“Oil and gas is what starts wars.”
So says Chris Faulkner, CEO of Breitling Energy Corporation, a Texas-based shale exploration and production company bidding on oil and gas blocks in the United Kingdom. Like thousands of other US energy executives, Faulkner is closely monitoring American and European policy responses to the Ukrainian crisis, which has amounted to both a military and energy pricing confrontation with Russia.
Faulkner’s analysis of Europe’s options is blunt:
“It’s pretty simple. You can embrace Russia and kiss the imperial ring, or you can embrace shale gas. The reality is that if you have no energy security policy in place, whether it’s a country like the UK or another close to Russia, you’re fools.”
Many energy officials now believe that Russia’s annexation of Crimea and its threats to cut off gas supplies to Ukraine, an energy hub for Europe, represents the biggest security crisis Europe has experienced since the end of the Cold War.
At the same time, the Ukrainian crisis may finally end debate on whether or not the US will open up exports of shale-based liquefied natural gas (LNG) to foreign neighbors – including the EU, not as yet covered by current US free trade agreements.
Breitling (which ironically advertises itself as “American oil from American soil”) is now consulting in both Europe and China to extend fracking operations abroad. American LNG exports are part of the equation.
“On one side, producers say [LNG exports] will monetize a growing and ample supply of natural gas. On the other, refiners and petrochemical interests say it endangers an industrial renaissance based on that same bounty of shale gas.”
The reality is something in between, Faulkner insists:
“The country is experiencing something amazing, and that is natural gas development. It’s really a win-win situation for everyone and it will continue to be so.” He believes the opening of LNG exports is inevitable.
The Europeans and Russians may not agree, but for different reasons. Europe wants commitment to expedited LNG exports from the US now; Russian doesn’t. “We’ve been actively vocal about the issue for a long time,” said Dr. Anita Orban, Hungary’s Ambassador-at-large for Energy Security who testified in favor of US energy exports before a House Subcommittee on Energy and Power in March. “Last July, we were struggling to get the LNG argument on the table, but now we’re seeing a geopolitical argument that’s become the dominant argument. Geopolitics is now the driver for US LNG exports, in other words. We see a huge sea change in the debate compared with last year.”
A Season of Renewed Debate
The Ukraine situation, in fact, has kick-started a renewed American dialogue on loosening all kinds of restrictions on US exports of gas and oil, including crude, condensates, light oils, and now, LNG.
That debate is highly polarized. On one side are the believers in America’s “energy independence,” meaning strong domestic production with little participation in global markets is tantamount to “energy security” and lower domestic oil and gas prices. On the other, a pro-export faction sees huge economic benefits associated with expanding US-global energy trade – specifically LNG exports that would allow US allies in Europe and Asia to stabilize their economies while lessening dependency on state monopolies like Russia’s Gazprom and politically volatile suppliers like Yemen, Egypt, Nigeria, Libya, and Algeria.
“There’s been a mythology around ‘energy security’ and energy independence in the US,” says Claire Casey, the Managing Director of Garten Rothkopf, an international advisory service on energy and global economy. “’Security’ is often conflated with ‘energy independence,’ understanding that to be local [domestic] production only. I think this is a willful misunderstanding on the part of political leaders. These leaders talk about ‘energy independence,’ and the words they use have to do with not importing [energy] and producing at home. When you’ve been pushing that for so long publically, it’s hard to say ‘Oh, but we should export now.’”
Gas, by contrast, is less of a political hot potato than oil. “Natural gas doesn’t have the same decades-long history of [national] protectionism as oil,” Casey stated. “There’s something called a ‘dash for gas’ – a fear in the utility industry that natural gas, being cheap and available, will end up creating risk because we could become too dependent on one fuel source. The petrochemical industry has been fighting over cheap gas – to keep it here to give the industry a competitive edge (over international companies).” But Casey says that argument has failed: “The Obama administration has done its homework and is moving forward.”
Strong US export restrictions on oil and gas have been in place since December 1975, when President Gerald Ford signed into law the Energy Policy and Conservation Act (EPCA), a ban on most US energy exports (with few exceptions) that remains in place today. The context of that law was to promote US energy independence, and shield American businesses and consumers from import shortages and price shocks – especially after the Arab oil embargo of 1973.
Today, though, the US energy picture has changed drastically. US and Canadian shale fracking, oil sands, and conventional drilling now account for 69% of new oil production worldwide. American natural gas production, much of it derived from horizontal shale drilling, is expected to reach record production rates of 72.02 billion cubic feet per day this year. The US has not only reduced its LNG gas imports by 80% in the last few years. It has also saved $40 billion in reduced energy imports so far this year, contributing to a $48 billion trade deficit reduction and a large growth in jobs – an estimated 240,000 new jobs, according to Department of Commerce calculations.
These statistics offer an altered view of international export opportunities, especially in light of Ukraine and European requests for US LNG exports.
“There’s no doubt that Congress has recognized that energy exports could provide a key tool in the toolbox of geopolitical security,” said Cory Gardner (Rep-Colorado), a Congressman who recently introduced H.R. 6, “The Domestic Prosperity and Global Freedom Act,” to expedite permissions for some 24 pending applications at DOE to develop specialized terminals for LNG export. “If you look at our options right now – to the Middle East, to Asia, to Eastern Europe – energy exports provide an additional avenue beyond diplomacy to provide our allies with greater energy independence.”
Gardner’s bill, among several circulating in the House and Senate, modifies the standard of review for future LNG export applications, shifting the benchmark from Free Trade Agreement (FTA) countries to World Trade Organization (WTO) members. Under current law, LNG export facilities shipping gas to countries without free trade agreements with the US require additional Department of Energy approvals, a process marked by extensive delays. A further environmental and safety review is required by the Federal Regulatory and Energy Commission. To date, only seven export applications have been approved (one final, six conditional), while 24 applications are still awaiting action.
But while the Ukrainian crisis has added new urgency to the export debate – not only have European energy ministers appealed for rapid release of LNG to their countries, but US Energy Secretary Dr. Ernest Moniz has referred to current US energy policy as anachronistic and needing review – the outcome is far from certain.
“US exports of LNG are going to be really constrained because there is a price risk,” said Dr. Keith Crane, director of environment, energy, and economic development for Rand Corporation. “The projects [to build] LNG terminals to liquefy and process gas are really expensive, costing billions – and most of the projects for building import terminals today are roosting places for seagulls,” he observed. “I haven’t seen anyone willing to build these facilities on spec.”
While terminals will exist to supply LNG to free trade partners with solid, long-term contracts, Crane points out that the business risks are still high: “There is no legislation on offer that the US would ever subsidize these LNG projects. There’s no way that the Obama Administration or the Republicans will subsidize them.”
The mood of the Obama administration, in fact, remains cautious. DOE continues to proceed with LNG export applications review as before. And the signals from Secretary Moniz have been mixed. During his recent testimony before the House Energy and Commerce Committee’s Subcommittee on Energy and Power, “Moniz made it very clear that LNG permits aren’t just being looked at in a vacuum of US job creation and US security interests, but were also being considered by the new G7 process,” Gardner reported. “His comments to me were that the Obama Administration will be weighing what G7 thinks” – a move that Gardner and several pro-LNG export officials strongly oppose.
“It sounds like they’re relying on G7 to make a determination on whether we approve these permits or not,” Gardner continued. “I don’t think we should be waiting for G7 to determine the fate of LNG exports. The US sees a clear benefit both domestically in terms of job creation and internationally through geopolitical security.”
Russia Raises the Gas Bills
Since the Crimean takeover, Putin and Gazprom have raised gas prices to Ukraine by more than 80%. On April 1, 2014, Alexei Miller, the head of Russia’s energy giant Gazprom, estimated that Ukraine owed $1.7 billion in unpaid gas bills to Russia. The gas bill further increased after Russia cancelled agreements with Kiev on Russia’s navy base in the Crimea, newly annexed in March. Ukraine had extended the lease of the base in 2010 for an annual rent and discounts on gas, but Moscow revoked this agreement after Crimea was annexed.
Now Moscow says Ukraine owes it $11.4 billion in gas discounts given in advance for the base. And Putin has come up with a figure of $38.4 billion owed to his country from past gas fines and unpaid contracts.
No one expects Ukraine, a country on the brink of bankruptcy, to be able to pay back these vast sums – not even from the $1 billion in promised US loan guarantees, the $15 billion committed already by the European Union, or the $14-$18 billion in bail outs promised by the International Monetary Fund (IMF). Kiev responded by refusing to pay the increased prices set by Gazprom, prompting speculation that Ukraine and Russia might enter into a new phase of conflict with both military and energy ramifications.
In early April, Putin sent a letter to 18 European leaders underscoring the seriousness of Ukraine’s gas debt and demanding prompt repayment. The Russian premier said that, without repayment, he would consider cutting off the gas to Ukraine – akin to the winters of 2005-2006 and 2008-2009.
In 2009, the supply cut off lasted less than two weeks, discontinuing gas supplies to most of Central Eastern Europe. Surprisingly, though, the stoppage had a positive effect. “The most important impact was the ensuing cooperation and diversification efforts among the affected countries,” said Orban. “Supply cut-offs are so dramatic and so obviously political that they invariably trigger actions on the receiving end to ease the dependency.”
Energy Dependency Creates Instability, Vulnerability
If nothing else, the Ukrainian crisis has underscored the energy risks and linkages between a single, nearly bankrupt Eastern European country and its much richer neighbors. In Ukraine itself, the country receives more than 63% of its natural gas from Russia; the entire rest of Europe gets 30%. And 80% of all Russian gas to Europe travels through the Ukrainian pipeline hub.
For years, Ukraine received discounted gas from Russia that effectively kept the country addicted to cheap monopoly gas. “They were drinking their own Kool-Aid: the natural gas from Russia,” noted Faulkner. “Ukrainians were paying 30% to 40% discounts, and Putin got them addicted so Ukraine didn’t industrialize or move their country forward. They got stuck.”
Aside from failing to develop their own shale reserves – the country has the third largest reserve in Europe – Ukraine’s oil and gas industry has been riddled with corruption.
Can US Help Europe Resist Crisis?
The good news for central Europe is that, today, the region is possibly more crisis-resistant than in the past. By connecting North-South pipelines together and enhancing gas storage facilities, Orban believes that both Poland and Hungary are now able to reverse the flow of natural gas to give Ukraine short-term energy aid if Russia cuts the supplies.
Still, in Orban’s estimation, “Clearing the way for US shale gas to reach America’s Central European NATO allies would provide significant protection against the deployment of the energy/price weapon. Liberalizing LNG exports would send a signal to market actors to kick-start the development of missing infrastructure [and] put an immediate downward pressure on gas prices in Central Eastern Europe well before a single American gas molecule reaches the shores of our region.”
“It is prices that provide the best economic and political tool for the monopoly supplier,” Orban said. “Whoever has the monopoly calls the shots.”
Written by: Dan Eberhart