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Diplomacy in Action

Keynote Address at the Pacific Energy Summit


Remarks
Robert D. Hormats
Under Secretary for Economic Growth, Energy, and the Environment 
Pacific Energy Summit
Vancouver, British Columbia, Canada
April 3, 2013

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Thank you Dennis for the kind introduction.

I am delighted to be here today at the Pacific Energy Summit. NBR has done a tremendous job in organizing the event. It will, I believe, help inform the consequential debate now underway regarding the worlds—and particularly, Asia’s—energy future.

To say that have seen major changes in the global energy landscape in recent years is, surely, an understatement.

In fact, the geography of global energy has changed dramatically—in terms of both supply and demand. The world’s energy mix has changed dramatically as well. And, of course, the interaction between energy and environment has emerged as an area of critical importance.

These developments bring both new opportunities and challenges—particularly to the Asia-Pacific region.

Rapid developments in unconventional gas, greater attention to alternative energy, the emergence of large new energy exporters, new oil and gas finds of considerable magnitude, and the meteoric rise in energy demand from emerging economies in Asia have sharply altered where energy comes from, where energy goes, and what kind of energy is produced and used. The geography of energy has changed for the United States and, indeed, for most of the world.

For much of the period since the oil embargoes and disruptions of the 1970’s and early 1980’s, the United States received the bulk of its oil imports from the Middle East, and more broadly from OPEC. This is no longer true.

The majority of our oil imports now come from here in Canada and from Latin America. We have especially strong energy partnerships with Canada and Mexico.

And, due to significant improvements in energy efficiency, and greater domestic production, U.S. oil imports have fallen to their lowest level since 1987. Oil imports as a share of total U.S. consumption have dropped from a 60 percent in 2005 to below 40 percent today.

The shift has been even more dramatic for natural gas. In the 2005—before the gas boom—experts predicted that U.S. LNG imports would rise to 180 billion cubic meters by 2025.

The U.S. Energy Information Administration now predicts that U.S. gas production will exceed consumption before 2020. This is leading American companies to invest in terminals to export—rather than import—LNG. And, LNG once destined for the United States from places like Qatar, is now fueling economies in Europe and Asia.

America’s growing energy self-sufficiency raises a number of geo-political and geo-economic questions. These developments present enormous opportunities not just for strengthening the U.S. economy, and reducing U.S. financial outflows, but also for enabling the United States to pursue new kinds of energy diplomacy.

The world’s new energy geography and increased American self-sufficiency should not be seen in the United States—or abroad—as foreshadowing, or justifying, an American pullback from the rest of the world. We live in an interdependent global economy, with interdependent energy markets. Energy shortages, price volatility, or disruptions anywhere can threaten economic growth everywhere.

Therefore, we want to work with participants in this new geography—our traditional partners plus major emerging economies—to help ensure stability and transparency in energy markets, the development of alternative fuels, freedom of navigation, and good environmental practices.

The United States has seen—and will continue to see—global energy security, market efficiency, stability, and cooperation to be in our economic, foreign policy, and national security interests.

But, the United States cannot successfully guarantee global energy security, efficiency, and market stability on its own. This is especially true today, with so many new or rapidly growing players, who account for ever increasing amounts of the energy consumption and production.

The IEA, for example, reports that nearly two-thirds of growth in global energy demand over the next twenty years will come from emerging economies in Asia. China, in particular, is expected to use 68 percent more energy than the United States by 2035. Already, 75 percent of oil flowing from the Persian Gulf goes to Asia.

Increasingly, the Indo-Pacific Sea lanes will be the channel for moving energy east. One graphic indication of this comes from projections that oil and gas shipments through the Straits of Malacca will double over the next two decades. So, many countries share an interest in keeping those lanes open and secure—and ensuring that disputes in the region are settled peacefully and based on international law.

And, on the production side, technical advancements upstream, new finds in places like Tanzania, Mozambique, and the eastern Mediterranean, as well as the globalization of natural gas markets—driven by the rise in LNG trade—will also alter supply patterns and the direction and volume of trade.

As a result, a growing number of countries will have a voice in the global energy dialogue; a stake in the security of important global shipping routes; an interest in market stability, efficiency, and transparency; and a role in developing good ways of financing new energy infrastructure and technologies.

The decisions made by new and increasingly significant players—both importers and exporters—will have a profound impact on global energy markets.

For example, when it comes to natural gas markets, we all—Asia especially—can learn from the European experience. Major changes in Europe in recent years have demonstrated that a greater diversity of supply choices, a wider range of pipeline and distribution systems, enhanced infrastructure, price liberalization, and meaningful anti-monopoly laws and regulations have led to greater energy security and more efficient markets that are unshackled from past rigidities, distortions, and potential political leverage.

These lessons can help guide Asian governments as they weigh their options.

Fortunately, Asia’s economies now have many competitive options, such as pipeline gas from Eurasia or LNG imports from Australia and other parts of Asia, Qatar, and North America to fulfill their growing demand for natural gas.

To the difficult challenges already mentioned, we must also add another layer of complexity— the interaction between energy and the environment.

Growth in energy demand in emerging economies has followed the path set by the United States and other industrialized economies in the course of their development. As countries develop, they consume more energy. But the period of rapid growth for most OECD countries came at a time when the environment was for many an afterthought. The world today no longer has that option.

The threats of catastrophic climate change and permanent environmental degradation are real. For many emerging countries, the environmental impact is increasingly apparent within their borders. Choking pollution threatens the health of their citizens—particularly children—and their peoples’ economic productivity as well as the quality of millions of lives.

So, today, given the broad sweep of changes in the global energy equation, we need a new vision, a new path forward.

Here, I see four opportunities.

First, all of our countries need to focus on producing greater amounts of energy from renewable sources, such as wind, solar, geothermal, and hydro. And, we need to continue developing nuclear power, which also offers a source of electricity free of CO2 emissions.

Accelerating the development and deployment of clean energy technologies will require a renewed commitment to innovation.

Governments must, therefore, avoid mercantilist policies that hinder innovation, such as providing subsidies to local producers, favoring indigenous over foreign companies, forcing technology transfer as a condition of market access, distorting regulatory standards, or imposing restrictive trade barriers.

A new form of mercantilism has emerged in the energy and environmental sectors—often referred to as “green mercantilism.” While attractive to some in the short-term, over the long-term, green mercantilism will discourage investments of time, money, and talent for the development of new technologies. These policies will reduce the pace of innovation, which is critical to revolutionize our energy sector and enable new technologies to be competitive, without requiring subsidies or other forms of protection.

Progress was made at the last APEC Summit meeting in Vladivostok, Russia, where member-economies agreed to limit tariffs on environmental goods and services. We need to build on this.

Second, the ongoing natural gas revolution presents an intermediate or bridge fuel opportunity. The global landscape has changed markedly because of new shale technologies, as well as major conventional gas finds in Africa, the Mediterranean, Australia, and other regions.

The United States has organized dialogues with a number of large emerging countries to discuss the development of their gas resources. The State Department’s Unconventional Gas Technical Engagement Program, in particular, is helping countries develop their gas resources safely and reasonably. Our engagement with foreign governments especially features private sector participation. Many of our companies have great experience in production techniques that can be deployed around the world. And, our engagement involves our regulators, who can work with foreign governments to promote good environmental practices.

Replacing other fuels—particularly coal—with natural gas can benefit both energy security and the environment. Nowhere is this truer than Asian countries, where power sectors are rapidly developing. Natural gas, however, is not a panacea.

This brings me to my third point.

As we take advantage of dramatic new opportunities stemming from the global gas revolution, we cannot lose momentum in pursuing higher environmental standards.

This can be done with great effect. For instance, in the 1970’s, the United States Congress passed the Clean Air Act. Owing to this legislation, the United States enjoys some of the cleanest air in the world today. Some feared that that the economy would be weakened from clean air regulations. It was not.

National air quality standards for the emission of sulfur dioxide and nitrous oxides from power plants spurred an environment control technology industry that created large numbers of jobs and produced over $37 billion in exports in 2010.

The fourth opportunity is simply to use energy more efficiently.

The energy intensity—which is a measure of energy use per dollar of GDP—of the U.S. economy is expected to decline by 42 percent between 2010 and 2035. Companies are striving for efficiency not simply to advance good environmental practices, but also because it is good business. Being more efficient makes them more competitive.

Some governments, unfortunately, have gone down a path of providing large fossil-fuel subsidies for their citizens. Although intended to support poor citizens, energy subsidies are, by and large, counter-productive. These subsidies impose substantial fiscal, economic, and environmental costs.

Several studies have shown that fossil-fuel subsidies benefit high-income households more than the poor. Removing or reducing energy subsidies would incentivize energy efficiency and lower energy consumption. But we must also recognize that doing this is far from easy.

For some low-income countries, crafting a more effective social safety net that benefits low-income households would ease the difficult and politically-fraught task of reducing or eliminating fuel subsidies.This should be a high-priority—for social reasons and for energy-related reasons as well.

The four opportunities I have outlined are particularly relevant to the Asia-Pacific region.

Energy diplomacy is a core component of America’s focused engagement with Asia.

We see an opportunity for a closer, mutually beneficial dialogue on a wide range of energy matters with Japan, China, India, South Korea, and ASEAN nations.

In fact, after this meeting ends, I will travel to China and then Japan.

Energy cooperation is a top-priority on my agenda, just as it was during my recent visit to India last month.

And I just had a conversation here with Indonesia’s Ambassador Dino Djalal about the strong potential for a thriving, comprehensive energy dialogue with all of these countries.

There is also an important multilateral element to our cooperation.

At the East Asia Summit in November 2012, President Obama announced the U.S.-Asia-Pacific Comprehensive Energy Partnership.

Through the Partnership, the United States has committed to provide up to $6 billion of financing through the U.S. Ex-Im Bank and OPIC for sustainable power and energy infrastructure projects. The U.S. Trade and Development Agency and the State Department are committed to providing technical and capacity-building assistance to help get these projects off of the ground. And, the U.S. private sector is keen to play a constructive role.

As we meet here, a new energy order is emerging.

Facing a rapidly changing worldwide energy picture, the State Department will continue to work across the globe in partnership with others to help countries develop and bolster a variety of new supplies and suppliers, find opportunities to manage the growing global thirst for energy, ensure secure and efficient means of energy transport and transmission, and mitigate environmental damage and climate change.

Our own political, economic, environmental, and national security interests depend on a robust energy diplomacy and strong partnerships to seize the opportunities and address the challenges we all face.

Thank you.



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