tv Key Capitol Hill Hearings CSPAN December 26, 2013 11:30am-1:31pm EST
it's established in the article 20 and also in others. when we have these committees headed by the ministry of finance who is the chairman, the energy minister participates in the bank governor for two states and/or before independent members nominated by the mexican president and ratified by two-thirds majority of the people of the mexican senate. that's supposed to be the committee that will run -- run the fund and the fund will be based in the central bank. when the money comes in the first thing the fund will do is pay the contractors. profit-sharing that establishes costs. the fund pays them first but secondly, the fund -- up to 4.7% of gdp. that is the base that right now the oil sector submits to the
budget. that's the number in 2013. so what we are going to do in the future is that base of the budget coming from oil will remain constant. and the way that it will stabilize our finances. the mexican finances will not be suffering from lack of money. so we have a constant of 4.7%. after we reach the 4.7% the rest of the money goes into long-term savings. that, up to 3% of gdp. once we reach 3% of gdp we put that in the bank. then if we assume there's another dollar that comes additional to the first, it is defined in the following way. at least 40% of that new dollar goes again to the savings account. that means we increased the savings account until it is is reached from 3% up to 10% of the gdp. every year we get at least 40
cents of each additional dollar back to states. this is very important because we are thinking of the future. once we achieve that, the next step is up to 10% of the additional dollar will go to the universal pension fund. agile, mexico is -- the creation of a universal pension system. these are funds that pension system. the next 10% goes to science and technology and renewable energy projects. the next 30% goes to our vehicle that, like the model in norway managed by the ministry of energy where you can put a national state which seems be very promising. and up to 10% goes to regional energy development. the idea is the money that funds
through the mexican what reform goes mostly to long-term projects. so we've established a base for the budget that will allow us -- [inaudible] we are betting on the future. next, please. transparency is one of the most important elements of this reform. i haven't found a mexican that isn't satisfied with which has been has worked so far in the oil industry in our country. so we need to have a new mechanism to do it better. the constitutional amendment goes to that in articles nine and 21. so first come were going to make the getting dressed and guidelines will be made public. so anybody can see it. second, transparency clauses will be included in oil and gas contracts in every oil and gas contracts. so that the citizens of mexico and of the world can ask for
those permissions from the. there will be full disclosure associate to oil and gas contracts. the money goes to the fund and the fund pays for the cost. those transactions shall be made public as well. and forth, external audits supervised. it's very important. the funding is going to be public and auditable. so we believe that we are establishing a constitutional that we are establishing for elements of best practices for transparency. in addition to that there's an article that allows congress to establish special legislation against corruption. and that is something also we need to tackle first. next please. well, this has been the main elements of the energy reform. i'm sure you have many questions to which i will learn a lot. i'm looking forward for that opportunity.
as you also know, the statutory articles established the guidelines looking forward. it's up to 120 days for secondary -- legislation which we believe will go through in the next process of congress which will be between edward the first and april the 30th. many of those elements will be fixed by congress, and i just hope that you will invite me again in april so we can have another conversation once it is approved. thank you very much applaud that -- [applause] >> give us 15 minutes for questions. again, my welcomed everybody. i'm going to do something with my colleagues know i really do, which is to stay silent. i would like to open up for just 50 minutes to a couple of questions from the floor for the undersecretary.
>> bob wright, u.s. department of energy. it's been my experience that the pemex has held the geological data very close to the vest. so my question is, will that be disclosed in general for all of mexico, or will you have it remain for when you open up a particular area that they would be available, and how would it be available? >> these are very important questions. the constitutional reform establishes that that information that pemex has been able to collect through the years goes to a national hydrocarbons commission. the objective of that is to be able to make it public once the areas has been selected by the ministry of energy. so once we're opening up an area for bidding, the main it is the national hydrocarbons commission will make public the information that we have for the very. in addition to the we are giving the hydrocarbons commission the
responsibility to contract private sector or others to do seismic studies for them. for most of years in mexico right now we'll have two dimensions studies. so we need to increase the quality of the studies that we have of our subsoil due to technological advances and we are a little bit behind on the. so first we collect the data into the hydrocarbons commission. we opened that up to be able to establish more information, and once we decide and it will become available for competition, then we shall information. >> let me take someone from yo your. >> christian gomez from the council of the americas. curious about the referent that's being proposed in 2015 but is there a realistic chance this could stop the reform?
>> thank you, christian. i don't think so, but this is something that will be debated in mexico. as you know there is still secondary legislation to be approved by congress in order to regulate what we call -- has a different technological effects than a referendum. and the process has not been started yet. so it will continue with the guideline that our constitutional reform has established following the ground zero and the secondary legislation in congress. >> but how will this get resolved in the end of? >> we will wait and see what happens with the legislation of that, because right now it's not there yet.
>> will there be an emphasis or is it still too early on the onshore versus the offshore, both of which have different potential but tremendous potential? >> thank you. they have said at ground zero is very interested on keeping the onshore and the shallow waters that we call offshore but with a small distance. so we will see first what happens at ground zero, what would be the request from them in the first 90 days. once that is approved, they can go into the process of changing those entitlements into contracts. he has been a public -- is been public about the idea of looking for help in some of what we call -- major fields or brownfields and will also be very open to see how pemex plant seeds from
its oil investments in shallow waters. but it seems to be the case that areas of deepwater off the gulf of mexico or the shale gas or show oil in the northern part of borders with texas. these are the states in the northern part seems to be the area more promising for exploration. [inaudible] >> wait for the mic, please. >> the united states and germany have embarked on a very ambitious plan for clean and renewable energy as part of the energy transportation process. could you talk little bit about your plan for energy efficiency and industry-standard in that regards? thanks. >> thank you very much. this is been a very important topic of discussion in congress. two oh the articles in the
constitutional reform established the responsibly of the mexican state to come up with a plan, a transition plan. that plan is going to be the responsibility of the ministry of energy. what we see is that natural gas is a very important, fuel, that's right. because, and right now we have this big iron in the country that we have a strong resource of natural gas of what we are consuming. that also means that we would like to burn more natural gas, to produce electricity in mexico. but because we do have a strong supply of natural gas right now, then we are burning fuel oils or diesel, which is more polluting, but more important, it cost us over four times or up to six times more than we would be
burning natural gas. so for fundamental reasons and economic reasons, it's about policy that were not producing enough natural gas to produce more electricity. if we produce more electricity with natural gas, we will be able to reduce the cost of electricity in mexico, which are very high. over, an average, we are over 25%. we pay 25% more in electricity in mexico then you guys paid in the u.s. that's very bad for our business sector. there's many reasons why we have to move to natural gas. in addition to that, a strong part of the money that's being collected in the fund will go to renewable energy. in the constitutional and establishes a particular responsibility for congress that in the next 120 days, once a reform is published, it will cause specific legislation to push for renewables in the country. specific terms has to be enacted because with a strong potential
to have more production of electricity, and we need -- right now we are 26 different blocks have to do with the process and there's not a very clear process how to get there. so you have to do with different institutions and every time you go to one step, it seems that you have left an institution behind, you have to go back. it's just not right. we have now the responsibility through the constitutional reform to do it the better. >> we will take one more question. wait for the mic, please. >> yes, i'm david johansen with u.s. international trade commission. it's been 20 years since nafta was intimate and there's been much discussion on this anniversary, both in the united states and in mexico. data application of nafta lead to what is occurring now in mexico, the opening of the energy sector to foreign investment? thank you. >> thank you. i was very young when nafta was
-- [laughter] i will say that obviously we are looking for two elements that go in the same direction. in the near term, as i showed in the slide, we have had a decreasing production of oil, gas, gasoline and the petrochemicals. that created the need for the mexican government. the responsibility change a framework that we have. and secondly, of course we are interested in having a better economic integration in a way that allows us to compete on a fair basis. is our cost of gas and electricity are higher than those that are in the united states, we do not benefit -- mexico, we do not benefit the region. so we need to establish mechanisms to make the whole area competitive, and i think that this reform accomplishes
both of those objectives. >> thank you spend i wish i could take more questions spent you will. spend i'll be around if they're still other questions. >> we will come back in a few minutes with a larger panel but i would like to ask david goldwyn now to talk little bit about his report into frame for us the discussion that will have in the panel. they give very much. why don't we sit down? [applause] >> him mr. ambassador, mr. senator, let me first say thank you to the atlantic council for the bush of being a be a part of this reporter also want to thank three minutes of my team your indispensable. neil brown, cory and lee hendrix made immeasurable contributions. i think the first finding that we make in this report is that you have to appreciate what a remarkable feat of political statecraft and statesmanship this reform is.
here in washington we got ourselves on the back if we get bipartisan agreement to keep the government open for another few months. in the course of your mexico has with the agreement of three parties that don't agree with each other much have done education reform, fiscal reform, and now with two of the three major parties energy reform. it's a formidable a competent. it's breathtaking in the scale of its ambition. if it succeeds it will mexico from being a major to by 2025 i think a strategic supplier of oil and it will revive its economy and i think be very positive for bilateral relations and the hemisphere. i think of to understand that these changes are permissive and directed in nature. the constitution permits private investment into the upstream, midstream and downstream. directs the legislature to create legislation and then regulators to create regulation. now the hard work begins. it's all about implementation and execution.
and i think there are for me five major accomplishments of this reform that are worth pointing out. the first one, most obvious is the introduction of private investment into all these sectors. the second is that mexico has separated energy policy from industry supervision. isaac best practice in regulation. setting policy and five new regulators, safety, environment, managing the pipeline system that have to be stood up. they will do the monitoring so that is quite best practice. third is this new and very transparent petroleum fund which very much liked in the region fund has independent supervision caps how much money will come out of the industry to the federal budget and then direct all these other purposes. for this transparency. if implemented the mexican system will be among the most transparent. transparent, that contract will have a degree of public accessibility. reports of fines and costs paid by the industry are directed to be transparent as well as the fund itself.
that is quite remarkable. this is sustainability. that is directed as undersecretary ochoa said in two of the articles that both electricity system and hydrocarbon system that they're supposed to be sustainability goals. my sense is that there are three major categories of commercial opportunities here. the first will involve pemex. joint ventures with pemex on what it calls its bid an apples. feels that pemex developed and more or less abandoned as it moved onto the next high pressure there because it had to maintain production. so with basic enhance oil recovery and a duty on capital is likely that mexico can increase its production 300, 400,000 a day much like we see iraq due to basic conventional oil field services. pemex believes it will keep shallow on jordan keep tendency for itself but you never know what kind of trade-offs they make it. the transitory articles and the constitution indicate that reserves will be bookable and they have taken everything short of saying book reserved to say
that this system is designed to allow companies to account for the future benefits of the contracts they are entering into. so i think these joint ventures with trigger a first day of opportunity conference on these been apples, second on the existing deepwater feels when they have exploration which are part of their brown zero operation would bring in a joint venture, the second i think will be the seismic area where there will be a need for 3-d seismic. and third will be after the round zero, probably a year after legislation the new deepwater. that's where you'll see the greatest influx from private partners. we see some significant challenges for mexico to overcome in a publishing this reform. the first is managing expectation. because as people who know the industry know well, the wrapup this kind of cell and he would take a couple of years to get all the regulators stood up. there will be a gradual but not
an exponential rise in investment and i think managing expectations from the blog will be important, likewise in the power sector you will need to develop gas an and transport gan and transport gas energy subsidy gas for fuel oil so it'll be a while before you see those results in the electricity sector. this government has undertaken an initiative and it's uncertain whether in the next five years they will see the lion's share of these benefits but they did it anyway and that's really admirable. the second challenge will be delivering competitive oil and gas exploration terms. that are a lot the fans in that part. they've got to work together, move quick and be competitive when we could be getting in the world of $80 oil. it's not clear how it will work, but for each of the terms and also we need to find out when we will figure out which scheme will apply to which form of a grid. will it be a concession? will be profit-sharing? production sharing? that's a challenge. the 30th doing the effective regulators, light fantastic
framework regulators but you will need people, world, and you need to does. i think about whether it out with the mexico outsources and brings in external help, external expertise to bridge the gap to where they train their own cohorts of regulars. the fourth the question is value proposition for the power sector, and that's where there's not as much detail in the power sector as in the hydrocarbon sector in the reform, but who will be able to invest, can they sell directly to customers, how and at what price? rice is a big issue. gasoline prices are subsidized, and subsidy reform dropped out of the reform. so how that takes place, how subsidies are dealt with i think will affect the power sector reform as well. it is cutting the cord with pemex, which is the framework says five independent directors, five government directors, the minister decide to it's a new commercial public enterprise. it has more ability to plan on its own.
how big is the dividend going to be? the government will still be relying on pemex in the early years. can they plan? this remains to be seen. the sex is trusting the market. it turns out the best -- and develop oil, will that be okay for pemex? or will measures be taken to correcdirect where investment g? the seventh is a local content. there's talk about the need for local content rules, what will they be? will they be like brazil? the government has indicated it has seen the challenges, it does not intend to follow the brazilian model, but that remains to be seen. so in terms of the opportunity, i think there are really four tremendous opportunities for mexico. first in terms of bricks, it is the best in class. this is a government that can do structural reform. this is a government that can move quickly. among all the other countries out there, if you limited well, this woman of mexico to the head
of the class not just in energy but in other areas where it will look like the country to invest in. the second is prosperity. if this works, you've got positives for balancing trade, investment, manufacturing, job creation, cheaper energy. and i think in terms of energy investment if this model works the way it's designed, mexico will be in pole position in the hemisphere. it's your choice is brazil, colombia is extremely competitive, you've got venezuela, brazil, ecuador, if you have offshore, where do you want to be? i think mexico has the chance to be the most competitive. i think the third is dutch. mexico's ability to document these are forms i think we'll get it stature from the transparency, from the edge of the, from the openness, from market competitiveness. that has credit from the international stage. finally, come to be strategic supply by 2,025,000 on opec reduction peaks, mexican
production if all goes well will begin to come on board. mexico to take that place and be very strategic. so we called this report energy reform at last questioner because these reforms as impressive as they are are necessary but not as sufficient condition to create these reformed. you've got of legislation and regulation, terms, see what you can book, how competitive they are in speed. but we also collect mexico rising because there's no question that while the question that while the road to get up in this will be bumpy, there's no turning back now. the government has made this commitment. so it's a remarkable accomplishment and i can only say that mr. ambassador, mr. secretary, we wish you well in completing it. thank you. [applause] >> thank you. they're going to put some extra
>> great. please. why don't i take the furthest away? so again, i'm the director of the adrienne arsht latin americans and and a want to thank all the panelists for coming, enrique and david, thanks for the fastening presentation. last week i was reprimanded in an interview by a journalist for being too enthusiastic about what mexico has done. so to my panelists, that's a warning because i'm going to try to redeem myself. i'm going to try to be very office is a. i'm going to try to censor my questions on three principles -- printable areas which is the mechanics of reform, the business implications of the reform, and then what are the
implications for mexico and mexico's future. and i'm not an energy expert. i'm just a local, lay down washington policy civilian. so let me start with duncan and ask him for his comments. but i'd love you if you could please post comments within the context of what is this going to mean for a new north american revival, and particularly in energies industry but given as we for that nafta is now just coming onto its 20 years, what is now the 2.0 and how does its energy reform the in that? >> thanks, peter. and thanks for inviting me today. first of all i would echo the sentiments that have been expressed already, particularly the paradigm shift. of those of us have been engaged in mexican energy policy worked for a number of years, i fell into it almost by accident back in 2005. and it emerged at a meeting at
mexico city. we were talking about the future of north america. the one question that kept coming up was what do we do with energy? remember, the situation was very, very different back in 2005-2006. the big concern in the time it was energy security. the big concern was where are we going to find the energy company on gas that we need to really power our economy? fast forward eight years, we're in a very, very different situation. the united states is now in a situation where it's looking at regional energy, or north american energy independence or autonomy. it's looking at a situation where it's been through and going through the shell and type of revolution. and feels much more secure about itself. this is a very important dimension understanding, the way in which this reform in mexico has been received in the united states. there's a big difference. if you talk to people in houston come you see a numbers excitement about the business
opportunities that are there. you see people in washington, that's great, we are happy for you guys. which is a different that was in 2005, or even 2008 when the last attempt to bring energy reform was put on the table. and ultimately failed. north america at this point in time i think is in a much, much better situation than has been in the past. and mexico's reform is kind of like the icing on the cake. because it means we are now going to see potentially another million barrels of oil production per day being added by 2025. i would put it on little later than that. we're going to see come hopefully, rising levels of natural gas production. and we're going to see the possibility of a think this is the key point, more than just production figures and reserves, we see the potential now for real energy market integration in north america. .. integration in north america. it it touches on many things
that enrique pointed to. which is that we need to guarantee not just supply but stability of supply of energy for the producers of north america. we need to keep energy costs low in the united states and in canada, and we need to lower them significantly in mexico. partially that's for competitiveness and partially because people need it. some people in mexico spend up to one-third of their income on their electricity bill every month. in the north of the country, we need to lower those electricity costs for social purposes as well. the energy reform that we're seeing go through the congress right nowsethingat so i think it is a game changer and there is a lot of work to go to happen and in the first 120 days of this year, we are going to see that and i know that you graduated 1997, something like that and i was there and i don't know if they gave the same speech that he always gives at the graduation ceremony i had to
hear it like 34 times as the director of the program, but he always said [inaudible] iain this moment is like that celebrating the graduation. it's moving forward on to the next stage of life, but they are going to begin now. there is so much work to do and that's why it's important that we keep our focus on the oil and gas sector and the questions that david brought up earlier. >> that is a great said way for the question because he comes from ostend room with a very academic at and it's certainly not where he spends most of his life because you are the only one on the panel that was an oil executive. the and in mexico. so talk to us a little bit about what is going well through an energy executives mind right now and how is this seeing him as a
game changer and how does the spanish, french or the u.s. energy executives choose between now mexico for trinidad, what goes through their head? >> first of all, thank you mr. ambassador and secretary for being here. just like in your business sometimes they use these things as a strategic plan. the tough part is the business plan to implement that mission. that's the toughest part so i think all of us have to talk through the challenges that we are facing. i have to say but maybe this was the easiest part of the whole energy reform part. and still, because of all of the race expectations i think that there is a tough road ahead. i certainly don't represent the industry, but being working in
the energy sector and the oil sector for 34 years, five of those in mexico city, i want to basically focus my comments on three areas and then we can get some conversation from the audience. i want to talk about pemex. pemex is not going away. okay? pemex is also not going to be privatized. i don't like the word privatization. i refer the word recapitalization. pemex one day will become a control in the participating growth of what is going to be an extremely important company such as pemex. so forget the privatization of pemex. hopefully what we will see is the recapitalization of pemex. but we have to be sure that pemex is able to compete in this new world. pemex cannot play a very important role in this whole process if it has one hand tied behind its back.
i am extremely pleased as an academic that about 10% if not more that is going to go to the technology and science, that is extremely important and that is one of the areas the secretary said we know is very interesting pemex is going to go through what i consider a very important brain drain. as all of these new companies coming to mexico to cooperate, but me assure you that a lot of the technicians and a lot of the geologists' and engineers are going to come from pemex. a lot of the companies are going to high your folks from pemex. pemex also in the next five years faces a lot of petroleum engineers and geologists at about to retire in the next three to five years so there is a huge technical knowledge based challenge that pemex is going to face. the most important thing for
pemex is to the culture of the company. it is not technical expertise and its engineers and its geologists'. it's the culture of entrepreneurship and that the company learns in the business when we become international. today, for example, they have joined the u.s. gulf of mexico with ruechel. hockley because it will make money with shell because of its learning along with them and how to develop the state border resources like colombia is going to begin living in the waters of the caribbean. so it's very important that the re-engineering of pemex also becomes a very important piece of this energy reform. my other comment that we are going to be looking at from i think of the oil company's point of view is a downstream sector. pemex was shown here. there's about 2 million barrels
a day and about 1.6 million barrels a day of what we call the boilerplate refining capacity that there's about 1.2 of the capacity and that therefore the huge gap of over 600,000 of barrels a day of imports not only of the refined products but also natural gas and a value of over $20 billion a year of deficits for the imports of the refined products and gas so that is an issue that also has to be addressed. the refinery about a ten or 12 billion-dollar project has been paid but i think the refining sector is going to be extremely important. in mexico we are going to see if they can do joint ventures in the u.s. with the u.s. refineries. it takes anywhere between three to seven years to build a whole refinery system, so maybe there are some joint-venture possibilities in the u.s. gulf of mexico. last, and i think it's important
is offshore safety. we were recently in a meeting in tampa talking about offshore safety in the gulf of mexico. we were very pleased to see that fined was there and have an important presence because as mexico begins to drill we already had this scenario and we have the submersibles that are already drilling about 30 miles south of the u.s. maritime border on the area. what happens on how we are going to manage the event like the deepwater horizon in the waters. we do have the agreement. it's a very good basic agreement between the united states and mexico and how to handle from a technical point of view and major event like this but those of us that went through the deep water horizon know how difficult
it is to manage such an event so i think that offshore safety is something that also appears not only the industry but also the united states government to be concerned with. >> let me just ask everyday wife -- enrique about managing expectations in mexico i mean, it's with this reform promises a lot. but a lot won't come so quickly. so now in the polls are saying that the reform is not that popular, the economy has yet to take off in a very definitive way. how does the president showed that? how do you keep going in this
political part because as you try to fix the policy, you need to try to keep the public's right. >> it was very easy to -- when will. in the country because one. and i think that shows the leadership. now with some polls it really depends as many what type of questions you ask you describe the benefits for this type down and the majority of the people pay and lower costs in electricity or gas if you want
to private tv to privatize you have a very high responsive note that these are not and it came to produce more in mexico and that will increase the cost of electricity to the process, so i believe that these reforms will show the benefits to the people. we have also been very careful following the disruption not to establish a timeline that is not going to be achievable. we've believe that as david study describes accurately it is going to take time and that three former establishes already a timeline and we are going to follow it. then we can migrate from those contracts, from those entitlements to the new contracts. that should be put into the discussion in congress and the
next era. once congress approves, then we are looking for a one year period of time in the transition to the contract you see up to two years for the first round and round 2016 might be a around that time and as many were today no the reforms in brazil and colombia we are fully aware of that now. we also believe that there are some that will benefit from this time this new contract sooner than others and shale gas and oil in the northern parts of the country or the water in and around the fields would show an increasing production than big water in the gulf of mexico. so we will see some benefits coming and we are estimating that the oil production would increase from the 2.5 million barrels per day that
we have now to our town of 3 million by 2018 and 3.5 by 2025. we believe that is a fair estimate. we also believe that there's an increasing production of natural gas from the 5,700 to that that we produced today to around 8,000 by the end of this administration and to then around the 2025 which would allow us to reduce or in part substantially from the u.s. and decrease the cost of the gas and electricity. so we believe that the numbers, are there. the numbers we have seen many companies have made those estimates and show that around $10 billion by the end of 2018 we believe that that's fair. that's increased by 50% of the investment in mexico today. so that is a huge jump if we
achieve that number by 2018. but those are estimates from the private sector think tanks. now on jobs we believe that we will increase half a million jobs by 2018. over 2.5 million jobs by 2025. so, those are the estimates that we have put forward to the mexican people and we believe that this is obviously a cheating in the midrange and the longer range and we do not have something immediate in order to get it right. we need to do it one step at a time and we are committed to do it that way triet >> let me ask you and i think this just sort of outlines where we are and where we are going to say it now, fell and for us for the civilian like me, how do we measure progress around the road, what are the milestones that we should all be looking for that this is going in the right direction and this is on time and as you do that, who has
done this really well and what example should we compare mexico to as a best case scenario? >> i have the four bellwether's i guess i would watch and the next six months. first this legislation and the government is already prepared to ask the legislation for implementation that we need to see what to the frameworks look like and what do we know about the terms and how predictable will it be so legislation is the first benchmark and the second is going to be budget because if they get a significant budget allocation, if we see that the agencies are funded so they can hire outside help to be able to stand up to the safety rules or the environmental rules or the licensing then we are going to see that they can predict i guess as the regulators are going to be in the position to move swiftly when the time comes. the third is that outsourcing particularly in the power sector you are going to need a lot more
information about the nature of the distribution about whether there is metering at the houses and what are the sizes, what do we know what the quality of transmission, that has to be organized for the investors in a way that they understand so why would be watching the budget and is there any new help on their and forth with the leadership. are we going to see a chavanel leaders on these efforts? prosody the cup president obama brought in the guy that's going to fix this and he has a mandate that will tell you what this looks like so we should start to see the leaders and the environmental efforts probably. so those are the four bellwethers for me. brazil did it right the first time but in the second reform has taken aback. so i would say the opening to the upstream norway and brazil have follow that model, the transparency, the u.s. and norway have done it and algeria
have done it and iraq and libya. the system of open criteria you opened the envelope and see who wins that the independence of the regulators come and i think it remains to be seen if there will be the ct ks or the performance standards or what kind of regulators they are going to be what norway is another example and brazil, colombia has a terrific. so those are other countries that have done this well. and on the front i think it is pretty much only norway that has done this with the kind of political independence, fiscal independence. >> it's worth spending a moment to talk about the regulation because that is the key element right now i think in this and the question a lot of us have is we have a very small underfunded national commission at this point in time and in the relatively short period of time we are expecting them to either find the human capital and their resources and mexico or bring them in from outside and that is
the danger i think here. david said it very well is the commission going to be allowed to recruit internationally will it have the resources to do it and will that be an attractive position because if it is not a strong and autonomous regulator, then this will be a problem for both companies wanting to invest in mexico and for the benefit distributed to the mexican people. >> what role can the institutions like yours and in texas play in cooperating with the technical assistance? when there's a lot of universities that have a long relationship with mexico and pemex. we have members working now on the shale gas development talking about the water resources along the border and the development to the water resources.
so, i essentially, our universities and partnerships which we have with paula technical and the national science foundation, the resources are there for us on our side of the business to add value to this whole process. and remember, there is a heavy involvement in their research and partnerships in the american universities with the private sector. so yes, there is no question that the u.s. institutions and academic institutions and in the corporations in partnership can play a key role in this whole process. >> this is a very important issue on independence from the former leaders and in the constitution reform has to take notice of these. one of the stronger elements is
that in the constitution but regulators and the down shore regulators have achieved some sort of constitutional status, and they have granted technical autonomy and they have granted something out of the sufficiency so what does this mean the? for the service will what they provide up until now it would go to the ministry of financing and to the budget so they won't be allowed to keep that. now they were allowed to keep that and they would be allowed to have it in the commission in the trust account up to three years of their budget. that means that they would have an account for almost three years of what their budget is like. so they would have enough
resources that would be provided by their own services to be able to do all these type of things. now we are evolving from a system that is out regulated and to the system that would be regulated by others. so we are migrating and we are fully aware that we have to be very careful. in addition to that, there will be two new members that are the five member regulators and seven member this is also due to increasing the workload so we believe that they will have the project and the autonomy to the level to be a fundamental part of that model that we have achieved in the constitution. >> all of you have mentioned the word transparency in your remarks and in your comments. and clearly the reform aims to turn a page.
how did the mexican government guaranteed that transparency particularly in light of them becoming more independent but how does pemex improved its independence from the very beginning? what are the steps of transparency really concrete steps that people ought to be looking for and that one would expect the government take let me begin with duncan and a question for all of you. >> the first step is to learn what the best practices are out there in the world. the second thing is to take full of vintage of the technology that we have available to us. we had a rundown of how what would it work its way through in the payments, etc.. that information needs to be publicly available online the and easily accessible. it shouldn't be hidden behind a different hurdles that you have to get over. and the third thing that i would say is the industry needs to play a role in making sure that things remain open and let's say
the industry was hysterically not the most transparent industry. in the recent years it has begun to pick up and realize that transparency actually worked in their favor and i would say that civil society plays a very big role and the government should work with civil society working with think tanks and etc to make sure the data is available to the public. >> i think that the industry has changed considerably in the last 20 to 50 years. and i feel we do welcome transparency. we do welcome also the governments. so, we have many countries in the world that i am not going to mengin triet we have huge challenges because there are a lot of things the we but like to implement that is a part of the corporate core with the shareholders and it's extremely difficult to implement. so, i think transparency not only goes from the industry, of but also transparency and the whole process.
there is a lot of data both seismic and a lot of different data that we do have to share. we have consortiums talking about universities and in the universities in which five or six different public companies are participating in the consortium and the sure knowledge and they share the new licenses and procedures and sometimes transparency is important, but good governance within the country and which we operate is extremely important and i think that is going to be the case in mexico by the way. i don't have any question having lived there and having trouble there for the last five or six years regularly that there is a cultural change that there is a new re-engineering not only of pemex but there is an engineering of the mexican society. we have to be -- by the way i didn't mean that the reform process was easy. folks have to understand -- i did say that but i mean i didn't
mean that. people have to understand the first thing when i was sent to mexico, believe it or not, my corporation sent me 43 week course of mexican history and you have to go back to the mexican american market 1847, 48 people forget the u.s. marines were at the airport in 1914. there's history behind this whole culture that also ties in too much of 1938 that we have to understand the political and the historical courage that it took the administration of the president to move this forward. so yes even though from the historical and political context, the process was difficult and was not easy. i meant to say that from a business point of view this is the easy part and now comes the
implementation so we can get to those targets the we are looking at for 2016 and for 2020. >> i would just add really quickly, peter, that it's remarkable that the constitutional level you have to understand the articles have constitutional status of revenue transparency, contract transparency, cost reporting transparency and reporting of the distributions of the national fund are all basically commanded that the constitutional level. i don't think this is in the country in the world that has a constitutional level directive for the transparency that is impressive so the smaller steps that will be important will be looking at what the options system looks like and presumably there will be transparent and joining something like the extractive industries transparency initiatives will give up the platform for the civil society to participate and that has been a popular international movement that has shown some good results. >> let me give you the last word before an open up questions. >> there is a transparency in
the administration and what you have said is true we went to different countries to see how the models work and we learned from those who have transparency elements that have worked well and we have put them in the constitution so that we could have a mandate to make them enforceable in the next steps. and most importantly they are not satisfied with the way that transparency has been dealt with the extracted sector in the past. so that is a strong situation and we hope that as a society. the idea is very important. >> i would like to bring all of our other guests here.
why don't i begin with you because i see that you are close >> thank you very much. there is perhaps it is on purpose but there is some ambiguity about the issue of the reserves. and david come in the paper he says it is clear that it fits the intention to allow the companies to be able to benefit from the future value of what they are doing. i haven't heard you quite say that. could you tell us how the government of mexico has used this going forward because that is the fundamental issue. >> what the congress has achieved in the constitution we believe this is the standard practice that has to be established with oil and gas of the mexican nation, but those would also be available to report to the future economic
benefits of the contract for filling down the request the companies have been different markets. so, we are going to the international status that's how we see that article. >> i would just add that to the sec will ultimately what to look at the contract and see the risk and as there are security entitlements. and if they exceed those in the form of the contract, then they will make a determination of those reserves are able to be booked by companies. and in terms of the political culture from talking to the colleagues here and talking to some of the parties in the preceding the threshold for the legislation is lower than the threshold for the constitutional reform, the entire initiative makes no sense in the ability of the companies to book reserves so there is a deep knowledge and a recognition on the part of the government that if the companies cannot book reserves, then they will not invest and they wouldn't have gone through all this effort to try to force this constitutional change and
knowing that it would take a constitutional change without it, and i think that in the legislation, that is the two big bellwethers are going to be how much the definition of the scheme is to find the legislation and how much visibility there is on the term because of these companies have their models and a crunchy danny and how they are going to turn on investment and take mexico and not kurdistan or some other place and so earlier we see the visibility. >> my question is about the national content and what the thinking is are not the national content that has been a big issue in the hemisphere and in the extent to which mexico deals with the national content issue will put it either more competitive versus the other options or less competitive.
>> one of the constitutional articles that we saw in the secondary law would have established the percentages in in the areas and in the timeframe for the national context. what we have learned in other countries is that it is important to one of the outcomes to have a strong national industry that produces the surfaces and participates actively in that transformation and the oil and gas sector and we are aiming to that but it would be the second legislation that we would establish. we are also aware that some of the examples in the other countries have been the street rules that have slowed down the implementation of the reform or that has made them more expensive in each process of implementation. another strong element is establishing the investment we were looking for the company is
right now based in the u.s. the would be able to be based in mexico and have important offices and interviews in new products there in mexico in order to bring them instead of from the u.n. to be able to buy from mexico. and they are achieving their own private sector has become the worldwide producer of services in the oil and gas sector so we are aiming at that and we are also aware that we have commitments in the free trade agreements that establishes that we have to have equal treatment of investment, so we have these in the same way. >> i have to mention as we are sitting here today there are a number of mexican companies today in houston already talking to the u.s. company's particular
surface contract companies so it isn't only from the point of view of the dollar's going but i think the mexican companies are going to come over here to the joint ventures with u.s. corporations to have that knowledge transfer and that skill transferred you are going to see in the next five years a very considerable number of a very good quality of companies that are going to be the future of this industry itself from the local content point of view of the case is indeed different. in fact some of the ask the question about nafta this is an area now where the infrastructure is going to help with this relationship between the mexican small companies and medium-sized companies that provide services and equipment on the products to the khalil and gas industry in mexico. that to me is a huge area of growth by the way. >> it's important to remember that we sit here in washington and say we don't want the
requirements to be too high because that would be a barrier to the investment but we also don't want to do it too low because a part of the gulf this isn't just about all leal and gas. it's about actually developing the economy and increasing the competitiveness and adding jobs ultimately and if we want the reform to be politically sustainable, the mexican people need to feel the benefit from it and that's why i think it is incumbent upon both business and government right now to work together on what would be the fare level for the national content and then for the government and pemex in particular to work with local providers in the country to actually develop the national indigenous capacity to do this because that is where the long-term benefits will be felt. >> back of the room, sir. >> the ibm not from the brookings institution. first under secretary, thank you
for coming out to washington and for your powerpoint presentation, which i hope the atlantic council will place on their website. my question concerns the valuation of the blocks. the prior year to the international markets, who will determine the valuation of the existing fields and what are the criteria that would be used to determine that value? >> we will leave that presentation to the atlantic council and thank you very much for having me. the ministry of industry would make that economic balance. the information from the commission and the ministry of finance would make the fifth collaboration and then i would be taken off by the national commission on top of the mexican state, but that will establish
the framework but the industry would require a case by case analysis because the fields to the conditions so we will allow them to establish a framework that would be up to the ministry of energy responsibilities and minister of finance responsibilities to each contract depending on that quality of the field. >> i would just say this is an area of risk. to take an area in the deep water and say this is a framework that we are going to apply and these are the terms creates a way to scale about a lot of the acreage at one time for the optional where the market will turn in the price that if this field by field,
that creates i think a significant drag on the bureaucratic process and the ability to slow down why it is one field of versus another 100 certain terms of i think that you run into the problems of that being done as a way of getting pemex to people to get some preferential rights and i know that isn't that these fine but that is something to watch in that process is what is the most efficient way to get those blocks down for option and how much flexibility will there be for the companies in which case the higher risk in the shale gas and other areas because of the cost to lean towards the concession versus the profiteering. >> let me ask the best practice example who has done the value acreage correctly? >> we have done it pretty well. at least i would say in the deepwater gulf of mexico. i would agree. we've run the seismic and we did a geological the assessment and make the data available and then goes up for the markets to determine the price. when we have seen high risk like
and shale gas and the deep water in 1998 when the prices for $10 we provided tax incentives to encourage people to go into the business and to go into the deep water and both of those incentives expired once we did that, but what is the area of high risk and we wanted to maximize it, but we did it by area, by the type of geology rather than by field and i think they all do something similar. even the u.k. as one scheme and the marginal field and another one for deepwater and makes it easier bureaucratic on the licensing agency. >> the variation which is important among the different types. >> deepwater versus shale. >> the variation by the legislation. >> the gentleman in the back has been waiting a couple and from
the george washington university. mr. duncan mentioned about the price of electricity in mexico being a little bit too high especially on the northern part and i'm a witness of this. even though the production will open up and the production costs will slow down because of the openness of the distribution in electricity and gasoline and the electricity is still controlled by the national company what opportunities will be there. is this even considered about opening up the national company and what opportunities could be there for the business? >> that is a very good question. the other part of the energy reform has a strong transformation in the electricity sector. this is the field of let me just give you some of that important
ninth. the transmission are monopolies, so the way that this reform allows the private participation is through the contract with c. fpo busbee 61 cfp power company. in the way they did their own transformation that allowed the company to establish the contract that would allow them to build the new transmission link for and the price of electricity comes from that cost of the fuel used to produce electricity so there is a big opportunity there for the natural gas to have that in the whole area. yet now the other important part in mexico is the inefficient system working along 20% of that electricity that we conduct. and this is due to the technical failures and in some eerie as it is more like the social problems
that have been introduced and people are not paying more people are stealing their electricity. so through this we will find a mechanism to make them more efficient, but if you see the percentage of the impact having a market of electricity and having some substantial natural gas in the renewables that can put a mix of the production of electricity in a way to hold down significantly. that is 80% of the electricity to make better prices to make it more competitiveness. so we hope. at least a huge transformation as well and i would suggest the secretary for electricity in january it is very important. it got to the post secondary position but it has taken much more of that attention will.
>> please transmit to the undersecretary of the floor is open. i know there's a section of the report on electricity to the to do you want to summarize that? >> we would be delighted to have her here. there are -- i think this is an area where there is great opportunity. but the framework makes all the difference. it may be that in mexico the generation is to be the first area of the opportunity rather than the great extension where places can have relatively small sources of generation and provide electricity to, you know, something other than the major load centers and so their needs to be visibility and flexibility in the legislation to allow those relatively smaller generators to be able to sell directly to customers. relying on the fee would cse with the collections are not good enough for the transmission
sort of security when the transmission is already weak would be a sense of security for the investors so some flexibility would be helpful. a subsidy is the other because as long as there is residential the target is going to be the industrial consumers producing their own electricity and to create a system where you can extend transmission and bring all this capital at some point you're going to have to open up the residential base and no one is going to be able to provide electricity cheaper than the existing subsidized system. so that is i think in the initial draft of the reform there have been a transitory minimum that calls for moving from the general subsidies to the targeted subsidies which would be classic economic theory. right now everybody in mexico city gets there first to kilowatt of electricity free whether you are carlos or you need some income subsidy from the government. that's a very expensive system. semidey in the secondary
legislation there would be another opportunity to take a look at that. but that is we say the value proposition is the question is this type of questions in the framework that still have to be worked out. >> when the word subsidy was mentioned. >> many in the room know it is a bizarre system in mexico. it really is and some people in up paying very little and when you jump over the sort of barrier to the residential consumption all of a sudden the cost of everything in the complicity that you have consumed goes up enormously. and so, working out how to remove the subsidies, but at the same time lowering in the energy cost i think is a part of the conundrum that we are looking at right now. and it's very important in political terms because this is where the average mexican i think is going to feel the benefit of the energy reform. yes, we can talk about jobs and the competitiveness and all the other great things that the average mexican on the street wants to see that the promise of
low energy costs and lower fuel costs as well really comes through in a reasonable period of time. >> i'm not an optimist on this but once you have a greater participation by the generators in the system and once you bring in these lower-cost of natural gas which doesn't necessarily happen because the reform happen just by building a pipeline across-the-board to get the gas into the market, that i think we will begin to feel those benefits anyway. >> we are willing to take the questions from the web as well. >> i have had the good fortune. i worked for pemex a couple of years and looked at hundreds of wells and kilometers of seismic and geological potential is very good and i think you will generate a tremendous interest. my question is turning the issue of security for operations, how do you think that will play out
for drilling the wells especially on short? >> thank you very much. one of the elements of that reform is an institution is going to be created to overlook the safety and the environmental issues which is going to be dependent on the ministry of the environment. and that was created as your same pemex regulates a self-regulatory institution regarding if the financing happens then they have to make a report to the ministry of industry and would have observation of the severity. >> i would add the u.s.-mexico agreement finally cleared up and the u.s., chris is a part of the
budget deal and at the time the state department was launching that we thought it would be the first step to cooperate with mexico and now i turn celt that is pretty completely that this would be the area for the corporation because we certainly learned a lot about the safety and at least in the deep water oil spill prevention mechanisms and commercially available systems so that is one of the areas over the next month we could have some bilateral columbia the cocoa operations. >> i want to underscore that process is already in place and has been in place before the reform because there's a great cooperation and the coast guard and work in the u.s. state department and coastguard private industry and in november there was a meeting in tampa in which the mexican officials and coast guard officials for their
work so the process is in place. all i wanted to underscore and highlight again through mabey was saying everything in this world as easy as far as the agreements are concerned, the implementation is a very difficult challenge and deepwater horizon told us that. the concept being able to work hand in hand is going to transfer a lot of knowledge of how we handled the business. so, i think that is an area that we are going to see quite a bit of encouragement on a modeling on offshore drilling but also the pipeline transportation we have seen a number against mexico and also an the onshore field work. >> the public security onshore in particular we are going to see that is going out into the deep waters of mexico but as a question i get asked a lot my
standard response is look at where it operates a globally they don't always operate in the safest places. they know how to deal with the security threats. the one potential exception i would say is the smaller operators that might benefit from a boom in the business in the northern mexico. that's where we have to keep focused on the questions of the rolph law in mexico and we have to keep a focus on trying to lower the levels of violence across the country, and in particular lowering the cost of doing business because it has to be a disincentive for the investment in the recent years it does raise the cost of doing business when you have to say face the threat of kidnapping and extortion etc. and for the companies that isn't a big deal and for the smaller companies that is something the need to factor in.
>> this year from the role for the bank or the public bench in the world bank and opening the sector to the private participation. >> not that i am aware of. the transformational reform is that you would allow something that happened that seems the secondary legislation that would allow the participation of the private sector's in the generations for the consumption of the strong nearby businesses will. and that has been put into question because it wasn't a
constitutional amendment. but there have been several intentions to amend the constitution or to book a the modeling in place but now it has been unsuccessful so what we are doing now is establishing something that is already there. a third of mexico's power production is done by the private sector. but now what we are achieving in these reforms is not only that they have a constitutional basis, but also promoting the market so that we have the lowest cost producers want first and that would be one of the reasons where we could increase the price in the future because if we have the strong supplies of natural gas in the country, that would decrease the cost of the production of in the independent body in the distribution lines and according to the work cost that we would be able to transfer this to the overall population. of course, there is a task ahead
to get the subsidy system right in order to decrease the externalities' that you have described but this is part of the whole plan of implementation that will allow of lower cost of the production of electricity to reach the deal of the mexicans. >> there is one area how about product branding and detail. if they are privately-owned by the operators but only carry the products from pemex. in the legislation or the secondary legislation are we looking at the availability of private branding, that's number one, the operator of the private brand going to be able to input them into their own gasoline so that therefore the refining can
be met by the new operator, is that model for the downstream marketing of the fuels if somewhere in the vision of the reform? >> of course because we have an irony that we are going to import but there is no benefit of competition for the consumer. so what we are looking at is precisely the secondary legislation to open up the branding service and if that means that when the private sector will do this business and needs to import, then that is what we are currently doing, working 50% to the nitze that would be obviously the process will to increase the production capacity inside the country. the refineries in the u.s., well, the irony is that we have done already. we have a refinery in texas and
it's a joint venture with shale. but if they would want to bring their partners to mexico until they were written to do so what that is ironic now. you can ask your companion to do their own joint venture in the u.s. but you forbid the company to do it in the country will. with the energy reform they put forward in congress payments would be allowed to do those ventures in mexico so we are looking for an important change in the downstream. we have the legal structure without for allow those things to happen. >> for the previous questioner there's always an opportunity for the financial institutions to provide private financing and would be welcomed in the sector it turns out now they're the
number one customer. the export credit agency has the content but i think that having that participation would probably give comfort to some private investors so it's something for them to encourage. >> i have a question for those watching on the web what does this mean for the broad u.s.-mexico relationships? and i'm going to add the commerce, judicial cooperation security cooperation. >> that is a question that i get quite a lot i have to say. what i think has been fascinating and incredibly well handled by the u.s. government over the last ten to 15 or even 20 years is how the u.s. government has respected mexico's sovereign right to determine its own energy future. and the wall that has been placed by the u.s. government was actually giving the foreign service institute and the
officer said to me was this really the result of pressure from the united states that the reform happened and began to come up with a conspiracy theory that was bizarre. this sounds like something from one of my class is in mexico. this didn't happen. they had always been incredibly respectful in terms of allowing mexico to determine its own future and this is the result of a national the date but the implications for the relationship i think are very positive. partly because of increased business integration but mostly the point i mentioned early on is increased integration of the energy markets which means they see in integration of the production system in north america. what we are looking at for the future is that all of the countries in north america depend upon each other and to really enhance their competitiveness and that is what this opens up the possibility
for is lowering the energy cost in mexico and guaranteeing the stability of the supply of making sure that they produce and can stay there because the energy costs are lower. and in other areas you mentioned immigration security for example. these are areas where there will be a very positive net benefit for the mexican people and mexican economy and already we are seeing the the zero migration from mexico to the united states. partly that is a demographics here in the united states and partly the result of the economic opportunities and this can only help. some of the estimates proved to be right about 100,000 new jobs in the energy sector that is something that we should celebrate because that means that more 16-year-old mexicans see their future in the country as opposed to leaving. and on the point of security, you know, if you are a young man that lives in a marginalized
area and you have no economic opportunity there are very little traces so what are you going to do are you going to migrate are going to the potential the organized crime? and this offers you a way out. it means to be modified to of the changes happening of course and other changes in the economy, but i see it as a very positive thing and will relieve a lot of the pressure on the bilateral relationship in the long run. >> did you want to add something? >> let me ask you another question for those watching on the web. first the bilateral relationships and now this reform in the ttp that's being negotiated and some of the negotiations. >> i think as an exporter probably in the oil and gas and the domestic markets to more
value there is for the state in a different position because for us the ability to export gas given the enormous amount of gas that we had and the potential to export and the relatively low prices, that gives basically something a bargaining chip to use for those trade negotiations that we didn't have that was indispensable for us. i think that mexico would be the collateral beneficiary of that. i'm not so certain they are going to become an exporter in the next ten to 15 years given the incredible amount of demand in the low price of gas right now. so i'm not so sure that it is as big a deal for mexico in the trade agreements as it is for us. >> did you want to add a view on that a bilateral negotiation? >> the first objective in the reform of the sort is to have enough oil, natural gas, petrochemicals produced in mexico for the markets.
i think that you're right mexico will not be an exporter in the near future. the first task is to reduce the imports as we have on the natural gas and that will boost a new country and lower the price of electricity. but intel long run if the reforms are made for 50 years, the reforms have impacted the short term but mostly in the long term, so i think that we will see a different scenario regarding that. for those benefits to come into place you have to start out some of the very important things that we have done on the very first step and we will follow the timeline of that reform established, but we have our ai is looking into the future in those fields. >> the main thing is that we have to look at what is going on in mexico also from the perspective of the united
states. this is a strategic regional revolution that is going to take place. if you look at the keystone pipeline, between the keystone pipeline and all of the west and east and down to the east coast pipelines that are going to be opening up here in the next few years the u.s. gulf coast and finance system is going to have the flexibility and capacity of another 3 million barrels a day of capacity, namely the canadian crude coming down. .. displace? what foreign crude coming into the gulf coast is going to be displaced? if i'm a refiner in the gulf coast, i can tell a importer of crude the price differential verses wti is going to be different because now i have canadian crude in the pipeline
that all i have to do is open the valve. the same thing with lng. i think what we're talking about is that this mexican energy reform is really going to open a whole new strategic view of a regional energy matrix that we haven't seen before, that we as >> i think if you guys can get your heads together, certainly from the energy point of view, we can certainly become a power to be. there was a headline yesterday, forgetting the news service, about this energy revolution and how we're going to drown in oil because of all the oil that's going to be available. mexico, united states and canada, it's very important for all three economies and also for this reform to move forward. >> if you play this out into the future, after mexico meets its domestic demand, what can be interesting or for the hemisphere is the product trade because most of u.s. products are now going to the hemisphere, but central america needs gas. and so the you depending on how
widespread the shale formations are in mexico, you can see 15, 20 years out that mexico could be a supplier to central america. and a lot of the problems we've had so far on fuel oil dependency in the caribbean and very high carbon consumption in central america could be resolved by cooperation between mexico and central america or mexico and the caribbean. there hasn't been a source close enough, frankly, to some of that territory to be able to get gas to them. colombia has talked about it, but i think, you know, 15 years out we're probably talking not only about north american, but hemispheric on a large scale. >> also in central america, mexico can play a very important role. >> well, we, i'm sure, could go on more a number of more hours, but i'm going to have to draw it to a close. i really appreciate everybody's participation. an announcement, for those members of the press who would like to interview the undersecretary and some of our guests, if we could meet in the back of this conference room at
the end, that would be great. just an expression of thanks to all of you for participating. it's been an amazing, amazing thing to watch in mexico not only from a point of view of the technical ability to have passed this reform, but the prowess with which you did it. not only this reform, i mean, in this past 12 months in mexico there has been an education reform, a telecommunications reform, a reform of the financial and tax system, a political reform and now culminating a year and a couple of days into the first year of president pena nieto with an energy reform. i think you could provide washington with a harvard case study about how to get some things done. happy holidays to everybody. thank you for joining us. >> thank you very much. >> thank you. [applause]
[inaudible conversations] [inaudible conversations] >> bob ney served in congress for 11 years before resigning in 2006 amid corruption allegations. he went on to serve a year in federal prison. he's written a book about the experience, and on our companion network, c-span, bob ney is our guest on "q&a" at 7 p.m.
eastern. and at 9 p.m. on c-span, "first ladies. influence and image." tonight we look at mamie eisenhower. >> we now have secular norms instead of theological norms that govern our acceptance or rejection of the ways in which a god or gods or goddess can speak to people and what impact that has. so, for instance, the branch videos. you had david key rich who -- deremember who said his insights helped other members of the community understand the bible better and allows them to understand that they are living in the end times in a way that most americans don't accept. well, that by itself doesn't seem to be a problem, but when it leads to other elements, then
that trigger both law enforcement's concern as well as the popular press' concern, then suddenly this idea of somebody listening to god and having his followers do things that seem to be aberrant to national norms, that's dangerous. and that needs to be policed and controlled. >> wes he yang religion professor or peter got chalk argues that religious persecution is committed by the very government that's supposed to protect us from persecution sunday night at 9 on "after words," part of booktv this weekend on c-span2. >> senators return to washington for legislative business on mono, january 6th. -- monday, january 6th. the senate will vote on confirmation for janet yellen and the senate is expected to consider extending unemployment benefits. on new year's eve, long-term unemployment benefits expire
cutting off payments to about 1.3 million people without jobs. when the senate reconvenes, you can see live coverage here on c-span2. next, a look at u.s. relations with saudi arabia and the effect of a possible nuclear deal with iran and syria's civil war. from the hudson institute, this is 90 minutes. >> good morning. thank you for being here. um, we're going to go for about an hour and a half here. we're going to speak for about 45 minutes to an our, then we'll open it up at the end for questions and answers. so thank you again for coming to hudson, and thank you to our c-span audience, and thank you for this wonderful panel with elliot abrams and brian katulis. elliot abrams was deputy national security adviser for global democracy strategy during the george w. bush
administration. he's currently a senior fellow for middle eastern studies at the council on foreign relations and the author most recently of "tested by zion: the bush administration and the israeli/palestinian conflict." brian katulis is a senior fellow at the center or fur american progress where he focuses on the middle east and north africa. he is co-author of one book, there are also a couple of articles by brian over there on the side, i think they're still available. and, about brian's recent work on saudi arabia which he'll fill us in a bit. in the meantime, i wanted mr. abrams to make a first comments at first, and then brian, and then we'll have a discussion. thanks. >> thank you. thank you all for being here today. i want to start by saying that some of the discussion of u.s./saudi relations, i think,
is overdone in the sense of a hopeless crisis that will result in incurable differences. this is an old relationship, roughly 75 years old. aramco was founded in 1944, and there have been a lot of ups and downs. i mean, whatever the challenges today, think of 1973. the arab oil embargo which you could, in a certain sense, call an act of war by the saudis against the united states, or think of 2001. so the relationship has been through crises. um, and survived them. and another positive point, the relationship is more supple, thicker today than in many years in the past. there have been times, i think, when the relationship was
king-president. that's about it. you now have an institutionalized relationship. there is a mil-mil relationship. there is a cia-saudi intel relationship. there's a dhs-saudi interior ministry relationship, fbi. there's a treasury-ministry of finance relationship. it doesn't just depend on one or two individuals. um, obviously, the relationship is, is based to a very large degree on oil, but even there i i think one should expand that a little. there was an alliance during the cold war against the soviet union. there was an alliance after 1979 against iran. there was also an american appreciation over the last decades of what i would call professional, reliable saudi handling of oil as the world's
pain oil supplier and of money. by the saudi treasury and investment authorities. it has been an alliance of two very, very different societies. that can be hidden. i mean, if you're an american official, you know, dealing with foreign minister asud who's a graduate of princeton, you don't have the sense that you're dealing with someone who cannot that gate your culture. navigate your culture. but still, tease are two very -- these are two very, very different societies when it comes to matters like religious freedom, political freedom, treatment of women. i think that's going to be a growing problem. it wasn't a big problem for many decades. we had a lot of allies that were very different societies and that were in some cases pretty unattractive dictatorships starting with josef stalin in world war ii. and we went through a long
period in the cold war when the internal situation in a friendly country didn't matter to us. it matters more and more. now as human rights values get -- i hate this word, but globalized and as america pays over time generally more attention to those questions, we no longer just say, oh, well, that's a different culture. and i think that's going to be more important, because what has been missing for over the decades has been the saudi end of that. that is, we heard from the royal family. we didn't hear from the people of saudi arabia. there was no visible civil society in saudi arabia. there is now. partly because of technology. there's twitter, now there are blogposts. now the saudi people appear just a little bit as actors. that's got to increase, it seems to me. and that will increase over
years when saudi oil is less important to us because of all these trends toward north american energy independence. one would have to assume that saudi influence in washington will decline rather than growing. there's, obviously, a crisis of confidence here today over syria, over egypt, and particularly over iran. and i think that the saudis have relied on us since 1979 to be if a confrontation with iran, and we have been. and they're very worried, i think, that now the united states may decide not to be in a confrontation with iran. and, of course, our views of iran are fundamentally different from theirs. their problem is this is a powerful persian shia country. our problem is with the islamic republic. and if it weren't the islamic republic, if it were a democratic iran, our problems would largely dis disa appear,
but it's not at all clear the saudis' problems would disappear. we can come back to that. i would adjust one other thing. the crisis we're having in the relations now with the lack of good communication which i think can partly be blamed on the administration, but, of course, several of the top people in saudi arabia are very old and sick. and having the kind of relationship we had, let's say, 10 years ago, 15 years ago would be far more difficult today. saudi arabia may in the next few years enter a succession crisis. the king is over 90 and not in good health, the crown prince is apparently in worse health. you look at the statistics, we may get a succession crisis during the obama administration. never, i think it's fair to say, since the establishment of this government have we not known
who's next. it's not at all clear that the crown prince can take over, is well enough to take over. and you have that succession problem at a time when the saudis are reaping the end of the brothers -- reaching the end of the brothers and are going to have to confront the question of going to the next generation. and that happens at a moment when tension with the united states is as high as it has been certainly since 2001, and our influence rat the top in saudi arabia -- at the top in saudi arabia is, i think, as small as it has been in a very long time. that's an unfortunate combination of events. i should stop there and turn the mic back. >> yeah. brian, if you would -- >> great. thank you, lee. first, at the outset, i want to say happy holidays to you all especially those of you who are watching c-span, because if you're watching this, you should be watching "it's a wonderful life." that's what i'll be doing.
but we hope we have a good discussion here. and second, thank you, elliot, and thanks to the hudson institute and for all the work that you do. i'm, obviously, from a center-left think tank, but i -- and don't agree with a lot of what you write in the weekly standard, or elliot and i have been on panels -- [laughter] >> i agree with everything. >> i'm enriched by it. and your thinking. i hope the dialogue today and all of the work -- yesterday i was just reading the latest edition of current trends in islamist ideology which is a great publication this institution published -- >> yeah. >> puts out. again, even if i don't agree with it, it helps enp liven my thinking, and i think it's very good. what i wanted to do at the outset was maybe make three overall points just to get the discussion going. one, a snapshot on u.s./saudi relations based on the statements from saudi leaders. second, a brief assessment of what see saudi strategy and how they're doing s. and then, third, a comment on u.s. strategy, to structure it that
way. first, just to start out to show you how bad things had become in the u.s./saudi relations, three quotes. one, a letter from abdullah to the president of the united states. at a time when peoples and nations part, we are at a crossroads. it is time for the united states and saudi arabia to look at their separate interests. second, a saudi official here in washington saying that abdullah, quote: doesn't mince words like the president. if the u.s. doesn't do more to reduce the violence -- and here he was talking in the west bank and gaza -- there will be grave consequences for u.s. interests. and then, third, from a diplomatic cable, a u.s. diplomat writing about abdullah. talking about a visit he had with a u.s. diplomat. u.s. policy has now given iraq to iran as a gift on a golden platter.
this diplomat wrote: king abdullah was upset and somewhat emotional, while not specific be; even appeared to be questioning the bone my december of u.s. policy. i highlight these statements because they come from 2001, 2002 and 2005. and i think there's been a lot of chatter about the most recent statements. and quite, you know, visible protestations about u.s. policy. but to demonstrate that there has been a certain consistency of criticism -- and elliott, i'm sure, experienced this in the bush administration -- coming from saudi arabia. for those of you who speak arabic, when i read the recent comments then also these past comments, the phrase -- [speaking in native tongue] came to mind in terms of empty talk, talk that i think in some ways doesn't necessarily reflect the core interest which i think there's still strong interest.
and i fundamentally agree with elliott that there's a values disconnect between our two nations, and i hope we talk about that. but i think, ultimately, we've heard through the years an overtalk and a lot of analysis as u.s. policy has shifted whether it was last decade or currently trying to adjust to the complicated currents in the middle east, saudis have often talked a lot. but when you look at what they do, it's actually sometimes quite different. second point i wanted to make was about the saudi strategy, and i asked lee if he wouldn't mind handing out a paper i did two years ago -- and i think some of it is still relevant -- but then also a recent article about u.s./saudi registrations. but it was an interesting exercise to look at how saudi arabia itself defining its national security interests. quite often we as analysts here in america look at things from our lens and what do we get out of this relationship. but it was interesting for me to interview people not only in the
government, but outside of the government in the sector elliott has talked about, the ngo sector. and be my main conclusion, and you can disagree with this, but it was that saudi arabia punches far below its weight given its considerable resources, both oil resources, given its conventional military power -- something that successive u.s. administrations have had something to do with -- and given its unique status in the islamic world if you neutrally try to assess what its stated objectives especially over the last ten years. it has not done a good job in advancing its own stated self-interest. i mean, we talk about the islamist ideology and the support for radicals, i hope we talk about that because it's a very dangerous one. but quite simply over the last ten years the saudis have said they don't want iranian influence to spread through the region. what they've seen in iraq, in lebanon, in the palestinian territories is the spread of iranian influence, and we can talk about why that's the case. the saudi cans have also said
they'd like to advance, for a decade now, the arab peace initiative. but if you go to them and ask what's your strategy, what's your tactics to get that done, again, grumbles and complaints but not a clear strategy. and then finally i'll just say despite its considerable oil wealth if you look at the situation inside not only in terms of governance and human rights which is troubling, and i as a progressive am troubled by that, when you look at how wealthy the country should be and you look at the economic inequalities and the substantial internal challenges they're going to -- already have and will have when it comes to energy subsidies, dealing with a very young populationment almost every day you'll see this if you look at the arabic newspaper, protests in a certain part of saudi arabia right now. they've been able to keep a lid on this through repression, through using their considerable resources. but be you look at sort of the long-term trends as a clinical analyst, it's hard for me to see how this all hangs together, and
this is compatible and complementary to elliott's point. sorry for going on here, the last point on u.s. policy. and, again, i would highlight -- and i think elliott may disagree with me, many in the room may disagree with me, but i would highlight that over the last ten years i've seen a remarkable continuity in terms of the broad strokes of u.s. policy and not only u.s./saudi policy, but broad policy in the region. i think what's changed quite a lot is the overall strategic context, and elliott has talked about this. you know, from 1933 til 2003 it was quite easier to define and discern what was the relationship. and i'll quibble with sort of the title even of this session, because it's technically not an alliance. we have alliances with european partners. israel is a major non-nato ally. saudi arabia has been a marriage of interests at certain points. oil was at the core, oil and security was at the core of that
bargain. but for decades the u.s. viewed saudi arabia as an important partner to check soviet influences. for decades saudi arabia viewed the u.s. as a country that it could turn to when it faced challenges from nasser and post-1979 to contain the iranian influence. now, whatever you think about the dual containment strategy of the united states in the 1990s, containing iran and iraq, when the iraq war happened in 2003 -- and i know there's a lot of criticisms of it, but my deepest concern was that it changed the strategic paradigm in the region for the united states. that this policy has created for the last ten years, i think, a situation of strategic drift. and one where there's been a lot of tactical, reactive of crisis management. and here i'm not assessing in this from the level of presidential speeches, whether it be president bush or president obama, but in terms of actual u.s. policy, it's been quite a muddle and quite tactical in terms of not certain what it wants to achieve. but back to the u.s./saudi
relationship, i think in this period of competition for influence within the region, saudi arabia's one of many actors trying to throw its weight around in many ways. there are still some mainstays, and elliott mentioned those. the counterterrorism cooperation is actually quite strong on some levels but worrisome when you talk about syria and other things. and that is, i think, we could talk for the whole session about this. the weapons relationship, the military relationship is quite strong. if you noticed earlier this month, another sizable anti-tank missile delivery from the united states, from raytheon. the differences are, we'll get into. iran, quite clearly, i think why have they've been stating publicly their various concerns in saudi royals. but with, again, you ask them if they've accepted this interim agreement and whether they've accepted secretary hagel's recent visit to the region, i think strip away all of the rhetoric, you'll see there's a pragmatism that's there. syria, big divide. and i hope we talk a lot about that.
egypt, again, serious differences, but i think can be navigated which is where i'll close. i think despite sort of the tensions, i think there's common interests. i think a divergence of values, which i agree with elliott here, we need to talk about. but if i had one advice for this current administration, what i hear quite a lot when i'm in the region is that there's nobody they perceive inside the obama white house or the administration as their go-to person. somebody that they can talk to. again, not because we love them and share their values, but in terms of effectively advancing our policy interests. that would be one recommendation of they want somebody that they can talk to and listen to. and i think in some ways their public statements are a reelection of their -- reflection of their own ineffectiveness of their own strategy, to advance their own goals. but also the sense of, well, maybe the u.s. doesn't like us anymore. and i would submit to you that's not a bad thing for u.s. policy.
maybe a potential for leverage if it's exercised in some sort of way. but, again, going back to this broader point that i don't think we know what we want writ large in the region. and i think this is a problem not only of the obama administration, but his predecessor, because there was a lot of confused, mixed messages there. so i think we're at a complicated point, but i don't see a major break coming, and i think it definitely needs to be managed. >> thanks, brian, that's terrific. and thanks, elliott. there's a lot to go on with those two statements. and when i say, brian, hearing you speak, one of the things i think the three of us agree on when you talk about the different problems with, certainly, coming up this saudi society and elliott spoke about this too, i think the three of us agree that it would actually be a good thing, a positive thing if the united states and american policymakers had an active role in helping to steer saudi society in a positive direction rather than a dangerous direction. >> you know, in the old days --
and there were very many of them -- when bandar was ambassador here, he had unrivaled access to the white house. of you know, the british or french ambassador would call up on monday and say do you think there's any possibility i could see the president in the next week or two? and bandar would call up at 3 p.m. and say i need to come over at 4. [laughter] and it used to annoy me a lot. why should they have this kind of access? but actually president bush once said he's not influencing me, i'm influencing him. you know, keep them close. this is how i get a message in an hour directly to the king. this is how i get a reply from the king. and it was, actually -- it worked. it worked. a little bit of discounting because you knew some piece of the message was bandar, not the king.
basically, it worked. and i think i fully agree that i think tom donilon was for a while the point pan for the saudis. and finish man for the saudis. and the system had not been fixed so there's somebody whom they and we view as the key intermediary s. and that's very unfortunate, was we do want to influence them. even punching under their weight, they obviously have a lot ofen influence in, for example, syria. they have an active syria policy. they have a very active bahrain policy, and we want to maximize our own influence, and we're probably not doing it right now. >> yep. and i think to respond to your, the u.s. having an active role in steering the saudi direction, i completely agree with the instinct, but the devil is in the details of how you implement that at time of change in the middle east. what i glided over in my opening statement but quite clearly in the first year of the arab uprise us, the saudis felt like they were on their heels. they lost partners, as they saw
it. they thought that the united states and president obama had thrown mubarak under the bus. my personal view is that mubarak had thrown himself under the bus because of the lack of a credible, economic and democratic reforms. and you just can only contain popular antipathy so much. on yemen today actually played an interesting, and continue, a constructive role. a curious thing that a monarchy is actually playing a role in sort of mediating a pathway towards what i think could have some potential for continued openness in their political system. yemen clearly has a lot of terrorism problems and other things. but the gcc and mostly saudi arabia playing that role. where i think, again, they've really punched far below their weight is this issue of trying to contain iran. quite clearly, their response to the situation in bahrain, they perceive it through a certain lens. their reaction to that, if it's fair to call it similar to the brezhnev doctrine that we're not going to allow, so they contain that there, but i think the biggest gap -- and, again, i
come back to iraq and their perceptions about iraq and the shift inside of iraq which i think is, remains a huge challenge and it's, obviously, connected -- to syria. and i think when they saw the u.s. administration in september in particular walk away from what they thought would be even targeted, limited strikes, you know, they were already in a process of trying to place bets on a number of different actors. and now based on my most recent trip to eastern turkey, they and others are all in. and it's, i think, presenting a very -- >> with regard to syria, you mean. >> yeah. and with some very dangerous groups perhaps. and perhaps less so saudi arabia than other gcc states. but i think by 2014, it's already coming out in the press, but i think even in this administration that perhaps the threats in northern syria are starting to rival some of the other security threats that the united states faces in the middle east. >> i'm just, i'm sitting here trying to think of whether i agree that they're punching
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