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WESTERN HEMISPHERE ENERGY SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON 

THE WESTERN HEMISPHERE

OF THE

COMMITTEE ON 

INTERNATIONAL RELATIONS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 2, 2006

Serial No. 109–204

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations 

(II)

COMMITTEE ON INTERNATIONAL RELATIONS 

HENRY J. HYDE, Illinois, Chairman 

JAMES A. LEACH, Iowa 

CHRISTOPHER H. SMITH, New Jersey, 

Vice Chairman 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

EDWARD R. ROYCE, California 

PETER T. KING, New York 

STEVE CHABOT, Ohio 

THOMAS G. TANCREDO, Colorado 

RON PAUL, Texas 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

JO ANN DAVIS, Virginia 

MARK GREEN, Wisconsin 

JERRY WELLER, Illinois 

MIKE PENCE, Indiana 

THADDEUS G. MCCOTTER, Michigan 

KATHERINE HARRIS, Florida 

JOE WILSON, South Carolina 

JOHN BOOZMAN, Arkansas 

J. GRESHAM BARRETT, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL MCCAUL, Texas 

TED POE, Texas 

TOM LANTOS, California 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

SHERROD BROWN, Ohio 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

WILLIAM D. DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JOSEPH CROWLEY, New York 

EARL BLUMENAUER, Oregon 

SHELLEY BERKLEY, Nevada 

GRACE F. NAPOLITANO, California 

ADAM B. SCHIFF, California 

DIANE E. WATSON, California 

ADAM SMITH, Washington 

BETTY MCCOLLUM, Minnesota 

BEN CHANDLER, Kentucky 

DENNIS A. CARDOZA, California 

RUSS CARNAHAN, Missouri 

THOMAS E. MOONEY, SR., Staff Director/General Counsel 

ROBERT R. KING, Democratic Staff Director 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE

DAN BURTON, Indiana, Chairman 

RON PAUL, Texas 

JERRY WELLER, Illinois, Vice Chairman 

KATHERINE HARRIS, Florida 

JAMES A. LEACH, Iowa 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

CONNIE MACK, Florida 

MICHAEL MCCAUL, Texas 

ELIOT L. ENGEL, New York 

GRACE NAPOLITANO, California 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

WILLIAM D. DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

MARK WALKER, Subcommittee Staff Director 

JASON STEINBAUM, Democratic Professional Staff Member 

DAN S. GETZ, Professional Staff Member 

BRIAN WANKO, Staff Associate 

(III)

C O N T E N T S 

Page

WITNESSES 

The Honorable Karen A. Harbert, Assistant Secretary, Office of Policy and 

International Affairs, U.S. Department of Energy ............................................ 8

Ms. Anne Korin, Co-Director, Institute for the Analysis of Global Security ...... 36

Sidney Weintraub, Ph.D., William E. Simon Chair in Political Economy, Center for Strategic and International Studies ....................................................... 45

Mr. Eric Farnsworth, Vice President, Council of the Americas ........................... 50

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Dan Burton, a Representative in Congress from the State 

of Indiana, and Chairman, Subcommittee on the Western Hemisphere: 

Prepared statement .............................................................................................. 4

The Honorable Karen A. Harbert: Prepared statement ....................................... 13

Ms. Anne Korin: Prepared statement .................................................................... 39

Sidney Weintraub, Ph.D.: Prepared statement ..................................................... 46

Mr. Eric Farnsworth: Prepared statement ............................................................ 53

Council of the Americas report, ‘‘Energy in the Americas’’ .................................. 66

APPENDIX 

The Honorable Ileana Ros-Lehtinen, a Representative in Congress from the 

State of Florida, and Chair, Subcommittee on the Middle East and Central 

Asia: Prepared statement .................................................................................... 101

The Honorable Barbara Lee, a Representative in Congress from the State 

of California: Statement for the record and questions for the Honorable 

Karen A. Harbert ................................................................................................. 101

The New York Times article, ‘‘As Profits Sour, Companies Pay U.S. Less 

for Gas Rights,’’ dated January 23, 2006 ........................................................... 102

(1)

WESTERN HEMISPHERE ENERGY SECURITY 

THURSDAY, MARCH 2, 2006

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE, 

COMMITTEE ON INTERNATIONAL RELATIONS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:06 p.m. in room 

2172, Rayburn House Office Building, the Honorable Connie Mack 

presiding. 

Mr. MACK. Good afternoon. A quorum being present, the Subcommittee on Hemisphere will come to order. I ask unanimous consent that all Members’ and witnesses’ opening statements be included in the record. Without objection, so ordered. 

I ask unanimous consent that all articles exhibits and extraneous 

or tabular material referred to by the Members or witnesses be included in the record. Without objection, so ordered. 

I ask unanimous consent that any Member who may attend today’s hearing be considered a Member of the Subcommittee for the 

purposes of receiving testimony and questioning witnesses after 

Subcommittee Members have been given the opportunity to do so. 

Without objection, so ordered. 

Today we are convening a hearing on energy security in the 

Western Hemisphere. Your testimony will help the Subcommittee 

in making an assessment of hemispheric oil market and the ongoing development of energy resources in North America and the 

Caribbean regions. By the time we are finished today, I hope the 

Subcommittee will have a better understanding of the energy investment climate in these regions and the risks in the hemispheric 

energy markets linked to political trends, the politicization of these 

strategic commodities, and the potential production and supply disruptions. 

We undertake this oversight hearing with the keen eye toward 

our broader foreign policy goals of strengthening stability in the 

Americas through growth and development and strong support for 

further democratization. 

I first want to welcome our distinguished new Ranking Member, 

Congressman Eliot Engel of New York. Congressman Engel represents the 17th District which includes the Bronx, Westchester 

and Rockland Counties. He is a member of the Human Rights Caucus, serves as Vice Chair of the House Democratic Task Force on 

Homeland Security and the Democratic Task Force on Health. We 

look forward to working with you and your staff on Western Hemisphere affairs. 

Mr. ENGEL. Thank you. 

2

Mr. MACK. Welcome. 

I would like to for the record state that Chairman Burton is not 

able to make it today. He is feeling ill, and I will be reading and 

also placing his opening statement into the record, and I must say 

it is an honor and privilege to do so. The following is his statement. 

I believe that the energy and ideas are two primary drivers of 

growth and development. When free market forces drive the exchange of both of these commodities, nations stand a better chance 

of enjoying equitable distribution of the fruits of economic growth. 

When energy markets are free of corruption and promote open, responsible, and environmentally-safe investment, nations stand a 

better chance of governing these resources and the revenue that is 

generated for the benefit of their people. 

Conversely, when rigid artificial mechanisms are put in place, 

development of energy resources is often stifled, or these resources 

are exploited, squandered and enjoyed by only a select few. 

This is a subject we have been focusing on for many months, 

with high oil and gas prices costing consumers more than ever. Obviously, Hurricane Katrina focused our attention like a laser beam 

to the very real threat of disruption in our own domestic energy 

supply. 

Almost 40 percent of the energy we consume in the U.S. is supplied by petroleum, and our appetite has nearly tripled in the last 

half century. In his most recent State of the Union address, President Bush, like many of his predecessors, rightly pointed to the 

need to reduce our dependency on foreign oil from volatile suppliers 

in the Middle East. 

Just last week, Saudi Arabia security forces thwarted a terrorist 

attack against a facility which produces two-thirds of the country’s 

output. The threat of supply distribution saw crude oil futures 

spike more than $2.30 to almost $63 per barrel. Militants in Nigeria and protestors in Ecuador have disrupted output in these countries, and insurgents in Iraq have interrupted production there. 

Political instability and security threats in the countries that 

supply our energy needs, along with greater competition for fossil 

fuels, is driving costs even higher. Clearly, part of our strategy 

must be to conserve and diversify our sources of energy. We cannot 

afford to delay research and investment in alternative fuels. Equally important is to work with the major stable partners we have—

like Mexico and Canada—to improve technologies and to develop 

infrastructure and expand investment. We can and we must do 

more to encourage multilateral investments that foster greater integration and development of regional energy sectors. 

The newly-elected President of Bolivia, Evo Morales, will be making decisions about the hydrocarbons industry in that country that 

will have deep social, economic long-term implications. Expectations are high, particularly with Mr. Morales’ supporters in the indigenous communities that have been marginalized historically. 

Despite conflicting signals to foreign investors, President Morales 

has pledged to renegotiate with foreign oil companies in order to 

develop Bolivia’s natural gas reserves. The people of Bolivia will 

benefit from increased development of natural gas, and the economic growth that will come from expansion beyond traditional 

markets like Argentina and Brazil. Fresh investments however reVerDate Mar 21 2002 14:55 Oct 12, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 F:\WORK\WH\030206\26334.000 HINTREL1 PsN: SHIRL
3

mains on the sidelines as political uncertainties and risks appear 

high. 

Similarly, political instability and legal uncertainties in Ecuador 

have resulted in prolonged investment disputes for United States 

companies and a 50 percent drop in oil production. Strikes, protests, and sabotage of oil pipelines in the country have further exacerbated problems there. 

Venezuela has been a dependable supplier of oil to the United 

States, and up until recently, bilateral relations have been good. As 

this Subcommittee knows, Chairman Burton has tried to temper 

public remarks about Venezuela in the last 12 months, and he 

wants to make it very clear that he wishes to continue to pursue 

dialogue with Caracas. 

Nevertheless, in recent weeks I have become increasingly convinced that the Government of Venezuela is seeking to destabilize 

the region and dismantle the institutions of democracy within its 

borders and beyond them. 

Equally worrisome, in recent weeks President Hugo Chavez and 

Communist Dictator Fidel Castro of Cuba, along with other Latin 

American leaders, have begun reaching out to known Islamic terrorist organizations, such as Hamas, and cozying-up to renowned 

terrorist-sponsoring nations like Iran and North Korea. 

Any alliance between terrorist-sponsoring nations and leftist 

leaders in Latin America will be viewed as a serious and direct 

threat to the national security of the United States and our friends 

in the hemisphere. When they cooperate with terrorist organizations such as Hamas, or cooperate with renowned terrorist-sponsoring nations like Iran or North Korea, President Chavez and the 

Cuban dictator are putting themselves and others at risk, and several world bodies will be no longer tolerate it. 

The Venezuelans can sell their oil anywhere they like. Venezuela 

is a sovereign state. They can sell it at deep discounts or finance 

consumption of their oil. Some observers point to the obvious with 

arrangements in Cuba. The artificial mechanisms will further indebtedness in some of the poorest countries in the hemisphere, not 

to mention, over-reliance on a single energy source. I believe it also 

bears mentioning in this hearing that huge oil revenues have not 

resulted in a reduction of poverty rates under Hugo Chavez’s 

version of democracy in Venezuela. 

I will ask our witnesses today to address these and other concerns I have in the hemisphere. 

President Bush has laid out a roadmap for cooperation to consolidate democracy in the Western Hemisphere, and to use trade as a 

catalyst for positive growth in the region to create conditions which 

will alleviate poverty and strengthen democratic institutions. A cohesive energy security framework will provide the economic 

underpinnings for the growth and stability that most of the governments in the region are pursuing. Twenty-nine of the thirty-four 

Western Hemisphere nations that met in Argentina last year are 

in favor of moving forward on free trade negotiations. Cooperation 

in these areas of energy development and investment and integration must be a top priority of policy makers. 

[The prepared statement of Mr. Burton follows:]

4

PREPARED STATEMENT OF THE HONORABLE DAN BURTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA, AND CHAIRMAN, SUBCOMMITTEE ON THE

WESTERN HEMISPHERE

Today we are convening a hearing on Energy Security in the Western Hemisphere. Your testimony will help the Subcommittee in making an assessment of 

hemispheric oil markets, and the ongoing development of energy resources in North 

America, the Andean and Caribbean regions. By the time we are finished today, I 

hope the Subcommittee will have a better understanding of the energy investment 

climate in these regions, and the risks in hemispheric energy markets linked to political trends, the politicization of these strategic commodities, and potential production and supply disruptions. 

We undertake this oversight hearing with a keen eye towards our broader foreign 

policy goals of strengthening stability in the Americas through growth and development, and strong support of furthering democratization. 

I first want to welcome our distinguished new Ranking Member, Congressman 

Eliot Engel of New York. Congressman Engel represents the 17th District which includes the Bronx, Westchester and Rockland Counties. He is a member of the 

Human Rights Caucus, serves as Vice Chair of the House Democratic Task Force 

on Homeland Security and the Democratic Task Force on Health. We look forward 

to working with you and your staff on Western Hemisphere Affairs. 

I believe that energy and ideas are two primary drivers of growth and development. When free market forces drive the exchange of both of these commodities, nations stand a better chance of enjoying equitable distribution of the fruits of economic growth. When energy markets are free of corruption and promote open, responsible, and environmentally-safe investment, nations stand a better chance of 

governing these resources and the revenue that is generated for the benefit of their 

people. Conversely, when rigid, artificial mechanisms are put in place, development 

of energy resources is often stifled, or these resources are exploited, squandered and 

enjoyed by only a select few. 

This is a subject we have been focusing on for many months, with high oil and 

gas prices costing consumers more than ever. Obviously, Hurricane Katrina focused 

our attention like a laser beam to the very real threat of disruptions in our own 

domestic energy supply. 

Almost 40% of the energy we consume in the U.S. is supplied by petroleum, and 

our appetite has nearly tripled in the last half century. In his most recent State 

of the Union address, President Bush, like many of his predecessors, rightly pointed 

to the need to reduce our dependence on foreign oil from volatile suppliers in the 

Middle East. 

Just last week, Saudi Arabian security forces thwarted a terrorist attack against 

the Abqaiq facility, which processes two-thirds of the country’s output. The threat 

of supply disruptions saw crude oil futures spike more than $2.30 to almost $63 per 

barrel. Militants in Nigeria and protestors in Ecuador have disrupted output in 

those countries, and insurgents in Iraq have interrupted production there. 

Political instability and security threats in the countries that supply our energy 

needs, along with greater competition for fossil fuels, is driving costs ever higher. 

Clearly, part of our strategy must be to conserve and diversify our sources of energy. 

We cannot afford to delay research and investment in alternative fuels. Equally important is to work with the major, stable partners we have—like Mexico and Canada—to improve technologies and to develop infrastructure and expand investment. 

We can and we must do more to encourage multilateral initiatives that foster greater integration and development of regional energy sectors. 

I have personally raised this with Inter-American Development Bank President 

Moreno, and was briefed on his plans to finance both public and private sectors to 

generate electricity and transport and distribute electricity and natural gas. Last 

year alone the IDB approved more than $1 billion dollars in lending to energy 

projects/investments in Latin America and the Caribbean. 

The newly-elected president of Bolivia, Evo Morales, will be making decisions 

about the hydrocarbons industry in that country that will have deep social and economic long-term implications. Expectations are high, particularly from Mr. Morales’ 

supporters in the indigenous communities that have been marginalized historically. 

Despite conflicting signals to foreign investors, President Morales has pledged to renegotiate with foreign oil companies in order to develop Bolivia’s natural gas reserves. The people of Bolivia will benefit from increased development of natural gas, 

and the economic growth that will come from expansion beyond traditional markets 

like Argentina and Brazil. Fresh investment however, remains on the sidelines, as 

political uncertainties and risks appear high. 

5

Similarly, political instability and legal uncertainties in Ecuador have resulted in 

prolonged investment disputes for U.S. companies and a 50% drop in oil production. 

Strikes, protests and sabotage of oil pipelines in that country have further exacerbated problems there. 

Venezuela has been a dependable supplier of oil to the United States, and up until 

recently, bilateral relations have been good. As this Subcommittee knows, I have 

tried to temper public remarks about Venezuela in the last twelve months, and I 

want to make it very clear that I wish to continue pursuing DIALOGUE with Caracas. Nevertheless, in recent weeks I have become increasingly convinced that the 

government of Venezuela is seeking to destabilize the region and dismantle the institutions of democracy within its borders and beyond them. Equally worrisome, in 

recent weeks President Hugo Chavez and Communist Dictator Fidel Castro of Cuba, 

along with other Latin American leaders, have begun reaching out to known Islamic 

terrorist organizations, such as Hamas, and cozying-up to renowned terrorist-sponsoring nations like Iran and North Korea. Any alliance between terrorist-sponsoring 

nations and leftist leaders in Latin America will be viewed as a serious and direct 

threat to the national security of the United States and our friends in the Hemisphere. When they cooperate with terrorist organizations such as Hamas, or cooperate with renowned terrorist-sponsoring nations like Iran or North Korea, President 

Chavez and the Cuban dictator are putting themselves and others at risk, and several world bodies will not long tolerate it. 

The Venezuelans can sell their oil anywhere they like. Venezuela is a sovereign 

state. They can sell it at deep discounts, or finance consumption of their oil. Some 

observers point to the obvious with arrangements like Petro-Caribe; these artificial 

mechanisms will further indebtedness in some of the poorest countries in our hemisphere, not to mention, over-reliance on a single energy source. I believe it also 

bears mentioning in this hearing that huge oil revenues have not resulted in a reduction of poverty rates under Mr. Chavez’ version of democracy in Venezuela. 

I will ask our witnesses today to address these and other concerns I have in the 

hemisphere. 

President Bush has laid out a roadmap for cooperation to consolidate democracy 

in the Western Hemisphere, and to use trade as a catalyst for positive growth in 

the region to create conditions which will alleviate poverty and strengthen democratic institutions. A cohesive energy security framework will provide the economic 

underpinnings for the growth and stability that most of the governments in the region are pursuing. Twenty-nine of the 34 Western Hemisphere nations that met 

down in Argentina late last year are in favor of moving forward on free trade negotiations. Cooperation in the area of energy development, investment and integration 

must be a top priority of policy makers. 

I now recognize the distinguished ranking member from New York, Eliot Engel, 

for any statement he may wish to make.

Mr. MACK. I now recognize the distinguished Ranking Member 

from New York, Eliot Engel, for any statement he may wish to 

make. 

Mr. ENGEL. Well, thank you very much, Mr. Chairman, and 

thank you for your very kind words of welcome. I really appreciate 

them, and I look forward to working with you. 

Before I turn to the Subcommittee hearing, I want to reiterate 

what you already mentioned, that today marks my first hearing on 

the Western Hemisphere Subcommittee, and I am honored to join 

you as Ranking Member. Again, thank you for the very, very kind 

words. 

I look forward to working with our Subcommittee Chairman, Mr. 

Burton, with whom I have worked closely over the years. I have 

heard such good things about how he runs the Subcommittee that 

I am excited to collaborate with him on future legislative efforts. 

I understand, as you mentioned, he is not feeling well today, and 

I wish him a speedy recovery. I also look forward to working on a 

bipartisan basis with all of my fellow Subcommittee colleagues to 

raise the profile of the Western Hemisphere region and help ensure 

that its numerous pressing issues receive the attention they deserve. 

6

Turning to the issue at hand, as President Bush said during his 

State of the Union address, America is dangerously addicted to oil. 

We consume nearly 21 million barrels of oil per day, every day, and 

our appetite is increasing. Today the American economy demands 

over 25 percent of global oil production while our known oil reserves make up only 3 percent of global supply. 

For our imports, the United States has long relied on Western 

Hemisphere suppliers of oil and gas. Indeed, according to the most 

recent statistics, crude oil imports from Canada, Latin America, 

and the Caribbean amount to 50 percent of total United States imports. 

Even as our thirst for more oil increases, China, India, and the 

development world are demanding a greater share of the pie. Being 

so completely dependent on a single finite and pollution-causing 

fuel might only be an economic or environmental problem if it were 

not for the fact that the United States must import over 60 percent 

of our oil, which is over 12 million barrels per day, and much of 

that from nations with fragile, unfriendly or outright hostile governments to ours. 

Whether it is the kidnappings in Nigeria’s oil fields, the rampant 

corruption in Russia, the war in Iraq, or the nuclear stand off with 

Iran, when it comes to oil imports America has few good options. 

In an era of increasing volatility in the Persian Gulf and the Gulf 

of Guinea, events have shown that some Western Hemisphere energy suppliers are not immune. From Bolivian riots over natural 

gas and natural gas policy to Venezuelan musings about shifting 

export focus away from the United States to developing Chinese interests in the Western Hemisphere region, even our closest neighbors are not a completely stable source of supply. 

Addiction to foreign oil limits our actions on the global stage and 

our choices here at home. It leaves us vulnerable to acts of God and 

acts of man, and it is intertwined with terrorism. Dependency on 

foreign oil is one of the central national security problems we will 

face in this 21st century. It is therefore imperative to U.S. national 

security that we wean ourselves off of oil. 

Mr. Chairman, I am proud to add that I am Co-Chair of the bipartisan Oil and National Security Congressional Caucus, which I 

Co-Chair with Congressman Jim Saxton, that I am also the lead 

Democratic sponsor of H.R. 4409, the Bipartisan Fuel Choices For 

America’s Security Act, which I am doing with our colleague Jack 

Kingston. 

As in our hearing today, our efforts seek to find ways to reduce 

the amount of oil we use and import as well by finding alternatives 

to gasoline in the cars we drive. 

At today’s hearing, I welcome the opportunity to explore the profound challenges our dependency on foreign oil poses to our national security and questions related to energy security in our 

hemisphere. I also welcome the opportunity to learn about developments in the Western Hemisphere region, and how the United 

States can improve its relations within the hemisphere and reduce 

its vulnerability to supply disruption. 

Thank you, Mr. Chairman. 

Mr. MACK. Thank you, and now I will recognize myself for an 

opening statement. 

7

I am glad to be able to play a part in this important hearing 

today. I want to thank the witnesses for sharing their insight with 

us, and I would also like to thank the Subcommittee for all of their 

help in preparing for today’s hearing. 

Today, the United States is the largest consumer of global energy 

resources, thereby making access to energy a strategic importance 

for our nation. The President, in his State of the Union speech, 

said that America is addicted to oil, which is often imported from 

unstable parts of the world. 

Although I strongly agree with the President that we must become a country less dependent on foreign sources of energy, the reality is that in the near term we are very dependent upon energy 

from places and countries that may not have the United States 

best interest at heart. 

Today’s hearing is focused on understanding the risk in the 

Western Hemisphere energy markets, the political trends which 

may impact the energy, markets, and the potential production and 

supply disruption. I think this issue is of critical importance to this 

Congress, especially in light of the growing instability in Latin 

America. 

While freedom is on the march on many places around the world, 

a resurgence of socialist, communist and anti-freedom governments 

and movements in Latin America represent an emerging threat to 

freedom in the region and to the energy needs of the United States. 

The instigator is Venezuela’s Socialist President Hugo Chavez 

who is using state-owned oil money to underwrite his iron-fisted 

control of Venezuela people and to back his alliance with leftist 

leaders and causes through Latin America. 

With Venezuela as the world’s fifth largest oil producer, and oil 

at over $60 a barrel, Chavez has assumed the identity of a modernday Simon Bolivar who attempted to unify Latin American in the 

1800s. Oil is Chavez’s ATM to finance a bolivarian revolution that 

abuses Presidential power in Venezuela and fans the flame of Socialism and regional instability. 

In many of the Western Hemisphere, we are seeing a free market 

approach to energy production. However, in Venezuela I am 

alarmed by the changes we are witnessing. While Chavez still respects an arrangement with foreign companies doing business side 

by side with government-owned oil companies, Hugo Chavez has 

slowly stepped up controls of foreign operators. 

Many foreign energy companies are doing well in Venezuela, and 

are hesitant to make much noise to fear upsetting the apple cart. 

But make no mistake, Chavez aims to nationalize the Venezuelan 

oil sector. He is putting increased pressure on foreign companies by 

forcing them to pay back taxes, threatening seizures of property, 

and energy fields, and even renegotiating contracts. 

I will ask our witnesses today to address my concerns about Venezuela, Hugo Chavez and his growing influence in the region, and 

his impacts upon our energy security. 

I now would like to introduce our first guest, our first panel, 

Karen Harbert, is Assistant Secretary of Policy and International 

Affairs with the U.S. Department of Energy. Her office is the primary policy advisor to the Secretary in the department of domestic 

8

and international energy issues, new policy initiatives and implementation of the national energy policy. 

Previously, she served as Deputy Assistant Administrator for 

Latin America and the Caribbean at the U.S. Agency for International Development, with primary responsibility for foreign assistance programs in South America and the Caribbean, and she 

also had oversight of programs in 11 countries, totaling over 800 

million and 1,000 employees. 

Good to have you with us, Secretary. 

[Witness sworn.] 

Mr. MACK. Thank you, and now if you would please summarize 

or give your opening statement, we would appreciate it. 

TESTIMONY OF THE HONORABLE KAREN A. HARBERT, ASSISTANT SECRETARY, OFFICE OF POLICY AND INTERNATIONAL 

AFFAIRS, U.S. DEPARTMENT OF ENERGY 

Ms. HARBERT. Good afternoon, Mr. Chairman, and welcome, Congressman Engel, to the Subcommittee. I look forward to working 

with both of you and Members of the Subcommittee in the times 

ahead. 

I am very pleased to be here today to discuss the importance the 

Administration places on energy security and efforts to strengthen 

energy security in our hemisphere. As you both have stated, U.S. 

energy security is inextricably intertwined with our economic prosperity and our national security, and that is why the President has 

made energy security a real focus of his Administration, and chose 

to highlight new initiatives in the State of the Union. 

We believe that a secure and prosperous Western Hemisphere is 

vital for our national interest. Integrated markets, interconnected 

infrastructure, technologically-advanced deployment of a broad 

range of resources, and efficient end-use of energy will create a 

strong, confident and prosperous Western Hemisphere. 

The prospects for economic growth in the hemisphere and development in the region are going to be increasingly reliant on 

unlocking valuable resources that are in the Western Hemisphere. 

The United States consumes 20.7 million barrels of oil per day, 

of which close to 6 million of that comes from the Western Hemisphere, especially from our border countries of Canada and Mexico. 

The United States imports 58 percent of its oil and petroleum products and 19 countries in the Western Hemisphere contribute to half 

of that imported from those energy sources. 

When we look at how we apply our international energy policy 

on the international front, we believe and we presume that access 

to secure, reliable, affordable sources of energy is fundamental to 

national economic security. Energy is clearly the life blood of economies around the world. Global economic growth that we want to 

see sustained and increase is dependent upon the supply of this energy. It has to be adequate, it has to be reliable, it has to be affordable. 

Our key foreign policy objectives, like the promotion of democracy, the promotion of trades, sustainable economic development, 

poverty reduction, environment protection, all of those rely on the 

provision of this energy. 

9

We are the world’s largest producer and consumer of energy, and 

therefore the U.S. must assume a leading role in addressing the 

world’s energy challenges. As you all have pointed out, there are 

a few key trends out there that are of particular concern. Most of 

the energy that drives the economic growth that we are experiencing today is derived from fossil fuels from a relatively small 

number of producers. 

Record high oil prices indicate limited spare oil capacity, and 

that is due to the lack of new investment and new supply, and unforeseen levels of demand in parts of the world like India and 

China. 

New resources are located in places that are geographically hard 

to reach, geologically difficult to develop, politically unstable, and 

unfriendly to new investment. Also, we have to keep in mind that 

nearly 2 billion people in the world lack access to reliable affordable energy. 

We must be mindful of the environmental challenges and the climate change challenges that will only become more prevalent in 

years to come, and they will require us and others to respond in 

ways that provide energy for economic growth and poverty reduction, but they have to ensure the long-term safety and environmental safety of our planet. 

With all of that as a backdrop, what are the U.S. goals to achieve 

the very vital energy diversification that we and others in national 

security depend upon? 

First, we must expand energy production to meet the needs of a 

growing economy. We have to do that by using technology to diversify the types of energy we consume, improve energy efficiency, and 

lessen the environmental burden of energy consumption. 

We have to do that by improving investment climates in resource 

countries, and we have pursue market-based pricing, and lastly 

and very importantly, we have to modernize and protect the global 

energy infrastructure. 

The Western Hemisphere produces one-fourth of the world’s 

crude, one-third of the world’s natural gas, one-fourth of its coal, 

and over a third of global electricity, but our focus in the Western 

Hemisphere must begin here at home as well. 

Our domestic resources still provide a major portion of the energy consumed in the United States, and we have to remember 

that. The United States produces almost 90 percent of the hemisphere’s coal. We have significant coal reserves. We possess the 

sixth largest natural gas reserves, and the eleventh largest crude 

reserves. We still produce 40 percent of what we consume, and obviously we are importing 60 percent of what we consume. 

Our most important energy partners lie on our borders. Our most 

important energy partner in this hemisphere and in the world is 

Canada. The current and future energy supply and our integrated 

energy infrastructure further binds an already strategic and fruitful relationship. 

The Canadian provinces of Alberta, British Columbia, Saskatchewan provide the majority of our natural gas imports, and Canada 

provides almost 80 percent of all the natural gas that is entering 

the United States. 

10

Twenty-five percent of our imports come from Canada and Mexico combined. Mexico is our second largest supplier and the prospects between Canada and Mexico of increasing production in both 

those countries through technological break-throughs and hopefully 

private sector investment will only further solidify a very strong 

cultural, economic, and trade relationship. 

Of course, other countries have important roles to play to ensure 

hemispheric energy security and economic prosperity to us and 

their citizens. 

Venezuela sends close to 60 percent of its oil to the United 

States. We are a very important export outlet for Venezuela’s stateowned oil company, PDVSA. Venezuela outfitted CITGO, its refineries here in the United States, to particularly use Venezuela’s 

heavy sour crude as its feedstock, and very few refineries around 

the world exist that could actually be sufficient in number to make 

Venezuela’s crude oil imports be economic. 

Venezuela also possesses the continent’s largest gas reserves, but 

significant investment and expertise are needed to develop this 

substantial resource, and in a few minutes I will detail what those 

challenges are. 

The U.S. appetite for LNG is growing, and new authorities under 

the EPACT that was signed into law by the President in August 

2005 are going to allow for increased import capability. At present, 

we have no greater, no more reliable LNG partner than Trinidad 

and Tobago. This Caribbean country accounts for 70 percent of our 

total LNG imports, and it is continuing to expand its supply. 

Bolivia, as you all have pointed out, has the second largest proven natural gas reserves in South America, and those reserves, if 

used for development of their country, could be a tremendous platform for prosperity for that country. 

There are other projects underway in Central America, like the 

Central American Natural Gas Pipeline and South American gas 

ring that could also lead to greater integration of our energy infrastructures. 

Undiscovered oil and gas in the hemisphere is estimated at 30 

percent and 20 percent of the world’s total undiscovered resources, 

respectively. Oil producers in the hemisphere have tremendous potential for increasing output over the next decade, and certainly at 

the price points we are experiencing today there is ample incentive. 

However, technical, economic, and political challenges exist. 

The United States is firmly committed to promoting the importance of a stable transparent investment climate which invites private sector investment to unlock those resources and invites the expertise that is resident in the private sector to do so. Those resources, if developed responsibly, will help Latin America lead its 

way out of poverty. 

Where are these new sources of production? They reside first in 

North America. Canada has very rich resources in its oil sands. 

They rank second only to Saudi Arabia. Mexico also has great potential to increase its output. However, they must address their 

current prohibitions on private investment in the oil and gas sector. 

11

Venezuela also has significant additional heavy oil. Venezuela 

needs capital, it needs technological expertise to untap or to develop these resources. 

Currently, PDVSA’s production is declining significantly, producing almost 50 percent less than at its peak. Total Venezuelan 

output is now only 2.5 million barrels per day. It does not even 

meet its OPEC crude quota. This emphasizes PdVSA’s need for investment and technical expertise. Without it, and without the new 

investment which is similar to the amount of investment needed in 

Canada to unlock the oil sands, future production will continue to 

decline. 

In 1998, the Department of Energy made a forecast based on 

what it new then of what Venezuela’s production would be in 2005. 

They estimated it to be 5.5 million barrels. It is now at 2.5 million 

barrels, a 3 million barrel differential. 

How do we unlock these resources in the Western Hemisphere 

and abroad? The best way to do it is to harness the power of technology to diversify. Harnessing the power of technology and of markets to improve energy conservation and efficiency is a goal that we 

have embraced and was outlined in the State of the Union. 

Renewable energy offers the possibility to reduce reliance on oil, 

not just for the United States but for many countries in the Western Hemisphere. Brazil is notable in its efforts to transform its 

transport sector and use ethanol. We also have to do this not just 

bilaterally, but by using multilateral initiatives through hydrogen, 

carbon sequestration, and new nuclear technologies. 

A few words about the investment climate, and then I look forward to answer your questions. 

In order to develop and secure these energy resources now and 

for the future, massive amounts of investment are necessary. The 

International Energy Agency estimates that Latin America will require $1.3 trillion of investment in the energy sector between 2001 

and 2030. That type of investment will only happen if there is the 

right investment climate. Capital is a coward and will go where it 

is most comfortable. We want it to be comfortable in the Western 

Hemisphere. 

Therefore, the Western Hemisphere countries must establish predictable, transparent, and nondiscriminatory investment in trade 

policies. Retroactive contract changes, investment disputes, and unclear rules will drive away investment, damage economies, and in 

the long run ultimately it is the citizens of the Western Hemisphere that will pay the price. 

Countries such as Canada and Trinidad and Tobago have developed regimes and created new opportunities. Others are choosing 

to close off their sectors to foreign investment, or are rejecting their 

openness to investment. Some positive examples right now are Colombia and Peru where increased transparency and predictability 

is showing new exploration. Trinidad and Tobago is developing 

their natural gas resources. 

Right now Ecuador is experiencing tremendous problems. The 

importance of forthright negotiation and communication is critical. 

There are significant investment disputes right now in Ecuador. 

We hope that the Government of Ecuador will make the right decision. 

12

Bringing energy infrastructure throughout the Western Hemisphere up to meet contemporary needs depends on deepening our 

interconnections and expanding our markets. We have already 

done that with a variety of trade pacts between us and Canada and 

Mexico, the Central American, Dominican Republic Free Trade 

Agreement, and the new agreements in the Andes. 

The United States recognizes that as part of the Western Hemisphere our energy future rises and falls with our neighbors. While 

energy exists in the world market, our energy security is best 

served by working with our partners in the hemisphere to ensure 

that we all produce at optimal levels, and that our infrastructure 

development and energy consumption occur at the most efficient 

levels and in the most efficient ways. 

However, energy security depends on the choices countries make, 

and we are concerned that some countries in this hemisphere are 

making the wrong choices. Moves to restrict foreign investment and 

implement or increase the reach of state-run industries limit their 

ability to access capital for investment, restricting the development 

and access to energy supplies and infrastructure. 

It is a model that many hold as patriotic, but delivers less prosperity to their citizens, and ultimately threaten world energy markets. 

Thank you. 

[The prepared statement of Ms. Harbert follows:]

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Mr. MACK. Thank you, thank you very much. 

I would like to focus some questions on Venezuela, and Latin 

America. You talked a little bit about the crude that they have and 

that it takes a certain capacity refineries to be able to handle that 

crude. I have read and seen statements from Hugo Chavez threatening to stop selling oil to the United States. I am also under the 

understanding that there is not too many other places that can 

take what he has to sell, and bring it to market. 

Can you talk a little bit about that? 

Ms. HARBERT. Certainly. We in the United States are well 

equipped to refine his crude. The type of crude that Venezuela produces is a very particular type of crude that requires a certain type 

of refining capacity. We are the closest place that can actually do 

that. If there are other countries that he is interested in selling to, 

it is a sovereign country and can do that. 

If you incorporate transport costs and the infrastructure and investment that would be needed to build new refineries to process 

that, the price of that crude would go up significantly. So I am not 

sure how many people would be interested in making those new investments, and then paying the much higher price if their citizens 

would have to pay to actually utilize that crude. 

So it is a mutually beneficial arrangement. We are close to him 

and we have got the capacity here to actually accommodate his 

crude. 

Mr. MACK. So I guess the point that I am trying to get to is if 

we are looking to diversify our energy supply or to find ways for 

more secure energy sources here in the Western Hemisphere, countries talking about stopping selling of oil and trying to limit investment into the future is not going to move us toward security for 

anybody in the hemisphere, and it seems to me this is what Venezuela is up to; that they are trying to isolate at least the United 

States, whether it is with Ecuador and others, and not investing 

into the future. 

You talked about how the production in Venezuela has dropped 

some. What was the number? 

Ms. HARBERT. Well, it has dropped by 3 million barrels relative 

to our forecast from 1998. We thought they would be at about 5.5, 

and they are at 2.5 right now. 

Mr. MACK. And that is as a result of not investing into their own 

infrastructure, is that how you——

Ms. HARBERT. At high oil prices certainly all countries have 

ample incentive to be producing at maximum capacity. Unfortunately, their capacity right now is 2.5 million which, as I said, is 

under their OPEC quota. 

Energy is a commodity traded on the global market, and I think 

we have to be very aware of if one country or another decides not 

to sell to another country, it does not take those commodities off 

the market. They will just be reallocated. 

The market is a very efficient mechanism. As we found in the 

wake of Hurricanes Katrina and Rita, resources will be allocated 

where the demand is, and so we have to be aware that should one 

country choose not to sell to another country, it just means that 

other countries and the markets will reallocate that supply to 

where the demand is. 

31

Mr. MACK. Can you talk a little bit about diversification? We talk 

a lot about finding new places to drill for oil. We talk about conservation. We talk about alternative energy supply. Can you talk 

a little bit about in the Western Hemisphere what you see as a 

trend toward diversifying our energy supply? 

Ms. HARBERT. Well, I see it as threefold. Diversification of where 

we get our energy from, and we certainly see new ample supplies 

of both oil and natural gas because gas is certainly becoming a 

more important commodity to the United States economy, and we 

see supplies from Canada, from Mexico, from Bolivia, from Peru, 

from Colombia, and limited supply from Brazil. So those new resources we see as an important part of our diversification of where 

we get our energy from. 

We also see important diversification of the type of energy that 

we use. As we seek to reduce our dependence on oil, certainly there 

is going to be increasing demand for natural gas and liquified natural gas, and we are seeking to have a better ability to import 

liquified natural gas from places in this hemisphere and outside of 

this hemisphere. Trinidad and Tobago certainly is our primary 

partner in the hemisphere, and they are expanding in that regard. 

In addition, not only the United States but other countries in the 

hemisphere are looking to expand their use of ethanol, their use of 

solar and wind and geothermal and hydro for some countries, and 

Central America is still a very important part of their energy mix. 

We have to incorporate a whole variety of energy sources in order 

to secure our energy future. It has to be a short, medium, and longterm strategy. In the United States, we are looking for the longterm where we are investing in such technologies as hydrogen. In 

the medium term, we are looking at ethanol. We are looking at 

solar and wind to be an increasingly larger part of our energy mix. 

In the short term, we have to have to have much more effective energy efficiency measures. 

In 2006, we have, because of the energy bill, a lot of new tax incentives that encourage consumers, residents, homeowners, businesses, to be more efficient users of energy. We are trying to help 

countries in the Western Hemisphere to employ the same type of 

legal and regulatory framework that we have here to encourage 

those countries to be more efficient users of energy. We all have to 

be better producers, and equally as important is to be better consumers of energy. 

Mr. MACK. One of the things I did not hear you say, and maybe 

I just did not hear it, but does nuclear energy also play not just 

here in the United States, but also in the hemisphere? 

Ms. HARBERT. There is no more nuclear-friendly Administration 

than this Administration, and the President strongly believes that 

we in the United States have to incorporate nuclear power in a 

much larger way, and has received new authorities in the Energy 

Policy Act to do that, and unveiled in his Fiscal Year 2007 budget 

a new global nuclear energy partnership that will help countries 

around the world incorporate energy in a proliferation-resistant 

manner, and we will be willing to assist them. 

The President today is in India, and they were able to ink a new 

agreement on being able to expand the use of civilian nuclear 

power in India. 

32

We believe globally it is in our interest and it is a very climatefriendly, environmentally-friendly technology, and if we are able to 

help Brazil, Argentina, that are already using nuclear power, and 

other countries in the hemisphere that will be interested in expanding it in a proliferation-resistant way, we are able to do that. 

So we are strongly in support of it, and we are strongly supporting this to be used on a global basis. 

Mr. MACK. Thank you. 

Congressman Engel, do you have any questions? 

Mr. ENGEL. Yes, thank you. Thank you, Mr. Chairman. 

Secretary Harbert, thank you for your testimony, very excellent 

testimony. You said that Latin America and energy resources will need $1.3 

trillion of investment. While obviously we all want to see oil prices 

drop, will not investments of this size merely extend or addiction 

to oil and fossil fuels and in essence keep prices high as a result? 

In comparison, we invest only a few billion dollars in alternative 

fuels. And if the President, and I welcome his words at the State 

of the Union, if the President is serious about ending our addiction 

to oil, I think that we need to put those tens of billions into alternative fuels, and use our technological edge to make other forms 

of energy economical and efficient, and I am wondering if you could 

respond to that. 

Ms. HARBERT. The President in his 2007 budget, you will see a 

22 percent increase in the research and development component of 

our budget to develop clean energy. He strongly believes that the 

way that we are going to get out of the energy situation in which 

we find ourselves is not to drill our way out of it; it is to innovate 

our way out of it, and innovation is something that the United 

States has always excelled in. 

He has an Advanced Energy Initiative, along with that an advanced American Competitiveness Initiative that will increase our 

investments in science and technology, and help to what I call 

make sure that we have the back bench; that the people that are 

in kindergarten, the people that are in college actually are given 

the opportunity to study technologically advanced solutions to our 

energy problems and will be able to carry that forward, because 

this is not a solution that we are going to solve today or tomorrow 

or even during this Administration. 

We have to set the framework in place to make the investments 

over time that will help us to have those technologies available and 

be able to be commercialized and used not only here and not only 

in the Western Hemisphere but in economies like China and India 

that are growing at a very rapid pace. 

Mr. ENGEL. Well, thank you, but since you mentioned the budget, 

let me say that many of us, myself included, believe that there 

needs to be much more allocated for energy and alternative fuels, 

and looking to wean us off of oil, and I hope that the budgetary 

process that is going to go on here in the next weeks and months 

that we will be able to add to that because I think that while we 

are all in a pinch, and obviously we wish we had more money for 

everything, I think the President’s budget is inadequate, frankly, 

in the monies allocated to look at alternative fuels. 

I would like to—yes. 

33

Ms. HARBERT. I want to say on the 1.3 trillion, just to answer 

your question on that: That is actually from the private sector that 

will need to be invested, private capital to actually develop the energy infrastructure so that there is affordable, reliable access to energy in Latin America. 

As I pointed out in my testimony, and both of you mentioned 

that that is dependent on an investment climate in the Western 

Hemisphere that will attract that capital. Otherwise, we are not 

going to be able to have the people in this hemisphere have access 

to the energy that they need to develop their own economies. 

Mr. ENGEL. Thank you. I want to ask you about the proposed 

Latin American pipeline because that is something that obviously 

can be very important. 

South American leaders from Venezuela to Argentina are proposing to build this pipeline, and it would be the world’s largest 

pipeline across Latin America. They say they see the plan as the 

first blue print for a new era of regional cooperation, greater independence from international markets, and the United States, and 

a more prominent voice on the world stage. 

President Chavez, as has been mentioned, of Venezuela has 

called the proposal a symbol of diminishing United States influence 

in Latin America, and observers have called the project an effort 

to forge a new South American identity. 

Despite the public pledges of unity, the pipeline is still a long 

way from being built. What do you think is the likelihood that the 

many remaining obstacles—finding the estimated 20 billion to pay 

for it, resolving the environmental concerns of burrowing through 

the Amazon Rain Forest, dealing with competing interests of individualized nations—can be overcome? 

Then let me also throw out that how vulnerable is the project to 

political and financial turmoil in the area, in your opinion, given 

that the Presidential elections is slated for many countries, including Brazil, Venezuela, before the end of the year, does the pipeline 

have a future beyond the planning of photo opportunities in summits? 

Ms. HARBERT. The best model of energy integration is actually 

found in this hemisphere, and it is what the United States, Canada 

and Mexico have already undertaken and integrating our energy 

infrastructure, and for whether it is in Central America or in South 

America as countries look to integrate their energy infrastructure 

to be more economic and more efficient, they should look at the 

model we have currently employed, whether we have harmonization of our regulatory frameworks, harmonization of supply, it is 

truly a model that one needs to look at. 

For this specific project, you correctly point out, it is years in the 

offing, if it ever comes to fruition. Tremendous technical challenges. 

There are tremendous environmental challenges. But most importantly, there are tremendous financial feasibility challenges to that. 

Capital will be attracted to this project if the investment climates 

in all of the countries that it has to traverse actually make the decision that they are willing to open up and be inviting to the private capital. It is in the interest of everybody for there to be a more 

efficient allocation of natural resources. I do not see this pipeline’s 

coming to fruition of being exclusionary of the United States. 

34

As I said before, energy is traded on an open market. And so if 

it is used there, then other energy will be freed up somewhere else 

to come to the United States. But it would be up to the countries 

and their governments to make the decision that they are going to 

open up, that it is going to embrace market principles, and that 

they are going to be open for business to the very significant technical expertise that is needed, and the technical expertise does not 

rely or reside in state-owned oil companies. It resides in the private 

sector that is putting their own private capital into research and 

development, so they will have to be open to capital and to foreign 

expertise. 

Mr. ENGEL. Mr. Chairman, if you will indulge me, I would just 

like to ask another series of questions. 

We have talked a lot about Hugo Chavez and Venezuela and 

some of the things that he has threatened. There are a lot of eyes 

looking at Bolivia as well. The new President, Evo Morales, obviously has some decisions to make. There has been rhetoric, there 

has been all kinds of things, no one really knows what direction he 

will go. 

In your estimation, what do you think is the likelihood of the Bolivian President Morales nationalizing the Bolivian gas sector? And 

what are the political, economic, and social implications of nationalization in Bolivia, and how should investors approach a potential 

nationalization? 

Ms. HARBERT. You correctly point out that the new President, 

President Morales, has a tremendous opportunity before him. He 

has the opportunity to make the right decision for the people of Bolivia, and that is that he is going to unlock those resources and use 

them for the development of his country. 

I do not believe that nationalization will lead to that in the most 

economic and efficient way, and probably not within the time frame 

of his presidency. This type of resource and the amount of capital 

that is needed does not reside in Bolivia. 

Bolivia does not have a very good economy. And if they are going 

to unlock these resources to actually pump up their economy, even 

pay their external debt, they need to do that using foreign capital, 

using foreign expertise that comes only if he is willing to make the 

decisions to have the type of climate and have the type of predictable investment climate that will allow companies to actually make 

the decision to stay in Bolivia or to come to Bolivia for the long 

run. 

Mr. ENGEL. Well, thank you, and I have one final question that 

I would like to ask you about Canada, because you made a point 

to emphasize that our major supplier and trading partner in this 

sector is Canada. 

What mechanisms exist to work toward common ends and to address issues of concern with Canada, be they energy issues or other 

issues that could spillover and affect our energy relationship with 

Canada? 

I represent New York, and we all remember the infamous blackout of August 2003, I think it was, and that had something to do 

with Canada. Everyone put the blame on everybody else, but obviously it was very important that we coordinate things with Canada. 

35

So if there are disputes, what mechanisms do we have to address 

common issues of concern? 

Ms. HARBERT. Certainly. Just a note on the blackout. From everything that happens that is unfortunate you hope to learn from 

it, and we learned from that that we needed far more cooperation 

on the regulatory side of things, and I am pleased to say that our 

FERC regulators and their regulatory agencies are now meeting on 

a very regular basis to find out where there are glitches, where 

there are gaps, how we can harmonize things to actually ensure 

the reliability of the system because they are very interconnected, 

and we have now invited Mexico into this process because increasingly we are going to have a connected system on our southern 

boarder, and we think it is in our interest in their interest to see 

how we are solving our problems with Canada. 

We have a very strong bilateral relationship with Canada today. 

We unveiled a new report that is called ‘‘The North America: The 

Energy Picture II,’’ which is a very concrete picture of how we see 

our relationship with Canada and Mexico, how we see ourselves 

trilaterally, and that was published by the Security and Prosperity 

Partnership Working Group, and that is a set of government officials from Canada, the United States and Mexico that worked together on a regular basis to address issues, whether they be trade, 

whether they be on the energy side, whether they be—whatever 

issue that we might have either bilaterally or trilaterally. 

Energy is one of the most important parts of the relationship, 

and we have nine working groups that work throughout the year 

to address issues. 

Mr. ENGEL. Thank you very much. 

Ms. HARBERT. Thank you. 

Mr. MACK. Thank you, and just to follow up on that question, I 

think this will probably be it. But can you talk a little bit about 

China’s involvement or role or stake in the oil sands that you 

talked about in Canada? 

Ms. HARBERT. As I pointed out, and I detail a little bit more in 

my written testimony, the importance of the oil sands for the 

United States, for Canada, and ultimately for the world energy 

market, and it requires a tremendous amount of investment. Canada has been open to investment just as we are open for investment, and the Chinese have invested in a small part of the oil 

sands. 

I think that that is perfectly normal. We need investment to 

unlock those resources. They are not taking by this investment any 

of these resources off the table and cipher them off for other things, 

so we are quite comfortable with additional investment going into 

the oil sands. 

Certainly if we do not develop those oil sands over time, it is not 

in our interest since the destination of a majority of that product 

will be the U.S. market. 

Mr. MACK. Okay, thank you very much, and we appreciate you 

coming before the Committee, and your testimony, and we look forward to hearing from you again soon. 

Ms. HARBERT. Thank you. 

Mr. MACK. I now would like to invite the second panel to come 

forward. Eric Farnsworth, Dr. Sidney Weintraub, and Anne Korin. 

36

[Witnesses sworn.] 

Mr. MACK. Ms. Korin, if you would like to begin with your opening statement. 

TESTIMONY OF MS. ANNE KORIN, CO-DIRECTOR, INSTITUTE 

FOR THE ANALYSIS OF GLOBAL SECURITY 

Ms. KORIN. I will try not to repeat what was said before. I am 

co-director of the Institute for the Analysis of Global Security, 

which is a think tank focused on energy security, and I also Chair 

the Set America Free Coalition, which is a coalition of national security and foreign policy-focused organizations and prominent individuals along with environmental, labor, religious and business 

groups, all concerned about our increasing dependence on foreign 

oil, and focused on ways to reduce that dependence. 

I want to thank the Chairman and the Ranking Member for inviting me to brief you today. 

I think it is very obvious that we have a situation of increasing 

global instability in the energy sector, and most particularly in the 

oil market, and unfortunately, there is very, very little that we can 

do about it in terms of ensuring our security of supply and the stability of supply. 

When we look at the Persian Gulf or the Gulf of Guinea, we see 

increasing violence, increasing attacks against infrastructure, and 

of course political disruptions, and different statements by the leaders, various leaders in these regions that indicate that they might 

use oil as a weapon. 

Unfortunately, we are also seeing that kind of behavior in the 

Western Hemisphere. Following the President’s remarks on our addiction to oil and the need for the United States to stop being so 

dependent on countries that do not particularly like us, it would 

seem natural that we increase our dependence on our own hemisphere where it would seem that it should be easier for us to secure supply and to develop better relationship with the countries 

in the region. 

Unfortunately, what we see is that we have very little control 

over what is going on in our own back yard. 

While obviously we have a very excellent relationship with Canada, even when you look at Mexico, we can do very little to improve 

the investment climate in Mexico and to open Mexico up to foreign 

investment, and that is what is going to be required for a country 

like Mexico to really develop its energy resources, and to not drop 

down in terms of its energy production, and because we are so dependent on Mexico, it would be very much detrimental to our national interest to see the production in Mexico go down. 

Looking further south, Venezuela is clearly the biggest problem 

that we have in the Western Hemisphere in terms of energy production because Chavez, who appears to want to replace Fidel Castro in terms of being the regional troublemaker and instigator 

against the United States, is kind of leading the charge, and what 

he is doing is basically bribing, trying to bribe the countries around 

him with preferential terms for energy, and using energy to expand 

his sphere of influence. 

That, of course, is detrimental to our national interest. We need 

to increase our own influence in our own back yard, and instead 

37

we are watching it go down. We are watching anti-Americanism increase in our own back yard. 

We can go country to country, and I think we see an enormous 

amount of problems, from riots in Bolivia over natural gas issues, 

and keep in mind that the last several governments in Bolivia were 

toppled because of energy issues. You look at Ecuador, and just like 

in Nigeria, you are seeing a tax against energy infrastructure 

there. You even had attacks in Venezuela. Right on the eve of the 

election December you had attacks against the pipeline there. 

I just came back from Prague where IGS organized the NATO 

Forum on Energy Security, and the major focus there was critical 

energy infrastructure protection, and the fact is that it is extremely, extremely difficult no matter how many resources you 

throw at the problem to protect pipelines from attack; just too easy 

to do, and in an area where you see increasing discontent, increasing discontent and an increasing anger targeted especially at foreign oil companies, unjustified in my view, but certainly a lot of 

anger targeted at foreign oil operators in the region. You are going 

to see, I believe, more and more of these types of attacks. 

So what we need to do since we are, I think, unable to do much 

to influence the internal politics of these countries, what we need 

to do is look inward, is look inward and think about what the U.S. 

in terms of policy can do to better insulate itself to energy supply 

shocks, and how it can use energy policy as a tool to improve the 

geo-political situation. 

What we have really seen is because of our increasing energy 

consumption, particularly our oil consumption, we hear a lot about 

energy dependence, but the fact is that the U.S. has a lot of energy. 

We just do not have enough oil to meet our needs. We have 3 percent of the oil reserves and we account for a quarter of world oil 

demand, and our import rate has grown from 30 percent in the 

early 1970s to over 60 percent today and steadily increasing. We 

do not have enough oil to meet our needs. 

So what we see is, unfortunately, very often our energy imperative has the effect of forcing our hand when it comes to foreign policy. But I think we have a real opportunity in the Western Hemisphere to do something different here, and when I think of doing 

something different, I think specifically of ethanol. 

We are in a very bizarre situation where we do not tax oil coming from Saudi Arabia. We do tax ethanol coming in from Brazil, 

for instance. When we talk about increasing the energy security of 

the United States and diversifying our fuel supply, and keep in 

mind that over two-thirds of our oil consumption is in the transportation sector, so diversifying fuel, increasing fuel choice in the 

transportation sector is really key to improving our energy security 

just as we did in the power sector. Today, only 2 percent of our 

electricity is generated from oil. 

Alternative fuels are a very good way to do that, and we have 

an opportunity to develop economic interdependence with our 

neighbors in the Western Hemisphere. There is a limit to how 

much ethanol we can produce here at home cheaply. The best way 

to produce ethanol, there has been a lot of talk about cellulosic ethanol and all this, and this is worth investing in. It is a promising 

technology, but it is not yet economic at a commercial scale, and 

38

it remains to be seen if the technological and economic hurtles will 

be overcome. 

What we do know is that ethanol from sugarcane is——

Mr. MACK. I am sorry. If you could wind it down, so we can get 

the others. 

Ms. KORIN. Sure. 

Mr. MACK. And have time for the entire panel to ask questions. 

Ms. KORIN. Sure. I would just say I want to commend Ranking 

Member Engel, along with Chairman Burton, who are both leading 

the H.R. 4409, the Fuel Choices for American Security Act, which 

basically removes this barrier to free trade, and increases energy 

security by removing this tariff on imported ethanol, among many 

other measures to improve energy security. I think it is the most 

comprehensive bill on the issue of oil savings brought before this 

chamber in many, many years, and I would encourage other Members to get on this bill as well. 

[The prepared statement of Ms. Korin follows:]

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Mr. MACK. Thank you very much. 

Dr. Weintraub. 

TESTIMONY OF SIDNEY WEINTRAUB, PH.D., WILLIAM E. SIMON 

CHAIR IN POLITICAL ECONOMY, CENTER FOR STRATEGIC 

AND INTERNATIONAL STUDIES 

Mr. WEINTRAUB. Thank you for inviting me. 

Mr. MACK. Thank you. 

Mr. WEINTRAUB. Let me make two big points. You have heard 

them before, but I do want to emphasize that 50 percent of our 

crude oil imports come from the Western Hemisphere. There are 

more products and other things, and in my prepared statement 

that you can have will have some details on those issues about 

what the other refined products are, and more than 95 percent—

these are 2004 data—of our natural case, including LNG, comes 

from the Western Hemisphere. In other words, we have a big stake 

in this hemisphere. 

Of the five largest oil exporters to the United States, three are 

in Latin America, Canada, Mexico, Venezuela, and the others are 

Saudi Arabia, and Nigeria. 

You will have a lot more data from my organization, the Center 

for Strategic and International Studies, in the fall. We are engaged 

in a project, we are a year-and-a-half into it so far, looking at the 

situation of 11 countries in the hemisphere, the United States, 

Canada, nine in Latin America and the Caribbean, looking at each 

country, looking at the regulatory frameworks, who is producing 

what, where, and the project really has a double emphasis. 

One is, what can be done to foster cooperation among the countries; and then second, analyzing in some detail the political impediments that stand in the way of cooperation, and the political 

impediments of fears as some of you have already noted with respect to Bolivia, Venezuela, and others. 

Let me just say a word, and not much more than that, on our 

three mail hemispheric suppliers. The United States companies are 

still investing in Venezuela. I will not go into the forms unless you 

really want to ask, but let me make a point that has not been made 

here before. The fact that the private sector remains engaged in 

Venezuela at a time when the public sector, the government cannot 

really get very far I think is useful for us, and I do not think we 

would want to interfere with that. 

Mexico wants to cooperate, but Mexico, as Secretary Harbert 

said, Mexico has a capital shortage for many, many reasons, and 

I can get into that, both its tax system and its system of who controls the oil, which limits exploration and production, and could 

lead to a crisis in not too many years. 

Canada is our most reliable supplier, especially now with the oil 

sands. I visited the oil sands. If you have not, it is an experience 

you ought to see. It is a massive, massive operation, and its future 

depends on technology and massive infusions of investment. 

Let me give you three conclusions and I will stop. I think the 

conclusions are a little different from some of the things you have 

heard. 

United States policy toward Latin America has alienated just 

about all the countries in the region. We are not very popular in 

46

1 All views expressed in this statement are solely those of the author. 

2 It was noted by hemispheric governments, and was the theme of much comment in hemispheric media, that President Bush’s state-of-the-union address ignored the Western Hemisphere, even when the president discussed energy. 

Latin America. There are some exceptions. And I would think 

that—this is not the Congress I talked about now, this is the 

United States Government—that if we really want cooperation in 

the hemispheric field, we have to be cooperating generally in our 

foreign policy and take into account Latin America. 

In the President’s State of the Union message, everybody in 

Latin America noticed, even when discussing energy, he never once 

mentioned Latin America, and that was noted. 

Two, I do not think there will be any United States energy security if there is not also security in the Latin American/Caribbean 

region. This idea that we can independently be secure and they are 

not secure, I do not think is reality. 

And finally, I think we must understand their aspirations too. 

There is a reason they undertake the policy they take. Sometimes 

they are misguided. Sometimes they are not, but there is a reason 

in each case, and I think we have to understand that. 

My conclusion simply is I urge all of you to think and act broadly. As the title of these hearings imply, energy security in the 

Western Hemisphere, and keep that point Western Hemisphere in 

mind. 

Thank you. 

[The prepared statement of Mr. Weintraub follows:]

PREPARED STATEMENT OF SIDNEY WEINTRAUB, PH.D.,1 WILLIAM E. SIMON CHAIR IN

POLITICAL ECONOMY, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

I would like to begin my presentation with a few facts on the importance of the 

Western Hemisphere in supplying energy resources, especially crude oil and natural 

gas, to the United States. Imports of crude oil from hemispheric countries (Canada, 

Latin America, and the Caribbean) amounted to 50 percent of total U.S. crude oil 

imports in 2004, the latest year for which annual figures are available. Over and 

above this, the United States imports significant amounts of oil products from countries in the Western Hemisphere, as can be seen in the tables at the end of this 

presentation. With this much energy resource reliance on the hemisphere, it is remarkable that the U.S. government has so thoroughly ignored the hemisphere in 

its foreign policy.2

Imports of natural gas, including liquefied natural gas (LNG), from hemispheric 

countries in 2004 were 95.5 percent of total gas imports that year. The U.S. electric 

energy grid also involves trade in electricity with both Mexico, and especially with 

Canada. 

The five most important foreign suppliers of crude oil to the United States in 2004 

were Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria, in that order. Three 

of the five are in the Western Hemisphere. Canada, in 2004, supplied 85 percent 

of the natural gas imported by the United States. Our most important supplier of 

LNG was Trinidad & Tobago. 

The appendix to this presentation contains detailed data on the role of the Western Hemisphere in supplying energy resources to the United States. 

The State of Energy Cooperation in the Western Hemisphere 

I will devote the rest of this presentation to some key analytical issues related 

to energy cooperation in the Western Hemisphere and to political problems that impede the extent of cooperation that would enhance hemispheric energy security. The 

material I am presenting today will be amplified later this year, in the autumn I 

hope, when the Center for Strategic and International Studies (CSIS) publishes a 

study now in progress there on energy cooperation in the Western Hemisphere. The 

study will have chapters on the energy and political situations in 11 hemispheric 

countries that are producers of oil and/or gas (Argentina, Bolivia, Brazil, Canada, 

Colombia, Ecuador, Mexico, Peru, Trinidad & Tobago, the United States, and VenVerDate Mar 21 2002 14:55 Oct 12, 2006 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 F:\WORK\WH\030206\26334.000 HINTREL1 PsN: SHIRL
47

ezuela), as well as a chapter on cooperation among the three countries of North 

America, plus material on the energy infrastructure in the hemisphere, a comparative presentation of regulatory procedures and issues, and a discussion of the roles 

of China and India in seeking energy sources in the hemisphere. The book will also 

contain educated estimates on which hemispheric countries will be important oil 

and gas producers in 2025. 

The most significant country energy problem from the U.S. vantage is Venezuela 

because of its large oil and gas endowment coupled with the animosity between its 

president, Hugo Cha ́vez, and the United States. Venezuela is producing less oil 

today than it did when Cha ́vez became president in 1999 because of the sacking of 

key personnel in the state-owned energy company, Petroleos de Venezuela, S.A. 

(Pedevesa). Venezuela is providing oil at discounted prices to Caribbean countries, 

including Cuba, and Cha ́vez is using this generosity to organize countries in the 

Caribbean, and elsewhere in Latin America, against the United States. From time 

to time he threatens to cut off oil exports to the United States, but it is unlikely 

that he can do this in the near future and find alternative markets where Venezuela’s heavy oil can be refined. Venezuela is raising the government take on oil 

concessions to private companies, including U.S. companies, but foreign investment 

continues because operating in Venezuela is still profitable and most companies are 

looking to the long term to a Venezuela under different leadership. Venezuela, 

under its president, evidently is not a country interested in promoting hemispheric 

energy cooperation that includes the United States. 

Mexico is friendly toward the United States and wishes to cooperate, but the problem there is the inability to fashion a policy that facilitates cooperation, or even a 

policy that takes into account Mexico’s own medium- and long-term oil and gas 

needs. Because of insufficient tax collection to meet the needs of the federal government’s outlays, about one-third of fiscal expenditures come from taxes on the gross 

revenues of Petro ́leos Mexicanos (Pemex), the government oil monopoly. Consequently, despite high oil prices, Pemex in recent years has had a net loss in its 

accounts each year. The company is already borrowed to the hilt. The Mexican constitution and regulations do not permit private equity or risk investment in oil and 

gas. As a result, there has been inadequate exploration for oil and gas, and hence 

little prospect for increases in output, absent some lucky find. It is revealing to look 

at a map showing deep-water drilling in the U.S. and Mexican areas of the Gulf 

of Mexico. The U.S. side is covered with dots showing where drilling has taken 

place, whereas the Mexican side is almost devoid of dots. At current rates of production, if there are no important new discoveries, Mexico will run out of oil in about 

11 to 12 years. In addition, Mexico is now a large importer of natural gas and refined products, like gasoline. The unwillingness to allow private risk contracts is 

deeply rooted in Mexican history and hard to change, perhaps impossible to change 

during the current presidential election year. It has also proved to be near impossible to raise more tax revenue. A valid question to ask is whether Mexico can alter 

the politics connected with either private investment and/or tax collections to head 

off an energy collapse, or whether the country will act only after the crisis has 

erupted. 

Canada is the largest oil and gas exporter to the United States; in 2004, Canada 

supplied 16 percent of U.S. oil imports and, as noted earlier, 85 percent of U.S. gas 

imports. Of the big three hemispheric oil suppliers to the United States, Canada is 

by far the most reliable. Much of Canada’s oil production now comes from the oil 

sands in Alberta, and if past increases in oil sands output is any guide, Canada’s 

oil production future should be comforting from the viewpoint of U.S. energy security. However, future production from oil sands depends on the development of efficient technologies for in situ production to extract bitumen that is far below the surface (as contrasted with mining operations to extract the bitumen closer to the surface), dealing with major environmental problems of water usage and air emissions, 

and finding substitutes for natural gas to heat the bitumen enough so that it can 

flow and be recovered and upgraded. Projected investments in oil sands to meet 

these needs are huge, and are likely to be made. There is no indication in any of 

the three North American countries that output of natural gas will be augmented 

enough to meet the needs of the region, which is why much attention is being given 

to infrastructure needs to import LNG from outside the region. 

Hemispheric energy security must deal not only with U.S. and North American 

security, but the security of supplies for Latin America and Caribbean (LAC) countries as well. I will touch only briefly on LAC country issues in this written presentation. 

Bolivia has large proven reserves of natural gas (49 trillion cubic feet), but the 

political situation in the country makes it an uncertain supplier. Natural gas exports from Bolivia now go to Brazil and Argentina; the Brazilian national oil comVerDate Mar 21 2002 14:55 Oct 12, 2006 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 F:\WORK\WH\030206\26334.000 HINTREL1 PsN: SHIRL
48

pany, Petrobra ́s, is a large investor in Bolivia and Petrobra ́s has indicated that it 

is ready to invest further if certain understandings are reached. Bolivia has refused 

to consider a gas pipeline to a Pacific Ocean port in Chile because of lingering animosity over Bolivia’s loss of territorial access to the sea more than 100 years ago. 

Bolivia’s reliability as a supplier depends heavily on the flexibility that Evo Morales, 

the new president, has to meet the gas needs of neighboring countries, while at the 

same time fulfilling the nationalist demands of the voters who elected him into office. 

Trinidad & Tobago has followed a consistent policy over decades in developing its 

energy resources, particularly natural gas, and has become the leading supplier of 

LNG to the United States. 

Brazil is not now a major exporter of either oil or gas, and is unlikely to be one 

in the medium term because of the vast size of the internal market, but considerable exploration and development is taking place. What appear to be major natural 

gas finds in deep waters in the Santos Basin, off Sa ̃o Paulo state, are likely to reduce the need for gas imports over the next decade. Petrobras, the state-owned oil 

and gas company has developed considerable proficiency in deep-water drilling. 

There is also considerable foreign investment in oil and gas in Brazil, and this generally takes the form of joint ventures with Petrobras. Those Mexican officials who 

believe that private investment will be needed in the Mexican oil and gas industry 

to head off an energy crisis tend to point to Petrobras as a model that Pemex might 

emulate in the future. 

Development of the oil and gas industry is held back in Colombia by the longstanding guerrilla movements there, including the targeting by guerrillas of oil and 

gas pipelines. 

The reliability of the oil sector in Ecuador has been impeded by political insecurity; for example, martial law was imposed just last week. The oil and gas situation 

in Peru is much more favorable, and the Camisea project there is proceeding 

smoothly. There are plans for shipping LNG from Peru to the west coasts of Mexico 

and the United States over the next few years. Argentina, which has large natural 

gas reserves (proven reserves are 27 trillion cubic feet) , is not now meeting its potential largely because investment was impeded for a long period when sales prices 

by producers were frozen in depreciated pesos and consumer prices were subsidized 

as a way for the administration to gain political popularity. Indeed, Argentina felt 

it necessary to break a long-term contract to supply natural gas to Chile in order 

to satisfy domestic demand. 

Bolivia, as noted above, refuses to sell natural gas to Chile and this, combined 

with the Argentine cutoff, puts Chile in a bind to obtain secure supplies of natural 

gas. Some natural gas may come from Peru, but this is not certain, and Chile may 

fall back on developing the infrastructure to import LNG from Asia. The inability 

of Chile to be able to rely on its neighbors to obtain natural gas highlights the uncertainty of cooperation in energy matters in the southern area of South America. 

The political problems are more difficult to overcome than the technical ones. 

Conclusion 

The foregoing discussion does not deal with the U.S. energy situation or policy to 

overcome current and projected supply problems. My purpose in this presentation 

is to look at the situation in the rest of the hemisphere and how this may affect 

U.S. and hemispheric energy security. Part of the reason for my lack of analysis of 

the U.S. energy situation is that this is widely available from other sources; and 

also because I do not know what form U.S. energy policy will take in light of President Bush’s state-of-the-union address. My purpose in this presentation is to look 

at the situation in the rest of the hemisphere and how this may affect U.S. and 

hemispheric energy security. 

The main conclusion I wish to leave is that the hemisphere would benefit greatly 

if there were energy cooperation from Canada in the north to Argentina in the 

south. The impediments to this cooperation are more political than they are technical, although there are considerable financial and technical issues that must be 

resolved. The United States, I believe, can help in dealing with both the political 

and technical impediments to hemispheric energy cooperation. To play its proper 

role, the U.S. government must:

• Give higher priority than is now the case to the hemisphere generally, and 

with respect to energy in particular;

• Take into account hemispheric capacities and aspirations in developing its 

own energy policies; and

• Recognize that there will be no U.S. energy security if this security is lacking 

elsewhere in the hemisphere.

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Mr. MACK. Thank you. Mr. Farnsworth. 

TESTIMONY OF MR. ERIC FARNSWORTH, VICE PRESIDENT, 

COUNCIL OF THE AMERICAS 

Mr. FARNSWORTH. Thank you, Mr. Chairman. I appreciate the 

opportunity to be here before you today. 


26334a0002.eps
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My name is Eric Farnsworth, and I head the Washington Office 

of the Council of the Americas, and it is a privilege to appear before you. 

Congratulations as well, Mr. Engel, for your position with the 

Subcommittee, and we look forward to working with you in the future. 

Mr. Chairman, let me give you the proverbial bottom line first 

if I can. Energy in the Western Hemisphere whether we realize it 

or not is of the highest strategic importance to the United States. 

As you know, we are the world’s largest energy user, we have 

talked about that already this afternoon. Even if we are overtaken 

at some point by China, our own energy needs will continue to increase as our economy and our populations both continue to grow. 

At the same time though we ourselves have abundant energy resources as has also been mentioned, including oil and gas and coal, 

and a growing potential for alternatives, we are not self-sufficient, 

and frankly, self-sufficiency really is not a realistic goal at this 

point. Rather, we are energy interdependent, and to meet our 

needs we are going to have to continue to rely on imported energy. 

I think that is just a statement of fact. 

Dr. Weintraub has mentioned that of our primary energy partners three of our top five in terms of imports come from the Western Hemisphere—Canada, Mexico and Venezuela—joining, of 

course, Saudi Arabia and Nigeria, making the Western Hemisphere 

key to our economic and strategic self-interests. 

All other things being equal then, energy partnership in the 

Americas can and really must support our broader economic and 

strategic interests. 

At the same time, and I think this is the key point, this is not 

a one-way street, it is two sides, if I can use another cliche, two 

sides of the same coin. The democratic development of Latin America and the Caribbean is a top priority for United States policymakers on a bipartisan basis and enhanced wealth creation in the 

region is a critical component of that development. 

To give just one statistic which really caught my eye just recently, the World Bank recently reported that between 1980 and 

2000 per capital GDP in Latin America grew over a 20-year period 

less than 1 percent. On the other hand over the same period of 

time, China enjoyed per capita GDP growth of over 8 percent per 

year. That kind of puts it into perspective. It is addressing this development gap which increases every year that energy in the Americas becomes so important. 

The opportunities are solid because Latin America, the Caribbean and Canada are truly blessed in terms of the level of proven 

energy resources they possess. Canada, for example, possesses an 

astounding 179 billion barrels of non-conventional oil sands, which 

are now economically viable given advances in technology and 

higher oil prices generally. 

In fact, recoverable energy reserves in the Western Hemisphere, 

including unconventional oil reserves, surpass even Saudi Arabia, 

and dwarf other regions of the world. 

In terms of proven conventional reserves in the Western Hemisphere, Venezuela is at the top—we have talked about that—folVerDate Mar 21 2002 14:55 Oct 12, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 F:\WORK\WH\030206\26334.000 HINTREL1 PsN: SHIRL
52

lowed by the United States, Mexico, Brazil and Ecuador, and 

Brazil, in fact, has just announced some additional promising finds. 

The hemisphere also enjoys plentiful deposits of natural gas, a 

key fuel source in terms of electricity power generation. After the 

United States, Venezuela again has the highest level, followed in 

order by Canada, Bolivia, Trinidad and Tobago, and Mexico as 

well, and this goes to the point, Mr. Engel, that you were raising 

earlier, a significant potential exists to produce and consume alternative fuel sources from the hemisphere such as ethanol from 

Brazil and elsewhere to supplement United States production, or 

frankly, coal bed methane from Canada. 

In terms of coal, just to complete the picture, the United States 

remains well ahead of our neighbors in terms of both production 

and consumption. 

So there is a real mutuality of interest here in terms of our need 

for energy resources and the hemisphere’s ability to produce energy 

resources. 

What is really not apparent at this point however, and this has 

already been discussed but I think it bears reemphasis, is how to 

mobilize the massive investments that will be required to fully develop these impressive hemispheric resources. 

Secretary Harbert talked about $1.3 trillion of investment required over the next 25 years or so. That is clearly an estimate, but 

the numbers are big, and the numbers are not going to get smaller. 

The Western Hemisphere is part of a global economy competing for 

the same marginal investment dollars as everyone else. 

To be direct, it is incumbent upon nations in the hemisphere 

wishing to develop their natural resources that might otherwise 

lack technical and managerial expertise, as well as significant capital of their own, to create an investment climate whereby foreign 

energy companies can work in partnership with local governments 

to develop their resources in a mutually beneficial manner. 

Attention to industry-specific and more general investment climate issues is therefore needed. Improvements in education and 

the rule of law, regulatory certainty, nondiscriminatory and stable 

tax regimes, effective personal security, anti-corruption, and effective dispute resolution: Last is a critical point, and has already 

come up, and I would be happy to talk more about it if you would 

like. 

Those countries which have paid attention to these matters have 

seen investments increase, as well international financing institutions like the Inter-American Development Bank have a very important role to play in mobilizing capital for investment, and indeed have done so. 

But we issued a report just before the Summit of the Americas 

in Mar del Plata which talks about energy security in the Western 

Hemisphere, and if I can, let me just pull out two or three primary 

points from that and then I would be delighted to answer some 

questions. 

Briefly, the report argues that increasing partnership in hemispheric energy matters must be an important part of our overall 

hemispheric policy, not an afterthought, and not taken for granted. 

A balanced, engaged approach is needed. 

53

Second, in the global environment, competitiveness is perhaps 

the key issue facing the hemisphere. High direct or indirect energy 

costs due to market rigidities impact all energy users, making the 

region a less attractive place to do business, to say nothing of quality of life issues. 

As well, investment climates that are unattractive compared to 

other countries in the region will not attract the direct foreign and 

domestic investment required to develop either the energy resources mentioned above, or frankly, the broader economy. 

Let me raise Mexico for example, which despite sitting on significant natural gas resources, actually has been importing natural gas 

since 2000, which obviously impacts their national income accounts. Mexicans go to the polls July 2. We do not know what is 

going to happen. Hopefully, there will be some movement on the 

investment side in Mexico after the elections, but frankly, this is 

a call for the Mexicans to make based on who they elect and based 

on what the newly-elected President and his Administration choose 

to do. 

Finally, in addition to conservation, which somebody has said 

may be the top form of alternative energy that actually exists, we 

must do a better job of exploring the possibility of alternative fuels 

in the hemisphere which could prove to be a boon for development 

while making the region less reliant on imports from elsewhere. 

Of course, we have already talked about President Bush’s State 

of the Union address. He also raised the issue with President Lula 

of Brazil when he was there in Brasilia in November. 

The resources are there to supplement our own given Brazil’s agricultural profile. What has been missing has been a market to use 

ethanol as well as a price point of conventional fuels high enough 

to make ethanol economically viable. 

But really this is not so much a question of energy, it is a question of trade policy, and Chairman Mack, you coming from Florida, 

you certainly understand this, and it is an issue that is more 

broader than the energy side because Brazilian ethanol is made 

from sugar. That has already been put into the conversation, and 

anyone who followed the recent CAFTA debate knows the political 

sensitivities of these issues in the United States. That is just a 

statement of political reality. But as a strategic matter, this issue 

bears consideration and could provide a way forward not just on 

energy, but frankly, could provide a way forward perhaps on broader trade issues in the hemisphere. 

These issues are ripe for further consideration. The resources 

exist, and frankly, so does the need. What does not exist yet, 

though could, is the size and quality of investment needed to develop and effectively utilize these resources. That in fact is the real 

issue, and I would submit the real opportunity facing those of us 

who promote energy partnership in the Americas. 

Mr. Chairman, again thank you for the opportunity to be here. 

I appreciate it and look forward to your questions. 

[The prepared statement of Mr. Farnsworth follows:]

PREPARED STATEMENT OF MR. ERIC FARNSWORTH, VICE PRESIDENT, COUNCIL OF THE

AMERICAS

Good afternoon, Mr. Chairman and members of the Committee. My name is Eric 

Farnsworth, Vice President of the Council of the Americas. As you know, for over 

54

40 years the Council of the Americas (‘‘Council’’) has been a leading voice for policy 

and business in the Western Hemisphere, from Canada to Argentina. Our members 

include some 170 prominent companies invested and doing business in the Americas, with a mandate to promote partnership in the Americas based on democracy, 

open markets, and the rule of law. Thank you, Mr. Chairman, for the opportunity 

to appear before you on an issue of such importance to both the United States and 

the Western Hemisphere. 

Mr. Chairman, let me give you the proverbial bottom line first. Energy in the 

Western Hemisphere—whether we realize it or not—is of the highest strategic importance to the United States. As you know, we are the world’s largest energy user; 

even if we are overtaken at some point by China, our own energy needs will continue to increase as both our economy and population grow. At the same time, 

though we ourselves have abundant energy resources including oil, gas, coal, and 

a growing potential for alternatives, we are not self-sufficient, and self-sufficiency 

really isn’t a realistic goal at this point. We are energy interdependent, and to meet 

our needs, we will have to continue to rely on imported energy. 

Currently, three of our top five sources of imported energy are in the Western 

Hemisphere: Canada, Mexico, and Venezuela, along with Saudi Arabia and Nigeria, 

making the Western Hemisphere a key to our economic well-being and strategic interests. That’s particularly important to remember as recent terrorist attacks 

against Saudi oil refineries or Nigerian supply disruptions fill the news, to say nothing of ongoing difficulties in Iraq and Iran or the exponentially increasing demands 

of China and other rapidly developing nations. All other things being equal, energy 

partnership in the Americas can, and really must, support our broader economic and 

strategic interests. 

At the same time, the democratic development of Latin America and the Caribbean is a top priority for US policymakers on a bipartisan basis, and enhanced 

wealth creation in the region is a critical component for that development. To give 

just one statistic, the World Bank recently reported that between 1980 and 2000, 

per capita GDP in Latin America grew, in total, less than one percent. On the other 

hand, over the same period of time China enjoyed per capita GDP growth of over 

eight percent per year. It’s in addressing this development gap, which increases 

every year, that energy in the Americas becomes so important. 

The opportunities are solid, because Latin America, the Caribbean, and Canada 

are truly blessed in terms of the level of proven energy resources they possess. Canada, for example, possesses an astounding 179 billion barrels of non-conventional oil 

sands, which are now economically viable given advances in technology and higher 

oil prices generally. In fact, recoverable energy reserves in the Western Hemisphere, 

including unconventional oil reserves, surpass even Saudi Arabia and dwarf other 

regions of the world. In terms of proven conventional reserves in the Western Hemisphere, Venezuela is at the top, followed by the United States, Mexico, Brazil, and 

Ecuador, and Brazil has just announced promising additional finds. The hemisphere 

also enjoys plentiful deposits of natural gas—a key fuel source in terms of electric 

power generation. After the United States, Venezuela again has the highest level, 

followed in order by Canada, Bolivia, Trinidad and Tobago, and Mexico. As well, significant potential exists to produce and consume alternative fuel sources, such as 

ethanol from Brazil and elsewhere to supplement US production, or coal bed methane from Canada. In terms of coal, the United States remains well ahead of our 

neighbors in both production and consumption. 

These resources by any measure can play an important, if not paramount, role 

in regional development if developed and consumed wisely. On the supply side, absent energy, the development prospects for a nation such as Bolivia, South America’s poorest nation, or Ecuador, are uncertain at best. On the demand side, without 

greater attention to market efficiency in the development and utilization of hemispheric energy resources, it will be more difficult for producers and consumers both 

to build regional competitiveness in a global economy. This directly impacts the 

hemisphere’s ability to compete successfully against the rapidly modernizing economic giants of China and India, as well as a host of other nations. 

For the United States, if existing trends continue projecting out until 2025 or 

2030, the increasing US demand for energy can be met by sources from our own 

hemisphere, though that is not guaranteed. What’s not yet apparent is how to mobilize the massive investments that will be required to fully develop these impressive 

hemispheric resources, particularly in an environment where, as former Secretary 

of State Colin Powell has said, global capital is a coward and it will always seek 

its highest risk-adjusted return. 

Clearly, there would appear to be a mutuality of long-term interests in the hemisphere in building energy partnership in the Americas. 

55

The Western Hemisphere is part of a global economy, competing for the same 

marginal investment dollars as everyone else. For investors to invest, the risk adjusted climate must be welcoming. To be direct, it is therefore incumbent upon nations in the hemisphere wishing to develop their natural resources that might otherwise lack technical and managerial expertise, as well as significant capital of their 

own, to create an investment climate whereby foreign energy companies can work 

in partnership with local governments to develop their resources in a mutually beneficial manner. Attention to industry-specific and more general investment climate 

issues is needed: improvements in education, training, and the rule of law; regulatory certainty; non-discriminatory and stable tax regimes; effective personal security; anti-corruption; and effective dispute resolution. Those countries which have 

paid attention to these matters have seen investments increase. As well, international financing institutions such as the Inter-American Development Bank have 

an important role to play in mobilizing capital for investment, as the IDB has done, 

for example, in Peru’s Camisea natural gas fields. 

With these issues in mind, the Council of the Americas released a report late last 

year, in advance of the fourth Summit of the Americas in Mar del Plata, Argentina, 

which suggests a number of recommendations for hemispheric policymakers. With 

the Chairman’s agreement, I would ask that that report be introduced in the record. 

Briefly, the report argues that maintaining a secure supply of energy from foreign 

sources is a strategic matter for the United States, and energy in the Americas must 

therefore be a priority. Increasing partnership in hemispheric energy matters must 

be an important part of our overall hemispheric policy, not an afterthought or taken 

for granted. A balanced, engaged approach is needed. 

Second, in a global environment, competitiveness is perhaps the key issue facing 

the hemisphere. High direct or indirect energy costs due to market rigidities impact 

all energy users, making the region a less attractive place to do business, to say 

nothing of quality of life issues. As well, investment climates that are unattractive 

compared to other countries and regions will not attract the direct foreign and domestic investment required to develop either the energy resources mentioned above 

or the broader economy. Mexico, for example, despite sitting on sufficient natural 

gas reserves, actually imports natural gas and has done so since 2000. This directly 

impacts Mexico’s national income accounts and their competitiveness profile at a 

time when that nation, even with the NAFTA relationship with the United States 

and Canada, faces a direct economic challenge from China. Hopefully, we’ll see some 

movement on these issues in Mexico after their elections on July 2, but that remains 

to be seen, and of course it’s up to Mexicans themselves to determine how to best 

develop their own energy resources. 

In the North American context, energy issues are an important part of the Security and Prosperity Partnership (SPP) which the Administration has rightfully made 

a priority, and which the Council has strongly endorsed. As in other hemispheric 

nations, it’s difficult to see how Mexico develops if its energy reserves continue to 

fall due to a lack of energy sector investment, and an underdeveloped Mexico, as 

the Council has pointed out elsewhere, is of strategic concern to the United States. 

But it’s not just Mexico; it will be impossible to fully develop Canada’s energy resources, discussed earlier, unless the three governments find a means whereby labor 

markets and products to service the fields are made more flexible through the SPP 

or alternative means. Addressing market rigidities in North America and throughout the region would help make partnership possible. 

Finally, in addition to conservation, which may be the top form of alternative energy available, we must do a better job exploring the possibility of alternative fuels 

in the hemisphere, which could prove to be a boon for development while making 

the region less reliant on imports from elsewhere. Of course the President mentioned ethanol in his State of the Union address, and he also discussed it directly 

with Brazil’s President Lula during a short trip to Brasilia in November. The resources are there to supplement our own, given Brazil’s agricultural profile; what’s 

been missing has been a market to use ethanol as well as a price point of conventional fuels high enough to make ethanol economically viable. But as oil prices remain historically high, the cost of ethanol production is now economical. As well, 

flex fuel automobiles, which automatically determine the proper fuel mix between 

gasoline and ethanol, are becoming a real alternative. The question, though, is not 

one of energy, but rather trade policy. Brazilian ethanol is made from sugar, and 

anyone who followed the recent CAFTA debate knows the political sensitivity of 

these issues in the United States. But as a strategic matter, the issue bears consideration and could provide a way forward not just on energy, but also on trade matters generally. 

These issues are ripe for further consideration. The resources exist, and so does 

the need. What doesn’t yet exist, though could, is the size and quality of investment 

56

needed to develop and effectively utilize these resources. That is the real issue, and 

the opportunity, facing those who would promote energy partnership in the Americas. 

Mr. Chairman, thank you again for the invitation to be with you today. I look forward to answering any questions you might have.

Mr. MACK. Thank you very much. 

Two quick questions and maybe each one of you can offer some 

ideas on them. 

First, there was a discussion, you have all talked about ethanol, 

an alternative energy source for us in the United States, and you 

are correct about the political nature of our friends and sugar producers in the United States. So I would like to get your opinion. 

How much is this ethanol, how quickly can we move it forward? Is 

the investment opportunities there. Outside of the United States, 

is it some people are also looking toward alternative energy? That 

is one. 

And number two, there is no doubt, and I think Dr. Weintraub 

was heading and talking about this, that when we talk about security in the Western Hemisphere and energy, certainly there has 

been a void of leadership that has been needed in Latin America 

and other parts of the United States. 

But if places like Venezuela are moving toward nationalizing 

their energy sector, how is foreign investment, there is not an 

opening, an opportunity for foreign investment to unlock potential. 

So I would like, if you could, to talk about, each one of you take 

an opportunity to talk about those two issues. 

Ms. KORIN. I think they are actually both very much tied together, and the reason is if we open up the market to ethanol imports, what we will do is really create an opportunity for our neighbors in the Western Hemisphere and throughout the world really, 

many poor countries throughout the world whose climate enables 

them to be cheap sugarcane producers, and thus cheap ethanol producers, we will enable them to grow wealthier, and thus create an 

economic interdependence, increase or sphere of influence and 

counteract forces like those of Chavez that are moving against capitalism, against openness to investment and all of these things. 

So the way that we can help promote the types of values that we 

want, the type of transparency and openness that we want is this 

lever, which is ethanol, and I think we need to do that. 

Mr. MACK. And if I could just on that, and you can care to comment if you would like, each one of you, but we have seen the oil 

prices keep going up, and we have seen Venezuela and Hugo Chavez having the opportunity to make lots of money, but we still see 

poverty very high, so we could help broaden energy supply with 

ethanol and others throughout the Western Hemisphere, but how 

do you make sure that that ultimately goes to help the people in 

those countries that need the help when you still see, I believe it 

is in Venezuela 80 percent of the people are still living in poverty, 

so I think it is a noble goal, and something that the United States 

ought to take a leadership role in, but what would you suggest that 

we do to make sure that those fruits are getting to the people of 

those countries to help rise all boats? 

Ms. KORIN. There is very little that we can actually do to change 

the type of—to improve the governance of the region. However, 

when you look at oil in particular, it is a resource that requires 

57

very little participation on the part of the population in terms of 

extraction and so forth, and so you have what is known as a natural resource curse. You do not just see it in Venezuela, you see 

it around the world. Look at Nigeria. Nigeria has taken in billions 

of dollars in oil wells, yet most Nigerians live on less than a dollar 

a day. 

If you have a resource that requires more people to work, creates 

more of a middle class, and ethanol production certain qualifies, 

then you are just increasing the general wealth of the population. 

You have a situation here in Venezuela, it is interesting to note, 

you did not ask this but I just want to say oil prices are much higher today than it was several years ago. Venezuela is producing less 

oil than it was several years ago, but making more money, and 

therefore it is not really in the interest of these countries to 

produce as much as we would like them to produce, to produce as 

much as would be necessary to drive the prices down. 

One thing that we need to do is create a situation where energy 

can compete on a btu basis. It can in some sectors. It cannot in the 

transportation sector, which is almost 100 percent petroleum-dependent. If you create fuel choice in the transportation sector, not 

just with ethanol, with methanol, with electricity, which is almost 

not generated from oil in this country, and therefore you can tap 

into nuclear power, clean coal, solar, all of this, then you are creating a situation where oil price eventually—certainly not in the 

short term, but over the long haul, decade, 15 years, 20 years, it 

will become much more—oil will become much more interchangeable with other energy commodities, and that will have the effect 

of keeping prices much more under control. 

Mr. WEINTRAUB. Let me make a comment on ethanol and Brazil. 

Brazil is one of the 11 countries that we are looking at quite a lot 

in that study I mentioned. 

Brazil today produces ethanol today without any subsidies. It is 

an independent commodity, and they have developed their cars so 

they can work on any combination of gasoline and ethanol. 

In addition to that, in addition to the United States, in addition 

to having a big duty on imports of ethanol, and subsidies for production of ethanol, we have been producing it mostly with corn, 

and there is no doubt that corn is a less efficient base material for 

producing ethanol. 

The part of the President’s speech that I think is terribly useful 

is if we could produce ethanol from cellulose material that he mentioned, that would be a big advantage because then you would not 

have to go to sugar and take up all the land with the sugar. It will 

take a long time. 

But keep in mind that we are keeping out Brazilian ethanol, and 

ethanol, Brazil is developing it in such a way that not only is it 

being used a lot in Brazil, but they are making it a commodity in 

the Far East, and they are trying to develop their ethanol capacity 

to make it a commodity for worldwide use. 

I guess what I am saying is I think it would behoove you took 

carefully at Brazil’s advances in ethanol. 

Let me answer your second question, and I will be very brief, I 

will not take much time. The word ‘‘nationalization’’ is not necessarily a good word in the context of what you are talking about. 

58

Many, many countries are in oil. Almost all of them own the oil in 

the ground. Canada is clear, the oil in the ground is owned by the 

Canadian Government or the Canadian people. It is true in most 

countries. It is true in Mexico. It is mostly true in Venezuela. 

It is not that, it is how that oil is being explored, produced, and 

how it is done. Petrobus, for example, a Brazilian company is, I 

think, if I recall correctly, owns something like 40 percent by the 

Brazilian Government, but they control the policy, but they do have 

joint ventures with oil companies from all over the world. 

So the question I think you sort of have to ask is not whether 

it is nationalized or not. Saudi Arabia nationalized its oil, but how 

it is operated and what kind of private investment and under what 

terms they allow that private investment to take place. 

Mr. MACK. And if you do not mind answer your own question. 

What kind of policies could we move forward? Obviously, the first 

one is have a better relations with Venezuela, but that is a twoway street. What can we do to help Venezuela understand that the 

ideas of freedom will be much more beneficial to their country just 

in terms of security and energy than trying to isolate itself? 

Mr. WEINTRAUB. I do not think they are producing less than they 

did before because they are holding it back in Venezuela. I think 

they are producing less than they did before because the PdVSA, 

you know, the national oil company, they lost a lot of its key people 

at the time of the strike and they got rid of them. They had to 

bring in other people to run the oil company, and they are just not 

as efficient. 

My answer to your question though is is that I do not think there 

is very much we can do as a U.S. Government to convince Chavez 

to do other things. If he stepped over a line of some kind, I suppose 

we could have some kind of retaliation, but right now the oil is 

being shipped out of Venezuela. We are getting the oil. United 

States companies are investing still, and they are changing their 

contracts, and they are changing to equity contracts compared to 

the service contracts they had earlier. 

So I would think that our major interest other than get in a 

shouting match with Chavez, which would just help him, our main 

interests I would think is to keep getting the oil in our market or 

in the world market. 

Mr. FARNSWORTH. Thank you, Mr Chairman, if I could just add 

a couple points to what has already been said, and maybe a point 

of divergence in one area. 

Just a quick point on ethanol. There is a huge potential there, 

but it is not today, it is not tomorrow. It is not next week, and we 

are probably talking in the midterm. What has not existed to be 

able to create the market in the United States, or frankly, most 

places for ethanol, particularly in the transport sector, has been 

two aspects. 

One, it has not been economically viable to produce based on the 

price of alternatives, which in this case oil is the alternative, and 

so the actual production process has been too expensive on a unit 

basis. 

But more importantly, although the production capability has existed, the usage capability has not existed, so you have had the 

possibility to supply but there has been no demand for it because, 

59

particularly again in the transport sector, the autos and trucks and 

in some cases actually aircraft that are now being produced to be 

ethanol-capable simply did not exist. 

There are some exiting research and technology and it has moved 

well beyond the R&D stage now to application in terms of flex fuel 

automobiles. In fact, seven out of every 10 new cars in Brazil today 

that are sold are flex fuel cars, and what that means is that the 

computer within the engine itself, you can fill it with ethanol, you 

can fill it with gas, you can fill it some combination, it does not 

matter. The engine itself tells what fuel to burn for peak performance in the engine. 

It is astounding technology. In fact, U.S. producers in large 

measure are leading the charge. It is a very exciting alternative. 

That said, we are still a ways away from full implementation of 

that. The market simply has to develop, but the possibilities are 

very, very large, and very interesting, so I would just put that on 

the table. 

Your question about how to ensure that the wealth from natural 

resources are spread more equitably through Latin America is, 

frankly, a question that has vexed Latin American watchers for literally hundreds of years. I mean, Latin America has been and in 

large measure now continues to be a resource-based economy, 

whether it is oil, gas, whether it is copper or tin, what have you, 

and yet the Latin American region continues to be the most 

disequitable region in the world. 

So you have this very difficult situation whereby the countries, 

the nations of Latin America are very wealthy, but that wealth has 

not been spread throughout the economy broadly. 

I certainly do not have an answer for you. I wish I did. A lot better minds than mine have looked at it and come up empty. But one 

thing I would suggest as a way to at least get at these issues is 

for countries to really begin to drill down or in some cases continue 

to drill down—no pun intended—in terms of the institutions of democracy that they establish. 

The rule of law has got to be much more actively and appropriately instituted in countries throughout the region. The education system so you are not just educating the elite, but rather 

more broadly throughout the societies. The access to capital for 

micro enterprises, and frankly, for people who are not already rich. 

There is less of a sense of venture capital or entrepreneuralism in 

the Western Hemisphere broadly than there is in the United 

States. The list goes on and on. 

But I think if you begin to address some of these issues, then you 

are going to have the ability to distribute wealth from wherever it 

comes from, whether it is trade, whether it is natural resources, 

whether it is technology, wherever it is from, to be able to get that 

more actively through the economies, and I think that is the critical question facing Latin America as a whole. 

A country like Chile, frankly, has done pretty well doing that, 

but Chile has concentrated on remaking the institutions into a 

modern globally-focused country, and they have done that very, 

very well. Other countries are also trying to do that. Some countries are not doing as well, and I think that is kind of where the 

dynamics go. 

60

So yes, the supposition or the assumptions behind your question, 

I believe, are spot-on. The answer is a long-range answer, but I do 

not think it is directly related to energy per se. I mean, it is a 

much broader development question. 

Energy has to play a role however, and if we can find a way 

through creating institutions that work better both in the energy 

sector and more broadly, rule of law, again I come back to that, is 

just a critical aspect. I think what we would begin to see is in the 

region generally, each country would do it a little bit differently, 

no doubt about that, but in the region generally you will start to 

see that wealth that is created more equitably spread throughout 

the economy. 

So I would just add that into the equation, and again, it is a 

long-term result. 

Mr. MACK. Thank you. 

Congressman Engel. 

Mr. ENGEL. Thank you, Mr. Chairman, and I want to thank all 

the witnesses for very enlightening testimony, and I think there is 

a unanimity and you are all essentially saying the same things. 

I would first like to ask unanimous consent, Congresswoman 

Barbara Lee has asked me to submit questions and a statement for 

the record for her, and I would like unanimous consent to do so. 

Mr. MACK. Without objection, so ordered. 

Mr. ENGEL. Thank you. 

One of the things that she points out, which I want to mention 

because you are all touching on it. Mr. Farnsworth, you talked 

about a partnership with Latin America, and it would seem to me 

that because we are all in the Western Hemisphere it would be 

natural for the United States and South and Central America to 

have a partnership along, of course, with Canada, but other nations 

who are rivaling us understand that, and they are going to try to 

move into it as well. 

But one of the things that I have noticed as taking over as Ranking Member of the Subcommittee is that there are so many disparities that exists in Latin America between the very tiny percentage 

of ultra rich people and most of the rest of the people, and Congresswoman Lee points that out, and one of the questions she asks, 

which I think is a question that we need to think about, is why 

should foreign companies have tax breaks and concessions that 

strip poor people in these countries from benefitting from their very 

own natural resources, and she points out that in many of these 

countries natural resources are on the lands of the poorest, most 

marginalized communities like the indigenous and Afro descendants. 

So it is a problem, and it is a feeling that we have to be very 

careful about not being on the wrong side of that issue because if 

we are on the wrong side of that issue, then there are democratic 

elections, as we encourage being held in Latin America, then we 

find that many of the people who come to power are people that 

raise these issues and raise them in the context of the United 

States being on the wrong side. 

So I am wondering if anyone would like to comment on that. Mr. 

Farnsworth, you have talked a lot about partnershipings, and perhaps you should start. 

61

Mr. FARNSWORTH. I would be happy to, and thank you for the opportunity. 

I think that the Congresswoman’s sensitivities are well placed, 

and in fact again this goes directly to what I was talking about just 

previously in response to the earlier question. I do believe that income disparities across the region are a real challenge, and they 

have political consequences. 

Now, with regard to what you are saying, or more accurately, 

what the Congresswoman is asking in terms of foreign companies, 

I think that the right way to look at this would be in terms of the 

investment climate globally. 

I mean, Latin America no longer, if it ever was, is existing in its 

own region without connections to the rest of the world, and the 

folks that are looking to make investments in the region are also 

people by virtue of the amount of investment that is required who 

have the ability and are looking at alternatives around the world, 

whether it be in China, whether it be in India, whether it be elsewhere. 

The whole point is that without the ability to direct investment, 

which we do not have and we certainly are not looking for, the 

companies in question are going to make, and these just are not 

international companies, they are domestic companies as well, are 

going to make investment based on where they perceive the best 

rate of risk adjusted return is going to be. 

So each country is going to have a different climate, investment 

climate, not weather climate, but that is going to impact on the individual decisions of the companies. 

It really is up to the countries themselves to determine what 

they believe is in their own interest, and then the companies, 

whether they be United States, Canadian, Spanish, Brazilian, are 

going to determine whether they should put their own money and 

their stockholders’ money into those types of economies. 

I do not think that there is one common framework that one 

could say is applicable to all countries. They are going to develop 

their own, and that is okay. But again, the companies in question 

will then either take advantage or not based on their perceptions. 

Mr. WEINTRAUB. Let me add one sentence. 

Mr. ENGEL. Yes. 

Mr. WEINTRAUB. Not much on this point. I am sympathetic with 

the concerns that are expressed underlying the question. It has 

been a long struggle, as Eric Farnsworth said dealing with that. I 

have been knocking around Latin America for a long time. I was 

once an AID mission, a director in Chile before it became so prosperous, and I know something about all of these issues. 

In general, Latin American countries have relatively low savings 

rates. They do not save enough. They are a little like us, and if 

they do not save enough—I am not sure they are as bad as us—

if they do not save enough, what they do is they need foreign savings; in other words, they need capital in-flows, and that is a critical element of their development processes, so these capital inflows can go into a new investment. 

That recognition came after the collapse, the debt crisis of the 

1980s, and a lot of countries changed their laws, and they realize 

that borrowing money was no more a secure method than getting 

62

capital through investments, so they searched for capital, and that 

is still the case. What they are looking for is more capital. 

Brazil has just proposed a new law to give some concessions to 

people, companies who buy government bonds so they can get more 

money in there. 

What happens after the money gets there and they use it, that 

the policies of the country are somewhat inadequate, sure, they 

are, they are inadequate. 

But I would like to add one further point here to keep it in context. Chile, because it has had steady growth in GDP since about 

1985, has reduced the level of poverty from about—well, it was before about 40 percent to less than 20 percent. 

In other words, the steady growth was the critical element in reducing their poverty, but inequality in Chile has risen over that 

same period, just as inequality in the United States is greater now 

than it ever has been before. There are a lot of reasons for that, 

I do not want to get into that here, but you are dealing with a really difficult issue. I mean, the answer to your question would take 

volumes just covering, or filling up this whole room, I think. 

Mr. ENGEL. Well, thank you. I think those are both excellent answers. 

Ms. Korin, let me ask you since you are so active with Set America Free, and as you know I am an admirer of the organization and 

have worked closely with the organization Set America Free. 

What really strikes me, and I said this in my opening statement 

about Set America Free is you have people from all different ideological persuasions coming together all coming to the same conclusion that America needs to look at alternative energy sources, and 

America needs to wean itself off of oil. 

Even if we did not feel that way, it is only a matter of time before we deplete the oil reserves in the world, and so why not start 

now so that we can be free in terms of our national security policies 

and not be blackmailed, or as people have said, not let them hold 

us over a barrel. 

I am wondering if there is anything that you would like to add 

about Set America Free and what some of our goals should be in 

terms of when we are dealing within the Western Hemisphere? 

Ms. KORIN. I think one of the most important things, and thank 

you for bringing up Set America Free, I think one of the most important things to understand is that many of the national security 

vulnerabilities that we face across the world are really only one degree of separation away from the oil issue. 

If you look, for instance, you know, looking far away from our 

hemisphere, but you look at Iran’s transients in regards to its nuclear program, and see that we have actually very little influence 

over them, you start to understand, well, Iran has bought itself a 

third of humanity with energy deals with China and India. China 

is sitting on the Security Council, and so you know, it is not really 

concerned about sanctions. It is not really concerned about anything. 

You look around the world at proliferators of radical Islam, of developers of weapons of mass destruction, financiers of terrorism, 

and all of that is tied to petro dollars. If all of the oil in the world 

63

came from Scandinavia and Kansas, and you know, it was easier 

to secure, then Set America Free would not exist. 

But we are in a situation where we are fighting a war against 

terrorism, and unfortunately we are paying for both sides of the 

war, and beyond that our most critical supply chain, the life line 

of our economy, what underlies the global economy is energy. It is 

plentiful and affordable energy, and most particularly oil. 

That has been targeted as a prime target by terrorists, and we 

saw that just recently with the attempted attack on Abqaiq, but I 

think we need to understand that this really is a global problem. 

Whether it is Islamist terrorists or other groups, it is very, very 

easy to attack oil infrastructure and by doing that you create a 

really profound impact on our economy here. 

If you just think about it, terrorists have removed over 1 million 

barrels a day from the oil market. If that million barrels a day 

were back in the oil market, oil prices would be $10–15 lower per 

barrel than it is now. 

So I think one of the things that we really need to do is focus 

on where we are using the oil and how we can be diversifying. We 

are always going to need oil. We just need to shift it from being 

a strategic commodity to just another commodity, and to do that it 

has to be interchangeable with other energy commodities. 

Like I said, we essentially do not use oil to generate power in 

this country, so what we need to focus on is the transportation sector. 

I just want to comment, Mr. Farnsworth mentioned ethanol, and 

talked about how it is not really there yet. In Brazil, ethanol is 

cheaper than gasoline. Yes, they went through a period of incentives and so forth, but today without incentives it is cheaper than 

gasoline. So what we need to do is open up the market and let the 

market work. 

I would strongly suggest that what this chamber do is encourage 

by law if necessary automakers to make sure that every car sold 

in the U.S. is a flexible fuel vehicle. It costs less than $150 extra 

to make a car that can run on gasoline and a variety of alchohols, 

not just ethanol, also methanol which by the way can be made from 

coal for under 50 cents a gallon, and the U.S. is rich in coal. 

So there is a lot that we can do and we need to do that as soon 

as possible. 

Mr. ENGEL. Thank you very much. Let me in my questioning to 

piggyback on what Congressman Mack was saying about ethanol, 

and you just mentioned ethanol again. I am going to use this to 

give my bill, and Congressman Kingston’s bill a plug, H.R. 4409, 

The Fuel Choices for American Security Act. 

That aims to wean us off of 21⁄2 million barrels of oil per day by 

the 2015, and 5 million barrels a day by the year 2025, and somebody pointed out, I think it was Mr. Farnsworth, that one of the 

problems with ethanol right now is that people think it is not economically viable. 

That is why I think our government policies ought to be giving 

the tax breaks for people who use hybrid cars for instance and to 

the manufacturers who make hybrid cars, and using the tax breaks 

to make ethanol economically viable. I have gone from someone 

who was very dubious about ethanol to someone who is absolutely 

64

convinced that that is the direction we ought to go, and we can 

make it from wastes, from corn husks, from soybeans, switchgrass 

to you name it, we can do that. 

I want to just finish with Brazil. We talked a lot about automobiles and flex fuels, and I think you excellently pointed out that 

it is very cost-efficient to make sure that all cars are made with 

flex fuel engines. 

In Brazil, very interesting statistic, ethanol made from sugarcane 

constitutes about one-fifth of the fuel used, 20 percent of the fuel 

used. 

So you have answered some of these questions, but I want any 

of you to expand on them. What is the impact of expanding sugarbased ethanol production in Brazil and elsewhere in the hemisphere? Would there be an impact on the American sugar industry, 

American corn industry, or other American products used to 

produce ethanol? 

Can imported ethanol be a fuel source to significantly reduce our 

imports of oil? And are there impediments preventing imported 

ethanol from having a substantial impact on the amount of oil 

America imports? 

Any of those questions any of you would like to address, particularly from the Brazil/United States angle. 

Ms. KORIN. If I could just address a quick point. I know there 

is a lot of concern, I mean, the reason we have a protectionist policy is because there is concern that cheap ethanol coming in from 

overseas would negatively impact our ethanol in the U.S., which is 

primarily produced from corn and is more expensive. I just want to say it costs less than $2 a barrel to lift oil in Saudi 

Arabia. It costs much more to lift oil in the United States. Yet 

United States oil producers still make money. They make less 

money per barrel than the Saudis, but they still make money. 

Especially in an era of high oil prices where the price point at 

which ethanol, you know, needs to be sold in order to be competitive is higher than if oil prices were at $20 a barrel, there is plenty 

of room for all sorts of producers of ethanol to compete at all sorts 

of price points. There is much more room to absorb ethanol in the 

market than the U.S. corn producers can provide. 

So yes, they would face more competitive, and they would make 

less money per gallon than an ethanol producer from the Caribbean or from Brazil, but they would still make money. 

Mr. ENGEL. Thank you. Anybody else? 

Mr. FARNSWORTH. Thank you. Let me just make a couple of 

points if I could with the Brazil-specific prism, if you will. 

In fact, Brazil, as I mentioned in the testimony, has the fourth 

largest conventional reserves in the hemisphere, and they have just 

announced some additional finds, and yet Brazil is not self-sufficient in oil, and the fact is they have used very aggressively government programs to support the ethanol industry which has 

changed the terms of trade in Brazil. 

So now instead of importing massive amounts of petroleum, they 

are able to actually export petroleum. It is a very interesting dynamic going on. 

I am not sure that it is directly transferrable to the United 

States for a number of reasons; politics being not the least of them. 

65

But I would also say that the U.S. market is much larger, frankly, 

and I do not know that we need to get into this fuel over that fuel, 

this is better, this not. We can use additional ethanol to supplement what we already have. 

The market is big enough. It can handle more fuel moving into 

the marketplace, and that is a good thing because that gives alternatives, whether it is corn-based, sugar-based, switch grass-based, 

whatever it is, in addition to the petroleum-based gasoline that we 

already utilize. 

I do not see personally petroleum being moved, being replaced by 

ethanol, if you will, anytime soon. I guess that is just a statement 

of fact. But I do see that with an expanding market the small percentage of ethanol usage in the United States could certainly be expanded, and I think that would help in terms of our imports and 

in terms of our trade profile. 

But there is again, and I come back to the issue and it has been 

raised by others on the panel in terms of the base from which certain ethanols are made are directly impacted by U.S. trade policy. 

So this not just an energy issue, it is a trade policy issue, and so 

you are getting into some bigger related issues, but it is not unified 

around one subject. 

So I would certainly encourage additional conversation along 

those lines, but we are not there yet. We have got a long way to 

go. 

Mr. ENGEL. Dr. Weintraub, any final comments? 

Mr. WEINTRAUB. No. I agree with what has been said, but please 

remember that Brazil spent a lot of years developing their ethanol 

industry. They spent a lot of money at it until they got to the point 

today where they do not need subsidies anymore to be able to 

produce it. 

The problem they face though is whether or not they can devote 

more land to sugarcane growing because that is what it takes, and 

there is a limit to how far they can go. We cannot do the same very 

easily. We do not have the same kind of land for sugar. If more 

sugar went into production of ethanol, it probably would have an 

effect on sugar prices. I do not really know. I am not an expert on 

world sugar. 

But I sort of think here in this country our sugar policy will be 

driven more by politics than it will be by economics. 

Mr. ENGEL. Thank you. Thank you, Mr. Chairman. 

Mr. MACK. Thank you, and I want to thank each one of you for 

being here and your testimony and your insight. Thank you very 

much. 

Before we would adjourn, I would like to ask unanimous consent 

to enter into the record the report from the Council of the Americas 

that was just released, ‘‘Energy in the Americas.’’ Without objection, so order. 

[The information referred to follows:]

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Mr. MACK. Thank you very much, and the meeting is adjourned. 

[Whereupon, at 3:55 p.m., the Subcommittee was adjourned.] 

(101)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE ILEANA ROS-LEHTINEN, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA

The importance of energy sources originating in the Western hemisphere is 

strongly evidenced by the fact that this region has been the main source of energy 

for US consumption. Nearly 90% of US primary energy sources originate in the 

Western hemisphere. 

Given these numbers and taking into account the pressing energy supply challenges our country faces, we should look to the Americas when trying to face our 

energy challenges. 

Last year, the Energy Policy Act of 2005 established that the Secretary of Energy 

would carry out a program to promote cooperation on energy issues with countries 

of the Western Hemisphere. This act greatly encourages the participation of institutions of higher education in programs aimed at strengthening the energy cooperation with the Western Hemisphere. 

Even before the passing of the act, Florida International University established 

the Center for Energy Technology of the Americas (CETA) in my Congressional district. 

This outstanding academic institution was awarded $1.3 million by the U.S. Department of Energy and is displaying great dedication in its efforts to enhance energy security by building on the long-standing historical, commercial, social, and 

geopolitical ties it has with the Western hemisphere. 

However, in order to achieve energy security in this hemisphere, there are still 

many hurdles to overcome. According to CETA, we are facing restrictions by inadequate regulatory and tax frameworks, rights-of-way, access to capital markets, political and social instability in the region as well as, obvious and very relevant technological challenges. 

The questions posed by this situation, which I would like to address, are which 

efforts has the Department of Energy undertaken to date to carry out the direction 

provided by the Congress on Western Hemisphere energy cooperation? 

Concerning the strategies, I would also be interested in learning what combination of fossil fuels and renewable energy sources the Department of Energy plans 

to implement in promoting cooperation with the Western Hemisphere. Also, what 

are the Department of Energy’s funding priorities and investments for increased cooperation in the region? 

Lastly, I would like to stress the important role universities with a profound expertise and strong connections in the field, such as CETA at Florida International 

University, can play in carrying out the direction provided by Congress on Western 

Hemisphere energy cooperation. 

Let us use these important resources and join forces to guarantee U.S. energy security independent from imports from the Middle East but based on cooperation 

with our friends in the Western Hemisphere. 

QUESTIONS FOR THE HONORABLE KAREN A. HARBERT, ASSISTANT SECRETARY, OFFICE

OF POLICY AND INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY, AND

STATEMENT FOR THE RECORD BY THE HONORABLE BARBARA LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Thank you, Mr. Chairman for hosting this important hearing today. I would also 

like to extend a warm welcome and congratulations to our new Ranking Member, 

102

Mr. Engel. I look forward to working with you on issues to strengthen relations with 

our hemispheric friends and neighbors. 

Let me also thank you, Assistant Secretary Harbert, for being here today. You 

have an extensive background in engaging with Latin America. And I hope that you 

will reflect and share with your colleagues in the administration the concerns outlined today by Members of this Subcommittee from both sides of the aisle. 

Across the country, and especially in my home state of California, gas prices have 

reached historic highs. It is incomprehensible that this administration would allow 

gas prices to double with practically no checks or balances. Clearly, these policies 

allow rich oil executives to taking a sizable chunk out of the pay checks of American 

consumers. However, American wages have not increased at the same rate, and we 

all know well the stories of families—who must choose between gas or food, or gas 

and the rent which are becoming more and more common.

Other oil companies are making record profits and are not being asked to explain their actions. Do you really believe that CITGO should be singled out to 

answer questions about their oil programs to help struggling communities here 

in the United States? 

A CITGO investigation was recently launched. Do you know if there are similar plans to probe American businesses, non-profits, and community leaders who 

are exploring alternative affordable energy options?

In January, the New York Times reported on how the U.S. government is losing 

royalties owed by gas companies. Mr. Chairman, I ask unanimous consent to submit 

the full article for the record. Instead of tightening regulations to prevent these 

losses, this administration relaxed the auditing process. Assistant Secretary 

Harbert, who is bearing the brunt of these costs? American tax payers.

While wealth disparities in the United States are shameful, the disparities that 

exist in Latin America are simply overwhelming, and since the privatization era 

the gap continues to expand. In many of these countries natural resources are 

on the lands of the poorest, most marginalized communities like Indigenous and 

Afro-descendants. Encouraging trade and investment should not necessarily 

translate in selling-out your constituents and their natural resources. 

Why should foreign companies have tax breaks and concessions that strip poor 

people in these countries from benefiting from their very own natural resources? 

Please explain why the Department of Energy and this administration would 

oppose efforts by South American leaders to protect their constituents from similar burdens?

[NOTE: Responses to these questions were not received from the Department of Energy in time for publishing. Answers will be available in Committee file.] 

AS PROFITS SOAR, COMPANIES PAY U.S. LESS FOR GAS RIGHTS

The New York Times 

January 23, 2006

By EDMUND L. ANDREWS

WASHINGTON, Jan. 22—At a time when energy prices and industry profits are 

soaring, the federal government collected little more money last year than it did five 

years ago from the companies that extracted more than $60 billion in oil and gas 

from publicly owned lands and coastal waters. 

If royalty payments in fiscal 2005 for natural gas had risen in step with market 

prices, the government would have received about $700 million more than it actually did, a three-month investigation by The New York Times has found. 

But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to 

provide the Interior Department with much lower sale prices—the crucial determinant for calculating government royalties—than they reported to their shareholders. 

As a result, the nation’s taxpayers, collectively, the biggest owner of American oil 

and gas reserves, have missed much of the recent energy bonanza. 

The disparities in gas prices parallel those uncovered just five years ago in a wave 

of scandals involving royalty payments for oil. From 1998 to 2001, a dozen major 

companies, while admitting no wrongdoing, paid a total of $438 million to settle 

charges that they had fraudulently understated their sale prices for oil. 

Since then, the government has tightened its rules for oil payments. But with natural gas, the Bush administration recently loosened the rules and eased its audits 

intended to uncover cheating. 

103

Industry executives deny any wrongdoing, arguing that the disparities stem primarily from different rules for calculating the sale prices for paying royalties and 

the sale prices for informing shareholders. 

‘‘The price of gas downstream is always going to be higher because you have costs 

that have to be recouped for getting it to the customer,’’ said Robert H. Davis, a 

spokesman for Exxon Mobil. ‘‘You have to process the gas. You have to transport 

it, and you have to sell it. There will always be a discrepancy there.’’

Companies that pump oil and gas on federal property are required to pay the government royalties, usually 12 percent to 16 percent of the value of what they sell. 

Royalties for natural gas have climbed sharply in the last three years. But while 

prices nearly doubled from 2001 to 2005, the $5.15 billion in gas royalties for 2005 

was less than the $5.35 billion in 2001. When oil and gas are combined, royalties 

were about $8 billion in 2005, almost the same as in 2001. 

Because much of the information about specific transactions is kept secret, it remains unclear to what extent, if at all, the weakness in royalty payments stems 

from deliberate cheating or from issues with the rules themselves. 

But one major producer, Burlington Resources, admitted to shareholders last year 

that it might have underpaid about $76 million in gas royalties in the 1990’s. And 

in Alabama, a jury ruled in 2003 that Exxon had cheated on $63.6 million worth 

of royalties from gas wells in state-owned waters. The jury awarded $11.9 billion 

in punitive damages, which a judge later reduced to $3.5 billion. Exxon disputes the 

charges and is appealing the verdict. 

The possible losses to taxpayers in gas could be even higher than the losses tied 

to the scandals over oil royalties. For one thing, natural gas production on federal 

land is worth twice as much as oil. 

Moreover, the Interior Department has scaled back on full audits, pushed out a 

couple of its more aggressive auditors and been criticized by its own inspector general for the audits that it did pursue. 

‘‘We are talking about the same issues and in many cases the same players as 

before,’’ said Danielle Brian, executive director of the Project on Government Oversight, a nonprofit watchdog group that exposed many of the oil royalty scandals. 

‘‘These companies had knowingly been cheating on oil for years, if not decades,’’ 

Ms. Brian continued. ‘‘To ignore the likelihood that the same thing is happening on 

the gas side is absurd.’’

Johnnie M. Burton, director of the Interior Department’s Minerals Management 

Service, said the disparities were mostly the result of deductions that the regulations let companies take, reducing the sale prices they report to the government. 

But Ms. Burton said she had not known and could not explain why companies 

were reporting higher sale prices to their shareholders and to the Securities and Exchange Commission than to her office. 

‘‘I can’t answer because I don’t know,’’ she said in an interview. ‘‘We don’t look 

at S.E.C. filings. We don’t have enough staff to do all of that. If we were to do that, 

then we would have to have more staff and more budget. You know, there is such 

a thing as budget constraint, and it’s been real tough, let me tell you.’’ The contrasts 

between what companies are telling the government and what they are telling 

shareholders is stark. 

The Interior Department, using the numbers given by companies paying royalties, 

said the average sale price of natural gas on federal leases was $5.62 per thousand 

cubic feet in fiscal 2005, which ended Sept. 30. 

By contrast, Exxon told shareholders that it received about $6.88 per thousand 

cubic feet in the nine months that ended Sept. 30. Chevron said its average price 

in that period was $6.49. Kerr-McGee, which suffered huge losses from hedging 

against a drop in prices, nonetheless said it still received an average price of $6.59. 

‘‘There’s no reason why what the companies report to their shareholders should 

be higher than what they report’’ to the Minerals Management Service, said Lee 

Helfrich, a lawyer who has represented California in many battles with the industry 

over royalties. ‘‘The ultimate goals or mission of the S.E.C. and the M.M.S. are different, but the information reported to each should be the same.’’

In the scandals over oil royalties in the 1990’s, government investigators, aided 

by industry whistle-blowers and investigation by the Project on Government Oversight, found that companies were using a host of tricks to understate their sale 

prices. 

These included buy-sell agreements in which producers swapped oil with each 

other at artificially low prices and then resold it at higher prices. Companies also 

sold oil at below-market prices to their own affiliates, classified high-priced ‘‘sweet’’ 

oil as much cheaper ‘‘sour’’ oil and padded their deductions for transportation costs. 

104

In the wake of the scandals, the outgoing Clinton administration pushed through 

tough new rules for valuing crude oil, which relied on comparing company reports 

with an index of spot market prices. 

A Pro-Industry Approach 

But the Bush administration did not close any loopholes for valuing natural gas. 

Indeed, in March 2005 it expanded the list of deductions and decided against valuing sales at spot-market prices when companies were selling to their own affiliates. 

The industry-friendly stance was intentional. Mr. Bush and top White House officials also placed a top priority on promoting domestic energy production. Vice President Dick Cheney’s energy task force called for giving lucrative new incentives to 

companies that drill in the Gulf of Mexico and other high-risk areas. 

The Bush administration also took a much more relaxed approach to auditing and 

fraud prevention. In 2003, the Interior Department’s inspector general declared that 

the auditing process was ‘‘ineffective’’ and ‘‘lacked accountability’’ and that many of 

the auditors were unqualified. 

In one instance, inspectors discovered that auditors had lost the working papers 

for an important audit and tried to cover up their blunder by creating and backdating false documents. Rather than punish anybody, the inspector general recounted, the minerals service gave the employee who produced the new documents 

a financial bonus for ‘‘creativity.’’

Administration officials said last week that they had addressed most of the criticisms and that the inspector general had since said its corrective actions were ‘‘sufficient.’’

The Interior Department also fired two of its most aggressive and successful auditors. One of them was Bobby L. Maxwell, a veteran auditor who had recovered hundreds of millions of dollars in underpayments over a 22-year career and received an 

award for meritorious service in 2003 from Interior Secretary Gale A. Norton. 

Mr. Maxwell was fired in early 2005 after clashing with superiors over his belief 

that Kerr-McGee had shortchanged the government $12 million. Mr. Maxwell 

charged that he had been wrongfully fired, and the government paid him an undisclosed amount of money to settle out of court. 

Mr. Maxwell is now pursuing Kerr-McGee, which has denied any guilt, with his 

own lawsuit under the False Claims Act, which allows private citizens who prove 

fraud to collect some of the money they help recover. 

Patrick Etchart, a spokesman for the Minerals Management Service in Denver, 

said that Mr. Maxwell lost his job because of a reorganization and that he had declined an offer to move to a different city. 

But lawmakers who wrestled with the government over previous royalty scandals 

are dubious. 

‘‘It’s all gotten worse, not better,’’ said Representative Carolyn B. Maloney, Democrat of New York, who led Congressional investigations into cheating on oil royalties 

in the 1990’s. ‘‘They make the process so complicated that no one can really follow 

the money.’’

Ending Detailed Inspections 

Perhaps the most striking example of sluggish auditing is the government’s effort 

to collect back royalties from companies that blatantly ignored one of the government’s basic rules. 

Under current rules aimed at promoting energy production in deep waters, companies can produce large volumes of oil and gas without paying royalties at all. But 

the rules also require companies to start paying royalties if market prices climb 

above certain ‘‘threshold’’ levels. 

As it happens, market prices have been above those levels since the 2003 fiscal 

year. But even though dozens of companies never bothered to start paying, Ms. Burton said earlier this month that the government had yet to demand repayment three 

months into the 2006 fiscal year. 

‘‘It’s more complicated than you might think,’’ said Lucy Querques Dennett , associate director of the Minerals Management Service in charge of the issue. 

But enforcing the rules about price thresholds is easy compared with verifying the 

actual sale value of natural gas. 

Over the last four years, the Bush administration has ordered its auditors to 

move away from detailed inspections in favor of a more cursory approach of looking 

for anomalies in company reports. If a company in Louisiana, say, reported prices 

that differed from those of other companies in the same region, it would attract closer scrutiny. 

105

Mr. Etchart, the agency’s spokesman, said that the number of full-scale audits 

had declined slightly over the past few years and that the budget for compliance 

had fallen. 

But he said the government still took a ‘‘close look’’ at 71 percent of oil and gas 

production. ‘‘Our strategy would obviously be to focus on anomalies,’’ he said, ‘‘but 

it is also to focus on large producing areas.’’

The agency’s strategy has drawn protests, however, from many states, which are 

entitled to a share of federal royalties, and from some of the Interior Department’s 

most aggressive auditors. 

One of those auditors was Kevin Gambrell, director of the Federal Indian Minerals Office in Farmington, N.M. Mr. Gambrell fought with his superiors over many 

issues, one of which was their demand that he do fewer audits and simply monitor 

posted prices of companies in the same area. 

‘‘Where the M.M.S. approach falls short is that there are so many different types 

of deductions you can take in getting gas and oil to the market, and there are so 

many premiums and bonuses in the contracts,’’ Mr. Gambrell said in a recent interview. ‘‘You have to take a detailed look at the contracts to know what’s going on.’’

The Interior Department forced Mr. Gambrell out in 2003, charging that he had 

improperly destroyed office documents. Mr. Gambrell sued for wrongful termination, 

arguing that he had discarded only copies of documents. He also presented evidence 

that his office had recovered eight times as much money as offices that used the 

administration’s preferred approach. 

The government settled his case in 2004 by clearing him of any wrongdoing and 

paying him an undisclosed amount of money. 

For practical purposes, the biggest cost to taxpayers may have less to do with 

cheating and fraud than with the government’s inscrutable rules. 

Consider the case of Burlington Resources, a Houston-based producer that 

ConocoPhillips acquired in December for $35.6 billion. Burlington paid $8.5 million 

in 2001 to settle charges of cheating related to its oil royalties. Last March, Burlington disclosed that it might also have underpaid gas royalties by about $76 million during the 1990’s. It set aside $81 million to cover possible litigation costs. 

Unlike others, Burlington executives provided information to The Times on the 

royalties it paid for natural gas and on the sale prices that it has reported to the 

Interior Department since 2002. 

During those four years, Burlington said it paid $627 million in gas royalties and 

that its annual payment shot up from $89 million in 2002 to $233 million in 2005. 

That surge in royalties does track closely with the rise in market prices. But Burlington’s numbers also highlight the essential issue raised by many critics: the rules 

let companies understate the value of their gas sales by taking scores of deductions. 

Those deductions include the cost of transportation, processing, brokerage fees, 

pipeline reservation fees and even certain ‘‘theoretical losses’’ for companies that 

own their own pipelines. 

In 2001, Burlington reported an average price of $1.98 per thousand cubic feet 

to the government but an average sale price of $3.20 to its shareholders. In 2005, 

the company reported an average sale price of $5.75 to the government and $6.46 

to shareholders. 

Keeping Royalties Secret 

James Bartlett, a spokesman for Burlington, said part of the discrepancy resulted 

from the fact that much of Burlington’s production is in the Rocky Mountains, 

where natural gas fetches lower prices. 

The federal government does not require companies to divulge the amount of royalties they pay or what they tell the government about sale prices. And unlike Burlington Resources, Exxon and most other major oil companies refused to disclose the 

information when asked. 

‘‘It’s not required information,’’ said Mr. Davis of Exxon, echoing responses from 

Chevron, Royal Dutch/Shell and other big producers. ‘‘We’re not going to publish it.’’

Æ