WASHINGTON, D.C.

Mr. Chairman, I am John Maresca, Vice President, Worldwide Relations, of Unocal Company. Unocal is among the world’s main energy useful resource and undertaking 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’re a serious oil and gas producer. I respect your invitation to speak right here right this moment. I imagine these hearings are essential and well timed, and that i congratulate you for focusing on Central Asia oil and gas reserves and the function they play in shaping U.S. coverage.

Immediately we would like to concentrate on three issues concerning this region, its assets and U.S. coverage:

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

The necessity for U.S. support for international and regional efforts to attain balanced and lasting political settlements inside Russia, other newly independent states and in Afghanistan.

The necessity for structured assistance to encourage economic reforms and the development of acceptable investment climates in the area. On this regard, we specifically assist repeal or removing of Part 907 of the liberty Assist Act.

For greater than 2,000 years, Central Asia has been a gathering floor between Europe and Asia, the location of historical east-west trade routes collectively known as the Silk Road and, at numerous points in historical past, a cradle of scholarship, culture and power. It is usually a area of actually enormous natural sources, that are revitalizing cross-border commerce, creating optimistic political interplay and stimulating regional cooperation. These resources have the potential to recharge the economies of neighboring nations and put whole regions on the street to prosperity.

About 100 years ago, the worldwide oil business was born in the Caspian/Central Asian area with the discovery of oil. Within the intervening years, below Soviet rule, the existence

of the region’s oil and gas assets was generally identified, however solely partially or poorly developed.

As we close to the top of the 20th century, historical past brings us full circle. With political obstacles falling, Central Asia and the Caspian are once once more attracting folks from across the globe who’re looking for methods to develop and ship its bountiful vitality assets to the markets of the world.

The Caspian region accommodates large untapped hydrocarbon reserves, a lot of them located in the Caspian Sea basin itself. Proven natural gas reserves within Azerbaijan, Uzbekistan, Turkmenistan and Kazakhstan equal greater than 236 trillion cubic ft. The region’s whole oil reserves might reach greater than 60 billion barrels of oil — enough to service Europe’s oil needs for 11 years. Some estimates are as excessive as 200 billion barrels. In 1995, the region was producing solely 870,000 barrels per day (44 million tons per yr [Mt/y]).

By 2010, Western firms might increase manufacturing to about four.5 million barrels a day (Mb/d) — an increase of greater than 500 p.c in only 15 years. If this happens, the region would characterize about 5 % of the world’s whole oil production, and almost 20 % of oil produced amongst non-OPEC international locations.

One main downside has but to be resolved: how one can get the region’s huge energy resources to the markets where they are wanted. There are few, if any, different areas of the world where there will be such a dramatic enhance in the provision of oil and gas to the world market. The solution appears simple: build a “new” Silk Highway. Implementing this answer, however, is far from simple. The risks are excessive, but so are the rewards.

Finding and Building Routes to World Markets

Certainly one of the principle problems is that Central Asia is remoted. 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 sequence of pure obstacles — mountains and seas — as well as political obstacles, such as battle zones or sanctioned nations.

Which means that the area’s natural resources are landlocked, both geographically and politically. Every of the countries within the Caucasus and Central Asia faces tough political challenges. Some have unsettled wars or latent conflicts. Others have evolving methods where the laws — and even the courts — are dynamic and altering. Enterprise commitments might be rescinded with out warning, or they can be displaced by new geopolitical realities.

In addition, a chief technical impediment we face in transporting oil is the region’s existing pipeline infrastructure. Because the area’s pipelines were constructed through the Moscow-centered Soviet interval, they are likely to head north and west towards Russia. There are not any connections to the south and east.

Depending wholly on this infrastructure to export Central Asia oil just isn’t practical. Russia at the moment is unlikely to absorb large new portions of “foreign” oil, is unlikely to be a major marketplace for energy in the subsequent decade, and lacks the capacity to deliver it to different markets.

Definitely there is no simple method out of Central Asia. If there are to be other routes, in other directions, they have to be built.

Two major power infrastructure projects are looking for to satisfy this challenge. One, under the aegis of the Caspian Pipeline Consortium, or CPC, plans to construct 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 by way of the Bosphorus to the Mediterranean and world markets.

The opposite challenge is sponsored by the Azerbaijan Worldwide Working Firm (AIOC), a consortium of 11 international oil firms including 4 American firms — Unocal, Amoco, Exxon and Pennzoil. It can follow one or each 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 prolong to a delivery 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 when each pipelines had been built, they would not have sufficient whole capability to transport all of the oil anticipated to move from the area in the future; nor would they have the capability to maneuver it to the right markets. Different export pipelines should be constructed.

Unocal believes that the central factor in planning these pipelines should be the placement of the long run vitality markets which are most probably to wish these new supplies. Simply as Central Asia was the assembly ground between Europe and Asia in centuries past, it is once more in a novel place to potentially service markets in each of those areas — if export routes to these markets might be built. Let’s check out a number of the potential markets.

Western Europe

Western Europe is a tough market. It is characterized by excessive prices for oil merchandise, an aging inhabitants, and rising competitors from natural gas. Between 1995 and 2010, we estimate that demand for oil will enhance from 14.1 Mb/d (705 Mt/y) to 15.0 Mb/d (750 Mt/y), a median development fee of solely zero.5 p.c yearly. Moreover, the area is already amply provided from fields within the Middle East, North Sea, Scandinavia and Russia. Although there is perhaps room for a few of Central Asia’s oil, the Western European market is unlikely to have the ability to absorb all the production from the Caspian area.

Central and Japanese Europe

Central and Japanese Europe markets do not look any better. Although there may be elevated demand for oil in the area’s transport sector, natural gas is gaining energy as a competitor. Between 1995 and 2010, demand for oil is predicted to extend by solely half 1,000,000 barrels per day, from 1.Three Mb/d (67 Mt/y) to 1.Eight Mb/d (91.5 Mt/y). Like Western Europe, this market can be very competitive. In addition to supplies of oil from the North Sea, Africa and the Center East, Russia provides nearly all of the oil to this area.

The Domestic NIS Market

The growth in demand for oil additionally shall be weak in the Newly Impartial States (NIS). We anticipate Russian and other NIS markets to increase demand by solely 1.2 p.c annually between 1997 and 2010.

Asia/Pacific

In stark contrast to the opposite three markets, the Asia/Pacific area has a rapidly increasing demand for oil and an anticipated significant enhance in population. Previous to the latest 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 enhance in demand will most likely not meet these expectations, Unocal stands behind its long-term estimates.

Vitality demand development will stay robust for one key cause: the area’s population is expected to develop by 700 million people by 2010.

It is in everyone’s interests that there be ample provides for Asia’s rising vitality necessities. If Asia’s vitality wants are not glad, they’ll merely put stress on all world markets, driving costs upwards in every single place.

The important thing query is how the vitality assets of Central Asia can be made out there to fulfill the energy needs of nearby Asian markets. There are two attainable solutions — with several variations.

Export Routes

East to China: Prohibitively Lengthy?

One possibility is to go east throughout China. However this would mean constructing a pipeline of more than 3,000 kilometers to central China — in addition to a 2,000-kilometer connection to reach the primary inhabitants centers along the coast. Even with these formidable challenges, China Nationwide Petroleum Corporation is considering building a pipeline east from Kazakhstan to Chinese markets.

Unocal had a crew in Beijing just last week for consultations with the Chinese language. Given China’s long-range outlook and its ability to concentrate resources to satisfy its personal wants, China is nearly sure to construct such a line. The query is what’s going to the prices of transporting oil via this pipeline be and what netback will the producers receive.

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

A second choice is to construct a pipeline south from Central Asia to the Indian Ocean.

One apparent potential route south could be throughout Iran. However, this option is foreclosed for American firms because of U.S. sanctions laws. The one different potential route possibility is across Afghanistan, which has its own distinctive challenges.

The nation has been concerned in bitter warfare for almost two decades. The territory across which the pipeline would prolong is controlled by the Taliban, an Islamic movement that is not recognized as a government by most different nations. From the outset, we have made it clear that building of our proposed pipeline can not begin until a recognized authorities is in place that has the arrogance of governments, lenders and our firm.

In spite of this, a route by Afghanistan appears to be the perfect choice with the fewest technical obstacles. It is the shortest route to the sea and has comparatively favorable terrain for a pipeline. The route by way of Afghanistan is the one that will convey Central Asian oil closest to Asian markets and thus could be the most affordable by way 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 can make the most of and gather oil from present pipeline infrastructure in Turkmenistan, Uzbekistan, Kazakhstan and Russia.

The 1,040-mile-lengthy oil pipeline would start near the city of Chardzhou, in northern Turkmenistan, and prolong southeasterly by way of Afghanistan to an export terminal that would be constructed on the Pakistan coast on the Arabian Sea. Solely about 440 miles of the pipeline would be in Afghanistan.

This 42-inch-diameter pipeline could have a shipping capability of one million barrels of oil per day. Estimated cost of the mission — which is analogous in scope to the Trans Alaska Pipeline — is about US$2.5 billion.

There may be appreciable international and regional political curiosity on this pipeline. Asian crude oil importers, particularly from Japan, are looking to Central Asia and the Caspian as a brand new strategic supply of supply to fulfill their want for resource range. The pipeline advantages Central Asian nations because it might enable them to sell their oil in expanding and highly prospective exhausting forex markets. The pipeline would benefit Afghanistan, which might receive revenues from transport tariffs, and would promote stability and encourage trade and economic improvement. Though Unocal has not negotiated with anybody group, and does not favor any group, we’ve had contacts with and briefings for all of them. We all know that the different factions in Afghanistan understand the importance of the pipeline project for their country, and have expressed their assist of it.

A latest research 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 entry to higher worth markets than these at the moment being accessed by way of the standard Baltic and Black Sea export routes.

This is evidenced by the netback values producers will obtain as determined by the World Bank examine. For West Siberian crude, the netback value will enhance by nearly $2.00 per barrel by going south Nigerian to Asia. For a producer in western Kazakhstan, the netback worth will improve by more than $1 per barrel by going south to Asia as in comparison with west to the Mediterranean by way of the Black Sea.

Natural Gas Export

Given the plentiful natural gas supplies of Central Asia, our purpose is to link a specific pure useful resource with the nearest viable market. This is primary for the industrial viability of any gas project. As with all initiatives being thought-about on this region, the following initiatives face geo-political challenges, in addition to market points.

Unocal and the Turkish company, Koc Holding A.S., are fascinated by bringing competitive gas supplies to the Turkey market. The proposed Eurasia Natural Gas Pipeline would transport gas from Turkmenistan instantly throughout the Caspian Sea by means of Azerbaijan and Georgia to Turkey. Sixty percent of this proposed gas pipeline would comply with the same route as the oil pipeline proposed to run from Baku to Ceyhan. In fact, the demarcation of the Caspian stays a problem.

Last October, the Central Asia Pipeline, Ltd. (CentGas) consortium, wherein Unocal holds an interest, was formed to develop a gas pipeline that may link Turkmenistan’s huge natural gas reserves within the Dauletabad Subject with markets in Pakistan and presumably India. An unbiased evaluation shows that the sphere’s sources are satisfactory for the venture’s wants, assuming manufacturing charges rising over time to 2 billion cubic feet of gas per day for 30 years or extra.

In manufacturing since 1983, the Dauletabad Field’s natural gas has been delivered north via Uzbekistan, Kazakhstan and Russia to markets within the Caspian and Black Sea areas. The proposed 790-mile pipeline will open up new markets for this gas, travelling from Turkmenistan via Afghanistan to Multan, Pakistan. A proposed extension would link with the present Sui pipeline system, transferring gas to near New Delhi, the place it will connect with the prevailing HBJ pipeline. By serving these further volumes, the extension would improve the economics of the project, leading to overall reductions in delivered natural gas prices for all users and better margins. As presently planned, the CentGas pipeline would value roughly $2 billion. A 400-mile extension into India could add $600 million to the general venture cost.

As with the proposed Central Asia Oil Pipeline, CentGas can’t begin construction till an internationally acknowledged Afghanistan authorities is in place. For the mission to advance, it must have worldwide financing, government-to-government agreements and government-to-consortium agreements.

The Central Asia and Caspian area is blessed with ample oil and gas that can improve the lives of the region’s residents and provide power for development for Europe and Asia.

The impact of those sources on U.S. commercial pursuits and U.S. overseas policy can be vital and intertwined. Without peaceful settlement of conflicts inside the area, cross-border oil and gas pipelines will not be prone to be built. We urge the Administration and the Congress to provide robust support to the United Nations-led peace course of in Afghanistan.

U.S. help in growing these new economies shall be essential to enterprise’ success. We encourage robust technical help packages all through the region. We additionally urge repeal or removing of Section 907 of the freedom Assist Act. This section unfairly restricts U.S. government assistance to the federal government of Azerbaijan and limits U.S. affect within the region.

Creating cost-efficient, worthwhile and environment friendly export routes for Central Asia assets is a formidable, but not impossible, task. It has been achieved earlier than. A business corridor, a “new” Silk Road, can hyperlink the Central Asia provide with the demand — as soon as once more making Central Asia the crossroads between Europe and Asia.

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