How to stop Russia's rise with natural gas

On New Year’s Day, 2009, a dispute over payment between Russia and Ukraine led to Russia cutting off all Ukraine bound gas, which included 25 percent of the European Union’s gas supply.1 To make things worse, Europe was in the middle of an especially harsh winter. Even though most countries had prepared for a gas shortage by stockpiling natural gas, their efforts were not enough, as few European countries had more than a month’s worth of reserves, and many lacked any reserves. The crisis hit Europe hard: Bulgaria was forced to shut off industrial production to save fuel for heating, thousands lost heating and electricity, and tiny Slovakia even declared a national state of emergency.1

This is not an isolated event. Russia has halted Europe’s gas supply in 1999, 2006, 2009, and 2012, each time in the dead of winter. The 2009 shortage cost €1 billion in Ireland alone2, and the 2012 shortage caused 650 deaths in Central and Eastern Europe.3 Although the EU as a whole gets only 31 percent of its gas from Russia, many Eastern European countries get 90-100 percent of their gas through Ukraine, and Germany, the EU’s de facto leader, gets 42 percent.4 Besides denying thousands of people heat for the homes and offices and severely injuring economies, these gas crises have broader geopolitical implications. Ukraine gave half the ownership of its gas pipeline, its biggest source of revenue, over to Gazprom (the Russian state-owned energy agency) after the 2009 crisis. Further, Russia took over most Ukrainian mines and power stations, has sent in many Gazprom security police to guard the pipeline (actually heavily armed soldiers and drones), boosted cooperation between Russian and Ukrainian defense ministries, has secured not only a more favorable Ukrainian government but also a much longer lease on its critical Black Sea base in Sevastopol, and, most ominously, has begun implementing political reforms in Ukraine to make Ukraine more like Russia. Russia has also exploited the total reliance of Eastern Europe on Gazprom’s natural gas in mid-2009 when it set up a number of security and economic alliances that heavily favored Russia (think Warsaw Pact part II).5 When Turkey lost 67 percent of its gas in 2009, it cozied up to Iran to get gas from them. Turkey helped Iran build a major pipeline through Turkey, a pipeline that until very recently continued to operate despite sanctions on Iran.

Further, Russia is not nearly as dependent on the EU as the EU is on Russia. Russia is building new pipelines to China and the Koreas, and has recently completed pipelines to China in 2010, and to Turkey and the Caucus region in 2006.6, 7, 8 Demand from Turkey and China nearly equals demand from Europe,8 meaning that Russia can make up lost gas revenues from Europe by simply increasing gas supply to other countries.

Europe’s reliance on Russian gas stems largely from the fact that Europe has little gas of its own. However, it seems puzzling that European nations continue to rely on authoritarian and unpredictable Russia in light of recent events in the gas market. 2011 was a record year for U.S. natural gas production, which now outstrips domestic demand by 119 billion cubic meters.9 This is excess is far greater than European demand, which currently amounts to 65 billion cubic meters.1 American shale gas is cheap, too: it is at the lowest price in a decade. This boom and low price is largely attributable to recent advances in shale-gas mining techniques that have opened up billions of cubic meters of gas up to drilling.10 Exporting this excess gas to Eastern Europe would be beneficial for gas companies and U.S. foreign relations: gas companies would make greater profits while the U.S. would keep Eastern Europe out of Russia’s sphere of influence. Further, Europeans citizens would benefit from U.S. gas: American natural gas costs $30 per 1,000 cubic meters11, while Russian gas shipped to Western Europe costs $500 per 1,000 cubic meters and gas shipped through Ukraine costs $250 per 1,000 cubic meters.12 If natural gas prices were lowered this dramatically, Europe’s economic recovery would speed up rapidly.

So what is it that stops the U.S. from exporting more gas to Europe? As usual, the answer is money. Natural gas must undergo an expensive liquefaction process before sea transport, while it can be left in its natural gaseous state for pipeline transport. Further, after a sea journey, natural gas must be regassified, a process that can only be done at expensive terminals that usually cost more than $1 billion13 to build.

In the long run, it is worthwhile to make investments in building regasification terminals in Eastern Europe because the expected monetary payoff to gas companies and political payoff to the U.S. government is so great. In the short term, however, stop gap measures must be taken. The U.S. can assist European nations in acquiring machines called floating regasification and storage units (FSRUs), natural gas tankers converted to serve as regasification terminals. FSRUs can be leased for an average of $70 million per year, an inexpensive price considering that one FSRU can regassify 3.4 billion cubic meters of natural gas, or 125 percent of Lithuania’s natural gas consumption. FSRUs are also much quicker to build than regasification terminals. Already, Lithuania, one of the first European countries to lease an FSRU, has seen its negotiating power with the Russian leadership increase after it leased its FSRU earlier this year.14

To do its part, Europe can start developing its own shale gas reserves and diversifying its gas sources. The EU sits on 2.168 trillion cubic meters14 of accessible natural gas. If the EU were to build facilities for extracting this gas, it could hypothetically eliminate the need for foreign supplies of gas. Further, the EU could turn to other sources of gas, such as Qatar or Mozambique, both of which have made enormous natural gas discoveries recently.15

The process of weaning Europe off of Russia’s teat may be dirty and expensive. But the end result, a steep drop in Russian influence in Europe, particularly Eastern Europe, will be enormously valuable from a geopolitical standpoint. Once Russian influence is no more in Europe, true integration of Eastern Europe into the EU and the Schengen Area can begin, which will further bolster the EU and make it an effective counterweight to Russia. This would be particularly beneficial for the U.S., which has a prime opportunity to accelerate the recovery by bolstering the natural gas industry and to weaken its old foe. America would be a fool not to take it.

 
Citations 
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