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Securing Eastern Europe’s LNG Lifeline

Eastern European energy independence lies in American natural gas fields.

Europeans pay some of the highest natural gas prices on the planet and Russia’s state controlled gas company, Gazprom, is a big reason why. Gazprom has a near monopoly on gas supplied to Eastern Europe and is Europe’s single largest supplier of natural gas. Because Gazprom has so much market power, they have a lot of leverage when setting the price of gas, and insist that the price be linked to crude oil. To make matters worse, the price of a key alternative source of supply – LNG (liquefied natural gas), has gone up even more. Robust economic growth in Asian markets and Japan’s Fukushima disaster has caused the price for LNG in East Asia to clear $18/mmBtu – prices 50% higher than the cost of Russian gas in many European countries. For a handful of countries however, escaping Russia’s regional dominance while maintaining energy security is worth that price. Poland for example has signed a LNG off take agreement with Qatar which would have them pay 16% of crude plus a 50¢ fixed component (about $17-19/mmBtu at recent crude prices), pricing well above their Russian supply.

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High prices leave many Europeans looking enviously across the Atlantic towards America, where its shale gas revolution has unlocked trillions of cubic feet of supply, and has pushed prices there well below $4/mmBtu. Europe itself has material shale gas resources, however both regulation and technical challenges have made it very difficult Europe to realize its full shale potential (Talisman and Exxon have both exited Poland, and France has a ban on fracking for example). As a result, a group of Central and Eastern European nations have joined together to create a lobby group called LNG Allies – an organization whose purpose is to lobby for easier European access to American LNG.

The American Department of Energy (DoE) has received 36 LNG export applications representing about 40 Bcf/d of export capacity (about 60% of the US’ current production). The DoE has been quite liberal in its approvals; approving 31 applications (33 Bcf/d) provided deliveries are only to countries with which the US has a Free Trade Agreement. Because of the few number of countries that have FTAs with the US (even fewer import LNG), for a project to achieve economic sanction it would likely require a permit to export to non-FTA countries like Japan, China and the EU, some of the world’s largest LNG markets. The DoE has only approved the applications of 5 such terminals amounting to an export capacity of 6.8 Bcf/d. While it is a common view amongst industry commentators that the US will not approve many more non-FTA permits, it is unclear where the DoE is likely to draw the line. Further complicating things for prospective European buyers, much of the volumes destined for non-FTA countries has already been locked up by Asian buyers, who are looking for relief from the extraordinary premiums they are paying for natural gas. While the US and the European Union are working towards their own FTA, agreement on the details is not expected until at least 2015 at the earliest, and must still be ratified by the US, the EU, and all of its member nations before it takes effect. American LNG deliveries to Europe are still likely many years away on an FTA basis. That said there are things that EU countries can do to help get their hands on American natural gas.

Natural gas utilities in countries like Poland or Lithuania, which are building LNG regasification capacity and would not need to enormous volumes of LNG, should try to partner with a brownfield landowner on the US eastern seaboard in a state like Pennsylvania or New Jersey. There are dozens of such sites, closed refineries for example, awaiting reuse. Instead of spending money on reclamation and redevelopment costs associated with putting the LNG terminal on land as is proposed on the US Gulf Coast (USGC), Eastern European utilities should instead berth a Floating LNG barge (FLNG) adjacent to the refinery for example.

A FLNG facility offers several advantages for those who are willing to give up a little bit on scale. FLNG avoids many of the traditional cost overruns and challenges associated with land based construction, as they are constructed overseas where the labour costs are much lower. Further, by having your LNG terminal on a barge, it is easy to move around, should economic conditions change. By choosing to berth adjacent to a refinery in the mid-Atlantic, FLNG will likely be able to piggyback existing and recently completed infrastructure built to bring Marcellus natural gas to market. (The Marcellus is a very large shale gas field in the US Appalachian mountains, which currently produces more natural gas than the entire country of Canada, and is still growing rapidly). By piggybacking existing infrastructure, Eastern European utilities will be able to avoid large long-term contracts for pipelines that would eliminate the flexibility gained by using FLNG. Further, by locating so close to the most prolific natural gas basin on the North American continent, natural gas transportation costs by pipeline to the FLNG terminal will be very low, and by siting in the mid-Atlantic states, marine shipping costs to Poland or Lithuania will be ~$0.40/mmBtu cheaper than sourcing gas from the USGC (~$40mm per year for a small facility). Further by sourcing their own gas, and running it through their own terminals, Eastern European utilities will be able to better capture more of the gas price differential for themselves and to the benefit of their customers. American LNG could have a landed cost of about $8.50/mmbtu, very competitive with current European gas prices.

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*1 mcf ~ 1 mmbtu

If a consortium similar to above put forth an application for export at a capacity in the range of 0.3-0.4 Bcf/d, it should be compelling to the US government. According to an August report by the US Congressional Research Service, it has been the opinion of both successive US Presidential administrations and Congresses that European energy security (i.e. to weaken Russian influence by limiting their energy exports to Europe) is in the American national interest. Current Russian intervention in Ukraine will only help the case of applicants like Lithuania and Poland (both border Russia and are members of NATO).

By permitting LNG exports to countries most under control of Gazprom’s influence at US market prices, the US could both support its domestic energy industry, and support its geopolitical agenda simultaneously. Effective lobbying from LNG Allies should be able to put pressure on the US government to not only approve an export application, but also to hopefully expedite approval. An application to export a small volume of natural gas will have little impact on neither gas prices, nor energy security for Americans, but will have an enormous impact on the countries that are able to secure the supply. If European countries want to show that they are serious, they’ll need to do more than to lobby the US government for access. A tangible proposal by way of an FLNG terminal would be a great start.