International Aspects of U.S. Energy Security

International Aspects of U.S. Energy Security

Alan P. Larson, Under Secretary for Economic, Business, and Agricultural Affairs Testimony Before the Senate Foreign Relations Committee, Subcommittee on International Economic Policy, Export and Trade Promotion Washington, DC April 8, 2003

(As prepared)

Mr. Chairman, distinguished Committee members, I am pleased to be here today with Deputy Secretary of Energy McSlarrow to discuss the international aspects of U.S. energy security.

Hard Facts About Energy

We approach international energy policy aware of a number of hard facts that must be factored into the formulation of the nexus of an effective energy security and foreign policy. These hard facts include:

* Imports supply roughly half of our oil needs, and an even greater share of the needs of some of our most important allies and economic partners.

* We are no longer self-sufficient in natural gas. We now import 15 percent of our natural gas, almost entirely from Canada, but in growing volumes from Trinidad and other LNG [liquefied natural gas] suppliers.

* Two-thirds of proven world oil reserves are in the Middle East. In contrast, the United States has 2 percent of proven world oil reserves.

* OPEC [Organization of Petroleum Exporting Countries] nations provide roughly one third of the total oil exports, but also control two-thirds of world reserves.

* Oil supply shocks in any region of the world have an impact on our economy through the instantaneous operation of international oil markets, as we saw recently in Venezuela.

Taken together, these facts mean that an effective international energy security policy must, as outlined in the President's National Energy Policy:

1. Promote increased and diversified production of energy from a range of foreign suppliers in many regions.

2. Coordinate effective international measures to respond to physical oil supply disruptions, through investment in strategic oil stocks, and through cooperative mechanisms to draw on them in case of a severe physical oil supply disruption.

3. Encourage major oil producing countries to maintain responsible production policies to support a growing world economy and reduce oil market price volatility.

American energy security policy must complement and support America's economic and foreign policy goals. We must ensure that our economy has access to energy on terms and conditions that support economic growth and prosperity. And we must ensure that the United States can pursue its foreign policy and national security interests without being constrained by energy concerns.

The international oil market can be both volatile and unpredictable, as its recent reactions to recent events in Venezuela and Iraq have demonstrated. We have intensified our already close contacts with major oil producing and consuming countries, making clear that we look first to producers to follow through on their offers to offset market disruptions. If needed to reinforce their efforts, consuming countries stand ready to use strategic stocks. We are pleased that major producers, especially Saudi Arabia, have stepped up production, which has helped to stabilize and reassure global oil markets. This approach -- looking to cooperation with the major producers and consumers -- to handle challenges of the global energy market underscores the role of foreign policy in promoting energy security.

Domestic Energy Supplies

Energy policies that rely on market forces have made our economy more flexible and responsive. We use energy more efficiently; since 1970, America's energy intensity (the amount of energy it takes to produce one dollar of GDP [gross domestic product]) has declined by 40 percent. New technologies, such as deep-water drilling and enhanced oil recovery, are reducing the environmental effects and the economic costs of accessing technically challenging oil and gas reserves in the United States. In fact, the U.S. Gulf of Mexico remains one of the world's most promising regions. Alaska also holds vast reserves that can bolster our energy security.

The U.S. is a leading energy producer. The United States produced 72 of the 98 quadrillion BTUs [British thermal units] of energy that we consumed in 1999. The United States is the world's second largest natural gas producer and its third largest oil producer.

We are virtually self-sufficient in all energy resources except oil, of which we import just over half of our needs. EIA [Energy Information Administration] forecasts suggest that over the next 20 years, U.S. oil consumption could increase by 33 percent or more than 6 million barrels a day. Depending on many factors, including the domestic and international energy policies we adopt, the Energy Information Administration estimates that imported oil could grow to as much as 62 percent of our total oil consumption by 2020.

Other developed regions are also dependent on foreign oil. Europe currently imports 52 percent of its oil needs. Japan imports 98 percent of its oil needs.

These high levels of imports by friends and allies, as well as by the United States, means that energy security cannot be defined as self-sufficiency, as much as we would like that to be the case. With 2 percent of the world's proven oil reserves, the United States is unlikely to ever again be self-sufficient in oil.

Reliability Through Diversification

Energy investments are costly, risky and require long-term commitments. For that reason, neither companies nor countries can have all of their eggs in one basket. Recognizing this reality, American energy security policy has sought to encourage like-minded free market policies toward energy, emphasizing the expansion and diversification of energy supplies. In the immediate future, however, oil and natural gas will likely continue to play a central role in the world economy and international energy markets. So we must find more oil and gas supplies, and these supplies must be reliable and made available on terms that permit sustained economic growth. Let me provide you with just a few concrete examples that demonstrate what we are doing to achieve these energy goals.

North America: Energy Integration

We have made strengthening our energy cooperation with Canada and Mexico a top priority of energy security policy. We established a North American Energy Working Group in 2001 to serve as a forum for exchanging information and pursuing joint strategies. Senior energy experts from the three North American governments recently released a North American "Energy Picture" report that, for the first time, jointly measures the energy stocks, trading balances, and energy flows in the continent. This marks the first time we have truly looked at the North American market as a unified one. It is an important first step towards greater integration, and mutual economic benefit, and greater energy security. And our work on the Working Group continues.

Canada is our leading supplier of imported natural gas, electricity and oil. All three flow across the border in both directions. The Canadian energy sector is developing its heavy oil reserves, with production expected to reach one million barrels per day by year-end. These heavy oil reserves are anchoring Canada as a pillar of North American energy security. World-scale oil and natural gas projects are also underway in Atlantic Canada, which is now the fastest growing source of natural gas for New England.

New England is the region of our country that is most dependent on home heating oil. New England homes tend to be a the end of our nation's natural gas grid --- or are not even connected to the grid at all. Canadian gas is helping reduce significantly that dependence.

Several Canadian provinces are also enthusiastic about major new hydroelectric projects, with potential for large-scale new supply the United States. Last but not least, Canada is a leader and a key partner in a range of renewable and alternative energy sources, from fuel cells to bio-mass.

Canada's vast resources, market based energy policies, and our interconnected energy infrastructures, contribute significantly to U.S. energy security and to the shared economic health of our two nations. These are all reasons why the State Department hosts an inter-agency bilateral "Energy Consultative Mechanism" between the two governments, allowing each side to work towards common ends and to address issues of concern.

Mexico is one of our leading energy and trading partners, and has, with other major producers, surged production in recent months to reduce market volatility. The U.S. is also the leading market for Mexican manufactured exports, which are now about 10 times the value of Mexico's oil exports. Energy trade with Mexico is not a one-way street. We import crude oil and electricity from Mexico, and are a net exporter of refined petroleum products and natural gas to Mexico.

Mexico will make its own decisions on whether or how it wants to liberalize its energy sector to attract investment, and whether that investment will be domestic or foreign. Mexico has already liberalized transportation, distribution, and storage of natural gas, and has successfully attracted domestic and foreign investment to that sector. In the last few years, Mexico has also begun to allow independent power producers (IPPs) to sell power to the public grid.

The reliability of North American energy trade is also enhanced, of course, by geographic proximity. But more important than geography alone is the rule of law and predictable investment conditions created by NAFTA [North American Free Trade Agreement], integrated pipeline networks, closer cooperation between our governments and energy companies and long-term reliable supply relationships. Our policy is to deepen further this framework of rule of law and predictable investment conditions in North America and to use it as an example as we seek to build similar frameworks in other regions. For example, the North American Energy Working Group has five expert sub-groups that have harmonized certain appliance standards to facilitate trade and established a mechanism for scientific and technical cooperation.

Venezuela: Traditional, But Strained, Supplier

Venezuela and the United States have also enjoyed strong historical energy ties. Traditionally, Venezuela has been one of our most reliable oil partners. Venezuelan oil policy, until recently, has been built upon a reputation of reliability to international markets, which was of great mutual benefit. Through World Wars, politically inspired embargoes, and global dislocations, Venezuela found that its national interest was best advanced through maintaining a reputation of reliability.

Venezuela's turmoil came at a difficult period for the world economy, but production, and to a lesser extent refinery operations, are now recovering. Venezuela led the way in opening aspects of its energy sector to U.S. firms. These firms remain hard at work there, just as Venezuelan owned CITGO continues to operate in the U.S. as a commercial entity. These reciprocal energy investments bring benefits to both parties. We maintain a robust, if more difficult, energy dialogue with Venezuela, and will continue to do so.

And the United States will continue to work to help Venezuelans resolve their political differences. The key to reverse the severe economic and political decline in Venezuela is a renewed dedication to find a constitutional, democratic, peaceful and electoral solution to the crisis as called for in Organization of American States (OAS) Permanent Council Resolution 833. Democracy and the rule of law are essential elements of a sound investment climate. The dialogue facilitated by the OAS Secretary General remains the best forum in which the Government and the opposition can secure such an agreement, and we urge both sides to avail themselves of this opportunity. The Friends of the OAS Secretary General's Mission for Venezuela, of which the U.S. is a member, was formed in January to support this dialogue.

Caspian Coming On Line

The Caspian basin has tremendous potential, offering the possibility of production increases from 1.6 million b/d [barrels per day] in 2001 to 5.0 million b/d in 2010. This will represent the largest non-OPEC production growth in the world. Transporting this oil from this land-locked region to world markets through the development of multiple pipelines has been a major U.S. foreign policy priority since the mid-1990s. In addition to enhanced energy security, this policy will strengthen the sovereignty and economic viability of new nation states in the region.

The Department of State maintains a Senior Advisor on Caspian Basin Energy Diplomacy. The incumbent, Ambassador Steve Mann, serves as a catalyst between governments, industry and in some cases NGOs [non-governmental organizations], to achieve specific milestones to forward the goal of creating an East-West energy corridor from the Caspian to the Mediterranean.

Construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline begins this month, April 2003. BTC will start shipping oil in 2005. The pipeline will transport up to 1 million barrels/day when it reaches full capacity (in 2010). The U.S. is also working with the governments of Kazakhstan and Azerbaijan to bring Kazakhstani oil into the BTC pipeline system.

The South Caucasus gas line, running from the offshore Shah Deniz gas field in Azerbaijan to central Turkey, is also moving ahead and will begin operations in 2006. We are also working to improve the investment climate throughout the region by stressing the need for governments to respect contract sanctity and fight against corruption.

Russia: Energy Super Power

Russia already is an energy super-power. Expanded oil and gas production in Russia can make a major contribution to its own economy and to a well-balanced global supply mix. Russia is developing new oil and gas fields, including multi-billion dollar projects, with U.S. and other foreign investors. They are also successfully expanding production from existing fields as they work more closely with, and learn from, Western service companies. We welcome strengthened energy ties with Russia, and their new energy production in the coming years will enhance U.S. and global energy security. Through the programs of Eximbank and OPIC [Overseas Private Investment Corporation], we are providing financing and insurance to reduce the political risk of energy investments. We look forward to working with Russia as it strengthens its ties with the International Energy Agency.

We join the Department of Energy and the Department of Commerce in the U.S.-Russia Energy Working Group. The working group has met several times in the last year, and has formed five sub-groups to focus on cooperation in the areas of: 1) Stability of oil supply, prices and forecasts; 2) Investments into the Russian Energy Sector; 3) Energy Efficient Technologies; 4) Information Exchange; and 5) Small and Medium Energy Enterprises. The third meeting of the high-level group will be in Washington April 7-9, but the working level sub-groups have launched several concrete initiatives.

We also joined with the Department of Commerce and the Department of Energy to establish the U.S.-Russia Commercial Energy Dialogue. Our Commercial Energy Dialogue with Russia focuses on facilitating commercial cooperation both within and outside Russia and addressing bottlenecks that limit the amount of Russian energy that can reach world markets. The U.S. hosted the first U.S. Russia Commercial Energy Summit in Houston in October, 2002, with participation by a large number of American and Russian energy firms and senior officials. The next official dialogue meeting was held in Moscow in December, and successfully organized follow-up to be driven by the private sector Five sub-committees are preparing recommendations for both governments on possible steps to enhance the potential for commercial cooperation. These groups meet regularly in Moscow, and focus on the investment framework, the regulatory framework, markets and transportation, services and equipment, and small-medium sized enterprises.

West Africa: Great Potential

The Administration recognizes Africa's emerging role as a major energy supplier. For example, Nigeria is normally the fifth largest supplier of crude oil to the U.S., with exports to the U.S. averaging nearly 600,000 bpd [barrels per day] in 2002. We are in close contact with the Nigerian government and the firms operating in the Niger Delta region in these days of unrest.

Oil reserves generate a large share of government revenue in countries such as Nigeria, Angola, Gabon, Equatorial Guinea, Republic of Congo and Cameroon. Emerging potential producers, such as Sao Tome, Chad and Mauritania also will begin producing significant new oil supplies in coming years. U.S. energy firms are key in Africa's on-going emergence as an energy supplying region. From the large firms, such as ExxonMobil and ChevronTexaco, to the smaller oil firms such as Amerada Hess, Marathon, Ocean Energy, Kerr-McGee and others, U.S. companies bring the most advanced technologies and resources to assist African countries in developing their energy resources.

We have a strong policy interest in assisting oil-producing countries to channel their energy resources into solid and sustainable economic development that will benefit their populations. Democratization and the development of responsible governing institutions are particularly important in reducing oil related conflicts and promoting African supply stability. Substantial foreign direct investment is needed to develop African energy resources both onshore and offshore deepwater. We support this process by encouraging the reforms needed to improve the investment climate. Accountability and transparency are necessary to ensure that oil revenues benefit the population and support development. We have an interest in helping West African nations solve these problems, not just out of altruism, but also self-interest.

We are prepared to explore new partnerships to help West African countries make good on their commitment to good governance, transparent business practices, sound economic policies and market-based regulation. We have negotiated a bilateral energy cooperation framework agreement with Nigeria. We favor the World Bank's involvement in independent monitoring arrangements in the Chad-Cameroon pipeline project. Another sign of our commitment is the opening of our new embassy in Equatorial Guinea. This new mission will support our ongoing work in the areas of energy security, human rights, and good governance in Equatorial Guinea.

Persian Gulf: Key Global Suppliers

The Middle East holds two-thirds of proven world oil reserves and has the lowest production costs in the world. Saudi Arabia, the world's largest oil producer, has pursued a policy of investing in spare oil production capacity and storage, and diversifying its export routes to both the Persian Gulf and the Red Sea. These enormous investments allow Saudi Arabia to credibly assure markets that it has the spare production capacity, and the export outlets, to mitigate supply disruptions in the Gulf or elsewhere. Saudi Arabia and other major Gulf producers, such as the UAE, Kuwait, and Qatar, repeatedly emphasize their commitment to be reliable suppliers of oil and natural gas to world markets. And they have demonstrated their leadership by offsetting the recent fluctuations in Venezuelan and Iraqi exports.

Despite frequently expressed concerns about "dependence" on the Middle East, the world and U.S. economies clearly benefit from access to these low-cost supplies. In fact, this region is a core supplier not to the U.S., but to our key economic partners, primarily in Asia. Without abundant, low-cost Gulf supplies, we would expend scarce economic resources to secure the energy we need at higher cost to the world economy, and our citizens.

Gulf producers will continue to have an indispensable role in the world market. In fact, we will encourage them to increase foreign investment to steadily expand supplies, and increase their own economic potential. But, just as the disruption in Venezuela has shown, the world needs a highly flexible, resilient oil market that will allow for some regions to compensate for ebbs and flows in others. And the greater diversity and growth in world oil production we seek should also allow the market to work better.

Emergency Preparedness and the International Energy Agency

Continued close cooperation with energy producers and consumers enhances our collective emergency preparedness. In the event of disruptions, we have looked to producers to make a maximum effort to use spare capacity to replace lost supply. Producers are acting, but we are also ready if needed. We sustain intense consultations with our partners in the International Energy Agency (IEA) and, if necessary, we are ready, willing and able to make an appropriate emergency response, primarily based on coordinated drawdown of strategic stocks. The 26 IEA members collectively hold over 1.3 billion barrels of government-controlled stocks, representing 114 days import coverage.

The critical role of the International Energy Agency is worth underscoring here. Founded in 1974 in response to the oil shocks, the Agency Secretariat and 26 member countries have developed a coordinated approach to emergency preparedness and potential use of strategic petroleum reserves. In addition, the IEA's small, expert staff provides information and analysis on the quick-changing energy scene. The IEA tracks all five energy sources -- oil, gas, renewables, coal, and nuclear -- and provides a global framework to support short-term readiness to respond to energy disruptions and long-term diversification and technology development. The agency also provides expert guidance to important non-member countries, such as Russia and China, on investment policies, strategic stocks, and how to work better within energy markets. This dovetails with work the U.S. and others are doing in the Asia Pacific Economic Cooperation (APEC) forum and contributes to enhanced energy security.

Energy Infrastructure Security

Given potential terrorist threats to energy infrastructure, the State Departments Counter-Terrorism Coordinator and Political -Military Bureau's Office of Critical Infrastructure Protection work closely with the Departments of Homeland Security and Energy and U.S. Ambassadors overseas to increase awareness of these threats and facilitate cooperation to handle them.

Problem Countries Needing Special Treatment

While our general energy security approach is to actively support the global opening of trade and investment opportunities, there is a set of problem countries whose policies and actions are of such concern that we bar or restrict American firms from most commercial activities with these states, including exploring for or developing energy resources, and, in most cases, buying or importing their oil. These countries include major oil producers such as Libya and Iran, and more limited producers such as Sudan, Cuba and Burma. Libya, Iran, Sudan and Cuba are designated State Sponsors of Terrorism.

In dealing with these nations, we balance our desire to diversify our energy sources with our very real concerns about the security threats that these nations pose to the international community. With the Iran and Libya Sanctions Act (ILSA), Congress set out a policy to discourage investment in the development of petroleum resources in Iran and Libya because of concern about those countries' support for international terrorism and pursuit of weapons of mass destruction (WMD).

Iraq: Country in Transition

The Administration has been clear that our actions in Iraq are not "about oil." As the President has assured the world, Iraqi oil belongs to the Iraqi people. Coalition forces are working to ensure that Iraq's oil sector is protected from acts of sabotage. When Iraqi oil flows again, we will do everything we can to ensure that the proceeds are applied for the benefit of the Iraqi people. Iraq's oil and other natural resources belong to all the Iraqi people -- and the United States is and will respect this fact.

Conclusion

Energy security is a leading Administration priority, and our National Energy Policy spells out the roadmap to achieve it. In the long run we need new technologies such as hydrogen that can fuel our economy without posing threats to the environment or our national security. In the interim, our international energy policy must address the familiar challenges posed by a hydrocarbon-based economy where oil reserves are concentrated in various challenging regions of the world.

Energy security is advanced by sustained improvements in the investment climates in Russia, the Caspian, Africa, and in our own hemisphere, as well as by improved investment opportunities in traditional venues such as the Gulf and Venezuela. We are placing special emphasis on making the integrated North American market work better. To counter short-term, physical disruptions, we stand ready, with our IEA allies, to deploy a collective response if needed.

We intend to engage intensively with energy partners all over the world to diversify supplies, improve investment opportunities and assure that market forces work as transparently and efficiently as possible. Like the war on terrorism, achieving energy security will not be achieved by one dramatic breakthrough but rather by sustained, patient and determined efforts. The State Department here and overseas is actively engaged on this entire effort to enhance our energy security.

[End]

© Scoop Media