Editor's Note: Below is an excerpt from a research note written by Hedgeye Senior Energy Policy analyst Joseph McMonigle. To read this entire note email sales@hedgeye.com.
Fix for US Energy Companies involved in projects outside Russia but pipeline sanctions likely survive.
The US Senate passed legislation that imposes new and tougher sanctions on Russia and Iran by a 92-2 vote in late June. The surprisingly speedy passage and big bipartisan vote led many to believe the House would be forced to quickly approve the bill. Instead the House has raised constitutional concerns and delayed consideration of the Senate bill for three weeks and counting.
While we think the current political environment in Washington means the House will eventually pass Russia sanctions legislation this month, we don’t expect the House to rubber-stamp the Senate language. Instead the House will pass a different bill or at least one with significant changes.
Expanded Sanctions on Projects Outside of Russia
For energy investors, we believe the House will rewrite language on expanded Russian energy sanctions. The Senate language contains a provision that will extend sanctions to US companies involved in projects outside of Russia where a Russian company is a partner or member of a consortium.
The Senate language will have virtually no impact on current energy production inside Russia but will hurt US companies involved in projects elsewhere around the globe that may have a Russian company as a consortium member or investor. Examples might be an offshore Africa project or an upstream project in Iraq.
US oil companies are seeking a fix to this provision, and we believe the House will limit the sanctions language to projects inside Russia which is basically current sanctions policy imposed by the Obama Administration.
NordStream 2 Pipeline Sanctions
Another energy provision in the legislation involves pipelines and is attracting criticism from European countries and companies. The pipeline provision impacts the NordStream 2 pipeline project and the legislation specifically cites US policy “to continue to oppose the NordStream 2 pipeline given its detrimental impacts on the European Union’s energy security, gas market development in Central and Eastern Europe, and energy reforms in Ukraine.”
European governments and companies are lobbying Congress to remove the provision but we think it is likely to remain in the House version. There are no US companies involved in the NordStream project and it theoretically competes with US LNG exports so in our view the language is unlikely to be removed.
No Impact on Current Russian Crude Production
There is nothing in the Senate bill that would adversely impact current Russian crude production which is at record levels already. It is also unlikely that any new House language will be added to change current production levels.
Limiting Presidential Authority to Lift Sanctions
Finally, the big headline grabber of the Senate bill was a new provision that would limit the President’s ability to lift sanctions or provide waivers without Congressional approval. The language in the bill only applies to Russia sanctions and not to Iran sanctions.
Press reports indicate that the White House is lobbying the House to remove the language limiting the President’s authority. Certainly, any President and White House from either party would oppose such language. It’s the type of provision President Obama would have supported as a Senator but aggressively opposed as President. As a result, we think there is a 60 percent chance the language limiting the President’s authority gets removed by the House.
Regardless of the outcome, we do not believe the Trump Administration will loosen current sanctions on Russia absent some major breakthrough on Ukraine. It is also worth noting that the Trump Treasury Department has denied a request by ExxonMobil for a waiver of Russia sanctions.