disclosure and transparency commitments from producing governments. As
long as the playing field is level, and aggregate industry wide figures
are published, US industry is unlikely to object to revenue disclosure.
In most countries companies would like nothing better than for the
public to know how much revenue the government is taking in, so that
the burden of nation-building would rest more with national authorities
and less on the local operators. The US should lead a G-7 effort to
create a new set of incentives and pressures on developing nation oil
producers to disclose the revenues they earn and how they spend them.
Give Better Policy Advice. The US needs to consider whether we can
give oil producers better economic advice than we have to date on how
to manage revenues. We need to say more than ``open your markets,
deregulate your prices and introduce competition'' if we want to
produce real economic development in Nigeria, Angola and other nations.
The Chad-Cameroon example of creating a college of leaders to supervise
a national development may work, but in the end it relies on the good
graces of a state that may or may not respect the rule of law. There is
new thinking by the IMF and the New America Foundation on the benefits
of distributing some large portion of oil revenues directly to a
population. The theory holds that this method empowers people, creates
economic demand and undercuts the power of the state by forcing them to
seek money through taxation and the consent of the governed. It is a
theory that is being considered for Iraq. It is possible that the IMF
and World Bank should be advising Nigeria and Angola to consider this
mechanism as a means of enhancing both economic and political
development. I would urge Congress to commission some serious analysis
of its own on this issue.
Use Our Leverage. The key sources of leverage over oil producing
nations today are: 1) renegotiation of sovereign debt, 2) help
financing energy infrastructure, 3) access to trade financing, and 4)
access to Western banks and capital markets. The US should muster the
G-7 to lead a coalition to use this leverage to ``extract''
transparency and development commitments from oil producers.
Debt for transparency. The greatest source of influence that the
West has over Nigeria and Angola is their sovereign debt. The US should
consider a G-7 initiative to forgive the debt of developing oil
producers that make enforceable commitments to publish the aggregate
amounts of their tax, royalty and other resource payments and public
expenditures, to commit to a plan of development, and to accept IMF
monitoring of their commitments. Such an offer might offend the
sovereign sensibilities of many nations, but it would create a domestic
debate in those nations over the costs and benefits of transparency.
Infrastructure for Development. A second great need of African
nations is for electric power and telecommunications. Many of these
projects can be financed commercially, but most must be publicly
financed. The World Bank has been reluctant to make a strong commitment
to infrastructure finance for fear of interfering with private markets.
They also rightly insist on policy reform before they are willing to
invest in project finance. But a new fund, with new capital
contributions by the Bank's members, could provide a magnet for
financing infrastructure for those nations willing to make a commitment
to development and transparency. The Chad-Cameroon pipeline is an
example of how this may work, but Chad-Cameroon was a unique case: the
oil was landlocked, Exxon-Mobil refused to finance the pipeline without
World Bank support, and Chad was not wealthy enough to publicly finance
the project on its own. But a fund that would help finance
infrastructure along with private capital could incentivize countries
to swap transparency for development.
Conditional Trade Finance. The US, the World Bank and others have
made great strides on conditioning trade finance on enforcement of
environmental standards. The need for impact statements and remediation
plans has changed some projects for the better and stopped others
altogether. A G-7 effort to have all G-7 nations condition trade
finance on some commitments to transparency and use of revenues could
be a powerful tool to press developing nations to adopt honest
practices.
Raise the Standards for Access to Western Banks. One new concept,
well documented by Jonathan Winer, a former State Department colleague
of mine, bears examination. This is a proposal to use the successful G-
8 Financial Action Task Force (FATF) to create new standards for access
to Western banks and to mimic the Kimberly Process for deterring trade
in conflict diamonds to deter illegal trade in oil. In briefest
summary, the proposal would beto require national banks in countries
like Nigeria and Angola to disclose their ownership and document the
validity of their transactions before they gain access to correspondent
Western banks. This would deny capital access to illegitimate banks and
track outflows from governments known for corruption. A second proposal
would ``tag'' oil sales to ensure that all legitimate sales were
traceable to their owner. This would not harm legitimate Western
operators or national oil companies, but could help deter those in or
out of government who divert the proceeds of oil sales for their own
benefit.
More Assertive Diplomacy. Achieving better governance in Africa
depends on the leaders of African countries having the political will
to change. They care a great deal about how the US and others perceive
them and whether their behavior has political price. US high level
diplomacy is a powerful tool we must exercise. With Angola, Secretary
Powell has put transparency high on the agenda and he is getting
results. We have many interests in Nigeria and their internal problems
and the issue of their relations with their neighbors is not making it
to the top of the agenda. The US must also be willing to step in with
forceful diplomacy when internal forces threaten democratic African oil
states. The US rhetorical response to the recent coup attempt in Sao
Tome was strong and helpful, but in the aftermath US and UK leadership
have been absent. The coup attempt was an effort by those in the
military and external forces to allocate the proceeds Sao Tome may earn
from its 40% share in the Joint Development Zone with Nigeria President
Obasanjo's offer to ``protect'' Sao Tome was as unwelcome as it was
unwise. Wedged between those in Nigeria and Angola who would compete
for control of its oil, Sao Tome cries out for a US or UK commitment to
preserve its independence! The US should put a USAID mission on the
ground in Sao Tome, help Sao Tome build the capacity to manage its
potential wealth, and warn its neighbors not to interfere. Sao Tome
could be a prime case for the EITI. The US could lead an effort to get
Sao Tome to pledge its signing bonuses and future revenues to the World
Bank in exchange for a line of credit for development today.
CONCLUSION
The global economy is likely to rely on hydrocarbons for
transportation fuel and power for at least the next two decades. Our
national security will depend on securing diverse supplies of oil and
gas and on ensuring that the governments who supply us do not use our
money to harm us. As a bilateral matter this will require serious
diplomatic engagement with our key suppliers and concern about their
political stability. Where we can, we need to use our leverage to
encourage better governance in oil producing nations so they will be
stable and humane. We have many tools we can use. We are neglecting
these tools, and basic tenets of diplomacy, to our detriment. A little
Congressional sunshine on these issues may help the Administration to
see the light. I commend you for your efforts here today.
Senator Hagel. Mr. Goldwyn, thank you.
Dr. Ottaway, welcome. Nice to have you. Let me remind
everyone who you are: senior associate, Carnegie Endowment for
International Peace here in Washington, among other
achievements. We are glad you are here and we look forward to
your testimony.
STATEMENT OF DR. MARINA OTTAWAY, SENIOR ASSOCIATE, DEMOCRACY
AND RULE OF LAW PROJECT, CARNEGIE ENDOWMENT FOR INTERNATIONAL
PEACE, WASHINGTON, DC
Dr. Ottaway. Thank you, Mr. Chairman. Being the last
speaker, I will try to avoid repeating what other people have
said, and I will depart somewhat from my prepared remarks.
I think there is widespread agreement among the witnesses
that the main threat to energy security in both Latin America
and in West Africa is really the problem of political
instability. I would like to point out that the instability
that threatens our oil supply takes two forms.
One is the instability that directly affects the oil
fields. For example, we see that in West Africa very clearly in
the case of Nigeria where the entire oil-producing area of the
delta is a bubbling caldron at this point with almost daily
incidents that affect oil production.
But there is perhaps an even more insidious kind of
instability that affects all oil-producing countries which is
the potential for instability that comes from the misuse of oil
revenue and from the tremendous income inequalities that
develop in these countries. If you look at the case of
Venezuela, that is a good reminder of it. The problem there is
not that the oil fields themselves are threatened, but it is
the overall political situation that has developed in the
country that affects the supply of oil.
When you look at West Africa I do not think we should be
complacent to think that, because in Angola the oil fields are
mostly offshore, instability is not going to be a problem that
affects oil supplies. The oil fields are not going to be
threatened. They are too far offshore. We are unlikely to see
any real problem. That is why Angola was capable of greatly
increasing oil production during a war. But if the political
situation in Angola itself becomes unstable, if the resentment
of the population about the misuse of oil revenue increases,
which is very likely to happen now that the war is over and
people are going to focus more on that kind of issue, then I
think the supplies from Angola can also be threatened. So I
think it is important to keep this in consideration.
The second point that I would like to make is that while
certainly the United States is committed to promoting democracy
and transparency in these countries, the conflicting interests
of the United States sometimes lead to the implementation of
policies that clearly are not very helpful in terms of
promoting democracy and transparency. Let me give you one
example of that.
One problem that we have particularly in Nigeria now that
the United States wants two very different things from Nigeria.
The United States wants oil supplies and the United States
wants Nigeria to play a major role as a peacekeeper in West
Africa. I think they are both important goals, and it is quite
understandable that the U.S. Government would want them both.
But the two work at cross purposes with each other because one
of the tendencies that we have right now, because we need
Nigeria to help in Liberia, to help in other unstable countries
in West Africa, is not perhaps to put sufficient pressure on
President Obasanjo on the domestic political reforms that are
badly needed in the country. In a sense, it is very difficult
to rely on a country to help police the region and at the same
time to slap him on the wrist too often on issues of domestic
governance. There is a built-in conflict here that we need to
sort out.
There are other policies that we are trying to promote in
Nigeria and promote in the entire region, as a matter of fact,
which can work at cross purposes to our goal of reducing
corruption and improving transparency. In the name of
democracy, we have been promoting decentralization in Nigeria,
for example, and I am sure we do the same thing in Angola now
that the war is over. I do not want to sound as if I were
defending centralization because there are big problems with
that too. But one of the unexpected consequences or unwanted
consequences of decentralization in Nigeria has been the
decentralization of corruption so that instead of having very
corrupt management of oil revenue at the level of the Federal
Government, now you also have the problem of a very corrupt
management of oil revenue at the level of the 36 state
governments.
So essentially this is an issue that requires more
rethinking about how we can both promote decentralization and
at the same time try to combat the problems that arise when
governments are not sufficiently monitored and when there are
not sufficient checks and balances. I would argue that the
policy of decentralization has really not been very helpful in
the case of Nigeria, and that is a policy which is supported by
the United States and by the international financial
institutions. So, again, there are conflicts in what we are
doing.
There is certainly need to think seriously about what can
be done by the United States, by again the international
financial institutions, other countries to improve the
management of oil revenue by particularly African countries,
but all developing countries essentially. I would caution about
jumping to conclusion too quickly about the fact that we know
what the solution is. I hear too much about the Chad model
because the Chad model, while it sounds fairly promising on
paper, is still untested. We really will not know how the Chad
model works until oil production in Chad is fully on stream and
there is more of a track record of whether these organizations
that have been set up, whether the participation by NGOs, both
domestic and international, is really improving the management
of oil revenue or it is not.
I also hear a lot about following more the example of
Alaska, trying to distribute part of the oil revenue directly
to citizens. Again, I think the countries have to be studied
one by one in terms of what would work in the particular
situation. There are many such countries in Africa totally
dependent on oil--Chad is certainly going to be one of them;
Angola is another one. And even Nigeria, which has in many ways
a more diversified economy, falls in that category--where the
government has virtually no revenue except what comes from oil.
Under those circumstances, it is difficult to distribute oil
money to citizens. Oil revenues are really not quite sufficient
even to pay for the basic tasks of government. So I do not
think one can jump to conclusions that the solution for these
countries is to distribute part of the oil revenue directly to
citizens. I think the cases have to be considered one by one.
The last point that I would like to make concerning
transparency is the fact that in many of these countries there
is a role that the oil companies can play and have to play in
many ways in promoting transparency, and not in the sense that
I think it is the role of the oil companies to reform these
governments, but that the oil companies are in a position to
provide information about how much money is being paid to these
governments, and just having those figures would help
tremendously the domestic process of monitoring how the money
is being spent and is being allocated. So I think,
unfortunately, whether or not they like it--and I know this is
an extremely sensitive issue on which there has been a lot of
resistance--the oil companies may have to step up their efforts
in this area of helping make available the information on which
then efforts to promote transparency of the governments can be
based.
Thank you.
[The prepared statement of Dr. Ottaway follows:]
Prepared Statement of Marina Ottaway, Senior Associate, Democracy and
Rule of Law Project, Carnegie Endowment for International Peace,
Washington, DC
SECURING OIL FROM WEST AFRICA AND LATIN AMERICA: THE CHALLENGE OF
INTERNAL TURMOIL
A key factor in protecting United States energy security is gaining
and maintaining access to diversified sources of oil and gas from
different regions in order to minimize the likelihood of severe
disruption. West Africa and Latin America are already important sources
of diversity in the US oil supply. In particular, Venezuela accounted
for over 13 percent of US imports of crude oil in 2002, while Nigeria
and Angola accounted for 6.4 percent and 3.5 percent respectively.
Furthermore, oil exploration and development of extractive capacity in
West Africa are increasing rapidly. Angola's production alone is
expected to increase from an average of 696,000 barrels per day in 2001
to over a million barrels per day in the next few years and it could go
as high as 3.2 million by 2020, according to some estimates.
US continued access to these important sources of oil, however, is
threatened by the political instability that affects all three
countries. Oil supplies from Nigeria are routinely disrupted by
politically motivated incidents that close down pipelines and, more
rarely, production facilities. In December 2002 a general strike sent
Venezuela's exports plummeting.
The problems of oil producing developing countries are related at
least in part to the negative impact of oil exploitation. Some analysts
have talked about the ``curse of oil'' that afflicts countries where
oil is the major, often the only, asset and thus dominates the economy.
These countries suffer from a typical set of problems. Other economic
sectors, including agriculture and manufacturing, are usually
neglected; unemployment levels are high as a result, and the oil
industry, which is capital intensive, does little to alleviate the
problem; and income disparities tend to be very wide, as a privileged
few profit from the oil revenue, often through corruption, while the
rest of the country stagnates. Even more serious are the political
problems associated with oil wealth in poor countries. The first is
corruption, an endemic problem when large amounts of revenue start
pouring suddenly into countries with weak institutions and systems of
accountability. Indeed, a lot of the oil revenue of countries like
Nigeria and Angola has never been accounted for, disappearing in the
hands of politicians and their cronies without ever appearing in the
state books. Finally, the population of oil producing countries often
develops a sense of entitlement to wealth--if the country is rich in
oil, the population should also be rich. The expectation that oil
revenue can take care of all problems is usually unrealistic,
particularly in countries with a large population.
The distortions created by oil revenue are not the only cause of
the problems that produce instability in countries such as Nigeria,
Angola and Venezuela, but they are an important part of it. As a
result, these countries cannot achieve stability without addressing the
problem of how oil revenue is used and accounted for. If the United
States wants to secure undisrupted access to oil from these countries,
it must help them find a more transparent and more beneficial way to
use oil revenue. Oil companies also have to play a role. While in
recent years oil companies have become much more aware of the
disruption their presence causes and have taken some steps, many
problems persist and need to be addressed.
Nigeria and Angola
Both Nigeria and Angola are deeply troubled countries. Political
problems have proven, and continue to prove, extremely disruptive to
oil production in Nigeria. In Angola, the oil industry has been
somewhat insulated from the civil war that raged in that country since
it attained independence in 1975 because most oil deposits are off-
shore. Indeed, Angola became an important oil producer in the midst of
war. After the death of UNITA leader Jonas Savimbi in early 2002, the
war has largely ended and the country is struggling toward stability.
Paradoxically, oil may well become a new source of domestic strife, as
Angolans turn their attention from wartime survival to the present
socio-economic problems and discover how much of the oil revenue has
been misused or, worse, has disappeared without a trace.
With or without oil, Nigeria would be a very troubled, difficult to
govern country, but oil has created additional complications. At the
root of all problems is the extreme ethnic diversity of the country.
There are over three hundred ethnic groups, but most importantly three
dominant blocs. Northerners have historically dominated the military,
the Yorubas from the west have been prominent in the business sector,
and Ibos from the east have provided disproportionate numbers to the
civil service and business. The tensions among the three major blocs
exploded in the civil war of 1967-69, which started when the Ibos of
the eastern region seceded from Nigeria and set up their own state of
Biafra. Biafra was eventually defeated and Nigeria was reunited, but
the underlying problem of achieving stability in such diverse country
remains.
In fact, the political picture has become even more complicated
recently. The division between Muslims, that dominate the north, and
Christians, more numerous in the rest of the country, has become
politicized, as Muslims in Nigeria follow the worldwide trend toward
greater assertiveness. Several northern states have recently
incorporated aspects of the Islamic sharia into their legal systems.
Another very important source of tension is the increasing militancy of
the population of the oil producing Niger Delta. This population,
composed of many small ethnic groups, has long paid the price of oil
exploitation, losing land and suffering from the consequences of high
levels of air and water pollution. However, very little of the oil
revenue has been invested to alleviate its problems. Until recently,
all oil revenue has gone to the federal government, which doled it out
to states and localities. Oil producing areas, which have little
political clout, were short-changed. While the distribution of oil
revenue has become much more equitable in the last few years under
President Obasanjo and control has been decentralized, many militant
ethnic-based organizations continue to operate throughout the delta.
These groups cause considerable disruption of oil production by
sabotaging pipelines and occasionally even taking over oil platforms.
To their activities must be added the problems caused by
``entrepreneurs'' who tap into the pipeline to siphon off and resell
oil. This highly dangerous business has repeatedly caused fires and
explosions, killing or seriously injuring hundreds and forcing the
temporary shut-down of pipelines.
An additional source of instability in Nigeria is the ever-present
threat that the military, which has governed the country through most
of its existence, will seek to seize power again. Nigeria's return to
civilian government with the election of 1999 remains fragile and a
renewal of military rule is a possibility. The new government has taken
some steps to address the country's economic and social problems,
particularly in the Niger Delta, but the challenges are immense and
popular confidence in the government is low.
Even this abbreviated sketch should make it clear that many of
Nigeria's problems are not caused by the misuse of its oil riches, and
would not go away completely even if oil revenue was used better and
more equitably and if oil companies implemented more effective remedies
for the ills their operations produce. But whether oil is the cause or
not, Nigeria's problems can disrupt oil flows and cannot be ignored.
The Angola situation is somewhat less complicated. Although the
country has experienced almost thirty years of civil war, the conflict
was a bilateral one between the ruling MPLA and the insurgent UNITA,
and did not have the intricacy of Nigeria's multiple layers of
conflicts. Furthermore, it did not seriously affect the growth of the
oil industry because fields are located mostly off-shore. The civil war
ended after the death of Unita's leader Jonas Savimbi in February 2002.
Angola is moving toward elections and there is a real possibility that
elections results will be respected, rather than precipitating a new
conflict as they did in 1992. This does not mean that Angola will soon
be a democratic country. Elections are unlikely to be truly free and
fair, given UNITA's present weakness, the MPLA's strong grip over the
country and the oil revenue, and the virtual absence of any other
viable political party. But elections will at least be a step in the
right direction.
With the return of peace, however, the enormity of the socio-
economic problems the country faces is becoming more evident and it is
more urgent to address them, lest they become source of new conflicts.
Many of these problems are related to oil and the misuse of oil
revenue. Thus, oil production in the future will be at the center of
political conflict in Angola, while during the civil war it was not.
The first problem that needs addressing urgently is the fact that the
country's economy is dead, except for the oil sector. This is the
result of war--agriculture has been completely undermined by the
fighting and above all by mines both sides planted in large numbers,
making it impossible for peasants to tend their fields in many areas.
Furthermore, the urban economy was initially choked by the government's
socialist policies, which put all enterprises under state control.
While those policies have now been abandoned, the pace of economic
restructuring has been painfully slow and stagnation continues. Unless
the economy revives and creates jobs, the cities will become unstable.
Economic revival depends on restructuring and investing oil revenue in
the development of economic sectors that can become viable on their own
after the start up period. Unfortunately, many oil-producing countries
succumb to the temptation to use oil revenue to subsidize consumption
or invest in enterprises that seem prestigious but never become viable.
The second problem Angola needs to tackle immediately is that of
establishing accountability for oil revenue. Oil royalties so far have
been spent financing war and lining the pocket of government officials.
Large amounts have never been accounted for--for example, increase in
oil prices during the Gulf war were never reflected in the Angolan
official oil revenue figures.
Failure to address these problems is likely to create further
instability in Angola. This could affect oil production. While the oil
installations are not particularly vulnerable to sabotage because of
their off-shore location, sabotage of installations is not the only
form disruption of oil production can take. The strikes of December
2002 and early 2003 in Venezuela, discussed briefly below, show that
political action, particularly strikes, can have a dramatic effect on
oil production. An additional problem in Angola is that one of the
major oil producing areas is the Cabinda enclave, where an independence
movement has been operating persistently, although without much
success, since Angola became independent.
VENEZUELA
The problems experienced by the oil industry in Venezuela, when a
politically motivated strike beginning in December 2002 cut oil
production from over 3 million + barrels a day to under 400,000 a day,
are a reminder that oil supplies can easily be disrupted by political
unrest. Equally importantly, the crisis that led to the strikes, which
is far from resolved, shows the economic and ultimately political
problems that can emerge in a country overly dependent on oil revenue.
Venezuela, for forty years considered to be the most democratic and
stable country in Latin America, has been in turmoil for over a decade
now. At the heart of the crisis is the breakdown of the social and
political pact on which democracy was based as the country outgrew its
ability to live off oil revenue without having developed sufficient
sources of alternative revenue. Venezuela's stability was based on a
power-sharing agreement among major political parties, backed up by oil
revenue that allowed the government to keep the population relatively
prosperous. As the population increased and oil revenue failed to keep
pace, the pact started unraveling. An impoverished population became
increasingly distrustful of the old political class. The resentment
only increased when drastic economic reforms enacted to wean the
country away from dependence on oil and revive the economy were
introduced suddenly without explanation.
The crisis stretched for several years, through two attempted coup
d'etat and eventually led to the demise of the old political class and
the election of a populist former army officer, Hugo Chavez in 1998.
Under his leadership, the government slipped toward semi-
authoritarianism, and the opposition became more willing to resort to
direct action rather than the ballot box, leading to the December 2002
crisis. At the time of this writing, there is a good chance that
Chavez's presidential mandate will be terminated by a recall referendum
and that new elections will be held. Even if this happens, the crisis
will not be over--and Venezuela will not become again a dependable
source of oil for the United States--unless a new social compact is
negotiated that addresses the grievances of the large impoverished
segment of the population.
TAKING STEPS
Neither the US government nor the oil companies have the capacity,
let alone the obligation, to address all the problems these countries
face. On the other hand, it is in the interest of both to do something
to help make these oil producers into more reliable sources of energy
and easier environments in which to operate. The chance that the US
government and the oil companies will have a positive impact is greater
in Angola and by far most remote in Nigeria. I will deal with the case
of Venezuela separately, because the situation in that country is very
different.
In general, the measures the US government can attempt fall into
two categories: first, support for the attempts to resolve the
conflicts created by oil in a democratic fashion, through negotiations
and compromise, rather than through violence. While support for a
democracy writ large in Nigeria and Angola is a good thing in itself,
it is unlikely to have much impact on oil-related conflicts. Even in a
best case scenario, it will take many years before the political
systems of Nigeria and Angola function democratically. But the problems
of how to distribute oil revenue among levels governments and regions,
of how to use it, and how to ensure that it will be used productively
have to be addressed immediately. The government needs to engage the
governments of Nigeria and Angola and the groups with a stake in the
distribution and use of oil revenue these issues.
It is also important that in encouraging this process the US does
not try to impose solutions based on models that are either unproven or
modeled on countries with very different characteristics. For example,
there has been much talk recently of the advantages of the ``Chad
model'' or the ``Alaska model.'' The Chad model takes control over oil
revenue out of the hands of the executive, giving it instead to a broad
coalition of government officials and NGOs, under international
supervision. While it has appealing features, it is also cumbersome,
gives much responsibility to non-elected domestic groups and to foreign
bodies. Most importantly, the system is still untested and will remain
such until Chad's oil fields go into full production and generate a
steady revenue stream. The Alaska model puts part of the oil revenue
into a trust fund, the dividends of which are distributed directly to
the citizens. This works well for Alaska, where state and localities
also have revenue from taxes. It may not be a realistic model for
countries where oil is the only source of public revenue and thus has
to finance the entire budget, including all public services such as
education, health, and the provision of basic infrastructure. The US
should help countries design a system to allocate and control oil
revenue that fit each country's requirements but not try to impose
specific solutions.
The second step the US can and should take is much easier in
theory, although it requires political will: working simultaneously
with the governments of the oil producing countries and the oil
companies to ensure that the information about how much revenue the
government is receiving becomes public domain. Transparency will help
stop the corrupt diversion of oil revenue to private bank accounts. It
will also facilitate an apportioning of funds among regions and levels
of government based on real figures rather than myths. Finally, it may
also help curb the unrealistic expectation of the population that oil
revenue can make everybody rich. The Extractive Industry Transparency
Initiative, launched by British Prime Minister Tony Blair in June as a
result of NGO pressure, deserves full US support. The initiative would
make it mandatory for oil companies and other extractive industries to
disclose how much they pay to the producing countries. Information
about oil revenue is not a sufficient condition to ensure transparency
in how the recipient government spends that money, but it is a
precondition for it. Oil companies should be required to make that
information public, but certainly have no responsibility for monitoring
the expenditure.
The case of Venezuela is different. The problem there is not the
absence of mechanisms of accountability or even less the incapacity to
manage a democratic political system--only a few years ago Venezuela
was considered, and in fact was, a consolidated democracy. Rather, the
problem is the breakdown of the social and political pact that ensured
the country's stability. It is in the interest of the US to help as
much as possible in the renegotiations of such a pact. This is much
more important than trying to support Chavez's ouster in a referendum
or specific candidates in the next elections. Who wins is less
important than whether the winner represents a new consensus rather
than another deep division in the body politic.
Major oil producing countries in West Africa and Latin America can
make an important contribution to US energy security, since they are
not affected by the difficult problems of the Middle East. However,
they have considerable problems of their own, which the US cannot
ignore.
Senator Hagel. Dr. Ottaway, thank you very much. Each of
you have presented excellent statements. Again, I remind you
that I will assure that each of your full statements are
included in the record.
Mr. West, let me get back to you and your opening comments
about things that Congress can do. Obviously, you ended up with
some of that referencing natural gas and you made some
important points that we should be listening to. But let me
open that up and go back to your statement and allow you to
answer the question, what do you mean, what can we do, what
should we be doing, the Congress.
Mr. West. I think natural gas is the area, to me, which
Congress should be focusing on. Again, the oil markets and the
gas markets work very differently, and I believe that there are
all kinds of problems, but there are diverse suppliers and
there is massive infrastructure available to move oil in this
global market. Natural gas works differently given its physical
characteristics. It can only be moved by pipeline or by a
super-cold ship or change the form completely into methanol or
something.
The fact is that the world is awash with natural gas. There
are vast resources of natural gas, but they are in places like
Russia, Iran, West Africa, Latin America. So how can you move
it here? You need infrastructure. The fact of the matter is
that there was a lot of concern in the spring that there was
going to be a big natural gas shortage this winter because
storage numbers were quite low. Now storage numbers are back
within the range. But there has been an uptick in the price,
and the general floor price of natural gas has moved up to
about $3.50. The net effect is that the price of gas is moving
up. This is going to affect a lot of industries, and we simply
cannot get the natural gas in North America unless we change
the infrastructure, whether it is pipelines, moving Alaskan gas
in. There is a possibility of opening up some areas of the
western overthrust belt. That is I believe in the energy bill.
There may be some tax incentives.
But I think one area is also, when you get into these
international issues, the permitting of liquified natural gas
facilities. This is a critical issue. Four terminals in the
continental United States were built in the 1970s, and none
were built since then. The natural gas business has been
completely deregulated. My view is government officials--if
they do not have a form to fill out, then no form will be
filled out. And they do not know how to do this.
The administration is focusing more on this. I think they
deserve credit, but there is a complete lack of understanding
on LNG. There is a perceived in LNG, which I do not think is
realistic, but this is deemed threatening to neighborhoods, to
communities where this LNG will be brought in. So there are
opposition groups now forming against this, which I do not
think are really necessary or reflect the facts.
So you have got the Federal Government and you have State
governments. You have unclear permitting and you have an
unclear understanding, but throughout all this, there is a
fundamental need. Over 20 terminals have been proposed; 20
terminals are not going to be built. But a number of these
terminals are going to be built, and I think we should do
everything we can to facilitate it. I think it should be a
national priority.
Senator Hagel. Would either of you like to respond to
anything Mr. West said or the question itself?
Mr. Goldwyn. Sure. I would like to agree. I think for
electric power, I think for diversity of supply, natural gas is
the future. For the environment, we are going to use cleaner
fuels. Natural gas is going to be key, and if we cannot get it
into the country, then we are not going to have affordable
prices, and if we cannot get it into the country, we are not
going to have diversity of supply because we will not have as
many choices in terms of suppliers.
It was in the National Energy Policy to try and assert
Federal jurisdiction--nicely worded--to try and help with some
of this permitting and planning and it has not happened. I
think something needs to be done. I think not just the heavy
hand of the Federal Government over State governments saying
this is where you need to put this plant. I think there are
ways you can be creative and work with local communities so
either they get some of the benefit of having an LNG plant in
their area or at least there is a little bit more of a
cooperative effort to try and site these things.
But the other thing I think the Federal Government can do,
the Department of Energy can do is have an education program to
take some of the fear out of LNG. People think it is going to
be a magnet for terrorist attacks or that somebody can put a
match near it and the thing is going to blow up. And it is just
not the case. But people do not know and they do not
understand, and that is a role the Federal Government can play,
is to educate people about what the reality is.
Senator Hagel. Thank you.
Dr. Ottaway.
Dr. Ottaway. This is not my field.
Senator Hagel. Well, thank you. We will get into some
specific areas that I wanted to pursue with you here in a
moment, doctor.
Mr. West. Mr. Chairman, can I make one point?
Senator Hagel. Yes.
Mr. West. I agree with everything Mr. Goldwyn said, but I
wanted to expand it. High natural gas prices are going to
affect more than just electricity. It will have a huge impact,
for example, on American agriculture which relies on the
production of ammonia and urea for fertilizer. It is already
having a big impact on the chemical industry in the United
States. This is a big deal. There are whole industries that are
built on the concept of cheap natural gas, and that is a thing
of the past.
Senator Hagel. As a United States Senator who represents an
agriculture State, I am well aware of your comment, and you are
right.
Staying with this current theme, I would be interested--and
you touched on it very briefly, Mr. West--in each of your sense
of the current energy bill that is now in the conference
committee between the House and Senate, especially in regard to
the areas that you have talked about, production and pipelines,
incentives. Now, it is floating, as we all know, and what we
will get as the final product no one is quite sure. But we are
getting close I believe to something here that will get out of
the conference committee. What you know now, the general themes
addressed in the two bills and what we will most likely come up
with, I would appreciate each of your evaluations of that,
beginning with you, Mr. West.
Mr. West. It seems to me there are two things. There are
some financial incentives and there is also accelerating the
permitting process. I do not disagree with either of those, but
I think in the end we have a fundamental problem. Mr. Goldwyn
said, well, we can always bid up the price of oil and get oil
even if it is at $50 a barrel. It is important to understand
that if we have a very cold winter, a prolonged cold snap, you
cannot bid up the price of natural gas. There will be no
natural gas. This is entirely different than oil. So I just
think we have got to go beyond the bill.
This is a very serious problem. Alan Greenspan spoke about
this in the spring when the storage level was very low. I like
to quote a joke about a lobster man from Maine. They asked,
have you been a lobster man all your life? Not yet. Do you
think the fog will clear? Always does. Is there going to be a
natural gas shortage in the United States? The answer is yes.
The only question is when.
Senator Hagel. Mr. Goldwyn.
Mr. Goldwyn. Mr. Chairman, it is a little hard to tell what
is in the bill because I guess both sides of the aisle have not
had a chance to look at it, so it is a little hard to comment
on it. But from what I understand from previous versions, I
think the current bill does virtually nothing to address our
energy security. I think the measures to try and promote the
building of an Alaska gas pipeline are important and positive.
I think from my understanding, steps to try and create a
more reliable electric grid, to reduce our vulnerability there
are absolutely marginal.
In terms of international energy, I do not think there is
anything in the bill that does anything to try and promote the
diversity of supply or enhance stability.
I think there are ample subsidies and tax credits on both
sides, too many for me to probably take a stab at, but I think
that since most of them are directed internally--and as Mr.
West has very accurately said, we are not going to solve this
problem by energy independence--I am not sure that a lot of
those are really a productive use of the taxpayers' funds. I
think there are some funds for promotion of alternatives and
renewables which are an important and positive thing, but also
not a short-term solution. I hate to be sort of glib about it,
but my general sense is we would be better off without it.
Senator Hagel. Without the bill from what you know of it.
Mr. Goldwyn. Yes, sir.
Senator Hagel. Well, I appreciate you both being very
delicate regarding ethanol, not knowing exactly where you come
out on that. But thank you for skirting around that.
Dr. Ottaway, before we get into some of your universe, is
there anything that you would like to respond to on what you
have heard?
Dr. Ottaway. No.
Senator Hagel. Doctor, let us talk a little bit about your
testimony, your thoughts. One of the things, as you noted I am
sure as you listened to your colleagues' presentations--Mr.
Goldwyn talked about these new threats, challenges that we face
in the world today across the spectrum, but specifically in
regard to our energy challenges. I believe he said something to
the effect that great militaries are not going to be able to
address those issues. He was referencing trade, diplomacy,
specifically some of the things that you have talked about.
Would you take that and define that, the threats that we
know are out there, the threats that we will most likely
continue to face in some variation of new forms? But we are
getting a sense, as we start this new century, of what is ahead
here, and yes, militaries are important and laser-guided
munitions are important, but that is not going to deal with the
kind of threats that not just the United States but the world
is facing today. Since this is your general area, I would like
to hear more about what you think we should be doing and we are
not doing in the way of developing policy in the United States
to deal with these new threats, not just from the deterrence
perspective, but let us take some initiative.
Dr. Ottaway. Well, I think in general the most important
threat on the political level, not on the military level, comes
from the domestic instability of a large number of countries. I
would argue that practically all African countries and a good
number of countries in Latin America are extremely vulnerable
to domestic political unrest because of the kind of economic
conditions that exist, and not only chronic conditions of
under-development but also what has been a great increase in
income inequality which has developed during the last 15 years,
which is, for example, one of the problems that is at the root
of the popularity of Chavez in Venezuela. What brought Chavez
to power originally was a resentment by a large segment of the
population that had fallen below the poverty line in the
previous 15 years concerning what was going on.
So that being the case, I think the steps that we can take
are unfortunately long-term steps because one of the problems
that we are dealing with here is that we are dealing with sort
of short-term threats that exist here and now, the solution for
which are long-term solutions. I think the only thing we can do
is to try and give sustained attention to the issues of
development and to the issues of democratic transformation of
these countries beginning now but to stay these countries all
along. Unfortunately, because of the large number of countries
involved, we tend to pay attention to these issues in the short
term while there is a crisis and then again to forget about it.
I think, for example, one example is the contrast between
what we are seeing in the case of Nigeria and we are seeing in
the case of Angola. In the case of Nigeria, because there has
been this direct threat to the oil installations, direct loss
of production, siphoning off of oil and so on, as we heard from
the previous panel, the U.S. Embassy, for example, has in place
personnel to try and deal with those issues, to try to work
with the NGOs, with the oil companies, with the governments of
the oil-producing areas and so on to try and address those
issues.
Angola can also be threatened by instability at some point,
because you have the same conditions of an enormously
impoverished population while oil revenue keeps on growing.
Particularly now that the war is over, there is really no good
explanation for the population what is happening to this money.
Unfortunately, because we are not seeing direct threats to the
oil installations, there is not that much attention being paid
to that issue. I think there is certain complacency to say,
well, you know, Angola is not democratic, but it is stable and
there is no threat to the oil installations, so we do not pay
much attention to the problem. I think because the problems are
so difficult to address and are so long-term, we cannot wait to
address them once the acute phase has started. What we need to
do--and I realize that this is very difficult, is to pay
sustained attention to these problems of economic development
and political transformation before the situation reaches a
critical phase.
Senator Hagel. With that, I suspect in your opinion you
would include things that Mr. Goldwyn referred to, trade,
diplomacy, humanitarian, all the other efforts that----
Dr. Ottaway. And development assistance, yes.
Senator Hagel. Thank you.
Robin West, would you like to respond to any of this?
Mr. West. Yes. One point I would like to make is I think
that in fact--and Dr. Ottaway wrote an excellent paper which if
one is interested in the subject, I commend to you, on what is
the role of the oil companies. But it is important to recognize
in places like Mexico and Venezuela, the international oil
company has had little or no presence.
In West Africa, I think that it is the international oil
companies, sometimes encouragement from other parties, but they
are becoming some of the most productive agents for change.
They actually have much bigger presence in the country than any
foreign government, and in some cases they are trying to put
pressure because they feel sensitive from pressure in their
home countries. But they actually have been a conduit to help
try and move some of this. There are limits to what they can
do, but I think in recent years that they tried to be
constructive.
Dr. Ottaway. If I can add on that point, I think the oil
companies have taken almost a disproportionate share of the
burden for local government in a place like Nigeria, for
example. The oil companies end up running entire towns,
providing whatever education is provided, and so on.
Where there is more reluctance, understandably so, on the
part of the oil companies is to deal with the national
government and particularly to make available internationally
some of the figures about oil production and oil payments and
how much money is being paid into the coffers of these
governments. That is one area where I think there is room for
improvement. I do not expect the oil companies to end up
becoming a substitute government for countries like Nigeria. I
mean, that will not be very desirable. It is not their role.
Senator Hagel. Thank you.
Mr. Goldwyn, any thoughts on all this?
Mr. Goldwyn. Just two. I think one is that I agree with Dr.
Ottaway that you need a case-by-case approach. I think in each
of these countries, we have got to ask ourselves, do we have
any leverage and what is it and how do we use it? Is it
bilateral? Is it multilateral? I think there is some urgency
because a lot of these countries, particularly in West Africa,
are going to be very, very rich very soon, not now, but if you
look at the curve of how much revenue they are going to get, it
is like this now and then it goes off the roof. We have 3
years, 4 years, or there will be no touching these governments.
So I think you have got to look at the leverage you have
got now. Some of that is debt. Some of it is their need for
capacity building. Right now some of it is their need for
development assistance, but it is not really a money issue. It
is creating a political environment where the people who have
been on the wrong side of this question for a long time have a
political motivation to change. That is part reputation and
that is part monetizing future revenues for development now,
and it is letting them be successful political leaders. So I
think that is where our focus ought to lie is to use that sort
of leverage.
On the publish what you pay oil revenue question, it is an
important issue, and I have to say I have struggled with it
myself. I think if we could get to a place where governments,
the U.S. Government and other governments, push producing
governments to say we want companies to report aggregates of
payments to the IMF and the IMF will publish those aggregates,
I think you would find companies willing to do that. They are
not going to violate confidentiality agreements. They are not
going to take on the job of renegotiating anything with the
government. It is not in their interest to do it. But if
governments push governments for that kind of transparency and
there is a level playing field so national oil companies like
Saudi Aramco or PDVSA are also required to have their payments
published, I think that is a formula. I think if you build that
policy, the oil companies will come along because they will be
respecting the will of the governments in which they are guest
operators.
Senator Hagel. Thank you.
Mr. West, you wanted to respond?
Mr. West. Yes. Two points. One is that my firm is doing an
analysis for CSIS on West African oil revenues. In fact, we
understand basically what the contracts are and the timing of
the contracts and what production comes from the contracts. So
we can get a pretty good idea of what the aggregate amounts of
money that are flowing now.
The second thing that is important to understand is how the
contracts work in West Africa. Mr. Goldwyn is absolutely
correct, that production will be surging, but there is a cost
recovery factor that in fact the governments in the early days
do not get that much money. It is in the out-years when they
get a lot of free cash-flow. So understanding the nature of the
contracts becomes very important to following the money.
Senator Hagel. Dr. Ottaway.
Dr. Ottaway. That is very important politically. Mr. West
said something that is interesting; that is, his organization
can get a pretty good fix on those figures. The population of
the country cannot, and there is a great deal of misconception
very often because nobody knows how much money is coming in.
Very often people at the popular level develop this idea that
there is a huge amount of money, and therefore everybody should
be rich in the country. That is a mentality that has played
havoc with the politics of a lot of oil-producing countries,
that there is an exaggerated expectation of what oil revenue
could do and how much is really coming and so on.
Senator Hagel. I have been informed we are going to have a
vote here shortly, but let me get to a point you made, Mr.
West, in your testimony. You were talking about West Africa and
I believe you said something to the effect that a lot of things
are going right there. We heard not all the problems, but we
have heard today about a lot of problems. Tell us a little bit
about what you perceive is going right.
Mr. West. Well, what is right is the investment environment
and the fact is that the operations are offshore so there is
less physical security issues. There is a world market in
exploration rights. The governments and the companies
understand that so that a lot of capital has flowed in. The
point I tried to make is that there is more industry capital
that has flowed in in recent years to West Africa than there
has been to Russia, Latin America, or the Middle East. Most
people are surprised when you say that. So the international
companies have come in. They have stayed offshore. From a pure
oil operations investment standpoint, it has worked pretty
well. From a government standpoint, I am in complete agreement
with my two committee members.
But you have other situations. There are other countries
where you have very dubious governments and you also have very
unstable operating regimes. So the glass is half full at least
in West Africa.
Senator Hagel. Does anyone else want to respond to that
question?
Dr. Ottaway. No.
Senator Hagel. Unless the three of you have any additional
comments, I am going to adjourn our subcommittee hearing, but I
want to again, on behalf of the committee, thank you for your
testimony. It is important. We will, as we often do, be back to
you for more assistance and get your counsel on these big
issues. These are issues that are as important as any we are
dealing with and will deal with for many years to come. So your
contributions are important and we appreciate it very much.
Thank you.
[Whereupon, at 4:33 p.m., the subcommittee adjourned, to
reconvene subject to the call of the Chair.]