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Testimony by John J. Maresca, Vice President, International Relations,
Unocal Corporation

To House Committee on International Relations
Subcommittee on Asia and the Pacific
February 12, 1998
Washington, D.C.

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.

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 gas.

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 
world.

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 the rewards.

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 other markets.

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

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 Caspian region.

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.

Asia/Pacific

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.

Export Routes

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 receive.

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 Russia.

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 US$2.5 billion.

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 it.

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 government-to-consortium agreements.

Conclusion

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.

Thank you.

Source:
http://www.house.gov/international_relations/105th/ap/wsap212982.htm

--

Background information: Who is John J. Maresca?
See the following excerpt of a 1997 press release:


Unocal names former ambassador John J. Maresca as vice president, 
International Relations

El Segundo, Calif., Sept. 9, 1997 -- Unocal Corporation today announced 
the appointment of John J. Maresca, former United States ambassador to the
Organization for Security and Cooperation in Europe (OSCE), as vice 
president for International Relations. Maresca will be responsible for 
advising UnocalŐs management on international relations worldwide, with 
initial emphasis on Central Asia. He reports to Unocal President John F. 
Imle, Jr.

"Given the increasingly global scope of UnocalŐs activities, managing the 
complexities of international issues is imperative," said Imle. "With his 
extensive diplomatic experience in Europe and Central Asia, Jack will play
a key role on Unocal's international team." Maresca was the first president
of the Open Media Research Institute, the private successor to the Radio 
Free Europe/Radio Liberty Research Institute, and also the first director 
of the European Centre for Common Ground, a private international conflict
resolution organization. During his career with the U.S. State Department, 
Maresca served as U.S. Ambassador to the OSCE from 1989 until 1992. At 
OSCE, he was a principal architect of several significant agreements on 
political, military, economic and human rights issues, including its 
Charter of Paris for a New Europe which was signed at the summit 
officially ending the Cold War in 1990.

Maresca also was the U.S. mediator for the conflicts in Cyprus and 
Nagorno-Karabakh, where he worked closely with the governments of Russia, 
Turkey, Greece, Armenia and Azerbaijan. In 1992, he was sent as Special 
Envoy to establish American diplomatic relations with the newly formed 
independent states of the former U.S.S.R. and with Albania. From 1986 
until 1988, Maresca served as Deputy Assistant Secretary of Defense and 
supervised U.S. defense interests in the North Atlantic Treaty 
Organization (NATO), Europe and the U.S.S.R. A former U.S. naval officer, 
he earned a B.A. degree in political science from Yale University and 
pursued graduate studies at the London School of Economics.

Source:
http://www.unocal.com/uclnews/97news/090997.htm