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After Russia attempted to the territorial integrity of Ukraine by sending some armed insurgency forces in Crimea, appeals from the economic press appeared as well as from political leaders or analysts from the natural resources geopolicy for the purpose of accelerating the liquefied natural gas exports (GNL) from USA towards Europe.
No matter how good this proposal might sound, it can’t be feasible from any point of view considered. Much more intelligent and producing immediate consequences on Russia and on its budgetary and monetary balance, is the liberalization of the oil exports on the part of USA. The real economic vulnerability of Russia consists of the oil price not the gas price.
There are few grounds for which such measure is a positive one, grounds indicated by the recent experiment: the release from the strategic oil reserves of USA of a modest oil quantity, of only 5 million barrels, that produced effects immediately on the international markets. But let’s see first of all, what are the consequences of the American law from gas trade sector abroad, in order to prove why the GNL export can’t be of any help under crisis conditions of the one in Ukraine.
Six GNL export licenses in six years of mandate for Obama; the export starts at minimum 4 years after the license has been granted
The Office for Gas and Oil Supply Security regulates the gas supply by means of section 3 of Natural Gas Law since 1938, surrounded by a number of other regulations and secondary laws that can determine the process for the grant of the license to last up to five years. The primary legislation in the USA divides the export type in export towards states that hold a free trade agreement with USA ( FTA states) and export towards states that do not hold a free trade agreement with the USA (non-FTA).
Most of the states that are willing, taking into account their statements, to import GNL from the USA, including Ukraine, didn’t sign such an agreement with Washington. Japan, the world largest GNL individual buyer doesn’t have a FTA agreement with the USA . Actually, USA signed FTA agreements with only 17 states.
The grant of the license for GNL export towards non-FTA states lasts considerably more, and in the analysis process of the application submitted by the exporter, a vague notion is taken into account: not to affect the American national interest. A calculation or objective evaluation algorithm hasn’t been developed for this condition and it shall depend on the Department of Energy (DOE) to decide for what destinations grants freedom for export and for which doesn’t.
During Barack Obama mandates, DOE granted only six export licenses towards non-FTA states. The export license grant doesn’t imply an immediate export. Cheniere Energy, a company that owns a liquefaction station in Louisiana, received the export license towards non-FTA states in 2011, but will not be able to export earlier than 2015.
The lobby on the part of the American Petroleum Institute, the business coalition of the most powerful 500 business energy companies existent in USA, accelerated over the last weeks in terms of the relaxation of the regulations related to gas exports towards destinations that have both the economic relations with USA. Huffington Post writes that, during the first two weeks since the onset of the Ukrainian crisis, no fewer than six bills have been presented in the American Congress that suggested changes for the acceleration of the procedures to obtain the GNL export license.
The internal gas production, discounts offered for consumers for market share and minor exports
The occasion of the Russian-Ukrainian conflict was not missed by the gas producing companies, that want to have benefits beyond the North-American border. ”We like of course the fact that Ukraine brought to the core of debates the GNL export matter”, stated the executive director of America’s Natural Gas Alliance, the most important patronage of the gas independent companies.
The demands that come on the part of the American companies that draw and commercialize this resource are not new. Starting from 2007, according to the Center for Responsive Politics, the oil and gas companies hired more than 750 people for lobby activities on this matter, and made electoral contributions that exceeded $ 150 million. Although the annual rate for gas domestic production rise exceeds the one of the rise in consumption, the American gas exports are to be neglected on the world GNL market.
The internal gas and oil production of the USA rose considerably and the imported oil is brought in smaller and smaller quantities and exclusively from states that don’t have a history of supply interruption towards USA , but a permissive legislation in terms of the gas exports towards other markets is not minded by the powerful American industries large energy consumers: agriculture, petrochemistry, chemistry, automotive, military and energy producers.
The energy secretary in USA: America doesn’t have the capacity to export massively GNL
Another component for which the pressure applied by oil export, that will produce effects on Russia as soon as the large oil exchanges from the entire world open, must be preferred to the pressure applied by GNL export, is accounted for by the GNL technical capacity of USA and by the EU liquefaction capacity.
Both of them are at a distance of few years to be functional to be able to influence something in the situation on the field. Moreover, the development costs of the scale infrastructure in liquefaction and regasification, at every end of the logistic chain, would engage funds that, for many EU states, are beyond possibilities. According to the American DOE, in May 2013 there were only two facilities holding GNL export licenses towards non-FTA states, but none of them has been able to export by now: Freeport in Texas (is starting the export in 2017), and Sabine Pass in Louisiana (is starting the export in 2015).
The massive GNL export is not considered as a possibility at hand of America in the following years even by its minister of energy, Ernest Moniz. He stated that USA doesn’t have the physical capacity to export GNL and the measure will not solve the crisis in Ukraine and will not remove the European vulnerabilities. Moreover, when USA will hold the capacity to export GNL massively, the government will not be able to determine the direction of the exports because the government is not involved in economic activities of this type, and only private companies.
Indeed, the tight collaboration between the energy resources private companies and the American government was more an exception than a rule in the American system, especially because of the federal government type, that granted each state the power to make decisions and to regulate. This is how we get to have completely regulated tariffs at electricity in Arizona or Texas and completely deregulated tariffs in the North of USA.
Is Europe the best commercial opportunity for the American GNL ?
The moment the American GNL finds its way towards the EU markets, this will be the consequence of an answer on the part of the market, dictated by an advantageous price. We must mention that the large GNL traders, such as Qatar, that entered this market a long time ago, but also a skimming of the applications for export licenses from America, show that the EU will have to compete for GNL with the Asian markets, in search for predictable suppliers and willing to offer higher prices than the Europeans are paying now, on average, for the gas received through pipes.
Even if Europe becomes a major GNL buyer, it is likely that the majority of the American charges to direct prevailingly towards Pacific. Then, taking into account the context in which there are already powerful players on the world markets, functional export and receiving terminals, under construction and planned in the order of hundreds, we ask ourselves how commercially viable will the exports be towards Europe in a few years, since there are now GNL suppliers that can supply it any time.
Moreover, USA didn’t plan GNL as much as it planned due to the internal boom in the shale production. Consequently, Europe already benefited from increased GNL quantities that could buy on the spot or forward markets, providing to some states the possibility to renegotiate the pipe gas contracts from Russia, an opportunity that hasn’t been used as it should.
Russia needs at least 110 dollars/barrel for a balanced budget
The data provided by the Russian authorities show that the revenues entered the federal budget from the gas sale abroad, reach about 9% of the total budget, while the revenues from oil reach almost 40%. The Russian Deputy Prime Minister Yogor Gaidar, in a moment of sincerity, noticed the fact that the socialist system from the former URSS (the Union of Soviet Socialist Republics) could survive only at the cost of high deficits and production on stock due to the erosion of the fiscal basis of the regime pursuant to the decline of the oil price that has been sold abroad.
For the first time since 1990, before the onset of the first world war in Iraq, USA vended a quantity of oil of only 5 million barrels of its own strategic reserves, on the ground that wants to test the technical viability of the installations and of the work procedures. It’s sure that, the moment when Russia intensified the conflict with Ukraine and such an American economic operation appears, we can’t say it’s only a hazard.
The effect was still real: USA can influence the oil price on the international markets destroying substantial advantages that Russia might get. The oil price dropped to a minimum over the last two months during the period up to the oil sale from 14 March. The American oil export consent by companies, supported even for few months, would decrease the oil price up to unsustainable levels for the Russian government, making the situation quite harder for it.
More analyses show that Russia needs a price of 110 dollars/barrel at oil, only to keep the budget balanced. However, Gazprom holds the monopoly of Russia’s gas exports, and its calculation method for the gas prices is set based on the gas price indexing with the oil price within some long-term contracts. A lower oil price produces the renegotiation of clauses of the gas supply contracts, if not the client could lose on the spot market, that Gazprom does not approve.
The accelerated economic growth of Russia between 2000 and 2008 was directed to a large extent by ever-growing prices of the Russian oil. As crisis emerged, 2009 came with a contraction of Russia’s economy in real terms, with percentages made up of two numbers, and hardly achieved modest rises, on the ground of oil price recovery. The rest of Russian economy, influenced in a form or another by oil price, faces serious challenges, and the budgets of the Russian regions and provinces don’t benefit from all the range of subsidies and social funds provided by Moscow in order to calm down the electors.
Translated by: Silktrans