US energy could loosen Russia’s grip on Europe
MUCH of Russia’s power in Ukraine and Western Europe results from its control over energy supplies and distribution systems. Russia supplies the European Union with nearly 25 per cent of its gas and more than half of Russian gas exported to Europe flows through pipelines in Ukraine, writes Nick Loris.
Diminishing Russia’s economic leverage over Ukraine and Western Europe could be a key component of America’s policy response. This could be achieved simply by liberalising global energy markets. The US has antiquated and unnecessary restrictions on exporting liquefied natural gas (LNG) and crude oil, and its government could consider lifting these restrictions as a priority.
Ukraine understands that energy diversification is a key to its own future and reached agreements with Royal Dutch Shell and Chevron to explore and develop two large shale gas fields in Yuzivska and Olesska in 2013.
But to stand still because Ukraine is opening new shale gas fields is short-sighted. The US could wrest control over European energy markets and supplies crossing Ukraine by taking the lead in a broad liberalisation of global energy markets.
America could maximise its influence by increasing opportunities for exports. The US is already a net exporter of refined petroleum products and has doubled its exports to Europe from 2007 to 2012. This is reducing some of Russia’s grip on the region.
The US has overtaken Russia as the world’s leading natural gas producer and will replace Russia as the world’s largest oil producer soon.
America’s shale oil and shale gas revolution can influence the geopolitical landscape by establishing export opportunities.
The two policy reforms most critical to freeing up American energy exports are lifting natural gas export barriers and lifting the ban on crude oil exports.
Policy-makers have called for restrictions to be lifted on natural gas exports because of Ukraine’s reliance on Russian energy. But companies wanting to export natural gas have to first obtain approval from both the United States Federal Energy Regulatory Commission (FERC) and the Department of Energy (DOE). This is automatically authorised if the country has a free trade agreement (FTA) with the United States but there are none with European countries.
The decision to export natural gas should be a business decision, not a political one and natural gas should be treated as any other good traded around the world.
The US government banned crude oil exports, with limited exceptions, in 1975. Allowing crude exports would increase economic efficiency, grow the economy, and demonstrate America’s commitment to free trade. Crude oil exports could drive down prices as more supplies reach the world market and more efficient refiners.
Lifting gas export restrictions may not have a near-term and direct impact on the Ukraine crisis as it takes five to seven years to build a new LNG terminal from scratch. But to do so would send an important signal to Russia and the rest of the world that strategies based on gaining power from controlling energy interests will no longer be effective.
Opening markets would provide a diversity of suppliers and greater energy supplies for the global market. This is likely to result in lower prices and would provide more choice for countries like Ukraine in the not so distant future.
Providing that choice would diminish Russia’s power. Establishing free market reforms and increasing energy supplies would help to prevent future incidents and price shocks in Ukraine and globally.
Even though US LNG exports may not immediately impact Ukraine, they will have an impact on Russia’s energy-control over Western Europe in the near future.
An import terminal in the United States is being changed into an export terminal and is likely be online by the end of 2015.
Cyprus, with abundant natural gas reserves off its coasts, is another regional player which could help alter the geopolitical power-balance through energy production.
Russian President Vladimir Putin is likely to take Russia in the direction he wants regardless of sanctions imposed by the United States or Western Europe.
Mr Putin knows Russia has to sell its energy to maintain its economy and he knows that Europe needs that natural gas. It is quite possible, although unlikely, that Russia could retaliate against sanctions by embargoing gas exports.
As American natural gas exports and exports from around the world attempt to undermine Russian influence over Ukraine and Western Europe, expect Mr Putin to counteract that by undercutting exports with artificially lower prices.
This will be difficult as natural gas sales contracts are often over multiple decades, but Russia’s ability to sell gas at artificially low prices could scare off potential importers.
Exploration and development of shale supplies across Europe could significantly change the geopolitical and economic influence Russia currently holds over Europe.