Tuesday, July 11, 2017

A Russia Sanctions Trap

A Senate provision could hurt U.S. oil firms working outside Russia.


By The Editorial Board
The Wall Street Journal
July 11, 2017

Congress wants to increase sanctions on Russia for meddling in the 2016 election, and please go for it. But the bill that recently passed the Senate 98-2 contains a hastily written provision that could boomerang on U.S. interests, and the House can fix the potential damage.

The problem is a provision that expands restrictions on how U.S. energy firms can interact with Russian counterparts. U.S. companies are already prohibited from investing in or advising on oil and gas projects in Russia. But the bill would also bar them from taking part in any project anywhere with sanctioned Russian firms. In practice this could bar U.S. companies from some of the biggest deepwater drilling projects around the world and thus help Russia and China.

At issue is a quirk of the oil and gas industry known as “unitization”—a technical term for operating efficiency. Governments (say, Brazil) will grant leases to many industry players for different blocks of the same oil field. While the leases are stand-alone deals, the host government will nonetheless require all players to jointly create the infrastructure (pipelines, etc.) to efficiently develop the field.

Under the Senate language, U.S. companies would be barred from any project where sanctioned Russian firms were also granted exploration rights. Those blocks would instead be snapped up by European or Chinese firms that aren’t bound by similar restrictions. Russia could even exploit the rules to hurt U.S. companies by bidding on projects solely to drive American energy firms out of deals.

Richard Sawaya, vice president of the National Foreign Trade Council, estimates that the Senate provision could bar U.S. oil and gas firms from some $100 billion in exploration projects over 10 years—with commensurate damage to American jobs, shareholders and tax revenue. The provision might even help Russian companies get much of that business.

The oil and gas industry supports the overall sanctions bill but wants to correct the boomerang provision. Texas Rep. Pete Sessions may be able to force some changes as head of the House Rules Committee, but he could use a hand from the Trump Administration. Secretary of State Rex Tillerson may be reticent given his former Exxon ties, but this bill should transcend political appearances.

The White House dislikes the sanctions bill because it limits President Trump’s discretion to lift sanctions without Congressional approval. So it may be staying silent in hopes that the oil provision takes down the entire bill in the House. Republicans who want to act against Russia shouldn’t let that happen.

Mr. Trump wants to unleash U.S. oil and gas production, which properly deployed can undercut Vladimir Putin’s petro-dollar revenue at home and his political leverage over European energy markets. It makes no sense to kneecap U.S. energy production in the rest of the world in a bill aimed at sanctioning Russia.


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