On the wave of the recent Ukraine conflict, Russia’s annexation of Crimea and new Kremlin threats to cut gas supplies to Ukraine and Europe, several EU countries, including the Visegrad Group (Poland, the Czech Republic, Slovakia and Hungary), have renewed and intensified their lobbying to the U.S. to ease restrictions and fasten its Liquefied Natural Gas (LNG) exports after 2015, when those U.S. LNG exports become available. In a letter to senior U.S. lawmakers, the four Visegrad countries concluded:
„The presence of US natural gas would be much welcome in central and eastern Europe, and congressional action to expedite LNG exports to America’s allies would come at a critically important time for the region. … Energy Security is not only a day-to-day issue for millions of citizens in our region, but it is one of the most important security challenges that America’s allies face in central and eastern Europe today.“
Like Asian countries, they seek more secure and competitive supplies of both natural gas and oil. For the European countries, a principal U.S. decision on LNG exports to Europe has become more urgent after Russia’s annexation of Crimea and because many Gazprom gas supply contracts with them will expire in the next two years. But US Secretary of State John Kerry stated during the EU-US Energy Council on 2 April 2014 that Europeans should not expect LNG exports from the U.S. until 2015 as the first LNG terminal will only open in 2015 with a capacity of 22.7 bcm per year.
The EU intends to diversify its gas supplies and to expand its LNG imports, including from the U.S as the result of its shale gas revolution. Even the German government is re-considering a revival of its long-planned project to build a LNG-terminal in Wilhelmshaven. Other EU countries, such as Lithuania, Estonia, Croatia, Greece and Cyprus have already planned to build new LNG terminals before the recent Russian-Ukraine conflict started. Poland is building near the German border a LNG terminal, which will already become operational in 2015.
But the EU’s newly declared interest at an expansion of its LNG imports comes at a time, when both the European and the global LNG markets as the most dynamic fossil fuel market are undergoing significant changes with wide-ranging geo-economic and geopolitical impacts. The rapidly expanding production of shale gas has transformed the U.S. from the largest LNG import market to an increasingly self-sustaining gas producer. At present, natural gas is both still imported, but also exported. However, the U.S. will become a net-exporting gas country in the forthcoming years, exceeding its imports.
In 2009, the U.S. even overtook Russia as the world’s largest gas producer and in 2010 the Qatari output as the world’s largest LNG exporter by about 60%. In 2012, the U.S. natural gas production increased up to 681.4 billion cubic meters (bcm; 20.4% of the global production), whereas Russia’s was just 592.3 bcm (17.6% of global production). Even OPEC members such as United Arab Emirates are currently considering heavy investments in U.S. and Canadian shale gas projects to take advantage of low gas prices to secure cheap supplies as they are increasingly importing gas to meet their surging demand for electricity from their growing populations.
American shale gas production is expected to increase from 34% of total US natural gas production in 2011 to 49% in 2035 and more than 50% in 2040. The U.S. Energy Information Administration (EIA) has forecasted that the U.S. will become in 2016 a net-exporter of LNG (albeit with a rather limit potential for the years to come), in 2025 a net pipeline exporter and in 2021 an overall net exporter of natural gas. The U.S. may even overtake Russia as the world’s combined largest oil and gas producer by 2015. Accordingly, U.S. net LNG imports had been reduced from 107 bcm in 2007 to just 1.52 bcm in 2013 – the lowest level during the last decade. At the same time, while the GDP of the U.S. grew by an average of 3.9% between 1993 and 2000 and 1.6% after that, U.S. total energy consumption shrunk between 2011 and 2013 to levels in the late 1990s and early 2000s .
The U.S. development of unconventional gas reserves has brought foreign direct invest¬ment (FDI), created more than one million new jobs, and helped to strengthen energy diversification. The decline in domestic coal consumption as the result of the coal-to-gas switch has opened the prospect of becoming a leading coal exporter reaching 500 million tons (mt) per year by 2030 to Europe, Asia and other regions. Europe has already in the last two years increased its imports of cheap coal from the U.S. as it is replacing more expensive imported gas in power generation with coal. Between 2007 and 2012, US coal exports to to Europe doubled from 32% of total coal exports to 58%. It has also led to higher greenhouse gas (GHG) emissions in the EU-28 contrary to its declared climate protection policies.
The production glut has reduced natural gas prices in the U.S. by more than two-thirds since 2008. In the past five years, U.S. carbon dioxide emissions decreased by 13% to the lowest levels since 1994 due to the coal-to-gas switch, new energy saving technologies and a doubling of renewable energy production. It is even more impressive if one takes into account that the real GDP in 2012 was 55% higher and the U.S. population 17.5% larger than in 1994.
The share of coal in the U.S. energy mix fell from 22.5% in 2007 to just 18.1% in 2012. Over the same time, total U.S. energy consumption has been reduced by 6.4% towards 2007. But in the longer-term, the U.S. would have to phase out gas in electricity generation to meet its emission targets unless carbon capture and storage (CCS) is available at a low cost for widespread use.
Furthermore, the U.S. is also experiencing a shale oil revolution. Since 2006, U.S. net imports have been reduced by more than 30% by 2012, due to a combination of lower demand and increased domestic production. Presently, around just 13% of the U.S. oil imports are coming from the Persian Gulf and the Middle East in comparison with 22-24% more than 10 years ago. The U.S. petroleum imports declined from 60% of domestic consumption in 2005 to 46% in 2011. According to IEA forecasts, the U.S. may become the world’s largest oil producer in 2015. During the last five years, the United States and Canada combined have become the fastest-growing region in the world for new oil supplies, overtaking producers like Russia and even Saudi Arabia.
Meanwhile, the “Annual Energy Outlook” of the U.S. Government’s Energy Information Agency (EIA) predicts a further decline of 36% in U.S. oil consumption in between now and 2035. The net import share of total US energy consumption will decline from 22% in 2010 to just 13 % in 2035.
According to the latest “Annual Energy Outlook 2014” report, U.S. gas production and consumption will rise from 740 million cubic meter per day (mmcm/d) to 815 mmcm/d by 2040. Its new outlook also increased the US LNG exports by 160% towards the previous outlook report of 2013.
Opponents of shale gas production and environmentalists have often contended a rising shale gas output and considered it as a bubble rather than a long-term trend. But EIA and new analyses have shown that the US gas resource base (in contrast to its oil resource base) is sufficient for at least 100 years or more at current production. Furthermore, shale gas wells offer higher initial returns than conventional gas ones. Although unconventional wells cost more to drill, the average cost of the shale gas retrieved was 40-50% less than from new conventional wells in 2011. According to industry experts, higher initial production, along with increasingly fast and cost-effective drilling, also leads to faster pay back investment costs than conventional wells – sometimes in less than two years.
But the U.S. shale oil production may already peak around 2020 and be just a third of U.S. output by 2040 due to the lower reserves and resources in comparison with the U.S. unconventional gas reserves.
Changing Prospects for U.S. LNG Exports to Europe
Already before the recent Ukraine conflict and Russia’s annexation of Crimea, the U.S. has debated whether its expanding shale gas production can also exported to Europe and Asia, starting in 2015. US-LNG exports need two approvals by the:
- Department of Energy (DOE) to sell gas overseas (reviewing economic and geopolitical considerations); and
- Federal Energy Regulatory Commission (FERC), which overlooks and controls the projects meeting environmental, safety and other regulations. In comparison with the approval process by the DOE, it is the more lengthy and complex process that often determines the speed of US-LNG exports approvals.
Under a U.S. law of 1938 and the Natural Gas Act, no one can import and export natural gas from the U.S. to a foreign country without first obtaining permission from the DOE. Export applications to most free trade agreement (FTA) countries like Canada and Mexico are deemed to be in the public interest and such applications can be quickly authorized by the DOE. They must be granted ‘without modification or delay’ when those exports do not threaten national security conditions. But with the exception of South Korea, most FTA countries are not likely to be significant importers of U.S. LNG supplies. The U.S. has free trade agreements with 20 countries, but not with one in Europe, which makes it more difficult to import LNG from the U.S. For all other countries without the U.S. has a FTA, the DOE may hold hearings and make modifications as well as impose conditions it find ‘necessary and appropriate’ and ‘for good cause shown’.
At present, the U.S. energy company Cherniere Energy owns the Sabine Pass LNG export terminal in Louisiana as the only one with an LNG export license since 2010 for LNG exports to UK, Spain and other countries, starting in 2015. Six other LNG projects will not start before 2018/19. The total capacity of these approved terminals that will be commissioned between 2016 and 2020, will be around 118 billion cubic meters (bcm) per year.
By May 2014, altogether 28 liquefaction projects have been proposed with a total export capacity of more than 285 mt per year - equivalent to more than a third of U.S. domestically consumed natural gas and nearly equal the current total of global LNG trade. The vast majority of these projects are located on the coast of the Gulf of Mexico. Only 6 projects are planned elsewhere (2 on Alaska, 2 on the West Coast and 2 others on the East Coast).
The Sabine Pass LNG is the only project that has received both the DOE and FERC approvals to export to FTA and non-FTA countries. Additionally, 23 other US projects have received the regular DOE approval to export LNG to FTA countries; 4 projects have been sanctioned to export to non-FTA-countries. The DOE approved six export projects to non-FTA countries and a seventh one with conditions (Jordan Cove LNG terminal in Oregon, which will supply Asia). The total export capacity of these seven LNG export projects is 95 bcm per year. FERC has just approved one as the result of campaigners against gas exports (such as the Sierra Club environmental group) and mounting legal challenges. But none of these projects has finalized its financing.
But at present most experts believe that the U.S. is unlikely to export more than 40-80 bcm of LNG (equivalent to just 1-2% of global gas demand) based on its produced shale gas between 2015 and 2020.
In 2017, the U,.S. will produce LNG equal to a sixth of EU consumption, but half of its has already reserved by India and South Korea - another half, however, by UK and Spain companies. In this context, the present finalized negotiations of the Transatlantic Trade and Investment Partnership (TTIP) agreement could facilitate and fasten more U.S. LNG exports to Europe. According to new forecasts, the U.S. LNG exports could increase up to 66 bcm a year between 2018 and 2020. The Senate’s Energy Committee is currently working on a series of LNG-related bills. The ‘Expedited Liquid Natural Gas for American Allies Act’ of 2013 would allow easier authorization to export LNG to non-FTA partners of the U.S., particularly exports to NATO member states, Japan and any other foreign country where gas exports may promote wider U.S. security interests.
Factbox: US-LNG Approvals
|Plant||Location||Non-FTA approval||Applied to FERC||FERC approval||Start-up||Capacity (mtpa)|
|Sabine Pass||Sabine Pass, Louisiana||Yes||Yes||Yes||2015||18|
|Corpus Christi||Corpus Christi, Texas||No||Yes||No||2017||13.5|
|Jordan Cove||Coos Bay, Oregon||Yes||Yes||No||2017||6|
|Lake Charles||Lake Charles, Louisiana||Yes||Yes||No||2019||15|
|Cameron LNG||Hackberry, Louisiana||Yes||Yes||No||2017||12|
|Lake Charles||Lake Charles, Louisiana||Yes||Yes||No||2019||15|
|Dominion Cove Point||Chesapeake Bay, Maryland||Yes||Yes||No||2017||5.25|
|Oregon LNG||Warrenton, Oregon||No||Yes||No||2019||9|
|Lavaca Bay FLNG||Port Lavaca, Texas||No||Yes||No||2018||4.4|
|Southern LNG||Elba Island, Georgia||No||Yes||No||2017||6|
|Magnolia LNG||Lake Charles, Louisiana||No||Yes||No||2018||8|
|Cambridge Energy FLNG||Plaquemines, Louisiana||No||Yes||No||2018||8|
|Golden Pass||Sabine Pass, Texas||No||No||No||2018||15.6|
However, even those limited exports may have some significant implications on national or even European energy supply security in combination with some other new strategic developments.
The U.S. industry is as much as divided as the political landscape. The U.S. energy intensive industry (major chemical, aluminium and steel companies), however, is opposed to any U.S. LNG exports based on its cheap unconventional gas production. They have established a lobby alliance called “America’s Energy Advantage” (AEA) to dissuade the Obama-govern¬ment from exporting larges LNG-volumes. They have argued that the U.S. manufacturing industry and other large domestic gas consumers would suffer as the result of “inevitable large rises in gas prices.” Dow Chemical has argued that U.S. LNG exports should be limited since there is up to eight times more value in using America’s abundant and cheap natural gas resources as the raw material to create high-value products that can be exported. In addition, environmentalists insist on multi-year studies of environmental impacts of fracking expansion to precede any export approvals. Environmental organizations such as the Sierra Club are opposed to any LNG exports because they are opposed that any retired coal-fired power plant will be replaced by a natural gas power plant.
But energy experts and the energy industry have dismissed the fear suggesting a significant increase of domestic gas prices in the U.S. They have forecasted a price increase as the result of LNG exports be just US$0.15 Million British thermal units (MMBtu) to Henry Hub prices. Cherniere expects European LNG import prices will fall by US0.4-0.6 MMBtu.
Furthermore, U.S. LNG exports would be consistent with the U.S.’ stated commitment and principle of decades to free markets and allowing them to function largely unimpeded. If policymakers want to restrict exports more severely or ban them entirely, the only way would be to the Congress support to change the law.
The DOE released in December 2012 a long-delayed report for a decision on permitting additional LNG exports to countries with which the U.S. does not have a free-trade agreement (FTA) in which it has concluded that US LNG exports would offer many economic advantages. LNG could produce US$30 billion annually in export earnings without increasing domestic gas prices significantly. Under no scenario the report has analysed, U.S. gas prices would become linked to oil prices. In its view, the benefits are far greater than the costs of limited higher gas prices at home.
With the introduction of the ‘LNG for NATO Act’ by the influential Republican senator Richard Lugar for reducing NATO allies’ vulnerability to an overdependence on Russia and Iranian gas imports, the EU has already made clear that in December 2012 that those U.S. LNG supplies must be available to all 27 EU member states and not just the 21 NATO members.
Until Russia’s annexation of Crimea, the U.S. energy strategy has put the emphasis on exploiting its shale gas resources for industrial production, whereas the expansion of LNG exports has not been given a priority so far. But meanwhile more than 50 Republican and Democrat lawmakers are supporting a bill that has criticized the ‘go-slow’-approach of the DOE and would automatically permit LNG exports to NATO countries.
The DOE has now proposed changes to its LNG approval process to Non-FTA countries. Those projects could only apply after completing environmental review and getting approval from FERC. It would allow the DOE on projects which have a sound commercial backing and restrict applications and which have already completed the FERC environmental review process as required under the National Environmental Policy Act (NEPA). Whether these changes will also fasten the entire approval process, however, is uncertain as it can also heighten risks for the applicant companies. These changes appear not take into account the support of U.S. lawmakers for a fastening and expanding LNG exports to its European allies.
But the DOE is already considering to increase the LNG export potential from 170-340 to 566 MMcm/d. The DOE has issued conditional approvals for 280 MMcm/d at just six LNG export terminals. Furthermore, It has also ‘welcomed consultation’ with the U.S. Congress on expanding and fastening LNG export approval processes as well as to control the destination of those exports in ’extraordinary circumstances’ like the present Ukrainian crisis.
But at present, most experts believe that the U.S. is unlikely to export more than 40-80 bcm of LNG (equivalent to just 1-2% of global gas demand) based on its produced shale gas between 2015 and 2020 due to the political conditions of a rigorous federal regulatory permitting process and the high costs of around US$7 billion to build an export LNG terminal.
Europe’s Growing Interest at Expanding its LNG Market versus Market Realities
While the overall path of the transformation of the EU energy system of production, supply, and consumption has clearly been defined in a way that the process must be cost-effective, technology-neutral as well as socially and environmentally acceptable, the EU’s strategy and in particular adequate instruments still need to be developed and identified. In this light and confronted with a rising oil and import dependency (in contrast to the U.S.) from politically unstable or other problematic suppliers, the EU’s future energy security faces even more severe risks, vulnerabilities, and uncertainties. In 2011, the EU-27 spent more than €488 billion on energy imports – six times more than in 1999 and amounting to 3.9% of GDP. But hitherto, it has even not recognized, discussed or just marginalized the manifold geo-economic and geopolitical implications of the increasing US energy independence and self-dependency for the U.S., the world gas markets as well as regional and global stability.
During the last two decades, interregional gas trade has increased by 80%. But the worldwide growth of LNG trade fell in 2012 by 1.6% after 30 consecutive years of global LNG increase and stagnated in 2013. Between 2008 and 2012, eight new countries have begun to join the club of 18 importing LNG countries. But it is forecasted further to grow by another 400 bcm to reach 1,090 bcm in 2035. The share of LNG in the total interregional trade will rise from 42% in 2011 to around 50% by 2035 by adding 210 bcm of the 400 bcm in total. However, shale gas developments outside the U.S. like in China may also decrease the forecasted global LNG growth as China has been expected to become one the largest LNG importer. Also shale gas developments in Mexico, Latin America, the Middle East or in Europe itself (UK, Lithuania, Poland, Romania, Spain, Ukraine et. al.) may significantly lower their anticipated LNG import demand.
In the short-term future, new LNG capacity is expected to come online after 2016/2017, which can already double the world’s liquefaction capacity from 288 million tons (mt) in 2013 to 575 mt. in 2018. It can decrease the ele¬vated LNG prices even in the Asia-Pacific region. But most projects are currently facing delays, which can also tighten again the global LNG market.
The worldwide overcapacity of LNG created a situation in Europe in 2010-2012 that LNG imports were temporarily up to 40% less expensive than pipeline gas mostly based on long-term contracts, and has contributed to the de-linkage of gas prices from the oil prices. That de-linkage could become a permanent feature of the global energy markets as the remaining global unconventional gas resources are considerable larger than conventional ones. The shale gas and oil ‘revolution’ is already spreading around the globe, albeit in a rather evolutionary way.
LNG also increased its market share in Europe as compared to pipeline gas until 2011. In 2010, it constitutes around 20% of gas imports and around 15% of total gas consumption (EU: 15%). At that year, new LNG projects reached a highpoint by planning to build up a total capacity of 384-438 bcm by 2020.
But a further expansion of LNG imports to Europe is currently difficult as long as Asian gas prices are at least 50% higher than those in Europe. As the result of Europe’s gas demand stagnation, and with Russian and Norwegian pipeline gas becoming less costly as well as with cheaper North American coal flooding European power plants, European LNG imports decreased in the last two years by 45% (by 27% alone in 2012). It left many European regasification terminals underutilized up to 73% in 2013. But in a mid- and longer-term perspective, higher LNG imports and new terminals could be a crucial ‘disruptive’ force in future gas pricing conflicts between the EU and Russia. A further gas import diversification would also strengthen Europe’s energy supply security. The EU’s gas diversification strategy after the last Russian-Ukrainian gas conflict in 2009 has already contributed to Gazprom’s price cuts in the region during the last two years.
However, given the building and operating costs of the U.S. LNG export terminals, additional transport and regasification costs on the European side, it is presently unclear whether U.S. LNG exports to Europe would also be economically competitive enough against Russian pipeline gas. But this view does not anticipate the future rising Russian pipeline costs as the present gas supplies stems from still mostly from its older and depleting low-cost gas fields. In the future, the gas will be transported on even longer pipeline transports from Yamal and other Siberian gas fields, when both the production and transport costs will be much higher.
Nonetheless, the newly build and planned LNG terminals together with the reverse-flow capabilities of new gas interconnectors for the EU’s Southern Gas and North-South Gas Corridors, the building of the TANAP und TAP-pipelines and with some successful lighthouse projects of unconventional gas production in Europe itself (UK, Spain, Poland, Lithuania, Romania, Ukraine) will significantly increase the overall European gas supply security - particularly for those European countries, which are still heavily or even exclusively dependent on just one single gas foreign producer and exporter (Gazprom).
Moreover, the EU-28 or at least some EU member states might be willing to pay a security of supply cost by diversifying their gas imports away from Europe. On the U.S. side too, geopolitical and wider security interests of the U.S. may not just fasten the approval process on the DOE side, but also decrease the LNG export costs to Europe by reducing specific tax and other costs on the U.S. government side.
Conclusions and Perspectives
At the EU-US Energy Council meeting on April, US President Obama stated that the US will considering additional energy supplies, but he recommended Europe to look at its own energy assets, in particular using its own shale gas resources for reducing its gas dependence on Russia.
US LNG exports are not an immediate-term energy solution for a Russian gas supply disruption or a larger replacement of Russian gas exports to Europe in the next years. But another 28 additional applications to export LNG from the U.S. are at various stages of the approval process. They have a theoretical combined capacity of more than 280 bcm per year in export capacity, albeit only a fraction is presently expected to move ahead. However, the U.S. is in the midst of debating, whether and how to fasten U.S. LNG exports to its European and other allies. The Obama government is re-considering the DOE approval process in order to fasten it. But the more lengthy and complex approval process of FERS is presently not planned to fasten and shorten it. President Obama made also clear, even fastened and expanded LNG exports will go into the open market rather than target directly exports to Europe. As the IEA calculated US LNG export prices to Europe will be just below US$9 MMbtu for Europe and just above US$9 MMbtu for the Asian gas market.
But many of the U.S. competing LNG projects in Australia, East Africa and the Middle East are more strategically timed and located in Asia as well as planned to serve the growing Asian LNG market. Given the possibility of an oversupply of the global LNG market by 2017/18, the final destination of U.S. LNG exports becoming available in 2016/2017 may end up at the European gas market rather than the Asian one as it is now often forecasted.
Moreover, the next US presidential campaign rolling in 2016 may focus much more than the present Obama government on expanding U.S. LNG exports as a geopolitical instrument of U.S. foreign and security policies. The strongest supporter of a new US geopolitical energy strategy is currently seen in former US Secretary of State Hilary Clinton.
In addition to US-LNG exports - and often overlooked -, 13 Canadian LNG export projects are also becoming available after 2017 with around 40 bcm until 2020. They are not in the same way domestically disputed like in the U.S. and Canada has clearly a strategic interest in diversifying its gas exports to Europe and Asia and becoming less dependent on the U.S. gas market.
Regardless lower or higher U.S. LNG exports to Europe by 2020, those exports are currently not available for a new Russian gas supply disruption in 2014. In the mid-term perspective, they can play an important gas import diversification option for Europe, but are not a ‘silver-bullet’-solution to replace Russian pipeline gas as Europe’s needs a comprehensive strategy to include a variety of options and instruments (ranging from energy efficiency measures to the expansion of other energy sources - such as renewables, nuclear and coal – to new gas imports from other exporters) in order to decrease its gas import dependence on Russia.
But even limited U.S. LNG exports may have some significant market impacts and implications on national or even European energy supply security - in combination with Europe’s stagnating gas demand (and a significantly reduced increase of its gas imports) and new gas import options (i.e. Southern Corridor with TAP and TANAP, in the future also East Mediterranean gas supplies from Israel and Cyprus) emerging in the forthcoming years.
But the prospect of cheaper U.S. LNG exports has raised growing concerns in Australia, which has an additional LNG capacity of up to 80 mt per year under construction becoming online in 2018. It may surpass even Qatar as the presently the world’s largest LNG exporter. Australian LNG projects are among the most expensive in the world and some of it may not be economic towards cheaper US LNG exports.
In the next years, Europe has to compete ever more fiercely for LNG with higher valued gas markets in Asia with its more experienced and well-connected Asian LNG buyers. It may even lose control of markets and pricing at a time, when its interest to reduce its dependence on Russian pipeline gas becomes ever stronger for both economic and geopolitical reasons. Given Asia’s rising LNG demand as well as higher LNG import prices and Europe’s rather stagnating gas demand at least until 2020, the situation of the global LNG markets may become more competitive until 2016/2018 when the global LNG market may experience new overcapacities.
But the U.S. shale gas revolution and the prospect of even limited U.S. LNG exports to Europe have already become a game changer in regard to its manifold impacts on the global gas markets by changing the oil-indexed long-term gas contracts and a successful use of these LNG export prospects as a successful bargaining chip to secure lower gas prices from Russia’s Gazprom in their gas contract negotiations.
At present, the major geopolitical question related to the future U.S. LNG exports needs still to be answered by the U.S. side: whether expanded LNG exports to Europe are designed as a strategic US LNG policy to counterbalance or even to contain an apparently long-term Putin strategy towards reasserting Russian influence in the former Soviet Union?.
For some US economic experts and lawmakers in the U.S. Congress, those expanded LNG exports would also contribute to solve the chronic debt problem of the U.S. But even a fast-tracked approval process and even when all export LNG project approvals will be granted, those projects are privately funded and require billions of capital investment as well as several years to complete.
Dr. Frank Umbach is Associate Director at the European Centre for Energy and Resource Security (EUCERS), King's College, London.