The Warsaw Voice » Business » Monthly - August 28, 2015
Central Europe Energy Partners
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American LNG: An Opportunity for Greater Energy Security in Europe
It is difficult for Europe to cut ties with its monopoly gas supplier. Diversification in this area is not facilitated by plans to expand the Nord Stream pipeline, or the agreement between Russia and Turkey. The solution, however, may be found in the export of liquefied natural gas (LNG) from the United States to Europe. This necessitates changes in American law and the expansion of European infrastructure.

Until recently, the United States was one of the largest importers of energy resources in the world. Today, due to the shale gas revolution, America is a global leader in the production of oil and gas. Last year alone, crude oil production in the United States increased by 16.2 percent. Despite falling commodity prices, 2014 was the sixth year in a row when the extraction of “black gold” increased. This allowed America to achieve production of 8.7 million barrels of oil per day, the highest figure since the beginning of the last century. The shale revolution also affected gas production in the United States. This currently stands at about 2 billion cubic meters per day and already exceeds the level of demand on the domestic market.

As a result, the United States currently produces more gas than it can use. Importantly, the raw material is produced mainly in the eastern states close to the Atlantic ports. Furthermore, its transportation to Europe can be cost effective, because gas in liquid form takes up six hundred times less space than in its original form. Although LNG currently represents only about 10 percent of global gas consumption, this share is rapidly growing. This is mainly due to the development of infrastructure and the opening up of new markets. In 2014, global LNG supplies were estimated at 243 million tons, about 1.5 percent more than a year earlier.

Time to abandon embargo
Under these circumstances, a gas alliance of America and Europe seems obvious. Yet, as demonstrated by a recent roundtable debate on LNG in Brussels, there are many challenges on both sides. The first obstacle is a formal ban on the export of oil and significant impediments to the export of gas in the United States that have been in place for 40 years. In the 1970s, in the face of a Middle East crisis and the decline of domestic production, these regulations had some economic justification. By strengthening the internal market, they were supposed to protect U.S. consumers from rising energy prices.

The Americans managed to achieve this goal, and thanks to technological progress—which has allowed them to reach previously inaccessible deposits—the United States today has access to not only cheap energy, but also an excess of oil and gas. The situation on international markets has changed as well. So the current embargo model will be difficult to maintain if the United States wants to remain a major player on global energy markets, including the EU. It is difficult to imagine the Transatlantic Trade and Investment Partnership (TTIP) without European companies having full access to American energy resources.

Investment in infrastructure
Major changes in U.S. regulations are not everything. In the case of energy markets, free trade cannot be decreed simply by removing legal barriers and customs. It necessitates transmission infrastructure—terminals, pipelines and interconnectors—without which we cannot effectively transport raw materials and then distribute them across Central Europe. The Americans are more advanced in this area, as their export terminals currently being built on the East Coast will have the capacity to be converted into LNG terminals and reload about 90 billion cubic meters of gas per year. Although the profitability of some projects has been brought into question, authorities in the United States have declared that most of the terminals on the East Coast and in the Gulf of Mexico will be ready to export LNG next year.

In Europe, the Energy Union may be an incentive for the development of infrastructure. Currently, programs related to the construction of connections between individual member states are being carried out. The idea is to make LNG-related infrastructure fully correspond with the needs of countries that specifically require diversified gas supplies. These are primarily Central European countries. An LNG terminal in the northwestern Polish city of Świnoujście fits into this pattern and could fundamentally change the situation in Poland’s energy sector. However, opening the Polish terminal without an additional transmission infrastructure will not contribute to a massive increase in the consumption of LNG in Europe.

North-South Corridor is essential
Energy security in Europe cannot be achieved without full development of infrastructure. This requires a holistic approach, coordinated at the regional and pan-European levels as a condition of the creation and functioning of the internal European energy market. The most important element of this plan should be the North-South Corridor, whose task is to integrate key infrastructure components, including the existing and planned LNG terminals, from the Baltic to the Adriatic, and ultimately the Black Sea. Thanks to the terminals in Świnoujście and Klaipeda, the Corridor would become part of a pan-European pipeline network with interconnectors. It would constitute an energy highway stretching from the Polish and Lithuanian coastline to the Croatian island of Krk.

This, in turn, would foster the emergence of a regional purchasing group consisting of Polish, Lithuanian, Czech, Hungarian and Ukrainian companies. This group would have real power to negotiate the most favorable gas prices. In fact, the infrastructure is not designed to serve as a casual bargaining chip in negotiations with raw material suppliers, but as a long-term instrument for strengthening market mechanisms in the energy sector. Energy security is crucial in this respect, but from the point of view of businesses and households, competitive energy prices are equally important. Without adequate infrastructure, both these objectives will remain unfulfilled.

Janusz Luks