INSIGHT: Ukraine awakens US to using LNG exports as diplomatic tool

11 March 2014 16:12  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--US policymakers have offered a remarkable response to the upheaval in Ukraine and its breakaway Crimean peninsula.

The US has discussed using its liquefied natural gas (LNG) as a diplomatic weapon in the crisis, arguing that exports to Europe could offset Russian threats to disrupting shipments of the fuel.

This is the first time in recent history that the US has ever considered wielding energy exports in such a way.

Right now, the US limits LNG exports by requiring companies to receive licences from the government.

Before the crisis in Ukraine, the criteria for the licences were based on how LNG exports could affect domestic gas prices and whether they would harm the US manufacturing and petrochemical production, said Jason Bordoff, director of the Center on Global Energy Policy in Columbia University. He was speaking during a presentation his university held about the Ukrainian crisis.

"We haven't talked as much as I think we probably should about what the geopolitical implications of putting US gas into the global marketplace might be," he said.

"I think this crisis is one reminder of the benefits that we can see if the US increases diversity of supply by putting US natural gas into the global market," Bordoff said.

Right now, there is little that US energy diplomacy could do to change affairs in Ukraine. Currently, the US has no LNG export facilities in the lower 48 states, and the first one will not start exporting fuel until the end of 2015.

Instead, the US could lay the groundwork so it could use energy exports in the next geopolitical crisis.

Policy makers have called on the US to do just that by easing restrictions on LNG exports.

Looking ahead, the US could also remove restrictions on oil exports, viewing these as another diplomatic tool that could join LNG.

Any change to US oil and LNG export policy could have ramifications for refiners and petrochemical producers.

The current restrictions on oil exports have fattened refiner margins, since it has increased domestic supplies of crude. These increased supplies caused the US oil benchmark to trade at a discount to international grades.

In addition, US petrochemical producers rely on natural gas both as a feedstock and as a fuel.

US oil and natural gas producers have already been pressuring policy makers to ease export restrictions based on economic arguments. Now they are adding geopolitical ones, given the recent upheaval in Ukraine.

Ukraine has deposed its Russian-leaning president, Viktor Yanukovych, and is now tilting towards the West. Those in the predominantly Russian-speaking Crimea are now seeking to secede from Ukraine and join Russia. Armed men wearing no military insignia have since occupied much of Crimea.

Western countries have protested the presence of the troops and the possible secession of Crimea.

Their response, though, is limited by Europe's dependence on Russian gas. About a third of the region's natural gas comes from Russia and about half of that passes through pipelines in Ukraine, said Bordoff of Columbia University.

The threat of such disruptions to Europe has created several calls in the US for the country to speed up the approval process for terminals that export LNG.

Speaker of the House John Boehner (Republican-Ohio) has called on the US president to exercise his powers as commander in chief to ease restrictions on LNG exports.

Representative Cory Gardner (Republican-Colorado) introduced a bill to speed up LNG exports to what it called “our global allies, including Ukraine and other eastern European nations currently at the mercy of Russian energy supplies”.

Senator Mark Udall (Democrat-Colorado) introduced legislation to allow companies to export LNG to more countries.

Secretary of Energy Ernest Moniz pondered whether the US should add geopolitical considerations among the criteria to approve LNG exports to countries that are not members of free-trade agreements (FTAs), a category that includes the nation's European allies.

In the short term, the US can do nothing with its energy resources to change what is happening in Ukraine, said Kenneth Medlock, senior director at the Center for Energy Studies at Rice University's Baker Institute.

"However, the longer term should be in focus. Specifically, the US needs to be able to demonstrate a credible threat to Russian dominance in Europe," Medlock said.

Policy makers have already proposed several ways to do this through speeding up the approval process for LNG export licences.

Medlock proposed another. The US could grant free-trade status to members of the EU. This would remove the main restriction for US LNG exports.

LNG is not the only potential energy tool the US could wield. The country could also ease restrictions on oil exports, which are mostly limited to Canada and Mexico.

Even before the Ukraine crisis, Lisa Murkowski (Republican-Alaska) had proposed lifting such restrictions.

The diplomatic merits of such a move are limited. Because oil markets are so fungible, they cannot be a direct lever for diplomacy, Medlock said.

If oil exports have any effect, it would be broad and general, putting negative pressure on prices, he said.

Among those in the industry, the American Petroleum Institute (API) already has called on the US to speed up LNG approvals in the wake of the Ukrainian crisis.

The American Fuel & Petrochemicals Manufacturers (AFPM) has voiced support for the easing of both LNG and oil export restrictions, although the trade group based its arguments on free-trade principles.

However, a group representing manufacturers and petrochemical producers warned about using LNG exports in response to the Ukraine crisis.

“Exporting US natural gas to Ukraine will not weaken Russian President Vladimir Putin but it will harm American consumers, manufacturers and the US economy," according to a statement by America's Energy Advantage (AEA). 

"There is nothing standing in the way of Ukraine, or all of western Europe, from signing a contract tomorrow to import LNG from one of the six facilities that have already been approved to export American natural gas to nations without a US free trade agreement," AEA said. "The hard fact of the matter is that LNG exports to central Europe are not economically viable."

Even before the upheaval in Ukraine, the US petrochemical industry has been wary about unhindered LNG exports.

In the past, the petrochemical industry refuted the economic arguments made by proponents of LNG exports. Now they must fight geopolitical ones.

Additional reporting by Nigel Davis and Joe Kamalick


By: Al Greenwood
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