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. Last Updated: 07/27/2016

Evans Puts Blocks in Place for Oil Pact

APAn honor guard saluting U.S. President George W. Bush upon his arrival at Vnukovo Airport on Thursday evening. Bush was met by First Deputy Prime Minister Alexei Kudrin.
In the hours before President George Bush flew in Thursday night, U.S. Commerce Secretary Don Evans laid the groundwork for closer cooperation between the United States and Russia in the key areas of oil and aerospace.

Bush and President Vladimir Putin are expected to sign off on an energy agreement during their summit talks Friday that could open the door to Russia becoming an important supplier to the U.S. market.

Formal cooperation in oil would be the obvious culmination of events following the Sept. 11 attacks on America, when supplies from the Middle East began to look less reliable, analysts said.

"We seek to reduce volatility and enhance predictability of global energy markets and reliability of global energy supply," reads a draft of the agreement, obtained by Reuters on Thursday.

The aim is "to promote access to world markets for Russian energy including that through the development and modernization of Russia's ports," the draft says.

Russia now exports an insignificant amount of crude oil and a small amount of oil products to the United States. Finding a way to increase those deliveries figures prominently on the summit agenda, said Economic Development and Trade Minister German Gref, with Evans at his side.

"America is the world's second- biggest energy consumer after Europe," Gref said, speaking after a signing ceremony between oil major ExxonMobil and the Amur Shipbuilding Plant for a $140 million offshore platform.

"For Russia, of course, this is a new market. We believe Russia can be the United States' strategic partner in ensuring steady supplies of energy to the U.S. as well as global markets," he said.

The $140 million platform is for the Sakhalin-1 project headed by ExxonMobil affiliate Exxon Neftegas in Russia's Far East. Developed in the framework of one of Russia's first production-sharing agreements, the project's billions of barrels of reserves represent the fastest way Russian oil can get to America's West Coast.

"Certainly those resources can add to the energy security, energy stability and energy supply of the world," said Evans, himself an oil industry veteran and longtime advocate of sending tankers from Sakhalin across the Pacific Ocean.

The development costs for Sakhalin-1's first phase total more than $4 billion and represent Russia's largest foreign direct investment. "The conditions for investment and trade between the United States and Russia continue to grow," Evans said. "I'm confident that you'll see more foreign direct investment coming to Russia in the years ahead, and particularly in the energy sector."

Russia's rapidly increasing oil production has taken the world aback somewhat. It seems only yesterday that extraction fell from a peak of 570 million tons in 1987 to 301 million tons in 1996. Since then, Russia has railed up production 15 percent, becoming the world's No. 2 after Saudi Arabia.

These extra barrels have led to banner profits and revenues for Russia's oil companies, many of which now believe that foreign oil companies aren't needed enough to deserve extra privileges outlined in production-sharing agreements.

No. 1 LUKoil, for example, laid out its own plans earlier this week to build northern ports that would serve the U.S. market. Russian oil companies such as LUKoil say they can take care of the energy sector themselves.

Gref disagrees, saying foreign investment is necessary to push the pace of the sector's development. He listed three spheres where U.S. and Russian interests coincide: infrastructure, transit and jointly formulating strategy in other countries' markets. "If we see the need to substantially increase Russia's role in the balancing act that is global energy, then we're going to have to attract investment," Gref said.

It is expected that the new energy agreement will address Central Asia and how its energy supplies can be integrated into international markets.

The Organization for the Petroleum Exporting Countries, or OPEC, however, has yet to be forced off the world arena, said Roland Nash, Renaissance Capital's equity strategist. "While Russia can fiddle with the oil price through supply on the world market, the absence of a direct supply route leaves OPEC with the trump cards," Nash said.

Gref said an enhanced role for Russia is far from a foregone conclusion. Without regulatory changes, any kind of uptick could be a long time coming. "There is a lot of bureaucracy," he said. "We must continue with reforms."

Prior to his meeting with Gref, Evans appeared briefly at a round table on U.S.-Russian aerospace cooperation, held under the auspices of the Russian-American Business Dialogue. Top-level officials of both nations' government and private sectors pledged to work together to overcome trade barriers.

Yury Koptev, head of the Russian Aviation and Space Agency, proposed creating a permanent coordinating body to monitor cooperation in the aerospace industry. "Such a body would meet not only on the eve of summits, but regularly," he said, adding that such a forum would help turn the improving political climate into a fruitful business climate.

Andrew Somers, president of the American Chamber of Commerce in Russia, suggested that the body could be a subcommittee of the chamber's aerospace committee, which was established a month ago to bring together private businesses and government officials working in the industry. Somers said the permanent body could meet every six weeks to two months and periodically draw up policy recommendations.

The proposal won overwhelming support from aerospace officials and industry leaders, who agreed that a number of important issues -- especially concerning government regulations -- needed to be ironed out.

Russian space officials and industry representatives voiced concern about two problems that have already hindered some joint projects. They lamented that private U.S. companies were not allowed to invest money in the development of rocket technologies by foreign countries, which has left some Russian companies scrounging for cash to fund the development of joint projects. Russian officials also complained that U.S. export restrictions have prevented the serial production of certain U.S. technologies, such as rocket engines, by Russian enterprises.

Participants from the U.S. side complained about the regulation that caps foreign ownership in aerospace sector at 25 percent plus one share.

"The 25 percent cap on foreign ownership is of great concern," said Joseph Bogosian, deputy assistant secretary of commerce. "It results in foreign direct investment, it results in jobs in Russia, it results in the ability to keep designer talent here in Russia, and it results in exports from Russia."

The U.S. side also lobbied Thursday for a lifting of prohibitive duties on foreign aviation technology. The duties of value-added tax and import tax total 40 percent. "[By not lifting the tariffs] the Russian government would force the Russian airlines out of any oversees business," said Thomas Pickering, Boeing's senior vice president for international relations. "Without Russian airlines it's hard to see how you will have an aviation industry.

Staff Writers Natalia Yefimova and Lyuba Pronina contributed to this story.