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THE ATLANTIC COUNCIL OF THE UNITED STATES
BLACK SEA ENERGY & ECONOMIC FORUM 2010
LUNCHEON AND SPECIAL ADDRESS
WELCOME:
ROSS WILSON,
DIRECTOR,
DINU PATRICIU EURASIA CENTER,
ATLANTIC COUNCIL
MODERATOR:
CEM DUNA,
PRESIDENT,
AB CONSULTANCY AND INVESTMENT SERVICES
SPEAKERS:
RICHARD MORNINGSTAR,
SPECIAL ENVOY FOR EURASIAN ENERGY,
U.S. DEPARTMENT OF STATE
THURSDAY, SEPTEMBER 30, 2010
Transcript by
Federal News Service
Washington, D.C.
ROSS WILSON: Good afternoon and welcome again to our luncheon on the second day of the Black Sea Energy and Economic Forum. Eating is always an important part of these events, but the Atlantic Council, I think, puts a high priority on using every minute of the full time that we are in Istanbul together for substantive discussions that are of interest to us.
This particular segment will feature two people. First, Ambassador Cem Duna, who will essentially moderate a discussion following Ambassador Morningstar’s remarks. Ambassador Duna has a long and distinguished career as a Turkish diplomat.
He served in some wonderful places – Copenhagen, the Hague, London – Jeddah, maybe not quite so wonderful – also in Geneva, as Turkey’s ambassador and permanent delegate to the United Nations office in Geneva and its chief negotiator during the GATT round of global trade negotiations.
In 1991 to 1995, he served as Turkey’s ambassador to the European Union and played a major role in the negotiations that Turkey had to join to form a customs union with the EU, or probably the EC at that particular time. Currently, he’s president of AB Consultancy and Investor Services here in Turkey, a friend to many of us.
Our keynote speaker is Ambassador Richard Morningstar, a longtime friend of mine, somebody I worked with closely in the State Department in the 1990s. He is currently Secretary of State Hillary Clinton’s special envoy for Eurasian energy. He’s been in that position since April, 2009. He had a similar role for President Clinton and Secretary of State Albright when he served in 1999 to 2001 as special advisor to the president and to the secretary of state for Caspian energy – for Caspian Basin energy diplomacy.
He was, in addition – prior to that, in the Clinton administration, he served as special assistant to the president and advisor to the secretary on assistance to the states of the former Soviet Union, which position took him to every single one of the countries that emerged following the collapse of the Soviet Union.
Ambassador Morningstar brings a tremendous depth of knowledge to the mission that he’s engaged in now. I think he’s done a lot to refocus and regalvanize American diplomacy on energy issues. We’re delighted to have him. Please welcome Ambassador Cem Duna and Ambassador Dick Morningstar. (Applause.)
AMBASSADOR RICHARD MORNINGSTAR: Well, distinguished ministers, distinguished former national security advisors and distinguished guests, first of all, thank you – thank you very much, Ross, and congratulations to you and to Fred Kempe and the Atlantic Council for this remarkable and amazingly successful conference that you are having in Istanbul this week.
You know, when I started this job 18 months ago, I was frequently asked, what had changed since my work on regional energy issues during the Clinton administration? I thought then that I had some good answers, the respective roles of Russia and Europe, the relative importance of gas versus oil, the emergence of an LNG spot market, expectations for the global economy.
Recently, though, I’ve come to the conclusion that there is a simpler answer. Just about everything has changed. And what’s becoming clearer to me is that the pace at which basic assumptions about Eurasian energy security are changing is, if anything, increasing.
When I started my current job, to say nothing of when I was Caspian energy coordinator a decade ago, shale gas was not even discussed. Prospects for future Russian-Ukrainian energy cooperation looked slim to none. Few would have predicted that suppliers like Russia would be willing to renegotiate take-or-pay terms of existing agreements. Nobody was predicting that the United States would become a net exporter of gas.
The lesson that I draw from this is that any serious effort to address the complex, interrelated problems of Eurasian energy needs to be taken with humility. Assumptions that look rock solid today can change and can change quickly. If we build in that realization up front, we’re most likely to come out at the other end with solutions that work.
That said, you obviously can’t plan without making assumptions. And those assumptions need to be based on the best, most realistic analysis available of the context in which decisions will be made. Based on my work of the past 18 months, let me share with you today my sense of the context of the realities we face in our work on Eurasian energy during the period ahead.
First, we’re moving inexorably out of the world of zero-sum. There may have been moments over the past decade when one or another player had the cash or the clout to pull others along with it on a specific project or projects. Not anymore. Political will is a necessary but not a sufficient condition for realizing major projects.
Lasting solutions to the problem of securing the orderly, efficient transportation of energy throughout the Eurasian marketplace will require a high degree of compromise and common benefit or they may well not happen, which is another way of saying that big ideas need to be bankable.
At the risk of stating the obvious, some of the major projects that have been on the drawing boards for a while are breathtakingly expensive – too expensive, in most cases, for any single actor to pay for out of petty cash.
Given the uncertainty of energy markets and the aftershocks of the global financial crisis, finding financing for big, new projects will more than ever require a sound business case, one that not only makes sense in terms of economics, but that factors in the risks in a region where predictability can be an issue.
One big challenge in making a convincing business case is the reality that energy demand and supply both loom as major question marks today. While there is every likelihood that energy demand in Europe, including Turkey, will return to and eventually exceed pre-slump levels, it’s not at all clear how fast this will occur.
And on the supply side, shale gas and other developments could emerge – and I emphasize could – emerge as real game changers. Some argue, for example, that the U.S. could, in fact, become a substantial exporter of gas to Europe and global markets in just a few years. There are companies that are working very hard on this.
This means that some very big investment decisions may have to be made on the basis of best guesses that may or may not hold up. And that implies, in the short- to mid-term that the smart approach to energy security, particularly for specific countries or regions may be local and incremental, an approach that focuses on getting the most out of or adding marginally to existing infrastructure.
Within Europe, for example, there is much that can be done in terms of connecting existing gas and electric networks and building gas storage that can pay significant dividends in return for minimal new investment. Indeed, the EU has committed several billion euros for investment in such facilities. The EU has also correctly recognized that improving energy efficiency, investment in renewables and liberalization of energy markets are smart moves that can make a real difference in the near term.
But my final point in this quick reality check is that much of what I’ve just said notwithstanding, there will remain a place in the Eurasian energy security picture for new, major infrastructure projects. At the end of the day, demand for Eurasian energy will exceed the ability of existing infrastructure to supply it. There is nothing that comes close to matching the reliability and economies of scale that large-capacity dedicated pipelines or a similar fixed infrastructure can provide.
Based on the torrent of press releases that come through my office on a regular basis, it would appear that there are a lot of people out there who would agree with at least my final point. South Stream, White Stream, MedStream, Blue Stream-2, an Arab pipeline, pipelines from Qatar, from northern Iraq, from Samsun to Ceyhan and Burgas to Alexandropoulos, from Turkmenistan to India and of course, Nabucco, ITGI and TAP.
It’s a confusing picture. And of course, not all of these projects will get off the drawing board in view of the realities I’ve just been talking about. So what is the Obama – what is the Obama administration’s approach to this plethora of projects? Our approach is grounded in certain core principles.
First, Europe’s energy security is in America’s national interest. Our economies are interdependent. An energy-secure Europe is in the U.S. national interest and vice versa. Next, diversity is good. Just as in investing, having alternatives in terms of sources of energy, suppliers and transit options will ultimately benefit all players.
The best solutions are those that the market produces. Indeed, given the need for bankability I described a moment ago, they are likely to be the only solutions. Based on these principles, some of the projects and ideas that have surfaced have made more sense to us than others. And we’ve said so.
We have, for example, strongly supported the concept of a Southern Corridor to complement existing networks for moving gas from Eurasia to Europe. We’re working with the EU and Ukraine to make the Ukrainian gas transit system more reliable. We’re engaged on a wide range of energy issues with Russia.
We’ve worked with international oil companies along with Azerbaijan and Kazakhstan to develop means to move the anticipated increase in Kazakh oil production to world markets. We’ve facilitated exchanges of information and expertise on emerging technologies like shale gas, where the U.S. has unique experience. We’ve worked across the region on realizing the potential of clean energy technologies, including energy efficiencies and renewable energy.
As we look ahead after 18 months of work, the principles I’ve enumerated will continue to guide U.S. policy on Eurasian energy. At the same time, we should recognize that we’re entering what will be an especially important period for Eurasian energy, particularly as it relates to the diversity of gas supplies for Europe. Indeed, in some respects, the period ahead will be decisive.
What do I mean by that? I mean, fundamentally, that a number of things will soon become clear. First, it will become clear – and indeed it’s already clear – that there will be a southern energy corridor. The June 7th conclusion of a Turkish-Azeri gas purchase transit agreement removed the last major uncertainty regarding terms for moving substantial volumes of Azeri gas across Anatolia.
On that basis, the Shah Deniz-2 consortium, which is developing a large offshore gas field in the Caspian, is moving ahead with project planning. Negotiations with potential buyers and shippers are underway. Potential shippers of Shah Deniz gas, the Nabucco, ITGI and TAP consortia are lining up financing and putting in place the organizational structure to transport the gas.
A Southern Corridor is going to happen. And I’d like to congratulate our Turkish hosts and their Azeri counterparts and commercial interlocutors for getting to yes after years of negotiation, although we do understand there are still details to be worked through.
Second, it’ll become clear in the months ahead whether Turkmenistan will contribute to the Southern Corridor by shipping gas across the Caspian or will choose to focus on other routes for diversifying its energy exports, such as the TAPI project, which is – which they’ve been talking about a lot lately.
The Nabucco consortium, supported by the EU, has worked hard to elicit a firm commitment from Ashgabat to ship its gas west. The U.S., for its part, has supported the concept of a trans-Caspian gas pipeline since the ’90s. This obviously is a sovereign decision for the government of Turkmenistan and it may well be that Turkmenistan will not agree to gas crossing the Caspian by pipeline in the foreseeable future.
In that case, the window for its involvement as an early contributor to the Southern Corridor would inevitably close. Given that, the Shah Deniz consortium – or given that the Shah Deniz consortium is looking to make their decision in the next six months, other sources of gas must be considered. Even Azerbaijan might ultimately be a source of additional gas.
This leads to the third point. It’s becoming clearer that prospects for bringing gas into the Southern Corridor from points further east and south are looking more promising. At some point, hopefully sooner rather than later, but at some point, a new government will be formed in Iraq. We hope that a priority of the new government will be to break the longstanding stalemate between Baghdad and Kurdish regional authorities on a hydrocarbon law and revenue sharing agreement.
This would bring important benefits to Iraq in terms of further development of its oil and gas infrastructure, of jobs and of revenue creation for both national and regional authorities. It would also create the framework for a serious discussion of how to bring Iraqi gas into the Southern Corridor.
Let’s be clear. This is not going to be an easy discussion. There are some domestic – Iraqi domestic priorities that need to be sorted out. And in our view, any viable scheme for exporting resources from the north of Iraq must be endorsed by Iraq’s central government. But there does seem to be a consensus among experts that Iraq does have ample gas in both the northern and southern parts of the country.
Once these reserves are developed, Iraq should be able to meet domestic demand and export significant volumes without difficulty. And we shouldn’t forget that Prime Minister Maliki said last year in Ankara that Iraq could provide 15 bcm of gas for Nabucco. It’s also worth noting that Qatar is becoming an increasingly important exporter of gas to European markets and may now be more interested in exporting piped gas as well as LNG.
Proposals for bringing Arab gas across the Syrian border to Turkey have also reemerged and reports of the size of the Tamar and Leviathan fields off the Israeli-Lebanese coast simply underscore the fact that to Turkey’s east and south, there is abundant gas to meet Europe’s long-term energy needs, even if other options remain blocked for now.
One more thing will become clear in the months ahead. Sometime between now and next spring, the Shah Deniz-2 consortium will decide which of the three groups vying to ship its gas to European markets gets the nod. That decision will have profound implications for the three consortia, Nabucco, ITGI and TAP, whose business models rely on locking in early substantial volumes of Shah Deniz gas.
Indeed, the consensus among industry experts is that given their competitive approach and the impediments to accessing non-Azeri sources of gas, only one of the three, at least in the short term, can remain viable after that decision.
Commercial issues will principally determine the decision of the Shah Deniz consortium, whose members have a duty to their stockholders to cut the best deal that they can. For our part, we have always said that we support the Southern Corridor. Any of the three competing projects could, in our view, serve as the basis for that corridor.
In fact, each of the pipeline consortia brings to the table elements that could provide added value to the Southern Corridor. In the abstract, Nabucco would be preferable. Nabucco has clear advantages in terms of meeting the needs of consumers in the eastern EU countries. A dedicated large pipeline like Nabucco operating to international standards would have important advantages over existing infrastructure and might be the most profitable solution if operated at full capacity. That’s why it’s important to do everything possible to line up additional early sources of gas from Iraq or elsewhere.
The conundrum is that beefing up infrastructure could be, in the short term, the most cost-effective way to handle initial Shah Deniz-2 volumes, although that may prove – also prove to be easier said than done. At the same time, no one seriously questions that in the long term, improvements to current infrastructure will be inadequate to handle expanding European and Turkish demand, and as new gas sources become available for the Southern Corridor, it will need a way to get to market.
So the question naturally arises, does this have to be an either/or moment? The short answer is that although governments will continue to play a role, the markets will decide or will at least have the strongest voice in making the decisions involved. But I think it would be a mistake to rule out outcomes that incorporate, through means like consolidation or staging, the stronger points of the various consortia.
The challenge of the month ahead is to get the Southern Corridor up and running in a way that reflects current gas availability but also allows room to grow and that meets in a timely manner the needs of Europe’s less well-served consumers. The competing consortia current business plans all fall short, in one way or another, of meeting that challenge. Maybe this shouldn’t be surprising, since all three projects were conceived years ago in a very different environment. Momentous decisions on Shah Deniz-2 gas are coming up fast. It may be time to take another look at the assumptions underlying the competing projects for transporting that gas.
This is a time when commercial creativity is necessary. As I said at the opening of these remarks, a lot has changed with respect to Eurasian energy since I got into this line of work, but a constant has been, the markets reward those who can best adapt to change when circumstances require it. I think that’s a good place to end. Thank you. (Applause.)
CEM DUNA: Thank you, sir, very much for this excellent presentation of the situation today. I think it was President Putin who once said laying down pipelines is very easy. All you need to do is put the pipes one after the other and bolt them and rail them and all that. The difference is, he said, we have the – (inaudible) – and you don’t.
Now, let me ask Ambassador the following question as a starter, and then I will take questions from the floor, and please, anyone who is asking questions, I will be grateful if we can have an idea about who he is or she is and then the question.
I have in front of me an excerpt from the EU green paper on Turkey’s role as a transit country. They say that Turkey is of strategic importance for the security of energy supplies to the EU, lying at the crossroads of various existing and future pipelines, carrying both oil and gas from many core producer regions, namely Russia and the Caspian Sea, the Middle East and the north of Africa.
That fits very much to the picture that you have drawn in the long list of projects waiting to be implemented, if at all. You have been very closely associated with the success of the BTC. It was a project which, at the outset, no one really thought that it was doable. But then, at one time, we had the constellation of stars arranged in such a way that it became doable and everybody was then supporting the project. And it became a reality and it’s a success story today.
What will be your interpretation of Nabucco, whether stars will realign itself and then we will have a more realistic approach to Nabucco and Nabucco as a project will come to life?
AMB. MORNINGSTAR: Well, first of all, to reiterate briefly what I said in the very opening of my remarks, I think the circumstances that surrounded the Baku-Tbilisi-Ceyhan pipeline are, in fact, very different than the circumstances that surround the Southern Corridor. I mentioned some of those in my opening. First of all, the role of Europe: Europe had nothing to do with the Baku-Tbilisi-Ceyhan pipeline. Russia is playing a different role than it did at that time. There were any number of other differences that I mentioned.
There is also one other major difference that I didn’t spell out in my address. Basically, at the time of the Baku-Tbilisi-Ceyhan pipeline, the companies who were producing oil in the western Caspian had no other choice but to get their oil out through that pipeline, because every other possibility was foreclosed to them. Iran was not a possibility; Turkey, because of its position on the Bosporus, basically precluded a major Baku-Supsa pipeline. There are already pipelines going through Russia, including the Caspian – the CPC, Caspian Pipeline Consortium that Chevron was so involved in. There wasn’t a great interest in another pipeline going through Russia.
So the point at that time was, ultimately, if there was going to be oil leaving the western Caspian and going to the market, Baku-Tbilisi-Ceyhan was the only outlet open to the companies, and they in fact had to build it if they wanted to get their oil outlet.
This is a very different situation today. First of all, there isn’t just one option to get gas from Azerbaijan to Europe. We talked about at least three options today. There may be others, so that the commercial realities are going to play – whatever they may be – are going to play a much greater role today, I think, than they did in the Baku-Tbilisi-Ceyhan context. And it’s not going to be – whereas the producers, in effect, built the Baku-Tbilisi-Ceyhan pipeline, it’s going to be the consumers or the buyers that are going to build whatever pipelines come out of the Caspian with respect to gas.
So I think it’s a very different situation, and people always ask, well, why can’t we – why can’t this just be like it was with BTC? Well, it can’t because it’s different.
MR. DUNA: Very good. Now the floor is open for questions to Ambassador Morningstar.
AMB. MORNINGSTAR: (Chuckles.) There’s somebody back there.
MR. DUNA: Where do you see that? Oh, yeah.
Q: Ambassador Morningstar, thank you very much for a very informative presentation. Time and again, we come up with the difference between attitudes between Azerbaijan and Turkey and Europe and America concerning the necessity or otherwise of considering gas from Iran. Yesterday, we heard the prime minister of Turkey saying, at one point, that he doubted the reserve base was there for Nabucco, and then suddenly, later on, in a separate section, saying that Nabucco was approved by Turkey and that everything was fine.
It did seem to me as if he was trying to indicate that Turkey still looks to Iran as a source of gas for Europe. I just wonder whether you would comment – whether you, yourself, consider that that is indeed Turkey’s position, or whether you think there is sufficient gas available without relying on Iran.
AMB. MORNINGSTAR: Well, we have Minister Yildiz right here. Maybe – (laughter) – maybe he should better answer that question. And I don’t know that I would want to interpret anything that he may have said. I can only tell you what the United States’ position is, and I think it’s also consistent with the position of the EU and most EU member states, that in fact Iranian gas will not be part of the Southern Corridor, certainly for the foreseeable future, given the problems that we have now with Iran.
I do believe that there is – that that is a position that is consistent between the U.S., between the EU and member states. So I don’t think it’s an issue. In fact, one of the interesting developments over the last month or so is the Trans-Adriatic Pipeline, who, frankly, we had not paid a whole lot of attention to, announced that Iranian gas would not be part of their project, and I think that was a reaction to the present situation with respect to Iran.
MR. DUNA: Mr. Minister, would you like to take the floor and give us your opinion? (Laughter.)
(Mr. Yildiz’s remarks are delivered via translator.)
TANER YILDIZ: First of all, bon appétit. Are we not a minority? Now, I am very glad – we are all very glad to see the participants in Istanbul, this beautiful city of Istanbul. Yesterday, in his speech, our prime minister said something. He drew attention to a responsibility. We have resources on our right side; or our left side, we have consumption, he said, so those need to meet. And the prime minister said that he thought that Turkey has the advantage of being a meeting point.
As far as supply security in energy is concerned, this project is part of solving security problems, be it Nabucco, ITGI or TAP. This is the reason why when we think of the interests of the countries of the suppliers, if the interest of the EU member countries and the suppliers meets, then this project can be realizable and there is no reason whatsoever this project cannot be realized. It can be realized.
Now, Turkey did what it had to do, and it will continue to assume its responsibility. Turkey will keep maintaining its positive attitude, constructive attitude. Turkey will do whatever it did in all other projects, as far as assuming the responsibility is concerned, in this project as well. But I want to draw your attention to a particular point. If there are, indeed, reserves, it means that it cannot just be a commercial project.
In fact, it’s an important point to underline. If projects are only merely commercial, then you wouldn’t just pay attention to the type of gas, but one needs to take into account the situation, the developments that are taking place in the region, the developments that are taking place in the world. Maybe the project was conceived as such because of the developments that took place, but I think that if you just described this project merely as a commercial project, then it will not be sufficient.
Our prime minister believes in this project. Without his political support, the intergovernmental agreement couldn’t have been signed, and it was signed in July, so our prime minister believes that this project can, indeed, be realized.
AMB. MORNINGSTAR: Just to briefly respond, I want to emphasize that the energy relationship between the United States and Turkey is excellent, and I agree with you, Mr. Minister, that you can’t totally separate political – the political from the commercial. But for any project – as a necessary precondition for any project that has to be commercially viable, because, you know, the companies are not going to get involved unless they have an appropriate return. But obviously, the politics will always play some kind of role, so I would agree with that.
MR. DUNA: No questions?
AMB. MORNINGSTAR: Was it so all-encompassing, what I said in my speech, that no one had any questions?
MR. DUNA: Definitely that was the case. Oh, there you are.
Q: Hi, Ian Hague, Firebird Management. We’re investors in Russia, including in the energy sector, and one question that I sort of have been thinking about since the panel earlier in the day was to what degree is work actually proceeding on the South Stream project? From what I can tell, it has more of the hallmarks of a political initiative than an actual bit of infrastructure.
AMB. MORNINGSTAR: Well, unfortunately, Mr. Scaroni, who spoke last night, is not here today because he could probably tell you better than I can because of Eni’s involvement with Gazprom. There have been memoranda of understanding that have been signed with some Eastern European countries, but that – they’re just memoranda of understanding. There’s nothing binding.
There are any number of issues that will still have to be addressed on South Stream, such as, how does South Stream get financed? It’s not just Russia coming up with all the money, because Eni is a 50-percent owner. It may go down to 40 percent if EDF becomes part of it. And they’re going to require non-recourse project finance in order to do their part. So it’s unclear whether that would become available. There are any number of regulatory issues that need to be sorted out. So South Stream – there are issues with all pipelines. Certainly South Stream has many issues as well.
But no, there have been – there’s been no, quote, concrete work that’s been done at this point.
MR. DUNA: Thank you. It seems to me your presentation has been so substantive that – encompassing, as you say. Well, I suppose we will be thanking you for this excellent presentation, and I think we can go back to our dessert.
AMB. MORNINGSTAR: Okay, thank you very much.
MR. DUNA: Thank you. (Applause.)
(END)