Russia’s military intervention in Ukraine is bolstering the case for easing restrictions on exports of the U.S.’s booming natural gas production, according to energy analysts and industry groups.
Russia, the world’s second-largest producer of natural gas after the U.S., twice since 2006 has cut supplies of the fuel to Ukraine, a conduit for energy to Europe. Greater access to U.S. supplies would blunt the ability of Russia to use energy as a weapon, according to supporters of lifting export curbs.
“One immediate step the president can and should take is to dramatically expedite the approval of U.S. exports of natural gas,” House Speaker John Boehner, an Ohio Republican, said today in a statement.
President Vladimir Putin said today during a news conference that Russia is canceling the price discount on natural gas for Ukraine because it owes money to Russian gas giant OAO Gazprom. (OGZD) At the same time, President Barack Obama’s administration is preparing a financial-assistance package for Ukraine that would include $1 billion in loan guarantees to help the nation offset reduced energy subsidies, according to a White House statement today.
U.S. producers and industry groups see the regional tensions as another reason to speed approval of pending LNG-export permits.
“Having more of our gas reach the market will reduce volatility and provide diversity,” Karen Harbert, president of the U.S. Chamber of Commerce’s 21st Century Energy Institute, told reporters today on a conference call. The institute released a report citing Ukraine has having the least energy security among the top 25 energy-consuming nations.
American companies need the U.S. Energy Department’s permission to export liquefied natural gas to countries that lack a free-trade agreement with the U.S., such as those in the European Union. LNG-export projects also need to pass a Federal Energy Regulatory Commission environmental and safety review.
The Energy Department is weighing approval of at least 24 applications from companies including Cheniere Energy Inc. (LNG:US) and Kinder Morgan Inc. (KMI:US) to export the liquefied version of the fuel in tankers after approving six applications since 2010, including five within the past year.
A Snapshot of Ukraine's Past and Future
“The department remains committed to an expeditious and responsible process,” William Gibbons, an Energy Department spokesman, said today in an e-mailed statement. He said the agency will continue its review of LNG-export applications on a case-by-case basis, taking into consideration economic, energy security, environmental and geopolitical effects.
While Ukraine has been in a state of political unrest for months, the situation became particularly tense over the weekend after Putin sent troops to occupy Crimea, a peninsula in southeastern Ukraine where pro-Russian sentiment is high.
“American natural gas can ease the vulnerability of the region to supply constraints,” Dan Whitten, a spokesman for America’s Natural Gas Alliance, a Washington-based industry group, said in an e-mail. “We hope and believe that some of our abundant natural gas can make its way to our friends in Europe to reduce this vulnerability.”
The Obama administration is brokering a trade deal with the 28-nation European Union, though the talks are still in relatively early stages, and negotiators don’t expect a deal until at least the end of the year. The U.S. doesn’t have free-trade deals with Ukraine or Russia.
While the U.S. didn’t expedite liquefied natural gas export permits after Japan’s nuclear disaster in 2011, Russia’s intervention in Ukraine has already begun to shape the energy and trade debate on Capitol Hill.
“The Department of Energy’s approval process for LNG exports is unnecessarily putting our allies at the mercy of Vladimir Putin,” House Energy and Commerce Committee Chairman Fred Upton, a Michigan Republican, said in a statement. “Now is the time to send the signal to our global allies that U.S. natural gas will be an available and viable alternative to their energy needs.”
Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat, plans to ask Treasury Secretary Jacob J. Lew at a panel hearing tomorrow how U.S. trade and investment can be used to respond to Russia’s actions in Ukraine, Keith Chu, a committee spokesman, said in an e-mail.
The Obama administration has halted bilateral trade and investment talks with Russia, Trevor Kincaid, a spokesman for the U.S. Trade Representative’s Office, said yesterday in an e-mail. As recently as December, Russian officials met with U.S. Trade Representative Michael Froman to discuss the possibility of boosting trade between the two nations through by increasing investment and standardizing regulations.
The U.S. Commerce Department announced yesterday it will lead a trade mission to Moscow and St. Petersburg in September, according to a notice in the Federal Register.
Even if the Energy Department were to approve the remaining LNG-export applications immediately, the fuel wouldn’t be ready for market. Proposed terminals, which cost billions of dollars to build, must also pass the Federal Energy Regulatory Commission’s environmental and safety review.
The commission has approved just one of the LNG-export projects reviewed by the Energy Department since 2010. That facility, Cheniere’s Sabine Pass terminal in Cameron Parish, Louisiana, won’t be operational until at least late 2015.
Russian gas supplies to Ukraine were disrupted temporarily in 2006 and 2009, and reduced in 2008, because of pricing and debt disputes, cutting off deliveries to southeastern Europe.
“The U.S. needs to get its LNG exports in place sooner rather than later,” Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG cargoes, said in a phone interview. “Any supply source of LNG to increase the resilience of European markets to short-term swings would be a good thing.”
Prices of some LNG cargoes to Europe jumped above $30 per million British thermal units as a result of the disruption in 2009, Allen said. Besides physical supply disruptions, the unrest in Ukraine could pose financial complications for the gas trade if the U.S. and its allies impose economic sanctions on Russia, he said.
Russia’s Gazprom says it now provides about 30 percent of the natural gas that powers electricity generators, furnaces and factories across the region, and Europe buys about a third of the 4.2 million barrels of crude OAO Rosneft (ROSN) pumps daily.
Curtailing supplies now would be less disruptive to the market than in past years because a mild winter has kept Europe’s gas inventories 11 percent higher than at the same time last year, said Jan Stuart, head of energy research at Credit Suisse Group AG in New York, in a note to clients today. The Nord Stream pipeline, which sends gas from Russia across the Baltic Sea to Germany, has reduced the percentage of Russian gas supplied to continental Europe via Ukraine.
If Russian gas supplies through Ukraine are shut “for a prolonged period of time,” U.K. gas for delivery next winter could jump above $13 per million British thermal units, or 80 pence per therm, Francisco Blanch, global head of commodity research at Bank of America (BAC:US) Corp. in New York, said in a note to clients today. Gas for next-month delivery on ICE Futures Europe in London settled today at $9.68 per million Btu.
A reduction in European and Ukrainian use of Russian natural gas would harm Gazprom if the company can’t find alternate buyers.
“It’s really a question of whether Putin wants to shoot Gazprom in the foot,” Anders Aslund, a senior fellow at the Peter G. Peterson Institute for International Economics in Washington, said in a phone interview. He said Russia’s sales to Europe have already declined by 30 percent since 2009. In the meantime, Europe has increased its imports of the fuel and increased storage, Aslund said.
The European Union has been diversifying its energy portfolio to rely less on Russian natural gas for more than a decade, Kevin Book, managing director of ClearView Energy Partners LLC, a Washington-based energy consultancy, said in an e-mail.
At the same time, U.S. natural gas production has surged from advances in drilling techniques, including hydraulic fracturing or fracking. Europe has already benefited from diverted LNG cargoes that would have gone to the U.S. and coal exports from the U.S., Book said.
While there aren’t any short-term opportunities to reduce the existing European reliance on Russian natural gas, medium-term options include imports from the U.S. and other suppliers, he said.
“European interest in U.S. gas exports is likely to grow, but economic considerations are likely to predominate,” Book said. “U.S. companies don’t export out of the kindness of their hearts, and European customers don’t buy with indifference to price.”
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