U.S.-Russia Energy Cooperation – The Logic of Common Interests

 

Remarks by

Alexander Vershbow

U.S. Ambassador to the Russian Federation

at the

Moscow International Petroleum Club

March 4, 2003

 

Thank you for inviting me to participate in the Moscow International Petroleum Club’s luncheon today.  Unlike many of you, I am not a neftyanik (oil man).  I’m just a chinovnik (official).  But I’m happy to have the opportunity to talk to you today about my own perspectives on the oil business, on what President Putin has referred to as “the logic of common interests” of our two countries, and a bit on current events.

I know that both Russia and the U.S. have been in the oil business for a long time.  In the middle of the 19th century, Russians and others were producing oil in Baku while, in the U.S., oil development was centered in Western Pennsylvania.  Today, the oil industry remains important in both countries, though today we talk about different places like Sakhalin and the Gulf of Mexico rather than Baku and Western Pennsylvania. 

Despite this common interest in oil and gas, until a year ago energy was not considered one of the key elements in Russian-U.S. relations.  But President Putin and President Bush have changed all that.  During their summit meeting last May and again in November, the Presidents issued joint statements emphasizing the important role of energy cooperation. October marked the first Russia-U.S. Commercial Energy Summit in Houston, with Ministers Gref and Yusufov and Secretaries Evans and Abraham presiding.  But the real stars of this business-to-business dialogue in Texas were the representatives of Russian and U.S. petroleum and petroleum service companies, because true cooperation means Russian and U.S. companies working together on concrete projects.

I believe the Commercial Energy Dialogue that grew out of the Houston Summit (and was launched here in Moscow in December) offers great promise both in facilitating effective communication between business and government, and in facilitating cooperation between Russian and U.S. companies.  I am sure that those of you in the business community would agree that many agreements and contracts between companies arise from informal discussions held on the margins of other meetings.  We trust the same will be true with the Commercial Energy Dialogue – that individual Russian and U.S. companies will, in the course of discussions, realize that they have mutual interests, and will jointly develop projects that will benefit both companies.

One of the most recent headlines has been the decision of BP and the principal shareholders in TNK to form a new Russian company, comprised of assets belonging to Sidanco, as well as BP and TNK assets in Russia and Ukraine.  As many have noted, this is a landmark event, as BP, a major international oil company, plans to invest billions of dollars in this venture.  And, although neither BP, TNK, nor Sidanco is a U.S. company, we wish the companies and their shareholders well and hope that the new venture will serve to encourage other international companies, including U.S. firms, to increase their cooperation with Russian companies and their investment in Russia.

Looking at the BP-TNK-Sidanco deal, some market-watchers have concluded that it paves the way for a flood of foreign energy investment in Russia and that it signifies that Russia has reached “investment grade” status.  While we recognize and applaud Russia’s progress over the last 12 years in moving from a state-controlled economy, guided by the teachings of Marx and Lenin, to one that features a vibrant private sector, following the teachings of Adam Smith and Andrew Carnegie, we don’t believe the BP-TNK-Sidanco deal guarantees a surge in foreign investment – either in the energy sector or elsewhere.  We think it is premature to say that, as a destination for foreign investment, “Russia has arrived.”  We continue to see room for improvement in Russia’s investment climate.  And we have concerns about both the content and the pace of reforms.

For example, we continue to support passage of beneficial Production Sharing Agreement amendments to the tax code.  We believe an attractive PSA regime can facilitate investment in the development of “difficult” oil and gas reserves – reserves that might not be developed for years, if at all, were it not for the financial incentives and recourse to international arbitration that PSAs provide.  We hope the Duma will move forward on this legislation soon, and that the results will provide a real stimulus to new investment.

We also look forward to the development of new subsoil legislation for projects that do not need to be developed on PSA terms.  We believe the Russian Government should strive for a tax and license regime that is transparent, stable, enforceable, and that offers investors a fair opportunity to earn a reasonable profit.  We would particularly welcome a regime that would permit holders of exploration and development licenses to freely sell or transfer those licenses.  We would also welcome subsoil legislation giving investors access to international arbitration for resolution of commercial disputes.

Whatever the regime oil and gas companies are operating under, it is critical that federal, regional, and local authorities respect the sanctity of agreements and contracts.  I can think of nothing that will do more to discourage investment than efforts to violate or unilaterally renegotiate contracts and agreements.  Such efforts, even when unsuccessful, breed distrust among current investors and encourage prospective investors to look for safer places to risk their capital.  In the past year, we were particularly concerned about threats to declare the Caspian Pipeline Consortium a “natural monopoly,” even though its founding agreements stipulated that it would not be subject to the relevant legislation.

Finally, it is no secret that oil producers in Russia are constrained by a shortage of export pipeline capacity.  Lack of export capacity hampers Russia’s effort to meet world demand for its oil and to play the role of a reliable supplier. 

This is unfortunate because it goes to the heart of what make Russian-U.S. energy cooperation mutually beneficial.  The U.S. and other major energy-consuming countries seek adequate, reliable supplies of oil from diverse sources.  Russia, with its substantial oil and gas reserves, is ideally suited to the role of bolstering world energy security.  But to do so it must be able to increase its exports to meet growing world demand for Russian oil. U.S. companies over the years have developed many technologies that can improve oil recovery.  Many U.S. companies also have ready access to relatively low-cost capital.  Both could be put to use in helping Russian companies increase their production, maintain and develop their energy transportation infrastructure, and increase their exports to the world market.

To date, this hasn’t happened.  Or, at least it hasn’t happened enough.  We hope the Russian Government, Transneft, and the oil companies working in Russia can find a way to work together – with help from American and other partners – to ensure that the right pipelines are built, in the right places, and at the right times.  This will ensure that Russia will be able to play the pivotal role in seeks to play in promoting world energy security, as well as attract more investment. 

For example, in their November joint statement, Presidents Putin and Bush welcomed the prospect of constructing a deepwater port for energy exports.  The proposed Murmansk pipeline and terminal project at this ice-free port certainly would fulfill the promise of this initiative. 

From its location in northwest Russia, a Murmansk oil terminal would be well-placed for direct exports to the U.S. market, as well as to European markets, 12 months a year.  Shippers also could avoid the constraints, possible delays, and environmental challenges involved in shipping oil through the Bosphorus or the Danish Straits.

Overall, we agree with many western and Russian oil company representatives who note that capital needs and logistical challenges might make it difficult for Transneft to expand Russia’s pipeline capacity quickly enough to meet Russia’s export goals.  This calls for creative solutions.  We see merit in involving the private sector in pipeline development, both for its capital and for its know-how. We note that some have proposed that, at a minimum, the Russian Government permit private companies to help finance construction of the pipeline.  In return, the companies could receive lower tariffs or more favorable access to the pipeline.

When it comes to pipelines and countries that serve as sources of imported oil, my Government has followed a particular philosophy summed up by the English expression, “Don’t put all of your eggs in one basket.”  It means, don’t rely entirely on one thing or person or approach to achieve your goals. Relying on Middle Eastern oil, we ran into big problems that had huge economic implications during the OPEC oil embargo in the 1970s.  For the past several years, however, we have tried to diversify, receiving oil shipments from many countries from various points of the globe, including Venezuela, Canada, and Nigeria.  We’ve also been working on the development of energy resources in the Caspian region, promoting the construction and use of multiple pipeline routes as a means of enhancing world energy security. 

I would point out though that the advice, “Don’t put all your eggs in one basket,” is as valid for major oil-exporting countries as it is for major oil-consuming countries like the United States.  Russia would be wise to expand both its pipeline capacity and the directions of its pipelines.  In that way, if bottlenecks or unforeseen difficulties emerge in shipping via one route, Russia will have the ability to continue exporting via other routes and to a variety of destinations.  In the end, both of our countries will benefit:  you will continue receiving additional revenue from sales of oil, and we will have more secure access to energy sources.

This seems like a natural point to raise a topic that I know has been on a lot of people’s minds in recent times:  the situation in Iraq.  This is an issue on which our two countries clearly have differences, but I would argue that they are more over tactics than over strategic goals.  We both agree that Saddam Hussein must be disarmed of his weapons of mass destruction.  The question is how to get there.

Here’s our approach:  We all know that Saddam had weapons of mass destruction.  He used chemical weapons years ago against Iran and even against his own people.  Before the last group of UN inspectors departed in 1998, they had already catalogued the existence of thousands of tons of nerve gas and thousands of liters of deadly anthrax and other toxins.  Those substances cannot have just disappeared into thin air.  Saddam Hussein must account for Iraq’s weapons of mass destruction – either declare that he has them so they can be destroyed, or give evidence that they’ve been destroyed. If he fails to do either, he must face “serious consequences.”  That’s what UNSCR 1441 says.  This resolution gave him one last chance, after 12 years, to comply with the terms of the bargain that ended the Gulf War in 1991.  And the sad but clear fact is that Saddam has already failed to comply.  He has missed his last chance. 

So we – the international community, but especially the members of the Security Council – are fast approaching the moment of truth.  We understand that Russia wishes to avoid military action and to keep the issue firmly within the UN Security Council.  But Russia also shares our interest in demanding that Saddam fulfill his obligations to disarm.  With Saddam’s continued refusal to disarm peacefully, there may be no alternative to war.  Time is running out.

Meanwhile, we recognize that Russia and Russian oil companies have significant economic interests in Iraq.  So we understand Russia’s concern about the effect regime change and/or war in Iraq could have on repayment of Iraq debts to Russian companies and on the fate of existing petroleum contracts.  We will take such interests into account and support a level-playing field for investors.  Contrary to what some journalists and conspiracy theorists have suggested, the United States’s efforts to achieve Iraq’s disarmament are not a cover for acquiring control of Iraq’s oil.  We believe Iraq’s oil and gas belong to the Iraqi people and should be developed for their benefit.  We hope future Iraqi Governments also will take this view, and that they will manage Iraq’s petroleum resources in a way that serves the interests of the Iraqi people.

I’ve talked about energy, energy security, and Iraq, but let me end on a broader topic – the central role energy can play in Russian-U.S. relations.  Both our countries have long talked about how the Cold War is over, about how it's time to move beyond the "old agenda" of arms control toward a more normal relationship.  And, of course, we're doing exactly this in a number of fields.  We cooperate in space exploration, law enforcement, the fight against terrorism and HIV/AIDS, indeed in a large number of areas that we could only have dreamed about a few years ago when we lived on the verge of mutually assured destruction.

But energy has the potential to be the most important of them all, at least in economic terms.  We are talking about huge sums of money, in a field where Americans both have the practical experience and the willingness to invest if the conditions are right.  Just witness the Caspian Pipeline Consortium and Sakhalin I. 

You could hardly find a better symbol of the transformation of our relationship, from Cold War foes to 21st century friends, than cooperation in a peaceful business venture that clearly advances the economic and security interests of both Russia and the United States.  We truly are living in a far different world, and I think our grandchildren will read history books about the incredible changes over the past ten years with awe and wonder.

Well, I think I’ve spoken enough, so I’ll end my remarks here.  Thank you again for inviting me today.