Trump Mulls Another ‘Peregruzka’ with Russia

As Trump mulls another ‘peregruzka’ with Russia, he should consider perils of Big Oil diplomacy

Amy Myers Jaffe, University of California, Davis

Energy has long been used as a tool of U.S. foreign policy, particularly in the Middle East. But it’s true in other regions and countries as well, most notably Russia, where President Donald Trump is pondering another possible “reset” in relations.

This will be the fourth such attempt at a relationship reboot with Moscow since the disintegration of the Soviet Union began in 1989. And each time – in 1993, 2002 and 2009 – renewed investment by the U.S. oil and gas industry played a role in trying to improve ties. And each effort failed for a variety of reasons.

With the U.S. relationship with Russia once again high on the White House agenda amid Russian overtures and intensive attention to the ins and outs of Russian hacking, it’s worth taking a closer look at these past roles the U.S. energy industry has played in efforts to pursue warmer ties with Russia. Trump would be wise to heed this history, especially since oil always looms large in the bilateral relationship.

Oil and American diplomacy

The U.S. oil and gas industry is widely considered one of the most technologically advanced in the world, having pioneered fracking techniques as well as other advanced technologies needed to drill in Russia’s harsh Arctic terrains and to liquefy natural gas for easy shipment.

And for decades, the U.S. has sponsored trade missions that use oil and gas investment as a way to persuade other countries to adhere to American interests. Examples include disarmament in Kazakhstan and Libya, conflict resolution in the Middle East and Latin America and nuclear nonproliferation and the fight against terrorism in the former Soviet Union and West and East Africa.

On the flip side, denial of access to American know-how has been wielded as a stick against countries that defy the U.S.-led international order: for example, by sponsoring terrorism (Iran and Libya) or invading neighboring countries (Russia).

Post-Cold War euphoria turns sour

The opening of Russia’s oil industry to American companies began shortly after the collapse of the USSR. A 1993 summit between leaders of both countries led to the creation of the Gore-Chernomyrdin Commission to promote Russo-American economic and technological cooperation, including in energy.

The United States, in essence, was offering up its companies to assist Russia in revitalizing its energy industry. ConocoPhillips was an early adopter with its Polar Lights project, which began in 1994 amid the euphoria of U.S.-Russia collaboration. But the company soon became a victim of Russian bureaucratic hassles that hampered its ability to export oil.

Other U.S. companies that followed suffered similar fates as that early optimism was met with myriad legal, regulatory and logistical difficulties that eventually turned profits into losses in some cases.

Such failures mirrored the difficulties on other policy fronts that eventually beset the Gore-Chernomyrdin deal and subsequent U.S. arms control initiatives as the Kremlin failed to honor both the letter and spirit of agreements.

While this experience clearly illustrates the dangers of being lured by unfulfillable promises and misplaced optimism when it comes to Russia, the U.S. had a hard time learning this lesson.

Putin, 9/11 and a new hope

In the aftermath of the Sept. 11, 2001, terrorist attack, the U.S.-Russian energy dialogue again gained momentum after newly elected Russian President Vladimir Putin let it be known that Moscow was willing and able to help diversify global energy supplies away from the troubled Middle East to help the U.S.

It was in this context that several U.S. oil companies, including ExxonMobil, expanded their exploration and production deals in Russia. In May 2002, President George W. Bush and Putin initiated a new high-level dialogue that led to an energy summit in Houston, Texas, in October and new oil and gas investment deals.

But all was not smooth sailing despite what seemed to be initially an auspicious geopolitical backdrop. No sooner had billions of dollars been committed and oil started to flow than Putin initiated a change of political course in 2005 that defined Russian national security as better served by renationalizing the oil and gas industry.

And so U.S. oil companies experienced similar reneging and renegotiations, as well as threatening tactics directed from the Kremlin, which in some cases included outright arrests of partners and the taking of assets.

The Kremlin used a variety of means to “convince” its foreign partners to turn over assets to favored firms whose leaders were positioned inside Putin’s inner circle. Disputes over back taxes and other kinds of trumped-up environmental or criminal charges were used to justify the retaking of assets. Approvals for access to export pipelines were often linked unofficially to selling stakes back to Russian entities.

The pressures on oil industry executives trying to do business in Russia was so intense at least one American-born senior executive of a major multinational company was forced into hiding. In another example, in 2004 the Russian government effectively annulled a tender award ExxonMobil had won in 1993 for exploration rights in the Russian Arctic region of the Sakhalin Islands and requested over a billion dollars for a new license to operate there.

Obama’s reset goes wrong

Perhaps the most famous effort at a reset with Russia came in 2009 shortly after President Obama took office, when then-Secretary of State Hillary Clinton gave her Russian counterpart an actual red button with the word “reset” written on it.

While the Obama administration did not explicitly make energy cooperation a diplomatic carrot, the effort did improve the situation for a few American oil firms like Chevron and ExxonMobil – at least temporarily – as Russian interest in developing technically challenging Arctic oil and gas resources increased.

As we all know, the Obama reset ran aground as other geopolitical disagreements, such as Russia’s invasion of Ukraine in 2014 and its military intervention in Syria’s civil war, overshadowed the relationship. The U.S. and Europe placed sanctions on Russia in 2014, creating losses anew for U.S. oil companies.

In the end, most American companies such as ConocoPhillips and Marathon Oil have chosen to sell their holdings in Russia and exit completely in recent years. Others, like ExxonMobil, have reduced risk by participating in international consortia involving important Russian and international firms.

ExxonMobil, for example, eventually secured its multi-billion dollar deal in the Sakhalin Islands by partnering with Russian oil giant Rosneft and several other foreign firms. Still, the venture has faced many obstacles, including tax disputes and logistical problems.

Lessons for the U.S.

There is no question that this history of triumphs and failures offers important lessons for the oil industry and the Trump administration.

In all three efforts, American diplomats and oil executives alike focused on discussions about long term win-wins, while the Russians goals were more limited and short-term.

The first lesson is that Moscow can be quick to offer an accommodating posture when it needs something, such as money or advanced technology, but that this is not necessarily reflective of a permanent change in vision. One savvy American oil company chairman once confided to me that the CEO of his Russian counterpart in a joint venture spent nearly all of his workday canvassing the halls of the Kremlin to intercept early changes in policy or internal political power shifts.

Right now, for example, Russia desperately needs the sanctions on its economy removed. The history suggests Trump probably shouldn’t offer any relief until Russia has brought substantial concessions to the table on issues such as nuclear weapons, cooperation on ISIS and Syria, and ongoing hacking threats.

Secondly, a position of strength will facilitate a deal faster than an accommodative posture or natural alignment, as Rex Tillerson, the newly confirmed secretary of state and former chairman and CEO of ExxonMobil, knows from first-hand experience. Oil companies that approached Russian leaders with talk of technology transfer and technical expertise were not necessarily those that excelled against the political winds in Moscow. Rather, companies posing a strong competitive market challenge to Russian counterparts such as Rosneft fared better than the rank and file, many of whom have been forced to abandon Russian assets over the years.

ExxonMobil is an example of the success of this strategy. After lengthy negotiations with Rosneft seemed to be getting nowhere, ExxonMobil mounted an assertive campaign to challenge that company in key markets such as Eastern Europe, Germany and China by offering its customers competitively priced, alternative supplies. The tenor of the talks with Russia improved after that, leading to an expanded strategic agreement (read truce) in 2013.

The Russian wolf

As the Kremlin tries to woo yet another incoming U.S. administration, Moscow expects to count on what it considers the “greed” of Big Oil to help it end the sanctions strangling its economy and to attract fresh investment in its energy industry.

But perhaps this time around, the U.S. government and the Western oil industry will more accurately view Russia as a wolf in sheep’s clothing and greet the overture prepared with its own gun in hand: U.S. shale exports, which provide competition for Russian oil and help prevent diplomatic strong-arming.

The new administration has already positioned itself to use this lever, perhaps evidence that Trump could be the negotiator-in-chief he has promised to be.

The Conversation

Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis

This article was originally published on The Conversation. Read the original article.

Will Obama’s offshore drilling ban be Trumped?

Will Obama’s offshore drilling ban be Trumped?

Patrick Parenteau, Vermont Law School

President Obama gave environmental advocates a Christmas present when he announced in late December that he was banning oil and gas drilling in huge swaths of the Arctic and Atlantic oceans. This action “indefinitely” protects almost 120 million acres of ecologically important and highly sensitive marine environments from the risks of oil spills and other industrial impacts.

President Obama acted boldly to conserve important ecological resources and solidify his environmental legacy. But by making creative use of an obscure provision of a 1953 law, Obama ignited a legal and political firestorm.

Republicans and oil industry trade groups are threatening to challenge the ban in court or through legislation. They also contend that the Trump administration can act directly to reverse it. But a close reading of the law suggests that it could be difficult to undo Obama’s sweeping act.

The power to withdraw

Congress passed the law now known as the Outer Continental Shelf Lands Act in 1953 to assert federal control over submerged lands that lie more then three miles offshore, beyond state coastal waters. Section 12(a) of the law authorizes the president to “withdraw from disposition any of the unleased lands of the outer Continental Shelf.”

Starting in 1960 with the Eisenhower administration, six presidents from both parties have used this power. Most withdrawals were time-limited, but some were long-term. For example, in 1990 President George H. W. Bush permanently banned oil and gas development in California’s Monterey Bay, which later became a national marine sanctuary.

Kelp forests in the Monterey Bay National Marine Sanctuary support many marine species.
Chad King, NOAA/Flickr

President Obama used section 12(a) in 2014 to protect Alaska’s Bristol Bay, one of the most productive wild salmon fisheries in the world. In 2015 he took the same step for approximately 9.8 million acres in the biologically rich Chukchi and Beaufort seas.

Obama’s latest action bars energy production in 115 million more acres of the Chukchi and Beaufort seas – an area known as the “Arctic Ring of Life” because of its importance to Inupiat Peoples who have lived there for millennia. The order also withdraws 3.8 million acres off the Atlantic Coast from Norfolk, Virginia to Canada, including several unique and largely unexplored coral canyons.

Why Obama acted

In a Presidential Memorandum on the Arctic withdrawals, Obama provided three reasons for his action. First, he asserted, these areas have irreplaceable value for marine mammals, other wildlife, wildlife habitat, scientific research and Alaska Native subsistence use. Second, they are extremely vulnerable to oil spills. Finally, drilling for oil and responding to spills in Arctic waters poses unique logistical, operational, safety and scientific challenges.

In ordering the Atlantic withdrawals, Obama cited his responsibility to “ensure that the unique resources associated with these canyons remain available for future generations.”

Market forces support Obama’s action. Royal Dutch Shell stopped drilling in the Chukchi Sea in 2015 after spending US$7 billion and drilling in what proved to be a dry hole. Since 2008 the Interior Department has canceled or withdrawn a number of sales in Alaskan waters due to low demand. Shell, ConocoPhillips, Statoil, Chevron, BP and Exxon have all to some degree abandoned offshore Arctic drilling.

The Beaufort and Chukchi seas are zones of the Arctic Ocean off the coast of northern Alaska.
Mohonu/Wikipedia, CC BY-SA

Low oil prices coupled with high drilling costs make business success in the region a risky prospect. Lloyd’s of London forecast this scenario in a 2012 report that called offshore drilling in the Arctic “a unique and hard-to-manage risk.”

What happens next?

Critics of President Obama’s action, including the state of Alaska and the U.S. Chamber of Commerce, say they may challenge Obama’s order in court, in hopes that the Trump administration will opt not to defend it. But environmental groups, which hailed Obama’s action, will seek to intervene in any such lawsuit.

Moreover, to demonstrate that they have standing to sue, plaintiffs would have to show that they have suffered or face imminent injury; that this harm was caused by Obama’s action; and that it can be redressed by the court. Market conditions will make this very difficult.

The Energy Information Administration currently projects that crude oil prices, which averaged about $43 per barrel through 2016, will rise to only about $52 per barrel in 2017. Whether these areas will ever be commercially viable is an open question, especially since rapid changes are taking place in the electricity and transportation sectors, and other coastal areas are open for leasing in Alaska’s near-shore waters and the Gulf of Mexico.

The Royal Dutch Shell drilling rig Kulluk broke loose and ran aground near Kodiak Island in the Gulf of Alaska as it was being towed to Seattle for winter maintenance in December 2012. This Coast Guard overflight video shows the harsh conditions along Alaska’s coast in winter.

Alternatively, Donald Trump could issue his own memorandum in office seeking to cancel Obama’s. However, section 12(a) does not provide any authority for presidents to revoke actions by their predecessors. It delegates authority to presidents to withdraw land unconditionally. Once they take this step, only Congress can undo it.

This issue has never been litigated. Opponents can be expected to argue that Obama’s use of section 12(a) in this manner is unconstitutional because it violates the so-called “nondelegation doctrine,” which basically holds that Congress cannot delegate legislative functions to the executive branch without articulating some “intelligible principles.”

However, one could argue that Obama’s action was based on an articulation of intelligible principles gleaned from the stated policies of the OCSLA, which recognizes that the “the outer Continental Shelf is a vital national resource reserve held by the Federal Government for the public.” The law expressly recognizes both the energy and environmental values of the OCS. Thus President Obama’s decision reflects a considered judgment that the national interest is best served by protecting the unique natural resources of these areas, while at the same time weaning the nation from its dangerous dependence on fossil fuels.

Exxon Mobil CEO Rex Tillerson, Donald Trump’s choice for secretary of state, shakes hands with Russian President Vladimir Putin in 2012 after signing an agreement with Russian state-owned oil company Rosneft. The companies’ joint venture to develop energy resources in Russia’s Arctic waters has been blocked by U.S. sanctions on Russia since 2014.
AP Photo/RIA-Novosti, Mikhail Klimentyev, Presidential Press Service

The section 12(a) authority is similar in some respects to the authority granted by the Antiquities Act, which authorizes the president to “reserve parcels of land as a part of [a] national monument.” Like the OCSLA, the Antiquities Act does not authorize subsequent presidents to undo the designations of their predecessors. Obama has also used this power extensively – most recently, last week when he designated two new national monuments in Utah and Nevada totaling 1.65 million acres.

Some laws do include language that allows such actions to be revoked. Examples include the Forest Service Organic Administration Act, under which most national forests were established, and the 1976 Federal Land Policy and Management Act, which sets out policies for managing multiple-use public lands. The fact that Congress chose not to include revocation language in the OCSLA indicates that it did not intend to provide such power.

What can the new Congress do?

Under Article IV of the Constitution, Congress has plenary authority to dispose of federal property as it sees fit. This would include the authority to open these areas to leasing for energy development. Members of Alaska’s congressional delegation are considering introducing legislation to override Obama’s drilling ban. But Democrats could filibuster to block any such move, and Republicans – who will hold a 52-48 margin in the Senate – would need 60 votes to stop them.

On the other hand, Congress may be content to let President-elect Trump make the first move and see how it goes in court. If Trump attempts to reverse the withdrawal, environmental groups contesting his decision would face some of the same obstacles as an industry challenge to Obama’s action. It could be especially challenging for environmental groups to show that the claim is “ripe” for judicial review, at least until a post-Obama administration acts to actually open up these areas for leasing. That may not occur for some time, given the weak market for the oil in these regions.

In the meantime, this decision is a fitting capstone for a president who has done everything within his power to confront the existential threat of climate change and rationally move the nation and the world onto a safer and more sustainable path.

The Conversation

Patrick Parenteau, Professor of Law, Vermont Law School

This article was originally published on The Conversation. Read the original article.