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House Majority Leader Kevin McCarthy announced today that the House will fix a provision in the Senate Russia sanctions bill that would disadvantage US companies in affected projects outside of Russia.
Despite media reports that the House would quickly pass the Senate bill “as is,” we told Hedgeye clients in a July 10 note that “the House will rewrite language on expanded Russian energy sanctions.”
In an interview with Bloomberg today, McCarthy confirmed that “there’s ‘broad consensus’ among lawmakers from both parties to change that provision.” McCarthy also expected to add North Korea sanctions and other minor changes.
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. Examples might be an offshore Africa project or an upstream project in Iraq.
Section 223 of the Senate bill contains language that “prohibits the provision, exportation, or reexportation, directly or indirectly, by United States persons or persons within the United States, of goods, services (except financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects – (1) that have the potential to produce oil; (2) in which a Russian energy firm is involved; and (3) that involve any person determined to be subject to the directive or the property or interests in property of such a person.”
Another more relevant example might be in Venezuela where the US is now considering energy sanctions in response to Maduro’s July 30 Constituent Assembly election. It’s possible that US sanctions may create an opening for an expanded role for Russia and Russian energy companies in the sector that under the Senate language could negatively impact US companies already operating in the country.
We think the Senate will go along with the fix and expect Congress will pass the sanctions legislation before the Congressional recess.
NordStream 2 Pipeline Sanctions
Another energy provision in the legislation involves pipelines and is attracting criticism from European countries and companies. Section 232 extends sanctions to “an investment that directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines” as well as anyone who “sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information or support.”
This provision is aimed squarely at 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.
Shell would seem to have the most at stake here since it has significant economic exposure in the US and therefore easily subject to sanctions. But the provision will not stop the project from being constructed. It has a fairly low price tag and Gazprom could finance it entirely.
Limiting Presidential Authority to Lift Sanctions via Speaker’s Objection
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.
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.
Recent press reports indicate that the House may keep the language limiting Presidential authority but alter the language to make it operative via an objection by the Speaker. The current Senate language allows any member of Congress to make an objection and start the process for a vote of disapproval.
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.