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By Andrew Holland on Mar 5, 2014 with 17 responses

The U.S. Does Not Have As Much Leverage Over Russia’s Energy As You Think

I have seen a number of commentators over the last few days say that the American shale gas revolution means that the U.S. could simply announce new LNG exports and that would undercut Russian gas. House Energy and Commerce Committee Chairman Upton, for instance, said in a statement: “Expanding U.S. LNG exports is an opportunity to combat Russian influence and power, and we have an energy diplomacy responsibility to act quickly.”

Statements like this overstate the influence that U.S. energy can have on this crisis Ukraine. While it is true that a viable, functioning LNG export capacity would provide geopolitical benefits, we do not have it today and we should not think that the U.S. energy boom will help in this crisis.

The U.S. energy boom has already helped reduce Russia’s influence and increased European energy security, without a singe molecule of US Natural Gas landing on the continent. This is because, even if the United States does not directly supply Europe with oil or natural gas, because the U.S. no longer is demanding imports of liquefied natural gas (LNG) has freed up major suppliers like Qatar or Norway to send supplies to Europe.

Furthermore, by 2018-2020, an expansion of U.S. exports of LNG could supply Western Europe by further undercutting the Russian position as monopoly supplier. The boldest example of these options is that the European Commission felt strong enough to bring and win an anti-trust suit against Gazprom.

These are long-term trends, however. In the short term, the U.S. alone does not actually have much leverage over Russia in energy. Gone are the days when 20% of the Marshall Plan could be given as in-kind donations of American oil, as the U.S. did in 1948.

Today, the U.S. could not even announce that we intended to buy LNG from a current exporter like Qatar to ship to Ukraine to supplant Russian gas, because Ukraine has no LNG import facilities. Ukraine doesn’t even have import pipelines from Western Europe – the only place it can get gas from is Russia – so they are at Gazprom’s mercy when they announce price increases.

Surprisingly, the ones that have the leverage in this crisis is not energy-rich U.S. – it is energy poor Europe. The conventional wisdom is that Europe is fatally dependent on Russia for gas imports, but that’s wrong. After a warm winter that had lower than predicted gas demand, European gas inventories are high (unlike in the U.S., where our cold winter has drawn gas inventories down to near zero and driven prices up). So, with European gas demand low and inventories high, Russia needs Europe to buy its gas more than Europe needs the gas.

As I wrote earlier this week, that means that the Europeans can change Russian behavior by implementing an embargo on the importation of Russian gas. American policymakers should move away from unilateral sanctions that would have little effect and begin to pressure allies in Europe to stand up to Russia. Members of Congress and pundits should not focus on what the U.S. can do alone (or use this crisis as another excuse to score political points), but should focus on how to put some steel in the spines of the French, German, Italian, and UK governments. If they ceased buying Russian gas, things would change quickly. Americans should offer all possible support, but we should not pretend that our energy policy will change anything in Ukraine in the short term.

  1. By Geoffrey Styles on March 5, 2014 at 12:08 pm

    Andrew,
    You’re certainly right that enabling more future US LNG exports won’t affect the spot market for Russian gas, or deliveries under existing contracts. It’s also true that Ukraine’s LNG terminal at Yuzhnyi won’t be ready until at least 2018. However, as an old trader I do wonder about the potential impact of streamlined US LNG permitting on Russia’s ability to line up new long-term contracts in the EU long before the facilities on the Gulf Coast are built, or to renew expiring contracts.

    And while I am sympathetic to your argument about stiffening the spines of the governments that consume most of Russia’s gas exports to Europe, doesn’t that run into the least-common-denominator requirement for EU action? Having taken pains to remove the Ukraine from their energy dealings with Russia when they signed on to the Nordstream pipeline, with a former Bundeskanzler at the helm, what motivates Germany to cut back on supplies from Russia? They’re not even willing to consider suspending Russia’s G8 membership, which would be a much smaller step.

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    • By Andrew Holland on March 5, 2014 at 12:39 pm

      Geoff – Good comments. I was motivated to write this by the rhetoric from certain Members of Congress implying that we could solve all this if only Obama had approved more LNG export facilities. My point is that’s a long-term push that would not move the needle in the short term (though it could provide important long term help).

      The Germans have always assumed they had a good business partner in Gazprom, no matter what else the Russian government does. The last week’s actions should put some doubt in there. The Germans have to realize that geopolitics still exists – not every international relationship comes down to business.

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  2. By Eightman on March 6, 2014 at 3:09 am

    How long would it take to build an LNG import port facility in let’s say Odessa, if the U.S. Army Corp of Engineers undertook the task?

    I dare say it could be finished before next winter. This task would probably be less onerous then the Berlin Airlift at the start of the last Cold War.

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    • By Andrew Holland on March 6, 2014 at 8:59 am

      Agree – could be done. But pretty sure nothing saying “US Army” is going into Ukraine!

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    • By Geoffrey Styles on March 6, 2014 at 9:53 am

      As noted below, Ukraine already has an LNG terminal in early stages of construction at Yuzhnyi, not far from Odessa. However, if for quicker results it’s not a different construction manager that you want, but a Floating Storage and Regasification Unit: http://www.hoeghlng.com/regas/Pages/New-FSRU-Vessels.aspx

      Would Russia consider the arrival of an FSRU in the Black Sea as a hostile act?

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  3. By ben on March 6, 2014 at 9:08 am

    I’be been chuckling at all the chest pounding over Ukraine when the actions of the Russians are quite predictable and probably similar to what we might expect out of our own government under similar circumstances. Preemptive steps to protect a vital naval base and assets in the Crimea poses a fair basis for action in eyes of the Russian people–the one constituency that Putin really cares about. All the hand wringing in the west is wonderful theater and no doubt makes us feel better for our indignation, but it matters precious little in the end. So long as the new government in Kiev keeps their knives and forks on the table and the linen in their laps, the situation will settle down and Putin will have demonstrated that he moved with resolve to protect Russia, Russian-Ukrainians and their vital interests along the Black Sea.

    We do love the saber rattling, as it makes for great excitement in an era when the political class has proven itself incapable of addressing issues with competence or responsibility here at home. It has been good to see the president resist some of the baiting while Sec’y Kerry has sized things up in person. All the talk about energy supplies, LNG and otherwise, is lovely fodder over in the think tanks, but it;s hardly a substitution for real world judgments. The slow and largely steady pace of modern commerce continues apace and the steady push and pull of international trade serves as the relentless current that drives us toward one another’s shore.

    Don’t get me wrong, I too have looked into the soul of Mr. Putin; I just happened to see very little apart from an old KGB man from St. Pete who has long lived a suspension of reality that you really do get to pick your own facts. Something all intelligence services tend to find a bit tempting. It shall remain a challenging task, indeed, to teach an old dog new tricks.

    It is high time to get back to the tough business here at home. Alas, that’s not much fun when it involves having to say “no” when the cookie jar is long ago empty.

    An old line that may be worth the chewing:

    “The whole modern world has divided itself in conservatives and progressives. The business of progressives is to go making mistakes. The business of conservatives is to prevent the mistakes from being corrected.” – G. K. Chesterton

    Ben

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  4. By Forrest on March 6, 2014 at 2:23 pm

    It doesn’t help that Obama’s approval ratings have dropped to new low. When Kennedy suffered from weakness, Russia tried to move nuclear missiles into our back yard. The International community needs and depends on strong U.S.. Guess that’s the price for being a Super Power, whether we retain that status much longer is debatable. Putin should pay a price for aggression. This was Hillary’s clumsy reference to Hiltler unimpeded aggression comment. Taking 50% of his treasury income away per NG sales to Europe would be devastating to Putin’s politics. U.S. Sanctions from what I read a waste of time and again makes us look weak and without good ideas. Our international influence, other than military, would be enhanced, being an energy exporter. This is Putin’s power and reason number one for Germany to not offend. Cheap cost of NG.

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  5. By ben on March 6, 2014 at 8:09 pm

    The ramblings of Forrest are so disjointed, as to leave one wondering aloud: Have we studied in the same language?

    Temporarily taking away 50% of the Russian treasury will achieve what? Good God, these are a people/culture that withstood the threat of Leningrad’s survival in the face of Hitler’s onslaught. And we amuse ourselves with the notion that a temporary loss to the national treasury will sweep away the visceral chauvanism of the typical Russian? That’s remarkable! If nothing else, that rascal Putin knows the impulse of his own people. Much less might be said of our own self-examination. Ah, yes,
    The End of History. Shame, I’d nearly forgotten!

    We’re so incredibly naive (or is that just dumb?) in our lazy pretensions of human suffering. Little wonder how the term bourgeoisie came to fit so well how the developing world would embrace its unapologetic, “love em, hate ‘em” attitude toward the west with its own unapologetic slide into the mire of an impulsive,
    mind-numbing, narcissism of license with little regard for the maintenance of
    liberty in our own corner of the globe.

    One may offer a cautionary note: Presumptions of moral advantage comes at the risk of grave miscalculation. There’s a subtle eddy in today’s currents that aims to defy a smug, misplaced self-confidence, as if we are somehow in league with the angels. History has long proven unkind toward those too quick and proud in their misbegotten opinions.

    There is still time for us to act wisely. But the hour grows late and the angels are. as ever, restless.

    Ben

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  6. By Forrest on March 7, 2014 at 9:09 am

    I think you underestimate the diplomacy tactic of undertaking change in our energy policy to support exports of NG. Making a policy change announcement per CIC has immediate ramifications and empowers Europe to stand up. This effort cost taxpayers little as compared to the usual throw money tactic to Ukraine. Ukraine has corruption problems and the easy fed money will do more harm than good…given an easy or spineless solution for politics.
    I was watching CBS report this morning on the Presidents hour long telephone conversation with Putin that gave the viewership the impression of involved and on top of it Commander. Later I read the reality of the conversation useless and nonproductive. We definitely have national weak spot upon media meddling within politics. Guess people forget media is run by Unions?
    Ethanol is expecting exports to increase to Europe. Canadian’s have a large market within Europe for biofuel. These are good indices, that Europe is attempting more diversity and stability upon energy markets. Same with their wind, solar, and geothermal projects.
    I believe the best energy policy for U.S. per our financial mess, international interests, and global pollution. Continue a low cost push for alternative energy progress, quit utilizing NG for power plant use, support the increase petrol production and exports thereof, maximize use of bio-mass and bio-fuel, increase best in class nuclear and coal electric production, decommission old nuclear and coal plants, and continue with high efficient and sensible (cost efficient) devices development and use.

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  7. By Ben on March 7, 2014 at 1:04 pm

    Another flight of fancy by Forrest. Market mechanisms (price point being among the most prominent) not government fiat will have the greatest influence on the highest and best application of natural gas and other energy sources. These applications will take a generation to unfold and some of this will occur in fits and starts as capital outlays follow the evolution of risk-mitigating strategies. To the extent that sound public policy may prove supportive of risk mitigation by fostering planning-related predictability, well, that is most welcome. Regrettably, we’ve seen very little of that, of late (passing a federal budget and related appropriations on schedule might prove a healthy start).

    I’m glad the president had his chat–something that could have been done over a week ago. Rather than laying flowers to the dead, Sec’y Kerry could have flown to Moscow to meet with his counterpart to offer: “The influence of the west in Ukraine and in Russia is a fact. It is in the homeland, in the home and, in fact, very near your heart. It’s called a Smartphone and the contents are courtesy of Madison Avenue, Hollywood and millions of individual content-producers sharing the opinions without censorship or government edict.” He’d then board his jet for Geneva or Paris and
    a glass of wine ahead of interviews for the evening news.

    The little man Putin will get his referendum and even his preferred results, but what he can’t achieve is resistance to the wave of liberty lapping the shores of the Black Sea and the Baltic and the Barents….. We just need to be wise and allow the march of progress to evolve more than precipitate. We might have done better to embrace such a view in SW Asia rather than signing on to the foreign policy Kool-Aid of the former brigands occupying the White House. That tragic, strategic failing will remain with us for the balance of this decade and beyond.

    “…… as from a fountain continually flowing out of the city, the Roman camp was quickly and plentifully filled with fresh men, not at all abating in courage for the loss they sustained, but even from their very anger gaining new force and resolute to go on with the war.” – Plutarch

    How precious little we learn from the past.

    Ben

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    • By stashgal on March 17, 2014 at 5:25 pm

      Even if Europe has vast plays of natural gas, it’s a very densely populated so there will be a lot of resistance to fracking. Again, natural gas is a temporary fossil resource, it will deplete, then what?

      What do we have to replace natural gas in making fertilizer, heating, generating electricity etc?
      Why should the market be the only consideration for use of these temporary resources? We are being way too short sighted in using these fossil resources, with 7.2 BILLION humans, when the cost of extraction exceeds the ability of the market to pay for it, it’s game over for most of us.
      Biofuel takes more energy to produce than can be gotten from it & it displaces food crops, crop “waste” should be returned to the soil to maintain fertility,

      The drive for profits at any cost has cost us dearly, you may make profits today but tomorrow, we all starve, you can’t eat money.

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      • By Forrest on March 18, 2014 at 8:31 am

        Not true, profit motive has fed, housed, and improved mankind’s plight far above all attempts to “control markets”. Plenty of history to prove that point and a point we should hit hard to educate citizenry upon. Natural gas is a renewable resource. Meaning the anaerobic bacterial process is very short cycle. We are just beginning to exploit anaerobic digester process and I expect all municipal waste systems as well as agricultural waste systems will employ the process. Compost piles are very greenhouse gas polluting, better to send vegetation waste to digester to produce valuable compost and bio gas aka natural gas. Last year I talked to professor at Michigan State that had a demonstration at Ag Expo where he explained his department is working on converting municipal waste for field use. The stats are encouraging as a replacement for fossil fertilizer for entire corn crop. The additional benefit of much improved/friendlier soil enrichment for bacterial world. Maybe you have read of Milorganic of Milwaukee sludge fame highly prized for lawn and vegetable garden use? There is a process for wind turbine stand alone process to manufacture ammonia, not yet competitive with cheap NG fertilizer, but nonetheless on the self if needed. Food production is really a challenge of technology, capital, and market payback. The challenge in which bio energy will make the path easier for food production. Modern farm practices can improve soil fertility at a faster pace than nature. We should be using max bio mass as you do for heating per many benefits. Electricity better produced by nuclear and coal for long term outlook with supplemental of solar and wind if efficient technology can be developed to balance production or consumption. The moon is quickly gaining interest per 24 hr solar production and H3 dust that makes a perfect nuclear fuel.

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        • By stashgal on March 18, 2014 at 5:25 pm

          I wonder why the US hasn’t done more to use bio-digesters to make methane? Other countries like Germany, UK & Denmark are far ahead of us.
          I have heard of some pig farms that have pig poo digesters that provide them with methane for cooking & the solid wastes can be used as fertilizers. I wonder why we aren’t doing more of that here?
          Perhaps part of the problem is that the amount of gas produced is fine for small applications but can’t be scaled up enough to replace the vast amounts of NG we currently use.

          I think we should be doing far more to recycle all our wastes in this manner instead of just hauling it off into a dump or into the ocean. Even in the dump, methane can be tapped & used like they do in S.F. in CA.

          I fully agree with your post, we must do more with our “waste”.
          The problem with profit is when the owners take too much of the profit from their workers production. That happens when there are far more workers than jobs like today.

          After the black death in Europe, the survivors were rich, the Lords couldn’t find enough people willing to work on their estates without paying a lot more than they were accustomed to.
          But that only lasted until the population grew to exceed the number of workers needed, then they returned to being ill treated, abused, under paid, landless serfs.

          As usual our biggest problem is that there are just too many of us.

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          • By Forrest on March 19, 2014 at 8:52 am

            Renewable natural gas should gain much traction per the attributes of the pipeline distribution and the efficiencies of NG equipment i.e. the advanced combined cycle power plant is amazingly efficient and will kill coal and nuclear. Also, per that statement it is a natural to focus R&D to converting coal to natural gas fuel. The U.S. while not to Europe’s capacity is increasing the farm, landfill, and municipal waste conversion to biogas. In Michigan quite a few successful operations. Also, pellet fuel will gain strength as renewable low cost fuel supply. It makes a lot of sense to save valuable natural gas for more demanding applications.
            Your point of Dark Age of plagues adjusting supply demand is correct, but a very dreadful solution. The modern problem will worsen upon low talent and difficult to manage labor verses the robotic industry. What to do? Raise min wage and put them all out work? I do know what makes employee’s more attractive and valuable. Good attitude, educated, physically fit and healthy, physically strong, intelligent, high moral standards, good habits, trust worthy, work ethic, ability to relocate, attractive, etc.. We can utilize the entire workforce and pay them well if they have these characteristics. To motivate and train the population to this end. Greatly increase entry level employment, add religious training, decrease volunteer work, and breakup the traditional school to better meet needs of country via competitive open market forces.

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            • By stashgal on March 19, 2014 at 9:37 pm

              Pellet fuel is worthless if the power is out as the fan & pellet feeder are powered by electricity it also takes more energy to produce pelleted fuel than just wood or biogas.

              I don’t think the robotic industry will have a very long life as it is too dependent upon cheap fossil resources especially OIL & oil is in decline which is why the price is so much higher than it was & it will go higher still.

              Employees need a better education than they are currently getting especially in the sciences & teaching them religious nonsense will cripple their ability to reason & think for themselves.
              Religions are ancient superstitions that are used to instill fear of an immaginarry super being & to control the believers. Believers also make better cannon fodder as they are taught to believe that death isn’t the end of life that they will go to a better life if they obey. That is nonsense, death is FINAL.

              No all potential employees are attractive, physically strong, fit, intelligent or able to relocate & unfortunately too many younger workers have a poor work ethic & paying them a poverty wage will do nothing to improve their attitudes about work.
              Too many people once middle class workers have been forced into poverty because of our terrible tree trade agreements & thanks to our poor health system that leaves millions unable to access health care, they are also sicker. Oboma “care” is just another taxpayer giveaway to the private for profit health industry & millions still can’t afford to buy it.
              I still say that exporting our temporary supply of NG is STUPID! We barely made it through this winter & our reserves were almost exhausted, what about next winter? Will we run short so people freeze to death here while the NG extractors make a profit selling our gas overseas?

              The cost of living in the advanced countries is much higher than in the 3rd world so there is no way workers here can compete against slave labor & they shouldn’t be expected to.

              We are still stuck with the problem of too many people & declining resources & since we refuse to address that problem usually because of religious beliefs, I’m afraid those old plagues will cull the excess through hunger, wars, disease & starvation.

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  8. By stashgal on March 16, 2014 at 10:21 pm

    Why are we so anxious to export LNG? You do remember that NG is a fossil resource & this past winter depleted our stores to almost 0.

    These fracked gas well are depleted very quickly & when we run out of affordable NG then what? We should be reserving these resources for our own needs not for political one up man ship.
    We have too large a population to return to wood & pellet stoves are only useful if the electricity is on which is why I have a wood stove not a pellet stove.

    The fracked oil “boom” won’t last much longer either as they are peaking & the price they are getting for their oil is so far too low for them to continue to drill & fracking.

    We need to remember that these fossil resources are TEMPORARY & we still don’t have anything that can replace the many uses of these resources aside from fuel.

    We may well end up with the lights on but the shelves empty.

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    • By Forrest on March 17, 2014 at 9:49 am

      My take on fracking…my state of Michigan has been doing it for decades with no environmental harm. The process is far underground as compared to shallow water aquifers. The reserves of NG available to the process is expected to be huge i.e. Europe has enormous untapped reserves as probably many places upon planet. Exporting a valuable commodity not that bad when improving our trade imbalance, state of economy, and ability to decrease economy crushing national debt and entitlement load. We need a quick revenue enhancer presently to forestall economic Armageddon. But, do so per market timing to achieve maximum ROI such as present day international tensions. But, best if we allow open market efficiencies to do most of the thinking. Managed markets not intelligent nor efficient. Also, good to economize valuable NG and not waste upon power plant fuel. Also, much of it can be saved per higher utilization of biofuel such as Europe achieved. Canada huge reserves of bio fuel must be transported to Europe as U.S. consumption so low. The reserves of biofuel is huge and go mostly untapped. A shame as decaying plant matter bad for global warming gas accumulations. Most citizens are aware that ecology of forest, plant kingdom, and soil micro flora have different abilities to convert CO2, but science is still evaluating the abilities of each. Most don’t realize modern forestry management practices greatly improve solar efficiency of forest to maximize wood growth and in doing so, convert CO2. Farming practices are designed to maximize sunshine conversion to cellulose as well. The value of storing cellulose for CO2 entrapment per old growth forest is offset by increasing poor conversion of CO2 and the fact decaying trees dump it all back, sure at a later time, but much more attractive practice is to maximize solar efficiency per plant growth and utilizing the bio energy to offset fossil fuel. This is equally attractive as bio energy is very cost effective. Efficiencies for devices that utilize the fuel are greatly improved per the days of slash and burn to produce some hunks of charcoal for steel production.

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