-Caveat Lector- September 1999 World Energy "Areas to Watch" -DOE The countries/regions listed in this report are: a) important from an energy perspective; and/or b) experiencing significant economic, political, or other problems which currently (or likely in the short-term) could affect their energy sectors. Click on the name listed below for a brief discussion/analysis of the main concerns regarding that particular country/region's energy industry. Information contained in this report is the best available as of September 1999 and can change. Angola Caspian Colombia Indonesia Iran Iraq Libya Nigeria Russia Venezuela Angola Main Concerns: Angola, which had endured three decades of civil war following independence from Portugal in 1975, was plunged back into war when hostilities resumed between the Forcas Armadas de Angola (FAA) and forces of the National Union for the Total Independence of Angola (UNITA) in the latter half of 1998. Angola is sub-Saharan Africa's second largest oil producer behind Nigeria, with the majority of its crude production located offshore Cabinda. Crude oil production, which has more than quadrupled since 1980, averaged 735,000 barrels per day (bbl/d) in 1998. Angola's crude oil exports to the United States were 445,000 bbl/d in 1998 (60.5% of Angola's production for the year). Angola was the sixth largest supplier (largest non-OPEC supplier outside the Western Hemisphere) of imported crude to the United States in 1998. Angolan crude is also exported to European and Asian markets. Caspian/Caucasus Main Concerns: The Caspian Sea is developing into a significant oil and gas exporting area, and the Caucasus is a potentially major world oil transit center. Proven oil reserves for the entire Caspian Sea region are estimated at 16-32 billion barrels, comparable to those in the United States (22 billion barrels) and the North Sea (17 billion barrels). Natural gas reserves are even larger, accounting for almost 2/3 of the hydrocarbon reserves (proved plus possible) in the Caspian Sea region. Getting this oil out of the region to world markets, however, is complicated by several factors, including geography and geopolitics. The "northern route" for early oil from Azerbaijan, for instance, which (combined with a western route to Georgia), could carry up to 200,000 barrels per day (bbl/d), passes for 80 miles through the war-torn Russian republic of Chechnya en route to the Black Sea port of Novorosiisk. Although a peace agreement reached between Russia and Chechnya cleared the way for the July 1997 tripartite agreement between Azerbaijan, Chechnya, and Russia on early oil exports from Azerbaijan and allowed necessary repairs to begin on the existing oil pipeline, it did not settle the issue of pipeline tariffs. Chechnya and Russian transport company, Transneft, have also clashed in the past over the issue of tariffs and war reparations from Russia. Russia has offered to provide economic aid to Chechnya on the condition that Chechnya secures the safety of the northern route for early oil that passes through its borders. Deadlocks over negotiations prompted Russia to announce that it would build another pipeline that would bypass Chechnya. One proposed alternative pipeline would use the northern route, but would add a new segment that would pass along the Chechen border in the southern Russian republic of Dagestan, and then go on towards the Stavropol region, ending at Terskoye in North Ossetia. In October 1998, Russia made another proposal to build a new pipeline from Baku, Azerbaijan via Dagestan to Novorosissk in Russia, but the proposal was rejected by Azerbaijan's state oil company, SOCAR. Dagestan has security concerns of its own. In August 1999, fighting flared between Islamic militants and Russian forces in Dagestan. COLOMBIA Main Concerns: Colombia, a significant oil producer and exporter, faces serious problems, including guerrilla groups active in the country for the past 34 years and now in control of large swaths of the country, right-wing paramilitary groups, a major illicit drug trade, large fiscal deficits, and high unemployment. Despite these problems, Colombia's oil production is at an all-time high, up from just over 100,000 barrels per day (bbl/d) in the early 1980s, to an estimated 844,000 bbl/d in the first quarter of 1999 (with net oil exports of over 470,000 bbl/d, largely to the United States). Colombia's government estimates that bombings of oil pipelines alone cost the country about $50 million annually. INDONESIA Main Concerns: East Asia's economic crisis, which began in mid-1997, affected Indonesia, a significant world oil exporter and a member of OPEC, particularly seriously. Violence and riots erupted throughout the country in early 1998 in response to higher food prices and soaring unemployment. Indonesia's economy has continued to shrink in 1999. In terms of energy, Indonesia's oil refining and liquefied natural gas (LNG) sectors have been adversely affected. Indonesia's oil demand, which had been growing rapidly for years, fell from 940,000 bbl/d in 1997 to an estimated 893,000 million bbl/d in 1998. On April 20, 1999, 1,500 students demanding a 10% share of company oil revenues attacked facilities of Caltex Pacific Indonesia (a Chevron/Texaco joint venture) in the Sumatran province of Riau. Communities in Aceh, Irain Jaya, and Kalimantan also are demanding higher revenues from natural resources produced in their regions. As far as natural gas is concerned, press reports indicated that South Korea was canceling agreements in 1998 for import cargoes from Indonesia and Malaysia, while Japan, which had been a fast-growing LNG market in recent years, now is unlikely to need more LNG supplies until 2001. In July 1998, Indonesia announced that it would postpone exploration at the giant (42 trillion cubic feet) Natuna natural gas field from 2003 to 2007. In early July 1999, a mob attacked the Arun LNG facility (run by Mobil/Pertamina) and located in Aceh, part of the northwestern Indonesia island of Sumatra. Local residents apparently have been angered by their perception that the Indonesian government spends revenues earned in Sumatra (and Aceh particularly) on the island of Java, leaving Aceh behind. Another issue which has come up relatively recently is that of the former Portugese colony of East Timor (invaded and seized by Indonesia in 1975), which voted overwhelmgly in early September 1999 for independence from Indonesia. This has been followed by violence and a declaration of martial law by the Indonesian government. In terms of energy significance, there is a question about the legal status of the Timor Gap Treaty (between Australia and Indonesia) if East Timor becomes independent. The Timor Gap is being explored by Pertamina, Phillips Petroleum Co., BHP, Santos, and Shell Australia for possibly large oil and gas deposits. Although East Timorese pro-independence groups have said they would honor the Timor Gap Treaty, there is no East Timorese government yet to confirm this officially. IRAN Main Concerns: U.S. economic sanctions and diplomatic pressure are complicating Iran's efforts aimed at attracting needed investment to its oil and gas industries. Iran's new President, Mohammad Khatami (elected May 1997), has expressed interest in a dialogue with the West, but the extent to which such dialogue may proceed given the extensive influence of the country's Islamist fundamentalists is uncertain. Despite the change in leadership, tensions between Iran and the West, particularly the United States, continue. Among the key points of contention are: 1) Iran's opposition to the Middle East peace process; 2) U.S. accusations of Iranian support for various terrorist groups; 3) Iranian purchases of missiles and other military equipment from North Korea, Russia, and elsewhere; 4) the Iran and Libya Sanctions Act of 1996 (Public Law104-073), which authorizes the imposition of U.S. sanctions against foreign companies investing in Iranian oil or gas projects (originally applied to investments of $40 million or more annually, automatically lowered to $20 million one year after enactment); and 5) Iran's occupation of three islands in the Persian Gulf also claimed by the United Arab Emirates. The United States has had no diplomatic ties with Iran since 1979, after Islamic militants stormed the U.S. Embassy and held 52 Americans hostage for 444 days. Iran currently is producing around 3.4-3.5 million bbl/d of oil (with net exports of about 2.2-2.3 million bbl/d). IRAQ Main Concerns: Iraq, which contains huge oil and gas reserves and is a major oil producer and exporter, has been subject to international sanctions since its 1990 invasion of Kuwait. Sanctions are to remain in place until Iraq complies with the provisions of the United Nations (U.N.) Security Council resolutions ending hostilities in the subsequent 1991 Persian Gulf War. A key provision is the destruction of long-range missiles and weapons of mass destruction. However, Iraq has periodically refused to cooperate with U.N. weapons inspectors responsible for verifying compliance, heightening tensions. In the fall of 1997, the United States led a military buildup threatening air strikes against Iraq. Iraq ultimately agreed to cooperate after last-minute discussions with U.N. Secretary General Kofi Annan in February 1998, but in November 1998, the United States once again came close to military intervention due to Iraq's decision to end cooperation with U.N. weapons inspectors. On December 16, 1998, the United States launched air strikes against Iraq following a report by Richard Butler, head of the U.N. Special Commission in Iraq (UNSCOM) stating that Iraq was not cooperating on several fronts. As of August 1999, Iraq was producing around 2.6-2.8 million bbl/d and exporting an estimated 2.0-2.2 million bbl/d under U.N. Security Council Resolution 986, which allows oil sales to raise revenue for humanitarian purposes, war reparations, and U.N. operations in Iraq. Iraqi oil production could increase to as high as 3.0 million bbl/d in coming months as spare parts are now being allowed into the country. In February 1998, the U.N. Security Council unanimously approved an increase in the amount of oil Iraq may export, to $5.265 billion worth of oil over a 180-day period (from $2.14 billion over the same period). With the rise in oil prices in recent months (as well as increasing Iraqi oil production), Iraq could surpass this amount during the current 6-month phase due to end in November 1999. As of mid-August, 1999, it remained unclear what the UN Security Council's response would be if Iraq exceeded its revenue ceiling in the current phase. In anticipation of the eventual lifting of economic sanctions, Iraq already has signed potentially lucrative oil and gas deals (which will come into effect when sanctions are lifted) with companies from Russia, France, and China, and has invited international partners to invest in natural gas projects worth $4.2 billion. Prior to August 1990, Iraq was producing over 3 million bbl/d and exporting 2.8 million bbl/d (1.6 million bbl/d via pipeline to theTurkish port of Ceyhan; 800,000 bbl/d via the IPSA2 pipeline across Saudi Arabia, which is currently closed; 300,000 bbl/d via the Persian Gulf port of Mina al-Bakr; and somewhat less than 100,000 barrels per day by truck through Turkey). LIBYA Main Concerns: On April 5, 1999, more than 10 years after the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland that killed 270 people, Libya, which exports around 1.2 million bbl/d of oil, extradited 2 men suspected in the attack. In response, the United Nations suspended economic and other sanctions against Libya which had been in place since April 1992 (see original U.N. economic sanctions). These sanctions, expanded in November 1993, had included a freeze on Libyan funds overseas, a ban on the sale of oil equipment for oil and gas export terminals and refineries, and restrictions on civil aviation and the supply of arms (see additional U.N. sanctions). U.S. sanctions, including the Iran-Libya Sanctions Act (ILSA) of 1996, remain in effect. ILSA extends U.S. sanctions on Libya to cover foreign companies that make new investments of $40 million or more over a 12-month period in Libya's oil or gas sectors. With the suspension of sanctions, numerous oil and gas companies are eager to either expand operations and/or reenter the country. A full lifting of sanctions may occur 90 days after the U.N. certifies that Libya has met all requirements, including renunciation of support for terrorist acts. On July 9, 1999, the U.N. Security Council issued a statement saying that while it "welcomed the significant progress" which Libya had made in complying with U.N. demands, that at the same time Libya would need to do more (i.e., cooperate with court proceedings, pay compensation to families if the suspects are convicted, etc.) before sanctions were lifted permanently. Meanwhile, on July 7, 1999, Britain reestablished diplomatic relations with Libya. NIGERIA Main Concerns: Ethnic unrest and violence continue in the Niger Delta region of Nigeria, the largest oil producer and exporter in Africa. President Obasanjo took office on May 29, 1999, returning Nigeria to civilian rule for the first time since 1983. Oil production operated by the foreign firms in the region has also been disrupted on several occasions. Nigeria is one of the world's leading oil exporters, with production of over 2 million bbl/d of oil in the first half of 1999, and with exports of around 680,000 bbl/d to the United States. On July 6, 1999, President Obasanjo announced the cancellation of crude oil sales contracts and exploration agreements awarded by the previous government of President Abubakr. A majority of the awards (11 were in Nigeria's deepwater area) were granted to local firms, which were believed to have ties to active and former senior military officials. President Obasanjo has established a commission to examine the propriety of all government contracts awarded in 1999 prior to his administration's assumption of power. Obasanjo himself has been accused of favoring nominees from his native southwest. RUSSIA Main Concerns: Nearly a decade after the breakup of the Soviet Union, Russia continues to experience serious economic and political difficulties (in part caused by oil export revenues, down 11.7% during the first five months of 1999 compared to the corresponding period in 1998. Russia's economy has declined by more than 40% since 1990 while unemployment has increased sharply. Russia also has experienced significant political turmoil over the past few years, including a violent confrontation between the Russian military and the country's Duma (congress), rapid and sudden changes in governments, a war in Chechnya, and in August 1999 another military conflict in Dagestan. Partly as a result of these economic and political problems, Russian energy production has fallen sharply. Russia's problems are a source of concern to world oil and gas markets because Russia is a major net oil and gas exporter, mainly to Europe. Russian oil production, for instance, has fallen from its peak of 11.4 million bbl/d in 1988 to only 5.9 million bbl/d in 1998. Coal, electricity, and natural gas production also have declined. Meanwhile, Russia's net oil exports (including exports to other republics of the former Soviet Union), after reaching 4.9 million bbl/d in 1990, fell sharply before bottoming out at 3.2 million bbl/d during 1993 - 1995. Since then, net oil exports have increased somewhat -- to 3.5 million bbl/d in 1998. In 1998, total Russian oil production fell an additional (though small) 0.8%. A 2.2% decline in production by Russian oil companies was mostly offset by an increase in production by foreign/Russian joint ventures. During the first half of 1999, indications are that further declines in investment in Russia's oil sector have led to another small (0.9%) decline in production. A survey by the Russian Petroleum Investor found that Russia's economic/political problems are affecting smaller independent operators and energy service companies, which have been forced to layoff personnel and/or curtail their operations, the hardest. Canada's Fracmaster, for instance, laid off 75% of its Russian work force in 1998. Russia's downstream/retail oil sector has been affected as well, with plans to expand the number of gasoline stations shelved. Major international companies have been affected to a lesser extent by Russia's problems. A few projects have been cancelled, such as BP Amoco at Priobskoye and Occidental at Komi, but a number of factors were considered in these decisions. Elf Aquitaine has downsized its presence, and BHP has pulled out of Russia. However, most major international companies have stayed in Russia after reducing labor costs. VENEZUELA Main Concerns:Venezuela, which has the largest oil reserves in the Western Hemisphere and is a major oil exporter, especially to the United States, has been experiencing serious political and economic uncertainty over the past year. In December 1998, Hugo Chávez won election as president with 56% of the vote, running on a populist agenda against the established political order, as head of a leftist coalition. On September 7, 1999, Standard and Poor's placed its ratings on Petrozuata Finance Inc.'s bonds on "CreditWatch" with negative implications. The Petrozuata project is a $3.6 billion partnership of Venezuela's state oil company, PdVSA, and Conoco, and aims to extract 1.5-2 billion barrels over its 35-year contract. In July 1999, Petroleum Intelligence Weekly (PIW) reported that three existing projects (Petrozuata, Cerro Negro, and Sincor) in Venezuela's huge, heavy-oil, Orinoco belt are facing construction delays, cost overruns, and limited access to finance. PIW also reported that many companies which had been interested in Venezuela several years ago have now backed off. In early September 1999, PdVSA was hit by numerous resignations of top officials amid concerns over President Chavez's intentions for the company. Also, credit-rating agency Fitch IBCA has announced that it is reviewing PdVSA for a possible downgrade. Fitch IBCA said that it was concerned about Venezuela's "increasingly complex political situation and the low priority assigned to economic reform." Finally, Reuters reported in early September 1999 that foreign oil companies are stepping up their lobbying of the Venezuelan government out of concerns that billions of dollars in their investments may be threatened by President Chávez's policies. Venezuela in 1998 produced an estimated 3.3 million barrels per day, up about 64,000 bbl/d from 1997 levels. Venezuela exported about 2.8 million bbl/d, of which about 1.7 million bbl/d went to the United States. In June 1999, Venezuela was producing 2.72 million barrels per day of crude oil, which is exactly the amount allotted by the Organization of Petroleum Exporting Countries (OPEC). As part of a coordinated effort by major oil exporters to prop up world oil prices since early 1998, Venezuela has agreed to production cuts totaling 650,000 bbl/d over the past year, including 125,000 bbl/d pledged in the Hague OPEC meeting in late March 1999. Venezuela's target OPEC quota is now about 2.72 million bbl/d (compared to around 3.4 million bbl/d in January 1998), a 19.3% cut. Venezuela's actual production peaked at 3.7 million bbl/d in early 1998, its highest in 26 years. By May 1999, Venezuela was producing less than 2.8 million bbl/d of crude oil, just slightly above its quota. These moves by Venezuela appear to mark a break from years of a strategy aimed at increasing oil production and world markets share, to one of increasing oil prices. To date, Venezuela's oil sector has been hurt by the production cuts, although prices might have been even lower without them. Among other things, the cuts and shut-ins have lessened Venezuela's oil production capacity, and this capacity could be difficult to reestablish anytime soon. Prior to budget cutbacks and production restraints, Venezuela had raised its oil production capacity by more than 200,000 bbl/d annually for 3 years. 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