Transcript of Acting Special Envoy and Coordinator for International Energy Affairs, Amos Hochstein, discussion on European energy security with Hunga

Ms. Zieseniss:  Greetings to everyone from the U.S. Department of State’s Media Hub in Brussels. I would like to welcome our callers who have dialed in from across Europe.  We also have a group of journalists dialing in from Budapest today, so we welcome them to the call as well.

Today we are pleased to be joined by the Acting Special Envoy and Coordinator for International Energy Affairs Amos Hochstein who is speaking to us from Washington, DC.  He has an impressive title and an even more impressive portfolio overseeing the U.S. foreign policy as it intersects with energy and national security.  He also serves as the Secretary’s advisor on global energy security and diplomacy.

We’re going to begin today’s call with brief remarks from Acting Special Envoy Hochstein, and then we’re going to open the line up to your questions.  Today’s call is on the record and we’re going to try to get to as many of your questions as we can during the time that we have.

With that, I will turn it over to Acting Special Envoy Amos Hochstein.  Sir, over to you.

Acting Special Envoy Hochstein:  Thank you, and I know I’ve kept some of you waiting a little bit.  I apologize for the delay in the start time.

Thank you again for organizing this call.  It’s pleasure.

This is an extremely important issue for us as we look at energy security in Europe as a key foreign policy and national security interest of the United States.  As a result, even though my portfolio is global and addresses an area across the world on energy security and energy diplomacy, I spend a significant amount of my time and my team’s time on issues of European energy security.

The way that I’d like to normally frame it is that we’ve had a crisis erupt over and over again in Europe on supply.  It happened in 2005-2006, it happened again in 2009, and it happened again in 2014.  We also had some reliability of supply issues as the Soviet Union collapsed and we had some of the countries that had gained, newly gained independence had also suffered through in those early days energy security and energy supply crises.

But if you look at the last three crises that we have endured in Europe, want they have done is time and again pointed out how critical an issue this is, and that as long as there is energy in security in Europe from a supply perspective, this will continue to do two things.  It will hang over the economic development in Europe and it will hang over its political abilities and political decision-making processes.

As a result, what we wanted to do in 2009 as the President and Secretary Clinton had looked, came into office just one day or the day of the end of the last crisis in 2009 on January 20th, was to look at how we can partner with our colleagues and friends and allies in Europe and in the EU in particular to address this issue and give it more elevated attention.

I believe that we’ve made a tremendous amount of progress since then, but not enough.

If you look at the crisis in 2014 and comparing it to 2009, due to a variety of legislative and regulatory changes in Europe, we were able to implement reverse flows when the gas stopped flowing into Ukraine, and from Poland and from Hungary and later on from Slovakia.

The ability to do that has really changed the tone and the nature of the crisis as it enabled us to spend more time on the negotiation side to get to a deal between Ukraine and Russia.

But what we need to do more is to work together, the EU and the United States, and with the member states, to have a truly integrated energy market inside Europe.  The gas that enters Europe from any point could continue to flow through the different pipelines and reach any other point.  That means upgrades to some pipelines, creation of new ones, reversing the flow of others, and then create infrastructure and fund infrastructure, new infrastructure, that will allow for additional sources to come into Europe.  That means not just expanding LNG per se, but expanding the right key nodes areas for LNG facilities.

The next phase of it is to look at not just the routes and the suppliers, but the supplies themselves, and I think the EU has taken leadership in addressing the goals for integration of renewables.  That’s both in our collective interest as a planet from a climate perspective as well as changing the Military Intelligence of how much crude oil, how much gas, petroleum products and renewables.

Finally, looking at the relationships as we look beyond Europe, not only the activities inside Europe, but how we can continue to manage the changes in the Eastern Mediterranean, in Iraq and Kurdistan, in North Africa, in the United States, and make sure that as we all know on this call, commodities such as oil and gas are truly global and you can’t pay attention only to what’s happening inside Europe as a region, but rather looking at it as part of the globe.  And especially with the transformational era that we are living in in energy, and especially in gas.  And I don’t just mean the radical drop in oil prices recently.  I mean the truly transformational era in energy of changes, of the ability to move gas and oil in different parts of the world, and new producers coming on line around the world that are not subject to a cartel or to the group of very few producers controlling the market.  This is becoming a more globalized market with new producers making their own decisions of supply.

But therefore, we need to partner together, the EU and the United States, to look at how we can make sure that the fact that we have these new supplies and changes in dynamics, how does that affect and enhance energy security around the world?  Primarily in Europe, but also if it’s in Central America and the Caribbean or any other region, to make sure that no country is subject to one supplier using energy as either a tool or a weapon against them.

So as a result of everything I’ve just said, I think this is an exciting time.  It’s an exciting time in energy, it’s an exciting time in the U.S.-Europe relationship, and I believe that the crisis that we narrowly avoided this coming winter by reaching a deal between Naftogaz and GAZPROM, between Ukraine and Russia, through the skillful negotiation of the commission with a lot of effort from the United States and others in working with the parties, we avoided that for this winter but we cannot forget that we’ve avoided other crises in the past and that if we don’t do the hard work that we’ve done before and that we should do again now, to make it not only 2014 a better condition for avoiding a crisis than in 2009, but to make it our incentive to not having another crisis in the future and being able to handle it if we do in a better way.

With that, let me open it up to questions, which I think is more interesting to most of you anyway, and make this a little bit more conversational, taking into account that it’s still a phone call.  Thank you guys.

Ms. Zieseniss:  Thank you so much and thanks for setting the stage for us.

Operator:  Our first question comes from Tim Gardner with Reuters.  Please go ahead.

Mr. Gardner:  Thanks for holding this.

As you talked about the new energy supply world, there is the problem of oil exports not being allowed, for the most part, from the US.  How do you see that increasing?  There’s been news last week that in 2013, there was an allowance for some condensates that people didn’t really know about.  Should companies be following the approvals that have been made by Commerce Department and send some of this lightly processed condensate to the world?

Acting Special Envoy Hochstein:  As I said we’re in a transformational era in energy, and things that we would not have predicted a few years ago are now a fact.  One of them was the shale gas revolution and immediately after that…I can tell you three years ago when I talked to some corporate executives in the business who said yes, this is happening in shale gas but it will never happen in oil, and today of course the United States is increasing our production of oil quite considerably over the last couple of years and will continue to do so next year.

The debate about oil exports, therefore, is natural and I think this is a great conversation to have.  I’ve been following it.  Congress is having it and the United States, think tanks and governments around the world are having that conversation.  And I think in the weeks and months ahead we will all continue to follow the discussion and think what is in the best interest of the markets of the United States and see how this progresses.  But I’m very sorry to disappoint that I’m not going to break any news here today.

Mr. Gardner:  Can I follow up?  Mexico, Pemex has said that they are expecting U.S. condensates by the end of the year.  We send them to Canada.  What’s the hold-up with Mexico?

Acting Special Envoy Hochstein:  Again, I think I’m not going to discuss on this call the issues of export policy.  We are working on that.  I’m sure you can ask question of the Department of Commerce as to what their process is going forward.  We study these cases as they come, but I think on exports, we’ve done a tremendous amount of work on natural gas exports that have had already an impact on Europe, on Asia on price.  As I said, these are complicated issues that we need to look at thoroughly and judiciously and we are doing so on all issues of oil and petroleum product exports.

Operator:  Our next question comes from Elizabeth Webster with Embassy Budapest.  Please go ahead.

Ms. Webster:  Hi, I have a question from Lila Horavaz of Business Daily, Vila Gazdaság.

Ms. Horavaz:  Hi, I would like to ask if the South Stream pipeline would really improve the energy security in our region after it replaces the existing pipeline?  Or would it only change the energy situation in other countries?

Acting Special Envoy Hochstein:  You know, whenever somebody proposes a massive new project like South Stream, it needs to be judged on the economic merits.  I have never been able to understand a project that will cost close to $50 billion to take the same gas from the same fields largely to the same customers by simply avoiding one supply route.  That is clearly not economic, and therefore if it’s not economic one has to ask oneself, what is the reason for it?  In my opinion, if the reason is political, then one has to really ask the question are we looking towards a diversification of resources in Europe?  Or looking to double down yet again on another one or two generations of dependency on the same source.

So I would urge countries to take a look at what the underlying interest of those who are building the pipeline and to judge for themselves whether this is something that will lead to more energy security or to more energy dependence.

 

Ms. Horavaz:  Is it risky for other regions, from the energy security point of view, if the share of the Hungarian MOL company and the Croatian Oil Company, would be owned by a Russian company?

Acting Special Envoy Hochstein:  MOL is a publicly traded company and is able to have discussions, make their own decisions on this.  I think as you know I’ve traveled in the region quite a bit.  I’ve been to both Croatia and Hungary several times this past year.  I think what is important is to resolve the dispute over the management of INA and its future.  It’s an important company in the economy of Croatia and the region, and its immediate region, and I think that what’s important is or what I’ve tried to achieve in my trips there, in my extensive conversations with both parties, is to get to at least an understanding of how to manage INA moving forward.  I think that’s very important for the relationship between Hungary and Croatia.  It’s important for the region, and it’s important for energy security in Croatia.

What would be a shame is if the relationship between the two countries on energy issues was affected by the dispute over INA and that is what I’ve been hoping to avoid.

Hungary and Croatia are natural allies when it comes to many issues, but I think pointedly so on energy security.

The hope for an LNG facility on Krk Island, a facility that I have been a big champion of and the United States has been big supporters of, would naturally feed it well with two countries that are interconnected by pipelines.

So I think again, as I said in the answer to the previous question, you have to look at what’s in the economic interest and the overarching security interests of the country and keep that in mind when making strategic decisions such as who owns the infrastructure in your country.  And again, every country is free to make their own decisions and publicly traded companies are free to make those as well, but I would simply urge companies and countries, especially, to look at the overarching security interests of their own country and keep that in mind when they make these decisions and what the impacts are long term, not just the short term impact.

Operator:  Our next question comes from Stanley Reed with New York Times.

Mr. Reed:  Mr. Hochstein, thanks very much for the briefing.

It seems to me one fairly salient point is that there is a lot of idle LNG import facilities in Europe now basically because demand is low and gas by pipeline is cheaper.  How could that situation be remedied fairly quickly so that if the following winter was cold we might not, we wouldn’t have a crisis or potential one either?

Acting Special Envoy Hochstein:  Thank you.  That’s a great question because that’s at the crux of this whole discussion.  There is a lot of unutilized LNG capacity in Europe already, and that’s why I was trying to be careful to say that when we talk about new infrastructure it has to be the right infrastructure in the right place.  What needs to happen in our view is that the integration of the market itself has to get more, has to become a project that is more complete.  And if gas can flow from Point A to Point B uninterrupted and in a way that doesn’t increase costs, then I think that we can see utilization go up.

We can also see strategic places of where LNG would be beneficial to providing that extra security of supply and where maybe it will not.  Let me give a couple of examples.

I was honored to be able to participate in the launch in Klaipėda of the Lithuania LNG facility.  That is a critical facility not necessarily to supply all the gas needs for the Baltic region, but in chipping away at the energy island status of the Baltics.  That if you combine their electricity interconnection with the Nordic states and with Poland, even if they don’t always use electricity from those and don’t necessarily use the gas from the LNG and they continue to be supplied from Russia, it gives them the optionality.  It allows them to negotiate price better.

If you look at Krk Island in Croatia and are able to bring gas there that already is interconnected into Hungary which is interconnected into its neighbors in Slovakia and in Ukraine, and you start looking at specific critical nodes of infrastructure that can support European energy security.  The same is true in Bulgaria, which is nearly 100 percent dependent on one supplier.

So how do you get the right LNG In the right places that will take gas to the critical markets that are so dependent and lack diversification of supply?

This is one of the key parts, I’m sorry that I’m going long on this question but I think it’s a key question.

Some of these projects are not necessarily financeable on their own, and that’s where it requires government leadership and EU leadership to understand what is there for security purposes and how to integrate together with the private sector make this provide both, make economic sense, and political and security sense.

I hope I answered your question.

Operator:  Our next question comes from George Kakouris with Politis, please go ahead.

Mr. Kakouris:  Hi, Mr. Hochstein, thank you for the briefing.

In your opinion, in case of a successful normalization of relations with Tehran and the West, could they play a role in providing an extra energy alternative for Europe?  And how would that shape the plans of what’s happening right now for these humanitarian needs?  Thank you.

Acting Special Envoy Hochstein:  We’re at a critical time in the negotiations on the nuclear deal with Iran and I really wouldn’t want to open that conversation and speculate into that.  Let’s put first things first.  First we reach a deal and then we can talk about any implications on energy.

As far as the Eastern Mediterranean, I think that a lot of factors there are ripe for making a big contribution both to the region and to the neighboring countries and I personally think it’s a very exciting opportunity in the Eastern Med.  It’s a great example of where if you get the politics right, the payoff is going to be quite considerable and impressive.  And that’s both to address the cooperation in the region itself and the change in supply and demand there, as well as making sure that the Eastern Med can be a source of supply for global markets and specifically for Europe.

Operator:  Our next question comes from Sergiy Sydorenko.

Mr. Sydorenko:  Concerning Ukrainian and Russian relations on the gas issue: I guess you have heard there were some talks and some ideas to provide EU member states these new contracts of gas supply from Russia that would be linked not to [inaudible] Ukraine and EU border, but to the Ukraine-Russia border.

Do you consider this option possible and would you engage the European partners to move that way?  Thank you.

Acting Special Envoy Hochstein:  I think that as we look — First I think it’s important to know that we reached a very important deal between Russia and Ukraine to renew supplies for this winter.  That agreement goes through March.  That pretty much leaves the status quo as is for that period of time.  We have to make sure we do not let go of this process and wait until this term of this agreement expires.  We need to continue the conversation of how to ensure Ukrainian energy security moving forward.

As far as the reliability and if there can be any changes to the contract and the supplies from Russia into individual countries through Ukraine, those are all subject to conversations that need to happen between those companies, those countries, and see what works best for everyone.

We as the United States and working with our colleagues in the EU want to make sure that this is done in a way that follows EU regulations and rules of doing business and that it makes sense, and most importantly, that it does not change dynamics that will affect the security of supply for European member states who receive their gas via Ukraine.

Operator:  Our next question comes from Kyriakos Pomilorides with Antenna.  Please go ahead.

[Pause]

Operator:  We’ll go to the next question with Esra Aygin with Heretus, please go ahead.

Ms. Aygin:  Hi, thank you very much for this briefing.

I want to ask specifically about Cyprus.  I know you were here some time ago, quite recently.  Is the natural gas resource in Cyprus too small to play any role in the European supply security, the diversification of European supply?  And if it is not too small and it could play a role, what would be the best way to get it to Europe?  You have mentioned idle LNG facilities. I guess it is now an expected fact that LNG in Cyprus would not be an economically viable option.  So would that pipeline through Turkey be the best option of getting the gas to Europe?  Or do you think the Cyprus gas can join with the Israeli gas to go to the Egyptian LNGs?  Could you give me some insight of what you think about this specific issue?

Acting Special Envoy Hochstein:  Sure, thank you for that.

First of all, as far as if it’s too small, I do not think it’s too small.  I think also we’re at the beginning of the process of identifying what the size of the reservoirs of recoverable gas is in Cyprus and there’s drilling going on at the moment by the Italian Company ENI in association with their partners from Korea, so we have to see what the results from that are.

As far as what’s the best way to commercialize energy exports out of Cyprus, I think the best way to look at it is broadening the lens and looking at the Eastern Mediterranean as a whole, and looking at it from Israel to Cyprus, Egypt, Turkey, Greece and potentially in the future maybe Lebanon as well.  And the key to commercializing and monetizing these great new exciting discoveries is working together.  We have to work on the political process, obviously, but we have to identify a way for taking advantage of existing infrastructure and not trying to replicate each country on its own, very costly projects.  And the more we can work together, that will contribute to getting a better result for both the stability of the region and the security and prosperity of the region as well.

Let me just add one last point on that.  If you look at each of the countries that I mentioned on the border of the Eastern Mediterranean and look at what their interests are, they are all aligned and similar.  Which means that the more we can work together, the more we reach an end result that is in the self-best interest of each of the countries.

Operator:  Our next question comes from Sandra Veljkovic with Vecernji List.  Please go ahead.

Ms. Veljkovic:  Hi.  Thanks for taking the call.

I’d like to go back to the question of INA, Croatian government and MOL.  So far have you heard anything from the Croatian government on the creation or the possible, on the possible negotiations with MOL?

Acting Special Envoy Hochstein:  Did you ask if I heard from the Croatian government about — I missed a little bit of that.

Ms. Veljkovic: Yes, from the Croatian government. You’ve been here a number of times and as I understand there has been an offer to help solve the problem, mediator.  So MOL allegedly accepted your offer.  And the Croatian government is still being quiet about that.

Acting Special Envoy Hochstein:  As you said, I’ve had the great pleasure of being able to travel to both Zagreb and to Budapest several times in the last year, year and a half.

Look, I made it clear in all my trips that we need to get to a point where there’s two processes that have to continue side by side.  One is an arbitration process that MOL and the Government of Croatia have undertaken, and I am not seeking to interfere in that.  But while we get to resolution, it is important for the parties to continue to meet and to do so in a constructive manner.  That should lead to a better more effective, more efficient management of INA in the interim period while a decision on the future of INA and the management is made.

I have made a number of proposals and shared a number of ideas with both parties.  I don’t want to go into the details of what I propose to governments, but I hope that they take heart to some of my suggestions and we stand willing and ready to support the parties in reaching that kind of an accommodation.

It is, once again, it is in the best interest of Croatia, of MOL and of Hungary to reach an accommodation as quickly as possible on the management of INA moving forward.

I apologize, I’m going to have to leave soon, so why don’t we take one more question.

Operator:  Our next question comes from Jasmina Kuzmanovic with Bloomberg News.  Please go ahead.

Ms. Kuzmanovic:  Hello, thanks for the briefing, Mr. Hochstein.

Today we have a new development from Croatia regarding Croatia and MOL over INA and that is that the Croatian government has accepted the U.S. mediation offer.  Actually, they call it a facilitator, so they accept the international expert suggested by the U.S. to facilitate in these talks.  They were very clear this is about facilitation.

So could you tell us more what kind of role this person would have that would listen to these talks?  The next talks would be by the end of the year, Minister [Vrdoljak] said.  How can this put the whole process of negotiations forward?

Acting Special Envoy Hochstein:  First, I will wait to be notified by the Croatian government if they’ve made any decisions about processes moving forward.

If —

Ms. Kuzmanovic:  It’s in our story today, so —

Acting Special Envoy Hochstein:  I’m sure whatever’s in the press I always trust completely, but I usually wait also to talk to the government as well.

As I said before, I don’t really share what I discuss with governments and so on, but we will look to move forward in any way that we can to help and support the process moving forward as quickly as possible in line with the proposals and ideas that I’ve shared with the two parties.

So any progress is good news and I would hope that again, and I want to make one thing clear.  We, the United States government, and any of our suggestions, will not mediate in the sense of the arbitration case.  That is moving forward on its own and we are not interfering with that, or taking any action that would prejudice that.

We have always said that we thought that the direct talks between the two parties should continue and if they needed some support in those talks we would be happy to work on ideas to provide that.

Again, after I have conversations with the government in Croatia and MOL, I may be able to give you a little bit more of what I think about the next steps.  But clearly I would hope that we do have a meeting before the end of the year either with or without our participation because I think the mere fact of discussions continuing and ongoing is important for the process.  So I would hope that that happens before the end of the year and I think even more importantly that it happens more aggressively with more frequent meetings going in soon after the new year.

Ms. Zieseniss:  Thank you very much.  Ladies and gentlemen that will conclude today’s call.  I want to thank Mr. Hochstein for joining us and for spending some time with us today and I want to thank all of you for calling in and participating and for your questions.

If you have any additional questions about today’s call after the fact, you can contact us atTheBrusselsHub@State.gov.

And also just to let you know, a digital recording of this conversation is going to be available for 24 hours after this call.  I will turn it back over to AT&T to explain to you how you can access that recording.  Again, thank you so much for your participation today.

Operator:  Ladies and gentlemen, you may access the replay service by dialing 320-365-3844 and entering the access code of 344575.  You may also dial 1-800-475-6701 and entering the access code of 344575.

That does conclude your conference for today.