Commentary on Political Economy

Wednesday, 23 March 2022

 

How Europe Got Hooked on Russian Gas Despite Reagan’s Warnings

A Soviet-era pipeline, opposed by the president but supported by the oil and gas industry, set up the dependency that today helps fund the Russian assault on Ukraine.

President Ronald Reagan imposed sanctions in 1981 in an effort to block a Soviet pipleine project, but he soon ran into stiff opposition from industry.
President Ronald Reagan imposed sanctions in 1981 in an effort to block a Soviet pipleine project, but he soon ran into stiff opposition from industry.
Credit...NBC NewsWire, via Getty Images

The language in the C.I.A. memo was unequivocal: The 3,500-mile gas pipeline from Siberia to Germany is a direct threat to the future of Western Europe, creating “serious repercussions” from a dangerous reliance on Russian fuel.

The agency wasn’t briefing President Biden today. It was advising President Reagan more than four decades ago.

The memo was prescient. That Soviet-era pipeline, the subject of a bitter fight during the Reagan administration, marked the start of Europe’s heavy dependence on Russian natural gas to heat homes and fuel industry. However, those gas purchases now help fund Vladimir V. Putin’s war machine in Ukraine, despite worldwide condemnation of the attacks and global efforts to punish Russia financially.

In 1981, Reagan imposed sanctions to try to block the pipeline, a major Soviet initiative designed to carry huge amounts of fuel to America’s critical allies in Europe. But he swiftly faced stiff opposition — not just from the Kremlin and European nations eager for a cheap source of gas, but also from a powerful lobby close to home: oil and gas companies that stood to profit from access to Russia’s gargantuan gas reserves.

In a public-relations and lobbying blitz that played out across newspaper opinion pages, congressional committees and a direct appeal to the White House, industry executives and lobbyists fought the sanctions. “Reagan has absolutely no reason to forbid this business,” Wolfgang Oehme, chairman of an Exxon subsidiary with a stake in the pipeline, said at the time.

Those efforts, nearly a half-century ago, show how some of the world’s largest oil and gas companies played a critical role in opening up Russia’s reserves by opposing sanctions and advocating for business interests over national security, human rights or environmental concerns.

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Today, Europe’s reliance on Russia’s gas has put European nations in a compromised position: They continue to purchase Russian energy, transferring enormous sums of money to Moscow, which fund a Russian invasion that they denounce.

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Reagan’s effort to block the pipeline decades ago, which ultimately failed, also laid the foundations for a huge build-out of natural gas, which is now hindering Europe’s attempts to tackle climate change. Even as natural gas has helped to replace dirtier coal, the pipelines and other gas infrastructure that followed have effectively committed Europe to a reliance on gas that not only continues today, but remains difficult to unravel even in a moment of global unity against Russian aggression.

“The Soviet Union is a superpower that really emerged on the back of its oil and gas exports,” said Agnia Grigas, a senior fellow at the Atlantic Council and an expert on the security and energy issues of Russia and the former Soviet states. “Nothing has changed.”

Pipes that were intended for use in the Nord Stream 2 project, a pipeline that was halted becasue of Russia’s attack on Ukraine.
Image
Pipes that were intended for use in the Nord Stream 2 project, a pipeline that was halted becasue of Russia’s attack on Ukraine.
Credit...Odd Andersen/Agence France-Presse — Getty Images

In the face of opposition both at home and abroad, Reagan in 1982 reversed the sanctions, which had stopped American companies from supplying or participating in the project. The pipeline from Siberia to West Germany opened two years later.

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The industry lobbying has continued to this day.

In 2014, when the Obama administration imposed sanctions against Russia following its military seizure of the Crimean peninsula from Ukraine, Exxon fought the measures, meeting with White House officials.

As Russia this year massed troops on the Ukrainian border, the American Petroleum Institute, the powerful industry group, lobbied against tougher sanctions, saying that any measures needed to be “as targeted as possible in order to limit potential harm to the competitiveness of U.S. companies.”

In the wake of Russia’s brutal invasion of Ukraine, Shell, BP and Exxon have said they will end their Russian operations.

Casey Norton, a spokesman for Exxon, said the company “does not advocate for or against sanctions” but had communicated with the U.S. government “to provide information about the potential impacts on energy markets and investments.” He said that Exxon was complying with all sanctions, had discontinued its flagship project in Russia and was withholding new investment there.

Bethany Williams, an American Petroleum Institute spokeswoman, said that any interactions by its members with policymakers on sanctions had been limited to “ensuring retaliatory measures are clearly written to reduce any room for uncertainty and ensure maximum compliance.”

John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce, said his organization had a longstanding belief that sanctions would very likely fail if they were unilateral. Exxon, the American Petroleum Institute and the Chamber of Commerce all condemned Russia’s invasion. Shell and BP had no comment.

The concerns raised during the Reagan administration four decades ago have been borne out. Before Russia’s attack on Ukraine last month, Germany relied on Russia for 55 percent of its gas, for example, complicating Europe’s response to Russian aggression in Ukraine.

For Ukraine, the consequences have been devastating. “The companies that have been working with the Russian regime were driven only by pure financial interest,” said Oleg Ustenko, a top adviser to the Ukrainian president, Volodymyr Zelensky. “They closed their eyes to the morality of it, and now we are paying the consequences.”

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Vladimir V. Putin, then prime minister, and  Gazprom chief executive Alexey B. Miller during a  2009  dispute in which Russia shut off supplies to Europe.
Image
Vladimir V. Putin, then prime minister, and  Gazprom chief executive Alexey B. Miller during a  2009  dispute in which Russia shut off supplies to Europe.
Credit...Mikhail Metzel/Associated Press

On a frigid Sunday morning in December 1981, millions of Poles woke up to find their country under a state of martial law. Global condemnation of the Polish authorities, and of their backers in the Kremlin, was swift.

Already wary of the Soviets’ plan to build a gas pipeline to Western Europe, the Reagan administration produced a list of economic sanctions that essentially banned American companies from helping to build it. “The fate of a proud and ancient nation hangs in the balance,” Reagan said in his Christmas address.

The measure drew immediate ire from America’s European allies, where the $25 billion pipeline promised a stable source of gas at a time nations were still reeling from the oil shocks of the 1970s. But within the United States, it was the oil and gas lobby that fought back.

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The sanctions would “aggravate further our international reputation for commercial reliability,” the U.S. Chamber of Commerce, which represented major oil and gas companies and pipeline manufacturers among numerous other industries, warned in a letter to the White House. The pipeline would, in fact, give Western Europe “a degree of leverage over the Soviets rather than vice versa,” Richard Lesher, the group’s president, later told The Washington Post.

Following intense lobbying, the House Foreign Affairs Committee voted to lift the sanctions, despite a letter from Secretary of State George P. Shultz warning that such legislation would “severely cripple” the administration’s ability to deal with the Polish crisis.

That battle four decades ago marked the start of a huge build-out of gas infrastructure in Europe. Today, an extensive network of pipelines stretches from Russia to Europe, supplying about 40 percent of the continent’s gas.

That network has given Moscow leverage over its European neighbors. In 2009, when Russia and Ukraine became embroiled in a diplomatic dispute, Russia shut off its gas supplies, leaving tens of thousands of homes without heat. More than a dozen people froze to death, mainly in Poland, before Russia reopened its pipelines.

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An abundant flow of gas from Russia had consequences beyond security, slowing Europe’s efforts to tackle climate change by shifting toward renewables, experts say. The European Union has said it now aims to reduce its gas imports by two-thirds, and quickly ramp up its use of wind, solar and other forms of renewable energy.

“Obviously they could have done that before, but there was no incentive to,” said Margarita Balmaceda, professor of diplomacy and international relations at Seton Hall University and an associate at the Harvard Ukrainian Research Institute. Access to Russia’s gas, she said, had “definitely slowed the move toward renewables.”

Mr. Putin and   Exxon  chairman Rex Tillerson, wearing the Order of Friendship, a Russian state decoration, in St. Petersburg in 2013.
Image
Mr. Putin and   Exxon  chairman Rex Tillerson, wearing the Order of Friendship, a Russian state decoration, in St. Petersburg in 2013.
Credit...Mikhail Klimentyev/TASS, via Alamy

The fossil fuel companies’ early involvement in the Siberian pipeline was also the start of a courtship of a region with some of the world’s largest reserves of oil, natural gas and other commodities. Following the fall of the Soviet Union in 1991, successive U.S. administrations also traded their vigilance for an increasingly warm embrace of Moscow, pushing for closer energy ties. (In 2001, President George W. Bush famously said that he had looked Mr. Putin in the eye and got a sense of his soul, comments he later said he regretted.)

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Spurred by a thaw in East-West relations, fossil fuel companies pursued joint ventures to develop Russia’s oil and gas fields with Russia’s state-controlled oil and gas giants. BP took a nearly 20 percent stake in Rosneft, the Russian oil giant, that accounted for a third of BP’s oil and gas production and more than half its reserves. Shell teamed with Gazprom, the state-owned gas company, to work on projects including Russia’s first liquefied natural gas plant, and invested in the Nordstream 2 gas pipeline.

Both BP and Shell say they are now exiting those projects.

Exxon, which invested in a gas project near the Pacific island of Sakhalin in the 1990s, in recent years had pursued a heftier stake in Russian oil and gas production, signing a deal with Rosneft for a possible $500 billion investment. A video produced by Rosneft in 2012 portrayed the wide-ranging nature of their planned partnership: joint headquarters in St. Petersburg and Houston, a slice of Exxon’s operations in the Permian Basin in Texas and Gulf of Mexico, and the sharing of fracking and offshore drilling technology.

In 2013, Mr. Putin awarded the Exxon chief executive, Rex Tillerson, the Order of Friendship, one of the highest honors Russia gives to foreign citizens.

The fallout from Russia’s annexation of the Crimean peninsula the following year forced Exxon to stall the deal, but not without a fight. Even after the United States adopted sanctions, Exxon tried to push ahead with the Rosneft deal, signing legal documents with the state-owned company’s chairman, Igor I. Sechin. Exxon was later fined $2 million for actions the Treasury Department said “demonstrated reckless disregard for U.S. sanctions requirements.”

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Exxon sued, saying that the U.S. sanctions covered only Mr. Sechin’s personal affairs, not the company he presided over. A Texas judge ruled in favor of Exxon, though the judge called Exxon’s conduct “risky and, perhaps, imprudent.”

Exxon also worked to influence Congress’s attempts to pass sanctions against Russia around that time, its lobbying disclosures show.

Because of reluctance among some members of Congress to oppose those sanctions, “we had to step in front of that and explain to them how that was hurting U.S. businesses,” Keith McCoy, a former Exxon lobbyist said in a 2021 video released as part of a sting operation by the environmental group Greenpeace.

As recently as January 2022, the American Petroleum Institute lobbied to soften sanctions against Russia, saying they should be “as targeted as possible in order to limit potential harm to the competitiveness of U.S. companies.”

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At his confirmation hearing to become Secretary of State under former President Donald J. Trump, Mr. Tillerson, the Exxon chief executive, stated that he had “never lobbied against sanctions personally” and that “to my knowledge, Exxon never directly lobbied against sanctions.”

Bob Corker, a Republican Senator from Tennessee who was chairman of the Senate Foreign Relations Committee at the time, interjected, “I think you called me at the time.”

Asked about the call this week, Mr. Corker said the two men regularly discussed policy on the phone.

Hiroko Tabuchi is an investigative reporter on the climate desk. She was part of the Times team that received the 2013 Pulitzer for explanatory reporting.

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