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LNG's Limits
American Gas Won't Deliver Europe From Putin

The West has so far struggled to respond to Putin’s seizure of Crimea in large part because it’s lacked the capacity to do so effectively. Russia supplies the lion’s share of Ukraine’s natural gas, which is no doubt one of the reasons Kiev moved East last November, not West. But Gazprom also supplies 30 percent of the EU’s gas as well, roughly two-thirds of which travels through Ukraine at some point. That flow of gas, and more importantly the ability to shut off that flow (a maneuver Russia has used before) is a potent weapon for Putin. But as Speaker Boehner and other lawmakers have remarked this week, thanks to the shale boom, the US is now a considerable producer of natural gas, as well. Can America use this windfall to blunt Vlad’s advantage in Ukraine?

The media sure seems to think so. Skimming headlines at the papers of record gives the impression that fracking could be the West’s trump card in this conflict. From the WSJ: “U.S. Can Use Energy as a Weapon Against Putin,” and “America’s Oil and Gas Leverage: A shrewder President would use it to reduce Putin’s influence.” The FT reports that the “Gas boom hands the US a potent weapon,” while the Gray Lady published “U.S. Hopes Boom in Natural Gas Can Curb Putin.” Has America’s shale revolution’s time come to shine in the geopolitical limelight?

Not so fast. A number of factors water down the immediate utility of American gas for Ukraine and Europe. The first, and most obvious one: the US currently operates just one facility capable of liquifying natural gas for the trans-Atlantic trip. That’s not a reflection of incompetent planning, but rather of how rapidly shale has transformed America’s energy outlook. Just 10 years ago we were working on building out LNG import facilities; exports weren’t part of the discussion. Now, more than two dozen LNG export facilities are awaiting permission from the Obama administration to break ground, but even if the President signed the papers today, the US wouldn’t be shipping LNG to its allies in any significant quantities for years to come.

But it’s not just America’s LNG export infrastructure in question. LNG must be turned back into gas upon arrival, and Europe doesn’t have the requisite number of terminals ready to import enough LNG to significantly weaken Russia’s current market share.

There’s more. As the CFR’s Michael Levi writes, governments don’t ship this gas, businesses do, and with the sky-high prices LNG is currently fetching in Asia, the profit motive isn’t on the European’s side:

It is difficult to see how U.S. exports will substantially erode the long-run share of Russian gas in Europe. It is far more profitable for buyers of U.S. natural gas to ship it to Asia – where prices are far higher – than to Europe. (The exception is if European companies are willing to pay a hefty premium to get their gas from the United States – but remember, these are commercial entities, which makes it very difficult for them to do that.) There is, of course, a knock on effect from that, since if U.S. gas frees up other supplies that were destined for Asia, those supplies can potentially move into Europe instead. But Russia remains a relatively low-cost supplier into Europe, and can trim its prices to keep its market share. Moreover, unlike European gas companies, the big Russian players have much tighter ties with the state. If Moscow wants them to keep their share in the European market for strategic reasons, it may be able to make them do that. Russia would lose money – an important piece of geopolitical harm – but its leverage wouldn’t be slashed.

Levi’s piece is, as usual, a level-headed, nuanced, yet clearly-worded review of a complicated situation, and his conclusion is clear: the power of American gas exports is being overstated.

Sure, it’d be nice if US shale gas could go toe-to-toe with Gazprom. But while we’re wishing for things, why not ask for a sane European energy policy that embraced shale gas as the opportunity that it is, or a Germany that still used zero-carbon nuclear energy as a foundation for its baseload energy mix (here, France has it right). Those are better long-term bets for Europe than American shale gas, which, while cheap stateside, will come dear for Europe after accounting for Asian LNG demand and the costs of liquefaction and shipping.

For the crisis at hand, though, Europe needs to come to terms with the fact that, when it comes to energy, Putin holds the sharpest knife, and wishful thinking or political grandstanding won’t change that.

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  • S.C. Schwarz

    You are quite correct that we could not start shipping significant quantities of LNG to Europe tomorrow. However, markets reflect expectations not just current realities. We could credibly commit to ship LNG to Europe in the future, and start building the infrastructure now, as could Europe. As for the public/private issue, we, and the Europeans, could provide a subsidy, if required. It would be far cheaper than any military option.

    Although it would take a few years to fully implement, there is no technical or economic reason we couldn’t cripple Russia’s energy exports. Unfortunately what both the US and the Europeans lack is the political will and Putin knows it.

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