Russia Looking for an Exit?

Published by the Atlantic Council on September 24, 2015. To access the original article, click here.

As Russia increases its support for beleaguered Syrian President Bashar al-Assad, rebels in eastern Ukraine have observed a ceasefire since September 1. The second Minsk ceasefire agreement, signed in February, had been repeatedly violated. But things have changed. Some separatist leaders have left the area, returning to posh jobs in Moscow. Former Donetsk Prime Minister Alexander Borodai has resumed his consulting career in the Russian capital, and former Luhansk Prime Minister Marat Bashirov chairs the government relations committee at the Russian Managers Association.

Russian reporting on Ukraine has also decreased. Two of its star war reporters have been sent to Syria. On September 6, Dmitry Kiselyov's two-and-half hour program—Rossiya 1's flagship weekly news program—was different: known for his fiery rhetoric against the government in Kyiv, the host "was uncharacteristically cursory" in his comments about Ukraine, the BBC observed. Kiselyov didn't discuss Ukraine until more than half way through his show, and this was in a week with deadly clashes outside Ukraine's parliament. Another Russian journalist observed, "Kiselyov knows something about a change in the rules of the game...The rest of us will find out a little later." RT reported that an impetus for better relations is coming from the West.

Talking heads began to speculate that Russian President Vladimir Putin may be looking to ease the Ukraine crisis and restore relations with the West. Carnegie Endowment's Dmitri Trenin writes, "Moscow certainly hopes that cooperation with the United States and the West on Syria would blunt their confrontation over Ukraine." He goes on to say that it's "probably not a mere coincidence" that hostilities in the Donbas have died down when they did. Another possible reason for the timing is Putin's upcoming speech at the United Nations General Assembly on September 28. Reduced hostilities in Ukraine could lead to a blunting of the criticism he can expect from the world community. The strategy is paying off: President Obama has agreed to meet with Putin during his visit.

There are a number of factors for Russia's changing strategy in Ukraine. Despite Putin's bluster about restoring Russian greatness, it is in considerable economic difficulty. The state budget is highly dependent on the sale of oil and gas. Andrey Movchan reports that 60 percent of consolidated budget revenues come from taxes either directly or indirectly related to the oil and gas sector. The Russian government needs oil at $100 a barrel to balance its budget; with oil selling between $40 and $50 per barrel, it is running deep deficits. The Russian economy is projected to decline by three percent in 2015.

The future doesn't look any brighter for Russia's energy sector either. While Rosneft planned to double its oil shipments to China, and Gazprom announced a doubling of the Nord Stream natural gas pipeline, the reality is quite different. Oil shipments to China have fallen below contracted levels (1.48 mt increase for 2015 instead of the contracted 5 million mt increase). Sanctions are preventing western participation in the Sakhalin II project. China is not providing the $25 billion financing to build the Power of Siberia pipeline and has refused to sign a decade-long anticipated contract for the Altai pipeline. In the West, the much ballyhooed Turkish Stream is also being held in abeyance. The Russian mega-energy deals of the last decade appear to be more propaganda than reality.

Economics is not the Russian President's only concern: the Russian people do not support deeper involvement in Ukraine. According to the Levada Center, 70 percent of Russians supported the takeover of Crimea as "Russian" land, and 80 percent say that retaking Crimea proves Russia's great power status. But when it comes to eastern Ukraine, the results are different. As of March 2015, 57 percent of Russians said the country should stay within its present borders, 64 percent said Russia should not try to keep former Soviet republics under control, and 55 percent said the country should focus on domestic issues. As the Russian economy continues to worsen, it's likely these isolationist sentiments will only increase.

Russia's continuing involvement in Ukraine is turning counterproductive for the Kremlin. Before 2014, Ukraine was leaning toward a more Western identity but nothing was solidified. That identity is no longer ambiguous, thanks to the Kremlin's overreach. Now there are US special forces on Ukrainian soil, training Ukrainian troops. The commander of US Army-Europe Lt. Gen. Ben Hodges said that those numbers may be expanded. In 2014, Ukraine signed an Association Agreement with the European Union, eliminating the possibility of it joining the Kremlin-led Eurasia Economic Union. Long divided NATO allies remain united over Russian sanctions, and for the first time in its post-Soviet history, a majority of Ukrainians want their country to join NATO.

Last week US Secretary of Defense Ashton Carter spoke with his Russian counterpart on ways deconflict Syria, but any cooperation between the two countries should not soften our Ukraine policy. The West may have only marginal influence on the worldwide energy market, but increasing pressure on pipeline routes, Russian public opinion, and negative geopolitical developments are taking their toll on the Kremlin's resolve.

James J. Coyle is a Research Fellow at the Atlantic Council and the Director of Global Education at Chapman University in Orange, CA.

Q&A with energy watcher James Coyle

Published in the Orange County Register on April 4, 2013. To access the original article, click here.

Q: What factors are causing high gas prices worldwide?

A: First, there's the ever-increasing need for fuel in China and, to a lesser extent, India. These countries push up demand. In China, they're putting 70,000 new cars on the road every day. Those aren't replacement cars; that's a net increase of vehicles every day. And when you combine that with declines in production from Libya, Syria and Iraq and sanctions on petroleum exports from Iran, you have a recipe for high prices.

Q: So when will we get relief at the pump?

A: I hate to be pessimistic, but as long as demand for oil continues to grow worldwide, we can anticipate high prices. While prices in March moved down slightly because of seasonal fluctuations, the long-term trends predict prices remaining around $4 per gallon.

Q: What needs to happen for gas to become more affordable?

A: The usual answer is drill, baby, drill – but the domestic amount of traditionally-recoverable oil that is suitable for production as gasoline offers just a short-term solution. We're talking about unrecovered deposits in the Arctic National Wildlife Refuge in Alaska, off the coast of California and some other places. They could provide relief for 10 years, maybe 20. Recent advances in the recovery of oil from shale extend the timeline out to 50 years, but at a high environmental cost.

In the short term, any increase in supply, regardless of where we drill, will drop the prices. There really is no such thing as a domestic or world market. That's a fallacy; it's all one market. So we can increase tar sands production in Canada, and all that will do is produce enough oil so that China can add another 70,000 cars to the road.

Q: Taking a longer view, are there opportunities for improvement?

A: There are a couple of possibilities that provide some hope. One is biofuels. Researchers are really starting to experiment with the growth of algae and other things that could be burned for energy – not to put gas in your tank but to generate electricity so oil can be freed up to use for gasoline.

Also, we are witnessing a revolution in the production of petroleum and natural gas from shale oil. Ten years ago, the question was "How long before we run out?" It was a scary possibility. Then, in 2002, a new technique was established to unleash energy from shale through fracking. Now, for the first time since the 1960s, the U.S. is exporting energy. This is the most viable source of hope, because other technologies are just too immature. It is, however, a two-edged sword: the sudden availability of cheaper oil and gas from fracking is kicking the bottom out of alternative energy technologies.

Q: Won't conservation help?

A: Yes, it becomes clear that a big part of the answer is conservation, which doesn't have to mean people riding everywhere on bicycles. It can mean things as simple as checking your tires. If everyone in the U.S. kept their tires properly inflated, we would see a 5 percent reduction in the use of gasoline. That might not sound like a lot, but we consume 20 million barrels of oil a day. Five percent would equate to an extra million barrels of oil daily.

Exxon follows BP into Russian Exploration

The World Economic Forum in Davos was the location where ExxonMobil announced its joint venture with Rosneft to explore the Black Sea for oil. The two energy giants are combining forces to explore a deepwater trough off the coast of Krasnodar. During the exploratory stage, the two companies will split the costs 50-50, but Exxon will pay 66 percent during the development stage. The geologic formation, known as the Tuapse Trough, is estimated to hold 7.2 billion barrels of oil or its equivalent. http://www.themoscowtimes.com/business/article/exxon-rosneft-sink-1bln-in-black-sea/429894.html Exxon has committed itself to drilling two wells in the area, according to Hurriyet. ExxonMobil has been in Russia a number of years, as 30% owner of the consortium that has developed the Sakhalin-1 project.

The $1 billion deal was signed on January 27. Russian Deputy Prime Minister and Rosneft Chairman Igor Sechin remarked, "Cooperation with ExxonMobil once again underscores our commitment to the principles of transparency and vision of the Russian energy industry as a part of an integrated market place." The St. Petersburg Times reports that the consensus is that Sechin is sincere; Rosneft is looking to a global future, and to achieve that goal requires Western partners.

Rosneft has now signed deals with both BP and ExxonMobil, and Shell's CEO Peter Voser says that he is also in talks with company concerning a possible partnership. Energy analyst Matthew Hulbert writes in European Energy Review that such deals represent the start of a mergers & aquisitions frenzy in the upsteam sector in Russia and other countries, as a result of the Exxon oil spill in the Gulf. Traditionally "safe" locales such as the United States have been demonstrated to carry large, potential financial risks. This is forcing the majors to look at other locations that were previously rejected because of the political risk.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.