U.S. Secretary of State’s Special Envoy for Eurasian Energy, Ambassador Richard Morningstar

Russia and the United States need major dialog on investment issues. The U.S. Secretary of State’s Special Envoy for Eurasian Energy, Ambassador Richard Morningstar, gave an interview to Interfax, in which he talked about cooperation between Russia and the United States in the fuel and energy sector, what place the countries will occupy in light of the shale revolution in the U.S. gas market, and U.S. projects in the Caspian.

– Could you briefly outline your role as a Special Envoy for Eurasian Energy? What have been some of the challenges that you have seen since you have been appointed in 2009?

– As the Envoy for Eurasian Energy, I am responsible for energy policy as it relates to Europe, Russia, Ukraine, Caucasus, Central Asia, and Turkey – a pretty broad reach. As far as challenges go, again that’s a broad question. The biggest challenge is tying commercial realities in the energy market with strategic issues, such as diversification. Any country should have a balanced and diversified energy policy. It is also important to tie in global market trends and to try to predict what is going to happen, particularly with the shale and LNG markets.

– Do you believe that uncertainty is the biggest challenge at this time?

– There are a lot of unknowns. If you look, for example, at the U.S. Energy Information Administration’s projections from five years ago, they predict that United States will be importing huge amounts of LNG. Now, five years later, due to our domestic shale production, the outlook is that we won’t import LNG. However, it is possible that we will export LNG due to our large supply of shale gas.

– How would you work with the new Energy Resources Bureau, and with Ambassador Pascual, who is leading the bureau?

– We work together very well. I have known Carlos for many years. We started working together in 1993, when I first came to work for the government, and we have been good friends ever since. As the Envoy for Eurasian Energy, I continue to work directly for the Secretary of State. However, Carlos and I work very closely together.

– What is the U.S. stance regarding the Nabucco pipeline? Is it correct to assume that you were misquoted in the media, when it was reported that you, while visiting Baku, had said that the U.S. favors small pipelines projects over Nabucco.

– I believe I was unintentionally misinterpreted, and for that reason we issued a statement to explain what exactly our policy is. Nabucco would be preferable from a strategic and political standpoint, and it would bring more gas to Europe. However, it must be commercially viable, as any pipeline should be. At this point, we support any pipeline from the Southern Corridor that is commercially viable and meets certain conditions, such as providing diversification to those countries that are reliant on a single source of supply and guaranteeing that the smaller pipeline could be expanded to provide for additional gas that will come online in the future.

– How do you envision supply-demand dynamics changing between Russia and the U.S. regarding natural gas, now that the U.S. has become top producer of natural gas in the last two years?

– I think it is still too early to tell. We are producing enough gas to meet our needs at this point. We have to decide how much gas should be exported and to which countries. For example, perhaps we could convert shale into LNG and export it to Asia, where there seems to be an unending demand for gas, or perhaps LNG will be sent to Europe. There is plenty of demand for both Russia and the United States and anybody else who can produce gas.

– Eastern Europe is very much looking forward to U.S. shale gas...

– They understandably are looking for diversification. To which countries in Europe it would go, I don’t know. If gas goes to Western Europe, it would free more gas for Eastern Europe. It’s hard to predict, but I also want to emphasize that in order to export gas it will take a lot of money. LNG facilities have to be converted to export terminals, and companies that export have to get licenses. One has been issued at this time. And one of the conditions of the license is that it won’t adversely affect prices in the U.S. market. We have to see how all that plays out. When we are talking about relatively small amounts, I don’t think that will be a problem. If it got to be a very large amount, that could have an effect. I believe that demand for gas will continue to grow. There will be various sources for that gas, and Russia will be a supplier, but there will be other sources as well.

– We are seeing more U.S. companies become active in Russian partnerships, as seen with this year’s deal when Exxon and Rosneft agreed to invest 3.2 billion dollars to develop East Prinovozemelski Blocks 1, 2, and 3 in the Arctic Kara Sea and the Tuapse licensing block in the Black Sea. In return, Rosneft will benefit from ExxonMobil’s expertise and receive equity interest in some of ExxonMobil’s U.S. developments. This deal has had a positive impact on U.S.-Russia energy relations. What is your assessment?

– I think it has a positive impact. We need even more dialog with our Russian colleagues on investment issues. A deal like Exxon-Rosneft is a deal in Russia’s interest, because some of the projects that Exxon will be working on are very expensive and require a high degree of technology, with which companies like Exxon can help. I think there are other areas where there could be opportunities for investment, such as bringing gas from production facilities to power plants and working on refined products. We have to keep exploring the areas that make sense from the Russian standpoint for investment. Obviously there are other various regulatory issues that would have to be dealt with. I think that when the investments are in a country’s interest, it is easier to work out those kinds of issues. Additionally, there should be Russian investments in the United States and in North America.

– Do you anticipate any concrete projects of that kind in the coming future?

– I hope so. I cannot comment on concrete projects because that is between the companies. I certainly see opportunities. Maybe Russian companies can get involved in some unconventional projects with American companies. Shale projects could be an example.

– What do you think of Iran’s role as a future oil and gas exporter?

– Iran certainly has a lot of oil and gas. And obviously it is no secret that we are having huge political problems with Iran. Right now, Iran will have an increasingly limited role. I have always felt that one of the benefits for Iran in resolving some of the very difficult political issues, such as the nuclear issues, would be that it would facilitate their participation in the world energy market. Things are not going in a positive direction, and they will probably end up playing a lesser and lesser role.

– Exxon’s entry into Kurdistan – was the government aware of Exxon’s entry to Kurdistan? How will this impact relations between the central government in Baghdad and the Kurdistan government? Does this mean that Exxon and the U.S. government will have a stronger hand in shaping the country’s future oil and gas law?

– We hope and work towards the goal that Erbil and Baghdad ultimately resolve issues with respect to oil and gas. It is in their interest that they do so. We encourage agreement on hydrocarbons that will make investment easier. Obviously these are difficult political questions. Any way we can help to resolve those issues, we want to.

– Is there a possibility that Iraq becomes a gas supplier to Nabucco?

– There is a possibility, but it is a question of timing. Many of the issues you alluded to in your previous question need to be resolved before the gas can be exported North. We are looking out at period of many years, but hopefully by then the political situation will be resolved and exports would be possible. But there is no way to predict when it is going to happen.

– Why has it taken so long for BOTAS to liberalize, and do you think that private Turkish firms will play a greater role in securing Turkish import contracts?

– I do not consider myself to be an expert on the internal Turkish market. I would certainly hope that Turkey will make progress on its way towards liberalization.

– Do you think Turkey will import additional volumes of Azeri gas, given favorable netback from Shah-Deniz 1 gas?

– It is clear from their agreement with Azerbaijan that they will import 6 bcm of the 16 bcm from the Shah-Deniz 2 gas.

– Prime Minister Putin has said Russia will need to invest over $300 billion to keep pumping oil at current levels though to 2020. However without Arctic oil tax breaks Exxon-Rosneft will have a low internal rate of return. How confident are you that tax breaks will be put in place? Is it not a problem that Gazprom’s Prirazlomnoye field has been included on a list of fields to be awarded a preferential oil export duty, but not Rosneft-Exxon JV fields?

– Tax issues are important to resolve. If taxes are too great, they are going to destroy the incentives to produce the field. Obviously it is an issue that Exxon and Rosneft have to work out with the Russian government to make this project happen. It is important to emphasize that we strongly support increased Russian oil production. There will continue to be demand for oil for the foreseeable future. There is not much room between what will be demanded and the supply of oil. So, small interruptions in supply can have a very adverse effect on the price of oil and the global oil market. Russia and other countries can produce a buffer to potential interruptions, and the global market would be better off. We would encourage growth of Russian oil production.

– On the Trans-Caspian pipeline. How does the United States view this project? Do you support this project? Do you view it as an alternative to the South Stream? And how do you view the fact that five countries should make a decision about it?

– There a lot of questions in one. We supported the Trans-Caspian pipeline for many years. I was involved in the Caspian back in the mid- and late 1990s. We understand Russia’s position on the necessity of the agreement of five littoral states before any pipeline can be built. However, we have a different legal opinion. As long as the pipeline is in either Turkmen or Azeri waters and if they have an agreement between themselves, then this is sufficient. Obviously it is something that is very important for the E.U.

I don’t see the Trans-Caspian pipeline as competition to the South Stream as such. We neither oppose nor support South Stream. There are various commercial and regulatory issues that have to be dealt with before South Stream is built. It is also quite frankly a major issue between Russia and Ukraine. This is something that has to be determined as part of the Russian-Ukrainian relationship.