U.S. willing to ignore energy economics to challenge Russia? Sounds like ‘political manipulation’ to me, by E. Katharine Foshag

Russian state-controlled natural gas producer Gazprom supplied the European Union and Turkey with a record-setting volume of gas in 2013, 162 billion cubic meters, of which roughly 50 percent travelled through Ukraine via pipeline. As geopolitical tensions between Russia and Ukraine continue to escalate, Republican leaders in the U.S. have been quick to criticize President Obama’s administration for failing to appropriately leverage its own energy resources to counteract Russian influence in Europe and the Ukraine on the basis of their natural gas stores. In particular, members of Congress have capitalized on the Russia-Ukraine crisis to step up their calls for more rapid approvals of natural gas exports.

Wrote Speaker of the House John Boehner in a Wall Street Journal op-ed last week, “The ability to turn the tables and put the Russian leader in check lies right beneath our feet, in the form of vast supplies of natural energy.” Senator John Barrasso added, “If President Obama is serious about helping the people of Ukraine, he will immediately expedite the approval process for liquefied natural gas exports. American natural gas exports would help Ukraine free itself from Russian energy and [Russian President’s Vladimir] Putin’s political manipulation.” If choosing to link the call for exports of liquefied natural gas, or LNG, with geopolitical leverage against Russia is meant to come across as something other than “political manipulation” of their own, however, members of Congress are most certainly failing in this regard.

Over the past two weeks, six bills have been introduced in Congress with the aim of fast-tracking permits required to export LNG. Implicit in such calls to action is the suggestion that President Obama has the means to flood Europe with cheap, U.S. shale gas and single-handedly free Europe and pro-EU Ukrainians from the clutches of Putin—all by signing on a dotted line.

In reality, though, the U.S. does not have the physical LNG export capacity to make a dent in the global natural gas supply before the end of the decade, let alone today. Even if it did, the private companies that control U.S. natural gas reserves would be incented only to sell the gas to the highest bidders: likely, given current regional pricing of natural gas, Asian companies. What’s more, regardless of what the U.S. does or does not do, Putin retains the upper hand as a gas provider to Europe and Ukraine. Consider that Gazprom currently produces natural gas at prices comparable to its U.S. counterparts, $3-4 per million British thermal units (mmbtu), yet sells it at prices in the range of $9-11 per mmbtu. All Putin has to do is take a slight haircut on margins to price American LNG, which analysts estimate would arrive in Europe at similar cost when considering both liquefaction and shipping, out of the market.

In 2008, leading energy corporations had just a few years prior completed numerous significant capital expenditure programs to finance the construction of LNG import facilities; no LNG export facilities yet existed in the continental U.S., nor were any planned. It is only in recent years that, with the application of hydraulic fracturing technology to unconventional stores of oil and natural gas, the U.S. has catapulted in stature to become the leading petroleum and natural gas producer in the world, and LNG exports have finally become economically feasible. This has little to do with politics and is instead a reflection of economic realities, the very realities Western leaders accused Putin of ignoring when he offered the since-ousted Ukrainian President Viktor Yanukovych a steep discount on its natural gas imports last December. The deal was perceived to be linked to Ukraine’s subsequent rejection of an EU trade agreement.

The fact is that even the first LNG export facilities from the U.S., those that have already received approval for export to non-free trade agreement counties, will not begin shipping gas overseas until late 2015. Further, based on commercial contracts already in place, only a minimal portion of the already small amount of gas technically able to be transported to Europe will actually be going to Europe—and even then to Spain, a country that does not import from Russia via Ukraine anyway. Due to the capital intensity of the construction of LNG export facilities, a company will not begin construction until commercial contracts are in place guaranteeing the purchase of minimum volumes of liquefied gas. Consistent with Economics 101, private energy companies considering investment in U.S. LNG export terminals have zero incentive to ship gas to Europe when oil-linked prices dictate that the profits to be found in Asia are twice as large.

When it comes to natural resource production, the U.S. has long held its pro-private company stance, a position in stark contrast to those advanced by countries with resources controlled by state-owned oil and gas companies, Russia included. This position has virtually precluded the U.S. government from exploiting its energy resources for the ‘national interest’ in past political skirmishes. It has provided the perfect backdrop for American criticism of Putin’s less-than-capitalist interferences with Gazprom’s independence, such as in 2009, when a 13-day freeze of gas supplies to Ukraine cost Gazprom (and its foreign shareholders) an estimated $1.1 billion. And, this position has not changed—regardless of current lobbying efforts surrounding natural gas export approvals. If the U.S.’s energy resources ultimately play a role in minimizing conflict between Russia, Ukraine and the rest of the EU, it will be for no other reason than because the economics make sense for American companies.


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