President Donald Trump complained during recent NATO meetings and through Twitter about how, in his opinion, Germany is “captive to Russia” because of that country’s reliance on Russian energy, especially natural gas.
This grievance may seem odd, given Trump’s often warm comments regarding Russian leader Vladimir Putin. But it makes sense in light of how Trump keeps insisting that the U.S. and Russia are “competitors” rather than adversaries.
As a scholar of European natural gas markets, I can see how Trump might consider the country he leads to be Russia’s main competitor in that industry and that region. I also believe that even if Europe ends up buying relatively little natural gas from American companies, the mere existence of the competition could help reduce Russia’s ability to use its natural gas to exert political pressure in Europe.
US natural gas exports
Because of the spread of hydraulic fracturing and the directional drilling of shale rock formations, commonly called “fracking,” the U.S. is now the world’s top natural gas producer.
Abundant natural gas has not only kept prices historically low for U.S. consumers as more of the country’s electricity has been generated with natural gas, it has also made it possible for the nation to export more natural gas than it buys from other countries. That is what happened in 2017 for the first time in 60 years.
In addition to selling natural gas to Mexico and Canada, which gets transported by pipeline, the U.S. is now exporting liquefied natural gas, commonly called LNG.
Only two LNG facilities – one in Louisiana and one in Maryland – are operating today in the U.S., with total capacity of about 5 billion cubic feet per day. But at least four more are on the way and a shuttered plant in Alaska could be revived soon. Additional U.S. LNG capacity of up to 25 billion cubic feet per day could become available before long, depending on how many of the many LNG terminals being considered are ultimately built.
As American production and its capacity to liquify natural gas grows, the U.S. government’s Energy Information Administration is forecasting that China and other Asian countries will buy most of this fuel due to their swift economic growth and their efforts to slash pollution.
But surely European countries will buy some of America’s exported LNG, reducing Russia’s dominance of that market.
Russia’s European dominance
In recent years, Europe has imported about 20 percent of the natural gas it consumes, mostly from Russia and Norway.
Even as the region began to import liquified natural gas from the U.S., Europe’s Russian gas imports hit record highs in 2017. Demand was higher than usual thanks to the region’s economic recovery and extremely cold winter.
Several factors buttress Russia’s dominance of this market. First, many countries have signed long-term contracts, locking in their purchases of Russian gas for years to come.
Second, Russia can produce natural gas very cheaply and it costs little to bring it to Europe using pipelines, many of which have already been built. In contrast, U.S. producers spend money liquefying natural gas – even if it costs relatively little to drill – and ship it across the Atlantic Ocean. As a result, the price of the gas when it lands in Europe is more than double the price in the U.S.
U.S. LNG currently costs about US$6 per million British Thermal Units in Europe, about $1 more than the average price of Russian gas in that market.
Third, Russia has embarked on new pipeline projects that include the controversial Nord Stream 2, the $11 billion natural gas pipeline that is supposed to be completed next year. It will deliver Russian gas directly to Germany, bypassing Ukraine – which has sparred with Russia over what it should collect for serving as a transit country repeatedly since 2005. In addition, Russia accuses Ukraine of siphoning of gas destined for Europe, allegations Ukraine denies.
Diluting Russia’s political leverage
The problems with Ukrainian transit gave Europeans an incentive to import natural gas using different routes and suppliers. Countries in Central and Eastern Europe, in particular, have been trying to minimize not only supply disruptions but also – and even more importantly – the geopolitical and economic pressure that Russian has exerted in exchange for access to its gas imports.
The region experienced at least 17 disruptions in its natural gas flows or price manipulations that were either definitely or probably politically motivated between 1990 and 2015, according to my colleague Gabriel Collins, who studies geopolitics and commodity markets.
This kind of intervention has made countries such as Poland and Lithuania highly critical of the Nord Stream 2 pipeline. While Western Europe sees in that project a potential end to supply disruptions, Eastern Europe and the Baltic countries see the potential for the region to become even more dependent on Russian gas. If that happens, they fear, Russia could gain more geopolitical influence that goes beyond the post-Soviet bloc to include Germany, Austria and the rest of Western Europe.
As such, their concerns match the consternation that Trump has expressed to a great degree.
Even so, the U.S. government cannot guarantee that U.S.-produced LNG will be shipped to Europe or anywhere else. Private companies, which make their own decisions, do not need to heed the federal government’s geopolitical goals. And the initial U.S. natural gas exports to Europe have proven very modest.
The U.S. government can, however, facilitate U.S. exports with policies that encourage them.
In addition, I believe that U.S. natural gas exports can make a difference in Europe, even if Europe never buys very large volumes of American LNG.
That’s because, U.S. natural gas can dampen Russia’s geopolitical influence and economic rents as long as it poses a credible threat to Russian gas. For that to happen, all of Europe – not only the Western countries – needs the infastructure required to handle, move and store imported liquified natural gas. Simply having the ability to access U.S. gas can potentially diminish some of the political leverage Russia now wields in Europe.