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18 June 2003

Vershbow "Cautiously Optimistic" about Russian Energy Policy

(Remarks at U.S.-Russia Energy Summit Executive Seminar) (3360)
In the energy sector "there is a real commonality of interests"
between the United States and Russia, Ambassador Alexander Vershbow
told participants in the U.S.-Russia Energy Summit Executive Seminar
in Moscow June 17.
"The United States is the world's largest energy consumer and is
trying to diversify its sources. Russia has some of the world's
largest deposits of energy resources. The goal is to make sure Russian
oil companies can develop their resources and get their products to
market," said Vershbow, the U.S. ambassador to the Russian Federation.
American companies can play a role by "providing the technical
capability, the access to capital, and the international expertise
that Russian companies need to become truly global companies, helping
to advance and solidify Russia's integration into the international
economy."
"There are good reasons to be 'cautiously optimistic' about the
direction of Russia's energy policy," Vershbow said. "Electricity
reform is underway and gas reform, while currently stalled at the
starting gate, has at least been recognized as a priority by
opinion-makers, business, and Russian policymakers."
Among other positive developments he cited "encouraging signs that the
Russian Government will permit private companies to play a larger role
in determining when and where pipelines are built. While this will not
likely include private ownership of major export pipelines, private
financing in exchange for preferred pipeline access or lower tariffs
may be possible."
He said the United States welcomes Russian government support for a
pipeline to Murmansk and is "pleased that companies, analysts and
government officials are beginning to look at prospects for Russian
exports of liquefied natural gas" through that Arctic port.
However, Vershbow also discussed some reasons to temper his optimism
about Russian energy policy:
- The Caspian Pipeline Consortium (CPC): "There has been no decision
to move forward to Phase 2 ... We also are concerned about past
threats to declare CPC a natural monopoly, despite the guarantees
written into its founding agreements. To ensure an attractive
investment climate, federal regional and local authorities must
respect the sanctity of agreements and contracts."
- Production-sharing Agreements: "PSA tax amendments passed by the
Duma last month don't do enough to inspire international confidence in
the stability and predictability of Russia's investment climate."
- Sakhalin Island Travel Restrictions: "New travel restrictions
recently imposed on all non-residents on Sakhalin Island represent
another example of a very mixed message being sent to investors in the
Russian energy sector. ... In a spirit of cooperation and partnership,
and for its own sake, Russia should rescind or modify these
restrictions - and soon."
Among the items of good news mentioned by Vershbow in conclusion were
last year's Houston Commercial Energy Summit and the establishment of
a Commercial Energy Dialogue consisting of five "sub-groups" comprised
of representatives of Russian and U.S. companies who have been working
on various issues. They will present a report in September at the
Commercial Energy Summit in St. Petersburg containing policy
recommendations for the two governments.
Following is Vershbow's speech as prepared for delivery:
(begin text)
U.S.-RUSSIA ENERGY COOPERATION - IN OUR MUTUAL INTEREST
Remarks by Alexander Vershbow
U.S. Ambassador to the Russian Federation 
At the "U.S.-Russia Energy Summit Executive Seminar"
Carnegie Institute Moscow Center
June 17, 2003
Thank you very much for that kind introduction and thank you for
giving me the opportunity to speak at this seminar on the important,
and timely, subject of U.S.-Russian energy relations.
Energy is truly the bold new frontier of the 21st century for both
America and Russia. Both of our peoples expanded the frontiers of
their nations across whole continents - the Americans heading west
across the Great Plains in the 1800s, and the Russians moving east.
Both of our nations have brought forth great scientists and
innovators: Edison and Mendeleev, Ford and Lomonosov, Franklin and
Sakharov. Today, our astronauts and cosmonauts are working side by
side, along with other nations, on the International Space Station.
And over the past few years we've seen Americans and Russians make
bold advances in the field of energy development as well, working
together to tap the natural resources that lie beneath the earth in
Siberia and on the seafloor off the coast of Sakhalin. Our scientists
are also leading the world in developing the next generation of energy
technologies. This leadership was recognized on Sunday might, when
President Putin presented the first annual "Global Energy" prize to
three scientists, one from Russia and two from the United States, who
are pushing the technological envelope.
Presidents Bush and Putin have placed energy high on the U.S.-Russian
agenda. Since their first summit meetings in 2001, energy issues have
figured prominently both in high-level discussions and in my Embassy's
day-to-day engagement with representatives of the Russian Government
and Russian energy companies. As we approach the next Commercial
Energy Summit, which Russia will host in St. Petersburg toward the end
of September, I'd like to give you the view from my desk in the
Embassy of what has been achieved so far, what we still hope to
accomplish, and the prospects for reaching our final destination.
The energy sector is clearly an area where there is a real commonality
of interests between our two countries. The United States is the
world's largest energy consumer, and is trying to diversify its
sources. Russia has some of the world's largest deposits of energy
resources. The goal is to make sure Russian oil companies can develop
their resources and get their products to market. U.S. companies can
definitely play a role here, providing the technical capability, the
access to capital, and the international expertise that Russian
companies need to become truly global companies, helping to advance
and solidify Russia's integration into the international economy.
Stronger energy ties, and stronger economic ties more generally, can
also strengthen the overall bilateral relationship. From time to time,
the United States and Russia will continue to have differences on
important issues. But if we can give each side a stronger stake in the
relationship through expanded trade and investment, it can help keep
the overall relationship on track through good times and bad. Despite
all of the recent frictions between the United States and some of its
European Allies over Iraq, for example, the network of interlocking
relationships and interdependencies between the United States and
Europe is so extensive, and runs so deep, that it makes it much less
likely that political disagreements will affect the basic foundations
of our relations.
I can't say the United States and Russia have reached the point where
our energy cooperation is strong enough to play this role
single-handedly, but we have made great progress. Several large and
medium-sized U.S. oil and gas and oilfield service companies are
either working in Russia, or actively seeking to participate in
projects here. In turn, several Russian companies either have or are
pursuing downstream assets or marketing arrangements in the United
States.
Meanwhile, representatives of U.S. and Russian companies are working
together within the framework of the Commercial Energy Dialogue,
identifying existing obstacles to bilateral energy trade and
investment, and proposing ways of eliminating those obstacles. At the
same time, officials from the U.S. Department of Energy and Russia's
Ministry of Energy are pushing forward on our government-to-government
dialogue on energy and are cooperating on a range of technical and
policy issues, ranging from power sector regulation to oil spill
prevention and response, to coordination in gathering and analyzing
energy statistics.
How will we know when we have succeeded? I think one sign will be when
U.S. and Russian companies have equal access to each other's markets -
when U.S. companies can compete for Russian projects on an equal
footing with Russian companies, and when the term "Russian oil
company" no longer implies a company whose shares are less highly
valued than those of its western competitors.
To use a well-worn diplomatic cliché, there are good reasons to be
"cautiously optimistic" about the direction of Russia's energy policy.
The policy battles continue, but electricity reform is underway and
gas reform, while currently stalled at the starting gate, has at least
been recognized as a priority by opinion-makers, business, and Russian
policymakers.
Meanwhile, there are signs that Russian Government officials are
beginning to recognize that it is in the national interest to address
the shortage of oil export pipeline capacity. Expansion of the Baltic
Pipeline System and construction of the Angarsk-Daqing and Western
Siberia-Murmansk pipelines are the most prominent of a number of
planned expansions of the trunk pipeline system. And there are
encouraging signs that the Russian Government will permit private
companies to play a larger role in determining when and where
pipelines are built. While this will not likely include private
ownership of major export pipelines, private financing in exchange for
preferred pipeline access or lower tariffs may be possible.
A word about the Western Siberia-Murmansk project. In their joint
statement last November, President Putin and President Bush welcomed
the prospect of constructing a deepwater port for energy exports.
Consequently, we welcomed the fact that, in its new long-term energy
strategy, the Russian Government supports the concept of a pipeline to
Murmansk - an ice-free, deepwater port. Construction of the pipeline
and terminal will fulfill the promise of this initiative. A Murmansk
oil terminal would be ideally located to facilitate direct exports to
the United States, as well as to European markets, 12 months a year.
Shippers could also avoid the delays and heightened safety and
environmental hazards that attend shipping through the Bosphorus or
the Danish Straits.
Murmansk could also be a hub for Russia gas exports, given the
sizeable gas reserves in the Arctic, both onshore and offshore. We are
pleased that companies, analysts and government officials are
beginning to look at prospects for Russian exports of liquefied
natural gas (LNG). We see a growing demand for LNG worldwide and, in
particular, in the United States. It is no longer a "pipe dream" - pun
intended - to imagine a world market for LNG, with multiple buyers and
sellers. Russia - particularly a Russia with a restructured gas
industry featuring many producers and sellers - would be well placed
to thrive in such an environment. We can easily envision sizeable LNG
exports from Murmansk and Sakhalin being sold on both U.S. coasts and
in both Asia and Europe.
What makes both concepts attractive - the Western-Siberia-Murmansk oil
pipeline and the idea of Murmansk as an LNG hub - is that they both
are stories of diversity of supply and, therefore, of strengthening
energy security. We are accustomed to the arguments from the
perspective of large energy-consuming countries like the United
States. It is prudent policy to avoid excessive reliance upon a single
oil supplier or on several suppliers in a particular region. Likewise,
relying on a mix of energy sources - oil, gas, coal, renewables -
provides some protection against a possible disruption in supplies of
one of those sources.
But diversification is equally important for major energy exporters
like Russia. Most of Russia's current energy exports run either south,
through the Bosphorus (which is increasingly congested), or west.
Shipping oil and gas north can open up new markets and provide
alternatives in the event of constraints or disruptions on Russia's
traditional routes. Similarly, adding LNG exports to exports of crude
oil and exports of gas via pipeline would give Russia added security
as an energy provider. A three-legged stool is much more stable than a
two-legged stool.
Let me also note that, as President Bush has said, we welcome
cooperation with Russia in Caspian energy, yet another non-traditional
area that could show real promise in expanding the horizons for our
energy partnership.
So energy security and energy diversity are important both to net
energy-exporting countries and to net energy-importing countries. And
Russia and the United States can directly address each other's energy
security needs. But we don't see energy security as simply a bilateral
issue. Nor does Russia. I think this accounts for Russia's enhanced
cooperation with the International Energy Agency (IEA), an
organization whose core mission is to promote world energy security.
Both Russia and the members of the IEA recognize the critical role
that Russia can play in strengthening world energy security. That is
why IEA members welcomed the participation of Russian Energy Minister
Yusufov at their recent meeting in Paris.
We don't delude ourselves into thinking that all of those involved in
energy are making grand calculations about strengthening national or
world energy security. The companies, particularly the private
companies, are calculating what moves will increase their profits and
enhance shareholder value. This year, we have welcomed the successful
partnerships between Russian oil companies and U.S. oilfield service
companies, Marathon Oil's reentry into Russia with its purchase of
KMOC and its holdings in western Siberia, and the launch of the next
phase of the Sakhalin-1 project. We hope these successes presage
deeper cooperation between U.S. and Russian companies.
Over the past few months we also have witnessed two large mergers in
Russia. We hope that the creation of TNK-BP and YukosSibneft will help
break down the barriers that have separated Russian oil and gas
companies from their international counterparts. We also hope that the
same dynamism, the same entrepeneurial spirit that prompted these
deals will help foster an open, competitive environment in which small
and mid-sized oil companies and new entrants to the market can
flourish as well. We have a similar view of the gas market. The more
competition the better.
However, in looking at Russian energy developments, I note that we see
reasons to be "cautious" as well as "optimistic." To date, there has
been no decision to move forward to Phase 2 of the Caspian Pipeline
Consortium (CPC), which would expand the capacity of the pipeline to
accommodate an expected increase in oil exports from Kazakhstan, plus
oil from Russia, too. We also are concerned about past threats to
declare CPC a natural monopoly, despite the guarantees written into
its founding agreements. To ensure an attractive investment climate,
federal, regional and local authorities must respect the sanctity of
agreements and contracts.
Indeed, investors prefer stability or, at least, predictability. For
some time now, the U.S. Government has promoted production-sharing
agreements (PSAs) as a means of promoting development of certain
difficult fields. So we are concerned that the PSA tax amendments
passed by the Duma last month don't do enough to inspire international
confidence in the stability and predictability of Russia's investment
climate. Much is at stake. The unique economic and technological
challenges of developing many large projects - projects that are
needed to ensure that Russia can sustain its role as a growing and
reliable supplier of energy to world markets - require a new approach
from the Russian side that is more inviting to the potential investor.
Along the same lines, from time to time, we hear of investigations or
threats to withdraw development licenses held by companies - often
foreign companies. It isn't clear what objective standards are being
used. Companies need to see greater transparency in the system, as
well as a fair and even application of rules and regulations at the
local and federal level.
Sometimes problems arise that surprise us. New travel restrictions
recently imposed on all non-residents on Sakhalin Island represent
another example of a very mixed message being sent to investors in the
Russian energy sector. Sakhalin is one of the most promising areas for
oil and gas development in Russia, and could become the home to 15,000
or more expatriate workers and their families in the coming years. Yet
the Governor of Sakhalin issued a decree imposing onerous restrictions
on travel outside the capital by non-residents, especially foreign
visitors. The restrictions and delays are particularly burdensome for
foreign oil and gas companies that employ many short-term, expatriate
workers (as well as local residents) in developing their projects -
projects that will enable Russia to become a major exporter of energy
to Pacific markets. In a spirit of cooperation and partnership, and
for its own sake, Russia should rescind or modify these restrictions -
and soon.
The fact that domestic gas prices in Russia are set well below their
economic level has become an issue in Russia's accession to the World
Trade Organization (WTO). We welcome the Russian Government's recently
announced plans to take certain steps, such as raising the regulated
tariffs for natural gas on the domestic market. However, across the
board, Russia should strive to create a level playing field of
competition in the production of gas by independent producers selling
gas at market-determined prices.
Back to the good news and the theme of this seminar, the "U.S.-Russian
Energy Summit." Last year's Houston Commercial Energy Summit brought
together two U.S. Cabinet Secretaries, two Russian Ministers, and
hundreds of U.S. and Russian business leaders. It was a spectacular
event, in which some of the most significant discussions took place,
informally, among the private sector participants. Some even took
place while pitching horseshoes and cowpies. That part may not be
easily repeated, but we don't view Houston as a one-time event. It was
meant to be a catalyst for enhancing the dialogue between U.S. and
Russian companies.
With this in mind, the two Governments committed to establish a
framework for this dialogue - the Commercial Energy Dialogue, which
was established last December. Since then, as with the
Russian-American Business Dialogue, the private sector has been in the
driver's seat of this new initiative, with governments largely in the
background. Five "sub-groups" comprised of representatives of Russian
and U.S. companies, each with both Russian and U.S. co-chairs, have
been working steadily since December. With the help of a Steering
Committee, ably co-chaired by Andrew Somers of the American Chamber of
Commerce and Arkadiy Volskiy of the Russian Union of Industrialists
and Entrepeneurs, the participants are developing a report containing
policy recommendations for the two Governments. They hope to present
this to U.S. and Russian government representatives at the St.
Petersburg Commercial Energy Summit in September. The Governments will
then have clear guidance from the companies on what is needed to
enhance bilateral cooperation and energy trade and investment.
I've spoken of energy cooperation so far primarily in commercial terms
and primarily in terms of oil, gas, and electricity, but there is a
broader framework. Opportunities for bilateral cooperation exist in
the production, trade and use of other energy resources, such as coal
and renewables. President Bush has announced a new initiative,
inviting other countries to join the United States in developing
hydrogen as an energy source. In response to the President's call, we
are beginning to engage with our Russian counterparts on ways to make
this clean fuel source widely available and commercially viable. We
also hope to strengthen our cooperation on energy-related
environmental issues, such as clean coal technology and carbon
sequestration.
Energy is not the only area of expanding U.S.-Russia cooperation. Our
common interests extend to the war against international terrorism,
preventing or countering the proliferation of weapons of mass
destruction to countries like Iran and North Korea, combating other
transnational threats like narcotics trafficking and organized crime,
and joining forces to fight infectious diseases like HIV/AIDS and to
promote sustainable development in the third world. If in the past we
sought to manage a confrontational relationship through arms control,
today we are discussing ways to meet common threats together - by
cooperating on missile defense, building a real partnership between
NATO and Russia, or forging close links between our intelligence
services and law enforcement agencies.
The bilateral agenda will naturally change and evolve over time. But
given the mutual interests of Russia and the United States, we can
expect to continue to explore opportunities for closer cooperation on
energy and countless other subjects for many more years to come.
(end text)
(Distributed by the Bureau of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)