The Ukrainian crisis has had far-reaching consequences in the global economy, especially in Europe.
One of the major areas of concern centres on Russia’s position as a key supplier of gas to the rest of the continent.
European nations are faced with severe concerns regarding the security of energy supplies since the Russian seizure of control of the Crimean peninsula from Ukraine. Russia has in the past not been shy of cutting gas supplies to countries and regions they are having disputes with, and fears abound that they may do the same in response to any European political and economic sanctions for their actions.
Europe currently gets nearly a third of its fuel from Russia, so the prospect of supply suddenly being shut off is a troubling one for the leaders of many nations.
Against this backdrop, scrutiny of the US export rules on liquefied natural gas has been stepped up. Current regulations require the Department of Energy to grant permission for exports to all but a handful of nations with free-trade agreements with the US.
Hearings before the House & Senate Energy Committees focused on whether or not speeding up the review of two dozen pending export applications would help America’s European allies reduce dependency on Russian natural gas.
A measure was also considered by the House Energy Committee that would allow US natural gas exports to be made without government approval to nations that are members of the WTO. However there are serious concerns that permitting unlimited liquefied natural gas (LNG) exports could have major unintended consequences such as pushing up domestic prices.
Moreover, the main issue is that any measures taken in this area would not come into effect for several years. Harold Hamm, chairman and CEO of Continental Resources Inc. (the biggest player in North Dakota’s oil fields) said in remarks to a House of Representatives Foreign Affairs Committee that “While opening LNG exports is a noble goal and one that we as a country are actively working towards, the fact is the infrastructure to undertake large scale overnight LNG exports does not currently exist.”
Therefore, the idea that freeing up US gas exports would serve as a political weapon against Russia, enabling European allies to free themselves of dependence on Russian supply, is at best a long-term strategic one.
Even worse, Michael Levi, a fellow at the Council on Foreign Relations who also testified at the hearing has said in a blog post that these measures are likely to be far less effective than many believe.
The argument by proponents of the measures is that that freeing up US LNG exports would deter Putin from using the “gas weapon” (i.e. shutting off supply as a bargaining chip) since it would encourage European nations to shift long term acquisitions of gas to US supply, as well as dulling the impact of future threats, since US exports would fill in for any lost Russian supply.
Undercutting its rivals
The first problem with this argument, Levi suggests, is that export and import business is conducted by companies, not countries. The US government doesn’t sell gas to anyone; the businesses within the US decide where any gas they produce eventually goes. Likewise, it is European companies that import and purchase gas, not European nations. Much of American excess, exportable supply is already earmarked for Asia where prices are far higher than in Europe.
Additionally, Russia is an exception to this corporate trade framework, since its major players are either state-controlled or have very close ties with the state. Therefore they can undercut their potential US rivals by significant margins for purely political reasons. Reasons which would not impact the decision making of the purely profit-focused US and European companies.
The second problem is that vastly increasing supply of natural gas into Europe in a crisis depends on there being infrastructure in place that can accommodate this increased supply. This means there needs to be a significant number of under-utilised natural gas import terminals available in Europe. In particular, there needs to be enough excess capacity to replace Russian imports. At the present time, Russian imports greatly exceed spare LNG import capacity.
Potential long-term ramifications
It has also been argued by Edward Chow, a senior fellow at Centre for Strategic and International Studies, that Russia is arguably more dependent on European demand than Europe is dependent on Russian supply, saying that “Russia is even more reliant on the European market as the destination of 80% percent of its oil and gas exports.” And he also posed the question: "So, who is more reliant on whom? This has more to do with the exercise of political will rather than of economic leverage."
So it could be said that while Europe may fear Russia simply shutting off its gas supplies, the potential long term ramifications of such action would be far worse for Russia. This is especially true in the context that such a move might force European nations to seek supply elsewhere and never return to the now-unreliable prospect of Russian supply.
As is usually the case, the issue is far more complex than it is being painted as by many parties. In theory freeing up rules governing US LNG exports would help many European nations, and this was certainly the plea made by the Energy Minister for Lithuania Jaroslav Neverovic. Lithuania pays higher prices for gas than almost any country in Europe, since Russia is their sole supplier and they have disagreements with Gazprom, the state-owned gas company.
However, the fact remains that even if the desired measures were enacted today, countries like Lithuania would not see gas from the US for many years yet. Even if it were, for most countries Russian supply would remain a cheaper option, and so profit-driven companies would likely steer clear of more expensive US supply.
And lastly, it is debatable whether or not Russia could even risk shutting off supply to Europe en masse, as the cost to them would be potentially catastrophic.
Special report prepared by IG Australia