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Interfax.com  |  Interviews  |  Amos Hochstein: I donít like putting sanctions on Russia



Interviews


May 19, 2016

Amos Hochstein: I donít like putting sanctions on Russia


U.S. Department of State Special Envoy and Coordinator for International Energy Affairs Amos Hochstein has given an interview to Interfax‘s special correspndent in the United States Ksenia Baygarova in which he speaks about why the United States has started to export oil and gas, how realistic the intention of oil producing countries to freeze oil production is, and how U.S. energy companies react to sanctions against Russia.

Question: Why has the United States being the major importer of energy resources started exporting the oil and gas? Was it dictated by economic or geopolitical reasons?

Answer: You have to remember, and I think thatís gotten lost in people who think that we decided to export natural gas, LNG, for political reasons, forget that until three years ago we were the largest importers of natural gas, LNG. So the question of exports was not even debated, discussed, or possible because all that we were thinking about is where can we get enough natural gas to supply our market. We didnít have enough. And not only were we the largest importer of natural gas, but everyone thought that we were going to continue to be the largest importer of natural gas for decades. Technology advancement meant that the shale gas revolution in America started, and all of a sudden we went from the largest natural gas importer, to no imports of LNG, to now becoming an exporter. But thatís subject to the private sector and the availability of the gas. It was not a political decision or a geopolitical or a national security issue whatsoever. We have enormous resources of natural gas now - that we cannot consume on our own - and therefore it made sense to export some of it. But even so, whatís happening in America is that we are using so much natural gas ourselves, that less is being exported, and the vast majority is being used here.

On oil, we removed the ban on exports. But if we think back, if we look at it from a perspective, not from the outside from looking Ďoh is the United States trying to affect the politics of oilĎ we donít normally have controls on exports of commodities. Thatís not the American way. Itís very rare for us to have something like that.

The only place where we have controls are on military issues, when you have technologies that can be used for both civilian and military use, and then we put restrictions on the exports. We donít ban them, but we put restrictions; require licenses and so on.

Oil was different. The reason we banned oil was largely because of the Arab oil boycott in the 1970-s. That created a big reaction at home and the politics of it created the ban. The ban today made no sense, but it wasnít addressed for all these years because if you will note in oil, we imported over 60% of our petroleum products. Exports wasnít even a consideration. Nobody even thought about exporting oil. On the contrary, we were a declining oil producer, so our oil production was going down since the 1980-s. All of a sudden after the shale gas revolution, we had the unconventional oil revolution in the United States, and think about what happened here. In 2012, four years ago, we were producing 6 million barrels a day. In 2015 we were producing 9.5 million [barrels]. We added 3.5 million barrels a day of production due to a new technology of extraction of oil. That is like, we added a whole more than Kuwait; we added more than the UAE in total; we added more than Iran. And these are some of the largest oil producers in the world after Russia and Saudi [Arabia]. So thatís how much of a big difference it was. We added 30% to our production. So, 30% of our production was added in the last four years. So, the debate was natural once we had so much oil and our imports were reduced so significantly, that we had to look at it. And instead of looking at it as to why did we lift the ban, the question started becoming ĎWould we have put in a ban today? Does it make sense?Ď And the answer is no. It didnít make sense in our new economic reality of oil production, of 9.5 million barrels, it didnít make any sense. But we didnít do it in isolation. We lifted the ban at the same time that we extended the tax credits on renewable energy. So, we tied it. We are going to move on the oil, but we are also going to move to ensure more investment into renewable energy. And it was not about geopolitics, and it was not about national security.

But the U.S. doesnít hide its intention to eliminate the dependence of the Europe from Russian resources.

We donít believe, the United States does not believe, that any part of the world should depend on one supplier only for any commodity. Thatís true here in our own neighborhood, in the Americas, where some countries are 100% dependent for fuel on one supplier, and we are trying to help them diversify. In Europe, we want them to continue to buy from Russia. Russia is an important supplier into Europe, but it cannot be a single supplier into the market. Thatís not healthy for Russia; thatís not healthy for European countries. And the dependence of 100% on one supplier is a bad idea from an economic perspective, commercial perspective, and political perspective

So, we have worked with Europe to diversify, bring in competition, bring in the kind of infrastructure that will allow for competition of one form of gas compared to another. And Iíll give you an example. If Bulgaria or Serbia are buying 100% of gas from Russia, what we would like to see is competition, and the competition is not just with Russian gas, but with different forms of gas. So, you are going to have the gas from the Caspian, from Azerbaijan, that will come in, and thatís pipeline gas from Azerbaijan competing with pipeline gas from Russia. But thatís not enough. We think they should be taking advantage of new technologies and therefore make sure that thereís LNG access as well so that you can compete Israeli gas, Egyptian gas, Qatari gas, Australian gas, American gas. Wherever. Doesnít matter.

Q.: So you are talking about market.

A.: Iím talking about market. Let a market competition where Russian gas will compete with everybody else. And ultimately if you are buying 100% from one source, but you have the ability to buy from others, thatís fine. But right now several countries in Europe have no choice. How do you negotiate price and supply terms if you have no choice?

Q.: The U.S. is against the Nord Stream 2 project. Because of that some Russian experts criticize the U.S. position for disregarding the principles of a free market. You are against the Nord Stream 2 project, because it hits Ukraine, but, for example, LNG export of the U.S. hits Gazprom. But market itís market. What would you answer those critics?

A.: I disagree that Nord Stream 2 is a commercial projectÖ

Q.: Why not?

A.: Because we already have infrastructure to bring in the necessary gas through Ukraine, and Nord Stream 1 is not even at 100%, itís at 70%. If you build LNG terminals, and build new pipelines from other sources, there will be enough, there is enough gas infrastructure to come into Europe. Building a $12 billion new pipeline, when existing infrastructure is already there, and gas prices are at an all-time low, meaning that the commercial application of how do you monetize a $12-plus billion project, is suspect. The pipeline through Ukraine works well. It has worked well. It may need some maintenance and upgrades, and so on - thatís fine- but it serves its purpose. Instead of creating new infrastructure that will move the gas from Ukraine to Germany, create 80%, if not more, of all the Russian gas into Europe will come into one place, into Germany. That doesnít make a lot of sense from an energy security perspective or from an economic security perspective.

And therefore, again, I donít see any future where Russia is not one of the largest suppliers of gas into the market in Europe. Thatís, to me, is clear. But why try to ban and eliminate all competition from the market on a regular basis?

Q.: So itís not only a question of Ukraine why you donít support Nord Stream 2...

A.: I think Ukraine is part of it.

Q.: But thatís not Russiaís responsibility. Thatís Europeís responsibility. And look Ukraine makes close to two, if not more than two billion a dollar in revenues from transit fees. Moving it away for no real reason seems to be an application of pressure on Ukraine at a time when their economic recovery is anemic and I donít see how they would survive that.

Q.: But the U.S. supports the Trans-Anatolian pipeline (TANAP), which doesnít go through Ukraine eitherÖ Donít you see the same problems with that as with Nord Stream 2?

Q.: No. Absolutely not. The TANAP pipeline, which is the Southern Gas Corridor, is bringing brand new gas that Europe has never had access to. So, it creates competition of new forms of gas from a new source. Not only the gas source is different, but the transportation route is different. So, I think thatís actually a very helpful part of the diversification. The Nord Stream 2 is simply moving the same gas to the same customer from Ukraine over to Germany. Thatís all it does. The TANAP project brings Azerbaijan gas from the Caspian and maybe in future Turkmenistan gas, into Europe. So, it allows new source of gas into Europe.

Q.: Itís about LNG export again. So you agree that now we have the gas war competition between LNG andÖ

A.: No. I disagree. I donít like the word war. I think thereís competition. But why canít there be many suppliers of gas. I donít understand why thatís a bad thing.

At the end of the day, if somebody doesnít want to buy it, nobody will. Nobody forces anybody to buy anything. Iím prohibited, I have no possible way of asking, instructing, or telling an American company who to sell gas to. The first cargo of gas did not goÖ everybody talked in the media about ĎAmerican gas will go to LithuaniaĎ. No gas has gone to Lithuania from the United States. So far it has gone to Brazil and to Portugal. It actually hasnít gone to all the places that the politics people talked about. Itís going to where the market is. I think that more American gas is going to go in our own hemisphere, and some will go to Asia, and some may go to Japan, or to India, or to Korea.

Q.: Some people think that LNG exports from the U.S. will somehow impact the prices inside of the U.S. Do you agree with that?

A.: They havenít so far. You know when we started the discussion about whether or not to begin exports, there was a discussion what will happen to price. And there were those that said that price will remain stable because we have enough gas, and there were those who said that gas prices in America will go up. The reality is that gas prices went down. In those days gas price was over $4, today theyíre hovering over about $2. Thatís very cheap. Our natural gas in the United States is very cheap and weíve already started exports. So, those who make the argument that youíve just mentioned, those who make the arguments that prices will go up, thatís already been proven as not accurate.

Q.: Letís talk about oil. Do you have any comments on the recent summit in Doha? Do you think that those attempts to stop, to freeze the oil production are realistic, and do you think that OPEC can still impact on the oil prices?

A.: Thatís a lot of very big questions. So, on the Doha summit. The failure of the summit to achieve an agreement on freezing was not a surprise to me. There is a fundamental flaw in the argument for a freeze. The reason that oil prices went down was because we had an oversupply in the market, so the supply was significantly higher than the demand. The storages and reserves around the world were filling up, and the price crashed. At this point in time, almost every country on the planet that produces oil is producing at their maximum capacity. They cannot increase.

They are at all-out highs. Thatís true of Russia. Itís true of Kuwait. Itís true of Iran, of Libya, of Iraq. So if the problem in the oil market is identified as an oversupply, freezing production at maximum peak capacity, doesnít solve the problem; it just freezes the problem. So thatís if you come from the perspective of trying to intervene in the market. But my skepticism of these meetings is because I donít believe that an artificial intervention in the market is necessary. The market will rebalance itself. A few months ago people were talking about whether oil prices would go to $20. Thatís when we were below $30 a barrel. Three months latter weíre at $45 a barrel. So, the market is rebalancing itself. We have seen announcements across the world of reduction in investment in new production. That means that fewer barrels will come online as demand continues to rise, even if its lower, it will rebalance. Look what happens here in the United States. We were at 9.5 million barrels a day last year, and weíre down to below nine, we are at just about 9 [million] barrels, so we have lost 700,000 barrels a day of production. We just lost a million barrels a day out of Canada for the fires. There was a terrorist attack in Nigeria that took off a few hundred thousand barrels. Some of that will come back, and something else will go away, but weíre going to see a rebalancing of the market that doesnít need OPEC to intervene.

Any deal that OPEC can reach or if anybody thought that you could reach a deal on production, without the participation of Iran, that didnít make any sense. So the idea that they would freeze their production when theyíre finally out of sanction in order to help other countries was never a realistic approach. So, I never expected IranÖ

Q.: What about Iran? Now after this nuclear deal there are so many new opportunities. Is the U.S. ready to allow its companies to enter to Iran?

A.: We have removed our sanctions and we have made it, I have made it, very clear when I am asked by companies, we do not stand in the way of companies investing in Iran, or Iran increasing their production, increasing their exports. That is up to Iran to figure out with investors, and domestically on their regulations and attract investors. Having said that, to the second part of your question, we lifted the sanctions on everybody in the world except for ourselves.

So, the US embargo is still in place. We are the only ones that are suffering from the sanctions, and American companies cannot become investors in the energy sectors in Iran at this point. Only foreign-owned subsidiaries can, and only under strict guidelines. So weíre not looking at, so I do not see a lot of U.S.-Iran cooperation on energy. We still have a lot of outstanding, deep concerns about Iranís activities, and that is why our sanctions are still in place, some sanctions are still in place, and the embargo is still in place. So, as long as that is the case, there will not be any cooperation.

Q.: And what about gas? Is there any cooperation prospects?

A.: On natural gas I think that it is going to take some time before Iran emerges on the market just because they have enormous reserves of gas, but the production still needs a few years of work.

Q.: So itís too early to think for example about IranĎs participation in some plans like the Southern Gas Corridor?

A.: Iran is still importing gas from Turkmenistan, and it is exporting below its contract with Turkey. I think they still need some work before they can become and exporter. Iran is announcing a lot of projects, but there is not a lot of gas behind those projects, so pipelines to Pakistan, to Iraq, to Oman, to Europe, to everywhere in the world, but I think there needs to be some work first done, and we are doing to follow, with, with interest.

Q.: Is the U.S. still interested in oil production in the Arctic shelf? What is the minimum price level at which U.S. companies could enter to the market?

A.: We donít decide, as a government energy policy, for companies. We are different than almost any country in the world. We have no state-owned oil companies, or any energy companies, and we cannot tell our companies what to invest in.

Oil prices have to be commercially attractive to make any investment, and right now we are seeing companies announcing cutbacks in investments in new production. The Arctic is probably among the most expensive oil places, and therefore youíve seen a lot of companies shy away from it, but I think that the larger companies that have more cash on-hand, or more cash in their balance sheets are still interested because the future of the Arctic is attractive. So, I donít know what the price-point that theyíll come in, but as a U.S. government, I donít think weíve taken a position on whether the price is right or whether the economic conditions are right for that.

I think we would like to see some voluntary principles that all of us who are neighbors to the Arctic have, to make sure that whatever does happen from an exploration perspective in the Arctic, is done carefully and responsibly, and with a thinking towards the environmental impacts that could happen. So, I wouldnít want to see a rush in there without paying a lot of attention. What I have seen from the companies is that they are in fact paying attention and putting guidelines in place to address that.

Q.: ArenĎt you afraid that due to sanctions against Russia U.S. companies could be replaced by Korean, Chinese, Japanese and other companies in the Arctic?

A.: First, I donít like putting sanctions on Russia, and I strongly, I really deeply, hope that we do not have them in the shortest amount of time possible, that we can remove them. Theyíre no good. For us, for Russia, for Europe, Ö I think Russian sanctions are a difficult tool, but they will be in place until the Ukraine situation is changed and the Minsk agreements are implemented. So, itís not because I think this is so much fun. Itís bad for the relationship. Having said that, I think that the design of the sanctions is such that thereís always a risk of being backfilled, so far that hasnít happened. These sanctions were done in coordination with Europe, and we keep in touch with countries from other parts of the world. Everybody understands the reason and the cause of the sanctions, and everybody supports the implementation of the Minsk Agreement. That is why you have not seen a backfill for European companies that backed out or American companies that have backed out. I suspect that that will be the case for as long as the sanctions are in place.

Transcript by David Lysenko



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