Energy and Security from the Caspian to Europe

Welcome and Moderator:
Ross Wilson,
Patriciu Eurasia Center, Atlantic Council

Neil Brown,
Senior Staff Member,
Senate Foreign Relations Committee Staff

Marik String,
Deputy Chief Counsel,
Senate Foreign Relations Committee Staff

David Koryani,
Deputy Director,
Patriciu Eurasia Center, Atlantic Council

Adnan Vatansever,
Independent Analyst 

Date: Tuesday, December 18, 2012 

Transcript by
Federal News Service
Washington, D.C.

ROSS WILSON: (In progress) – delighted to welcome all of you here today to this event that looks at the status of Caspian energy and especially natural gas development, American and allied interests in that development, and in other issues related to European energy security, and in U.S. policies and actions that aim to advance those interests, that have aimed to advance those interests over the last number of years and looking forward.

Today’s meeting is part of the Eurasian Energy Futures initiative, which is a new Atlantic Council effort spearheaded by the Eurasia Center in conjunction with the council’s Energy and Environment Program. It aims to stimulate new thinking and problem solving on energy issues across this vast area, all the way from Central Asia in the East to Europe and to America’s closest allies in the West.

Since the collapse of the Soviet Union just over 20 years ago, it has been American policy to support and promote the development of Caspian energy resources. Contrary to the views of some, I think especially in the region, this has never been about energy for the United States, but rather about several other important interests.

One has been to increase energy supplies for the global market, more or less without regard to specific recipients. It seemed more urgent in the early 1990s perhaps than today to augment global energy supplies, but energy, of course, is the lifeblood of the entire world economy.

A second interest was to ensure and support the sovereignty, territorial integrity and independence of the new states that emerged in the Soviet Union’s collapse. These countries faced extremely tough economic problems. Energy was a means to acquire the resources to deal with those problems, and mechanism – and a mechanism for advancing their real independence from Russia and real ability to determine their own future.

A third interest – set of interests related to Iran. By the late 1990s, the United States was becoming much more concerned about Iran’s destabilizing policies and especially its development of nuclear weapons and ballistic missile technologies. We thought at the time it important to ensure that Caspian oil and gas producers did not trade dependence on Russia for the export of their oil and gas for dependence on Iran. We wanted to minimize and prevent investment in Iran’s oil and gas sector that fueled and continues to fuel its destructive policies. And we were sensitive to the need – to European and other needs for more energy resources, so the Caspian agenda was a more positive set of work that we engaged on as the United States and with our allies to secure important alternative resources for them. Indeed, a central point throughout this period or over the last 20 years has always been advancing European energy security.

At the direction of U.S. Senator Richard Lugar, Senate Foreign Relations Committee staff members Neil Brown and Marik String visited Azerbaijan, Turkmenistan and Turkey in October to assess the state of play with regard to Caspian gas, the infrastructure to get it to market, and U.S. policy to promote the development of those resources and that infrastructure. Yeah. It’s great that it’s not only think tanks engaged in this sort of stuff and I’m starting to see the competition coming from the Senate Foreign Relations Committee staff.

The initiative flowed from Senator Lugar’s impressive attention to matters concerning U.S. energy security policy. This included his support for the Energy Diplomacy and Security Act of 2006 that helped lead to the creation of the State Department’s Energy Resources Bureau last year.

Senator Lugar was involved in efforts to establish the position of special envoy for Eurasian energy affairs, and remains interested – very interested in the work that that envoy has carried out. And he has called on NATO to include energy security among its Article Five contingencies, clearly trying to put energy security on the NATO agenda as well as on the U.S. national agenda and European Union agenda.

Among other things, Senator Lugar asked Marik and Neil to assess the status of competing pipeline proposals, to report on the prospects for including gas from Turkmenistan, Iraq, Kazakhstan and the Eastern Mediterranean in this new infrastructure, to generate recommendations on how American policy can ensure that the evolution of the southern quarter can best serve the interests of trans-Atlantic energy security, and to investigate the impact of eliminating the U.S. envoy for Eurasian energy security position, which seems to be the direction that the Obama administration is headed in.

Their report was released – excuse me – was released last Wednesday. It accompanied the introduction of Senator Lugar’s LNG for NATO Act that would make it a priority to facilitate U.S. natural gas exports to our NATO allies as another way to further promote and advance European energy security.

To discuss this report and related issues, we’re exceptionally pleased to welcome the report’s authors.

Neil Brown is senior adviser to Senator Lugar and a senior professional staff member on the Senate Foreign Relations Committee, where he works on energy and related security matters really all around the world. And I gather just before going to the Caspian region was in other places in Mexico.

Marik String is deputy chief counsel and senior professional staff member for Europe and Eurasia at the Senate Foreign Relations Committee, where he’s played an important role in staffing the committee’s consideration of legislation, resolutions and treaties, including the new START Treaty in 2010. He is a key committee point person on U.S. policy toward Europe and Eurasia. We were pleased to work with him last year on the Georgia Task Force that produced a report about – released about this time last year that looked at U.S. policy toward that country and developments there.

We’re also pleased to welcome David Koranyi – or I’m pleased to welcome David Koranyi, the Atlantic Council’s deputy director of the Atlantic Council’s Eurasia Center. He leads our Eurasian Energy Futures initiative, and is a significant driver of programs for us on European and Eurasian energy security. David is a former undersecretary of state and chief foreign policy and national security adviser to the Hungarian Prime Minister Gordon Bajnai. We are exceptionally pleased to have David with us at the Atlantic Council.

Finally, we’re pleased to welcome Adnan Vatansever, an analyst who specializes in energy issues on Russia, other states of the former Soviet Union and East Central Europe. Adnan was a senior associate in the Energy and Climate Program at the Carnegie Endowment until recently. Our formal announcement will be going out I think in a few days, but I’m pleased here to report that Adnan will be joining the Atlantic Council as a non-resident senior fellow to support our work on Eurasian Energy and Futures Imitative and other energy related work in the region.

Our program today, I will turn the floor over the Marik String and Neil Brown to present briefly on the report that they released several days ago. After that, we will have comments by David and Adnan, some discussion, and entertain questions and comments from all of you. So with no further ado, let me turn over to Marik String. Welcome.

MARIK STRING: Thank you very much. Thank you to the Atlantic Council for organizing this even and particularly to you, Ambassador Wilson, for the kind introduction, and to Ian Brzezinski, and David, and Damon for putting this event together. We’re both delighted to talk about the recent report that Senator Lugar released and the piece of legislation that Ambassador Wilson just mentioned.

Neil and I will divide our comments up. I’ll talk about why the Southern Energy Corridor still makes sense for the United States and Europe, and talk about some of the specific pipeline proposals under consideration, including some of our recommendations on those proposals. Neil will turn to future supplies for the Southern Corridor and talk about our legislation in greater depth.

So as all of you I’m sure are aware, when we talk about the Southern Corridor for natural gas, we’re talking about the infrastructure, series of pipelines that have been either built and are being expanded, or the other pipelines that are being considered to take Caspian gas onward to European and to global markets.

And the first key finding of our report is that the Southern Corridor for gas appears finally to be within reach. And I think this is an important finding, because for many years, a growing cadre of skeptics had asserted that the Southern Corridor for gas is dead or no longer makes commercial sense. I think it’s important first to just briefly mention some of the trends in Europe that have underpinned kind of the skeptics’ argument and have admittedly helped to create more competitive markets in Europe even before the Southern Corridor for gas has been completed.

First, some cite the shale revolution in the United States; LNG that was sourced in the Middle East and North Africa that was once destined for the United States has now been able to be sent to Europe. This has created, or helped to create spot markets in Europe and put pressure on Russia’s long-term contracts that generally are indexed to the much higher priced oil. And perhaps, in the future, U.S. LNG can also contribute to this trend. And Neil will talk about that in some greater detail.

There could also be a shale revolution in Eastern Europe and Eastern Europe could become an indigenous producer of its own gas.

Third, the EU has finally gotten its act together and put forward a more coherent energy policy, although not without some frustration still. The EU regulations are forcing suppliers to unbundle ownership and distribution networks, and, as many of you know, Gazprom is now seeking exemptions from these regulations for some of their marquis distribution projects, including the Nord Stream pipeline from Russia to Germany under the Baltic Sea, and has also recently launched an anti-trust investigation of Gazprom.

Fourth, and finally, Gazprom, by many accounts, has overextended itself. It’s had to abandon the Shtokman Arctic gas fields and it’s been chastened by a plummet in its market value.

And our argument is quite simple. We say that these trends are all promising for the creation of truly competitive markets in Eastern and Central Europe and really throughout Europe, but they may or may not last. Pipelines for the foreseeable future are still cheaper than LNG transport. European shale development has been uneven. Some companies have left exploration projects. Two key countries have banned shale exploration. And EU emission standards will continue to lead to a substitution away from oil and coal towards gas. And we believe that we have a unique opportunity now to make the Southern Corridor a success. In fact, we believe we owe it to our NATO allies and partners to see this project through to the finish.

And there are three sort of key realities that we think make it likely that this project will be completed.

First, there’s a huge amount of gas that will soon come online from Azeri fields in the Caspian beyond the Shah Deniz II gas, which will be the anchor for the initial stage of the Southern Corridor to Europe. The Absheron field could come online in the next decade. The Azerbaijani government may soon tender expiration offers for the ACG deep fields.

Secondly, the Azerbaijani government is sticking with its strategic decision to use energy to forge ties with the West. I think this is an underappreciated reality. Azerbaijan could quite easily sell its gas locally or regionally. Turkey would be happy to buy all of the Azeri – all of Azerbaijan’s gas, but Azerbaijan has made a decision to send it onward to Europe, even though this decision has arguably brought a lot more pressure to bear against the government in Baku by two of its very large and significant neighbors.

Finally, many of our allies still remain overreliant on Gazprom, and, in the case of Turkey, on Iranian gas.

The part of the Southern Corridor that is dead is the original Nabucco proposal, as most of you know. This proposal was blessed by the EU and the U.S. in 2009. In our view, the most critical development since 2009 has been the proposal put forth by the Turkish and Azeri governments for the TANAP pipeline, the trans-Anatolian pipeline, which is envisioned to replace much of the Nabucco original proposal across Turkey. And this proposal was recently ratified by both the Turkish and Azeri Parliaments and has many advances over Nabucco. Instead of having six private companies trying to come up with a feasible pipeline, it’s only two governments driving initial strategic decisions.

Now, by June 2013, the next key decision for the Shah Deniz consortium is between the two onward routes from Turkey. There are two proposals remaining. The trans-Adriatic pipeline, which would transit Greece, Albania, underneath the Adriatic, to Italy, and, secondly, the Nabucco West proposal, which is the scaled back Nabucco proposal that would transit Nabucco’s original distance across the EU through Bulgaria, Romania, Hungary, and Austria.

In our report, we endorse Nabucco West for the simple reason that it provides the most benefit to U.S. foreign policy interests in providing diversification to our allies who most need it.

To be clear, either pipeline would be in the U.S. interest, broadly construed. Perhaps both can be built over the long term. And either, we think, could make commercial sense. But what we’re interested in is the pressing energy predicament still faced most acutely by Central European allies and their overreliance on one supplier.

I think another underappreciated reality is that the United States has no direct commercial interests in the Southern Corridor for gas, apart from perhaps some smaller service contracts. The United States is principally involved in this whole project, as Ambassador Wilson mentioned, because of U.S. foreign policy interests. But I think some statistic bear out our recommendation.

Of the Nabucco West transit countries, Bulgaria is still relying on Gazprom for 89 percent of its gas, Hungary for 57 percent, Romania for 23 percent. Although this is not part of Nabucco West current proposal, one could envision very short distance interconnectors to the Czech Republican and Slovakia, which respectively rely on Gazprom for 100 percent and 92 percent of their gas.

Over the coming years, several of these allies will also see their long-term contracts with Gazprom coming due, and Nabucco West would help provide these allies with negotiating leverage, would reduce the potency of energy cutoffs, and would bolster all of these allies’ sovereignty.

But contrast, the TAP pipeline, which, as I mentioned, would transit Greece, Albania and Italy, would have only marginal benefits to U.S. foreign policy interests. All three of these countries are, without doubt, very important U.S. allies, but only two of these countries even purchase gas from Gazprom. Of these two countries, Greece and Italy both rely on Gazprom for less than 46 percent of their need. By virtue of geography, we’ll also have very easy access to North African gas that comes online in the future after reforms prompted by the Arab Spring.

And one caveat I’d just note to our argument is that TAP does have certain advantages. It would free up gas to be sold in other Central European markets. It’s most likely – it’s going to be cheaper to build than Nabucco West, and TAP does benefit from a more efficient management structure with only three companies as opposed to six companies in Nabucco West driving decisions.

With that, I’ll turn to Neil.

NEIL BROWN: One of the – is this on?

MR. WILSON: It will be.

MR. BROWN: OK. One of the worst things that comes with working for Senator Lugar is that you finish something and then he tells you to do more, to take it further, to take the benefits further, to push more, something that our friends at the State Department sometimes hear from us.

I was thinking of that because what I wanted to talk a little bit about first was the need to do more. We, as Marik said, happily were at a point where the extension of the Southern Gas Corridor with SCP, TANAP, and EU onward connection is really within reach, and that’s something that has taken many years and a lot of work, particularly by some very talented people in the State Department to get to this point, but that’s not enough. The benefits – the strategic benefits, the economic benefits, the liquidity benefits in global energy markets will be maximized if we keep going. And there’s been a lot of work on it over years, over decades.

So we have to overcome the temptation to declare victory and move on, although all of us like a victory every now and then. Really, the key to the future of the Southern Corridor in my opinion is across the Caspian. The discussions, particularly with Turkmenistan, given its geographical proximity to Azerbaijan, and its prominence in being the largest country with known gas reserves in Central Asia, you know, puts Turkmenistan really at the center of the question.

Many of you here probably know the political situation in Central Asia much better than I do. I’m more of an energy guy. So I think it’s fair to say that the former president of Turkmenistan was a bit odd and when the new president came in there was a lot of hope for change. And I remember going to Ashgabat several years ago, shortly after the new president came in. And you could see some of the changes coming, and some of the photos coming down of the old president, and whatnot, but then when we went back last time, you see that they’ve just been replaced by and large.

And I think kind of so goes the bilateral relationship, where we’re able to work on a number of important issues, particularly, for example, humanitarian assistance to Afghanistan. But we still have a long way to go in the bilateral relationship.

And if you move beyond security considerations, it’s really energy is the heart of it, right? As was mentioned, I handle global energy affairs, which takes me to a lot of countries that depend on oil and gas primarily for their lifeblood. And when you go to those countries, that’s what you’ve got to be talking about, otherwise you’re missing the economic boat. You’re missing the security boat.

And, you know, the same is true in Turkmenistan. The problem is the government in Ashgabat I don’t think has a clear vision for where it wants to go. Now, it puts out goals for either about 70 bcm of capacity. Today, they want to more than double that. But I think there’s a lot of skepticism over whether they really want to do that. There’s a lot of question as to whether the ambitions of the regime actually require that development happens. And what that means is that their domestic policy on energy is outdated to the realities of what would need to happen to reach the production goals.

In very short form, I think – I saw a couple of people here who could explain the contracting requirements of IOCs certainly better than I can as a Senate guy, but essentially the IOCs need to be able to book the reserves. They need to be able to take some form of ownership over the reserves to justify billions of dollars in investments. That is what gives the companies value.

So when Ashgabat says, well, we just want you in service contracts, well – which essentially means we’ll just pay you for whatever thing we want you to do, whatever technology we want you to deploy, that’s not something that is all that attractive.

And so if Ashgabat is not willing to change that piece of the puzzle, it becomes very hard then to imagine very large new export markets outside of Turkmenistan. But even with what we have today, we know that there’s a great deal of gas (flowing ?), maybe eight bcm or so in the Caspian sea already. The Turkmen government is generally more open to a better investment climate offshore, but the general feeling out there amongst industries that, listen, we’re not so convinced that there’s that much gas to be had offshore. We really want the onshore fields. So it’s a process in that regard.

But, you know, there still is opportunity for a trans-Caspian trade route, trans-Caspian pipeline, interconnectors, whatever it is. The EU has over the course of the last few years really increased their engagement with Turkmenistan to varying success. I mean, you sort of – you see some great press releases and then the energy commissioner goes and can’t get a meeting, and you sort of back and forth, so goes it. But clearly without that EU leadership, I think that we would be in a worse place than we are today in terms of keeping it on the agenda at the highest level.

We’ve also seen a new development in Turkey showing much more interest in playing a productive role in the energy equation with Turkmenistan. They already have a purchase agreement in place. There’s just no gas to purchase. You know, Turkey itself has tremendous gas needs going forward and growth and could consume essentially all the gas that Turkmenistan would like to sell to it. So the recent inclusion of Turkey in the ministerial level talks on trans-Caspian trade I think is a very positive development, one that the U.S. should be encouraging.

We also need a little bit more from Azerbaijan. I think – you know, Azerbaijan has really been a great ally in many ways, including in energy trade. I mean, really, against all odds. And there’s some people in this room who were involved in that before – certainly before I was.

But they need to – they need to step it up on Turkmenistan a little bit, because Marik mentioned TANAP across Turkey they own – they have now an 80 percent share. They will go down to 51 percent which essentially is giving the government of Azerbaijan, or SOCAR, the control over what gas enters the pipeline. And you really need Azerbaijan to guarantee without a doubt that Turkmen gas, if made available, would be able to transit. There would be zero incentive for Ashgabat to trade if they can’t get the gas out or they’re uncertain about the terms. So that’s something that Azerbaijan could do that would be useful.

You know, in the short term, you know, there was a couple of years ago this idea of kind of small interconnectors across the Caspian. And different parties view that in different ways that kind of – it kind of went out of fashion a little bit, but I think it’s an idea that has a lot of potential. It’s not particularly aggressive towards Russia, which is the big player in terms of providing hard currency to Turkmenistan through its importation of Turkmen gas.

And Turkey I think in particular, one of the suggestions we make is that Turkey go ahead and offer to buy any gas. And actually Turkey would have the capital to put forward for the connectors. And you’re talking about even a large trans-Caspian trunk line is in the scheme of global energy not very expensive and not very challenging. It’s a short distance under known waters.

So that would be a short-term possibility that you might go ahead and be able to connect in to the current infrastructure build outs plans, but, nonetheless, you’d have to move quickly to make that happen.

Over the long term, we have to continue working, you know, even against all odds at a more formal intergovernmental agreement, U.S., EU, Turkey with Turkmenistan for large volumes in the future. But, you know, that is something that’s going to take many years.

The last point on Turkmenistan I would make is that the most important thing you could do to encourage Turkmenistan to participate really is to finish all the stuff that Marik talked about, because you sort of look across the Caspian and you see sort of on down the proposed line trouble after trouble over years. Now, I think we’re very close to overcoming all that, but if we can go to Ashgabat and say, listen, this is going to happen, we now know this is going to happen, without a doubt, I think that that’s a very strong signal in building confidence.

Let me just say one quick thing about Iraq. In 2009, when we were in Akra for the intergovernmental agreement signing or Nabucco treaty signing, the prime minister of Iraq was there and pledged 15 bcm for the Southern Corridor, which was – kind of took everybody by surprise, and delightfully so. Of course, between then and now, you can look on the news and you sort of see that there’s still no oil and gas agreement between Baghdad and the Kurdish region. And the necessary build out of power infrastructure in Iraq also has not come along at the pace which we would like. That’s important because it’s a little bit hard as a government to say, oh, we’re going to export our gas while people still don’t have power, which – power being the main use for gas.

So the U.S. in general has said, listen, we’re not encouraging trade from the northern regions of Iraq without this national framework in place. I think that there’s been good reasons for that, but, you know, this has gone on for a long time now and Iraq is missing opportunities.

So I think that it’s important that we continue to reassess that policy and see whether it is in our interest, both our security and stability interests in the region, but also in our commercial interests. You see a lot more U.S. companies and international companies realizing that, you know, essentially – you know, the oil regime in southern Iraq is a bit of a mess so we’re going to go ahead and look north. And we know there may be consequences for the future in terms of southern.

Just to be slightly provocative, we didn’t go into great detail into Eastern Mediterranean opportunities, but clearly there’s a lot of development in Israel; there’s opportunities in Cyprus, maybe Lebanon. And in Israel in particular, you know, with its good investment climate, its, you know, steady rule of law in business, you know, we – it’s a very good bet that that production is going to go forward. And Turkey is the obvious trading partner. Now, people will say, well, you know, now look what’s going on between them right now. It won’t happen. Well, you always have to look down the road and it’s never too early for a conversation, even informal conversations on that.

Quickly, because I went on a little bit longer than I should have there, I wanted to just touch on LNG. You all have seen there was a – there’s been some great reporting in the Post and the Journal on the U.S. shale developments in the United States, massive breakthroughs driven by technology, driven by prices on the oil side. On the gas side, we probably – you know, estimate up to 100 years of capacity. And there’s been some controversy on whether we should export the gas.

But I think, you know, within the U.S. gas market – you know, it’s interesting. We don’t really have a supply problem anymore. We kind of have a demand problem. Where are we going to put all this gas? Because a lot of it is actually operating at losses on the gas itself, so, you know, the developments can stay afloat because the associated liquids produced are quite valuable.

The Department of Energy – I don’t know – I think this is more of a foreign policy crowd so you may not know the export licensing regime for LNG. Actually, not that many people in the energy policy crowd know it either because it’s not really been a problem for us anymore.

You know, we used to have the EIA, Energy Information Administration, at DOE. It used to project U.S. LNG exports going, you know, sort of like this. Excuse me – imports going like this. And so there was build out of infrastructure to bring in all this natural gas. Well, we don’t need it anymore. And so already the U.S. shale revolution is impacting Europe because all those ships that had been intended to come to U.S. shores can now be – can be bought in Europe, which is adding liquidity that wasn’t expected to be there previously.

But, you know, we have all this gas here so what are we going to do with it? The Department of Energy is charged to license exports. They have to do a public interest determination. Last year, they issued one license, and then saw an onslaught of applications, and a lot of political rumblings, which were coming before an election that you may have heard about. So they said, listen, let’s stop for a minute and let’s do some study on the economic impacts. And I think that that was probably a good decision. I think that we didn’t know much about it.

Coincidentally, that study came out at the same time as our report just two days before, which got people interested in one of the suggestions, which is that we go ahead and license LNG for NATO allies. Already, within the export regime, if you are a country with which we have a free trade agreement, you get a license automatically. So there’s a precedent for saying, our closest friends, we’re going to go ahead and trade with no matter what on LNG.

So I would say that – and Marik would say, and, more important than the two of us, Senator Lugar would say, listen, these are our allies. They put their soldiers in harm’s way for us. We would do the same so we probably should go ahead and trade gas with them, particularly when that gas can help break the monopoly that Russia has over some key markets.

It also draws into questions of Iran. Likely the U.S. Congress will consider sanctions on Iranian natural gas in the future. Whether they will go through or not, who knows. But it is a problem for Turkey. So if the United States is telling Turkey, you know, please, we need you to reduce your imports of Iranian gas, then it’s a bit of a – it would be a bit hypocritical if we were saying we would not also export our domestic gas to you.

Finally, let me just say a little bit about U.S. engagement. You know, we’ve really been blessed on the Southern Corridor with some just extraordinarily talented diplomats. You know, Matt Bryza, Boyden Gray, Dick Morningstar, you know, and then their teams. And it’s kept it going.

We saw after the completion of the first phase of the Southern Corridor, the Baku-Tbilisi-Ceyhan pipeline, the South Caucuses pipeline, we saw kind of a falloff in U.S. engagement. Again, it goes back to my first point of, you sort of have a success and maybe we should just declare victory and kind of stop.

But that meant that we weren’t realizing the full benefits, and with now Vice President Biden we pushed quite hard to get higher level attention. And Secretary Rice did that; Secretary Clinton did it, and more. And I think that from Brussels to Baku, the U.S. engagement is widely regarded to have been critical to keep it going.

I think it’s important to remember as I – as I mentioned, it’s a global phenomenon but if you’re in a country that is so dependent on your oil and gas resources for survival, then where are decisions being made? They’re being made at the top, right? Like the point – I like in Nigeria – the energy minister is the president of the country.

And so we have – as a U.S. government, when we’re advocating the Southern Corridor, we have to be talking at the top. It’s – if you’re not, then it’s a waste of time essentially. And so – so that’s point one. Our ambassadors can do that, but they also have broad agendas. And sometimes, they don’t – you know, in some countries, they won’t have quite the access that you would need.

Number – the other problem with relying solely on ambassadors is that they – they’re kind of stuck in country. You know, they can do a little bit between countries, but you need somebody who can go from capital to capital, almost like a shuttle diplomacy situation where you’re moving agreements. You’re cutting through the BS to keep the momentum going. So in the report, we strongly endorse continuation of the envoy. I think not continuing the special envoy would send a very bad message of U.S. disengagement.

The idea of dual hatting the assistant secretary for energy, Ambassador Pascual, I mean, there is probably no more capable diplomat in the State Department in my opinion. But, you know, he’s covering the world and he has a very small agency. So, you know, when you have high-priority opportunities, then you’ve got to push, and you can’t – got to have the staffing there to make it happen. So with that, let me just stop.

MR. WILSON: Great. Thank you very much.

Comments from David and Adnan.

DAVID KORANYI: Thank you, Neil, for taking away this great starting line. I wanted to start off to thanking all these great U.S. diplomats that have helped putting all this together. But, I mean, frankly, I would just like to add Ambassador Wilson to the –

MR. BROWN: Of course.

MR. KORANYI: – he was instrumental in the BTC pipeline, and also Carlos Pascual, Neil, you mentioned that, Deputy Assistant Secretary Amos Hochstein is very instrumental today.

So I think overall – and this is true for the last 10, 12 years, this is another subject where the U.S. plays and played a very instrumental role in waking up Europe and making Europe realize what the real strategic goals are here. So I think Europe is finally getting its act together. It’s finally putting the pieces together. You mentioned the Gazprom investigation. There are many things going with regard to the internal market in energy so things are finally moving forward. There is a more robust energy diplomacy on behalf of Commissioner Oettinger, on behalf of Lady Ashton so the pieces are finally moving. But that said, we still very much need and require U.S. diplomatic assistance.

So we are truly grateful, and especially me coming from Europe, coming from Hungary, from a country which experienced firsthand how bad it could be when the Russian natural gas supplies are cut off – in the middle of winter in 2006 this happened, and it again happened in 2009. We can have this firsthand experience how strategic and how vulnerable these countries are from the energy perspectives.

Let me just react to a couple of points in the report and what Marik and Neil just said before me. I mean, one thing which is important to recognize is that there are fundamental changes in the last let’s say five years on the energy markets, on the energy markets in the United States but also on the energy markets in Europe.

Five years ago, I remember I was working in the European Parliament and we already talked about the Southern Gas Corridor at length. And the main concern about the Southern Gas Corridor at that time was the supply side. Where does the gas (fill ?) come from? Will there be enough gas to fill such a major dedicated pipeline like Nabucco?

And now, five years later, the debate is more about that we have all these supplies or potential supplies coming online. There are much more supplies potentially coming from Azerbaijan than previously mentioned. We have the Iraq supplies, Turkmenistan supplies, et cetera, et cetera. But when what about the demand in Europe?

Because of the recession, because of other issues like the European trading scheme, and defaults in the European trading scheme, and because it favors coal as opposed to natural gas right now because of the whole pricing structures in Europe right now, we have a situation where we face a sluggish demand right now. And the – I mean, according to most of the prediction, like the predictions of the International Energy Agency, the natural gas demand in Europe will remain more or less sluggish up until the end of this decade. So the situation is completely the reverse as it was five years ago. So that’s one key point we have to keep in mind.

On Azerbaijan, I full agree with the report and what you guys said is that the situation completely changed with the Absheron, with Med, with the ACG deep developments, Azerbaijan in itself will be able to supply at least the first phase of Nabucco West or TAP. I think – or both. This could also be the case.

When it comes to Iraq, I actually share your concern as well is that because of the domestic consumption needs, also because of Turkey’s huge demand increases in natural gas, most of this gas, at least for the foreseeable future, will be sucked up in Iraq itself and then in Turkey so not much of this gas will get to Europe, at least in the coming decade, maybe after that, that’s possible.

When it comes to Turkmenistan, I can only quote Dick Morningstar, who recently in Istanbul – we have this yearly, annual gathering called the Atlantic Council Energy and Economic Summit – and he happened to say that although he keeps working for the trans-Caspian pipeline, and he remains, of course, utterly optimistic, but he will be the first to go to dance on the streets of Baku whenever this happens.

So I have my skepticism myself. And because of all the problems with Russia, with the legal status of the Caspian Sea, with all the security concerns, I’m not just not seeing that happen in the foreseeable future. So the Turkmen piece is something which I have my doubts about, not to mention the huge buy ins on behalf of China, and the huge shipments, and increasing the huge shipments going to China from Turkmenistan.

More optimistic – although you need a certain amount of idealism for that, but I’m more optimist on the Eastern Mediterranean, because if you look at the prices to build a pipeline, a dedicated pipeline from Cyprus to Turkey, it would cost about one tenth than to build an LNG terminal on the island of Cyprus. So the costs – the economics would be just much more. And there is this huge demand in Turkey. Again, all the demand is very close to the shore so the pipeline could just bring – and then you could also build a front pipeline to the TANAP pipeline which could then bring any extra gas from Cyprus and perhaps also from Israel to Europe. So that’s – that’s something which I see more likely to happen than gas from Turkmenistan.

And then, we haven’t talked – and I don’t want to go into the details – the Black Sea offshore which could also feed into a Nabucco West of the later stage via Romania. The Romanian-Hungarian interconnector already exists so that’s another option,

Just very briefly on the whole Nabucco versus TAP debate. I mentioned that in the medium term, in like 15 years’ time, I could easily mention that both of these pipelines will be built eventually. But I fully share the assessment of the report that strategically, the most important piece is the Nabucco West because of all the reasons outlined before. Let me just add three additional components.

One – I’m of course somewhat biased because I’m Hungarian, but for the Hungarian national economy, it costs an extra 3 percent of GDP yearly because we have to pay that higher gas price to Russia because is in a monopoly position, whenever we sit down and negotiate about the gas prices. So that’s one.

The other piece, which is crucially important, and I think it’s a major advantage as opposed to TAP, is – it’s the Balkans piece. And, strangely enough, it was TAP before which emphasized that via TAP, the Balkan could be supplied well.

From my perspective, what I see is that the Nabucco West is better positioned, that from there, the Balkans would be better supplied. There is already an existing interconnection between Croatia and Hungary. There is an existing interconnection between Hungary and Serbia. The interconnection between Bosnia Herzegovina and Croatia could be easily expanded so this Balkan round and to hook up the Balkan states could be relatively easily done once the Nabucco West is in place.

And all the more so, and this is crucially important just to refer back on the demand side, I talked about in the beginning is that one of the best prospects for an increasing natural gas demand is actually in the Balkans. Some projections say that it’s 10 to 12 bcm in the Balkans for the next decade. So that could be a huge market for gas coming from the Caspian.

And then, finally, one piece, again Hungarian piece, but also an Austrian piece is that we – because of the 2006 and then 2009 crisis, we developed huge gas (to reach ?) capacity so the Central European gas to reach capacities exceed 8 billion cubic meters. So you could store lots of gas there and in the face of crisis, you can supply the neighboring countries, just as Hungary did during the crisis of 2009, to neighboring countries like Slovakia and like also Serbia. So that’s also a strategic argument.

Two key pieces on what you need in order to move the Nabucco West forward.

One – and it’s actually happening – is to – just as happened in the case of TAP – to change the composition of the current consortium, because how the current consortium looks like, they just lack the finance or firepower to put something together like the Nabucco West. So you need the Shah Deniz consortium members, at least some of the Shah Deniz consortium members in the Nabucco West consortium. And this is happening as we speak. There was just recently a meeting in Hungary, in Budapest, on the 6th of December. As far as I know, negotiations are proceeding in due course. So very soon SOCAR, BP, Total could buy into the Nabucco West consortium. So that’s one crucial piece.

And the second crucial piece, and that refers back to Turkmen and all the other gas, is what I see – and this is not mentioned in the report, but it would be great to elaborate on that as well, is to preclude a future situation where demand uptick again – upticks again in Europe, but there is a sort of a foreclosure when it comes to the TANAP piece, that because of commercial rivalry, because of – let’s put it bluntly, SOCAR not willing to have less major Turkmen or Eastern Med gas coming to the system because they have a majority ownership in the pipeline, what would be crucial to preclude that is to make Turkey, but also Georgia and Azerbaijan at some point, join the Europe energy community, which essentially means that the European regulations, including – (inaudible) – access will also refer to these countries. So they have to comply with these regulations. So I see that as a crucial piece.

And I will stop here. And I think Adnan is in a unique position to talk about the LNG piece.

ADNAN VATANSEVER: Thank you very much. I’d like to start thanking Ambassador Wilson for the introduction and I should say that I’m really thrilled to be joining the Atlantic Council, and especially excited for working on this Eurasian initiative, which I think is a very unique one, at least in this town in terms of its having a very comprehensive plan about enhancing energy security in Europe. And I thank David Koranyi as well for asking me to comment on this excellent report.

What I’ll do is I’ll say a few things about the report and try to provide my own assessment about where the Eurasian – actually where the European energy security risks lie, where I see the main risks in terms of my own assessment and to what extent it actually differs from what is the general narrative.

I think the report is an excellent report. It has provided a very good analysis of what the prospects for enhancing energy security in Europe are, especially in the Eastern part of Europe, where the dependence on Russian gas remains so high.

And the recommendations of the report could not be more timely. Indeed, as the report shows, there is a window of opportunity at the moment for that, for U.S. engagement especially. And the last time when the U.S. was engaged very actively, it did result in some very major achievements, which were in the form of Baku-Tbilisi-Ceyhan and also the South Caucuses pipeline.

And, currently, there is this window of opportunity that, again, U.S. engagement can make quite a big difference. And it’s not only in the form of supporting Caspian gas flows to the region, but also possibly in the form of U.S. LNG exports to Europe, which would also make – could make potentially a quite significant contribution to the energy security in that region. And, for that reason, I do find the recommendations very timely and very accurate.

Now, let me say how I see, how I perceive the energy security risks in Europe, what are the main threats.

In general, most of the narratives by most experts actually do focus on one aspect, which is the risk of physical disruption of gas flows from Russia. And I do find this is – the risk is a valid risk. You can’t say that it’s not there. But, in a lot of cases, that risk I think is overestimated, partly because let me say why and explain where actually the real risk remains. And I think the real risk actually has to do with the price of gas that these countries have to pay. Let me explain what I mean.

In terms of physical disruption, first, they have happened, but I would say that they have been very rare. The second thing is, when they happened, it’s not always to point out who exactly is responsible there, especially in the case of 2006 and 2009 disruptions that had to do with Ukraine. A lot of experts have put the blame on Ukraine. And it’s – I would say putting 100 percent of the blame on Russia in that case probably would not be exactly accurate and probably it’s more complicated than that.

The third thing is physical disruptions are actually very public. When you do that, it actually gives very bad signals for client states and for everybody else that has some deals with Gazprom. And the Russian state, neither the Russian nor Gazprom actually have interest in having physical disruptions, now, because of this public aspect of that.

And I should also say that this has been to some extent – this narrative has been one that Gazprom has used very skillfully in the past few years by portraying that physical disruptions are really a very big threat, and it has been used to justify two big pipeline projects, Nord Stream and South Stream. In their case, physical disruption has meant problems deriving from Ukraine. But, again, this narrative about physical disruption has been overemphasized including by Gazprom.

Where I do find the bigger threat is actually in terms of overpaying for gas. And how exactly this could affect energy security of countries? Well, I find in two ways.

The first one is, by overpaying for gas, you may end up with quite significant repercussions for the economy. And this is the case in Eastern Europe where quite a few reports have illustrated that Eastern European countries are actually paying much higher prices than Western European countries for gas, for the same Russian gas.

In fact, a report about a month ago was showing that Bulgaria was paying higher for Russian gas than Greece, even though the same gas has to pass Bulgarian pipelines and go to Greece, which doesn’t make much sense if you think from an economic standpoint, but it makes sense if you’re actually locked in dealing with a country that has very significant market power or a monopolistic power.

So the threats to some extent would be on the economic competitiveness of this region, of Eastern Europe, which actually suffers some significant demographic problems in the next decades as well. I mean, it will hurt – if it gets locked in high-priced Russian gas for one reason or another, it will hurt its economic competitiveness and its future standing, global standing, and partly, it will have an impact on the European Union as well.

The other piece is that when it comes to negotiations for price, unlike physical disruptions, these negotiations, first, they are much more frequent. They happen pretty much – if you talk about Ukraine, I mean, I don’t remember a month when there hasn’t been negotiation on the price of gas in the past few years, for instance, of course they are more frequent.

And the second thing is there are not as public as physical disruption. You really don’t know what exactly is being discussed at the table with Gazprom. And what is discussed there could have some repercussions on foreign policy decisions that are made in these capitals in Eastern Europe. So that’s actually where the impact may occur.

And, in this case, Moscow does have very significant levers. And I could mention very briefly how exactly they could work. It could be an ad-hoc discount. It could be a change in the formula of the contract for a certain year or for the duration of the contract. It could be a decision to exempt export tax, which means an immediate 30 percent discount of the gas. And I would be a decision to work on the take-or-pay obligations that some countries accumulate.

So there are very different levers in the hands of Moscow. And it’s not clear how exactly these negotiations have an impact on the foreign policy decisions that are made in these countries, but one can assess that there are – one can assume that there are some implications about when these countries are making some major decisions for their policies.

So in terms of risk, where I see the main risk is getting – for this region particularly, Eastern and Central Europe, the main risk I see is getting locked in high-priced or overpriced Russian gas. And I should say why I think there is a real risk for that. I see there are five reasons for that.

First, the cost of Russian gas is rising. It’s partly because Soviet gas fields are getting depleted very quickly, by about 3 to 4 percent per year, and the new fields will cost much more. So there is one reason to expect higher prices because cost will rise.

The second thing is the expert strategy that has been adopted by Gazprom will also cost and somebody has to pay for that. Now, Gazprom is building the Nord Stream pipeline and they have started building South Stream. It’s not clear whether it will be built eventually or not yet, I would say. But when these pipelines are complete, Russia will have twice the capacity of what it really needs to export gas to Europe, even considering what the demands of – of European demand will be like in 10 years or so. Plus the capacity of some of these power plants will be underutilized, and if they’re underutilized, the operation cost per unit of gas that they’re selling to Europe will be actually higher. And somebody will have to pay for that. Again, I don’t say that this has to be paid by European clients. The cost would be well borne by Gazprom, but it will not happen unless certain measures for diversification in that region are taken, and I’ll go to that later.

Now, the third reason about why I see that Eastern Europe can face this risk of getting locked in high price is the nature of the Russian economy. One can describe it as a two-engine economy, which is heavily reliant on oil revenues and gas revenues. And the oil engine of that economy is actually slowing down. Oil is peaking. The hope – Russia’s hope is actually that gas will take over partly and its share in these revenues will start increasing. So the hope is that Russia will keep expanding its exports. So exports become extremely important for Russia. And how do you – what do you do if you cannot increase your volumes of exports – I mean, the best hope is that you will be selling at a higher price.

Now, the fourth reason is that Gazprom is actually getting squeezed out of the domestic markets. Ten years ago, Gazprom was producing 90 percent of the gas in Russia. Now, it’s down to about 75 percent or so. And it is losing quite a lot of the domestic contracts in the country. Like a few weeks ago, it lost a contract to Mosenergo, the biggest power supplier in the Moscow region. It lost the contract to a private company. And if this trend continues, it will mean Gazprom will have an even greater incentive to be earning money from abroad rather than from home. So this actually makes another reason for why Gazprom will be a very tough bargainer in the years ahead.

And the final reason is if Russian and China reach a deal on gas supplies, this will also have very serious repercussions for Eastern Europe in terms of pricing. It could have at least.

Now, is there a solution? Could really Eastern Europe and Central Europe not get locked in high-priced Russian gas? Yes, there are two ways to do that. One would be – one of the solutions could possibly come from Russia, and that would be if Russia actually evolves towards a very competitive market where you have much more efficiently functioning gas sector, their part of the cost savings would be translated – could be passed onto clients in Europe and so on. But that’s not going to happen very quickly and it’s not going to happen automatically. Even if there are some cost savings for whatever reason, there will be tough bargaining involved. And unless Gazprom is really in one way or another forced to actually reduce in price, it’s not going to happen.

And that actually brings me to the last point, which is – where I see the solution – it is – the solution would be to do everything possible to diversify the sources of supply in this part of Europe. And this could be done either through U.S. LNG. It could be done through unconventional gas. It could be done through Caspian gas, northern Iraq, and so on, Eastern Mediterranean.

And this is not – this is not going to have only it’s reducing – possibly reducing the price of gas for that region and helping with economic competitiveness. It will also provide a larger room for maneuvering at the negotiation table of leaders in this country when they go and talk to people in Moscow, in Gazprom. And this will help to minimize some of the potential implications for foreign policy decision making in this part of the world.

And for that reason, I say this report is extremely timely and the recommendations are that extremely important, because this actually points out exactly where the solution lies. Thank you.

MR. WILSON: Great. Many thanks to each of our panelists. I’d like to open up the discussion to all of you to ask questions. I’ll take the moderator’s prerogative to ask the first one, but then please catch my eye. I would ask when I call on your to please identify yourself and pose a question to one or more of our panelists.

To ask a first question, I think one of the important recommendations in your report is that the United States government should make a clear and unequivocal decision to back Nabucco West. Clearly, in the development of Baku-Tbilisi-Ceyhan pipeline, it was a pivotal decision when the United States decided to put its thumb on the scale to help that pipeline to become a reality.

I wonder – and your fundamental reasons have to do with strategic interests that the United States has with respect to allies and other countries in East and Central Europe in particular to reduce their dependence on Russian gas.

My question for you is how – when you were in Baku, how is this seen there? Clearly, the Azeris will be among the key decision makers as to where their gas is going to go beyond the Turkish border. How did they see the mix of strategic interests, on the one hand – they may or may not be that interested in reducing the dependence of East and Central European countries on Russian supplies; they certainly are interested in diversifying their own relations in that part of the world. And then there’s a set of commercial considerations, where they think they can make money over the longer term and achieve the best contracts for them. How did the Azeris assess this? What did you hear when you were in Baku?

MR. STRING: So I guess I’ll take a first stab at that. So, of course, the Azeris and pretty much every one of our government interlocutors were still weighing the two options. No one was clear that they preferred one option over another, but, as I mentioned in my opening comments, this project – particularly for the Azeris has had large political implications, not just commercial implications. So everyone in Baku and Ankara recognized that this isn’t purely a commercial project. This is also a strategic foreign policy project for them as well. So they recognize the difference, but I don’t think that they’re ready to sort of endorse one or the other.

In terms of our recommendation that the United States should back one proposal – as we say in the report, the United States interest does not lie with Nabucco West per se. The United States interest lies with advancing two objectives: first, getting gas to allies and partners who need it, who need diversification; and two, having an option that is scalable in the future for additional Azeri gas, additional trans-Caspian gas, Iraqi gas, Eastern Mediterranean gas.

Currently, the only proposal in our view that meets those two criteria is Nabucco West. That could change. There have been others. BP put forward another proposal, the SEP pipeline, Southeast Europe pipeline, although not many details were disclosed on what that would actually entail conceivably that could have fit the bill as well, but that has been eliminated. And so as with those criteria in mind, Nabucco West in our view fits those two criteria the best and would do most to advance U.S. interests.

MR. WILSON: Anything you want to add, Neil?

MR. BROWN: Maybe just one thought. The good rule of thumb on energy in Azerbaijan is that they sell the oil for money to build their economy. Their gas is for money, but for politics, for geopolitics. And it’s that fact that gives the U.S. taking a firm position the opening to actually affect the decisions. It’s not a purely commercial decision when it comes to the government of Azerbaijan.

But you have to then weigh that against the fact that it is a commercial entity, the consortium that will be financing it. So, you know, we can – the Nabucco West proposal has to be commercially viable. You know, we don’t have the proprietary information on whether it will be or not, but I think clearly, what David mentioned about the prospect of SOCAR, BP, Statoil, you know, other Shah Deniz partners possibly going in on Nabucco West, I think that would be tremendously beneficial, particularly since it seems likely that RWE will pull out of the consortium.

MR. WILSON: OK. We have a number of questions. What I’ll try to do is group of couple together. First one here and then Jeff.

Q: Thank you. Kevin Massy from Brookings. I have two quick questions, one on pipelines, one on LNG. The report, which was a great report – thank you for publishing it – makes mention of the potential of revisiting the exemption of Shah Deniz, the Shah Deniz II field from U.S. sanctions.

Do you think that there is – and I got from reading the report an implied implication between the choice the U.S. has in backing one of the onward pipelines and the leverage that it may have in determining whether the exemption continues. Was that implication intentional? Do you see the U.S. being able to use that leverage in terms of forcing a decision on the onward pipeline for Nabucco West?

And the second question is on the LNG for NATO proposition. It obviously makes political sense, but did you look at the trade implications, particularly the WTO status of selecting countries based on criteria other than free trade agreement classifications?

MR. WILSON: Good. Thank you.

And then let’s have one from Jeff, right here in the front row.

Q: Thank you. Jeff Mankoff from CSIS. You talked a little bit about the LNG – the decision about whether to export U.S. LNG and the potential for that to affect the diversification of supplies to Europe, but, nevertheless, that despite the prospect of expanding LNG exports from the U.S. and the possibility of developing unconventional gas within Europe that the Southern Corridor, nevertheless, makes both political and financial sense.

And so, I was hoping you could address a little bit the question about specifically unconventional gas in Europe, sort of where that stands in terms of political and environmental decision making and what the long-term implications could be in terms of the commercial viability of the Southern Corridor project.

MR. WILSON: OK. Let’s take those three – Shah Deniz and the Iran sanctions issue, special deal for NATO members in terms of trade in natural gas, and shale gas in Europe, unconventional gas in Europe. Who would like to go first?

MR. BROWN: Sure. Kevin, on the sanctions issue, I think it seems to – your question seems to be twofold. And one is: should the U.S. essentially threaten sanctions to get what we want on the pipeline? And I think that would be a mistake. I think that that would put us in the category of countries – actions on energy supplies that we don’t encourage.

But what we were stating is rather different, which is the reality that Congress will continue to push for tighter and tighter sanctions so long as Iran continues its nuclear weapons program or continues to refuse to cooperate with international community and monitoring what they claim is not a weapons program, however you want to phrase it. It’s very – it’s predictable that that discussion will happen. It’s unpredictable what the outcomes will be.

Generally, in sanctions there’s – there are opportunities to have exemptions for national security priorities. The Shah Deniz project came under scrutiny in the last round because in the Shah Deniz consortium, the national Iranian oil company has a 10 percent share. It’s not active. You know, it’s – but it’s – it’s there. And the – and a successful effort was made thankfully for an exemption to pass for Shah Deniz.

So the question then is: can that exemption on the first stage of Shah Deniz continue? I think it can. I think that can be justified, but then, when you’re talking about actually increasing the perspective income for that Iranian entity, through expansion of Shah Deniz II, then the bar is going to go up higher, just like the geopolitical forces of the Iranian program going forward is going to push Congress to be stronger and stronger.

So what you’re going to see I think – this is not a revolutionary idea – is a higher and higher bar for exemptions. And if – what our report is saying is that if you want to have the strongest case to get exemptions, then of the two pipeline alternatives in Europe we have today, Nabucco West is the strongest case.

But, as Marik mentioned, I mean, either pipeline is in the U.S. interest, but one of them has stronger geopolitical gains for the United States. And I think that we shouldn’t delude ourselves in the reality. I mean, the fact is that – you know, very few people in Congress care all that much about the Southern Corridor. A few, relatively few have even heard of it. So when you’re going in and saying that one of the largest national security threats, you know, a tool that we’re using to try to block one of our largest national security threats, Iranian nuclear weapons, we should have exemptions for, it’s a lot of education that needs to happen in that process. Why don’t I let you hop in on something else.

MR. STRING: Yeah. Just one additional point. The United States Congress has exhibited unanimity on the point of further sanctioning Iran. We don’t talk about unanimity much in the U.S. Congress, but on this issue, sanction bills pass 100 to zero, 98 to zero, no one opposes them. That’s the number one legislative priority in foreign policy right now. So that’s just to augment what Neil said.

In terms of the LNG bill – so I guess the – I’d say in the next Congress, there’s going to be a protracted political battle about LNG exports. Some members are still opposed to any exports beyond what we currently export, mostly to – a bit to South Korea, a bit to Japan, Mexico, and we import and re-export to Canada. Others will be in favor of a full liberalization.

What we try to do in recommending our bill to Senator Lugar is to find a middle ground, to slowly liberalize the LNG export regime. As Neil mentioned, we are proposing to export, initially, in addition to free trade partners only to our closest friends and allies. Now, there’s a lot of other countries that probably deserve to be on that list, but what our bill was intended to do – it won’t receive action in this Congress – is intended to be an opening proposal to get discussions started. And that debate will play out more fully in the next Congress for sure. If you guys have –

MR. WILSON: Just to press you on that. Is there anything – has there been an assessment to the extent to which that kind of policy will be WTO compliant or is that a set of issues that needs to get examined as this bill moves forward?

MR. BROWN: Well, we didn’t do an extensive WTO examination, but we already have exemptions. We already have special treatment of some countries. So there’s no reason to think that additional special treatment would be different.

MR. WILSON: OK. Shale gas in Europe.

MR. KORANYI: Briefly, on the shale gas – what I see is that we are kind of at a tipping point when it comes to shale gas. The U.K. just a couple of days ago announced that they will allow – they will lift this moratorium they imposed after the minor earthquakes in the U.K. so they’re going to proceed with shale gas so the U.K. seems to be banking on shale gas. It’s anybody’s guess. It will take some time to first assess the resources which are there and then to extract them.

And there are huge question marks around what the costs will be. At least in the U.K., the regulatory framework is in place. So my assumption will be that the U.K. will move at the fastest pace, faster than Poland which, I mean, in principle, is ahead of the game, but because of this whole regulatory framework which existed before in the U.K., the U.K. is better positioned to move first.

The other potential is Poland. There was a significant diminishing in the assessment of the actual resources there, and there are huge question marks also around the actual costs, and the geology, and the economics of the whole thing. And, in any case, I mean, when you look at it from the perspective of the Southern Gas Corridor, I honestly don’t think that there will be larger quantities of Polish shale gas coming online before 2030. So the Southern Gas Corridor will be faster. The Southern Corridor gas will reach the European markets faster than gas from Polish shale gas.

Another big unknown is Ukraine, but huge question marks around the investment environment there, not to mention many other problems there. And then, we have an ongoing debate on the European Union level. This could also interfere with shale gas developments all across Europe, because there is – although the initial reports from the European Parliament and also the European Commissions were quite positive and quite supportive, but when it comes to the EU, the environmental regulations, they’re usually more stringent so there could easily be a new regulation in place which could then at least hinder shale gas developments in Europe.

So my bottom line – and it’s very hard to make assumptions, but my bottom line will be that the best case scenario when it comes to shale gas, it can – it could at least offset the declining indigenous traditional gas production in Europe. And that’s the absolute best case scenario.

Just one remark on LNG, and then this ties completely to the report and why I think it’s so important and so timely as – and Adnan I think emphasized that point quite rightly, that it’s all about the leverage. There are many countries – and it’s in the report – that there are many countries in the region, Hungary among them, the Czech Republic, Slovakia and others, who have to renegotiate their long-term natural gas supply contract by 2015, ’16, so within the timeframe of the next couple of years. And it’s quite clear that it’s not going to – I mean, most of these projects will not be ready by then so we will not be able to buy exclusively gas from outside Russia. So we’re going to have to buy Russian gas, which is not a disaster in itself.

The real question is: what leverage you have when you sit down and negotiate about the long-term natural gas prices? And if we have an LNG terminal, which we hope to have on the Island of Krk in Croatia, and from that perspective, the recommendation in the report about financing, and (IDB ?) loans, and help on that front to build the LNG terminals as soon as possible are really crucial, are really crucial, because it’s an entirely different negotiating position if you sit down with the Russians with the potential – even with the potential of an LNG terminal being soon ready.

That’s what the Poles just did actually. They just renegotiated their own existing contract. Purely with the prospect of this Swinoujscie LNG terminal being ready in two years’ time, they will be able to achieve or extract a 20 percent price concession on natural gas from the Russians because the Russians knew that there will be new sources coming online.

MR. WILSON: Good. Thank you. Julie, and then Dana, here in the second row.

Q: Julia Nanay, PFC Energy. Coming back to Turkmenistan and Azerbaijan, I was wondering, neither one of you really commented on the relations between the two countries and whether a trans-Caspian gas pipeline would also depend on solving the disputes over their shared fields.

MR. WILSON: And over here, Dana Marshall (sp).

Q: Thank you. The question is on Ukraine. There was some discussion of that country, but I wonder if I could draw the panel a little bit. Obviously, this is a country that’s very dependent on Russian gas, a lot of issues involved, including some very strange incident that just occurred a few weeks ago up there. I wonder if the panel looked at the need to diversify Ukraine’s gas supply in the context of the report.

And, very quickly, is there a champion after Senator Lugar retires, to move that bill through?

MR. WILSON: OK. Three good questions: Turkmen-Azeri relations, Ukraine gas diversification, and next Senate champion. Who would like to take on Turkmen-Azerbaijan?

MR. BROWN: Sure. We’ve seen over the last several years – Julia, I probably would have just asked you that same question. So it’s a little bit unfair to send it to me.

We’ve seen over the last few years Azerbaijan and Turkmenistan have steadily improved relations. You know, there’s always setbacks, but there’s a level of communication that is very welcome.

In the case – it was also mentioned of the delimitation issues in the Caspian, the geography is such that it’s Azerbaijan and Turkmenistan with that maritime border, no matter how you end up slicing up the Caspian in terms of sovereign territory. So they can agree to a pipeline. They can agree to smaller interconnections. The question is a matter of will. You don’t have to – you don’t have to conclude every piece of a border arrangement in order to have cross-border trade. And we see that around the world.

So, you know: is there will? And, you know, the Azeri government has I think said all the right things. As I mentioned, I think one of the things they need to say now is to guarantee that they would in fact transit Turkmen gas even ahead of their own future production, if that’s what it came to.

And that’s a conversation that, you know, I know that Ambassador Morningstar is having in Baku in terms of looking towards the future in Azerbaijan. I think that President Aliyev understands; has a long-term horizon view for the country. You know, Azerbaijan – you know, frankly, given the excellent investments that have been made by BP and its partners, you know, it stands ready to be a real hub to link Central Asia to Europe.

And so the question is: is it going to do it? And I think because of all of the general global gas market changes that are affecting Europe, you know, we do have – we have this window of opportunity, but, you know, if that window shuts, then it may be that Shah Deniz II is sort of end of it, or Absheron is the end of it. And when that runs out, then Azerbaijan’s political leverage will run out with it.

So, you know, I think the conversation that needs to be had in Baku is: listen, you know, you need Turkmenistan to guarantee your long-term relevance, geopolitical relevance in the gas market. And then – I’m sorry, what was the other –

MR. WILSON: Ukraine gas diversification. You, or perhaps Adnan, or David.

MR. KORANYI: Let me just briefly react on this. I may slightly disagree on that. What I see and that’s partly connected to the potentially sluggish demand in Europe. And I think there is a reasonable concern in Baku that’s allowing Turkmen gas to come to Europe is not in their interest in the medium and long term. It’s a market you can hardly – that’s – (inaudible) – the size so the Azeris are rightly concerned that there are all these competing potential natural gas sources, Black Sea offshore again, Eastern Med coming online. So if I we were sitting in Baku, I would be concerned to put the Turkmens also on the whole thing. So I think the Azeris are perfectly – they feel perfectly convenient not to proceed with the trans-Caspian arrangement, but, again, that’s my hunch.

MR. VATANSEVER: On Ukraine, well, in terms of diversification, or at least reducing its dependence on Russia, that’s been a very – there’s been very lively discussion on this in Ukraine for the past few years because of ongoing difficulties with Moscow. But I should say that there are – there are some possibilities for that, that Ukrainians have been talking about which I don’t really find very viable.

For instance, there has been a project for LNG imports, which I think technically is very difficult. They have been talking about Azeri gas, but there’s so much competition to get Azeri gas through, you know, so many routes. Then, the other route would be through the Bosphorus, which would require the consensus of the Turkish government. And, clearly, there is I think very – there would be very weak support for this kind of idea at a time when the government is trying to restrict any potential environment damage in the straits, including by oil tankers, not just LNG there.

Now, other routes are possibly getting gas from the west, but the amounts from there – these are likely but there will be limited and it will take quite a few years until we really have enough gas for these countries in Eastern Europe, first of all, to be diversified enough so that they – I mean, Ukraine starts getting that.

Now, where I really see the difficulty that will lie ahead is Ukraine’s leverage towards Russia is expected to get weaker. I mean, the amount of gas that is transiting Ukraine is going down and down. And if South Stream is realized, that would hurt even more. But even if it’s not realized, the prospects for it are actually – are considerable – providing considerable leverage for Moscow.

And the other problem is – I mean, some of the solution would be to rapidly expand unconventional gas in Ukraine. And this is definitely a possibility because the reserves are quite significant and Ukraine is working on that. It will not be an immediate solution though. It will take many years until it becomes a solution.

And the other possible solution for them is to switch rapidly to coal. As they have been signing agreements with China, loans have been coming there for that reason.

Now, one problem that I find though is Ukrainians have determined a target to rapidly reduce gas purchases from Russia and to reduce gas consumption overall. But in order to accomplish that goal, the leadership will really need to know how much exactly is being consumed by the different sectors in Ukraine though: how much of gas goes to residential consumption, how much to industry, how much to the power sector. And Ukraine does not really have the answer partly because there is a lot of arbitrage going on. The prices between the different sectors are different, and companies that sell the gas, they claim it goes to the residential sector, but it actually goes to industry, and vice versa.

So you could have – you really don’t have the accurate picture about how much is being consumed. And if you don’t have that picture, you cannot really draw a very detailed plan about reducing your consumption like sector by sector or even like region by region. That becomes a challenge.

And, as a result, what I would suggest, they really need make the energy sector at home much more transparent in order to have significant success domestically and then some success in their negotiation power when they deal with Moscow.

MR. WILSON: Thank you. That’s very helpful. And the question of a champion as Senator Lugar looks toward retirement.

MR. BROWN: Well, I think it would presumptuous to guess what another senator or representative would do in the next Congress. I can say that the most important – on the Senate side, the most important people in the debate on LNG exports are aware, are interested, and have indicated support.

You know, we face a danger of LNG exports becoming the next big partisan fight on energy, on domestic energy. I mean – you know, let’s – you know, although I sit on the Foreign Relations Committee staff, you know, this is – when you deal with energy, you have to deal with the domestic energy situation robustly. And, you know, the hardest part of my job is trying to get people in the energy debate to care about the international aspects of it.

So the conflict is going to be on what are the economic impacts of LNG exports from the United States. And, in general, you know, most Republicans are going to be in favor of a full liberalization. And, probably, in the Senate, probably a quarter of Democrats would join that position. And the rest of the Democratic Caucus will probably be fairly split in part because of this impact that shale gas is having on economic development across the country.

So, you know, we could be – so the moral from that is there’s not enough numbers to do much of anything if it turns into a big fight. So you do what Senator Lugar has done for 36 years in the Senate, which is find some common ground. And how can you not agree that trading with our, you now, our greatest allies is in the U.S. interest? So that’s where we’re pointing to. Possibly we skipped the debate a little bit.

But, you know, there has been a lot of interest in bringing the security considerations to that, what so far has been a domestic debate. And there’s a lot precedent for that. We do that for pipelines – you know, we do – I mean, don’t get me started on Keystone. You know, it’s not – it’s not new territory in that regard, but it’s the first application of those international aspects to this particular domestic debate.

MR. STRING: And I’ll just add – in terms of a future champion for the Southern Corridor and European energy security generally, no one in Congress is going to oppose the concept of diversifying supplies to allies in Central Europe. The key is who is willing to undertake the energy diplomacy to do the same thing that Neil mentioned that our State Department should be doing, having a dedicated representative to go and talk to presidents and prime ministers who make these decisions in the region. I think that will be important for a member of Congress, whoever that may be to undertake personal diplomacy to see this project through.

MR. WILSON: We’ve gotten over and I’m extremely reluctant to go any further. But since we’ve talked a lot about Azerbaijan, I’d like to just give two minutes. Please be – if you could be brief to the deputy chief of the mission of the Azerbaijani Embassy.

Q: Thank you. An interesting panel and a more interesting report. I stand ready to discuss that in detail with all of you. Very briefly, a couple of comments and a question.

The concern regarding 51 percent of SOCAR owning TANAP consortium, whether that will create any problem for Turkmen gas, absolutely no concern for that. My understanding so for around 20 years of Azerbaijan’s cooperation in the energy sector, we’ve been very clear in honoring our contractual obligations over 30 plus PSA so no concern.

As far as Azerbaijan – whether Azerbaijan is ready to provide transit capabilities, I’ll just give you one particular example. From January to November this year, 2.3 million tons of Turkmen oil have been transport by the Baku-Tbilisi-Ceyhan pipeline. So, again, Azerbaijan is ready to provide transit capabilities. It just takes probably more effort on the side of the other Caspian Sea member – littoral state to reach out to their potential customers. So the position to sell gas at their border is not exactly helpful.

Shah Deniz exemption – we are compliant both with U.N. sanctions, with all the sanctions that are right now in place. You all are very well aware of geopolitical concerns when Shah Deniz – when NICO wasn’t included specifically in Shah Deniz, but specifically for the reason of geopolitical importance, that particular project has been excluded from the sanctions this time, because we talk about supplying our strategic allies in Europe.

What is of more concern to me is, again, the attempt I would say to prefer one project, TAP over Nabucco West or vice versa. Strategically, the decision has been taken by Azerbaijan, taking our resources to the West. And what remains to be seen now and decided is a commercial one, which of the projects makes sense in commercial terms. And the U.S. administration has been very clear about that. They keep telling us, and rightfully so, that they do not favor any single project or the other because it has to be a commercial decision.

Now, my question is: specifically, a number of countries that you referred to in your report have recently been engaged in the opening of the South Stream pipeline. And some of them went even further to declare this project as a project of common interest in the EU My question is whether you have reached out to these countries? What was the message you sent to them? Would appreciate your reply. Thank you.

MR. WILSON: Brief reply on your conversations with the Europeans.

MR. STRING: On South Stream? Yeah. I would agree. I share your concern about many statements that continue to come out of NATO, EU capitals about the Southern Corridor still having problems, being dead, and South Stream potentially fulfilling their strategic objectives. We’ve made them aware of our concerns and we cite some of these concerns in our report.

In terms of selecting one pipeline over the other, in my ideal world, both pipelines could be built immediately. And everyone would have more diversification and more energy options because that’s what this is really about, energy options.

But the fact of the matter is, initially, both won’t be built, and from a foreign policy perspective, because that’s what we’re charged to think about, as we’ve stated, one makes more sense. A series of these – of countries in Central Europe will see their contracts with Gazprom come due so they face a particularly pressing need. So I don’t have anything more to say than what I laid out at the beginning of my comments.

MR. WILSON: David?

MR. KORANYI: Just on South Stream. I mean, South Stream was not designated by the EU as a – as a project of priority. And it was not granted any exception so far. North Stream was.

Q: (Off mic.)

They asked for it. They recently asked for the exemptions but they were not granted anything. I mean – but it’s also – Commissioner Oettinger not showing up at the South Stream initial ceremony also showed something. So I slightly disagree there.

On the argument of reliable supplier, I actually fully agree and in no way I’m trying to question the commitment of Azerbaijan for the Southern Gas Corridor. Forgive my bluntness, but this is the exact same argument we have heard from the Russians that they have been a reliable supplier for 30 years, and then from the Ukrainians that they have been a reliable transit state for 30 years. And yet, we were without gas for four weeks in January at the end of 2009 so that’s –

MR. WILSON: Anything else, Neil?

MR. BROWN: Yeah. Maybe just to add – I mean, I think that the question on South Stream is just more reason as to why the U.S. high-level engagement remains vital. I mean, we have to have top people going to these governments to make the case and to know what in those governments’ statements is fact, and what is positioning for their reality, that they’re going to continue to trade with Russia for the foreseeable future. And that’s not a bad thing. It’s all about the point of leverage and it’s about some element of diversification.

I think – I hope that there’s no misunderstanding, nothing in the report or I hope anything we said has questioned Azerbaijan’s commitment to gas trade with Europe. What we’re talking about is how that role can be better enhanced in the future in this period of partnership. And I think that that’s clear. I think that that’s something that all the top officials in Baku I hope know and I’m sure do.

You know, it does – you know, the – you know, I understand that the choice of pipeline has to be commercial. I mean, it has to be commercially viable, but that doesn’t make it any less relevant to make the strategic case of which one is more in the interest of the United States. That’s something that many people in the State Department have been hesitant to do, and for very legitimate reasons.

But we’re not the State Department. And when it comes to laws, including the sanctions laws we discussed, when it comes to other laws that the embassy is well acquainted with, you know, Congress has its own opinion. And so, you know, it’s important that those considerations and other points of view get out there.

MR. WILSON: There are lots of other people that have tried to get my attention or ask questions. We’ve gone 15 minutes over and so I think I’ll bring this to a conclusion. I want to thank all of you for coming out in the holiday season, for being part of this discussion. I wish you all good holidays. I want to thank in particular David Koranyi, Laura Linderman (sp) and Rena Linden (sp) for their support here. And we are very, very grateful for our panelists for being with us. Please join me in thanking them. (Applause.)


Related Experts: Adnan Vatansever, David Koranyi, Ian Brzezinski, and Ross Wilson