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U.S. Gas Exports to Ukraine a False Hope, Not Based in Reality

Washington Post: Boehner’s plan to save Ukraine: It’s full of gas
By: Steven Mufson
07 March 2014

John Boehner thinks the United States can help Ukraine by approving more gas export terminals. Is he right?

“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,” Boehner says in an article in Friday's Wall Street Journal.

If only it were that simple. No infrastructure limitations. No worries about the price signals that motivate private companies more concerned with profits than with politics. New exports of natural gas – whether from the United States, or Qatar or Australia – would increase competition and put Russia is a weaker bargaining position. Long gone is talk that used to take place among gas producers of forming a “GOPEC” – an organization of gas exporting countries. But Russia remains the world’s largest gas exporter, and one of the world’s lowest cost producers with easy access to the European market, and it will undoubtedly remain a key player.

“Can you imagine situations where U.S. gas could be a useful buffer? Yes. Is this the killer app? Absolutely not,” says Michael Levi, an energy expert at the Council on Foreign Relations. “And is this something the US can wield as a weapon? No. But it can be useful at the margins.”

What is Boehner’s argument?

1. Europe is dependent upon Russia for oil, gas and coal.

True. Europe relies on Russia for about 30 percent of its natural gas, mostly through two major pipeline routes. This arrangement dates back to the 1980s, when the Soviet Union forged an agreement to build a pipeline from Soviet natural gas fields to western European consumers. President Reagan warned at the time that building European economic dependence on Soviet gas would end up compromising European political independence. But in 1982 – prodded by American companies eager to work on construction of the pipeline – the Reagan administration dropped its opposition to the project.

Europe has tried to become less dependent by supporting new pipelines to Norway and the Caspian region, and by building terminals to receive liquefied natural gas (LNG) and turn it back into gas. But those are very expensive projects, and take time to construct. Moreover, western Europe’s own gas fields are aging and in decline, so even if it adds new sources, it will probably remain a big importer of Russian gas.

Can U.S. gas exports replace Russian gas? Not likely. Industry executives and experts expect a limited number of export facilities to be built regardless of the permitting process because the economics of a terminal look different if you’re building the 12th one than if you’re building the first.

Moreover, companies that apply for export permits already have customers. Otherwise they wouldn’t take the financial risk of building multi-billion dollar export facilities. And Japanese and other Asian companies, not European ones, have been the main buyers of U.S. gas exports.

2. Boehner says America's failure to export its abundant natural gas reserves is “attributable in large part to the U.S. Department of Energy, which maintains an approval process that is excruciatingly slow and amounts to a de facto ban on American natural-gas exports—a situation that Mr. Putin has happily exploited to finance his geopolitical goals.”

The U.S. failure to export natural gas is not the fault of the Energy Department.

“This is the first sort of fallacy,” Levi says. “Most market observers believe that the U.S. will ultimately export less than what has already been approved. The biggest constraint on U.S. natural gas exports is the difficulty making money doing it, not getting the permit.”

In fact, the United States is still a (small) net importer of natural gas, though that will soon change. U.S. natural gas abundance is a recent phenomenon dating to the 2008 and 2009 boom in shale gas drilling. Less than a decade ago shale gas accounted for a negligible amount of U.S. gas production; today it’s more than a quarter of U.S. gas output. So until recently, there wasn’t any gas to export. And until 2011 or so, there weren’t many applications for permits to build LNG terminals. And until December 2012, when a consulting firm finished a (controversial) study about the impact of exporting gas, the DOE could not issue permits. Since then, it has issued six -- or one every two and a half months.

The most important contribution the United States is making at this moment to the world’s gas supply is the gas that we’re not importing. A decade ago, U.S. imports were forecast to grow rapidly. And countries like Qatar, which counted on the U.S. market when it was building its LNG export capacity, can now send its tankers to Europe or Asia. And the terminal it was planning to use on the U.S. gulf coast is being converted to an export terminal.

3. Because of these bad U.S. policies, Europe has nowhere else to turn except Russia, Boehner said.

One place Europe can turn: Norway, which has more than doubled its gas exports since 2000. Norway is now the world’s second largest gas exporter, after Russia.

Europe has also expanded its capacity to regasify LNG by about a quarter since 2010, and the group Gas Infrastructure Europe could grow by another quarter by 2017. In addition to 22 existing terminals, six more are under construction, according to GIE’s February 2014 map. The whole idea is to be able to import LNG from Qatar, Australia, Nigeria and Algeria, as well as the United States.

Yet European imports of LNG have dropped 47 percent since 2011. Why? Russia has cut prices, and Qatar is selling at higher prices in Japan, which shut down all its nuclear power plants after the tsunami and earthquake that damaged the Fukushima Daiichi complex that year. The LNG facilities operated at about 20 percent of capacity, the GLE report says. Instead of importing LNG, Europe has used more coal and kept on buying gas from Russia.

It isn’t hard for Russia to undercut LNG prices. To liquefy, ship and regasify natural gas costs at least $6 per thousand cubic feet and maybe more. If prices run around $12 per thousand cubic feet in Europe, then the price in the United States has to remain below $6 for European imports of U.S. gas to make much sense. That’s not a given.

“Having U.S. exports on the table will push down prices and reduce revenues to Russia,” says Levi. “That’s not a trivial thing. It’s just not the thing people are claiming.

Europe will have more choices, and that will give it more room to maneuver, economically and politically. That’s crucial. But at the end of the day, it might still choose to buy Russian gas just as it has over the past two years.

4. Boehner again: “These policies have amounted to our nation imposing economic sanctions on itself—sentencing consumers in the U.S. and abroad to higher prices and slower growth while ceding the international energy marketplace to countries such as Russia, Venezuela and Iran.”

Exports will increase natural gas prices in the United States, not lower them. It might not increase them much if you buy the NERA study. Exports of oil could conceivably lower the price of petroleum products if it allows crude producers to sell petroleum to more efficient refiners in other countries. But it will be a minor change given that refining costs are a small sliver of overall retail petroleum product prices.

5. Boehner's answers? “These include construction of the Keystone XL oil pipeline, ending the Obama administration's embargo on our supplies of oil and gas from federal lands and waters, and halting the effort to take coal out of America's electricity generation mix.”

This is a grab bag of oil industry and GOP priorities. The Keystone XL pipeline, an oil pipeline, will have no impact on Ukraine’s or Europe’s gas reliance on Russia. The oil it would carry is less than 1 percent of global consumption. If you accept that it is a net addition to world supply, it could shave a bit off world prices, but only a bit.

And the reduction of coal in the United States – the “war on coal,” if you’re so inclined -- has, in fact, made more coal available for export at attractive prices. Some of it has gone to Europe, where it has competed with Russian gas and given European buyers more bargaining power on Russian gas prices.