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S. HRG. 109–857

ENERGY SECURITY IN LATIN AMERICA

HEARING

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 22, 2006

Printed for the use of the Committee on Foreign Relations

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

JOHN E. SUNUNU, New Hampshire

LISA MURKOWSKI, Alaska

MEL MARTINEZ, Florida

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

BARACK OBAMA, Illinois

KENNETH A. MYERS, Jr., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

(II)

CONTENTS

Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware ..................................... 40

Craig, Hon. Larry E., U.S. Senator from Idaho .................................................... 1

Prepared statement .......................................................................................... 3

Cavallo, Hon. Domingo, chairman and CEO, DFC Associates, LLC, and

former Minister of Economy for Argentina ........................................................ 12

Prepared statement .......................................................................................... 14

de Carvalho, Eduardo Pereira, president, Brazilian Association of Sugar Cane

and Ethanol Producers, Sao Paulo, Brazil ......................................................... 26

Prepared statement .......................................................................................... 28

Giusti, Luis E., senior advisor, Center for Strategic and International Studies,

Washington, DC ................................................................................................... 18

Prepared statement .......................................................................................... 21

Goldwyn, Hon. David L., president, Goldwyn International Strategies, LLC,

Washington, DC ................................................................................................... 30

Prepared statement .......................................................................................... 33

Lugar, Hon. Richard G., U.S. Senator from Indiana ............................................ 1

Martinez, Hon. Mel, U.S. Senator from Florida .................................................... 7

Nelson, Hon. Bill, U.S. Senator from Florida ........................................................ 8

Salazar, Hon. Ken, U.S. Senator from Colorado ................................................... 4

Prepared statement .......................................................................................... 6

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Farnsworth, Eric, vice president, Council of the Americas, prepared statement ...................................................................................................................... 56

Johnson, Stephen C., senior policy analyst for Latin America, The Kathryn

and Shelby Cullom Davis Institute for International Studies, The Heritage

Foundation, prepared statement ......................................................................... 58

Mendelson-Forman, Johanna, Ph.D., senior associate, Center for Strategic

and International Studies, Washington, DC ...................................................... 62

(III)

(1)

ENERGY SECURITY IN LATIN AMERICA

THURSDAY, JUNE 22, 2006

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC.

The committee met, pursuant to notice, at 9:40 a.m., in room

SD–419, Dirksen Senate Office Building, Hon. Richard G. Lugar

(chairman of the committee) presiding.

Present: Senators Lugar, Chafee, Coleman, Martinez, Biden, and

Nelson.

Also present: Senators Craig and Salazar.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S.

SENATOR FROM INDIANA

The CHAIRMAN. This hearing of the Senate Foreign Relations

Committee is called to order.

We are honored to have two distinguished colleagues before us

on our first panel today. To respect their time commitments, we

will call upon them for their testimony immediately. After they

have completed their testimony, I will deliver an opening statement, as will the distinguished ranking member as he arrives, and

then we have a remarkable panel to follow this morning.

Rollcall votes will come, three of them, at about 11 o’clock. So we

will do our best to maneuver around them. We have some extraordinary opportunities today to learn about energy policy, Latin

America, and the intersection of these with regard to our country.

It’s a real privilege to call now upon the distinguished Senator

from the State of Idaho, Larry Craig, to be followed by the equally

distinguished Senator from the State of Colorado, Ken Salazar.

Gentlemen, proceed as you wish. Your full statements will be made

a part of the record. If you would summarize within a 5- or 10-

minute period, that would be desirable.

Senator Craig.

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM

IDAHO

Senator CRAIG. Well, Mr. Chairman, thank you very much for allowing both of us to be here. I’m pleased to have Ken at my side

as we discuss these important issues.

It is an opportunity to address both energy and Latin American

issues, and I want to commend you and your insight in addressing

this very timely and important set of topics, and for introducing S.

2435, the Energy Diplomacy and Security Act. Your bill will help

move the Latin American region toward the center of this country’s

2

strategic planning, and reevaluate attitudes amongst some United

States officials who currently limit our ability to diversify our energy supply and also to compete fairly with countries like China for

resources in the hemisphere.

Mr. Chairman, you know I’ve always been fairly direct and blunt

about these issues. Recent developments in Latin America are not

in keeping, in my opinion, with the United States’ energy, economic, or national security interest. For example, the nationalization of industries in Latin America is troubling.

Further, while this kind of backward-looking activity is contrary

to our country’s belief in the power of property rights and free enterprise in transforming developing economies, it is nevertheless

very welcome to countries around the world with leftist-leaning

governments and state-controlled industries. In particular, it is my

firm opinion that the likes of China are exploiting these regressive

developments right at our doorstep.

Whether or not that’s true, I know China is preparing to plant

oil rigs 50 miles offshore of our coastline. Venezuela has recently

purchased 18 rigs from that country. Hugo Chavez has stated numerous times that he seeks to divert his oil exports away from the

United States to China.

But, in any event, the fact remains that our policies, if they ever

warrant that term toward Latin America, don’t seem to be working.

And it is arguably the case that China is inclined to exploit this

precipitous decline in United States influence in Latin America. It

is a product of failure. The result may be that some governments

in Latin America are doomed to repeat past economic mistakes and

thereby relive their failed turbulent histories, rather than join the

expanding communities of modern and progressive democracies.

As it relates to China’s engagement in Latin America, let me direct the committee’s attention to two statements. In yesterday’s

New York Times, Thomas Friedman points out that China, too,

thinks of Latin America as its backyard. In particular, Friedman

states, ‘‘China is almost exclusively focused on extracting natural

resources—timber, iron, soybeans, minerals, gas, and fish—to feed

its voracious appetite and keep jobs and factories humming in

China.’’

Additionally, the administration’s own national security strategy

paper points to China’s energy resource hunger and states that

China is ‘‘expanding trade, but acting as if they can somehow lock

up energy supplies around the world or seek to direct markets

rather than opening them up.’’

Mr. Chairman, I firmly believe your bill, S. 2435, of which I am

a cosponsor, will change a policy toward Latin America of nonengagement on substantive issues that ought to be of mutual concern to the United States and its neighbors. The position is actually worse than merely benign neglect or nonengagement. At the

same time that we fail to engage on drug interdiction, energy development, extradition, and similar criminal justice issues, we are

actually antagonizing the populations of countries with whom we

have a strategic interest in maintaining productive relationships.

Mr. Chairman, I will ask that the balance of my statement become a part of the record, and let me summarize and conclude.

3

I believe it is only through aggressive oversight and pushing bills

like S. 2435 that we can change course and correct our policies in

Latin America. Failure to constructively engage this region and to

promote partnerships on energy and other issues between the

United States and Latin American countries will condemn the

United States to consistently poor outcomes on matters of importance to our citizens.

Whether it is affordable energy or the jobs that arise from soundly executed foreign policy or an orderly and legal immigration policy, we have a responsibility to be friends, neighbors, and to engage

our neighbors to the south. I have no doubt that the region you are

addressing today is just as important, if not more important, than

the Middle East, where we seem to focus all of our attention today.

In my opinion, if we do not correct our course in Latin America,

the long-term consequences to the United States will prove seriously adverse. I hope we do not wake up one day and realize that

our focus has been too narrowly directed at the Middle East while

equally important events, including the petropolitics of Latin America, are in the process of delivering a profound and negative impact

on this country.

I thank you for allowing me to testify, Mr. Chairman.

[The prepared statement of Senator Craig follows:]

PREPARED STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM IDAHO

Mr. Chairman, thank you for this opportunity to address both energy and Latin

America issues. I want to commend you for your insight in addressing these very

timely and important topics, and for introducing S. 2435, the Energy Diplomacy and

Security Act. Your bill will help move the Latin American region toward the center

of this country’s strategic planning by reevaluating attitudes among some U.S. officials that currently limit our ability to diversify our energy supplies and also to compete fairly with countries like China for resources in this hemisphere.

Mr. Chairman, let’s call a spade a spade. Recent developments in Latin America

are not in keeping with the United States’ energy, economic, or national security

interests. For example, the nationalization of industries in Latin America is troubling. Further, while this kind of backward-looking activity is contrary to our country’s belief in the power of property rights and free enterprise to transform developing economies, it is nonetheless very welcome to countries around the world with

leftist-leaning governments and state-controlled industries. In particular, it is my

firm opinion that the likes of China are exploiting these regressive developments

right on our doorstep.

Whether or not it is the fact that China is preparing to plant oil rigs 50 miles

off our southern coastline, or that Venezuela has recently purchased 18 oil rigs from

that country, or the simple fact that Hugo Chavez has stated numerous times that

he seeks to divert his oil exports away from the United States and to China—the

fact remains constant that our policies (if they even warrant that term) toward

Latin America don’t seem to be working and it is arguably the case that China is

inclined to exploit the precipitous decline in United States influence in Latin America produced by that failure. The result may be that some governments in Latin

America are doomed to repeat past economic mistakes and thereby relive their

failed turbulent histories, rather than join the expanding community of modern and

progressive democracies.

As it relates to China’s engagement in Latin America, let me quickly point out

two statements. In yesterday’s New York Times, Thomas Friedman points out that

China, too, thinks of Latin America as their backyard. In particular, Friedman

states, ‘‘China is almost exclusively focused on extracting natural resources—timber,

iron, soybeans, minerals, gas, and fish to feed its voracious appetite and keep jobs

and factories humming in China.’’ Additionally, the administration’s own National

Security Strategy paper points to China’s energy resource hunger by stating that

China is ‘‘expanding trade, but acting as if they can somehow lock-up energy supplies around the world or seek to direct markets rather than opening them up.’’

Mr. Chairman, I firmly believe your bill, S. 2435 (of which I am an original sponsor) will seek to change a policy toward Latin America of nonengagement on subVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 H:\DOCS\ENERGY.TXT mich PsN: mich
4

stantive issues that ought to be of mutual concern between the United States and

its neighbors. The position is actually worse than one of merely negligent nonengagement. At the same time that we fail to engage on drug interdiction; the development of energy resources; extradition and similar criminal justice issues, we are

actually antagonizing the populations of countries we have a strategic interest in

maintaining productive relations with.

Mr. Chairman, to be blunt, we have some resistance to overcome in this city to

a new approach toward Latin America. While Republican and Democrat administrations have come and gone, many bureaucrats remain that harbor a strong institutional bias toward Latin America. That said, it is my opinion that many high-level

bureaucratic officials in the State Department and the CIA have been misguided in

their responsibilities in the region. No doubt Hugo Chavez is a worrying phenomenon. However, the questionable antics of our State Department during the

coup d’etat in Venezuela in 2002 have, in my opinion, had dire consequences on our

ability to appropriately influence not only Venezuela, but other countries in the region as well. There is no quicker formula for solidarity among Latin American governments than the appearance of interference and victimization by the United

States.

Further, we have small groups in this country who seem to genuinely fear the

likes of Chavez, Castro, and Morales and want nothing to do with them even if it

involves the pursuit of U.S. national interests. This fear leads to comprehensive

nonengagement, leaving the door open for further and unwanted influence in the

region from other countries that do not have our well-being at heart. Those who fear

these leftist leaders of Latin America must have no faith in the great concepts of

America, capitalism, diplomacy, the power of engagement, and a human’s will to be

free. Additionally, those driven by fear in this country fail severely to see that isolation policies have never been successful. Unfortunately, these small, fear-mongering

groups do not appear to be isolated in particular regions of our country. They also

appear to be locked in at influential bureaucratic posts at the State Department and

the CIA.

It is only through aggressive oversight and pushing bills like S. 2435 that we can

change course and correct our policies in Latin America. Failure to constructively

engage this region and to promote partnership on energy and other issues between

the United States and Latin American countries will condemn the United States to

consistently poor outcomes on matters of importance to our citizens—whether it is

affordable energy, or the jobs that arise from soundly executed foreign trade policies.

I have no doubt that the region you are addressing today is just as important,

if not more important, than the Middle-East where we are heavily involved today.

In my opinion, if we do not correct our course in Latin America, the long-term consequences to the United States will prove seriously adverse. I hope we do not wake

up one day and realize that our focus had been too narrowly directed toward the

Middle East while equally important events including the petropolitics of Latin

America were in the process of delivering a profound and negative impact on this

country.

The CHAIRMAN. Well, I thank you very much for your testimony,

Senator Craig, and for your leadership in energy policy, generally.

I thank you for your specific reference to the legislation we have

offered and its general concept, that our State Department must

have officials who are engaged in the geopolitics of energy. That

clearly includes Latin America, as well as the other areas that you

have referenced. We must urgently reorganize our own efforts, both

legislatively as well as administratively.

Senator Salazar, would you proceed with your statement.

STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR FROM

COLORADO

Senator SALAZAR. Thank you very much, Chairman Lugar, and

thank you to Senator Nelson and Senator Martinez for the bipartisan leadership that you bring to this committee and to this

United States Senate. I also very much enjoy working next to my

colleague, Senator Craig, on so many issues, from veterans’ affairs

to energy issues, and it’s always a pleasure to appear with him.

5

I come today to talk about energy security in Latin America, as

a member of the Energy Committee and as someone who has long

been involved in our struggle to understand the unsustainability of

our own energy policies and practices here at home.

My home State of Colorado is home to the National Renewable

Energy Laboratory, and my constituents care deeply about the

issue of energy independence. From rural communities in the eastern plains excited about new ethanol and wind technologies, to the

citizens who experienced the oil shale boom and bust cycle of the

late 1970s and early 1980s, they all care about the issue of energy

very deeply.

But I have also had the opportunity to think some about this relationship between foreign policy and energy security, and I appreciate the opportunity to briefly discuss some thoughts with the

committee today. I worry every day, like all of us, about the horrible facts that we face with our dependency crisis today.

America consumes one-quarter of the world’s oil supplies but has

just 3 percent of world oil reserves. Roughly 22 percent of the

world’s oil is in the hands of countries under United States or U.N.

sanctions. By some accounts, only 9 percent of the world’s oil is in

the hands of free countries.

As many of us speak about energy independence, about freeing

the United States from an ever-escalating, zero-sum competition

for resources with China and India, and of freeing the United

States from our dependency on oil-rich regimes that are sometimes

among the very worst actors on the international stage, this is a

very serious topic that needs to be addressed.

I am pleased to be a cosponsor of Senate bill 2435, Chairman

Lugar’s Energy Diplomacy and Security Act of 2006, which is also

cosponsored by Senator Biden and by Senator Craig. This legislation sees the urgent need to elevate energy issues on our diplomatic agenda, such as through an institutionalized Western

Hemisphere Crisis Response mechanism. Last year’s devastating

hurricanes and their aftermath made plain the need for this kind

of coordinated approach.

It also recognizes the opportunities inherent in this effort by calling for a Western Hemisphere Energy Cooperation Forum and Energy Industry Group. Those entities can help emphasize our shared

interests with Canada, Mexico, Central and South America.

Those shared interests should be obvious, but too often they are

obscured by political rhetoric, misperceptions, and old grievances.

As I have often discussed with my colleague, Senator Martinez, the

highly politicized and provocative policies of Venezuela’s Hugo Chavez spring to mind when one thinks about the energy issues in the

region, as does the Evo Morales decision to nationalize Bolivia’s oil

and gas fields.

In the Western Hemisphere, as elsewhere, control over energy resources can be translated into a certain type of political power, but

this is not the whole story. We have much to learn from our neighbors in the Western Hemisphere. We can learn from Brazil’s success with ethanol. We can learn from Canada’s experience with oil

sands.

And we in turn, as the United States, have much to offer to our

neighbors. By serving as a catalyst for greater cooperation and a

6

more strategic approach to energy security in the region, U.S. diplomacy can help energize the public and the private sectors to address some of the real problems, like inadequate electricity infrastructure investment in Latin America and other challenges that

they face that hamper regional growth and create instability.

An energized approach to regional energy diplomacy, one that is

respectful of the development needs of our neighbors, and one that

takes the long-term view, would be a real asset in our efforts to

build a more stable and a more prosperous world. I wish this committee all the best in its work on this issue, and I look forward to

helping you as an active partner in these endeavors.

I am reminded, in conclusion, of the Alliance for Progress which

President Kennedy formed in the 1960s. I spent about 4 months in

Central America back in the early 1980s, and the people of Central

America still remembered that Alliance for Progress that had been

formed.

So I think as we look at our world ahead in this new century,

that the relationship that we have with our neighbors to the south

and through all of Latin America is going to be very crucial for us

in our efforts to create a safer and more secure world. And I believe

that the energy coalitions that we could form with these countries

can create the foundation for the kind of alliance that we need to

have with all of Latin America.

I thank you, Mr. Chairman. I thank you, Senator Nelson and

Senator Martinez, for your attention this morning.

[The prepared statement of Senator Salazar follows:]

PREPARED STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR FROM COLORADO

First I want to thank Chairman Lugar, Senator Biden, and the rest of the committee for inviting me to testify today; it is always a pleasure to work with my colleagues on both sides of the aisle who share an interest in energy security issues.

And of course I always enjoy working alongside Senator Craig.

I come to today’s topic of Energy Security in Latin America as a member of the

Energy Committee, and as someone long involved in the struggle to address the

unsustainability of our own energy policies and practices here at home.

My home State of Colorado is home to the National Renewable Energy Laboratory, and my constituents care deeply about energy issues—from the rural communities excited about new ethanol and wind technologies to the citizens who experienced the oil shale boom and bust cycle of the late 1970s and early 1980s.

But I have also had the opportunity to think through the relationship between

foreign policy and energy security, and this opportunity to briefly join the discussions of the Foreign Relations Committee has helped to crystallize some of that

thinking.

I worry about the horrible, realistic facts that we face with our depending crisis

today. America consumes one-quarter of the world’s oil supplies but has just 3 percent of world oil reserves.

Roughly 22 percent of the world’s oil is in the hands of countries under United

States or United Nations sanctions. By some accounts, only 9 percent of the world’s

oil is in the hands of ‘‘free’’ countries.

I often speak, as do many others, of achieving ‘‘energy independence’’—of freeing

the United States from an ever-escalating, zero-sum competition for resources with

China and India, and of freeing the United States from our dependency on oil-rich

regimes that are, sometimes, among the very worst actors on the international

stage.

No one should mistake this as a quest for isolationism. Energy markets are global

markets, and that is not going to change. David Victor recently published an oped about the much-touted success of Brazil’s energy policies in the Houston Chronicle. He noted that Brazil’s success involved removing buffers from standing between

the people of Brazil and the reality of the international energy markets, thereby exposing an interesting paradox.

7

‘‘Even as Brazil has become self-sufficient it has also, ironically, become more dependent on world markets. That’s because the Brazilian Government has widely relaxed price controls so that the prices of fuels within the country are set to the

world market. Thus Brazilians see real world prices when they fill up at the pump,

and the decisions about which cars to buy and how much to drive reflect real costs

and benefits of the fuel they consume.’’

So I recognize that the quest for energy security is not about pulling up the drawbridges and hunkering down. I also recognize that moving toward a new energy

economy on a global scale promises not simply to remove obstacles and problems—

it promises to enable new partnerships and opportunities that can strengthen important international relationships, serve as catalysts for new economic growth and

development, and enmesh more and more of the world in a web of stabilizing relationships that are, literally and figuratively, empowering.

That is why I am so pleased to be a cosponsor of S. 2435, Chairman Lugar’s Energy Diplomacy and Security Act of 2006, which is also cosponsored by Senator

Biden and by Senator Craig.

This legislation sees the urgent need to elevate energy issues on our diplomatic

agenda—such as through an institutionalized Western Hemisphere Crisis Response

Mechanism. Last year’s devastating hurricanes, and their aftermath, made plain the

need for this kind of coordinated approach.

It also recognizes the opportunities inherent in this effort by calling for a Western

Hemisphere Energy Cooperation Forum and Energy Industry Group. Those entities

can help emphasize our shared interests with Canada, Mexico, Central and South

America.

Those shared interests should be obvious, but too often they are obscured by politicized rhetoric, misperceptions, and old grievances. The highly politicized and provocative policies of Venezuela’s Hugo Chavez spring to mind when one thinks about

energy issues in the region, as does Evo Morales’ decision to nationalize Bolivia’s

oil and gas fields. In the Western Hemisphere, as elsewhere, control over energy resources can be translated into a certain type of political power. But this is not the

whole story. We have much to learn from our neighbors in the Western Hemisphere.

We can learn from Brazil’s success with ethanol. We can learn from Canada’s experience with oil sands.

And we, in turn, have much to offer. By serving as a catalyst for greater cooperation and a more strategic approach to energy security in the region, U.S. diplomacy

can help energize the public and the private sectors to address some of the real

problems—like inadequate electricity infrastructure investment in Latin America—

that hamper regional growth.

An energized approach to regional energy diplomacy—one that is respectful of the

development needs of our neighbors, and one that takes the long-term view—would

be a real asset in our efforts to build a more stable and prosperous world. I wish

this committee all the best in its work on this issue, and look forward to being an

active partner of yours in these endeavors.

The CHAIRMAN. Well, thank you very much, Senator Salazar.

Thank you for that personal reference to your own experience in

the past, as well as the work you now do on committees that are

certainly allies of our efforts. This is not a jurisdictional problem

in the Senate. It’s one that offers opportunities for many committees, and we would like to play our role. We really thank both of

you for contributing to that through your presence this morning.

We have, as you both have witnessed, both of our Senators from

Florida. Before I excuse our two witnesses from the first panel, I

would like to ask those Senators if they have questions or comments they would like to make.

Senator Martinez.

STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR FROM

FLORIDA

Senator MARTINEZ. Mr. Chairman, thank you very much. I appreciate that, and I appreciate my colleagues being here on this important issue.

8

I couldn’t agree more with Senator Craig’s assertion that the importance of Latin America to our country sometimes is well understated. The fact is that it is a tremendous area of opportunity but

also one in which, if we do not care about it enough, we may also

encounter very great difficulties. I think there are great opportunities for cooperation. Obviously, political stability, rule of law, are

essential for us to have the kind of relationships that are positive

and that can be so fruitful, as we’ve seen with Mexico and Brazil.

On the other hand, when we have a disregard for human rights

and private property rights, then we see the catastrophic end

which can come, the example, obviously, Cuba. But also we see the

very, very negative trends in Venezuela, which are not good for

their own people or good for the relationships in the region, recently followed by Bolivia, what I think is unfortunate because it

has caused tremendous disruption to many of their strong partners

like Spain and other Latin American countries.

The example of Brazil is one that we should note because their

shift to ethanol, which has allowed them to achieve energy independence, a country that does not enjoy large fossil fuel deposits,

is something that I think we could take a great lesson from. What

they have done with flex fuel vehicles as well as extensive use of

ethanol is something that I think is a great lesson for us.

But thank you for holding this hearing, and thank you for the

opportunity to speak.

The CHAIRMAN. Thank you very much, Senator.

Senator Nelson.

STATEMENT OF HON. BILL NELSON, U.S. SENATOR FROM

FLORIDA

Senator NELSON. Mr. Chairman, I think it’s worth noting that

both the Senators have expressed concern about Hugo Chavez. And

isn’t it interesting that as he threatens to cut off his oil supply to

the United States, a threat that at this moment I think is a hollow

threat—simply because of his enormous investment and the fact

that the refineries on the Gulf Coast are the kind of refineries that

can process his grade of crude, and his infrastructure over the

United States, all the Citgo gas stations are part of PDVSA—so it’s

probably a hollow threat right now.

However, the fact that he is threatening to cut off what is, in effect, 12 percent of our daily consumption of oil in the United States

underscores the point that the two gentlemen have said: We ought

to be looking to alternative fuels, so that we’re not dependent on

that foreign supply of oil, his, Venezuela’s, or others.

And thank goodness that the Peruvian people suddenly said

enough of this foreign meddling in their internal politics and their

elections for president, and said, ‘‘We don’t want another country

to come in,’’ as Venezuela, through President Chavez, was trying

to do. So that gives us a glimmer of hope.

But both of these Senators have stated it well. The United States

foreign policy ought to be much more heavily involved in Latin

America, and one of the things that we can do indirectly is change

our dependence on foreign oil, so that we don’t have that daily dependence on Venezuelan oil.

Thank you.

9

The CHAIRMAN. Thank you, Senator Nelson. Let me just conclude

by mentioning that Senator Craig has been very active, and we

have tried to support his efforts. It is possible the Canadian firm,

Iogen, will make an investment in his State of Idaho to produce

cellulosic ethanol. This would be the first large production, and

would offer indications of how that process is going to go.

I think it’s a tremendously important investment. I know Senator Craig has addressed the Secretary of Energy, as I have, to try

to get through the regulations that seem to need to get written to

utilize the legislation Congress has already passed on loan guarantees. Do you have any up-to-date news, Senator Craig, that you can

share with the committee on how that proceeds?

Senator CRAIG. Well, Mr. Chairman, thank you very much. Obviously ethanol is becoming a substantial success story in this country. To be able to go to a greater biomass like cellulose—straw,

stubble, cornstalks and all of that—is a tremendous opportunity.

You’ve explained it well.

In the EPAC legislation of last year we produced the necessary

tools by which to help that happen. DOE and OMB are working

closely right now to get those regs out. I did meet with our new

OMB Director this week, and it was a most frank discussion because it’s kind of like one department pointing at the other, both

blaming each other. I said, ‘‘Blame game is overwith, guys. Go to

work and get it done. The timeline is important for us, for this

country, for this technology.’’

Mr. Portman agrees with that. I think he will move aggressively.

He tells me he will do so. He is focused on those particular regulations. It’s not just for Iogen and cellulosic development. It’s for a

broad range of other new technologies coming into the market that

we’re interested in, collectively. And so I think with your urging—

and I tremendously thank you for your support in that—and your

continued urging, I think they need to know that we’re very intent

on what they’re doing. I think they now understand that, and that

time is of the essence.

Thank you.

The CHAIRMAN. Well, thank you very much, Senator Craig. And

I would just add, I have been in touch with our Hoosier friend, Al

Hubbard, at the White House, so that he might be helpful

likewise——

Senator CRAIG. Good.

The CHAIRMAN [continuing]. Because the President himself has

spoken of the importance of cellulosic ethanol. I think our joint

feeling is, this is the time to get on with it. This is really an important and urgent situation. But I thank you for your additional testimony.

Senator CRAIG. Well, thank you.

The CHAIRMAN. We thank both of you for coming and look forward to continuing to visit with you.

The Chair would now like to call the second distinguished panel

that will appear before the committee this morning: the Honorable

Domingo Cavallo, chairman and CEO, DFC Associates, former Minister of the Economy for Argentina; Mr. Luis Giusti, senior adviser,

Center for Strategic and International Studies in Washington, DC;

Mr. Eduardo Pereira de Carvalho, president, Brazilian Association

10

of Sugar Cane and Ethanol Producers, Sao Paulo, Brazil; and the

Honorable David L. Goldwyn, president of Goldwyn International

Strategies, LLC, of Washington, DC. Gentlemen, we are delighted

to have you.

The CHAIRMAN. I am going to proceed now, as I indicated, with

my opening statement. When Senator Biden comes to our hearing,

we’ll recognize him of course for that same opportunity.

The Foreign Relations Committee meets today to continue our

examination of the ways in which energy is transforming geopolitics and threatening United States national security and economic prosperity. In previous hearings we have defined the severity of these threats, examined options for reducing United States

oil dependence, and explored in detail how energy is affecting our

relationships with other nations, including India, China, and the

Persian Gulf states.

Today we meet to look at energy security in the context of our

relations with Latin America. Mexico and Venezuela are two of

America’s top oil suppliers. Mexico has been a reliable energy partner. Venezuela, on the other hand, has made repeated threats to

suspend oil supplies, and President Hugo Chavez has tried to use

Venezuela’s oil wells to gain political advantages in this hemisphere. His inflammatory rhetoric and actions, coupled with the

precipitous nationalization of the natural gas sector by Bolivia, underscore the vulnerability of United States national security to the

political manipulation of energy.

The Government Accountability Office has just completed a draft

version of a report that I commissioned, that examines our country’s vulnerability to an oil supply disruption by Venezuela. The report says that a 6-month disruption that removed, and I quote, ‘‘all

or most Venezuelan oil from the world market,’’ could raise oil

prices by $11 per barrel and reduce U.S. GDP by $23 billion. Even

more startling is the possibility the Venezuelan Government might

follow through on its threat to shut down its wholly owned refinery

system in the United States, operated by Citgo.

Even without a government disruption of the flow of oil from

Venezuela, oil production in that country faces serious challenges

that could impact the global price of oil and the United States economy. The GAO report points to a severe deterioration in the ability

of Venezuela to meet its oil production targets in the foreseeable

future. This has happened because the Venezuelan oil industry has

allowed its technical and managerial expertise to deteriorate, and

has failed to invest sufficiently in the maintenance of its oil fields.

The GAO study reinforces the urgent need to move away from

reliance on volatile and sometimes hostile producers. According to

the GAO, administration officials told them, and I quote, that ‘‘they

do not have Venezuelan-specific contingency plans for a potential

loss of oil.’’ Instead, our response to a Venezuelan oil disruption

would rely on the Strategic Petroleum Reserve and diplomatic efforts to convince other oil producers to increase production.

In March, I introduced, as has been mentioned by our Senatorial

colleagues, the Energy Diplomacy and Security Act, S. 2435, which

would realign our diplomatic priorities to address the new geopolitics of energy security. It would dramatically enhance our international energy activities, and move our policy away from the outVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
11

dated notion that energy security is simply about finding more oil

and gas.

Although global in scope, a particular priority of this bill is to

stimulate partnerships in the Western Hemisphere. The high cost

of energy imports, vulnerability to supply shocks, and the increased

potential for conflict are concerns widely shared in the region.

The bill creates a standing ministerial-level Western Hemisphere

Energy Forum, modeled on the Energy Working Group of the Asia

Pacific Economic Cooperation Forum. The Energy Diplomacy and

Security Act also calls for international partnerships among energy

producers and consumers.

One area of energy cooperation that could be especially fruitful

for our hemisphere is ethanol. The expansion of ethanol capabilities

would improve the diversity and reliability of fuel supplies, create

jobs in many countries, and help reduce greenhouse gas emissions.

Brazil, long ago, saw the importance of ethanol and is now energy

self-sufficient. Brazil and the United States can work together to

improve our mutual energy security, and that of the region, by

spreading our shared expertise. The current protective tariff on

ethanol imports to the United States should be reconsidered in

light of this mutual interest in improving energy security.

This morning, we are joined by two distinguished panels, and we

have heard from the first, our colleagues Senator Larry Craig and

Senator Ken Salazar. Both, I would point out, are members of the

Energy Committee of the United States Senate and cosponsors of

the Energy Diplomacy and Security Act. We appreciate the benefit

of their energy expertise and their counsel as our committee continues to examine these issues, as does the Energy Committee.

On the second panel just before us, we will hear from four experts with deep experience in Western Hemisphere energy affairs.

We welcome Dr. Domingo Cavallo, the former Economy Minister of

Argentina, and currently chairman and CEO of DFC Associates;

Mr. Luis Giusti, the former president of Venezuela National Oil

Company, currently senior adviser at the Center for Strategic and

International Studies; Mr. Eduardo Carvalho, formerly the Deputy

Finance Minister of Brazil, currently the president of Brazil’s Association of Sugar Cane and Ethanol Producers; and Mr. David

Goldwyn, former Assistant Secretary of Energy for Policy and

International Affairs, and currently the president of Goldwyn International Strategies.

We thank each one of you for coming to see us this morning. Let

me say at the outset that your statements will be made a part of

the record in full. I would like to hear from all of you, and we ask

for you to summarize your comments within perhaps a 10-minute

period of time. We will be liberal in interpretation because our desire is to hear you and to make sure that all of you are heard, prior

to 11 o’clock, when we will have rollcall votes. So we will work our

way around that as best we can, with as much continuity as possible.

We thank you for your patience with our legislative system and

the duties that each one of us have, not only to hear distinguished

witnesses but to vote at least three times on our armed services authorization bill this morning. I’ll ask you to proceed in the order

12

that I have introduced you, and that would be first of all Mr.

Cavallo. Would you turn on your microphone, please.

STATEMENT OF HON. DOMINGO CAVALLO, CHAIRMAN AND

CEO, DFC ASSOCIATES, LLC, AND FORMER MINISTER OF

ECONOMY FOR ARGENTINA

Mr. CAVALLO. Chairman Lugar, Senator Martinez, Senator Nelson, Senator Chafee, thank you for this opportunity to discus with

you a situation that impacts energy security.

As paradoxical as it may sound, the ‘‘Bolivarian’’ policies that the

President of Venezuela describes as ‘‘integrationist’’ are destroying

the very valuable comparative advantage that the Southern Cone

of America had developed in the previous decade. Therefore, I predict that they will be self-defeating.

President Hugo Chavez’s rhetoric and actions not only create a

sense of vanishing security in the United States but also, through

their influence on President Evo Morales of Bolivia, have a concrete negative impact on several South American countries. Their

policies are destroying a very promising regional integration process that until recently benefited the energy-scarce economies of the

region.

To make things worse, Argentina, which during the 1990s, led

the regional energy integration process, has been trapped by misaligned energy prices in 2002. This has the effect of reinforcing the

disintegration process fostered by President Hugo Chavez.

Chile and Brazil are already suffering the impact of regional energy disintegration. For the time being, the Argentinean Government does not acknowledge the negative effect on its economy

because it has shifted the burden of the adjustment to Chile. Nevertheless, the country’s business community is already foreseeing

natural gas and electricity shortages ahead.

The sooner Argentina starts to work together with Chile and

Brazil to revive the energy integration process of the 1990s by reencouraging private investment in the energy sector, the better for

reversing this trend and for opening the eyes of President Evo Morales and making him conscious of the bad advice and false promises he receives from President Hugo Chavez.

During the 1990s, energy supplies increased in the Southern

Cone, thanks to significant investment in exploration and exploitation of hydrocarbons and in the generation, transmission, and

distribution of electricity and gas. Energy availability and energy

costs became an important source of comparative advantage for the

region vis-a-vis other regions of the world.

This competitive edge had its origin mainly in the availability of

reserves of natural gas in Bolivia and in Argentina, and acquired

a regional dimension thanks to the rapid process of cross border

energy integration. Availability of natural gas reserves strongly influences the cost of electricity generation because natural gas is the

main, primary input for the production of electricity.

In my written statement I provide a description, with prices and

quantities, of this very nice process of energy integration and the

good results that it generated.

This favorable integration process began to change when, in the

aftermath of the Argentine crisis in 2002, the Argentinean GovernVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
13

ment decided to impose a price freeze on natural gas tariffs at the

‘‘pesified’’ precrisis level. This, which would have been already

problematic in the absence of any other developments, happened at

the time when the international prices of energy began to surge.

In practice, this implied that the prices of natural gas in Argentina fell to one-third of its precrisis level at the same time when

the international price of energy more than doubled. The consequences of these policies were to foster domestic demand and to

discourage domestic supply.

In the year 2005, Argentina already imported again 5 million

cubic meters a day from Bolivia, and had to curtail exports to

Chile. To this date, the most optimistic forecasts of energy production in Argentina predict that it will stop being a net exporter of

gas by the year 2010, but most likely at the current rates of consumption Argentina will become a net importer earlier.

This new situation generated the surge in demand for Bolivian

gas. The forecast predicts the level of demand of 68 million cubic

meters per day in 2010, compared to 31 million cubic meters per

day in 2005. This is because the entire region will become dependent on Bolivian gas. Peru, which has been investing in exploring

and exploiting natural gas, intelligently chose to develop a facility

for exporting LNG via the Pacific, so at this point it can only be

expected to be a marginal source of supply for its neighbors via

cross-border gas ducts.

The increased demand for its natural gas reserves could have allowed Bolivia to increase exports at more advantageous prices, if

it had chosen to create the correct market incentives for further exploration and exploitation of its existing untapped reserves.

Unfortunately, President Evo Morales, following the advice of

President Hugo Chavez, has chosen a policy path that will likely

have the opposite effect. By breaking its contractual agreement

with the private companies that had invested in exploration and

exploitation of natural gas in the last decade, it has increased the

uncertainty faced by private sector producers, and will likely generate disinvestment in the sector.

The combination of these policy choices in Argentina and Bolivia

have had the effect of restricting supply and lethally harming the

comparative advantage that had evolved in the previous years.

The advocates of these new energy policies in Latin America

argue that Chavez’s Venezuela will become the main regional supplier of natural gas at low prices and the supplier of capital and

technology for Yacimientos Petroliferos Fiscales Bolivianos to expand its natural gas production. This is not warranted by the recent developments by Venezuela’s own oil and gas production.

Oil production that had reached 3.5 million barrels per day in

1998 has dropped to 2.6 in 2005, and natural gas production

dropped from 89 million cubic meters per day to 77 in the same period. This is not surprising because Venezuela under Chavez, rather than increasing human capital investment in the state-owned

energy company, PDVSA, and creating incentive for private sector

risk-taking, has done exactly the opposite.

In practice, the only state-owned company that could actually

help Yacimientos Petroliferos Fiscales Bolivianos become an efficient energy producer is the Brazilian Petrobras, which has shown

14

1 I would like to acknowledge the comments of Pablo Givogri, Raul Garcia, and Carlos Bastos.

to be efficient and visionary. During the same period in which Venezuela reduced its energy production, Brazil, which is significantly

poorer in nonrenewable energy resources, has increased its oil production from 1 million barrels per day to 1.5 million, and its natural gas production from 17 million cubic meters per day to 30 million.

But the Bolivian strategy, instead of choosing Petrobras as its

partner, so far has made it its main victim. If, as it has already

been announced by President Lula, Brazil encourages more investment in exploration of its own offshore gas reserves and succeeds

in becoming self-sufficient in natural gas by 2008, or invests in regasification plants to access the LNG market, Bolivia may lose its

main client. By then, President Evo Morales will realize that the

advice of President Hugo Chavez was lethal.

Paradoxically, its only alternative for the future will be to encourage the production and exportation of LNG, as former Presidents Quiroga and Sanchez de Lozada had envisaged. Of course,

that solution will require creating very favorable conditions for

international private investment, because Bolivia will have neither

the human nor the financial resources for such an endeavor.

[The prepared statement of Mr. Cavallo follows:]

PREPARED STATEMENT OF HON. DOMINGO CAVALLO, CHAIRMAN AND CEO, DFC

ASSOCIATES, LLC, FORMER MINISTER OF ECONOMY FOR ARGENTINA

Chairman Lugar, Senator Biden and members of the committee, thank you for

this opportunity to discuss with you a situation that impacts hemispheric energy security.

As paradoxical as it may sound, the ‘‘Bolivarian’’ policies that the President of

Venezuela describes as ‘‘integrationist’’ are destroying the very valuable comparative

advantage that the Southern Cone of America developed in the last decade.1

President Hugo Chavez’s rhetoric and actions not only create a sense of energy

insecurity in the United States, but also, through their influence on President Evo

Morales of Bolivia, have had a negative impact on several other South American

countries. Their policies are destroying a very promising regional integration process

that until recently benefited the energy scarce economies of the region. To make

things worse, Argentina, which during the 1990s led the regional energy integration

process, has been trapped by misaligned energy prices since 2002. This has the effect of reinforcing the disintegration process fostered by President Hugo Chavez.

Chile and Brazil are already suffering from the impact of regional energy disintegration. For the time being, the Argentinean Government does not acknowledge the

negative effect on its economy because it has shifted the burden of the adjustment

to Chile. Nevertheless the country’s business community is already foreseeing natural gas and electricity shortages. The sooner Argentina starts to work together

with Chile and Brazil to revive the energy integration process of the 1990s by reencouraging private investment in the energy sector, the better the chances are for

reversing this trend and for making President Evo Morales aware of the bad advice

and false promises he receives from President Hugo Chavez.

THE REGIONAL ENERGY INTEGRATION PROCESS OF THE 1990S

During the 1990s, energy supply increased in the Southern Cone, thanks to significant investment in exploration and exploitation of hydrocarbons and in the generation, transmission, and distribution of electricity and gas. Energy availability

and energy costs became an important source of comparative advantage for the region vis-a-vis other regions of the world. This competitive edge had its origin mainly

in the availability of reserves of natural gas in Bolivia and in Argentina, and acquired a regional dimension thanks to the rapid process of cross border energy integration. Availability of natural gas reserves strongly influences the cost of electricity

15

2Gas interconnections reached around 7,000 kilometers in extension connecting Argentina,

Bolivia, Brazil, Chile, and Uruguay. 3The government intervention in the gas market deepened in 2004 when gas prices were segmented by end-user category and activity. After the 2002 devaluation and domestic rates

‘‘pesification,’’ gas prices were split between the domestic and the external market. Until such

date, gas prices for both markets had evolved with virtually no noticeable differences among

them. The government’s agreement with producers in 2004 determined a further split in gas

prices within the domestic market prices. Such domestic price split distinguishes the captive distributors’ market (residential, commercial users)—which maintains the same rate—from the deregulated clients market (mostly large users buying directly from the producers). 4 Imported volumes decreased significantly during 1999—1.1 million m3/day compared to 1998

volumes—4.7 million m3/day. 5 Exports to Chile from Argentina increased from 1.9 MMm3/day in 1997 to 12.0 MMm3/day

in 2000. 6The base wellhead price of the gas to be exported through Bolivia to Brazil (BTB) pipeline

was U.S. $0.95 per million btu for a volume from 8 to 16 MMm3/day. For additional volumes

up to 30.08 MMm3/day the established base price is U.S. S1.20 per million of btu. These prices

are adjusted through a formula related to the price of an international fuel oil basket.

generation because natural gas is the primary input for the production of electricity.2

This process was guided by several energy integration protocols signed by Brazil,

Argentina, Uruguay, Paraguay, Chile, and Bolivia. Each country was committed to

restructuring its energy sector according to a common vision and common regulatory

principles. These were (a) promotion of competition, (b) attraction of private capital,

(c) regulation of monopolist activities, (d) open access to transport facilities, (e) economic criteria for price setting, (f) independent regulatory authorities, and (g) encouraging the participation of many international actors.

This very promising process of regional integration is now in crisis. The policies

of price freezes for natural gas and electricity in Argentina after the devaluation of

2002 significantly reduced investment carried out by the private sector in the energy

sector. 3 More recently, as the consequence of nationalization of hydrocarbons in Bolivia, natural gas producers have announced the suspension of new investments. In

summary, these recent policy decisions by the two key suppliers in the energy matrix of the region are destroying the natural comparative advantage that had been

developed in the previous decade.

THE EFFECT OF PRIVATE INVESTMENT IN THE ENERGY SECTOR OF ARGENTINA

In the early 1990s, Argentina organized the energy sector in line with the principles of the signed integration protocols and, in a short period of time, became a

net exporter of natural gas to the region. The production of natural gas in Argentina

increased from 62 to 98 million m3/day between 1995 and 2000. Thanks to this impressive increase in supply, Argentina stopped importing natural gas from Bolivia

in 2000 4 and began exporting significant volumes to gas-strapped Chile (since

1997).5 The market wellhead prices paid to natural gas producers that created the

incentives for exploration and extraction of natural gas in Argentina was around

$1.4 per mmbtu in the Neuquen basin. The City Gate prices that include transportation costs, ranged from $2.0 per mmbtu in the Greater Buenos Aires Area to $2.8

per mmbtu in Santiago. These prices were roughly half of the price of natural gas

in the U.S. market. This price differential exemplifies the extent of the aforementioned comparative advantage in natural gas that had emerged in the Southern

Cone.

THE EFFECT OF PRIVATE SECTOR INVESTMENT IN THE ENERGY SECTOR OF BOLIVIA

Bolivia, which as a consequence of expansion of natural gas production in Argentina, was losing its only foreign client, began negotiating with Brazil the export of

volumes of natural gas that were four times bigger than those that it had been exporting to Argentina. At the end of 2001, the negotiated wellhead price of U.S. $1.2

per mmbtu in the Tarija basin 6 translated into a U.S. $3.0 per mmbtu in the San

Pablo City gate. This was slightly higher than prices paid in Argentina and Chile

but still substantially lower than prices in the United States. The exports of natural

gas from Bolivia to Brazil reached 22 million m3/day in 2005. Production in Bolivia

increased from 9 to 31 million m3/day between 2000 and 2005.

POLICY REVERSAL IN ARGENTINA

These favorable integration forces began to change when, in the aftermath of the

Argentine crisis in 2002, the Argentinean Government decided to impose a price

16

7Wellhead gas prices for the distribution market were indirectly frozen as a consequence of

suspending the pass through gas price mechanisms to end users rates—contemplated in the licenses awarded by the Government of Argentina. 8Furthermore, only 15 trillion of cubic feet (TCF) gas reserves are not associated with oil and

could be develop as an additional source of natural gas for exports. Of these, 11 TCF are already

committed to a LNG project. So, Hugo Chavez is offering gas that Venezuela actually will not

have available.

freeze on natural gas tariffs at the ‘‘pesified’’ precrisis level.7 This, which would

have been already problematic in the absence of any other developments, happened

at the same time when the international prices of energy began to surge. The prices

of natural gas in Argentina fell to one-third of its precrisis level at the same time

that the international prices of energy more than doubled. The consequence of this

policy was an increase in domestic demand and a decrease in domestic supply. In

the year 2005, Argentina imported 5 million m3/day from Bolivia, and had to curtail

exports to Chile. The most optimistic forecasts of energy production in Argentina

predict that it will stop being a net exporter of gas by the year 2010. But most likely, at the current rates of consumption, Argentina will become a net importer earlier.

INCREASED DEMAND FOR BOLIVIAN NATURAL GAS

This new situation generated a surge in demand for Bolivian gas. The forecasts

predict a level of demand of 68 millions m3 per day in 2010 compared to 31 million m3 per day in 2005. This is because the entire region will become dependent on Bolivian gas. Peru, which has been investing in exploration and exploitation of natural

gas, intelligently chose to develop facilities for exporting LNG via the Pacific, so at

this point it can only be expected to be a marginal source of supply for its neighbors

via cross border gas ducts.

The increased demand for its natural gas reserves could have allowed Bolivia to

increase exports at more advantageous prices, if it had chosen to create the correct

market incentives for further exploration and exploitation of its existing untapped

reserves. Unfortunately, President Evo Morales, following the advice of President

Hugo Chavez, has chosen a policy path that will likely have the opposite effects. By

breaking its contractual agreements with the private companies that had invested

in exploration and exploitation of natural gas in the last decade it has increased the

uncertainty faced by private sector producers and will likely generate disinvestment

in the sector.

EXPENSIVE CONSEQUENCES OF POLICIES IN BOLIVIA AND ARGENTINA

The combination of these policy choices in Argentina and Bolivia have had the effect of restricting supply and lethally harming the comparative advantage that had

evolved in the previous years. Once these policies have worked out all their effects,

the costs of energy for industrial consumers of natural gas and electricity power

plants in the main industrial areas of the region will be close to the levels paid by

their counterparts in the United States. The reason is that natural gas users in

these areas will have to purchase LNG from foreign markets at international prices

which are roughly equivalent to alternative sources of energy like fuel and diesel

oil.

VENEZUELA’S FALSE PROMISES

The advocates of these new energy policies in Latin America argue that Chavez’s

Venezuela will become the main regional supplier of natural gas at low prices and

the supplier of capital and technology for YPFB (Yacimientos Petroliferos Fiscales

Bolivianos) to expand its natural gas production. This is not warranted by the recent developments of Venezuela’s own oil and gas production. Oil production that

had reached 3.5 million of barrels per day in 1998 has dropped to 2.6 in 2005, and

natural gas production dropped from 89 millions m3 per day to 77 in the same period. 8 This is not surprising because Venezuela, under Chavez, rather than increasing human capital investment in the state-owned energy company, PDVSA, and creating incentives for private sector risk taking, has done exactly the opposite.

PETROBRAS COULD HAVE HELPED YPFB

In practice, the only state-owned company that could actually help YPFB become

an efficient energy producer is the Brazilian Petrobras, which has shown to be efficient and visionary. During the same period in which Venezuela reduced its energy

production, Brazil, which is significantly poorer in nonrenewable energy resources,

has increased its oil production from 1 million barrels per day to 1.5 million and

17

its natural gas production from 17 millions m3 per day to 30. But the Bolivian strategy, instead of choosing Petrobras as its partner, so far has made it the main victim.

IN THE MEDIUM TERM BOLIVIA WILL SUFFER

If, as it has already been announced by President Lula da Silva, Brazil encourages more investment in exploration of its own offshore gas reserves and succeeds

in becoming self-sufficient in natural gas by 2008, or invests in regasification plants

to access the LNG market, Bolivia may lose its main client. By then, President Evo

Morales will realize that the advice of President Hugo Chavez was lethal. Paradoxically its only alternatives for the future will be to encourage the production and

export of LNG as former Presidents Quiroga and Sanchez de Lozada had envisaged.

Of course, that solution will require creating very favorable conditions for international private investment, because Bolivia will have neither the human nor the

financial resources for such an endeavor.

WELLHEAD NATURAL GAS PRICES IN THE SOUTHERN CONE

[US$/MMBTU]

At Wellhead

Precrisis—

prices before

devaluation

(2001)

Segmented

markets— 2008

Tarija Basin (Bolivia)

Exports to Brazil ..................................................................................................................... 1,23 3,00

Exports to Argentina ............................................................................................................... — 3,00

Noroeste Basin (Argentina)

Residential and Small Users (commercial, small industries) ............................................... 1,21 0,40

Other Users (CNG and users with consumption >300 m3/day) ............................................ 1,21 0,98

Deregulated Market (large users) .......................................................................................... 1,18 1,51

Exports .................................................................................................................................... 1,26 1,89

Import from Bolivia at Border ................................................................................................ — 3,24

Neuquina Basin (Argentina)

Residential and Small Users (commercial, small industries) ............................................... 1,44 0,48

Other Users (CNG and users with consumption >300 m3/day) ............................................ 1,44 1,04

Deregulated Market (large users) .......................................................................................... 1,39 1,64

Exports .................................................................................................................................... 1,48 2,05

Austral Basin (Argentina)

Residential and Small Users (commercial, small industries) ............................................... 1,03 0,34

Other Users (CNG and users with consumption >300 m3/day) ............................................ 1,03 0,87

Deregulated Market (large users) .......................................................................................... 0,98 1,45

Exports .................................................................................................................................... 0,96 1,81

Santos Basin (Brazil) 1,58 3,60

CITY GATE NATURAL GAS PRICES IN THE SOUTHERN CONE

[US$/MMBTU]

At City Gates

Precrisis—

prices before

devaluation

(2001)

Segmented

markets— 2006

Greater Buenos Aires (GBA)

By TGN System

Residential and Small Users (commercial, small industries) ............................................... 1,96 0,65

Other Users (CNG and users with consumption >300 m3/day) ............................................ 1,96 2,07

Deregulated Market (large users) .......................................................................................... 1,93 2,63

Import from Bolivia ................................................................................................................ — 4,45

By San Martin Pipeline

Residential and Small Users (commercial, small industries) ............................................... 1,97 0,66

Other Users (CNG and users with consumption >300 m3/day) ............................................ 1,97 2,11

Deregulated Market (large users) .......................................................................................... 1,92 2,76

San Pablo

Gas from Bolivia .............................................................................................................................. 3,02 4,82

Gas from Domestic Production ........................................................................................................ 1,89 3,91

Residential, Commercial, Industries ............................................................................................... 3,02 4,82

Power Generation ............................................................................................................................. 2,59 3,92

18

CITY GATE NATURAL GAS PRICES IN THE SOUTHERN CONE—Continued

[US$/MMBTU]

At City Gates

Precrisis—

prices before

devaluation

(2001)

Segmented

markets— 2006

Santiago

Gas from Neuquina Basin (all users) ............................................................................................. 2,81 3,44

The CHAIRMAN. Thank you very much, Mr. Cavallo.

I would like to proceed now with our second witness, Mr. Giusti.

STATEMENT OF LUIS E. GIUSTI, SENIOR ADVISOR, CENTER

FOR STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, DC

Mr. GIUSTI. Thank you very much, Mr. Chairman. It’s an honor

to share the floor with you and the rest of your colleagues.

I’d like to start with a brief backdrop. The discussion about oil

independence has taken center stage in this country, but that independence, understood as self-sufficiency, is not the real issue, not

only because it’s not feasible but because the business of oil is global. The high prices of recent times result not from the large imports

of oil into the United States, but from the fundamentals and perceptions of the global oil market.

Today, crude oil inventories in OECD countries are at a 20-year

high, and global inventories are at an 8-year high. The futures

market has been in ‘‘contango’’ since October 2004, meaning that

future prices are higher than pump prices, which has triggered sustained stockpiling. On the other hand, growth in demand for oil has

been slowing down, 3 million barrels a day in 2004, 1 million barrels a day in 2005, and so far this year about 800,000 barrels a

day, indicating that the high price is having an effect on consumption.

Then why are prices so high? The most important factor is the

erosion of spare capacity. Having been large in the past, 15 million

barrels a day in 1985, 9 million barrels a day in 1991, and 8 million barrels a day still in 2002, it is now down to 2 million barrels

a day.

But can we expect the future development of new large spare oil

production capacity for us to feel comfortable again? Most likely the

answer is no, because with the exception of Saudi Arabia, nobody

is planning to build it. The spare capacity enjoyed in the past was

not planned for. It resulted from an overestimation of long-run demand. Inadvertently, we developed a comfort cushion.

Perhaps now the world will have to develop a new perspective of

the meaning of inventories. The director of the International Energy Agency, Claude Mandil, has gone to great length and efforts

to convey the message that strategic stocks of OECD are enough

to cover 18 months of an eventual absence of Iranian exports, 2.7

million barrels a day, but to little avail.

The conclusion is that the oil market is global, and oil is generally fungible. For that reason, in analyzing supply stability, it

would be shortsighted to look at oil flows from Latin America into

this country in isolation, or for that matter any other oil imports

19

from other regions or countries. The United States will continue to

be a large importer of oil, and those imports can only increase. Stability and security will always depend on the global fundamentals,

irrespective of where the imported oil comes from.

Having said that, I’m going to address the three points that you

asked me to comment about in your letter. The first one has to do

with reliability of supplies from Venezuela, a point that has been

already mentioned several times this morning.

Let’s start with capacity. Currently Venezuela’s production capacity stands at 2.6 million barrels a day, but since that number

includes 1.1 million barrels a day being produced by the private

companies that operate the joint ventures, it can be deduced that

the PDVSA capacity is 1.5 million barrels a day, and that represents a severe drop of 1.8 million barrels a day since this government, the current government, has been in office. This is a result

of poor management, weak technical capacity, and weak execution

capacity, mostly deriving from the dismissal of 18,000 workers.

However, and I think this is a very important point, despite this

diminished capacity during the 7 years of the current Venezuelan

Government, oil from that country continues to flow to the United

States at a rate of about 1.4 to 1.5 million barrels a day, in line

with the tradition of many years of trade. I would argue that despite the aggressive political discourse against the U.S. Government, oil exports to this country have a high priority in the slate

of Venezuelan sales.

As part of the political agenda, President Chavez continuously

threatens the U.S. Government with suspending exports to the

United States, and has indicated that those exports would most

likely be diverted to China. This was mentioned by your colleague,

Senator Nelson.

The 1.5 million barrels a day of Venezuelan oil imports into this

country are the result of many dozens of contracts with clients in

the United States that have been buying Venezuelan oil for decades. Many of those clients have refineries capable of processing

sour and heavy feedstock, which constitutes the largest portion of

Venezuelan oil.

The continuity of those exports to the United States is of utmost

importance for Venezuela, despite anything that is contained within the political discourse of the Venezuelan Government. Exporting

that oil to China is practically impossible, because the refining network in China is mostly primitive and incapable of receiving those

volumes of sour and heavy crude.

It would take several years of bilateral, coordinated joint planning and investment to turn such an initiative into reality, and

this, by the way, is not happening. And it would be absurd to build

this capacity to export to China at the expense of the most profitable option for those exports, which is none other than the United

States. It would take new oil to be developed for this initiative.

Nevertheless, in the unlikely event of a suspension of those shipments, Venezuela would have to sell the crude at other destinations, and oil being generally fungible, oil from other places would

come to the United States shores. It would naturally generate

logistical complications and at least temporarily increase costs, but

20

eventually the necessary adjustments would take place and everything would return to normalcy.

It is true that imports of Venezuelan oil are very important to

the United States, but it is a fact that Venezuela needs badly its

oil exports to the United States, and especially the current government, in order to finance its huge expenses.

Finally, the threat of a shutdown of Citgo refineries occasionally

included in the political speech of the Venezuelan Government is

empty talk. Citgo operates through a network of some 14,000 retail

outlets, but it does not own any of them. It only owns refineries,

terminals, and pipelines. An arbitrary shutdown of Citgo refineries

would imply breaching thousands of contracts without justification,

posing an unmanageable and costly legal situation for Venezuela.

I would argue that the only risk represented by the present Venezuelan administration concerning oil supply to the United States

is not current, it’s not of today. It relates to frustrated expectations

of building up new barrels in the future. This is a direct consequence of the diminished operational and financial capacity of

the national oil corporation. In addition, plans and projects of expansion coming from private international companies operating in

Venezuela are losing momentum as a result of the frequent

changes of rules and the difficult surrounding environment these

companies have to face, so a significant increase of that country’s

production is unlikely.

The second topic you assigned to me was resource nationalism.

In the history of oil we will find a secular inclination of oil countries to get a larger share of the revenues. However, attracting the

capital required has implied moderating that appetite in order to

allow the oil companies to assume calculated risks and make an attractive profit.

The very high prices that we are seeing now have generated

huge revenues, leading every oil country to consider ways of capturing a larger portion of the windfalls. Even the United States

and the United Kingdom and Canada have discussed the idea of

higher or new taxes. Despite the somewhat questionable justification of some actions aimed at changing taxes and contracts, the initiatives of seeking to renegotiate terms are understandable and are

within the realm of manageable and acceptable. As a reference, in

no country is resource nationalism stronger than in Saudi Arabia,

yet it is perhaps the most reliable supplier in the world.

What is certainly unacceptable is to take actions like the recent

unilateral expropriation of the hydrocarbons industry in Bolivia.

The only other case in which we have seen abusive actions, never

to that degree, of course, is in Venezuela.

In the case of Ecuador, for example, the government has insisted

that the seizing by the government of Block 15 of Oxy should not

be interpreted as equivalent to the Bolivian case. They argue that

the affair is purely legal and related to an alleged violation of contract by the international oil company. Well, time will soon tell

what is the case.

And the last point, and I’ll try to be brief on this, that you assigned me was, what about opportunities for increased United

States and Latin American cooperation?

21

And I would like to remind you that there was a spinoff of the

Summit of the Americas in 1994. It was called Energy Integration

of the Americas. A lot of work was carried out to try to identify

barriers for a larger integration, like political hurdles, tariffs,

quotas, logistics, and eventually undertake the necessary forums,

with the ultimate objective of having a seamless energy platform

that would benefit all countries and in addition facilitate and improve commercial activities.

We could say a lot more about this, but there is no time here.

We can discuss as we go along, but my view is that salvaging the

initiative of 1994 could be an excellent way of having a fresh start

that should be in every country’s best interest.

However, I am sure you will agree with me in stating that the

dialog cannot compromise the basic principles of business, a market-based approach, public-private cooperation, respect for property

rights and contracts, and the right balance among policy, regulations, and operations and business. Although this would probably

mean that we would have a few casualties, because maybe some

would not like to come to discuss under those terms, countries such

as Brazil, Colombia, Chile, Peru, Trinidad-Tobago, and even Ecuador, could lead the way, together with the United States to the

north, of course. Their leaders are thinking creatively, and have instituted effective measures to develop their respective resources in

productive ways. The presence of Canada would certainly enhance

the initiative.

There is no silver bullet here, but hard work along the described

lines could translate into a more balanced and reliable regional energy network. This, by the way, would be entirely consistent with

section No. 4 of the EDSA, Energy Diplomacy and Security Act,

which refers to strategic energy partnerships.

Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Giusti follows:]

PREPARED STATEMENT OF LUIS E. GIUSTI, SENIOR ADVISER, CENTER FOR STRATEGIC

AND INTERNATIONAL STUDIES, WASHINGTON, DC

I. BACKDROP

As a result of the tightness of the oil market during the last 4 years, the world

as a whole, and certainly the United States, has been affected by extremely high

oil prices. This has a detrimental effect on our day to day, reflected by the prices

we pay for gasoline and diesel at the pump, as well as heating oil and gas for our

homes.

As a result, the discussion about oil independence has taken center stage in this

country. But that independence (understood as self-sufficiency) is not the real issue.

Not only because it is not feasible, but because the business of oil is global. The

high prices of recent times result not from the large imports of oil into the United

States, but from the fundamentals and perceptions of the global oil market.

It would take much longer than the time assigned to this testimony, to explain

why and how we got to where we are today. However, it is worthwhile to point out

briefly that today crude oil inventories in OECD are at a 20-year high and global

inventories are at an 8-year high. The futures market has been in ‘‘contango’’ since

October 2004 (meaning that future prices are higher than prompt prices), which has

triggered sustained stockpiling. On the other hand, growth in demand for oil has

been slowing down (3 million BD in 2004, 1 million BD in 2005, and 800,000 BD

in the first half of 2006), indicating that the price is having an effect on consumption. Then, why are prices so high? The most important factor is the erosion of spare

capacity. Having been large in the past (15 million BD in 1985, 9 million BD in

1991 and 8 million BD in 2002), it is now down to 2 million BD. A second factor

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is the tightness of the refining network in a time of strong demand for high quality

refined products, which is driving prices up along the whole supply chain.

But, can we expect the future development of new large spare oil production capacity for us to feel comfortable again? Most likely the answer is ‘‘no,’’ because with

the exception of Saudi Arabia, nobody is planning to build it. The spare capacity

enjoyed in the past was not planned for. It resulted from an overestimation of longrun demand. Inadvertently we developed a ‘‘comfort cushion.’’ Perhaps the world

will have to develop a new perspective of the meaning of inventories. Currently,

global oil stock cover runs at 72 days (commercial stocks), which should be a strong

reason for comfort. Maybe a somewhat larger stock cover will replace the absence

of spare capacity. Additionally, the director of the IEA has gone to great length and

efforts to convey the message that strategic stocks of OECD are enough to cover 18

months of an eventual absence of Iranian exports (2.7 million BD), but to little

avail. In the event of a major disruption, how much a difference would it make between having say 76 days or 71 days of stock cover? That difference would be immaterial, but it can mark a difference of $4–$5 per barrel in today’s oil market.

The conclusion is that the oil market is global and oil is generally fungible. For

that reason, in analyzing supply stability it would be shortsighted to look at oil

flows from Latin America into this country in isolation, or for that matter any other

oil imports from other regions or countries. The United States will continue to be

a large importer of oil and those imports can only increase. Stability and security

will always depend on the global fundamentals, irrespective of where the imported

oil comes from.

II. A BRIEF LOOK AT OIL AND GAS IN LATIN AMERICA

Following is a summarized description of the characteristics of the most important

countries in connection with oil and gas in Latin America.

Chile

Chile has meager oil reserves of 150 million barrels, and its oil production is

18,400 BD, while its consumption is 225,000 BD, the deficit being covered by imports, mainly from Argentina and Brazil, but also from Nigeria and Angola.

Colombia

In 1999, oil production in Colombia stood at 820,000 barrels per day. However,

as a result of lack of investment production, has fallen to 530,000 BD and the country faces a future sustained decline. Proven oil reserves have fallen to a very modest

1.6 billion barrels and proven gas reserves are scarcely 4 trillion cubic feet. Fears

have risen that the country will become a net importer by 2010. On the other hand,

more than 80 percent of Colombian territory remains unexplored and its basins hold

a large hydrocarbons’ potential (possible reserves have been estimated at 47 billion

barrels), but for many years the country failed to attract new investment due to the

poor internal security environment, coupled with unfavorable energy investment

terms. Nevertheless, during the last 2 years the Colombian Government has turned

the trend around by putting in place a much more attractive framework for investments in exploration and production. The most important reform was the creation

of a regulatory agency (Agencia Nacional de Hidrocarburos), in charge of regulation

and administration. A large portion of Ecopetrol’s portfolio was carved out and assigned to the agency. This new framework plus a more attractive model for investment, in addition to the much improved political stability and security resulting

from the effective policies of President Uribe, have oil companies flocking to the

country. It should be expected that very soon Colombia would become a producer

of growing importance in the region and perhaps an important oil exporter.

Peru

Peru’s oil reserves are very small at 253 million barrels and it barely produces

100,000 BD, while it consumes 160,000 BD. But it is rich in free gas reserves, with

some 16 Tcf. These reserves will be tapped by the Camisea project, the most ambitious project in the history of Peru. Consisting of the extraction, transportation, and

distribution of natural gas, this project is a fundamental factor of Peru’s energy

strategy. By tapping into a reliable, low-cost energy source, Camisea will not only

provide direct benefits to electricity end-users, but it will also improve the country’s

competitiveness and increase its technical capacity. The project will help alleviate

Peru’s trade deficit by converting the country from energy importer into an exporter

by 2007. Direct investment in the project will be around $2 billion. Part of the gas

volume will go as LNG to the North American west coast.

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Trinidad—Tobago

Unlike the rest of the islands in the Caribbean basin, Trinidad/Tobago is hydrocarbon rich and is the largest producer of oil and natural gas in the region. Oil reserves are a modest 1 billion barrels and oil production is 130,000 BD, but gas

reserves are 26 Tcf and current gas production is 2,700 MMcfd. Since the 1970s,

Trinidad/Tobago has embarked in several successful initiatives that have expanded

its local gas industry as part of a government strategy to promote industrialization.

Its large natural gas reserves have enabled the country to become the most industrialized in the Caribbean. The energy sector represents 72 percent of total exports,

and the country’s political stability and attractive geology, as well as its proximity

to the high demand United States, Latin America, and Europe, have supported high

levels of foreign direct investment. The country has established a large LNG infrastructure and today has three liquefaction trains with 10 mtpa, plus a fourth one

about to come on stream. Immediate plans contemplate building two additional

trains. Together with Nigeria, Trinidad/Tobago dominate the Atlantic LNG market.

Brazil

Brazil has a population of 175 million, fifth largest in the world and its economy

of $452 billion is the 13th in the world. After years of efforts in exploration, mostly

offshore, Brazil has reached an oil production of 2.0 million BD. However, its sustained economic growth has increased oil demand to a level of 2.2 million BD, with

the deficit covered by imports from Africa, the Middle East, and minor volumes from

Argentina. Great credit for the large increase in oil production goes to its national

oil company Petrobras, which has become a world class oil company and a leader

in deep water drilling. In recent years, the company has gone international in E&P.

Current oil reserves stand at 11 billion barrels. Its gas reserves are a modest 8.8

Tcf, with production of 1,100 MMcfd being less than the 2,300 MMcfd of demand.

The deficit is covered by imports from Bolivia and Argentina.

The recent actions by the Bolivian Government cast shadows over the longer term

gas trading to Brazil, a country that will very likely be looking for alternatives, including LNG imports. An additional highlight is that the country is the world’s largest producer and exporter of ethanol. Over half of all cars in the country are flex

fuel, meaning they can run on 100 percent ethanol or on an ethanol-gasoline mixture. Ethanol in Brazil is made from sugarcane, which prospers in the country’s

tropical climate. The current high prices of oil, natural gas, and hydrocarbon products have prompted the government to mandate all gasoline for domestic consumption to contain 25 percent ethanol. Also, Brazil has plans for sizable nuclear developments. Two plants are already in operation and a third one is under construction.

There is a large accumulation of stranded gas in the north, in a place called Urucu.

The hydrocarbons industry in Brazil is well organized, with a strong institutional

framework, including a regulatory agency. Practically every big international oil

company has acreage and/or other interests in the country. This has been crucial

for supplying the needs of a very large country, although great challenges lay ahead.

Argentina

Argentina has oil reserves of 2.7 billion barrels and it produces 700,000 BD, while

oil consumption is 400,000 BD (41 percent of primary needs). Oil exports are important for the country, but marginal in a worldwide context. They essentially go to

Brazil and Chile. The country is long in natural gas, with reserves of 21 Tcf. It produces some 4,400 MMcfd, enough to supply its domestic needs (45 percent of primary energy) and to export some volumes to Uruguay and Chile. However, it imports some gas from Bolivia, for geographic/logistical rehaznos, and in recent times

its policies have slowed down investments affecting gas exports.

Bolivia

The third poorest nation in the hemisphere behind Haiti and Nicaragua, holds oil

reserves of 440 million barrels and produces 42,000 BD. However, it is very long

in natural gas with reserves 54 Tcf (30 Tcf proven and 24 Tcf probable). Despite

those huge reserves, gas production stands at 1,500 MMCf/d and investment has

slowed down to a trickle and some companies are leaving due to an insecure and

arbitrary operating environment. The most recent actions of expropriation of the oil

industry may prove to be the last nail in the coffin for the possibilities of a largescale gas development. This can be considered a tragedy. A combination of ignorance

and populism has led to a rejection of foreign investments, and there is virtually

no credible alternative scenario whereby Bolivia would be able to grow economically

without exploration, production, and export of its natural gas reserves.

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Ecuador

The country holds oil reserves of 2.5 billion barrels and oil production is 550,000

BD, two thirds of which go to the export market. This is a marginal number in a

worldwide scale, but it is of fundamental importance for the future of Ecuador. Gas

reserves stand at a meager 0.4 Tcf. This country is also seeing international energy

investors depart because an unfair and arbitrary investment climate, in addition to

excessive bureaucracy and political volatility.

Mexico

Mexico has a population of more than 100 million and its economy is the number 10 in the world ($640 billion). It has benefited immensely from its partnership in

NAFTA. It has the fourth largest oil reserves in the hemisphere (oil 12 billion barrels and gas 15 Tcf) and currently produces 3.5 million BD. It is the third supplier

of crude to the United States, behind Canada and Saudi Arabia. However, its reserves are plummeting and it is forced to import billions of dollars of gasoline and

natural gas. Despite having possible oil reserves of 50 billion barrels, the lack of

investments is leading the country to a short-term demise as an oil exporter. This

is the direct result of a combination of heavy dogmatism and populism, that has

dominated the political landscape for decades. The last two governments have struggled to open the energy sector to private investments, with only modest political

progress, although the magnitude of the eventual collapse of the oil industry is beginning to change the minds of many politicians.

Venezuela

The country remains the most important oil and gas country in the hemisphere,

with 78 billion barrels of oil reserves, 150 Tcf of natural gas (although only 15 Tcf

are of free gas), and some 220 billion barrels reserves of extra-heavy oil in the Orinoco Belt. After the sustained increase in production capacity to 3.5 million BD during the 1990s, the country has suffered a major setback resulting from political instability and arbitrary management of the oil industry. In addition, frequent

changes of the rules and several international arbitration lawsuits have instilled

confusion and uncertainty in the international oil companies partnering with

PDVSA in Venezuelan territory. As a result, oil production capacity has fallen to

2.6 million BD, despite an increase of 1.1 million BD resulting from the contracts

with private companies that were put in place in the previous administration. Unless the prevailing uncertainty and the frequent obstacles posed by the government

can be diffused, Venezuela will undoubtedly continue being important, but its

growth as an oil exporter will only be marginal (see the following point).

III. RELIABILITY OF SUPPLIES FROM VENEZUELA

Oil production capacity in Venezuela has suffered a severe drop in the past few

years. In February 1999, when the current government took office, that capacity

stood at nearly 3.5 million BD. At that moment, already some 200,000 BD were operated by private oil companies as part of the new contracts signed for joint operational agreements and strategic associations. Thus, the capacity of PDVSA proper

was some 3.3 million BD. Currently, Venezuela’s production capacity stands at 2.6

million BD, but since that number includes 1.1 million BD being produced by the

private companies that operate the joint ventures, it can be deduced that PDVSA’s

capacity is 1.5 million BD, i.e., a drop of 1.8 million BD. This is the result of poor

management and weak execution capacity, mostly deriving from the dismissal of

18,000 workers.

However, during the 7 years of the current Venezuelan Government, oil from that

country continues to flow to the United States at a rate of 1.4–1.5 million BD, in

line with the tradition of many years of trade. I would argue that despite the aggressive political discourse against the United States Government, oil exports to this

country seem to have a high priority in the slate of Venezuelan sales.

As part of the political agenda, President Chavez continuously threatens the U.S.

Government with suspending exports to the United States, and has indicated that

those exports would most likely be diverted to China. But, as you very well know,

the U.S. Government does not own terminals, refineries, pipelines, or distribution

networks. In fact, it does not even buy oil, with the exception of the occasional program of royalties in kind. The 1.5 million BD of Venezuela oil imports into this

country are the result of many dozens of contracts with clients in the United States

that have been buying Venezuelan oil for decades. Many of those clients have refineries capable of processing sour and heavy feedstock, which constitute the largest

portion of Venezuelan oil. The continuity of those exports to the United States is

of utmost importance for Venezuela, despite anything that is contained within the

political discourse of the Venezuelan Government. Exporting that oil to China would

25

be practically impossible, because the refining network in China is mostly primitive

and incapable of receiving those volumes of sour and heavy crude. It would take several years of bilateral coordinated joint planning and investments to turn such an

initiative into reality (it is not happening), and it would be absurd to build it at the

expense of the most profitable option for those exports, which is non-other than the

United States market. Add to that the volumes that go to Citgo, a subsidiary of

PDVSA, and it is highly unlikely that there would be any disruption of Venezuelan

exports to the United States. Nevertheless, in the unlikely event of a suspension of

those shipments, Venezuela would have to sell the crude at other destinations, and

oil being generally fungible, oil from other places would come to the U.S. shores.

It would naturally generate logistical complications and at least temporary increased costs, but eventually the necessary adjustments would take place and everything would return to normalcy. It is true that imports of Venezuelan oil are very

important to the United States, but it is a fact that Venezuela needs badly its oil

exports to the United States, and especially the current government in order to finance its huge expenses.

Finally, the threat of a shutdown of Citgo refineries, occasionally included in the

political speech of the Venezuelan Government is empty talk. Citgo operates

through a network of some 14,000 retail outlets, but it does not own any of them.

It only owns refineries, terminals, and pipelines. An arbitrary shutdown of Citgo refineries would imply breaching thousands of contracts without justification, posing

an unmanageable and costly legal situation for Venezuela.

The only real risk represented by the present Venezuelan administration concerning oil supplies to the United States is not current. It relates to frustrated expectations of building up new barrels in the future. For the past 6 years the Venezuelan Government and PDVSA have been announcing ambitious (normally not

viable) expansion plans of the country’s production, but nothing significant happens.

This is a direct consequence of the diminished operational and financial capacity of

the national oil corporation. In addition, plans and projects of expansion coming

from private international companies are losing momentum, as a result of the frequent changes of rules and the difficult surrounding environment they have to face.

So a significant increase of that country’s production is unlikely.

These opinions are entirely consistent with the ones I have expressed in my public

writings and interviews, and which I gave to representatives of GAO with whom I

met for some 4 hours as part of their work in putting together their report for Senator Lugar.

IV. RESOURCE NATIONALISM IN LATIN AMERICA

The term ‘‘resource nationalism’’ is in hot vogue these days. But what does it really mean? If what we have in mind is the seizing of higher revenues, we should not

forget that in the history of oil we will find a secular inclination of oil countries to

get a larger share of the revenues. However, attracting the capital required has implied moderating that appetite, in order to allow the oil companies to assume calculated risks and make an attractive profit.

In recent times, the price of oil has reached extremely high levels, but most importantly levels that no one would have expected only 4 years ago (in early 2002

price predictions for the year were $22–$23 per barrel, and OPEC had agreed to a

ceiling of 21.7 million BD in anticipation of a very soft market). These very high

prices have generated huge revenues, leading every oil country to consider ways of

capturing a larger portion of the windfalls. Even the United States and the United

Kingdom have discussed the idea of higher or new taxes. Despite the somewhat

questionable justification of any actions aimed at changing taxes and contracts, the

initiatives of seeking to renegotiate terms are within the realm of the manageable

and acceptable.

What is certainly unacceptable is to take actions like the recent unilateral expropriation of the hydrocarbons industry in Bolivia. I do not intend in these lines to

address the implications of that case, which are well known by the distinguished

Senators present here. The only other case in which abusive actions have been undertaken by a government is in Venezuela, although it has never gotten to the extremes of unilateral expropriation.

In the case of Ecuador, the government has insisted that the seizing by the government of Block 15, formerly in charge of Oxy, should not be interpreted as equivalent to the Bolivian case. They argue that the affair is purely legal and related to

an alleged violation of contract by the international oil company. Despite a very poor

sense of timing to say the least, coming in the middle of discussions of a FTA with

the United States, and without taking sides, it looks like it could in fact be an isolated case. Time will soon tell.

26

In Colombia, Peru, Brazil, and Trinidad-Tobago, there are no indications whatsoever of anything similar to the case of Venezuela, and much less to the case of Bolivia. Mexico is a special case in its own characteristics. Finally there is Argentina,

but I am sure that my friend Domingo Cavallo, will give you an accurate picture

of that case.

V. OPPORTUNITIES FOR INCREASED UNITED STATES-LATIN AMERICA COOPERATION ON

ENERGY SECURITY (GOVERNMENTS AND PRIVATE SECTOR)

In 1994, as a spin-off from the Summit of the Americas held in Miami, an initiative called ‘‘Energy Integration of the Americas’’ was installed. Its objective was to

build an integrated energy data bank, evaluate existing interconnections among the

countries, identify barriers for a larger integration (political hurdles, tariffs, quotas,

logistics, etc.), and eventually undertake reforms and agreements, with the ultimate

objective of having a seamless energy platform that would benefit all countries, and

in addition facilitate and improve commercial activities. The initiative, which involved the public and the private sectors of each one of the countries of the American hemisphere, was launched in Washington and was followed up with working

meetings in Santa Cruz, Bolivia and in Caracas, Venezuela. One of the relevant features of the existing network is that while North America has a large deficit of oil,

Canada and Latin America have large surpluses of energy resources, which if developed efficiently and effectively, can be a leading engine of regional development and

an important contributor to global competitiveness. However, in the next few years

the initiative lost momentum and eventually faded out.

The evolution of the energy landscape in the past few years has once again

brought to the fore the importance of the subject. In the words contained in a recent

report published by the Council of the Americas, if geography is destiny, the Americas are ripe for development of an energy partnership benefiting both suppliers and

consumers, while linking the economies of the countries and increasing trade. The

report continues to argue that the entire Western Hemisphere stands to gain if energy partnership is pursued, assuming the implementation of terms and conditions

consistent with a market-based, public-private approach to energy sector development. Beyond politics, the key questions center on the ability to raise and utilize

effectively the massive amounts of increased investment required to develop the resources that already exist. Fundamentally, unless investment climates are improved

in the energy sector and elsewhere, investors will continue to look to other markets

as opportunities with greater interest than the Americas. Without necessary investment, reserves will be depleted, imports into the region will increase, and terms of

trade will deteriorate. My view is that salvaging the initiative of 1994 could be an

excellent way of having a fresh start that should be in every country’s best interest.

However, the dialog cannot compromise the basic principles of business, a marketbased approach, public-private cooperation, respect for property rights and contracts, and the right balance of policy–regulation–operations/business. Although this

would probably mean losing a few significant actors, countries such as Brazil, Colombia, Chile, Peru, Trinidad-Tobago, and even Ecuador could lead the way. Their

leaders are thinking creatively and have instituted effective measures to develop

their respective resources in productive ways. The presence of Canada would certainly enhance the initiative. There is no silver bullet, but hard work along the described lines could translate into a more balanced and reliable regional energy network.

VI. REFERENCE

Council of the Americas’ Energy Action Group, Energy in the Americas—Building

a Lasting Partnership for Security and Prosperity (Washington, DC: Council of the

Americas, October 2005), 6–8.

The CHAIRMAN. Well, thank you very much, Mr. Giusti.

I would like to call now on Mr. Carvalho.

STATEMENT OF EDUARDO PEREIRA DE CARVALHO, PRESIDENT, BRAZILIAN ASSOCIATION OF SUGAR CANE AND ETHANOL PRODUCERS, SAO PAULO, BRAZIL

Mr. DE CARVALHO. Thank you, Mr. Chairman, honorable Senators. Thank you for the honor and privilege to address this committee.

27

We are living in a changing era for energy, given environmental

imperatives and security of supply of fossil fuels. Two countries,

the United States and Brazil, emerge in a privileged position to develop ethanol as an octane booster or a gasoline enhancer or even

as its perfect substitute.

There will be no silver bullet, as my colleague has said, to petroleum substitution. But, and I quote, ‘‘Biomass ethanol is the best

alternative to partially replace oil derivates in the next decades,

considering consumers acceptability and strategic considerations,’’

as declared recently by none less than Shell International.

Brazil’s large experience with ethanol has been developed over

the last 30 years, not only in high blending volumes but also in 100

percent ethanol-dedicated cars, or in its present version of flex fuel

vehicles. This was possible due to the gradual setting of a huge infrastructure for ethanol distribution, whereby all of the more than

33,000 gas stations all over the country have at least one dedicated

pump for E100 fuel.

At the same time, the United States has been expanding its own

ethanol production at an astonishing growth rate of about 20 percent a year, consistent with public policies established to increase

its consumption to 7.5 billion gallons in 2012, but its potential use

can be much more ambitious. Today, the combined ethanol production of the United States and Brazil of around 9 billion gallons accounts for less than 2 percent of the total world consumption of

gasoline. Could we think of a potential market for ethanol of 49

times the present production?

Brazil has been working to promote the global market for ethanol. In order to achieve this growth, we consider that it’s important to launch a Brazil-United States partnership. Brazil and the

United States account for 70 percent of world ethanol production.

In our view, there is not going to be a global market until we see

ethanol being produced and consumed in many countries. We need

more players. Such partnership between our two countries could

pursue goals such as common standards, technical cooperation,

common research projects and, above all, joint efforts to promote

ethanol in third markets.

Therefore, let me be very clear on this point. The Brazilian private sector does not have any goals of displacing the domestic ethanol industry in the United States. We realize that a thriving ethanol industry in the United States is of enormous importance to

consolidate a global market for ethanol. In this spirit, I repeat, we

do not think that it would be in our own interest to displace domestic production in the United States, our goal being complement it

and/or displace oil imports.

Within the spirit of such a desirable partnership, it’s important

to point out that autarkic development in renewable fuels contradicts the framework of a free and global trade in fossil fuels.

The present tariff and other duties on imported ethanol in the

United States are an obstacle to an even more aggressive market

expansion, and certainly an inducement to higher prices than those

that could prevail in more liberalized conditions.

Is Brazil able to contribute, with its vast potential, to a larger

ethanol market? Certainly.

28

Let us consider, first, the necessary acreage for it. Today, no

more than 7.5 million acres are used to produce 4.5 billion gallons

of fuel in Brazil, but we have in Brazil more than 250 million acres

that can be taken as a potential area to expand agriculture, respecting all preservation areas, especially the rain forests. Current

expansion programs suggest a production level of 8 billion gallons

by 2011, based on our domestic market, mainly induced by the

spectacular acceptance of flex fuel vehicles, and some moderate

growth assumptions on exports.

The search for alternative fuels must be based on their economic,

environmental, and social sustainability. Economically speaking,

Brazilian sugarcane ethanol is already competitive with any gasoline obtained from $40-a-barrel crude, without any form of subsidy

either in agriculture, industry, or to the consumer.

Sugarcane ethanol is a most efficient instrument to sequester

carbon dioxide in the atmosphere and consequently mollify the serious threat of global warming. For each unit of fossil fuel consumed

in the whole process of production, sugarcane ethanol generates 8.3

units of renewable energy.

The social dimension is shown by the high rate of employment

generation, turning the areas with sugarcane cultivation into one

of the most developed areas within the country, the highest wage

paid in the agriculture sector, the best social conditions, education,

health, and so on. There is every reason, Mr. Chairman, to believe

that the conditions created in Brazil can be replicated as well in

the tropical regions of the world, benefiting hundreds of millions of

people, especially in Latin America, Africa, and Southeast Asia.

A freer trade policy regarding ethanol in the United States would

enhance the potential of not only much more ambitious goals to

gasoline substitution, but also prevent and smooth out possible

price peaks and pressures. Additionally, it could induce effective

changes in the process of economic development of a vast number

of underdeveloped and developing nations.

In short, free markets and fair systems to govern them need to

be recognized as powerful instruments to secure a balanced supply

of renewable fuels in the near future, and Brazil and the United

States would have much to gain by joining forces to globalize ethanol as an energy commodity.

Thank you, Mr. Chairman.

[The prepared statement of Mr. de Carvalho follows:]

PREPARED STATEMENT OF EDUARDO PEREIRA DE CARVALHO, PRESIDENT, BRAZILIAN

ASSOCIATION OF SUGAR CANE AND ETHANOL PRODUCERS, SAO PAULO, BRAZIL

Mr. Chairman, honorable Senators, thank you for the honor and privilege to address this committee. We are living in a changing era for energy, given environmental imperatives and security of supply of fossil fuels.

Two countries, the United States and Brazil, emerge in a privileged position to

develop ethanol, as an octane booster, or a gasoline enhancer, or even as its perfect

substitute.

There will be no ‘‘silver bullet’’ to petroleum substitution. But, ‘‘biomass ethanol

is the best alternative to partially replace oil derivates in the next decades, considering consumers acceptability and strategic considerations’’ as declared recently by

none less than Shell International.

Brazil’s large experience with ethanol has been developed over the last 30 years.

Not only in high blending volumes, but also in 100 percent ethanol dedicated cars,

or in its present version of flex fuel vehicles. This was possible due to the gradual

setting of a huge infrastructure for ethanol distribution, whereby all of the more

29

than 33,000 gas stations all over the country have at least one dedicated pump for

E100 fuel.

At the same time, the United States has been expanding its own ethanol production at an astonishing growth rate of around 20 percent a year, consistent with public policies established to increase the consumption to 7.5 billion gallons in 2012.

But its potential use can be much more ambitious. Today, the combined ethanol production of the United States and Brazil, of around 9 billion gallons, accounts for less

than 2 percent of the total world consumption of gasoline. Could we think of a potential market for ethanol of 49 times the present production?

Brazil has been working to promote a global market for ethanol. In order to

achieve this goal, we consider that it is important to launch a Brazil-United States

partnership. Brazil and the United States account for 70 percent of the world’s ethanol production. In our view, there is not going to be a global market until we see

ethanol being produced and consumed in many countries. We need more players.

Such partnership between our two countries could pursue goals such as common

standards, technical cooperation, common research projects and—above all—joint efforts to promote ethanol in third markets.

Therefore, let me be very clear on this point: The Brazilian private sector does

not have any goals of displacing the domestic ethanol industry in the United States.

We realize that a thriving ethanol industry in the United States is of enormous importance to consolidate a global market for ethanol. In this spirit, I repeat, we do

not think that it would be in our own interest to displace domestic production—our

goal is to complement it and/or displace oil imports.

Within the spirit of such a desirable partnership, it is important to point out that

autarkic development in renewable fuels contradicts the framework of a free and

global trade in fossil fuels. The present tariff and other duties on imported ethanol

in the United States are an obstacle to an even more aggressive market expansion,

and certainly an inducement to higher prices than those that could prevail in more

liberalized conditions. Is Brazil able to contribute, with its vast potential, to a larger

ethanol market?

Certainly.

Let us consider, first, the necessary acreage for it. Today, no more than 7.5 million acres are used to produce 4.5 billion gallons. But we have in Brazil more than

250 millions acres that can be taken as a potential area to expand agriculture—respecting all preservation areas, especially our rain forests. Current expansion programs suggest a production level of 8 billion gallons by 2011. This, based on our

domestic market, mainly induced by the spectacular acceptance of the flex fuel vehicles, and some moderate growth assumption on exports.

The search for alternative fuels must be based on their economic, environmental,

and social sustainability. Economically speaking, Brazilian sugarcane ethanol is already competitive with any gasoline obtained from a $40 barrel of crude, without

any form of subsidy—either in agriculture, industry, or to the consumer.

Sugarcane ethanol is a most efficient instrument to sequester carbon dioxide in

the atmosphere and consequently mollify the serious threat of global warming: For

each unit of fossil fuel consumed in the whole production process, sugarcane ethanol

generates 8.3 units of renewable energy.

The social dimension is shown by the high rate of employment generation, turning

the areas with sugarcane cultivation in one of the most developed areas within the

country: The highest wages paid in the agricultural sector; the best social conditions

(education, health care, etc.).

There is every reason to believe that the conditions created in Brazil can be replicated elsewhere in the tropical regions of the world, benefiting hundreds of millions of people, especially in Latin America, Africa, and South East Asia.

A freer trade policy regarding ethanol in the United States would entrance the

potential of not only much more ambitious goals to gasoline substitution, but also

prevent and smooth out possible price peaks and pressures. Additionally, it could

induce effective changes in the process of economic development of a vast number

of underdeveloped and developing nations.

In short, free markets and fair systems to govern them, need to be recognized as

powerful instruments to secure a balanced supply of renewable fuels in the near future. And Brazil and the United States would have much to gain by joining forces

to globalize ethanol as an energy commodity.

Thank you.

The CHAIRMAN. Well, thank you very much, Mr. Carvalho, for

that important visionary statement and agenda that you presented.

I would like to call now upon Mr. Goldwyn.

30

STATEMENT OF HON. DAVID L. GOLDWYN, PRESIDENT,

GOLDWYN INTERNATIONAL STRATEGIES, LLC, WASHINGTON, DC

Mr. GOLDWYN. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, it’s a pleasure to be here.

I think, without a doubt, the erosion of U.S. power and influence

around the globe due to our dependency and that of our allies and

our competitors on oil is the key foreign policy challenge of our

time. I commend the chairman and the committee for a comprehensive and a sustained and very responsible approach to this issue,

and it gives me hope that maybe this time we’ll actually do something about it.

With respect to the hemisphere, I would say that the energy

trends in the hemisphere are mixed, but overall investment is declining, production is flattening, and resource nationalism is rising

in the key producing nations. With respect to our diplomacy in the

region as you have focused on it, it’s increasingly confined to North

America. Most of our longstanding bilateral and multilateral energy dialogs are dormant, and we have no strategic engagement on

energy with two of the most important producers, Venezuela and,

of course, Brazil.

But the key foreign policy issue that results from all this is that

U.S. influence in the hemisphere is declining fast. I share the

chairman’s vision that we need a fresh approach to energy diplomacy in the hemisphere, and I think the Energy Diplomacy and Security Act provides a terrific framework for this kind of approach.

But, in addition, I think the United States has to enhance its energy security by engaging the region on the issues that concern its

people, and those are the issues of job creation and poverty alleviation, migration, and trade promotion. An asymmetrical approach,

one that focuses on a broad range of issues rather than just energy

security, may pay great dividends in energy security, more than

one that’s just focused on energy. I think the ‘‘energy for development’’ component of the EDSA is a good example of how to leverage

this asymmetrical approach.

So this morning I’m going to talk very briefly about the trends

in the hemisphere, how and why they negatively impact our foreign

policy that’s driving this, and then, what we should do about it.

In terms of the hemisphere itself, I think as my colleagues have

said this morning, there’s no question that Latin America is a key

component of United States energy diversity. We don’t have a

whole lot of diversity from the Middle East if we don’t have the

supply from this hemisphere. It’s much more important even than

Africa in that context. There’s no getting around its importance.

Also, they are close by and, as Luis has said, deeply integrated into

the U.S. system.

We’re seeing two trends now. One is the rise in state control, and

that’s in Venezuela and Bolivia, Ecuador, and as the former finance

minister has said, what happened to Argentina in 2002. And there

we’re seeing investment leave those countries, we’re seeing production flatten.

But the other trend is toward a market model, and there I think

we have to acknowledge Brazil’s tremendous success, Colombia’s,

and Peru’s. Brazil has gotten a lot of credit for being self-sufficient

31

in oil because of ethanol, but they increased their production by 1

million barrels a day over 10 years, and that has an equal or greater effect on their self-sufficiency.

But the problem is, since the greatest producers are Mexico and

Venezuela, the net effect is negative, and that’s a problem. Why is

that a problem, and why do we care? Well, there are economic reasons why these trends are bad. Obviously, it’s bad for the shareholders of U.S. companies when their profits get cut significantly,

and when production flattens, it puts long-term pressure on oil

prices.

But the real consequence that we need to worry about is the foreign policy impact, and there we’re seeing a growing rejection of

free markets, an erosion of democratic structures in a lot of countries, and the decline of U.S. influence in the region. What’s new

about this is that for the first time since the fall of the Soviet

Union, the United States has a political and ideological competitor

in Hugo Chavez, and a competitor that is well financed with oil

wealth and very creative about how they’re competing with us.

I would argue that this trend is reversible, and that U.S. alliances can be expanded and restored, if we are prepared to engage

the hemisphere with respect and creativity on the issues that matter to the hemisphere. But we have to compete, and right now I

would argue in Latin America we’re not even on the field.

Some examples of how our influence is declining: First, polls

show our image is at a historic low in the hemisphere. Anti-United

States rhetoric is up. Support for liberalized markets and free trade

is declining. The FTAA is pretty much dead in the water. The 2005

Mar de Plata Summit of the Americas couldn’t even produce a consensus statement. We have suspended our military cooperation

with 10 countries because they don’t conform to our orthodoxy on

the International Criminal Court. We couldn’t get support, probably for the first time in our history, on a candidate for the Secretary General for the OAS, and we’re actually not doing so well

on who the next Latin American candidate is on the Security Council, either.

A greater concern is that as these populist regimes take power,

democratic structures are eroding. By democratic means, referenda

and other things, the political space is eroding. Space for political

opposition is disappearing as referenda create more and more restrictive rules for how these governments govern. And our institutions like IRI and NDI, which have been great ways to build party

opposition, are basically no longer welcome in these countries.

These internal governance issues need to be the focus of our policy.

Now, why is this happening? There are really three reasons.

Some of this is self-inflicted wounds from U.S. diplomacy, some of

it is internal, and some of it is energy. I think we have to acknowledge the self-inflicted wounds of U.S. diplomacy in the hemisphere.

We don’t pay attention to Latin America because of Latin America.

Our policy in Latin America has primarily been about counternarcotics. When we had close ties with regimes that marginalized

their own indigenous populations, we didn’t pay a whole lot of regard to it, and now they’re in power, and guess what? They don’t

like us too much. It’s actually ironic because we provided a lot of

support for political parties in these countries, particularly in BoVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
32

livia, and by empowering them and teaching them how to participate in the process, they are now in power, but our support has not

been very well recognized.

Our image is also declining because of policies in other places in

the world, no doubt in the Middle East, and things like Guantanamo and Abu Ghraib have hurt our image in the hemisphere. Our

direct assistance for things like child survival is declining for budgetary reasons, so we’re viewed as being insensitive to the region’s

concerns.

But there are lots of internal reasons also, and that’s that trade

liberalization and GDP growth have not led to poverty alleviation

or the inclusion of excluded minorities in countries like Venezuela,

Bolivia, Ecuador, and Peru. That has led to a rejection of markets

and the Washington consensus. That doesn’t mean that it’s bad,

but it means that we haven’t really looked at all the consequences

of what those countries actually experienced.

Another reason is that their populations are growing, they need

more money, and guess where they go. They go to oil revenues because that’s the greatest source. And, as Luis has said, the United

States, the United Kingdom, Canada, lots of people are raising

taxes.

But the new piece and the piece of most concern is the competition from Venezuela. Hugo Chavez is not the first hemispheric

leader to try and compete with the United States or demonize us

to increase his popularity, but he’s the best financed, and rarely

has the United States been so destructive and inept in our own

way of competing with someone.

I think we have to be careful here not to dismiss the reasons why

Hugo Chavez came to power, or to exaggerate the potency of his

model in other places in the region. What does have to concern us

is that Venezuela is trying to export this model to other countries,

and they’re being clever about it.

In places where trade liberalization has hurt a country—we do

a trade deal with Colombia, we wipe out the Bolivian soybean market. What’s U.S. policy? Let the market provide. What’s Venezuelan policy? We’ll buy your soybeans. It’s clever.

On the days when U.S. oil companies are here testifying about

how Congress needs to deal with low income heating assistance

programs, what does President Chavez do? He decides to provide

heating oil to Northeast communities. It’s clever.

They have also capitalized on these differences in the regions by

offering subsidized energy products in cooperation and joint investment to the rest of the region. And I think the jury is frankly out

on whether this model will be of appeal, whether anybody wants

their investment, but everyone will take cheap oil and the cheap

products.

So the question is, what are we doing to compete? What are we

doing to defend our model? What are we doing to try and improve

our own brand in the hemisphere? And here I think we need to do

a couple of things.

I think the Energy Diplomacy and Security Act is a terrific

framework. We have to care about energy. We have to focus on the

region. We have to build up our frameworks in the hemisphere.

And I would just argue, as I have in my written testimony, that

33

we have to have the flexibility to allow us to do this at the subregional level as well.

But we need a positive agenda in the hemisphere. We really need

one that recognizes the need to improve education and infrastructure, that addresses the negative social impact of trade liberalization, and that offers the respect and cooperation of the United

States to the countries that work with us. I think this is going to

advance our interests no matter what the price of oil is.

We need to address issues like poverty. We can do a lot of things.

One is on trade liberalization. We ought to think about lifting that

tariff on Brazil and developing that market. We have to show there

are rewards for these kinds of exports. We can improve the visa

process for people who will be the future leaders of these countries.

We could improve our military cooperation with the region’s militaries, without this orthodoxy; and deal with migration with Mexico, which is obviously important to them. We can support World

Bank and Inter-American Development Bank programs on things

like bringing electricity, particularly rural electrification, in the region. This is stuff that people care about, and like the Alliance for

Progress that the Senators talked about earlier, it shows that we

actually care about their welfare. It’s a positive agenda.

I think we can also do things like compete in areas where we

have adversaries. In Venezuela and Bolivia, we should not abandon

the field. We should not reduce our diplomacy. We should not reduce our engagement. We should ratchet it up, because we have

something to say and we should defend it. And Venezuela, hopefully we’ll talk about it in the question and answer period, but

there too I think we ought to end the dialog through the media,

talk directly, and reengage.

Overall in the hemisphere, dialog and diplomacy will be the important means to try and address energy security in the hemisphere. But more than the dialog, we really have to have the product, we really have to have the substance, and that’s where I think

we need this asymmetrical approach that addresses a broader

range of issues.

Thank you.

[The prepared statement of Hon. Goldwyn follows:]

PREPARED STATEMENT OF HON. DAVID L. GOLDWYN, PRESIDENT, GOLDWYN

INTERNATIONAL STRATEGIES, LLC, WASHINGTON, DC

Mr. Chairman and members of the committee, it is an honor to speak with you

today about the intersection between growing resource nationalism in Latin America and the erosion of United States influence in the hemisphere. The energy trends

in the hemisphere are mixed, but overall investment is declining, production is flattening, and resource nationalism is rising in some key producing nations. United

States energy diplomacy is increasingly confined to North America. Most of our

longstanding bilateral and multilateral energy dialogs are not functioning. We have

no strategic engagement on energy with two of the three key producers: Venezuela

and Brazil. U.S. influence in the hemisphere is declining fast. The United States

needs a fresh approach to energy diplomacy in the hemisphere. The Energy Diplomacy and Security Act (EDSA) provides an excellent framework for such an approach. In addition, the United States will enhance its energy security by engaging

the region on issues that concern its people: job creation, poverty alleviation, migration, and trade promotion. An asymmetrical approach, one that addresses a broad

range of issues rather than just energy security, may pay dividends equal to or

greater than one focused solely on energy. The ‘‘Energy for Development’’ component

of the EDSA is an excellent example of this kind of approach. EDSA should also,

however, ensure that the United States has the flexibility to utilize subregional enVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 H:\DOCS\ENERGY.TXT mich PsN: mich
34

ergy dialogs and that any new framework strengthens, rather than weakens, the energy diplomacy mission of the Department of Energy. I will discuss current energy

trends in the hemisphere, their impact on U.S. foreign policy, the status of existing

energy security dialogs, and the utility of a fresh approach, with a specific focus on

EDSA.

I. THE IMPORTANCE OF THE HEMISPHERE

Latin America is a strategic region for United States foreign policy for many reasons. We are neighbors, trading partners, investment partners and we share deep

family and cultural ties. The hemisphere is democratic, with one notable exception.

In the energy sphere, the hemisphere provides the United States with a large portion of our diversity of oil and gas supply. For this reason, the failure of the hemisphere to realize its potential for growth is a serious concern for U.S. and global

energy security. Latin America is far closer to the United States market than the

Middle East. While the investment climate in key Latin American countries is deteriorating as state control increases, even in Venezuela access to exploration acreage

remains superior to that in the Middle East. Additionally, the non-OPEC producers

in this region exert counterpressure on OPEC’s monopoly power.

Mexico and Central and South American nations delivered nearly 14 percent of

global oil production in 2005, and possess approximately 9.7 percent of global oil reserves, with 6.5 percent in Venezuela and 1.1 percent in Mexico alone. The region

is also a major refining center, with nearly 9.2 percent of the world’s refining capacity. Regional refineries are designed to serve the specialized needs of U.S. markets.

The most important exporters, Venezuela and Mexico, consistently rank in the top

four sources of United States oil supply along with Canada and Saudi Arabia. Venezuela averaged 1.29 million barrels per day (m/bpd) in 2005; Mexico averaged 1.59

m/bpd in that year.

II. ENERGY TRENDS IN THE HEMISPHERE

In Latin America today we see two trend lines. One trend is toward rising state

control of energy resources—in Venezuela, Argentina, Bolivia, and Ecuador, in particular. The concern here is that this trend will limit the growth of global supplies

of oil and gas by undermining the value of existing investments, discouraging future

investment or barring foreign investment altogether. The economic consequence of

these trends is that the hemisphere will contribute less to the diversification of oil

supply, thereby increasing the importance of OPEC supply and over time undermining economic development in the region. The political consequences of these

trends in the short run are the decline of U.S. influence in the region to competing

ideologies and the erosion of democratic structures.

A second trend is toward creative fiscal regimes that welcome foreign investment

and require state-owned companies to compete with international companies, with

independent regulators that promote fair and efficient regulation. Countries observing this model are increasing production or stalling the decline of existing reserves.

Brazil, Colombia, Trinidad and Tobago, and Peru are key examples of this creative

model.

When we consider that Mexico, so far, continues to bar foreign investment in its

upstream oil and gas sector, and the size of the reserves and production of the countries practicing the resource nationalism model, the net effect is negative. Foreign

investment in the oil sector is shifting away from South America to North America,

particularly to Canada’s oil sands. When we compare 2005 to 2004, only Brazil and

Trinidad managed to increase production significantly, while other countries faced

decline or very modest gains.

A. The rise in state control

Venezuela and Mexico are the most important oil exporters in the hemisphere.

While Brazil, Colombia, Ecuador, and Argentina are important destinations for foreign investment, and helpfully produce enough oil to meet their own domestic needs

and make some contribution to the global export market, they are not strategic suppliers to the global market at this time. Only Mexico, Brazil, and Venezuela produce

more than a million barrels per day. Bolivia has enormous gas reserves, but exports

mostly to Brazil and modestly to Argentina. Only Trinidad and Tobago is a key supplier to the world gas market.

From those countries now committed to increasing state control, the United States

faces two key challenges: The loss of production growth and diversity of supply from

the region if new economic frameworks are unattractive to foreign investors and,

most critically, the loss of United States influence from well-financed political competition.

35

The economic impact of rising state control

The recent wave of changes in contractual terms and dramatic changes in tax regimes in Venezuela, Bolivia, Ecuador, and in recent years Argentina, threatens to

slow new investment and eventually deepen instability and poverty in these nations

as well as destroy shareholder value for the companies invested there. The deterioration in the investment climate for energy in these countries is primarily an economic threat, helping to lock in constrained supply and high prices. We are seeing

the revision of economic terms at a time when producers rather than companies

hold more market power.

Venezuela passed a hydrocarbons law that mandated a 51 percent share by the

national oil company and a higher royalty rate. Operations, such as those under Operating Service Agreements, which may have stretched the legal interpretation of

the law when they were begun, were subject to a strict and adverse legal interpretation when they appeared to be poor earners for the government. Taxes once renounced, like the export tax, have been revived so that the government can earn,

in essence, a fixed 33.33 percent royalty. The impact, according to expert analysts

like Deutche Bank and Wood Mackenzie, is a massive flight of investment capital

from Venezuela’s heavy oil sector to Canada’s oil sands, effectively freezing development of the hemisphere’s largest oil reserves during one of the greatest oil booms

in history.

In Bolivia, President Evo Morale’s May 1, 2006 decree declared that the state

would take control of all gas fields. Royalty payments to the Bolivian Government

at the largest gas fields, including San Alberto and San Antonio, will now increase

from 50 percent to 82 percent. All producers are obliged to sell at least 51 percent

of their holdings to the Bolivian Government, with the value of that share to be assessed by audit and negotiation. The state will take 60 percent of production from

other fields. Bolivia has left itself an open door through which it can compromise

or retreat: Details of new contracts are to be worked out on a case-by-case basis.

But companies were given only 6 months to renegotiate contracts or be expelled.

In Ecuador, President Palacios seeks to increase windfall revenues from 30 percent to 50 percent and to renegotiate production sharing contracts, while still embroiled in disputes over company claims for refunds of value added tax payments

denied by the government. Ecuador has now seized and will attempt to operate an

oil field developed by Occidental Petroleum. Argentina reversed a successful fiscal

regime by imposing export taxes and other restrictions which have returned it to

being a net oil importer.

The net effect of these developments is that new investment in these countries

is virtually frozen at a time when prices should be driving new exploration and production. It is notable that even China, which is aggressively competing for exploration acreage worldwide, is not a major player in the hemisphere. China holds less

than 10 percent of upstream assets in the hemisphere, primarily recent acquisitions

of Western assets in Ecuador and Peru, and enjoys no preferential access in Venezuela at this time. No new investment has been made under Venezuela’s 1998 hydrocarbons law. New investment is unthinkable in Bolivia until existing companies

can determine the extent of their losses. Ecuador’s investors are mulling legal action

for expropriation and suspension of existing investments. The future growth potential of the hemisphere is being undermined and the region’s economies risk a major

contraction if oil prices drop significantly anytime over the next decade.

B. The market model

The hemisphere is not monolithic. We have seen remarkable success stories like

Brazil, Colombia, and Peru, which have created independent regulators and obliged

their national energy companies to compete with outside companies for exploration

rights. Such progressive cases provide bright spots in the region. Brazil has received

enormous, and well-deserved credit for the contribution that sugar-based ethanol

has made to its self-sufficiency in oil. But equal credit should go to Brazil for a remarkable change in its terms for welcoming foreign investment, which made Brazil

one of the most desirable destinations for exploration. Brazil’s aggressive oil production strategy increased domestic oil production by 1 m/bpd over 10 years. In 1995,

Brazil produced less than 700 m/bpd. In 2006, they are forecast to produce close to

1.7 m/bpd. Their jump in domestic production has had as great an impact on reduction in oil imports as anything else.

Competition has also made Petrobras a better company and a fearsome global

competitor. Peru is set to become a net gas exporter if plans to build an LNG terminal and production from the Camisea project meet expectations. But these market-based energy producers are not the dominant economic models in the hemisphere, are not major oil exporters and, with the exception of Brazil, do not operate

36

in the countries with the greatest reserves. Colombia is battling a rapid decline of

its reserves and production. Peru is a net exporter.

Mexico

Mexico has been a long-time reliable supplier, but its upstream oil sector has been

closed to foreign investment and it is projected to decline unless this policy changes

or unless the Mexican Government dramatically increases the amount of PEMEX

earnings it can keep for capital investment. In 2004, PEMEX paid the government

60 percent of its revenues. Mexico has enormous oil potential on its side of the Gulf

of Mexico and a change in policy could both change global oil markets and create

a formidable source of wealth for development of the country itself. Mexico will hold

a closely contested Presidential election this July, and the winner will have to address how to avoid seeing Mexico decline as an oil power. For now, all candidates

appear to oppose foreign investment in the energy sector but economic reality, opportunity, and perhaps creative political action could yet provide this generation of

Mexicans with an economic bonanza.

III. THE IMPACT OF HEMISPHERIC ENERGY TRENDS ON U.S. FOREIGN POLICY

The most important challenge to the United States from these hemispheric energy

trends is political, not economic. U.S. influence in the hemisphere is waning in key

areas, support for liberalized markets and free trade is declining, and democratic

structures are under stress as populist governing models reduce the space for political opposition. The November 2005 Mar De Plata Summit of the Americas could

not produce a consensus statement. Military cooperation with nearly 10 countries

has been suspended for the failure of these neighbors to conform to U.S. orthodoxy

on the International Criminal Court. The United States could not muster support

for its candidate for Secretary General of the Organization of American States.

Much of this decline is self inflicted. The hemisphere has not been a priority for

U.S. foreign policy for many years, other than as target for our counternarcotics policy. Bilateral relations are focused on whether the hemisphere supports U.S. policy

in other areas. The image of the U.S. is declining in the hemisphere due to U.S.

policies in the Middle East and human rights issues raised by our treatment of detainees from Abu Ghraib to Guantanamo. Nonmilitary aid for development assistance and child survival is declining for budgetary reasons. The United States is

widely perceived as insensitive to the region’s concerns and our influence has been

harmed as a result.

The Venezuelan challenge

For the first time since the fall of the Soviet Union, the United States now has

an ideological and political competitor for political influence, arising primarily from

Venezuela.

High oil prices have enabled President Chavez to maintain very high revenues for

his government, allowing increased domestic social spending, high levels of foreign

assistance, and modest reinvestment by PDVSA in countries in South America and

the Caribbean. President Chavez has a competing vision from that of the United

States on a broad range of issues. He opposes the United States on trade integration, our liberal (versus his Bolivarian) model of democracy, on Iran and Iraq, and

seeks to exclude the United States from regional economic energy arrangements in

South America and the Caribbean. His economic policy is to raise taxes and royalties on foreign energy investment, demand majority control of projects, and in the

non-oil sector to seize land or other underutilized industrial resources for the state.

Venezuela competes with the United States in the hemisphere, offering aid for solidarity. Venezuela has capitalized on the different needs of the hemisphere’s subregions by creating PetroCaribe, PetroAndina and Petrosur to foster cooperation and

joint investment on a subregional basis. It has created an alternative trade grouping

called ALBA, the Bolivarian Alternative for the Americas—which attempts to force

nations to choose between trade agreements with the United States and with Venezuela. Venezuela is also identifying places where trade liberalization has a negative impact and stepping in to provide redress. Venezuela purchased debt issues

from Argentina and Ecuador, and when the Colombia free-trade agreement with the

United States threatened Bolivia’s soybean crop, Venezuela agreed to purchase it.

The jury is still out on whether the Venezuelan economic model is viable at $25

oil and whether their neighbors support the Bolivarian vision and will really allow

joint investment, or if they are just accepting President Chavez’s assistance. But the

political challenge to the U.S. vision for the region is unmistakable.

The Venezuelan model is an issue in every nearly every election in the hemisphere. In Bolivia, the mobilization of long disenfranchised indigenous forces—aided

by years of United States assistance in party building and election organizing—led

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to the election of President Evo Morales, who is following the Venezuelan model.

In Peru, Alan Garcia defeated Ollanta Humala, a proponent of the Venezuelan

model, in a close election. In Mexico, the PAN candidate, Felipe Calderon, has closed

a large gap with his PRD opponent, Manuel Lopez Obrador, by asserting he will

follow the Venezuelan model if he is elected.

Given these mixed results, we should be careful not to overstate the salience of

the Venezuelan model or to dismiss too quickly the forces that gave rise to it in the

first place.

The roots of the antimarkets approach

It is important to understand what is behind the challenge to the U.S. model. We

are seeing the rise of state control and forced revision of contracts for two reasons.

One is that trade liberalization and increased GDP growth have not led to poverty

alleviation or inclusion of excluded minorities in countries like Venezuela, Bolivia,

Ecuador, and Peru, leading to a rejection of liberalized markets and the Washington

consensus in many countries. Another is that growing populations have increased

the pressure for governments to raise revenues in economies that are still resourcedependent, so governments are appropriating the best available source of cash regardless of the long-term consequences. This latter trend has led to higher taxes and

royalties all over the world, including the United Kingdom.

The United States should protest violations of contracts or expropriations where

these takes place and deny benefits such as bilateral trade agreements to countries

that do not respect the agreements they have signed. The United States suspension

of free-trade agreement talks with Ecuador is a good example of this. But the market will either tolerate or punish the economic actions of governments that raise tax

and royalty rates or other fiscal terms adversely. If companies can make money

under the new terms offered by Venezuela or Bolivia, they will pursue these opportunities. If companies cannot profit, they will close their operations, and if countries

do not spend their own capital to develop their resources, then production will fall,

their revenues will shrink, and the popularity of their programs will shrink with

them. This may lead to higher energy prices, but foolish economic policy is not a

basis for U.S. Government intervention.

The need for a new hemispheric foreign policy approach

What the United States lacks is a positive agenda in the hemisphere, one that

recognizes the need to improve education and infrastructure, addresses the negative

social impacts of trade liberalization, and offers the respect and cooperation of the

United States to those countries that work with us. This will advance U.S. interests,

no matter what the price of oil is. We need to address legitimate issues like poverty

and advocate how our model can address them. Examples of this are addressing

trade barriers to agricultural imports, expanding educational opportunities in the

United States for future leaders, improving the visa application process, expanding

military to military contacts, especially exchanges under the International Military

Education and Training Program, dealing with migration issues with Mexico in a

spirit of respect and fairness, supporting World Bank and Inter American Development Bank infrastructure programs in the hemisphere, supporting the development

of civil society and the capacity of democratic institutions and treating our relations

with our hemispheric neighbors as intrinsically important, not as litmus tests of loyalty to the United States on Iraq or other issues external to the region itself. In

countries where we face ideological competition, like Venezuela and Bolivia, it is

crucial that we do not abandon the field. We need to increase our diplomatic engagement and defend our way of thinking.

I believe that Bolivia’s recent actions will mark the nadir of the turn toward repudiation of contracts. Countries like Bolivia and Ecuador are too poor and frankly,

too insignificant to global energy markets to sustain the kind of behavior they are

engaging in. Powers like Brazil can communicate this to Bolivia better than the

United States can. The United States should maintain dialog with Bolivia and give

it our best, even if unwelcome, advice and cooperate where we can.

Venezuela is a more complicated case. Venezuela is a competitor, but it is not

likely to halt supply to the United States as an act of political warfare unless we

embargo them first. They have, in fact, remained reliable suppliers of oil and products, despite the heated rhetoric reported in the media. An act of energy aggression

by Venezuela against its neighbors is also unlikely at this time. Any hope Venezuela

has for regional leadership would evaporate if they used their oil wealth for acts

of military aggression against a neighbor. Withdrawing oil supply from the market

will harm their new friends and future markets, as well as cut the government’s

supply of revenue. The United States could, would, and should use the Strategic Petroleum Reserve to redress the unlikely event of a production halt by Venezuela, or

38

another (equally unlikely) strike by its workers. For now, the Venezuelan challenge

is ideological.

Here too U.S. policy has failed to understand what factors have led to President

Chavez’s enormous popularity. Venezuelan Governments prior to the Chavez government governed poorly, practiced corruption, ignored poverty, and excluded minority sectors of its society. The Chavez government came to power determined to

return control of energy policy from the national oil company to the government

ministry, to reclaim some of the oil rents held by the national oil company for the

government’s own account, and to change the economic terms of its acreage allocation from those set when oil was $10. This is a policy the United States would support in any other country. The government has spent lavishly and allegedly unwisely on social programs, but this is what we pray most African Governments

would do with their own oil wealth. The famous strike of 2002–2003 was a battle

between the national oil company and the government and the government won. I

cannot imagine the United States supporting the PEMEX in a battle against the

Mexican Government for control of the PEMEX Board of Directors. The U.S. rhetorical support for the coup that displaced the President for a day was foolish, destructive, and devastating to our bilateral relations.

Where Venezuela has gone wrong economically is by changing contract terms with

impunity and hostility, rather than by negotiation with companies who have been

its partners for decades, invested billions in its energy sector, and created the production that now enriches the nation. The manner in which the recent changes have

taken place has been shortsighted, destructive, and unnecessary. Venezuela has

changed its interpretation of its own tax laws, but it is provocative and disingenuous to accuse companies of being tax cheats as a consequence. Time will tell

whether the attractiveness of Venezuela’s tremendous oil and gas reserves overcomes the pain inflicted by the way these changes have been made. Oil companies

tend not to be emotional about these issues as long as they are making money.

Where Venezuela has gone wrong, politically, is by using legal methods to restrict

freedom of the press, prosecution to intimidate political opposition, and constitutional assemblies to unbalance formerly balanced institutions like the Supreme

Court and national election commission. The regime itself, helped by the failure of

a political opposition to mount a campaign describing what it was for, and high oil

prices sufficient to fund the government and external programs at the same time,

does not appear to need to use either tactic to win large majorities. These internal

governance issues should be the focus of a regional policy, which includes, but is

not led by the United States. We should have objective assessments as to whether

Venezuela’s actions are undermining any other important United States security interests. Venezuela has positioned itself as an ideological competitor to the United

States in the hemisphere. We need not and should not treat Venezuela as an enemy;

we should, however, try to compete. We should also end our dialog via the media

and resume the dialog between our senior foreign affairs, commerce, energy, and

cultural officials. We should work with Europe and with hemispheric partners to reinforce a message of respect for democratic institutions.

IV. THE STATUS OF CURRENT DIALOGS AND THE NEED FOR A FRESH APPROACH

The United States has had a number of bilateral and multilateral energy policy

fora in the hemisphere over the years. Some are active, while others have lapsed

or are stagnant. These fora are platforms to understand market dynamics, share

best practices on energy efficiency and conservation, share understanding on ways

to enhance energy production, and exchange views on how a nation’s energy policies

may be enhanced or reformed to promote the nation’s own policy. These policy dialogs are also essential for building the understanding and relationships that are essential for trade promotion and conflict resolution.

The premier multilateral energy forum was the Hemispheric Energy Initiative

(HEI), a multilateral meeting of the hemisphere’s energy ministers, with many active subgroups, which was cochaired by the United States and Venezuela. The HEI

is dormant due to the status of our relationship with Venezuela, leaving us with

no effective forum at all. Bilaterally, the United States had a Principal Coordinators

Energy Dialog with Venezuela, as well as a 30-year technical cooperation agreement

with Venezuela. The bilateral Venezuelan dialogs were suspended for political reasons.

The United States has a trilateral energy policy dialog with Canada and Mexico,

which has addressed electric power, energy conservation, harmonization of standards and market outlooks. It has taken many forms, but it functions very well.

What remains of engagement is not adequate. A fresh approach which engages

the United States with all the region’s producers and consumers is sorely needed.

39

I commend the Chairman for the vision contained in EDSA and for the framework

it provides. I wish to comment on four aspects of the bill.

With respect to section 3, on the Sense of the Congress on Energy Security and

Diplomacy, I strongly share the call to integrate energy security into national security policy coordination by an interagency grouping and by creation of a new position at the State Department. In practice, there will be a need for energy security

to be considered in many of the bilateral policy groups as well, so the issue is not

marginalized, but these are important new measures. I would hope that the Secretary of Energy will be a player on bilateral policies in the Middle East, Central

Asia, and other regions as well, so that the Energy Department’s expertise is enhanced and not diminished.

The Strategic Energy Partnerships contained in section 4 of the bill will be essential. We may have some of these on paper, but they need to have the diplomatic

attention that has been lacking. The lack of high-level engagement with Brazil is

a case in point. Here I would caution that we should not exclude dialog with countries that are ineligible to receive economic or military assistance. This kind of assistance gets suspended from time to time, with countries ranging from Nigeria to

Venezuela. We should not tie the hands of our diplomats especially when we are

using other measures like withholding assistance to impact a country’s behavior.

The Energy Crisis Response Mechanisms in section 5 are essential for bringing

China and India into the international collective energy security system. Here, too,

I would urge some flexibility to include other nations such as Thailand, Singapore,

or Indonesia in such a system so we do not marginalize them or miss the chance

to build an even stronger collective energy security system with consuming nations

who will have a common interest with us.

Finally, with respect to section 6, I share the Chairman’s view that we need a

new Hemispheric Energy Cooperation Forum with a strong private sector forum.

The United States needs to engage producing countries with successful policies,

such as Brazil, Colombia, and Peru, as well as competitors like Venezuela. We need

to engage the consuming countries as well, in the Caribbean and Central America,

as well as the Southern Cone, to address policies that favor consumers. One lesson

we have learned from the HEI is that different regions of the hemisphere have different needs—some focus on power generation, others on integration of their grids,

still others on access to oil and gas. The United States may be able to forge stronger

bonds, and frankly compete more effectively on an energy security vision for the region, if we can organize along subregional lines, and meet in plenary when the timing is right. I think we have to recognize that while there is a state of conflict

among the producing nations, a hemisphere-wide forum will face great challenges

in achieving any meaningful consensus. I think we need one, but I suggest the bill

provide some flexibility in how it is organized.

I have some concern, as a former Assistant Secretary of Energy, with putting the

State Department in charge of this effort with Energy’s cooperation, rather than the

other way around. I recognize there may be jurisdictional issues here. One factor

I urge you to consider is that we need to deepen the international energy diplomacy

capacity of the Department of Energy. Their relationships with civil servants in

ministries across the globe provide a bridge across changes in government here and

there. They can talk when the politics of nonenergy issues obstruct dialog among

the foreign ministries. It is easier to get energy ministers together for regular meetings than secretaries of state. Their staff should be expanded and serious program

budget established to make our cooperation more than rhetorical. For true reform

to be achieved, I agree that foreign ministers, indeed heads of government will have

to be involved. This will be the key to integrating energy security into foreign policy.

But I urge some flexibility on the bureaucratic leadership provisions of this section

as well.

V. EXTERNAL POLICIES

In addressing challenges in Latin America, EDSA recognizes that the United

States cannot go it alone. I note with admiration that the Chairman has placed an

emphasis on integrating energy security into NATO policy, and into dialog with

China and India. I would only add that we need to take an asymmetrical approach

to our multilateral diplomacy outside the energy sphere. We need to focus the

United States-European Union Dialog on democracy promotion and conflict resolution in Latin America. We must also begin a dialog with China and India on security and stability in energy-producing areas. Both are great powers and we share

an interest in stable energy supply and conflict resolution. As these powers grow

on the international stage, we need to talk to them about their policies and how

40

they interact with the IMF, World Bank, and international multistakeholder efforts

like the Extractive Industries Transparency Initiative.

While it is the topic of many of your other hearings, it must be said that regional

approaches to combat the use of oil as a tool of foreign policy are tactical measures

to manage the near-term consequences of the impact of oil wealth on many oil producing nations. The energy dependency of the United States, our allies in Europe

and developed Asia, and the growing dependence of rising powers such as China

and India on imported oil, is rapidly eroding United States global power and influence around the world. My colleague, Jan Kalicki, and I, and a host of energy experts from around the world from producing and consuming nations, analyzed the

sources of these problems and suggest a set of domestic and international solutions

to them in a book we coedited titled ‘‘Energy and Security: Toward a New Foreign

Policy Strategy’’ (Wilson Center Press/Johns Hopkins University Press, 2005). As

the Chairman so eloquently argued in his Brookings speech this year, a strategic

approach to this program must focus on reducing the importance of oil as a global

commodity. While this is a 20- or 30-year effort, a strategic energy policy that invests in new technology, uses tax and regulatory policy to accelerate the deployment

of alternative fuels and vehicles, and drastically increase fuel efficiency, and expands the system of collective energy security to include China and India, is the

only way to protect America’s power and influence for the long term. I commend

the committee for its historic attention to these fundamental issues.

The CHAIRMAN. Well, thank you very much, Mr. Goldwyn, for a

very comprehensive statement on our whole diplomacy, in addition

to the energy focus.

Let me recognize the distinguished ranking member of the committee, Senator Biden, for his opening statement or comments.

STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR

FROM DELAWARE

Senator BIDEN. Mr. Chairman, I apologize. I had to, attend another meeting, and I apologize for being late. I look forward to

being able to ask some questions.

The CHAIRMAN. Let me just pragmatically suggest 5 minutes on

this first round. We’re all sort of coming and going, and the Chair

will try to recognize people as they reappear, and hopefully the

panel will not be dismayed by these comings and goings.

I want to start by asking this question. Essentially you have

mentioned, Mr. Carvalho, that it would be helpful even in a bilateral relationship with Brazil, but you have extended that to really

all other countries in the hemisphere, to have what might be a

roundtable in which we would discuss how Brazil’s success in ethanol from sugar could be replicated by many countries in Latin

America, and for that matter, elsewhere around the world.

And second, I ask you this. Could that roundtable, in addition to

production expertise, and all the problems Brazil faced over 20

years which need not be faced by everybody else if we learn the

Brazilian story well, talk about flex fuel cars? How are these going

to be produced? Who will do that sort of thing?

Because in our experiment here in the United States, in my

home State of Indiana, we’re into production of corn ethanol in a

big way. But then it leads to a question: What about there being

only 75,000 flex fuel cars in the whole State of Indiana, and only

32 filling stations that have a pump? In other words, how do other

countries, in addition to Brazil and the United States, if we get

into this dialog, replicate what is required for that type of alternative situation?

Whether it’s sugar ethanol or corn ethanol or cellulosic, as we

discussed with the first panel, all these potential alternative fuels

41

offer great possibilities for countries in Latin America that just

don’t have any deposits of oil, but do maybe have sugar or fiber

that can yield ethanol, as we can in 50 States in the United States.

In other words, theoretically it’s possible for every country to be involved in the energy business, for new wealth to come to each of

these countries in a way that no one has envisioned until recently.

We have just discovered the Brazilian model in the last 120 days.

My guess is that around this country virtually no one knew 77 percent of the cars are flex fuel, or 52 percent of the sugar crop goes

to ethanol, or facts that all of us now rattle off simply because this

has become almost doctrine of how you have success. Plus there

has been some good offshore drilling for oil, which is also very important in terms of bringing about this energy independence.

Now, just physically, how do we get everybody around the table?

You are out there in the field now, in Brazil, and you’ve come here

today to dialog with us in the United States. We’re encouraging a

lot more of that, which is good in itself, a Brazilian-American relationship. And you suggest that we drop the tariffs and the barriers.

I endorsed that in the opening statement.

But beyond that, how do we extend this to the rest of the continent, to Central America?

Mr. DE CARVALHO. Well, Mr. Chairman, I think you are extremely qualified to talk about it, and I have read carefully your

article, together with our Ambassador Abdenur, and I congratulate

you on——

The CHAIRMAN. He’s a good man.

Mr. DE CARVALHO [continuing]. Your vision on energy. The fact

that the introduction of ethanol as a partial substitute for gasoline,

as we have said, there’s no silver bullet at all, but certainly ethanol

can contribute. The problem is how we can generalize production

and then consumption of ethanol, and the fact that the sustainable

ethanol out of sugarcane cannot be replicated outside the tropical

world calls for the cellulosic processing, ethanol production, which

always has been 10 to 15 years ahead.

I have been dealing with this for the last 20 years. Always it’s

10 or 15 years ahead. But now I propose something different. Why

don’t we join on research? Why don’t we get together and see what

kind of improvements on research programs can be made in order

to accelerate? We cannot wait another 10 to 15 or 20 years to have

ethanol production that can be sustainable everywhere in the

world. Because if we get this process, we will develop ethanol production everywhere, especially in the northern hemisphere. And

then the market is there, as I said. There is 450 billion gallons of

gasoline market to be conquered by ethanol.

Now, we should be collaborating. I think that we have to recognize different problems. I think Argentina began a program on ethanol, although in the early 1980s, but unfortunately didn’t go

ahead. Colombia today has a very important program of substitution, of blending ethanol in their gasolines, and the sugar industry is transforming part of their sugar exports into ethanol production to use locally. I think Guatemala is in such a process. In

Mexico there is a study. I think we could be together in a kind of

association or whatever instrument, to get together to work toward

those goals.

42

There is much that needs to be done. We have never to forget,

though, that ethanol in production in the gasoline market is not an

economic proposition at the beginning. It should be economic, certainly, but it’s much more than that. It is strategic.

So why have we had success in Brazil? Because that was a strategic decision of the country, faced with necessity. Necessity is

what made our program a successful one today, but it was not always a success, and several times people didn’t regard it as a viable program at all. So there must be political leadership. Otherwise, there will be no place for ethanol, because oil companies will

never allow us to sell ethanol if there is not a political mandate to

do so.

And once you have the political mandate, then you will have the

possibility of improving your infrastructure of distribution, of gas

stations, etcetera, etcetera, etcetera. But when people realize there

is a political decision of the country to get rid really of the oil ethics, as President Bush has said, then things will fall.

When people realize that your 5 million flex fuel cars that you

have in the United States can be fueled by ethanol, the gas stations will come, but not if you design a program that is only fitted

for the local production capacity. The market for ethanol in the

United States is much larger than the 7.5 billion gallons of ethanol

that is due to be produced in 2012.

The actual market for gasoline today, which is the actual potential market for ethanol, in the United States alone is 140 billion

gallons a year. Imagine what you can do with that. Imagine the

kind of investment that people will be ready to make if there is

such a strategic political decision.

That’s some of the thoughts that your provocation helps me

to——

The CHAIRMAN. Well, I’m glad to have provoked you into a remarkable statement. I appreciate that.

Senator Biden.

Senator BIDEN. I would like to follow up, if I may, Mr. Carvalho.

What was the effect on the rural economies, not just on the country’s overall lack of dependence any longer on oil? What were the

spinoff effects on the economies in rural areas? In other words, did

it generate other economic benefits, in addition to giving you the

independence on balance of payments, deficits, etcetera? Are there

tangible effects in rural communities?

Mr. DE CARVALHO. Well, thank you, Mr. Senator, for your question. It’s very simple. Sixty-five percent of all sugarcane production,

70 percent of all sugar and ethanol production is concentrated in

the state of Sao Paulo.

If you go to the sugarcane areas in Sao Paulo, you will see what

we call the California of Brazil, because the distribution of income,

the generation of employment, No. 1—because it’s a high employment industry. Especially on the sugarcane fields, we employ at

least a million employees, direct employees, which means some 3

to 4 million in direct employment, and where you have the highest

wage rates in agriculture sector in the whole Brazil. You can see

visually what happens in the places where sugarcane comes.

There was a saying in the early part of our introduction of a few

programs, ethanol programs, in the late 1970s, early 1980s, whereVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
43

as people said, ‘‘No, sugarcane is going to destroy food production,’’

and this argument is being used today here in our states elsewhere, which is not true. The capacity of the agriculture is much

more, agriculture is much more sophisticated than that.

We are not substituting food production. We are the country inducing further food production, because the income levels rise and

demand rises and people begin to produce much more things.

Senator BIDEN. I was on one of the Sunday shows, and so I

missed a ‘‘Meet The Press’’ show on oil executives. Any of you guys

see that? I didn’t, until I saw clips of it.

The oil executives were making the argument to Mr. Russert on

Sunday that corn ethanol wasn’t a really good bet. Everything from

the price of corn chips to other food products would go up, and that

the total cost to the economy would be significant in diverting this

much of the agriculture production.

I kind of found it interesting. At the same time they talked about

how they’re going green. And that’s why I asked the question about

the impact on rural communities, not only in terms of employment

in harvesting sugarcane and the refining process, but the generated income in the region from refining—that you would have a

greater wealth in these communities. That’s why I asked the question. I found it fascinating that there were many arguments why

diversification was going to drive up the prices.

The second question I have is on this point, if I may, for another

moment. You made the same statement that others have made on

this issue: That transition is not perceived to be in the interest of

the oil companies, notwithstanding the oil companies are arguing

that they are making transitions themselves.

Did you find a necessity to provide a floor for the price of oil, so

that they couldn’t drive this emerging market out of business? In

other words, in our case right now, it’s economical to go to corn ethanol, if oil is at $30 a barrel. What was your experience with the

industry in trying to retard or encourage this transition?

Mr. DE CARVALHO. Well, Mr. Senator, we had that problem, because all the ethanol industry was built in the late 1970s and early

1980s. But when oil prices began to drop by the middle of the

1980s, our ethanol program was practically abundant. And we producers, we had to sustain the whole process of building up our sugarcane fields, our plants, and they were just on stream.

Fortunately enough, at that moment Soviet Union disappeared,

so a protected market for Cuba’s sugar disappeared, and there was

an opportunity for our plants to transform sugarcane into sugar

and not ethanol, and we became the leader in sugar exports during

the 1990s. We were no one in the sugar market in the early 1990s,

and we finished the decade being the number one exporter of sugar

in the world.

But the fact is that we had a tremendous increasing productivity.

Our cost of production for 1,000 liters of ethanol in the early 1980s

was $850, and today I don’t know what is the cost of production

because my associates, they don’t tell me what their cost of production is, but I know it’s below $200, constant dollars, of the same

quantity of 1,000 liters.

So we will increase productivity. We will never say that I would

like to have a guaranteed minimum price of oil in order for us to

44

compete with it. No, that’s not the way to proceed. What we have

is to believe that the cycle of petroleum is changing and we will not

have any more cheap oil. We have to bet. The private industry is

there to risk, and this risk we can assume.

Senator BIDEN. Thank you. My time is up.

The CHAIRMAN. Thank you very much, Senator Biden.

Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman, very much, and welcome, distinguished panelists.

Senator Craig in the first panel said the fact remains constant

that our policies—and he said if they warrant that term—toward

Latin America don’t seem to be working, and then Mr. Goldwyn

said what the United States lacks is a positive agenda in the hemisphere, and then Mr. Goldwyn talked about our counternarcotics

efforts. Is that the area where we’ve really gone wrong and alienated some of our friends in the hemisphere, and what can we do

better in that area?

Mr. GOLDWYN. Well, I think we haven’t gone wrong in seeking

counternarcotics cooperation. And I think some of the trade preferences that we have offered, that we are about to eliminate, to

countries that try and switch from crops that produce drugs to

other ones, has been a good effort and maybe we ought to continue

it. But I think the problem is that we haven’t done a whole lot else.

I think with respect to that policy, the fact is that the profit that

farmers make from these alternative crops is well below what they

were making from growing coca, and the amount of jobs created by

those programs was pretty thin, and so it wasn’t very appealing.

Other people were able to compete with us. So I think we need to

be more creative on our counternarcotics program.

But I think the greatest problem is that we didn’t do a whole lot

else, and the fact is that trade liberalization is a wonderful thing

but it has severe dislocation consequences and we didn’t really

think those through. We didn’t really engage the region’s governments on how they were dealing with it. And so we have these

large indigenous, marginalized populations that have been out of

the economy for years and are very hostile to the Washington consensus.

So I think what we need is a policy that’s a little bit more creative. Now, that might be a better way to look at job creation there.

It might be lifting some of these trade barriers, so they can grow

sugar and corn and other things and export them to the United

States without facing our trade barriers. Probably the best job creation policy that we could have for the hemisphere, would be to lift

the barriers we have on the things that they make the most.

But I think that we also need to look at some positive engagement in the region. Things like rural electrification would make a

huge difference. It would promote development in areas that are

pretty much off the grid. It’s not needed in every country, but it’s

needed in a lot of them.

I think our visa application process and educational exchanges,

where once upon a time we brought lots of people from the hemisphere to our universities, and they went on to become finance

ministers and heads of state, well, now it’s kind of hard to get a

visa to come to the United States and we don’t welcome a lot of

45

those people here. We are basically throwing away the seed corn

of the future leaders. So I think things along that line would give

us a positive agenda in the hemisphere.

Senator CHAFEE. Maybe I could ask the other panelists to comment also on how we can have a better relationship in the hemisphere. Mr. Cavallo? If you agree with Senator Craig and Mr.

Goldwyn’s premise?

Mr. CAVALLO. Yes, I agree with what Mr. Goldwyn said, except

that I don’t think that it’s trade liberalization that caused the problems in Latin America. Actually I would say the lack of trade liberalization in terms of the protection that the United States still

provides to, for example, agricultural products that are efficiently

produced in Latin America, and also we have seen the case of ethanol which is particularly related to the supply of energy in the

world.

Now, I think that the big mistakes of the United States in dealing with Latin America refer to the management of a financial crisis. The United States in the early 1990s offered Latin American

support through the Brady Plan and through the joint participation

in the negotiation of the Uruguay Round, and also in the Initiative

for the Americas, to launch reforms that were not decided in Washington, that had been decided in each one of the Latin American

countries by their leaders, but were in line with the prevalent

views in the United States and in the most advanced countries in

the sense that a market-oriented system would be more efficient

and conducive to improved growth and wealth in all the countries.

Now, the United States was not ready enough, or more than the

United States, the IMF, to work together with the countries at a

time of crisis to prevent the very negative effect of financial crisis

in the region. That was particularly the case of Argentina.

For example, all the problems that the Southern Cone is now facing in terms of energy supply relates to the combination of

‘‘pesification’’ and devaluation that came as a consequence of the financial crisis in Argentina. But the United States and the IMF

could have helped Argentina to have a smooth transition to a new

set of policies by the end of 2001 and 2002, but instead of doing

that, it preferred to let Argentina go to hell, you know.

So I think that the policy of the United States vis-a-vis Latin

America should pay more attention to global stability of the countries and be ready to help in critical moments, to prevent the sort

of climate of confrontation that we now have in the hemisphere.

Senator CHAFEE. Thank you very much. I see my time has expired. Thank you.

Senator COLEMAN. Thank you. There’s so much that I want to

ask and so little time. I’ve just got to make just a general statement beforehand.

We talk about American policy, and I would agree that we need

a more positive agenda, but I think to blame trade liberalization

on some of the challenges we’re seeing with populist regimes in

Latin America, I’m not sure I necessarily buy that. With all the

negatives, there are a lot of positives going on, too.

Uribe just gets reelected. Humala is rejected in Peru. John

Danilovich with the Millennium Challenge Account is doing some

tremendous things, and brings great experience to that. The elecVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
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tion of Bachelet in Chile and our relationship with Tabare Vazquez

in Uruguay.

And I would say respectfully, Mr. Cavallo, that the concerns that

Argentina has had about its fiscal situation is not an IMF problem.

I mean, part of what we’re saying is, you know, people have to act

responsibly. When Uruguay had a problem, we were there.

So it’s easier to paint with a broad brush these challenges in the

region, but I think even the challenges ultimately perhaps develop

into opportunities. I think that Brazil and Colombia, and even

Spain is now looking at Chavez as a problem, and it’s not a United

States problem. It’s a problem of instability in the region. And so

when Morales moves against the oil fields, the Brazilian interests,

all of a sudden the Brazilians have an awakening.

And we have got, you know, Colombia wants to do an agreement,

and I hope that we get to it, and there are some challenges with

that. And Peru, Bolivia, looking at the Millennium Challenge Account, we’ve got to deal with that. So I think there’s a range of opportunity. I think it’s a little simplistic to kind of look at the

United States as the big bad guy here and somehow the cause of

some of the challenges. There are some deep-seated issues in Latin

America. And we need to be at the table, and I certainly agree with

that.

Let me ask, Mr. de Carvalho, one of the things you talked about

was in regard to ethanol, the service stations. We talked about the

challenge. Half the ethanol, half the E85 pumps in America are in

my State, Minnesota. So as we talk about flex fuel engines, we talk

about production of ethanol, and you’re right on the money, you

know. We talked about 7.5 billion gallons in 2010 as some high watermark. We’re going to exceed that. If we did nothing, we’ll be at

14 billion gallons, and it can’t all be done by corn and soybeans.

And I want to reflect on the very good question by the ranking

member. You know, this issue about what kind of economic, well,

I can tell you that $100 million of economic activity, now close to

probably $150 million, in Fairmont, MN is a big deal. It’s a big deal

in Austin, MN. It’s a big deal in Benson, MN. It’s a big deal getting

capital investment in rural communities that are growing jobs and

then raising prices, so I think there’s great opportunity.

But the question I have is, for Brazil, we face an issue here with

the lack of infrastructure, and I thought you made the comment

that the stations there will come. Did Brazil do anything to support

that infrastructure, to create that infrastructure? What did the

Government do to provide greater opportunity for distribution of

ethanol?

Mr. DE CARVALHO. To remember the circumstances at the time

when the program was launched, second half of 1970s, early 1980s,

the 100 percent ethanol car was launched in 1979 on the second

oil shock. When you are blending ethanol with gasoline it’s a very

simple operation, economically speaking. But when you are selling

the 100 percent ethanol, which in your case is the E85, you have

to know that you have to price it accordingly with the mileage of

each one of those fuels.

Although ethanol is a fantastic enhancer to driveability, it has a

minus component, which is the fact that you drive less miles per

gallon than with gasoline, and this differential must be seen at the

47

price at the gas station. It means that for you to sell E85, you have

to price it below 70 percent of the gasoline prices.

Senator COLEMAN. But my question, if I may, in the limited time

I have, the presence of the pump itself, the actual infrastructure—

in other words, one of the challenges we have is the lack of E85

pumps in places, so——

Mr. DE CARVALHO. That is simple. We had this special gasoline

at the time, the blue gasoline, whatever they were called at the

time. They were transformed into ethanol deposit and pump. The

pump is there. The problem is the distribution system, but the

pump is there.

They have at least four or five deposits at the gas station, so you

can put one of them dedicated to ethanol, and you arrange some

of the rubber, some of the material, to be more consistent with the

corrosive action of the ethanol which is higher than gasoline. But

this is a very simple problem.

The problem is on the distribution system, the basis, how you

distribute it. For instance, you do have a problem here because you

do not carry ethanol on your pipeline system, and that’s something

incredible, because we do transport our ethanol on our pipeline system, and Petrobras has an experience of 30 years of doing so. But,

unfortunately for us, you do not do so, which makes the markets

of both East and West Coast extremely accessible to our ethanol

because of the general costs of distribution.

Now, what you have to do is, you have to have volume of production, and price competitive with gasoline, but because of your low

taxes on gasoline it’s difficult to arrive at such a situation under

present production circumstances and then the protection, because

protection, as we know, induces higher prices. Higher prices does

not induce for the consumption of ethanol on your 5 million flex

fuel vehicles that you have today. That could represent at least 2

to 3 billion liters, gallons, of ethanol consumption, the existing flex

fuel fleet you have in the United States.

Senator NELSON. Senator Coleman, we’re down to 21⁄2 minutes to

vote.

Senator COLEMAN. All right. I would just ask this question, and

the ranking member will recess the committee until the chairman

comes back, so that we can cast this vote on the floor.

What I would like for you to state for the record, is the threat

that Chavez makes in the cutoff of the oil—we discussed it earlier,

about how he would give up all of the infrastructure that he has

in the United States through the Citgo stations and so forth—what

is the timing when he would, in your opinion, make good on that

threat to cut off the oil to the United States? That’s what I would

like you to state for the record.

Senator BIDEN. Please. Fire away.

Mr. GIUSTI. Fire away? I personally think that it’s highly unlikely that we’re going to see anything of that kind in the foreseeable future, in the next few years. And the reason, the reason is

that those exports are not only necessary for Venezuela, but they

do not have alternative destinations because of the sour and heavy

nature of the crudes that are exported to the United States.

And the second thing, which I also mentioned in my statement,

had to do with Citgo. And the threat that they’re going to shut

48

down the refineries of Citgo I think is also very highly unlikely because the stations, the outlets, are not owned by Petroleos de Venezuela, and as a result of that those are contracts with clients.

So in the event, unlikely event, that they would shut down the

refineries, there will be a breach of thousands of contracts, and I

cannot foresee how that could be managed legally, to have a breach

of 10, 12, 13,000 contracts in the United States. I think this is

highly unlikely. This is my answer to that.

Mr. GOLDWYN. If I could add to it, I agree with everything, with

what Luis Giusti has said. Chavez often couches his threat with ‘‘if

we are attacked, if something happens to us, then we will cut off

the oil.’’ And I really think it is only in the face of an attack by

the United States or an embargo or a direct action by us that he

would actually do this.

The CHAIRMAN. Well, I appreciate your continuing on as we are

coming and going. Let me commence another round of questioning

at this point, and simply explore the issue further with you, Mr.

Goldwyn. You made the three points as to why things have not

gone well for the United States diplomacy overall, the first point

being we’ve not paid much attention to Latin America.

And there have been, most of us have noticed, we’ve had testimony, we were all deeply involved in election campaigns in Central

America in particular, occasionally South America, in the 1980s.

We saw a lot of visitation by members of this committee, by members of the Senate, various groups. But in the 1990s we became

preoccupied with the fall of the Soviet Union, with Russia, with

Eastern Europe, with other implications of that situation, and unfortunately there was a lapse of attention.

The energy situation for us is imperative, but likewise, as you

have suggested, poverty and income and so forth are pretty important for all of us, whether we’re in the United States or in Central

or South America. Suddenly we have the possibilities of using agriculture for industry, whether it’s the sugar crop in the tropical

areas or cellulosic fiber in the nontropical areas. In our country

corn and soybeans come to mind as possibilities.

I notice, for instance, just in rural counties in Indiana where the

ethanol is about to be produced—it hasn’t quite gotten there yet,

but it will in the next few months—the injection of that much new

income into a small county in Indiana, plus the enhanced value of

the corn that is soaked up from all around, are going to have huge

implications that people in our State have not quite grasped yet.

They will. It will be almost like oil wealth coming suddenly to a

country that has something of this sort. But that could also happen

throughout Latin America.

Diplomatically, how do we get this to happen? Who calls the

meeting? Who begins to integrate a structure of relationships? As

people like myself and even the President have inquired, what if

we drop the tariff with regard to ethanol vis-a-vis Brazil?

Countries in Central America who are part of our new Central

American Free Trade Agreement will say, ‘‘Now, hang on here for

just a minute. We think that may disadvantage us.’’ And they reason that really won’t work for them.

We have sugar producers in the United States who will say,

‘‘Now, hang on,’’ again, because here sugar is going to be coming

49

in under a different guise. And we say, ‘‘Well, you folks just don’t

get it. We have an energy crisis in the country. It’s not just a sugar

subsidy problem for 1,100 farms that are left in the South, that

deal with this sort of thing.’’

In other words, the vested interests in each of these cases are entrenched with political clout in their governments, ours included.

However, is it a possibility that in fact the United States and other

countries can begin to talk about new wealth for every country and

the possibilities of sharing expertise, and all of the lessons we have

learned? Mr. Carvalho’s situation went from $800 to $200. There

is no need for us all to go through that whole experiment again.

Does this make a difference, do you think, ultimately, in the overall

diplomatic situation, in addition to our energy predicament?

Mr. GOLDWYN. Mr. Chairman, I think that it could. I think it

could really be transforming for our hemispheric policy. Let me address two questions. First is how do you do it, and then what is

the impact.

There are three options for how you, in a sense, call this meeting.

There is the now-dormant Hemispheric Energy Initiative, the spinoff of the Summit of the Americas. It’s dormant because the United

States and Venezuela are the cochairs. But it doesn’t mean that

you can’t have a hemispheric summit called by the United States

and Brazil, you know, with this topic. But that’s a meeting of energy ministers. That’s one option.

The other is the ad hoc approach. We have a global partnership

on carbon sequestration. We’ve got a global partnership on nuclear

energy. There’s no reason why we can’t have a hemispheric partnership on biofuels or alternative fuels and energy, and we can invite to it anybody who wants to participate.

But as you have said, Mr. Chairman, the focus here isn’t on the

producers, it’s also on the consumers. It’s all these countries in

Central America and the Caribbean that are terribly squeezed by

product prices right now, and it’s all the countries that can produce

fuel. So you could do that on an ad hoc basis——

The CHAIRMAN. That’s the point I have often made, that there

are some consumers here in addition to all the producers that we’re

talking about.

Mr. GOLDWYN. More consumers than producers, and a lot of the

producers subsidize the cost of the products in their own country,

so it’s a tax on them, too. And so that’s why we always focus on

the big guys, but there are greater numbers in focusing on the consumers.

And a third way is really to create a new forum, the way you’ve

suggested in your bill, which would be to have our State Department’s trade ministries and other people together at the table.

I think one of those approaches is the way to do it. You can

bridge these differences and these entrenched interests by looking

at what the potential market is for alternative fuels in the hemisphere, what the potential could be, what measures like our renewable fuel standard could drive you there, and whether they are

high enough. You might show that the pie is big enough for everybody to produce or for people to produce more without severely

damaging United States sugar interests or damaging the Central

American interests. There might be a hook to include more counVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
50

tries in some sort of a regional trade agreement, even though the

authority is about to expire, which is based on expanding the pie

rather than the way people tend to look at it right now.

The CHAIRMAN. Mr. Giusti, do you have a comment in this area?

Mr. GIUSTI. Yes. Thank you very much, Mr. Chairman. I would

like to say that I’m sure that many good things can be done along

the lines that David has been mentioning, but I would not cast in

general a negative outlook on the region. You were not here when

Senator Coleman spoke, but I share a lot of his views. There are

many good stories there.

First of all, the FTA of Peru, the FTA of Columbia, even Ecuador, I think some of the things are going to be solved and that will

come to terms also. The story in Colombia is an excellent story concerning the reform, the new institutional framework, the fact that

companies are flocking there, it’s going to become an exporter. We

have the case of Trinidad-Tobago, not being Latin America, which

is a great story. Brazil is an excellent story in many ways.

And I think we have to be careful not to follow too much the very

loud voices that capture most of the headlines, because there are

a lot of things that can be said at that moment. Because everybody

says, you know, the White House, instead of really what it is,

which is the multilateral institutions, and there are consequences.

But a lot of the countries have learned that they really have to

reinforce their institutional framework, and they’re making great

progress. So I think there is room enough to really do a lot of good

things in terms of diplomacy from the United States.

The CHAIRMAN. Mr. Cavallo.

Mr. CAVALLO. Yes, I agree that there is room for reviving the

trade negotiations, starting with or focusing on the energy issues,

but I think the only chance of attracting complete interest by the

Latin American countries is to start linking energy to agriculture,

and I think ethanol could be a good bridge between the two subjects.

Of course, the reason why Free Trade of the Americas has not

become very interesting for Brazil or for Argentina or for other efficient producers of agricultural products was because of the fact

that agriculture is always left for the discussion in the Doha

Round. Now, I suggest that the United States starts working together with Latin America, as it did in the late 1980s, early 1990s,

at the time of the Uruguay Round, to try to cooperate, to get free

trade of agriculture products in the Doha Round, and to start discussing these issues within the hemisphere linked to energy.

The CHAIRMAN. Along that line, do I hear you right? We don’t

know how the Doha Round will come out. Some are very pessimistic. But in the meanwhile, is it conceivable we could have a free

trade agreement on agriculture in the hemisphere?

Mr. CAVALLO. Yes, that would be a big step.

The CHAIRMAN. This need not be a total comprehensive agreement of everything in the world but, as you are saying, there is

clearly a link with agriculture and energy.

Mr. CAVALLO. And energy.

The CHAIRMAN. And maybe we all have something to say about

that, but the point that some of you have made, is to show some

interest on the part of the United States in other countries in the

51

hemisphere, to indicate that we really care, that we have a national interest in this. The consensus would be in fact a free trade

agreement for agriculture.

Now, somebody might say, ‘‘Oh, why don’t we try out something

else,’’ but let’s sort of keep it simple for the moment. Doha is all

wrapped around agriculture because the world has simply got to

solve that before we take on automobiles or pharmaceuticals or everything else.

Agriculture does speak to the plight of many people who are very

poor, and some of them who are not doing too well in the United

States, for that matter. When I talk about counties in which suddenly an ethanol plant arrives, why, that may be a deliverance in

terms of jobs as well as revenue in the banks and various other

things in our country. So I am intrigued by that slice of the pie

that you have mentioned. It may be helpful for us here.

Mr. CAVALLO. Yes, and let me add one point. You should not be

accepting on the effectiveness, or you should be clear that I think

Hugo Chavez has not been effective in convincing the rest of South

America, particularly because of the consequences for the energyscarce countries of Latin America of the actions he is implementing, and also he is recommending to Evo Morales.

The CHAIRMAN. Taking that principle of our relationship with

Venezuela which you were discussing as I was coming in, winding

up that thought, what if we were to have this dialog with all the

countries in the hemisphere about agriculture and energy?

There is no reason why we could not be of help to Venezuela in

this situation, you know, as opposed to an adversarial situation in

which we say, ‘‘Are you about to cut off our oil?’’ or what have you,

and accept the fact that that is unlikely, as many of you have mentioned, because of the refinery problems and because of many problems of this sort, and at the same time welcome Venezuela around

the table, welcome Evo Morales around the table.

Now, these folks might not know exactly what to do and say in

these situations. They might not come. They might advise others

to stay away. But, nevertheless, it’s an affirmative situation in

which, as opposed to picking out places where the sky may fall, we

are really trying to address the situations of many countries with

whom our relationships might be refurbished.

So I have envisioned this as a way and I think all of you are expressing this—that we meet problems that are strategically urgent

with regard to energy in the world. In other hearings, for example,

we have heard that maybe three-quarters of all the oil reserves in

the world are really now governed by states, by people like Vladimir Putin, or others who may be in charge, or Iran currently, and

so forth, as opposed to there being a free-flowing market.

The testimony used to be, ‘‘After all, this is very fungible. It

shows up one place, doesn’t show up someplace else.’’ But what if,

as is being suggested, governments as a matter of policy simply

don’t develop reserves, or restrict certain areas from receiving

whatever they are?

We are about to hear testimony again from Europeans that they

are not only disturbed, but in some cases frightened, by the fact

that President Putin suggested his emphasis might go to the Far

East. Our testifiers would say, ‘‘Well, that isn’t practical. The natVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 H:\DOCS\ENERGY.TXT mich PsN: mich
52

ural gas lines all go to Europe, and oil might go there.’’ But nevertheless, even the implication that there’s a possibility, that somehow if you’re 80 percent dependent on natural gas from Russia, as

Hungarians are, for example, or even 40 percent in Germany, that

you might see your industry in real disarray while one of these experiments went on, is worrisome in this context.

In our hemisphere we don’t have that kind of urgency for the moment, although in our own national situation in the United States

we do have a sense of urgency. It’s most often expressed by people

coming into our hearings and asking, ‘‘Are the oil companies

gouging me at the pump locally?’’ or some situation of that variety,

as opposed to the overall problem of the difference between demand

and supply in the world being as narrow as you have all pointed

out, and the events of the day causing spikes and difficulties.

We’ve had a revelation, I think, as we’ve heard about Brazil.

That’s why we’ve focused so much on that today. The Ambassador

of Brazil has visited with me and with others. Brazilian officials

are noticing a more friendly attitude, that we’re deeply interested

in what’s happening. And so as a result, why, the visitations have

increased substantially. We’ve always been interested in Brazil, but

maybe not with that intensity for a while.

I wrote an op-ed for the Miami Herald with the Ambassador of

Brazil, just to illustrate the fact that two people can actually pen

an article together that other people in the hemisphere might read.

Just leaving aside whatever we said, just the fact that we were

doing it, and the fact that this is a unique experience, illustrates

what you have been saying about lack of attention, lack of intensity.

This is why I’m trying to think organizationally with our State

Department. What if we do set up this new bureau and we do have

this focus? Somebody has to staff it. Somebody has to call the meetings. Our role as legislators is really not administrative. We are not

over there day-by-day, sort of doing the Lord’s work in our diplomacy. Through these hearings we try to bring advice from people

like yourselves that have seen a good bit of this situation, that

might be helpful.

Do you have any further comment, Mr. Carvalho? I’ve already

asked you so many questions, but you’ve been most informative.

Mr. DE CARVALHO. Mr. Chairman, you have said a lot of very important things. Let’s take Minister Cavallo saying about agriculture and energy. First of all, we must understand what is the

oil, what are we living.

We are living in a situation whereas there is no more surplus

cushion production capacity, as you have said. It has been sharply

reduced, and essentially all the oil producers don’t want to have

discussion. It means that increasingly oil will be more and more

scarce, and there will be substitution for natural gas where it’s possible to do so, or not. But then Europeans are preoccupied with the

Ukrainian situation.

Now, what is oil, or what is natural gas, or what is coal? It’s photosynthesis that was buried in the soil for 500 million years. Now,

we have the possibility of having the photosynthesis in every agricultural field in the world produce energy.

53

Now, what is the problem with agriculture today? And this is a

very important point, and I think that Mr. Cavallo mentioned it,

and I think that David mentioned it also. It is the fact that with

present agricultural technology you can produce anything. The

specter of hunger, the specter of the population growing and not

growing food production, that’s something of the past. We have

proven that we can produce whatever product is necessary from agriculture. The problem is income distribution that doesn’t lead people to have access to what can be produced, which is a completely

different problem.

Now, what is the problem of developing underdeveloped countries, is that those countries are able to produce agricultural products. That’s what they are able to do. They cannot produce big computers. They cannot produce the big Mercedes, beautiful cars. But

they can produce grains, they can produce energy, but they are induced not to produce because there are no markets, because the

present agricultural markets are closed by the protection of the developing Northern Hemisphere countries. That’s true. That’s what

happens. Where you have tariff peaks, where you have real protection which does not appear, is on agricultural products. Now, if you take the $360 billion figure for subsidies in Europe

and North America, you will understand that it’s impossible for

those countries in the south to produce products because markets

are closed. They are only open when there is a clear interest in

having this market open. The rule is to close the market.

We are seeing the present difficulties of the Doha Round of the

negotiations. Unfortunately, Mr. Chairman, you are not there on

the negotiations table, because I would love to have you on the negotiations table on the side of the U.S. Government, because your

position is so clear, so open.

But in energy we can have a differential. Let’s open up. Let’s not

pay the farmer not to produce, which is nonsense in the world. You

pay the guy not to use the land, but let’s use the land to produce

energy. Let’s put the subsidies not to produce competing food produces, let’s use these subsidies to begin ethanol and biodiesel production, and some day in the future these subsidies will disappear.

Let’s use the subsidies, not as a permanent defense to nonproductive production, agricultural production, but to induce and to

enhance processes that need some subsidy to begin with, and then,

10 years from now, 5 years from now, 15 years from now, we will

have increasing independence and reliability on renewable fuels to

substitute the fossil ones. We have everything. We have the lands.

We have the technology, and some of it must be developed. We

have the goodwill of people. Why don’t we do that?

So I strongly support your act, Mr. Chairman, to get together

people and to try to design programs and actions that can produce

this result.

Mr. GIUSTI. Could I make a brief comment, Mr. Chairman?

The CHAIRMAN. Please.

Mr. GIUSTI. This is extremely important, of course, the ethanol,

and I support it in full, but we should not lose the perspective of

the global picture. There is abundant oil. There is abundant gas.

We may be a little bit confused because of the market that we’re

seeing now, but the market will change. It would take a long time

54

to analyze the market in detail, which I of course will not try to

do here, but we can speculate about that.

But one thing is clear: Oil, the oil is there. If you take proven

and probable reserves and you add them up, and even taking the

very ambitious profile of the International Energy Agency, oil

would last for the next 50 years, even without exploration. That is

not the real question, and the big oil issue is not a question.

The real question is, is there going to be the right paradigm in

terms of the cooperation between the national oil companies and

the international oil companies? Those two groups have their own

problems. The problem and the limitation of the IOCs is access to

reserves.

But then the national oil companies do not have the above

ground resources, which is market savvy, financial capacity, technology, managerial and operational expertise. Some of them have.

The high price is not helping, because people tend to feel that they

can do everything on their own.

But I think we will evolve into a new stage when the market

changes, where once again this cooperation is going to have to come

about, because at the end the question is, who is in charge of supplying oil to the world? Nobody. It’s only actors that have common

interests that will bring about the development of these resources.

And even when ethanol and other sources are going to be extremely important in the future, we still are hanging in with 25 or

30 years or even more of fossil fuels, especially oil and gas, and we

have to deal with those.

The CHAIRMAN. That’s a very important point, and I suppose that

each of you would agree with this idea. To the extent, however,

that we have vital ethanol production and alternative fuels and so

forth, we’re likely to have more civil conversation with all the nations about oil. That is our predicament, given the fact that we

don’t have any alternatives, that some people, to use a cliche, have

us over the barrel for the moment.

But if in fact it was apparent that there are all sorts of ways that

we can fuel our cars and other things, then oil is only one of the

options we have. There probably will be a lot of years to get to that

point.

On that very score, let’s say that we got this energy-agriculture

dialog going. Would other countries, other than the United States

and Latin America, be more effective, say, in visiting with the

Mexicans about PEMEX, just to take that example?

I have visited with the Mexicans, and we even raised this in this

committee. They advised, ‘‘Why don’t you suggest that the United

States might invest $10 billion in PEMEX, to try to get the facilities up-to-date, to get the production going again, to maybe double

the production? It would be good for Mexico, for the GNP of that

state and all its citizens, quite apart from the hemisphere.’’ So I

raised that issue in a public hearing like this.

Well, no one in the United States pays any attention to such a

thought, but they do in Mexico, and it’s all adverse, with people indicating that ‘‘this is our national heritage. This is almost like

Mexican blood in the soil. We don’t want Americans fooling around

with that.’’ I understand that. There’s a high degree of nationalistic

fervor surrounding this subject.

55

But at the same time, in terms of the best interests of Mexico,

the hemisphere, the United States, all the rest of us, it would be

helpful if in fact they doubled their production, improved their facilities, and increased their national wealth. But some of you make

the point, I think correctly, that maybe the posture of the United

States vis-a-vis all the countries in the hemisphere is not quite the

posture right now that leads anyone to do reasonable things.

I’m just wondering, is there anybody in Latin America who could

visit with the Mexicans about this situation?

Mr. GIUSTI. I am sure that, if I may, I am sure that a lot can

be done, and the reason is very simple. The Mexicans have realized, in a very hard way, that they have to change.

This is a country, this is a company, PEMEX, that has consumed

15 billion barrels of oil reserves in the past 15 years. They have

gone down from 27 billion barrels to 12. They are seeing their future as an oil country in jeopardy, and unless they do something—

because when you have to go and drill a well in these areas where

they have expectations, in the Gulf of Mexico, that well will cost

you even $100 million. They don’t have the money. They know they

need it.

I’m sure that anybody who is elected now in Mexico is going to

face a very, very difficult dilemma. All of these roots that come

from the early 20th century are going to have to be revised, because this nationalism is really, the way it’s conceived now, it’s

really going to destroy the possibilities of Mexico. So I think there

is room there, and especially with some of the candidates that really have a clear vision of this.

Mr. GOLDWYN. If I can join in, Mr. Chairman, I think Petrobras

would probably be one company that could talk to PEMEX. Luis

Tellez contributed a chapter to a book I coedited on energy and security. He is the former energy minister for Mexico.

He looked to Norway as an example of how Mexico could find a

vision for state-led development of the energy sector and have the

security that they wouldn’t lose control of the resources, but they

could develop them in a model that might be more palatable to

them. It could be the former Venezuelan model, it could be the

Petrobras model, or the Norwegian model. He argues that more

than anything else, to leave the resources for this generation of

Mexicans in the ground rather than develop it would be a waste.

If I could offer a quick comment on your previous point. If I understood you correctly, what you’re proposing would be really a

phenomenal act of geopolitical jujitsu. Because I think what you

were suggesting is that we could mobilize the nongovernment-controlled sectors of the oil producers, and make the farmers into the

energy producers, and create a constituency in each of those countries which was pro-free trade, which would be very hard for those

governments to resist because they would have to in a sense oppose

their own farmers who wanted to export fuel or export crops for

fuel.

We have to solve the cellulosic ethanol problem in order to really

be able to produce at that scale and price-competitive, but it’s such

a big idea, if that’s what you’re talking about, that I think it’s certainly worth talking about because that could really be transforming not only in the hemisphere but also in Africa.

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The CHAIRMAN. Well, I thank you for illuminating the idea and

endorsing it so well.

Let me thank each one of you. We have another vote, and then

we will have another vote, so I don’t want to detain you, but we

really appreciate so much your testimony, your papers as well as

your forthcoming responses. We look forward to calling upon you

again, if we may.

So saying, our hearing is adjourned.

[Whereupon, at 11:00 a.m., the hearing was adjourned.]

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF ERIC FARNSWORTH, VICE PRESIDENT, COUNCIL OF THE

AMERICAS

The Council of the Americas (Council) appreciates the request of the Senate Foreign Relations Committee to provide testimony concerning energy security in Latin

America and to offer comments in relation to the ‘‘Energy Diplomacy and Security

Act,’’ S. 2435. For over 40 years, the Council has been a leading voice for policy and

business in the Western Hemisphere. Our members include over 170 prominent

companies invested and doing business in the Americas, with a mandate to promote

policy and commercial partnership in the Americas based on democracy, open markets, and the rule of law.

Since mid-2004, the Council has led an Energy Action Group, a leading publicprivate dialog designed to focus attention on the strategic issues at the heart of

hemispheric energy issues, while providing concrete recommendations to policy makers for the outlines of a Western Hemisphere energy strategy. On this basis, in late

2005 the Council issued a well-received report with recommendations, ‘‘Energy in

the Americas: Building a Lasting Partnership for Security and Prosperity,’’ which

called attention to the vital issues at stake while highlighting areas of partnership

and convergence as well as areas for further attention.

ENERGY IN THE WESTERN HEMISPHERE IS A STRATEGIC MATTER FOR THE UNITED

STATES

Despite other issues around the globe that demand the attention of policy makers,

energy in the Western Hemisphere—whether we realize it or not—is of the highest

strategic importance to the United States. We are the world’s largest energy user;

even if we are overtaken at some point by China, our own energy needs will continue to increase as both our economy and population grow. At the same time,

though we ourselves have abundant energy resources including oil, gas, coal, and

a growing potential for alternatives, we are not self-sufficient, and self-sufficiency

is not a realistic goal. We are energy interdependent, and to meet our needs, we

will have to continue to rely on imported energy.

The perception is that most of our imported energy comes from the Middle East,

a region of constant political and military risk, making supplies uncertain. In fact,

three of our top five sources of imported energy are in the Western Hemisphere:

Canada, Mexico, and Venezuela (along with Saudi Arabia and Nigeria), making the

Western Hemisphere a key to our economic well-being and strategic interests. If existing trends continue until 2025 or 2030, the increasing U.S. demand for energy

can actually be met by sources from our own hemisphere, but only if the massive

investments are mobilized that will be required to fully develop these impressive

hemispheric resources. As a result, all other things equal, a more coordinated, vibrant energy partnership in the Americas based on market forces would support

broader U.S. economic and strategic interests.

At the same time, the democratic development of Latin America and the Caribbean is a top regional priority for United States policy makers on a bipartisan basis,

and enhanced wealth creation in the hemisphere is a critical component for that development. In fact, given significant concern in Washington with Latin America’s

supposed ongoing ‘‘lurch to the left,’’ democratic development is perhaps the top regional issue facing U.S. policy makers. To put things into perspective, the World

Bank recently reported that between 1980 and 2000, per capita GDP in Latin America grew, in total, less than one percent. On the other hand, over the same period

of time China enjoyed per capita GDP growth of over 8 percent per year. It is in

addressing this development gap, which increases every year, that energy in the

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Americas becomes so important, and so relevant to broader U.S. interests in the

hemisphere.

ENERGY RESOURCES EXIST, THE QUESTION IS INVESTMENT

Fortunately, including Canada’s massive oil sands deposits, recoverable energy reserves in the Western Hemisphere surpass even the Middle East and dwarf other

regions of the world. In terms of proven conventional reserves in the Western Hemisphere, Venezuela is at the top, followed by the United States, Mexico, Brazil, and

Ecuador, and Brazil has also just announced promising additional finds. The hemisphere also enjoys plentiful deposits of natural gas—a key fuel source in terms of

electric power generation. After the United States, Venezuela again has the highest

level, followed in order by Canada, Bolivia, Trinidad and Tobago, and Mexico. As

well, significant potential exists to produce and consume alternative fuel sources,

such as ethanol, from Brazil, Colombia, and elsewhere, or coal bed methane from

Canada. In terms of coal, the United States remains well ahead of our hemispheric

neighbors in both production and consumption.

These resources by any measure can play an important, if not paramount, role

in regional development if produced and consumed wisely. On the supply side, absent energy, the development prospects for a nation such as Bolivia, South America’s poorest nation, or Ecuador, are uncertain at best. Nonetheless, recent government actions that aggressively target foreign energy investors, change the rules of

the game mid-stream, or unduly politicize the energy sector and actively discourage

the direct foreign investment that is required to identify, finance, and manage the

energy resources that are increasingly difficult, for technological, geologic, or other

reasons, to develop. In a global economy, such investment will flow elsewhere, where

the risk-reward profile is more favorable.

On the demand side in the hemisphere, without greater attention to market efficiency in the development and utilization of energy resources, it will be more difficult for producers and consumers alike to build regional competitiveness in a global economy.

This directly impacts the hemisphere’s ability to compete successfully against the

rapidly modernizing economic giants of China and India, as well as a host of other

nations. For example, Chile is now looking to ship liquefied natural gas from East

Asia, incurring transportation and infrastructure costs, rather than pipe it from its

neighbors, because regional gas supplies are subject to political manipulation and

thus unreliable. Once new supplier relationships are established with the Far East,

South American producers will be less able to sell their own products efficiently to

their neighbors.

Clearly, there would appear to be a mutuality of long-term interests in the hemisphere in building energy partnership in the Americas.

The Western Hemisphere is part of a global economy, competing for the same

marginal investment dollars as other geographic regions. For investors to invest, the

risk-adjusted climate must be welcoming. It is therefore incumbent upon nations in

the hemisphere wishing to develop their natural resources who might otherwise lack

technical and managerial expertise, as well as significant capital of their own, to

create an investment climate whereby foreign energy companies can work in partnership with local governments to develop their resources in a mutually beneficial

manner. Attention to industry-specific and more general investment climate issues

is needed: Improvements in education, training, and the rule of law; regulatory certainty; nondiscriminatory and stable tax regimes; effective personal security;

anticorruption; and effective dispute resolution. Those countries which have paid attention to these matters have seen investments increase. As well, international financing institutions have an important role to play in mobilizing capital for investment.

RECOMMENDATIONS

Several recommendations flow from this analysis. First, it is self-evident that

maintenance of a secure energy supply from foreign sources is a strategic matter

for the United States, and energy in the Americas must therefore be a priority. Increasing partnership in hemispheric energy matters must be an important part of

our overall hemispheric policy approach, not an afterthought or taken for granted.

A balanced, engaged approach is needed.

Second, in a global environment, competitiveness is perhaps the key issue facing

the hemisphere. High direct or indirect energy costs such as petroleum in the transport sector or power generation, respectively, impact all energy users, making the

region a less attractive place to do business, and quality of life suffers, too. As well,

investment climates that are unattractive compared to other countries and regions

58

will not attract the direct foreign and domestic investment required to develop either the energy resources mentioned above nor the broader economy. Mexico, for example, despite sitting on sufficient natural gas reserves, actually imports natural

gas and has done so since 2000. This directly impacts Mexico’s national income accounts and their national competitiveness profile at a time when that nation, even

with the NAFTA relationship with the United States and Canada, faces a direct economic challenge from China. Hopefully, we will see forward movement on these

issues in Mexico after their elections in less than 2 weeks, but that remains to be

seen, and of course it is up to Mexicans themselves to determine how best to develop

their own energy resources.

In the North American context, energy issues are an important part of the Security and Prosperity Partnership (SPP) which the administration has rightfully made

a priority, and which the Council has strongly endorsed. As in other hemispheric

nations, it is difficult to see how Mexico develops if its energy reserves continue to

fall due to a lack of investment in the energy sector, and an underdeveloped Mexico

is of strategic concern to the United States, particularly in relation to the vexing

issue of illegal immigration. But it is not just Mexico; it will be impossible to fully

develop Canada’s energy resources, too, unless the three governments find a means

whereby labor markets and products to service the fields are made more flexible

through the SPP or alternative means.

Finally, in addition to conservation, which is perhaps the top form of alternative

energy available, both the public and the private sectors must do a better job exploring the possibility of alternative fuels in the hemisphere, which could prove to be

a boon for development while making the region less reliant on imports from elsewhere. As a strategic matter, no less than the late George Kennan advocated an

aggressive reduction in energy consumption in order to lessen our reliance on energy imports from unstable areas. He might also have considered viable alternatives

in the Western Hemisphere. More recently, the President quite rightly mentioned

ethanol in his State of the Union address, and he also discussed it directly with Brazil’s President Lula during a short trip to Brasilia in November. Chairman Lugar

has also been a strong and thoughtful proponent of these issues. The resources are

there, especially in Brazil and also Colombia, particularly if a free trade agreement

with the latter nation is approved that will allow importation of ethanol duty-free

to the United States. What has been missing has been a market to use ethanol as

well as a price point of conventional fuels high enough to make ethanol economically

viable. But as oil prices remain historically high, the cost of ethanol production is

now economical. As well, flex fuel automobiles, which automatically determine the

proper fuel mix between gasoline and ethanol, are becoming a legitimate alternative. The question, though, is not actually about energy, but rather trade policy.

Ethanol from South America is primarily made from sugar, which remains politically sensitive in the United States. Nonetheless, as a strategic matter, the issue

bears active consideration.

These issues are ripe for further consideration. The energy resources exist, and

so does the need. What does not yet exist, though could, is the size and quality of

investment needed to develop and effectively utilize these resources. That is the real

issue facing those who would promote energy partnership in the Americas.

Once again, the Council of the Americas appreciates the opportunity to provide

testimony on this critical matter before the Senate Foreign Relations Committee

and stands ready to assist committee members as they further investigate these important issues.

PREPARED STATEMENT OF STEPHEN C. JOHNSON, SENIOR POLICY ANALYST FOR LATIN

AMERICA, THE KATHRYN AND SHELBY CULLOM DAVIS INSTITUTE FOR INTERNATIONAL STUDIES, THE HERITAGE FOUNDATION

Chairman Lugar, distinguished members of the committee, thank you for inviting

me to submit testimony on this important subject—energy security in Latin America. Your hearing comes at a time when rising gasoline prices have opened our eyes

to the vulnerabilities of supplies worldwide, especially those in our own neighborhood.

Speaking at The Heritage Foundation on March 31, 2006, Assistant Secretary of

Energy for Policy and International Affairs, Karen Harbert, said that a secure and

prosperous Western Hemisphere is vital for our national interest. Integrated energy

markets, interconnected infrastructure, development of a broad range of resources,

and efficient use will benefit the United States and the populations of neighboring

countries.

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1 U.S. Department of Energy, Information Administration, International Energy Annual 2003,

June 28, 2005, table 1.2, at www.eia.doe.gov/pub/international/iealf/table12.xls (February 10,

2006). 2Karen A. Harbert, ‘‘Western Hemisphere Energy Security,’’ testimony before the House Subcommittee on Western Hemisphere Affairs, March 2, 2006. 3 Jason Bush, ‘‘China and India: A Rage for Oil,’’ Business Week, August 25, 2005, at

www.businessweek.com/bwdaily/dnflash/aug2005/nf200508254692db016.htm?chan=gb (February 7, 2006). 4 Based on estimates from U.S. Department of Energy, ‘‘World Proved Reserves of Oil and

Natural Gas.’’ 5 Ibid.

6The United States produces almost 90 percent of the hemisphere’s coal and has significant

reserves—but there are limits to how it can be used.

However, there are significant roadblocks to achieving those goals. Differing philosophies about resource ownership, exploitation, and distribution within the Americas hamper the establishment of a free energy market. Weak or inconsistent

governance plagues some states, thereby limiting investment and cooperation. Dwindling reserves and rising consumption generally threaten energy security where further exploration and research into fresh technologies is absent.

Keys to overcoming these impediments are more active hemispheric diplomacy,

urging neighboring countries to embrace open markets, not cartels, more support for

improvements in democratic governance, and a commitment to diversify energy supplies.

STAGGERING STATISTICS

Energy sources can be broken down by fossil fuels, electricity generated from renewable sources, and nuclear energy. By far, fossil fuels are the mainstay of transportation systems and electrical powerplants—our major concern.

On average, the Western Hemisphere consumes about 30 million barrels of oil per

day, of which the United States uses more than 20 million barrels, two-thirds of it

imported.1 In 2005, net imports accounted for 58 percent of U.S. total petroleum

consumption. According to the Department of Energy, 13 states in our hemisphere

provided 49 percent of the United States’ gross imports of crude oil and petroleum

products. Top suppliers included Canada, Mexico, and Venezuela. These three countries accounted for 39 percent of United States gross imports in 2005, with Ecuador,

Colombia, Brazil, Trinidad and Tobago, and Argentina following close behind.2

As economies expand worldwide, car ownership is rising and new factories require

more energy. As an example of the relationship between energy consumption and

growth, China’s petroleum use increased by 15 percent in 2004, outpacing its 9 percent economic growth rate.3 Without significant discoveries of new reserves or technological advances, the world will face an energy crunch.

The United States has estimated reserves of 21 billion barrels of oil (in decline

since the 1970s) and 192 trillion cubic feet of natural gas. Canada has 178 billion

barrels of oil and 56 trillion cubic feet of gas, making it potentially the largest petroleum supplier. Mexico has only 15 billion barrels of oil and about 16 trillion cubic

feet of gas.4 Venezuela has an estimated 77 billion barrels of oil (supplying about

7 percent of United States’ needs) and about 149 trillion cubic feet of gas.5 These,

plus other known global reserves might last for 30 years or more, barring no new

discoveries.6

OBSTACLES TO COOPERATION AND SECURITY

Countries throughout the Americas hold differing concepts of property rights and

the purpose of government that impact resource use and the stability of markets.

Consequently, they have sharply divergent capacities to exploit resources and pursue technological advancement.

Apples and oranges

In colonial times, Britain’s weak rule permitted the growth of community governments and free commerce in the north. As a result, North Americans developed a

system of property rights that protected that which was granted to, bought, or invented by an individual. Spain’s military expeditions imposed centralized government and monopolies in the south. If not so stated in national charters of resulting

independent nations, the right to own property was considered a concession of the

state. Whereas individual citizens and private enterprises could stake claims to underground treasure in the United States and Canada, almost all Latin American

constitutions made subsurface resources the property of the state.

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7Thomas Catan and Andy Webb-Vidal, ‘‘Caracas warns oil companies of more tax increases,’’

The Financial Times, April 11, 2006, p. 11. 8Tim Weiner, ‘‘Corruption and Waste Bleed Mexico’s Oil Lifeline,’’ The New York Times, January 21, 2003, p. 1. 9The gas pipeline will be more expensive to build and operate than liquefying and shipping

gas. ‘‘The Explosive Nature of Gas,’’ The Economist, February 11, 2006, p. 36.

Today, property rights may be stronger in some Latin American countries than

others, but minerals, petroleum, and gas are controlled by those in power. Governments predominantly own fields, pipelines, and refineries, subjecting them to political influences. Where economies are not big or free enough to support enterprises

that can explore, extract, and market resources, the state offers concessions to foreign operators in exchange for part of the revenues.

These arrangements can remain stable for years. But if market prices rise, politicians may desire a bigger cut of the profits or suddenly think they have the capacity

to operate such industries on their own. Ecuador’s May 2006 takeover of Occidental

Petroleum’s concessions is an example of the latter. In Venezuela, deputy oil minister Bernard Mommer recently told foreign oil companies, ‘‘The government can

promise you whatever they want—it is not binding.’’ 7 Such caprice is an outgrowth

of centuries-old personalistic rule and traditions of impunity.

Squandering profits

For years, the revenue transfer from Pemex (Petrleos Mexicanos) to the Mexican

state was the epitome of industry serving a single-party state. By the time Mexico’s

first opposition president, Vicente Fox, came into office, Pemex was turning over

more than half its revenues to the government, amounting to half the federal budget. At the same time, executives claimed it was losing about $1 billion annually to

internal corruption.8 Since then, Petroleos de Venezuela (PDVSA) has surpassed

Pemex as an example of industry supporting a misguided state, but also funding

the malicious agenda of an authoritarian leader.

On December 2, 2002, business and labor leaders called a national work stoppage,

hoping to pressure Venezuelan President Hugo Chavez into resigning. Some 35,000

PDVSA workers walked out, temporarily slowing production. Chavez fired nearly

half of them, then put the semi-autonomous oil giant under his direct control. Petroleum income now appears to support his Bolivarian social programs, foreign debt

purchases, campaign contributions to leftist candidates in neighboring countries,

and a worrisome arms build-up. Democratic, market-oriented Trinidad and Tobago

could be a target of intimidation should Chavez decide to seize some of its adjacent

offshore gas fields.

Throughout the region, Chavez plays petropolitics. In September 2003, he accused

the Dominican Republic of harboring former President Carlos Andres Perez, a political foe. He then stopped oil deliveries, triggering a temporary energy crisis while

Dominican authorities scrambled for new suppliers. Such turmoil helps lift prices,

giving him the ability to offer discounted fuel to cooperative admirers in foreign

countries, including the United States, where he can influence politic discourse and

public opinion. In May 2006, he donated fertilizer and oil to Sandinista mayors in

Nicaragua. Presidential elections will take place there in November.

President Evo Morales of Bolivia is headed in a similar direction, announcing the

partial nationalization of gas fields in May 2006. He has so far followed Chavez’s

playbook in politics, announcing a constituent assembly to rewrite the constitution,

inviting Cuban advisors to help run the police, and devising a scheme to redistribute

land. Bolivia’s pygmy economy generates about the same activity annually as

Springfield, IL, and higher rents from the hydrocarbon industry could help Morales

consolidate power as long as mismanagement does not put him out of business.

Markets versus monopolies. Outside of the taxes, salaries, and dividends to stockholders, private energy companies use profits to modernize equipment, service fields

and mines, and conduct research in such areas as renewable energy supplies. In

contrast, Mexico’s Pemex still supports the state to such an extent that field maintenance and further exploration has become a minor priority leading to stagnating

output. Foreign investment could help, but Mexican elites fear such an opening

could lead to loss of financial control, while pliant politicians have convinced the

public that national patrimony is at risk. Sadly, Mexico now imports natural gas

from the United States, even though it has some 15 trillion cubic feet of reserves.

Further South, Venezuela’s Chavez announced an extravagant $20 billion, 5,000-

mile gas pipeline from Venezuela to Argentina that will probably never materialize.9

More realistically, he is starting to unite state hydrocarbon industries into a cartel

under his control. Petrocaribe, Petrocentro, Petroandina, and Petrosur are entities

he invented under an umbrella organization called Petroamerica. Ecuador’s statist

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oil and Bolivia’s hydrocarbon industries are good candidates for membership. Argentina, Uruguay, Central America, and many Caribbean states with few or no resources could make up the client base. High prices outside the cooperative would

support subsidies within. But attendant corruption, mismanagement, and lost foreign investment could also provoke collapse.

Energy-hungry China, the world’s fourth largest economy, is another power player

on the state industry side of the ledger. China has pursued petroleum partnerships

with Venezuela, Ecuador, Colombia, Argentina, Brazil, Mexico, and most recently

Cuba, where it could soon be drilling in the Florida Straits, 50 miles from United

States shores. China’s state-to-state business deals reinforce the region’s tradition

of centralized decisionmaking and anti-competitive practices.

JUMPING THE HURDLES

Rising global consumption and the emergence of powerful new economies mean

that timely adoption of effective energy strategies is crucial. The best way to assure

sufficient resources is to foster competition and let markets respond to needs. And

while prospects for much of the region seem grim based on prevailing anti-market

policies in neighboring countries, the United States has reliable energy partners in

market-oriented Canada, Trinidad and Tobago, and even statist Mexico, Colombia,

and Peru. Brazil could become an important associate in developing new supplies

of ethanol, a product that involves more private enterprise than government monopoly. To move the ball forward, the United States should:

• Embrace regional energy diplomacy. Right now Venezuela’s Chavez has seized

the initiative by developing monopolistic arrangements in Latin America. As

suggested by the proposed Energy Diplomacy and Security Act (S. 2435), the

U.S. Departments of State and Energy could promote a hemispheric energy security forum to encourage collaboration among willing states on competitive

energy markets, attracting investors, replacing monopolies with regulatory authorities, and sharing information and research—as some Latin American countries have attempted to do before without much success. The U.S. Congress

should support those and existing multilateral diplomatic efforts with adequate

funds for travel and dedicated personnel. • Urge neighboring countries to embrace free markets, not cartels. Eventual adoption of stronger property rights and competitive enterprise is the key to spreading prosperity through jobs and ownership. One way to make state energy monopolies truly public is to distribute company shares among the country’s voting

population. The government’s role then converts to regulation. United States

public diplomacy could help Latin American publics understand such concepts. • Consistently support improvements in democratic governance. Since elections

took place in the majority of Latin American nations in the 1990s, United

States support for checks and balances, constituent representation, transparency, and rule of law has been spotty. Development funds have been shifted

to serve other regions of the globe while big dollar environmental and health

programs have dominated Latin American assistance efforts. The U.S. Secretary

of State should ensure that development programs in Latin America help consolidate deeper democratic traditions to bring voters of all classes and income

closer to their governments and diminish the appeal of authoritarian populists.

• Promote diverse energy supplies. At home, the U.S. Congress should end the 54-

cent per gallon tariff on sugarcane-based ethanol meant to protect U.S. corn

farmers. There are other uses for corn besides making ethanol. The United

States, Caribbean and Central American allies, and Brazil could then collaborate in developing ethanol markets to free each other from Hugo Chavez’s extortionist petropolitics. American lawmakers should ease complicated regulations

that limit refinery expansion and mandate complicated regional recipes for gasoline that have made it difficult for existing refiners to meet growing demands.

By equal measure they should make further exploration possible for responsible

extraction of fossil resources.

CONCLUSION

According to the United States Department of Energy, Latin America will require

nearly $1.3 trillion in energy sector investment between now and 2030. Unfortunately, high oil prices have resulted in a resurgence of government control over industries and the rise of populist, authoritarian leaders in Venezuela and Bolivia.

Outside of the hemisphere’s market economies, needed investment will probably not

occur. While the United States cannot rescue every neighbor from bad decisions, it

can encourage cooperation among allies in making ones that will help sustain

growth and broaden prosperity.

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As responsible neighbors, we must agree on policies that allow market forces to

shape demand, guide energy users in changing consumption habits, and promote the

development of new technologies such as fuel cells and hydrogen power. Considering

the emergence of powerful global economies and expanding populations in our own

hemisphere, there is little time to lose.

Again, I appreciate the chance to provide testimony on this important topic and

commend the committee for its work.

PREPARED STATEMENT OF JOHANNA MENDELSON-FORMAN, PH.D., SENIOR ASSOCIATE,

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, DC

My name is Dr. Johanna Mendelson-Forman. I am a senior associate at the Center for Strategic and International Studies, and formerly the director of Peace, Security and Human Rights Programs at the U.N. Foundation. I am an expert on postconflict reconstruction issues, security and development, and a Latin Americanist by

training. I appreciate this opportunity to provide the committee with written testimony.

For the last decade I have worked on security issues in this hemisphere and in

Africa. My work on peace building and development have led me to conclude that

among the most important relationships that can ensure a durable peace is by using

the issue of energy supply as a tool for building security and development. A secure

source of energy in a country emerging from war can mean the difference between

a safe environment and one riddled by crime. Giving communities access to electricity and lighting can reduce criminal activity that often frequents war zones.

Using the potential of renewable energy, we have also learned that creating products like ethanol and biodiesel can provide a ready means of employment of demobilized soldiers and combatants. Not only will growing the feedstock for biofuels allow

people to earn a decent living and provide immediate job security, but it is also clear

that renewable biofuels can support transportation. Biodiesel is easily used in

trucks and cars with diesel engines. Little refining is needed for this product. And

helping farmers produce crops that can be converted to bioenergy also gives these

individuals a chance to export products to a world market where alternative fuels

are in high demand.

Unfortunately, our planning for reconstruction has often overlooked what has become very clear in the last few years of soaring energy costs, and less reliable

sources of fossil fuel. In Africa, the Caribbean, and many parts of Southeast Asia,

the climate is ripe for converting sugar and other crops into fuel. And the appropriate use of biomass energy, while used at a community level, could also be expanded to ensure that all people have access to fuel for cooking.

Not only does an energy and security approach benefit the war-affected country,

but it also has the ability to create work, serve as a poverty alleviation tool, and

provide a means for energy deficient countries to rise from dependence on fossil

fuels. In the recent World Bank Report on biofuels the Bank economists calculated

that for every unit of energy produced from agricultural crops you create 100 new

jobs. The 25 poorest countries, many of which are also conflict-ridden, are also bereft

of natural resources for energy generation. A focus on renewable sources of energy

helps to promote peace and a more stable economy. Development of an indigenous

biofuel industry could provide the last best chance for highly indebted nations to reduce the burden of paying for high priced energy derived from fossil fuels, thus permitting precious state funds to be used on social and economic development.

One need only look at our own hemisphere to comprehend the linkage between

energy and security in the last few years. The Caribbean, our third border, is a region ripe for the creation of a huge biofuel producing zone. Today it still lacks the

adequate infrastructure or investment to start the process in a systematic or coherent fashion. But a policy that promoted an energy zone in the Caribbean would go

far in supporting the concept behind the legislation introduced by Senator Lugar.

Weak states and the increased vulnerability that many Caribbean islands have

to drug traffickers and transnational crime also further complicates the situation

when little funds are left to fight these kinds of problems when resources are going

to pay for energy costs. Regional dependency on fossil fuels among almost every

Caribbean island (except Trinidad and Tobago which has oil and natural gas) makes

all these nations vulnerable to the petroleum diplomacy of President Hugo Chavez

of Venezuela who has provided cheap subsidized fuel from Venezuela to win over

support for his political agenda in the Americas. Subsidized Venezuelan oil gives

Chavez an important leverage point for political gain as so many of these island

states have come to rely on him to meet their energy needs. This situation further

exacerbates United States relations with many Latin American states who see their

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1 Information for this section is derived from a field assessment performed by the author, and

Dr. Daniel de la Torre Ugarte and Ms. Charlotte McDowell for the U.N. Trade and Development

Agency (UNCTAD) and the U.N. Foundation Biofuels Initiative in November 2005.

need for oil as a trade-off between support for the government of Hugo Chavez and

their own need to maintain good relations with the United States.

TRANSNATIONAL THREATS AT THE THIRD BORDER

Without a stable supply of energy for oil dependent nations of the Caribbean, existing problems will only be exacerbated by the shock of economic instability coming

from fluctuating oil prices. A majority of Caribbean states experience problems that

already impact U.S. national security and well-being, with significant potential

growth:

• Weak or failing states (Haiti), • Potential launching grounds for terrorist activities, • Transshipment of narcotics, • HIV/AIDs, • Illegal immigration, • Transshipment of weapons, and • Safe havens for criminal activities such as money laundering.

Even though many Caribbean islands have experienced economic growth over the

past decade, these gains are now in jeopardy as short- to medium-term high-priced

fossil fuels and long-term depletion concerns threaten economic sustainability. Only

with specific interventions to protect island economies through alternative energy

sources will the Caribbean be able to sustain economic growth. Also, a move toward

energy independence will promote security through generating development and stability.

Access to energy has also served as both a stick and a carrot for United States

policies in the Latin American region. Currently, United States dependency on oil

produced in Venezuela has created turmoil in our policies to democratic development and democracy promotion. The Caribbean, in particular, has been a focus of

the use of oil as a carrot through potential political endorsement at the regional and

international levels. The potential for the use of Caribbean oil dependence as a stick

is inherent in the lessons from the recent experience of the Russian shut-off of

Ukrainian gas supplies, and not a relationship conducive to United States national

security.

I will use the opportunity of this testimony to describe two important cases. The

first will discuss the potential for using alternative energy production as a means

of saving Haiti from state failure, while also providing the Dominican Republic with

an important export market for its sugar production. Combining peace building and

renewable energy may very well save Hispaniola from the long-term prospect of

state failure and decline.

The second case will discuss how in Bolivia, a country where the United States

Government spends millions of dollars on coca eradication and crop substitution,

that a better way to approach this problem may be through a focused project for

renewable energy that would use feedstock that could be converted into ethanol, and

then used for both domestic and export markets. The world demand for ethanol continues to grow each day, and giving Bolivian peasants a chance to grow crops whose

export value is high, and where demand is insatiable, affords a brighter alternative

for development than our current crop substitution programs provides.

1. Saving Hispaniola

An island-wide project on bioenergy could create significant benefits for peace and

security. Not only would the development of alternative energy sources benefit the

Dominican Republic, it may also lay the foundation for greater cross-border collaboration with Haiti. The continued deterioration of political, economic, and environmental conditions in Haiti creates strain on the Dominican Government as continued migration across a porous border, transshipment of illegal narcotics, and the

vulnerability to spreading issues of HIV/AIDS and violence rises. The benefits of

biofuels for energy self-sufficiency and poverty reduction would potentially also be

available to Haitian communities at the border. Such a situation could lead to a

wider effort to use energy as a bridge to peaceful relations between the two nations

and improvement of the Haitian economic and social situation.1

CONTEXT

The Dominican Republic is a poor island nation that has experienced remarkable

economic growth in the last few years. Agriculture and sugar in particular, has been

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2 UNDP National Human Development Report, Dominican Republic 2005.

replaced by free trade zones and a range of service industries as the main revenue

generating businesses as the primary source of export earnings. Yet, according to

the 2005 National Human Development Report, the Dominican Republic’s shift to

these industries was accompanied by considerable social upheaval and scarce

human development. The accelerated and unplanned growth of the tourism sector

has created problems of resource overexploitation, citizen insecurity, and the predominance of enclave economies, and is seen as unsustainable in its current form.

The free trade zones have been stagnating and are losing competitiveness in relation to other countries, and job creation has been greatest in the informal sector,

thereby prompting the deterioration of quality of employment and living conditions

for the majority of the population.2

But sustained economic growth and social integration in the Dominican Republic

will require the resolution of two important issues: Energy and the political crisis

in Haiti. Without a source of fuel to generate electricity, the Dominican Republic

will be unable to grow its important tourism industry, let alone in an environmentally sustainable and socially responsible manner. Unless the downward spiral

of Haiti is stopped, the proximity to a failed state at its border will continue to put

pressure on the Dominican Republic through unabated migration of Haitians that

continues to tax an already underfunded public sector and is the cause of much social tension. Thus, without alternative energy sources, economic development will

remain illusive, and unless the Haitian border is converted into a zone where

projects that generate employment and energy on both sides, there will be little

hope for long-term economic progress and social stability.

ENERGY NEEDS

The dramatic rise in oil prices over the last 6 months has precipitated a crisis

in the energy sector. Over 80 percent of the Dominican Republic’s energy comes

from petroleum products. As the price of oil has increased so has the Nation’s debt.

With no other immediate energy source, the Dominican Republic is now searching

for sustainable alternative energy supplies that can mitigate the effects of its oil dependency.

Bioenergy is not a new idea in the Dominican Republic. Its large sugar plantations have already attracted the attention of investors. But to date no large-scale

conversion of sugarcane to ethanol has occurred, as the United States’ quota system,

the possibility of gaining preferential market access to the European Union, and the

domestic price support provided by the Dominican Government combine to create

prices well above world market levels. These conditions have delayed investment

considerations on biofuels, and therefore thinking about biodiesel fuel is relatively

new and limited to small scale projects.

Yet all this may change, based on information gathered on the recent visit to the

Dominican Republic. Not only is there a new consensus at the highest political level

that alternative energy is a priority issue, but it is also clear that the most recent

increase in oil prices has strengthened the hand of President Leonel Fernandez to

take steps regarding the energy crisis. These steps will ultimately result in important conservation initiatives such as allowing combined ethanol-gasoline mixtures.

He has also supported the National Commission on Energy to coordinate the government’s response to the island’s energy needs. On November 8, the President signed

an agreement with President Uribe of Colombia in which Colombia will provide energy assistance and the transfer of technology for ethanol production. It is also clear

from the number of Brazilian investors knocking at the doors of government agencies that the time for biofuels has arrived in the Dominican Republic.

POTENTIAL FOR AN ISLAND-WIDE PROJECT

Another compelling reason for considering the Dominican Republic for a pilot case

for the biofuels initiative is that it shares an island with one of the most environmentally devastated nations on earth—Haiti. After years of neglect, internal conflict, and entrenched poverty, Haiti’s problems have compounded the urgency of

finding alternative energy sources that would serve the needs of both Haiti and the

Dominican Republic. Projects that used the development of renewable energy resources between both countries could also have a positive impact on resolving some

of the more intractable political problems. Solving the energy needs of both the Dominican Republic and Haiti could also lead to some innovative models of peace

building. Bringing citizens together around common problems, such as the lack of

electricity or fuel, can potentially create solutions that politicians may be unable to

resolve.

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PRODUCTS: ETHANOL

Sugarcane has historically been one of the most important agricultural products

of the Dominican Republic. During the mid-1980s, sugar accounted for 85 percent

of the country’s export earnings. However, sugarcane production peaked with the

1982 output of 11.8 million metric tons, and in 1993 the amount of land planted

with sugarcane peaked at 234,000 hectares (736,000 MT).

Currently, the sugar industry is far from these levels, with production reaching

only 5.3 million metric tons and a total of 135,000 hectares planted with the crop.

This loss in both land utilization and productivity has resulted from several factors:

The reduction of the export quota to the United States, world overproduction of

sugar and therefore falling international prices, the arrival of non-sugar sweeteners,

lack of investment in the sector, and unsuccessful privatization efforts.

Given the experience of sugar production in the Dominican Republic, these gaps

between historical and current sugar production raise the question of whether conversion of sugarcane to ethanol provides an alternative for revitalization of sugarcane production. The answer to this question is complex, as there are two clearly

distinguishable producer groups with diverse interests. On one hand are large, modern, integrated producers, and on the other hand are colonos: Independent landholders that received land from the privatization of land previously owned and operated by the government.

Most of the current domestic market and sugar export quota is filled by the production of the modern sector, which also absorbs about 30 percent of the colonos’

production. These producers sell at prices well above the 15 cents per pound that

characterizes world markets. This access is to a large extent a function of their control of marketing and distribution systems in both the domestic and U.S. markets.

For these modern producers, the conversion of sugar to ethanol is not an immediately attractive venture. Ethanol would garner prices for sugarcane below 12 cents

per pound, compared to the current price of nearly 20 cents per pound. Even when

considering expansion of productive capacity beyond the traditional sugar market,

it would not be possible to recuperate the capital investment required for the conversion to ethanol within the expected time frame to recoup their capital investment

of 7 years. In summary, modern producers do not see themselves as pioneers of ethanol production in the Dominican Republic.

The other important producer group is the colonos. They represent approximately

60,000 hectares of sugarcane land. The colonos view the conversion of sugarcane to

ethanol as a way to develop a market for the sugar they currently produce or could

potentially produce on fallow land. They are confident that a long-term plan for ethanol would allow them to invest in sugar productivity that would yield more than

60 MT/ha, a level nearly double their current yield of 32 MT/ha. This would allow

colonos to produce sugar for ethanol at levels that would be profitable for private

investors. The aim would be to supply enough feedstock for at least three plants of

1 million metric tons. However, one of the challenges facing the colonos is their lack

of control of processing facilities needed for both sugar and ethanol.

Although foreign private investors have shown interest in establishing ethanol

conversion plants to process the colonos’ harvests, the issue still remains on how to

coordinate between producers and processors to maintain a stable long-term agreement on the price and supply of feedstock. Potential investors have indicated the

need for a clear institutional and legal framework for biofuels, as well as the need

for specific incentives for ethanol production. The level or type of incentives required

to make these investments feasible is unclear.

In any case, utilization of bagasse for the cogeneration of electricity is viewed as

necessary complement of ethanol conversion facilities. The level of electricity generated beyond the needs of conversion facilities would depend on the efficiency of

the boilers and the size of the plants.

Finally, there is support at the country’s only oil refinery (REFIDOMSA) for the

use of ethanol in a fuel blend of up to 10 percent with gasoline. The refinery has

already drawn up plans for developing the infrastructure to store and blend either

local or imported ethanol with gasoline in preparation for the possibility of lowpriced ethanol.

BIODIESEL

There is nearly common agreement on the part of all public and private actors

in the biofuels sector to support production of biodiesel. The area known as the

‘‘linen del noroeste’’ (northwest line) is viewed as one of the areas with greatest potential, and is also one of the most economically depressed areas of the country. This

region includes a significant amount of idle land suitable for the production of

Jatropha, castor, coconut, and other species rich in oil content. To a large extent,

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3The Consorcio Tecno-DEAH is supported by the Dominican Institute of Integrated Development (IDDI), and directed by Omar Bros, Flanz Flambert, and Alex Rood.

the enthusiasm for biodiesel production is rooted in its potential to provide not only

a cleaner and renewable source of energy, but also in its potential to generate economic development in the region and to recuperate eroded areas. The transparent

integration of biodiesel into the current distribution and utilization system is also

perceived as an important advantage.

While there is much more agreement regarding the potential production of biodiesel than there is for ethanol, there is less specific information. The Ministry of

Agriculture is currently in the process of assessing the resource potential for these

and other species, as well as regions in the country suitable for production.

Various stakeholders expect that the oil crops used as feedstock for biodiesel

would be largely produced by small farmers, and that the cost of the feedstock

would be compatible with small scale, less capital intensive conversion processes.

Some of the oil crops that are endemic to the Dominican Republic and Haiti, such

as Jatropha, could also play a significant role in recuperating degraded soils and

slopes, thereby alleviating a significant environmental problem for both countries.

INTEGRATED DEVELOPMENT OPPORTUNITIES

There are currently various cases in the Dominican Republic of small scale alternative energy projects aimed at creating energy self-sufficiency in rural areas by utilizing biomass. These projects range from development of biodigestors by the Organization of American States’ Inter-American Institute for Cooperation on Agriculture

(IICA) to research by the University Institute of Technology (INTEL) on the possibilities for generating energy from various seaweed species. Additional reports of individual communities that have developed solar power capabilities with the support

of Peace Corps volunteers and have been demonstrating their results to interested

members of other Dominican and Haitian communities, indicating that further

small-scale projects have yet to be disseminated and replicated.

The proliferation of such small-scale, development-oriented projects indicates the

need for coordination of researchers and practitioners in the interests of creating dialog on existing efforts. Both the UNDP country office and the Dominican Global

Foundation for Democracy and Development expressed interest in potential joint

support of a series of conferences to generate knowledge-sharing and cooperation on

such projects.

A Haitian-Dominican private-sector and NGO consortium is also currently seeking

funding for a planned cross border community-based biodiesel project.3 This effort

has been presented to the local UNDP office as well as the European Community

for funding. The project would initially work to develop jatropha, sweet sorghum,

and castor beans to generate biofuels for community-based consumption on both

sides of the border. They have also drawn up plans for a potential ethanol project

that would utilize mobile mills to be deployed across the border to Haiti to overcome

infrastructure problems and provide for Haitian laborers in their native communities to gain employment. The UNDP office has reportedly secured a European contribution to this project that should become available by the end of the year, and

is looking to their own ability to provide small grants to such an effort and related

energy sector projects. Both the NGO itself and the UNDP office expressed the need

for additional technical support for this project.

Aside from this potential project, other U.N. offices have limited activities in the

area of energy. FAO is in the initial stages of considering the impact of renewable

energy projects in the Dominican Republic. In 2004, they published a report on the

rehabilitation of the Dominican sugar industry and a socioeconomic survey of the

small-scale sugar growers that could be relevant to an ethanol-based project, and

have also made important contacts with both the political and agricultural community. For its part, the UNDP has been working in the area of energy to a limited

degree through its small grant program, but efforts have been primarily in the area

of electrification of rural areas and solar projects. The potential for collaboration

with the UNDP through the small grants program and technical support or information-sharing appears to hold positive partnership opportunities rather than the duplication of efforts.

Environment for change

The legal-regulatory environment has the potential to assist biomass energy alternatives. As early as 1949, a law was passed regarding ethanol-gasoline mixtures for

automobiles. Even before this current crisis, the government of former President

Hipolito Mejia signed an executive order in 2002 that would provide tax exemptions

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4Decreto No. 732–02, 2002 (September 10).

5Decreto No. 566–05, 2005 (October 11).

to businesses for developing technical facilities to mix ethanol with gasoline.4 In October 2005, President Fernandez issued an executive order that created technical requirements for the mixing of ethanol with gasoline, and also set specific guidelines

for mixture that would allow up to 10 percent ethanol to be mixed with gasoline.5

While this was an important step and signaled to refiners that ethanol mixtures are

allowable, the actual decree does not mandate immediate implementation.

In terms of trade, the Dominican Republic has access to preferential and growing

United States markets for ethanol through the provisions in the Caribbean Basin

Initiative and the CAFTA–DR agreement. Because the legal import quotas of these

initiatives are expressed in percentages, as the U.S. market continues to grow, the

absolute amount allowed for duty-free imports will also grow. The United States recently passed a renewable fuels mandate of 7.5 billion gallons, which may provide

a significant export opportunity for countries such as the Dominican Republic.

1. Caribbean Basin Initiative—The Caribbean Basin Initiative was established in

1983 to promote ‘‘a stable political and economic climate in the Caribbean region.’’

As part of the initiative, duty-free status is granted to a large array of products from

beneficiary countries, including fuel ethanol under certain conditions. If produced

from at least 50 percent local feedstock (e.g., ethanol produced from sugarcane

grown in CBI beneficiary countries), ethanol may be imported duty-free to the

United States. If the local feedstock content is lower, limitations apply on quantity

of duty-free ethanol.

Nevertheless, up to 7 percent of the U.S. market may be supplied duty-free by

CBI ethanol containing no local feedstock. In this case, hydrous (‘‘wet’’) ethanol produced in other countries, historically Brazil or European countries, can be shipped

to a dehydration plant in a CBI country for reprocessing. After the ethanol is dehydrated, it is imported duty-free into the United States. Currently, imports of dehydrated ethanol under the CBI are far below the 7 percent cap (approximately 3 percent in 2003). For 2003, the cap was about 150 million gallons, while only about

60 million gallons were imported under the CBI. Dehydration plants are currently

operating in Jamaica, Costa Rica, and El Salvador.

2. CAFTA–DR—The Free Trade Agreement with Central America and the Dominican Republic (CAFTA–DR) does not increase overall access to the United States

ethanol market. The agreement allows the Dominican Republic and Central American countries and to share in the CBI quota, but does not increase the quota.

Whether through CBI or CAFTA, the vehicle currently exists to utilize export potential to the U.S. as a means to generate the volume and experience required for

a viable domestic ethanol industry.

Public opinion

Public awareness of the energy crisis is at best a financial issue. The price of gasoline at the pump has impacted lower income families with one car and the price

of public transportation. It has also affected the cost of electricity, exacerbating

what is already one of the highest electricity costs in the region. Energy conversation as a public policy is still in its initial phases. The government has chosen to

educate consumers about saving energy through public service announcements and

billboards. The National Energy Commission published a consumer guide, but it is

unclear who actually has read it, or the degree of its dissemination nationwide.

What is clear is that environmental considerations for clean energy are less evident,

though many nongovernmental organizations exist with a mission to promote conservation of natural resources, forest land, and soil.

For the Dominican Republic, the challenge is one of timing and creating a consensus around what steps are needed immediately to ensure reduced demand for

gasoline and electricity. The social impact of closing gasoline stations is dramatic.

From the time that the President ordered service station closures until the week

of November 20, 2005, newspapers reported a 34 percent decline in gasoline consumption. But progress on this front will ultimately impact the economy as fewer

individuals are mobile on the weekends, especially during the key holiday shopping

season.

Another challenge for the Dominican Republic will be to find a way to service the

debt it has incurred in the electric sector. According to interviews and newspaper

accounts, the government has a half-billion dollar shortfall in electricity revenues,

something that continues to prevent adequate and continuous production of electricity. That situation, coupled by a 40 percent loss of electricity through distribution inefficiencies and illegal tapping of power lines, has created an unworkable situation in a country where fossil fuels are essential for power.

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6The venture was agreed to by ALCOGROUP of Belgium, an ethanol producing and distributing company, and Tomas Destil of Spain, a specialist in engineering and manufacturing of alcohol distillation plants. The plant was originally scheduled to be under construction in September of 2005 and to go online in the last trimester of 2006.

Foreign investment opportunities

Internationally, the conditions in the Dominican Republic have attracted the attention of foreign investors who see the potential for bioenergy and are aggressively

pursuing government offices in search of contracts and long-term arrangements to

reap the rewards of ethanol production. Brazil has been especially evident in its

trade missions to government offices and to private sector investors as that nation

have both the technology and the ethanol that could jump-start the production of

fuel mixtures. A joint Belgian-Spanish private sector endeavor has plans for immediate construction of a 100,000 ton ethanol plant, along with support of the sugargrower federations, although the actual start date of construction is uncertain.6

How much foreign investment will help move the Dominican Republic toward energy independence is still unknown. In our conversations with government officials

and private sector individuals, there was a more marked interest to pursue biodiesel

as a first solution to high petroleum prices. Indeed, there was broad consensus

about biodiesel as a major approach to the immediate energy needs because of the

lower necessary investment for production. Additionally, the land needed for biodiesel production could be less arable, and even arid, given the current sources of

oil from nut-bearing plants like Jatropha and Castor bean. Even though ethanol was

on everyone’s agenda, it was also evident that it would require much larger investments to start production on any larger-scale program.

Potential funding mechanisms

It is very likely that biofuels-related projects would have access to the Clean Development Mechanisms (CDM) of the Kyoto Protocol. Access to these mechanisms

could provide marginal revenues that would reduce investment risk for biofuels

projects. However, gaining access to these funds is not a trivial task: It requires the

estimation of environmental impacts from a baseline situation and is a complex

process that could delay or even limit access to projects in the Dominican Republic.

There is also a need to access long-term financing that could make projects viable

with significant investment in fixed assets over a longer-term repayment period

than private investors are willing to offer. Due to their potential environmental and

social impacts, some of these projects could be particularly suited to ‘‘socially concerned’’ investors.

Government position today

President Leonel Fernandez has laid a strong foundation for a new energy policy

in the Dominican Republic. With an eye toward good governance and insistence on

using a National Energy Commission to unite his key ministries, he has created a

sense of urgency and collaboration on the need to solve the energy crisis that was

evident in all our meetings, from the Foreign Ministry, to Agriculture, to Industry

and Commerce. Every government leader sees himself or herself as a stakeholder.

It would be too easy to say that coordination and information sharing is complete,

however. As in any bureaucracy, there are gaps in communication, and a lack of

understanding in specific issue areas. Yet given the nation’s history of having suffered a long period of authoritarian rule, followed by a series of centralized government authorities, the situation under Fernandez’ leadership provides the basis for

eventual success in developing a much higher degree of energy independence.

The political component of Fernandez’ mission is also important. Unlike his predecessors, he recognizes that any energy solution in the Dominican Republic must also

embrace the actual situation in Haiti. His approach to securing an energy future

of Hispaniola is genuine, and though an uphill battle, is sensitive to how his Haitian

neighbors affect not only the Dominican Republic’s own social climate, but also its

potential as a place for foreign direct investment.

Challenges

Key challenges for 2006 will include:

• Developing an integrated strategy among government agencies and public

groups on an appropriate and measured policy framework for bioenergy and

other alternative sources, from photovoltaic to wind energy.

• Encouraging small-scale projects that provide immediate energy cost relief to

the rural areas, such as methane farms, and other types of biomass projects

that can help local producers.

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• Creating a public campaign that supports the eventual conversion of sugar to

ethanol, while also engaging larger producers and independent sugar growers

in a dialog about the timing and sequencing of such conversion. • Developing an immediate program to launch biofuels as a means to generate

electricity in its national power system. • Providing broad citizen education at all levels of schooling that support energy

conservation. • Working with the international community to ensure that the efforts in the Dominican Republic are captured so they can be applied and refined for use by

other small island states. • Creating a binational commission after the Haitian elections that uses the current energy crisis as a means to rebuild trust and confidence between the two

nations, thereby creating a new pathway for engagement and dialog.

The Dominican Republic is ripe for new energy opportunities. It was easy to engage leaders, NGOs, the private sector, and academics on the importance of energy

independence. If the high price of fossil fuels continues over the long-term as experts predict, it will be even more urgent to consider the leadership of the Dominican Republic, through its President Leonel Fernandez, as a role model for working

toward short-, medium-, and long-range solutions to current conditions.

2. Ending addictions and creating new markets: Biofuels for crop substitution

The United States has two addictions: One to oil and the other to drugs. In his

State of the Union speech in January, President Bush announced that the United

States must end its addiction to oil. And he advocated agricultural crops as alternative energy sources. What he failed to note is that those same crops could also

address another addiction—cocaine.

A proposal to encourage Andean growers to substitute grasses that can be converted to ethanol for the lucrative coca plant could help address the scourge of cocaine. With a world market suddenly craving ethanol, not only would farmers have

a crop with insatiable demand, but growing it would provide a legal, sustainable income. This two for one result could form the foundation of an approach to Latin

America that promotes the region’s need to address security, poverty reduction, energy needs, and sustainable development.

Our dependence on imported petroleum from conflict areas must end. There is no

better opportunity than in our own backyard. The Caribbean and Central America

are especially ripe for a full-blown energy policy that uses the agricultural resources

already in place—sugar and oil palms—to support ethanol and biodiesel industries

that will reduce dependence on fossil fuels, create employment, and address an everincreasing demand for sustainable energy from renewable resources. And the Andean region, where hundreds of hectares of illegal cocaine are grown and destroyed,

the potential to convert these plants into biofuels for transportation could transform

the economy of the entire region.

With $70 a barrel oil, and no end in sight, the Caribbean nations are quickly

turning to biofuel production as an alternative to their mono-economies based on

sugar and tourism as the hope of the future. And high oil prices make using sugarcane even more profitable for regional producers to make ethanol than to import fossil fuels. With the market for Caribbean sugar limited in Europe and the United

States, small producers are making the switch. St. Kitts and Nevis have already diverted their sugar harvest to ethanol, and larger islands like the Dominican Republic and Barbados are exploring such prospects, while also thinking about ways to

convert other sources such as palm oil to biodiesel. This model could also be replicated in the Andean countries, where large scale production of feedstock for

biofuels opens an entire new market for international trade and development.

Brazil began tapping ethanol more than three decades ago. More than 40 percent

of Brazil’s energy comes from green sources, compared with 7 percent in the developed world. It plans to become energy self-sufficient this year, a landmark accomplishment. The country has developed ethanol technology and is aggressively marketing its technology to other countries, particularly the Caribbean. The efficiency

of converting sugarcane into ethanol is enhanced by using the waste, bagasse, to

fuel the entire process, thereby eliminating the dependence on fossil fuels and reducing energy costs.

Even with the second largest supply of natural gas in the hemisphere, Bolivia still

remains dependent on foreign oil sources for transportation. If a program to encourage energy self-sufficiency were launched with a way to generate better livelihoods

for those currently growing coca plants, the potential for creating a drug-free zone

in the Andes would carry with it energy independence.

An enlightened new policy toward our Latin American relations must attack our

addiction to oil and drugs in a way that also addresses United States national secuVerDate 11-MAY-2000 14:15 Apr 19, 2007 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 H:\DOCS\ENERGY.TXT mich PsN: mich
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rity concerns. Biofuels are part of the solution. Continued income inequality produces political unrest which can prepare the ground for terrorism to take root. And

corruption that arises from the trade in illegal narcotics, porous borders, weak governance, and continued regional dependence on Venezuelan oil weaken the United

States’ ability to leverage its influence in a region where our national interests remain an integral part of our own post 9–11 security agenda.

A Latin America policy that anchors itself on the development of alternative energy sources such as ethanol and biodiesel not only addresses the challenge of the

future energy needs, but also becomes a major tool for development, poverty reduction, and regional diplomatic and commercial cooperation.

A renewable energy policy for the hemisphere—especially the Caribbean and Central America, and the Andean region—developed in close cooperation with Brazil

will also confront some of the major threats that we face now:

• Energy self-sufficiency as oil supplies are being depleted, a reality in some countries as early as 2025.

• Poverty reduction and the creation of sustainable livelihoods through development of highly marketable products—the demand for which grows steadily as

China, India, and other countries expand rapidly.

• An alternative to the expansion of nuclear energy in poor countries that can illafford the construction, let alone the maintenance, of nuclear power plants.

• Ending the tyranny of drug cartels that corrupt security forces, and victimize

growers who have few viable economic alternatives in farming.

• Reducing the risks of failed states, especially in the Caribbean.

The president’s message of ending addictions should be taken at face value. Isn’t

reducing poverty and income inequality, while also ending the vagaries of global petroleum supply, a good approach to our hemispheric security policy?

Thank you for allowing me the opportunity to propose some new approaches to

an old problem. The time is ripe for creative thinking about how to use energy security as a keystone in our approach to hemispheric issues, to build stronger ties with

our neighbors, and to promote programs that reinforce policies that prevent terrorism from taking root in our own backyard. The surest way to that goal is by engaging in an enlightened development program in the Americas that makes renewable energy the core of its approach and provides opportunities for public-private

partnerships to ensure that within the next decade we live in a region no longer

dependent on fossil fuels for transport and for living.

Æ