U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

43–575 PDF 2010

PIPELINE POLITICS: ACHIEVING ENERGY SECURITY 

IN THE OSCE REGION 

HEARING 

BEFORE THE

COMMISSION ON SECURITY AND 

COOPERATION IN EUROPE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

JUNE 25, 2007 

Printed for the use of the 

Commission on Security and Cooperation in Europe 

[CSCE 110–1–3] 

( 

Available via http://www.csce.gov 

COMMISSION ON SECURITY AND COOPERATION IN EUROPE 

LEGISLATIVE BRANCH COMMISSIONERS 

HOUSE SENATE 

ALCEE L. HASTINGS, Florida, 

Chairman 

LOUISE McINTOSH SLAUGHTER, 

New York 

MIKE McINTYRE, North Carolina 

HILDA L. SOLIS, California 

G.K. BUTTERFIELD, North Carolina 

CHRISTOPHER H. SMITH, New Jersey 

ROBERT B. ADERHOLT, Alabama 

JOSEPH R. PITTS, Pennsylvania 

MIKE PENCE, Indiana 

BENJAMIN L. CARDIN, Maryland, 

Co-Chairman 

RUSSELL D. FEINGOLD, Wisconsin 

CHRISTOPHER J. DODD, Connecticut 

HILLARY RODHAM CLINTON, New York 

JOHN F. KERRY, Massachusetts 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

SAXBY CHAMBLISS, Georgia 

RICHARD BURR, North Carolina 

EXECUTIVE BRANCH COMMISSIONERS 

VACANT, Department of State 

VACANT, Department of Defense 

VACANT, Department of Commerce 

(II) 

PIPELINE POLITICS: ACHIEVING ENERGY 

SECURITY IN THE OSCE REGION 

JUNE 25, 2007 

COMMISSIONERS 

Page 

Hon. Alcee L. Hastings, Chairman, Commission on Security 

and Cooperation in Europe ..................................................... 1 

Hon. Benjamin L. Cardin, Co-Chairman, Commission on 

Security and Cooperation in Europe ...................................... 3 

Hon. G.K. Butterfield, Commissioner, Commission on Security and Cooperation in Europe .............................................. 4 

WITNESSES 

Greg Manuel, Special Adviser to the Secretary and International Energy Coordinator, Department of State ............. 6 

Al Hegburg, Deputy Assistant Secretary of Energy for International Energy Policy ............................................................ 10 

Matthew Bryza, Deputy Assistant Secretary of State for European and Eurasian Affairs .................................................. 12 

Ambassador Steven R. Mann, Principal Deputy Assistant 

Secretary of State for South and Central Asian Affairs ....... 14 

H.E. Yashar Aliyev, Ambassador of the Republic of Azerbaijan to the United States ..................................................... 20 

H.E. Mikhail Khvostov, Ambassador of the Republic of 

Belarus to the United States .................................................. 22 

Keith Smith, Senior Advisor, Center for Strategic and International Studies ....................................................................... 26 

Pierre Noe ̈l, Research Associate, University of Cambridge ..... 28 

APPENDICES 

Prepared statement of Hon. Benjamin L. Cardin .................... 36 

Prepared statement of Hon. Sam Brownback ........................... 38 

Prepared statement of Greg Manuel ......................................... 39 

Prepared statement of Al Hegburg ............................................ 49 

Prepared statement of H.E. Yashar Aliyev ............................... 53 

Prepared statement of H.E. Mikhail Khvostov ......................... 56 

Prepared statement of Keith Smith .......................................... 59 

Prepared statement of Pierre Noe ̈l ............................................ 69 

(III) 

(1) 

PIPELINE POLITICS: ACHIEVING ENERGY 

SECURITY IN THE OSCE REGION 

June 25, 2007 

COMMISSION ON SECURITY AND COOPERATION IN EUROPE

WASHINGTON, DC 

The hearing was held at 2:58 p.m. in room 419 Dirksen Senate 

Office Building, Washington, DC, Hon. Alcee L. Hastings, presiding. 

Commissioners present: Hon. Alcee L. Hastings, Chairman, Commission on Security and Cooperation in Europe; Hon. Benjamin L. 

Cardin, Co-Chairman, Commission on Security and Cooperation in 

Europe; and Hon. G.K. Butterfield, Commissioner, Commission on 

Security and Cooperation in Europe. 

Witnesses present: Greg Manuel, Special Adviser to the Secretary 

and International Energy Coordinator, Department of State; Al 

Hegburg, Deputy Assistant Secretary of Energy for International 

Energy Policy; Matthew Bryza, Deputy Assistant Secretary of State 

for European and Eurasian Affairs; Ambassador Steven R. Mann, 

Principal Deputy Assistant Secretary of State for South and Central Asian Affairs; H.E. Yashar Aliyev, Ambassador of the Republic 

of Azerbaijan to the United States; H.E. Mikhail Khvostov, Ambassador of the Republic of Belarus to the United States; Keith Smith, 

Senior Advisor, Center for Strategic and International Studies; and 

Pierre Noe ̈l, Research Associate, University of Cambridge. 

HON. ALCEE L. HASTINGS, CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. HASTINGS. Ladies and gentleman, good afternoon. I want to 

warmly welcome you to this hearing of the Commission on Security 

and Cooperation in Europe. 

I expect that Senator Cardin and others of my colleagues may 

come along, but in the interest of time I certainly do not want to— 

oh, there he is, as I speak. 

Today’s hearing is the first of three hearings the commission 

plans to hold on the topic of energy security, an issue that spans 

the security, economic and the environmental and human dimensions of the Helsinki process. 

This hearing series is designed to give the Commission a comprehensive picture of this complex issue and highlight areas where 

the Commission, the U.S. Government and the OSCE can take effective action. 

Today’s hearing will focus on conflict prevention and the security 

of supply and transit of oil and gas. The supply and transit of enVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
2 

ergy is often a source of insecurity and conflict for OSCE participating States. The recent challenges faced when Russia shut off 

gas supplies to transit and consumer countries highlighted the potential for political and economic conflict. 

The second hearing in the series is going to focus on the development of democracy and civil society in countries with abundant energy resources. This problem is often referred to as ‘‘the resource 

curse.’’ In an economic sense, energy resources are a blessing, as 

they provide countries with needed income. But these resources can 

also lead to unintended consequences such as stunted economic and 

political development. 

It’s remarkable that only two of the world’s top 10 oil exporters 

are established liberal democracies. You’re going to have to come 

back to the other hearings to find out who those two are. [Laughter.] 

The third hearing will address the nexus of energy security and 

environmental security, focusing on the diversification of energy 

supply and sustainable technologies. The quest for diversification of 

energy supplies and greater energy security gives consumer countries an opportunity to address the environmental challenges of energy supplies by adopting new technologies that not only decrease 

dependence on foreign sources but also help address environmental 

concerns. 

But today, we are going to take a geostrategic look at energy 

supply and transit. Specifically, we hope to address questions such 

as: What are the factors in ensuring reliable and predictable supply 

and transit of oil and natural gas? What is the United States doing 

to ensure our own energy security? And what role does the United 

States have to play in Eurasian energy security? 

To answer these complex questions, we are pleased to have an 

excellent slate of witnesses. In addition to our exceptional and unusually large panel of U.S. Government witnesses, I’m quite 

pleased to welcome two distinguished Ambassadors from the OSCE 

participating States of Azerbaijan and Belarus. Both countries represent different aspects of the issue of energy security, and we are 

pleased to hear their experiences and insights on how they view 

energy security given their geographic and political positions in the 

world. 

Clearly, during today’s hearing, we’re going to hear a lot about 

Russia. In today’s newspaper, I read of the ‘‘South Stream’’ that is 

being developed by Gazprom and others. So my notes have not 

even caught up with what the events of the day are. 

And notice, when I talk of them as a supplier of oil and natural 

gas with no affront meant, I didn’t say reliable supplier. The jury 

is still out on that decision. Just in the past week, President Putin 

stated that Russia has a major stake in forming an infrastructure 

of trust in the global and regional economies, including in the energy sector. 

That would be a welcome development, although many would say 

that there is already plenty of evidence to convict at this point 

based on Russia’s actions in the recent past. 

I want to state for the record that we did invite the Russian Ambassador to join us here today so that we could hear the Russian 

view on these issues, but he declined. 

3 

That said, I’m very pleased with the assembled witnesses here 

today and I’ll be interested to hear from our panelists on the prospects for improving the energy security situation, where they think 

Russia is going and actions the United States can take to foster a 

more secure energy environment. 

Before I introduce the first panel, I’d like to hear from my distinguished friend and colleague for any opening comments he may 

make, Senator Cardin my co-chair. Thank you, sir. You have the 

floor. 

HON. BENJAMIN L. CARDIN, CO-CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. CARDIN. Mr. Chairman, thank you very much for holding 

this hearing. I think this subject is extremely important and one 

in which the Helsinki Commission and the OSCE can take a major 

leadership role. 

I regret I will not be able to stay for much longer. We have the 

immigration bill that’s on the floor this week and there’s a little bit 

of interest from our constituents on that issue. 

But let me just underscore this particular hearing in a couple 

ways. First, I did chair, as the chairman knows, the second committee, the OSCE Parliamentary Assembly, and I must tell you energy was one of our top issues and we are concerned about it from 

a security point of view. It is a challenge for the OSCE states. 

One of my major concerns is that for the United States to exercise leadership in this area, we need to start with our own energy 

policies. And this last week, the U.S. Senate passed an energy bill 

that I think moves us in the right direction. I would have liked to 

have seen some additional provisions that we were unable to get, 

but it’s a strong bill and it speaks to the United States moving toward energy independence. 

Now, we’re all going to be dependent on the region, there’s no 

question about it, but the United States uses too much energy and 

has not made the type of investment in alternative fuels that it 

needs to if it’s going to be able to be a major player in the international community dealing with the subject of this hearing. 

So I’ve introduced legislation that calls upon our Nation to become energy independent. We were able to put a person on the 

moon. You’ve heard this analogy made by many of us. Why not 

make an Apollo-type commitment towards energy independence? 

And my legislation requires us to be 90 percent self-sufficient by 

the next decade. I think that can be achieved. But it starts with 

conservation and must have a large ingredient for alternative renewable energy sources and we need to continue our commitment 

to research. 

Now, why do we need to do this? Well, today’s hearing is concerning security and that’s a major issue. A lot of the energy that’s 

consumed by OSCE states, the United States, in particular, has its 

roots in countries that don’t necessarily agree with our foreign policy objectives, and that’s putting it mildly. 

So that when we fill up our tanks with gas here, we are supplying resources to countries who, quite frankly, disagree with our 

way of life and that’s something that we need to make sure we 

avoid in the future. 

4 

So there’s strong security reasons why OSCE should be concerned about its energy sources and the dependency among different states for energy. It’s also very important for economic reasons. 

I just came back from the eastern shore of Maryland, filled up 

my tank with gasoline and two of my constituents took the opportunity to complain to me about the cost of gasoline. Now, we might 

argue whether it’s a fair price or not, but I can tell you the unpredictability of energy costs in America is affecting our economy and, 

I dare say, affects the entire OSCE’s economic growth by the fact 

that it’s unpredictable. 

Investors do not like to make decisions based upon unpredictability. We’ve lost some plants in Maryland because of energy costs 

and the unpredictability of energy costs. 

And the last point I want to make, which I think the United 

States must exercise leadership, is on the environmental front. 

Global climate change is real. So as we look at the security issues 

concerning energy, we also need to be mindful to get away from the 

carbon-based energy sources so that we address the global climate 

change. 

I come from the State of Maryland. We’re a coastal State. Sea 

level change has a dramatic impact on my State. Global climate 

change has an impact on the entire OSCE and our entire world. 

So, Mr. Chairman, I’m glad that this hearing is taking place. I 

think it is of the utmost priority and I assure you the fact that I 

am unable to stay for the witnesses is not my lack of my interest 

and my staff will inform me and we intend to followup with the 

people that are at the witness table. 

I thank our governmental witnesses for being here. I particularly 

thank our two Ambassadors and our private sector experts for 

sharing their wisdom with this Commission. 

Mr. HASTINGS. Thank you very much, Senator. 

We’ve also been joined by one of the newer members of the Helsinki Commission, my good friend from North Carolina, G.K. 

Butterfield. 

Congressman Butterfield, if you have any opening comment, we’ll 

take it at this time. 

HON. G.K. BUTTERFIELD, COMMISSIONER, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. BUTTERFIELD. Thank you very much, Mr. Chairman. Let me 

thank you for convening this hearing today and I apologize for 

being late. I’ve been multitasking, as we all do from time to time. 

But thank you, witnesses, for coming forward today to give us 

your testimony. I’m going to try to stay for a while and then I’m 

going to have to be at another event at 4:15 this afternoon, but 

thank you all very much. 

I am a new member of this Commission, Mr. Chairman, and so 

I’m in a learning mode right now and I’m eager to hear what the 

witnesses have to say. I’m also looking forward to our upcoming 

trip that we will be taking to Ukraine. 

But, Mr. Chairman, looking at the issue of energy, it doesn’t take 

very long to realize that one of the greatest vulnerabilities of America is our dependence on foreign oil. We talk about it all the time. 

5 

I’m on the Energy and Commerce Committee and we’re working 

very hard right now to get out an energy independence bill by the 

Fourth of July and I must say that we are right on target to do 

that. 

For all of our military strength and economic power, our country 

would come to nearly a halt without foreign oil. That is very sad, 

but it is certainly true. 

Today, oil alone fuels 96 percent of our transportation needs and 

it’s an indispensable part of the manufacture of millions of goods 

and products in this country and despite America’s extreme dependence on oil, our country only has 3 percent of the world’s oil 

reserves. 

After Hurricane Katrina, we saw how the loss of just a fraction 

of refining capacity for even a few days can create enormous economic unease and cause prices to soar. It was a strong display of 

our vulnerability and it showed just how devastating any long-term 

interruption could be for America. 

America is not alone in its concern about how best to address our 

future energy needs. Energy security has become a priority for the 

European Union and its 27 member states, and they’re certainly to 

be applauded for that. 

Together, the United States and Europe produce about 23 percent of the world’s energy, but they consume almost 40 percent of 

the world’s supply. Barring any significant policy changes, dependence on foreign sources of energy is expected to rise even further 

in the future for both America and Europe. 

Mr. Chairman, I’m encouraged that the United States and the 

European communities continue to broaden the energy dialogue on 

the joint promotion of collective energy security and energy efficiency and alternative energy sources and this can only enhance 

our collective strength and security. 

And so I’m looking forward to this hearing more from the perspective of our panelists today and I thank each of you for your 

participation. 

I yield back. 

Mr. HASTINGS. Thank you very much, Congressman Butterfield. 

From the State Department, we have our first testimony, Mr. 

Greg Manuel, who is the Special Adviser to the Secretary and 

International Energy Coordinator charged with providing strategic 

oversight, developing new policy approaches and initiatives and 

fully integrating energy issues into the decisionmaking process at 

senior levels of the State Department. 

We also have two additional department witnesses that may not 

provide testimony, but have graciously agreed to be available for 

questions and answers. 

We have Ambassador Steve Mann, who I know, Principal Deputy 

Assistant Secretary for South and Central Asian Affairs, who is responsible for the full range of foreign policy issues in the region, 

including management of region-wide energy issues. 

From 2001 to 2005, he was the senior U.S. official responsible for 

Caspian energy issues and was heavily involved in our realizing 

the Baku-Tbilisi-Ceyhan oil pipeline and in the successful launch 

of the Caspian Pipeline Consortium line. 

6 

From 1998 to 2001, he served as the U.S. Ambassador to 

Turkmenistan. 

Next to Ambassador Mann is Mr. Matt Bryza, Deputy Assistant 

Secretary of State for European and Eurasian Affairs, where he’s 

responsible for policy oversight and management of relations with 

countries in the Caucasus, and southern Europe. Mr. Bryza coordinates U.S. energy policy in the region surrounding the Black and 

Caspian Seas. 

And, from the Department of Energy, I’m pleased to introduce 

Mr. Hegburg, Deputy Assistant Secretary for International Energy 

Policy. His policy and management responsibilities cover international energy issues in the Middle East, Russia and Caspian, 

and Africa, as well as functional areas, such as energy security and 

markets. 

Finally, since we have a very full witness list today, I’d like to 

ask each of our witnesses to please abbreviate your remarks as 

best you can. Your full statements will be accepted into the record 

and are made a part of these proceedings. 

And, ladies and gentlemen, I believe those of you in the audience 

will learn that the witnesses’ more extensive biographies and their 

full statements will be available for handouts at the table outside. 

So with that, Mr. Manuel, please proceed with your statement. 

GREG MANUEL, SPECIAL ADVISER TO THE SECRETARY AND 

INTERNATIONAL ENERGY COORDINATOR, DEPARTMENT OF 

STATE 

Mr. MANUEL. Thank you very much. 

Chairman Hastings, Co-Chairman Cardin, thank you for this opportunity to discuss U.S. policy and energy security in Europe and 

Eurasia. Just from the opening remarks today, I think you’ll hear 

a number of issues discussed in these opening remarks that touch 

not only on this session, but some concerns and interests that were 

expressed both earlier, but, also, certainly the subject of future 

hearings that you have scheduled. 

I’m here today, as already acknowledged, with two of my colleagues, Matt Bryza, the Deputy Assistant Secretary for the Bureau of European Affairs, and Steve Mann, who’s Principal Deputy 

Assistant Secretary for the Bureau of South and Central Asian Affairs, both of whom represent our front line on European-Eurasian 

oil and gas issues. 

I’m also joined by Al Hegburg, an old acquaintance and colleague, with the Department of Energy. 

Our interests in the regions, in the European-Eurasian region, 

encompassing Europe, Russia, the South Caucasus, and Central 

Asia, are far-reaching, anchored by our five-pronged global energy 

strategy, which is to diversify the supply of conventional fuels and 

expand production, to diversify our energy portfolio by expanding 

the use of alternative and renewable energy, to promote increased 

energy efficiency and conservation measures, to advance environmental stewardship and to protect critical infrastructure and promote market stability. 

We have adopted a comprehensive strategy tailored to Europe 

and Eurasia, with the following objectives: that the United States 

and our Euro-Atlantic allies maintain reliable access to diversified 

7 

supplies of energy, including oil, natural gas, renewable and alternative fuels, and nuclear power; that hydrocarbon producers and 

Azerbaijan in Central Asia realize the benefits from multiple export routes to European and global markets; that European energy 

markets function efficiently; that we decrease the potential for energy to be used as a political or commercial weapon; that Eurasian 

energy producers manage hydrocarbon wealth wisely to avoid corruption and economic instability; and, that the Euro-Atlantic community develops commercially viable technologies to reduce carbon 

emissions without slowing economic growth. 

These objectives, of course, are interrelated. By increasing diversity of sources of supply and transit routes, we can bolster market 

efficiency through competition and reduce vulnerability to energy 

supply disruptions. 

Relying on market-based policies to manage energy revenue 

streams transparently can limit the corruption and economic distortions that undermine economic growth and stability. And by increasing diversity of types of energy, we also reduce the danger of 

politically or commercially motivated energy cutoffs, while reducing 

our dependence on hydrocarbons, which, in turn, reduces carbon 

emissions and pollution, benefiting the environment. 

To advance our international energy strategy, we are pursuing a 

broad range of mechanisms, including enhanced trade and transparency, intensified technology development, new regional energy 

partnerships, bolstered energy dialogues, and novel public-private 

sector partnerships, which I will speak to a little bit later. 

While we explore these issues in greater depth in the discussion 

ahead, I want to highlight a few key areas of important activity on 

each side of the conventional and alternative energy divide. 

On conventional energy, we have begun to see dividends resulting from over a decade of intense diplomatic engagement by the 

United States and Azerbaijan, Georgia and Turkey. Both the BakuTbilisi-Ceyhan, VTC, and South Caucasus pipelines are providing, 

for the first time, real, not theoretical, alternative pipeline routes. 

As the South Caucasus gas pipeline comes fully on-stream in 

coming weeks, it will link Azerbaijan’s giant Shah Deniz gas field 

in the Caspian Sea with Turkey’s gas grid. Development of the 

Shah Deniz field has the potential to make Azerbaijan self-sufficient in natural gas and will provide Georgia and Turkey with an 

invaluable alternative supplier. 

Looking forward to 2020, we are working to create a ring of natural gas infrastructure extending from the Caspian Sea, around 

the Black Sea, and into Europe. This will occur through the expansion of the SCGP and to a larger southern corridor, comprising two 

emerging projects, the Turkey-Greece-Italy and the Nabucco pipelines. 

The southern corridor will complement Gazprom’s existing pipeline infrastructure, as well as new supplies of liquid natural gas 

from Norway and perhaps Russia and other countries. 

Finally, we see an inclusion of Kazakhstan, Turkmenistan, and 

Iraq as important future suppliers of gas into the Nabucco pipeline. 

Our cooperation with the EU to realize the southern corridor of 

natural gas infrastructure is accelerating. During the recent USEU Summit, which was on April 30, the United States and the EuVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
8 

ropean Commission pledged to seek diversification of energy types, 

sources and supply routes, with a particular focus on the Caspian 

region. 

We’re also working to help our European allies unify their energy 

policies to elicit more equitable and market-based energy deals 

with Russia and resist divide-and-conquer tactics. 

We continue to oppose oil and gas pipelines that run to, from or 

through Iran. By standing together, EU member states can transform into negotiating a reality out of the theory that Russia is as 

dependent on revenue streams from Europe as Europe is dependent on Russian natural gas flows. 

We’re also working with our European partners to diversify 

sources of gas supply in northern Europe. As Russia and Germany 

strive to develop the massive ‘‘Nord Stream’’ pipeline to transport 

Russian and Central Asian natural gas under the Baltic Sea to 

Germany, Nordic, and Baltic countries are striving to increase regional competition. 

Norway is entering a new phase of large-scale natural gas production. It already serves as a key alternative supplier of natural 

gas to northern Europe. Oslo, Copenhagen, and Warsaw may be 

moving closer to agreement on a project to link Norway’s gas fields 

with Denmark’s gas pipelines into the Baltic Sea, with an extension to Poland. 

We are supporting this initiative, as well as efforts by Poland, 

Estonia, Latvia, and Lithuania to develop commercially viable ventures involving regional liquid natural gas terminals, natural gas 

storage, and thermal power generation that could reduce their dependence on Russian gas as the ‘‘Nord Stream’’ pipeline develops. 

On alternative energy and efficiency, over the last 2 years, the 

United States and EU have greatly intensified cooperation aimed 

at accelerating the development and deployment of alternative energy and efficiency technologies. 

Beginning with the 2006 U.S.-EU Summit declaration, the 

United States and EU, for the first time, outlined a systematized 

approach to cooperation on biofuels, carbon capture and sequestration, energy efficiency, methane capture, and support of legislation 

to stimulate the growth of alternative energy across the Atlantic. 

On biofuels, we are taking concrete steps to cooperate on research and development of cellulosic or second generation bioethanol and looking at biodiesel, as well. We’re discussing regulatory 

and policy tools to promote biofuels development, exchanging analysis of potential economic and environmental impacts of biofuels, 

and comparing respective resources estimates of potential biofuels 

source biomass. 

On efficiency, we have renewed the U.S.-EU Energy Star agreement, covering office equipment, and are exploring extensions of 

this agreement to other products, such as consumer electronics. 

We are examining the development of international lighting efficiency standards and joint efforts to improve efficiencies of buildings and housing. We are cooperating to promote efficiency in key 

developing countries, most specifically, by securing EU cooperation 

in the development of a trilateral U.S.-EU-Ukraine energy efficiency action plan. Enhancing efficiency of electricity and gas marVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
9 

kets in Ukraine will have an immediate benefit, providing more potential Ukrainian energy exports to the EU. 

We have recently joined jointly-held workshops on carbon capture and storage and are preparing a report on possible areas of 

trans-Atlantic cooperation on environmental, economic and regulatory coordination in the development of this promising new technology. 

In addition, we have dramatically increased our direct engagement with the private sector to draw upon firms’ dynamism, creativity and adaptability in meeting these technology challenges. 

The State Department and Germany’s foreign ministry in March 

convened the U.S.-EU Energy Technology CEO Forum, which drew 

together 20 senior trans-Atlantic private sector leaders to generate 

key recommendations on speeding trans-Atlantic cooperation in the 

development and deployment of advanced clean energy technologies. 

The recommendations, covering biofuels, energy production, energy efficiency and energy research, provided a set of seven distinct 

initiatives that are being pursued by the United States, EU, and 

German Governments. 

In conclusion, there is no silver bullet or quick fix to increase energy security in Europe and Eurasia. The EU and the United 

States both recognize the vital importance of diversification of supplies of hydrocarbons upon which both the United States and Europe will depend on for many decades. 

It will take a multifaceted, long-term effort between the United 

States and the EU with producer and consumer countries to increase supply diversification, develop alternative energy sources, 

and encourage Russia to bring more of its oil and gas resources to 

world markets within a free and competitive market framework. 

To meet the long-term energy and climate challenges that Europe and the United States both face, we are working with Europe 

to help produce energy demand and diversify energy sources. We 

are dramatically accelerating the deepening cooperation with the 

EU to develop and deploy advanced clean energy technologies, such 

as biofuels, renewables, clean coal and nuclear power, that will be 

critical to meeting our joint energy security needs in the future. 

We are collectively joining forces with our private sectors and 

forging new partnerships to best leverage our comparative advantages. Our collective energy challenges have undoubtedly invigorated and focused many of our key European and Eurasian relationships. 

Energy has grown to be a veritable critical center of gravity, exposing our joint interests and vulnerabilities in the region. While 

our intensified efforts have already begun to yield promising results, we continue to look for opportunities to bolster our work in 

the region. 

We are honored to be here before you today. Thank you, again, 

Mr. Chairman and members of the Commission, for giving us this 

opportunity here this afternoon. 

Thank you. 

Mr. HASTINGS. Thank you very much, Mr. Manuel. 

10 

And I’ll turn now to Mr. Al Hegburg, the Deputy Assistant Secretary of the Office of Policy and International Affairs for the U.S. 

Department of Energy. 

Mr. Hegburg, let me also ask you to pass on to Secretary 

Bodman my thanks for your appearance. One of the missing links 

in the Helsinki process has been a focus on the energy aspects and 

the Department of Energy and Commerce has a significant role to 

play in that regard and I had indicated during my tenure that I 

wanted to highlight it. 

So I thank you and I thank Secretary Bodman especially. 

Please proceed, sir. 

AL HEGBURG, DEPUTY ASSISTANT SECRETARY OF ENERGY 

FOR INTERNATIONAL ENERGY POLICY 

Mr. HEGBURG. As the Secretary said, we are the nerd agency and 

I’m clearly not the nerd, because I don’t even know how to push 

the button. 

Thank you very much for the invitation to be with you today and 

for your kind words, which I will certainly pass on to the Secretary. 

I would just like to say a couple of words about how we look at 

this period of transition that we are in from the marketplace that 

we’re in now to the marketplace that we hope we’ll be in the future, particularly as alternative fuels penetrate the market and 

greater efficiency shows up in the marketplace, and a variety of 

other things. 

But I think I’d just like to say a couple of things about we have 

to keep in mind that we live in a hydrocarbon economy and will 

for some period of time, and there are sort of two ways to go about 

dealing with that. 

One is to try to adjust that economy very quickly and the other 

is to try to influence it to change. I think it’s important to try to 

influence it to change, because I think it will be longstanding 

change that we will get as opposed to abrupt and disruptive 

change. 

Over the next 25 years, there is an estimate that just to sustain 

the hydrocarbon economy we have in oil and gas, the investment 

required will be on the order of $8 trillion, and that means that oil 

and gas worldwide will require over $300 billion a year in investment, and that’s across the board, refining, production, transportation infrastructure and all those things. 

All the things Greg mentioned in his testimony about pipelines, 

increased production in the Caspian is part of that estimate and 

that is an expensive place to do business. And those investments 

are likely to be made in the short term, but there are some things 

that sort of have an influence on the way in which that investment 

is made and the degree of penetration in the marketplace that oil 

and gas will show. 

First, there are, I think four issues on the table that we have to 

deal with when looking forward on the oil and gas supply-demand 

balance and those are climate change, which is obviously a significant one and has a significant impact on the way in which this investment takes place. 

One is energy security, obviously, which everyone has referred to 

here. But the other two, which are ones I would like to mention 

11 

in passing, are the question of governance and the question of the 

erosion of globalization. 

If you go back and look over the past 30 years, the energy economy in the United States has become fully integrated into the 

world. As everyone knows, we import a great deal of oil. We are 

an attractive investment environment for foreign investors who 

have actually invested in our refineries, our production and all 

those kinds of things. 

We have gained efficiency in the marketplace, largely as a result 

of the removal of price regulation on oil and price controls on natural gas. And the industry and people in general have responded 

by investing. In other words, that marketplace was competitive, it 

was international, it was global, and it was generally open. 

We are seeing now some changes which suggest that 

globalization is eroding. We see a fair amount of resource nationalism in the world and that’s not just in the way of extracting additional rents out of producers and investors, but also actually turning the country around to pursue a kind of energy nationalism that 

is counter to their interest. Venezuela is, of course, a very important example here. 

As that country decided to essentially nationalize the industry, 

the industry and investing industry started to accelerate the repatriation of their capital and withheld investment. 

And one thing that happens in the oil and gas sector is you have 

to continually reinvest to maintain production, because it is a declining asset. It continues to decline from the first day of production. So there’s a constant need for reinvestment. 

And so Venezuela, as you’ve seen over the past year or so, has 

eroded in terms of both the share owned by the state and now the 

shares in heavy oil owned by the investors. And that is a serious 

potential problem. It is a problem that we see elsewhere. 

We may even see it in Russia, which has serious problems with 

sustaining oil production and gas production and is in the process 

of changing the nature of the investors’ relationship to the state, 

and I think that’s something we need to pay a fair amount of attention to, because it raises political questions, it raises investment 

questions, it raises commitment to the international economy that 

we all share and hope will benefit us all. 

I would just like to say briefly something about natural gas, because that is relevant obviously to the Caspian, to pipelines and to 

future production. Russian gas production, as controlled by 

Gazprom, is in decline and it’s in decline for several reasons, partly 

because they have not invested in new developments. 

As the super giant fields decline, their share of production is 

going down. That means the question of their meeting their contractual obligations to the countries of Europe is in question, unless 

they can find alternative supplies. 

And there are some alternative supplies out there for them. One 

is the independent gas producers in Russia are increasing production and although they’re quite a bit smaller than Gazprom, they 

are making up some. The government has decided to increase 

prices in the domestic market, which has been essentially a free 

good for most of the Russian economy. And so the industrial sector 

will receive—gas prices will go up to the industrial sector. 

12 

There will be shifts away from natural gas in the power sector, 

which is a quite large user of gas, to natural gas to coal and nuclear. And, of course, they will have to rely on increased deliveries 

from the countries of Central Asia, particularly Turkmenistan, and 

that is actually, I think, the core issue for Russian gas supplies is 

to what the net level of production in Turkmenistan will be to supply the Russian market, and if all that gas will go to Russia or 

some of that gas will go west, as has been mentioned, through 

some of the pipelines. 

Those I want to sort of put on the table as concerns, because I 

think it relates to the question of how we relate to Russia, but also 

how Russia relates to the world energy economy, and that’s something that I think deserves our attention, your attention and others. 

I think I’d just like to say, in closing, one thing about energy 

economies. We tend to look at energy compartmentalized, but the 

energy economy in this country is really quite impressive in a lot 

of different ways and it can be even better, and it should have several characteristics and we have what we call—these are not the 

10 Commandments nor the 95 theses of Martin Luther, but there’s 

some things that you would hope that the energy economy could be. 

The first is innovative, and this is a very innovative economy. 

And we talk about technology, but the idea is to be innovative in 

a way that that technology comes to the marketplace as quickly as 

possible. 

It has to be clean. It has to be inexpensive. It has to be available. 

It has to meet the questions, as you’ve referred to, of people saying 

how much it costs to fill up their gas tank. That is clearly a concern. 

And I think we can do that. We can go through the transition 

and reach those kinds of goals. It’s not going to be easy and it’s 

going to require a fair amount of work, but I think it’s important 

and I hope we can discuss that and what the role of the Caspian 

is in meeting those goals. 

Thank you very much. 

Mr. HASTINGS. Thank you very much. 

Mr. Mann and Mr. Bryza, I recognize that you were not asked 

to offer comments, but I would permit you, in light of the fact that 

you’ve been so kind as to come, if you care to take a minute or 2, 

I have no hesitancy if you wish to add something, if either of you 

would. 

Mr. Bryza? 

MATTHEW BRYZA, DEPUTY ASSISTANT SECRETARY OF STATE 

FOR EUROPEAN AND EURASIAN AFFAIRS 

Mr. BRYZA. Thank you very much, Mr. Chairman, very much for 

this opportunity maybe to clarify or even simplify the incredibly 

complex picture of our energy security policy, and just a couple of 

pictures I’ll show you that have to do with what you mentioned at 

the beginning, how we deal with Russia as a potential energy partner and as the major single supplier of natural gas, its most important of commodities, to Europe. 

Today, Gazprom is the largest single supplier of gas to Europe 

and it provides anywhere between 25, 30, 35 percent of the gas 

13 

consumed in Europe. It provides that gas through a network of 

pipelines you see on this map here. 

For those of you behind, you’ll see in the copy of the testimony 

this map that shows a whole bunch of red lines. These red lines 

are an enormous infrastructure system that Gazprom uses to move 

gas from Siberia and from Central Asia to European markets. 

Gazprom is, by law, a monopoly, passed by the Russian Duma, 

and Gazprom behaves as a monopoly. It’s not evil to be a monopoly. 

It’s a good business to be in if you can be a monopolist. But our 

country, however, has decided, our government has decided we are 

not in favor of energy or any other monopolies and, as we know, 

the first major antitrust case in our country’s history was the 

breakup of Standard Oil. 

Well, Gazprom is a monopoly and it functions relatively well 

based on this enormous network of pipelines, which allows it to do 

what? This network allows Gazprom to buy gas in Central Asia for 

around $100 per 1,000 cubic meters. This is very important, because as Al was suggesting, the gas production in Russia’s own 

fields is declining. 

So Gazprom’s looking for the easy way out. It absorbs the gas in 

Central Asia through that pipeline that runs diagonally from 

Ashgabat, Turkmenistan up toward the European part of Russia, 

$100 per 1,000 cubic meters, sells it in Europe for nearly three 

times that cost. 

That’s a problem for our Euro-Atlantic community, because such 

a differential in price between $100 and close to $300 underscores 

an inefficiency in the market and we believe our national security 

is best served when markets function efficiently. 

But this difference in price also generates an enormous amount 

of rents that are distributed often non-transparently in a way that 

undermines the rule of law, undermines our broader goals at energy sector reform, which then gets at what both Greg and what 

Al were talking about in terms of wanting to see the resources and 

the revenue streams managed wisely so we see the advance of market economies and democracy. 

The way to deal with this is not by simply talking, but it’s by 

changing the facts on the ground through the increase of competition and we’re trying to do that, first and foremost, by expanding 

the delivery options for gas from Central Asia and from Azerbaijan 

especially to Europe. 

On this map, you’ll see a very small yellow line at the bottom, 

on the lower right. That’s the Baku-Tbilisi-Erzerum gas pipeline, or 

the SCGP South Caucasus gas pipeline that Mr. Manuel discussed. 

It’s becoming functional now, gas is moving into it, and it’ll be 

fully functional shortly. That alone, that pipeline won’t create the 

full degree of competition we seek. 

As Greg suggested in his testimony, we hope to see a ring of gas 

infrastructure extending back to the Caspian Sea and around the 

Black Sea. That’s on the second graph I’ll show you here in a second. 

What this shows is a ring of infrastructure in which that yellow 

line from Azerbaijan has expanded in two more lines. There’s the 

Turkey-Greece-Italy pipeline that Mr. Manuel talked about and 

14 

then Nabucco pipeline extending from Turkey all the way to Austria. 

That, combined with liquid natural gas shipments from Norway, 

what you see at the top of the graph, the blue line, and maybe liquid natural gas from Russia and from other locations, coupled with 

increased deliveries of gas from North Africa begin to provide Europe with some genuine diversity in gas supply. 

The idea is once our allies in Europe have the ability to choose 

their suppliers of gas rather than relying overwhelmingly on one 

supplier, we’ll see a more mutually beneficial relationship between 

Europe and Russia and Gazprom as the Europeans can negotiate 

more equitable terms. 

Finally, there’s a question as to whether or not this whole project 

can be realized. Is there enough gas, as was often asked, in the 

Caspian region? 

Often, observers say, ‘‘Well, there’s not enough gas in Azerbaijan 

to begin these pipelines.’’ And the last graph I’ll show you—here 

it comes—demonstrates that, indeed, in Azerbaijan, there’s an 

enormous quantity of gas that will be available, we hope, in coming 

years, sufficient to fill the Turkey-Greece-Italy pipeline and hopefully the first phase of that Nabucco pipeline that goes from Turkey 

to Bulgaria, Romania, Hungary, and Austria. 

This last graph is an optimistic version, granted, upside, 

unrisked projections, but based on data provided by the international companies operating in Azerbaijan. And what it shows 

you, if you simplify it, and each colored slice is another gas field 

that’s either being produced in Azerbaijan or will soon be. 

What it shows you is that by the period 2015 to 2016, there will 

be a dramatic, we hope, a dramatic increase in gas production in 

Azerbaijan, getting the production up to a level such that there’ll 

be enough left over after gas is consumed in Azerbaijan and Georgia and in Turkey to provide for those two pipelines I’ve been talking about. 

We’re doing a lot of other things I won’t go into in the northern 

part of Europe, around the Baltic Sea. All of these efforts are 

aimed at helping our European allies pool their strategic vision and 

their negotiating ability so that over time, they’re able to negotiate 

more mutually beneficial relationships with Gazprom, so that relationship really does work in two directions. 

Thank you very much. 

Mr. HASTINGS. Thank you very much. 

Ambassador Mann, do you have a contribution? 

AMBASSADOR STEVEN R. MANN, PRINCIPAL DEPUTY ASSISTANT SECRETARY OF STATE FOR SOUTH AND CENTRAL 

ASIAN AFFAIRS 

Amb. MANN. Well, thank you, Mr. Chairman. 

I think my starting point for this is a feeling that I know all of 

my colleagues share of gratitude to you, Mr. Chairman, for holding 

these hearings, for giving us this opportunity to talk about an issue 

that is so important and for your personal involvement in this 

issue, which I know is by no means new. 

I handle the Central Asian part of these issues and for Central 

Asia, it’s an important economic question and as with a number of 

15 

other nations in the region, it’s a question of supporting the independence and the sovereignty of these countries, when you get 

down to the base issues there. 

So we have achieved a lot as a government, as an interagency 

team, and my colleagues have pointed out the challenges that we 

have in the future. 

And just one final note, Mr. Chairman. You have a full table 

here of representatives of the executive branch. I think this shows 

the strength and the depth that we have because there are the four 

of us up here, but behind us, also, is a team of tremendous professionals in our departments, in the Department of Commerce, the 

Trade and Development Agency, Export-Import Bank, and in the 

intelligence community, who have been at the heart of the successes that we’ve had as a government. 

So, anyway, thank you, again, Mr. Chairman, and to the Commission. 

Mr. HASTINGS. It’s clear to me that we have an ongoing significant number of issues and the questions are so numerous. 

And I’m, in light of the other witnesses, much more prone to be 

brief, which is not my custom and practice, but you all have been 

very clear. 

Mr. Hegburg, I was interested in something that you said specifically and it’s so obvious, and yet people don’t think about it, that 

you have to have continuing investment, I believe you spoke of, in 

order to maintain the efforts that a country or a company wishes 

to put out, which caused me, when you spoke of our market, meaning the United States, and the fact that significant investors from 

around the world have come to play in that house, I’m curious 

about the refining aspect of it. 

You did use the term that they’ve invested in our refineries, but 

some of us have a continuing concern that there has been no real 

development of new refineries in the United States for a substantial period of time. 

What are the implications of that? 

Mr. HEGBURG. Thank you, Chairman. 

I’m defining—let me just make—I don’t have the numbers in 

front of me, but it is clear we have not invested in new refining 

{refineries} and, at the same time, our refining capacity in the 

United States has increased by something on the order of 6 million 

barrels a day. 

Don’t hold me to that number, but I think that’s what I recollect. 

And that is because when refiners invest, they invest in what are 

called their legacy assets. They invest in the existing equipment 

that they have, because it’s the cheapest place to invest. 

They have the land, they have the personnel, they have the electric supply, they have all those kinds of things. 

They have less of a permitting requirement. They have a permitting requirement, obviously, to add capacity, but it is cheaper to 

add a coker or a distillation facility or something else to that refinery than it is to go out and build an entirely new refinery on a 

greenfield investment. 

So, yes, we have shut down refineries, but at the same time, 

we’ve increased refining capacity in the United States substantially. 

16 

Mr. HASTINGS. All right. I thank you. 

And I do have a concern with reference to regional and multilateral organizations. A lot of us talk about GUAM, the Georgia, 

Ukraine, Azerbaijan, and Moldova, and their recent summit in 

Baku and the continuing question considering that Kazakhstan 

and Turkmenistan didn’t attend, how do we propose to be able to 

help them to achieve their objective? 

And perhaps even more important and significant is something 

that is beyond the sphere of OSCE and that is that the International Energy Agency was established quite some time ago, in 

’73 or ’74 or thereabouts, and it had as an objective the crisis that 

existed at that time and the key energy demand centers in the 

world were all members of the Organization of Economic Cooperation and Development. 

Today, China, India, Brazil, just to mention some big ones, are 

not involved in that multilateral structure. 

And I guess if I have a question, it is in what multilateral framework should the United States and the EU be working to achieve 

energy security goals? And I think there were two questions there. 

I’ll lay them open to anyone who would answer and then I’ll ask 

Congressman Butterfield to put a question or two. 

Mr. BRYZA. Thank you, Mr. Chairman. I’ll answer the first one, 

if that’s OK, on GUAM, as the person responsible for our relations 

with some of those countries. 

GUAM is emerging as an organization that will play, hopefully, 

a useful role, a concrete role. It’s been developing step-by-step its 

mechanisms to be able to be really active and make a concrete contribution. 

But it is not the main forum in which we together are working 

with the countries you mentioned to advance this vision that I described through the maps, a vision of gas supply diversification and 

oil diversification. 

A lot of this work has been done by the United States, frankly, 

taking the lead, in cooperation with those very countries during the 

course of a decade, including those years we talked about when 

Ambassador Mann was our envoy to the Caspian region. 

Years before that, I was the deputy to our envoys when we began 

with Richard Morningstar and then there was John Wolf and Beth 

Jones, Ambassador Mann’s predecessors, and we developed a pattern of cooperation that follows the path of the Baku-TbilisiCeyhan oil pipeline and the South Caucasus gas pipeline, a pattern 

of cooperation that reflects a vision of those countries to bring in 

Turkey as a positive strategic player in the region and as the gateway for those countries to European and indeed global energy markets, and we used the infrastructure projects of these two pipelines 

to forge that cooperation. 

We’re trying to build on that decade of success in a new phase 

now that involves that sort of increase in production of gas in Azerbaijan and then involves us reaching across the Caspian Sea, as 

Ambassador Mann can describe, through diplomacy, hopefully with 

the countries of Azerbaijan and Georgia and Turkey taking the 

lead in building up, step by step, concrete cooperation with both 

Turkmenistan and Kazakhstan at the pace at which Turkmenistan 

17 

and Kazakhstan are comfortable in integrating their infrastructure 

into this vision that I’ve tried to describe to you. 

Mr. HASTINGS. Mr. Hegburg and Mr. Manuel? We’ll start with 

Mr. Hegburg. 

Mr. HEGBURG. Just on the IEA and the OECD. In June, the 

OECD decided to invite certain countries to open discussions with 

the OECD about membership. Those included Chile, Estonia, 

Israel, Russia, and Slovenia. 

It also decided to strengthen cooperation with Brazil, China, 

India, Indonesia, and South Africa. Now, that’s material to—I 

guess I’d make two points. 

That’s material to the IEA, because you can’t be in the IEA unless you’re a member of the OECD. So in the first group, that’s on 

the road to joining the OECD. 

In terms of China, India, Brazil, and South Africa, all of which 

are significant players in the world oil and biofuel market, for example, there’s been ongoing conversations with those countries for 

the last several years, or some of them. And I’m not part of these 

negotiations or discussions, but some of the issues around IEA 

membership relate to energy policy, as well as the strategic stock 

requirements. 

It’s important to keep in mind, you asked about which regional 

organizations should we belong to, it strikes me that the IEA is the 

best. It is expansive. It can move and incorporate new members. 

It has two elements that I think are central to energy markets. 

One is an energy policy function, which it takes very seriously and 

which, in fact, investigates the countries every year. In fact, the 

U.S. investigation is going on right now. They’re here talking to 

people about our energy policy. 

And the other is not just the stockholding requirement, but the 

collaborative nature of cooperation during an oil supply disruption 

of some sort. And it was used during the hurricanes, Katrina and 

Rita, in which our partners in Europe did make available gasoline 

that came through arbitrage to the east coast. 

And the mechanism was both bilaterally with the countries in 

Europe that had surplus gasoline, but also involved the IEA secretariat in Paris. So it has worked to the U.S. benefit on several occasions and I think has stood the test of time. 

Mr. HASTINGS. Mr. Manuel? 

Mr. MANUEL. Mr. Chairman, I just wanted to very briefly touch 

on two questions. One was on the IEA, the other was on investment issues related to the domestic market. 

On the IEA, I had the chance to speak to Mr. Tanaka, who will 

be the incoming head of the IEA, I believe the first of September, 

and we had exactly this discussion. We’ve been working very closely with the IEA over the last year to bring China into the IEA as 

closely as we could. 

A lot of my colleagues have already mentioned a number of the 

restrictions. The good news it that China and India both have been 

part of the working groups, of which there are five, and have been 

invited as observers now for just over 6 months and have been integrated in an unofficial sense. 

The challenge is that because of the charter of the IEA being 

strictly linked to the OECD and the fact that the voting rights in 

18 

the IEA are tied to the oil consumption of 1974, that if you were 

to bring in a China or India, the real question would be, well, are 

we going to then normalize energy or oil consumption based on 

2005 or whatever metric. 

If you were to do that, China would have the second most votes 

on the IEA, just to give a sense of the challenges that are ongoing 

now behind closed doors. But to your point, this is a very important 

issue, integrating them into the world community and having the 

IEA be sort of the centerpiece to make that happen has been a real 

interest of ours and something we’ve been pushing for some time. 

On investments, my background in the private sector is as an investment banker and a venture capitalist and entrepreneur and it 

is remarkable to see, outside of the conventional sort of energy picture, how quickly investment is moving towards alternative energy. 

And I wanted to paint just a little bit of the other side of the picture for you, that 16 percent, for example, 16 percent of venture 

capital investments last quarter were in the energy technology sector, which is roughly triple that of where it was just 2 years ago. 

The VC industry is a great lead indicator of where things are 

going and my own sense from my previous relationships in the private sector is that you are going to be seeing fundamental shift 

changes in energy technology and the sorts of substitution opportunities that they create vice the conventional energy sector, which 

we’re already seeing in Brazil and we are beginning to see here in 

the United States. 

Thank you very much. 

Mr. HASTINGS. That certainly is good news, because it would be 

hard to hold this kind of hearing without talking about the alternative energy needs that we have. 

But perhaps we’ll have some light shed by Congressman 

Butterfield, since he serves on that committee that’s cranking out— 

did you say before the Fourth of July recess? 

I work here, but I don’t know these things. I’m on other committees. I do know that the Senate has been very actively involved and 

I know that the House is developing its energy package. 

Mr. BUTTERFIELD. Well, Mr. Chairman, you have been around 

this place much longer than I have and you know it changes by the 

day. But right now the plan is to separate energy independence 

from climate change and hopefully by the Fourth of July we will 

have some legislation on the floor that deals with energy independence. 

It will not have some of the more controversial provisions that 

you’ve read about, that will take place on a later date, but we are 

going to roll out some very cutting edge, innovative ideas for consideration. 

But let’s talk about Europe for a minute, Mr. Manuel, if we can. 

And I’m also new to this Commission and so much I need to learn 

about our friends in Europe. And let’s be very basic in this conversation. 

Let me ask you, is there a comprehensive energy policy that all 

of the European countries have signed onto it or is that still work 

in progress? 

Mr. MANUEL. Yes, there is. It’s a package that was put together 

just a few months ago and adopted and the various degrees of 

19 

adoption, of course, are still subject to a number of countries’ domestic legislative bodies and, of course, just taking the impetus beyond just the notional interest in moving in this direction. 

But, yes, there are several goals, everything from renewable 

standards to efficiency gains that the Europeans have—— 

Mr. BUTTERFIELD. But I get the impression that not all of the 

European countries are on the same page. I know they’re striving 

for commonality, but I get the impression that they’re not there 

yet. 

Mr. HASTINGS. And as a segue to that, what do you make if Italy, 

for example, with [inaudible] making their move with Russia? How 

does that factor? 

Mr. MANUEL. I think Matt Bryza would like to take the Italian 

question. But on the European, we’re working very closely with the 

Europeans in ways, frankly, that we never have done before, beyond just the... 

Mr. BUTTERFIELD. Is that productive or counterproductive? 

Mr. MANUEL. It’s very productive. I myself have been assisting 

at countless working groups on various aspects of alternative energy that we’ve been pushing. So I’m much more focused on the 

non-conventional aspects of what we’re pushing ahead with the Europeans. 

The very good news is that the sources, the political commitment 

and I think the tangible and concrete results sort of down the road 

are being formulated today. The amount of research and development efforts around biofuels and energy efficiency programs that 

we’re looking to put together, new ways that we’re coordinating 

and working with our private sectors, which I mentioned happened 

in March with Secretary Rice and Foreign Minister Steinmeier. 

All of these efforts are novel. All of these efforts are more coordinated than ever before and really yielding, beginning to yield some 

very formative changes in how the trans-Atlantic relationship is 

helping to solve our more global energy challenges. 

Mr. BUTTERFIELD. Are there some things that this commission 

can do or even the Congress can do to encourage European countries to formulate better energy policy? 

Mr. MANUEL. There are a whole lot, standards and codes, having 

our regulators, for example, meet with their regulators and everything from distributed energy integration into the grid, something 

I had a conference call on this morning, huge concerns between 

where the IEEE is going and the IEC, which is the European 

standard body, the sort of focus and commitment that Congress can 

bring to these issues could be very helpful and I’m more than 

happy to talk at length with you about a number of different areas 

that I think we could—— 

Mr. BUTTERFIELD. And, finally, let me ask you, is it conceivable, 

in your mind, that the European countries and the United States 

could develop a consensus on how to approach China and the challenges that the China factor presents? 

Mr. MANUEL. I’m not sure that we’ll say the Europeans have developed a consensus on anything. There is a growing consensus, 

let’s say, a growing consensus on a number of issues, climate 

change, China. Even Russia, we’ve made a lot of advances in terms 

20 

of moving political opinion and leaders’ opinions on what one might 

do. 

But, no, I think that there’s still a number of areas of opportunity along those lines. 

Mr. BUTTERFIELD. Thank you. Thank all of you very much. I 

yield back. 

Mr. HASTINGS. Thank you very much, Mr. Butterfield. 

Gentlemen, because I have the other panelists, I do have a substantial number of questions and as I did in a recent hearing, if 

you would permit, I will send to you in writing a few questions and 

if you would be so kind as to answer them, then I would incorporate them into this hearing, but, in addition there, to put the 

questions and the answers on the Helsinki website so that the discussion can continue in that fashion. 

I’m deeply appreciative to all of you and I hope you will participate with us in our continuing efforts in this regard. 

Thank you so very much. 

And I’d invite our next panel up now, our two Ambassadors, Ambassador of the Republic of Azerbaijan, Yashar Aliyev, and my 

friend, the Ambassador of Belarus, Mikhail Khvostov. 

As they come forward, to lay bona fides on the table, occasionally, ladies and gentlemen, those of you that are in the audience 

think that we operate inside the beltway in a vacuum. In fact, we 

do not. 

Long before I became chairman of the Helsinki Commission, both 

these Ambassadors and I have had opportunities to have meetings 

and I also have the distinction in both their countries, with their 

assistance and the assistance of Mr. Aliyev’s predecessor, to have 

been the lead observer to elections in both their countries. 

So unrelated to just this issue, I get to know them and have gotten to know them in a variety of ways and I’ve been to both their 

countries and was treated more than admirably by the officials 

that had responsibility in attending and expediting. 

But I’d take this opportunity to thank both of them for their assistance as we’ve moved about. 

Gentlemen, I hope you won’t mind that I will avoid reading your 

comprehensive biographies and say, as I said earlier to the audience, that they are available at the table outside. But I’m much 

more interested in getting to them and our panel that comes after 

them. 

So I don’t know which of you cares to go first. I don’t know 

what—‘‘A’’ comes before ‘‘B,’’ at least in the United States’ language. 

So, Ambassador Aliyev, if you would go forward, please. 

H.E. YASHAR ALIYEV, AMBASSADOR OF THE REPUBLIC OF 

AZERBAIJAN TO THE UNITED STATES 

Amb. ALIYEV. Thank you, distinguished Mr. Chairman, distinguished members of the Commission. Just allow me to thank you 

for inviting me to participate in today’s hearings. 

I will summarize my testimony and request to include its full 

text in the record of the hearing. 

Mr. HASTINGS. Without objection. 

21 

Amb. ALIYEV. Implementing its energy strategy, Azerbaijan has 

always received the strong political support from the United States. 

Without U.S. assistance, it would have been impossible to complete 

several pipeline mega projects in the region. 

Today, as the Baku-Tbilisi-Ceyhan oil pipeline and the BakuTbilisi-Erzerum gas pipeline have become a reality, they now represent key elements of the oil and gas transportation system in the 

region. 

In addition to its role as a large energy producer, Azerbaijan is 

also becoming an important transit hub for multimodal transportation of vast hydrocarbon resources of Central Asia to world markets, in particular, the European ones, through the east-west energy corridor. 

Evidence of this emerging role is the June 2006 agreement between Azerbaijan and Kazakhstan on transportation of Kazakh oil 

to international markets via Baku-Tbilisi-Ceyhan pipeline. 

Diversification of transportation routes, as well as of energy suppliers and markets, are key factors for ensuring the reliable and 

predictable supply and transit of oil and gas to European consumers. 

Existence of multiple transportation routes from a number of 

suppliers would also reduce a possibility of tensions on our energy 

supply. As the international community has witnessed in several 

cases over the last few years, supply chain disruptions can cause 

energy insecurity in European countries. 

Having signed, in November 2006, memorandum of understanding with the European Union on strategic partnership in the 

field of energy, my country has proved its ability to be a reliable 

partner in ensuring predictability and transparency in energy supply and in enhancing the European energy security, both as a supplier and a transit country. 

Along with that, Kazakhstan and Turkmenistan can become important elements in ensuring the European energy security with 

Azerbaijan as a transitional hub for delivering the Central Asian 

hydrocarbons to the European markets via BTC and BTE pipelines. 

Meanwhile, if they would opt for other routes of transportation, 

Azerbaijan is in a position to fill Baku-Tbilisi-Ceyhan and BakuTbilisi-Erzerum pipelines with its resources. 

Azerbaijan and the United States productively cooperate in many 

areas. My country is a staunch ally of the United States in the 

global war on terror. The economic cooperation between the two 

countries has been recently elevated to the level of partnership. 

The first meeting of the bilateral economic partnership commission 

in February this year was followed by the energy dialogue last 

March, when our countries signed memorandum of understanding 

on energy security. 

This particular memorandum, as well as the one signed between 

Azerbaijan and the European Union, represents an important contribution in ensuring energy security in Europe. 

In order to manage oil revenues, maintain macroeconomic stability and finance implementation of strategically important social 

and infrastructure projects in the country, my government has established the state oil fund. 

22 

In 2003, my country has joined the extractive industries transparency initiative proposed by the United Kingdom. The state oil 

fund is the responsible organ for implementation of this particular 

initiative. 

Democratization is another crucial task for my government in 

pursuing economic development. Being one of the most dynamical 

developing economies, with increasing inflow of petrol dollars, 

Azerbaijan is determined to steadily diversify its economy and pursue with reforms to strengthen its democracy, ensure protection of 

human rights, fight corruption, to further independence of court 

system, and ensure transparency and efficiency of state governance. 

Azerbaijan is the most [inaudible] of its economy and is promoting democracy and the rule of law in the country, as well as 

on the regional level. 

The second summit of GUAM Organization for Democracy and 

Economic Development, which was successfully held in Baku just 

a week ago, is another manifestation of the above-mentioned commitments of my country, which assumed 1-year chairmanship in 

the organization. 

The energy security matter is of profound importance in bilateral 

relations between Azerbaijan and United States of America. So, 

therefore, I would like to appeal to members of this committee and 

for you, Mr. Chairman, to the members of the U.S. Congress to repeal section 907 of Freedom Support Act of 1992 that restricts U.S. 

assistance to Azerbaijan. 

It does not comply with the spirit and level of bilateral relations 

between our countries and it is for that reason, annually waived by 

the president of the United States since 2002. 

I thank you, Mr. Chairman. 

Mr. HASTINGS. Thank you very much, Ambassador. 

Mr. Ambassador, you may proceed, Ambassador Khvostov. 

H.E. MIKHAIL KHVOSTOV, AMBASSADOR OF THE REPUBLIC OF 

BELARUS TO THE UNITED STATES 

Amb. KHVOSTOV. Thank you, Mr. Chairman. 

Mr. Chairman, Mr. Butterfield, members of the staff, thank you 

for the invitation to speak on the issue so important for us, which 

is the energy security. 

It’s important that we recognize today’s problems of global energy security and those of tomorrow. It’s more important that we 

act now to address them. Energy security is no longer a matter 

solely of national sovereignty. Today, security is an indispensable 

issue, even in general discussions about foreign policy. 

Energy security requires that we recognize our energy dependence. Individually, we are powerless to affect the global debate on 

energy security. 

Why the United States is indispensable for us in this wide discussion on energy is because without it, we will suffer a political 

power cut. There is a general desire to make energy cooperation 

mutual advantages and equal, but still the interests do not always 

coincide. 

What to do? The answer, in my view, is to develop a model of 

energy security cooperation and implement mechanisms of mutual 

23 

interests, which may be long-term energy supply, uninterrupted 

supply, acceptable terms and conditions, equality and mutual benefits, strong dialogue and cooperation, and, of course, mutual approach. 

We should strengthen the dialogue and cooperation to meet the 

challenges and our dependence on oil and gas needs to be balanced 

by stable and reliable supply, which includes the sole role of transit 

countries, and I count Belarus in this group of reliable partners. 

The significance of transit countries becomes more and more considerable. Clear bilateral regional and international rules could improve predictability for transit and supply of energy, deepen interdependence and stability. 

This approach does not deny the right of a producer to benefit 

from its oil and gas reserves, as well as the right to consume or 

to benefit from the supply. 

Belarus lies on the gas transit route from Russia to Europe and 

is the second largest transit country for Russian gas by volume 

after Ukraine. Russia is the leading gas exporter to Europe and is 

the second important source of crude oil. 

And the transit country should benefit from the benefits of producer and consumer, with a clear regulatory framework for transit 

which will help us to avoid much more expensive alternatives of 

building long, roundabout pipelines. 

Events of the beginning of 2007 remind us that supply in the 

OSCE region is not as secure as it should be. We in Belarus are 

not oversensitive regarding the sensation of energy trade to market 

prices, but I have to recognize that we are sensitive regarding the 

bilateral agreements we have with Russia, including those with 

preferential arrangements and terms, subsequent to the bilateral 

treaty on the union state. 

We understand that pacts must be respected. Belarus is among 

the countries most dependent on external energy sources. Eighty 

percent of Belarus’ energy comes from Russia. Energy cooperation 

between Belarus and Russia is closed and, also, Gazprom’s business strategy remains a matter of concern to my government. 

The sufficient and affordable availability of energy is a precondition for Belarus competitiveness and economic growth. The 

government is convinced that our energy dependence cannot be forever increased and our first thing is to reduce dependency by increasing share of carbon-free energy sources and gradual introduction of energy efficiency. 

By 2010, we expect to invest in energy efficiency $5 billion U.S. 

Belarus is in the same situation as most of the OSCE countries 

that are large energy importers, all of which have to face the increasing prices of oil and gas in the coming years. 

A key issue for Belarus’ energy security is its dependency on a 

single supplier. In the near future, Belarus can import oil from different sources. We have two refineries and we can afford transport 

expansions. 

Energy security and sustainable growth are critical for the OEC 

region. Belarus will remain a country actively involved in energy 

security in the region, primarily in the European Union. As a reliable transit country, Belarus is important for both sides of the 

east-west corridor. 

24 

The European Union is trying to set up a common energy policy 

today for member-states. We agree with the EU position that mutual energy relationships between states must be predictable, 

transparent and reliable, but my view is the OSCE countries and 

not the European Union have to come together as a special ad hoc 

‘‘’Committee of the Whole’’ for energy producing, transiting and 

consuming countries to generate binding decisions on energy security, and the OSCE framework is relevant. 

The only matter which matters is our collective determination. 

The OSCE cannot be transformed across into a regional OPEC. 

Yet, energy is an issue of importance to the development of the 

OSCE members and the role of the OSCE is in enhancing dialogue 

energy security and generating binding decisions. 

And the OSCE can be a platform not only for political dialogue 

conversation, but also for addressing energy security issues, which, 

in the last instance, may be of a political nature. 

Thank you very much. 

Mr. HASTINGS. Thank you very much, Ambassador Khvostov. 

I’ll start my questions with you and, as I said to the previous 

panel, I’ll just have a couple of questions, and I do want to have 

the full array of panelists to have an opportunity to participate and 

there are two more waiting to testify. 

But, Ambassador Khvostov, what has been the impact of the January Russia increase in energy prices on the Belarusian economy? 

I could go into great detail, but I’d just share with you my personal observation when I learned that the energy supply had been 

temporarily shut off by Russia. It highlighted the fact for me what 

you say in your testimony, and that is that Belarus is in the same 

position as a large number of OSCE countries by having a single 

supplier. 

And at the same time, I personally did not do very much comprehensive study regarding what affect that had on your economy 

and if you could elucidate for me your thoughts on that, I’d appreciate it. 

Amb. KHVOSTOV. Well, it’s a very good question, Mr. Chairman. 

Of course, the situation will impact the economy. Our losses are, 

although not as big as we expected, maybe due to our GDP amount 

in $35 billion U.S. 

So I’m not sure about the right figures, but maybe it’s around $300 million, $350 million U.S., maybe. But although the government had foreseen this situation and with the purpose to minimize 

the consequences found for national development has been created 

in the last year and into which some $700 million U.S. have been 

paid at the end of the last year, and, of course, it will be fulfilled 

with every coming year. 

But, yes, I can agree with you that there was an impact of general gas prices on the Belarusian economy. 

Mr. HASTINGS. Right. Well, as I did say to the other witnesses 

and say again to you, I am going to have some followup questions. 

If you choose to answer them, I will place them on the website of 

the Helsinki Commission, but I won’t go into great detail. 

I must make, however, the observation that it would seem to me 

that Belarus and other countries similarly situated, for example, 

you have a responsibility contractually to Lithuania and if you are 

25 

not getting your supplies, you’re not able to fulfill those contractual 

responsibilities. 

I also am keenly observant of Russia using oil and gas as leverage in other places. I go next week to the parliamentary assembly 

in Ukraine and previous to what happened in Belarus, it happened 

in Ukraine, pervious to that, in Georgia, as well, and then Poland 

also had this kind of usage. 

I have some concerns, Ambassador, and perhaps you and I can 

followup with personal visits and I’ll express them to you in greater 

detail, but I will send to you some additional questions and hope 

that you would answer them. 

But I am so very grateful to you for being here today. 

Ambassador Aliyev, I used the term in my opening comments 

that we’re having a hearing soon on the issue of the resource curse. 

Azerbaijan was one of the first countries to sign on the extractive 

industries transparency initiative designed to inject greater transparency into international oil deals. 

And I was heartened by your comments about things that are 

taking place in regards of the establishment of democratic values. 

But how is Azerbaijan working to ensure that its energy revenues 

contribute to the growth of a well rounded economy in your country? 

Amb. ALIYEV. Thank you very much for this question. 

First of all, I need to mention that long ago, in December of 

1999, my government established a state oil fund, an organization 

which is designed to, first of all, be executive body that is responsible for collection of the petrol dollars and it is a transparent and 

open organization through which, in the year 2003, we joined to the 

EITE proposed by Great Britain. 

And I’m very proud to inform you, Mr. Chairman, that tomorrow, 

in Vienna, on the 26th of June, this particular fund will be granted 

the United Nations public service award, which is another manifestation of how transparent and open oil or petrol dollars are collecting in Azerbaijan. 

As of today, the state oil fund has collected about $1.8 billion, 

which is to be allocated for national economy development, in particular, non-oil sector, which is of paramount importance for my 

country to avoid so-called Dutch disease. 

Thank you. 

Mr. HASTINGS. Thank you both very much and we’ll followup personally with both of you. I’m grateful to you for being here. And 

when you see yours and my friend from Russia, this is my second 

hearing that I’ve invited him and he hasn’t attended. 

You tell him I’m interested in his views. I appreciate it very 

much. Thank you very much. 

I’d invite now Keith Smith and Pierre Noe ̈l. And thank you all 

for your patience, Mr. Noe ̈l and Mr. Smith. 

Mr. Smith is the senior associate for the Center for Strategic and 

International Studies and Mr. Noe ̈l is a research associate at the 

University of Cambridge. 

And as I have said previously, their biographies in full are available outside. 

I also thank you all, ladies and gentlemen. I can say to you this 

is the second hearing I’ve chaired. I chaired a briefing as chair of 

26 

Helsinki. And I do intend, before these energy hearings, if you’re 

interested in attending others, I intend by that time to try to find 

some mechanism to have greater audience participation. 

I, for one, find it awfully boring to have to sit up and listen and 

not to be able to say anything. So at some point, I’m going to 

change the format. I don’t care what the rest of the Congress does. 

Somehow or another, when people take up their time, come from 

their offices, their staff, lots of you have information and ideas out 

there that would be beneficial to us. 

And at the very least, we could develop a questionnaire or something that would permit that you offer your views. So expect that 

from me in the future so that you don’t just have to come to a dry 

hearing. 

But we have scintillating witnesses now, so I invite you to stay. 

Mr. Noe ̈l, you are going to kick us off, or Mr. Smith? Either. 

KEITH SMITH, SENIOR ADVISOR, CENTER FOR STRATEGIC 

AND INTERNATIONAL STUDIES 

Mr. SMITH. Thank you very much, Mr. Chairman. It’s a pleasure 

to be here. 

I’ve been writing about this subject for a number of years and 

there wasn’t much interest, quite frankly, until particularly in— 

well, in the United States and I would say in western Europe until 

the Gazprom cutoff of gas to Ukraine in January 2006. 

It suddenly became a topical issue and there was a lot of interest 

and excitement about the issue. On the other hand, there’s a lot 

more excitement and talk than there is action. Some of my Russian 

colleagues know that I’m a strong critic of the present government’s policies on energy, but I also criticize, to some extent, the 

European reaction to this. 

And I say that having lived 13 years of my life in Europe and 

dealt for many other years with European issues, but my European-born wife keeps insisting that I should give equal criticism to 

the United States and Europe. But I tell her I really don’t deal 

with that, I deal with Russian and European energy issues. 

But I think that there has been, for a long time, too long, ignored 

the growing use of Russian energy resources for political and strategic purposes and while January of 2006 was, to some extent, a 

wakeup call or at least a snooze alarm for a lot of people on energy, 

the use of Russian energy goes back to 1990. 

And in 1992, I was in Latvia and Estonia and experienced a situation where I had to sleep in my clothes at night because the energy had been turned off. It had been turned off for the reason that 

the Russian government wanted to pressure the Estonians and 

Latvians into allowing Russian military officers to stay there in 

their countries. 

Then in 1993–94, we saw the cutoffs to the Ukraine, had a lot 

of political implications. Some of this is in my testimony and I 

won’t go into it. 

From 1997 to 2000, lived in Lithuania, where, because of negotiations between an American and a Russian company and the Lithuanians—the Russian Transneft, the monopoly exporter of Russian 

oil, cut off oil shipments nine times during the 3 years I was there. 

27 

And we’ve seen it happen, it happened in Latvia almost 4 years 

ago. Oil was cut off to Latvia, even though Latvia’s an EU member. 

Nothing was done. There was almost no reaction in Brussels. Lithuania was cut off many times since, but definitively, it was cut off 

last July. 

The reaction in the European Commission was a weak letter, 

quite frankly, from the president of the EU, was never replied to, 

never followedup. Now, beginning, there’s some followup, but the 

Russians announced definitively that this problem with the pipeline that they had in Russia, they can’t fix it and it will never be 

fixed and there won’t be any oil going to Lithuania. 

It’s obviously a political thing and we know more about this all 

the time. This is something that I think that people need to pay 

attention to. For too long, in Europe, the European energy policy 

was really decided by Mr. Putin, Mr. Schroeder, Mr. Chirac, and 

Mr. Berlusconi in private meetings. 

It’s becoming more open now, but I think that there’s still a legacy in Europe of the large countries kind of deciding what they’re 

going to do to support their own companies and the smaller countries kind of had to make do. 

So the idea of a European energy policy, somewhat like the 

United States, is more talk than it really is action. There has been 

movement in Europe and I think in the right direction, but meanwhile you’ve got a Kremlin which is very agile, knows how to operate behind the scenes, non-transparent action. 

You’ve got intelligence officers running the energy policy in Russia. These intelligence officers, they know how to operate and they 

know how to operate quickly and they’ve been very successful over 

the last couple of years in checkmating European attempts to develop alternative supplies of energy into Europe. 

I think some of the deals recently reached, very non-transparent 

deals with Hungary, with Slovakia, with Bulgaria, Serbia, I think 

these things, these are going to really hurt the European policy 

and make it much more difficult for Europe to find alternative supplies of energy. 

I think the Nord Stream or the pipeline that the Germans—Mr. 

Schroeder particularly reached with Mr. Putin, an undersea pipeline, gas pipeline deal from Russia to Germany, the way it was 

done was not in the interest of Europe and I don’t believe in the 

interest of Germany. 

I mean, the fact that the Germans will be paying more than 

twice what they would if there was a free market in gas and this 

was done, as we all remember, the man that put this deal together 

was a former Stasi agent, east German intelligence agent, who 

worked closely with Mr. Putin during the Cold War and he’s now 

the deputy CEO of the company located in Zug, Switzerland, and 

the CEO is Mr. Schroeder. 

So there’s been a lack of transparency, a lack of, I think, working 

together for the common European interest. This is changing, but 

Europe is dealing, I think—it’s like all democracies and democratic 

organizations. It works slowly and by consensus and meanwhile 

you have a very fast running Kremlin which has worked quite effectively, I think, in cutting off some of the plans that the Europeans had to bring in alternative energy. 

28 

So a lot of the stuff announced today, the plans for alternative 

energy are good, I applaud them, but, quite frankly, I think they’re 

going to be—some are going to be too late and some are going to 

be slow and it’s going to take a long time in developing. 

I think there are some things that Europe can do. There’s a mythology, I think, in Europe which has developed that Russia is not 

bound by the energy charter treaty which it signed in 1997, because it hasn’t ratified that treaty. Well, Article 45 of that same 

treaty says that it should go into force on signature, not on ratification. And, in fact, Russia has ratified—has signed these 40 agreements, which is put into force and not ratified. 

So I think the Europeans would have been wise to kind of push 

that and push Russia to open up its pipeline systems using that. 

The second thing I think the Europeans have some clout with, 

and we could support that, is the implementation of Article 82 of 

the EC treaty, which has to do with antimonopoly and antitrust 

legislation. They used it against the horrendous attempt at Microsoft to bundle its music program with its Windows program and 

Microsoft has paid a hefty fine as a result of that. 

But meanwhile, Gazprom and Transneft, which are massive monopolies and which cost the European consumer billions of euros, 

have not been touched by Article 82 yet and I think there’s some 

things that can be done there. 

I think Mr. Bryza, in fact, and Mr. Mann mentioned some of the 

projects, specific projects in Central Asian and the Caspian area 

and I think that our support of those projects, I think, are very, 

very important. This is one case where I believe in the movie ‘‘Field 

of Dreams,’’ if you build it, they will come. And I think if you build 

those pipelines, there will be oil and gas to fill those and it will 

help Europe and by helping Europe, I think you help ensure the 

security of Europe and the own interest, the security interest of the 

United States. 

Thank you, sir. 

Mr. HASTINGS. Mr. Noe ̈l? 

PIERRE NOE ̈ L, RESEARCH ASSOCIATE, UNIVERSITY OF 

CAMBRIDGE 

Mr. NOE ̈L. Thank you very much, Mr. Chairman, for inviting me 

today. I am Pierre Noe ̈l. I work at the Judge Business School at 

the University of Cambridge in the UK, but you will have already 

noticed from my accent that I am from another European country. 

I will talk today on the EU-Russia gas relationship and the security, security treaties and what can be done about them. 

What is the interest of Europe? The interest of Europe is quite 

clear. It’s in the de-politicization of the gas relationship with Russia and it is in bringing Russian gas into a competitive framework 

to supply the European markets. 

These two objectives were embedded into the energy charter 

treaty and its transit protocol. 

What are Russia’s interests? Russia’s interests are maintaining 

and growing politicization of the gas relationship with Europe and 

toward limiting competition against Russian gas in Europe, in the 

European market, especially alternative gas from Central Asia. 

29 

So the gap between these two positions could not be greater. 

They are completely opposed and this gap cannot reasonably be 

bridged by some sort of a compromise position, and this fact is now 

well, I think, acknowledged in Europe it has always been the case 

over the past 10–15 years. But this is now quite well acknowledged 

in Brussels and in the European capitols. 

This gap, I believe, is the root cause of the uneasiness in Europe, 

the growing uneasiness towards our dependence on Russian gas. 

So where does it leave us? Can we live in such a situation? Well, 

we have [inaudible], our big external supplier, which has a conception, a perception of what this relationship should be, which is completely at odds with ours. 

Can we live with that? What are the risks? What can be done 

to hedge against these risks? 

I think that there are two risks, basically. One is the risk of supply disruption and the other one is what I would call the scarcity 

risk. The risk of supply disruption, it’s important to note, would be 

with us even if Russia shared our view of what this conventional 

energy relationship should be. 

What can be done? The key measure, I believe, is purely an EUcentered or EU-focused measure, is the creation of an integrated 

competitive European gas market. If we at last created this common gas market, we would create de facto solidarity between EU, 

EU countries. We would massively increase the fungibility of the 

EU gas market, just as the North American gas market is now 

completely integrated, completely competitive and completely fungible. 

That’s absolutely not the case in Europe. So the member countries, and I will not name them, but the member countries who oppose such a move against the will of the EU commission and some 

of the member countries, these countries do the EU and energy security a disservice and they should, I believe, amend their policy. 

You have [inaudible] to ensure quality review exceptions in 

terms of building strategic gas storage. We have, as everybody has, 

a lot of commercial gas storage, but no strategic gas storage. Maybe 

we should think more carefully about that. 

We can also increase the shortened demand elasticity by requiring gas-fired power stations to maintain petroleum products inventory in case their gas supply contract had to be interrupted. 

We can also, it would probably be expensive, but we can also 

mandate spare LNG re-gasification capacities to allow the gas market to attract more LNG [inaudible] from the open international 

market in time of crisis. 

The second risk is the scarcity risk. It’s, to be clear, the risk of— 

I mean, if we have to face a sustained restrictive gas policy from 

Russia, in other words, if Russia is either unable or unwilling to 

expand its gas supply to Europe as our needs grow. 

Well, it’s very much the situation we are in, but how should we 

react? How should we respond to the prospects of this situation 

going into the future? 

First of all, I think it’s important to note that this Russian strategy is a self-defeating strategy. Russia is pricing itself out of the 

European markets, and I can give you the numbers, if you’re interested, afterwards. 

30 

Beyond that, I mean, beyond the fact that they are damaging 

their own market share in Europe, we can do several things to 

maximize competition against Russian gas in Europe. Norway is 

benefiting massively from the Russian restrictive gas strategy in 

the European market. We have more liquid natural gas coming 

into Europe from various places in the world and we increase our 

North African imports. 

The United States, as far as Central Asia is concerned, and I will 

not repeat what has been said by the State Department officials, 

but the United States has worked quite effectively towards increasing competition against Russian gas in Europe from Central Asia. 

I have to touch briefly upon the Iranian question. If you think 

globally, I mean, one of the obvious potential candidates to sort of 

check the Russian monopoly power on the gas market is Iran and, 

on this issue, the United States has been much less helpful than 

on the Central Asian case, though there are other barriers and it 

doesn’t mean that there are not serious issues for treating Iran differently, but I think this had to be said. 

Then, of course, competition against gas does not only mean nonRussian gas. It also means all the technologies to purchase electricity and so continuing and expanding R&D investment into clean 

coal and renewables and next generation nuclear power are all 

strategies that can make a difference in terms of reducing Russian 

market power in Europe and also in Asia. 

So just to conclude, just a few thoughts as we have conclusion. 

I think the threat perception in Europe has been exacerbated by 

the Ukraine crisis. I believe that the level of threat perception currently in Europe is probably a bit exaggerated as far as the risks 

are concerned linked to our dependence on Russia. 

I think that provided we put in place the policies to deal with 

these risks, we can live with this gas relationship as it is, even 

given the deteriorating political context of this commercial relationship. But the perception gap between Russia and the EU that I 

have outlined at the beginning of this presentation makes it, I 

think, very unlikely that this trade between Russia and Europe 

will grow into the future. I think it will, at best, plateau and probably decline. 

Thank you very much. 

Mr. HASTINGS. That’s fairly optimistic, all things considered. I 

would have a little bit of concern for the geopolitics if I were to 

take face value what you said, Mr. Noe ̈l. 

It’s easy to say that it’s exaggerated, the emphasis that some in 

Europe and here in the United States are placing on what Russia’s 

actions have been that have been manifested. But with the lack of 

transparency and added to that what Mr. Smith just got through 

saying regarding who actually runs the Russian energy policy without identifying Gazprom, with their efforts toward developing monopolies with countries that are totally reliant upon them for their 

energy. 

It’s easy for us in room 419, an air-conditioned, well lighted 

room, to conclude that everything is worth the risk. I do agree with 

all of the things that you said regarding what must be done in the 

way of dialogue and then enforcement of treaties, but as I sit here 

listening to everything today, the one thing that I’m absolutely cerVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
31 

tain of is that there is instability in this market at this point and 

there is uncertainty as to which way it’s going to go. 

And why I part company with you is if you had been in Belarus 

in January and oil or gas had been cut off, you’d have a different 

view about it, and the same would hold for Ukraine or Lithuania 

or Poland or in Georgia, where other levers are used. 

And something we haven’t talked about, nor do either of you 

need to for my purposes, but with the ongoing instability in the 

areas where pipelines run, and I’m not talking about anything less 

than serious conflicts that are commonly referred to as frozen conflicts, with those things ongoing and the likelihood of interruption 

of any of these pipelines being something that could take place, 

there are some serious, serious problems out there that are being 

discussed. 

But I join company with Mr. Smith and believe that it’s a distinct possibility that it may be too little too late. So it doesn’t mean 

that all is lost or that we should not do all of the things. I was 

happy that you brought up Iran, because that’s what I wanted to 

start with Mr. Smith about. 

What is the role of Iran in discussions of European energy security? And very little has been said here today other than until Mr. 

Noe ̈l brought it up. 

What’s your take, Mr. Smith? 

Mr. SMITH. You know, Mr. Chairman, I’m kind of schizophrenic 

on this issue. I agree, to some extent, that we need to keep pressure on Iran because of the nuclear issue. At the same time, I 

think that Iran can be, as Mr. Noe ̈l said, I agree with him, can be 

part of the answer by providing an alternative exit point for not 

only Iranian, but Caspian Sea oil and gas, and especially gas, and 

I would like to see that done. 

If there’s a way to kind of square that circle, I would be in favor 

of it. I don’t know—I don’t know really what I would propose at the 

moment. I think that we’re—in some ways, I’m probably leaning toward working with the Iranians or allowing other countries to work 

with the Iranians to get gas and oil out, Caspian Sea oil and gas 

out. 

Without Iranian support, there won’t be a delimitation of the 

Caspian Sea and without a delimitation of the Caspian Sea, there 

probably won’t be pipelines underneath the Caspian Sea which are 

needed to bring gas and oil from the eastern Caspian to the western part. 

So I would say probably I come down on the side of allowing European and other companies to use Iran as a transit point, not necessarily as a source, but as a transit point for oil and gas from 

other countries. That’s probably where I’d come out, but I have to 

confess I’m a little conflicted on the issue of how we deal with Iran. 

Mr. HASTINGS. I understand. Let me followup on—not followup, 

but ask another question. 

When the GATT round came into effect, a lot of countries were 

not involved in being able to be contracting parties with the GATT 

and that holds true for countries that are non-WTO countries. 

How do you use some of the [inaudible] that are in existence? 

The energy charter treaty, for example, how do you utilize that 

32 

with non-WTO countries to try to gain greater transparency in this 

particular area, Mr. Smith? 

Mr. SMITH. Well, you don’t have to be a WTO member or even 

a GATT member to sign on to transparency agreements and there 

are international conventions on transparency in business that 

anybody can sign onto and which is designed actually to increase 

a country’s attractiveness to foreign investors. 

So the two are not incompatible and I think there are countries— 

and you have countries like Ukraine which are not WTO members, 

but which have—I hope they will be by the end of the year, but 

which have signed on to some of these transparency measures, but 

unfortunately are not enforcing them. 

I don’t know how you deal with some of the countries. I mean, 

there are a lot of oil producers and gas producers, especially around 

the Central Asian area, who lack a lot of transparency. 

I think over a period of time, though, working with them, I think 

it’s important for the United States and Europe to work with these 

countries, not to isolate them, not to treat them as pariahs, and I 

would include Uzbekistan in that, which is going to be an important gas producer and the Russians believe that they have locked 

up all the gas supplies for the next 20 years from Uzbekistan. 

But I believe that a deal is a deal, if maybe in Central Asia, and 

I think that if the Europeans and the United States work together 

in a little more—I think a little more closely in dealing with some 

of these producer countries, I think there’s some hope. 

Also, the enforcement of European standards, for instance, on, as 

I had mentioned before, antitrust, antimonopoly legislation. But I 

think keeping the pressure on without really beating up on these 

governments I think is part of a key and I think—for instance, I 

think Turkmenistan and Kazakhstan would very much like to have 

a kind of multidirectional energy policy, but right now they feel 

like they’re being held hostage by Russian pipelines. 

But they would like to be able to ship to China, to ship to Europe, because the prices are much more favorable for them. So 

that’s where I think that Europe has got a problem, because right 

now Europe is paying over $300, as somebody mentioned earlier, 

$300 a 1,000 cubic meters for gas, which Russia purchases really 

from $70 to $100 a 1,000 cubic meters. 

And Mr. Putin keeps claiming that, in fact, we’ve been subsidizing these countries for a long time by giving them cheap oil 

and gas. Well, who’s been subsidizing whom? I mean, the Central 

Asians have been subsidizing Russia. It’s the Central Asians that 

are subsidizing Ukraine, because most of Ukraine’s gas comes from 

Turkmenistan. 

So I think that more publicity, working with these governments 

on transparency. I think the EU has, for instance, some very good 

capacity in some of their programs that they call the twinning program, where they take EU officials, put them in ministries in some 

of the key energy and other ministries in these governments that 

are not members of the WTO or Gatt, and it has an effect. 

I’ve seen this have an effect because it’s a little harder to be corrupt when you’ve got somebody from the European Commission 

looking over your shoulder and I think this is a very good policy 

33 

and I think the Europeans have an excellent opportunity, I think, 

to increase transparency in some of these countries. 

Mr. HASTINGS. I appreciate it very much, Mr. Smith. 

Mr. Noe ̈l, I’ll give you the last say at the hearing and add the 

question, do you have optimism that the European Union will be 

able to forge a common energy policy or is that not necessarily? 

I wasn’t kidding. When I picked up the newspaper today, I was 

reading for the first time about ENI and Gazprom and it just kind 

of struck me how fast things are happening and how much different people are on different pages, and I’m just curious. So you 

have the last word. 

Mr. NOE ̈L. Thank you very much, Mr. Chairman. I’d like to go 

back for 1 minute to your previous question. You were absolutely 

right. I do not underestimate the challenge that the new EU member countries or some of these countries are not appearing, not yet, 

EU member countries, the challenges they face because they have 

only one supplier and they have this historical relationship which 

makes it that they have only one supplier, and this supplier is, to 

say the least, quite difficult to deal with. 

There is no easy, rapidly implementable solution to that. The solution can only be a dynamic one and I am thinking of two things. 

The first one is gradually bringing some diversity into the energy 

supply of these countries, and it is already happening and I think 

it will continue to happen. 

There are two LNG projects, one of the advanced, in the Baltic 

Sea. There is one in the Adriatic Sea, one on the north, one on the 

south, which will bring diversity, more diversity into the gas supply 

of central and eastern Europe. 

Then if Europe, as I hope it will, finally integrates its gas grid, 

there will be possibilities in times of crisis for west-to-east gas flow 

for these countries. So that’s the first thing. 

The other thing which can also be dynamic is Russia—we can 

also be hopeful that Russia eventually will understand that the 

way it deals with its immediate neighbors, the transit countries to 

Europe, affects the way it is perceived in Europe as a reliable or 

unreliable supplier. 

And the Ukraine crisis of January 2006 is a perfect example of 

that. The way Russia dealt with Ukraine destroyed Russia’s credibility and Russia’s credibility as a reliable supplier in Europe. 

So Russia can learn, first, and, second, gradually, there will be 

more diversity to these countries. There is no rapid solution to this 

problem. 

Your second question, Mr. Chairman, it’s a mixed bag. Yes, there 

already is a strong agreement between EU member countries in energy, but these countries come from energy situations, not to speak 

about policies, but energy situations which are very different. 

Nuclear energy produces 85 percent of electricity consumed in 

France, 85 percent. Nuclear energy is an illegal technology in Austria and the Republic of Ireland. This is only one example. 

Natural gas, the UK natural gas market is one of the only two 

truly competitive natural gas markets in the world with the North 

American market. The French or the Italian or the German gas 

markets are completely different. They are organized under completely different lines than the UK market, and I could continue. 

34 

Norway produces much of its electricity from hydroelectricity, 

whereas most of the other countries do not. 

So we come from—and Norway’s not a member country, sorry. 

But we come from very, very different backgrounds in terms of our 

energy systems. So you can imagine that when we talk about nuclear energy in an EU meeting, when you have Austria and the Republic of Ireland, on the one hand, and France on the other hand, 

it’s quite difficult to reach an agreement on what our nuclear energy policy should be. 

And I could go on and on and on. So it’s a very difficult process, 

but it’s a process which has advanced significantly over the past 

few years and which I believe will continue to advance towards a 

more coherent integrated energy policy in Europe. 

Mr. HASTINGS. Well, one thing I wish that we had more time to 

deal with, and we will in the future, and that is the world implications. And, you know, you go through an energy hearing and you 

only hear Venezuela mentioned one time, India and China are 

mentioned without talking about Malaysia and Indonesia and Pakistan, somewhere along the line, Japan is left out of this equation 

and all they can do is import, significant. 

Then we haven’t spoken about some of the others, aside from the 

Gulf states or Algeria and how they play a significant role. I guess 

we could go on and on. 

I appreciate you all so very much, as well as all of the witnesses. 

While there may not have been any news made here today, the 

simple fact of the matter is I think we all now understand and are 

beginning, as you have for some time, Mr. Smith, to recognize that 

it is going to require a concerted effort on behalf of the world. 

And I thoroughly agree with you, something that you said and 

it sticks with me, when I’m interfacing not only as the chair of this 

Commission, but as the previous president of the parliamentary assembly, I took a softer approach in talking with colleagues that 

some referred to as pariah states and somehow or another, in my 

heart of hearts, I don’t see things that way. 

I don’t think you can ignore places that do have very bad governance, from my point of view, without taking into consideration a 

need to deal with them in a realistic way and to see how incrementally you may be able to produce change. 

Case in point would be Turkmenistan, great opportunities exist 

after Niyazov’s death and I’m not so sure people moved swiftly 

enough to try to have some impact, albeit the change may not have 

been one that would be favored by some. 

The fact of the matter is the people have a lot of gas and it would 

be a good thing of people understood how to talk to them on their 

terms. 

I’m pleased to report that if it follows in July in Ukraine, as I 

suspect it will next week, Turkmenistan is sending a representative for the first time in a long time to the parliamentary assembly. 

And if there is anything that I learn from all of this, as I determine to make energy my highest priority, I know that you cannot 

deal with this particular problem without dealing with the other 

components of the Helsinki process and that is the human rights 

aspect of it or governance aspects or rule of law aspects are equally 

important, and not to suggest by any stretch of the imagination 

35 

that there is anything less than political dynamics that are at work 

here all the time. 

And I join your wife—sometimes this country needs to be criticized, as well, Mr. Smith. 

Thank you. 

Mr. SMITH. I’ll tell her that. 

Mr. HASTINGS. Thank you all. Hearing adjourned. 

[Whereupon, at 4:59 p.m., the hearing was adjourned.] 

36 

A P P E N D I C E S 

PREPARED STATEMENT OF HON. BENJAMIN L. CARDIN, COCHAIRMAN, COMMISSION ON SECURITY AND COOPERATION 

IN EUROPE 

Thank you, Mr. Chairman. I am pleased that the Commission is 

focusing on energy security—a topic that binds all of the participating States of the Organization for Security and Cooperation in 

Europe (OSCE). We are truly all part of a global energy system 

that requires us to work together to achieve our common energy 

goals. 

It has become clear that real energy security requires not only 

reliable sources of oil and gas, but a decrease in dependency on hydrocarbons. Recently I introduced legislation that would create a 

framework for the United States to become energy independent in 

a decade, and put us on the path to become fossil fuel independent. 

For too long America has been held hostage by its reliance on foreign energy. Energy independence is critical for our national security and for our environment, and this bill provides a much-needed 

framework for developing a comprehensive energy policy for our 

nation. 

The Energy Independence Act would create a bipartisan Blue 

Ribbon Commission to study and review policy changes that are 

needed for the United States to achieve energy independence. 

Starting in 2009, the Commission would meet every two years and 

report to Congress on how to adjust our policies to achieve energy 

independence by 2017. Energy independence is defined as getting 

90 percent of our energy needs from domestic sources. 

Petroleum accounts for 84 percent of our nation’s imported energy. Transportation accounts for approximately 28 percent of all 

energy used in the United States, so sourcing our energy domestically will require major changes in how we use our energy resources. I support raising CAFE standards, which could save more 

than 36 billion gallons of gas a year. There are other significant 

steps we can take such as creating standards for replacement tires, 

increased energy efficiency standards for buildings, and an increased availability of renewable energy products. 

A comprehensive energy policy must include conservation, greater availability of renewable energy sources and investment in our 

transportation infrastructure, including more funding for rail systems, buses, subways and light rail. 

Equally important, we need to become energy independent to 

protect our environment. Global climate change is a real danger to 

this country and we need an energy policy that will also make us 

friendlier towards the environment. We need greater investment in 

renewable sources of energy. Wind, solar, and biofuels all hold 

great promise for our future. But we need to make a firm commitment to investing in these technologies, to increase efficiency and 

reduce costs to the consumer. 

Energy security is not just about the high price of oil—this is 

also about helping to create a more stable and secure world. Our 

quest for hydrocarbons has led us to partner with countries that 

37 

are either unstable or have horrendous human rights records. Real 

energy security means we can rely less on energy sources that 

come from unstable and unsavory countries. By removing the 

stranglehold they hold on our economy, we can more effectively address the economic and civil society developments in these countries. I know this aspect will be part of our second hearing in this 

series and I look forward to that discussion. 

38 

PREPARED STATEMENT OF HON. SAM BROWNBACK, RANKING 

MEMBER, COMMISSION ON SECURITY AND COOPERATION IN 

EUROPE 

Mr. Chairman, thank you for convening this hearing. Energy security for the United States is certainly closely tied with that of 

Europe and Eurasia and I believe this hearing will help us better 

understand the implications of recent energy disputes in Europe. 

Ensuring a steady supply of energy for the U.S. and its allies is 

a key national security priority. Our transportation sector is dependent on oil for 97 percent of its fuel. The United States uses 25 

percent of the world’s oil, yet only has 5 percent of proven oil reserves. And as fate would have it, much of the world’s supply of 

these hydrocarbons is located in regions where countries are hostile 

to us or are unstable—or both. It is imperative that the United 

States decrease its dependence on foreign oil so that our economy 

is not held hostage to events happening half a world away. Given 

the demands of our economy, that will require the United States 

to not only increase our own domestic production of oil and natural 

gas, but also to increase our energy efficiency and find alternative 

fuels. 

Diversification of the sources of energy and the delivery mechanisms are the key to overall energy security. This is true not only 

for the United States but for our European and Eurasian partners 

as well. U.S. policy should continue to foster more sources of supply 

and more pipelines. I believe it is unsound policy for the West to 

allow Russia to control the sources and transit routes for Caspian 

and Central Asian hydrocarbons. That would be so even if our relations with Russia were better than they are today or are likely to 

be in the foreseeable future—it is just common sense not to count 

on one supplier for such a valuable commodity. 

Russia has enjoyed some successes in the past few months, locking up major energy deals with Kazakhstan and Turkmenistan. 

Still, we cannot afford to throw up our hands in resignation. The 

Baku-Tbilisi-Ceyhan (BTC) pipeline was a great success for Washington, reflecting a bi-partisan approach over two administrations 

to an energy and geopolitical problem. Opening up Azerbaijan’s reserves to the West set a precedent for promoting multiple pipelines 

that helps ensure supply while supporting the independence of 

Azerbaijan. 

I have strongly supported the BTC pipeline. In legislation I have 

offered—the Silk Road Act I and II—I have urged that we enlarge 

the scope of our energy projects to the length and breadth of Central Asia and Afghanistan. 

The question now is whether we can build on our success in 

other Caspian and Central Asian projects. The BTC was possible 

because Washington put its shoulder to the wheel and pushed hard 

for years until a dream became reality. I hope to hear from our witnesses how the U.S. Government proposes to continue this effort. 

39 

PREPARED STATEMENT OF GREG MANUEL, SPECIAL ADVISER 

TO THE SECRETARY AND INTERNATIONAL ENERGY COORDINATOR, DEPARTMENT OF STATE 

Chairman Hastings, and Cochairman Cardin, Ranking Members 

Smith and Brownback, and members of the Commission, thank you 

for this opportunity to discuss U.S. policy on energy security in Europe and Eurasia. Our energy interests in these regions—encompassing Europe, Russia, the South Caucuses, and Central Asia— 

are far reaching. Anchored by our five prong global energy strategy 

to (1) diversify the supply of conventional fuels and expand production (2) diversify our energy portfolio by expanding the use of alternative and renewable energy, (3) promote increased energy efficiency and conservation measures, (4) advance environmental stewardship, and (5) protect critical infrastructure and promote market 

stability, we have adopted a comprehensive strategy tailored to Europe and Eurasia with the following objectives: 

• The United States and our Euroatlantic allies maintain reliable access to diversified supplies of energy, including oil, natural 

gas, renewable and alternative fuels, and nuclear power; 

• Hydrocarbon producers in Azerbaijan and Central Asia realize 

the benefit from multiple export routes to European and global 

markets; 

• European energy markets (especially for natural gas) function 

efficiently; 

• Decrease potential for energy to be used as a political or commercial weapon; 

• Eurasian energy producers manage hydrocarbon wealth wisely 

to avoid corruption and economic instability; and 

• The Euroatlantic community develops commercially viable 

technologies to reduce carbon emissions without slowing economic 

growth. 

These objectives are inter-related. By increasing diversity of 

sources of supply and transit routes, we can bolster market efficiency through competition and reduce vulnerability to energy supply disruptions. Relying on market-based policies to manage energy 

revenue streams transparently can limit the corruption and economic distortions that undermine economic growth and stability. 

By increasing diversity of types of energy, we also reduce the danger of politically or commercially motivated energy cutoffs, directed 

at either producers or consumers, while reducing our dependence 

on hydrocarbons, which in turn reduces carbon emissions and pollution, benefiting the environment. 

To advance our international energy strategy, we are pursuing a 

broad range of mechanisms, including enhanced trade and transparency, intensified technology development, new regional energy 

partnerships, bolstered energy dialogues, and novel public-private 

sector partnerships. 

DIVERSIFICATION OF ENERGY SUPPLIERS AND ROUTES

America’s aim is to advance reliable, long-term flows of oil and 

natural gas from the Caspian region. Reliability requires sustained 

investment and diversified sources and supply routes—a point emphasized and endorsed by G8 leaders during their summit in RusVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
40 

sia last July, when they committed to the St. Petersburg Global 

Energy Security Principles, which also include commitments to 

open transparent, efficient, and competitive energy markets. 

The EU is heavily reliant on fossil fuels and likely will be for 

decades. Oil accounts for 40 percent of the EU’s energy demand; 

gas, 24 percent; coal, 17 percent; nuclear, 13 percent; and hydroelectric and renewables, six percent. According to the International 

Energy Agency, Russia provides 60 percent of EU gas imports and 

25 percent of oil imports. In March, the European Union adopted 

a broad package of targets and incentives that is meant to reduce 

EU dependence on fossil fuels. The IEA nevertheless projects that 

by 2030, barring major policy shifts, the EU will import 70 percent 

of the energy it consumes. 

Russia remains the largest single supplier of oil and gas for 

many EU member states. Dependence on Russian crude oil in 2006 

is as follows: 12 percent of France’s oil comes from Russia; Germany obtains 34 percent from Russia; and Poland, Slovakia and 

Hungary each obtain almost 100 percent. But oil is a fungible commodity that can find its way to global markets through a multiplicity of pipelines and tanker routes from any point on the globe. 

Natural gas is a different story. Until liquid natural gas is a 

globally traded commodity like oil, the market for natural gas will 

remain based on long-term contracts. The EU is dependent on Russian parastatal company Gazprom for 60 percent of its natural gas 

imports and 40 percent of all the natural gas it consumes. Europe 

secures the balance of its natural gas from the North Sea and the 

Norwegian Continental Shelf, North Africa, imports of liquefied 

natural gas, and limited production on mainland Europe. In 2005, 

Gazprom accounted for 32 percent of pipeline gas imports in 

France; 40 percent in Germany; 68 percent in Hungary; 63 percent 

in Poland; and 100 percent in Slovakia, Bulgaria, and the Baltic 

states. EU dependence on Gazprom will likely grow in coming 

years, as North Sea gas supplies deplete, and Gazprom seeks to 

lock in exclusive supply contracts lasting two to three decades, and 

Gazprom control of delivery infrastructure and distribution assets 

in the downstream increases. 

Map 1 depicts the enormous network of pipelines on which 

Gazprom relies to transport gas from Western Siberia and Central 

Asia to Europe. 

In the eyes of many European consumers, Russia’s reputation for 

reliability of gas supply was damaged by its January 2006 cutoff 

of gas supplies to Ukraine, and mysterious explosions on a Russian 

pipeline that cut all gas flows to Georgia and Armenia during the 

peak of the winter of 2006’s harshest weather. A similar oil cutoff 

to Belarus, and threats of new stops in service to Azerbaijan and 

Georgia in winter 2007, further propelled European consumers to 

seek diversity of supply sources. 

Because of Russia’s nationalistic interventions in its energy sector, investment in Russia’s upstream production and infrastructure 

has lagged and this can lead to significant challenges to meeting 

supply obligations. Existing Russian gas production in Western Siberia is being depleted, and has not been replaced or expanded by 

investment in new production or reinvestment for expansion; in effect, several of the country’s most important large gas fields are exVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
41 

periencing production declines, and the substantial volumes of gas 

production have been voluntarily shut in by Gazprom. Significant 

lead time and foreign technical expertise would be needed to begin 

to develop many of these shut in resources. During the course of 

the next five to ten years, Russia will need to develop new supplies 

of gas to continue meeting its 25- and 30-year contracts in Europe. 

This will require huge levels of investment in highly remote areas 

like the Arctic, Eastern Siberia and Russia’s Far East. Gazprom is 

eyeing the Caspian Basin, especially Central Asia, as the cheapest 

and most readily available supply of natural gas to allow Gazprom 

to fulfill its supply contracts in Europe. Gazprom seeks to continue 

buying Central Asian gas at low rates which it can sell at high 

prices by virtue of its position as the monopolist owner of the largest pipeline network serving Europe, and the only one linking central Asia and Europe. 

Gazprom, as the dominant supplier to the European market, cur- rently purchases gas in Central Asia for $100 per 1,000 cubic meters, then sells gas for $265 or $285 in Europe. Preliminary price 

estimates for Azerbaijani gas shipped to Europe via the SCP and 

the Turkey-Greece-Italy pipeline indicate an independent route 

could potentially yield better prices for both European consumers 

and Caspian producers through transparent market mechanisms, 

and will increase competition for those markets. 

The enormous rents generated by the current differential in gas 

price between Central Asia and Europe are generally distributed 

non-transparently, contributing to corruption and undermining energy sector and broader economic reform along the entire supply 

chain. These revenue streams and control of a considerable portion 

of the world’s gas reserves enable Gazprom, a monopoly by Russian 

law, to constrain competition in both upstream and downstream 

markets by acquiring strategic energy infrastructure in Europe and 

the Caspian, by concluding exclusive long term purchase and delivery contracts under non-transparent terms, and by acquiring equity 

positions in European energy companies. It is therefore critical to 

find common cause with our Europeans allies and Central Asian 

producers to counter monopoly pressure by increasing the number 

of suppliers and supply routes for world gas markets. 

Map 1 shows the first option to increase competition for gas markets through multiple gas pipelines. The yellow line on the map 

that links Baku, Azerbaijan with Erzurum, Turkey depicts the 

South Caucasus Gas Pipeline (SCGP), one of the most complex gas 

pipelines ever developed, and which parallels much of the BakuTbilisi-Ceyhan (BTC) oil pipeline. SCGP and BTC received strong 

support from the United States for over a decade, as we helped the 

Governments of Azerbaijan, Georgia, and Turkey work together 

and with private investors to realize these infrastructure projects 

that changed Europe’s strategic map. As SCGP comes fully onstream in coming weeks, it will link Azerbaijan’s giant Shah Deniz 

gas field in the Caspian Sea with Turkey’s gas grid. Development 

of the Shah Deniz field has the potential to make Azerbaijan selfsufficient in natural gas, and will provide Georgia and Turkey with 

an invaluable alternative supplier. 

Map 2 depicts the vision of what we hope to achieve in 2020— 

a ring of natural gas infrastructure extending from the Caspian 

42 

Sea around the Black Sea into Europe. Working with companies 

and countries, we seek to expand the SCGP into a larger ‘‘Southern 

Corridor’’ comprising two emerging projects: the Turkey-GreeceItaly (TGI) and Nabucco pipelines. The Southern Corridor will complement Gazprom’s existing pipeline infrastructure, as well as new 

supplies of liquid natural gas from Norway and perhaps Russia and 

other countries. 

The first phase of TGI will be operational later this summer, 

when the Turkish and Greek gas grids are connected. Shortly 

thereafter, we expect a modest volume of Azerbaijani gas to reach 

Greece. Over the subsequent three to five years, a trans-Adriatic 

link will connect the gas grids of Greece and Italy, providing a reliable flow of diversified gas supply from Azerbaijan. 

The Nabucco pipeline, conceived by the European Commission in 

conjunction with the Governments of Turkey, Bulgaria, Romania, 

Hungary, and Austria, is in an earlier phase of development. 

Nabucco promises to deliver large volumes of natural gas from the 

Caspian Basin and the Middle East into Southern and Central Europe. The U.S. supports Nabucco exclusively as a way to transport 

Azerbaijani—but not Iranian—gas to Europe. We believe Azerbaijan’s gas reserves and potential production are sufficient to fill 

both TGI and the first phase of Nabucco. We are working to facilitate close cooperation among all Nabucco countries, the Government of Azerbaijan, and investors in both the pipeline and Azerbaijani gas production, which is crucial to ensure sufficient Azerbaijani gas is available to meet the investors’ schedule for 

Nabucco’s realization. 

This graph, 

drawn from data provided by international energy companies operating in Azerbaijan, projects that Azerbaijani gas production 

could expand to nearly 50 billion cubic meters (BCM) per year by 

2016. The graph provides an un-risked, upside estimate of how 

quickly gas production can expand in Azerbaijan if investors and 

governments synchronize at the same, high level of efficiency that 

characterized our efforts on BTC and SCGP. It is an optimistic, but 

practicable, estimate. If investors and governments reach these targets, their effort could provide 20 to 30 BCM for export to Europe, 

covering the 11.5 BCM required for TGI and the 8.5 to 10 BCM required for Nabucco’s first phase. Reaching these production targets 

will be a challenge, requiring synchronization of upstream production with midstream investments in pipelines. The United States 

is committed to offering whatever diplomatic assistance the relevant governments and companies may seek as they strive to forge 

the same successful public-private partnership that realized BTC 

and the SCGP. 

While Azerbaijani gas reserves are sufficient to launch Nabucco, 

later phases of the pipeline project will require additional gas supplies from Turkmenistan, Kazakhstan, and/or Iraq. 

Kazakhstan is a growing energy giant. Its oil and gas production 

will increase rapidly over the next five years. That production will 

require new outlets to world markets. We are proud of the leading 

role US companies have played in helping to build Kazakhstan’s 

energy sector and the country’s broader economy. As a rising nonOPEC oil producer, Kazakhstan is especially important. As new 

43 

fields come on line, Kazakhstan exports will add to world supplies. 

Export outlets are a problem, however. The stalled expansion of the 

existing Caspian Pipeline Consortium (CPC) pipeline through Russia will certainly necessitate development of new routes to market. 

Kazakhstan’s large natural gas reserves and rising production will 

likewise induce the development of new means to bring energy supplies to markets. 

Turkmenistan presents new challenges and opportunities. The 

closed nature of the previous regime discouraged new investment 

and prevented the flow of much-needed advanced technology to the 

Turkmen energy sector. In the absence of such investment over the 

past decade, Turkmenistan had scant opportunity to increase its 

production; indeed, its ability to ship gas to Russia has fallen below 

the volume for which it has contracted. The declaration issued in 

Ashgabat in mid-May by the Presidents of Russia, Kazakhstan, 

and Turkmenistan calls for investment in Turkmenistan’s gas infrastructure. We support Turkmenistan in observing existing gas 

sales contracts. At the same time, Turkmenistan will benefit from 

additional options to export its gas and we will work with the government of Turkmenistan to facilitate its access to world markets. 

Additionally, the U.S., Turkey, and Iraq are exploring potential 

gas production in northern Iraq, which could be exported to Turkey 

and onward into Nabucco. We are only in the early stages of this 

effort, as we work together to attract investment and ensure that 

Iraq has sufficient natural gas available to meet its domestic demand even as it seeks to tap European gas markets. EUR Deputy 

Assistant Secretary Matt Bryza and Turkish Energy Minister 

Hilmi Guler co-chaired the first trilateral meeting on Iraq gas production/exports in March. They plan to follow up with a subsequent 

meeting in Istanbul on June 30. 

Our cooperation with the EU to realize the Southern Corridor of 

natural gas infrastructure is accelerating. During the recent U.S.- 

EU Summit, the United States and the European Commission 

pledged to seek diversification of energy types, sources, and supply 

routes, with a particular focus on the Caspian region. We are also 

working to help our European allies unify their energy policies to 

elicit more equitable and market-based energy deals with Russia 

and resist divide-and-conquer tactics. We continue to oppose oil and 

gas pipelines that run to, from or through Iran. By standing together, EU member states can transform into negotiating reality 

the theory that Russia is as dependent on revenue streams from 

Europe as Europe is dependent on Russian natural gas flows. The 

centerpiece of this effort is the Athens Process, which seeks to harmonize gas and electricity markets through the Southeast Europe 

Cooperation Process. 

We are also working with our European partners to diversify 

sources of gas supply in Northern Europe. As Russia and Germany 

strive to develop the massive Nordstream pipeline to transport 

Russian and Central Asian natural gas under the Baltic Sea to 

Germany, Nordic and Baltic countries are striving to increase regional competition. Norway is entering a new phase of large-scale 

natural gas production; it already serves as a key alternative supplier of natural gas to northern Europe. Oslo, Copenhagen, and 

Warsaw may be moving closer to agreement on a project to link 

44 

Norway’s gas fields with Denmark’s gas pipelines under the Baltic 

Sea, with an extension to Poland. We are supporting this initiative, 

as well as efforts by Poland, Estonia, Latvia, and Lithuania to develop commercially viable ventures involving regional liquid natural gas terminals, natural gas storage, and thermal power generation that could reduce their dependence on Russia gas as the 

Nordstream pipeline develops. 

DIVERSIFYING ENERGY RESOURCES AND MANAGING ENERGY

DEMAND

Over the last two years the U.S. and the EU have greatly intensified cooperation aimed at accelerating the development and deployment of alternative energy and efficiency technology and legislation. Beginning with the 2006 U.S.-EU Summit declaration, the 

U.S. and EU—for the first time—outlined a systematized approach 

to cooperation on biofuels, energy efficiency and efforts to diversify 

European hydrocarbons supplies. 

In the 2007 U.S.-EU Summit declaration, we went further, laying out our individual complementary goals and a detailed joint action plan to: • work on carbon capture and storage technologies, to unlock the 

enormous potential of clean coal; • further our work on energy efficiency bilaterally and in multilateral fora; • develop a groundbreaking set of compatible specifications for 

pure bioethanol and biodiesel by the end of 2007, to facilitate international trade in and development of these fuels; • cooperate to hold an international renewable energy conference 

at the Ministerial level in Washington in March 2008, with the 

goal of advancing and commercializing renewable energy systems; 

and • develop a joint workplan within the framework of the Methane-to-Markets international partnership to identify specific activities and goals to advance recovery of methane, a powerful greenhouse gas. 

We launched last fall U.S.-EU working groups on biofuels and 

energy efficiency, working subsequently to implement the groups’ 

detailed joint work plans. On biofuels, we are taking steps to cooperate in research and development of cellulosic or ‘‘second generation’’ bioethanol, and looking at biodiesel as well. We are also 

sharing results and ideas on regulatory and policy tools to promote 

biofuels development, exchanging analyses of potential economic 

and environmental impacts of biofuels, and comparing respective 

resource assessments of potential biofuels source biomass. These 

initiatives involve the Department of Energy, the EPA and the Department of State. 

On efficiency, we have renewed the U.S.-EU ENERGY STAR 

agreement covering office equipment, and are exploring extension 

of this agreement to other products such as consumer electronics. 

We are examining coordination on development of international 

lighting efficiency standards (such as for compact fluorescent lighting), and joint efforts to address efficiency of TVs, digital television 

adapters and computer servers. We are also seeking to cooperate 

on energy efficient buildings and housing in three areas: 1) assessVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
45 

ment of buildings technologies—sharing lessons learned, especially 

in retrofits of existing buildings; 2) cooperation on energy efficient 

model codes and standards; and 3) sharing information on building 

energy performance criteria and requirements. 

We are also cooperating to promote efficiency in key third countries, most specifically by securing EU cooperation in the development of a trilateral U.S.-EU-Ukraine energy efficiency action plan. 

Enhancing efficiency of electricity and gas markets in Ukraine will 

have an immediate benefit of providing more potential Ukrainian 

energy exports for the EU. 

We have more recently held joint workshops on carbon capture 

and storage, and are preparing a report on possible areas of transatlantic cooperation on environmental, economic and regulatory coordination in the development of this promising technology. We are 

looking for possible policy incentives to promote commercialization 

of carbon capture and storage as quickly as possible. We also share 

the goal of committing to a common approach to monitoring CO2 

stored in underground geological formations or elsewhere. 

In addition, we have dramatically increased our direct engagement with the private sector, to draw upon firms’ dynamism, creativity and adaptability in meeting these technology challenges. 

The State Department and Germany’s Foreign Ministry in March 

convened the U.S.-EU Energy Technology CEO Forum, which drew 

together 20 senior transatlantic private sector leaders to generate 

key recommendations on speeding transatlantic cooperation in the 

development and deployment of advanced clean energy technologies. Their report, covering biofuels, energy production, energy 

efficiency, and energy research in key technologies (second generation biofuels, energy storage, and carbon capture and sequestration) provides a set of 7 distinct initiatives that are being pursued 

by the U.S., EU, and German governments. 

On March 9, the EU’s 27 heads of state adopted a set of 17 broad 

energy and climate mandates on energy efficiency, greenhouse gas 

emissions, and initiatives to speed clean energy technology development, increase energy sector competition, integrate the EU-wide internal energy market and develop a coherent external EU energy 

policy. 

The U.S. does not favor the EU’s approach of mandatory greenhouse gas targets, and we see the EU targets as highly unlikely to 

be met within 13 years, given that the EU–15 are lagging in their 

numerical goals now. The EU has not estimated costs of such reductions, and leaders made no mention of potential costs. Independent studies have estimated that it may cost the EU upwards 

of $1 trillion to meet its 2020 goals. 

SPECIFIC ELEMENTS OF THE MARCH 9 PACKAGE INCLUDE: 

• binding targets to cut EU greenhouse gas emissions 20 percent, increase renewables use to 20 percent and raise biofuels use 

to 10 percent of fuels by 2020; 

• a 20 percent increase in EU energy efficiency by 2020; 

• a target of 30 percent greenhouse gas cuts by 2020 if other 

OECD countries agree; 

• a call for negotiations on a global climate change agreement 

after Kyoto lapses in 2012; and 

46 

• measures to increase energy sector competition, integrate energy markets and develop a coherent external energy policy by 

2009. 

The EU sought to address a number of interrelated goals with 

this package, including the need to use efficiency to reduce demand 

for imported hydrocarbons and reduce internal power generation 

needs, the necessity of increasing the smooth functioning and effectiveness of the EU’s internal energy markets, the intention to reduce EU greenhouse gas emissions, and the imperative of developing a coherent external energy policy, allowing the EU to ‘‘speak 

with one voice’’ in negotiating with Russia and other external suppliers. According to the European Commission, the ‘‘Energy Policy 

for Europe’’ is intended ‘‘to combat climate change and boost the 

European Union’s energy security and competitiveness.’’ 

Greenhouse Gas Reductions: In the package the EU laid out an 

objective of limiting the global average temperature increase to 2 

degrees Celsius above pre-industrial levels. Toward this end EU 

leaders committed to at least 20 percent reduction of greenhouse 

gas emissions by 2020 compared to 1990. They set an EU goal of 

30 percent reduction in greenhouse gas emissions by 2020 if OECD 

countries commit to comparable reductions, and called for advanced 

developing countries (such as China and India) to ‘‘contribute adequately’’ according to their capabilities. The EU has also called for 

developed countries as a whole to reduce collective emissions by 50 

percent by 2050 compared to 1990. 

The U.S. does not favor the EU’s approach of mandatory greenhouse gas targets, and we see the EU targets as highly unlikely to 

be met within 13 years, given EU-15 lagging on Kyoto goals. The 

EU has not estimated costs of such reductions, and leaders made 

no mention of potential costs. Independent studies have estimated 

that it may cost the EU upwards of $1 trillion to meet its 2020 

goals. 

Energy Efficiency: The EU leaders endorsed an earlier EU target 

of saving 20 percent of EU energy consumption compared to current projections for 2020. This is an EU-wide objective rather than 

a binding target for each country. There are no sectoral (e.g. buildings, transport, power generation) targets or objectives mentioned 

in the Council decisions. We believe the EU’s goals will increase 

the EU’s motivation to work with the U.S. on efficiency measures 

such as ENERGY STAR, and green/efficient buildings. 

Energy Sector Competition, Internal Market Integration and External Energy Policy: EU leaders did not support a European Commission proposal for complete ‘‘unbundling,’’ or forcible break-ups, 

of energy generation and distribution companies, but called for 

‘‘greater separation’’ based on independently run network operators 

(a Commission compromise offer, based on the successful ‘‘Scottish 

model.’’) Germany and France had fiercely resisted the potential 

break-up of national energy champions such as E.On/Ruhrgas and 

Gaz de France; the compromise deal should allow ownership of 

such firms to avoid EU legal challenges. 

The EU leaders also agreed to the following: 

• steps to complete physical integration of the EU’s internal energy market by January 2009, including building more electrical 

interconnectors between countries; 

47 

• appointment of coordinators to facilitate completion of key 

projects, including a Germany-Poland-Lithuania power link, offshore wind project links, a France-Spain power link, and the 

Nabucco gas pipeline in SE Europe; and • a plan to develop a common EU external energy policy by 2009 

using multilateral, bilateral and regional instruments. 

Completion of the EU internal energy market, by linking EU 

electricity and gas networks, will improve EU member state ability 

to respond to supply shocks, such as the Ukraine gas cutoff in 

2006, and the interruption of oil supplies via Belarus and Lithuania in 2006 and 2007. This will substantially enhance security 

of energy supply in Europe. 

Renewable Energy: The EU endorsed a binding target of 20 percent share of renewable energy in overall EU energy consumption 

by 2020. Differentiated national targets are to be developed by the 

European Commission and Member States together and take into 

account differing economic starting points, economic potential and 

current energy mix. Each Member State will set its own national 

renewables target for different sectors (e.g. electricity, heating, 

transport, excepting biofuels). 

The renewables deal sets an EU-wide average target, a compromise to appease France and coal-dependent Poland, Czech Republic, and Slovakia, who are worried about meeting individual 

country targets. EU leaders acknowledged that setting individual 

country targets will involve difficult and lengthy negotiations, and 

did not specify the legal mechanism for enforcement. France failed 

in its effort to have nuclear energy recognized as a renewable energy equivalent based on low carbon emissions. Germany and other 

countries, including the Nordics, are expected to exceed the 20 percent average goal, allowing for newer EU members to set lower individual goals. 

Biofuels: Finally, the EU endorsed a ‘‘binding target’’ of a 10 percent minimum biofuels share in overall EU transport petrol and 

diesel consumption by 2020. This target is specifically mandated 

for each Member State to meet, subject to biofuels production being 

‘‘sustainable’’ and second-generation biofuels becoming commercially available. This will require the EU amending its Fuel Quality 

Directive. This target further enhances EU willingness to work 

with the U.S. toward compatible international biofuels standards. 

In sum, the EU package contains a number of targets that will 

be difficult to meet physically and/or could be foiled by internal disagreements within the EU. Nevertheless, the EU package provides 

room for the U.S. to work with Europe on development and commercial deployment of biofuels, renewables, clean coal and other 

energy technologies, as agreed during the April 30 U.S.-EU Summit. 

CONCLUSION

There is no ‘‘silver bullet’’ or quick fix to increase energy security. 

The EU and U.S. both recognize the vital importance of diversification of supplies of hydrocarbons, upon which both the US and Europe will depend for many decades. It will take a multifaceted, long 

term effort between the U.S., the EU, and with producer and consumer countries to increase supply diversification, develop alterVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
48 

native energy sources, and encourage Russia to bring more of its 

oil and gas resources to world markets within a free and competitive market framework. 

To meet the long-term energy and climate challenges that Europe and the U.S. both face, we are working with Europe to help 

reduce energy demand and diversify energy sources. We are dramatically accelerating and deepening cooperation with the EU to 

develop and deploy advanced clean energy technologies—such as 

biofuels, renewables, clean coal, and nuclear power—that will be 

critical to meeting our joint energy security needs in the future. We 

are collectively joining forces with our private sectors and forging 

new partnerships to take advantage of our comparative advantages. 

Our collective energy challenges have undoubtedly invigorated 

and focused many of our key European and Eurasian relationships. 

Energy has grown to be a critical center of gravity, exposing our 

joint interests and vulnerabilities in the region. While our intensified efforts have already begun to yield promising results, we continue to look for opportunities to bolster our work in the region. 

We are honored to be here before you today. Thank you again 

Mr. Chairman and members of the Committee for giving us this opportunity to be here this afternoon. 

49 

PREPARED STATEMENT OF AL HEGBURG, DEPUTY ASSISTANT 

SECRETARY OF ENERGY FOR INTERNATIONAL ENERGY POLICY 

Chairman Hastings and members of the commission, thank you 

for the opportunity to appear today. It is an honor to speak to the 

Commission on Security and Cooperation in Europe about energy 

security and oil and gas infrastructure opportunities and challenges in the OSCE region. 

Your hearing is particularly timely for several reasons. 

First, the world economy currently relies on a global hydrocarbon-based energy economy which is experiencing high prices, 

high energy demand growth forecasts, limited space capacity, the 

need to reduce hydrocarbon emissions, and greater direct political 

manipulation of oil and gas resources worldwide. 

Second, for the first time since the 1970s, there is a greater perception that this globally integrated energy economy is increasingly 

vulnerable to significant oil supply disruptions from either natural 

disasters or terrorist attacks on the energy supply system. 

These developments and perceptions have prompted salutary responses: They include: 

• a renewed investment in increasing energy efficiency; 

• a commitment to deploying greater public and private resources to promote technological development and market penetration of clean and alternatively fueled vehicles and systems; 

• a proliferation of bilateral and multilateral international cooperative strategies and programs among consumers and some producers to address these developments; and, 

• a continued commitment to international economic cooperation 

within existing global institutions to ensure the widest possible 

scope of energy and investment collaboration among the international community. To sustain the existing energy market until 

the important innovations noted above are effectively deployed requires continued investment in existing energy markets to improve 

the chances for a smoother transition. 

THE OIL MARKET TO 2012 

High oil prices have had an impact on investment although the 

consequences may not be evident until after 2012. Upstream investment has risen. However, investment devoted to exploration 

has remained relatively flat due to a shift towards production as 

companies move to capitalize on higher prices. In addition, international equity investor’s access to new opportunities is limited. 

Between now and 2012, world oil demand could reach 100 mb/ 

d which is equivalent to an increase of about 15 percent. This increased demand will be met by increased output from production 

in the Caspian region, West Africa, several OPEC countries, Latin 

America, and Canada. 

Caspian producers are essential to meeting the world’s increasing energy demand. The Caspian countries have shown remarkable 

success over the past decade in developing their resources and supplying international markets. Kazakhstan and Azerbaijan successfully developed their oil industry over the past decade by inviting 

private company investment. This investment was instrumental in 

50 

developing both the resources and the local and regional transportation infrastructure needed to bring oil to markets. 

Major producing fields either in production or advanced development include the ACG field in Azerbaijan, and the Tengiz and 

Kashagan field in Kazakhstan. The market expects additional development opportunities. However, the producing companies and 

the Caspian states will need to develop additional export capacity 

for the additional supply volumes. 

Other producers will also contribute to the supply increase in 

this period. In numeric terms, OPEC members are forecast to add 

over 7mmb/d of production in the period to 2012, while non-OPEC 

countries are forecast to add over 4mmb/d. 

Among OPEC members, large increments of increased production 

are forecast from Nigeria, Iraq, Algeria, Qatar, Kuwait, the UAE, 

and of course Saudi Arabia, the latter of which has embarked on 

a huge domestic and international investment program across the 

entire value chain. 

Among the non-OPEC countries, the largest production increase 

is expected from Brazil, followed by Canada, Russia, and the Caspian countries. 

There are several important messages in this short-term outlook. 

First with very few exceptions, most of these countries permit private equity investment in their oil and gas sectors. The exceptions 

are Kuwait, Saudi Arabia, and increasingly Russia, although Saudi 

Arabia has encouraged private equity investment in its natural gas 

sector. 

Second, three of the largest increases come from the non-OPEC 

countries of Russia, Brazil, and Canada. While some of the OPEC 

members, Qatar and Algeria, experience substantial oil production 

gains related to increased natural gas production, Nigeria benefits 

from deepwater discoveries. 

Third, it is important to note that these are point estimates for 

both supply and demand which will react to a variety of market 

and non-market-related developments such as changes in the 

broader world economy, greater efficiency gains, and other unexpected technological innovations. 

Furthermore, the supply forecasts are also subject to substantial 

uncertainty including the pace of increase in Iraqi, Libyan, and 

Russian production. 

Finally, some important producers will no longer make major 

contributions to increased world oil production. Two that stand out 

are Venezuela and Norway, the former due to its nationalization 

decision and the latter to natural decline and other factors. 

Even a large exploration success would be unlikely to materially 

affect these production estimates in the short term. 

THE MARKET FROM 2012–2017 

The period to 2017 contains greater uncertainty. On the upside, 

private investors normally pursue additional investment in their 

heritage assets in an effort to stem natural decline, find and economically develop smaller satellite fields, or deploy new recovery 

technologies in existing and well-understood reservoirs. These practices have proven very successful for investors over the last few 

51 

decades in part due to major advances in oil production and recovery technologies and could very well do so again. 

At the same time, the need for additional supply to meet increased demand, at slightly over 5mmb/d, is significantly below the 

12mmb/d increment needed in 2012. This suggests that producers 

and investors will hesitate to make large capital commitments 

until later in this decade. 

However, one caveat that is central to this calculation is that six 

of the producers noted above may experience actual production declines and three are expected only to maintain production. That requires the nine remaining producers to provide an increase share 

of the increment required. Among those who are forecast to further 

increase production are Saudi Arabia, Russia, Canada, Iran, Iraq, 

Kazakhstan, and Brazil. 

Some offshore producers, Angola for example, are expected to experience peak production primarily due to the nature of the producing reservoirs. 

There are also non-production uncertainties already manifest in 

the market. 

The risk profile of certain countries is increasing due to their 

pursuit of resource nationalism and other non-market practices 

such as non-competitive contracts. In addition, continued cost inflation can prove a barrier to investment. 

While high prices encourage the development of alternative energy, they also embolden some producers to exploit the opportunity 

to unilaterally change investment terms to increase the government revenue take. For example, in several countries, and in spite 

of stabilization clauses in contracts signed between the host country and the private investors, governments have acted unilaterally. 

In the Russian market in particular, current investors have recently faced unilateral renegotiation of terms, which have increased 

the risk exposure of investors and limited their returns. Through 

such practices as dividends, companies are limiting their exposure 

to these disruptions and repatriating earnings rather than retaining them for continued reinvestment in their existing assets. 

Concerns over energy security are really in large part concerns 

over whether the necessary investments are being made for future 

production. There are several ways to do this. For example we need 

to make the market more liquid with more diverse sources of supply, so that it cannot be manipulated for political purposes. We 

need to encourage sovereign governments to withdraw from production and pricing decisions and encourage them to promote multiple 

sales options for producers. 

While governments have the right to manage and control production, constraining, if not effectively removing, the private investor’s 

discretion and production share removes both funds and incentives 

for the investor to continue to reinvest in the asset. Over time, absent a new investor or even if a government decides to invest its 

own money, production levels are likely to decline faster than otherwise would have been the case or not increase as forecast. 

These consequences are not in the interest of any of the parties. 

Higher than expected government revenue is often diverted to increase domestic spending rather than longer-term investment. 

These governments often use the additional money to subsidize doVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
52 

mestic prices, contributing to the onset of the notorious ‘‘Dutch Disease,’’ reducing international competitive pressure on domestic 

prices, creating inflation, and raising currency valuations. Such 

consequences eventually lead to a correction that can be particularly painful to the domestic economy, the citizens, and, in some 

cases, political order. 

The argument in favor of greater market-driven oil policies based 

on competition is based on support for privatization as opposed to 

nationalization. It is not a political issue but an international economic one which is essential to long-term sustainable development 

of hydrocarbon resources as well as whatever new fuels enter the 

market. Such an approach contributes to broader social and economic benefits. If adopted, it means the energy market would be 

transparent, financially disciplined, ownership driven, non-discriminatory, efficient, environmentally sound, globally integrated, 

and innovative. 

International organizations can encourage and deepen initiatives 

such as the Extractive Industries Transparency Initiative (EITI) 

and the Joint Oil Data Initiative (JODI) that seek to make energy 

information more transparent, provide important data about resource production and supply, and contribute to a more efficient 

and competitive international energy market. 

Mr. Chairman, members of the commission, I’m grateful for the 

opportunity to speak before you today, and I look forward to your 

questions. 

53 

PREPARED STATEMENT OF H.E. YASHAR ALIYEV, AMBASSADOR OF THE REPUBLIC OF AZERBAIJAN TO THE UNITED 

STATES 

Distinguished Mr. Chairman, 

Distinguished Members of the Commission, 

Azerbaijan is one of the oldest oil producing countries in the 

world. Oil extraction in Azerbaijan dates back to between the 7– 

6 centuries B.C. In 1848 the world’s first on-shore oil-well was industrially drilled in Baku. It happened 11 years before Pennsylvania’s oil boom. Remarkably, a century later in 1949, the world’s 

first off-shore oil-well was also drilled in Azerbaijan. 

After regaining its independence, Azerbaijan was facing numerous problems emanating from the disruption of traditional economic ties within the once single economy of USSR. While struggling to overcome the difficulties, Azerbaijan has steadily pursued 

an independent energy policy. Under the leadership of the late 

President Heydar Aliyev the Government developed the national 

energy strategy, which envisioned the diversification of export 

routes for Caspian oil through the construction of new pipelines. 

In implementing its energy strategy, Azerbaijan has always received strong political support from the United States. Without US 

assistance it would have been impossible to complete within a relatively short period of time several pipeline mega-projects in the 

region. 

Today, as the Baku-Tbilisi-Ceyhan (BTC) oil-pipeline and the 

Baku-Tbilisi-Erzurum (BTE) gas-pipeline have become a reality, 

they now represent key elements of the oil and gas transportation 

system in the region. 

In addition to its role as a large energy producer, Azerbaijan is 

also becoming an important transit hub for multimodal transportation of vast hydrocarbon resources of Central Asia to the world 

markets, and particularly the European markets, through the EastWest Energy Corridor. Evidence of this emerging role is the June 

2006 Agreement between Azerbaijan and Kazakhstan on transportation of Kazakh oil to international markets via Baku-TbilisiCeyhan pipeline. 

Diversification of transportation routes, as well as of energy suppliers and markets are key factors for ensuring the reliable and 

predictable supply and transit of oil and gas to European consumers. Existence of multiple transportation routes from a number 

of suppliers would also reduce a possibility of rising tensions over 

energy supply. 

As the international community has witnessed in several cases 

over the last few years, supply chain disruptions can cause energy 

insecurity in European countries. Having signed in November 2006 

an MOU with EU on Strategic partnership in the field of energy, 

Azerbaijan has proved its ability to be a reliable partner in ensuring predictability and transparency in energy supply, and in enhancing the European energy security both as a supplier and a 

transit country. 

Along with that Kazakhstan and Turkmenistan can become important elements in ensuring the European energy security with 

54 

Azerbaijan as a transitional hub for delivering the Central Asian 

hydrocarbons to the European markets via BTC and BTE pipelines. 

Meanwhile, if they would opt for other routes of transportation, 

Azerbaijan is in a position to fill BTC and BTE pipelines with its 

resources. 

Azerbaijan and the United States productively cooperate in many 

areas. Azerbaijan is a staunch ally of the United States in the global war on terror. Economic cooperation has been recently elevated 

to the level of partnership. The 1st meeting of the bilateral Economic Partnership Commission in February this year was followed 

by the Energy Dialogue in last March, when our countries singed 

MOU on Energy Security. This MOU, as well as the MOU on Strategic partnership in the field of energy between Azerbaijan and EU 

represent important contributions to ensuring energy security in 

Europe. 

Strengthening transparency and financial discipline in the energy sector constitutes a top priority for my Government. In order 

to manage oil revenues, maintain macroeconomic stability and finance implementation of strategically important social and infrastructure projects in the country, the Government of Azerbaijan 

has established the State Oil Fund. 

In 2003 Azerbaijan joined the Extractive Industries Transparency Initiative (EITI) initiated by the United Kingdom. The 

State Oil Fund is the responsible organ for implementation of the 

EITI initiative. 

In recognition of the activities of the State Oil Fund, the United 

Nations granted it the 2007 Public Service Award for ‘‘Improving 

transparency, accountability and responsiveness in the Public Service’’. It is the highest global award of international recognition of 

excellence in public service. The State Oil Fund is the first government agency awarded the UN Public Service Award among the 

government institutions of the Eastern Europe and the Commonwealth of Independent States. Tomorrow this award will be presented to the Fund officials in Vienna. 

Democratization is another crucial task for my Government in 

pursuing economic development. Being one of the most dynamically 

developing economies with increasing inflow of petrodollars, Azerbaijan is determined to steadily diversify its economy and pursue 

with reforms to strengthen its democracy, ensure protection of 

human rights, fight corruption, further independence of its court 

system, and ensure transparency and efficiency of state governance. 

Azerbaijan is demonstrating openness of its economy and is promoting democracy and the rule of law in the country, as well as 

on the regional level. 

The Second Summit of GUAM Organization for Democracy and 

Economic Development, which was successfully held in Baku just 

a week ago, is another manifestation of the abovementioned commitments of my country, which assumed 1 year chairmanship in 

the organization. 

In conclusion, distinguished Members of the Commission, I would 

call you to repeal Section 907 of FREEDOM Support Act that restricts US assistance to Azerbaijan. The Act does not comply with 

55 

the spirit and level of bilateral relations of our countries and is for 

that reason annually waved by the President of the United States 

since 2002. 

Thank you. 

56 

PREPARED STATEMENT OF H.E. MIKHAIL KHVOSTOV, AMBASSADOR OF THE REPUBLIC OF BELARUS TO THE UNITED 

STATES 

Chairman Hastings, 

Co-chairman Cardin, 

Members of the Commission: 

Thank you for the invitation to speak on the issue so important 

for all of us which is the energy security. Energy is a strategic commodity of high relevance to geopolitics. It has been clear in modern 

history starting with World War II and extending to current global 

power relations. 

Energy is and remains essential in our days. We can hardly 

imagine to live without it. With world population growing, national 

economies developing and standards of living rising, demand on energy is rapidly on the rise. 

It’s important that we recognize today’s problems to global energy security and those of tomorrow. It’s even more important that 

we act now to address them. Energy security is no longer a matter 

solely of national sovereignty. Today, security is indispensable 

issue even in general discussions about foreign policy. Energy security requires that we recognize our interdependence. Individually 

we are powerless to affect the global debate on energy security. 

None individual country is in a position to ensure its natural energy security individually. Why the United States is indispensable 

for us in this wide discussion on energy is because without it we 

will suffer a political power cut. 

There is a general desire to make energy cooperation mutually 

advantageous and equal. But still the interests do not always coincide. What to do? The answer is to develop a model of energy security cooperation and implement mechanisms of mutual interests 

which may be: 

• long term energy supply 

• uninterrupted supply • acceptable terms and conditions • equality and mutual benefits • strong dialogue and cooperation • multilateral approach 

The global nature of the energy security and the growing interdependence between producing, transiting and consuming countries 

require a strengthened partnership. 

We should strengthen the dialogue and cooperation to meet the 

challenges. And our dependency on oil and gas needs to be balanced by stable and reliable supply which includes the sole role of 

transit countries. And I count Belarus in this group of reliable 

partners. The significance of transit countries becomes more and 

more considerable. 

Clear bilateral, regional and international rules could improve 

predictability for transit and supply of energy, deepen interdependence and stability. This approach does not deny the right of a producer to benefit from its oil and gas reserves as well as the right 

of a consumer to benefit from the supply. Belarus lies on the gas 

transit route from Russia to Europe and is the second largest transit country for Russian gas by volume after Ukraine. Russia is the 

leading gas exporter to Europe and is its second important source 

57 

of crude oil. And the transit country should benefit from the benefits of producer and consumer. We need clear regulatory frameworks for transit which could help us to avoid much more expensive alternative of building long roundabout pipelines. 

Events of the beginning of 2007 remind us that supply in the 

OSCE region is not that secured as it should be. Crude oil supply 

from Russia via Belarus to the EU was suspended at the beginning 

of this year due to a price dispute. 

We in Belarus are not oversensitive regarding the transition of 

energy trade to market prices. But I have to recognize that we are 

sensitive regarding the bilateral agreements we have with Russia 

including those fixing preferential arrangements and terms subsequent upon bilateral treaty on Union State: we understand that 

pacts must be respected. 

Belarus is among the countries most dependent on external energy sources. 80% of Belarusian energy comes from Russia. Energy 

cooperation between Belarus and Russia is close, although 

Gazprom’s business strategy remains a matter of concern to my 

government. The sufficient and affordable availability of energy is 

a precondition for Belarus’s competitiveness and economic growth. 

The government is convinced that our energy dependency cannot be 

further increased, and our first aim is to reduce this dependency 

by increasing share of carbon-free energy sources and gradual introduction of energy efficiency. By 2010 we expect to invest in energy efficiency 5 billion USD. 

Belarus is in the same situation as most of the OSCE countries 

that are large energy importers, all of which have to face the increasing prices of oil and gas in the coming years. A key issue for 

Belarusian energy security is its dependency on a single supplier. 

In the near future Belarus can import oil from different sources, we 

have two refining capacities and we can afford transport expenses. 

Energy security and sustainable growth are critical for the OSCE 

region. Belarus will remain a country actively involved in energy 

security in this region, primarily in the European Union. As a reliable transit country, Belarus is important for both sides of the East 

†a ́West corridor. 

Energy security is a global challenge. Independent national policies are not now enough to provide secure access to energy. We 

need to work together: producing, transiting and consuming countries. 

The EU is trying to set up a common energy policy today for 

member-states. We agree with the EU position that mutual energy 

relationships between states must be predictable, transparent and 

reliable. But in my view the OSCE countries and not the EU have 

to come together as an ad hoc Committee of the Whole for energy 

producing, transiting and consuming countries to generate binding 

decisions on energy security. And the OSCE framework is relevant. 

The only matter which matters is our collective determination. The 

OSCE can not be transformed into regional OPEC. Yet, energy is 

an issue of importance to the development of the OSCE members. 

The role of the OSCE is in enhancing dialogue on energy security 

and generating binding decisions. 

58 

The OSCE can be a platform not only for political dialogue on 

this issue but also for addressing energy security issues which in 

the last instance may be of political nature. 

Thank you. 

59 

PREPARED STATEMENT OF KEITH SMITH, SENIOR ADVISOR, 

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

SUMMARY

• The U.S. and the EU have long ignored the Kremlin’s nontransparent and monopolistic energy policies, and its use of energy 

to exert control over the new democracies of Central and Eastern 

Europe. 

• The disruption of natural gas to Ukraine and Georgia in January 2006, and to Belarus and Georgia in January 2007 was only 

a continuation of Russia’s petro-politics, that started with the fall 

of the Soviet Union in 1990. 

• The U.S. and Europe’s tolerance of these coercive policies and 

non-transparent business practices have incorrectly signaled to the 

Kremlin that the West believes that Russia has the upper hand because of its substantial energy resources. Russia is very much dependent on the West’s export revenue, energy financing and technology. 

• A coordinated U.S. and EU energy policy is necessary to prevent the Kremlin from expanding its political leverage over the 

new democracies of Central Europe, and with key Western European allies of the United States. 

• The West must cooperate closely in order to force the Kremlin 

to make Russian energy policies and actions more transparent, 

competitive and reciprocal, and to follow internationally accepted 

business practices. Western tolerance of Moscow’s coercive use of 

energy resources and pipeline monopolies only retards Russia’s development into a genuine strategic partner. 

• Recent developments in Russian-Central Asian energy relations and in the energy policies in Hungary, Slovakia and Bulgaria 

will increase Russia’s coercive energy power and may seriously 

hamper European common security interests. 

• The U.S. and EU should step up assistance to Central Europe 

countries for the development of alternative pipelines and non-Russian sources of energy supply. 

• The Kremlin should not be allowed to use its monopoly power 

and corrupt practices to block alternative pipelines from supplying 

natural gas and oil to Europe. 

• Enforcement of Europe’s competition laws and of the Energy 

Charter Treaty would bring greater competition and transparency 

to the EU’s energy markets and would force Russia to modify its 

most egregious energy marketing practices. 

• Central European countries can improve their own security by 

increasing domestic energy storage, by boosting indigenous supplies 

of gas and oil by reducing corruption and by creating a more welcoming and transparent environment for Western investors. 

A DELAYED WAKE-UP CALL

Gazprom’s disruptions of natural gas and oil to Central Europe 

in 2006/2007 increased awareness in Europe and the United States 

regarding Moscow’s success in using its energy resources as political leverage in Europe and to undermine the new democracies that 

most recently emerged from decades of Kremlin control.1 Russia’s 

60 

recent sharp increases in natural gas prices to Ukraine, Georgia, 

Belarus, Bulgaria, Armenia and Moldova, and its control over key 

European gas pipeline systems, raise fresh concerns about Russia’s 

foreign economic policies and the security implications for Europe. 

Russia’s energy strategy also raises the stakes regarding America’s 

own growing dependency on energy imports, and should lead us to 

question expectations that Russian supplies of gas and oil will 

somehow contribute to America’s energy security. Unfortunately, 

the U.S. and Western Europe have largely ignored this problem 

until recently, in part because the coercive nature of Russia’s petropolitics has largely been confined to East Central Europe and Central Asia. 

For many new EU member states such as Poland, Latvia, Lithuania, and for new democracies, like Ukraine, Georgia, and 

Moldova, Russian energy control is an old problem. Central European attempts to raise this issue in Western capitals have until recently been brushed aside. The rapid acceptance in 2005 by the EU 

Commission of the Russian-German undersea gas pipeline project 

was a serious mistake and highlighted Europe’s inability to implement a common foreign and security policy. The concerns voiced by 

the Central Europeans should have raised the alarm bells in Brussels and in European capitals long before the Ukraine crises of 

early 2006. 

The slow Western response has allowed Russian state companies 

time to stitch together additional bilateral deals with individual 

Western governments who are anxious to help their companies 

gain an investment foothold in Russian energy production. A re-examination of EU policy may be made more difficult by the curious 

fact that Russia plays an important role in the EU’s own Energy 

Treaty Commission (ETC). This is the case, even though Moscow 

has refused to implement the Energy Charter, and particularly the 

draft Transit Protocol that is part of the Treaty. Russian implementation of this agreement would have resulted in greater competition within Russia’s energy transportation sector. Under Article 

45 of the Energy Charter, Russia was obliged to put the treaty into 

force at the time of signing, but has successful convinced most Europeans that it was free to ignore the treaty unless it is ratified by 

the Duma. In spite of pressure from the EU to implement the 

Charter, Gazprom’s Deputy CEO Medvedev has labeled it as a 

‘‘stillborn document.’’ Gazprom believes that its bargaining position 

now outweighs that of the West as a result of high world energy 

prices and political instability in producer countries in the Middle 

East, Africa and South America. In any case, the long-term political and security significance of the Putin Government’s assertive 

energy policies warrants much closer study by Western governments, including the United States. 

There is an unrealistic expectation in some circles in the U.S. 

that Russian natural gas supplies from the Russian Far East or 

from off-shore in the Barents Sea will fill the gap created by declining U.S. and Canadian production and by political instability in 

Latin America, Nigeria and the Middle East. The reality is that 

Russian oil and gas exports are not growing at the pace they were 

just 3–4 years ago. In addition, investment in Russian exploration 

and development has declined from the level that existed before the 

61 

systematic destruction of Yukos began in 2003 and the accelerated 

move to centralize control of almost all oil and gas resources under 

the current Kremlin Administration. 

PIPELINE POLITICS AND WESTERN VULNERABILITIES

The Putin Government has made it clear that it intends to use 

its energy export power to regain Russia’s Cold War influence 

around the world. Even former Kremlin economic adviser, Andrei 

Illarionov, who was pressured into resigning in late 2005, has criticized his country’s use of energy supplies as a weapon in its relations with other countries. Gazprom’s recent takeover of the Armenian, Belarus and Moldovan gas pipeline systems and its increasing domination of energy facilities and markets in Ukraine, demonstrate Russia’s willingness to use its powerful energy muscle to 

secure control of its neighbor’s energy infrastructure in order to use 

it to influence the domestic political lineup in those countries. 

EU ambassadors in Moscow were warned in 2006 by Gazprom’s 

CEO, Alexei Miller, that Russia could divert natural gas now going 

to Europe to China and the U.S. if his company were not allowed 

more freedom to buy Europe’s downstream energy facilities. Miller 

was not offering similar access to Russian energy markets. This 

warning was quickly followed by a similar threat from President 

Putin. Little attention was given in the Western press to the fact 

that Russia does not allow Western firms the same degree of access 

to Russian facilities that Russian state energy companies already 

have in Europe and the United States. Moscow clearly believes that 

the tight world energy market and high prices provide it with 

enough leverage over the West to pursue non-reciprocal policies 

and to continue to follow monopolistic, non-transparent business 

practices. 

‘‘Pipeline imperialism’’ by Moscow dates back to 1990, when it interrupted energy supplies to the Baltic States in a futile attempt 

to stifle their independence movement. The ‘‘energy weapon’’ was 

again used against the Baltic States in 1992, in retaliation for Baltic demands that Russia remove its remaining military forces from 

the region. In 1993 and 1994, Russia reduced gas supplies to 

Ukraine, in part, to force Kiev to pay for previous gas shipments, 

but also to pressure Ukraine into ceding more control to Russia 

over the Black Sea Fleet and over Ukraine’s energy infrastructure.2

Even Belarus, and indirectly Poland and Lithuania, suffered supply 

disruptions in 2004 from the Kremlin’s effort to take over Belarus’ 

gas pipeline system. From 1998 to 2000, in an attempt to stop the 

sale of Lithuania’s refinery, port facility, and pipeline to the Williams Company of Tulsa, Oklahoma, Transneft, Russia’s monopoly 

transporter of piped oil, stopped the flow of crude oil to Lithuania 

nine times. 

Russia’s Gazprom, with the help of Germany’s Ruhrgas, exercises 

control over the gas facilities and pipelines in the three Baltic 

States, where they also have monopoly control of the domestic gas 

markets in all three Baltic States. Media outlets in the West have 

generally ignored Transneft’s refusal to allow Kazakhstan to supply oil to Lithuania’s Mazeikai Refinery through the Russian pipeline system. Kazakhstan’s oil company has the legal right to ship 

crude oil to the Baltic coast, based on their transit agreement with 

62 

Transneft agreed to last fall. Moscow attempted to stop any nonRussian company from taking over the Yukos ownership of Lithuania’s facilities. Three years ago, Russia stopped all piped shipments 

of oil to Latvia in an effort to gain control over the oil port at 

Ventspils. Almost a year ago, Moscow blocked the shipment of all 

oil to Lithuania’s Mazeikai Refinery and the port at Butinge on the 

Baltic Sea, claiming that the pipeline ‘‘suffered a serious breakdown.’’ This use of pipeline imperialism in the Baltic States has not 

received enough attention in the West even though Latvia and 

Lithuania are EU and NATO members. 

The Russian pipeline monopolies of Gazprom (natural gas) and 

Transneft (oil) have been given free rides in terms of the open-market requirements of WTO and the EU’s own Energy Charter. The 

EU’s agreement with Russia on WTO in effect gave Moscow’s increasingly monopolistic energy transportation and production companies carte blanche to avoid following accepted Western business 

practices. The WTO agreement with the EU (not challenged by the 

U.S.) also allowed Russia to maintain a trade advantage in industrial goods by keeping its domestic energy prices at a fraction of 

world market prices. 

GERMAN-RUSSIAN ENERGY RELATIONS

Russia stands to greatly increase its market share and its leverage in Germany and the rest of Europe through the construction 

of the expensive Baltic undersea Northern Europe gas pipeline 

(Nord Stream). An alternative construction of a parallel pipeline to 

the Yamal I line that runs through Poland would have been a 

much cheaper alternative (now estimated at $10.5 billion for Nord 

Stream vs $2.8 billion for Yamal II). In addition, the enlargement 

of the Yamal line would have given both Central and Western European energy consumers greater political and economic security. 

The increased costs of Nord Stream will result in much higher energy prices for West European consumers. 

The Russian-German agreement, unless modified, will give Russia’s state-run Gazprom a significant voice in German domestic energy policies and indirectly over the gas markets in all of Central 

Europe. Germany as an energy market and a source of bank financing, however, is crucial to Russian development. If changes are 

not made in the Schroeder-Putin agreement on the Baltic pipeline, 

Germany may face an increasingly insecure neighborhood to its 

east. Germany will also have to confront Russian control of its domestic energy markets and increased Russian political influence in 

Germany. 

No single country wields more influence in Moscow than does 

Germany. The trade and financial ties between Berlin and Moscow 

are important to the sustained development of both nations. Although many outside of Germany were disappointed with Chancellor Schroeder’s consistent support for President Putin’s domestic 

policies, everyone recognizes the value to European security of a 

close, constructive German-Russian relationship. Good friends, 

however, should not avoid frank discussions regarding the imperial 

tendencies in Russia’s foreign policies. Baring some dramatic policy 

change, Germany will continue to become more dependent on Russian gas imports (now over 44% of all the gas that Germany imVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
63 

ports). This import dependence could well grow to 80% after the 

completion of all phases of the Nord Stream project. 

IS THE WEST PAYING ATTENTION? 

Europe’s energy relationship with Russia has for the past several 

years been directed by only a few of the larger member countries. 

The leaders of these countries have too often praised President 

Putin’s democratic credentials while ignoring Russia’s backsliding 

on democracy and the coercive use of Russian energy power. The 

U. S. has also often been too willing to accept Russia’s monopolistic 

and coercive energy policies in return for possible support on Iranian and Korean foreign policy issues. In addition, the EU and the 

U.S. have ignored the noncompetitive and political aspects of Russia’s energy export policies, in part due to the desire of Western 

companies for exploration and production rights in Russia. Although the EU recently initiated a more comprehensive study of 

the Community’s energy security, the large countries of Europe 

continue to resist adhering to a common EU energy policy. Meanwhile, Russian companies are rapidly locking up non-transparent 

business deals with the Central Asian suppliers of Kazakhstan, 

Turkmenistan and Uzbekistan and with individual European consuming nations. These deals will result in enormous profit for Russian companies. Russian pipeline monopolies insure that Russia 

can buy energy cheap and sell it in Europe at a profit almost unmatched in world markets. 

EUROPE AS HOSTAGE TO RUSSIAN ENERGY

The importance of good relations between Russia and the West, 

and particularly between Germany and Russia, cannot be underestimated. Nevertheless, it is a mistake for us to give Moscow the 

impression that we believe that the West needs Russian energy 

supplies more than Russia needs the oil and gas revenue that 

comes from the Western markets. Nor is it wise to let the Putin 

Government believe that its authoritarian domestic policies are acceptable in the West as long as there is an expectation of increasing exports of Russia’s energy resources. The West holds some powerful cards. Russia will not be able to develop its vast energy fields 

in Siberia, the Pacific Coast and in the Barents Sea before the middle of the next decade without Western capital and technology. 

There are growing indications that Russia will be unable to meet 

its current European gas contracts unless foreign investors are offered significantly greater participation in exploration and development of Russia’s new gas and oil fields. At present the opposite is 

happening, with Western companies’ exploration and development 

rights being steadily and purposely reduced. 

Russian gas exports to the West are already dependent on 

Gazprom’s ability to monopolize and control gas exports from 

Turkmenistan, Kazakhstan and Uzbekistan.3 This Russian dependency on Central Asia will increase over the next 7–10 years, until 

there are substantial gas flows from the Shtokman field in the 

Barents Sea, and from new wells in the Sakhalin and Siberian 

fields. In the past, Gazprom has neither had a reputation in the 

industry for innovation nor for productivity increases in exploration 

64 

and development. With the company now under tighter control by 

the Kremlin, there are good reasons to question whether Gazprom 

and the increasingly powerful Rosneft will have the managerial 

skills, financing and technology necessary to meet Russia’s export 

goals through increased domestic production. 

There has been no coordinated push by either the EU or the U.S. 

to require that Russia open its energy market to foreign investors 

in the same way that Western companies and markets are open to 

Russian investors. Lukoil has been allowed to buy 100% of Getty 

Petroleum in the U.S., including 1,500 gas stations. U.S. energy 

companies can, according to Russian law, only own 49% of a Russian company, although in practice 20% ownership appears to be 

the ceiling set by the Kremlin. The West should be using its leverage to force Russia to play by the same transparent, competitive 

rules that guide business in the West. Western governments should 

not acquiesce to this uneven set of rules, but should demand full 

reciprocity with Russia in their investment policies. This would 

help promote the kind of investment that will increase, rather than 

decrease, economic reform and a more balanced growth in Russia 

itself. President Putin has compared the new Gazprom colossus to 

Norway’s Statoil, but the latter has real domestic competition, its 

exports are divorced from foreign policy and it is a totally transparent company.4 Gazprom, with its interlocking ties to the Kremlin Administration and its gas pipeline monopoly, cannot be compared to any Western firm. 

INTELLIGENCE OFFICERS MAKING ENERGY POLICY

Former intelligence officers (siloviki) in the Putin administration 

and in Russia’s energy companies have a strong role in determining national energy policy. The head of Rosneft is a former 

KGB associate of President Putin, and he helped engineer the 

breakup of Yukos and his company’s seizure of the most valuable 

assets of Yukos. Former KGB and GRU officers sit on the boards 

of most of the country’s major energy companies. In 1999, Moscow 

went so far as to send a former KGB/FSB officer as ambassador to 

Lithuania, in an attempt to provide behind-the-scenes support to 

Lukoil’s negotiations with the Lithuanian Government and America’s Williams Company. Before assuming the job in Vilnius, the 

ambassador had been the FSB’s official liaison officer with Lukoil. 

A few former intelligence officers are quite progressive in their 

views. The majority, however, oppose any weakening of the state 

through the growth of a transparent, independent private sector, 

and find it difficult to accept the idea of a win-win energy deal with 

a Western company. Granting majority control to a Western energy 

firm is viewed by most former Russian intelligence officers as a 

danger to Russia’s national security interests. Even the Western 

managers of TNK/BP are no longer permitted to see their company’s own seismic data. President Putin’s use of Matthias Warnig, 

a former East German Stasi officer and now Dresdner Bank executive, to put together the financing and management of the Nord 

Stream pipeline system only added, perhaps unfairly, to suspicion 

that the project is more strategically than commercially motivated. 

Mr. Warnig, who was earlier proposed by Gazprom to sit on its 

65 

board, is working directly under former Chancellor Schroeder in 

managing Nord Stream, the Baltic pipeline system.5

CEDING TOO MUCH CONTROL TO GAZPROM

More scrutiny should be given by Western governments to the 

potential power of Gazprom to control the gas markets in Central 

Europe following the completion of the Baltic pipeline system in 

2011–12. Under the German-Russian agreement, Gazprom will be 

able to buy significant shares in Germany’s gas companies. Will 

this allow Gazprom to veto shipments of gas from Germany to Poland if the Poles have a dispute with Gazprom over price or availability and Russia decides to reduce or cut off the flow of gas? 

Could the increased power of Gazprom be used to stop liquid natural gas (LNG) receiving plants from being constructed in Poland, 

Latvia, or even in Germany? How much more political influence 

will Moscow have in Berlin as a result of Germany’s growing energy dependency on Russia and of Gazprom’s ownership stake in 

Ruhrgas? 

The EU has proposed that member states increase their levels of 

natural gas storage. This may become more difficult now that Poland and the Baltic states are being bypassed by the Nord Stream 

gas pipeline. Russian purchases of gas from Turkmenistan, Uzbekistan, and Kazakhstan are designed to deny the West, including 

countries such as Ukraine, the ability to buy oil and gas directly 

from Central Asia or at prices negotiated between producer and 

consumer, rather than working through Gazprom. The company 

buys Central Asian gas at $70–100 a cubic meter and sells Russian 

gas in Europe for $250–$350. Monopoly control of the pipelines out 

of Central Asia is extremely profitable—for Russia. There is a question as to whether the monopolistic pipeline policy of the Kremlin 

is compatible with WTO membership. Considering our experience 

with China’s WTO compliance, there are good reasons to doubt 

whether Russia will relax its control of Central Asian gas shipments after it has been admitted to the WTO. Forcing more open 

and competitive energy policies by Moscow before a possible WTO 

membership would be a wiser course for the West than repeating 

the China experience. 

Gazprom has recently reached non-transparent deals with Hungary, Slovakia and Bulgaria that will guarantee Russia’s monopoly 

control of the gas and oil pipelines to Europe.6 These deals should 

be analyzed more closely by NATO for their security implications 

for Europe. NATO members have historically used the Alliance to 

examine issues that go beyond narrow questions of military defense. 

Part of the Kremlin’s present strategy is to rapidly increase 

prices to weak neighboring states in the hope that they will build 

up large debts, be unable to pay for the gas, and ultimately have 

to cede control over their domestic gas pipelines to Gazprom or 

Transneft to pay for the arrearages. This is what has happened in 

Belarus, Armenia and Moldova and is currently being threatened 

in Ukraine, Bulgaria, Belarus and Slovakia. 

It would help if we knew what the real market price of Russian 

gas and oil would be if a transparent situation existed within Russia’s exporting companies. If Russian consumers were forced to pay 

66 

prices that were significantly more than one-fifth of what Moscow 

claims to be the world market price, domestic demand would drop 

and additional Russian oil and gas would be placed on the international market. These are all questions that need greater discussion and scrutiny in European capitals, in Washington and within 

the EU Commission. 

UKRAINE NEEDS TO ACT TO STRENGTHEN ITS OWN HAND

Ukraine’s politicians, however, deserve much of the blame for the 

country’s present situation. Kiev has allowed corrupt oligarchs to 

continue their control over gas deliveries from Russia and to control many of the country’s domestic oil and gas fields. Even more 

damaging in the long run is the Ukrainian Government’s lack of 

movement in developing fair and just conditions for both domestic 

and foreign energy investors. Here again, a few powerful individuals, most of them with close ties to Russia, have successfully kept 

out Western competitors. Ukraine could substantially reduce its dependency on Russia through rapid reforms that would permit open 

tenders for energy exploration rights and a welcoming atmosphere 

for legitimate foreign energy investors. Seismic studies demonstrate that the country possesses considerable gas both on-shore, 

in the Black Sea and possibly in the Sea of Azov. 

The country continues to exhibit little transparency in the entire 

energy market. Two thirds of Ukraine’s refineries, processing 

three-fourths of the country’s oil, were already owned by Russian 

companies.7 Almost 100% of the refined product that is exported is 

produced in Russian-owned companies. Ukraine’s nuclear plants 

depend on Russian nuclear fuel rods. Former Russian Prime Minister Victor Chernomyrdin, who was also CEO of Gazprom, has for 

many years been Moscow’s ambassador to Kiev. He has effectively 

promoted Russian near monopoly and has checkmated attempts by 

Western companies to gain a stronger foothold in Ukraine. 

The cozy relationship between Russian and Ukrainian energy interests persists, even after the New Year’s Day reduction of gas 

supplies. Talk by the Ukrainians over the past year about diversifying imports and stopping corruption in the energy sector has resulted in little progress and in even greater domestic influence by 

the Russian-dominated RosUkrEnergo. The economics of the proposed Odessa-Brody oil pipeline are still in question, although it 

may be needed for security reasons. The NABUCCO gas pipeline 

project, which would go from Azerbaijan through Turkey to Austria, is a realistic alternative to gas shipments that go to Ukraine 

through Russia. A more immediate need is for the current 

Yanukovich Government to embark on an urgent program to curb 

corruption, improve energy efficiency, and to open the country’s oil 

and gas fields to Western investors. 

TIME FOR THE WEST TO LEAD ON ENERGY POLICY

Western acceptance of Russia’s ‘‘neo-colonial’’ policies in Eastern 

Europe, the Caucasus and Central Asia are not in the long-term interests of Russia itself. Acquiescing to Moscow’s more ‘‘robust’’ regional policies has only contributed to greater tension in RussianEast European relations and has slowed the development of demoVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
67 

cratic governments in the Caucasus and Central Asia. This in turn 

strengthens non-democratic elements in Russia that believe that 

their country’s strength and prestige is fostered through control of 

the neighborhood—and a large neighborhood at that. 

The EU should take the lead in building a more secure network 

of electricity inter-connectors between the countries of Western, 

Central and Eastern Europe. The EU could help marshal the international banks, such as the EBRD and EIB to take equity positions 

in the pipeline systems of Ukraine, Bulgaria, Moldova and Poland. 

This would help these countries modernize their pipelines. It would 

also provide a ‘‘neutral’’ party that could keep the pipelines from 

being controlled by non-transparent Russian companies and guarantee competition in gas and oil transportation. International financing for the proposed NABUCCO natural gas line from Azerbaijan would offer Central Europe much needed energy security, as 

would the building of the Odessa-Brody oil pipeline system. 

The United States should re-examine its long-term energy relationship with Russia. Support for American investment in Russia’s 

energy resources should not prevent us from demanding more 

transparent energy policies and a level playing field for foreign investors. We should expect a loosening of Russia’s monopoly pipeline 

system and demand from Moscow that Central Asian energy producers be given direct access to Western markets. We are not being 

hostile toward Russia when we insist that there be reciprocity in 

Russian-European-U.S. energy relations. It would be foolish on our 

part not to want Russia to evolve into an economically successful 

democracy. Everyone would gain. Russians are going through a difficult period psychologically. Unfortunately, they are highly suspicious of America’s motives in Central Europe and Central Asia 

and tend to believe that the U.S. and NATO are intent on ‘‘surrounding’’ Russia with hostile states; part of a grand scheme by the 

West to keep Russia weak economically and marginalized in international affairs. It is necessary for us to address these issues head 

on with our Russian colleagues, and at the same time work to 

counter Russian efforts to acquire psychological security by creating insecurity in Europe. 

The West, led by cooperation between the EU and the U.S., 

needs to quickly rethink its energy and non-energy policies with 

Russia. The two cannot be separated. The world does Russia no 

favor by ignoring the monopoly and noncompetitive nature of this 

energy relationship. All sides would benefit if Russia were to become more transparent and commercial in its foreign energy policies. Meanwhile, neither the EU nor U.S. should allow Moscow to 

threaten the security of Europe, particularly the new democracies 

of Central Europe through neglect or unwillingness to face down 

the new imperial mindset in the Kremlin. As Yuri Schmidt, the famous Russian human rights lawyer told audiences in Brussels, 

‘‘Yes, Russia needs something from you. It needs your silence, and 

it is ready to pay you for it, too.’’ The January 1, 2006 wake-up call 

to the West was also an opportunity for those who want to see Russia build a modern, democratic state that is linked to Europe by 

mutually beneficial political and economic ties. 

68 

POLICY RECOMMENDATIONS FOR THE WEST

Enforce the Energy Charter Treaty. According to Article 45 of the 

Treaty it went into effect when a state signed it (not ratified it), 

unless there was a specific declaration that it would ‘‘opt out’’ such 

as was done by Norway. Therefore, Russia already has a binding 

treaty obligation with the EU member states. 

Enforce the Rome Treaty’s competition and anti-trust rules in 

cross-border deals between Transneft, Gazprom and individual European states. 

Calculate the true cost to the European consumer of Russia’s 

pipeline monopoly of Central Asian supplies and of the very expensive Nord Stream pipeline. 

Prevent member states from reaching individual deals with Russia that undercut the viability of EU plans to bring alternative supplies of energy to Europe. 

Demand the right to immediately investigate disruptions of energy to the Baltic States, particularly when the disruption appears 

designed to force a member state to sell its facilities to Russia. 

Provide more leadership in working with Central Asians to supply gas and oil directly to the EU, without the use of intermediaries. 

Enforce a ‘‘level playing field’’ for European and Russian investors in the energy sector. The rules on both sides should be clear, 

transparent and enforceable. 

69 

PREPARED STATEMENT OF PIERRE NOE ̈ L, RESEARCH 

ASSOCIATE, UNIVERSITY OF CAMBRIDGE 

Mr. Chairman, Mr. Co-Chairman, members of the Commission, 

I would like to thank you for your invitation to participate in this 

hearing today. I am honored by this invitation and I hope my remarks are of some value to the Commission’s important work. 

Today I want to offer my perspective on the issues related to the 

energy relationship, especially the trade in natural gas, between 

Russia and the European Union. These views are strictly mine and 

should not be taken as reflecting those of any institution. 

1. THE DOMINANT VIEW: EUROPE’S RISING DEPENDENCE ON RUSSIAN

GAS CARRIES SERIOUS ENERGY SECURITY AND GEOPOLITICAL RISKS

Over the past five years and especially after the gas crisis between Russian and Ukraine in January 2006, the European Union 

has frequently been described as being under threat because of its 

large and rising dependence on energy imports from Russia, especially its dependence on Russian natural gas. The dominant view 

is that with this important trade relationship come serious and increasing supply security risks. Beyond that, there is a growing perception that this gas relationship is limiting European countries’ 

freedom to define and implement their foreign policy towards Russia, and that the Russian government is using energy to advance 

its own economic and foreign policy interests in Europe, including 

by playing European countries against one another. 

The growing uneasiness in Europe and in Western countries in 

general about the political dynamics in Russia and in Russian foreign policy—uneasiness which, I believe, is entirely justified—is 

turning into uneasiness about the energy relationship itself. Russia 

is becoming a country which is quite different from the country we 

would like it to be, that is undeniable. But does it mean that the 

risks associated with our commercial energy relationship with Russia are higher and can only grow? Does it mean that our energy 

security can only be sustained by aiming at energy independence 

from Russia, or at least a lower degree of dependence? 

Our gas relationship with Russia raises real issues and I will try 

to describe them, and also what could be done to tackle them. But 

‘‘dependence on Russian gas’’ is not a useful concept to think about 

these issues. If anything, framing the problem in terms of ‘‘dependence’’ plays in the hands of Russia and encourages the Russian government to try and politicize further the commercial energy relationship. The risks associated with our gas trade with Russia can 

and should be analyzed independently from our judgement about 

the evolution of Russia as a country, or the evolution of Mr. Putin’s 

foreign and domestic policies. 

2. A LARGE BUT STAGNATING COMMERCIAL GAS RELATIONSHIP

In 2006, the EU 27 imported 128 billion cubic meters (bcm) of 

natural gas from Russia. This is a very large commercial energy relationship. (By comparison, the US imported just under 100 bcm of 

gas from Canada that same year.) Imports from Russia amount to 

41% of the EU27 gas imports (32% for EU15), or 26.5% of gas conVerDate Nov 24 2008 11:33 Dec 23, 2010 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 E:\WORK\062507 HAROLD PsN: HAROLD
70 

sumption (22% for EU15). Russian gas clearly covers an important 

share of our energy needs. 

But this trade relationship is not growing significantly. Between 

2000 and 2006, the share of Russia in the EU27 gas imports has 

declined by 10 percentage points (51% to 41%). As a share of gas 

consumption, it has remained stable at just under 27%. 

Between 2000–2006, gas imports from Russia have grown by 10 

bcm (6 bcm for EU15). This amounts to 21% of the rise in EU gas 

consumption, and 12.5% of the rise in primary energy consumption 

(see graph below). In other words, around 80% of incremental gas 

(and 88% of incremental energy) consumed in the EU27 since 2000 

has not been Russian gas. Arguably, this is not a situation which 

is well described by the phrase ‘‘rising dependence’’. 

3. SUPPLY DISRUPTION RISK

The first of the two serious issues that Europe faces is the risk 

of disruption in the flow of gas from Russia to the EU consumers. 

This can happen for a number of reasons, from harsh climate in Siberia to an accident in the Russian transport system or in a transit 

country, to a commercial or political dispute between Russia and a 

customer, or between Russia and one of the countries through 

which the gas transits. 

What can be done? 

• First, European countries should create a single, integrated, 

competitive gas markets in order to substantially increase the level 

of ‘‘fungibility’’ in the European gas system. In a well-functioning 

market, a disruption of supply to one of the European countries 

should trigger spontaneous re-allocation of the physically available 

gas, as well as a rise in price. Currently this can not be the case. 

A fully integrated European gas market would also allow any molecule which reaches Europe (say, a LNG cargo unloaded in Spain) 


062507.eps
71 

to be commercialized anywhere in Europe, thereby alleviating the 

problem of dependence of some countries on specific import facilities. Some countries (among them France, Germany, Italy) are 

strongly resisting the Commission’s push towards a fully integrated 

and competitive European gas market, partly to protect the markets of their big national companies. If these countries are serious 

about gas security, this will have to change. • The EU could also review its options in terms of strategic gas 

storage. The Commission made some proposals a few years ago 

which were not accepted by member governments. It should be 

noted that European strategic stocks would only be effective as a 

gas security instrument if there were an integrated and competitive European gas market. • It is possible to increase the short-term price elasticity of gas 

demand by mandating gas-fired power generation plants to maintain stocks of petroleum products on which they could run if their 

gas contracts had to be interrupted during an emergency. • Another, probably relatively costly option is to mandate LNG 

operators to maintain spare regasification capacities so that the 

market can source incremental cargoes on the open market if supplies from Russia became temporarily unavailable. 

4. THE SCARCITY RISK: HOW TO HEDGE AGAINST RUSSIA’S INABILITY

AND/OR UNWILLINGNESS TO SELL MORE GAS TO EUROPE IN THE FU- TURE? 

The second risk that we face is the ‘‘scarcity risk’’. In a sense, 

it is the risk that we will not be able to become ‘‘dependent’’ 

enough because Russia will not be able, or will not be willing, to 

increase its supply to Europe. 

Such a scenario is much more likely to happen than a scenario 

where Europe would be flooded by cheap Russian gas and its dependence would grow significantly. This is the case for reasons 

linked both to the political economy of Russia’s gas industry (strong 

domestic gas demand, political difficulty to raise domestic gas 

prices towards market levels, lack of strategic and operational autonomy of Gazprom) and to the political economy of the EURussia 

gas relationship (declining mutual confidence, diverging visions regarding the principles and institutions that should structure the 

gas relationship and the European gas market itself). 

The main impact of a restrictive Russian gas policy (or other constraints on the expansion of Russian exports to Europe) would be 

higher gas price, either directly if there is a free market for gas in 

Europe, or indirectly as Europe (but also potentially China) would 

be prepared to pay more for LNG and other fuels. Beyond this economic impact, one can imagine a scenario where Russia’s restrictive gas policy is meant at extracting geopolitical benefits, not only 

monopoly rents. This possibility is an important driver behind the 

perceptions of rising energy security risks associated with the EURussia gas relationship. It should be noted that this scenario is 

highly relevant to China (a potential big importer of Eastern Siberian Russian gas). Beyond that, a sustained restrictive gas policy 

from Russia, especially if it is accompanied by a restrictive oil supply policy, could help maintain structural tensions on global energy 

markets. 

72 

Let me briefly describe what could be done to hedge against 

these risks. 

• The main policy goal that should be pursued is to maximize 

competition against Russian gas. The more restrictive the Russian 

gas policy will be, the more competing options there will be against 

Russian gas; it should be (and to some extent it has been in the 

recent past) a clear policy goal to encourage the development of 

these competing options. 

• Europe’s integration into the international market for LNG is 

already a reality but is still progressing rapidly. Direct gas imports 

from Central Asia are another source of non-Russian gas to Europe. Governments should work towards removing barriers to the 

development of this new trade route. The United States has worked 

quite effectively towards this goal through a very active ‘‘pipeline 

diplomacy’’ in Central Asia and the Caucasus; to the maximum extent possible, these efforts should be systematically coordinated 

with the EU. 

• As the natural gas market is globalising, dealing with the risk 

of a sustained restrictive Russian gas policy also means facilitating 

the development of gas trade links which have nothing to do with 

Europe. For example, gas exports from Central Asia to China are 

a positive development and, to extent possible, should be encouraged to increase further if the parties think it is in their interest. 

Iranian gas is also potentially very important in checking the implicit or explicit monopoly power of Russia. Technically, Iranian gas 

can be marketed in Europe by pipeline but is more likely to be exported as LNG to markets in Asia and Europe. There are serious 

uncertainties as to whether Iran could become a credible supplier 

of gas to the world market; both history and the current negotiating process with European and other companies would lead to 

caution, if not skepticism. But it is clear that if Iranian gas should 

remain stranded for geopolitical reasons, that would clearly reinforce Russia’s position. 

• Maximizing competition against Russian gas also means continuing public support for alternative electricity generation technology, especially low-carbon coal. Scarcity on the natural gas market means coal is back as the fuel of choice in Europe and the US 

(and remains so in China and India). This cannot be reconciled 

with the objective to de-carbonize energy supply unless technologies of low-carbon coal (through carbon capture and storage) 

become commercially available. 

• Finally, the possibility that we will have to face a sustained restrictive Russian gas policy is one more incentive for the US and 

Europe to develop strategic energy partnerships with China and 

India. Such partnerships should have both technical and political 

dimensions. Building a common vision of energy security with 

these big emerging countries should be a priority if we want to 

avoid over-politicization of the global energy markets in the coming 

years and decades. This could mean reforming the International 

Energy Agency to accommodate these key energy consuming countries. 

73 

5. CONCLUDING THOUGHTS

You asked me to reflect on how we can reduce the risk of conflict 

over energy supply. Conflicts over energy supply in the OSCE region (or in the world for that matter) are neither likely nor inevitable. For them to become even less likely, we have to work towards a situation where no country can be credibly threatened of 

supply disruption for political reasons; and where no country has 

to accept the politicization of the commercial energy trade that 

Russia is implicitly proposing to its actual and potential customers. 

We do not have to accept this ‘‘offer’’ and should not. Politicization 

of energy trade is a dangerous route to go down to. Provided we 

implement the policies that will help Europe hedge against the 

risks that emerge from our gas relationship with Russia (and this 

will not come free), we can live comfortably with this relationship. 

If the Russian government wants it to flourish as a commercial relationship, it will. If Russia demands that the gas relationship becomes the axis around which its political relationship with Europe 

revolves, then Russian gas will become less and less acceptable and 

the relationship will stagnate, if not decline. 

Æ 

This is an official publication of the 

Commission on Security and 

Cooperation in Europe. 

★ ★ ★ 

This publication is intended to document 

developments and trends in participating 

States of the Organization for Security 

and Cooperation in Europe (OSCE). 

★ ★ ★ 

All Commission publications may be freely 

reproduced, in any form, with appropriate 

credit. The Commission encourages 

the widest possible dissemination 

of its publications. 

★ ★ ★ 

http://www.csce.gov 

The Commission’s Web site provides 

access to the latest press releases 

and reports, as well as hearings and 

briefings. Using the Commission’s electronic 

subscription service, readers are able 

to receive press releases, articles, 

and other materials by topic or countries 

of particular interest. 

Please subscribe today.