TESTIMONY BY JOHN J. MARESCA
Mr. Chairman, I am John Maresca, Vice President, International
Relations, of Unocal Corporation. Unocal is one of the world's leading
energy resource and project development companies. Our activities are
focused on three major regions -- Asia, Latin America and the U.S. Gulf
of Mexico. In Asia and the U.S. Gulf of Mexico, we are a major oil and
gas producer. I appreciate your invitation to speak here today. I
believe these hearings are important and timely, and I congratulate you
for focusing on Central Asia oil and gas reserves and the role they
play in shaping U.S. policy.
VICE PRESIDENT, INTERNATIONAL RELATIONS
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS
SUBCOMMITTEE ON ASIA AND THE PACIFIC
FEBRUARY 12, 1998
Today we would like to focus on three issues concerning this
region, its resources and U.S. policy:
The need for multiple pipeline routes for Central Asian oil and
The need for U.S. support for international and regional efforts
to achieve balanced and lasting political settlements within Russia,
other newly independent states and in Afghanistan.
The need for structured assistance to encourage economic reforms
and the development of appropriate investment climates in the region.
In this regard, we specifically support repeal or removal of Section
907 of the Freedom Support Act.
For more than 2,000 years, Central Asia has been a meeting
ground between Europe and Asia, the site of ancient east-west trade
routes collectively called the Silk Road and, at various points in
history, a cradle of scholarship, culture and power. It is also a
region of truly enormous natural resources, which are revitalizing
cross-border trade, creating positive political interaction and
stimulating regional cooperation. These resources have the potential to
recharge the economies of neighboring countries and put entire regions
on the road to prosperity.
About 100 years ago, the international oil industry was born in
the Caspian/Central Asian region with the discovery of oil. In the
intervening years, under Soviet rule, the existence
of the region's oil and gas resources was generally known, but
only partially or poorly developed.
As we near the end of the 20th century, history brings us full circle.
With political barriers falling, Central Asia and the Caspian are once
again attracting people from around the globe who are seeking ways to
develop and deliver its bountiful energy resources to the markets of
The Caspian region contains tremendous untapped hydrocarbon
reserves, much of them located in the Caspian Sea basin itself. Proven
natural gas reserves within Azerbaijan, Uzbekistan, Turkmenistan and
Kazakhstan equal more than 236 trillion cubic feet. The region's total
oil reserves may reach more than 60 billion barrels of oil -- enough to
service Europe's oil needs for 11 years. Some estimates are as high as
200 billion barrels. In 1995, the region was producing only 870,000
barrels per day (44 million tons per year [Mt/y]).
By 2010, Western companies could increase production to about
4.5 million barrels a day (Mb/d) -- an increase of more than 500
percent in only 15 years. If this occurs, the region would represent
about five percent of the world's total oil production, and almost 20
percent of oil produced among non-OPEC countries.
One major problem has yet to be resolved: how to get the
region's vast energy resources to the markets where they are needed.
There are few, if any, other areas of the world where there can be such
a dramatic increase in the supply of oil and gas to the world market.
The solution seems simple: build a "new" Silk Road. Implementing this
solution, however, is far from simple. The risks are high, but so are
Finding and Building Routes to World Markets
One of the main problems is that Central Asia is isolated. The
region is bounded on the north by the Arctic Circle, on the east and
west by vast land distances, and on the south by a series of natural
obstacles -- mountains and seas -- as well as political obstacles, such
as conflict zones or sanctioned countries.
This means that the area's natural resources are landlocked,
both geographically and politically. Each of the countries in the
Caucasus and Central Asia faces difficult political challenges. Some
have unsettled wars or latent conflicts. Others have evolving systems
where the laws -- and even the courts -- are dynamic and changing.
Business commitments can be rescinded without warning, or they can be
displaced by new geopolitical realities.
In addition, a chief technical obstacle we face in transporting
oil is the region's existing pipeline infrastructure. Because the
region's pipelines were constructed during the Moscow-centered Soviet
period, they tend to head north and west toward Russia. There are no
connections to the south and east.
Depending wholly on this infrastructure to export Central Asia
oil is not practical. Russia currently is unlikely to absorb large new
quantities of "foreign" oil, is unlikely to be a significant market for
energy in the next decade, and lacks the capacity to deliver it to
Certainly there is no easy way out of Central Asia. If there are
to be other routes, in other directions, they must be built.
Two major energy infrastructure projects are seeking to meet this
challenge. One, under the aegis of the Caspian Pipeline Consortium, or
CPC, plans to build a pipeline west from the Northern Caspian to the
Russian Black Sea port of Novorossisk. From Novorossisk, oil from this
line would be transported by tanker through the Bosphorus to the
Mediterranean and world markets.
The other project is sponsored by the Azerbaijan International
Operating Company (AIOC), a consortium of 11 foreign oil companies
including four American companies -- Unocal, Amoco, Exxon and Pennzoil.
It will follow one or both of two routes west from Baku. One line will
angle north and cross the North Caucasus to Novorossisk. The other
route would cross Georgia and extend to a shipping terminal on the
Black Sea port of Supsa. This second route may be extended west and
south across Turkey to the Mediterranean port of Ceyhan.
But even if both pipelines were built, they would not have
enough total capacity to transport all the oil expected to flow from
the region in the future; nor would they have the capability to move it
to the right markets. Other export pipelines must be built.
Unocal believes that the central factor in planning these
pipelines should be the location of the future energy markets that are
most likely to need these new supplies. Just as Central Asia was the
meeting ground between Europe and Asia in centuries past, it is again
in a unique position to potentially service markets in both of these
regions -- if export routes to these markets can be built. Let's take a
look at some of the potential markets.
Western Europe is a tough market. It is characterized by high
prices for oil products, an aging population, and increasing
competition from natural gas. Between 1995 and 2010, we estimate that
demand for oil will increase from 14.1 Mb/d (705 Mt/y) to 15.0 Mb/d
(750 Mt/y), an average growth rate of only 0.5 percent annually.
Furthermore, the region is already amply supplied from fields in the
Middle East, North Sea, Scandinavia and Russia. Although there is
perhaps room for some of Central Asia's oil, the Western European
market is unlikely to be able to absorb all of the production from the
Central and Eastern Europe
Central and Eastern Europe markets do not look any better.
Although there is increased demand for oil in the region's transport
sector, natural gas is gaining strength as a competitor. Between 1995
and 2010, demand for oil is expected to increase by only half a million
barrels per day, from 1.3 Mb/d (67 Mt/y) to 1.8 Mb/d (91.5 Mt/y). Like
Western Europe, this market is also very competitive. In addition to
supplies of oil from the North Sea, Africa and the Middle East, Russia
supplies the majority of the oil to this region.
The Domestic NIS Market
The growth in demand for oil also will be weak in the Newly
Independent States (NIS). We expect Russian and other NIS markets to
increase demand by only 1.2 percent annually between 1997 and 2010.
In stark contrast to the other three markets, the Asia/Pacific
region has a rapidly increasing demand for oil and an expected
significant increase in population. Prior to the recent turbulence in
the various Asian/Pacific economies, we anticipated that this region's
demand for oil would almost double by 2010. Although the short-term
increase in demand will probably not meet these expectations, Unocal
stands behind its long-term estimates.
Energy demand growth will remain strong for one key reason: the
region's population is expected to grow by 700 million people by 2010.
It is in everyone's interests that there be adequate supplies
for Asia's increasing energy requirements. If Asia's energy needs are
not satisfied, they will simply put pressure on all world markets,
driving prices upwards everywhere.
The key question is how the energy resources of Central Asia can
be made available to satisfy the energy needs of nearby Asian markets.
There are two possible solutions -- with several variations.
East to China: Prohibitively Long?
One option is to go east across China. But this would mean
constructing a pipeline of more than 3,000 kilometers to central China
-- as well as a 2,000-kilometer connection to reach the main population
centers along the coast. Even with these formidable challenges, China
National Petroleum Corporation is considering building a pipeline east
from Kazakhstan to Chinese markets.
Unocal had a team in Beijing just last week for consultations
with the Chinese. Given China's long-range outlook and its ability to
concentrate resources to meet its own needs, China is almost certain to
build such a line. The question is what will the costs of transporting
oil through this pipeline be and what netback will the producers
South to the Indian Ocean: A Shorter Distance to Growing Markets
A second option is to build a pipeline south from Central Asia
to the Indian Ocean.
One obvious potential route south would be across Iran. However,
this option is foreclosed for American companies because of U.S.
sanctions legislation. The only other possible route option is across
Afghanistan, which has its own unique challenges.
The country has been involved in bitter warfare for almost two
decades. The territory across which the pipeline would extend is
controlled by the Taliban, an Islamic movement that is not recognized
as a government by most other nations. From the outset, we have made it
clear that construction of our proposed pipeline cannot begin until a
recognized government is in place that has the confidence of
governments, lenders and our company.
In spite of this, a route through Afghanistan appears to be the
best option with the fewest technical obstacles. It is the shortest
route to the sea and has relatively favorable terrain for a pipeline.
The route through Afghanistan is the one that would bring Central Asian
oil closest to Asian markets and thus would be the cheapest in terms of
transporting the oil.
Unocal envisions the creation of a Central Asian Oil Pipeline
Consortium. The pipeline would become an integral part of a regional
oil pipeline system that will utilize and gather oil from existing
pipeline infrastructure in Turkmenistan, Uzbekistan, Kazakhstan and
The 1,040-mile-long oil pipeline would begin near the town of
Chardzhou, in northern Turkmenistan, and extend southeasterly through
Afghanistan to an export terminal that would be constructed on the
Pakistan coast on the Arabian Sea. Only about 440 miles of the pipeline
would be in Afghanistan.
This 42-inch-diameter pipeline will have a shipping capacity of
one million barrels of oil per day. Estimated cost of the project --
which is similar in scope to the Trans Alaska Pipeline -- is about
There is considerable international and regional political
interest in this pipeline. Asian crude oil importers, particularly from
Japan, are looking to Central Asia and the Caspian as a new strategic
source of supply to satisfy their desire for resource diversity. The
pipeline benefits Central Asian countries because it would allow them
to sell their oil in expanding and highly prospective hard currency
markets. The pipeline would benefit Afghanistan, which would receive
revenues from transport tariffs, and would promote stability and
encourage trade and economic development. Although Unocal has not
negotiated with any one group, and does not favor any group, we have
had contacts with and briefings for all of them. We know that the
different factions in Afghanistan understand the importance of the
pipeline project for their country, and have expressed their support of
A recent study for the World Bank states that the proposed
pipeline from Central Asia across Afghanistan and Pakistan to the
Arabian Sea would provide more favorable netbacks to oil producers
through access to higher value markets than those currently being
accessed through the traditional Baltic and Black Sea export routes.
This is evidenced by the netback values producers will receive
as determined by the World Bank study. For West Siberian crude, the
netback value will increase by nearly $2.00 per barrel by going south
to Asia. For a producer in western Kazakhstan, the netback value will
increase by more than $1 per barrel by going south to Asia as compared
to west to the Mediterranean via the Black Sea.
Natural Gas Export
Given the plentiful natural gas supplies of Central Asia, our
aim is to link a specific natural resource with the nearest viable
market. This is basic for the commercial viability of any gas project.
As with all projects being considered in this region, the following
projects face geo-political challenges, as well as market issues.
Unocal and the Turkish company, Koc Holding A.S., are interested
in bringing competitive gas supplies to the Turkey market. The proposed
Eurasia Natural Gas Pipeline would transport gas from Turkmenistan
directly across the Caspian Sea through Azerbaijan and Georgia to
Turkey. Sixty percent of this proposed gas pipeline would follow the
same route as the oil pipeline proposed to run from Baku to Ceyhan. Of
course, the demarcation of the Caspian remains an issue.
Last October, the Central Asia Pipeline, Ltd. (CentGas)
consortium, in which Unocal holds an interest, was formed to develop a
gas pipeline that will link Turkmenistan's vast natural gas reserves in
the Dauletabad Field with markets in Pakistan and possibly India. An
independent evaluation shows that the field's resources are adequate
for the project's needs, assuming production rates rising over time to
2 billion cubic feet of gas per day for 30 years or more.
In production since 1983, the Dauletabad Field's natural gas has
been delivered north via Uzbekistan, Kazakhstan and Russia to markets
in the Caspian and Black Sea areas. The proposed 790-mile pipeline will
open up new markets for this gas, travelling from Turkmenistan through
Afghanistan to Multan, Pakistan. A proposed extension would link with
the existing Sui pipeline system, moving gas to near New Delhi, where
it would connect with the existing HBJ pipeline. By serving these
additional volumes, the extension would enhance the economics of the
project, leading to overall reductions in delivered natural gas costs
for all users and better margins. As currently planned, the CentGas
pipeline would cost approximately $2 billion. A 400-mile extension into
India could add $600 million to the overall project cost.
As with the proposed Central Asia Oil Pipeline, CentGas cannot
begin construction until an internationally recognized Afghanistan
government is in place. For the project to advance, it must have
international financing, government-to-government agreements and
The Central Asia and Caspian region is blessed with abundant oil
and gas that can enhance the lives of the region's residents and
provide energy for growth for Europe and Asia.
The impact of these resources on U.S. commercial interests and
U.S. foreign policy is also significant and intertwined. Without
peaceful settlement of conflicts within the region, cross-border oil
and gas pipelines are not likely to be built. We urge the
Administration and the Congress to give strong support to the United
Nations-led peace process in Afghanistan.
U.S. assistance in developing these new economies will be crucial to
business' success. We encourage strong technical assistance programs
throughout the region. We also urge repeal or removal of Section 907 of
the Freedom Support Act. This section unfairly restricts U.S.
government assistance to the government of Azerbaijan and limits U.S.
influence in the region.
Developing cost-effective, profitable and efficient export
routes for Central Asia resources is a formidable, but not impossible,
task. It has been accomplished before. A commercial corridor, a "new"
Silk Road, can link the Central Asia supply with the demand -- once
again making Central Asia the crossroads between Europe and Asia.