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Hearing of the International Economic Policy, Export and Trade Promotion Subcommittee of the Senate Foreign Relations Committee

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Location: Washington, DC

Federal News Service

HEADLINE: HEARING OF THE INTERNATIONAL ECONOMIC POLICY, EXPORT AND TRADE PROMOTION SUBCOMMITTEE OF THE SENATE FOREIGN RELATIONS COMMITTEE

SUBJECT: U.S. ENERGY SECURITY: WEST AFRICA AND LATIN AMERICA

CHAIRED BY: SENATOR CHUCK HAGEL (R-NE)

WITNESSES PANEL I:

JOHN BRODMAN, DEPUTY ASSISTANT SECRETARY, POLITICAL AND INTERNATIONAL AFFAIRS, DEPARTMENT OF ENERGY;

MATTHEW MCMANUS, ACTING DIRECTOR, OFFICE OF INTERNATIONAL ENERGY AND COMMODITY POLICY, DEPARTMENT OF STATE

PANEL II:

J. ROBINSON WEST, CHAIRMAN, PFC ENERGY;

DAVID GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL STRATEGIES, LLC;

DR. MARINA OTTAWAY, SENIOR ASSOCIATE, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE

LOCATION: 419 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. CHUCK HAGEL (R-NE): Good afternoon. This is the third subcommittee hearing this year on energy security. Prior witnesses have given the committee an overview of U.S. energy security policy, and how that policy is affected by events around the world. Because U.S. energy independence is not achievable in the near term, America needs a comprehensive energy policy that recognizes the realities of our inter-connected world and the linkages between political stability and energy security. Those realities vary from region to region. We cannot take a one size fits all approach to this effort.

Our first hearing in April of this year on energy security focused on an overview of global energy security issues. Our second hearing focused specifically on Russia and the Caspian Sea region. Today's witnesses will testify on the impact of recent developments in West Africa, specifically in Liberia and Nigeria, and in Latin America, especially in Venezuela and Mexico.

Both Latin America and West Africa are regions rich in resources but bedeviled by instability and conflict. Both regions can also play even greater roles as major suppliers of energy to the United States over the years to come. Approximately 30 percent of America's crude oil and petroleum imports come from Latin America, primarily Mexico and Venezuela. This energy relationship cannot be separated from our bilateral relationships, including trade and immigration.

While the U.S. imports crude oil and electricity from Mexico, we also are an exporter of natural gas to Mexico. The political unrest in Venezuela and the instability in the Venezuelan oil markets underscores the need for diversification of U.S. energy supplies. I'll ask today's witnesses to comment on how the oil strikes against President Chavez in Venezuela have affected U.S. energy policy and how the geo-strategic implications of continued political volatility in Venezuela could affect our economic and political interests in South America.

Other countries in Latin America hold promise with regard to energy production, particularly in the natural gas sector. Brazil and Chile are examples, examples of potential suppliers of natural gas, and they could fit into an overall global energy security strategy. West Africa holds significant potential for future energy development. Nigeria has the ninth largest proven natural gas reserves in the world and could significantly increase its crude oil production.

Nigeria is the greatest energy force in West Africa at this time. But other countries in the region, Cameroon, Equatorial Guinea and Gabon, to name a few, are also potential suppliers. Sao Tome, off the West African coast near Gabon and Nigeria has what may be billions of barrels of crude lying off of its coast.

However, a military coup seized control of the government for a week in July. West Africa will only realize its energy potential when it addresses the political instability and conflicts that plague the region. In both Latin America and West Africa, political instability and corruption will stymie long-term development efforts. Rule of law reforms must accompany energy development efforts in order to attract investment, promote prosperity and ensure peace.

Today, we have two panels of expert witnesses to discuss these important issues. The first panel we will first hear from deputy assistant secretary of Energy for Political and International Affairs, John Brodman, who will testify how the Energy Department use energy security issues as they pertain to Latin America and West Africa. Then we will receive testimony from Matthew McManus, acting director of the Office of International Energy and Commodity Policy, who will discuss energy issues in the Western Hemisphere and Africa and their relationship to U.S. energy security and commercial opportunities.

On the second panel, we will hear from the president of Goldwyn International Strategies, David Goldwyn; the chairman of PFC Energy, Robin West; and a senior associate at the Carnegie Endowment for International Peace, Dr. Marina Ottaway. Thank you all for coming, we appreciate your time, your efforts and we look forward to your testimony, welcome.

I have been joined by the distinguished Senator from Minnesota. Senator Coleman would you like to offer a statement before we hear from the witnesses?

BREAK IN TRANSCRIPT

MR. McMANUS: I think we look to advance our energy policies by keeping our principles, which is why we're working through the G8 on enhancing transparency, which is why we've added a new position in our embassy in Nigeria to work on corporate responsibility and why with the Department of Energy, we maintain a dialogue with countries throughout the world, even countries such as Venezuela where there are larger political issues at stake. So I think that it is a fundamental part of our overall foreign policy and it is well implemented and integrated into our policy making system.

SEN. HAGEL: Secretary Brodman, would you care to comment on that at all?

MR. BRODMAN: Yes, thank you, Mr. Chairman. I think that many of the new challenges that we see emerging today to our energy security really come from the kinds of things that we haven't seen in the past. As you know in the past, our supply disruptions came primarily from sovereign political decisions, revolutions and conventional wars, but today they're just as likely to come from corruption and a lack of transparency from good governance issues, from ethnic and religious conflicts, from border and territorial disputes, from political instability and other internal sources of conflict. And from the failure of the revenues from oil development to trickle down to support the economic and social development aspirations of the people directly involved.

And in many ways, I think the new challenges to our energy security today, really go beyond energy policy per se to touch on the things that Mr. McManus mentioned. I think resolving a lot of these issues really gets down to the United States helping these countries to manage the revenues they earn from oil, gas and other natural resource development in a way that will support sustainable social and economic development. And I really think that this is the new frontier for our energy security in the 21st century, especially when we look to Latin America and Africa.

SEN. HAGEL: How much of a role do multilateral institutions, organizations, play in our overall effort here, as you have just described, both of you in your testimony, to help these developing nations through these political crises, border problems, all the other specifics that you mentioned. Focusing on trying to help them develop some stability and security, as you've just noted, managing assets, and many of these countries have tremendous assets, as you have each laid those numbers out fairly clearly. World Bank, United Nations, how much of a role do they play, can they play, should they play in this effort? I'd like to hear from both of you, thank you.

Secretary Brodman?

MR. BRODMAN: Thank you. I believe they are playing an increasing role and there are a lot of very innovative activities going on being undertaken, I think, by the World Bank, by regional development banks, by the United Nations and by other organizations such as the International Energy Agency and the newly evolving International Energy Forum which is a forum for improving the dialogue between oil producing and oil consuming countries.

I think one excellent example of the role that international institutions can play, is the role that the World Bank played in the development of the Chad-Cameroon pipeline, to bring newly discovered oil from Chad to market. And the fund that that organization set up to channel the revenues from oil development projects in Chad into sustainable economic development projects within the country to make sure that the country as a whole benefits from the development of those natural resources.

The World Bank has also been highly instrumental in doing accounting to help oil producing countries get a better handle on the disposition of oil-of revenues that come from natural resource development, and I think in this sense, in supporting the efforts that we have undertaken in the G-8 and in other places to improve the transparency of transactions and natural resource development in developing countries.

In many places, many countries around the world, for years, a large portion of the revenues coming from natural resource development have never adequately been reported or reflected in published budget figures, and they've just been a potential source of funds for corruption and other activities, that have proved problematic across the board. So, and we also on a-strictly speaking now, on the energy technical side, we have a number of activities under way in the International Energy Agency to reach out to developing countries to help them improve their data collection, and their understanding of world energy markets and the forces at work that do impact their ability to develop their resources and to sell them gainfully in the world market.

And as I said-mentioned before too, we're strong supporters of this new International Energy Forum which is an outgrowth of the producer/consumer dialogue discussions that have been going on for the last 10 years.

MR. McMANUS: I think many of the larger OPEC oil producers don't qualify for the IMF standard financial packages, and as Secretary Brodman said it's therefore more important that when they focus their energies on a Chad, that they can make that a model. In Chad they've set up a revenue college, where 5 percent of the revenues from the Chad-Cameroon pipeline will go to the local population, 10 percent will go into a trust fund for future generations, and some 90 or 80 percent will be earmarked for health, education and welfare.

And the World Bank while there for really developing countries, I think is critical, and probably where they have their highest valued use.

SEN. HAGEL: Thank you. Rather than start a new question, Senator Coleman?

BREAK IN TRANSCRIPT
SEN. HAGEL: Thank you. You each touched upon the Venezuelan situation, political problems and stability, the issues that have confronted President Chavez. Can you each respond to-in a little more detail the question, have those difficulties impaired our energy policy relationship with Venezuela, have they forced us to take a more lateral approach or a more roundabout approach, how has it changed our policies and how do you foresee that Chavez government issue prolonging additional progress and any other dimension that you want to add to the question?

Secretary Brodman?

MR. BRODMAN: Mr. Chairman, I think the Venezuelan system, or the Venezuelan strike, while it wasn't completely unexpected, it was a severe blow to the United States for the first few months that it was ongoing. Primarily because Venezuela is such an important source of crude oil that is nearby, and it was very difficult for us to replace Venezuelan oil which takes about 10 days to deliver from ports in Venezuela to ports in the United States, with alternative supplies of oil which can take up to 45 days to deliver from the Persian Gulf for example to ports in the United States.

So I think the one thing that we have clearly learned from Venezuela is the importance of having a diverse set of energy suppliers supplying energy to the United States, and I think as the situation unfolded it was also very-it became very clear to us that it was also important that the world and other producing countries try and maintain spare production capacity so that they are able to make up for these unexpected losses of supply that occur really more frequently than I think we would like them to, but always with a major surprise.

The fact of the matter is other producers were able to increase their production and exports to the United States, and while we did suffer a major dip in our imports and in our stock levels for the first couple of months following the Venezuelan strike, by late February, early March, our imports in fact-imports of oil from other sources had been able to recover. Now, where we go from here in Venezuela I think depends a lot on what happens in Venezuela itself.

But unfortunately, we have also learned from disruptions that have taken place in other countries, that oftentimes production never recovers fully once a country has undergone a serious internal problem like Venezuela has. We've seen it in Iran, in the case of the Iranian revolution, we've seen it in Iraq as a matter of fact, after the Iran/Iraq war really, and I'm not talking about the effects of the first Gulf War and the subsequent embargo on Iraqi production, but I'm talking about the failure of Iraq to maintain its production capacity as a result of the Iran/Iraq war.

And we've seen it in a number of other countries too, where an internal event such as that that occurred in Venezuela, really created a climate that made continued and enhanced natural resource development much more difficult than it had been in the past, so.

MR. McMANUS: I would just add to that, I think for Venezuela to fully recover their reliability as an oil supplier, they'll have to solve their political situation in a constitutional, democratic, peaceful and electoral solution and that's why we're working with the OAS, that's one of the many reasons why we're working with the OAS and the OAS is working with Venezuela so that they will do that. But as John says, the ball is largely in their court and the great energy policy victory would be that other producers were able to compensate for a disruption in any one region of the world.

Oftentimes people talk about a disruption from the Middle East. I think Venezuela has shown that you can have a disruption from any one region in the world and in this case it was Middle East suppliers led by Saudi Arabia that largely compensated for a Western Hemisphere supplier, so we need to maintain engage with all of our major suppliers and I understand that Secretary Brodman is off the plane from Saudi Arabia hours ago.

SEN. HAGEL: Well, let me probe this a little deeper, specifically Chavez. Have we put in place, have we changed procedures, have we changed policy where we adjusted in dramatic ways our energy policy, our relationship with Venezuela to deal with his government? To deal with him, deal with the instability, after what happened?

MR. McMANUS: We have to deal with the sovereign government of Venezuela, so we continue at a lower level a dialogue between technical people of both governments on energy. They are our third largest supplier, they are a major investor in the U.S. through Citgo so the dialogue between the two governments is ongoing and we are able to have a full exchange of views with them, including our concerns about their lack of reliability in December and onward.

SEN. HAGEL: So we speak directly?

MR. McMANUS: Absolutely.

SEN. HAGEL: Secretary Brodman, would you like to add anything to that?

MR. BRODMAN: I would agree fully with what my colleague from the Department of State has said. We do engage with the Mexican government in technical consultations on a regular basis, and we make all the points about the need for stability and we're very frank with them about our concerns.

SEN. HAGEL: Gentlemen, September 11, 2001. How has that changed over the last two years, or has it, our energy relationship with West African countries? Has it had any effect, have we changed? We obviously have frozen our immigration policies, we have focused entirely on security issues, not inappropriately, and I suspect as a result of that over the last two years, we have let a number of things drift and we've deferred some tough decisions that we're going to have to get back to, like immigration reform. Has it affected our relationship with many of these developing West African nations?

MR. BRODMAN: Senator, I believe that in many cases you know, U.S. oil companies have been involved in the exploration and development of oil in West Africa for a number of years, I think in some countries our companies involvement in West Africa has gone back 45, 50 years and even more. And oil investment and development decisions are long term, are very long term in their nature, you know, developing an oil field sometimes takes five or six years and production will go on for as long as 20 or 30 years.

And I think in the immediate-I think many of the developments of West African oil and gas that we see coming to fruition today and those in the pipeline actually got started and were well underway by the time 9/11 took place. And I'm thinking here in particular of Angola and the new offshore developments in Nigeria. For many of our international oil companies, ExxonMobil for example, ChevronTexaco, Conaco, Phillips, West Africa is one of their single largest and most important focuses of attention for investment right now of any other place in the world, and I don't see that being affected itself by September 11.

On the other hand, we have heard from large numbers of developing oil producing countries that the new security procedures in the United States are inhibiting the growth and the kind of relationships I think we would like to develop with these oil-producing countries, in building long term secure relationships. For example, many of the countries in West Africa used to send students, oftentimes on scholarships supported by energy development projects to universities in the United States for their education.

And today, many of these programs are thwarted by the inability of these countries to get visas for the students to come to the United States and so as a result, many of the students are going to universities in France, or Britain or in Japan or other places in the world. And if this continues, for a long time, then there will be a whole new generation of young people in these producing companies who will I think, more naturally look to the countries they're familiar with where they got their education to do business in the long term.

So we have heard a lot of anecdotal evidence of that sort, but I think overall much of the investment and development that we see going on in Africa right now, actually got started well before 9/11 and will continue on its own merits.

SEN. HAGEL: Secretary Brodman, thank you, and I appreciate very much you taking us into the future a little bit here, based on what's worked in the past and what has helped develop a culture, a relationship, a base, an understanding. I appreciated your comments about that. Thank you.

Mr. McManus.

MR. McMANUS: I would just agree with that and our national energy policy which came out in May of 2001 was centered on what we needed to do to advance transparency in Africa. And we have redoubled our efforts with your help, as you know, on the African Growth and Opportunity Act, which in December 2002 was expanded so that we can address more countries in the region. The president visited in July and the Secretary of State is there today. So I think Africa remains a core priority of ours.

SEN. HAGEL: Gentlemen, thank you. I know we could stay at this for quite some time. Secretary Brodman, you have made a valiant effort to come forward here with probably little awareness of what country you're in or time zones and we appreciate your effort. You both have made very important contributions to our effort. We will talk again.

In the interest of the second panel, I, unless one of you have an additional comment, would again say your full statements will be placed in the record and the committee thanks you for what you're doing for our country as well.

MR. BRODMAN: Thank you, Mr. Chairman, and I'm sure I'm speaking on behalf of my colleague here when I say that the Department of State and the Department of Energy are fully supportive of you in your efforts to improve the energy security of the United States. Thank you.

SEN. HAGEL: Well, thank you. You know, Secretary Abraham learned everything he knows up here in the Senate. Sometimes he won't acknowledge that but he did. Give the secretary our regards. Thank you. Thank you, gentlemen.

As the first panel is making its way towards the exit, our second panel is welcome to step up to the table. Thank you. Ladies and gentlemen, thank you. I have introduced each of you, not, I suspect, in the glorious fashion that you deserve but nonetheless, to stay with the point here, we appreciate very much you each giving us some time this afternoon and putting your thoughts together in a statement which we look forward to hearing and then an opportunity to exchange some views as well. You are not strangers to this effort. You've all testified before. For that, we very much appreciate it.

Since the order that I have been given reads as Mr. West the first presenter, then I will stay with the order as they've given it to me and Mr. West, again, I remind all who are present, you are chairman of PFC Energy here in Washington, DC and an experienced hand at all this. So, welcome back. Thank you, please proceed.

BREAK IN TRANSCRIPT

SEN. HAGEL: Dr. Ottaway, thank you. Each of you has presented excellent statements and again I remind you that I will assure that each of your full statements are included in the record.

Mr. West, let me get back to you and your opening comments about things the Congress can do and obviously you've ended up with some of that referencing natural gas and you made some important points we should be listening to. But let me open that up and go back to your statement and allow you to answer the question. What do you mean? What can we do? What should we be doing in Congress?

MR. WEST: I think the natural gas is the area, to me, which Congress should be focusing on. Again, the oil markets and the gas markets worked very differently and I believe that there are all kinds of problems. But they're diverse suppliers and there is massive infrastructure available to move oil in this global market. Natural gas works differently given its physical characteristics. It can only be moved by pipeline or by super cold ship or change of form completely into methanol or something and the fact is also that the world is awash with natural gas. There are vast resources of natural gas but they are in places like Russia, Iran, West Africa, Latin America.

So how can you move it here? You need infrastructure and the fact of the matter is that there was a lot of concern in the spring that there was going to be a big natural gas shortage this winter because storage numbers were quite low. Now storage numbers are back within the range. But the price, there has been an uptake in the price and the general floor price of natural gas has moved up to about $3.50 and the net effect is that the price of gas is moving up. This is going to affect a lot of industries and we simply can't get the natural gas in North America unless we change the infrastructure, whether it's pipelines moving Alaskan gas in. There's a possibility of opening up some areas of the Western Overthrust Belt. That's, I believe, in the Energy Bill. There may be some tax incentives.

But I think one area is also, when you get into these international issues, is the permitting of liquefied natural gas facilities. This is a critical issue. Note there are three terminals that-excuse me, four terminals in continental United States were built in the '70s and none were built since then. The natural gas business is pretty deregulated. My view is government officials, if they don't have a form to fill out, then no form will be filled out. And they don't know how to do this. So, it seems to me, I mean, the administration is focusing more on this. I think they deserve credit but there is a complete lack of understanding on LNG. There is a perceived risk in LNG which I don't think is realistic but this is deemed threatening to neighborhoods, to communities where this LNG will be brought in. So opposition groups are now forming against this which I don't think are really necessary or reflect the facts.

So you've got the federal government, you have state governments, you have unclear permitting and you have an unclear understanding. But throughout all this, there is a fundamental need. Over 20 terminals have been proposed. Twenty terminals are not going to be built but a number of those terminals are going to be built and I think we should do everything we can to facilitate them. And I think it should be a national priority.

SEN. HAGEL: Would any of you like to respond to anything Mr. West said or the question itself?

MR. GOLDWYN: Sure.

SEN. HAGEL: Mr. Goldwyn.

MR. GOLDWYN: I'd like to agree. I think for electric power, I think for diversity of supply, natural gas is the future for our environment. We're going to use cleaner fuels. Natural gas is going to be key and if we can't get it into the country, then we're not going to have affordable prices and if we don't get it into the country, we're not going to have diversity of supply because we won't have as many choices in terms of supplier. It was in the national energy policy to try and assert federal jurisdiction-nicely worded but to assert federal jurisdiction to try and help with some of this determining and planning and it hasn't happened. And I think something needs to be done.

I think not just the heavy hand of federal government over state government, saying this is where you need to put this plant. I think there are ways you can be creative and work with local communities so they either have the benefit of having an LNG plant in their area or at least there is a little bit more of a cooperative effort to try and site these things. But the other thing I think the federal government can do, the Department of Energy can do, is have an education program to take some of the fear out of LNG. People think it's going to be a magnet for terrorist attacks or that somebody can put a match near it and think it's going to blow up and it's just not the case. But people don't know and they don't understand and that's a role the federal government can play, that's to educate people about what the reality is.

SEN. HAGEL: Thank you.

BREAK IN TRANSCRIPT

SEN. HAGEL: Thank you. We will get into some specific areas that I want to pursue with you here in a moment, Doctor.

MR. WEST: Mr. Chairman, can I make one point?

SEN. HAGEL: Yes.

MR. WEST: Mr. Goldwyn, I agree with everything you said but I want to expand it. It's that high natural gas prices is going to affect more than just electricity. They will have a huge impact, for example, on American agriculture which relies on the production of ammonia and urea for fertilizer. It's going to have-it's already having a big impact on the chemical industry in the United States. This is a big deal and there are whole industries that are built on the concept of cheap natural gas and that is a thing of the past.

SEN. HAGEL: As a United States senator who represents an agricultural state, I'm well aware of your comment and you're right. Staying with this current theme, I'd be interested-you touched on it very briefly, Mr. West-each of your sense of the current Energy Bill that is now in the Conference Committee between the House and Senate specially in regard to areas that you've talked about, production and pipelines, incentives. Now, it's floating as we all know and what we will get as a final product, no one is quite sure.

But we are getting close, I believe, to something here that will get out of the Conference Committee. What you know now is the general theme addressed in the two bills and what we will most likely come up with. I would appreciate each of your evaluations of that, beginning with you, Mr. West.

MR. WEST: My view is these incentives-it seems to me there are two things. One is there are some financial incentives, and there is also accelerating the permitting process. And I don't disagree with either of those, but I think in the end we have a fundamental problem. Mr. Goldwyn said, well, we can always bid up the price of oil and get oil, even if it's $50 a barrel. It's important to understand that if we have a very cold winter, prolonged cold snap, you can't bid up the price of natural gas. There will be no natural gas. And this is entirely different than oil.

So I just think we've got to go beyond the bill, and there has to be-this is a very serious problem. Alan Greenspan spoke about this in the spring when the storage level was very low. And I like to joke about lobstermen from Maine asked, "Have you been a lobsterman all your life?" "Not yet." "Think the fog will clear?" "Always does." Is there going to be a natural gas shortage in the United States? The answer is yes, the only question is when.

SEN. HAGEL: Mr. Goldwyn?

MR. GOLDWYN: Mr. Chairman, it's a little hard to tell what's in the bill cause I guess it hasn't-both sides of the aisle haven't had a chance to look at it, so it's a little hard to comment on it. But from what I understand from previous versions, I think the current bill does virtually nothing to address our energy security. I think the measures to try and promote the building of the last gas pipeline are important and positive. I think from my understanding the steps to try and create a more reliable electric grid to reduce our vulnerability there are absolutely marginal.

In terms of international energy, I don't think there's anything in the bill that does anything to try and promote the diversity of supply or enhance stability, and I think there are ample subsidies and tax credits on both sides; too many for me to probably take a stab at. But I think that since most of them are directed internally, and as Mr. West has very accurately said, you know, we're not going to solve this problem by energy independence. I'm not sure that a lot of those are really a productive use of the taxpayers' funds. I think there are some funds for promotion of alternatives and renewables which are an important and positive thing, but also not a short-term solution. And I hate to be sort of glib about it, but my general sense is we'd be better off without it.

SEN. HAGEL: Without the bill?

MR. GOLDWYN: Yeah.

SEN. HAGEL: From what you know of it?

MR. GOLDWYN: Yes, sir.

SEN. HAGEL: Well, I appreciate you both being very delicate regarding ethanol, not knowing exactly where you come out on that. But thank you for skirting around that.

Dr. Ottaway, before we get into some of your universe, anything that you would like to respond to on what you've heard? Doctor, let's talk a little bit about your testimony, your thoughts. And one of the things, as you noted I'm sure as you listened to your colleagues' presentations, Mr. Goldwyn talked about these new threats, challenges that we face in the world today across the spectrum, but specifically in regard to our energy challenges. And I believe he said something to the effect that great armies are not going to-or militaries are not going to be able to address those issues, and he talked I think referencing trade, diplomacy, specifically some of the things that you've talked about.

Would you take that and define that-the threats that we know are out there, the threats that we will most likely continue to face in some variation of new forms? But we're getting a sense as we start this new century what's ahead here and, yes, militaries are important and laser-guided munitions are important, but that isn't going to deal with the kind of threats that-not just the United States but the world is facing today. Since this is your general area, I'd like to hear more about what you think we should be doing and we're not doing in the way of developing policy in the United States to deal with these new threats, not just from the deterrence perspective but let's take some initiative.

MS. OTTAWAY: Okay. Well, I think in general the most important threat on the political level, not on the military level, comes from the domestic instability of a larger number of countries. I think we have I've argued that practically all African countries and a good number of countries in Latin America are extremely vulnerable to domestic political unrest because of the kind of economic conditions that exist. And not only chronic conditions of underdevelopment, but also what has been a great increase in inequality which has developed during the last 15 years, which is-for example, is one of the problems that is at the root of the popularity of Chavez in Venezuela. There has-what has brought Chavez to power originally was a resentment by large segment of population that had fallen below the poverty line in the previous 15 years, concerning what was going on.

So that being the case, I think the steps that we can take are unfortunately long-term steps because one of the problems that we are dealing with here is that we are dealing with sort of short-term threats that exist here and now, the solution for which are long-term solutions. And I think the only thing we can do is to try and give sustained attention to the issues of development and to the issues of democratic transformation of these countries, beginning now but to stay these countries all along. Unfortunately because of the large number of countries involved, we tend to pay attention to these issues in the short term while there is a crisis, and then again to forget about it.

I think, for example, we are seeing it-one example is the contrast between what we are seeing in the case of Nigeria and we are seeing in the case of Angola. In the case of Nigeria, because there has been this direct threat to the oil installation, direct loss of production, the siphoning off of oil and so on, as we heard from the previous panel, U.S. Embassy for example has in place personnel to try and deal with those issues, to try to work with the NGOs, with the oil companies, with the government of the oil producing areas and so on to try and address those issues.

Angola is also threatened at some point, but because we are not seeing-threatened with the possibility of instability because you have the same conditions of an enormously impoverished population while oil revenue keeps on growing, and particularly now that the war is over. But it's really not good explanation for the population what is happening to this money. Unfortunately, because we are not seeing direct threats to the oil installations, there is not that much attention which is being paid to that issue. I think there is a tendency to-there is a certain complacency to say, well, you know, Angola is not democratic but it is stable and there is no threat to the oil installations.

Not to pay much attention to it.

I think because the problems are so difficult to address and are so long term, we cannot wait to address them once the acute failures have started. So my-you know, what we need to do and I realize that this is very difficult, but to try to pay sustained attention to these problems of economic development and political transformation reaches a critical phase.

SEN. HAGEL: In that, I suspect, in your opinion you would include things that Mr. Goldwyn referred to: trade, diplomacy, humanitarian, all the other efforts that --

MS. OTTAWAY: And development assistance, yes.

SEN. HAGEL: Thank you.

Robin West, would you like to respond to any of this?

MR. WEST: Yes. One point I'd like to make is that I think that in fact-and Dr. Ottaway wrote an excellent paper, which if one is interested in the subject I'd commend to you, on what is the role of the oil companies. But it's important to recognize in places like Mexico and Venezuela the international oil company has had little or no presence. In West Africa I think that it's the international oil companies, sometimes encouragement from other parties, but they are becoming some of the most productive agents for change. They actually have a much bigger presence in the country than any foreign government. And in some cases they are trying to put pressure, because they feel sensitive from pressure in their home countries. But they actually have been a conduit to help try and move some of this. There are limits to what they can do, but I think that they have been-in recent years that they have tried to be constructive.

MS. OTTAWAY: If I can add on that point, I think the oil companies have taken almost a disproportionate share of the burden for local government in a place like Nigeria, for example. I mean, the oil companies end up by running entire, you know, towns and providing whatever education is provided and so on. Where there is more reluctance, understandably so, on the part of the oil companies is to deal with the national government and particularly to make available internationally some of the figures about oil production and oil payments and how much money is being paid into the coffers of these governments. That is one area where I think there is room for improvement. I don't expect the oil companies to-essentially ending up by becoming a substitute government for countries like Nigeria. I mean, that would not be very desirable. It's not their role.

SEN. HAGEL: Mr. Goldwyn, any thoughts on all this?

MR. GOLDWYN: Just two. I think one is that I agree with Dr. Ottaway that you need a case by case approach. I think in each of these countries we've got to ask ourselves do we have any leverage, and what is it and how do we use it? Is it bilateral, is it multilateral? I think there is some urgency because a lot of these countries, particularly in West Africa, are going to be very, very rich very soon. Not now, but if you look at the curve of how much revenue they're going to get, it's like this now and then it goes off the roof. We have three years, four years where there will be no touching these governments.

So I think you've got to look at the leverage you've got now. Some of that is debt. Some of it is their need for capacity building. Right now some of it is their need for development assistance, but it's not really a money issue. It's creating a political environment where the people who have been on the wrong side of this question for a long time have a political motivation to change. And that's part reputation and that's part monetizing future revenues for development now, and it's letting them be successful political leaders. So I think that's where our focus ought to lie is trying to-is to use that sort of leverage.

On the publish what you pay oil revenue question, it's an important issue and I have to say I've struggled with it myself. I think if we could get to a place where governments, U.S. government and other governments, push producing governments to say we want companies to publish-or to report aggregates of payments to the IMF, and the IMF will publish those aggregates, I think you would find companies willing to do that. They're not going to violate confidentiality agreements.

They're not going to take on the job of renegotiating everything with the governments. It's not in their interests to do it, you know. But if governments push governments for that kind of transparency and there is a level playing field so national oil companies like Saudi Aramco or PDVSA are also required to have their payments published, I think that is a formula. I think if you build that policy, the oil companies will come along because they will be respecting the will of the governments in which they are guest operators.

SEN. HAGEL: Thank you.

Mr. West, you wanted to respond?

MR. WEST: Yeah, two points. One is that we're in fact-my firm is doing an analysis for CSIS on West African oil revenues, and in fact we understand basically what the contracts are and the timing of the contracts and what production comes from the contracts. So we can get a pretty good idea of what the aggregate amounts of money are that are flowing now.

The second thing it's important to understand is how the contracts work in West Africa is-Mr. Goldwyn is absolutely correct that production will be surging. But there is a cost recovery factor that in fact the governments in the early days don't get that much money. It's in the out years when they get a lot of free cash flow. So understanding the nature of the contracts becomes very important to following the money.

SEN. HAGEL: Dr. Ottaway?

MS. OTTAWAY: And that is very important politically. Mr. West said something very interesting, that is they can-your organization can get a pretty good fix on those figures. The population of the country cannot. And there is a great deal of misconception very often about how much-because nobody knows how much money is coming in, very often people develop-you know, at the popular level people develop this idea that because somehow there is a huge amount of money and therefore everybody should be rich in the country. And that is the mentality that has played havoc with the politics of a lot of oil producing countries, that there is an exaggerated expectation of what that oil revenue could do and how much is really coming and so on.

SEN. HAGEL: I've been informed we're going to have a vote here shortly, but let me get to a point that you made, Mr. West, in your testimony and you were talking about West Africa and I believe you said something to the effect that a lot of things are going right there. We've heard not all the problems, but we've heard today about a lot of problems. Tell us a little bit about what you perceive as going right.

MR. WEST: Well, what's right is the investment environment and the fact is that the operations are offshore, so there is less physical security issues. There is a world market in exploration rights, the governments and the companies understand that, so that a lot of capital has flowed in. The point I tried to make is that there is more industry capital floated in recent years to West Africa than has been to Russia, Latin America or the Middle East. Most people are surprised when you say that. So the international companies have come in, they've stayed offshore. From a pure oil operations investment standpoint, it's worked pretty well. From a government standpoint, I am in complete agreement with my two committee members. But you have other situations-there are other countries where you have very dubious governments and you also have very unstable operating regimes. So this is-the glass is half full, at least in West Africa.

SEN. HAGEL: Anyone else want to respond to that question? Unless either of you-the three of you have any additional comments, I am going to adjourn our subcommittee hearing. But I want to again on behalf of the committee thank you for your testimony. It's important. We will, as we often do, be back to you for more assistance and get your counsel on these big issues. These are issues that are as important as any we're dealing with and will deal with for many years to come, so your contributions are important and we appreciate it very much. Thank you.

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