Vladimir Putin is up to his old tricks. Prompted by instability in neighboring Ukraine, pro-Russian forces have mobilized and occupied the Crimean Peninsula since late February. Putin, for his part, continues to deny Russian involvement. Regardless, Russia's current conflict with Ukraine and Russia's longstanding tensions with Europe and the West are due, in no small part, to energy-related issues. This fact becomes readily apparent by observing recent relations between Moscow, Kiev and their European counterparts.
Europe lives in the shadow of a Russia that has undergone an energy revolution. Gazprom, Russia's state-run natural gas monopoly, is the largest producer of natural gas in the world, and will, if current production continues, account for approximately 17 percent of global gas production in 2017. To say that Europe is reliant on Russian oil and gas is not an overstatement. Presently, Russia satisfies between 50 and 75 percent of Ukraine's natural gas needs, and Europe, as a whole, imports approximately 30 percent of its natural gas from Russia. Seventy-six percent of Russia's natural gas exports are sent to customers in Western Europe, with the bulk of these volumes going to Great Britain, France, Germany, Italy and Turkey.
In addition to dominating upstream development, Gazprom also controls the midstream by owning Russia's natural gas pipeline system. There are currently 10 major pipelines in Russia, eight of which are export pipelines. Of the westbound pipelines leaving Russia, nearly half transect Ukraine. No wonder Russia is parading its military along Ukraine's borders and using Crimea as leverage to rebuild its old empire. Putin's hubris in Crimea has now extended to the seizure of the gas terminal in Strilkove, which is located in Ukraine and outside Crimea. As of Tuesday, Putin has approved a draft bill for the annexation of Crimea, making its absorption into Russia all but inevitable, notwithstanding defiance from Ukraine, and sanctions from the United States and European Union.
Russia's energy dominance translates into political leverage, and Russia is not afraid to use it. Russia has used natural gas as a political weapon against Ukraine three times in recent history. In 2006, Russia reduced, and ultimately cut off, supplies to Ukraine as a result of a disagreement over gas prices. In 2008, Russia reduced its shipments to Ukraine by as much as 50 percent for several days as a result of unpaid Ukrainian debt. In 2009, exports to Ukraine were again halted completely as a result of unpaid debt. Although Russia only cut off supplies to Ukraine, the domino effect was felt across Europe, with decreased pipeline pressures reported in Hungary, Romania and Poland, which in turn affected shipments to Turkey, Greece and Macedonia. At the time, Great Britain announced plans to tap into its gas reserves as a result of the supply shortage. Last year, in an attempt to avert another crisis, Ukraine and Russia signed an agreement whereby Russia agreed to a 33 percent discount for the price of natural gas. That deal has now been canceled amid the recent military and economic tensions between those two nations, with Russia demanding immediate payment of $1.55 billion, a debt the nearly bankrupt interim Ukrainian government will be hard-pressed to satisfy.
Ukraine is not alone. Other nations are also held hostage to Russia's demands, and any attempts to break free from the Russian sphere of influence are met with threats of cutoffs. The Lithuanian ambassador to the United States has noted that overdependence leads to less competition and higher prices, observing that his country pays the highest price for gas in the world. He further stated that Lithuania's attempts to align itself more closely with the European Union and the United States have been met with Russian threats to cut off Lithuania's supply of natural gas.
The point is that energy issues, and natural gas issues in particular, are dominating European politics, and its derivative effects can be felt around the world. Russia's ace-up-the-sleeve natural gas bargaining chip has emboldened its foreign policies, as evidenced by recent Russian military excursions into Georgia and Ukraine, with little fear of serious repercussions from the West. This has caused the West to reevaluate its options, few of which are attractive. It is clear that no one wants a military engagement with Russia, and economic sanctions will only have a limited effect on Russia, and could result in counter-sanctions (i.e., cutting off gas).
A far simpler and much more productive solution is to increase U.S. exports of liquefied natural gas (LNG) to provide an alternative to Russian natural gas. The timing could not be better. The United States is in the midst of a natural gas boom, spear-headed by dramatically increased production in recent years as a result of improved (and improving) hydraulic fracturing methodology. In fact, in 2013, the United States surpassed Russia and Saudi Arabia to become the world's largest producer of natural gas. Moreover, by actively entering into the LNG export market (as well as supporting Ukraine in its efforts to remain a sovereign state), the United States signals the willingness to avoid isolationism and to use its economic power to deter Russian aggressions. It seems clear that the United States is well-positioned to alleviate trans-European tensions without firing a shot, all the while strengthening our global bargaining position and simultaneously weakening Russia's positioning in light of the Russian economy's heavy dependence on energy exports including oil and gas.
Unfortunately, it's not that simple. In order to transport natural gas that cannot be transported via pipeline, the gas must be liquefied. To export LNG, an LNG export terminal must be built. This is expensive. Existing terminals can be retrofitted to export LNG at a cost of about $4 billion, and new terminals can take 10 years to build and cost as much as $10 billion. Further complicating matters is the slow, bureaucratic process by which such facilities obtain the required approvals. The U.S. Department of Energy has jurisdiction over LNG export applications, whereas the Federal Energy Regulatory Commission has jurisdiction over the actual LNG facility, including the environmental review process, which can be drawn out as a result of challenges by NGOs. In instances where the United States has a free-trade agreement (FTA) with the receiving country, such applications are summarily granted. However, where the application involves a non-FTA country, the process becomes lengthy and cumbersome, resulting in a logjam. As of March 10, 31 applications were pending, while only six had been approved.
Although proponents of LNG exports have been calling for an expedited approval process for some time, the crisis in Ukraine has reinvigorated this issue in recent weeks. The Expedited LNG for American Allies Act of 2013 (S 192) allows for the exportation of LNG not only to nations with which there is an FTA, but also with any other foreign country where the secretary of state determines that the exportation promotes U.S. national security interests. This legislation, as well as an identical bill in the House (HR 580), was referred to committee more than a year ago, and no action has yet been taken. Recent calls for expedited LNG application approvals from Sens. John Barrasso, R-Wyo., and James Inhofe, R-Okla., have not been answered. Efforts to attach LNG exports to a Ukrainian aid package have also been unsuccessful. Despite one of the conclusions of a February report issued by the House of Representatives' Committee on Energy and Commerce ("Prosperity at Home and Strengthened Allies Abroad—A Global Perspective on Natural Gas Exports"), which states that "although the economic benefits of LNG exports are significant, they may well be exceeded by the geopolitical benefits," the likelihood of any relief from U.S. LNG exports does not appear imminent.
And yet, the United States would stand to benefit greatly from LNG exportation. More and more, natural gas is becoming a global commodity. Worldwide gas markets are growing by 3 percent a year. If current production levels are maintained, the United States is forecasted to become a net exporter of natural gas by 2018. It is estimated that the United States' energy revolution supports 1.7 million jobs, a number that may double by 2020. Not only will increased oil and natural gas production break the United States' dependence on foreign oil, but increased LNG exports will break European dependence on Russia's energy exports. Importantly, the increased availability of natural gas will also decrease global dependency on coal, which has higher greenhouse gas emissions. This is especially important to the growing economies of Asia, where coal is in abundance. More locally, Pennsylvania and other natural-gas-producing states would benefit greatly from LNG exports. The American Petroleum Institute estimates that between 38,000 and 60,000 additional jobs would be added if LNG exports are approved.
In short, the United States is uniquely positioned to address many geopolitical, energy and environmental concerns by advancing LNG exports. Although the United States will likely not be in the position to take action before the Ukrainian crisis is diffused, it would be a grave miscalculation to adopt a disinterested and disengaged position on global energy issues, because history, as we know, often repeats itself. By exporting LNG, the United States can provide our friends and allies abroad with a reliable and affordable supply of natural gas, while simultaneously decreasing global reliance on coal and oil, increasing domestic job creation, and strengthening our geopolitical standing in the world by taking a little iron out of Russia's ever-growing iron fist.
Reprinted with permission from the March 21, 2014 edition of The Legal Intelligencer © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, [email protected] or visit http://www.almreprints.com/.