USA*Engage Blog

How Russian sanctions could cost US energy dominance
Tuesday, 4 July 2017
by Richard Sawaya
An obscure provision tucked into the Russia sanctions legislation under consideration by Congress could have the unintended consequence of giving Russian energy firms a competitive edge over American companies. The provision in question could exclude U.S. oil and gas firms from over $100 billion in investment opportunities over the next 10 years, costing Americans well-paying jobs and hurting the 401(k)s and investment portfolios of nearly every American.

This section of the legislation, labeled "Modification of Directive 4," would expand and codify current sanctions against the Russian energy industry. Currently, U.S. energy firms are prohibited from participating in or providing technical assistance to oil and gas projects in Russia. This legislation would expand those prohibitions worldwide.

This poses a problem because of how energy companies are required to cooperate when drilling for deepwater reserves. Typically, multiple oil and gas firms will be granted different exploration blocks covering a single oil field. Governments often require that the owners of the associated blocks work together on one development for all of the blocks and share the costs. Governments offering deepwater concessions require such cooperative frameworks as a means to create the safe and efficient development of their natural resources.

Were this legislation to pass with the Directive 4 provision included, it could block U.S. oil and gas firms from participating in some international oil exploration and production projects. If any sanctioned Russian company was awarded an exploration block on an oil field, U.S. companies would be denied the means to explore anywhere on that field.

Russia could even strategically bid to get even a small piece of every oil field and thereby block their greatest competitors – U.S. firms – from participating. This would drive Americans out of the international market, allowing Russia the means to dominate that market along with EU and other non-US oil companies.

The legislation would even give Chinese oil firms an advantage over us. China has not sanctioned Russia and therefore is free to partner with Russian firms and participate in profit sharing from deepwater exploration and production. Even if the Russians didn't swoop in to claim additional exploration blocks in the absence of American competition, Sinopec and other Chinese companies would.

This will have a very real impact on the American economy and American jobs. A 2013 study estimated, for example, that opening up the Atlantic outer continental shelf for oil and gas exploration could generate almost 280,000 jobs and pump up to $23.5 billion a year into the U.S. economy. Multiply those figures by the many more exploration blocks already available worldwide and the harm to America becomes even more profound. If U.S. companies are prohibited from participating internationally, those jobs and that revenue instead goes to the Russians, European and Chinese firms.

The European Union also passed its own set of sanctions on Russia following its incursion into Ukraine, but the EU's sanctions automatically expire every six months if they're not renewed by all 28 European Union member states. These European sanctions are also limited to deepwater investment within the territory of the Russian Federation, and not expanded globally as is the case with the Russia sanctions bill. U.S. sanctions, on the other hand, remain in effect until they are lifted by the president. If this provision passed and the sanctions were codified into law, an act of Congress would be required to remove the sanctions, and there's no telling when or if that would ever happen.

President Trump pledged to put America first but this legislation, as currently written, would stimulate the Russian economy at the expense of our own. Jobs that would have employed Americans will instead go to Russians, and profits that would have gone to U.S. shareholders, including teacher retirement funds 401(k) plans, will instead be deposited into the pockets of wealthy Russian oligarchs. This legislation puts Russia first and needs to be rewritten.