The crisis in Ukraine has brought attention not only to the military influence that Russian President Vladimir Putin can exert, but also upon the influence that Russian natural gas can wield. Fully 60% of the European natural gas supply comes from Russia, with half of that supply running through pipelines that traverse Ukraine.
The state-controlled Russian provider Gazprom this week ended its discounted gas rate to Ukraine, demanding $1.8 billion in past payments from the nearly bankrupted new government in Kiev. This comes with the implied threat that Russia will slow the flow of gas to Ukraine, as well as to parts of Eastern Europe and the European Union -- a tactic Moscow used successfully in 2009. The Russian iron fist, when exercised in energy policy, is perhaps even more persuasive than it is via troop deployments.
At the same time, the U.S. is experiencing booming gas production from shale, which has resulted in both very low prices and a supply glut. In view of this, it has been suggested that the export of U.S. gas resources could be an effective weapon in curbing Russian influence into Ukraine, Eastern Europe and the EU. These arguments are far-fetched.
Unlike crude oil, which can be transported and stored as simply as water, natural gas has only two methods of transport: through pipelines and as liquefied natural gas, or LNG. As impossible as it might be to construct a new 5,000-mile pipeline from the U.S. to support European markets, wide-scale export of LNG is even less likely.
Building an export terminal for LNG is expensive. Converting an already existing import terminal -- as energy company Dominion Resources (D) is doing at Cove Point in Maryland -- costs $4 billion and takes four years to complete. Building from scratch takes 10 years and costs more than $10 billion.
Once completed, the export process is equally complex, requiring the cooling of the gas to negative 260 degrees Farenheit and putting that liquid into specialized tankers. The transported LNG needs to be "regasified" just as carefully, at import terminals, before it enters the local pipeline network. All of this, obviously, carries tremendous costs and risks, and adds to the premium that LNG must command over "regular" piped gas.
It's not that this technology doesn't exist. For one example, a robust LNG export business works in Qatar, where natural gas supplies greatly outstrip local demand and prices can reasonably expect to stay low indefinitely. But the U.S. is not Qatar.
Before potential LNG exporters will agree to spend the fortunes that are required to build export facilities, they'll demand ironclad contracts from both gas providers and from LNG buyers. The former must guarantee low input prices, while the latter must ensure strong premiums for decades into the future. Having followed and traded natural gas for two decades, I can tell you that securing such contracts from both sides here in the U.S. is problematic -- and the more players you have searching for these contracts, the more difficult this task becomes.
Despite these hurdles, a few companies are proceeding with LNG plans here in the U.S. Others that have been permitted for construction are moving cautiously, for the reasons I cite. But even assuming expedited permitting and a breakneck build-out of export terminals here in the U.S., significant exporting of U.S. natural gas wouldn't become a reality for at least five more years. At that point, it is unlikely that market conditions will remain as conducive to exports as they appear to be right now. Much more likely is that export terminals will turn out to be as bad a financial idea as did the import terminals that preceded them.
But even if energy companies choose to take these risks, there may be even more important questions to ask: Should our nation open up our own limited natural gas resources to be used as a stopgap for European energy dependence on Russia? Is the U.S. ready to become a fracking mecca, supplying the rest of the West with energy, while they happily shun traditional energy development and pursue renewables?
Is the U.S. now intent upon becoming exactly the type of petro state that we resent in Nigeria, Venezuela -- and in Russia?