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WASHINGTON – One by one, President Barack Obama’s warnings to Russia are being brushed aside by President Vladimir Putin, who appears to only be speeding up efforts to formally stake his claim to Ukraine’s Crimean Peninsula.
In the week since Obama first declared there would be “costs” if Putin pressed into Crimea, Russian forces have taken control of the region and a referendum has been scheduled to decide its future. Obama declared the March 16 vote a violation of international law, but in a region where ethnic Russians are the majority, the referendum seems likely to become another barrier to White House efforts to compel Putin to pull his forces from Crimea.
“The referendum vote is going to serve for Putin, in his mind, as the credibility and legitimacy of Russia’s presence there,” said Andrew Kuchins, the director of the Russia program at the Center for Strategic and International Studies.
If Crimea votes to join Russia, the referendum could also put Obama in the awkward position of opposing the outcome of a popular vote.
The White House has tried to match Russia’s assertive posture by moving quickly to impose financial sanctions and travel bans on Russians and other opponents of Ukraine’s new central government. U.S. officials have also urgently tried to rally the international community around the notion that Russia’s military maneuvers in Crimea are illegal, even seeking support from China, Moscow’s frequent ally against the West.
“I am confident that we are moving forward together, united in our determination to oppose actions that violate international law and to support the government and people of Ukraine,” Obama said Thursday.
The European Union also announced Thursday that it was suspending talks with Putin’s government on a wide-ranging economic agreement and on granting Russian citizens visa-free travel within the 28-nation bloc — a long-standing Russian objective.
The White House says it still believes a diplomatic solution to the dispute with Russia is possible. Obama spoke with Putin for more than an hour Thursday, outlining a potential resolution that would include Russia pulling its forces back in Crimea and direct talks between the Kremlin and Ukraine.
But the fast-moving developments in Crimea may mean that the ultimate question facing Obama is not be what the U.S. can do to stop Russia from taking control of Crimea, but what kind of relationship Washington can have with Moscow should that occur.
White House advisers insist the U.S. could not go back to a business as usual approach with Russia if Moscow were to annex Crimea or recognize its independence. But that may be seen as empty threat to the Kremlin after the U.S., as well as Europe, did just that in 2008 after Russia recognized the independence of Abkhazia and South Ossetia, two breakaway territories of Georgia. Russia also continues to keep military forces in both territories.
Privately, U.S. officials say Russia is running a similar playbook as it seeks to increase its influence in Crimea. And regional experts say Putin also appears to have a larger goal: influencing central government lawmakers in the Ukrainian capital of Kyiv as they prepare for elections later this spring.
“It says to the Ukrainians, Don’t mess with me or I’ll slice off a finger,” said Matthew Rojansky, a Russia analyst at the Woodrow Wilson International Center for Scholars.
The months-long political crisis in Ukraine bubbled over late last month when protesters in Kyiv ousted pro-Russian President Viktor Yanukovych. Amid the chaos, thousands of Russian forces took control of Crimea, a strategically important outpost in the Black Sea where Moscow has a military base.
The outcome of the Crimea referendum is not guaranteed, but there are clear indications the region will choose to side with Russia. About 60 per cent of Crimea’s population already identifies itself as Russian. And Crimea’s 100-seat parliament voted unanimously Thursday in favour of joining Russia.
The referendum had been scheduled for March 30, but was pushed up two weeks. And while the original vote was only on whether Crimea should get enhanced local powers, the peninsula’s residents will now also vote on whether to join Russia.
U.S. officials say they believe Putin was involved in orchestrating the referendum, though the Russian leader made no public statements about the planned vote. Earlier in the week, Putin said Russia had no intention of annexing Crimea, while insisting its population has the right to determine the region’s status in a referendum.
U.S. officials say they also see an unlikely ally emerging in China, which has frequently sided with Russia at the United Nations Security Council in blocking Western actions. While China has not condemned Russia’s actions outright, Beijing’s ambassador to the U.N. this week said it supported “noninterference” and respects Ukraine’s sovereignty and territorial integrity.
Susan Rice, Obama’s national security adviser, spoke this week with Chinese State Councilor Yang Jiechi. The White House said the officials agreed on the need for a peaceful resolution to the dispute that “upholds Ukraine’s sovereignty and territorial integrity.”
It appears unlikely China would actually take punitive actions against Russia. U.S. officials say Beijing is largely acting out of self-interest and appears to view the developments in Crimea through the prism of a nation that also has ethnic minorities who live in border regions and identify more closely with neighbouring countries.
Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding anotherNigeria to world supply, or about 2.5 million barrels a day.
That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to ConocoPhillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades.
“This is going to be a huge opportunity for any kind of player” in the energy sector, said Pablo Medina, a Latin American upstream analyst at Wood Mackenzie Ltd. in Houston. “All the companies are going to have to turn their heads and start analyzing Mexico.”
An influx of Mexican oil would contribute to a glut that is expected to lower the price of Brent crude, the benchmark for more than half the world’s crude that has averaged $108.62 a barrel this year, to as low as $88 a barrel in 2017, based on estimates from analysts in a Bloomberg survey. Five of the seven analysts who provided 2017 forecasts said prices would be lower than this year.
The revolution in shale drilling that boosted U.S. oil output to a 25-year high this month will allowNorth America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast on Dec. 12. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.
Exxon’s forecast, compiled annually by a team of company economists, scientists and engineers, didn’t take into account any changes in Mexico, William Colton, the company’s vice president of strategic planning, said during a presentation at the Center for Strategic and International Studies in Washington on Dec. 12.
Opening Mexico’s oilfields to foreign investment would be “a win-win if ever there was one,” said Colton, who described the move as “very good for the people of Mexico and people everywhere in the world who use energy.”
$15 Billion Boost
The bill ending the state monopoly was approved by the Mexican Congress Dec. 12. Before becoming law, the proposal must be ratified by state assemblies, most of which are controlled by proponents of the reform. Oil companies will be offered production-sharing contracts, or licenses where they get ownership of the pumped oil and authority to book crude reserves for accounting purposes. The contracts will be overseen by government regulators.
Though some foreign companies already operate in Mexico under service contracts with Petroleos Mexicanos, or Pemex, the reform could increase foreign investment by as much as $15 billion annually and boost potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report.
A doubling in production as suggested by Citigroup’s Ed Morse would put Mexican output at 5 million barrels a day, an unprecedented level for Pemex, the state oil company created during nationalization in 1938.
U.S. crude production will expand to 9.5 million barrels a day in 2016, the highest since the nation’s peak in 1970, the U.S. Energy Information Administration said today. That contrasts with last year’s EIA forecast that production would reach 7.5 million in 2019 before gradually declining to 6.1 million in 2040. U.S. output reached an all-time high 9.6 million in 1970.
A doubling of Mexico’s output maybe be slower to realize than the most bullish predictions as companies confront barriers in accessing capital and human resources needed for development, Riccardo Bertocco, a partner at Bain & Co. in Dallas.
An increase of 1 million barrels a day in output is the most realistic upper limit of what Mexico could achieve by 2025 based on the cost for new infrastructure, competition for new fields and opportunities all over the U.S., Bertocco said in a telephone interview Dec. 12.
“The opportunities are there, but they are still far from being materialized,” he said.
Drilling in Mexico will be held back by a lack of infrastructure, such as pipelines, in some of the potential shale developments. The government will need to decide on details for development such as tax rates, royalty structures and standards for booking reserves, Kurt Hallead, an analyst atRBC Capital Markets, wrote in a Dec. 12 note to clients.
It will take time to organize and conduct bidding rounds for licenses, and additional exploration, such as seismic tests, will need to be done, Hallead said.
“We are not expecting any significant impact from the reform to be felt in the next two years,” he wrote.
Foreign oil companies will face a backlash from Mexicans opposed to sharing the nation’s oil wealth, said Ricardo Monreal Avila of Movimiento Ciudadano Party, who sees the reform as violating Mexico’s constitution.
“We are going to see serious problems in the operations of these reforms. Indigenous communities and places chosen by foreign companies for extraction will not allow them on their property. There are going to be serious operational problems.”
Brent crude futures, the benchmark for more than half the world’s oil, rose as much as 1.8 percent to $110.80 a barrel in London today, the biggest intraday gain in two weeks, after Libyan rebels refused to relinquish control over oil ports to the central government. Libya, home to Africa’s largest proven reserves, has seen output tumble to the lowest since 2011 amid civil strife.
The first assets that will attract foreign investment will be mature oil fields drilled decades ago and reservoirs that need injections of steam or carbon dioxide to coax more crude out of the ground, Medina said. Deep-water prospects, shale and other technically challenging endeavors will follow later, he said.
The level of investor interest will be partly determined by which assets Pemex chooses to keep and which it will put up for auction, Medina said.
The Chicontepec field northeast of Mexico City may be among the richest prizes Pemex surrenders after its problems overcoming low pressure and disconnected crude deposits that have limited output, Medina said. Production that has averaged about 60,000 barrels a day may be increased to more than 100,000 by an international producer experienced in handling such fields, he said.
Chicontepec is just one of the over-budget, long-delayed projects for which Pemex will be eager to find partners, said Jose Antonio Prado, a former general counsel of Mexico’s energy ministry and Pemex official.
“The Mexican state will be able to incorporate private participants in projects that are already in force as well as new opportunities,” said Prado, now a partner at the law firm Holland & Knight LLP in Mexico City.
The reforms are especially important to open up exploration in Mexico’s deep-water fields, where additional capital, as well as better technology and expertise are needed, Carlos Solé, a Houston-based partner at Baker Botts LLP, said in a telephone interview. Pemex estimated the country’s deep-water Gulf of Mexico prospects may hold the equivalent of 26.6 billion barrels of crude.
Onshore, the potential is even greater with more than 60 billion untapped barrels, according to a Pemex presentation last month.
Some of the potential shale production sits across the border from Texas’s prolific Eagle Ford formation. The most resource-rich area studied so far is around the city of Tampico, a coastal city about 300 miles (480 kilometers) south of the bottom tip of the Texas border.
“I can’t tell you the amount of banks and investment funds coming from the U.S. and Europe that have been talking to us and are trying to have an expectation of what’s going to happen with the energy reform,” Prado said. “All those guys are going to be in Mexico next year in various forms trying to seek new opportunities.”
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