German Marshall Fund

Remarks
Amos J Hochstein
Special Envoy, Bureau of Energy Resources
Brussels, Belgium
November 28, 2016


Thank you, Christina, and thank you, Michael. It’s been a pleasure over the last several years to work with the GMF both here and in the Eastern Mediterranean, as Michael mentioned, and in the United States. And I appreciate the opportunity to be here with everyone today.

I think this is an opportunity post-US elections as we wrap up the Obama administration to look into where we’ve been- specifically on energy- because the transformation has been remarkable.

In order to be able to give that sense of why it’s been such a transformative time, I have to go back to the beginning of the Obama administration just to give a short snapshot of where we were coming into the world at that point in time- 2009.

First, the United States was producing at the time at about 5 ½ million barrels a day of oil. We were a significant importer of natural gas and a rising importer- in fact, one of the fastest-growing importers- of LNG. Our renewable energy was in its infancy, with not a lot of support. The vast majority of our power was coming from coal. We were seeing a resurgence in the coal industry with the mergers and acquisitions activity in the coal industry in the United States happening regularly.

The picture that the incoming administration of the President of the United States or, as he was at the time, the President-elect, when Obama was reading the transition papers and getting his first intelligence briefings, when he came to energy those papers basically said, “Mr. President, you are going to have a real problem in your presidency, because in the years that you will be President, you will have to deal with an increasing shortage of supply, increasing prices in gas and oil, where your diplomacy will be required to ensure that the United States has the adequate supply to fuel its economy.”

It didn’t work out that way. And last year, in 2015- or late 2014- our oil production peaked at 9.6 million barrels a day. Now, let’s pause there for a second, because we went from 5 ½ to 9.6 million barrels a day. That’s a 4-million-barrel increase. That is more than what UAE produces in total, what Kuwait produces in total. It is what Iran hopes to produce in total, it is what Iraq strives [to produce]. Meaning, just the delta of the increase would have been the second largest producer in OPEC. That’s just the increase in oil production. Now with the crash of oil prices last year we lost some of the production, and went back to about 8.3-8.4 million barrels a day, and today we’re back up at 8.5 million barrels a day. And I’ll get back to why I think that’s significant in a moment.

In actual gas, I described what the picture was in 2008-2009. Today we are no longer really importing LNG. In fact, in 2016- in early 2016, we started exporting. And there was a large debate in the administration- “should we export, should we not export, would we even have a market because of the transport costs?” Well today, we’re exporting to all the places people thought we would not. So the main anchors are so far South America -- which was not the expectation -- Brazil, Argentina, Chile, Central America -- as well as Kuwait, Dubai, and of course, some of the ports in Europe, India, China, etc. So the fact that we would be exporting from the United States natural gas to Kuwait and Dubai was not exactly the expectation.

In renewable energy, we had a headline in the media not long ago in the New York Times that said “Bring on $200 Oil.” And the intent was, that’s the only way that we’re going to see real growth in renewable energy, you’ve got to have really expensive crude oil prices to spur the investment in renewables. But the transformation of the renewable industry has been the reduction in price and therefore, in 2014-15, with record high oil prices at above $100 a barrel, we saw about $45 billion or so a year in investments in the United States alone in renewable energy. Later on in 2015, we saw an investment of $58 billion into renewable energy. So at the low price of oil, we still saw a far more significant increase in investment in renewable energy than we have with high oil prices because we have seen more and more of a disconnect between renewable energy investment and the price of oil.

Now, in the United States, we have Washington, DC and we have the rest of the country. In Washington, DC, renewable energy is still seen as a zero-sum game. If you talk about renewable energy, you are -- as I have been accused of being -- part of the war on fossil fuel. If you are anti-renewables, than you are a Neanderthal that supports the oil and gas industry. But the reality is that we’re seeing a growth in all of the above (all of those three, not coal). Meaning we’ve had an increase in oil production, we’ve had an increase in gas, and we’ve had an increase in renewables. And that has translated to what? To a reduction in emissions because the transition that the U.S. has gone through over the last few years has been from coal to gas, from coal to renewables. And that’s the trend that I see continuing. We are not going to go to all-green anytime soon, even with remarkable growth. We need to have that bridge into the cleaner future. And the cleaner future doesn’t necessarily mean 100% clean, it means cleaner. It means slight increases in nuclear, it means significant increases in natural gas, from over 65% reliance on coal to 40% and going down. But that’s those two. It’s coal moving to renewable energy and moving to gas.

Now there’s some talk about a bridge, meaning that we’re going to go to a clean renewable energy future with zero emissions. I don’t see it that way. A bridge means you build something to get to the other side. But you keep the bridge. You don’t build a bridge to get to the other side and cut down the bridge. So fossil fuel, in this case natural gas in my opinion, is going to be with us long after we build this bridge to get to the other side of renewable energy so that we have an energy mix.

So that’s the reality in which we have lived through from 2009 to where we are today. A better mix, inside the US, an increase in renewables, an increase in natural gas, and yes, an increase in oil production as well. Now, the last piece that came in the US was the efficiency rates, both in vehicle-fuel standards and in building codes and other efficiency in appliances. So the codes and regulations that were put in place early on in the administrations have matured and come on-line only now. Meaning that, if you take everything I’ve said as a whole- it is what has translated the United States into the world’s energy superpower. We’re uncomfortable as the US in talking in those kinds of terms. Sounds like it’s coming from a different kind of world. But it’s the reality. And it’s not that we are the superpower because we are producing more oil, or more gas, or more renewables alone. It’s because in every aspect of the word ‘energy’, the United States is leading that path.

Now I think that’s significant because it has a lot of foreign policy implications and a lot of national security implications that the American public and the American government have not actually internalized. And I’ll give you an example of something that’s in the press-in the headlines- at the moment. For days now, we are reading in the press and the financial newspapers particularly about every machination of an OPEC conversation. “Do we have a deal, do we not have a deal, is Iran part of the deal, is Iran not part of the deal, Iraq’s part of the deal, not part of the deal, Russia’s going to join the OPEC-non-OPEC alliance, no they’re not, yes they are, Saudi’s going to participate in the meeting, no they’re not.” Headline after headline. It’s intended to do two things: 1) generate an increase in price because they want to get to a cut. But 2) really what it’s doing is affecting sentiment, not production. In the time since OPEC announced its intended cut in Algiers a couple of months ago to today (and remember a cut is from existing levels), almost every country in OPEC has increased its production. So now you have a headline saying, “Okay, we finally got to a deal in cutting. What are you cutting from? The new level or the old level?”

Here’s why this is important, why this connects. If OPEC is successful and cuts production (it’s two pieces- they have to announce and reach an agreement, and then they have to implement it. Those two do not go together in OPEC usually. But let’s say they do.) They get a deal, they cut production, and as a result, the price actually goes up. What will that translate to? It will translate to the US producers, the conventional and the unconventional, to increase production. Because the only major producers in the world today that are not controlled by government but controlled by the market are in the US. There are more than 4,000 producers in the US, all with different economics. So if the price actually rises, the US will increase production, which will translate into the US gaining the market share. OPEC states will be at lower production levels and less money. Now that’s important because as the US we have to think about how the rest of the world views us. Oil-producing countries, in the history of our relationship, provided us with natural resources in return for a certain degree of security. Is that covenant as I’ve- I get that word thrown at me in the Middle East a lot- is that broken? No, I think not because I think our relationship was never based on that. But some do. What does that mean when your former big client is now your competitor? The second place where it means something is where is the energy market going? The reason that I just outlined why decisions in the US on production are far more important than a bunch of men getting together in fancy hotel lobbies to discuss what their policy should be is because it’s not government control and it has effects on the future.

So if we want to talk about the integration of renewable energy, if we want to look at the future of where world energy is going when we can do more with less because of efficiency standards, where we have a more diverse energy mix, that means that a discussion about peaking oil has to change. And everything that I see coming out of the EIA or the IEA or any of the other consultancies talking about peaking oil is still looking at the past as the measure for the future. Now I gave the 2008 scenario as the cautionary tale for never making too many predictions in the energy market because you’re more likely to be wrong than right, and therefore I’m not going to say that I know when peaking oil is going to be. But I think we’re underestimating that the forces that brought more oil to the market because of the shale are actually going to be what’s going to accelerate its demise. Because by keeping the prices there, it creates a different market dynamic that we don’t yet understand.

And look at what the UAE has done. An oil-producing country that relies on oil for a vast majority of its revenues. And yet it has lifted subsidies in the energy sector. It is moving to import LNG for its own consumption and made huge investments in renewable energy. This is an oil-producing country. What does this mean for the future? I’m not 100% sure. But I think that’s going to be the change agent that we are going to see into the future.

Where is my concern? It’s not here. My concern is Asia, where in Southeast Asia, we have seen Vietnam move away from its intention to invest in nuclear and in LNG, or reduce its investment in LNG, and announce coal power plants with 40 GW worth of power. Same in Malaysia, Thailand, the Philippines. So while we all talk about China all the time, we’re creating a sub-culture in Southeast Asia where coal comes back. How do we combat that? I don’t believe it’s simply by implementing only renewable energy. If we don’t have a functioning and stable trading of natural gas in Southeast Asia, we will not see a decline in coal, and in fact we will see the maturation of these coal power plants and the investments. And once you build 40 GW worth of coal power plants, that’s 25 years- 30 years- 35 years. Nobody’s going to build new power plants. The infrastructure investment is what will determine the future.

Now bringing it back to Europe and bringing it back close to home here in Brussels, the revolution that’s happened around the world in energy that I just described has an effect in Europe, specifically on the very impressive work that’s being done today in the Commission on trying to come again with an energy package that will be able to address the goals of the EU member states. But there’s an element that is hanging over our heads that is of vital importance for Europe’s very future and sovereignty and territorial integrity. And that is the energy security piece. Because energy security is not about energy. It’s about everything around energy. What we have seen over the last several years is a vulnerability that exists in Europe that has not been addressed fully.

I want to go back to 2009. Because the relationship on energy between the US and Europe was shaped from the very first moment that this administration came into power. On January 1, 2009, Russia cut off supplies of gas to Ukraine. And 9 days later, they cut off supplies to Europe via Ukraine. That crisis ended on January 20, the same day President Obama took his oath of office. Meaning that when the new Secretary of State came into office on January 21 and called counterparts in Europe, one of the first topics in every conversation was: “this cannot happen again, we just exposed a huge vulnerability for Europe.” Not because we didn’t have enough gas, but because we suddenly realized that we still have that vulnerability (by the way, the same one that existed in 2005-6 when gas was cut off by Russia to the Ukraine).

Now I’ll say this: people don’t give the EU enough credit. And the third energy package that was passed after the 2009 shut-off addressed one of the most critical elements. Therefore, in June of 2014, when Russia shut off the gas to Ukraine once again (and June is not a mistake. It’s very intentional. You shut off gas either in the middle of a storm in the winter like they did in 2009 or you do it in June. And why June? Because in Ukraine you use gas for heat. You draw on it all through the winter, which means that at the end of the spring you are at your lowest levels in your reserves. You have to buy through the summer in order to be able to survive the next winter. So June is your lowest point and that’s when you cut off supplies.) But here’s what happened in June that was unexpected. Reverse flow supplies from Poland, from Hungary, and from Slovakia entered into Ukraine. That was possible because of a provision that nobody paid attention to in the third energy package about destination clauses. So when Gazprom called its clients in Poland and Hungary and said “What the hell are you doing? You’re violating the terms of the contract. Only I get to decide if you can sell it on.” They said, “No that’s no longer illegal in the EU.” The reason I know that they [Gazprom] never paid attention is because they sued to the WTO at that point.

But we are still living through that crisis. A significant number of member-states live with the threat of an energy supply cut-off from a dominant supplier. Countries that- it’s true, if you look at the total of Europe, it’s not even near 100% of supplies from Russia- but certain countries have 100% supply for their own country. Whether you’re in Bulgaria, or Hungary, or Serbia, or Moldova, etc. And those countries live under that threat. We now have new technologies that have come into place that have made alternatives cheaper- the ability to diversity is there. First it was a gas pipeline from Azerbaijan through Turkey into Europe. Second was the ability to build LNG terminals on the borders of different key points in Europe in order to be able to bring diversity. This does not mean that Russia should not be a supplier in Europe. It should and it will. It is a significant resource-holder that is sitting right on your borders- it should be one of your main trading partners. But if it is allowed to be the only supplier into certain countries with zero alternatives -- that they can have a take-or-pay contract whether you need it or not, which means that you don’t only depend on them for the energy supply but it puts you into debt financially-- that’s not sustainable, because that translates into leverage. And if you live with that leverage, then you will continue to have a deepening of an old line that has begun to fade- the Cold War line- reemerging not as a military line but as an economic pressure line. And ultimately the decline of unity inside Europe. It is addressable, it is fixable, and remarkably, with not a lot of money. With relatively low levels of investment, you can have enough alternatives. Look at the example of Lithuania. They build an LNG terminal and just by signing the contract -- the thing hadn’t even arrived yet -- they were able to renegotiate a contract with Gazprom. Gazprom still sells them most of their gas, but now it’s at a competitive price. And now if Gazprom ever shuts it off, there’s an alternative. That’s all that needs to happen.

People used to ask, “Why don’t we move to more” in some of the more coal-dependent and diesel-dependent power countries in Europe, in eastern Europe in particular, “why don’t you move to natural gas in addition to renewables?” Normally I’m a champion of that, but here I say you’ve got to be crazy. As long as you have 100% dependency on one supplier, don’t expand that dependency. But that makes it harder to reach the emission targets for 2030, 2040, and 2050. So there’s a real opportunity and a real fork in the road for Europe today. We have projects that are pending in Europe today that will determine the next 30 years of energy dependency and energy security vulnerability. If you build Nordstream II and Turkstream, in combination, there is no room for a supply line through Ukraine. You will extend the dependency and eliminate all options of diversification for 25 years. New contracts will be signed, new dependencies created or extended. And if Europe does that, then the economic burden on Ukraine- losing nearly $2 billion a year of transit revenue- is not recoverable, which could lead to economic collapse. And we all know what happens when there’s economic collapse -- it always leads to political instability and ultimately a change in direction potentially. That’s what’s at stake in the next 6 to 9 months. And that’s not hyperbole -- that is literally what is at stake in the next 6 to 9 months. Decisions will be made. If Europe wants to work to avoid these threats, it will have to come together. Not every country cutting a separate deal, a one-off deal between itself and Gazprom and maybe one neighbor, but rather thinking about it internally as an energy union. That will be the success of the term “energy union.” Otherwise, it will not work. Because what could benefit three or four countries could be to the detriment of the total.

Now when it comes to climate, I think the answer that we were able to achieve together in Paris has been nothing short of remarkable. Not only because of setting the emissions targets. But rather because it was a fundamental psychological change around the world. When I go to oil-producing countries around the world, the switch that came, the “we need to change how we do business. Our future is changing” was because of Paris. And that was not there after Kyoto, not after Copenhagen. It was only there because of Paris. The impressive agreements, the ability of countries that most of the world didn’t think would come together -- India, China, the EU and the US in particular -- that was a game-changer. And I don’t think it’s reversible. There are those who say that it’s reversible and there are those who say that coal is coming back in America. I think they’re either ill-informed or they’re just lying to their constituencies. Neither is going to happen. We’re on a march in a certain direction and we are continuing to go in that direction. Regulations will either get us there faster or slower, but they won’t change the direction. Instead of focusing the future now on negotiations in the current political environment that we’re living in both in Europe and the US, I think we should say we’ve reached what we’ve reached on the negotiation side in Paris. It’s now time for the integration side. We need as an international collective to get together and make the investment and support to the developing world, to get the expertise needed, to get the support for the regulatory environment that will attract the private sector, and to ensure that the advanced financing mechanisms and tools are there to allow for the further integration of renewable energy. Because that is going to be the key to reaching the emission goals, and I think that is the key to reaching these goals much faster than we think and changing the projections that we are reading about for peaking oil and for a greener future much faster than we even assumed in Paris.

Thank you.

Question and Answer Session

Q from Moderator -- What have been the lessons learned for you in doing this job, being the cheerleader for European solidarity, and how do you foresee this moving forward in the future past this administration?

I think the lesson that I take from the last 5 ½-6 years, is that the ability to use diplomacy, to understand what the other side’s needs are, concerns are, and trying to look for solutions that match not only their energy needs per se but their political needs, that address the concerns, is entirely possible and achievable. I think the most gratifying part of the job has been traveling to the parts of Europe that are seen as having more challenges in this area and realizing that if you’re willing to spend the time and effort, you can actually achieve an enormous amount. It’s not going to be all at once, it’s not going to be fast, but there has to be an understanding of the other side.

I think where we all make mistakes sometimes is that we come up with a conclusion that we want. And you look at is you’re either with me or you’re just a terrible person, or you’re a terrible country, or you’re not with me, or how can you not understand where the world is going and why are you being so difficult. But at the end of the day I see most things through a political lens. And leaders are cyclical leaders. The minute an election is over in the back of their minds is the next election. And therefore coming into a conversation about how do we get an outcome is to figure out the politics of the other side, and to not expect them to ever take a decision that is contrary to their political interests.

To understand that the political interests are not only a necessary evil, but an actual value. Then how do you turn the collective wants – what the EU wants, what the United States wants, what we think is the right thing for the community – into the political imperative for the other side as well. I think that I’ve been told time and again, that in a new era, where the United States has nothing to spend, and Brussels has more limited resources, and other actors can come in with money and will always win, I think is fundamentally wrong. I think if you come in with sound argument and understanding of the other side, I find that the biggest source of disagreement on these issues is that there are countries – the EU and its immediate neighbors, who believe that others see them as “less than,” as less value, as not an equal in decision making, or that their concerns are of less importance than other concerns, and whether it’s true or not doesn’t matter, it’s the perception that matters. Because decisions are made on emotions and perceptions, as well as upon data and fact. So if you tie all that together, I still think that’s the role of diplomacy. And I think it is alive and well despite its obituaries being written all over the place.

Q from Moderator – Thanks, and one more follow up point, which is something that Sir. Michael introduced you with, which is the Southern Corridor. You’ve done a lot work in the Eastern Mediterranean, a lot of work on the Southern Corridor, its value for Europe. What do you think is the prospect there for the future? We have some Cyprus talks coming up, and also some new finds in the East Med of gas. How do you see this region developing and its significance developing for Europe?

I think this is where energy is the coolest thing. Because it’s never going to lead politics. But the reason why I’ve spent so much of my time on the Eastern Mediterranean, after all it’s not that big of a resource when you compare it to the world’s largest resources out there – in Qatar, Australia, Russia, the United States, Iran – but what’s cool about it is you have a number of countries may make use of it – Cyprus, Israel, potentially Lebanon, Egypt. But none of them can develop it on their own. They all have a challenge that makes it impossible to develop. Israel has not gotten to a point where it can develop LNG terminals on its own to export. And therefore they need somebody else to help them monetize their massive discoveries. Cyprus doesn’t have enough of discovery yet to produce it on its own, so it has the same problem that Israel does. Egypt has the resource, has infrastructure, but it has demand issues at home, and challenges with the ownership of the infrastructure.

And so therefore it seemed to us that this is a place where energy can actually anchor cooperation, in a region that doesn’t do that very often. And if you look at the geopolitical implications of the energy discoveries – they’ve been transformative. Israel and Cyprus – today we’ve gotten used to the fact that they are best of friends. That was not the case a very, very short time ago. From the independence of both countries, it was a cold relationship at best. And energy is the only reason that transformed the relationship from cold to not just warm, but extremely warm- and strategic.

We talk about energy cooperation between Israel and Egypt. The United States helped – you know I spent months traveling to Jordan for negotiations between Israel and Jordan, or rather between Noble Energy and corporations on the side of Jordan, and we now have two pipeline agreements between Israel and Jordan – one in the Dead Sea and one in the North. Cooperation with Egypt. Cooperation potentially with Turkey. If you have a deal on Cyprus (which I’m still extremely hopeful we can reach in a couple of weeks) then you can have a pipeline from Israel via Cyprus to Turkey. And look what you can suddenly do. Expand the region of Eastern Med importance – the decisions being made in Baku, and Turkey, and Jerusalem, and Nicosia, and Egypt, and Greece, and Bulgaria altogether. That’s remarkable.

And that could have an impact on Europe as a supply source close to its borders, that is cheap in transportation costs. But it also has a geopolitical implication of cementing economic ties between countries that don’t really know what that looks like, that don’t have any history of that. Hopefully with a new president there, maybe Lebanon can join the game as well. That’s my hope. But that’s what’s really cool about the energy piece. And I should add that without it, I don’t believe that the normalization between Israel and Turkey would have been finalized. You’d still be in round 17 of talks. So I think these are really interesting opportunities that can come up with identifying energy as a potential for collaboration and interconnection – towards prosperity and security.

Q – Thank you, we’ll open the floor to questions now:

[Unidentified] Thank you, just two short questions. The point you made about diplomacy as a tool to understand your interlocutor on the other side of the table. Aer you relatively satisfied that during your period of Special Envoy for Energy you have gained a good understanding of Russia’s needs and requirements? And on Iran, with the new administration coming in, the new National Security Advisor and his views on Iran, that the reintegration of Iran into the international energy economy is irreversible? That there are some concerns it may go the other way, from the US perspective. Thank you.

I’ll start from the top. Yes I do think I understand Russia’s needs, and Russia’s needs are not about price. My view, at the end of the day, is that when it comes to Russian gas - it has one market of consumers only. It’s a legacy of the Cold War, where infrastructure was built from Russia to certain countries – that’s the client base. Despite signing multiple MOUs with China at St. Petersburg – none have actually gone into implementation mode, for a variety of reasons. Therefore today, outside of a very small - it may be growing - but very insignificant LNG capability, their market is Europe.

Now when you have two parts of the European market – it’s really two markets: One is a diversified market, in the West, and one is a dependent one. In an era where natural gas prices in Europe went from 11 – 14 dollars depending on where you were, down to 6-7 dollars, then giving up market share is not at the top of your priority list. On the contrary – you want to make sure that you keep your market base. That’s what I think that fundamentally at the end of the day this is all about. If you diversify and let your countries that are 100 percent dependent to diversify, then they will buy less gas from you - at any price.

Now when you have a dependent that means you get to control what the price is. It’s no longer a market price -- you determine what the price is. And you have a very high base price that is not market-attached, and you give discounts. And those are political favors. So you have one line that goes throughout Europe – or two lines that come into Europe – which means the cost of transportation is almost equal to everyone. And yet every country has a bilateral contract with a different price, depending on the political favor you’re in. So I’m not saying that I disagree with their need to have a market – I get it. What I’m saying is be part of the market. Let the market develop. I’m not saying get out of the game, I’m saying don’t mess with the game. But I mean fair price- it’s a little bit rich to ask about “fair price” when you have transportation tariffs, when you’re not willing to allow fair price for everybody else, for your consumers. Why are you so scared of allowing LNG terminals? And bringing alternatives? Russia will always be able to beat the market price at the end of the day. So I think I do get it. I think that if Russia had major pipeline infrastructure going east, I think they’d care a little bit less. But that’s not the situation, that’s not the set of circumstances.

Beyond that, I think gas has proven to be a very fruitful and very useful tool - not in their energy policy, but in their foreign policy. And I don’t think they want to give that up either. I think gas as a leverage tool is useful. And they don’t want to give it up for no reason.

On the Iran question: there’s been a lot of talk in the campaign about what the United States’ new administration coming in do about Iran – quote: “rip up the deal on my first day” or “live with it.” You asked if I think that Iran’s reintegration into the world economy is irreversible. I’ve learned a long time ago to be careful with the extremes, so “irreversible” – I think everything is reversible under certain conditions. But the United States “acting alone” – not only do I think it would be extraordinarily difficult, but would be nearly impossible to do. And this is coming from the guy who was responsible for the implementation of oil sanctions on Iran from day one. And the day we implemented them, passed the law in December of 2011, by July 2012 they came into power. And we were able to take them from two and a half million barrels a day to one million barrels a day. We took them from 23 customers to five. I’m very proud of that achievement because I think that’s what brought them to the table for the negotiations.

Recreating that, without what we had before, which was a complete alliance with Europe and some of our allies in Asia, would be extraordinarily difficult. And therefore, I’m not saying that it’s irreversible because I can envision a situation where Iran violates their side of the agreement where Iran violates their side of the agreement, that would lead to a Security Council resolution, here a matching set of circumstances out of Washington, an agreement in certain countries in Asia, and we can re-implement. But acting alone, I think that’s going to be very, very difficult. And I think people will – once the new administration comes into power, reads up and thinks about this a little bit more – I think you’ll see the tone shift. And I will say, in all fairness to the Trump team coming in – I’ve been around long enough to see a lot of campaign rhetoric on policy that doesn’t always match the policy implementation side after January.

Q – [Unidentified] I wonder if we could switch to Asia and talk about the investments in coal there. You talked about the need for stable trade – we’re about to get a massive flood of LNG from Australia, for example. What else is needed to bring stability to the energy trade in Asia?

Well I think what’s needed in Asia – you’re right. What I should have said before, we’ve been in a world where Qatar has been a dominant player as an LNG exporter. In 2020, the largest LNG exporter is going to be Australia, followed by probably a close tie between the United States and Qatar – so we’ve gone from one dominant player to tripling that amount of natural gas coming on to the world’s markets. That in and of itself is a major shift. And the Australian market is much too, thanks to the world that Chevron has done there. I think what’s missing in Asia is a gas trading hub that will allow for real trading of natural gas. The disparate nature of the markets means that countries that are smaller in scale have a harder time at the moment with importing LNG unless something dynamic changes. There aren’t, unlike in Europe or the Americas, there are very few pipelines that are transboundary. Countries are very isolated as individual markets – so there is a pipeline from Asia to Singapore, but not much else in that region despite eleven years of discussion of building an ASEAN pipeline. So we really have no infrastructure to deliver LNG to countries that tell you the reason I’m building coal is because I can’t afford to build the LNG terminal for simple 2-3 bcm (billion cubic meters) in my south, like Vietnam for instance in its south, when I don’t have a pipeline that interconnects the South and the North. So there’s too much investment that I need to do in my own country to be able to support that.

Since I believe that the bridge to a cleaner future lies in the expansion of natural gas, I think we need to figure out a way to bring about the infrastructure investment to allow interconnection -- that’s one option. And the second option is how do we have a trading hub, that allows perhaps a wheel and spokes approach, whether it’s a certain amount of gas coming into a larger market that is broken up into pieces- smaller cargoes – and going into other countries in the region? I think that we’re experimenting already with that now in the Americas, with LNG from the United States – which is very cheap. But most countries in the Caribbean, which are reliant on one supplier of fuel from Venezuela, are not big enough to support LNG, and we’re starting to see companies adapt and come up with creative solutions. Barges are now doing it, container ships – because buying a container ship doesn’t cost anything with the shipping industry now, and therefore you can put a container ship in the middle of the sea with containers coming off an on, or on and off, to different markets.

So these are just other possibilities, I’m sure we’ll see many more develop. But until we have that I’m worried that we’re not going to see enough of a trade increase, and instead they are going to turn more to coal because it’s cheaper and easier. And I have to tell you – the air quality issue is… - when I say to people when I go to Asia, and I was there just a few weeks ago- take a look at your neighbors. Take a look at Beijing. When they want a blue sky for world leaders to come visit they have to shut down the entire economy of Beijing for ten days. Just to be able to have a blue sky. So you’re not looking into the future if you build these coal power plants, you’re looking out the window – that’s you in a few years. Look what’s happening in India. So it’s about living air quality. And it goes back to the previous question that we had – how do you talk to people? You have to look at it as - this is a political problem for you. If you build this, in a few years you’re going to have people rioting in the streets, with the higher cost of healthcare, with asthma, and people can’t see across the street. That’s ultimately going to be a political problem, not just a health problem, not just an economic one, not just an environmental one.

So I think that’s where we have to have that combination of building infrastructure to allow for that to happen with an understanding of what the true costs are for them going in this direction, of building this very expensive infrastructure.

Moderator: I want to thank all of you for coming today for this transatlantic conversation, and let’s give a round of applause to Special Envoy Hochstein.