Adding Fuel to the Fire
How the American shale gas boom can weaken Russia's hand in Ukraine.
With every passing hour, Ukraine seems to move closer to the brink of disaster. The causes are multifaceted, but a key driver of the crisis has been Ukrainian — and European — dependence on Russian natural gas. In the short term, U.S. officials are understandably scrambling to keep events from spiraling out of control in Crimea, where Russian troops have taken control of much of the peninsula. In the long term, however, the United States may be able to tip the balance against President Vladimir Putin, using the American shale-gas boom to weaken Russia’s geopolitical leverage in Ukraine.
Oil and natural gas are critical to the Russian economy, accounting for over half of federal budget revenues in 2012 and more than 70 percent of all exports. Ukraine, meanwhile, depends on Russia’s Gazprom for two-thirds of its gas needs, an arrangement that has given Moscow considerable leverage in Kiev. Gazprom announced that it will raise prices for Ukraine beginning in April, citing the country’s failure to pay debts. If the current standoff escalates, Russia could cut off supplies entirely, as it did over a pricing dispute in 2009. Although the impact of the loss of Russian supplies could be muted by current stockpiles — Ukraine has four or five months of gas in storage after a mild winter — a longer-term disruption would threaten the inventory cushion required for next winter.
And it’s not just Ukraine that could be affected by the current crisis: More than half of the natural gas that Russia supplies to Europe flows through Ukraine. Natural gas prices in Britain, Holland, and Germany jumped around 8 to 10 percent on Monday due to the crisis, before easing slightly since then. And Europe is only growing more dependent on Russian gas. In 2013, the share of Europe’s gas supplied by Gazprom reached a record level, and the International Energy Agency projects that it will continue to rise in the coming years. Russia has many long-term contracts in place to sell gas to Europe at prices linked to the high price of oil. And the global market for liquefied natural gas (LNG) is facing tight supplies in the medium-term.
Gas was a major factor in the fall of Ukrainian President Viktor Yanukovych. The protests that led to his ouster were prompted by his abandonment of plans for an association agreement with the European Union that would have opened the way for trade and financial assistance. That fateful decision in November followed a promise by Putin to provide Ukraine with a $15 billion bailout package and to slash natural-gas prices by a third. Even though Ukraine has cut its consumption of gas, which fell by more than 20 percent between 2005 and 2011 because of improved industrial efficiency and lower output, its heavy dependence on Russian gas made the offer of cheap energy too good to refuse.
But Ukrainian and European reliance on Russian gas can be reduced over time. As long-term contract volumes decline and E.U. imports rise, the growing gap can be filled by flexible, divertible LNG supplies from countries other than Russia, reducing the leverage Moscow can exert with its energy resources. Toward the end of the decade, global LNG supplies are projected to rise sharply with new supply from North America, Australia, and potentially East Africa and the Eastern Mediterranean. Recognizing the benefits that flexible LNG supplies can provide to its energy security, Ukraine has plans to develop an LNG import terminal on the Black Sea coast.
So how does the U.S. shale-gas boom enter into the equation? American LNG exports can help increase diversity of supply and encourage competition in Europe and globally, ultimately driving down prices. The Obama administration has already approved six export applications that will allow shipments to countries with which the United States does not have free trade agreements. These include some of the world’s largest LNG consumers like Japan and India. Still, the market remains uncertain about whether more export terminals will be approved. To date, the public debate about American LNG exports has mostly focused on the extent to which exports might push up domestic natural-gas prices. As the administration considers whether to continue approving export applications, it should take into account the geostrategic and security benefits of supplying more LNG to the global market.
In addition to diversifying its import options with LNG, Ukraine can increase its energy security by developing its own natural-gas supplies. According to the U.S. Energy Information Administration, Ukraine has the third-largest shale gas reserves in Europe, behind France and Poland. Exploration activity in Ukraine has been minimal, however, and significant legal, regulatory, and technical challenges exist. Countries like Ukraine seeking to develop shale resources can learn from the U.S. experience, which is why the State Department launched a program to help countries do so safely and economically. U.S. officials can also support countries by working to expand access for American firms with experience and expertise in developing shale resources.
By bringing both U.S. natural gas and U.S. technology and expertise to the global market, the American shale-gas boom can help diversify global natural gas supplies and undermine the ability of traditional gas suppliers like Russia to use monopoly positions as weapons. This will not happen overnight, but even as officials work to avoid immediate conflict in Ukraine, they should not lose sight of the potential long-term geopolitical benefits of the U.S. energy revolution.