American LNG: an opportunity for greater energy security in Europe

Effective diversification of gas supply has always proven to be difficult for Europe, a net importer of energy, for obvious reasons interested in maintaining high levels of security of supply of energy resources. A new opportunity, however, to redress existing excessive market dependencies, may arise with the export of liquefied natural gas (LNG) from the United States to Europe, but it will require changes in American legislation and the expansion of European gas infrastructure.

Until recently, the US was one of the major importers of energy resources in the world. Today, due to the shale revolution, the US is a global leader in the production of oil and gas. Just last year, crude oil production in the United States increased by 16.2%. Despite falling commodity prices, 2014 was the sixth in a row, when the extraction of "black gold" increased. This allowed Americans 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. Its size is currently about 2 billion cubic metres per day and already exceeds the level of demand in the domestic market.

[Tweet "In 2014, global LNG supplies were estimated at 243 million tonnes - about 1.5% more than a year earlier"]As a result, the United States, currently produces more gas than it can use. Importantly, the gas is produced mainly in the East Coast 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. Although LNG presently represents only about 10% of worldwide gas consumption, its share is rapidly growing. This is mainly due to the expansion of infrastructure and the opening up of new markets. In 2014, global LNG supplies were estimated at 243 million tonnes - about 1.5% 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 the recently concluded roundtable debate on LNG in Brussels, there are many challenges on both sides. The first obstacle is the formal ban on the export of oil, and significant impediments to the export of gas, which have been in force in the United States, for forty years now. 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 US consumers from rising energy prices.

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

Investments in infrastructure

[Tweet "free trade cannot be decreed simply by removing legal barriers and customs"]However, major changes in US legislation are not everything. In the case of energy markets, free trade cannot be decreed simply by removing legal barriers and customs. It requires transmission infrastructure - terminals, pipelines and interconnectors - without which we cannot effectively transport raw material, and then distribute it across Europe, and Central Europe in particular. Americans are more advanced in this area, as their export terminals, currently being built on the East Coast, will have the capacity to liquefy, and ship approximately 90 billion cubic metres of gas per year. Although the profitability of some projects has been brought into question, the American authorities have declared that, next year, the majority of terminals on the East Coast and in the Gulf of Mexico will be ready to export LNG.

In Europe, the implementation of the Energy Union’s strategy may be the incentive for the development of infrastructure. Currently, programmes related to the construction of connections between individual Member States are being carried out. The goal is for the LNG-related infrastructure to fully respond to the needs of these countries that specifically require the diversification of gas supply. These are primarily countries within Central Europe. The LNG terminal in Świnoujście (north-western Poland) fits into this pattern, and has the opportunity to fundamentally change the situation in the Polish energy sector, and potentially also throughout the CEE Region. However, the opening of the Polish terminal alone - without additional expansion of regional transmission infrastructure - will not contribute to a substantial increase in the consumption of LNG in Europe.

North-South Corridor is essential

[Tweet "The security of supply of energy resources in Europe cannot be achieved if Member States’ markets stay detached from each other"]The security of supply of energy resources in Europe cannot be achieved if Member States’ markets stay detached from each other, with only a partial development of infrastructure. It requires a holistic approach, co-ordinated at regional and pan-European levels, a prerequisite of the creation and functioning of the Internal Energy Market. An important component of this plan should be the North-South Corridor, whose task is to integrate key infrastructure projects, including the existing and planned LNG terminals, from the Baltic to the Adriatic, and ultimately to the Black Sea. Thanks to the terminals in Świnoujście (Poland) and Klaipeda (Lithuania), the Corridor and connections with Norwegian gas systems would become part of a pan-European, interconnected pipeline network. It would deliver an energy highway, stretching from the Polish, Lithuanian and Norwegian coastline to the Croatian island of Krk.

This, in turn, would foster the emergence of a regional purchasing group consisting of, among others, Polish, Lithuanian, Czech, Hungarian, Croatian and also Ukrainian companies. This group would have real power to facilitate the most favourable terms for gas supply. In fact, infrastructure itself is not designed to serve as a casual bargaining chip in negotiations with one or another supplier of raw materials, 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 the adequate infrastructure, both of these objectives will be hard to reach.

Janusz Luks, Central Europe Energy Partners (CEEP)