Time for Natural Gas Diplomacy

Time for Natural Gas Diplomacy

By Brittney Lenard, Yevgen Sautin

The United States is undergoing one of the quietest economic revolutions in history. Unthinkable only a few years ago, the shale gas revolution has drastically reduced domestic natural gas prices, making it possible for the U.S. to shutter heavily polluting coal plants, reduce the overall carbon intensiveness of our economy, and spur domestic manufacturing and petrochemicals industries. While the domestic benefits—and possible environmental costs—of this revolution have been the subject of vigorous public debate, relatively little attention has been paid to the immense geopolitical and economic potential for the United States if it were to ease its stringent rules that effectively prevent liquefied natural gas (LNG) exports to countries without free trade agreements with the United States.

 

While the U.S. is enjoying a supply glut and record low prices for natural gas, both Europe and Asia are continuing to see high prices due to supply-side constraints. In Asia, prices are about three times those here. High growth rates in Asia, environmental and safety concerns about coal and nuclear power, and fears regarding supply disruptions in Europe all point to strong long-term demand for natural-gas exports to Europe and Asia.

 

In Europe, meanwhile, natural-gas production has declined, making it more dependent on imports. It is no secret that much of Europe relies heavily on Russia for its gas supplies, a source of continued concern as European officials fear Gazprom’s virtual monopoly power and a possible cutoff of supply. Russia has long used energy supplies as a source of political leverage with its neighbors, who have few (if any) alternatives for supply. In order to maintain its commanding position in the European gas market, Russia has built the North Stream pipeline network to Germany and is hoping to receive approval for South Stream to Southern Europe. While these pipeline projects are designed to reduce dependency on transit states and increase Russia’s leverage, most Russian natural-gas exports to Europe must still pass through Belarus and Ukraine, and as relations between Russia and those countries continue to be fraught with tension, so has the certainty of natural-gas flows to Europe.

 

Although some European countries hope to exploit shale resources as an alternative source of gas, it is unclear whether deposits there are geologically similar to those in the United States, or even that they are commercially viable. Furthermore, most countries lack the latest technology to match the U.S. shale success, and they are doing little to make it easy for American companies to operate there. The biggest challenge to shale development in Europe may be the regulatory environment. Several countries, such as France and Bulgaria, have already placed a moratorium on fracking, and those countries that do hope to exploit their shale resources are held hostage by the expectation of possible EU regulation.

 

In this environment of uncertainty, many European countries are looking for additional sources of gas, anxious to reduce their dependence on Russia, but unsure of their ability to exploit shale resources. Countries like Poland, Lithuania and Ukraine are at various stages of planning and building LNG import terminals, as well as associated pipeline systems to distribute gas throughout their country and beyond. As these projects move forward, however, countries are becoming increasingly concerned about securing supply to make full use of the terminals’ capacity.

 

This is where the U.S. comes in. Current U.S. law allows the export of natural gas to countries without free trade agreements (FTAs) only when the Department of Energy deems it to be in the American public’s interest. In practice, this means that the Department of Energy conducts case-by-case reviews of export license applications for countries without FTAs. There are currently about forty pending applications to build LNG export terminals, and so far, the Department of Energy has approved just four. While the DOE contemplates further approvals, Canada is eyeing the lucrative Asian market and is hoping to export LNG in the Pacific within five years.

 

Were the DOE to speed up this approval process—a move that would require no new legislation or action by Congress—more export facilities would be built, and European countries could buy gas from the U.S. This would benefit all parties: LNG exports would provide a boost to the U.S. economy by creating jobs and furthering shale development, and they would give Europe another source of gas supply, helping to lower prices in the region.

 

But beyond the economic arguments, this is an opportunity for the United States to demonstrate its commitment to European security, without more troops or costly military commitments, which are mainly of symbolic value. The Obama administration’s “pivot” to Asia and its focus on events in the Middle East have, correctly or not, left European countries feeling neglected. U.S. approval of further LNG exports would demonstrate America’s continued commitment to its European allies, while supporting U.S. domestic economic and energy goals.

 

The perennial Ukrainian gas disputes should make clear the importance of having a strategic American LNG policy. Ukraine is currently almost completely reliant on Russian gas, and despite taking some energy efficiency measures and actively pursuing shale gas projects, Ukraine is unlikely to reduce its dependence on Russia anytime soon. Ukraine’s gas dependence has arrested its economic growth by running up a large balance-of-payments deficit and has left it vulnerable to political pressure from Moscow. Moreover, until this January when Gazprom slashed prices by a third due to Viktor Yanukovych’s decision to postpone signing the EU Association Agreement, Ukraine was paying more for its gas than most EU states. The recent discount improves Ukraine’s macroeconomic situation, but it has come at a high price. Most visibly, by not signing the Association Agreement, Ukraine has been thrown into the most serious political crisis in its history. Less obvious are the long-term effects on the country’s economic modernization. The Kremlin’s gas subsidies eliminate the immediate economic incentive to promote energy efficiency. They also make Ukraine even more dependent on Russia. And Russia’s decision to withhold the aid it had promised to Yanukovych underscores the precariousness of the pledges to reduce energy costs.

 

As Ukraine prepares to modernize its aging Gas Transit System (GTS) in 2014, Russia is seeking to exclude the EU from the modernization consortium and to effectively take direct control of the Ukrainian transit system. In the case of Ukraine, LNG diplomacy may be too little too late, but even here the potential is considerable. If Ukraine were to go through with its proposed plan of building a floating LNG terminal in the Black Sea, the United States could strengthen Ukraine’s bargaining position vis-à-vis Russia and would put a check on Moscow’s growing clout over Kiev. It would also facilitate energy integration with the EU through gas reverses and shared terminal capacity. And while U.S. LNG exports to Europe might not be a popular move with the Kremlin, it would help nudge that country along the path to a diversified economy that is less reliant on natural resources—a task that Russia is already well aware needs to be addressed.

 

Exporting LNG to Europe would strengthen some of our most important and oldest alliances, and would reaffirm our commitment to our newer partners in the region. Every country deserves the right to determine its own energy mix rather than being held hostage to one supplier, and the U.S. should do all it can to ensure that Europe benefits from a free and fair energy market. Beyond the benefits to European states, LNG exports to Europe would create U.S. jobs and provide a boost to the domestic gas industry. Furthermore, deepening of economic ties would strengthen American influence with those countries to which it exports LNG, and provide leverage in trade negotiations with those countries that hope to import U.S. gas. Such an opportunity, where the U.S. can create goodwill and gain influence in another part of the world while also boosting its own economy, is rare. We should take advantage of it.

 

Brittney Lenard is a member of the Europe and Eurasia practice at McLarty Associates in Washington, DC. Yevgen Sautin is a graduate student at the University of Chicago. He was previously a Junior Fellow in the Russia-Eurasia and Energy-Climate Change Programs of the Carnegie Endowment for International Peace in Washington, DC.

 

 

The National Interest

 

 

14.02.2014

 

 

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