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US LNG Export

Europe’s complacency is amazing

Edward Chow on impacts of US LNG-Exports

Europe’s complacency is amazing Europe’s complacency is amazing
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Edward Chow, a senior fellow in the Energy and National Security Program at CSIS, is an international energy expert with more than 30 years of oil and gas industry experience. He has worked in China, the Middle East, Africa, South America, Europe, and the former Soviet Union. Chow spent 20 years with Chevron Corporation in U.S. and overseas assignments and worked closely with the White House and the Capitol Hill.

ENERGLOBE recently had the opportunity to sit down with Edward Chow for an exclusive conversation focussing on future US exports of LNG. 

Europe’s complacency is amazing

It is not only for reasons of immediate concern – of which there are many – that the Middle East remains the focus of global political interest and discussion. For years, a constantly shifting debate has unfolded both within and outside the US on its future role in this region, which is the key to the global energy market, the ‘mother of all markets’ according to US Secretary of State John Kerry.

According to Edward Chow, in Washington there are two ways to assess the current set of crises in the Middle East. Both have far-reaching ramifications and both are shaped by the changes in international energy markets arising from the current oil and gas boom in the USA.

It is conventionally maintained in foreign policy circles that the Middle East will continue to represent the world’s most critical area for oil and gas extraction and production. Even if the US itself were to import relatively little oil from the region, the Middle East would remain of existential importance to its allies in Europe and elsewhere. Because there currently exists no actor capable of replacing the US in this region in terms of power and military presence, however, the US must continue to take the lead: the strength of its position in the Middle East must be maintained for the long term.

Nonetheless, as Chow explains, broad sections of public opinion would, today more than ever, call this argument into question and oppose its implications. Well over a decade of direct intervention in the Middle East have radically transformed the public debate on this issue within the US. This war-weariness, combined with the fact that the US is approaching a state of near-total independence from energy imports, raises an urgent question: why secure this region, at great cost, for China and India? Chow points out that this debate would in fact have little to do with Europe, as nearly eighty percent of the oil exported from the Middle East goes to Asia.

What nonetheless disturbs him, according to Chow, is the degree of complacency displayed by Europe’s approach to these matters. “It’s amazing”, he says, referring to numerous conversations he has held with experts in the capital cities of Europe. While the future role of the US in the Middle East is an object of intense discussion in Asia, in Europe it is simply assumed, at least among security experts, that the US has no choice but to remain fully present and active in the region, an assumption that also has the effect of relieving Europe of any additional responsibility there. Even as appears that Europeans will persist in this attitude, Chow believes that their future energy security urgently demands an alternative approach.

When asked about a future “transatlantic energy partnership”, such as the one proposed by the chair of the German Bundestag’s Foreign Affairs Committee, Norbert Röttgen, Chow simply shakes his head. In Washington, the representatives of several Eastern and Central European countries have recently intensified their calls on the US to begin exporting surplus oil and gas, products of its ongoing domestic ‘shale boom’, to help break their crippling dependence on Russian energy. Such calls have been taken up by politicians – mostly Republican, but also Democratic – who advocate an immediate lifting of US oil and gas export restrictions. However, according to Chow, these figures are motivated by strictly domestic political and economic considerations; for them, the requests emanating from Eastern Europe may simply offer a convenient rationalization towards their own ends, while in fact having little chance of being fulfilled. Chow thus describes how he has repeatedly advised European representatives to reflect on the prudence of “playing this card” and wasting the already limited influence they have in Washington.

Germany, on the other hand, is in a completely different league, but would still have to ask itself, if requesting exports from the US, why it is so reluctant to produce its own shale gas.  There is an obvious contradiction in being opposed to fracking while demanding that the US make its shale gas available to Europe and international LNG markets. Chow nonetheless believes Germany would enhance its credibility on the market – and send a clear signal to Moscow – if it commissioned an updated feasibility study on the construction of its own LNG terminal at Wilhelmshaven. For Chow, the importance would lie not necessarily in building this terminal, but in simply showing a serious interest in this option.

Responding to the claim made to ENERGLOBE by former EU Energy Commissioner Günther Oettinger that the number and capacity of LNG terminals in Europe is sufficient, Chow asks why this information has not been passed on to Poland and Lithuania, both of which have accepted EU financing for the construction of terminals that, lacking sufficient traffic and infrastructure, make little economic sense. Instead, says Chow, the EU is pouring money into an “insurance policy”.

If one fundamentally examines the situation, it is perfectly clear that Russia will continue to function as Europe’s key gas provider, not least because it makes the most sense economically for both parties. For Europe, the issue is not simply the import of Russian natural gas itself, but the prices and terms of trade that go with it. Additional LNG capacity would of course have a significant influence on these, particularly as large quantities of LNG that are no longer needed by the US are flowing into other markets.

Thus Chow’s suggestion regarding Wilhelmshaven: Before initiating large-scale projects or entering into major financial commitments, European actors could send clear and affordable signals to Moscow merely by drawing up public feasibility studies.

Returning to the issue of US LNG exports, especially the official projected export volume figure for the next few years of around 100 bcm (billion cubic meters) – nearly the current export volume of world-leader Qatar – Chow remains somewhat skeptical. As of roughly ten years ago, only five of a planned 40 LNG import terminals in the US had been completed. All of them have lost money, as the volumes required to generate profit have not been salable in the US. It remains to be seen which of these projects could actually be retrofitted for export and able to secure financing, according to Chow.

Rather than simply the future volume of LNG exports, the key question for Chow is how these exports will shape pricing and price indexing within the three global markets for natural gas. This would affect both the price differences between these markets as well as future oil-price-indexing for gas prices in Europe and the Far East. These are questions of real significance for Europe’s future economic competitiveness: a weaker oil-price index would lead to more competition in European gas markets and, with it, price reductions.

For Chow, the real significance of LNG exports from the US lies in the fact that they would represent a trade in gas not defined by oil prices. This, independent from the exact number of future LNG terminals and the volume of trade, promises to change global energy markets.  

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»THE CRISIS IN THE CONCEPT OF THE

WORLD ORDER (IS) THE ULTIMATE

INTERNATIONAL PROBLEM OF OUR DAYS.«

Henry Kissinger,„World Order“, August 2014