Afghanistan and Caspian Oil

[Franco Marenco <franco.marenco@casaccia.enea.it>]

 Subject: Mr. Chairman: The Caspian Sea Region Contains Tremendous
    Untapped Hydrocarbon Reserves...'98 Congressional Hearing

 "From the outset, we have made it clear that construction of the pipeline
 we have proposed across Afghanistan could not begin until a recognized
 government is in place that has the confidence of governments, lenders, and
 our company. "
Mr. John J. Maresca, vice president of international  relations, Unocal
Corporation

  U.S. INTERESTS IN THE CENTRAL ASIAN REPUBLICS HEARING BEFORE THE
 SUBCOMMITTEE ON ASIA AND THE PACIFIC OF THE COMMITTEE ON INTERNATIONAL
 RELATIONS HOUSE OF REPRESENTATIVES
 ONE HUNDRED FIFTH CONGRESS SECOND SESSION
 FEBRUARY 12, 1998
 Next we would like to hear from Mr. John J. Maresca, vice president of
 international relations, Unocal Corporation. You may proceed as you wish.
 STATEMENT OF JOHN J. MARESCA, VICE PRESIDENT OF INTERNATIONAL RELATIONS,
 UNOCAL CORPORATION
 Mr. Maresca. Thank you, Mr. Chairman. It's nice to see you again. I am John
 Maresca, vice president for international relations of the Unocal
 Corporation. Unocal, as you know, is one of the world's leading energy
 resource and project development companies. I appreciate your invitation to
 speak here today. I believe these hearings are important and timely. I
 congratulate you for focusing on Central Asia oil and gas reserves and the
 role they play in shaping U.S. policy.
 I would like to focus today on three issues. First, the need for multiple
 pipeline routes for Central Asian oil and gas resources. Second, the need
 for U.S. support for international and regional efforts to achieve balanced
 and lasting political settlements to the conflicts in the region, including
 Afghanistan. Third, the need for structured assistance to encourage
 economic reforms and the development of appropriate investment climates in
 the region. In this regard, we specifically support repeal or removal of
 section 907 of the Freedom Support Act.
 Mr. Chairman, the Caspian region contains tremendous untapped hydrocarbon
 reserves. Just to give an idea of the scale, proven natural gas reserves
 equal more than 236 trillion cubic feet. The region's total oil reserves
 may well reach more than 60 billion barrels of oil. Some estimates are as
 high as 200 billion barrels. In 1995, the region was producing only 870,000
 barrels per day. By 2010, western companies could increase production to
 about 4.5 million barrels a day, an increase of more than 500 percent in
 only 15 years. If this occurs, the region would represent about 5 percent
 of the world's total oil production.
 One major problem has yet to be resolved: how to get the region's vast
 energy resources to the markets where they are needed. Central Asia is
 isolated. Their natural resources are landlocked, both geographically and
 politically. Each of the countries in the Caucasus and Central Asia faces
 difficult political challenges. Some have unsettled wars or latent
 conflicts. Others have evolving systems where the laws and even the courts
 are dynamic and changing. In addition, a chief technical obstacle which we
 in the industry face in transporting oil is the region's existing pipeline
 infrastructure.
 Because the region's pipelines were constructed during the Moscow-centered
 Soviet period, they tend to head north and west toward Russia. There are no
 connections to the south and east. But Russia is currently unlikely to
 absorb large new quantities of foreign oil. It's unlikely to be a
 significant market for new energy in the next decade. It lacks the capacity
 to deliver it to other markets.
 Two major infrastructure projects are seeking to meet the need for
 additional export capacity. One, under the aegis of the Caspian Pipeline
 Consortium, plans to build a pipeline west from the northern Caspian to the
 Russian Black Sea port of Novorossiysk. Oil would then go by tanker through
 the Bosporus to the Mediterranean and world markets.
 The other project is sponsored by the Azerbaijan International Operating
 Company, a consortium of 11 foreign oil companies, including four American
 companies, Unocal, Amoco, Exxon and Pennzoil. This consortium conceives of
 two possible routes, one line would angle north and cross the north
 Caucasus to Novorossiysk. The other route would cross Georgia to a shipping
 terminal on the Black Sea. This second route could be extended west and
 south across Turkey to the Mediterranean port of Ceyhan.
 But even if both pipelines were built, they would not have enough total
 capacity to transport all the oil expected to flow from the region in the
 future. Nor would they have the capability to move it to the right markets.
 Other export pipelines must be built.
 At Unocal, we believe that the central factor in planning these pipelines
 should be the location of the future energy markets that are most likely to
 need these new supplies. Western Europe, Central and Eastern Europe, and
 the Newly Independent States of the former Soviet Union are all slow growth
 markets where demand will grow at only a half a percent to perhaps 1.2
 percent per year during the period 1995 to 2010.
 Asia is a different story all together. It will have a rapidly increasing
 energy consumption need. Prior to the recent turbulence in the Asian
 Pacific economies, we at Unocal anticipated that this region's demand for
 oil would almost double by 2010. Although the short-term increase in demand
 will probably not meet these expectations, we stand behind our long-term
 estimates.
 I should note that it is in everyone's interest that there be adequate
 supplies for Asia's increasing energy requirements. If Asia's energy needs
 are not satisfied, they will simply put pressure on all world markets,
 driving prices upwards everywhere.
 The key question then is how the energy resources of Central Asia can be
 made available to nearby Asian markets. There are two possible solutions,
with several variations. One option is to go east across China, but this
 would mean constructing a pipeline of more than 3,000 k ilometers just to
 reach Central China. In addition, there would have to be a 2,000-kilometer
 connection to reach the main population centers along the coast. The
 question then is what will be the cost of transporting oil through this
 pipeline, and what would be the netback which the producers would receive.
 For those who are not familiar with the terminology, the netback is the
 price which the producer receives for his oil or gas at the wellhead after
 all the transportation costs have been deducted. So it's the price he
 receives for the oil he produces at the wellhead.
 The second option is to build a pipeline south from Central Asia to the
 Indian Ocean. One obvious route south would cross Iran, but this is
 foreclosed for American companies because of U.S. sanctions legislation.
 The only other possible route is across Afghanistan, which has of course
 its own unique challenges. The country has been involved in bitter warfare
 for almost two decades, and is still divided by civil war. >From the
 outset, we have made it clear that construction of the pipeline we have
 proposed across Afghanistan could not begin until a recognized government
 is in place that has the confidence of governments, lenders, and our
company.
 Mr. Chairman, as you know, we have worked very closely with the University
 of Nebraska at Omaha in developing a training program for Afghanistan which
 will be open to both men and women, and which will operate in both parts of
 the country, the north and south.
 Unocal foresees a pipeline which would become part of a regional system
 that will gather oil from existing pipeline infrastructure in Turkmenistan,
 Uzbekistan, Kazakhstan and Russia. The 1,040-mile long oil pipeline would
 extend south through Afghanistan to an export terminal that would be
 constructed on the Pakistan coast. This 42-inch diameter pipeline will have
 a shipping capacity of one million barrels of oil per day. The estimated
 cost of the project, which is similar in scope to the trans-Alaska
 pipeline, is about $2.5 billion.
 Given the plentiful natural gas supplies of Central Asia, our aim is to
 link gas resources with the nearest viable markets. This is basic for the
 commercial viability of any gas project. But these projects also face
 geopolitical challenges. Unocal and the Turkish company Koc Holding are
 interested in bringing competitive gas supplies to Turkey. The proposed
 Eurasia natural gas pipeline would transport gas from Turkmenistan directly
 across the Caspian Sea through Azerbaijan and Georgia to Turkey. Of course
 the demarcation of the Caspian remains an issue.
 Last October, the Central Asia Gas Pipeline Consortium, called CentGas, in
 which Unocal holds an interest, was formed to develop a gas pipeline which
 will link Turkmenistan's vast Dauletabad gas field with markets in Pakistan
 and possibly India. The proposed 790-mile pipeline will open up new markets
 for this gas, traveling from Turkmenistan through Afghanistan to Multan in
Pakistan. The proposed extension would move gas on to New Delhi, where it
would connect with an existing pipeline. As with the proposed Central Asia
oil pipeline, CentGas can not begin construction until an internationally
 recognized Afghanistan Government is in place.
 The Central Asia and Caspian region is blessed with abundant oil and gas
 that can enhance the lives of the region's residents, and provide energy
 for growth in both Europe and Asia. The impact of these resources on U.S.
 commercial interests and U.S. foreign policy is also significant. Without
 peaceful settlement of the conflicts in the region, cross-border oil and
 gas pipelines are not likely to be built. We urge the Administration and
 the Congress to give strong support to the U.N.-led peace process in
 Afghanistan. The U.S. Government should use its influence to help find
 solutions to all of the region's conflicts.
 U.S. assistance in developing these new economies will be crucial to
 business success. We thus also encourage strong technical assistance
 programs throughout the region. Specifically, we urge repeal or removal of
 section 907 of the Freedom Support Act. This section unfairly restricts
 U.S. Government assistance to the government of Azerbaijan and limits U.S.
 influence in the region.
 Developing cost-effective export routes for Central Asian resources is a
 formidable task, but not an impossible one. Unocal and other American
 companies like it are fully prepared to undertake the job and to make
 Central Asia once again into the crossroads it has been in the past. Thank
 you, Mr. Chairman.