FROM London to Washington politicians and commentators have
arrived at a solution to their Putin problem. Russia is weak,
their argument claims, because it depends on oil and gas
revenue. Unleash American energy on the world and watch the
It's a neat answer, because none of the Western powers wants
a real war over Crimea, and UK, German, Italian and others'
financial interests make them reluctant to back sanctions on
John Boehner, speaker of the US House of Representatives,
says swifter approval of liquefied natural gas (LNG) exports
"is one clear step the US can take to stand by our allies and
stand up to Russian aggression". Lisa Murkowski, a senator from
Alaska, says oil and gas are now a "strategic asset" for the
US, which should "be aware of what we have and how important a
tool diplomatically an energy asset can be".
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Big media names are on board. The Wall Street
Journal thinks the US can "use energy as a weapon against
Putin", sending LNG first to "our good friends in Europe". In
the UK's Times newspaper, one commentator thinks the
US unconventionals boom could "kill Russia's energy industry".
Another in the Daily Telegraph notes that rising US
energy output helped with sanctions on Iran. "Should Moscow be
the next testing ground for America's E-bomb?" asks an
None of this bears much examination. First, there is nothing
the US can do, in energy terms, about Ukraine's plight right
now. The first shipments of US LNG, from the Sabine Pass
terminal in Louisiana, are at least two years away. Aside from
a sales agreement with the UK's Centrica, there is no guarantee
that much of the gas will end up in Europe, let alone reach
Ukraine. As Michael Levi, of the Council on Foreign Relations,
points out, it isn't the US government that will sell this LNG.
Companies will - in markets where prices are highest. For the
foreseeable future, that's Asia.
Despite that commercial reality, Texan Congressman Ted Poe has
just introduced bill HR 4155, "To authorise natural gas exports
to certain foreign countries, and for other purposes". His
bill, we are told, may be referred to as the "Fight Russian
Energy Exploitation (FREE) Act". It is designed to speed LNG
sales to Ukraine, even though Ukraine doesn't have an LNG
Lifting the ban on US exports of crude oil is a great idea -
at least for US producers keen to export into the global
market. But despite the success of the US tight oil sector, the
country is still the world's second largest oil importer (China
overtook it last year), and will be for years. Total imports
this year will be about 6 million barrels a day (b/d) - more
than Germany, the UK and France, the EU's three biggest
consumers, together used last year.
Oil is a global market in which any US exports would barely
make a dent. As the US remains a net importer, any oil sent out
of the US would have to be replaced by oil brought in. Opening
this trade in both directions might bring down global prices a
bit. And it might just narrow the differential between WTI and
Brent. Can someone explain how that would punish Russia?
Alternatively, runs another idea, the US could use some of
the 700 million barrels of oil in its Strategic Petroleum
Reserve (SPR) to weaken global prices. This is absurd. Not much
of the oil could be released quickly. It wouldn't necessarily
compete with Russian Urals exports. Any dip in the SPR's volume
would have to be replaced -because, after all, the reserve is
there to deal with shortages and emergencies. What about the
long-term impact of such a move? Just as the Arab embargo of
the 1970s injected a political risk premium into oil prices for
decades after, such an SPR move from the US would forever hang
over markets when something, somewhere, annoyed American
politicians. Does the US really want to toss away its
free-market principles on an untested, silly foreign policy
Apparently forgotten in these daft proposals is that the US
is now the world's high-cost marginal oil producer. Its tight
oil success has come thanks to sustained high oil prices.
Engineering some kind of slump - even if it were possible -
would put future tight oil supply growth in jeopardy. It would
also need the cooperation of producers in the Gulf, especially
Saudi Arabia. Is it in any big producer's interests to weaken
global oil prices to the kind of level that would hurt
As the world's biggest oil producer and biggest gas
exporter, Russia doesn't have much to fear from any of these
ploys. Its gas sales to Europe rose to 162 billion cubic metres
(cm) last year, or 33% of the continent's market. It still
meets a third of Europe's oil needs. By May, it hopes to have
signed a 30-year gas sales agreement with China, to export 38
Both Gazprom and Europe can cope without Ukraine's transit
of Russian gas to Europe, at least for the short term. The 55
billion cm/y Nord Stream pipeline to Germany has spare capacity
should Russia divert exports away from Ukraine. In the medium
term, Gazprom will also have South Stream, its 63 billion cm/y
link through the Black Sea to Bulgaria and central Europe, on
stream by 2015. Europe's dependence on Russian gas - between
50% and 100% for every country, aside from Romania, that lies
east of Trieste - is growing.
The best time to reduce this exposure to Russian gas has
passed. The Trans-Adriatic Pipeline, which will pipe up to 12
billion cm/y from Azerbaijan to southern Europe by 2018, is the
only real outcome of the EU's efforts to build alternative
import routes earlier this century. The grander Nabucco
project, which would have opened the so-called southern gas
corridor, has failed.
Brussels propagated several fantasies: that the Caspian had
enough gas to become a viable competitor to Russian imports;
that Iraq, whose associated gas reserves lie in the south,
might feed some supply through Turkey to the EU; that Nigeria,
lacking its own electricity, would send gas to Europe across
the Sahara; or that Turkmenistan gas could flow across the
Caspian, even though Russia, a Caspian littoral state, can stop
a pipeline being built across the sea. Unstable North Africa
was to be the other rival to Russia. But in the past three
years its exports to Europe have fallen from 71.6 billion cm to
48.5 billion cm.
All aboard the Gazprom express
Meanwhile, domestic policies across Europe have left any
semblance of an EU-wide energy strategy in shreds. Germany's
decision to phase out nuclear power has wedded it to Russian
gas (and left the continent desperate for coal). Hungary,
Austria and the Balkan states backed South Stream, not Nabucco.
Gas-rich Netherlands jumped aboard the Gazprom express when
Gasunie signed up to Nord Stream and plotted ways to ship
Russian gas further west.
Domestic shale gas could make a difference - but not for a
decade, at least. Poland, once considered the country with the
best prospects and, given Gazprom's domination of its supply,
most reason to exploit its shales has failed at the first
hurdle. Officials used to working with Russian partners, say
some Polish critics, have successfully thwarted their own
country's interests. Ukraine's own reserves are years away from
Shale optimism has since shifted to the UK. In theory, a
shale boom there could see some gas move onto the continent.
But no one knows how much it will cost; and the volumes are
unlikely to knock Russian gas out of the market anyway.
Likewise, new LNG receiving terminals in Poland and Croatia
will offer alternative supply only on the margin. It is
expensive, too. Extra LNG imports into Europe would end up
costing 35-40% more than Russian gas, says Goldman Sachs. And
thanks to Russian supplies, Europe can't stomach higher prices.
Imports of LNG were 86.7 billion cm in 2010, but fell to 45.8
billion last year, as cargoes were diverted to better-priced
markets in Asia. Only a decision by Japan to restart its
nuclear sector would change that dynamic.
The arrival of new US LNG supplies from six planned export
plants may bring down global gas prices over time. But the
expectation of those supplies has also hindered other
developments: consumers in Asia, awaiting cheaper US gas, have
been reluctant to sign new purchase agreements from other
planned LNG projects, slowing future upstream
Europe's economy is also too vulnerable to risk the kind of
energy war being talked about so blithely in the US. Ukraine
may be less important to EU imports now than it was the gas
wars of 2006 and 2009. But a supply interruption would still be
a problem. And sanctions on Russian gas would send prices
soaring. Another European recession could follow that kind of
price shock. Sure, it would hurt Russia as well, because it
can't quickly switch its supplies to another market. A trade
embargo, says Citi, a bank, would be a "serious negative-sum
event". In energy terms, Europe and Russia are in a lock.
Whatever other solutions the West comes up with, turning energy
into a weapon isn't the answer.
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