The Atlantic Council Of The United States

Black Sea Energy & Economic Forum 2011

Luncheon: Energy and Economic Futures


Frederick Kempe,
President and Chief Executive Officer,
Atlantic Council


Paolo Scaroni,
Chief Executive Officer,

Richard Morningstar,
Special Envoy for Eurasian Energy,
U.S. Department of States

Location: Istanbul, Turkey

Date: Friday, November 18, 2011
Time: 1:30 p.m.

Transcript by
Federal News Service
Washington, D.C.

FREDERICK KEMPE: Ladies and gentlemen, good afternoon. Welcome to this luncheon on the second day of our Black Sea Energy and Economic Forum. Thank you again for being with us.

We’ve got two remarkable speakers for this important and timely session on energy and economic futures. Paolo Scaroni, who has been a keynote at each of our three sessions, first in Bucharest and last year in Istanbul, chief executive officer of Eni.

We’re delighted to have you here, sir.

Ambassador Richard Morningstar, the U.S. secretary of state’s special envoy for Eurasian energy, and we’re delighted to welcome both of them as keynote speakers at our forum.

What we’ll do now is first enjoy lunch. In a few minutes I’ll return to the podium and we’ll continue with our program. Paolo Scaroni will give his comments, followed by Ambassador Morningstar, and then we’ll have a short Q&A session, hopefully in time that will remain with us.

I also want to – (inaudible) – the three sitting U.S. ambassadors in the audience. We have Frank Ricciardone, our U.S. ambassador to Turkey, Jim Warlick sitting right here in front of me.

Jim Warlick, where are you? Jim Warlick, who joins us from Sofia, ambassador to Bulgaria.

And John Heffern – John? – who’s joined us from Armenia. It’s great to have you all with us. Thank you very much. We’ll rejoin you in a minute. (Pause.)

I’m sorry to interrupt your conversations, but this is Fred Kempe. I think we’re going to get this luncheon discussion started.

We’ve already had good discussions yesterday and today about energy resources, transit issues, concerns in neighboring countries and prospects for renewables, shale gas and nuclear power.

Here, I think we can add two key new perspectives. First with a corporate CEO perspective is Paolo Scaroni, but this is more than a corporate CEO, this is a (golden ?) thinker, this is a visionary person who’s both reflective, thoughtful and a big thinker, and we’ve had him here, as I said, three times.

The first time – in fact, the first panel we ever had at a Black Sea Energy and Economic Forum was with Ambassador Morningstar in Bucharest. He’s headed up Eni since 2005, Italy’s largest energy producer and a company of great global reach. The company operates in 77 countries. In 2010 it put new gas fields into production in Italy – (audio break) – was awarded a license to develop the largest oil fields in Iraq – (audio break) – shale gas exploration in the Polish Baltic Basin.

It has a set of serious commitment with Gazprom – (audio break) – in Turkey – (audio break) – a large-capacity gas line that runs along the bottom of the Black Sea. A businessman of multifaceted interests, he is, as I said, a keen observer of international affairs.

Mr. Scaroni, Paolo, it’s great to have you with us. The podium is yours. (Applause.)

PAOLO SCARONI: Ladies and gentlemen, good afternoon. I am very pleased to be here today. It is the third time running that I’m part of this forum, and in fact, I was extremely honored to be invited again here this year.

Given this has become a kind of tradition, a regular appointment, I thought it might be a good idea to go through the main themes we discussed in the last couple of years, giving to you an update of what has happened in the last 20 months.

Last year I talked about three topics. The first one was the Black Sea importance to European supply security. The second is the need to develop infrastructure in the region for the transportation of gas in order to meet the EU twin energy objectives: diversification of supplies and diversification of routes.

The third item we discussed was Turkey’s key role within the Black Sea region because of its demographic profile, because of its economic potential, and because its growing importance on the international scene.

So what has changed since the Black Sea conference in 2010? Well, firstly the region importance to European energy security has, if anything, increased over the past 12 months, essentially for two main reasons.

The first is the Arab Spring, which has affected many of European traditional suppliers of gas. Now, the impact of what has happened in Egypt and in Tunisia and Algeria has been fairly limited. We are the biggest producer in the region, we are the biggest producer in Algeria, in Tunisia, in Egypt, and I often say we have not lost one barrel of production during this revolution.

So of course, we have lost a lot of production in Libya; essentially Europe lost 10 billion cubic meters of gas supplies, but luckily these events took place during the summer season, and during the summer season consumption is down and essentially nothing really has happened.

Now, production in Libya is back. We reopened the Greek – (audio break) – pipeline which is linking Libya to Europe, and the production will ramp up to the levels of before in a matter of weeks.

But while the Arab Spring has not yet led to a shortage of gas, the continuing unrest in North Africa, this region which supplies 20 percent of the gas going into Europe, has understandably focused minds on just how important the diversification of supply sources can be.

If developments on the supply side are part of the reason why the Black Sea region’s strategic position is even more important today than it was, the consumption side of the equation has been changing too. The big development here is of course the Fukushima event and its repercussion into the nuclear power energy production in Japan, of course, but also in Europe. Now, we estimate that what has happened in Fukushima and the consequence in Europe will add to the consumption of gas of the European Union 30 billion cubic meter of gas by 2018. Now, at this point we have raising (sic) concern in North Africa for the Arab Spring and the impact of Fukushima raising global demand, and the idea of securing gas supplies from other sources clearly moves up the list of priorities.

To this situation we must add the continuing tensions between Russia and the Ukraine, which is a key transit country, because 75 percent of the gas going – (audio break) – Russia to the – (audio break) – Union use Ukraine as a transit country.

Now, this tension, which have not been helped by the recent arrest of Mrs. Tymoshenko highlight both the importance of securing new gas and bringing it into Europe. The recent launch of the North Stream Pipeline, a pipeline which is linking Russia to Northern Europe, which by the way is being built by a subsidiary of Eni called Saipem, of course is a project which goes in the right direction. But there is room to do much more, especially here in the Black Sea region.

And this brings me to the second point: the importance for the Black Sea region of building new infrastructure for the transportation of gas. On this front, there are a number of different projects at various stage of developments, but one side of the spectrum – Fred Kempe was mentioning it – we have the Blue Stream, which is up and running, bringing 16 billion cubic meters of gas from Russia into Turkey.

It’s a joint venture between Gazprom and Eni, which we launched roughly 10 years ago, a little more than 10 years ago, is doing well. I think everybody’s happy – (audio break) – Russian gas getting into Turkey, which is an increasingly important consumer of gas.

Then we have the South Stream project. Now, this started as another joint venture between Eni and Gazprom, and now includes France EDF and the German company Wintershall – (audio break). South Stream is making good process and has nailed down the three key pillars on every infrastructure which aims to transport gas: first, where the gas comes from, the sourcing of gas; second, which is the transit route; and third, who is going to buy the gas at the other end of the pipe? Now, the South Stream has the three problems solved.

Then we have another group of projects which are trying to make the transition from the drawing board to reality, and this set I would put Nabucco, ITGI, the transatlantic pipeline and the most recent entrant, the SIEPA project, which all aim to diversify supply sources and bring new gas into Europe through Turkey.

What strikes me about this list of projects is that there seem to be a lot of them while there may not be enough known Russian gas. So many projects, but not much gas at all.

Let’s run through the potential upstream sources for gas.

First on the list there is, of course, Azerbaijan, which might be – might be – interested in exporting gas to Europe. The issue with Azerbaijan is that it currently has less than 20 billion cubic meter of gas production and a consumption of roughly 12 billion cubic meters. Now, the total capacity required by all those projects is 60 billion cubic meter against the eight, which is the actual possibility of exporting gas of Azerbaijan.

Next on the list of potential candidates for supplying gas is Iraq. The good news is that Iraq has ample gas reserves. The question for Iraq is not if, but when. The country is currently focused on the very difficult task to bring all production from 2.5 million barrels a day of oil up to 10 million barrel of oil per day in 2017. You can understand with such a task in front the export of gas is really not a priority for the country.

Third on the list is Turkmenistan. Here we are talking about a huge amount of reserves, but the real problem is how to get them out of Turkmenistan towards Europe. One idea to transport Turkmeni gas is to build a pipeline under the Caspian Sea, but that’s easier said than done. The Caspian Sea, despite its name, is a lake, and being a lake bordering countries, each have to agree on the pipeline being built, and Russia and Iran, both bordering countries, have already put their foot down.

More promising, we think, is the idea of using compressed natural gas, what we call CNG technology, to ship Turkmeni gas from Turkmenbashi to Azerbaijan, and then from there into one of the many pipelines under consideration.

Last on the list is Iran, which is another potential gas giant, but Iran’s political situation make it an impossible counterpart for any European project.

So the challenge for Nabucco, ITGI and TAP will be to secure sufficient non-Russian gas, and this challenge is highlighted by the fact that gas-producing countries don’t partner in any of these projects.

But now let’s turn to the third theme I raised in past edition of this conference. The idea that within this region, whose strategic importance on the global stage was going to increase, Turkey had a particular role to play. Turkey used to be important mainly because of its strategic position linking east to west culturally, economically and in terms of energy flows.

All of these things are still true, but now Turkey is important in its own right as the home of 75 million people, as the 15th largest economy on the planet, and as a growing energy market.

Thank you for your attention. (Applause.)

MR. KEMPE: Thank you very much for those insightful comments, and we’re looking forward to a discussion with you where we can, in the parlance of your industry, drill a little bit deeper on some of these issues.

The United States, although has never been and likely never will be a significant consumer of Caspian Basin energy, has for nearly 20 years been heavily involved on regional energy issues. The Baku-Tbilisi-Ceyhan main oil export pipeline that terminates here and whose opening was celebrated at a lavish event in 2006 on the Bosporus achieved realization in significant measure because it had strong U.S. support, along with, of course, that of Georgia and Azerbaijan.

Our second speaker is America’s point person today on regional energy. Ambassador Richard Morningstar is Secretary of State Hillary Clinton’s special envoy for Eurasian energy. He brings a tremendous career expertise, depth of knowledge to his current position, and has done a lot to stimulate and refocus American diplomacy on energy issues both in the position he holds today and when he served similarly as special adviser to the president and to the secretary of State for Caspian Basin energy diplomacy during the Clinton administration.

He has deep experience throughout the former Soviet Union and in Europe, having served as coordinator of U.S. assistance to the newly independent states in the 1990s, and as U.S. ambassador to the European Union in the final years of President Clinton’s term.

Ladies and gentlemen, please welcome Ambassador Richard Morningstar. (Applause.)

RICHARD MORNINGSTAR: Thanks. Thanks very much, Fred, and it’s a great pleasure to return to the Atlantic Council’s Black Sea Energy Forum.

It’s particularly a pleasure to again share the podium with my good friend Mr. Scaroni. I think you can probably guess that we don’t agree on everything, but I’ll give you my presentation and then I know there’s going to be plenty of time for discussion and I’m sure we can debate some of the issues that you raised and that I will raise.

It’s also very fitting to be here in Turkey, where we enjoy a very profound and productive energy relationship and have for many years, as Fred described, and it’s always been central to what we’re trying to accomplish.

This is also a very propitious time to be having this discussion, since it was only a couple of weeks ago that Turkey and Azerbaijan finally, after years of negotiation, concluded their historic gas transit agreement, which will allow the first volumes of Caspian gas to transit Turkey to the rest of Europe.

Let me just briefly outline our overall policy with respect to Eurasia, and then I’ll get into some of the specifics, particularly relating to the Southern Corridor. First, we encourage the development of new oil and gas resources while at the same time promoting efficiency and conservation and the use of all of our energy resources.

Because there is a world market for oil, new production contributes to meeting growing demand anywhere in the world, including in the United States. When we’re talking about natural gas in Turkey’s neighborhood, whether it’s the Caspian region or on Iraq or Russia or Central Asia, as Fred mentioned, it’s unlikely that any of that gas is ever going to reach the United States.

But it’s still important, because it’s going to add to the international gas supply. Additional supply in one place naturally frees up supply in another, and the market for liquefied natural gas continues to grow, and we can start to think about gas moving around markets in much the same way oil does, and, you know, one of the things that may not be for debate today but it’s going to be interesting looking down the road several years, whether fixed pipelines become somewhat archaic, given the ultimate development of liquefied natural gas.

Second, what we want to do is assist Europe in its quest for energy security, and you might say, well, gee, you know, we’re 4,000 miles away from Europe, why do we care about European energy security? Well, you know, Europe is our partner in any number of different areas. We have an interest in an economically strong Europe. Europe has a major interest in an economically strong United States. And energy security is a major factor in the economies of any country. And in spite of all the difficulties we’re facing in the world today, we can’t forget the relationship between energy security and a strong economy.

Of course, Europe is composed of many different states, and energy security is a more pressing issue to some than others. Some countries in Europe do not have a diverse energy mix and depend largely or, even in a few cases, entirely on a single supplier and transport group.

So our aim is to encourage the development of a balanced and diverse energy strategy with multiple energy sources, with multiple routes to market, and this approach further is competitive of efficient markets and also the best prices for consumers.

And we say this for all countries. It’s not just Europe. It’s for the United States; it’s for Russia. I mean, for example if Europe wants to diversify its energy supply, well, you know, Russia should be diversifying its consumers as well, and there’s no reason why Russia shouldn’t be, for example, doing more – (audio break).

The third component of our policy is our desire to help Caspian, Central Asian and Middle Eastern countries find new routes to market for their hydrocarbons. We want to help foster economic growth and prosperity in all of these countries. By expanding export routes, they can increase competition for their resources, demand a fair price and create strong links to the global economy.

And most of all, I think maybe the most important part of this prong of our strategy: These countries should be able to make their own choices as to how they deal with their energy resources. Equally important to helping new producers reach markets is our desire to foster deep economic integration with countries in the Caucasus as well as countries such as Iraq and Iran and Turkey.

Let me get a little more specific. Paolo raised the Southern Corridor issues. The Obama administration strongly supports the establishment of the Southern Corridor to bring natural gas to Europe via Turkey from the Caspian and potentially other sources beyond Europe’s southeastern frontiers.

Gas from Azerbaijan’s – (audio break) – field will be the first significant volumes available to supply the Southern Corridor. (Audio break) – development of the second phase of Shah Deniz are well under way.

I want to again make special mention of the breakthrough agreement signed by Turkey and Azerbaijan in late October on gas transit through Turkey. This historic agreement, which took years to negotiate, has not only paved the way for significant volumes of Caspian natural gas to reach Turkey and other European countries but has also opened the door to much greater supply in the future.

This truly is a signature achievement and should be counted by the signatory countries in the EU as a major success in ultimately bringing new supplies to the European market.

The next step is to determine which pipeline system will bring gas beyond Turkey to the rest of Europe. Today there are three separate pipeline consortia – Nabucco, ITGI, which was the Italy-Turkey-Greece Interconnector, and the Trans-Adriatic Pipeline, TAP. They’re all vying for the right to ship Shah Deniz gas into the EU. And if none of these projects is viable, BP, as Mr. Scaroni mentioned, has suggested the SEEP pipeline, which stands for Southeastern Europe Pipeline.

I don’t know if it makes sense to call a pipeline something that seeps, but anyway, this pipeline would bring gas to the Balkans through the so-called capillary approach.

Now, we understand that the Shah Deniz consortium expects to make a pipeline route decision by the end of the year or shortly thereafter, and in the light of the momentum achieved over the past two years, we’re confident that a commercially viable Southern Corridor will be realized.

There’s also good reason to believe – and I recognize the issues that Mr. Scaroni raised – that other sources will ultimately contribute volumes to the Southern Corridor. Obviously, Azerbaijan has promising potential in other fields than Shah Deniz. Indeed, just a few months ago a new discovery was made by Total and SOCAR at the Absheron field.

Turkmenistan has vast gas potential and is investing in infrastructure to keep open a Western gas export option, and there are increasing indications that once political issues are resolved and domestic electricity concerns are addressed, that Iraq can have significant gas export capacity.

We have an active dialogue with these countries, and with key partners like Turkey and with relevant members of the international business – (audio break) – and encourage development of the broadest possible basis for a robust Southern Corridor that will ultimately be a critical element in the global energy architecture. And of course, we’ve also been working closely and in full synchronization with the EU and the European Commission on these issues.

Now, I want to just take the opportunity to make very clear and state very clearly our policy with respect to the Southern Corridor. As happens often, things can get garbled in the press, and I have to tell you there were a few garbles in the press this week coming out of Azerbaijan. I know it made Harry Sachinis happy and maybe some others, but I want to make absolutely clear to everybody here what our policy is.

We support the Southern Corridor, which will consist of one or more pipeline projects that are commercially viable and strategically significant. Nabucco continues to be a highly desirable political and strategic option, but as with any pipeline that has to be commercially viable, there will ultimately be large amounts of gas to ship through Georgia and Turkey to Europe.

If a smaller pipeline is chosen to ship the first Shah Deniz gas to Europe, we believe that that pipeline should provide gas to the vulnerable countries in Europe and that there should be concrete, written guarantees that the pipeline will be expanded as more gas becomes available, and more gas will become available; it’s just a question of when.

So we will support any pipeline in the Southern Corridor that meets these conditions. That’s our policy. I don’t think I can state it any more clearly, just in case there’s any confusion.

The other point that I’d like to make is that – with respect to Europe is that more important than any pipeline that comes to Europe, whether it be Nabucco or any of the other three pipelines we mentioned, or for that matter, South Stream or whatever, the most important thing to create energy security within Europe is what Europe does itself with respect to liberalizing its market, with respect to creating interconnections between countries, by looking at alternative sources of energy, whether it be shale or whatever, by dealing with energy efficiency, by working with renewables, by increasing LNG facilities, by increasing storage facilities, doing all the things that are necessary for Europe to have its own balanced and diverse energy policy, whatever the pipeline is that comes through the Southern Corridor. The Southern Corridor’s important, but more important is what Europe does itself.

Just to conclude, obviously we look forward to the establishment of the Southern Corridor that will strengthen Turkey’s position in the region, and because of our historical partnership we think it will ultimately strengthen the United States. The breakthrough success that I’ve been talking about with respect to the gas transit agreement last week has delivered a key achievement towards this goal.

We also look forward – and I haven’t talked much about it; it could be the subject for a whole different talk – we need to sustain our dialogues with Russia and Ukraine and continue to make progress towards addressing issues of mutual concern.

I haven’t talked about South Stream. I’d be happy to have a discussion with Mr. Scaroni about that during the, you know, the question period and discussion period, but all of these are issues that we need to talk about, because we’re also addressing issues relating to supply security, the development of the Arctic, to new investment from Western companies and, in the Russian case, Russian investment in the United States.

And in Europe we look forward to continuing to work with respect to the U.S.-EU Energy Council, among other things. In fact, we have a ministerial meeting on November 28th with respect to that.

So I hope that this overview of our policy and our position on the Southern Corridor and other things has underscored the importance that the Obama administration – and I can tell you it’s very important for both President Obama and Secretary Clinton that they attach the Eurasian energy security and to the fruitful partnerships that we’ve forged over the past years with all the countries in the region.

So thank you, and I look forward to a little bit of a debate with Mr. Scaroni. (Laughter.)

MR. KEMPE: We’ve got about a half an hour for discussion and questions, so a good, meaty period of time.

I’m first going to turn to Mr. Scaroni to answer, in a way, Ambassador Morningstar. You seem to have some disagreements on gas supplies and best routes and that sort of thing.

I wonder, for the layman, there are lots of experts in the audience but there are also some laymen in the audience. Perhaps you could speak to both of them and just say really most sharply where your disagreements are and why it is you see – (audio break).

Yes, please.

MR. SCARONI: No, but listen, no disagreement at all. I’m simply describing from my perspective how – (audio break) – of supplies and routes in this region will develop in the next five to six or seven years. Now, I think that Ambassador Morningstar is explaining what is the policy of the Obama administration, where it wants to go, and maybe, maybe, I hope, really, I sincerely hope that the wishes of the administration, which I think are very wise, will happen sooner rather than later, because I think that most of our different views maybe are around the timing of what’s going to happen, rather than on the concept.

I fully agree that the best thing that can happen to Europe is to have a diversified sources of gas, diversified transit routes. This would be the best. Plus, of course, energy efficiency, LNG regasification terminals and all these things.

When I look at what’s happening in the region, I of course take notice of the fact that we have been talking about Nabucco for the last, you know, seven or eight years, and not much has happened. Then I’m asking myself why not much has happened.

Well, maybe because the amount of gas available is not enough to justify the investment, and most important of all – and excuse me if I just – (inaudible) – this concept – we are, I think, the biggest builder of pipelines in the world, I think, as any. We have never seen a big infrastructure happening without the partnership between producer and consumer.

The fact that there is not a producer among the partners of most of these projects for me is very bad news, and this is the way in which I interpret the fact that there is not – that these projects are not mature, which does not mean that they will not happen, but they will not happen in the next three to five years. This is our view.

MR. KEMPE: And Ambassador, answer this question: Mr. Scaroni has given his view about why Nabucco hasn’t happened, as much as everyone says what a great idea it is. What’s your answer to that?

MR. MORNINGSTAR: Well, I think Mr. Scaroni raises some good points.

And I agree with you that I think the issue more is timing than anything else. And the Shah Deniz consortium is, even as we speak, still considering all of the pipelines that we mentioned, including Nabucco, and they’ll make that determination whether Nabucco is commercially viable at this point.

But please note that I think our policy – I don’t know that I want to say that it’s changed, but there’s, you know, somewhat of a different emphasis than there has been in the past in that we support the Southern Corridor. You didn’t hear me saying Nabucco as the only pipeline and that we still think Nabucco, from a strategic standpoint, I think we all agree would be the best.

But then again, it’s a question whether it’s commercially viable. That’s why we make the point very strongly that if it’s determined that a smaller pipeline is commercially viable, and I think there’s no question that a smaller pipeline could deliver in the first instance the 10 BCM that would be available, 10-plus maybe, from Shah Deniz, that it be part of an overall program that’s expandable as more gas becomes available, which will be the case with respect to more gas in Azerbaijan and possibly from other areas as well.

I think the point that you made on participants in a consortium is actually I think a very important point, and one of the things that I didn’t mention is that under the new agreements between Turkey and Azerbaijan, it’s agreed that a decision would be made by mid-2013 as to whether there would be a dedicated pipeline across Turkey.

That does a couple of things. I think it does allow for the possibility of an expanded consortium to take place that could include companies like SOCAR, maybe Shah Deniz producers, and possibly other companies as well.

The other thing it does is that it could provide for more flexibility or increased flexibility on how we go forward, because whatever the plans are made, whatever the decisions are made right now, that it would give that period of time to make further determinations as to how much gas is available and the size of the pipeline could be adjusted at that point in time, maybe in the future.

So I would agree that timing is much of the issue. May not disagree as much as I would like to say just for the purposes of generating some fun debate and so on, but that’s how I see it.

MR. KEMPE: Thank you.

Barbara Judge – do you have a microphone? Thank you.

Q: I’m Barbara Judge. I usually ask – can you hear me?

MR. KEMPE: Yeah.


Q: Okay, so I’m not asking you to – (off mic) – I’m asking you a question as to whether – (off mic) – in Turkey. How can Turkey – with all his pipeline diplomacy going on and all these various pipelines being discussed, and Turkey, with its very strategic geography connecting east to west – (off mic) – big part of – (off mic) – region and having – (off mic) – how can Turkey insert itself into this debate and make sure that the benefits of the pipeline, whichever pipeline, goes to its citizens and not just – (off mic)?

MR. MORNINGSTAR: Well, first of all, let me say Turkey has certainly inserted itself into this debate, and Turkey has been extremely active and in a constructive role, and as it should, it’s also looking out for its own interests as a transit country and also its own interests from the standpoint of its own energy demand and energy supply.

An example of that is in fact the – (audio break) – in which Turkey will be, of the 16 BCM from Shah Deniz, Turkey will receive six BCM of that 16. I think Turkey recognizes, as it rightly should, its important, as you said. (Audio break) – from the stop of energy routes and transit, and Turkey is a major player in all respects in the region.

Part of our policy in encouraging development in the Caspian and Central Asia is to develop integration between those countries and Turkey as well. So I think Turkey is playing an important role and will continue to.

MR. SCARONI: Now, let me just add that apart from the strategic role that a transit country plays, it gets also money. It’s a very fantastic business to be a transit country, because you get paid something, the region, we’re talking about hundreds of millions of dollars essentially doing nothing.

So everyone would love to be a transit country, but of course, the geographic position of Turkey makes it a perfect transit country.

MR. KEMPE: David, did I see a question at your table? Yes, please.

Q: (Off mic) – a couple of questions, one to Mr. Scaroni. You mentioned the concept of the – (off mic) – across the Caspian. I understand that – (off mic) – the fact that it would probably cost something in line of four times as much as gas – (off mic) – CNG as – (off mic) – pipeline. I wonder if you could provide us with some figures.

And the question for Ambassador Morningstar, which is, you mentioned something that I don’t believe – (off mic) – mentioned before – the concept of written guarantees that the pipeline – (off mic) – pipeline in Azerbaijan decided upon would be able to be expanded as and when initial customs requirements are met and – (off mic) – for increased – (inaudible). Is this something that you’re going to secure the agreement of Azerbaijan and – (off mic)?

Thank you both.

MR. SCARONI: Good questions. Let me answer the first question. I don’t know how familiar you – all of you, you are with this idea of CNG, but essentially when you want to produce liquid gas, you have to compress the gas 600 times to make it liquid. You can also compress the gas 60 times or not 600, or maybe 80 times. The gas remains at a gas stage, the methane, but of course, you can ship it because the volume is reduced.

This costs a fraction of the liquefaction – really, one-tenth of costs to the liquefaction – and it’s a technology which is widely used, widely, which is used for short distances. Now, the distance between Turkmenbashi and Baku is roughly 300 kilometers, and it is the typical distance in which the CNG market can be applied.

Now, of course, if you can build a pipeline, it is much better. I’m not debating the idea of building a pipeline. But if you cannot build a pipeline for political reasons, because you don’t find agreement of other countries, CNG remains an alternative – that is, you bring your gas to Turkmenbashi, you make this small compression, you ship it to Baku, and then from Baku you can feed whatever pipeline you want.

We have made the economics of the project. Now, the economics works particularly well because most of the gas, the Turkmeni gas which would be shipped, is today flared, which means it is gas which is value zero. It is even a negative value, because it is environmentally certainly very dangerous to continue to flare the gas, and you can ship it to Baku.

This is the idea. Now, of course, all these ideas have to be technically very easy to carry forward, but you have to find agreement of – (audio break) – you have the agreement of Azerbaijan, and then you have to feed a small Nabucco, because you don’t have enough gas to create a real big infrastructure.

You can ship something like 5 billion cubic meter of gas, at least at the first stage. Five billion is not a lot, but is better than nothing if you cannot build a pipeline.

MR. KEMPE: Ambassador Morningstar, I invite you to make some news on these written guarantees.

MR. MORNINGSTAR: I don’t know that it’s news, but I can certainly tell you why I used the term, John, “written guarantees,” and remember, we’re not negotiating the agreements, so it’s going to be up to the parties as to what they finally agree to.

But there is a reason why I did say that, and I see Ambassador Pashayev is here from Azerbaijan. I don’t know if there are any SOCAR representatives here; I saw them this morning.

But here’s the reason why I said that: Let’s put ourselves in the mind-set of Azerbaijan, which is an example which maybe I shouldn’t do, but I will anyway. It seems to me that Azerbaijan has a strategic decision to make.

You know, it may decide, for example, that it’s better to start with a smaller pipeline, get gas more quickly into the Balkans and then expand later as more gas becomes available, as it assuredly will become more available.

Does Azerbaijan in that situation want to rely on vague promises with respect to expansion? I mean, again, I don’t want to – I shouldn’t put myself in their shoes, but I would think that they would want to be pretty sure that that expansion was going to take place.

And frankly, if a country were not sure, such as Azerbaijan, then maybe it would consider saying, “Hey, well, we’d better get that big pipeline built now, and, you know, producers, you’d better figure out how to make it commercially viable.” Maybe they could give some help and incentives in doing that.

But I think that is a political, strategic decision, so it may make commercial sense to go incrementally. They may prefer to do it that way, but if that’s going to be the case I would think that any country that was producing and was going to have supplies in the future, you’d want to know for sure what the plan for expansion is going to be. So I don’t think that’s news, I think it’s common sense.

MR. KEMPE: I think let’s take an expert view from Harry Sachinis. If you could – for those who don’t know you in the room, if you could identify yourself.

Q: (Off mic.)

MR. SCARONI: The question is for me?

Q: (Off mic.)

MR. SCARONI: So what role will be played by east Mediterranean countries –

Q: Gas supplies

MR. SCARONI: – in gas supplies. I mean, you’re talking about Cyprus and Lebanon, Israel? It’s what I call the – (inaudible) – basis, you know, which – well, I don’t know if this is a thing that everyone in this room knows, but there has been big discoveries of gas in this area between Cyprus, Lebanon and Israel.

The first discovery has been made by an American company, a U.S. company. The development has started and Israel is already producing something like 20,000 barrels of oil equivalent in gas in those fields.

Now, what would be the development? Now, first of all, we are not really clear of how large these discoveries would be. And then second, in any case this is going to be quite an expensive gas. It is of short, deep water, deep in terms of the deepness of the wells, so it’s going to be an expensive one.

But certainly it might change the geography of the gas supply into Europe, this discovery, if it is as large as some people think it will be. I don’t know if you, Ambassador Morningstar, have more information than we have on that.

MR. MORNINGSTAR: I don’t know that we have more information. You know, I would only say this: We would certainly hope that eastern Mediterranean gas can become a source of supply for Europe and for others. Now, it’s no secret that the political thicket that one would be dealing with in the eastern Mediterranean in any number of ways is significant, and a lot of those issues would have to be resolved. We hope they can be resolved, and we hope at some point that eastern Mediterranean gas will play a significant role.

Q: Thank you very much. (Off mic.)

MR. SCARONI: Well, no, you are asking the most interesting issue of the industry, because you should know that the gas industry until 2008 used to be the most boring industry in the world. Consumption growing 2 percent per annum, price is essentially unlinked, so price of oil produced in – so calories into gas, suppliers always the same, consumers the same – nothing changed, okay?

From 2008, in which there has been the beginning of the massive development of shale gas in the U.S., everything has changed now, really, to the point that while we speak, you know, while we speak today the world is divided in three markets – U.S., price, $4 per million Btu; Europe, there is a different between spot and long-term, but essentially prices, 9 to 10 dollars per million Btu. That is the double than the U.S.; Far East, $18 per million Btu. So the same product, the same molecules of the same gas can cost – not can cost, they do cost – $4 in the U.S. and $18 in Japan.

We know the consequences, of course, on the industrial production, the price of electricity, et cetera, et cetera.

Now, this situation, which is totally unprecedented, we have never seen such a thing, creates lots of troubles but also lots of opportunities, because you can imagine if you have a ship of liquid gas and you move it around in the world, you can make a fortune out of it, or lose a fortune, each way.

Now, how it would take this market to get to a – let’s say a more reasonable situation? One answer, Ambassador Morningstar gave it; I’m sure that 10 years from now liquid gas would be a commodity such as oil. So you would have the world full of ships of liquid gas, which will travel around, and therefore, making prices more similar from one part of the world to the other. That’s one possibility, you know?

Another possibility is that of course if there is abundant gas, high pricing would be pushed down by the fact that the consumer would choose other sources. This is particularly – (audio break) – where we try desperately to renegotiate with our traditional suppliers that these Algeria, Sonatrach; Gazprom, Russia; and Statoil, Norway – we tried to renegotiate prices in order to bring them down more similar to the U.S. prices.

I’m not pessimistic about that, but in order to get back to where we were, kind of – (inaudible) – the price of gas, it would take years, not months.

MR. MORNINGSTAR: Yeah, I don’t have a whole lot to add to that. I think it’s impossible to predict. I think the only thing we know for sure, gas demand is going to increase, and, you know, certainly between now and 2050 it may not be – it’s not as clean as renewables but it’s certainly a lot cleaner than oil and coal.

The other factor it is going to – I think two things will continue, at least short-term distortions. One is the nuclear issue in Japan, where their nuclear power post-Fukushima is sharply reduced, they mine a whole lot more liquefied natural gas. Obviously other countries in Asia, like China and Korea, have high demands.

That’s going to have an effect in Europe because of the German situation, and we’re going to be continuing to produce shale in the U.S. But, you know, I don’t think there’s any way to predict the long term. We don’t know whether shale will take off in other places. China could become a huge shale producer in the future.

We could become a huge LNG exporter as a result of all the shale that we’re doing. So it’s hard to predict, but I do think the short-term distortion is going to continue.

MR. SCARONI: Let me give you a number which I think is interesting, or at least I think so. In terms of calorific content – so power – when you buy a million BTU of gas in the U.S. and you paid $4 against the price of oil at $100, you are paying those calories at less than 20 percent the value of oil, so gas is extremely cheap, has never been so cheap.

In theory, all of us, we should transform our cars from running on gasoline to run on gas. The bill would be one-fourth of what we pay today. And this is, by the way, something which might happen.

MR. KEMPE: Fascinating. I see two last questions, so that’s why I’m going to take one after the other. David Goldman and Steve Shapiro.

Q: Thank you, Fred.

Two questions which I’m glad I don’t have to answer. One for Ambassador Morningstar: Do you think current proposed U.S. – (audio break) – the U.S. companies to ship – (off mic) – to the consortium.

And the second, for Mr. Scaroni, is what do you think Exxon’s move into the KRG? How do you think that’s going to change the dynamics or perhaps the potential for – (off mic) – shale?

MR. SCARONI: I’m not sure I’ve understood the second one, my question.

Q: ExxonMobil had –

MR. SCARONI: Ah, yes, I know – (inaudible).


Q: – has an effect, the prospects – (off mic) – to Europe.

MR. KEMPE: Well, let’s pick up those two, then we’ll go to Steve, please.

MR. MORNINGSTAR: First of all, David, I think it’s unfair that you asked that question, having just left the government six months ago. But my –

MR. KEMPE: That’s quite unfair, is it?

MR. MORNINGSTAR: But my answer to the question is simply that I can’t predict the future, but I think we’ll be able to manage the issue, and I’ll leave it at that.

MR. SCARONI: Now, on contracts in Kurdistan, in the Iraqi Kurdistan, this is your question. Listen, I was a little surprised, what I’ve read. Now, something might have changed, and frankly, I don’t know what is the situation today. What I can tell you, that my latest direct information about the position of the Iraqi government towards contracts signed in the Iraqi Kurdistan, which was maybe a month ago, told me don’t do it.

This is what I knew a month ago. Maybe the situation has changed, and I will investigate. But my latest information were those, direct.

MR. KEMPE: Direct that they would not respect the contracts or the –

MR. SCARONI: No, they said – no. Let’s say the Iraqi Kurdistan, the Iraqi – because Kurdistan as a new independent administration, since much before the Iraq, because the wars, the no-fly zone on I don’t remember which parallel – therefore Kurdistan got organized as an independent region much before the rest, and they signed some contract with some minor – not the major oil companies.

Now, from what I knew, the central government in Baghdad didn’t like the idea of an extension of those contracts, and therefore, we’ve been happy with our activity Zubair in the south of Iraq.

Now, with a certain amount of surprise, I read that the position must have changed, otherwise Exxon would have not signed that contract, I guess.

MR. MORNINGSTAR: Steve, may I respond to that question, that point?

MR. KEMPE: The – unless Steve wants to jump in here.

Q: I’ll pass. (Laughter.)

MR. KEMPE: Okay. I thought you might. Okay, Steve Shapiro, last question, though I’m going to put a little but of whipped cream on his question, his dessert question.

Q: Thank you, Fred.

Terrific discussion gentlemen; thank you very much.

Mr. Ambassador, you used the word “strategic” in referring to the Baku, and I’m reminded of Winston Churchill prior to World War I, who was in the admiralty and he viewed the need for oil as strategic as he was sizing up the fleet. And so they engineered purchases of the oil companies so that England would have a constant supply.

And thus my question to you, with respect to the United States’s policy, at what point does the consistent supply of energy, of oil and gas, to itself and/or its close allies, cross over from a commercial project to the issue of strategic and national security?

MR. KEMPE: Okay, that’s for Ambassador Morningstar, and then I’ll ask my –

Q: It is for Ambassador Morningstar.

MR. KEMPE: Yeah, and then I – but I’m going to pose it –

Q: You can –

MR. KEMPE: Yeah, and then I’ll pose the last question to Mr. Scaroni, and then you can go one after the other.

Mine does build off the Iran question, and not to put that in your mind, because it’s really more of a general question, and that is really when you are dealing globally as you are in as many countries as you are you never know when you’re going to get hit with a shock.

What do you see as your biggest global risk at the moment in a very risky business, please?

And why don’t you go first, Ambassador Morningstar? You can handle that one as well, if you’d like.

MR. MORNINGSTAR: Okay, I’m answering Mr. Shapiro’s question?

MR. KEMPE: Please, please.

MR. MORNINGSTAR: Well, you know, I think it’s for sure energy security goes beyond being a commercial issue. Energy security is a political security issue as well, and any country needs to be able to feel secure, needs to have a consistent supply of energy. I think that goes without saying.

When we use the term strategic, certainly when I use the term strategic, I don’t mean it from the standpoint of conflict or issues between countries. I only mean it from the standpoint that countries need to have energy security and that from the strategic standpoint it’s important that any country, whether it be the United States, Russia, China, or countries in this region or EU member states, have to have balanced and diversified energy policies which will allow it to be secure both commercially and politically.

And that doesn’t mean – and I want to emphasize the importance of diversity, because I never want our policy to be portrayed as being that it’s anti-Russian, for example, in some way. All (of my ?) point is that, as with any country, you know, there should be diverse supplies and there should not be reliance on one source of supply. So all countries, including Russia, have to have diversified approaches.

Q: Then you just always leave it to the market rather than – (off mic) – national security than the government – (off mic)?

MR. MORNINGSTAR: Well, it depends what you mean by – what does it mean that a government step in? For example, you know, if you look at the Southern Corridor, you know, a government can say, well, for political and strategic reasons it’s important to have a southern corridor and just, you know, for all the reasons, you know, that I stated in my presentation.

But even with those considerations, nothing’s going to work unless it’s commercially viable, unless governments are willing to put in huge subsidies, which they’re not willing to do today. So it becomes a mixture. Governments can only do so much.

MR. KEMPE: Mr. Scaroni, global risk.

MR. SCARONI: Now, you’re asking a very wide question. I’m not sure I want to keep you for a couple of hours explaining how we perceive risk. Let me just give you a couple of pillars of our philosophy.

The first one is that you don’t find oil in Switzerland. Unfortunately, Switzerland, there is no oil. We have to go where the oil is, no? So if the oil is in a different county, let’s go in a different country and try to do our best. So this is the first pillar. We accept a certain amount of risk.

Second, that the perception of risk of an oil producer is not the same of a saver who put his money in the bank. What I mean by that is, for example, no, I consider a very risky country the U.K. Why? Because they raised taxes on oil twice overnight, cutting down profits for their company with no alert at all.

Now, this is real risk, so I might consider the U.K. riskier than an African country – African countries in which you might read in the newspaper that they have troubles, but we have been working there in the last 15 years with no problem at all.

So the perception of risk of an oil company is very different from the perception of risk you would have if you want to put your deposit in the bank of that country.

MR. KEMPE: Thank you very much. On behalf of the audience, I want to thank both of you. I do want to say one thing: A long-running show, whether on Broadway or in Istanbul, only comes back because it’s such great value.

So Ambassador Morningstar and Mr. Scaroni, you’ve been great value to this conference. We’re delighted that you take your time to keep coming back to us and talking to us again, and watch for that next letter in the mail. We very much thank you.




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