March 25, 2014

LNG Can Hit Russia Where it Hurts

Russian forces recently seized a natural gas distribution station in the Ukrainian village of Strilkove. The action showed President Putin’s willingness to use energy exports as a weapon. It is also a reminder that energy can be a powerful weapon to counter Russian aggression.


“Russia is a gas station masquerading as a country.” – Sen. John McCain, CNN, 3/16/2014


About half of Russia’s revenue comes from oil and gas. By expediting approval of facilities to export liquefied natural gas (LNG) the U.S. can send a powerful signal to European markets that alternative supplies will be available soon. This will undermine Russia’s leverage with its European customers today.


“The Russian economy is a one trick pony, they are totally focused on natural gas and oil.” – Sen. Kelly Ayotte, CBS, 3/16/2014


Washington Democrats continue to act as if the conflict in Ukraine has nothing to do with energy. The Obama administration claims that speeding up LNG exports to Europe “would not have an immediate effect.” That view ignores Russia’s economic dependence on energy and the reality of how energy markets work.


Europe’s ability to import LNG is “a weapon of geopolitics as important as any warship.” – The Economist, 3/22/2014


In a January 4, 2014 article, The Economist noted that the U.S. shale gas revolution is already undermining Russia’s negotiating position relative to its European neighbors. By reducing U.S. demand, it has freed up supply to the region’s spot market and forced Russia’s state-owned gas company, Gazprom, to lower its prices. “The proportion of Europe’s gas bought in the spot market rose from 15% in 2008 to 44% in 2012,” and is now more than half. This further undermines Gazprom, whose “contracted-gas prices were only 5-6% above spot prices in the first half of 2013, against 70% in 2009.” America can immediately apply more pressure to the region’s gas prices, and further erode Russia’s revenues, by approving additional LNG export capacity.

Our European allies also are not buying the Obama administration’s excuses. On March 6, four central and eastern European countries wrote to congressional leaders that U.S. LNG exports can weaken Russia’s stranglehold over the region. “Congressional action to expedite LNG exports to America’s allies would come at a critically important time for the region.” 

Washington Democrats have denied any need to act more quickly. The administration has spent an average of 697 days processing each of the seven applications it has approved and refused to act expeditiously on another 24 applications still pending. Just days before Russia’s assault on the Strilkove facility, Senate Democrats had blocked consideration in the Foreign Relations Committee of legislation to expedite LNG permit approvals.

For each approved permit, more than three still pending

For each approved permit, more than three still pending

David Goldwyn, a former Obama administration official and current Brookings Institution fellow, has explained why speed is important. He wrote on March 18:

Indeed, a clear signal that [LNG] exports to European allies are ‘deemed to be in the national interest’ would indeed have an immediate impact on Russia’s market power and help accelerate the build out of gas transportation infrastructure in Europe. The U.S. has already caused Russia to renegotiate current gas contracts and discount renewed contracts due to the displacement of LNG flows once meant for our markets. An immediate signal that future U.S. LNG exports will be available to Europe will send a message to Russia that within a few years, despite its current ability to pressure Ukraine and other nations once part of the USSR, this will no longer be possible. Expectations of future supply will impact price expectations and infrastructure investment decisions made today. Ukraine’s future energy security lies in greater reverse flows of gas from Europe and well managed gas storage in Ukraine. To the extent that the firm promise of U.S. LNG exports in the 2017-2022 period sustain lower LNG prices and help finance new interconnections from LNG import terminals on the continent, Ukraine will benefit indirectly as well.

Still, Senate Democrats are in no hurry to provide this alternative supply of natural gas. They stand idly by as the Obama administration continues to drag its feet on LNG export permit approvals. There’s no doubt Russia is taking note.

Issue Tag: Energy