Carlos Pascual, the US special envoy for international energy affairs, on April 3 urged Europe to keep building pipelines and policies to create a truly competitive European market in natural gas. Pascual spoke at the Atlantic Council days after returning from meetings in Ukraine, Belgium and Moldova with government and private-sector officials, and representatives of civil society.

A full transcript of the event is below.

Welcome and Moderator:
Fred Kempe,
President and CEO,
Atlantic Council

Carlos Pascual,
Special Envoy and Coordinator for International Energy Affairs,
U.S. Department of State

Transcript by
Federal News Service
Washington, D.C.

FRED KEMPE: Greetings. Hello. I’m Fred Kempe, president and CEO of the Atlantic Council. And I’m delighted to welcome you here this afternoon. We’re honored to have with us today America’s top energy diplomatic. But as powerful as that is, it’s almost an understatement for all the talents that reside within the person of Ambassador Carlos Pascual – intellectual, diplomatic.

And sometimes you find that a period of time comes together with the talents of an individual. And we’re certainly not pleased that what’s going on around Ukraine is happening, but we’re delighted that we have a diplomatic of the capability, the experience and the resources of Ambassador Pascual to help us sort through these issues, particularly in the energy-related fields.

He’s just returned from Brussels, where he participated at the U.S.-EU – EU-U.S. Energy Council meeting. He was in Ukraine in late March, where he led the U.S. delegation of the U.S.-Ukrainian Energy Security Working Group that’s part of the Strategic Partnership Commission. So we’re interested to hear his readout on both meetings and then he’ll engage with the audience.

Ambassador Pascual is a regular participant at council events. And again, there’s just much more too to that – to that, because when he comes to the events he just fills them with incredible substance on global and U.S. energy trends. At our energy and economic summit in Istanbul he is the biggest hit every year with the people who come to that, including ministers from all over the region. Ambassador Pascual, so we’re delighted to have you back with us, hopefully in Istanbul this November.

I’d also like to welcome a distinguished audience. There’s a lot of expertise in this audience. And we’re looking forward to your input and questions. And as one always wants to do at this point, if you want to tweet use the hashtag – and today we’re using ACUkraine — #ACUkraine. We are very active on energy issues globally and in Europe and Eurasia in particular, as we strive for a world where energy brings nations together rather than separating them.

Long before the Ukrainian crisis, we’ve been arguing for a trans-Atlantic energy alliance. A lot of people thought, well, that’s kind of old-fashioned. A trans-Atlantic alliance on energy, don’t we need to go in some other directions? And now, what sounded old fashioned is now new age and is absolutely crucial and urgent.

We strongly feel actions taken by trans-Atlantic partners are critical in shaping the new world of energy and that global cooperation must be led by the Atlantic community to effectively address climate change and advance a pathway to a secure energy future. But particularly the United States great good fortune in our current energy renaissance also puts us in a position where we can be leaders on this pathway.

We at the Atlantic Council are working on a large number of energy projects on a global scale ranging from a major report on the north-south corridor in Central and Eastern Europe, an energy security conference with our Visegrad 4 partners in late April, energy sector reform in Latin America and working on the energy-water-food nexus in Africa with Moroccan partners. We also discuss energy issues in our Wroclaw Global Forum June 5th and 6th in Poland, and then our Istanbul summit, which is heavily energy-focused, on November 20th and 22nd.

The Ukraine crisis has served as a wake-up call to address one of the most acute vulnerabilities of Europe. Energy, and natural gas in particular, have been an Achilles’ heel of the EU for a long time. Europe with likely make it through the season without another disruption, but I’m not going to talk as the expert. I’ll pass it to Carlos, Ambassador Pascual, on that. But Gazprom still supplies more than half of Ukraine’s gas demand and close to one-third of Europe’s imports.

We had new news today on gas prices for Ukrainians from Russia. Half of the – of that gas – 82 billion cubic meters of Russia’s gas went through Ukraine in 2013. But that’s just part of the story. We also have a Ukraine and Europe highly dependent on crude oil and refined products. So we’re very eager to hear Ambassador Pascual talk about short-term policy options as well as dilemmas in this energy diversification strategy, and how one takes those on.

And I can’t think of anyone better to walk us through these intricacies and challenges to potential responses by Ukraine, Europe and by the United States. He has a CV that’s incredibly impressive, but I’ll do it in short form: Appointed special envoy in 2011, serving as the chief architect for U.S. energy policy abroad, before that held a number of positions in the foreign service including stints as ambassador to Ukraine, 2000 to 2003, and ambassador to Mexico, 2009 to 2011, and working at various times with USAID and the National Security Council.

So, Ambassador Pascual, the floor is yours. (Applause.)

CARLOS PASCUAL: Fred, thank you very much. We’re all here in a circumstance we’d rather actually not be in, at a point in time when there has been such a violation of Ukraine territorial integrity and national sovereignty. And one of the things that is incumbent on all of us is to do what we can to reinforce Ukraine’s sovereignty and independence, its right to identify itself and build its future as a European state.

So, Fred, I wanted to thank you for the work that you and the Atlantic Council and Damon and your whole team have been doing to bring so much focus to the crucial moment that we’re in right now, and to do all that we can and to build the community that we can to reinforce Ukraine’s rights as an independent state.

The function, as Fred said, that I have today is to focus on energy diplomacy and how energy intersects with our global national security objectives. And so I wanted to share with you a little bit of some of the work that we’ve been doing. As Fred said, we just has a U.S.-EU Energy Council meeting. It’s the fifth time we’ve had this. It meets annually, but it has an ongoing agenda. I just had a chance to spend some time in Ukraine and Moldova and have detailed energy security discussions there.

What I’d like to try to do is share with you some of the things that we’re trying to do in working with Ukraine, working with the EU, the neighbors, and trying to advance energy security for those countries and for the region. And I’m going to focus a lot of my attention on gas. And it’s not because gas is the only issue for Europe but, as Fred was saying earlier, it is a critically important commodity in this equation.

It accounts – Russian gas accounts for about half of Ukraine’s consumption. Ukraine consumes about 50 billion cubic meters of gas a year, and about 25 of that from Russia. Europe consumes about 30 percent of its gas from Russia, and about half of that 30 percent transits through Ukraine. To give you a sense of context though and why not oil, because people ask us all the time, oil is very much of global commodity. Gas is getting there; it’s not there yet.

But you can buy oil from pretty much any source as long as you have the capacity to bring it into your country. Gas is not – still not so flexible a commodity. And the ability to modulate the flows of gas into Ukraine and into Europe can have a fundamental impact on the ability of Ukraine and the European region to be able to heat their homes and to have functioning industry and, to some extent, electricity. But it’s really in heating and industry that are the critical factors.

And one of the things that I want to reinforce at the beginning, and I’ll come back to it at the end, and if I can leave you with one particular message, it is the importance of competition because if you can create a global environment where consumers have a choice about where they buy their commodities, where they get their supplies, that competition is their strength.

And if you have a market of 400 million Europeans, that can embrace and incorporate Ukraine. And in that market, if those countries have a choice in their supplies they can use that market power to reinforce their independence and break the ability of individual suppliers to use energy as a tool that affects the political choices that they want to make for the future. So to the extent to which you can keep reinforcing this point of how do we build competition and resiliency, that is probably one of the most important things that we can do.

All right, let me say a few things about the context. My guess is that if you came to this meeting you remember what happened in 2009 in the gas wars between Russia and Ukraine, shutoff of gas supplies to Ukraine, the downstream impact that that had on Europe, a major political incident in Europe, having a big impact on the economies of the – of countries as far downstream as Germany and France. This is not 2009. You’re not hearing the same kind of doomsday crisis scenarios as you did before.

And so why is that case? Well, one is nature. It was a much warmer winter and there’s a lot more gas in storage. But it is much deeper than that. After 2009, the European Union went into hyperdrive in changing its internal gas market policies. It created a whole series of new policies to promote competition. And so it made it impossible for a country or a company to own the gas, to own the pipeline system, and to own the distribution system. It changed certain requirements in contracts. So what are called destination plazas were eliminated and made illegal in contracts in the European Union.

The reason that was important was that previously when Russia exported gas to Germany or France, if they wanted to re-export it, it had to get permission from Russia in order to be able to do so. Now it can actually – a country, once it gets that gas, resell it based on the market supply and demand and in that region.

The other thing that they did was they made huge investments in infrastructure so that they built interconnecting pipelines that allow now gas to move from west to east, north to south, south to north. It’s not perfect, it’s not absolutely complete, but that process of beginning to create a market that can move molecules around the continent or can allow for trade in molecules across the continent has completely started to emerge.

The other thing, which is also a fundamental change in this market, is that there’s just more gas on global markets. And probably the most significant factor for that has been the United States. The United States has increased its production of natural gas by about 35 percent of the last five years. And the majority of that has been as a result of the production of shale gas. Because of that, the United States right now is importing about 5 billion cubic meters of LNG a year. It was projected that we would be importing 80 (billion).

That difference of 75 BCM has been redirected in global markets. And for a period of time, a lot of it went to Europe. And so in comparison to a situation where a decade ago Europe was highly dependent upon Russian gas, had a limited capacity to trade, could not move that gas internally, Europe found itself in a situation where it could begin to move gas internally, have internal trade.

And from that, as a result of the increase supplies that were coming through LNG, most of the – most of the utilities in Western Europe were able to renegotiate their contracts with Gazprom to be able to reduce the price and extend the financing terms. That would have been unheard of over a decade ago, right? Now, to give you a sense of how dynamic this market is, over the past year and in 2013, one of the things that the European traders began to do was they started moving a lot of their LNG, not in Europe but actually selling it in Asia.

So the irony was that as – after reducing prices with Gazprom, some of those European traders found that it was more in their interest to still import gas from Russia, but make more money on the price differential between LNG in Europe and LNG in Asia. The fundamental difference that occurred here is that they were doing it out of choice. It was a market and the emergence of a global market that allowed them to make decisions on how they were moving about supplies.

And so, one of the things that we’ve seen is that the ability to trade internally within Europe and externally has begun to change the world of gas globally. And so, let me come to another point that is – that has been debated quite a bit recently, which is issue of U.S. LNG supplies and does it make a difference to the current situation in Ukraine and in Europe. And I’ll ask you look at it from this perspective: What U.S. gas production has started to do for the global marketplace is to start an increase in trade in gas more generally, and more and more, what we’ve seen is that gas is traded as LNG. That literally means – that means that that market is becoming literally more liquid, in the sense that you can move the commodity around much more easily. It’s not simple to do. It’s very expensive to move it, but it is possible to do in ways that you haven’t done in the past. And as a result of those supplies coming into the market, what Europe was able to do was to be able to create a competitive pressure between LNG supplies, more gas out of Norway, gas out of Algeria that gave it choices. And those choices were the fundamental factor that allowed it to have market leverage over Gazprom.

And so what the Europeans are saying is that if the United States can supply this global marketplace, it will help maintain and sustain that pattern to competition and trade over time. This isn’t an issue of fixing the problem of supply tomorrow. And indeed, most of those supplies of U.S. LNG that will go onto the global market will not start to get onto the marketplace until 2015. Right now we’ve approved seven licenses. The first date, as I said, is about 2015 for about – for exports. Other commodities will start to come onto the market in 2017, 2018, 2019. The total amount that has been approved if they are actually built is about 95 billion cubic meters.

To put that in perspective, today Europe is important about 45 billion cubic meters of gas, so more than double that. The most that they had prior to the recession was about 65 billion cubic meters. So even if that gas is not going specifically to Europe, it’s helping to sustain this concept of competition in the global marketplace, which is fundamental to giving Europe choices. And so that’s one of the issues that we need to come back to and sustain in the future, how do we work together with the Europeans to help maintain that choice.

Europe, for its part, is taking a very important step. One of the things that was outlined in the U.S.-EU Energy Council meeting that we just had were decisions that were taken in a March European Council meeting in which instructions were given to the Energy Commission to develop a comprehensive strategy for Europe to reduce its dependency on fuel, and how does it do that, looking at all potential fuel sources, all potential suppliers and the investments in infrastructure that have to be made in order to make Europe less dependent on imports of gas from Russia.

And so we’ve really come to a common purpose where we’ve seen, between the United States and Europe, that we have a common interest in being able to sustain a range of different fuel choices from different suppliers in a competitive environment in a way that can achieve a twofold goal, which is how to makes Europe and the entire region more economically competitive, and at the same time, in making it more competitive, how do we reduce dependency on individual suppliers that can affect the geopolitical choices that countries can take. That’s a critical background to maintain in mind when we’re looking at these issues because otherwise it’s easy to get fixated on individual connections and pipelines and choices that consumers might make, and you ask, how does it add up? And if you can’t put it back into that context of that global competitive environment, you can’t figure out a solution to help you through these things.

All right, let me spend a few moments on Ukraine. Ukraine has already reduced its dependence on gas imports from Russia from about 80 percent from the time that Bill Miller and I were there, from the mid-’90s till 2003, to about 50 percent today. But at the same time, the question becomes, what choices does Ukraine have in the near term?

And so the first – the first set of actions is to look at that emerging European market, and how do you take advantage of it, because if you can now move gas from west to east, from north to south, how do you take advantage of those commercial relationships to find alternative ways of getting gas, let’s say, backwards into Ukraine?

The first two choices, and the simplest ones, are ones that have been tested and tried in the past. One is through Poland, where there’s a capacity of about 1.7 billion cubic meters a year – it’s not large – through Hungary, potentially another 2 to 3 billion cubic meters, let’s say on average 3 ½ billion cubic meters between the two. Those we know can be done, have the capacity to be activated.

A third area is through Slovakia. And there’s a lot of debate of whether the Slovak option is working, isn’t working, whether there are delays in it or not. There are fundamentally two different options you can take. One is whether you build some form of a bypass that allows a physical flow of gas backwards from Slovakia into Ukraine. Another option involves what is called a virtual reverse flow. And the only reason I’m going into this is that there is a lot of confusion that arises about these questions, and people get into questions about whether Slovakia is cooperating or not. And we need to understand what it is that needs to happen and what potentially can happen.

So a virtual reverse flow – think of it this way. There’s a lot of gas coming from Russia through Ukraine and onward into Slovakia. If you can leave some of it Ukraine and Ukraine can buy gas somewhere else and have it end up in Slovakia, then that’s a way of in fact allowing a lot of gas to stay in Ukraine. The problem with doing that is it involves contractual and commercial agreements and confidentiality over shipping data, over which Gazprom has a strong hold. And so for Slovakia to be able to do that, it will involve, let’s say, commercial pressures from Gazprom that it’s going to make it very difficult for it to be able to move forward.

And so what we’re trying to do is work out a way in which a physical reverse flow can be done through relatively minimal investments of about $20 million that will allow 7 to 8 billion cubic meters a year to be able to go back from Slovakia into Ukraine, and at the same time continue to work on this larger virtual reverse flow for the future.

Now, put those together. Let’s say Poland, Hungary, 3 ½ (billion), Slovakia it’s 7 (billion). You’re up to about 10 billion cubic meters. That’s about 20 percent of the supply that – of the supply requirement that Ukraine has that could be substituted from another source. But in order to do that, Ukraine’s got to purchase the gas, right? And there aren’t a lot of credit – a lot of – there aren’t a lot of gas companies that are lining up today to say that we really want to extend sales to Ukraine with an IOU that we’re going to get – we’re going to get financed in the future.

And so this is where it becomes so critical for the IMF program to come into place. The IMF program triggers – which is about $18 billion – triggers another $11 billion in EU finance that becomes available, and they are going to be the principal backers of those purchases of gas flows that are going to be coming back to Ukraine. So that is a key factor, and one of the reasons why the timing of those agreements has become so important.

Another factor in all of this that we have to keep in mind and speak very frankly about is Russia. The point here is not to say that we don’t want Russia to produce gas or ship it to Europe. The point is to say that we want that to happen in a competitive environment. Ukraine will still need Russian gas. Europe will still need Russian gas. And so the environment that we want to look at is one where there are multiple sources, and for Russia to recognize this reality about its interdependence.

Today Russia depends on about – on gas sales to Europe for about $50 billion a year in revenue. Russia is tied into Europe in pipeline capacity for a little over 200 billion cubic meters that it has the capacity to export into Europe. Europe is consuming about 167 billion cubic meters. So there’s a lot of spare capacity in its system.

The total amount of export capacity that Russia has of gas into Asia is 14 billion cubic meters, all right, 167 (billion) going to Europe, 14 (billion) going to Asia. If it negotiates a contract with China, that could be for quite a significant amount, but the time it’s going to take to build those pipelines and make those flows go are going to be several years down the line.

So this is a critical moment for both sides. It’s a critical moment for Europe and Ukraine to be able to use this commercial reality. They need Russian gas, but Russia also needs to sell that gas to them, and how to use this – use that reality of interdependence in a way to reach commercial relationships which will reinforce competition for the future.

There are a few things that the EU is going to have to do in the near term and which we’ve been discussing. One is to make sure that the market functions. And so you’ve seen on the one hand the competition directorate in the European Union that has an antitrust case with Gazprom. That’s important for it to proceed on legal grounds into the future. But there are other things that we’re seeing, for example, pipeline connections between countries which are suddenly being bought up by one particular actor, and they’re not necessarily being used. So how do you use regulatory requirements that preclude hoarding by any given company or actor to keep them from buying up pipeline capacity and preclude competition? May seem like a boring detail, but if you don’t pay attention to those details right now, you can’t get the right answers.

The other area where we’ve seen a lot of creativity from the European Union – in particular, I give the energy commissioner, Guenther Oettinger, a lot of credit for this – is to begin to look at how to work with European gas companies to purchase gas from Russia and store it in Ukraine for subsequent use in the European market. And the attractiveness is that Ukraine has about 35 billion cubic meters worth of gas storage capacity. It has the best natural gas stores of any country in Europe. And so if you can work out some of these commercial relationships, it takes those purchases off of Ukraine’s balance sheet, it puts it onto the balance sheet of European companies that can make those purchases, but it still has a way of reinforcing the future energy security of both Ukraine, if there are sales back into Ukraine, or Europe to assure that there is an immediate supply if necessary for European markets.

Now, all of these things are bridges, and bridges only work if you have the ability to get to somewhere. And so the critical piece that has to go along with this is where does Ukraine go into the future, and what are its possibilities? And here I think if we take a slightly longer-term perspective, there are great possibilities.

Ukraine currently produces about 20 billion cubic meters of gas a year. It’s done so consistently for about 30 years. It’s almost like putting in a straw and sucking it out, with very little investment that has gone in to explore, further develop wells and look at further potential. And so most companies that have been working in Ukraine in some way and have taken a short look have indicated that with minor investments that could be made, for example, in additional compressors, that you could probably, within a two-to-three-year period, get an increase of about 30 percent in production out of the existing wells that Ukraine has today.

We’ve started conversations with the minister of energy, with the EBRD, with the EU, looking at how one can structure a project that would bring in private investors, domestic Ukrainian investors, international partners, that would allow for the possibility of new technologies and new production capacities from those existing fields. So it’s a long way yet from being firm, but it’s something which is certainly within the realm of the doable.

Second issue is new contracts that were signed by Ukraine last year, including with Chevron, with Shell, with ENI, for development of shale gas potential. Those contracts were signed, generally, relatively late in the year. There are a number of conditions, precedents that have to be met, and some of them for the contracts to become active. There’s some drilling that has begun on a few of the contracts. But the reality is that the new government needs to have the capacity to do everything it can on its side to do very basic things like pass necessary regulatory measures on taxes or on banking matters that allow these contracts to go into full effect. If they are fully activated, those companies have estimated that Ukraine could increase its production of gas by potentially another 20 billion cubic meters by the year 2020.

So the other piece we have to add onto this is the potential for energy efficiency. One of the measures that Ukraine has already started to act on is legislation which it began, which one critical measure was passed, to increase its prices for domestic gas. This is going to be a painful issue for many Ukrainian citizens because they have been paying highly subsidized prices at a household level. But the problem this has created for Ukraine is that it has resulted in $13 billion a year in subsidies for gas, about 7 percent of Ukraine’s GDP, $13 billion a year just to pay the subsidies. And it cannot sustain itself unless it transitions out of this. And so the critical issue for it is to move from generalized subsidies to very specific subsidies that are targeted at low-income households.

But what happens if you start to change the price equation? The United States, if you think about municipalities, they will raise capital for energy efficiency investments by being able to say that if we make these investments, we’re going to generate a cash flow stream from the savings that we will not have to pay out for certain energy costs. And as a result of that, they can issue bonds and get from pension funds, from the private sector, from banks resources that allow them to pay for their energy efficiency investments. Ukraine hasn’t been able to do that because the subsidized prices have been so low, they can’t generate a cash flow stream. That may seem very basic, but it’s a fundamental change in the financial equation that should now allow them to be much more effective at a municipal level and an industrial level to be able to promote energy efficiency.

So look at it this way. If you can take the 20 billion cubic meters that you’re producing today and add another 5 (billion), if you can produce 20 (billion) more as a result of new contracts – so now you’re at 45 (billion) – if you can save 5 (billion) from energy efficiency measures, if you have the ability to add another 10 (billion) from reverse flow capabilities that might come from your neighbors, you’re suddenly finding yourself in a very different position. If in 2020 Ukraine took these measures, it could be potentially in a position to decide, do they want to import gas from Russia or not? It would be a commercial choice based on what is the economically smartest thing for them to be able to do.

And that is something that is within their reach. And it’s that vision that we’re trying to work toward in the short term, not just the stopgap measures that we need to find today to help create some sense of choice, but how to keep building this to a longer-term scenario with the ability to make choices about your energy supplies being based on your capacity to produce, your capacity to save, to be more efficient and to be able to have interconnected markets with your neighbors.

So let’s take a couple of minutes on the discussions about the neighbors. And let me start with Moldova. Moldova is in a very dependent position. Its gas pipelines come through Ukraine into Moldova and then go into Bulgaria. Its dependence on gas from Russia is a hundred percent. And so one of the first steps that they’re seeking to take is to build an interconnector between Romania and Moldova. It’s only going to have an impact if Moldova can change the way that it buys its gas.

And here’s its constraint. Moldovagaz, the company that is responsible for controlling the internal transit system and for gas purchases, is owned 50.1 percent by Gazprom. And until there is competition internally within Moldova to allow other purchasers to import gas, that situation isn’t very likely to change. But Moldova, at the same time, has petitioned the European Union and received commission to delay the unbundling of its gas system, in effect allowing competition to the year 2020. So one of the things that we need to do is work with Moldova and understand what the reasons are, and if there’s a willingness to try to bring that competition into play sooner, to help them have the capacity to be able to do it, because otherwise there will be no other source of gas for them coming into them into the future, even if they have that interconnected capability.

Second issue we need to think about is Bulgaria. Bulgaria is phenomenally dependent on Russian gas, almost completely. It has some possibilities that it could look toward in the near term coming from the south. In particular, the European Union is looking at building an interconnector from Greece to Bulgaria that will allow the use of an LNG terminal in Greece to bring up some supplies in the near term that could get back into the Bulgarian market.

Over the long term, there are even greater options. The Atlantic Council has done a phenomenal job of bringing a spotlight on the Southern Corridor, the project that would bring Azeri gas through Turkey into Greece, connecting through Albania into Italy. Now some of the companies are looking at what it would cost – an estimate is about a billion dollars – to build a spur from that through the Balkans that would allow yet another source of gas into those countries. And so that becomes a second option that is effective both for Bulgaria, but is – the other – the Balkan countries as well.

A few of the other countries that have dependency: the Baltics and Finland. The European Union has agreed in principle to build an LNG terminal that would benefit the Baltics and Finland. They need to come to a decision on where it’s going to be built and how it’s going to be shared. Lithuania has already taken a decision to build an LNG terminal, relatively small capacity. It could help supply Lithuania, but it’s not big enough to supply the entire region. There are other possibilities, for example, building an interconnector from Poland – through Poland to Lithuania and on to the Baltic countries.

When you start thinking about the market possibilities, the potential for trade that can exist in Europe, these kinds of small projects interconnecting individual states become a really big deal because what we’ve seen now is that if you’re in Poland, you can begin to import gas from Norway that could come through Germany and be interconnected from Germany into Poland. If you have the ability to keep bringing that into the Baltics, it’s not a crazy idea to be able to think that one of the Baltic countries could buy gas from Norway, have it begin to come back through that system, but there may even be Russian gas coming through a pipeline into Poland where Russian gas eventually gets swapped with a purchase from Norway, and that Russian gas ends up going back into the Baltic countries. It may seem convoluted, but hey, these kinds of swaps and trade occur all over the world all the time in any kind of a commodities market. And so what Europe is beginning to do is to make that kind of commodity market start to work in a European context for gas.

The final thing I’ll raise is the importance of some of the interconnectors that are being built in other parts of – the southern part of Europe. And probably one of the most important is an LNG terminal at Krk Island off of Croatia. If this were built, it then allows the ability to have the reverse flow capacity of gas from Croatia to Hungary, Hungary is looking at interconnections with Slovakia and between Hungary and Romania, and you get yet another supply source coming into the southern parts of Europe through LNG import options that can come from any part of the world.

And so what I want to bring you back to is this critical theme of competition. Gas is not the only commodity in the world. There are many other energy options that have to be thought about in a European context. It’s important to keep thinking about and working on other fuel sources, particularly for power generation. There are environmental considerations that have to be taken into account as well. There are nuclear issues that are going to have to be debated within Europe.

But this much we can begin to see, that on the issue of gas, which has been so fundamental in defining a geopolitical relationship between Russia and the European continent, that there are options. There are very real options that are being put in place today through practical investments that are being made by states and companies that are allowing for real-time trade in commodities in a way that are giving consumer – that is giving consumers choices. And if those choices can continue to be advanced, it has the potential to be able to bring in supplies from multiple sources, to do it at prices that, in the end, are going to be beneficial to consumers and allows trade to occur on the terms that we want, with all countries, all suppliers participating based on normal market principles and not on the basis of politics dictating or influencing the choices that countries make on how they get a critical commodity which is fundamental to their economic growth, and that is energy.

So let me stop there, and I’d be happy to answer any questions you might have. (Applause.)

MR. KEMPE: Carlos, that was absolutely brilliant, and brilliant because both of the – looking in the macro global picture, bringing it down to a more micro picture, and then right to the situation in Ukraine. I even think I understood it. (Laughter.) And so – and so – but the one thing that I wonder whether you could sharpen for us, and then I’ll go to questions from the audience right away as well, is in Ukraine, focus is on the very short term. If you were looking at what (one ?) needs to be done now, in the next hundred days, of all the things that you (were ?) listed, and you said, OK, if you can’t do anything else, you need to do the next – you need to do the following three or five, whatever number you want to pick, things, what would they be?

MR. PASCUAL: The first thing they have to do is negotiate contracts with suppliers. Ukraine has a framework agreement, for example, RWE, the German company, that has to be translated into a specific contract for the supply of gas. To do that, they also – Ukraine is going to have to work in concert with someone who’s able to guarantee that purchase. So it’s either going to have to be a country, like Germany, if it’s a German supplier, or the EU, but that has to happen very quickly. With that, it then gives the capacity to then make specific plans about how much of it is going to come back through Poland, how much of it might come back through Hungary.

Next thing they have to do is reach conclusion, I hope soon, with Slovakia on reverse flow capabilities that could be established that could get another 7 billion cubic meters back into the Ukrainian market. A powerful combination could be completing that agreement, EU financing for the necessary physical interconnections, about $20 million, and the gas supply contracts, which then give a very definitive prospect for another supply source that would help either build up stores or address consumption – immediate consumption requirements.

Another area that is absolutely critical is to lock in a sustainable relationship with Russia. And here the European Union, I think, is going to be a very critical power – player, and I think that they have been playing a pretty constructive role in addressing these issues with Gazprom. Russia has already increased the price of gas to Ukraine. It was about $268 per thousand cubic meters under the so-called Yanukovych contract that ended on April 1st. That price has gone up to $385 per thousand cubic meters. There have been rumblings from Russia that it will potentially even increase that price further because of what was called the so-called Black Sea Fleet discount, and since now Russia is claiming ownership of Crimea, that they would eliminate that discount into the future.

Ukraine needs help in working through these issues, and Europe is going to be probably the most effective partner in working – in helping them work through some of those contractual arrangements.

Those are very practical things that are being worked on right now. There are some that can be accelerated. But to the extent to which there are ambassadors here from the European Union, the representatives from the European Commission, to the extent to which you can really keep driving on these interconnections, the guarantee of gas purchases from European sources, in particular, the interconnections through Slovakia, that those are absolutely key.

MR. KEMPE: I hear also from some of my colleagues, particularly in Poland, that they would really like to see the administration, either through executive order or legislative action, speed up some of these licenses. How important is that? And what are the political impediments to getting that done?

MR. PASCUAL: I don’t want to comment on how important it is to speed up. Let me just comment on the facts, because the facts will just speak for themselves, right?

Right now the administration has approved seven export licenses. That – those seven, as I indicated before, once they’re actually realized, will result in about 95 billion cubic meters of gas exports from the United States. And so they start in 2015. They go through – they continue buildup through 2017, 2018, 2019. There are other applications which are being reviewed. If they are approved, the – they would come online yet even later.

So the issue here isn’t a question of getting gas onto the market today to supply Ukraine or Europe. The question is, is there a prospect for increased in – supplies of U.S. LNG on global markets in a way that can sustain this trend of competition in the marketplace that we’ve seen? OK, so I don’t want to say that it’s not important to have more supplies being approved yet into the future. We want to be able to allow the Department of Energy to make those choices on the merits.

But I think that one of the things that we have to recognize is that a lot has been done, and there is a great deal of supply that is – that is coming onto the market right now. And so if European companies wanted to begin to look at – and, you know, the information is available on who has gotten those licenses – and negotiate the contracts that could allow commodities to go into the European market, that possibility exists there today, right now. That doesn’t have to be waited for. And so I think that there is – there is a real potential to act on immediately that doesn’t depend on yet new contracts even being approved into the future. There’s a real possibility today.

MR. KEMPE: Thank you very much, Carlos.

The – let me turn to the audience to take a question here. And I see lots of different questions, so we’ll get to as much as we can. We don’t have that much time. So if you have a brief question –

Q: Thank you. Margarita Assenova, the Jamestown Foundation. Ambassador Pascual, thank you very much for excellent presentation. You really explained the energy of Europe very well.

Can you please elaborate a little bit on South Stream? Is the project still reality, given the legal problems with European Union? Is it –

MR. PASCUAL: I’m sorry. I didn’t hear the –

MR. KEMPE: South Stream

Q: South Stream.

MR. PASCUAL: South Stream. OK.

Q: Thank you.

MR. PASCUAL: And thank you for raising that, because it is a really important consideration here.

And so just to make sure everybody is aware of what South Stream is and, at times, for those who aren’t steeped in all of these issues, there’s a big difference between the Southern Corridor and South Stream. Southern Corridor is gas coming from Azerbaijan through Turkey into Europe, new supplies of gas, and that will come into the European market in about 2018.

South Stream is a project which is proposed by Russia that would provide gas coming under the – under the Black Sea, into Bulgaria and then through pipeline into the European market. It does not bring any new gas into Europe. It would simply take gas that is currently moving through Ukraine and move it through a different pipeline.

In order to be able to build that pipeline and put it into place, Gazprom and its partners have to seek a whole series of approvals from the European Union. And right now the European Union has announced that it’s essentially suspended that process and is not looking at any further action on it in the near term.

There are several companies that are involved in – as contractors, including Eni and Wintershall, which has just been bought by Gazprom, and EDF. And some of those companies, I know, have made very clear that they will only proceed with construction if the project is bankable and authorized by the European Union. The contracts very specifically say that if the project is not bankable – i.e., it you can’t go out to the marketplace and raise finance for it – then they are allowed to sell their shares out to Gazprom and get themselves out of the project.

The reason that’s important is that the only way the project becomes bankable is if the European Union authorizes it. There’s no bank that’s going to come in and finance projects that the European Union says it can’t actually move through European territory, right?

So keeping that in mind is important, and what it tells us is that right now this project has stalled. There doesn’t – there isn’t a huge prospect for it to move forward. If something radically changes in this European competitive context in the coming years, maybe that might change, but I think the European Union has made it very clear that it will need to see a very different competitive environment before it needs – before that project moves forward, very quickly.

MR. KEMPE: Thank you very much.

Please, right here.

Q: (Off mic.)


Q: Thank you, Mr. Pascual, for your presentation. I’m Nikolai Warburov (sp), Ukrainian journalist, just recently came, like one month ago, so quite familiar with the situation and like two short questions.

The first is that like – over like probably 30 percent of Ukrainians, they live below the poverty line, and on the other hand, like local current government, they just have to take unpopular steps – increases of prices for gas for Ukrainians, like for 40 percent. And like recent information that the Russians – they say that we – (before they denounced ?) – has denounced this hierarchy of treatments, they say that you have to pay – Ukrainian government have to pay like plus 30 percent for like – from 383 to $445 per 1,000.

So the question is, how about people? And the second – we have some speculation – (with ?) some radical organizations. They say, we will – if Russia will attack us in eastern border, we have to blow up – blow up this – all gas pipes on the western border. How you can combine this? (And they can, really ?). (Chuckles.)

MR. PASCUAL: OK. Look, I think, first of all, let’s start with people, because the last thing that anyone wants to see happen are innocent Ukrainian people who are in the midst of all of this to have to suffer and have a harder life.

At the same time, the Ukrainian people have been very strong and unequivocal in their message, which is that they want to take control of their lives, and they want the choice – to be able to have the choice to be part of Europe. And they have demonstrated that in ways that I think are unprecedented, certainly, in a European context.

And so part of the challenge that Ukraine faces today is that the country and its people are going to have to make choices and work through problems that allow them to realize the independence that they need to be a European state.

One of those choices is going to have to be on how they deal with their purchases of gas and gas prices. Ukraine has had phenomenally subsidized gas prices for a long period of time. Some have consistently said that Ukraine pays the highest gas prices in the world. It doesn’t. Go to Japan. Japan pays about 40 percent more.

And in the end, one of the things that is going to have to happen is to work out ways in which other countries also have done to be able to targeted subsidies to those who need them the most and not to be able to give those subsidies to any household regardless of the income.

And if you can begin to find a way to make those targeted subsidies work, you give the government a degree of freedom and flexibility that it doesn’t currently have.

And so that’s the legislation that Ukraine passed, which is to move from blanket subsidies for everybody to actually look at how to implement those targeted subsidies to low-income households. And here is an area where the United States, with the financing that we’re going to be providing through a $1 billion loan guarantee; others – donors, including the World Bank and the EBRD and the European Union – we need to come together and help Ukraine adopt some of the best practices of many countries throughout the world that have phased out subsidies and have targeted them and have actually made them work.

On the other part of the question that you raised, about doomsday scenarios and what might happen, I think one of the things that I think is important to do is come back and bring all audiences to the point of reason and – including Russian audiences. And one of the points of reasons is that there is a – there’s a real interdependence here and there’s a reason that in my talk I was reinforcing the $50 billion a year in revenue that Russia gets from its exports to – of gas to Europe, including to Ukraine; the dependence that Russia has on hydrocarbons, generally. So Russia depends on hydrocarbons for 52 percent of its budget. It’s 70 percent of its export revenue, all right? And so Russia needs these export markets. It needs to be able to demonstrate that it is a reliable exporter of hydrocarbons in order to be able to sustain those markets. And if it wants to do that, then it needs to first and foremost behave as a reliable and responsible commercial partner.

And so this is the point we need to build on. We need to build on the importance of viable commercial relationships that are based on market competition and try to put those in place, because if we start thinking first and foremost about doomsday scenarios on both sides, then we raise the rhetoric, then we raise the hyperbole, then we raise people’s fears and tensions.

There’s been a lot of hyperbole and fear and tension already. What we need to come back to is to get everybody to say, what do you really need for your country to succeed? What does Russia really need for it to succeed? And Russia needs normal commercial relationships with its neighbors, and it needs to be a supplier that is seen as a dependent supplier. And so any activity that is moving it in another direction is not, in the end, good for the Russian economy, the Russian people, for Russians, Russia’s position in the international community, and we hope that message becomes very clear to them as they analyze the situation.

MR. KEMPE: It’s such a valuable message.


Q: Batu Kutelia, McCain Institute. I am from Georgia. So you just mentioned that Russia is interested in the normal commercial relations in energy market, but I think all the recent behavior of the Russian ruling regime indicates that they are – tend to reciprocate asymmetrically to potential challenges as they see it coming. I mean in geopolitical confrontation. So – and we’ve seen this type of behavior previously as well, when simultaneously several energy infrastructure been blown up or some incident happened , or now we have vulnerabilities that Russian occupying forces are deploying quite closely to the major pipelines, like BTC pipeline or gas pipeline that’s going through Georgia.

So my question is that since the policies that you described are quite rational, and it will be challenged irrationally by the Russian Federation, what are the anticipation? Where is the weakest point of these strategies that you just described?

MR. KEMPE: And let me pick up one last question, because I know your time is tight. We have my Ukrainian colleague – she’s looking down at her – did – Elena (sp), did you have a question? Yes, please. Last question.

Q: Yeah. Two short questions, but they are very short. What about shale gas? In Europe many people think right now that because those relationships with Russia deteriorated, Europe will start seriously looking into exploring shale gas, which nobody wants to do in Europe, and everyone of course would prefer to buy this gas from U.S. without damaging the environment.

And a second short question about lowering oil prices in Ukraine: There are a lot of speculations about the United States’ abilities to lower oil prices globally, and if you remember, several weeks ago, U.S. sold a portion of strategic oil reserves and people were thinking whether it has to do something with Ukraine and – thank you.

MR. KEMPE: Thank you. And I apologize in advance for not getting to all the questions here. We just didn’t have the time.

MR. PASCUAL: First of all, you had a tragic experience of – yourself in your country, in Georgia, in 2008. And one of the things that I think is important to take from that lesson is the power that exists when you’re connected to a much broader community. And one of the things that you didn’t have in Georgia is the reality of a marketplace the scale and size of Europe. And one thing which Ukraine has to look to and we need to continue to work with you to be able to give Georgia the benefit of is how to strengthen those interconnections that you have with the European marketplace. If you can do that, then it starts to create a much more symmetrical relationship where the kind of asymmetrical actions that you were talking about become much more difficult.

If you’re talking about a country with – I don’t remember what Russia’s population is now – 140 million or something like that – vis-à-vis Georgia, what, 3 million –

Q: Four (million).

MR. PASCUAL: – four million, and you look at the size of the countries, the power of the marketplace, the military force, and if that’s your equation, it doesn’t – it looks pretty asymmetrical, and the ability to take asymmetrical actions without much consequence becomes very, very clear and at times painful.

If you look at a situation of a market relationship of 140 (million) and 150 million, a European market of 400 million, a very different type of economic situation that Russia is looking at with Europe, where it has a high dependency on Europe purchasing its gas, and frankly a physical dependency – I mean, Russia has 200 billion cubic meters’ worth of investments in pipelines to Europe. That is its principal gas export infrastructure that it has for anywhere in the world, right?

So use it. That’s the – that’s what we have to build on and use in a way that makes smart commercial sense, where the interdependence between those actors can result in better solutions that can also be translated into ways that give the countries within that European market a net which increases their independence.

But in order to be part of that European market net – and this comes back, again, in a way, to Ukraine – you got to play by the – you got to play by the rules of the European market, right? You can’t have your own set of rules, your own set of ideas, your own set of prices, the – your own perspective on how you manage things. You have to abide by that European energy community and the way that market function – function in that European energy community network.

And so if Europe, Ukraine, Moldova, Georgia can be brought more closely into that European energy community, there are benefits that accrue to all of those countries, but there are going to be transitional issues that Ukraine and Moldova and Georgia are going to face in the process of actually getting there.

On shale gas and Europe, interestingly, some of the greatest shale deposits in Europe may actually be in Ukraine, and the recent contracts that were signed in Ukraine are all – with Chevron, Shell, Eni are all on shale fields. There’s a lot of potential in conventional gas in Ukraine but potentially of a significant amount of unconventional gas.

The approach that we’ve taken in the United States is to share lessons on what we’ve learned on how to be able to engage with local communities and put in place the environmental and regulatory measures that result in best practices regarding to air quality, water, the treatment of fracking fluids, assessing seismic impact and addressing any impacts that might be seen on these issues.

We’ve done this in a way that helps Europe be able to make its choices in ways that are best for that European climate and individual countries. We’ve seen some countries begin to say, well, maybe we should look at this more closely. That – those are choices Europe is going to have to make. We – we’re not in a position to do that. What we’re in a position to do is to share information and experience, so that Europe can make the best choices that it can. And we continue to do that through the European Union. We continue to work through the International Energy Agency to be able to do it. There are some countries that have been much more forthcoming in seeking to move forward, such as Poland. There are other countries that have had a lot of pressure externally. Bulgaria, Romania applied when they’ve sought to develop their shale gas supplies. And what we’re hoping is that rational choices can be made based on sound facts, as opposed to, let’s say, some at times hyperbole, some myth about what the dangers of the development of shale gas might be. It’s not something that may be perfect, but there are ways to manage it so that you reduce the risks and be able to benefit from the increased availability of supplies.

In terms of oil prices, look, the global oil market is about 89 (million), 90 million barrels of oil that are consumed a day. In order to be able to sustain a change in global oil prices, you would have to see a massive amount of additional oil brought into that marketplace and sustained for a long period of time. A short-term injection of that oil is not going to simply lower prices and keep them at that low level.

Let’s think about the case of Libya in 2011. There was a release from strategic stocks that took place at that time. It was about 60 million barrels from the United States. There were comparable amounts from other parts of the world. It was maintained for a period of about 60 days, and the result of that was that it helped bring down prices by about $4 or $5 a barrel for a short period of time and kept them there – it kept them there at more or less that level, but were kept there eventually because there were other supplies that started to come back onto the market for – on a sustained period, particularly from Saudi Arabia.

So you know, the – there’s a little bit of a myth thinking that countries can simply intervene on global markets, use their strategic reserves to hold prices down and keep them there. The global oil market is a lot more complicated than that, and we have to recognize that that marketplace is going to function based on their expectations of what sustained supplies can be, not just what short-term interventions can – might do in a short period of time.

MR. KEMPE: Carlos, Ambassador Pascual, let me just say two things in closing. First of all, I know you need to scoot, and I know you’re in a hurry to get elsewhere, so I ask the audience to be respectful of that as you make your way out.

The second thing is to thank you for what was just a really rich presentation and discussion. And we will have this online, so that people can look at it and digest it in all its – in all its complexity and richness.

The – we’ve been doing great work here. You’ve tipped your hat to Damon. Let me do it again, to Damon and to David Koranyi, Adrian Karatnycky. We’ve really ramped up. We’ve had the – we’ve had the prime minister of Ukraine, of Georgia and Moldova here. To me, this is a great addition to this, giving us a really rich texture in the background for the energy markets. So thank you very much.

MR. PASCUAL: Thank you. (Applause.)