[Nettime-bold] "a route through Afghanistan [..] the best option"

[Andy Mueller-Maguhn <andy@ccc.de>]

	"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."


1998 UNOCAL CORPORATION TESTIMONY ON HOUSE COMMITTEE ON INTERNATIONAL
RELATIONS:
  
RE: OIL AND GAS RESOURCES IN THE CENTRAL ASIAN AND CASPIAN REGION

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.

WEB SOURCE:

http://www.house.gov/international_relations/105th/ap/wsap212982.htm

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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