Can American natural gas rescue Europe and Ukraine from the clutches of Russia? Not likely. Especially not soon.
It isn’t that easy. The cost of getting U.S. gas supplies to Europe and the lack of infrastructure on both sides of the Atlantic are major obstacles. Plus, Asian customers are offering higher prices. Opponents of gas exports (including consumer groups and petrochemical companies) say that some businesses and politicians are using the Ukraine crisis as an excuse to export. Proponents, by contrast, complain that the Energy Department is dragging its feet.
Both the Senate Energy and Natural Resources Committee and the House Energy and Commerce Committee have hearings on the issue set for Tuesday. Both committees are playing the Europe card. Lithuanian energy minister Jaroslav Neverovic is testifying in the Senate, and Hungary’s ambassador-at-large for energy security, Anita Orbán, will testify in the House.
In her prepared remarks, Orban says: “What Central Eastern Europe and the EU in general needs right now is the additional volume of gas. The most viable option Central Eastern Europeans have today is LNG.”
On Monday, the Energy Department gave conditional approval for an export terminal for the Jordan Cove Energy Project in Coos Bay, Ore. It would be the seventh permit granted by the department, which is required to review sales to countries that do not have free-trade agreements with the United States to make sure they are in the national interest. All seven have been granted since an economic impact study was completed at the end of 2012. The House hearing Tuesday relates to HR6, a bill that would grant permits to all 23 remaining proposed LNG export facilities “without delay or modification.”
In the Senate, Energy and Natural Resources Committee Chairman Mary Landrieu (D-La.) is one of the lawmakers leading for more natural gas exports. Landrieu’s state has many of the biggest petrochemical users of natural gas, with many jobs at stake, but Louisiana is also a major producer of natural gas both from conventional wells and from new shale resources, most notably from the Haynesville formation.
Dow Chemical, among the most outspoken companies opposed to large-scale exports, complained Tuesday that Landrieu had drawn up a witness list in “a one-sided and unfair fashion” that “unfairly skews the legitimate debate on this issue.”
Here are a few things to keep in mind as President Obama meets this week with European leaders -- with energy and Russia high on the agenda -- and as lawmakers and the oil and gas industry beat the drums for more exports.
U.S. natural gas is cheap, but is it cheap enough to displace Russian gas?
It costs about $3 per 1,000 cubic feet to liquefy natural gas, about $1 to transport it to Europe and $1 or so to turn the liquefied natural gas back into a gas. Current U.S. prices would make U.S. natural gas roughly as expensive as some of the Russian gas under recent European purchase contracts. For U.S. gas to make economic sense in Europe, it has to stay cheap. Right now, Russia, Algeria and Norway have the flexibility to undercut U.S. supplies if they need to.
The same story applies to liquefied natural gas, or LNG, from other sources. Goldman Sachs estimated in its March 4 energy weekly that U.S. LNG prices would be 35 percent to 40 percent higher than Russian prices if imported by Europe in large quantities.
Prices are higher in Asia, which is why large numbers of the LNG export facilities approved so far have long-term contracts with customers in Japan. Very little of the LNG exports approved so far will go to Europe.
When could U.S. LNG exports arrive?
Years from now. The earliest gas exports won’t come until late 2015 or 2016, and most won’t get started until 2017 through 2019. Hungary’s Orban argues, however, that American LNG plans could “immediately change the business calculus of infrastructure investments and send an extremely important message of strategic reassurance to the region.”
Will U.S. gas stay cheap?
That is a key question. Pick your study.
NERA completed a study for the Energy Department in late 2012 saying that prices could rise between 22 cents and $1.11 per 1,000 cubic feet. (For perspective, prices peaked at more than $6 per 1,000 cubic feet this winter; prices for delivery next winter are running around $4.60 per 1,000 cubic feet.)
A new NERA study — paid for by Cheniere, owner of the Sabine Pass LNG terminal — says that the price impact would be slightly smaller, around $1 per 1,000 cubic feet. Whether this is a lot depends on your point of view. NERA essentially says that, in the context of the $3.50 price swing this winter, it is well within the margin of error.
A group of big U.S.-based petrochemical companies says that prices could spike higher because of higher demand. The companies say that NERA used too low a range for gas exports and that exports and new power plants could strain supplies. The group, called America’s Energy Advantage, warns that the LNG export terminals already approved would use up 13 percent of the current levels of U.S. gas production. It fears that could reduce or eliminate the huge competitive advantage they now have over European chemical makers and could imperil $125 billion of investment now being made in U.S. chemical plants.
The petrochemical makers point to reports of comments by a JP Morgan commodities analyst saying that natural gas prices could “spurt” to about $8 per 1,000 cubic feet by 2016 on stronger demand.
Other analysts have also warned while shale gas is plentiful, production costs vary. Areas in Pennsylvania have very low costs, around $2 per 1,000 cubic feet; shale formations in other parts of the country have much higher production costs and won’t come online until prices rise enough to make drilling worthwhile.
NERA argues that there could be an automatic price stabilizing phenomenon. When U.S. prices rise too high, exports will drop and domestic supplies will rise, bringing prices down again.
Does Europe have enough terminals to import large quantities of LNG?
Right now Europe has enough LNG import terminals to handle a substantial surge in supplies. There are 22 terminals and, as of February, six under construction that could handle 220 billion cubic meters, according to Gas Infrastructure Europe. That would pose a threat to Russian imports.
But it’s a free market in the world of LNG tankers. Because LNG prices are higher in Asia, especially in Japan, producers are ignoring geopolitics and shipping gas there. Most of Europe’s LNG terminals have been idle.
Can Europe drill for its own shale gas?
No country matches the American advantages of technology, entrepreneurial spirit, relatively lax legal and regulatory requirements, and geological good luck.
“In relative terms, shale activity in Poland is by far the most active, though it’s still very much in the exploration/ ‘science experiment’ stages,” writes Pavel Molchanov, energy analyst at the investment firm Raymond James. He said encouraging results prompted ConocoPhillips to extend an exploration partnership. “On the other hand, some other international operators, including Exxon, Marathon Oil and Talisman, have been less impressed and exited,” he said.
Ukraine has two shale deals, one with Chevron and one with Shell. But neither one has started exploration.
In Germany, although there is no ban on fracking for shale gas, so few permits have been issued that it amounts to a “de facto moratorium,” Molchanov says.
Can Ukraine find more of its own conventional oil and gas?
Yes. There are new prospects in the Black Sea. But with Russia in control in Crimea, those Black Sea blocks most likely will be claimed as Russian territory. One major company executive expressed relief that the deals to drill in those prospects were not completed in January — and that the companies didn’t pay bonuses expected upon signing. Exxon Mobil was leading one of the consortia.
Can Ukraine do anything else?
Yes. It could end subsidies for natural gas, take the savings and give them directly to the poor. That would help the needy — and also cut the country’s natural gas consumption.