Will Ukraine Influence Potential Liquefied Natural Gas Exports From US to Europe?

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While Ukraine and Russia are fighting in courts over gas prices and the European Union is concerned about a possible disruption of natural gas transport through Ukraine, the U.S. may have an opportunity to hit hard on Russia’s gas monopoly and decrease its economic influence in Europe.

Is Europe ready for the deal?

After a more than three-decade-long ban, the United States has finally given permission to several companies to export lightly processed oil, a change that could trigger an increase in American oil exports in the coming years. A similar restriction is still in effect for gas exports, but if this ban is lifted, American gas companies might find themselves eyeing overseas markets, including Europe.

In the light of the escalating violence in eastern Ukraine and political battles with Russia, negotiations over gas between the two countries gas might fail, or a deal may be made too late, when the disruption of gas supplies to the EU becomes unavoidable. High risks will push Europe to look for alternative solutions, one of which is importing liquefied natural gas (LNG) from the United States. And many American companies fancy this possibility as well.

According to the U.S. Energy Information Administration’s World Shale Gas and Shale Oil Resource Assessment, Europe, including all the EU members plus Turkey, Norway, Switzerland and the non-EU Balkan states, consumed 18.7 trillion cubic feet of natural gas in 2013. Russia supplied 30 percent of this, with a significant amount flowing through Ukraine. The EIA estimates that 16 percent of the natural gas consumed in Europe passed through Ukraine’s pipeline network, based on data reported by Eastern Bloc Energy and Russia’s state-owned gas giant Gazprom.

In the past, as much as 80 percent of Russian natural gas exports to Europe went through Ukraine. This number fell to 50 to 60 percent after the Nord Stream pipeline, a direct link between Russia and Germany under the Baltic Sea, was finished in 2011. Currently, more than 60 percent of the gas consumed by Ukraine is imported, almost all from Gazprom.

In a move toward European integration, which became Ukraine’s main political course after the revolution and the fall of pro-Russian President Viktor Yanukovych and his government, the parliament agreed to discuss a bill allowing leasing of gas transport facilities on a joint venture basis to European or American companies, Reuters reported.

If the bill passes, foreign companies will be able to hold a 49 percent stake in the venture, while Ukraine will keep a controlling interest of 51 percent. Ventures will be responsible for managing both transport pipelines and underground gas storage facilities. Such a business model could improve Ukraine’s reputation as a trustworthy transporter and would limit Russia’s influence. Also, such business might make Southern Stream, a direct pipeline linking Russia and southeastern Europe directly underneath the Black Sea, less attractive to EU countries and businesses.

Despite Russia’s recent cutoff of all gas supplies for Ukraine’s internal consumption, Ukrainian Prime Minister Arseniy Yatsenyuk promised the EU that Ukraine would remain a reliable transport partner for members of the union—a promise not everyone in Europe is confident about.

Media promoting U.S. LNG exports

Right after Yanukovych was ousted and power was transferred by the Ukrainian parliament to the interim government, Western media seemed to be unanimous in their view of the role the U.S. should play to help Ukraine and Europe decrease their energy dependence on Russia. Newspapers were printing editorials with calls to lift the ban on LNG exports and start exporting to Europe.

“Increasing natural gas exports could serve American foreign-policy interests in Europe, which gets about 30 percent of its gas from Russia,” a New York Times editorial said. The Wall Street Journal echoed the same idea. “A serious President would also fast-forward permits on new liquefied natural gas terminals that could ship to Europe.”

But such calls were soon met by criticism. One of the critics’ main claims is that if the U.S. decides to lift the ban and export LNG to Europe, it would take years to build the necessary infrastructure and supply enough fuel to sufficiently reduce Russia’s exports. Kurt Cobb, an author, speaker and columnist focusing on energy and the environment, wrote in his blog that “the economics of natural gas exports beyond Mexico and Canada—which are both integrated into a North American pipeline system—suggest that such exports will be very limited if they ever come at all.”

Cobb argued that even though American natural gas production has increased dramatically since its post-Katrina record low in 2005, that growth almost stopped in 2012. Quoting the EIA, he wrote that production of gas in the U.S. rose only 0.9 percent in 2013, compared with 2012.

Cobb also argued that the cost of shipping LNG to Europe would be too high for it to be comparable with Russian fuel. He said a better place for export could be Japan, but that would not be secure or ideal. “U.S. entry into the LNG market could conceivably depress world prices and make even Japan a doubtful destination for U.S. LNG,” he wrote in the blog.

“It seems that U.S. drillers are going to be very, very busy just keeping domestic natural gas production from dipping, let alone expanding it to allow exports. And remember, we are still importing the stuff today! … How many companies will actually risk the billions needed to build U.S. natural gas export terminals to liquefy and load exports that may never appear? I doubt that very many will actually go through with their plans,” Cobb said.

But not all the experts share Cobb’s pessimism, though most of them agree on one thing: It would take years to start exporting gas from the U.S. to Europe.

The fogged future

Edward C. Chow, a senior fellow at the Center for Strategic and International Studies’ Energy and National Security Program, said when speaking to the Voice of America’s Ukrainian Service that if shale gas exports from the U.S. were to start in the near future, it could indeed influence the European market and challenge Russia’s dominance. But this influence would hardly be significant.

“Today the U.S. is not able to export gas because there is no LNG export plant,” Chow told the VOA. “Such facility will come into operation the earliest next year. So gas would start flowing in 2016.”

In his interview, he also noted that businesses would naturally seek a better sell price. And as far as Europe goes, Gazprom could always suggest a lower price.

Michael Quinn, a managing principal at the Analysis Group, said he believes that U.S. shale gas exportation to Europe is not impossible, but it would depend on the price that potential buyers overseas would offer to American sellers.

“For U.S. gas to get to, say, Ukraine, it would have to be produced, transported to a liquefaction facility, liquefied, put onto an LNG carrier boat, shipped, go into an LNG receiving facility in a special port there and then re-gasified. Could that happen? Certainly. How long would that take? Well, a couple of years at minimum,” Quinn said.

He noted that the economic benefits would determine whether American gas goes to Europe. “Physically … I see no reason why it couldn’t. From an economic perspective, you would have to run the numbers on it,” Quinn said. “In addition, obviously there are other countries that are much closer to Ukraine that export LNG. Algeria has for long been a big exporter.”

Quinn mentioned a small LNG facility in Alaska and another four or five LNG import facilities in the U.S., “some or all of which are being looked at for the possibility of reversing direction.” He added that to his knowledge there has been only one case of an LNG terminal both receiving and shipping liquefied gas.

He also does not see Ukraine-Russia conflicts over gas and reverse supply of Ukraine by the EU influencing U.S. natural gas market prices much. “My guess is that the effect would be minor at best. Right now there isn’t really a connection between Ukraine’s natural gas market and the U.S. natural gas market,” he said.

In a recent interview with Radio Free Europe/Radio Liberty, Edward Lucas, a senior editor at The Economist, said that politics plays a huge role in Russia/EU energy relations. “I think any idea that you can discuss gas in a depoliticized context is ridiculous,” he told RFE/RL. “Russia uses gas as a political weapon. The EU has made a political decision to liberalize its gas market. So this is, ipso facto, a political issue.”

Speaking at the EIA’s Energy Conference on June 15, Chairman of the House Energy and Commerce Committee Fred Upton said that thanks to its recent energy boom, the U.S. now has an opportunity to use its energy recourses as a “diplomatic tool.” But he said it is unlikely that the government will pass an LNG export bill in the next year.

With the worsening situation in Ukraine and growing hostility between Europe and Russia, there is little certainty about many aspects of international relations in general, and energy issues in particular.

 

Featured image source: flickr / lightgraphs under Creative Commons

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