[iwar] Central Asia Pipeline, Ltd testimony

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Date: 2001-11-05 00:58:28
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http://www.house.gov/international_relations/105th/ap/wsap212982.htm
TESTIMONY

BY

JOHN J. MARESCA

VICE PRESIDENT, INTERNATIONAL RELATIONS

UNOCAL CORPORATION

TO

HOUSE COMMITTEE ON INTERNATIONAL RELATIONS

SUBCOMMITTEE ON ASIA AND THE PACIFIC

FEBRUARY 12, 1998

WASHINGTON, D.C.

Mr. Chairman, I am John Maresca, Vice President, International
Relations, of Unocal Corporation. Unocal is one of the world's leading
energy resource and project development companies. Our activities are
focused on three major regions -- Asia, Latin America and the U.S.
Gulf of Mexico. In Asia and the U.S. Gulf of Mexico, we are a major
oil and gas producer. I appreciate your invitation to speak here
today. I believe these hearings are important and timely, and I
congratulate you for focusing on Central Asia oil and gas reserves and
the role they play in shaping U.S. policy.

Today we would like to focus on three issues concerning this region,
its resources and U.S. policy:

The need for multiple pipeline routes for Central Asian oil and gas.

The need for U.S. support for international and regional efforts to
achieve balanced and lasting political settlements within Russia,
other newly independent states and in Afghanistan.

The need for structured assistance to encourage economic reforms and
the development of appropriate investment climates in the region. In
this regard, we specifically support repeal or removal of Section 907
of the Freedom Support Act.

For more than 2,000 years, Central Asia has been a meeting ground
between Europe and Asia, the site of ancient east-west trade routes
collectively called the Silk Road and, at various points in history, a
cradle of scholarship, culture and power. It is also a region of truly
enormous natural resources, which are revitalizing cross-border trade,
creating positive political interaction and stimulating regional
cooperation. These resources have the potential to recharge the
economies of neighboring countries and put entire regions on the road
to prosperity.

About 100 years ago, the international oil industry was born in the
Caspian/Central Asian region with the discovery of oil. In the
intervening years, under Soviet rule, the existence

of the region's oil and gas resources was generally known, but only
partially or poorly developed.

As we near the end of the 20th century, history brings us full circle.
With political barriers falling, Central Asia and the Caspian are once
again attracting people from around the globe who are seeking ways to
develop and deliver its bountiful energy resources to the markets of
the world.

The Caspian region contains tremendous untapped hydrocarbon reserves,
much of them located in the Caspian Sea basin itself. Proven natural
gas reserves within Azerbaijan, Uzbekistan, Turkmenistan and
Kazakhstan equal more than 236 trillion cubic feet. The region's total
oil reserves may reach more than 60 billion barrels of oil -- enough
to service Europe's oil needs for 11 years. Some estimates are as high
as 200 billion barrels. In 1995, the region was producing only 870,000
barrels per day (44 million tons per year [Mt/y]).

By 2010, Western companies could increase production to about 4.5
million barrels a day (Mb/d) -- an increase of more than 500 percent
in only 15 years. If this occurs, the region would represent about
five percent of the world's total oil production, and almost 20
percent of oil produced among non-OPEC countries.

One major problem has yet to be resolved: how to get the region's vast
energy resources to the markets where they are needed. There are few,
if any, other areas of the world where there can be such a dramatic
increase in the supply of oil and gas to the world market. The
solution seems simple: build a "new" Silk Road. Implementing this
solution, however, is far from simple. The risks are high, but so are
the rewards.

Finding and Building Routes to World Markets

One of the main problems is that Central Asia is isolated. The region
is bounded on the north by the Arctic Circle, on the east and west by
vast land distances, and on the south by a series of natural obstacles
-- mountains and seas -- as well as political obstacles, such as
conflict zones or sanctioned countries.

This means that the area's natural resources are landlocked, both
geographically and politically. Each of the countries in the Caucasus
and Central Asia faces difficult political challenges. Some have
unsettled wars or latent conflicts. Others have evolving systems where
the laws -- and even the courts -- are dynamic and changing. Business
commitments can be rescinded without warning, or they can be displaced
by new geopolitical realities.

In addition, a chief technical obstacle we face in transporting oil is
the region's existing pipeline infrastructure. Because the region's
pipelines were constructed during the Moscow-centered Soviet period,
they tend to head north and west toward Russia. There are no
connections to the south and east.

Depending wholly on this infrastructure to export Central Asia oil is
not practical. Russia currently is unlikely to absorb large new
quantities of "foreign" oil, is unlikely to be a significant market
for energy in the next decade, and lacks the capacity to deliver it to
other markets.

Certainly there is no easy way out of Central Asia. If there are to be
other routes, in other directions, they must be built.

Two major energy infrastructure projects are seeking to meet this
challenge. One, under the aegis of the Caspian Pipeline Consortium, or
CPC, plans to build a pipeline west from the Northern Caspian to the
Russian Black Sea port of Novorossisk. From Novorossisk, oil from this
line would be transported by tanker through the Bosphorus to the
Mediterranean and world markets.

The other project is sponsored by the Azerbaijan International
Operating Company (AIOC), a consortium of 11 foreign oil companies
including four American companies -- Unocal, Amoco, Exxon and
Pennzoil. It will follow one or both of two routes west from Baku. One
line will angle north and cross the North Caucasus to Novorossisk. The
other route would cross Georgia and extend to a shipping terminal on
the Black Sea port of Supsa. This second route may be extended west
and south across Turkey to the Mediterranean port of Ceyhan.

But even if both pipelines were built, they would not have enough
total capacity to transport all the oil expected to flow from the
region in the future; nor would they have the capability to move it to
the right markets. Other export pipelines must be built.

Unocal believes that the central factor in planning these pipelines
should be the location of the future energy markets that are most
likely to need these new supplies. Just as Central Asia was the
meeting ground between Europe and Asia in centuries past, it is again
in a unique position to potentially service markets in both of these
regions -- if export routes to these markets can be built. Let's take
a look at some of the potential markets.

Western Europe

Western Europe is a tough market. It is characterized by high prices
for oil products, an aging population, and increasing competition from
natural gas. Between 1995 and 2010, we estimate that demand for oil
will increase from 14.1 Mb/d (705 Mt/y) to 15.0 Mb/d (750 Mt/y), an
average growth rate of only 0.5 percent annually. Furthermore, the
region is already amply supplied from fields in the Middle East, North
Sea, Scandinavia and Russia. Although there is perhaps room for some
of Central Asia's oil, the Western European market is unlikely to be
able to absorb all of the production from the Caspian region.

Central and Eastern Europe

Central and Eastern Europe markets do not look any better. Although
there is increased demand for oil in the region's transport sector,
natural gas is gaining strength as a competitor. Between 1995 and
2010, demand for oil is expected to increase by only half a million
barrels per day, from 1.3 Mb/d (67 Mt/y) to 1.8 Mb/d (91.5 Mt/y). Like
Western Europe, this market is also very competitive. In addition to
supplies of oil from the North Sea, Africa and the Middle East, Russia
supplies the majority of the oil to this region.

The Domestic NIS Market

The growth in demand for oil also will be weak in the Newly
Independent States (NIS). We expect Russian and other NIS markets to
increase demand by only 1.2 percent annually between 1997 and 2010.

Asia/Pacific

In stark contrast to the other three markets, the Asia/Pacific region
has a rapidly increasing demand for oil and an expected significant
increase in population. Prior to the recent turbulence in the various
Asian/Pacific economies, we anticipated that this region's demand for
oil would almost double by 2010. Although the short-term increase in
demand will probably not meet these expectations, Unocal stands behind
its long-term estimates.

Energy demand growth will remain strong for one key reason: the
region's population is expected to grow by 700 million people by 2010.

It is in everyone's interests that there be adequate supplies for
Asia's increasing energy requirements. If Asia's energy needs are not
satisfied, they will simply put pressure on all world markets, driving
prices upwards everywhere.

The key question is how the energy resources of Central Asia can be
made available to satisfy the energy needs of nearby Asian markets.
There are two possible solutions -- with several variations.

Export Routes

East to China: Prohibitively Long?

One option is to go east across China. But this would mean
constructing a pipeline of more than 3,000 kilometers to central China
-- as well as a 2,000-kilometer connection to reach the main
population centers along the coast. Even with these formidable
challenges, China National Petroleum Corporation is considering
building a pipeline east from Kazakhstan to Chinese markets.

Unocal had a team in Beijing just last week for consultations with the
Chinese. Given China's long-range outlook and its ability to
concentrate resources to meet its own needs, China is almost certain
to build such a line. The question is what will the costs of
transporting oil through this pipeline be and what netback will the
producers receive.

South to the Indian Ocean: A Shorter Distance to Growing Markets

A second option is to build a pipeline south from Central Asia to the
Indian Ocean.

One obvious potential route south would be across Iran. However, this
option is foreclosed for American companies because of U.S. sanctions
legislation. The only other possible route option is across
Afghanistan, which has its own unique challenges.

The country has been involved in bitter warfare for almost two
decades. The territory across which the pipeline would extend is
controlled by the Taliban, an Islamic movement that is not recognized
as a government by most other nations. From the outset, we have made
it clear that construction of our proposed pipeline cannot begin until
a recognized government is in place that has the confidence of
governments, lenders and our company.

In spite of this, a route through Afghanistan appears to be the best
option with the fewest technical obstacles. It is the shortest route
to the sea and has relatively favorable terrain for a pipeline. The
route through Afghanistan is the one that would bring Central Asian
oil closest to Asian markets and thus would be the cheapest in terms
of transporting the oil.

Unocal envisions the creation of a Central Asian Oil Pipeline
Consortium. The pipeline would become an integral part of a regional
oil pipeline system that will utilize and gather oil from existing
pipeline infrastructure in Turkmenistan, Uzbekistan, Kazakhstan and
Russia.

The 1,040-mile-long oil pipeline would begin near the town of
Chardzhou, in northern Turkmenistan, and extend southeasterly through
Afghanistan to an export terminal that would be constructed on the
Pakistan coast on the Arabian Sea. Only about 440 miles of the
pipeline would be in Afghanistan.

This 42-inch-diameter pipeline will have a shipping capacity of one
million barrels of oil per day. Estimated cost of the project -- which
is similar in scope to the Trans Alaska Pipeline -- is about US$2.5
billion.

There is considerable international and regional political interest in
this pipeline. Asian crude oil importers, particularly from Japan, are
looking to Central Asia and the Caspian as a new strategic source of
supply to satisfy their desire for resource diversity. The pipeline
benefits Central Asian countries because it would allow them to sell
their oil in expanding and highly prospective hard currency markets.
The pipeline would benefit Afghanistan, which would receive revenues
from transport tariffs, and would promote stability and encourage
trade and economic development. Although Unocal has not negotiated
with any one group, and does not favor any group, we have had contacts
with and briefings for all of them. We know that the different
factions in Afghanistan understand the importance of the pipeline
project for their country, and have expressed their support of it.

A recent study for the World Bank states that the proposed pipeline
from Central Asia across Afghanistan and Pakistan to the Arabian Sea
would provide more favorable netbacks to oil producers through access
to higher value markets than those currently being accessed through
the traditional Baltic and Black Sea export routes.

This is evidenced by the netback values producers will receive as
determined by the World Bank study. For West Siberian crude, the
netback value will increase by nearly $2.00 per barrel by going south
to Asia. For a producer in western Kazakhstan, the netback value will
increase by more than $1 per barrel by going south to Asia as compared
to west to the Mediterranean via the Black Sea.

Natural Gas Export

Given the plentiful natural gas supplies of Central Asia, our aim is
to link a specific natural resource with the nearest viable market.
This is basic for the commercial viability of any gas project. As with
all projects being considered in this region, the following projects
face geo-political challenges, as well as market issues.

Unocal and the Turkish company, Koc Holding A.S., are interested in
bringing competitive gas supplies to the Turkey market. The proposed
Eurasia Natural Gas Pipeline would transport gas from Turkmenistan
directly across the Caspian Sea through Azerbaijan and Georgia to
Turkey. Sixty percent of this proposed gas pipeline would follow the
same route as the oil pipeline proposed to run from Baku to Ceyhan. Of
course, the demarcation of the Caspian remains an issue.

Last October, the Central Asia Pipeline, Ltd. (CentGas) consortium, in
which Unocal holds an interest, was formed to develop a gas pipeline
that will link Turkmenistan's vast natural gas reserves in the
Dauletabad Field with markets in Pakistan and possibly India. An
independent evaluation shows that the field's resources are adequate
for the project's needs, assuming production rates rising over time to
2 billion cubic feet of gas per day for 30 years or more.

In production since 1983, the Dauletabad Field's natural gas has been
delivered north via Uzbekistan, Kazakhstan and Russia to markets in
the Caspian and Black Sea areas. The proposed 790-mile pipeline will
open up new markets for this gas, travelling from Turkmenistan through
Afghanistan to Multan, Pakistan. A proposed extension would link with
the existing Sui pipeline system, moving gas to near New Delhi, where
it would connect with the existing HBJ pipeline. By serving these
additional volumes, the extension would enhance the economics of the
project, leading to overall reductions in delivered natural gas costs
for all users and better margins. As currently planned, the CentGas
pipeline would cost approximately $2 billion. A 400-mile extension
into India could add $600 million to the overall project cost.

As with the proposed Central Asia Oil Pipeline, CentGas cannot begin
construction until an internationally recognized Afghanistan
government is in place. For the project to advance, it must have
international financing, government-to-government agreements and
government-to-consortium agreements.

Conclusion

The Central Asia and Caspian region is blessed with abundant oil and
gas that can enhance the lives of the region's residents and provide
energy for growth for Europe and Asia.

The impact of these resources on U.S. commercial interests and U.S.
foreign policy is also significant and intertwined. Without peaceful
settlement of conflicts within the region, cross-border oil and gas
pipelines are not likely to be built. We urge the Administration and
the Congress to give strong support to the United Nations-led peace
process in Afghanistan.

U.S. assistance in developing these new economies will be crucial to
business' success. We encourage strong technical assistance programs
throughout the region. We also urge repeal or removal of Section 907
of the Freedom Support Act. This section unfairly restricts U.S.
government assistance to the government of Azerbaijan and limits U.S.
influence in the region.

Developing cost-effective, profitable and efficient export routes for
Central Asia resources is a formidable, but not impossible, task. It
has been accomplished before. A commercial corridor, a "new" Silk
Road, can link the Central Asia supply with the demand -- once again
making Central Asia the crossroads between Europe and Asia.

Thank you.



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