Update on Caspian Basin Energy Policy

       MR. MANN: Well, thank you very much. This is pretty much the extent of my PowerPoint presentation. But I think it tells all that we need to see on this.

       It is -- it's a good time to talk about Caspian energy, because we have just reached a major milestone in U.S. policy, major milestone in the economic life of the region. And that is, the formal approval and the start of the construction phase of the Baku-Tblisi-Ceyhan oil pipeline. Now last month we had a great inaugural ceremony for this at the beginning, in Baku, and at the pipeline's end in Ceyhan, Turkey. This marks, as I said, the beginning of construction on BTC. It will eventually bring 1 million barrels a day of oil from the Caspian, principally from the Azeri-Chirag-Gunashli deposits in Azerbaijan waters down to the deep-water port of Ceyhan, on the Mediterranean.

       Now this is -- the United States has, for many years, supported a policy of multiple pipelines coming out of Eurasia. We have seen -- and you can see on this slide -- we had the early oil pipelines of Baku-Novorossisk and Baku-Supsa. Last November I went out with Secretary of Energy Abraham to Novorossisk for the inauguration of the CPC pipeline, bringing Tengiz oil out to the Black Sea. And we're looking ahead also to the start of the Shah-Deniz gas pipeline, which will bring gas from Azerbaijan up through Georgia and into the Turkish gas grid at Erzurum.

       The BTC pipeline and the Shah-Deniz gas pipeline are the centerpiece of what we call the east-west energy corridor. And again, this is a policy that is designed to bring competition into energy transport in the Caspian region. It is designed to handle the large new volumes of hydrocarbons that are going to be produced and extracted from the Caspian. We think it's a policy that makes a great deal of economic sense for the countries of the region.

       Just to go back in time a decade or so, at the end of the Soviet era, all of the pipelines that ran from Caspian, for both oil and gas, ran in a south-north direction. And what this created was an economic monopoly that compelled producers to accept whatever transport charges that the Transneft and Gazprom monopolies would impose for transporting that energy. So it was the desire of the United States government to support the Caspian producers, to support these new countries, in their desire to create an alternative east-west channel for oil and for gas.

       Anyway, after many years of effort, after much skepticism about BTC, the policy is succeeding. So that's the good news that I've come here to brief on today.

       Looking to challenges for the future, let me just outline a couple of them and stop and move on to questions. One is -- and this is something I look forward to, having been in Kazakhstan two weeks ago -- is developing a framework that will bring Kazakhstani oil volumes into the BTC system. Kazakhstan will have major new reserves coming on line in the years ahead, and we think there is a role for those oil volumes into the BTC channel as well.

       An overall point that I would leave you with -- and it's something that I say whenever I go to the region -- is that we encourage the countries of the region to do the best they can to create good investment climates for the foreign firms that are interested. There is global competition for energy investment. There is a limited amount of investment dollars out there. And I think it benefits Azerbaijan, Turkmenistan, Kazakhstan if they create the most stable and attractive investment climates for the companies as they look towards the future -- future tenders.

       The other challenge for the future is to -- that the countries will use the revenues well for development. We're very encouraged by the development of oil funds in Azerbaijan, in Kazakhstan, and we support this. We encourage that good use be made of the funds in a transparent, effective fashion to ensure the development of the countries of the region.

       Anyway, that is an overview of the successes we've had, some of the challenges for the future.

       This is the basic PowerPoint slide, so guided by that, let us move on to questions.

       MODERATOR: May I remind you, please, to wait for a mike and identify yourself by name and organization before you give the question.

       MR. MANN: Okay. Okay, well, question?

       Q Andrei Sitov from Tass, from Russia. What is your position on the trans-Caspian pipeline for oil? Thank you.

       MR. MANN: For oil?

       Q Yes. Especially from the ecological point of view.

       MR. MANN: I think it's premature to talk about a trans-Caspian pipeline for oil. I think first I'd make a number of points. First of all, that we're looking towards bringing Kazakhstani volumes into the Baku-Ceyhan system. But that is years and years off. What we want to do now is establish that political and legal framework that will eventually make it happen.

       The second point is, everyone agrees that when we start to transport either Kazakh or, who knows, it could be Russian volumes, into Baku-Ceyhan, or Turkman volumes, that that will start by barging. And I've read different estimates, but I think you're going to have to have at least 150,000 barrels a day of transport, and some estimates go as high as 400,000 barrels a day before you start -- before that justifies building a pipeline in an economic sense.

       Now, as for the ecology of it, I would make one observation. You already have many, many undersea pipelines in the Caspian. You have pipelines that are transporting the resources from the off-shore fields to the depots, to terminals. So there are a number of undersea pipelines that already exist. I agree with your basic point, though, that everything that is done in Caspian energy must be done to the highest environmental standards.

       Yes?

       Q Good morning, Ambassador Mann.

       My name is Chevaq Maroliva (ph). I am with Azerbaijan News/Azertaj (ph). You talked about challenges in the region. Could you please brief us on the changes in the investment climate that is done by the region countries? During your last trip, did you see any change -- any steps forward?

       MR. MANN: In Azerbaijan this was not that sharp an issue, because I think the basic investment pattern is well-set there. I think the issue in Azerbaijan is moving ahead with project implementation. It is more of an issue in Kazakhstan. The companies have expressed some concern about new regulations that the government of Kazakhstan has imposed, in terms of -- for example, the procurement law, which requires government-of-Kazakhstan licenses for procurements that are going to be made by companies. These are the sorts of things that make it less attractive for a company to invest in that area. So I'm not raising any alarm bells here. But I think -- I think that, as a general point, the country should be going in the other directions, looking at ways to cut red tape, cut bureaucracy, instead of finding new licensing requirements.

       Q My name is Kenan Aliyev (ph); I'm with Azerbaijani News Agency/Toran (ph). You talked about successes in the region, particularly, you emphasized the oil funds which created in Azerbaijan and Kazakhstan. But many people point to the fact that these oil funds -- they're not accountable to anyone except the president, for example, in Azerbaijan, who's unaccountable to anybody, because the parliament doesn't have any oversee policy over this oil fund. And basically, the all members of this fund appointed by the president. How can you call this success when many experts believe that this is just the institution which is created to generate wealth to the ruling elite? And many experts again point out the only -- who benefited from this oil development so far, particularly in Azerbaijan, were ruling elite -- President Aliyev and his family. Could you please comment on the --

       MR. MANN: Sure. Sure. It's a modest -- it's a modest success. The -- why do I say it's a success? Because I look around the world, and I see a number of countries that have no oil fund whatsoever -- no accountability, no cooperation with the World Bank and IMF and foreign governments on handling the revenue issue.

       So in that respect, yes, I'm delighted to see that in Azerbaijan and Kazakhstan.

       Now, you know, my outside observation on the oil fund is the instant issue is setting criteria for the use of the fund. And that's something that is going to have to be -- that needs to be done. It has not been worked out within Azerbaijan. And I think that's the top priority that I see as an outside observer.

       The broader questions you're asking really are questions of -- are political questions within Azerbaijan. And I'm not going to step down that road. But to put it in perspective, it's a modest success but there's more that needs to be done as the oil fund is developed to make sure that it goes to the purposes -- the correct purposes you're pointing out.

       Q Rule of law in these countries. It does not create any problem for U.S. government or to American companies to do business in Azerbaijan.

       MR. MANN: Thank you for that set-up because I refer you to the past 40 speeches I've made over the last two years, and in almost every speech, I've said this, which is I've said this is not ideology, this is not U.S. government policy; it's simple fact that there are three factors that are more important than anything else in attracting foreign investment into a country: number one, rule of law; number two, rule of law; and number three, rule of law. That's what brings foreign investment in.

       And I have had this conversation in every country that I've visited, simply to lay out the facts that foreign investors have other choices. The competition, let's say, that Azerbaijan, that Kazakhstan face is not each other. Their competition is Brazil. It's Canadian shale. It's deep-water gulf. So when a major company is facing the decision, "Do we want to invest two, three, five billion dollars in a given country?" one of the things they will look at is rule of law: "If we have a commercial dispute, how will we resolve this? What sort of conditions will our company, will our employees have to operate in in these countries?"

       Now, I think to the great credit of Azerbaijan and Kazakhstan, each government has dealt with foreign investors in a sophisticated and supportive fashion.

       But the point that I make -- and I think it's one you're getting at also -- is that the competition, the global competition never stops. So as the countries look to the next phases of investment, it's very, very important to develop rule of law, certainly in the political sense, but I'm talking right now in the narrow, commercial sense.

       Q Okay. Just one last question, not about rule of law, just seems like a political question which you don't like to answer.

       Anyway, the question is, the U.S. government plans -- I mean Bush administration plans to some operation in Iraq, and it's obvious that it may happen eventually if Iraq will not comply with a U.N. resolution. Which means eventually Iraqi oil may be open to the world market. Do you think this kind of development may jeopardize the future of the Eurasian transfer cartel, energy cartel, because the fact that Iraqi oil will be easy to bring to the world market and it will be cheaper than the Caspian oil?

       MR. MANN: That's an extremely good question. The way I would answer it is this -- and I certainly have given that a lot of thought. The financial estimates that I have seen for the BTC project have been calculated according to a range of oil prices. And the companies involved in this certainly have taken that into account, and it's their belief that even with oil selling at a much lower price than it is now, that the BTC project will be attractive.

       Now, what I tell people also is pay no attention to what I say, because this is just an opinion. But what you must pay attention to is the behavior of the companies. And they are putting up nearly $3 billion for this oil pipeline, in addition to the billions that they are investing in the ACG deposits. So I think that's the most persuasive evidence, that regardless of where oil prices might swing in the months and years ahead, that this project will be a success.

       Yes?

       Q Yeah, Tom Doggett (sp) with Reuters. I'd like to follow up on that question. In a post-Saddam Hussein government, which may happen soon here, we may have a U.S. military occupation government, which would ensure some kind of rule of law and would provide an opportunity to increase Iraq's production, once the sanctions are lifted, the fields are opened up, 1 to 2 million barrels a day, possibly; discovering new oil fields; upgrade facilities. Doesn't this make Iraq much more attractive than the Caspian region?

       I'm not talking about the Baku-Ceyhan pipeline, but other projects, especially if these Caspian countries don't have a rule of law.

       MR. MANN: Well, a basic point here is, what we're doing as a government is supporting the companies, and we shouldn't lose sight of that fact. The U.S. government doesn't write the checks to build the pipeline itself. So what we're doing is supporting Unocal, supporting Delta Hess, supporting BP and Statoil in these projects. And every indication I have is that they're fully committed and they're well on the way to extracting that ACG oil.

       Now the other point I would say, though, in terms of U.S. policy, is that there is a long-term fundamental logic to the U.S. policy of supporting multiple pipelines. This has been out there. This has been a part of U.S. policy since the mid-90s. And it's nothing that we're going to turn around on a dime, in that respect.

       We have -- there's not merely, I think, the economic rationale for this; we also see environmental reasons for supporting BTC. It is -- BTC is the largest Bosporus bypass pipeline under discussion. It also gives the countries of the region a greater measure of autonomy in their decision-making if they're not dependent on the old Soviet transport monopolies.

       So I think there are many good reasons for the U.S. to continue with its support, but the important part, again, is, what are the companies doing? And everything that we hear from every echelon of every company involved in this is that they're pushing smartly ahead.

       Q And one more. And finally, to get even more specific, do you think Iraqi oil investment opportunities in a post-Saddam government would discourage or make less attractive Caspian oil investment opportunities?

       MR. MANN: I can't say what Iraqi oil opportunities would look like, and certainly that's not the area that I'm expert on. And at this speculative stage, I don't know that anyone could do anything but speculate and throw darts.

       Q (Off mike.)

       MR. MANN: Yeah.

       Q Uh-huh.

       MR. MANN: Well, the point -- I think there's a valid point for the Caspian, which is take nothing for granted. You have 4 percent -- the Caspian has 4 percent of world oil reserves. Now that's not enough to dominate the market, by any stretch. It is enough to be an important of setting oil prices on the margin, if you will, in the same way that North Sea oil did in the 1970s.

       So my message -- when I go out to the Caspian, my message has nothing to do with Iraq. It's a general point which says that people are bringing new sources and new discoveries on line all the time, and you're in a competition for investment; therefore, work as hard as you can, as smartly as you can, to make an attractive investment climate.

       Q I'm Justin Kohl (sp), IFX News. Is there any verification or monitoring process or obligation on the government to ensure that financing from Western, U.S. oil companies doesn't go into private Swiss bank accounts that are controlled by governments -- (inaudible) -- particularly referring to Kazakhstan -- (inaudible) -- legitimate government accounts?

       MR. MANN: Well, we have the Foreign Corrupt Practices Act, is the core answer to your question. And American firms -- I know this from my dealing with them -- American firms are hyper-sensitive to that particular issue. I think that's the short answer to your question. And there is no long one.

       Q (Off mike.)

       MR. MANN: There is no long one.

       Any other questions? Yes? Here.

       Q Amy Butler with Bloomberg. You mentioned efforts to make investment opportunities in the region more attractive. Recently I think Saudi Arabia mentioned that they had foiled some sort of a plot to disrupt one of the oil pipelines in its own country with terrorist activity. And I was wondering -- obviously, the U.S. (doesn't want to see ?) see that sort of thing in the Caspian region. But, you know, is that, especially with Iraq and other tensions developing, is that a big concern? And what, if anything, can the U.S. government do about it?

       MR. MANN: It's a tough question to answer. And the way we approach it is this: that we want to take pipeline security and facility security seriously, yet we don't want to give the impression that we see an extraordinary threat out there. So we're trying to strike that sober balance. What we do is we consult with the countries, with the companies on -- well, what the potential threats might be to a pipeline, on what sort of response the security establishments of the countries could give if there is a problem. And this has been going on for some time as part of a low-key, working- level engagement in support of these new pipelines.

       Yes? Okay, sorry. A new one back here.

       Q Thomas Gorguissian, Al Wafd, Egypt. I will try to ask a question, to phrase in such a way that I will not get a short answer, you know? (Laughter.)

       So anyway, you stress -- and I will try to elaborate the same question that my colleagues raised, because at the end of the matter you are saying -- you mention that it's a commercial sense; I mean, there has to be a commercial sense.

       And I remember in the '70s when there was a slogan here, "Let the Arabs drink their oil," you know? I mean, if it's a lot of oil is there, what is the commercial sense of having more investment in somewhere? I'm not talking about the companies, I'm talking about the investment of the diplomacy as it was mentioned. You said it's Caspian oil region diplomacy. I mean, what are your -- let's say the criteria or the level according to which you will say we will continue or not, we will stop doing this?

       MR. MANN: Okay. Yeah. We have had this ambassadorship, this senior adviser position for Caspian energy, since the summer of 1998, and I am the fourth person to occupy this job. And it was created because the Caspian region created unusual challenges, unusual circumstances.

       If you look at the Gulf reserves, there are really no transport issues. You run a pipeline from the field to major sea lanes, and that's done. The Caspian region, though, is landlocked. So if you're going to create new pipelines in any direction, new pipelines, you have the challenges of running those across different countries, which requires a degree of international cooperation. And what the U.S. saw, and I think this was not unreasonable, is we saw that these are new countries just getting themselves established, that they have very complicated legal and diplomatic and economic issues to work through. You add to this the complication of dealing with a dozen or more international firms, and that's a recipe for confusion.

       So the U.S. response to this was to say, let's create someone to help coordinate this. And I think it was a smart U.S. policy and it's worked very well. A lot of the early work was creating the inter- governmental agreements necessary to allow the pipeline to run through three different countries. And we've done that for oil, we've done that for gas. Then, part of it is creating the host government agreements. Now, these are new concepts for countries that 10 years ago were still republics of the Soviet Union. So I think that is the underpinning of why the U.S. created something for the Caspian region.

       But you don't need to do it for the Persian Gulf region. You don't need to do it for other regions of the world. So at some point, my job will evaporate. When will that be? When I or my successor no longer give value-added; when the pipelines are in place; when the issues have been worked out. So I hope that's soon, but for the foreseeable future, I'll still be doing this job and traveling to the capitals.

       Yeah. Follow-up.

       Q You mentioned the timeline. Is there a timeline for this project, the BTC?

       MR. MANN: Oh, yeah.

       Q This is my first question. The second question for you -- short answer about the foreign act -- foreign corrupt act -- I'm not sure the same phrasing -- I mean, the term how you use it. And the related question about the elite getting creme de la creme or the big chunk of the money -- are these connected to each other or not connected, from your point of view?

       MR. MANN: Well, back to the timeline: I'm a bad briefer here. I should have laid this out. If we're talking Baku-Tblisi-Ceyhan on the oil pipeline --

       Oh, God. I have -- I love this. Okay. I need to stand close to the mike.

       The construction phase has just started, so what that means is, the pipe is actually being shipped at this moment from Japan out to the route. They're starting the actual work on crating this pipeline. And the first pipe will go in the ground next spring, March or April 2003. Construction should be completed at the end of 2004. Then they do testing and line fill, and we will see first oil going into Ceyhan in the first part of 2005. Now the Shah-Deniz gas pipeline is running several months behind that. We're looking at bringing Shah-Deniz gas into the Turkish gas grid in early 2006. But that's the basic timeline for each of these.

       In terms of -- oh, back to revenues for the elite. To -- this is why, to the greatest degree possible, the U.S. stresses rule of law, transparency, accountability. We don't have -- I mean, none of the countries in the former Soviet Union, I think you could say, have reached the perfect and ideal stage of rule of law.

       It's a process. We understand that. There's no question where our sympathies lie on this. We're joined in this, I hope -- well, I know also we're joined in this by the EU, by OSCE members. But you have to -- realistically, this is a process, and we're not there yet by any means.

       Q (Off mike) -- just a few more specifics, just for the background here. And in early 2005, when the first oil arrives, at that point, what will be the average daily volumes? When will it get to a million barrels? And is all the financing complete? Is there any opportunity or possible need here for U.S. export -- Ex-Im Bank financing or OPIC?

       MR. MANN: I believe -- but I would encourage you to check with BP on this -- I think we're talking about 3(00,000) or 400,000 barrels a day to start. And like any pipeline -- like the CPC pipeline, for example -- it's going to be a ramp-up.

       In terms of financing, the plan has always been for the consortium to start out by equity financing it for the opening months and then the -- lock in the financing, you know, at some point later, after the -- after projection sanction. So I'd say six to 12 months after projection sanction is what they're looking for, for locking in the financing phase.

       Now as for U.S. participation in this, U.S. Ex-Im Bank has been having detailed discussions with the consortium on this. I'm confident that U.S. Ex-Im is going to be part of this. That is U.S. Ex-Im's decision, of course, so God forbid that I should make commitments which are not mine to make. But how much Ex-Im is in for depends on the level of U.S. content in the project, and that's not clear yet.

       Q (Off mike.)

       MR. MANN: Can't say. We're still working that out with consortium as they come through with their list of proposed procurements.

       U.S. OPIC, I am hopeful, will be part of this project also. So that's another subject that they're in discussions with the consortium in.

       They're talking -- the project is talking to the export credit agencies of different European governments. They've been talking to IFC. They've been talking to EBRD. So out of this all, we're going to have a financing package, and that actually is moving forward very nicely.

       Yeah?

       Q I'm just wondering if I could maybe approach it from a slightly different angle. I mean, in this era in the U.S. of improved corporate transparency and corporate ethics, I mean, is there any obligation on U.S. oil companies to release the details of accounts that the monies -- the oil revenues monies are going into in the region? Should they sort of clarify --

       MR. MANN: That's -- it's a complicated question, because then it gets into business strategy and corporate information. I think, as a general point, the more transparency we have in all of this, the better we are collectively. But I realize that there has to be a certain part of confidentiality in negotiations with major companies.

       I don't -- I honestly don't know how you best strike that balance, but my belief is that the greater focus should be on the host countries to do all that they can to publish their budgets, publish their revenue estimates, and be transparent in how they handle the revenues that are coming in there.

       Q A couple of other technical issues. Have you received assurances from Kazakhstan that they will be providing oil for the BTC?

       MR. MANN: Fundamentally, it's a commercial decision, and what's going to determine this is the economics of shipping it from the North Caspian into Baku-Ceyhan.

       Now, I was in Kazakhstan two weeks ago. The Kazakh government officials that I met with are very interested in this. Kazakhstan is -- the government of Kazakhstan is a powerful believer in multiple pipelines. But it's not a question of assurances, it's a question of creating the best commercial conditions to ship out those volumes. And I think we're going to see that it is commercially attractive to ship a certain amount through the BTC line. But it's going to come down to numbers, not commitments.

       Q And secondly, I understand that the Turkmen are pushing very hard for a gas pipeline down south through Afghanistan. How viable is that project, in your opinion?

       MR. MANN: We are not going to know until we see the results of the feasibility study prepared by the Asian Development Bank. Again, everything is going to depend on price, and part of that will be the price at which the Turkmen choose to sell their gas. So the United States very much supports multiple pipelines for Turkmenistan. We believed that the trans-Caspian gas pipeline was by far the best opportunity for the government of Turkmenistan. Regrettably, the government did not choose to accept the consortium's offer, and I think that has been a great missed opportunity.

       I think -- are we in our final questions here?

       Yes?

       Q Okay, well, it will be the final one. Ambassador, there's been a lot of discussions recently on increased importance of non- Middle East oil, which is Caspian and Russia. Without going into any speculation about the outcome of possible Iraqi attacks, how do you think the work of your office will look like in the coming months?

       MR. MANN: I think it's going to look the same as it has looked for some time because there's a long-term logic to what we do, the issues are basically clear, they're out there on the ground. And I don't think that -- I can't envision any events changing the basic patient work that we're trying to do with the Caspian states.

       Caspian oil has a role to play in world oil supplies. Again, Caspian energy, Caspian oil volumes have been oversold. If you look at the press commentary of the mid-'90s, it talks about a second Persian Gulf, a wall of money that's going to hit the Caspian states.

       And that's too much. Now in reality, Caspian energy does have a valuable role to play, but again, it's a role on the margins. And the U.S. welcomes this new non-OPEC oil coming into the market. It will be good for the states and good for global economic growth. But we have to keep it in perspective.

       So I think our time is up here, but thank you --

       MODERATOR: (Off mike) -- real short.

       MR. MANN: Real short.

       MODERATOR: One more, from -- (off mike) -- in the back.

       Q My question today -- I mean, a lot of times you mentioned the relation of let's say referring to wisdom of the companies and their (foreseen ?) future over there. What is the relation -- how is these relations going on between the U.S. government and these oil companies? One is politics, and the other is completely commercial. And what is the price of this? Let's say Daniel Yergin --

       MR. MANN: We -- well, by and large, we think it's a good thing for the countries of the region to get this investment. That investment is only going to come from the private sector. That investment is not going to come from any foreign government. So it's the private sector we rely on to mobilize this investment. And we want to help that develop in a market-oriented fashion. That's the way I'd put it.

       Okay. Thank you very much.

       MODERATOR: I'd like to thank Ambassador Mann for the briefing. And thank you for joining us this morning. Also, a reminder: If you stay, in 10 minutes we have a second briefing by another Mann, Thomas Mann, who will be briefing on U.S. elections. We have the "Mann Gang" this morning. Thank you very much.