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Stuart Eizenstat Under Secretary for Economic, Business and Agricultural Affairs Testimony before the U.S. Senate Foreign Relations International Economic Policy, Export and Trade Promotion Subcommittee Washington, DC. October 23, 1997

Senator Hagel, thank you for holding these hearings to focus attention on Caspian energy development. In July, I had the opportunity to address a Senate Foreign Relations Committee hearing chaired by Senator Brownback on the geo-strategic significance of the Caucasus and Central Asia. Today, I welcome the opportunity to focus your attention on U.S. economic and strategic interests in the Caspian Sea Region, our policy to advance these interests, and the impediments to achieving these goals.

The Caspian Sea Basin is made up of the five littoral states of the Caspian Sea (Azerbaijan, Kazakhstan, Russia, Turkmenistan, and Iran), but our Caspian policy also includes all the other countries of Central Asia and the Caucasus. Known for its energy reserves, this entire region has great promise as a trade and transport corridor linking Europe with Asia -- a corridor with energy transport at its heart. While estimates of the size of regional oil and gas reserves vary widely, the Caspian Sea is potentially one of the world's most important new energy-producing regions. Although the Caspian may never rival the Persian Gulf, Caspian production can have important implications for world energy supplies on the margins. We believe rapid development of these energy resources and trade linkages is critical to the independence, prosperity, democracy, and stability of all the countries of Central Asia and the Caucasus.

U.S. Interests

Earlier this year the Clinton Administration made a policy decision to enhance further our engagement with the Caucasus and Central Asian nations in recognition of our growing national interests. This has become a major priority of our foreign policy. We have five main foreign policy interests in the Caspian region. They are:

• The independence and sovereignty of the New Independent States (NIS) and their democratic and market development;
• Promotion of regional conflict resolution;
• The increase and diversification of world energy supplies;
• Continued support for U.S. companies;
• And continued pressure on the Iranian regime to change its unacceptable practices.

The United States supports the development of secure, prosperous, democratic, and independent states at peace with each other and their neighbors in the region. We want to see these countries fully integrated into the world economy, and we strongly support those countries, such as Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, and Russia, that are committed to join the WTO. As the newly independent countries of the Caspian region work to enhance their sovereignty and to create stability within their own borders and in the region, energy resource development has emerged as critical factor and means to these ends. The speed and depth of macroeconomic reforms and democratization in these states will determine their ability to attract foreign investment and their future economic prosperity as well as the extent of their integration into the world economy.

Resolution of regional conflicts in Nagorno-Karabakh, Abkhazia, and Chechnya is also critical for successful and comprehensive energy development in the region. The conflict in Nagorno-Karabakh, for example, has contributed to political instability in Azerbaijan and hinders serious consideration of a pipeline from Azerbaijan through Armenia to the West. The U.S. promotes regional stability by taking an active role in resolving conflicts in the region.

U.S. policy focuses on strengthening integration among the region's new independent states across bilateral, regional and multilateral levels; supporting the development and diversification of regional infrastructure networks and transportation corridors to tie the region securely to the West; and constructively engaging these states through an energy, trade, and investment dialogue on Caspian energy development.

As a consumer nation, the United States is interested in enhancing and diversifying global energy supplies. It is the Clinton Administration's policy to promote rapid development of Caspian energy resources to reinforce Western energy security. In the longer term the scale of Caspian basin energy resources not only justifies -- but will demand -- multiple transportation options for moving production out into world markets. Multiple pipelines will prompt competition, will ensure reliable, more efficient operations, and will promote commercial viability. The U.S. supports a pipeline route from Baku, Azerbaijan, to Ceyhan, Turkey, as one of multiple routes. We recognize, however, that any pipeline will only be built if it is a commercially viable option for shippers.

We are encouraging these countries to adopt open, fair, and transparent investment regimes which will create favorable climates for U.S. companies to participate directly in the development of the region's energy resources. We are confident that U.S. company participation will bring strong partners and environmentally sound technology and practices to the countries in the region. The Clinton Administration has an active dialogue with the private sector and is working with the countries in the region to reduce or remove barriers to investment by U.S. companies.

In addition, the division of rights for development of the significant oil and gas deposits beneath the Caspian Sea remains a critical issue for the five littoral states. The U.S. Government has encouraged the states to adopt a legal regime in the Caspian Sea which includes the division of seabed resources through clearly established property rights and unrestricted transportation. Lack of clear ownership has led to a dispute between Azerbaijan and Turkmenistan over Caspian oil fields, slowing development. While the U.S. takes no position on the legal merits of overlapping claims to individual prospects, we are strongly encouraging the governments of Azerbaijan and Turkmenistan to negotiate directly to resolve their differences. We were pleased that the two sides have agreed to form an experts' group and urge both to meet at the earliest opportunity. Resolution of this dispute will open the door to development of cross-Caspian pipelines, speed investment, and enhance regional cooperation.

Another U.S. policy goal is to maintain pressure on the Iranian regime until such time as its unacceptable practices, including support for international terrorism and acquisition of weapons of mass destruction, cease. I covered this subject in greater detail in my testimony this morning before the House Ways and Mean Committee. U.S. efforts to isolate Iran are leading Tehran to look for new economic opportunities as well as new markets in the region. This presents a particular challenge as the USG works to balance its commercial interests in the region with its broader foreign policy goals.

In the Neighborhood

U.S. policy in the region is not an attempt to establish a U.S. sphere of influence in the region. Rather, U.S. policy stresses the importance of establishing a commercial basis for development and common benefits to be reaped. We see wide-ranging benefits to regional-actors (excluding Iran) from cooperative commercial development and transportation of Caspian energy resources. Currently, all existing export routes for Caspian energy travel north through Russia to Europe. Russia has very strong commercial and political interests in continuing to be a major transshipment point for the region's energy resources. For that to happen, Russia must address commercial concerns regarding reliability, security, transparency,, competitive tariffs, and access. Furthermore, as the developing markets of Asia attract oil and gas from the Caspian, additional market factors will influence the development of export routes for Caspian hydrocarbons.

Cooperation between Russian and American companies highlights the benefits of increased commercial development and regional cooperation. There are numerous examples of U.S.-Russian commercial cooperation. In December 1996, the members of the Caspian Pipeline Consortium (CPC) signed a Share Transfer Agreement to build a crude oil pipeline from the Tengiz field in western Kazakhstan to the Russian Black Sea coast at Novorossisyk. Signatories include the governments of Russia, Kazakhstan, and Oman, and U.S. oil companies Chevron, Mobil, and Oryx, and Russian companies Lukoil and Rosneft-Shell. Lukoil, a participant in two international consortia in Azerbaijan with U.S. companies, purchased shares in the Tengizchevroil Joint Venture (TCO) from Chevron in January 1997.

Besides the commercial benefits to Russian companies from participation in Caspian energy development, these economic ties help foster deeper and more positive political relationships between Russia and its neighbors. The presence of prosperous and democratic countries in Central Asia and the Caucasus will ensure long-term stability which is not only important for the individual countries, but also for the region as a whole. The trilateral cooperation among the U.S., Russia and France to resolve the Nagorno-Karabakh conflict underscores the importance of international efforts to promote conflict resolution and stability.

What happens in this region is also critical to Turkey, an important NATO ally. Turkey's economy is growing rapidly, and Turkey's demand for energy is growing with it. Turkey is concerned about establishing a variety of reliable sources of supply, and particularly anxious about avoiding too much dependence on Russia. This is part of what drove Turkey to talk with Iran about natural gas imports in recent years. The Caspian region is a natural source of energy for Turkey's economy, and Turkey can provide a reliable and economic export route for Caspian and Central Asian oil and gas.

In May, Turkey signed a memorandum of understanding with Turkmenistan and Iran to purchase gas from Turkmenistan. Iran will permit this gas to transit its territory. In July, Assistant Secretary Larson informed the House International Relations Committee that Turkey's gas supply plans do not appear to constitute sanctionable activity under ILSA (Iran-Libya Sanctions Act). We regard the decision to purchase gas from Turkmenistan rather than Iran as a positive development.

This announcement has been widely misinterpreted to mean that the U.S. has approved a pipeline across Iran. This is definitely not the case. We will monitor future developments under the memorandum of understanding, including pipeline construction projects and, should we find evidence of investment activity which could enhance Iran's ability to develop its own petroleum resources, will take appropriate action under ILSA. Obviously, we would prefer development of pipeline routes which do not involve Iran. We continue to encourage these countries to explore export routes that do not depend on Iran, specifically a cross-Caspian pipelines to carry Turkmen and Azerbaijani oil and gas to Turkey via the Caucasus. Let me be clear: We do not support any pipelines through Iran, carrying either Iranian oil and gas to western markets or that of any other country.

There is a potential problem on the horizon about which all states in the region, and ourselves, must be concerned. The early oil from both Kazakhstan and Azerbaijan is being transported to the Black Sea, and then will be shipped through the Bosporus to world markets. There is substantial concern in Turkey about the environmental dangers of large quantities of oil moving through the straits. This is a concern that the exporting countries, and the international community must take seriously, in order to ensure the safe transport of reasonable quantities of oil via this route.

Much progress has been made in recent years in relations between Turkey and Russia, and a strong economic relationship between those two countries is developing. We would like to see this trend continue. The development of energy resources in the Caucasus and Central Asia can produce economic spin-offs for both countries, and can be a lucrative area of cooperation. We need to encourage such cooperation and work with all parties to avoid potential problems like the Bosporus.

Achieving These Goals

The United States has key foreign policy interests at stake in the Caspian; the stakes for U.S. companies are equally high. Other governments have recognized the commercial opportunities in the region and have supported strongly their companies with high-level engagement, extensive credit lines, and other incentives. The U.S. Government needs to enhance its efforts throughout the region to support American companies in similar fashion and continue to bring U.S. companies to this market.

This is where Congress has an important role to play. While the Administration can bring high-level political muscle to support U.S. interests, we must also bring significant assets to the table which support our goals -- including Trade Development Agency (TDA), OPIC, EX-IM Bank financing, and technical assistance programs. Our assistance programs should be sharply focused on improving commercial and legal infrastructure to create a climate conducive to foreign investment. Legislation limiting and restricting our assistance and cooperation in individual countries should be abolished and the U.S. should encourage the governments of the region to increase regional cooperation. In this regard, the Administration supports repeal of Section 907 of the FREEDOM Support Act (FSA), urges establishment and financing of the Caucasus Enterprise Fund, and seeks increased FSA funding directed at Central Asia.

Section 907 of the Freedom Support Act, passed in October 1992, restricts USG assistance to the Government of Azerbaijan. The Clinton Administration, like the Bush Administration before it, opposes Section 907 and supports its repeal. This restriction on our assistance has not had a positive effect of encouraging the parties to resolve the Nagorno-Karabakh conflict and has actually hindered our ability to act as an honest broker and achieve our main foreign policy goals in the region. U.S. companies are also disadvantaged in some crucial respects by the burden that Section 907 places on companies working in Azerbaijan. Foreign competitors benefit significantly from unrestricted political and financial support from their governments support that has been inhibited here by concerns that Section 907 could be read to restrict assistance to U.S. investors in Azerbaijan.

Implementing our Recommendations

In the Administration's Caspian Region Energy Development Report, delivered to Congress in April, we suggested steps to further advance U.S. interests in the region. We have made significant progress in following through on a number of these recommendations.

• Although we continue to work toward total repeal of Section 907 of the FSA, we are hopeful that, in the interim, work currently underway in the Foreign Operations Conference Committee will result in easing of these restrictions to make some technical assistance to Azerbaijan possible. In addition to democracy programs, we hope that TDA and OPIC activities will be expressly exempted from Section 907. With these programs available in Azerbaijan, we will be able to encourage economic and political reform and support American companies.
• Similarly, we are working with Congress to take the necessary legislative and administrative action to make TDA, OPIC, and EXIM programs available to our companies throughout the Caucasus, Central Asia, Afghanistan, and Pakistan.
• We have been very successful in encouraging high-level visits to and from the region. Georgian President Shevardnadze, Azerbaijani President Aliyev, and Kyrgyz President Akayev visited Washington this summer, and Kazakhstani President Nazarbayev will visit Washington in November. I was pleased to see the large number of congressional delegations which traveled to the region this summer and hope it will continue. The First Lady will visit Kazakhstan, Kyrgyzstan, and Uzbekistan in November; our new Ambassador-At-Large to the NIS Steve Sestanovich will be traveling to Central Asia and the Caucasus next week; Energy Secretary Frederico Pena hopes to travel to Baku and Ashgabat in early November; and DOC (Department of Commerce) Counselor and Ombudsman Jan Kalicki will also travel to the region in the coming months.
• In addition, we are expanding and institutionalizing our contacts. A high-level interagency delegation will initiate energy dialogues with Azerbaijan and Turkmenistan this fall. The U.S.-Kazakhstan Joint Commission will hold its third meeting in November, and early in 1998 we plan to host the first meeting of the U.S.-Uzbekistan Joint Commission.
• We are also making progress toward achieving a lasting political settlement in Nagorno-Karabakh through our role as co-chair of the OSCE Minsk group process. In May, Deputy Secretary Talbott and his Russian and French counterparts traveled to the region, including to Nagorno-Karabakh, to present a new, coordinated peace proposal. Presidents Ter-Petrossian of Armenia and Aliyev of Azerbaijan have publicly endorsed this proposal. We are working with them and with the Nagorno-Karabakh Armenians toward meaningful negotiations. Our goal is to achieve significant progress, perhaps even a first-phase agreement, by the end of the year.
• We continue to work closely with Turkey to help resolve problems associated with the transport of oil through the Bosporus, including encouraging the installation of an upgraded navigation system. We are also looking at ways to develop new markets throughout the Black Sea which can absorb some of the Caspian's oil exports. In keeping with our support for the Baku-Ceyhan oil pipeline, we have urged the Turks to create a commercially attractive arrangement. On the gas side, we are working with Turkey to identify energy alternatives to meet their energy shortages, including gas from the Caspian through the Caucasus. We continue to press Turkey to open its border with Armenia as part of its ongoing, positive role in resolving the Nagorno-Karabakh conflict.
• The least progress has been made in Afghanistan, where the Afghan factions refuse to negotiate on terms for elements of a U.N.-led peace process to bring to an end decades of war and allow economic reconstruction to begin. Gas and oil pipeline proposals designed to carry Central Asian energy to world markets have been delayed indefinitely pending establishment of a broad-based, multi-ethnic government.

Conclusion

Caspian energy development is not a zero sum game -- all the new states can benefit from the region's rapid economic development. Establishment of a Caspian legal regime which resolves concerns about property rights and sovereignty will promote large scale investment in the region. Increased oil and gas exploration and production will spur the pace of pipeline construction and connect new markets to secure energy supplies. Producer and transit countries will earn fees in much needed-hard currency which can be used for capital investment in other sectors of their economies. Improvement in the overall economy and prosperity of the region will translate into a boom in demand for goods and services throughout the NIS and provide added social benefits. And cooperation between domestic and foreign companies will foster the transfer of skills and technology -- a winning combination for all concerned. Most of all, strong, growing economies can become the foundation for long-term stable, democratic governments in the region.

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