American LNG Export to Save Europe from Gazprom is Mostly Hot Air

by Michael Camarda

In the search for ways to punish Russia for its military incursion into and subsequent annexation of Crimea, the US and EU have both imposed sanctions, visa restrictions, assets freezes on Putin’s inner circle, as well as suspended Russia’s G8 membership. The more vaunted sectoral sanctions, with finance and energy being the most drastic, have not been imposed as of writing. The reason is clear to all that there is significant interdependence between Russia and the EU, especially in the field of energy where Europe receives between 25-30% of its gas and 1/3rd of its oil from Russia. The kind of sanctions that might deter Russia, scare European countries like Germany or Italy too. Such an economic disturbance could derail a European economy that seems on the verge of emerging from a fiveyear period of negative or flat GDP growth. Street protests continue to rock Athens and Madrid, violence driven by the volatile mixture of high unemployment and austerity programs.

This strategy of exporting via LNG American gas to Europe as a means to weaken or perhaps even dislodge Russia from the EU market is so chock full of ignorance of markets and so dependent on numerous unlikely scenarios, that it cannot be seen as anything but mere political posturing in a time of crisis.

With “little green men” standing triumphant in Crimea, the anti-Kiev Donetsk People’s Republic standing firm as of writing, the threat of even more “little green men” entering Eastern Ukraine, and Europe still with a weak economy and energy dependency on Russia, politicians like House Speaker John Boehner or Arizona Senator John McCain see America riding to the rescue of Western Civilization, just like in 1917 or 1941. Save NATO’s increased activity, this time Uncle Sam is not brandishing tanks or planes, but ships, and not cruisers or destroyers, but LNG tankers.

The goal for America is to weaken Russia’s energy position over Europe through what amounts to energy containment. This idea is not new; it goes back over 30 years from the Reagan Administration’s trying to block the Soviet Union’s Urengoy-Pomary-Uzhgorod gas pipeline to supply Western Europe to the more recent trans-Turkey Nabucco Pipeline that would take Azeri and potentially Iraqi or even Turkmen gas westward to make redundant Russia’s South Stream through the Black Sea. Both attempts to contain Russia through energy failed. There is much to believe that this current LNG plan will end in the same. What is new in this case is that the potential energy is coming not from a third country but from America itself. The recent shale revolution has turned America from a gas importer to a potentially major gas exporter in the coming years. America is now the world’s largest natural gas producer passing Russia. Russia remains the number one natural gas exporter, but some Americans hope to pass them in that category as well. The Shale Gas Revolution truly has been a remarkable “game-changer” for world energy markets, and stands as a testament to the ingenuity of the American small and medium size businessman and to the unique extraction laws in the United States.

With this new export potential set against the backdrop of the Ukraine Crisis, American policy planners, who likely have given up for the time being on exporting a Color Revolution to Russia (given the +80% approval being enjoyed by Vladimir Putin due to the Sochi victory and the Crimean Crisis), now seek to export the products of our shale gas revolution to their European allies in hopes of weakening Russia’s geopolitical posture once again. From the Arab oil embargo of the 1970s to the 2006/2009 Gas Wars between Ukraine and Russia, it seems history has not served as a guide—that the overt mixture of politics into the free (energy) market usually ends up a toxic brew for both producer and consumer.

Boehner seems to have forgotten the fact that decisions between private corporations are almost solely made along the lines of profits, not politics.

This strategy of exporting via LNG American gas to Europe as a means to weaken or perhaps even dislodge Russia from the EU market is so chock full of ignorance of markets and so dependent on numerous unlikely scenarios, that it cannot be seen as anything but mere political posturing in a time of crisis. Boehner’s proposals read more like a of the wish list of his corporate sponsors, i.e., approval of the Keystone OIL pipeline, something entirely irrelevant to the debate of Europe’s position vis-à-vis Russia’s Gazprom. Let us count the ways American LNG cannot save Europe from Russia, which has been a remarkably reliable supplier to countries that pay on time and in full over the last thirty years, through its state collapse, hardship, wars, and recession.

On Approval Process

In principle John Boehner is right to demand a faster, clearer approval process for natural gas export. He cites the Department of Energy’s own website showing six approvals in the last three years with 24 still pending approval (a seventh was approved as of late March, a welcome step). What’s driving the need for an approval process? Answer: the law. U.S. natural gas exports require federal approval pursuant to Section 3 of the Natural Gas Act with the DOE’s Office of Fossil Energy and the Federal Energy Regulatory Commission (FERC). John Boehner calls for quick liberalization. Boehner claims “In response to Mr. Putin’s aggression in Ukraine, President Obama should announce a series of steps that will dramatically expand production of American-made energy, beginning with lifting this de facto ban on exports of U.S.-produced liquefied natural gas.”

A quiet debate is raging on the sustainability of the entire Shale Gas Revolution. Some see it as a bubble that will soon burst.

As the lifting of this ban would lead to a fully free market situation, there is, for example, the possibility of American gas feeding the growth of China. Hypothetically, China could develop infrastructure linking its LNG facilities to impoverished, nucle-ar-armed North Korea. Boehner seems to have forgotten the fact that decisions between private corporations are almost solely made along the lines of profits, not politics. But certainly Boehner is right to question a very old law that less and less reflects the US energy reality. Approval processes should be expedited so America is no longer artificially constrained to exporting its natural gas to countries only with which it has a free-trade agreement. Perhaps a simple black list of non-FTA countries should be drawn up, countries whose reception of US Shale gas would be deemed to fall outside “the public interest.” This is a debate in and of itself; for the sake of this article, let us assume the US regulatory framework is totally liberalized and US shale gas can be shipped unabated and uninhibited to all corners of the world. Will Europe somehow then be safe Europe?

Will the Shale Revolution Literally Run out of Gas?

It’s the dirty little secret that gets less press attention than it should, the US Shale Revolution is based on significantly higher drilling and extraction inputs than conventional gas require. Despite the attention-grabbing headlines of the USA as the “New Saudi Arabia” and IEA reports that show head-spinning potential, a quiet debate is raging on the sustainability of the entire Shale Gas Revolution. Some see it as a bubble that will soon burst. Call it the cyclical nature of the oil and gas business, the high prices of the mid-2000s drove new technologies that have given us the current gas glut and record low Henry-hub prices in the United States. Even if production lasts longer than the naysayers have anticipated, most economists and energy experts say that the current price of US gas cannot remain so low; many shale gas players are no longer making a profit. Even if production remains, the price is likely to increase, as per the IEA (Figure 86). With every dollar rise in the Henry Hub price, this will eating into the much needed profit margins that would fuel any feasible export to European markets

If you are a gas company, where would you rather ship your gas…to Europe, whose growth is flat, or to Asia, with an $8 more per mmBtu margin and room for much more growth?

The dragon in the room of this entire debate, the one that puts the EU rescue plan most in doubt, is Asian consumers. Asian spot LNG prices are as of March around $18 per million British thermal units (mmBtu), while EU LNG hovers around $10 per mmBtu. Even if prices at the Henry Hub buck the experts predictions, even if production remains high, while price remains low (perhaps due to new technologies), if you are a gas company, where would you rather ship your gas…to Europe, whose growth is flat, or to Asia, with an $8 more per mmBtu margin and room for much more growth? While Japan’s nuclear reactors will likely come back on, they won’t likely be on at pre-Fukushima levels, even if China’s economy continues to cool off (no longer at 9-10% a year) but now at a modest 7%, this is still enormous in terms of growth potential for a country whose small political leadership has seen some unrest in protest of the Dickensian coal-based smog plaguing many Chinese cities.

Henry Hub spot natural gas prices. US Energy Information Administration. 

Other Domestic Factors

Despite Boehner’s economic voodoo assertions in his WSJ article that opening up exports will reduce consumer prices, many in the US don’t see it that way. Dow Chemical and many in the manufacturing sector have pushed (lobbied) hard to keep the export regulations in place. It is no secret that the comparative advantage that American manufacturing companies have enjoyed from the lowest natural gas prices in the world is something that they would like to keep. Any look at the political map of the United States shows that any candidate for the 2016 presidential elections will likely not fully embrace, at least rhetorically, a full, liberalized export. Why? States that are most in favor of exporting LNG, Texas and Louisiana, are solid Republican states; the heart of the Rust Belt are key “battleground states” of Pennsylvania, Ohio and Michigan. The last candidate to win without Ohio will be 56 years ago come 2016.

Any look at the political map of the United States shows that any candidate for the 2016 presidential elections will likely not fully embrace, at least rhetorically, a full, liberalized export.

Day-ahead daily average on-peak power prices. US Energy Information Administration.

This past winter on the East Coast proved brutally cold, snowy, and long. Prices spiked for consumers in the New York area, where higher demand coupled with power plant outages and gas equipment failures showed the need to invest in our own infrastructure before giving initiative to LNG export terminals to fund foreign markets.

Timing is Everything and the Quantity Matters

Lastly on the domestic front, only around 9-12 bcm, depending on one’s sources, of American LNG production have been so far approved by FERC. This is a drop in the bucket in comparison with the 140 bcm Europe currently imports from Russia and the 500 bcm it consumes (down from 512 in 2012 due to increased of cheaper coal). So not only is any American rescue years away, there must be substantial increase in LNG capability to even make the impact Europe needs to shift away from Russian gas.

Not to mention, the first LNG plant at Sabine Pass, Louisiana will likely come online in late 2015, four years after it was FERC approved, assuming no delays. With 24 more pending approvals and modifications likely for some of those contracts, it is hard to see how Ukraine or Eastern Europe will somehow be “saved” by American LNG anytime really before 2018. And this assumes all the aforementioned domestic scenarios go in favor of export to Europe. Meanwhile, Australia has embarked on the most ambitious LNG infrastructure projects in the world. Couple this with discoveries of Israeli and Cypriot gas fields, a potential easing in sanctions with Iran (a longer term prospect in terms of LNG) and the mere potential of Gazprom to sacrifice profits for market share if it feels threatened by lowering prices, makes American gas export on any significant scale highly unlikely; America may be able to fill in needs on a piecemeal or emergency basis for Europe. And yet there are even more reasons to be skeptical and those can be found in Europe itself.

Europe’s Got Its Own Issues to Solve

Firstly, even if the US lawmakers and regulators cancel all regulatory approval processes tomorrow and address the aforementioned domestic factors, Boehner’s plan cannot be implemented without Europe first putting its house in order, that is – deciding at the member state level to commit itself to LNG. The “EuroCrisis” must end before any hopes of serious investment needed across the continent could make any kind of energy independence from Russia a reality. Only a more financially stable Europe can afford the very expensive infrastructure needed to place LNG plants in all countries with ports. A conventional LNG regasification terminal can vary widely in cost, but a typical one with average storage capacity runs around $500M. This is not small change for a country that already receives Russian gas to make the switch for the mere sake of diversity of suppliers. Ukraine itself, the country most in need of saving, has a total of zero LNG import terminals.

LNG Terminals in Europe. GIE (Gas Infrastructure Europe) LNG Map, July 2013.

It’s hard to imagine a Texas launched LNG tanker crossing the Atlantic just to service Lithuania. Where in the world can you get a single slice of pizza delivered? This is essentially what the Baltic states are asking for.

It must be remembered that save some Crimean style operation, landlocked Hungary, Slovakia, Czech Republic, and Austria have no hope of ever having an LNG terminal; these countries will require more pipeline infrastructure linked up with the LNG terminals. The last major hurdle is who will specially deliver LNG to the tiny Baltic states whose volumes are so small, it’s hard to imagine a Texas launched LNG tanker crossing the Atlantic just to service Lithuania. Where in the world can you get a single slice of pizza delivered? This is essentially what the Baltic states are asking for when Lithuania’s Energy Minister Jaroslav Neverovic pleaded with the US to speed up its approval processes. Simply put, you need large order volumes to be economically viable to ship from the Gulf of Mexico; the gas usage of the Baltic states is too small to be profitable unless linked with another country’s LNG shipment. If Lithuania is so desperate to have its LNG regasification terminal full, why doesn’t it consult with closer Qatar who is the world leader of LNG instead of publicly pleaded for American help? To be marketable, any Baltic LNG orders would most likely have to be tied into deliveries with a bigger state from the region, perhaps Poland.

The Energy Weapon That Wasn’t, But America Still Has Influence

Given the context of this idea, let’s just admit it was an attempted American version to wield the “energy weapon,” that is, inject politics into energy markets, something the US government and the Western press never misses an opportunity to chide Russia for. However, America is the largest energy market in the world, when considering production and consumption combined. The mere fact that America is no longer an importing nation has hurt Russia, just look at the failed Shtokman Field plan to ship Russian LNG to the United States. As the natural gas market becomes less regionalized over the next decade and if the US shale gas trend continues, we might see more depressed prices in Europe due to the mere fact that the US is no longer buying, causing potential headaches for Gazprom’s account.

This LNG grandstanding should be seen for what it is: a quick, knee-jerk political posturing that reflects little of reality and is simply hot air.

So coming back to those in Congress like John Boehner who think that LNG export coupled with the “construction of the Keystone XL oil pipeline and halting the effort to take coal out of America’s electricity generation mix” is going to help Europe, whose reduction in gas consumption is a direct result of buying cheap American coal, need to reevaluate. As the veritable leader of the Republicans in Washington, it seems Boehner has forgotten the free-market principles his party is supposed to espouse, principles that will send US LNG if it makes it out of port to Asia, not Europe. In the words of Mark Twain, “reader, suppose you are an idiot. Or suppose you were a member of Congress, but I repeat myself.” This LNG grandstanding should be seen for what it is: a quick, knee-jerk political posturing that reflects little of reality and is simply hot air.

Michael Camarda is an MA student in the ENERPO program at European University at St. Petersburg.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: